UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-6465
The Travelers Series Trust
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Smith Barney Fund Management LLC
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 451-2010
Date of fiscal year end: December 31
Date of reporting period: December 31, 2003
ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
[INSERT SHAREHOLDER REPORT]
ANNUAL REPORT
DECEMBER 31, 2003
[UMBRELLA GRAPHIC]
THE TRAVELERS SERIES TRUST:
CONVERTIBLE SECURITIES PORTFOLIO
MFS MID CAP GROWTH PORTFOLIO
MERRILL LYNCH LARGE CAP CORE PORTFOLIO
[TRAVELERS LIFE AND ANNUITY LOGO]
The Travelers Insurance Company
The Travelers Life and Annuity Company
One Cityplace
Hartford, CT 06103
ANNUAL REPORT FOR THE TRAVELERS SERIES TRUST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHAT'S INSIDE
<Table>
LETTER FROM THE CHAIRMAN.................................... 1
CONVERTIBLE SECURITIES PORTFOLIO:
MANAGER OVERVIEW....................................... 3
PERFORMANCE COMPARISON................................. 5
MFS MID CAP GROWTH PORTFOLIO:
MANAGER OVERVIEW....................................... 6
PERFORMANCE COMPARISON................................. 8
MERRILL LYNCH LARGE CAP CORE PORTFOLIO:
MANAGER OVERVIEW....................................... 9
PERFORMANCE COMPARISON................................. 11
SCHEDULES OF INVESTMENTS.................................... 12
STATEMENTS OF ASSETS AND LIABILITIES........................ 26
STATEMENTS OF OPERATIONS.................................... 27
STATEMENTS OF CHANGES IN NET ASSETS......................... 28
NOTES TO FINANCIAL STATEMENTS............................... 31
FINANCIAL HIGHLIGHTS........................................ 36
INDEPENDENT AUDITORS' REPORT................................ 39
ADDITIONAL INFORMATION...................................... 40
TAX INFORMATION............................................. 44
</Table>
- --------------------------------------------------------------------------------
LETTER FROM THE CHAIRMAN
[R. JAY GERKEN PHOTO]
R. JAY GERKEN, CFA
Chairman, President and
Chief Executive Officer
DEAR SHAREHOLDER,
The year 2003 marked the end of the three-year equity
bear market, with the resurgence of stocks of all sizes
and styles and from a variety of industries. However,
the greatest gains were made by small-cap, rather than
large-cap stocks, and by those whose stock price had
fallen the farthest since the March 2000 market peaks,
particularly technology stocks. In general, mid-cap
stocks performed better than large-caps, yet not as well
as small-caps. Although investment-grade bond
performance was quite subdued, many high yield and
convertible bonds soared. It is no coincidence that both
those bond sectors are heavily influenced by the
fortunes of the stock market.
The turning point for stocks came in mid-March as the
U.S. ended the uncertainty over the impending Iraq War
and the major combat came to a swift completion.
Meanwhile, historically low interest rates and lowered
income taxes provided a double economic stimulus, which
first raised expectations for economic growth and then
led to gains in consumer confidence and rapid expansion.
But, job growth remained sluggish, causing some concerns
over the sustainability of both the economic rebound and
the market's positive performance.
Within this environment, the funds performed as follows:
Performance of the Funds as of December 31, 2003
<Table>
<Caption>
6 MONTHS 12 MONTHS
-------- ---------
CONVERTIBLE SECURITIES PORTFOLIO............................ 9.50% 26.26%
Merrill Lynch Investment Grade Convertible Bond Index....... 6.02 11.51
Lipper Specialty/Miscellaneous Variable Funds Category
Average................................................... 18.50 40.40
MFS MID CAP GROWTH PORTFOLIO................................ 15.82 37.05
Russell Midcap Growth Index................................. 20.19 42.71
Russell 2000 Index.......................................... 24.92 47.25
Lipper Mid-Cap Growth Variable Funds Category Average....... 17.25 36.34
MERRILL LYNCH LARGE CAP CORE PORTFOLIO (FORMERLY MFS
RESEARCH PORTFOLIO)....................................... 10.48 21.16
S&P 500 Index............................................... 15.14 28.67
Russell 1000 Index.......................................... 15.63 29.89
Lipper Large-Cap Core Variable Funds Category Average....... 13.96 26.42
</Table>
ALL FIGURES REPRESENT PAST PERFORMANCE AND ARE NOT A GUARANTEE OF FUTURE
RESULTS. Principal value and investment returns will fluctuate and investors'
shares, when redeemed may be worth more or less than their original cost.
Each fund's returns reflect expenses incurred by that fund, but do not reflect
any charges or expenses imposed by the variable annuity or life contract you
own, and do not reflect the deduction of any taxes. Therefore, your actual
returns would have been lower. An investor may not invest directly in the fund.
Index returns are provided for comparison, but an investor cannot invest
directly in an index. Additionally, these returns do not reflect any deduction
for fees or expenses, as indices are unmanaged, and do not incur such expenses.
Index returns also do not reflect any deduction for taxes.
The Merrill Lynch Investment Grade Convertible Bond Index is an index comprised
of convertible bonds rated investment-grade. The Russell Midcap Growth Index
measures the performance of those Russell Midcap companies with higher
price-to-book ratios and higher forecasted growth values (A price-to-book ratio
is the price of a stock compared to the difference between a company's assets
and liabilities). The Russell 2000 Index measures the performance of the 2000
smallest companies in the Russell 3000 Index, which represents approximately 8%
of the total market capitalization of the Russell 3000 Index. The S&P 500 Index
is a market capitalization-weighted index of 500 widely held common stocks. The
Russell 1000 Index measures the performance of the 1000 largest companies in the
Russell 3000 Index, which represents approximately 92% of the total market
capitalization of the Russell 3000 index.
Lipper, Inc. is a major independent mutual-fund tracking organization. Returns
are based on the period ended December 31, 2003 and include the reinvestment of
dividends and capital gains, if any. Returns were calculated among the 135 funds
for the six-month period and among the 130 funds for the 12-month period in the
Lipper specialty/miscellaneous variable funds category. Returns were calculated
among the 120 funds for the six-month period and among the 113 funds for the
12-month period in the Lipper mid-cap growth variable funds category. Returns
were calculated among the 230 funds for the six-month period and among the 224
funds for the 12-month period in the Lipper large-cap core variable funds
category.
1
Please read on for a more detailed look at prevailing economic and market
conditions during the funds' fiscal year and to learn how those conditions and
changes made to the portfolio during this time may have affected fund
performance.
INFORMATION ABOUT YOUR FUND
In recent months several issues in the mutual fund and variable insurance
products industries have come under the scrutiny of federal and state
regulators. Travelers Life & Annuity and some of its affiliates have received
requests for information from various government regulators regarding market
timing, late trading, and other mutual fund and variable product issues in
connection with various investigations. The fund has been informed that
Travelers Life & Annuity and its affiliates are responding to those information
requests and cooperating with the regulators, but are not in a position to
predict the outcome of these requests and investigations.
As always, thank you for your confidence in our stewardship of your assets. We
look forward to helping you continue to meet your financial goals.
Sincerely,
/s/ R. JAY GERKEN
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
January 19, 2004
2
- --------------------------------------------------------------------------------
MANAGER OVERVIEW
CONVERTIBLE SECURITIES PORTFOLIO
PERFORMANCE UPDATE
During its fiscal year ended December 31, 2003, the fund returned 26.26%. In
comparison, the fund outperformed its benchmark, the Merrill Lynch Investment
Grade Convertible Bond Index(i), which returned 11.51%, but underperformed the
Lipper specialty/miscellaneous variable funds category average, which was 40.40%
for the same period.(1)
The fund's bias towards investment-grade companies held back performance, as non
investment-grade issues experienced the most marked gains over the fund's fiscal
year. The fund benefited from the rise in equity valuations as well as from
significant spread tightening, (the difference between the yields of two bonds
with the same maturities), in the corporate markets. Investors continued to
drive the convertibles market higher as the economic recovery picked up steam
and all U.S. equity benchmarks made significant gains.
It was a landmark year for new convertible bond issuance -- it was the best year
in terms of new issues and the second best year in terms of proceeds after 2001.
The convertible primary market continued to rebound in December, when new
issuance typically slows down. However, there were also a record number of
redemptions in 2003, with a hefty amount of convertible bonds taken out of
circulation.
All three of the style indices advanced in the fourth quarter, led by the equity
alternative securities. As of the end of December, yield alternative securities
(convertibles that trade more like bonds) accounted for just 44% of the
benchmark index, down in the last three quarters as a result of the strong
equity markets. The total return alternative securities, which are classic-style
convertibles gained in the fourth quarter, but not as much as equity-sensitive
convertible securities, which trade more like stocks, did -- reflecting the
strength in the stock market.
WHAT AFFECTED FUND PERFORMANCE?
The fund's top-performing convertible during its fiscal year was FORD MOTOR CO.
The automaker continued to benefit as investors gravitated towards riskier
issues as they expect the improving economy to lift Corporate America's
prospects, causing the convertible to enjoy double-digit gains during the fourth
quarter. Other strong performers during the year were THE GAP, INC., TYCO
INTERNATIONAL LTD. and NEWELL RUBBERMAID INC. The fund's worst performing
convertible during its fiscal year was LINCARE HOLDINGS INC. The convertible was
pressured by Medicare reimbursement reductions introduced by the U.S. Congress,
which investors fear will hurt the company's bottom line significantly.
Thank you for your investment in the Convertible Securities Portfolio. We
appreciate that you have entrusted us to manage your money and value our
relationship with you.
Sincerely,
/s/ DAVID A. TYSON
David A. Tyson
Travelers Asset Management International Company, LLC.
January 19, 2004
(1) Lipper, Inc. is a major independent mutual-fund tracking organization.
Returns are based on the 12-month period ended December 31, 2003, calculated
among the 130 funds in the specialty/miscellaneous variable funds category
including the reinvestment of dividends and capital gains, if any.
3
The information provided is not intended to be a forecast of future events, a
guarantee of future results or investment advice. The opinions expressed are
current only through the end of the period of this report as stated on the cover
and are subject to change at any time based on market or other conditions. Views
expressed may differ from those of the firm as a whole.
Portfolio holdings and breakdowns are as of December 31, 2003 and are subject to
change and may not be representative of the portfolio manager's current or
future investments. The fund's top ten holdings as of this date were: American
International Group, Inc. (4.15%); Affymetrix, Inc. (4.01%) Verizon Global
Funding Group (3.99%); Interpublic Group Companies, Inc. (3.86%); Ford Motor
Corp. (3.66%); Tribune Company (3.54%); Newell Financial (3.37%); Tyco
International Group S.A. (3.06%); Gap, Inc. (3.02%); Walt Disney Co. (2.79%).
Please refer to pages 12 through 15 for a list and percentage breakdown of the
fund's holdings.
Fund performance reflects fund expenses, but does not reflect any charges or
expenses imposed by your variable contract. Index performance does not reflect
any deduction for fees or expenses. An investor may not invest directly in an
index.
(i) The Merrill Lynch Investment Grade Convertible Bond Index is an index
comprised of convertible bonds rated investment-grade.
4
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- CONVERTIBLE SECURITIES PORTFOLIO AS OF 12/31/03
(UNAUDITED)
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------------------
Twelve Months Ended 12/31/03 26.26%
Five Years Ended 12/31/03 9.24
5/1/98* through 12/31/03 8.29
<Caption>
CUMULATIVE TOTAL RETURN
-----------------------
5/1/98* through 12/31/03 57.07%
* Commencement of operations.
</Table>
This chart assumes an initial investment of $10,000 made at
inception on May 1, 1998, assuming reinvestment of dividends,
through December 31, 2003. The Merrill Lynch Investment Grade
Convertible Bond Index is comprised of 115 investment-grade
convertible bond issues. The Index excludes those issues that have
mandatory conversion features. (Investment-grade bonds are those
rated in one of the four highest rating categories by any
nationally recognized statistical rating organization.)
<Table>
<Caption>
MERRILL LYNCH INVESTMENT GRADE
CONVERTIBLE SECURITIES PORTFOLIO CONVERTIBLE BOND INDEX
-------------------------------- ------------------------------
5/1/98 10000.00 10000.00
12/98 10098.00 10387.00
12/99 11987.00 11594.00
12/00 13486.00 13392.00
12/01 13376.00 13375.00
12/02 12440.00 12655.00
12/31/03 15707.00 14111.00
</Table>
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The total returns and graph presented above do not
reflect expenses associated with your variable contract such as administrative
fees, account charges and surrender charges which, if reflected, would reduce
the total returns for all periods shown.
5
- --------------------------------------------------------------------------------
MANAGER OVERVIEW
MFS MID CAP GROWTH PORTFOLIO
PERFORMANCE UPDATE
During its fiscal year ended December 31, 2003, the fund returned 37.05%. In
comparison, the fund underperformed both of its benchmarks, the Russell Midcap
Growth Index,(i) which returned 42.71% as well as the Russell 2000 Index(ii),
which returned 47.25% for the same period. However, the fund outperformed its
Lipper mid-cap growth variable funds category average, which was 36.34% for the
same period.(1)
MARKET ENVIRONMENT
In the early months of 2003, investors were battered by economic and
geopolitical uncertainty. By year-end, however, they were upbeat as 2003 was the
first positive year for most global markets in four years. The turnaround in
global stock markets began in March and April, when it became apparent that the
U.S.- and British-led coalition was on the verge of military success in Iraq.
Increasingly positive economic numbers, particularly corporate earnings,
prompted an ensuing market rally. Additionally, as the year progressed, investor
focus on negative factors such as the Iraq situation, a short-lived SARS
epidemic, and corporate misdeeds decreased.
In the equity markets, the big surprise of 2003 was investors' appetite for
risk. After a brutal three-year market decline, many observers believed
investors would avoid risky investments. Instead, the markets experienced an
equity rally led by relatively low-quality, higher-risk stocks -- stocks of
companies with substantial debt on their balance sheets, low profit margins,
and/or second- and third-tier competitive positioning. Investors seemed to favor
the stocks that had fallen the hardest, rather than bidding up industry leaders
that had weathered the global downturn relatively well.
PERFORMANCE CONTRIBUTORS
Wireless tower rental companies CROWN CASTLE INTERNATIONAL CORP. and AMERICAN
TOWER CORPORATION, in the utilities and communication sector, were the fund's
best performing stocks. Cash flow growth and improving fundamentals drove these
stocks higher. In addition, debt refinancing improved overall balance sheets for
these companies.
In the leisure sector, Internet travel firm EXPEDIA, INC. benefited from market
share gains in the online travel business and posted solid results. Satellite TV
operator ECHOSTAR COMMUNICATIONS CORPORATION posted strong gains as the company
expanded its subscriber base and generated strong growth in free cash flows.
Shares of NTL INCORPORATED, the largest broadband and cable operator in the U.K.
and Ireland, soared after the company emerged from bankruptcy and continued to
strengthen its balance sheet and drive cash flow growth.
Contributors in technology included data storage software supplier VERITAS
SOFTWARE CORPORATION, which benefited from a recovery in technology spending for
storage software. Semiconductor company ANALOG DEVICES, INC. contributed to
performance due to an upswing in semiconductor demand and market share gains for
its well-positioned products.
The fund's investments in healthcare also contributed to performance.
Biotechnology equipment vendor INVITROGEN CORPORATION, which sells life science
tools used in research and drug manufacturing, benefited from an industry
recovery and improved product offerings and efficiency gains under a new CEO.
GENENTECH, INC.'S stock soared after receiving FDA approval for Avastin, an
innovative new cancer drug. We sold Genentech during the period and took some
profits. GUIDANT CORPORATION posted strong gains after an earlier sell-off,
based on the company's leading position in cardiac rhythm management and future
possibilities in drug-coated stents.
(1) Lipper, Inc. is a major independent mutual-fund tracking organization.
Returns are based on the 12-month period ended December 31, 2003, calculated
among the 113 funds in the Lipper mid-cap growth variable funds category
including the reinvestment of dividends and capital gains, if any.
6
DETRACTORS FROM PERFORMANCE
Despite solid gains from select stocks, the returns from the fund's overall
technology position trailed the benchmark's. NETWORK ASSOCIATES, INC. lagged as
sales of the company's industry leading anti-spam and anti-virus software were
slow to accelerate and were unable to meet or exceed our expectations. Software
developer PEOPLESOFT, INC. detracted from performance as demand for the
company's release of its product upgrade was not as robust as anticipated. We
sold Peoplesoft prior to the end of the period.
Media holding WESTWOOD ONE, INC. detracted from performance as the pickup in
advertising, which is tied to the economic recovery, proved slower than
expected. Weight loss services company WEIGHT WATCHERS INTERNATIONAL, INC.'S
stock price declined as fundamentals weakened in the face of competing diet
programs. We sold Weight Watchers during the period as our fundamental thesis
was not playing out as anticipated. Adult education provider CAREER EDUCATION
CORPORATION'S stock retreated late in the year amid allegations that employees
falsified accreditation documents, charges which management vigorously denies.
The fund was also negatively impacted by not owning two stocks in the Russell
Midcap Growth Index that performed well: AMAZON.COM, INC., which we avoided
based on valuation; and NEXTEL COMMUNICATIONS, INC., which the fund did not own
based on concerns about the competitive dynamic among wireless carriers.
The portfolio's cash position also detracted from relative performance. As with
nearly all annuity subaccounts, the fund holds some cash to buy new holdings and
to cover investor exchanges or redemptions. In a period when equity markets rose
sharply, the fund's cash holdings hurt performance against the Russell Midcap
Growth Index, which has no cash position.
Thank you for your investment in the MFS Mid Cap Growth Portfolio. We appreciate
that you have entrusted us to manage your money and value our relationship with
you.
Sincerely,
/s/ ERIC B. FISCHMAN
Eric B. Fischman
Massachusetts Financial Services
/s/ DAVID E. SETTE-DUCATI
David E. Sette-Ducati
Massachusetts Financial Services
January 22, 2004
The information provided is not intended to be a forecast of future events, a
guarantee of future results or investment advice. The opinions expressed are
current only through the end of the period of this report as stated on the cover
and are subject to change at any time based on market or other conditions. Views
expressed may differ from those of the firm as a whole.
Portfolio holdings and breakdowns are as of December 31, 2003 and are subject to
change and may not be representative of the portfolio manager's current or
future investments. The fund's top ten holdings as of this date were: NTL, Inc.
(3.14%); Cytyc Corp. (2.33%); Invitrogen Corp. (2.09%); Millipore Corp. (2.05%);
Xilinx, Inc. (1.93%); American Tower Corp., Class A Shares (1.84%); Westwood
One, Inc. (1.72%) Investors Financial Services Corp. (1.63%); Getty Images, Inc.
(1.63%); Career Education Corp. (1.57%). Please refer to pages 16 through 19 for
a list and percentage breakdown of the fund's holdings.
Fund performance reflects fund expenses, but does not reflect any charges or
expenses imposed by your variable contract. Index performance does not reflect
any deduction for fees or expenses. An investor may not invest directly in an
index.
RISK: Investments in mid-capitalization companies may involve a higher degree of
risk and volatility than investments in larger, more established companies.
(i) The Russell Midcap Growth Index measures the performance of those Russell
Midcap companies with higher price-to-book ratios and higher forecasted
growth values. (A price-to-book ratio is the price of a stock compared to
the difference between a company's assets and liabilities.)
(ii) The Russell 2000 Index measures the performance of the 2,000 smallest
companies in the Russell 3000 Index, which represents approximately 8% of
the total market capitalization of the Russell 3000 Index.
7
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- MFS MID CAP GROWTH PORTFOLIO AS OF 12/31/03
(UNAUDITED)
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------------------
Twelve Months Ended 12/31/03 37.05%
Five Years Ended 12/31/03 (0.79)
3/23/98* through 12/31/03 (0.60)
<Caption>
CUMULATIVE TOTAL RETURN
-----------------------
3/23/98* through 12/31/03 (3.41)%
* Commencement of operations.
</Table>
This chart assumes an initial investment of $10,000 made at
inception on March 23, 1998, assuming reinvestment of dividends,
through December 31, 2003. The Russell Midcap Growth Index measures
the performance of these Russell Midcap companies with higher
price-to-book ratios and higher forecasted growth values. The
Russell 2000 Index measures the performance of the 2,000 smallest
companies in the Russell 3000 Index, which represents approximately
8% of the total market capitalization of the Russell 3000 Index.
[Line Graph]
<Table>
<Caption>
MFS MIDCAP GROWTH RUSSELL MIDCAP GROWTH
PORTFOLIO INDEX RUSSELL 2000 INDEX
----------------- --------------------- ------------------
3/23/98 10000.00 10000.00 10000.00
12/98 10050.00 9935.00 8981.00
12/99 16499.00 11747.00 10891.00
12/00 18031.00 12716.00 10562.00
12/01 13772.00 10154.00 10824.00
12/02 7048.00 7372.00 8607.00
12/31/03 9659.00 10520.00 12674.00
</Table>
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The total returns and graph presented above do not
reflect expenses associated with your variable contract such as administrative
fees, account charges and surrender charges which, if reflected, would reduce
the total returns for all periods shown.
8
- --------------------------------------------------------------------------------
MANAGER OVERVIEW
MERRILL LYNCH LARGE CAP CORE PORTFOLIO (FORMERLY, MFS RESEARCH PORTFOLIO)
PERFORMANCE UPDATE
During its fiscal year ended December 31, 2003, the fund returned 21.16%. In
comparison, the fund underperformed its benchmarks, the unmanaged S&P 500
Index(i) and Russell 1000 Index(ii), which returned 28.67% and 29.89%,
respectively, for the same period. The fund underperformed its Lipper large-cap
core funds category average, which was 26.42% for the same period.(1)
We assumed management responsibility for the fund on November 17, 2003. We have
invested the assets in a manner designed to outperform other large cap core
portfolios using securities found in the Russell 1000 Index. Our investment
process attempts to add value through both security selection and portfolio
construction. We use quantitative selection criteria including earnings
momentum, earnings surprise and valuation. These criteria are input into a
proprietary quantitative model and are subject to selective fundamental
overrides. Portfolio construction consists of an optimization process with risk
management controlling style, capitalization, sector and individual security
bets.
The fund recorded mixed performance from November 17, 2003 through year-end
December 31, 2003, as we restructured the portfolio to bring it in line with our
current outlook (we turned over about half of the positions). Performance
benefited from favorable stock selection within the financials and consumer
staples sectors. On the flip side, underperformance resulted from poor stock
selection within the information technology and consumer discretionary sectors,
in addition to an underweight in the energy sector. At the individual stock
level, the largest outperformers were E*TRADE FINANCIAL CORP., PULTE HOMES,
INC., ACE LIMITED, GETTY IMAGES, INC. and GEORGIA PACIFIC CORPORATION. In
addition, the fund's underweight position in WAL-MART STORES, INC. had a
positive impact on performance. These were offset by underperformance in SANDISK
CORPORATION, SEARS, ROEBUCK & CO., JOHNSON & JOHNSON INC, and AGERE SYSTEMS INC.
As mentioned, we restructured the portfolio to position it in a more
pro-cyclical manner. These actions were based on our continuing belief that
economic momentum would be positive for the balance of this year and into 2004.
As a result, we added most significantly to information technology and consumer
discretionary while reducing exposure to consumer staples, energy, and health
care. Our largest purchases were GENERAL ELECTRIC COMPANY, J.P. MORGAN CHASE &
CO., PFIZER INC., and TEXAS INSTRUMENTS INC., and our largest sales were JOHNSON
& JOHNSON INC, TARGET CORPORATION, MICROSOFT CORPORATION, VERIZON COMMUNICATIONS
INC., and KOHL'S CORPORATION.
The fund is now overweighted in cyclical areas of the marketplace including
consumer discretionary and information technology and underweighted in
financials and consumer staples. We are attempting, through careful stock
selection, to be positioned in companies with positive earnings momentum,
earnings surprise, and valuation characteristics.
Thank you for your investment in the Merrill Lynch Large Cap Core Portfolio. We
appreciate that you have entrusted us to manage your money and value our
relationship with you.
Sincerely,
/s/ ROBERT C. DOLL, JR.
Robert C. Doll, Jr.
Merrill Lynch Investment Managers, L.P.
January 19, 2004
(1) Lipper, Inc. is a major independent mutual-fund tracking organization.
Returns are based on the 12-month period ended December 31, 2003, calculated
among the 224 funds in the Lipper large-cap core variable funds category
including the reinvestment of dividends and capital gains, if any.
9
The information provided is not intended to be a forecast of future events, a
guarantee of future results or investment advice. The opinions expressed are
current only through the end of the period of this report as stated on the cover
and are subject to change at any time based on market or other conditions. Views
expressed may differ from those of the firm as a whole.
Portfolio holdings and breakdowns are as of December 31, 2003 and are subject to
change and may not be representative of the portfolio manager's current or
future investments. The fund's top ten holdings as of this date were: Cisco
Systems, Inc. (2.59%); Altria Group, Inc. (2.08%); General Electric Co. (1.91%);
J.P. Morgan Chase & Co. (1.72%); Bank of America Corp. (1.69%); Pfizer, Inc.
(1.66%); Intel Corp. (1.62%) Exxon Mobil Corp.(1.53%); Texas Instruments, Inc.
(1.48%); Hewlett-Packard, Co. (1.40%). Please refer to pages 20 through 24 for a
list and percentage breakdown of the fund's holdings.
Fund performance reflects fund expenses, but does not reflect any charges or
expenses imposed by your variable contract. Index performance does not reflect
any deduction for fees or expenses. An investor may not invest directly in an
index.
(i) The S&P 500 Index is a market capitalization-weighted index of 500 widely
held common stocks.
(ii) The Russell 1000 Index measures the performance of the 1000 largest
companies in the Russell 3000 Index, which represents approximately 92% of
the total market capitalization of the Russell 3000 Index.
10
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON -- MERRILL LYNCH LARGE CAP CORE PORTFOLIO AS OF 12/31/03
(UNAUDITED)
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS
------------------------------------------
Twelve Months Ended 12/31/03 21.16%
Five Years Ended 12/31/03 (3.86)
3/23/98* through 12/31/03 (2.41)
<Caption>
CUMULATIVE TOTAL RETURN
-----------------------
3/23/98* through 12/31/03 (13.13)%
* Commencement of operations.
</Table>
This chart assumes an initial investment of $10,000 made at
inception on March 23, 1998, assuming reinvestment of dividends,
through December 31, 2003. The S&P 500 Index is an unmanaged index
composed of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange and over-the-counter
markets. The Russell 1000 Index measures the performance of the
1,000 largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell
3000 Index.
(PERFORMANCE GRAPH)
<Table>
<Caption>
MERRILL LYNCH LARGE CAP
CORE PORTFOLIO S&P 500 INDEX RUSSELL 1000 INDEX
----------------------- ------------- ------------------
3/23/98 10000.00 10000.00 10000.00
12/98 10577.00 11285.00 11204.00
12/99 13080.00 13658.00 13547.00
12/00 12351.00 12415.00 12491.00
12/01 9578.00 10940.00 10936.00
12/02 7170.00 8523.00 8569.00
12/31/03 8687.00 10967.00 11130.00
</Table>
** It is the opinion of management that the Russell 1000 Index more
accurately reflects the current composition of the Merrill Lynch Large
Cap Core Portfolio than the S&P 500 Index. In future reporting, the
Russell 1000 Index will be used as a basis of comparison of total return
performance rather than the S&P 500 Index.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Average annual total returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends. The total returns and graph presented above do not
reflect expenses associated your variable contract such as administrative fees,
account charges and surrender charges which, if reflected, would reduce the
total returns for all periods shown.
11
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS DECEMBER 31, 2003
CONVERTIBLE SECURITIES PORTFOLIO
<Table>
<Caption>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK -- 22.7%
- -----------------------------------------------------------------------------------------------
AUTOMOTIVE -- 7.3%
50,000 Ford Motor Co. Capital Trust II, 6.500%..................... $ 2,792,500
General Motors Corp.:
53,000 5.25%..................................................... 1,424,110
47,000 6.25%..................................................... 1,518,100
- -----------------------------------------------------------------------------------------------
5,734,710
- -----------------------------------------------------------------------------------------------
ELECTRIC -- 0.4%
3,150 Calenergy Capital Trust II, 6.250%.......................... 151,200
3,070 Calenergy Capital Trust III, 6.500%......................... 147,360
- -----------------------------------------------------------------------------------------------
298,560
- -----------------------------------------------------------------------------------------------
HOUSEWARES -- 3.3%
56,000 Newell Financial Trust I, 5.250%............................ 2,576,000
- -----------------------------------------------------------------------------------------------
MEDIA -- 3.4%
33,250 Tribune Co., 2.000%......................................... 2,701,563
- -----------------------------------------------------------------------------------------------
PHARMACEUTICALS -- 0.6%
8,000 Omnicare, Inc., 4.000%...................................... 510,000
- -----------------------------------------------------------------------------------------------
PIPELINES -- 1.9%
43,200 El Paso Energy Corp. Capital Trust I, 4.750%................ 1,458,000
- -----------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST -- 3.0%
39,515 Equity Office Properties Trust, 5.250%...................... 1,976,145
13,900 Reckson Associates Realty Corp., 7.625%..................... 350,975
- -----------------------------------------------------------------------------------------------
2,327,120
- -----------------------------------------------------------------------------------------------
SAVINGS AND LOANS -- 2.8%
25,000 Washington Mutual Capital Trust I, 5.375% (a)............... 1,391,500
15,000 Washington Mutual Inc., 5.375%.............................. 834,900
- -----------------------------------------------------------------------------------------------
2,226,400
- -----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 0.0%
Global Crossing Ltd.:
1,200 6.750% (b)................................................ 0
1,200 7.000% (a)(b)............................................. 12
6,000 Loral Space & Communications Ltd., 6.000% (a)............... 25,500
- -----------------------------------------------------------------------------------------------
25,512
- -----------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost -- $17,094,200)..... 17,857,865
- -----------------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
12
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
CONVERTIBLE SECURITIES PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT RATING(C) SECURITY VALUE
- -------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS AND NOTES -- 68.7%
- -------------------------------------------------------------------------------------------------
AUTOMOTIVE -- 2.4%
Lear Corp.:
$2,060,000 BBB- Zero coupon due 2/20/22................................... $ 1,084,075
1,500,000 BBB- Zero coupon due 2/20/22 (a)............................... 789,375
- -------------------------------------------------------------------------------------------------
1,873,450
- -------------------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 5.9%
3,000,000 NR Affymetrix, Inc., 5.000% due 10/1/06........................ 3,060,000
74,000 NR Aviron, 5.250% due 2/1/08................................... 76,960
Inhale Therapeutic Systems, Inc.:
250,000 NR 3.500% due 10/17/07....................................... 227,188
300,000 NR 3.500% due 10/17/07 (a)................................... 272,625
800,000 NR Invitrogen Corp., 2.000% due 8/1/23 (a)..................... 998,000
- -------------------------------------------------------------------------------------------------
4,634,773
- -------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES -- 3.7%
3,000,000 NR The Interpublic Group of Cos., Inc., 1.800% due 9/16/04..... 2,947,500
- -------------------------------------------------------------------------------------------------
COMPUTER SERVICES -- 2.0%
500,000 NR DST Systems, Inc., 4.125% due 8/15/23 (a)................... 598,750
951,000 BBB Electric Data Systems Corp., 3.875% due 7/15/23 (a)......... 997,361
- -------------------------------------------------------------------------------------------------
1,596,111
- -------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 6.4%
4,750,000 AAA American International Group, Inc., zero coupon due
11/9/31................................................... 3,164,687
3,370,000 Aa3* Merrill Lynch & Co., Inc., zero coupon due 5/23/31.......... 1,857,713
50,000 B Providian Financial Corp., 4.000% due 5/15/08............... 58,000
- -------------------------------------------------------------------------------------------------
5,080,400
- -------------------------------------------------------------------------------------------------
ELECTRIC -- 1.7%
900,000 BBB- CenterPoint Energy, Inc., 3.750% due 5/15/23 (a)............ 960,750
350,000 BBB PPL Energy Supply LLC, 2.625% due 5/15/23 (a)............... 360,500
- -------------------------------------------------------------------------------------------------
1,321,250
- -------------------------------------------------------------------------------------------------
ELECTRONICS -- 2.7%
800,000 BB Agilent Technologies Inc., 3.000% due 12/1/21............... 878,000
2,400,000 BBB- Arrow Electronics Inc., zero coupon due 2/21/21............. 1,260,000
- -------------------------------------------------------------------------------------------------
2,138,000
- -------------------------------------------------------------------------------------------------
GOLD MINING -- 0.2%
100,000 BBB+ Placer Dome Inc., 2.750% due 10/15/23 (a)................... 120,125
- -------------------------------------------------------------------------------------------------
HEALTHCARE -- 3.6%
1,200,000 BBB+ Health Management Associates, Inc., 1.500% due 8/1/23 (a)... 1,326,000
500,000 NR Lincare Holdings Inc., 3.000% due 6/15/33 (a)............... 500,625
Universal Health Services, Inc.:
1,100,000 BBB 0.426% due 6/23/20........................................ 730,125
450,000 BBB 0.426% due 6/23/20 (a).................................... 298,688
- -------------------------------------------------------------------------------------------------
2,855,438
- -------------------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
13
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
CONVERTIBLE SECURITIES PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT RATING(C) SECURITY VALUE
- -------------------------------------------------------------------------------------------------
LEISURE TIME -- 3.8%
$1,950,000 BB+ Royal Caribbean Cruises Ltd., zero coupon due 2/2/21........ $ 945,750
3,500,000 BB+ Starwood Hotels & Resorts Worldwide, Inc., zero coupon due
5/25/21................................................... 2,016,875
- -------------------------------------------------------------------------------------------------
2,962,625
- -------------------------------------------------------------------------------------------------
MANUFACTURING -- 3.6%
150,000 NR Ciber Inc., 2.875% due 12/15/23 (a)......................... 147,937
Tyco International Group, S.A.:
300,000 BBB- 2.750% due 1/15/18 (a).................................... 384,375
1,700,000 BBB- 3.125% due 1/15/23 (a).................................... 2,333,250
- -------------------------------------------------------------------------------------------------
2,865,562
- -------------------------------------------------------------------------------------------------
MEDIA -- 9.0%
1,000,000 NR Adelphia Communications Corp., 6.000% due 2/15/06 (d)....... 447,500
1,330,000 Ca* Charter Communications Inc., 4.750% due 6/1/06.............. 1,183,700
Liberty Media Corp.:
175,000 BBB- 0.750% due 3/30/23........................................ 207,375
500,000 BBB- 0.750% due 3/30/23 (a).................................... 592,500
2,100,000 BBB- 4.000% due 11/15/29....................................... 1,483,125
950,000 BBB- 3.500% due 1/15/31........................................ 800,375
250,000 BBB- 3.500% due 1/15/31(a)..................................... 210,625
2,000,000 BBB+ The Walt Disney Co., 2.125% due 4/15/23..................... 2,127,500
- -------------------------------------------------------------------------------------------------
7,052,700
- -------------------------------------------------------------------------------------------------
OIL AND GAS -- 5.5%
Diamond Offshore Drilling Inc.:
1,130,000 A 1.500% due 4/15/31........................................ 1,039,600
400,000 A 1.500% due 4/15/31 (a).................................... 368,000
Global Marine Inc.:
2,000,000 A- Zero coupon due 6/23/20................................... 1,157,500
600,000 A- Zero coupon due 6/23/20 (a)............................... 347,250
1,000,000 BBB Halliburton Co., 3.125% due 7/15/23 (a)..................... 1,041,250
Hanover Compressor Co.:
300,000 B 4.750% due 3/15/08........................................ 279,000
75,000 B 4.750% due 1/15/14........................................ 83,344
- -------------------------------------------------------------------------------------------------
4,315,944
- -------------------------------------------------------------------------------------------------
PHARMACEUTICALS -- 3.7%
600,000 B Advanced Medical Optics, Inc., 3.500% due 4/15/23 (a)....... 723,750
400,000 A Allergan, Inc., zero coupon due 11/6/22 (a)................. 383,000
Cephalon Inc.:
600,000 B- Tranche A, zero coupon due 6/15/33 (a)(b)................. 596,250
800,000 B- Tranche B, zero coupon due 6/15/33 (a)(b)................. 796,000
Valeant Pharmaceuticals International:
75,000 B 3.000% due 8/16/10 (a).................................... 82,781
75,000 B 4.000% due 11/15/13 (a)................................... 84,281
200,000 BBB- Watson Pharmaceuticals, Inc., 1.750% due 3/15/23 (a)........ 264,250
- -------------------------------------------------------------------------------------------------
2,930,312
- -------------------------------------------------------------------------------------------------
PIPELINES -- 1.2%
2,027,000 B- El Paso Corp., zero coupon due 2/28/21...................... 942,555
- -------------------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
14
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
CONVERTIBLE SECURITIES PORTFOLIO
<Table>
<Caption>
FACE
AMOUNT RATING(C) SECURITY VALUE
- -------------------------------------------------------------------------------------------------
RETAIL -- 6.7%
Best Buy Co., Inc.:
$ 500,000 BB+ 2.250% due 1/15/22........................................ $ 546,250
300,000 BB+ 2.250% due 1/15/22 (a).................................... 327,750
1,500,000 BB+ The Gap, Inc., 5.750% due 3/15/09........................... 2,308,125
J.C. Penny Co. Inc.:
1,150,000 BB- 5.000% due 10/15/08....................................... 1,267,875
750,000 BB- 5.000% due 10/15/08 (a)................................... 826,875
- -------------------------------------------------------------------------------------------------
5,276,875
- -------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 6.6%
3,150,000 BB+ Anixter International Inc., zero coupon due 7/7/33 (a)...... 1,350,562
1,000,000 BBB Cox Communications Inc., 0.348% due 2/23/21................. 730,000
100,000 NR Tekelec Inc., 2.250% due 6/15/08 (a)........................ 111,375
5,000,000 A+ Verizon Global Funding Corp., zero coupon due 5/15/21....... 3,043,750
- -------------------------------------------------------------------------------------------------
5,235,687
- -------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS AND NOTES (Cost -- $50,727,591)..... 54,149,307
- -------------------------------------------------------------------------------------------------
<Caption>
FACE
AMOUNT SECURITY VALUE
- -------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 8.6%
6,763,000 State Street Bank and Trust Co., 0.800% due 1/2/04; Proceeds
at maturity -- $6,763,301; (Fully collateralized by U.S.
Treasury Bonds, 6.125% due 11/15/27; Market value --
$6,903,183)
(Cost -- $6,763,000)...................................... 6,763,000
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0% (Cost -- $74,584,791**)......... $78,770,172
- -------------------------------------------------------------------------------------------------
</Table>
(a) Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers. These securities
have been deemed liquid pursuant to guidelines established by the Board of
Trustees.
(b) Non-income producing security.
(c) All ratings are by Standard & Poor's Ratings Service, except for those which
are identified by an asterisk (*), which are rated by Moody's Investors
Service.
(d) Security is currently in default.
** Aggregate cost for Federal income tax purposes is $74,590,663.
See page 25 for definitions of ratings.
SEE NOTES TO FINANCIAL STATEMENTS.
15
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
MFS MID CAP GROWTH PORTFOLIO
<Table>
<Caption>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
COMMON STOCK -- 95.7%
- ----------------------------------------------------------------------------------------
AEROSPACE AND DEFENSE -- 0.3%
17,700 Empresa Brasileira de Aeronautica S.A., Sponsored ADR....... $ 620,031
- ----------------------------------------------------------------------------------------
AIR FREIGHT AND COURIERS -- 0.9%
45,900 Expeditors International of Washington, Inc. ............... 1,728,594
- ----------------------------------------------------------------------------------------
AIRLINES -- 0.8%
59,800 JetBlue Airways Corp.+...................................... 1,585,896
- ----------------------------------------------------------------------------------------
BANKS -- 1.6%
81,900 Investors Financial Services Corp. ......................... 3,145,779
- ----------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 6.6%
45,800 Biogen Idec Inc.+........................................... 1,684,524
14,500 Celgene Corp.+.............................................. 652,790
27,440 Genzyme Corp.+.............................................. 1,353,890
44,600 Gilead Sciences, Inc.+...................................... 2,593,044
15,400 ICOS Corp.+................................................. 635,712
57,620 Invitrogen Corp.+........................................... 4,033,400
63,000 Millennium Pharmaceuticals, Inc.+........................... 1,176,210
12,000 Neurocrine Biosciences, Inc.+............................... 654,480
- ----------------------------------------------------------------------------------------
12,784,050
- ----------------------------------------------------------------------------------------
BUILDING PRODUCTS -- 1.0%
18,300 American Standard Cos. Inc.+................................ 1,842,810
- ----------------------------------------------------------------------------------------
CHEMICALS -- 0.2%
27,040 Lyondell Chemical Co........................................ 458,328
- ----------------------------------------------------------------------------------------
COMMERCIAL SERVICES AND SUPPLIES -- 9.1%
19,000 Alliance Data Systems Corp.+................................ 525,920
75,300 Career Education Corp.+..................................... 3,017,271
52,600 Corinthian Colleges, Inc.+.................................. 2,922,456
42,800 The Corporate Executive Board Co.+.......................... 1,997,476
53,200 DST Systems, Inc.+.......................................... 2,221,632
49,600 Manpower Inc................................................ 2,335,168
109,400 Monster Worldwide, Inc.+.................................... 2,402,424
34,300 Paychex, Inc................................................ 1,275,960
41,800 Robert Half International Inc.+............................. 975,612
- ----------------------------------------------------------------------------------------
17,673,919
- ----------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 3.9%
28,400 ADTRAN, Inc................................................. 880,400
49,100 Andrew Corp.+............................................... 565,141
141,800 CIENA Corp.+................................................ 941,552
204,400 Corning, Inc.+.............................................. 2,131,892
94,700 Juniper Networks, Inc.+..................................... 1,768,996
47,600 NetScreen Technologies, Inc.+............................... 1,178,100
- ----------------------------------------------------------------------------------------
7,466,081
- ----------------------------------------------------------------------------------------
COMPUTERS AND PERIPHERALS -- 0.9%
76,700 NVIDIA Corp.+............................................... 1,783,275
- ----------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
16
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
MFS MID CAP GROWTH PORTFOLIO
<Table>
<Caption>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
DIVERSIFIED FINANCIALS -- 6.0%
12,900 Affiliated Managers Group, Inc.+............................ $ 897,711
141,700 Ameritrade Holding Corp.+................................... 1,993,719
33,800 Legg Mason, Inc............................................. 2,608,684
86,750 NTL Inc.+................................................... 6,050,812
- ----------------------------------------------------------------------------------------
11,550,926
- ----------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 0.8%
47,200 SpectraSite, Inc.+.......................................... 1,640,200
- ----------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.3%
72,100 Rockwell Automation, Inc.................................... 2,566,760
- ----------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT AND INSTRUMENTS -- 4.3%
11,500 Amphenol Corp., Class A Shares+............................. 735,195
125,300 Flextronics International Ltd.+............................. 1,859,452
101,200 Thermo Electron Corp.+...................................... 2,550,240
88,300 Vishay Intertechnology, Inc.+............................... 2,022,070
32,750 Waters Corp.+............................................... 1,085,990
- ----------------------------------------------------------------------------------------
8,252,947
- ----------------------------------------------------------------------------------------
ENERGY EQUIPMENT AND SERVICES -- 3.1%
83,570 BJ Services Co.+............................................ 3,000,163
26,860 Cooper Cameron Corp.+....................................... 1,251,676
40,300 Smith International, Inc.+.................................. 1,673,256
- ----------------------------------------------------------------------------------------
5,925,095
- ----------------------------------------------------------------------------------------
FOOD PRODUCTS -- 0.7%
17,800 Hershey Foods Corp.......................................... 1,370,422
- ----------------------------------------------------------------------------------------
HEALTHCARE EQUIPMENT AND SUPPLIES -- 11.6%
57,300 Apogent Technologies Inc.+.................................. 1,320,192
114,700 Applera Corp. -- Applied Biosystems Group................... 2,375,437
31,700 C.R. Bard, Inc.............................................. 2,575,625
326,800 Cytyc Corp.+................................................ 4,496,768
64,700 DENTSPLY International Inc.................................. 2,922,499
45,700 Fisher Scientific International Inc.+....................... 1,890,609
39,700 Guidant Corp................................................ 2,389,940
91,700 Millipore Corp.+............................................ 3,947,685
49,500 Thoratec Corp.+............................................. 643,995
- ----------------------------------------------------------------------------------------
22,562,750
- ----------------------------------------------------------------------------------------
HEALTHCARE PROVIDERS AND SERVICES -- 1.5%
19,900 AmerisourceBergen Corp...................................... 1,117,385
109,900 Tenet Healthcare Corp.+..................................... 1,763,895
- ----------------------------------------------------------------------------------------
2,881,280
- ----------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
17
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
MFS MID CAP GROWTH PORTFOLIO
<Table>
<Caption>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
HOTELS, RESTAURANTS AND LEISURE -- 3.9%
44,200 The Cheesecake Factory Inc.+................................ $ 1,946,126
19,900 Four Seasons Hotels, Inc.................................... 1,017,885
2,700 Orbitz, Inc.+............................................... 62,640
31,380 Outback Steakhouse, Inc..................................... 1,387,310
55,600 Royal Caribbean Cruises Ltd................................. 1,934,324
31,930 Starwood Hotels & Resorts Worldwide, Inc.................... 1,148,522
- ----------------------------------------------------------------------------------------
7,496,807
- ----------------------------------------------------------------------------------------
INTERNET AND CATALOG RETAIL -- 0.8%
48,386 InterActiveCorp+............................................ 1,641,737
- ----------------------------------------------------------------------------------------
INTERNET SOFTWARE AND SERVICES -- 0.1%
25,400 Akamai Technologies, Inc.+.................................. 273,050
- ----------------------------------------------------------------------------------------
IT CONSULTING AND SERVICES -- 0.5%
33,590 SunGard Data Systems Inc.+.................................. 930,779
- ----------------------------------------------------------------------------------------
MEDIA -- 10.7%
93,300 Citadel Broadcasting Co.+................................... 2,087,121
27,720 The E.W. Scripps Co., Class A Shares........................ 2,609,561
86,030 EchoStar Communications Corp., Class A Shares+.............. 2,925,020
53,990 Entercom Communications Corp.+.............................. 2,859,310
62,500 Getty Images, Inc.+......................................... 3,133,125
41,200 Lin TV Corp., Class A Shares+............................... 1,063,372
57,260 Meredith Corp............................................... 2,794,861
97,060 Westwood One, Inc.+......................................... 3,320,423
- ----------------------------------------------------------------------------------------
20,792,793
- ----------------------------------------------------------------------------------------
PHARMACEUTICALS -- 1.2%
31,900 Medicis Pharmaceutical Corp., Class A Shares................ 2,274,470
- ----------------------------------------------------------------------------------------
ROAD AND RAIL -- 0.7%
62,600 Swift Transportation Co., Inc.+............................. 1,315,852
- ----------------------------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT AND PRODUCTS -- 8.2%
740,200 Agere Systems Inc.+......................................... 2,146,580
44,240 Analog Devices, Inc.+....................................... 2,019,556
42,300 Cymer, Inc.+................................................ 1,953,837
52,200 Marvell Technology Group Ltd.+.............................. 1,979,946
43,490 Novellus Systems, Inc.+..................................... 1,828,754
115,400 PMC-Sierra, Inc.+........................................... 2,325,310
96,200 Xilinx, Inc.+............................................... 3,726,788
- ----------------------------------------------------------------------------------------
15,980,771
- ----------------------------------------------------------------------------------------
SOFTWARE -- 6.1%
111,900 Amdocs Ltd.+................................................ 2,515,512
20,100 Ascential Software Corp.+................................... 521,193
140,540 BEA Systems, Inc.+.......................................... 1,728,642
130,700 Network Associates, Inc.+................................... 1,965,728
74,880 Symantec Corp.+............................................. 2,594,592
67,910 VERITAS Software Corp.+..................................... 2,523,536
- ----------------------------------------------------------------------------------------
11,849,203
- ----------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
18
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
MFS MID CAP GROWTH PORTFOLIO
<Table>
<Caption>
SHARES SECURITY VALUE
- ----------------------------------------------------------------------------------------
SPECIALTY RETAIL -- 5.6%
15,800 HOT Topic, Inc.+............................................ $ 465,468
79,070 Office Depot, Inc.+......................................... 1,321,260
24,300 Pacific Sunwear of California, Inc.+........................ 513,216
97,940 PETsMART, Inc............................................... 2,330,972
76,200 Ross Stores, Inc............................................ 2,013,966
43,700 The Talbots, Inc............................................ 1,345,086
65,100 Tiffany & Co................................................ 2,942,520
- ----------------------------------------------------------------------------------------
10,932,488
- ----------------------------------------------------------------------------------------
TEXTILES AND APPAREL -- 1.0%
24,100 Coach, Inc.+................................................ 909,775
24,000 Reebok International Ltd.................................... 943,680
- ----------------------------------------------------------------------------------------
1,853,455
- ----------------------------------------------------------------------------------------
TRADING COMPANIES AND DISTRIBUTORS -- 0.5%
20,200 W.W. Grainger, Inc.......................................... 957,278
- ----------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES -- 1.8%
327,810 American Tower Corp., Class A Shares+....................... 3,546,904
- ----------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $151,481,904)................... 185,684,730
- ----------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT -- 4.3%
$ 8,282,000 Federal Home Loan Bank Discount Notes, zero coupon due
1/2/04
(Cost -- $8,281,827)...................................... 8,281,827
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0% (Cost -- $159,763,731*)......... $193,966,557
- ----------------------------------------------------------------------------------------
</Table>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is $162,270,087.
Abbreviation used in this schedule:
ADR -- American Depository Receipt.
SEE NOTES TO FINANCIAL STATEMENTS.
19
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
MERRILL LYNCH LARGE CAP CORE PORTFOLIO
<Table>
<Caption>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
COMMON STOCK -- 99.1%
- -----------------------------------------------------------------------------------------
AUTO COMPONENTS -- 1.1%
20,000 Lear Corp................................................... $ 1,226,600
- -----------------------------------------------------------------------------------------
BANKS -- 1.7%
24,150 Bank of America Corp. ...................................... 1,942,385
- -----------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 2.1%
13,000 Genentech, Inc.+............................................ 1,216,410
18,000 Invitrogen Corp.+........................................... 1,260,000
- -----------------------------------------------------------------------------------------
2,476,410
- -----------------------------------------------------------------------------------------
CHEMICALS -- 1.3%
37,000 The Dow Chemical Co. ....................................... 1,538,090
- -----------------------------------------------------------------------------------------
COMMERCIAL SERVICES AND SUPPLIES -- 3.0%
64,000 Cendant Corp.+.............................................. 1,425,280
14,300 Corinthian Colleges, Inc.+.................................. 794,508
23,000 H&R Block, Inc. ............................................ 1,273,510
- -----------------------------------------------------------------------------------------
3,493,298
- -----------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 8.3%
5,200 ADTRAN, Inc. ............................................... 161,200
98,000 Avaya Inc.+................................................. 1,268,120
123,000 Cisco Systems, Inc.+........................................ 2,987,670
45,000 Foundry Networks, Inc.+..................................... 1,231,200
110,000 Motorola, Inc. ............................................. 1,547,700
14,300 Nokia Oyj, Sponsored ADR.................................... 243,100
231,200 Nortel Networks Corp.+...................................... 977,976
43,000 Scientific-Atlanta, Inc. ................................... 1,173,900
- -----------------------------------------------------------------------------------------
9,590,866
- -----------------------------------------------------------------------------------------
COMPUTERS - MEMORY DEVICES -- 0.0%
27,200 Seagate Technology, Escrow Shares+.......................... 0
- -----------------------------------------------------------------------------------------
COMPUTERS AND PERIPHERALS -- 3.9%
70,400 Hewlett-Packard Co. ........................................ 1,617,088
5,000 International Business Machines Corp. ...................... 463,400
19,000 SanDisk Corp.+.............................................. 1,161,660
110,000 Western Digital Corp.+...................................... 1,296,900
- -----------------------------------------------------------------------------------------
4,539,048
- -----------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
20
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
MERRILL LYNCH LARGE CAP CORE PORTFOLIO
<Table>
<Caption>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
DIVERSIFIED FINANCIALS -- 10.6%
16,000 The Bear Stearns Cos. Inc. ................................. $ 1,279,200
22,000 Capital One Financial Corp. ................................ 1,348,380
16,000 Countrywide Financial Corp. ................................ 1,213,600
105,000 E*TRADE Financial Corp.+.................................... 1,328,250
11,300 The Goldman Sachs Group, Inc. .............................. 1,115,649
54,000 J.P. Morgan Chase & Co. .................................... 1,983,420
15,000 Legg Mason, Inc. ........................................... 1,157,700
17,300 Lehman Brothers Holdings Inc. .............................. 1,335,906
58,000 MBNA Corp. ................................................. 1,441,300
- -----------------------------------------------------------------------------------------
12,203,405
- -----------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 0.2%
55,000 Cincinnati Bell Inc.+....................................... 277,750
- -----------------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 1.4%
56,000 Edison International+....................................... 1,228,080
15,800 TXU Corp. .................................................. 374,776
- -----------------------------------------------------------------------------------------
1,602,856
- -----------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 0.6%
19,000 Rockwell Automation, Inc. .................................. 676,400
- -----------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT AND INSTRUMENTS -- 1.9%
25,000 Agilent Technologies, Inc.+................................. 731,000
39,300 Flextronics International Ltd.+............................. 583,212
48,000 Sanmina-SCI Corp.+.......................................... 605,280
9,700 Thermo Electron Corp.+...................................... 244,440
- -----------------------------------------------------------------------------------------
2,163,932
- -----------------------------------------------------------------------------------------
FOOD AND DRUG RETAILING -- 0.9%
7,800 CVS Corp. .................................................. 281,736
122,000 Rite Aid Corp.+............................................. 736,880
- -----------------------------------------------------------------------------------------
1,018,616
- -----------------------------------------------------------------------------------------
HEALTHCARE EQUIPMENT AND SUPPLIES -- 2.5%
24,000 Beckman Coulter, Inc. ...................................... 1,219,920
5,800 Fisher Scientific International Inc.+....................... 239,946
23,000 Guidant Corp. .............................................. 1,384,600
- -----------------------------------------------------------------------------------------
2,844,466
- -----------------------------------------------------------------------------------------
HEALTHCARE PROVIDERS AND SERVICES -- 3.2%
14,800 AmerisourceBergen Corp. .................................... 831,020
27,000 Oxford Health Plans, Inc.+.................................. 1,174,500
18,000 PacifiCare Health Systems, Inc.+............................ 1,216,800
77,000 Service Corp. International+................................ 415,030
- -----------------------------------------------------------------------------------------
3,637,350
- -----------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
21
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
MERRILL LYNCH LARGE CAP CORE PORTFOLIO
<Table>
<Caption>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
HOTELS, RESTAURANTS AND LEISURE -- 2.3%
25,000 Mandalay Resort Group....................................... $ 1,118,000
60,000 McDonald's Corp. ........................................... 1,489,800
- -----------------------------------------------------------------------------------------
2,607,800
- -----------------------------------------------------------------------------------------
HOUSEHOLD DURABLES -- 5.7%
27,000 D.R. Horton, Inc. .......................................... 1,168,020
18,000 Fortune Brands, Inc. ....................................... 1,286,820
13,000 Hovnanian Enterprises, Inc.+................................ 1,131,780
8,000 Lennar Corp., Class A Shares................................ 768,000
13,000 The Ryland Group, Inc. ..................................... 1,152,320
28,000 Toll Brothers, Inc.+........................................ 1,113,280
- -----------------------------------------------------------------------------------------
6,620,220
- -----------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 0.2%
2,000 The Procter & Gamble Co. ................................... 199,760
- -----------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 2.9%
71,000 General Electric Co. ....................................... 2,199,580
21,000 Textron Inc. ............................................... 1,198,260
- -----------------------------------------------------------------------------------------
3,397,840
- -----------------------------------------------------------------------------------------
INSURANCE -- 3.2%
28,000 ACE Ltd. ................................................... 1,159,760
7,000 American International Group, Inc. ......................... 463,960
12,400 The Chubb Corp. ............................................ 844,440
21,000 MBIA Inc. .................................................. 1,243,830
- -----------------------------------------------------------------------------------------
3,711,990
- -----------------------------------------------------------------------------------------
IT CONSULTING AND SERVICES -- 1.0%
25,000 Cognizant Technology Solutions Corp.+....................... 1,141,000
- -----------------------------------------------------------------------------------------
MACHINERY -- 1.0%
24,000 Cummins Inc. ............................................... 1,174,560
- -----------------------------------------------------------------------------------------
MEDIA -- 1.9%
25,890 EchoStar Communications Corp., Class A Shares+.............. 880,260
23,000 Getty Images, Inc.+......................................... 1,152,990
2,400 McClatchy Co. .............................................. 165,120
- -----------------------------------------------------------------------------------------
2,198,370
- -----------------------------------------------------------------------------------------
METALS AND MINING -- 2.7%
29,000 Freeport-McMoRan Copper & Gold, Inc. ....................... 1,221,770
15,000 Phelps Dodge Corp.+......................................... 1,141,350
39,000 Worthington Industries, Inc. ............................... 703,170
- -----------------------------------------------------------------------------------------
3,066,290
- -----------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
22
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
MERRILL LYNCH LARGE CAP CORE PORTFOLIO
<Table>
<Caption>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
MULTI-LINE RETAIL -- 5.8%
59,000 Dollar General Corp. ....................................... $ 1,238,410
27,000 Federated Department Stores, Inc. .......................... 1,272,510
44,000 The May Department Stores Co. .............................. 1,279,080
36,000 Nordstrom, Inc. ............................................ 1,234,800
28,000 Sears, Roebuck & Co. ....................................... 1,273,720
7,000 Wal-Mart Stores, Inc. ...................................... 371,350
- -----------------------------------------------------------------------------------------
6,669,870
- -----------------------------------------------------------------------------------------
MULTI-UTILITIES -- 1.0%
119,000 The Williams Cos., Inc. .................................... 1,168,580
- -----------------------------------------------------------------------------------------
OIL AND GAS -- 1.5%
43,000 Exxon Mobil Corp. .......................................... 1,763,000
- -----------------------------------------------------------------------------------------
PAPER AND FOREST PRODUCTS -- 1.2%
45,000 Georgia-Pacific Corp. ...................................... 1,380,150
- -----------------------------------------------------------------------------------------
PHARMACEUTICALS -- 3.1%
9,000 Johnson & Johnson........................................... 464,940
47,000 Mylan Laboratories Inc. .................................... 1,187,220
54,000 Pfizer Inc. ................................................ 1,907,820
- -----------------------------------------------------------------------------------------
3,559,980
- -----------------------------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT AND PRODUCTS -- 9.2%
66,000 Amkor Technology, Inc.+..................................... 1,201,860
201,000 Atmel Corp.+................................................ 1,208,010
56,000 Cypress Semiconductor Corp.+................................ 1,196,160
58,000 Intel Corp. ................................................ 1,867,600
22,000 International Rectifier Corp.+.............................. 1,087,020
29,000 National Semiconductor Corp.+............................... 1,142,890
40,300 PMC-Sierra, Inc.+........................................... 812,045
58,000 Texas Instruments Inc. ..................................... 1,704,040
10,300 Xilinx, Inc.+............................................... 399,022
- -----------------------------------------------------------------------------------------
10,618,647
- -----------------------------------------------------------------------------------------
SOFTWARE -- 3.3%
43,000 Amdocs Ltd.+................................................ 966,640
54,000 Microsoft Corp. ............................................ 1,487,160
36,000 VERITAS Software Corp.+..................................... 1,337,760
- -----------------------------------------------------------------------------------------
3,791,560
- -----------------------------------------------------------------------------------------
SPECIALTY RETAIL -- 4.8%
14,000 AutoZone, Inc.+............................................. 1,192,940
35,000 Chico's FAS, Inc.+.......................................... 1,293,250
61,000 The Gap, Inc. .............................................. 1,415,810
26,600 The Home Depot, Inc. ....................................... 944,034
24,000 Staples, Inc.+.............................................. 655,200
- -----------------------------------------------------------------------------------------
5,501,234
- -----------------------------------------------------------------------------------------
TEXTILES AND APPAREL -- 0.8%
24,000 Reebok International Ltd. .................................. 943,680
- -----------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
23
- --------------------------------------------------------------------------------
SCHEDULES OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
MERRILL LYNCH LARGE CAP CORE PORTFOLIO
<Table>
<Caption>
SHARES SECURITY VALUE
- -----------------------------------------------------------------------------------------
TOBACCO -- 2.1%
44,000 Altria Group, Inc. ......................................... $ 2,394,480
- -----------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES -- 2.7%
48,600 AT&T Wireless Services Inc.+................................ 388,314
53,000 Nextel Communications, Inc.+................................ 1,487,180
223,000 Sprint Corp. (PCS Group)+................................... 1,253,260
- -----------------------------------------------------------------------------------------
3,128,754
- -----------------------------------------------------------------------------------------
TOTAL COMMON STOCK (Cost -- $108,127,318)................... 114,269,237
- -----------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.9%
$1,089,000 State Street Bank and Trust Co., 0.800% due 1/2/04; Proceeds
at maturity -- $1,089,048; (Fully collateralized by U.S.
Treasury Bonds, 6.250% due 5/15/30; Market value --
$1,116,000) (Cost -- $1,089,000).......................... 1,089,000
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0% (Cost -- $109,216,318*)......... $115,358,237
- -----------------------------------------------------------------------------------------
</Table>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is $109,967,496.
SEE NOTES TO FINANCIAL STATEMENTS.
24
- --------------------------------------------------------------------------------
BOND RATINGS (UNAUDITED)
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AA" to
"CCC" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
<Table>
AAA -- Bonds rated "AAA" have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest
and repay principal and differ from the highest rated issue
only in a small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than bonds in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than in higher
rated categories.
BB, B, CCC and CC -- Bonds rated "BB", "B", "CCC" and "CC" are regarded, on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates
the lowest degree of speculation and "CC" the highest degree
of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse
conditions.
</Table>
Moody's Investors Service ("Moody's") -- Numerical modifiers 1, 2, and 3 may be
applied to each generic rating from "Aa" to "Caa", where 1 is the highest and 3
the lowest ranking within its generic category.
<Table>
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective
elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally
strong position of such an issue.
Aa -- Bonds rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are
considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds rated "Baa" are considered as medium grade
obligations; i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long
period of time may be small.
Caa -- Bonds rated "Caa" are of poor standing. Such issues may be
in default, or there may be present elements of danger with
respect to principal or interest.
Ca -- Bonds rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Bonds rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
</Table>
25
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2003
<Table>
<Caption>
MFS MERRILL LYNCH
CONVERTIBLE MID CAP LARGE CAP
SECURITIES GROWTH CORE
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at cost...................................... $74,584,791 $ 159,763,731 $109,216,318
- ---------------------------------------------------------------------------------------------------------
Investments, at value..................................... $78,770,172 $ 193,966,557 $115,358,237
Cash...................................................... 948 370 919
Dividends and interest receivable......................... 350,818 53,794 160,092
Receivable for Fund shares sold........................... 124,733 -- --
Receivable for securities sold............................ -- 456,745 11,521,022
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS.............................................. 79,246,671 194,477,466 127,040,270
- ---------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased.......................... 2,749,372 1,555,585 11,552,031
Payable for Fund shares reacquired........................ 87,972 134,578 125,418
Investment advisory fees payable.......................... 37,116 127,668 76,546
Administration fees payable............................... 3,712 9,575 5,752
Accrued expenses.......................................... 37,120 42,281 80,245
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES......................................... 2,915,292 1,869,687 11,839,992
- ---------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS............................................ $76,331,379 $ 192,607,779 $115,200,278
- ---------------------------------------------------------------------------------------------------------
NET ASSETS:
Paid-in capital........................................... $74,253,229 $ 409,498,978 $189,949,042
Undistributed net investment income....................... 20,038 -- 42,557
Accumulated net realized loss from investment
transactions............................................ (2,127,269) (251,094,364) (80,936,202)
Net unrealized appreciation of investments and foreign
currencies.............................................. 4,185,381 34,203,165 6,144,881
- ---------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS............................................ $76,331,379 $ 192,607,779 $115,200,278
- ---------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING.......................................... 6,431,871 27,980,923 14,669,066
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, PER SHARE.................................. $11.87 $6.88 $7.85
- ---------------------------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
26
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003
<Table>
<Caption>
MFS MERRILL LYNCH
CONVERTIBLE MID CAP LARGE CAP
SECURITIES GROWTH CORE
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest.................................................. $ 1,444,307 $ 68,411 $ 32,717
Dividends................................................. 1,142,639 626,069 1,770,578
Less: Foreign withholding tax............................. -- (5,919) (14,380)
- -------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME................................... 2,586,946 688,561 1,788,915
- -------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2)......................... 353,452 1,275,200 858,205
Administration fees (Note 2).............................. 35,345 95,640 64,365
Audit and legal........................................... 32,087 30,511 41,011
Custody................................................... 17,988 31,350 48,249
Shareholder communications................................ 9,336 25,562 42,586
Trustees' fees............................................ 6,206 6,354 6,154
Shareholder servicing fees................................ 5,043 5,003 5,003
Other..................................................... 491 1,979 1,388
- -------------------------------------------------------------------------------------------------------
TOTAL EXPENSES............................................ 459,948 1,471,599 1,066,961
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS)................................ 2,126,998 (783,038) 721,954
- -------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 5):
Realized Gain (Loss) From:
Investment transactions................................. (200,129) 11,062,959 4,668,479
Foreign currency transactions........................... -- (639) 17,626
- -------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS).................................. (200,129) 11,062,320 4,686,105
- -------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation From:
Investments............................................. 11,848,955 39,853,411 15,254,670
Foreign currencies...................................... -- 334 938
- -------------------------------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION..................... 11,848,955 39,853,745 15,255,608
- -------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCIES.............. 11,648,826 50,916,065 19,941,713
- -------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS...................... $13,775,824 $50,133,027 $20,663,667
- -------------------------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
27
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31,
<Table>
<Caption>
CONVERTIBLE SECURITIES PORTFOLIO 2003 2002
- ----------------------------------------------------------------------------------------
OPERATIONS:
Net investment income..................................... $ 2,126,998 $ 2,129,705
Net realized loss......................................... (200,129) (1,887,243)
Increase (decrease) in net unrealized appreciation........ 11,848,955 (4,052,465)
- ----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS......... 13,775,824 (3,810,003)
- ----------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income..................................... (2,082,494) (3,673,756)
Net realized gains........................................ -- (328,641)
- ----------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS............................................ (2,082,494) (4,002,397)
- ----------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares.......................... 21,865,525 16,726,051
Net asset value of shares issued for reinvestment of
dividends............................................... 2,082,494 4,002,397
Cost of shares reacquired................................. (8,131,457) (14,450,595)
- ----------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM
FUND SHARE TRANSACTIONS................................. 15,816,562 6,277,853
- ----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS........................... 27,509,892 (1,534,547)
NET ASSETS:
Beginning of year......................................... 48,821,487 50,356,034
- ----------------------------------------------------------------------------------------
END OF YEAR*.............................................. $76,331,379 $ 48,821,487
- ----------------------------------------------------------------------------------------
* Includes undistributed net investment of:................. $20,038 $36,497
- ----------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
28
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER
31,
<Table>
<Caption>
MFS MID CAP GROWTH PORTFOLIO 2003 2002
- ------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss....................................... $ (783,038) $ (1,066,424)
Net realized gain (loss).................................. 11,062,320 (206,726,742)
Increase in net unrealized appreciation................... 39,853,745 69,770,853
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS......... 50,133,027 (138,022,313)
- ------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares.......................... 18,867,585 21,659,027
Cost of shares reacquired................................. (14,613,961) (23,919,477)
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE
TRANSACTIONS............................................ 4,253,624 (2,260,450)
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS........................... 54,386,651 (140,282,763)
NET ASSETS:
Beginning of year......................................... 138,221,128 278,503,891
- ------------------------------------------------------------------------------------------
END OF YEAR............................................... $192,607,779 $ 138,221,128
- ------------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
29
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) FOR THE YEARS ENDED DECEMBER
31,
<Table>
<Caption>
MERRILL LYNCH LARGE CAP CORE PORTFOLIO 2003 2002
- ------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income..................................... $ 721,954 $ 591,918
Net realized gain (loss).................................. 4,686,105 (38,917,113)
Increase (decrease) in net unrealized appreciation........ 15,255,608 (1,621,852)
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS......... 20,663,667 (39,947,047)
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income..................................... (723,790) (745,864)
- ------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS............................................ (723,790) (745,864)
- ------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares.......................... 2,493,380 3,400,629
Net asset value of shares issued for reinvestment of
dividends............................................... 723,790 745,864
Cost of shares reacquired................................. (13,967,138) (23,370,733)
- ------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS....... (10,749,968) (19,224,240)
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS........................... 9,189,909 (59,917,151)
NET ASSETS:
Beginning of year......................................... 106,010,369 165,927,520
- ------------------------------------------------------------------------------------------
END OF YEAR*.............................................. $115,200,278 $106,010,369
- ------------------------------------------------------------------------------------------
* Includes undistributed net investment income of:.......... $42,557 $26,767
- ------------------------------------------------------------------------------------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS.
30
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Convertible Securities, MFS Mid Cap Growth and Merrill Lynch Large Cap
Core (formerly known as MFS Research) Portfolios ("Fund(s)") are separate
investment funds of The Travelers Series Trust ("Trust"). The Convertible
Securities Portfolio and the Merrill Lynch Large Cap Core Portfolio are separate
diversified investment funds of the Trust. The MFS Mid Cap Growth Portfolio is a
separate non-diversified investment fund of the Trust. The Trust is a
Massachusetts business trust registered under the Investment Company Act of
1940, as amended, as an open-end management investment company and consists of
these Funds and thirteen other separate investment funds: Travelers Quality
Bond, Lazard International Stock, MFS Emerging Growth, Federated High Yield,
Federated Stock, Disciplined Mid Cap Stock, U.S. Government Securities, Social
Awareness Stock, Pioneer Fund, formerly known as Utilities, Large Cap, Equity
Income, Zero Coupon Bond Fund (Series 2005) and MFS Value Portfolios. The
financial statements and financial highlights for the other funds are presented
in separate shareholder reports. The Funds and the other investment funds of the
Trust are offered exclusively for use with certain variable annuity and variable
life insurance contracts offered through the separate accounts of various
affiliated life insurance companies.
The significant accounting policies consistently followed by the Funds are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets
or, if there were no sales during the day, at the mean between the closing bid
and asked prices; securities primarily traded on foreign exchanges are generally
valued at the closing values of such securities on their respective exchanges,
except that when a significant occurrence exists subsequent to the time a value
was so established and it is likely to have significantly changed the value,
then the fair value of those securities will be determined by consideration of
other factors by or under the direction of the Board of Trustees; securities
listed on the NASDAQ National Market System for which market quotations are
available are valued at the official closing price or, if there is no official
closing price on that day, at the last sale price; securities traded in the
over-the-counter market are valued at prices based on market quotations for
securities of similar type; U.S. government agencies and obligations are valued
at the mean between the last reported bid and asked prices; (c) securities
maturing within 60 days are valued at cost plus accreted discount or minus
amortized premium, which approximates value; (d) securities, other than U.S.
government agencies, that have a maturity of 60 days or more are valued at
prices based on market quotations for securities of similar type, yield and
maturity; (e) interest income, adjusted for amortization of premium and
accretion of discount, is recorded on an accrual basis and dividend income is
recorded on the ex-dividend date; foreign dividends are recorded on the
ex-dividend date or as soon as practical after the Fund determines the existence
of a dividend declaration after exercising reasonable due diligence; (f) gains
or losses on the sale of securities are calculated by using the specific
identification method; (g) dividends and distributions to shareholders are
recorded on the ex-dividend date; the Funds distribute dividends and capital
gains, if any, at least annually; (h) the accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollars on the date of valuation. Purchases
and sales of securities, income and expenses are translated at the rate of
exchange quoted on the respective date that such transactions are recorded.
Differences between income or expense amounts recorded and collected or paid are
adjusted when reported by the custodian; (i) the character of income and gains
to be distributed is determined in accordance with income tax regulations which
may differ from accounting principles generally accepted in the United States of
America. At December 31, 2003, reclassifications were made to the capital
accounts of the Convertible Securities and MFS Mid Cap Growth Portfolios to
reflect permanent book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, a portion of
accumulated net investment loss amounting to $783,682 was reclassified to
paid-in capital for the MFS Mid Cap Growth Portfolio. Net investment income, net
realized gains and net assets were not affected by this adjustment; (j) the
Funds intend to comply with the applicable provisions of the Internal Revenue
Code of 1986, as amended, pertaining to regulated investment companies and to
make distributions of taxable income sufficient to relieve it from substantially
all Federal income and excise taxes; and (k) estimates and assumptions are
required to be made regarding assets, liabilities and changes in net assets
resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
In addition, the MFS Mid Cap Growth and Merrill Lynch Large Cap Core
Portfolios may enter into forward exchange contracts in order to hedge against
foreign currency risk. These contracts are marked to market daily, by
recognizing the difference between the contract exchange rate and the current
forward rate as an unrealized gain or loss. Realized gains or losses are
recognized when the contracts are settled.
31
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS
Travelers Asset Management International Company LLC ("TAMIC"), an indirect
wholly-owned subsidiary of Citigroup Inc. ("Citigroup"), acts as investment
adviser to the Convertible Securities ("CS"), MFS Mid Cap Growth ("MMCG") and
Merrill Lynch Large Cap Core ("MLLCC") Portfolios. CS, MMCG and MLLCC each pay
TAMIC an investment advisory fee calculated at annual rates of 0.60%, 0.80% and
0.80%, respectively. These fees are calculated daily and paid monthly.
TAMIC has entered into a sub-advisory agreement with Massachusetts
Financial Services ("MFS"). Pursuant to the sub-advisory agreement, MFS is
responsible for the day-to-day fund operations and investment decisions for
MMCG. As a result, TAMIC pays MFS a sub-advisory fee at an annual rate of 0.375%
of the average daily net assets of MMCG.
For the period from January 1, 2003 through November 16, 2003, TAMIC had a
sub-advisory agreement with MFS. Pursuant to the sub-advisory agreement, MFS was
responsible for the day-to-day fund operations and investment decisions for
MLLCC and was compensated by TAMIC for such services at an annual rate of 0.375%
of the average daily net assets of MLLCC.
Effective November 17, 2003, the sub-advisory agreement with MFS on behalf
of MLLCC was terminated and TAMIC entered into a new sub-advisory agreement with
Merrill Lynch Investment Managers, L.P. ("MLIM"), which was approved by the
shareholders on November 14, 2003. Pursuant to the new sub-advisory agreement,
MLIM is responsible for the day-to-day fund operations and investment decisions
and is compensated by TAMIC for such services at an annual rate of 0.375% of the
average daily net assets of MLLCC.
The Travelers Insurance Company ("TIC"), another indirect wholly-owned
subsidiary of Citigroup, acts as administrator to the Funds. The Funds pay TIC
an administration fee calculated at an annual rate of 0.06% of the average daily
net assets of each respective Fund. This fee is calculated daily and paid
monthly. TIC has entered into a sub-administrative service agreement with Smith
Barney Fund Management LLC ("SBFM"), another indirect wholly-owned subsidiary of
Citigroup. TIC pays SBFM, as sub-administrator, a fee calculated at an annual
rate of 0.02% of the average daily net assets of each Fund, plus $30,000 per
Fund, subject to a maximum of 0.06% of each Fund's average daily net assets.
Citicorp Trust Bank, fsb. ("CTB"), another subsidiary of Citigroup, acts as
the Funds' transfer agent. CTB receives account fees and asset-based fees that
vary according to the size and type of account. For the year ended December 31,
2003, each Fund paid transfer agent fees of $5,000 to CTB.
For the year ended December 31, 2003, Citigroup Global Markets Inc. ("CGM")
(formerly known as Salomon Smith Barney Inc.), another indirect wholly-owned
subsidiary of Citigroup, received brokerage commissions of $245 from MLLCC.
One Trustee and all officers of the Trust are employees of Citigroup or its
subsidiaries.
3. INVESTMENTS
During the year ended December 31, 2003, the aggregate costs of purchases
and proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments), were as follows:
<Table>
<Caption>
PURCHASES SALES
- ------------------------------------------------------------------------------------------
Convertible Securities Portfolio............................ $ 37,457,669 $ 24,589,952
MFS Mid Cap Growth Portfolio................................ 152,398,492 150,517,262
Merrill Lynch Large Cap Core Portfolio...................... 190,013,409 197,113,705
- ------------------------------------------------------------------------------------------
</Table>
At December 31, 2003, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
<Table>
<Caption>
NET
UNREALIZED
APPRECIATION DEPRECIATION APPRECIATION
- ----------------------------------------------------------------------------------------------------------
Convertible Securities Portfolio............................ $ 6,015,859 $(1,836,350) $ 4,179,509
MFS Mid Cap Growth Portfolio................................ 36,534,375 (4,837,905) 31,696,470
Merrill Lynch Large Cap Core Portfolio...................... 7,530,123 (2,139,382) 5,390,741
- ----------------------------------------------------------------------------------------------------------
</Table>
32
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. REPURCHASE AGREEMENTS
The Funds purchase (and the custodian takes possession of) U.S. government
securities from securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Funds require continual
maintenance of the market value (plus accrued interest) of the collateral in
amounts at least equal to the repurchase price.
At December 31, 2003, MMCG did not have any repurchase agreements
outstanding.
5. FORWARD FOREIGN CURRENCY CONTRACTS
MMCG and MLLCC may enter into forward foreign currency contracts. A forward
foreign currency contract is an agreement between two parties to buy and sell a
currency at a set price on a future date. The contract is marked-to-market daily
and the change in value is recorded by the Fund as an unrealized gain or loss.
When a forward foreign currency contract is extinguished, through either
delivery or offset by entering into another forward foreign currency contract,
the Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value of the contract at
the time it was extinguished or offset. The Fund bears the market risk that
arises from changes in foreign currency exchange rates and the credit risk
should a counterparty be unable to meet the terms of such contracts.
At December 31, 2003, MMCG and MLLCC did not have any open forward foreign
currency contracts.
6. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest without par value. Transactions in shares of each
Fund were as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES PORTFOLIO
Shares sold................................................. 1,960,310 1,574,176
Shares issued on reinvestment............................... 175,782 413,531
Shares reacquired........................................... (754,259) (1,386,512)
- ------------------------------------------------------------------------------------------------------
Net Increase................................................ 1,381,833 601,195
- ------------------------------------------------------------------------------------------------------
MFS MID CAP GROWTH PORTFOLIO
Shares sold................................................. 3,078,239 3,032,958
Shares reacquired........................................... (2,635,504) (3,875,252)
- ------------------------------------------------------------------------------------------------------
Net Increase (Decrease)..................................... 442,735 (842,294)
- ------------------------------------------------------------------------------------------------------
MERRILL LYNCH LARGE CAP CORE PORTFOLIO
Shares sold................................................. 347,978 439,734
Shares issued on reinvestment............................... 92,361 113,691
Shares reacquired........................................... (2,023,282) (3,216,184)
- ------------------------------------------------------------------------------------------------------
Net Decrease................................................ (1,582,943) (2,662,759)
- ------------------------------------------------------------------------------------------------------
</Table>
7. CAPITAL LOSS CARRYFORWARDS
At December 31, 2003, CS, MMCG and MLLCC had, for Federal income tax
purposes, approximately $2,127,000, $248,594,000 and $80,178,000, respectively,
of capital loss carryforward available to offset future capital gains. To the
extent that these carryforward losses can be used to offset realized capital
gains, it is probable that such gains will not be distributed. The amounts and
expiration of the carryforwards are indicated below. Expiration occurs on
December 31 of the year indicated:
<Table>
<Caption>
2009 2010 2011
- -------------------------------------------------------------------------------------------------------------------
Convertible Securities Portfolio............................ -- $ 1,988,000 $139,000
MFS Mid Cap Growth Portfolio................................ $27,450,000 221,144,000 --
Merrill Lynch Large Cap Core Portfolio...................... 41,343,000 38,835,000 --
- -------------------------------------------------------------------------------------------------------------------
</Table>
33
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In addition, MLLCC had capital losses realized of $7,063 after October 31,
2003, which were deferred for tax purposes to the first day of the following
fiscal year.
8. INCOME TAX INFORMATION AND DISTRIBUTIONS TO SHAREHOLDERS
At December 31, 2003, the tax basis components of distributable earnings
were:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED CAPITAL UNREALIZED
ORDINARY INCOME LOSSES APPRECIATION
- -------------------------------------------------------------------------------------------------------
Convertible Securities Portfolio................... $25,910 $ (2,127,269) $ 4,179,509
MFS Mid Cap Growth Portfolio....................... -- (248,593,935) 31,696,809
Merrill Lynch Large Cap Core Portfolio............. 42,557 (80,177,960) 5,393,703
- -------------------------------------------------------------------------------------------------------
</Table>
At December 31, 2003, CS, MMCG and MLLCC, the differences between book
basis and tax basis unrealized depreciation was attributable primarily to wash
sale loss deferrals and the treatment of accretion of discounts and amortization
of premiums.
The tax character of distributions paid during the year ended December 31,
2003 was:
<Table>
<Caption>
ORDINARY INCOME
- -------------------------------------------------------------------------------
Convertible Securities Portfolio............................ $2,082,494
Merrill Lynch Large Cap Core Portfolio...................... 723,790
- -------------------------------------------------------------------------------
</Table>
For the year ended December 31, 2003, the MMCG did not make any
distributions.
At December 31, 2002, the tax basis components of distributable earnings
were:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED CAPITAL UNREALIZED
ORDINARY INCOME LOSSES DEPRECIATION
- --------------------------------------------------------------------------------------------------------
Convertible Securities Portfolio.................... $38,024 $ (1,988,103) $ (7,665,101)
MFS Mid Cap Growth Portfolio........................ -- (254,278,279) (10,169,204)
Merrill Lynch Large Cap Core Portfolio.............. 26,767 (80,327,498) (10,698,480)
- --------------------------------------------------------------------------------------------------------
</Table>
At December 31, 2002, CS, MMCG and MLLCC, the differences between book
basis and tax basis unrealized depreciation was attributable primarily to wash
sale loss deferrals and the treatment of accretion of discounts and amortization
of premiums.
The tax character of distributions paid during the year ended December 31,
2002 was:
<Table>
<Caption>
ORDINARY INCOME
- -------------------------------------------------------------------------------
Convertible Securities Portfolio............................ $4,022,397
Merrill Lynch Large Cap Core Portfolio...................... 745,864
- -------------------------------------------------------------------------------
</Table>
For the year ended December 31, 2002, the MMCG did not make any
distributions.
9. ADDITIONAL INFORMATION
The Funds have received the following information from Citigroup Asset
Management ("CAM"), the Citigroup business unit which includes the Funds'
Investment Manager, and other investment advisory companies, all of which are
indirect, wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry,
through an affiliate, into the transfer agent business in the period 1997-1999.
As CAM currently understands the facts, at the time CAM decided to enter the
transfer agent business, CAM sub-contracted for a period of five years certain
of the transfer agency services to a third party and also concluded a revenue
guarantee agreement with this sub-contractor providing that the sub-contractor
would guarantee certain benefits to CAM or its affiliates (the "Revenue
Guarantee Agreement"). In connection with the subsequent purchase of the
sub-contractor's business by an affiliate of the current sub-transfer agent
(PFPC Inc.) used by CAM on many of the funds it manages, this Revenue Guarantee
Agreement was amended eliminating those benefits in exchange for arrangements
that included a one-time payment from the sub-contractor.
34
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Boards of CAM-managed funds (the "Boards") were not informed of the
Revenue Guarantee Agreement with the sub-contractor at the time the Boards
considered and approved the transfer agent arrangements. Nor were the Boards
informed of the subsequent amendment to the Revenue Guarantee Agreement when
that occurred.
CAM has begun to take corrective actions. CAM will pay to the applicable
funds approximately $17 million (plus interest) that CAM and its affiliates
received from the Revenue Guarantee Agreement and its amendment. CAM also plans
an independent review to verify that the transfer agency fees charged by CAM
were fairly priced as compared to competitive alternatives. CAM is instituting
new procedures and making changes designed to ensure no similar arrangements are
entered into in the future.
CAM has briefed the SEC, the New York State Attorney General and other
regulators with respect to this matter, as well as the U.S. Attorney who is
investigating the matter. CAM is cooperating with governmental authorities on
this matter, the ultimate outcome of which is not yet determinable.
35
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year ended
December 31, unless otherwise noted:
<Table>
<Caption>
CONVERTIBLE SECURITIES PORTFOLIO 2003(1) 2002(1) 2001(1) 2000(1) 1999(1)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR.............. $ 9.67 $11.32 $12.06 $11.69 $ 9.86
- ------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2)(3)................... 0.39 0.45 0.47 0.58 0.46
Net realized and unrealized gain (loss)(3).... 2.15 (1.26) (0.56) 0.85 1.38
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations............. 2.54 (0.81) (0.09) 1.43 1.84
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income......................... (0.34) (0.77) (0.21) (0.25) --
Net realized gains............................ -- (0.07) (0.44) (0.81) (0.01)
- ------------------------------------------------------------------------------------------------------------
Total Distributions............................. (0.34) (0.84) (0.65) (1.06) (0.01)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................... $11.87 $ 9.67 $11.32 $12.06 $11.69
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN(4)................................. 26.26% (6.99)% (0.82)% 12.51% 18.70%
- ------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)................. $76,331 $48,821 $50,356 $26,294 $11,238
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(5)................................ 0.78% 0.80% 0.79% 0.80% 0.80%
Net investment income(3)...................... 3.61 4.36 3.95 4.76 4.33
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE......................... 44% 46% 56% 48% 79%
- ------------------------------------------------------------------------------------------------------------
</Table>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) The Travelers Insurance Company has agreed to reimburse the Fund for
expenses in the amounts of $6,833, $18,530 and $32,000 for the years ended
December 31, 2002, December 31, 2000 and December 31, 1999, respectively. If
such expenses were not reimbursed, the per share decreases to net investment
income and the actual expense ratios would have been as follows:
<Table>
<Caption>
DECREASES TO NET INVESTMENT EXPENSE RATIOS WITHOUT
INCOME PER SHARE EXPENSE REIMBURSEMENTS
--------------------------- ------------------------
2002 2000 1999 2002 2000 1999
------- ------ ------ ------ ----- -----
$0.00* $0.01 $0.05 0.81% 0.90% 1.23%
</Table>
(3) Effective January 1, 2001, the Fund adopted a change in the accounting
method that requires the Fund to amortize premiums and accrete all
discounts. Without the adoption of this change, for the year ended December
31, 2001, the ratio of net investment income to average net assets would
have been 3.99%. Per share information, ratios and supplemental data for the
periods prior to January 1, 2001 have not been restated to reflect this
change in presentation. In addition, the impact of this change to net
investment income and net realized and unrealized loss was less than $0.01
per share.
(4) Performance figures may reflect fee waivers and/or expense reimbursements.
Past performance is no guarantee of future results. In the absence of fee
waivers and/or expense reimbursements, the total return would be reduced.
Total returns do not reflect expenses associated with your variable contract
such as administrative fees, account charges and surrender charges which, if
reflected, would reduce the total returns for all periods shown.
(5) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 0.80%.
* Amount represents less than $0.01 per share.
36
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year ended
December 31, unless otherwise noted:
<Table>
<Caption>
MFS MID CAP GROWTH PORTFOLIO 2003 2002(1) 2001(1) 2000(1) 1999(1)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR............ $5.02 $9.81 $16.75 $16.43 $10.05
- ------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(2)...................... (0.03) (0.04) (0.06) (0.05) (0.04)
Net realized and unrealized gain (loss)..... 1.89 (4.75) (3.90) 1.69 6.46
- ------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations........... 1.86 (4.79) (3.96) 1.64 6.42
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net realized gains.......................... -- -- (2.98) (1.32) (0.04)
- ------------------------------------------------------------------------------------------------------
Total Distributions........................... -- -- (2.98) (1.32) (0.04)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................. $6.88 $5.02 $ 9.81 $16.75 $16.43
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN(3)............................... 37.05% (48.83)% (23.62)% 9.29% 64.17%
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............... $192,608 $138,221 $278,504 $314,150 $94,124
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(4).............................. 0.92% 0.93% 0.92% 0.90% 1.00%
Net investment loss......................... (0.49) (0.56) (0.49) (0.30) (0.33)
- ------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE....................... 98% 167% 96% 143% 162%
- ------------------------------------------------------------------------------------------------------
</Table>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) The Travelers Insurance Company has agreed to reimburse the Fund for
expenses in the amount of $27,304 for the year ended December 31, 1999. If
such expenses were not reimbursed, the increase to net investment loss and
the actual expense ratio would have been $0.01 and 1.07%, respectively.
(3) Performance figures may reflect fee waivers and/or expense reimbursements.
Past performance is no guarantee of future results. In the absence of fee
waivers and/or expense reimbursements, the total return would be reduced.
Total returns do not reflect expenses associated with your variable contract
such as administrative fees, account charges and surrender charges which, if
reflected, would reduce the total returns for all periods shown.
(4) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 1.00%.
37
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of beneficial interest outstanding throughout each year ended
December 31, unless otherwise noted:
<Table>
<Caption>
MERRILL LYNCH LARGE CAP CORE
PORTFOLIO 2003 2002(1) 2001(1) 2000(1) 1999(1)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR.......... $6.52 $8.77 $12.15 $13.06 $10.56
- ------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income (loss).............. 0.05 0.03 0.01 (0.01) 0.00*
Net realized and unrealized gain (loss)... 1.33 (2.23) (2.74) (0.70) 2.50
- ------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations......... 1.38 (2.20) (2.73) (0.71) 2.50
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income..................... (0.05) (0.05) (0.00)* -- --
Net realized gains........................ -- -- (0.65) (0.20) --
- ------------------------------------------------------------------------------------------------------
Total Distributions......................... (0.05) (0.05) (0.65) (0.20) --
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR................ $7.85 $6.52 $ 8.77 $12.15 $13.06
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN(2)............................. 21.16% (25.14)% (22.45)% (5.58)% 23.67%
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S)............. $115,200 $106,010 $165,928 $222,953 $152,073
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)............................... 0.99% 0.94% 0.92% 0.94% 0.99%
Net investment income (loss).............. 0.67 0.44 0.10 (0.07) 0.02
- ------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE..................... 182% 104% 98% 86% 85%
- ------------------------------------------------------------------------------------------------------
</Table>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Performance figures may reflect fee waivers and/or expense reimbursements.
Past performance is no guarantee of future results. In the absence of fee
waivers and/or expense reimbursements, the total return would be reduced.
Total returns do not reflect expenses associated with your variable contract
such as administrative fees, account charges and surrender charges which, if
reflected, would reduce the total returns for all periods shown.
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets will not exceed 1.00%.
* Amount represents less than $0.01 per share.
38
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
THE TRAVELERS SERIES TRUST:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Convertible Securities Portfolio, MFS Mid
Cap Growth Portfolio and Merrill Lynch Large Cap Core Portfolio (formerly known
as MFS Research Portfolio) ("Funds") of The Travelers Series Trust ("Trust"), as
of December 31, 2003, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and financial highlights for each of the years in the
five-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003, by correspondence with the custodian
and broker. As to securities purchased or sold but not yet received or
delivered, we performed other appropriate auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Convertible Securities Portfolio, MFS Mid Cap Growth Portfolio, and Merrill
Lynch Large Cap Core Portfolio of the Trust as of December 31, 2003, and the
results of their operations for the year then ended and the changes in their net
assets for each of the years in the two-year period then ended and the financial
highlights for each of the years in the five-year period then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
New York, New York
February 13, 2004
39
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
On November 14, 2003, a special meeting of the shareholders of the Merrill Lynch
Large Cap Core Portfolio ("Fund") was held for the purpose of voting on the
following matter:
1. To approve or disapprove a new investment sub-advisory agreement between
Travelers Asset Management International Company LLC and Merrill Lynch
Investment Managers, L.P. on behalf of the Fund.
The results of the vote on Proposal 1 were as follows:
<Table>
<Caption>
% OF VOTES % OF VOTES % OF
VOTES FOR SHARES VOTED AGAINST SHARES VOTED ABSTAINED SHARES VOTED
- ----------- ------------ --------- ------------ ---------- ------------
125,696,737 86.29% 6,847,926 4.70% 13,126,345 9.01%
</Table>
40
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
INFORMATION ABOUT TRUSTEES AND OFFICERS
The business and affairs of The Travelers Series Trust ("Trust") are
managed under the direction of the Trust's Board of Trustees. Information
pertaining to the Trustees and Officers of the Trust is set forth below. The
Statement of Additional Information includes additional information about the
Trustees and is available, without charge, upon request by calling the Trust's
administrator at 1-800-842-9368.
<Table>
<Caption>
TERM OF NUMBER OF
OFFICE(1) AND PORTFOLIOS IN
POSITION(S) LENGTH FUND COMPLEX OTHER
NAME, ADDRESS HELD WITH OF TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY BOARD MEMBERSHIPS
AND AGE FUND SERVED PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
- --------------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES:(2)
Frances M. Hawk, Trustee Since 1991 Private Investor 5 Board of Managers of
CFA, CFP 6 Variable Annuity
108 Oxford Hill Lane Separate Accounts of
Downingtown, PA TIC
Age 56
Lewis Mandell Trustee Since 1990 Professor, University of 5 Delaware North
160 Jacobs Hall Buffalo Corp.; Board of
Buffalo, NY Managers of 6
Age 61 Variable Annuity
Separate Accounts of
TIC
Robert E. McGill, III Trustee Since 1990 Retired 5 Lydall Inc.; Board
295 Hancock Road of Managers of 6
Williamstown, MA Variable Annuity
Age 72 Separate Accounts of
The Travelers
Insurance Co.
("TIC")
INTERESTED TRUSTEE:
R. Jay Gerken, CFA(3) Chairman, Since 2002 Managing Director of Citigroup 221 Chairman, Board of
Citigroup Asset Management President, Global Markets Inc. ("CGM"); Managers of 6
("CAM") Chief Chairman, President and Chief Variable Annuity
399 Park Avenue, 4th Floor Executive Executive Officer of Smith Separate Accounts of
New York, NY 10022 Officer and Barney Fund Management LLC TIC
Age 52 Trustee ("SBFM"), Travelers Investment
Adviser, Inc. ("TIA") and Citi
Fund Management Inc. ("CFM");
President and Chief Executive
Officer of certain mutual
funds associated with
Citigroup Inc. ("Citigroup");
formerly, Portfolio Manager of
Smith Barney Allocation Series
Inc. (from 1996 to 2001) and
Smith Barney Growth and Income
Fund (from 1996 to 2000)
</Table>
41
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
<Table>
<Caption>
TERM OF NUMBER OF
OFFICE(1) AND PORTFOLIOS IN
POSITION(S) LENGTH FUND COMPLEX OTHER
NAME, ADDRESS HELD WITH OF TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY BOARD MEMBERSHIPS
AND AGE FUND SERVED PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
- -----------------------------------------------------------------------------------------------------------------------------------
OFFICERS:
Andrew B. Shoup(4) Senior Vice Since 2004 Director of CAM; Senior Vice N/A N/A
CAM President and President and Chief
125 Broad Street, 10th Chief Administrative Officer of
Floor Administrative mutual funds associated with
New York, NY 10004 Officer Citigroup; Treasurer of
Age 47 certain mutual funds
associated with Citigroup;
Head of International Funds
Administration of CAM (from
2001 to 2003); Director of
Global Funds Administration of
CAM (from 2000 to 2001); Head
of U.S. Citibank Funds
Administration of CAM (from
1998 to 2000)
Richard L. Peteka Treasurer Since 2002 Director of CGM; Chief N/A N/A
CAM Financial Officer and
125 Broad Street, 11th Treasurer of certain mutual
Floor funds associated with
New York, NY 10004 Citigroup; Director and Head
Age 42 of Internal Control for CAM
U.S. Mutual Fund
Administration (from 1999 to
2002); Vice President, Head of
Mutual Fund Administration and
Treasurer at Oppenheimer
Capital (from 1996 to 1999)
</Table>
42
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
<Table>
<Caption>
TERM OF NUMBER OF
OFFICE(1) AND PORTFOLIOS IN
POSITION(S) LENGTH FUND COMPLEX OTHER
NAME, ADDRESS HELD WITH OF TIME PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY BOARD MEMBERSHIPS
AND AGE FUND SERVED PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
- -----------------------------------------------------------------------------------------------------------------------------------
Andrew Beagley Chief Anti- Since 2002 Director of CGM (since 2000); N/A N/A
CAM Money Director of Compliance, North
399 Park Avenue, 4th Floor Laundering America, CAM (since 2000);
New York, NY 10022 Compliance Chief Anti-Money Laundering
Age 40 Officer Compliance Officer and Vice
President of certain mutual
funds associated with
Citigroup; Director of
Compliance, Europe, the Middle
East and Africa, CAM (from
1999 to 2000); Compliance
Officer, Salomon Brothers
Asset Management Limited,
Smith Barney Global Capital
Management Inc., Salomon
Brothers Asset Management Asia
Pacific Limited (from 1997 to
1999)
Kaprel Ozsolak Controller Since 2002 Vice President of CGM; N/A N/A
CAM Controller of certain mutual
125 Broad Street, 11th funds associated with
Floor Citigroup
New York, NY 10004
Age 38
Ernest J. Wright Secretary Since 1994 Vice President and Secretary N/A N/A
Travelers Life & Annuity of TIC
One Cityplace
Hartford, CT 06103
Age 63
Kathleen A. McGah Assistant Since 1995 Deputy General Counsel of TIC N/A N/A
Travelers Life & Annuity Secretary
One Cityplace
Hartford, CT 06103
Age 53
</Table>
- ---------------
(1) Each Trustee and officer serves until his or her respective successor has
been duly elected and qualified.
(2) Mr. Knight Edwards is an Emeritus Trustee. An Emeritus Trustee is permitted
to attend meetings, but has no voting power.
(3) Mr. Gerken is an "interested person" of the Trust as defined in the
Investment Company Act of 1940, as amended, because Mr. Gerken is Managing
Director of CGM, an indirect wholly owned subsidiary of Citigroup, and his
ownership shares and options to purchase shares of Citigroup, the indirect
parent of TIC.
(4) As of January 21, 2004.
43
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Trust hereby designates for the fiscal year ended
December 31, 2003:
- Percentages of ordinary dividends paid as qualifying for the dividends
received deduction:
<Table>
Convertible Securities Portfolio............................ 0.40%
Merrill Lynch Large Cap Core Portfolio...................... 100.00
</Table>
44
THE TRAVELERS SERIES TRUST
- -------------------------------------------------------------------------------
<Table>
TRUSTEES INVESTMENT ADVISER
R. Jay Gerken, CFA
Chairman Travelers Asset Management International Company LLC
Frances M. Hawk, CFA, CFP
Lewis Mandell ADMINISTRATOR
Robert E. McGill, III
The Travelers Insurance Company
OFFICERS
CUSTODIAN
R. Jay Gerken, CFA
President and State Street Bank and Trust Company
Chief Executive Officer
TRANSFER AGENT
Andrew B. Shoup*
Senior Vice President and Citicorp Trust Bank, fsb.
Chief Administrative Officer
Richard L. Peteka
Treasurer
Andrew Beagley
Chief Anti-Money Laundering
Compliance Officer
Kaprel Ozsolak
Controller
Ernest J. Wright
Secretary
Kathleen A. McGah
Assistant Secretary
</Table>
- ---------------
* As of January 21, 2004.
The Funds are separate investment funds of The Travelers Series Trust, a
Massachusetts business trust.
This report is prepared for the general information of contract owners and is
not an offer of shares of The Travelers Series Trust: Convertible Securities,
MFS Mid Cap Growth and Merrill Lynch Large Cap Core Portfolios. It should not be
used in connection with any offer except in conjunction with the Prospectuses
for the Variable Annuity and Variable Universal Life Insurance products offered
by The Travelers Insurance Company or The Travelers Life and Annuity Company and
the Prospectuses for the underlying funds, which collectively contain all
pertinent information, including more complete information on charges and
expenses. All the funds contained in this report may not be available under your
variable annuity or life contract.
Series Trust (Annual) (2-04) Printed in U.S.A.
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees of the registrant has determined that Robert E.
McGill III, a member of the Board's Audit Committee, possesses the
technical attributes identified in Instruction 2(b) of Item 3 to Form
N-CSR to qualify as an "audit committee financial expert," and has
designated Mr. McGill as the Audit Committee's financial expert. Mr.
McGill is an "independent" Trustee pursuant to paragraph (a)(2) of Item
3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees for The Travelers Series Trust of $276,000 and $225,000
for the years ended 12/31/03 and 12/31/02.
(b) Audit-Related Fees for The Travelers Series Trust of $0 and
$0 for the years ended 12/31/03 and 12/31/02.
(c) Tax Fees for The Travelers Series Trust of $30,000 and $30,000 for the
years ended 12/31/03 and 12/31/02. These amounts represent aggregate
fees paid for tax compliance, tax advice and tax planning services,
which include (the filing and amendment of federal, state and local
income tax returns, timely RIC qualification review and tax
distribution and analysis planning) rendered by the Accountant to
Travelers Series Trust.
(d) All Other Fees for The Travelers Series Trust of $0 and $0 for the
years ended 12/31/03 and 12/31/02.
(e) (1) Audit Committee's pre-approval policies and procedures described
in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
The Audit Committee ("Committee") has adopted policies and procedures
to, among other purposes, approve all audit and non-audit services
provided to the Registrant and certain other persons by the
Registrant's independent auditors.
The Committee shall not approve non-audit services that the Committee
believes may taint the independence of the auditors. As of the date of
the approval of this Audit Committee Charter, permissible non-audit
services include any professional services (including tax services),
that are not prohibited services as described below, provided to the
Fund by the independent auditors, other than those provided to the Fund
in connection with an audit or a review of the financial statements of
the Fund. Permissible non-audit services may not include: (i)
bookkeeping or other services related to the accounting records or
financial statements of the Fund; (ii) financial information systems
design and implementation; (iii) appraisal or valuation services,
fairness opinions or contribution-in-kind reports; (iv) actuarial
services; (v) internal audit outsourcing services; (vi) management
functions or human resources; (vii) broker or dealer, investment
adviser or investment banking services; (viii) legal services and
expert services unrelated to the audit; and (ix) any other service the
Public Company Accounting Oversight Board determines, by regulation, is
impermissible.
The policies and procedures require the Committee to approve (a) all
audit and permissible non-audit services to be provided to the
Registrant and (b) all permissible non-audit services to be provided by
the Fund's independent auditors to the Adviser and any Covered Service
Providers if the engagement relates directly to the operations and
financial reporting of the Registrant. In carrying out this
responsibility, the Committee shall seek periodically from the Adviser
and from the independent auditors a list of audit and permissible
non-audit services that can be expected to be rendered to the
Registrant, the Adviser or any Covered Service Providers by the
Registrant's independent auditors, and an estimate of the fees sought
to be paid in connection with such services. The Committee may delegate
its responsibility to approve any such audit and permissible non-audit
services to a sub-committee consisting of the Chairperson of the
Committee (the "Chairperson") and at least one other member of the
Committee, as the Chairperson, from time to time, may determine and
appoint, and such sub-committee shall report to the Committee, at its
next meeting after the sub-committee's meeting, its decision(s). From
year to year, and at such other times as the Committee deems
appropriate, the Committee shall report to the Board whether this
system of approval has been effective and efficient or whether this
Charter should be amended to allow for pre-approval pursuant to such
policies and procedures as the Committee shall approve, including the
delegation of some or all of the Committee's per-approval
responsibilities to other persons (other than the Adviser or the Fund's
officers).
Pre-approval by the Committee of any permissible non-audit services is
not required so long as: (i) the aggregate amount of all such
permissible non-audit services provided to the Fund, the Adviser and
any service providers controlling, controlled by or under common
control with the Adviser that provide ongoing services to the Fund
("Covered Service Providers") constitutes not more than 5% of the total
amount of revenues paid to the independent auditors during the fiscal
year in which the permissible non-audit services are provided by (a)
the Fund, (b) the Adviser and (c) any entity controlling, controlled by
or under common control with the Adviser that provides ongoing services
to the Fund during the fiscal year in which the services are provided
that would have to be approved by the Committee; (ii) the permissible
non-audit services were not recognized by the Fund at the time of the
engagement to be non-audit services; and (iii) such services are
promptly brought to the attention of the Committee and approved by the
Committee (or its delegate(s)) prior to the completion of the audit.
(2)
(f) N/A
(g) Non-audit fees billed - $100,000 and $1.2 million for the years ended
12/31/2003 and 12/31/2002.
(h) Yes. Travelers Series Trust's Audit Committee has considered whether
the provision of non-audit services that were rendered to Service
Affiliates which were not pre-approved (not requiring pre-approval) is
compatible with maintaining the Accountant's independent. All services
provided by the Accountant to the Travelers Series Trust or to Service
Affiliates which were required to be pre-approved were pre-approved as
required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a- 3(c) under the Investment Company
Act of 1940, as amended (the "1940 Act")) are effective as of a date
within 90 days of the filing date of this report that includes the
disclosure required by this paragraph, based on their evaluation of the
disclosure controls and procedures required by Rule 30a-3(b) under the
1940 Act and 15d-15(b) under the Securities Exchange Act of 1934.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act)
that occurred during the registrant's last fiscal half-year (the
registrant's second fiscal half-year in the case of an annual report)
that have materially affected, or are likely to materially affect the
registrant's internal control over financial reporting.
ITEM 10. EXHIBITS.
(a) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(b) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 99.906CERT Certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this Report to be
signed on its behalf by the undersigned, there unto duly authorized.
The Travelers Series Trust
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
The Travelers Series Trust
Date: March 10, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
The Travelers Series Trust
Date: March 10, 2004
By: /s/ Richard L. Peteka
Richard L. Peteka
Chief Financial Officer of
The Travelers Series Trust
Date: March 10,2004