<PAGE> 1
Registration Statement No. 2-76640
811-3429
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 27
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27
CAPITAL APPRECIATION FUND
-------------------------
(Exact name of Registrant)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
---------------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (860) 277-0111
--------------
ERNEST J. WRIGHT
Secretary to the Board of Trustees
Capital Appreciation Fund
One Tower Square
Hartford, Connecticut 06183
---------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
-----------------------
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b).
- -----
X on May 1, 1998 pursuant to paragraph (b).
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60 days after filing pursuant to paragraph (a)(1).
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on __________ pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2).
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on __________ pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
- ---- previously filed post-effective amendment.
<PAGE> 2
CAPITAL APPRECIATION FUND
Cross-Reference Sheet pursuant to Rule 495 under the Securities Act of 1933
<TABLE>
<CAPTION>
ITEM
NO. CAPTION IN PROSPECTUS
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<S> <C>
1. Cover Page Cover Page
2. Synopsis Cover Page
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Fund Description; Investment
Objective and Policies
5. Management of the Fund Board of Trustees, Investment Advisers,
Securities Transactions; Fund Expenses;
Additional Information
6. Capital Stock and Other Securities Fund Description; Dividends and
Distributions; Shareholder Rights; Net
Asset Value
7. Purchase of Securities Being Offered Shareholder Rights
8. Redemption or Repurchase Net Asset Value
9. Legal Proceedings Legal Proceedings
<CAPTION>
CAPTION IN STATEMENT OF ADDITIONAL
INFORMATION
----------------------------------
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and Policies Investment Objective and Policies;
Investment Restrictions; Appendix
14. Management of the Registrant Trustees and Officers
15. Control Persons and Principal Additional Information
Holders of Securities
16. Investment Advisory and Investment Adviser; Additional Information
Other Services
17. Brokerage Allocation Brokerage
18. Capital Stock and Other Securities Declaration of Trust
19. Purchase, Redemption and Pricing Valuation of Securities
of Securities Being Offered
20. Tax Status Distributions and Taxes
21. Underwriters Not Applicable
22. Calculation of Performance Data Not Applicable
23. Financial Statements Additional Information
</TABLE>
<PAGE> 3
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE> 4
CAPITAL APPRECIATION FUND
ONE TOWER SQUARE
HARTFORD, CONNECTICUT 06183
TELEPHONE 1-860-277-0111
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Capital Appreciation Fund (the "Fund") is a diversified open-end management
investment company (mutual fund) whose goal is growth of capital primarily
through the use of common stocks. The Fund invests principally in common stocks
of small to large companies. Investments in smaller companies tend to be more
volatile than investments in larger more established companies.
Shares of the Fund are currently offered without a sales charge only to separate
accounts of The Travelers Insurance Company and The Travelers Life and Annuity
Company (the "Company" or "The Travelers"). The Fund serves as one of the
funding options for certain variable annuity and variable life insurance
contracts issued by the Company. The term "shareholder" as used in this
prospectus refers to any insurance company separate account that may use shares
of the Fund as a funding option now or in the future.
This Prospectus concisely sets forth the information about the Fund that you
should know before investing. Please read and retain it for future reference.
Additional information about the Fund is contained in a Statement of Additional
Information ("SAI") dated May 1, 1998 which has been filed with the Securities
and Exchange Commission ("SEC") and is incorporated by reference into this
Prospectus. A copy may be obtained, without charge, by writing to The Travelers
Insurance Company, One Tower Square, Hartford, Connecticut 06183-5030, by
calling 860-277-0111 or by accessing the SEC's website (http://www.sec.gov).
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR A VARIABLE
ANNUITY OR VARIABLE LIFE INSURANCE CONTRACT ISSUED BY THE TRAVELERS. BOTH THIS
PROSPECTUS AND THE CONTRACT PROSPECTUS SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS........................................ 3
FUND DESCRIPTION............................................ 4
INVESTMENT OBJECTIVE AND POLICIES........................... 4
INVESTMENT RESTRICTIONS..................................... 5
RISK FACTORS................................................ 5
BOARD OF TRUSTEES........................................... 5
INVESTMENT ADVISERS......................................... 5
TAMIC..................................................... 6
JANUS CAPITAL CORPORATION................................. 6
Portfolio Manager...................................... 6
FUND ADMINISTRATION......................................... 6
SECURITIES TRANSACTIONS..................................... 7
FUND EXPENSES............................................... 7
TRANSFER AGENT.............................................. 7
SHAREHOLDER RIGHTS.......................................... 7
NET ASSET VALUE............................................. 8
TAX STATUS.................................................. 8
DIVIDENDS AND DISTRIBUTIONS................................. 8
LEGAL PROCEEDINGS........................................... 8
YEAR 2000 COMPLIANCE........................................ 9
ADDITIONAL INFORMATION...................................... 9
EXHIBIT A................................................... 10
</TABLE>
CAF-2
<PAGE> 6
FINANCIAL HIGHLIGHTS
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CAPITAL APPRECIATION FUND
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
The following information for the year ended December 31, 1997 has been audited
by KPMG Peat Marwick LLP, independent auditors, whose report thereon appears in
the Fund's Annual Report dated December 31, 1997. All other periods presented
have been audited by other independent auditors. The information set out below
should be read in conjunction with the financial statements and related notes
that also appear in the Fund's 1997 Annual Report, which is incorporated by
reference into the SAI.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996(5) 1995 1994 1993(5) 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of
year............................ $ 36.72 $ 33.18 $ 24.50 $ 25.87 $ 22.72 $ 19.63 $ 14.62
Income from operations
Net investment income............. 0.19 0.23 0.24 0.19 0.19 0.28 0.36
Net gains or losses on securities
(realized and unrealized)....... 9.41 8.49 8.61 (1.41) 3.21 3.13 4.75
--------- --------- --------- -------- -------- -------- --------
Total from investment
operations.................... 9.60 8.72 8.85 (1.22) 3.40 3.41 5.11
Less distributions from (1)
Net investment income............. -- (0.41) (0.17) (0.15) (0.25) (0.32) (0.10)
Net realized gains................ -- (4.77) -- -- -- -- --
--------- --------- --------- -------- -------- -------- --------
Total distributions............. -- (5.18) (0.17) (0.15) (0.25) (0.32) (0.10)
--------- --------- --------- -------- -------- -------- --------
Net asset value, end of year....... $ 46.32 $ 36.72 $ 33.18 $ 24.50 $ 25.87 $ 22.72 $ 19.63
========= ========= ========= ======== ======== ======== ========
TOTAL RETURN (2)................... 26.14% 28.21% 36.37% (4.76)% 15.09% 17.60% 35.16%
Net assets, end of year
(thousands)..................... $ 407,701 $ 224,132 $ 122,155 $ 78,494 $ 62,414 $ 29,506 $ 20,497
RATIOS TO AVERAGE NET ASSETS
Expenses (3)...................... 0.84% 0.83% 0.85% 0.89% 0.87% 0.56% 0.56%
Net investment income............. 0.54% 0.69% 0.84% 0.79% 0.81% 1.39% 2.05%
Portfolio turnover rate........... 89% 84% 124% 106% 155% 126% 205%
Average Commission Rate Paid (per
shares) (4)..................... $ 0.07 $ 0.06 -- -- -- -- --
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1990(5) 1989 1988
- -----------------------------------
<S> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of
year............................ $ 15.76 $ 13.62 $ 12.54
Income from operations
Net investment income............. 0.09 0.14 0.11
Net gains or losses on securities
(realized and unrealized)....... (1.08) 2.00 1.15
-------- -------- --------
Total from investment
operations.................... (0.99) 2.14 1.26
Less distributions from (1)
Net investment income............. (0.15) -- (0.18)
Net realized gains................ -- -- --
-------- -------- --------
Total distributions............. (0.15) -- (0.18)
-------- -------- --------
Net asset value, end of year....... $ 14.62 $ 15.76 $ 13.62
======== ======== ========
TOTAL RETURN (2)................... (6.24)% 15.71% 10.06%
Net assets, end of year
(thousands)..................... $ 13,494 $ 15,456 $ 42,470
RATIOS TO AVERAGE NET ASSETS
Expenses (3)...................... 0.82% 1.37% 1.01%
Net investment income............. 0.58% 0.84% 0.83%
Portfolio turnover rate........... 80% 75% 104%
Average Commission Rate Paid (per
shares) (4)..................... -- -- --
</TABLE>
(1) For the years ended December 31, 1996 and later, distributions from realized
gains include both net realized short-term and long-term capital gains.
Prior to 1996, net realized short-term capital gains were included in
distributions from net investment income. For the year ended December 31,
1997, the distribution amounts represents less than $0.01 per share.
(2) Total return is determined by dividing the increase (decrease) in value of a
share during the year, after reflecting the reinvestment of dividends
declared during the year, by the beginning of year share price. Shares in
the Fund are only sold to The Travelers separate accounts in connection with
the issuance of variable annuity and variable life insurance contracts.
Total Return does not reflect the deduction of any contract charges or fees
assessed by The Travelers separate accounts.
(3) The ratios of expenses to average net assets for 1990 and later years
reflect an expense reimbursement by The Travelers in connection with
voluntary expense limitations. Without the expense reimbursement, the ratio
of operating expenses to average net assets would have been 0.96%, 0.91%,
1.28% and 1.56% for the years ended December 31, 1993, 1992, 1991 and 1990,
respectively. For the years ended December 31, 1994, 1995, 1996 and 1997,
there were no expense reimbursements by The Travelers in connection with the
voluntary expense limitation.
(4) For the fiscal years beginning after 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share on Funds which
held more than 10% of their assets in commissionable equity securities.
(5) Effective May 1, 1993, Janus Capital Corporation became subadviser. On May
1, 1990, TIMCO replaced Keystone Custodian Funds, Inc. as the investment
adviser. Effective July 1, 1996, TAMIC replaced TIMCO as the investment
adviser.
CAF-3
<PAGE> 7
FUND DESCRIPTION
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Capital Appreciation Fund (the "Fund") is registered with the SEC as a
diversified open-end management investment company, commonly known as a mutual
fund. The Fund was created under Massachusetts law as a Massachusetts business
trust on March 18, 1982.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide growth of capital primarily
through the use of common stocks. The Fund invests principally in common stocks
of small to large companies. It is the policy of the Fund to invest its assets
as fully as practicable in common stocks, securities convertible into common
stocks and securities having common stock characteristics, including rights and
warrants, selected primarily for prospective capital growth. Investments in
smaller companies tend to be more volatile than investments in larger, more
established issuers. While income is not an objective, securities appearing to
offer attractive possibilities for future growth of income may be included in
the portfolio whenever it seems possible to do so without conflicting with the
Fund's objective of capital growth. The Fund may invest in domestic, foreign and
restricted securities. While the Fund may occasionally invest in foreign
securities, it is not anticipated that they will, at any time, account for more
than twenty-five percent (25%) of the investment portfolio.
Although the Fund normally invests primarily in equity securities, the Fund may
increase its cash position when the investment adviser or the sub-adviser is
unable to locate investment opportunities with desirable risk/reward
characteristics and perceives an opportunity for capital growth from such
securities so the Fund may receive a return on its idle cash. The Fund may
invest in preferred stocks; warrants; corporate bonds and debentures; U.S.
government securities; instruments of banks which are members of the Federal
Deposit Insurance Corporation and have assets of at least $1 billion, such as
certificates of deposit, demand and time deposits and bankers' acceptances;
prime commercial paper, including master demand notes; repurchase agreements
secured by U.S. government securities; or other debt securities. The Fund may
invest in debt securities rated below investment grade. (See "High Yield/High
Risk Bonds" in Exhibit A.) When the Fund invests in debt securities, investment
income will increase and may constitute a large portion of the return on the
Fund and the Fund probably will not participate in market advances or declines
to the extent that it would if it were fully invested in common stocks.
The Fund may write covered call options on securities which it owns. Such an
option on an underlying security would obligate the Fund to sell, and give the
purchaser of the option the right to buy, that security at a stated exercise
price at any time until a stated expiration date of the option. The Fund may
also purchase index or individual equity call or put options. The Fund will pay
a premium to buy call (or put) options and thereby obtain the right to buy (or
sell) a fixed number of shares of the underlying asset at the stated exercise
price on or prior to the stated expiration date.
The Fund may also use futures contracts as a hedge to protect against changes in
stock prices or interest rates, and, to a limited extent, to seek to enhance
return. A stock index futures contract is a contractual obligation to buy or
sell a specified index of stocks at a future date for a fixed price. An interest
rate futures contract is a contract to buy or sell specified debt securities at
a future time for a fixed price.
For further information about the types of investments and investment techniques
available to the Fund, including the risks associated with such investments and
investment techniques, see Exhibit A to this Prospectus.
CAF-4
<PAGE> 8
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund has adopted the following fundamental investment restrictions,
(summarized from the full restrictions set forth in the SAI), which may not be
changed without a vote of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended.
Certain other fundamental restrictions are fully set forth in the Statement of
Additional Information. Unless otherwise stated, all references to the Fund's
assets are in terms of current market value, and all limitations apply at the
time of investment.
The Fund will not: (1) invest more than 5% of its assets in the securities of
any one issuer; (2) borrow money, except that the Fund may borrow money from
banks for temporary or emergency purposes in amounts of up to 10% of its gross
assets computed at cost; assets pledged to secure borrowings shall be no more
than the lesser of the amount borrowed or 10% of the Fund's gross assets
computed at cost; (3) invest more than 25% of its assets in the securities of
issuers in the same industry; and (4) invest more than 10% of its assets in
securities for which market quotations are not readily available, including
restricted securities.
RISK FACTORS
- --------------------------------------------------------------------------------
The risk inherent in investing in the Fund is that the net asset value will
fluctuate in response to changes in economic conditions, interest rates and the
market's perception of the underlying portfolio securities of the Fund. There
can be no assurance that the Fund will achieve its investment objective since
there is uncertainty in every investment.
The investment experience of equity investments over time will tend to reflect
levels of stock market prices and dividend payouts. Both are affected by diverse
factors, including not only business conditions and investor confidence in the
economy, but current conditions in a particular industry or company. The yield
on a common stock is not contractually determined. Equity securities are subject
to financial risks relating to the earning stability and overall financial
soundness of an issue. They are also subject to market risks relating to the
effect of general changes in the securities market on the price of a security.
In addition, there may be more risk associated with the Fund to the extent that
it invests in small or mid-sized companies. More risk is associated with
investment in small or mid-sized companies than with larger companies because
such companies may be dependent on only one or two products and may be more
vulnerable to competition from larger companies with greater resources and to
economic conditions affecting their market sector. Small or mid-sized companies
may be new, without long business or management histories, and perceived by the
market as unproven. Their securities may be held primarily by insiders or
institutional investors, which may affect marketability. The prices of these
stocks often fluctuate more than the overall stock market.
BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
Under Massachusetts law, the Fund's Board of Trustees has absolute and exclusive
control over the management and disposition of all assets of the Fund. Subject
to the provisions of the Declaration of Trust, the business and affairs of the
Fund shall be managed by the Trustees or other parties so designated by the
Trustees. Information relating to the Board of Trustees, including its members
and their compensation, is contained in the SAI.
INVESTMENT ADVISERS
- --------------------------------------------------------------------------------
Travelers Asset Management International Corporation ("TAMIC") provides
investment advice and, in general, supervises the management and investment
program of the Fund. Janus Capital Corporation provides sub-advisory services to
the Fund with respect to its daily investment operations, subject to the
supervision of the Board of Trustees and TAMIC.
CAF-5
<PAGE> 9
TAMIC
TAMIC is a registered investment adviser that was incorporated in 1978. Its
principal offices are located at One Tower Square, Hartford, Connecticut, and it
is an indirect wholly owned subsidiary of Travelers Group Inc., a financial
services holding company. TAMIC also acts as investment adviser or subadviser
for other investment companies used to fund variable products, as well as for
individual and pooled pension and profit-sharing accounts, and for domestic
insurance companies affiliated with the Travelers Insurance Company and
nonaffiliated insurance companies.
Under the Investment Advisory Agreement, TAMIC will be paid an amount equivalent
on an annual basis to 0.75% of the average daily net assets of the Fund. From
this amount, TAMIC will in turn pay an amount equivalent on an annual basis to a
maximum of 0.55% of the average daily net assets of the Fund to Janus Capital
Corporation for its services as sub-adviser. TAMIC will retain 0.20% as
compensation for its services as described above. The fee is computed and paid
weekly.
JANUS CAPITAL CORPORATION
Janus Capital Corporation (Janus Capital), 100 Filmore Street, Denver, Colorado
80206, has been employed by TAMIC as a sub-adviser to manage the daily
investment operations of the Fund, subject to the supervision of both TAMIC and
the Board of Trustees. Kansas City Southern Industries, Inc., a publicly traded
holding company whose primary subsidiaries are engaged in transportation,
financial services and real estate, owns approximately 83% of the outstanding
voting stock of Janus Capital. Janus Capital also acts as investment adviser to
other investment companies not affiliated with the Fund, as well as to
individual, corporate, charitable and retirement accounts.
Effective January 7, 1997, TAMIC paid to the Sub-Adviser a fee, equivalent on an
annual basis to the following:
<TABLE>
<CAPTION>
ANNUAL AGGREGATE NET ASSET
SUB-ADVISORY VALUE OF THE
FEE ACCOUNT
- -------------- -------------------
<C> <S> <C>
0.55% of the first $100,000,000
0.50% of the next $400,000,000
0.45% of the amount over $500,000,000
</TABLE>
Prior to January 7, 1997, TAMIC paid to Janus Capital an amount equivalent on an
annual basis to 0.55% of the Fund's average daily net assets for its services as
sub-adviser to the Fund.
The sub-advisory fees will be deducted on each valuation date and will be paid
monthly.
PORTFOLIO MANAGER
The day-to-day portfolio management of the Fund is currently handled by Scott
Schoelzel. Mr. Schoelzel joined Janus Capital Corporation in 1994. Mr. Schoelzel
is Executive Vice President and portfolio manager of Janus Twenty Fund, which he
has managed since August 1997, and Janus Olympus Fund, which he managed from its
inception to August 1997. From 1991 to 1993, Mr. Schoelzel was a portfolio
manager with Founders Asset Management, Denver, Colorado. He holds a Bachelor of
Arts in business from Colorado College.
FUND ADMINISTRATION
- --------------------------------------------------------------------------------
Capital Appreciation Fund ("Fund") has entered into an Administrative Services
Agreement, whereby Travelers Insurance will be responsible for the pricing and
bookkeeping services for the Fund at an annualized rate of 0.06% of the daily
net assets of the Fund. The Travelers Insurance Company, at its expense, may
appoint a sub-administrator to perform these services. The sub-administrator may
be affiliated with The Travelers Insurance Company.
CAF-6
<PAGE> 10
SECURITIES TRANSACTIONS
- --------------------------------------------------------------------------------
Under policies established by the Board of Trustees, TAMIC or Janus Capital will
select broker-dealers to execute transactions for the Fund, subject to the
receipt of best execution. Broker-dealers may from time to time be affiliated
with the Fund, TAMIC, Janus Capital or their affiliates.
The Fund may pay higher commissions to broker-dealers which provide research
services. TAMIC and Janus Capital may use these services in advising the Fund,
as well as in advising other clients for which they provide advisory services.
FUND EXPENSES
- --------------------------------------------------------------------------------
In addition to the investment advisory fees discussed above, other expenses of
the Fund include the charges and expenses of the transfer agent, the custodian,
the independent auditors, and any outside legal counsel employed by either the
Fund or the Board of Trustees; the compensation for the disinterested members of
the Board of Trustees; the costs of printing and mailing the Fund's
prospectuses, proxy solicitation materials, and annual, semi-annual and periodic
reports; brokerage commissions, interest charges and taxes; and any
registration, filing and other fees payable to government agencies in connection
with the registration of the Fund and its shares under federal and state
securities laws. Additionally, high portfolio turnover involves correspondingly
greater brokerage commissions and other transaction costs, which will be borne
directly by the Fund.
Pursuant to a Management Agreement dated May 1, 1993 between the Fund and The
Travelers Insurance Company, the Company has agreed to reimburse the Fund for
the amount by which the Fund's aggregate annual expenses, including investment
advisory fees but excluding brokerage commissions, interest charges and taxes,
exceed 1.25% of the Fund's average net assets for any fiscal year.
For the fiscal year ended December 31, 1997, the Fund paid 0.84% of its average
net assets in expenses.
TRANSFER AGENT
- --------------------------------------------------------------------------------
First Data Investor Services Group, Inc., Exchange Place, Boston, MA 02109,
serves as the Fund's transfer agent and dividend disbursing agent.
SHAREHOLDER RIGHTS
- --------------------------------------------------------------------------------
Shares of the Fund are currently sold only to insurance company separate
accounts in connection with variable annuity and variable life insurance
contracts issued by the Company. Shares of the Fund are not sold to the general
public. Fund shares are sold on a continuing basis, without a sales charge, at
the net asset value next computed after payment is made by the insurance company
to the Fund's custodian. However, the separate accounts to which shares are sold
may impose sales and other charges, as described in the appropriate contract
prospectus.
The Fund currently issues one class of shares which participate equally in
dividends and distributions and have equal voting, liquidation and other rights.
When issued and paid for, the shares will be fully paid and nonassessable by the
Fund and will have no preference, conversion, exchange or preemptive rights.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares are redeemable, transferable and freely
assignable as collateral. There are no sinking fund provisions. (See the
accompanying separate account prospectus for a discussion of voting rights
applicable to purchasers of variable annuity and variable life insurance
contracts.)
CAF-7
<PAGE> 11
Although the Fund is not currently aware of any disadvantages to contract owners
of either variable annuity or variable life insurance contracts because the
Fund's shares are available with respect to both products, an irreconcilable
material conflict may conceivably arise between contract owners of different
separate accounts investing in the Fund due to differences in tax treatment,
management of the Fund's investments, or other considerations. The Fund's Board
of Trustees will monitor events in order to identify any material conflicts
between variable annuity contract owners and variable life insurance policy
owners, and will determine what action, if any, should be taken in the event of
such a conflict.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of a Fund share is computed as of the close of trading on
each day on which the New York Stock Exchange ("Exchange") is open. The net
asset value per share is arrived at by determining the value of the Fund's
assets, subtracting its liabilities, and dividing the result by the number of
shares outstanding.
The Fund values short-term money market instruments with maturities of sixty
days or less at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount) which, when combined with
accrued interest receivable, approximates market. All other investments are
valued at market value or, where market quotations are not readily available, at
fair value as determined in good faith by the Fund's Board of Trustees.
Fund shares are redeemed at the redemption value next determined after the Fund
receives a redemption request. The redemption value is the net asset value
adjusted for fractions of a cent and may be more or less than the shareholder's
cost depending upon changes in the value of the Fund's portfolio between
purchase and redemption.
The Fund computes the redemption value at the close of the Exchange at the end
of the day on which it has received all proper documentation from the
shareholder. Redemption proceeds are normally wired or mailed either the same or
the next business day, but in no event later than seven days thereafter.
The Fund may temporarily suspend the right to redeem its shares when: (1) the
Exchange is closed, other than customary weekend and holiday closings; (2)
trading on the Exchange is restricted; (3) an emergency exists as determined by
the SEC so that disposal of the Fund's investments or determination of its net
asset value is not reasonably practicable; or (4) the SEC, for the protection of
shareholders, so orders.
TAX STATUS
- --------------------------------------------------------------------------------
The Fund has qualified, and intends to qualify in the future, as a regulated
investment company under Subchapter M of the Internal Revenue Code. The Fund
qualifies if, among other things, it distributes to its shareholders at least
90% of its net investment income for each fiscal year.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Capital gains and dividends are distributed in cash or reinvested in additional
shares of the Fund, without a sales charge. Although purchasers of variable
contracts are not subject to federal income taxes on distributions by the Fund,
they may be subject to state and local taxes and should review the accompanying
contract prospectus for a discussion of the tax treatment applicable to
purchasers of variable annuity and variable life insurance contracts.
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no pending material legal proceedings affecting the Fund.
CAF-8
<PAGE> 12
YEAR 2000 COMPLIANCE
- --------------------------------------------------------------------------------
Generally, computer programs were designed without considering the impact of the
upcoming change in the century. As a result, software and computer systems may
need to be upgraded or replaced in order to comply with "Year 2000"
requirements. If not corrected, these computer applications could fail or create
erroneous results by or at the Year 2000. The business, financial condition, and
results of operations of a company; investment advisor; separate account and/or
a mutual fund could be materially and adversely affected by the failure of its
systems and applications (or those either provided or operated by third-parties)
to properly operate or manage dates beyond the year 1999.
Travelers Life and Annuity and its affiliates have investigated the nature and
extent of the work required for our computer systems to process beyond the turn
of the century, and have made progress toward achieving this goal, including
upgrading and/or replacing existing systems. We are confirming with our service
providers that they are also in the process of replacing or modifying their
systems with the same goal. We expect that our principal systems will be Year
2000 compliant by early 1999. While these efforts involve substantial costs, we
closely monitor associated costs and continue to evaluate associated risks based
on actual expenses. While it is likely that these efforts will be successful, if
necessary modifications and conversions are not completed in a timely manner,
the Year 2000 requirements could have a material adverse effect on certain
operations of the Fund.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Except as otherwise stated in this Prospectus or as required by law, the Fund
reserves the right to change the terms of the offer stated in this Prospectus
without shareholder approval, including the right to impose or change fees for
services provided.
CAF-9
<PAGE> 13
EXHIBIT A
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DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND
INVESTMENT TECHNIQUES AVAILABLE TO THE FUND
FUTURES CONTRACTS
The Fund may use financial futures contracts either as a hedge to protect
against anticipated changes in stock prices and interest rates, or to facilitate
the purchase or sale of securities or, to a limited extent, to seek to enhance
return. Financial futures contracts consist of stock index futures contracts and
futures contracts on debt securities ("interest rate futures"). A stock index
futures contract is a contractual obligation to buy or sell a specified index of
stocks at a future date for a fixed price. An interest rate futures contract is
a contract to buy or sell specified debt securities at a future time for a fixed
price. When a futures contract is purchased, the Fund will set aside cash or
liquid securities equal to the total market value of the futures contract, less
the amount of the initial margin.
Hedging by use of interest rate futures seeks to protect the portfolio against
potential adverse movements in interest rates. When hedging is successful, any
depreciation in the value of portfolio securities will substantially be offset
by appreciation in the value of the futures position. Conversely, any
appreciation in the value of the portfolio securities will substantially be
offset by depreciation in the value of the futures position.
Positions taken in the futures markets are not normally held to maturity, but
instead are liquidated through offsetting transactions which may result in a
profit or a loss. Closing out an open futures contract sale or purchase is
effected by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the stock index or security and
the same delivery date. If the offsetting purchase price is less than the
original sale price, the Fund realizes a gain; if it is more, the Fund realizes
a loss. Conversely, if the offsetting sale price is more than the original
purchase price, the Fund realizes a gain; if less, a loss. While futures
positions taken by the Fund will usually be liquidated in this manner, the Fund
may instead make or take delivery of underlying securities whenever it appears
economically advantageous for it to do so. In determining gain or loss,
transaction costs must also be taken into account. There can be no assurance
that the Fund will be able to enter into an offsetting transaction with respect
to a particular contract at a particular time.
The Fund will not purchase or sell futures contracts or related options for
non-hedging purposes if the aggregate initial margin and premiums required to
establish such positions exceeds five percent (5%) of the fair market value of
its net assets, after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into.
All stock index and interest rate futures contracts will be traded on exchanges
that are licensed and regulated by the Commodity Futures Trading Commission
("CFTC"). The Fund will further seek to assure that fluctuations in the price of
any futures contracts that it uses for hedging purposes will be substantially
related to fluctuations in the price of the securities held by it or which it
expects to purchase, or for other risk reduction strategies, though there can be
no assurance that the expected result will always be achieved.
SPECIAL RISKS RELATING TO FUTURES CONTRACTS
While certain futures contracts may be purchased and sold to reduce certain
risks, these transactions may entail other risks. Thus, while the Fund may
benefit from the use of such futures, changes in stock price movements or
interest rates may result in a poorer overall performance for the Fund than if
it had not entered into such futures contracts. Moreover, in the event of an
imperfect correlation between the futures position and the portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Fund may be exposed to risk of loss. The adviser will attempt to reduce
this risk by engaging in futures transactions, to the extent possible, where, in
its judgment,
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there is a significant correlation between changes in the prices of the futures
contracts and the prices of any portfolio securities sought to be hedged.
Successful use of futures contracts for hedging purposes is also subject to the
adviser's ability to predict correctly movements in the direction of the market.
FORWARD CONTRACTS
Forward contracts are contracts to purchase or sell a specified amount of
property for an agreed upon price at a specified time. Forward contracts are not
currently exchange traded and are typically negotiated on an individual basis.
The Funds may enter into forward currency contracts to hedge against declines in
the value of securities denominated in, or whose value is tied to, a currency
other than the U.S. dollar or to reduce the impact of currency appreciation on
purchases of such securities. They may also enter into forward contracts to
purchase or sell securities or other financial indices.
BUYING PUT AND CALL OPTIONS
The Fund may purchase put options on securities held, or on futures contracts
whose price volatility is expected to closely match that of securities held, as
a defensive measure to preserve shareholders' capital when market conditions
warrant. The Fund may purchase call options on specific securities, or on
futures contracts whose price volatility is expected to closely match that of
securities eligible for purchase by the Fund, in anticipation of or as a
substitute for the purchase of the securities themselves. These options may be
listed on a national exchange or executed "over-the-counter" with a
broker-dealer as the counterparty. While the adviser anticipates that the
majority of option purchases and sales will be executed on a national exchange,
put or call options on specific securities or for non-standard terms are likely
to be executed directly with a broker-dealer when it is advantageous to do so.
Option contracts will be short-term in nature, generally less than nine months
in duration.
The Fund will pay a premium in exchange for the right to purchase (call) or sell
(put) a specific number of shares of an equity security or futures contract at a
specified price (the strike price) on or before the expiration date of the
option contract. In either case, the Fund's risk is limited to the option
premium paid.
The Fund may sell the put and call options prior to their expiration and thereby
realize a gain or loss. A call option will expire worthless if the price of the
related security is below the contract strike price at the time of expiration; a
put option will expire worthless if the price of the related security is above
the contract strike price at the time of expiration.
Put and call options will be employed primarily for bona fide hedging purposes
and to a limited extent, to seek to enhance return. Liquid securities sufficient
to fulfill the call option delivery obligation will be identified and segregated
in an account; deliverable securities sufficient to fulfill the put option
obligation will be similarly identified and segregated. In the case of put
options on futures contracts, portfolio securities whose price volatility is
expected to match that of the underlying futures contract will be identified and
segregated.
WRITING COVERED CALL OPTIONS
The Fund may write or sell covered call options. By writing a call option, the
Fund becomes obligated during the term of the option to deliver the securities
underlying the option upon payment of the exercise price.
The Fund may only write "covered" options. This means that as long as the Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option or in the case of call options on U.S. Treasury
bills, the Fund might own substantially similar U.S. Treasury bills.
The principal reason for writing call options is to obtain, through a receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. The Fund receives a premium from writing a call option which
it retains whether or not the option is exercised. By writing a call option, the
Fund might lose the potential for gain on the underlying security while the
option is open.
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Options on some securities are relatively new and it is impossible to predict
the amount of trading interest that will exist in such options. There can be no
assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could impair the Fund's ability to use such
options to achieve its investment objectives.
LOANS OF SECURITIES TO BROKER DEALERS
The Fund may lend securities to brokers and dealers pursuant to agreements
requiring that the loans be continuously secured by cash, or securities of the
U.S. government, its agencies or instrumentalities or any combination of cash
and such securities, as collateral equal at all times in value to at least the
market value of the securities loaned. Such securities loans will not be made
with respect to the Fund if as a result the aggregate of all outstanding
securities loans exceeds 15% of the value of the Fund's total assets taken at
their current value. The Fund continues to receive interest or dividends on the
securities loaned and simultaneously earns interest on the investment of the
cash loan collateral in U.S. Treasury notes, certificates of deposit, other high
grade, short-term obligations or interest bearing cash equivalents. Although
voting rights attendant to securities loaned pass to the borrower, such loans
may be called at any time and will be called so that the securities may be voted
by the Fund if, in the opinion of the Fund, a material event affecting the
investment is to occur. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans may be made only to borrowers deemed to be of good standing, under
standards approved by the Board of Trustees, when the income to be earned from
the loan justifies the attendant risks.
DEPOSITORY RECEIPTS AND FOREIGN SECURITIES
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. Additionally, dividends payable on foreign
securities may be subject to foreign taxes withheld prior to distribution.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility. Changes in
foreign exchange rates will affect the value of those securities which are
denominated or quoted in currencies other than the U.S. dollar. Many of the
foreign securities held by the Fund will not be registered with, nor will the
issuers thereof be subject to the reporting requirements of, the SEC.
Accordingly, there may be less publicly available information about the
securities and the foreign company or government issuing them than is available
about a domestic company of government entity. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment positions.
HIGH YIELD/HIGH RISK BONDS
The Fund has no pre-established minimum quality standards and may invest up to
35% of its assets in debt securities that are rated below investment grade
(securities rated Ba or lower by Moody's Investors Service, Inc. ("Moody's") or
BB or lower by Standard & Poor's Corporation ("S&P")). Such securities generally
offer a higher yield, but may be subject to a higher risk of default in interest
or principal payments and are considered speculative. The market prices of lower
rated securities are generally less sensitive to interest rate changes than
higher rated investments, but more sensitive to adverse economic or political
changes, or in the case of corporate issuers, individual corporate developments.
Lower rated securities may also have less liquid markets than higher rated
securities, and their liquidity as well as their value may be more severely
affected by adverse economic conditions, by adverse publicity and investor
perceptions of the market or by new or proposed legislation. (See the Statement
of Additional Information for a more detailed discussion of the bond ratings.)
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The Fund may also invest in unrated debt securities of foreign and domestic
issuers. Unrated debt, while not necessarily of lower quality than rated
securities, may not have as broad a market. Sovereign debt of foreign
governments is generally rated by country. Because these ratings do not take
into account individual factors relevant to each issue and may not be updated
regularly, the investment adviser or sub-adviser may treat such securities as
unrated debt. Unrated debt securities will be included in the 35% limit of the
Fund, unless the investment adviser or the sub-adviser deems such securities to
be the equivalent of investment-grade securities.
RISKS RELATING TO HIGH YIELD/HIGH RISK BONDS
High yield bonds are typically lower rated securities; the lower the quality of
a debt security, the higher the yield it will provide, but the greater the risk
that interest or principal payments will not be made when due. In the event of
an unanticipated default, the Fund would experience a reduction in its income,
and could expect a decline in the market value of the securities so affected.
While providing opportunities to maximize return over time, investors should be
aware of the following market, economic and credit factors influencing high
yield securities: (1) securities rated BB or lower by S&P or Ba or lower by
Moody's are considered predominantly speculative with respect to the ability of
the issuer to meet principal and interest payments; (2) the value of high yield
securities may be more susceptible to real or perceived adverse economic,
company or industry conditions than is the case for higher quality securities;
(3) widespread economic downturn could result in increased defaults in the high
yield market; (4) adverse market, credit or economic conditions could make it
difficult at certain times to sell certain high yield securities held by the
Fund; (5) the secondary market for high yield securities may be less liquid than
the secondary market for higher quality securities which may affect the value of
certain high yield securities held by the Fund at certain times; and (6) there
may not always be readily available market quotations for certain securities. At
these times, the investment adviser or sub-adviser will use its best judgment to
assign values to those securities.
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of one year or
less such as bank certificates of deposit, bankers' acceptances, commercial
paper (including master demand notes) and obligations issued or guaranteed by
the United States government, its agencies or instrumentalities, some of which
may be subject to repurchase agreements.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate can usually be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated certificates
of United States banks which have at least $1 billion in deposits as of the date
of their most recently published financial statements (including foreign
branches of U.S. banks, U.S. branches of foreign banks which are members of the
Federal Reserve System or the Federal Deposit Insurance Corporation, and savings
and loan associations which are insured by the Federal Deposit Insurance
Corporation).
The Fund will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Fund does not
currently intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft
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<PAGE> 17
drawn on a bank by an exporter or an importer to obtain a stated amount of funds
to pay for specific merchandise. The draft is then "accepted" by the bank which,
in effect, unconditionally guarantees to pay the face value of the instrument on
its maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
COMMERCIAL PAPER RATINGS
Commercial paper will consist of issues rated at the time of purchase A-1 or
higher by S&P or Prime-1 by Moody's; or, if not rated, will be issued by
companies which have an outstanding debt issue rated at the time of purchase
Aaa, Aa or A by Moody's, or AAA, AA or A by S&P, or will be determined by the
adviser to be of comparable quality.
Commercial paper rated A-1 by S&P has the following characteristics: Liquidity
ratios are adequate to meet cash requirements. The issuer's long-term senior
debt is rated "A" or better, although in some cases "BBB" credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public preparations to meet such
obligations. Relative strength or weakness of the above factors determines how
the issuer's commercial paper is rated within various categories.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States Government include a
variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance. Treasury bills have maturities of one year or
less; Treasury notes have maturities of one to ten years; and Treasury bonds
generally have maturities of greater than ten years at the date of issuance.
Securities issued or guaranteed by the United States Government or its agencies
or instrumentalities include direct obligations of the United States Treasury
and securities issued or guaranteed by the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal
Land Banks, Maritime Administration, The Tennessee Valley Authority, District of
Columbia Armory Board, Student Loan Marketing Association and Federal National
Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities, such as
Treasury bills and Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the United States;
others, such as securities of Federal Home Loan Banks, are supported by the
right of the issuer to borrow from the Treasury; still others, such as bonds
issued by the Federal National Mortgage Association, a private corporation, are
supported only by the credit of the instrumentality. Because the U.S. government
is not obligated by law to provide support to an
CAF-14
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instrumentality it sponsors, the Fund will invest in the securities issued by
such an instrumentality only when the adviser determines that the credit risk
with respect to the instrumentality does not make its securities unsuitable
investments. U.S. government securities will not include international agencies
or instrumentalities in which the U.S. government, its agencies or
instrumentalities participate, such as the World Bank, Asian Development Bank or
the Inter-American Development Bank, or issues insured by the Federal Deposit
Insurance Corporation.
REPURCHASE AGREEMENTS
Interim cash balances may be invested from time to time in repurchase agreements
with approved counterparties. Approved counterparties are limited to national
banks or reporting broker-dealers meeting the advisers credit quality standards
as presenting minimal risk of default. All repurchase transactions must be fully
collateralized. Repurchase transactions generally mature the next business day
but, in the event of a transaction of longer maturity, collateral will be marked
to market daily and, when required, additional cash or qualifying collateral
will be required from the counterparty.
In executing a repurchase agreement, the Fund purchases eligible securities
subject to the seller's simultaneous agreement to repurchase them on a mutually
agreed upon date and at a mutually agreed upon price. The purchase and resale
prices are negotiated with the counterparty on the basis of current short-term
interest rates, which may be more or less than the rate on the securities
collateralizing the transaction. Physical delivery or, in the case of "book
entry" securities, segregation in the counterparty's account at the Federal
Reserve for the benefit of the Fund is required to establish a perfected claim
to the collateral for the term of the agreement in the event the counterparty
fails to fulfill its obligation.
As the securities collateralizing a repurchase transaction are generally of
longer maturity than the term of the transaction, in the event of default by the
counterparty on its obligation, the Fund would bear the risks of delay, adverse
market fluctuation and transaction costs in disposing of the collateral.
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<PAGE> 20
CAPITAL APPRECIATION FUND
PROSPECTUS
L-11171 Printed in U.S.A.
TIC Ed. 5-98
<PAGE> 21
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 22
STATEMENT OF ADDITIONAL INFORMATION
CAPITAL APPRECIATION FUND
MAY 1, 1998
This Statement of Additional Information ("SAI") is not a prospectus
but relates to, and should be read in conjunction with, the Fund's prospectus
dated May 1, 1998. A copy of the prospectus is available from The Travelers
Insurance Company, Annuity Services, One Tower Square, Hartford, Connecticut
06183-5030 or by calling 860-277-0111. This SAI should be read in conjunction
with the accompanying 1997 Annual Report for the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES. . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
FORWARD CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
VALUATION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
DISTRIBUTIONS AND TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
TRUSTEES AND OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
DECLARATION OF TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
INVESTMENT ADVISORY SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 7
The Investment Adviser. . . . . . . . . . . . . . . . . . . . . . . 7
Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Subadviser. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
REDEMPTIONS IN KIND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
BROKERAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
FUND ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
<PAGE> 23
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Capital Appreciation Fund (the "Fund")
is to provide growth of capital primarily through the use of common stocks.
The Fund invests principally in common stocks of small to large companies that
characteristically move faster than the market during major price movements.
It is the policy of the Fund to invest its assets as fully as practicable in
common stocks, securities convertible into common stocks and securities having
common stock characteristics, including rights and warrants, selected primarily
for prospective capital growth. The Fund may also invest in debt instruments
and money market instruments. The Fund may enter into repurchase agreements,
write covered call options and purchase call or put options.
INVESTMENT RESTRICTIONS
None of the restrictions enumerated in this paragraph may be changed
without a vote of the holders of a majority of the Fund's outstanding shares,
as defined in the Investment Company Act of 1940 (the "1940 Act"). Unless
otherwise indicated, all limitations apply at the time of investment. The Fund
will not:
(1) invest more than 5% of its total assets, computed at market
value, in the securities of any one issuer;
(2) invest in more than 10% of any class of securities of any one
issuer;
(3) invest more than 5% of the value of its total assets in
companies which have been in operation for less than three
years;
(4) borrow money, except to facilitate redemptions or for emergency
or extraordinary purposes and then only from banks and in
amounts of up to 10% of its gross assets computed at cost; while
outstanding, a borrowing may not exceed one-third of the value
of the Fund's net assets, including the amount borrowed; the
Fund has no intention of attempting to increase its net income
by means of borrowing and all borrowings will be repaid before
additional investments are made; assets pledged to secure
borrowings shall be no more than the lesser of the amount
borrowed or 10% of the Fund's gross assets computed at cost;
(5) underwrite securities, except that the Fund may purchase
securities from issuers thereof or others and dispose of such
securities in a manner consistent with its other investment
policies; in the disposition of restricted securities the Fund
may be deemed to be an underwriter, as defined in the Securities
Act of 1933 (the "1933 Act");
(6) purchase real estate investment trusts that deal in real estate
or interests therein, or commodities or commodity contracts,
except transactions involving financial futures in order to
limit transactions and borrowing costs, and for hedging purposes;
(7) invest for the primary purpose of control or management;
(8) make margin purchases or short sales of securities, except that
the Fund may place up to 5% of the value of its net assets in
total margin deposits for positions in futures contracts;
(9) make loans, except that the Fund may purchase money market
securities, buy publicly and privately distributed debt
securities and lend limited amounts of its portfolio securities
to broker-dealers; all such investments must be consistent with
the Fund's investment objective and policies;
(10) invest more than 25% of its total assets in the securities of
issuers in any single industry;
1
<PAGE> 24
(11) purchase the securities of any other investment company except
in the open market and at customary brokerage rates and in no
event more than 3% of the voting securities of any investment
company;
(12) invest in interests in oil, gas or other mineral exploration or
development programs;
(13) invest more than 5% of its net assets in warrants, valued at the
lower of cost or market; warrants acquired by the Fund in units
or attached to securities will be deemed to be without value
with regard to this restriction. The Fund is subject to
restrictions in the sale of portfolio securities to, and in its
purchase or retention of securities of, companies in which the
management personnel of The Travelers Investment Management
Company Inc. ("TIMCO") have a substantial interest; or
(14) invest in an amount of up to 10% of the value of the Fund's net
assets in restricted securities which may not be publicly sold
without registration under the 1933 Act.
FORWARD CONTRACTS
A forward contract is an agreement between two parties in which one
party is obligated to deliver a stated amount of a stated asset at a specified
time in the future and the other party is obligated to pay a specified amount
for the assets at the time of delivery. The Fund may enter into forward
contracts to purchase and sell government securities, equity or income
securities, foreign currencies or other financial instruments. Forward
contracts generally are traded in an interbank market conducted directly
between traders (usually large commercial banks) and their customers. Unlike
futures contracts, which are standardized contracts, forward contracts can be
specifically drawn to meet the needs of the parties that enter into them. The
parties to a forward contract may agree to offset or terminate the contract
before its maturity, or may hold the contract to maturity and complete the
contemplated exchange.
The following discussion summarizes the Fund's principal uses of
forward foreign currency exchange contracts ("forward currency contracts"). The
Fund may enter into forward currency contracts with stated contract values of up
to the value of the Fund's assets. A forward currency contract is an obligation
to buy or sell an amount of a specified currency for an agreed price (which may
be in U.S. dollars or a foreign currency). The Fund will exchange foreign
currencies for U.S. dollars and for other foreign currencies in the normal
course of business and may buy and sell currencies through forward currency
contracts in order to fix a price for securities it has agreed to buy or sell
("transaction hedge"). The Fund also may hedge some or all of its investments
denominated in a foreign currency or exposed to foreign currency fluctuations
against a decline in the value of that currency relative to the U.S. dollar by
entering into forward currency contracts to sell an amount of that currency (or
a proxy currency whose performance is expected to replicate or exceed the
performance of that currency relative to the U.S. dollar) approximating the
value of some or all of its portfolio securities denominated in that currency
("position hedge") or by participating in options or futures contracts with
respect to the currency. The Fund also may enter into a forward currency
contract with respect to a currency where the Fund is considering the purchase
or sale of investments denominated in that currency but has not yet selected the
specific investments ("anticipatory hedge"). In any of these circumstances the
Fund may, alternatively, enter into a forward currency contract to purchase or
sell one foreign currency for a second currency that is expected to perform more
favorably relative to the U.S. dollar if the portfolio manager believes there is
a reasonable degree of correlation between movements in the two currencies
("cross-hedge").
These types of hedging minimize the effect of currency appreciation as
well as depreciation, but do not eliminate fluctuations in the underlying U.S.
dollar equivalent value of the proceeds of or rates of return on the Fund's
foreign currency denominated portfolio securities. The matching of the
increase in value of a forward contract and the decline in the U.S. dollar
equivalent value of the foreign currency denominated asset that is the subject
of the hedge generally will not be precise. Shifting the Fund's currency
exposure from one foreign currency to another removes the Fund's opportunity to
profit from increases in the value of the original currency and involves a risk
of increased losses to the Fund if its portfolio manager's projection of future
exchange rates is
2
<PAGE> 25
inaccurate. Proxy hedges and cross-hedges may result in losses if the currency
used to hedge does not perform similarly to the currency in which hedged
securities are denominated. Unforeseen changes in currency prices may result in
poorer overall performance for the Fund than if it had not entered into such
contracts.
The Fund will cover outstanding forward currency contracts by
maintaining liquid portfolio securities denominated in or whose value is tied to
the currency underlying the forward contract or the currency being hedged. To
the extent that the Fund is not able to cover its forward currency positions
with underlying portfolio securities, the Fund's custodian will segregate cash
or other liquid assets having a value equal to the aggregate amount of the
Fund's commitments under forward contracts entered into with respect to position
hedges, cross-hedges and anticipatory hedges. If the value of the securities
used to cover a position or the value of segregated assets declines, the Fund
will find alternative cover or segregate additional cash or liquid assets on a
daily basis so that the value of the covered and segregated assets will be equal
to the amount of the Fund's commitments with respect to such contracts. As an
alternative to segregating assets, the Fund may buy call options permitting the
Fund to buy the amount of foreign currency subject to a forward buy contract.
While forward contracts are not currently regulated by the CFTC, the
CFTC may in the future assert authority to regulate forward contracts. In such
event, the Fund's ability to utilize forward contracts may be restricted. In
addition, the Fund may not always be able to enter into forward contracts at
attractive prices and may be limited in its ability to use these contracts to
hedge Fund assets.
VALUATION OF SECURITIES
Current value for the Fund's portfolio securities is determined as
follows: Securities traded on national securities markets are valued at the
closing prices on such markets; securities for which no sales prices were
reported and U.S. Government and Agency obligations are valued at the mean
between the last reported bid and ask prices or on the basis of quotations
received from reputable brokers or other recognized sources; securities
maturing within 60 days are valued at cost plus accreted discount and, or minus
amortized premium, which approximates market value; and securities 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.
DISTRIBUTIONS AND TAXES
The Fund has qualified, and intends to qualify in the future, as a
regulated investment company under Subchapter M of the Internal Revenue Code.
Thus the Fund is relieved of any federal income tax liability by distributing
all of its net investment income and net capital gains, if any, to its
shareholders.
When the Fund makes a distribution, it intends to distribute only its
net capital gains and such income as has been predetermined to the best of the
Fund's ability to be taxable as ordinary income. Therefore, net investment
income distributions will not be made on the basis of distributable income as
computed on the Fund's books, but will be made on a federal taxation basis.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Name Present Position and Principal Occupation During Last Five Years
---- ----------------------------------------------------------------
<S> <C>
*Heath B. McLendon Managing Director (1993-present), Smith Barney Inc. ("Smith Barney");
Chairman and Member Chairman (1993-present), Smith Barney Strategy Advisors, Inc.;
388 Greenwich Street President and Director (1994-present), Mutual Management Corp.;
New York, New York Director and President (1996-present), Travelers Investment Adviser,
Age 64 Inc.; Chairman and Director of forty-two investment companies
associated with Smith Barney; Chairman, Board of Trustees, Drew
University; Advisory Director,
</TABLE>
3
<PAGE> 26
<TABLE>
<S> <C>
First Empire State Corporation; Chairman, Board of Managers, seven
Variable Annuity Separate Accounts of The Travelers Insurance Company+;
Chairman, Board of Trustees, five Mutual Funds sponsored by The
Travelers Insurance Company++; prior to July 1993, Senior Executive Vice
President of Shearson Lehman Brothers Inc.
Knight Edwards Of Counsel (1988-present), Edwards & Angell, Attorneys; Member,
Member Advisory Board (1973-1994), thirty-one mutual funds sponsored by
2700 Hospital Trust Tower Keystone Group, Inc.; Member, Board of Managers, seven Variable Annuity
Providence, Rhode Island Separate Accounts of The Travelers Insurance Company+; Trustee, five
Age 74 Mutual Funds sponsored by The Travelers Insurance Company.++
Robert E. McGill, III Retired manufacturing executive. Director (1983-1995), Executive Vice
Member President (1989-1994), The Dexter Corporation (manufacturer of
295 Hancock Street specialty chemicals and materials); Vice Chairman (1990-1992), Director
Williamstown, Massachusetts (1983-1995), Life Technologies, Inc. (life science/biotechnology
Age 66 products); Director, (1994-present), The Connecticut Surety Corporation
(insurance); Director (1995-present), CN Bioscience, Inc. (life
science/biotechnology products); Director (1995-present), Chemfab
Corporation (specialty materials manufacturer); Member, Board of
Managers, seven Variable Annuity Separate Accounts of The Travelers
Insurance Company+; Trustee, five Mutual Funds sponsored by The
Travelers Insurance Company.++
Lewis Mandell Dean, College of Business Administration (1995-present), Marquette
Member University; Professor of Finance (1980-1995) and Associate Dean
606 N. 13th Street (1993-1995), School of Business Administration, and Director, Center
Milwaukee, Wisconsin for Research and Development in Financial Services (1980-1995),
Age 55 University of Connecticut; Director (1992-present), GZA
Geoenvironmental Tech, Inc. (engineering services); Member, Board of
Managers, seven Variable Annuity Separate Accounts of The Travelers
Insurance Company+; Trustee, five Mutual Funds sponsored by The
Travelers Insurance Company.++
Frances M. Hawk, CFA, CFP Private Investor, (1997-present); Portfolio Manager (1992-1997), HLM
Member Management Company, Inc. (investment management); Assistant Treasurer,
222 Berkeley Street Pensions and Benefits. Management (1989-1992), United Technologies
Boston, Massachusetts Corporation (broad- based designer and manufacturer of high technology
Age 50 products); Member, Board of Managers, seven Variable Annuity Separate
Accounts of The Travelers Insurance Company+; Trustee, five Mutual
Funds sponsored by The Travelers Insurance Company.++
Ernest J. Wright Vice President and Secretary (1996-present), Assistant Secretary
Secretary to the Board (1994-1996), Counsel (1987-present), The Travelers Insurance Company;
One Tower Square Secretary, Board of Managers, seven Variable Annuity Separate Accounts
Hartford, Connecticut of The Travelers Insurance Company+; Secretary, Board of Trustees, five
Age 57 Mutual Funds sponsored by The Travelers Insurance Company.++
</TABLE>
4
<PAGE> 27
<TABLE>
<S> <C>
Kathleen A. McGah Assistant Secretary and Counsel (1995-present), The Travelers Insurance
Assistant Secretary to the Board Company; Assistant Secretary, Board of Managers, seven Variable Annuity
One Tower Square Separate Accounts of The Travelers Insurance Company+; Assistant
Hartford, Connecticut Secretary, Board of Trustees, five Mutual Funds sponsored by The
Age 47 Travelers Insurance Company.++ Prior to January 1995, Counsel, ITT
Hartford Life Insurance Company.
Lewis E. Daidone Managing Director of Smith Barney, Senior Vice President and Treasurer
Treasurer of 41 investment companies associated with Smith Barney, and Director
388 Greenwich Street and Vice President of SBMFM and TIA; Treasurer, Board of Trustees, five
New York, NY Mutual Funds sponsored by The Travelers Insurance Company.++
Age 39
Irving David Vice President of Smith Barney, Asset Management Division (March
Controller 1994-present) ); Controller, Board of Trustees, five Mutual Funds
388 Greenwich Street sponsored by The Travelers Insurance Company.++
New York, NY
Age 36
Thomas M. Reynolds Director of Smith Barney, Asset Management Division; Controller and
Controller Assistant Secretary of 35 investment companies associated with Smith
388 Greenwich Street Barney, (September 1991-present) ); Controller, Board of Trustees, five
New York, NY Mutual Funds sponsored by The Travelers Insurance Company.++
Age 37
</TABLE>
+ These seven Variable Annuity Separate Accounts are: The Travelers Growth
and Income Stock Account for Variable Annuities, The Travelers Quality
Bond Account for Variable Annuities, The Travelers Money Market Account
for Variable Annuities, The Travelers Timed Growth and Income Stock
Account for Variable Annuities, The Travelers Timed Short-Term Bond
Account for Variable Annuities, The Travelers Timed Aggressive Stock
Account for Variable Annuities and The Travelers Timed Bond Account for
Variable Annuities.
++ These five Mutual Funds are: Capital Appreciation Fund, Money Market
Portfolio, High Yield Bond Trust, Managed Assets Trust and The Travelers
Series Trust.
* Mr. McLendon is an "interested person" within the meaning of the 1940
Act by virtue of his position as Managing Director of Smith Barney Inc., an
indirect wholly owned subsidiary of Travelers Group Inc. and also owns shares
and options to purchase shares of Travelers Group Inc., the indirect parent of
The Travelers Insurance Company.
Members of the Board of Trustees who are also officers or employees of
Travelers Group Inc. or its subsidiaries are not entitled to any fee. Members of
the Board of Trustees who are not affiliated as employees of Travelers Group
Inc. or its subsidiaries receive an aggregate retainer of $19,000 for service on
the Boards of the five Mutual Funds sponsored by The Travelers Insurance Company
and the seven Variable Annuity Separate Accounts established by The Travelers
Insurance Company. They also receive an aggregate fee of $2,500 for each meeting
of such Boards attended. Board Members with 10 years of service may agree to
provide services as emeritus director at age 72 or upon reaching 80 years of age
and will receive 50% of the annual retainer and 50% of meeting fees if attended.
5
<PAGE> 28
PORTFOLIO TURNOVER
The Fund's portfolio turnover for the fiscal years ended December 31,
1995, 1996 and 1997 were 124% 84% and 89%, respectively. High portfolio
turnover involves correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Fund.
DECLARATION OF TRUST
The Fund is organized as a Massachusetts business trust. Pursuant to
certain decisions of the Supreme Judicial Court of Massachusetts, shareholders
of such a trust may, under certain circumstances, be held personally liable as
partners for the obligations of the trust. However, even if the Fund were held
to be a partnership, the possibility of its shareholders incurring financial
loss for that reason appears remote because the Fund's Declaration of Trust
contains an express disclaimer of shareholder liability for obligations of the
Fund and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees,
and because the Declaration of Trust provides for indemnification out of Fund
property for any shareholder held personally liable for the obligations of the
Fund.
The Declaration of Trust provides that a Trustee shall be liable only
for his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, a Trustee
shall not be liable for the neglect or wrongdoing of any such person; provided,
however, that nothing in the Declaration of Trust shall protect a Trustee
against any liability for his willful misfeasance, bad faith, gross negligence
or the reckless disregard of his duties.
Shareholders first elected Trustees at a meeting held on August 16,
1985, and most recently elected Trustees on April 23, 1993. No further
meetings of shareholders for the purpose of electing Trustees will be held,
unless required by law, and unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. Trustees may voluntarily resign from office, or a Trustee may be
removed from office (1) at any time by two-thirds vote of the Trustees; (2) by a
majority vote of Trustees where any Trustee becomes mentally or physically
incapacitated; and (3) either by declaration in writing or at a meeting called
for such purpose by the holders of not less than two-thirds of the outstanding
shares or other voting interests of the Fund. The Trustees are required to call
a meeting for the purpose of considering the removal of a person serving as
trustee, if requested in writing to do so by the holders of not less than 10% of
the outstanding shares or other voting interests of the Fund. The Fund is
required to assist in Shareholders' communications. In accordance with current
laws, insurance companies using the Fund as an underlying investment option
within their variable contracts will request voting instructions from contract
owners participating in such contracts and will vote shares of the Fund in the
same proportion as the voting instructions received.
Voting rights are not cumulative, so that the holders of more than 50%
of the shares voting in the election of Trustees can, if they choose to do so,
elect all of the Trustees of the Fund, in which event the holders of the
remaining shares will be unable to elect any person as a Trustee.
No amendment may be made to the Declaration of Trust without a "vote
of a majority of the outstanding voting securities" of the Fund (as defined in
the 1940 Act).
6
<PAGE> 29
INVESTMENT ADVISORY SERVICES
THE INVESTMENT ADVISER
Travelers Asset Management International Corporation ("TAMIC"), an
indirect wholly owned subsidiary of Travelers Group Inc., furnishes investment
management and advisory services to the Fund in accordance with the terms of an
Investment Advisory Agreement which was approved by shareholders on April 23,
1993.
As required by the 1940 Act, the Advisory Agreement will continue in
effect for a period more than two years from the date of its execution only so
long as its continuance is specifically approved at least annually (i) by a
vote of a majority of the Board of Trustees, or (ii) by a vote of a majority of
the outstanding voting securities of the Fund. In addition, and in either
event, the terms of the Advisory Agreement must be approved annually by a vote
of a majority of the Board of Trustees who are not parties to, or interested
persons of any party to, the Advisory Agreement, cast in person at a meeting
called for the purpose of voting on such approval and at which the Board of
Trustees is furnished such information as may be reasonably necessary to
evaluate the terms of the Advisory Agreement. The Advisory Agreement further
provides that it will terminate automatically upon assignment; may be amended
only with prior approval of a majority of the outstanding voting securities of
the Fund; may be terminated without the payment of any penalty at any time upon
sixty days' notice by the Board of Trustees or by a vote of a majority of the
outstanding voting securities of the Fund; and may not be terminated by TAMIC
without prior approval of a new investment advisory agreement by a vote of a
majority of the outstanding voting securities of the Fund.
Under the terms of the Advisory Agreement, TAMIC shall:
(1) obtain and evaluate pertinent economic, statistical and
financial data and other information relevant to the investment
policy of the Fund affecting the economy generally and
individual companies or industries, the securities of which are
included in the Fund's portfolio or are under consideration for
inclusion therein;
(2) be authorized to purchase supplemental research and other
services from brokers at an additional cost to the Fund;
(3) regularly furnish recommendations to the Board of Trustees with
respect to an investment program for approval, modification or
rejection by the Board of Trustees;
(4) take such steps as are necessary to implement the investment
program approved by the Board of Trustees;
(5) regularly report to the Board of Trustees with respect to
implementation of the approved investment program and any other
activities in connection with the administration of the assets
of the Fund; and
(6) be authorized to engage a subadviser to furnish investment
management information and advice to assist TAMIC in carrying out
its responsibilities under this agreement.
ADVISORY FEES
For furnishing investment management and advisory services to the
Fund, TAMIC is paid an amount equivalent on an annual basis to 0.75% of the
average daily net assets of the Fund. From that amount, TAMIC pays to Janus
Capital Corporation an amount equivalent on an annual basis to a maximum of
0.55% of the average daily net assets of the Fund for Janus Capital's services
as subadviser, TAMIC thus retaining 0.20% as
7
<PAGE> 30
compensation for its services (see "subadviser" below). The advisory fee is
computed daily and paid to TAMIC weekly.
For the fiscal years ended December 31, 1995, 1996 and 1997, the
investment advisory fees paid by the Fund to TAMIC were $752,372, $1,261,284
and $2,436,487, respectively.
THE SUBADVISER
Janus Capital Corporation (Janus Capital), 100 Fillmore Street,
Denver, Colorado, has been employed by TAMIC as a subadviser to manage the
daily investment operations of the Fund, subject to the supervision of both
TAMIC and the Board of Trustees. Kansas City Southern Industries, Inc., a
publicly traded holding company whose primary subsidiaries are engaged in
transportation, financial services and real estate, owns approximately 83% of
the outstanding voting stock of Janus Capital. Janus Capital also acts as
investment adviser to other investment companies not affiliated with the Fund,
as well as to individual, corporate, charitable and retirement accounts.
As described above, TAMIC, and not the Fund, will pay to Janus Capital
an amount equivalent on an annual basis to a maximum of 0.55% of the Fund's
average daily net assets for its services as a subadviser to the Fund. For the
years ended December 31, 1995, 1996 and 1997, Janus Capital Corporation
received $413,805, $378,385 and $1,786,757, respectively, in subadvisory fees.
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Fund to pay
for all redemptions in cash, the Fund may authorize payment to be made in
portfolio securities or other property.
However, the Fund has obligated itself under the 1940 Act to redeem
for cash all shares presented for redemption by any one shareholder up to
$250,000, or 1% of the Fund's net assets if that is less, in any 90-day period.
Securities delivered in payment of redemptions would be valued at the same
value assigned to them in computing the net asset value per share.
Shareholders receiving such securities would incur brokerage costs when these
securities are sold.
BROKERAGE
Subject to approval of the Board of Trustees, and in accordance with
the Advisory Agreement and Subadvisory Agreement, TAMIC or Janus Capital will
place purchase and sale orders for portfolio securities of the Fund through
brokerage firms which it may select from time to time with the objective of
seeking the best execution by responsible brokerage firms at reasonably
competitive rates. To the extent consistent with this policy, certain
brokerage transactions may be placed with firms which provide brokerage and
research services to TAMIC or Janus Capital, and such services may be paid for
at higher rates than other firms would charge. The term "brokerage and
research services" includes advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities for purchasers or sellers of securities; furnishing
analyses and reports concerning issues, industries, securities, economic
factors and trends; portfolio strategy and performance of accounts; and
effecting securities transactions and performing functions incidental thereto
(such as clearance and settlement). These brokerage and research services may
be utilized in providing investment advice to the Fund, and they may also be
utilized in providing investment advice and management to all accounts over
which TAMIC or Janus Capital exercise investment discretion, but not all of
such services will necessarily be utilized in providing investment advice to
the Fund. This practice may be expected to result in greater costs to the Fund
than might otherwise be the case if brokers whose charges were based on
execution alone were used for such transactions. TAMIC and Janus Capital
believe that brokers' research services are very important in providing
investment advice to the Fund but are unable to give the services a dollar
value. While research services are not expected to reduce the expenses of
TAMIC or Janus Capital, either would, through the use of these services, avoid
8
<PAGE> 31
the additional expenses which would be incurred if they should attempt to
develop comparable information through their own staff.
Transactions in the over-the-counter market are placed with the
principal market makers unless better price and execution may be obtained
otherwise. Brokerage fees will be incurred in connection with futures
transactions and the Fund will be required to deposit and maintain funds with
brokers as margin to guarantee performance of future obligations.
The overall reasonableness of brokerage commissions paid is evaluated
by the personnel of TAMIC or Janus Capital responsible for trading and managing
the Fund's portfolio by comparing brokerage firms utilized by TAMIC or Janus
Capital and other firms with respect to the following factors: the prices paid
or received in securities transactions; the speed of execution and settlement;
the size and difficulty of the brokerage transactions; the financial soundness
of the firms; and the quality, timeliness and quantity of research information
and reports.
The total brokerage commissions paid by the Fund for the fiscal years
ended December 31, 1995, 1996 and 1997 were $298,469, $273,000 and $1,166,544,
respectively. For the fiscal year ended December 31, 1997, no portfolio
transactions were directed to brokers because of research services. No formula
was used in placing such transactions and no specific amount of transactions was
allocated for research services. No brokerage business was placed with any
brokers affiliated with the Fund's investment adviser during the past three
fiscal years.
FUND ADMINISTRATION
The Fund entered into an Administrative Services Agreement during 1996
with The Travelers Insurance Company to provide pricing and bookkeeping
services at an annualized rate of .06% of the daily net assets of the Fund.
Travelers Insurance at its expense may appoint a sub-administrator to perform
these services. Mutual Management Corp. ("MMC"), an affiliate of Travelers
Insurance, has been appointed to serve in this capacity. Travelers Insurance
pays MMC, as sub-administrator, a fee calculated at an annual rate of 0.06% of
the daily net assets of the Fund. For the period ended December 31, 1996 and
year ended December 31, 1997, the administration fees were $25,243 and
$183,798, respectively.
ADDITIONAL INFORMATION
On April 1, 1998 The Travelers Insurance Company and its affiliates
owned 100% of the Fund's outstanding shares. The Travelers Insurance Company
is a stock insurance company chartered in 1864 in Connecticut and continuously
engaged in the insurance business since that time. It is a wholly owned
subsidiary of The Travelers Insurance Group Inc., which is indirectly owned,
through a wholly owned subsidiary, by Travelers Group Inc., a financial
services holding company. The Travelers Insurance Company's Home Office is
located at One Tower Square, Hartford, Connecticut 06183, telephone
860-277-0111.
First Data Investor Services Group, Inc., 53 State Street, Exchange
Place, Boston, MA, 02109, acts as transfer agent and dividend disbursing agent
for the Fund.
PNC Bank NA, 200 Stevens Drive, Lester, PA 19113 and Morgan Stanley
Trust Company, One Pierrepont Plaza, Brooklyn, NY, 11201 are custodians of the
securities and cash of the Fund.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, NY 10154, has been
selected as independent auditors to examine and report on the Fund's financial
statements for the fiscal year ending December 31, 1998.
Except as otherwise stated in its prospectus or as required by law,
the Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or
change fees for services provided.
9
<PAGE> 32
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, this SAI or any supplemental sales literature issued by the Fund,
and no person is entitled to rely on any information or representation not
contained therein.
The Fund's prospectus and this SAI omit certain information contained
in the Fund's registration statement filed with the Securities and Exchange
Commission which may be obtained from the Commission's principal office in
Washington, D.C. upon payment of the fee prescribed by the Rules and
Regulations promulgated by the Commission.
10
<PAGE> 33
APPENDIX
CORPORATE BOND RATINGS
S&P CORPORATE BOND RATINGS
A Standard & Poor's Corporation (S&P) corporate bond rating is a
current assessment of the creditworthiness of an obligor, including obligors
outside the United States, with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees. Ratings of foreign obligors do not take into account currency
exchange and related uncertainties. The ratings are based on current
information furnished by the issuer or obtained by S&P from other sources it
considers reliable.
The ratings are based, in varying degrees, on the following
considerations:
a. Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "A" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Although it normally exhibits 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 debt in this category than in higher rated categories.
5. BB, B, CCC, CC and C - Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation, and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
MOODY'S CORPORATE BOND RATINGS ARE AS FOLLOWS:
1. Aaa - Bonds which are 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
11
<PAGE> 34
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes are not likely to impair
the fundamentally strong position of such issues.
2. Aa - Bonds which are 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 as in Aaa securities, or there may be
other elements present which make the long term risks appear somewhat larger
than in Aaa securities.
3. A - Bonds which are 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 sometime in the
future.
4. Baa - Bonds which are 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.
5. Ba - Bonds which are 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.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
7. Caa - Bonds which are 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.
8. Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
market shortcomings.
9. C - Bonds which are rated as 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a midrange ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
12
<PAGE> 35
CAPITAL APPRECIATION FUND
STATEMENT OF ADDITIONAL INFORMATION
L-11171S
TIC Ed. 5-98
Printed in U.S.A.
<PAGE> 36
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) The financial statements of the Registrant and the Report of Independent
Accountants are contained in the Fund's Annual Report which is
incorporated in the Statement of Additional Information by reference. The
Registrant's financial statements for the period ended December 31, 1997
include:
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended December 31, 1997 and 1996
Statement of Investments as of December 31, 1997
Notes to Financial Statements
(b) Exhibits
<S> <C>
1. Declaration of Trust. (Incorporated herein by reference to Exhibit 1 to Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A filed on April 11, 1996.)
2. By-Laws of Capital Appreciation Fund. (Incorporated herein by reference to Exhibit 2 to
Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A filed on
April 11, 1996.)
5(a). Investment Advisory Agreement between the Registrant and The Travelers Investment
Management Company. (Incorporated herein by reference to Exhibit 5(A) to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed on February 20, 1997.)
5(b). Sub-Advisory Agreement between The Travelers Investment Management Company and Janus
Capital Corporation. (Incorporated herein by reference to Exhibit 5(B) to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed on February 20, 1997.)
8(a). Form of Custody Agreement between the Registrant and PNC Bank, N.A.
8(b). Form of Subcustody Agreement between Morgan Stanley Trust Company and Subcustodians.
9(a). Administrative Services Agreement between the Registrant and The Travelers Insurance
Company. (Incorporated herein by reference to Exhibit 9 to Post-Effective Amendment
No. 25 to the Registration Statement on Form N-1A filed on February 20, 1997.)
9(b). Form of Transfer Agency and Registrar Agreement between the Trust and First Data
Investor Services Group, Inc.
10. An opinion and consent of counsel as to the legality of the securities registered by the
Registrant. (Incorporated herein by reference to the Registrant's most-recent Rule 24f-2
Notice filing on March 25, 1998.)
11(A). Consent of Coopers & Lybrand L.L.P., Independent Accountants.
11(A). Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants.
</TABLE>
<PAGE> 37
<TABLE>
<S> <C>
11(B). Powers of Attorney authorizing Ernest J. Wright or Kathleen A McGah as signatories for
Heath B. McLendon, Knight Edwards, Robert E. McGill III, Lewis Mandell, Frances M. Hawk
and Ian R. Stuart. (Incorporated herein by reference to Exhibit 11(B) to Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A filed on April 11, 1996.)
Power of Attorney authorizing Ernest J. Wright or Kathleen A. McGah as signatory for
Lewis E. Daidone. (Incorporated herein by reference to Exhibit 11(B) to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A filed on February 20, 1997.)
27. Financial Data Schedule.
</TABLE>
<PAGE> 38
Item 25. Persons Controlled By or Under Common Control With the Registrant
Not Applicable.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of April 1, 1998
-------------- -----------------------
<S> <C>
Shares of beneficial interest, Nine (9)
without par value
</TABLE>
Item 27. Indemnification
Provisions for the indemnification of the Fund's Trustees and officers are
contained in the Fund's Declaration of Trust which was filed with Post-Effective
Amendment No. 24 to the Fund's Registration Statement as Exhibit 1 on April 11,
1996.
Rule 484 Undertaking
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liability (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE> 39
Item 28. Business and Other Connections of Investment Adviser
Officers and Directors of Travelers Asset Management International Corporation
(TAMIC), the Investment Adviser for Capital Appreciation Fund, are set forth in
the following table:
<TABLE>
<CAPTION>
Name Position with TAMIC Other Business
- ---- ------------------- --------------
<S> <C> <C>
Marc P. Weill Director and Chairman Senior Vice President **
Chief Investment Officer
David A. Tyson Director, President and Senior Vice President *
Chief Investment Officer
Joseph E. Rueli, Jr. Director, Senior Vice President Vice President*
and Chief Financial Officer
F. Denney Voss Director and Senior Vice Senior Vice President*
President
John R. Britt Director and Secretary Assistant Secretary *
Harvey Eisen Senior Vice President Senior Vice President*
Joseph M. Mullally Senior Vice President Vice President*
David Amaral Vice President Assistant Director*
John R. Calcagni Vice President Second Vice President*
Gene Collins Vice President Vice President*
John F. Green Vice President Second Vice President*
Thomas Hajdukiewicz Vice President Vice President*
Edward Hinchliffe III Vice President and Cashier Second Vice President and Cashier*
Richard E. John Vice President Vice President*
Kathryn D. Karlic Vice President Vice President*
David R. Miller Vice President Vice President*
Emil J. Molinaro Vice President Vice President*
Andrew Sanford Vice President Investment Officer*
Charles H. Silverstein Vice President Second Vice President*
Robert Simmons Vice President Assistant Investment Officer*
Jordan M. Stitzer Vice President Vice President*
Joel Strauch Vice President Vice President*
William H. White Treasurer Vice President and Treasurer *
Charles B. Chamberlain Assistant Treasurer Assistant Treasurer *
George M. Quaggin, Jr. Assistant Treasurer Assistant Treasurer *
Marla A. Berman Assistant Secretary Assistant Secretary**
Andrew Feldman Assistant Secretary Senior Counsel*
Millie Kim Assistant Secretary Senior Counsel*
Patricia A. Uzzel Compliance Officer Assistant Director*
Frank J. Fazzina Controller Director *
</TABLE>
* Positions are held with The Travelers Insurance Company, One Tower
Square, Hartford, Connecticut 06183.
** Positions are held with Travelers Group Inc. , 388 Greenwich Street,
New York, N.Y. 10013.
<PAGE> 40
Executive Officers and Directors of Janus Capital Corporation, the Registrant's
Sub-Adviser, are set forth in the following table:
<TABLE>
<CAPTION>
Position with Janus
Name Capital Corporation Other Business
- ---- ------------------- --------------
<S> <C> <C>
Thomas H. Bailey President, Director Chairman of Trustees and
and Chairman President of Janus Aspen Series
Chief Executive Officer and Janus Investment Fund
Denver, Colorado
Chairman and Director
IDEX Management, Inc.
Largo, Florida
James P. Craig, III Chairman, Executive Vice President
Director and and Trustee
Chief Investment Officer Janus Aspen Series and
Janus Investment Fund
Denver, Colorado
Michael E. Herman Independent Director Chairman
Finance Committee
Ewing Marion Kauffman
Foundation
Kansas City, Missouri
President, Kansas City Royals
Baseball Team
Kansas, Missouri
Thomas A. McDonnell Independent Director President and Director,
DST Systems Inc.
Kansas City, Missouri
Director
Euronet Services, Inc.
Lakewood, Kansas
Michael Stolper Independent Director President,
Stolper & Co., Inc.
San Diego, California
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
Position with Janus
Name Capital Corporation Other Business
- ---- ------------------- --------------
<S> <C> <C>
Thomas A. Early Vice President, General Vice General Counsel
Counsel and Secretary Janus Aspen Series and
Janus Investment Fund
Vice President
Janus Service Corp.
Janus Distributors, Inc.
Denver, Colorado
Steven R. Goodbarn Vice President of Finance, Vice President and Chief
Treasurer and Chief Financial Officer of
Financial Officer Janus Aspen Series and
Janus Investment Fund
Vice President of Finance
and Treasurer and CFO of
Janus Service Corp.,
Janus Distributors and Janus
Capital International Ltd.,
Denver, Colorado and
Director of Janus Capital
International Ltd.
Landon H. Rowland Independent Director President and Chief
Executive Officer
Kansas City Southern
Industries, Inc.
Mark B. Whiston Vice President and Director, President and CEO
Chief Marketing Officer Janus Capital International Ltd.
Denver, Colorado
Marjorie G. Hurd Vice President and President and Director
Chief Operations Officer Janus Service Corp.
</TABLE>
<PAGE> 42
Item 29. Principal Underwriter
Not Applicable.
Item 30. Location of Accounts and Records
(1) Mutual Management Corp.
388 Greenwich Street
New York, NY 10013
(2) PNC Bank, N.A.
200 Stevens Drive
Lester, PA 19113
(3) Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, NY 11201
(4) First Data Investor Services Group, Inc.
53 State Street
Boston, MA 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
The undersigned Registrant hereby undertakes to provide to each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, Capital Appreciation Fund, certifies that
it meets all of the requirements for effectiveness of this post-effective
amendment to this Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this amendment to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hartford, State of Connecticut, on April 21, 1998.
CAPITAL APPRECIATION FUND
-------------------------
(Registrant)
By: *HEATH B. McLENDON
------------------------------
Heath B. McLendon
Chairman, Board of Trustees
Pursuant to the requirements of the Securities Act of 1933, this post-effective
amendment to this Registration Statement has been signed below by the following
persons in the capacities indicated on April 21, 1998.
*HEATH B. McLENDON Chairman of the Board
- -------------------------------------
(Heath B. McLendon)
*KNIGHT EDWARDS Trustee
- -------------------------------------
(Knight Edwards)
*ROBERT E. McGILL III Trustee
- -------------------------------------
(Robert E. McGill III)
*LEWIS MANDELL Trustee
- -------------------------------------
(Lewis Mandell)
*FRANCES M. HAWK Trustee
- -------------------------------------
(Frances M. Hawk)
*LEWIS E. DAIDONE Treasurer
- -------------------------------------
(Lewis E. Daidone)
*By:
---------------------------------------
Ernest J. Wright, Attorney-in-Fact
Secretary, Board of Trustees
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
1. Declaration of Trust. (Incorporated herein by reference to
Exhibit 1 to Post-Effective Amendment No. 24 to the Registration
Statement on Form N-1A filed on April 11, 1996.)
2. By-Laws of Capital Appreciation Fund. (Incorporated herein by
reference to Exhibit 2 to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A filed on April 11, 1996.)
5(A). Investment Advisory Agreement between the Registrant and
Travelers Asset Management International Corporation.
(Incorporated herein by reference to Exhibit 5(A) to
Post-Effective Amendment No. 25 to the Registration Statement on
Form N-1A filed on February 20, 1997.)
5(B). Sub-Advisory Agreement between Travelers Asset Management
International Corporation and Janus Capital Corporation.
(Incorporated herein by reference to Exhibit 5(B) to
Post-Effective Amendment No. 25 to the Registration Statement on
Form N-1A filed on February 20, 1997.)
8(A). Form of Custody Agreement between the Registrant and PNC Bank. Electronically
8(B). Form of Subcustody Agreement between Morgan Stanley Electronically
Trust Company and Subcustodians.
9. Administrative Services Agreement between the Registrant and The
Travelers Insurance Company. (Incorporated herein by reference to
Exhibit 9 to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A filed on February 20, 1997.)
9(b). Form of Transfer Agency and Registrar Agreement between the Electronically
Trust and Frist Data Investor Services Group, Inc.
10. An opinion and consent of counsel as to the legality of the
securities registered by the Registrant. (Incorporated herein by
reference to the Registrant's most recent Rule 24f-2 Notice
filing on March 25, 1998.)
11(A). Consent of Coopers & Lybrand L.L.P., Independent Accountants. Electronically
11(B). Consent of KPMG Peat Marwick LLP, Independent Certified Electronically
Public Accountants.
11(C). Powers of Attorney authorizing Ernest J. Wright or Kathleen A.
McGah as signatory for Heath B. McLendon, Knight Edwards, Robert
E. McGill III, Lewis Mandell, Frances M. Hawk and Ian R. Stuart.
(Incorporated herein by reference to Exhibit 11(B) to
Post-Effective Amendment No. 24 to the Registration Statement on
Form N-1A filed on April 11, 1996.)
Power of Attorney authorizing Ernest J. Wright or Kathleen A.
McGah as signatory for Lewis E. Daidone. (Incorporated herein
by reference to Exhibit 11(B) to Post-Effective Amendment No. 25
to the Registration Statement on Form N-1A filed on February 20, 1997.)
27. Financial Data Schedule. Electronically
</TABLE>
<PAGE> 1
FORM OF
CUSTODY SERVICES AGREEMENT
This Agreement is made as of ______________________________________,
by and between,_______________________________________ a corporation (the
"Fund") and PNC BANK, NATIONAL ASSOCIATION, a national banking association
("PNC Bank").
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes
to retain PNC Bank to provide custodian services and PNC Bank wishes to furnish
such services, either directly or through an affiliate or affiliates, as more
fully described herein. In consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall
mean any officer of the Fund and any other person, who is duly authorized by
the Fund's Governing Board, to give Oral and Written Instructions on behalf of
the Fund. Such persons are listed in the Certificate attached hereto as the
Authorized Persons Appendix.
(b) "Book-Entry System". The term "Book-Entry System" means
Federal Reserve Treasury book-entry system for United States and federal agency
securities, its successor or successors, and its nominee or nominees and any
book-entry system maintained by an exchange registered with the SEC under the
1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities
Futures Trading Commission.
(d) "Governing Board". The term "Governing Board" shall mean
the Fund's Board of Directors if the Fund is a corporation or the Fund's Board
of Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall
mean oral instructions received by PNC Bank from an Authorized Person or from a
person reasonably believed by PNC Bank to be an Authorized Person.
(f) "SEC". The term "SEC" shall mean the Securities and
Exchange Commission.
(g) "Securities and Commodities Laws". The term "Securities
and Commodities Laws" shall mean the "1933 Act" which shall mean the Securities
Act of 1933, the "1934 Act" which shall mean the Securities Exchange Act of
1934, the "1940 Act" which shall mean the Investment Company Act of 1940, as
amended, and the "CEA" which shall mean the Commodities Exchange Act, as
amended.
<PAGE> 2
(h) "Shares". The term "Shares" shall mean the shares of
stock of any series or class of the Fund, or, where appropriate, units of
beneficial interest in a trust where the Fund is organized as a Trust.
(i) "Property". The term "Property" shall mean:
(i) any and all securities and other investment
items which the Fund on behalf of the
Portfolios may from time to time deposit, or
cause to be deposited, with PNC Bank or which
PNC Bank may from time to time hold for the
Fund on behalf of the Portfolios;
(ii) All income in respect of any of such
securities or other investment items;
(iii) all proceeds of the sale of any of such
securities or investment items; and
(iv) all proceeds of the sale of securities issued
by the Fund on behalf of the Portfolios,
which are received by PNC Bank from time to
time, from or on behalf of the Fund.
(j) "Written Instructions". The term "Written Instructions"
shall mean written instructions signed by one Authorized Person and received by
PNC Bank. The instructions may be delivered by hand, mail, tested telegram,
cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to provide
custodian services to each of the Portfolios, and PNC Bank accepts such
appointment and agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or, where
applicable, will provide PNC Bank with the following:
(a) certified or authenticated copies of the resolutions of
the Fund's Governing Board, approving the appointment of PNC Bank or its
affiliates to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of each Portfolio's advisory agreement or
agreements;
(d) a copy of each Portfolio's distribution agreement or
agreements;
(e) a copy of each Portfolio's administration agreements if
PNC Bank is not providing the Fund with such services;
(f) copies of any shareholder servicing agreements made in
respect of the Fund or a Portfolio; and
2
<PAGE> 3
(g) certified or authenticated copies of any and all
amendments or supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PNC Bank
undertakes to comply with all applicable requirements of the Securities and
Commodities Laws and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to all duties to be performed by
PNC Bank hereunder. Except as specifically set forth herein, PNC Bank assumes
no responsibility for such compliance by the Fund or any Portfolio.
5. Instructions. Unless otherwise provided in this Agreement,
PNC Bank shall act only upon Oral and Written Instructions. PNC Bank shall be
entitled to rely upon any Oral and Written Instructions it receives from an
Authorized Persons (or from a person reasonably believed by PNC Bank to be an
Authorized Person) pursuant to this Agreement. PNC Bank may assume that any
Oral or Written Instructions received hereunder are not in any way inconsistent
with the provisions of organizational documents or this Agreement or of any
vote, resolution or proceeding of the Fund's Governing Board or of the Fund's
shareholders.
The Fund agrees to forward to PNC Bank Written Instructions confirming
Oral Instructions so that PNC Bank receives the Written Instructions by the
close of business on the same day that such Oral Instructions are received.
The fact that such confirming Written Instructions are not received by PNC Bank
shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions.
The Fund further agrees that PNC Bank shall incur no liability to the
Fund in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PNC Bank is in doubt as to any
action it should or should not take, PNC Bank may request directions or advice,
including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to
any questions of law pertaining to any action it should or should not take, PNC
Bank may request advice at its own cost from such counsel of its own choosing
(who may be counsel for the Fund, the Fund's advisor or PNC Bank, at the option
of PNC Bank).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PNC Bank receives from the
Fund, and the advice it receives from counsel, PNC Bank shall be entitled to
rely upon and follow the advice of counsel.
(d) Protection of PNC Bank. PNC Bank shall be protected in
any action it takes or does not take in reliance upon directions, advice or
Oral or Written Instructions it receives from
3
<PAGE> 4
the Fund or from counsel and which PNC Bank believes, in good faith, to be
consistent with those directions, advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PNC Bank (i) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such directions, advice or Oral
or Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PNC Bank's properly taking or not taking
such action.
7. Records. The books and records pertaining to the Fund and any
Portfolio, which are in the possession of PNC Bank, shall be the property of
the Fund. Such books and records shall be prepared and maintained as required
by the 1940 Act and other applicable securities laws, rules and regulations.
The Fund, or the Fund's Authorized Persons, shall have access to such books and
records at all time during PNC Bank's normal business hours. Upon the
reasonable request of the Fund, copies of any such books and records shall be
provided by PNC Bank to the Fund or to an Authorized Person of the Fund, at the
Fund's expense.
8. Confidentiality. PNC Bank agrees to keep confidential all
records of the Fund and information relative to the Fund and its shareholders
(past, present and potential), unless the release of such records or
information is otherwise consented to, in writing, by the Fund. The Fund
agrees that such consent shall not be unreasonably withheld. The Fund further
agrees that, should PNC Bank be required to provide such information or records
to duly constituted authorities (who may institute civil or criminal contempt
proceedings for failure to comply), PNC Bank shall not be required to seek the
Fund's consent prior to disclosing such information.
9. Cooperation with Accountants. PNC Bank shall cooperate with
the Fund's independent public accountants and shall take all reasonable action
in the performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the expression
of their opinion, as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and shall
maintain in effect with appropriate parties one or more agreements making
reasonable provision for emergency use of electronic data processing equipment
to the extent appropriate equipment is available. In the event of equipment
failures, PNC Bank shall, at no additional expense to the Fund, take reasonable
steps to minimize service interruptions but shall have no liability with
respect thereto.
11. Compensation. As compensation for services rendered by PNC
Bank during the term of this Agreement, the Fund, on behalf of each of the
Portfolios, will pay to PNC Bank a fee or fees as may be agreed to in writing
by the Fund and PNC Bank.
12. Indemnification. The Fund, on behalf of each Portfolio,
agrees to indemnify and hold harmless PNC Bank and its nominees from all taxes,
charges, expenses, assessment, claims and liabilities (including, without
limitation, liabilities arising under the Securities and Commodities Laws and
any state and foreign securities and blue sky laws, and amendments thereto, and
expenses, including (without limitation) attorneys' fees and disbursements,
arising
4
<PAGE> 5
directly or indirectly from any action which PNC Bank takes or does not take
(i) at the request or on the direction of or in reliance on the advice of the
Fund or (ii) upon Oral or Written Instructions. Neither PNC Bank, nor any of
its nominees, shall be indemnified against any liability to the Fund or to its
shareholders (or any expenses incident to such liability) arising out of PNC
Bank's own willful misfeasance, bad faith, negligence or reckless disregard of
its duties and obligations under this Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be under no duty
to take any action on behalf of the Fund or any Portfolio except as
specifically set forth herein or as may be specifically agreed to by PNC Bank,
in writing. PNC Bank shall be obligated to exercise care and diligence in the
performance of its duties hereunder, to act in good faith and to use its best
effort, within reasonable limits, in performing services provided for under
this Agreement; PNC Bank shall be responsible for its own negligent failure to
perform its duties under this Agreement. Notwithstanding the foregoing, PNC
Bank shall not be responsible for losses beyond its control, provided that PNC
Bank has acted in accordance with the standard of care set forth above; and
provided further that PNC Bank shall only be responsible for that portion of
losses or damages suffered by the Fund or a particular Portfolio that are
attributable to the negligence of PNC Bank.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PNC Bank, in connection with its duties under this
Agreement, shall not be under any duty or obligation to inquire into and shall
not be liable for (a) the validity or invalidity or authority or lack thereof
of any Oral or Written Instruction, notice or other instrument which conforms
to the applicable requirements of this Agreement, and which PNC Bank reasonably
believes to be genuine; or (b) delays or errors or loss of data occurring by
reason of circumstances beyond PNC Bank's control, including acts of civil or
military authority, national emergencies, labor difficulties, fire, flood or
catastrophe, acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PNC Bank
shall have no liability to the Fund or to any Portfolio for any consequential,
special or indirect losses or damages which the Fund may incur or suffer by or
as a consequence of PNC Bank's performance of the services provided hereunder,
whether or not the likelihood of such losses or damages was known by PNC Bank.
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver or
arrange for delivery to PNC Bank, all the property owned by the Portfolios,
including cash received as a result of the distribution of its shares, during
the period that is set forth in this Agreement. PNC Bank will not be
responsible for such property until actual receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting
upon Written Instructions, shall open and maintain separate account(s) in the
Fund's name using all cash received from or for the account of the Fund,
subject to the terms of this Agreement. In addition, upon Written
Instructions, PNC Bank shall open separate custodial accounts for each
Portfolio of
5
<PAGE> 6
the Fund and shall hold in such account(s) all cash received from or for the
accounts of the Fund specifically designated to each Portfolio. PNC Bank shall
make cash payments from or for the account of a Portfolio only for:
(i) purchases of securities in the name of a
Portfolio or PNC Bank or PNC Bank's nominee
as provided in sub-paragraph j and for which
PNC Bank has received a copy of the broker's
or dealer's confirmation or payee's invoice,
as appropriate;
(ii) purchase or redemption of shares of the Fund
delivered to PNC Bank;
(iii) payment of, subject to Written Instructions,
interest, taxes, administration, accounting,
distribution, advisory, management fees or
similar expenses which are to be borne by a
Portfolio;
(iv) payment to, subject to receipt of Written
Instructions, the Fund's transfer agent, as
agent for the shareholders, an amount equal
to the amount of dividends and distributions
stated in the Written Instructions to be
distributed in cash by the transfer agent to
shareholders, or, in lieu of paying the
Fund's transfer agent, PNC Bank may arrange
for the direct payment of cash dividends and
distributions to shareholders in accordance
with procedures mutually agreed upon from
time to time by and among the Fund, PNC Bank
and the Fund's transfer agent.
(v) payments, upon receipt of Written
Instructions, in connection with the
conversion, exchange or surrender of
securities owned or subscribed to by the Fund
on behalf of a Portfolio and held by or
delivered to PNC Bank;
(vi) payments of the amounts of dividends received
with respect to securities sold short;
payments made to a sub-custodian pursuant to
provisions in sub-paragraph c of this
Agreement; and
(viii) payments, upon Written Instructions made for
other proper Fund purposes. PNC Bank is
hereby authorized to endorse and collect all
checks, drafts or other orders for the
payment of money received as custodian for
the account of the Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold all securities received
by it for or for the account of a Portfolio
in a separate account that physically
segregates such securities from those of any
other persons, firms or corporations. All
such securities shall be held or disposed of
only upon Written Instructions of the Fund
pursuant to the terms of this Agreement. PNC
Bank shall have no power or authority to
assign, hypothecate, pledge or otherwise
dispose of any such securities or investment,
except upon the express terms of this
Agreement and upon Written Instructions,
accompanied by a certified resolution of the
Fund's Governing Board, authorizing the
transaction. In no case may any member of
the Fund's Governing Board, or any officer,
employee or agent of the Fund withdraw any
securities.
6
<PAGE> 7
At PNC Bank's own expense and for its own
convenience, PNC Bank may enter into
sub-custodian agreements with other banks or
trust companies to perform duties described
in this sub-paragraph c. Such bank or trust
company shall have an aggregate capital,
surplus and undivided profits, according to
its last published report, of at least one
million dollars ($l,000,000), if it is a
subsidiary or affiliate of PNC Bank, or at
least twenty million dollars ($20,000,000) if
such bank or trust company is not a
subsidiary or affiliate of PNC Bank. In
addition, such bank or trust company must
agree to comply with the relevant provisions
of the 1940 Act and other applicable rules
and regulations. PNC Bank shall remain
responsible for the performance of all of its
duties as described in this Agreement and
shall hold the Fund harmless from its own
acts or omissions, under the standards of
care provided for herein, or of any
sub-custodian chosen by PNC Bank under the
terms of this sub-paragraph c.
(d) Transactions Requiring Instructions. Upon receipt of
Oral or Written Instructions and not otherwise, PNC Bank, directly or through
the use of the Book-Entry system, shall:
(i) deliver any Securities held for a Portfolio
against the receipt of payment for the sale
of such securities;
(ii) execute and deliver to such persons as may be
designated in such Oral or Written
Instructions, proxies, consents,
authorizations, and any other instruments
whereby the authority of a Portfolio as owner
of any securities may be exercised;
(iii) deliver any securities to the issuer thereof,
or its agent, when such securities are
called, redeemed, retired or otherwise become
payable; provided that, in any such case, the
cash or other consideration is to be
delivered to PNC Bank;
(iv) deliver any securities held for a Portfolio
against receipt of other securities or cash
issued or paid in connection with the
liquidation, reorganization, refinancing,
tender offer, merger, consolidation or
recapitalization of any corporation, or the
exercise of any conversion privilege;
(v) deliver any securities held for a Portfolio
to any protective committee, reorganization
committee or other person in connection with
the reorganization, refinancing, merger,
consolidation, recapitalization or sale of
assets of any corporation, and receive and
hold under the terms of this Agreement such
certificates of deposit, interim receipts or
other instruments or documents as may be
issued to it to evidence such delivery;
(vi) make such transfer or exchanges of the assets
of the Portfolios and take such other steps
as shall be stated in said Oral or Written
Instructions to
7
<PAGE> 8
be for the purpose of effectuating a duly
authorized plan of liquidation,
reorganization, merger, consolidation or
recapitalization of the Fund;
(vii) release securities belonging to a Portfolio
to any bank or trust company for the purpose
of a pledge or hypothecation to secure any
loan incurred by the Fund on behalf of that
Portfolio; provided, however, that securities
shall be released only upon payment to PNC
Bank of the monies borrowed, except that in
cases where additional collateral is required
to secure a borrowing already made subject to
proper prior authorization, further
securities may be released for that purpose;
and repay such loan upon redelivery to it of
the securities pledged or hypothecated
therefor and upon surrender of the note or
notes evidencing the loan;
(viii) release and deliver securities owned by a
Portfolio in connection with any repurchase
agreement entered into on behalf of the Fund,
but only on receipt of payment therefor; and
pay out moneys of the Fund in connection with
such repurchase agreements, but only upon the
delivery of the securities;
(ix) release and deliver or exchange securities
owned by the Fund in connection with any
conversion of such securities, pursuant to
their terms, into other securities;
(x) release and deliver securities owned by the
Fund on behalf of a Portfolio for the purpose
of redeeming in kind shares of the Fund upon
delivery thereof to PNC Bank; and
(xi) release and deliver or exchange securities
owned by the Fund on behalf of a Portfolio
for other corporate purposes. PNC Bank must
also receive a certified resolution
describing the nature of the corporate
purpose and the name and address of the
person(s) to whom delivery shall be made when
such action is pursuant to sub-paragraph d.
above.
(e) Use of Book-entry System. The Fund shall deliver to PNC
Bank certified resolutions of the Fund's Governing Board approving, authorizing
and instructing PNC Bank on a continuous and on-going basis, to deposit in the
Book-Entry System all securities belonging to the Portfolios eligible for
deposit therein and to utilize the Book-Entry System to the extent possible in
connection with settlements of purchases and sales of securities by the
Portfolios, and deliveries and returns of securities loaned, subject to
repurchase agreements or used as collateral in connection with borrowings. PNC
Bank shall continue to perform such duties until it receives Written or Oral
Instructions authorizing contrary actions(s).
To administer the Book-Entry System properly, the following provisions
shall apply:
(i) With respect to securities of each Portfolio
which are maintained in the Book-Entry
system, established pursuant to this
sub-paragraph e hereof, the records of PNC
Bank shall identify by Book-Entry or
otherwise those securities belonging to each
Portfolio. PNC Bank shall furnish the Fund a
detailed statement of the Property held for
each Portfolio under this
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<PAGE> 9
Agreement at least monthly and from time to
time and upon written request.
(ii) Securities and any cash of each Portfolio
deposited in the Book-Entry System will at
all times be segregated from any assets and
cash controlled by PNC Bank in other than a
fiduciary or custodian capacity but may be
commingled with other assets held in such
capacities. PNC Bank and its sub-custodian,
if any, will pay out money only upon receipt
of securities and will deliver securities
only upon the receipt of money.
(iii) All books and records maintained by PNC Bank
which relate to the Fund's participation in
the Book-Entry System will at all times
during PNC Bank's regular business hours be
open to the inspection of the Fund's duly
authorized employees or agents, and the Fund
will be furnished with all information in
respect of the services rendered to it as it
may require.
(iv) PNC Bank will provide the Fund with copies of
any report obtained by PNC Bank on the system
of internal accounting control of the
Book-Entry System promptly after receipt of
such a report by PNC Bank. PNC Bank will
also provide the Fund with such reports on
its own system of internal control as the
Fund may reasonably request from time to
time.
(f) Registration of Securities. All Securities held for a
Portfolio which are issued or issuable only in bearer form, except such
securities held in the Book-Entry System, shall be held by PNC Bank in bearer
form; all other securities held for a Portfolio may be registered in the name
of the Fund on behalf of that Portfolio; PNC Bank; the Book-Entry System; a
sub-custodian; or any duly appointed nominee(s) of the Fund, PNC Bank,
Book-Entry system or sub-custodian. The Fund reserves the right to instruct
PNC Bank as to the method of registration and safekeeping of the securities of
the Fund. The Fund agrees to furnish to PNC Bank appropriate instruments to
enable PNC Bank to hold or deliver in proper form for transfer, or to register
its registered nominee or in the name of the Book-Entry System, any securities
which it may hold for the account of a Portfolio and which may from time to
time be registered in the name of the Fund on behalf of a Portfolio. PNC Bank
shall hold all such securities which are not held in the Book-Entry System in a
separate account for a Portfolio in the name of the Fund on behalf of a
Portfolio physically segregated at all times from those of any other person or
persons.
(g) Voting and Other Action. Neither PNC Bank nor its
nominee shall vote any of the securities held pursuant to this Agreement by or
for the account of a Portfolio, except in accordance with Written Instructions.
PNC Bank, directly or through the use of the Book-Entry System, shall execute
in blank and promptly deliver all notice, proxies, and proxy soliciting
materials to the registered holder of such securities. If the registered
holder is not the Fund on behalf of a Portfolio then. Written or Oral
Instructions must designate the person(s) who owns such securities.
(h) Transactions Not Requiring Instructions. In the absence
of contrary Written Instructions, PNC Bank is authorized to take the following
actions:
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<PAGE> 10
(i) Collection of Income and Other Payments.
(A) collect and receive for the account
of each Portfolio, all income,
dividends, distributions, coupons,
option premiums, other payments and
similar items, included or to be
included in the Property, and, in
addition, promptly advise each
Portfolio of such receipt and credit
such income, as collected, to each
Portfolio's custodian account;
(B) endorse and deposit for collection,
in the name of the Fund, checks,
drafts, or other orders for the
payment of money;
(C) receive and hold for the account of
each Portfolio all securities
received as a distribution on the
Portfolio's portfolio securities as
a result of a stock dividend, share
split-up or reorganization,
recapitalization, readjustment or
other rearrangement or distribution
of rights or similar securities
issued with respect to any portfolio
securities belonging to a Portfolio
held by PNC Bank hereunder;
(D) present for payment and collect the
amount payable upon all securities
which may mature or be called,
redeemed, or retired, or otherwise
become payable on the date such
securities become payable; and
(E) take any action which may be
necessary and proper in connection
with the collection and receipt of
such income and other payments and
the endorsement for collection of
checks, drafts, and other negotiable
instruments.
(ii) Miscellaneous Transactions.
(A) PNC Bank is authorized to deliver or
cause to be delivered Property
against payment or other
consideration or written receipt
therefor in the following cases:
(1) for examination by a broker or
dealer selling for the account
of a Portfolio in accordance
with street delivery custom;
(2) for the exchange Or interim
receipts or temporary
securities for definitive
securities; and
(3) for transfer of securities into
the name of the Fund on behalf
of a Portfolio or PNC Bank or
nominee of either, or for
exchange of securities for a
different number of bonds,
certificates, or other
evidence, representing the same
aggregate face amount or number
of units bearing the same
interest rate, maturity date
and call provisions, if any;
provided that, in any such
case, the new securities are to
be delivered to PNC Bank.
(B) Unless and until PNC Bank receives
Oral or Written Instructions to the
contrary, PNC Bank shall:
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<PAGE> 11
(1) pay all income items held by it
which call for payment upon
presentation and hold the cash
received by it upon such
payment for the account of each
Portfolio;
(2) collect interest and cash
dividends received, with notice
to the Fund, to the account of
each Portfolio;
(3) hold for the account of each
Portfolio all stock dividends,
rights and similar securities
issued with respect to any
securities held by us; and
(4) execute as agent on behalf of
the Fund all necessary
ownership certificates required
by the Internal Revenue Code or
the Income Tax Regulations of
the United States Treasury
Department or under the laws of
any State now or hereafter in
effect, inserting the Fund's
name, on behalf of a Portfolio,
on such certificate as the
owner of the securities covered
thereby, to the extent it may
lawfully do so.
(i) Segregated Accounts.
(i) PNC Bank shall upon receipt of Written or
Oral Instructions establish and maintain
segregated accounts(s) on its records for and
on behalf of each Portfolio. Such account(s)
may be used to transfer cash and securities,
including securities in the Book-Entry
System:
(A) for the purposes of compliance by
the Fund with the procedures
required by a securities or option
exchange, providing such procedures
comply with the 1940 Act and any
releases of the SEC relating to the
maintenance of segregated accounts
by registered investment companies;
and
(B) Upon receipt of Written Instructions,
for other proper corporate purposes.
(ii) PNC Bank may enter into separate custodial
agreements with various futures commission
merchants ("FCMs") that the Fund uses ("FCM
Agreement"). Pursuant to an FCM Agreement, a
Portfolio's margin deposits in any
transactions involving futures contracts and
options on futures contracts will be held by
PNC Bank in accounts ("FCM Account") subject
to the disposition by the FCM involved in
such contracts and in accordance with the
customer contract between FCM and the Fund on
behalf of the Portfolio ("FCM Contract"), SEC
rules and the rules of the applicable
commodities exchange. Such FCM
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<PAGE> 12
Agreements shall only be entered into upon
receipt of Written Instructions from the Fund
which state that:
(A) a customer agreement between the FCM
and the Fund on behalf of a
Portfolio has been entered into; and
(B) the Fund is in compliance with all
the rules and regulations of the
CFTC. Transfers of initial margin
shall be made into a FCM Account
only upon Written Instructions;
transfers of premium and variation
margin may be made into a FCM
Account pursuant to Oral
Instructions. Transfers of funds
from a FCM Account to the FCM for
which PNC Bank holds such an account
may only occur upon certification by
the FCM to PNC Bank that pursuant to
the FCM Agreement and the FCM
Contract, all conditions precedent
to its right to give PNC Bank such
instructions have been satisfied.
(iii) PNC Bank shall arrange for the establishment
of IRA custodian accounts for such
shareholders holding shares through IRA
accounts, in accordance with the Portfolios'
prospectuses, the Internal Revenue Code
(including regulations), and with such other
procedures as are mutually agreed upon from
time to time by and among the Fund, PNC Bank
and the Fund's transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased
securities upon receipt of Oral or Written Instructions from the fund or its
investment advisor(s) that specify:
(i) the name of the issuer and the title of the
securities, including CUSIP number if
applicable;
(ii) the number of shares or the principal amount
purchased and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase;
and
(vi) the name of the person from whom or the
broker through whom the purchase was made.
PNC Bank shall upon receipt of securities
purchased by or for a Portfolio pay out of
the moneys held for the account of the
Portfolio the total amount payable to the
person from whom or the broker through whom
the purchase was made, provided that the same
conforms to the total amount payable as set
forth in such Oral or Written Instructions.
(k) Sales of Securities. PNC Bank shall sell securities upon
receipt of Oral Instructions from the Fund that specify:
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<PAGE> 13
(i) the name of the issuer and the title of the
security, including CUSIP number if
applicable;
(ii) the number of shares or principal amount
sold, and accrued interest, if any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon
such sale;
(vi) the name of the broker through whom or the
person to whom the sale was made; and
(vii) the location to which the security must be
delivered and delivery deadline, if any. PNC
Bank shall deliver the securities upon
receipt of the total amount payable to the
Portfolio upon such sale, provided that the
total amount payable is the same as was set
forth in the Oral or Written Instructions.
Subject to the foregoing, PNC Bank may accept
payment in such form as shall be satisfactory
to it, and may deliver securities and arrange
for payment in accordance with the customs
prevailing among dealers in securities.
(l) Reports.
(i) PNC Bank shall furnish the Fund the following
reports:
(A) such periodic and special reports as
the Fund may reasonably request;
(B) a monthly statement summarizing all
transactions and entries for the
account of each Portfolio, listing
the portfolio securities belonging
to each Portfolio with the adjusted
average cost of each issue and the
market value at the end of such
month, and stating the cash account
of each Portfolio including
disbursement;
(C) the reports to be furnished to the
Fund pursuant to Rule 17f-4; and
(D) such other information as may be
agreed upon from time to time
between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund
any proxy statement, proxy material, notice
of a call or conversion or similar
communication received by it as custodian of
the Property. PNC Bank shall be under no
other obligation to inform the Fund as to
such actions or events.
(m) Collections. All collections of monies or other
property, in respect, or which are to become part of the Property (but not the
Safekeeping thereof upon receipt by PNC Bank) shall be at the sole risk of the
Fund. If payment is not received by PNC Bank within a reasonable time after
proper demands have been made, PNC Bank shall notify the Fund in writing,
including copies of all demand letters, any written responses, memoranda of all
oral responses and to
13
<PAGE> 14
telephonic demands thereto, and await instructions from the Fund. PNC Bank
shall not be obliged to take legal action for collection unless and until
reasonably indemnified to its satisfaction. PNC Bank shall also notify the
Fund as soon as reasonably practicable whenever income due on securities is not
collected in due course.
15. Duration and Termination. This Agreement shall continue until
terminated by the Fund or by PNC Bank on sixty (60) days prior written notice
to the other party. In the event this Agreement is terminated (pending
appointment of a successor to PNC Bank or vote of the shareholders of the Fund
to dissolve or to function without a custodian of its cash, securities or other
property), PNC Bank shall not deliver cash, securities or other property of the
Portfolios to the Fund. It may deliver them to a bank or trust company of PNC
Bank's, having an aggregate capital, surplus and undivided profits, as shown by
its last published report, of not less than twenty million dollars
($20,000,000), as a custodian for the Fund to be held under terms similar to
those of this Agreement. PNC Bank shall not be required to make any such
delivery or payment until full payment shall have been made to PNC Bank of all
of its fees, compensation, costs and expenses. PNC Bank shall have a security
interest in and shall have a right of setoff against Property in the Fund's
possession as security for the payment of such fees, compensation, costs and
expenses.
16. Notices. All notices and other communications, including
Written Instructions, shall be in writing or by confirming telegram, cable,
telex or facsimile sending device. Notice shall be addressed (a) if to PNC Bank
at PNC Bank's address, Airport Business Center, International Court 2, 200
Stevens Drive, Lester, Pennsylvania 19113, marked for the attention of the
Custodian Services Department (or its successor) (b) if to the Fund, at the
address of the Fund; or (c) if to neither of the foregoing, at such other
address as shall have been notified to the sender of any such Notice or other
communication. If notice is sent by confirming telegram, cable, telex or
facsimile sending device, it shall be deemed to have been given immediately.
If notice is sent by first-class mail, it shall be deemed to have been given
five days after it has been mailed. If notice is sent by messenger, it shall
be deemed to have been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be
changed or waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
18. Delegation. PNC Bank may assign its rights and delegate its
duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PNC Bank gives the
Fund thirty (30) days prior written notice; (ii) the delegate agrees with PNC
Bank to comply with all relevant provisions of the 1940 Act; and (iii) PNC Bank
and such delegate promptly provide such information as the Fund may request,
and respond to such questions as the Fund may ask, relative to the delegation,
including (without limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE> 15
20. Further Actions. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof.
21. Miscellaneous. This Agreement embodies the entire agreement
and understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one more separate documents their agreement, if any, with respect
to delegated and/or Oral Instructions. The captions in this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect.
This Agreement shall be deemed to be a contract made in Pennsylvania
and governed by Pennsylvania law. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby. This Agreement shall
be binding and shall inure to the benefit of the parties hereto and their
respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below on the day and year first above
written.
PNC BANK, NATIONAL ASSOCIATION
CAPITAL APPRECIATION FUND
CASH INCOME TRUST
HIGH YIELD BOND TRUST
MANAGED ASSETS TRUST
15
<PAGE> 1
FORM OF
SUBCUSTODY AGREEMENT
Subcustody Agreement, dated _____________, between MORGAN
STANLEY TRUST COMPANY ("MSTC") and [Name of Subcustodian] {the "Subcustodian").
1. Appointment and Acceptance. MSTC hereby appoints the
Subcustodian as subcustodian of the Property (as hereinafter defined), and
instructs the Subcustodian to establish an account or accounts, each identified
as belonging to MSTC for the benefit of MSTC's clients. Each and all such
accounts, as applicable, will be referred to herein as the "Account" and will
be subject to the terms and conditions set forth herein.
2. The Account. The Subcustodian shall hold in the
Account for MSTC such bonds, debentures, notes, shares of stock, and other
securities ("Securities"), such cash and such other property (all such
Securities, cash and other property being collectively the "Property") which
are delivered to the Subcustodian for the Account. Each separate account in
the Account shall be identified on the Subcustodian's books as held solely for
the benefit of MSTC's clients.
3. Use of Depositories, Etc. (a) The Subcustodian may
engage a securities depository to hold Property deposited in the Account;
provided, however, the Subcustodian shall not, without the prior written
approval of MSTC, deposit Securities in any securities depository or utilize a
clearing agency, incorporated or organized under the laws of a country other
than the United States, other than the Euro-clear System or Centrale de
Livraison des Valeurs Mobilieres S.A., unless such depository or clearing
agency operates the central system for handling of securities or equivalent
book-entries in that country.
(b) If the Subcustodian deposits Property in a securities
depository or clearing agency, the Subcustodian shall identify the Property so
deposited on the Subcustodian's books as belonging to MSTC for the benefit of
MSTC's clients and shall require that such securities depository or clearing
agency identify the Property so deposited on its books as belonging to the
Subcustodian for the benefit of MSTC.
4. Representations. (a) The Subcustodian represents
that it is either:
(i) A branch of an institution described in
Section 4(b)(i);
(ii) A majority-owned direct or indirect
subsidiary of an institution described in Section 4(b)(i) or
bank-holding company that is incorporated or organized under
the laws of a country other than the United States and
currently has stockholders' equity in excess of $100 million
(U.S. dollars or the equivalent of U.S. dollars);
(iii) A banking institution or a trust company,
incorporated or organized under the laws of a country other
than the United States,
<PAGE> 2
regulated as such by that country's government or an agency
thereof and currently has stockholders' equity in excess of
$200 million (U.S. dollars or the equivalent of U.S. dollars);
or
(iv) Eligible to act as an "eligible foreign
custodian" as defined in Rule 17f-5 promulgated under the U.S.
Investment Company Act of 1940 pursuant to an exemption
thereto.
(b) The Subcustodian represents that it and any foreign
securities depository or foreign clearing agency utilized by it are either:
(i) (A) A banking institution organized under
the laws of the United States, (B) a member bank of the United
States Federal Reserve System or (C) any other banking
institution trust company, whether incorporated or not, doing
business under the laws of the United States or of any State
of the United States, a substantial portion of the business of
which consists of receiving deposits or exercising fiduciary
powers similar to those permitted to national banks under the
authority of the United States Comptroller of the Currency,
and which is supervised and examined by State or Federal
authority having supervision over banks, and that, in the case
of clause (A), (B) or (C) above, had, as of the last day of
its most recent fiscal year, equity capital in excess of $1
million; or
(ii) A bank, securities depository or clearing
agency supervised or regulated by a government agency or
regulatory authority in a jurisdiction other than the United
States having authority over such banks, depositories or
clearing agencies.
No less frequently than annually, and upon additional request by MSTC, the
Subcustodian shall certify in writing the name, address and principal place of
business of any entity described in clause (ii) above and the name and address
of the governmental agency or regulatory authority supervising such entity.
(c) The Subcustodian shall notify MSTC immediately in the
event (i) there appears to be a substantial likelihood that its stockholders'
equity will decline below the amounts set forth in Section 4(a) or (b), as
applicable, or (ii) in any event, at such time as any of its representations
may no longer be made.
(d) MSTC and the Subcustodian each represents and
warrants to the other, which representations and warranties shall be deemed to
be repeated on each date of delivery of Property to the Subcustodian, that:
(i) it is duly organized and existing under the
laws of the jurisdiction of its organization with full power
and authority to execute and
2
<PAGE> 3
delivery this Agreement and to perform all of the duties and
obligations to be performed by it hereunder;
(ii) the person executing this Agreement on its
behalf has been duly and properly authorized to do so; and
(iii) this Agreement is the legal, valid and
binding obligation of such party, enforceable against such
party in accordance with its terms, except as such
enforceability may be limited by the effect of any bankruptcy,
insolvency or similar laws, or by equitable principles
relating to or limiting creditors' rights generally.
5. Actions Upon Authorized Instructions. Upon
Authorized Instructions (as hereinafter defined), the Subcustodian is
authorized to pay cash from the Account and to sell, assign, transfer, deliver
or exchange, or to receive or purchase for the Account, Property, but only as
provided in such Authorized Instructions.
6. Actions Without Authorized Instructions. Unless the
Subcustodian receives Authorized Instructions to the contrary, the Subcustodian
is authorized to:
(a) make payments to itself or others for expenses of
handling Property or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to MSTC;
(b) receive and collect all income and principal with
respect to Securities and to credit cash receipts to the Accounts;
(c) exchange Securities when the exchange is purely
ministerial (including, without limitation, the exchange of interim receipts to
temporary securities for securities in definitive form and the exchange of
warrants, or other documents of entitlement to securities, for the securities
themselves);
(d) surrender Securities at maturity or when called for
redemption upon receiving payment therefor;
(e) execute in MSTC's name such ownership and other
certificates as may be required to obtain the payment of income from
Securities;
(f) pay or cause to be paid, from the Accounts, any and
all taxes and levies in the nature of taxes imposed on Property by any
governmental authority in connection with custody of and transactions in such
Property;
(g) endorse for collection, in the name of MSTC, checks,
drafts and other negotiable instruments;
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<PAGE> 4
(h) take non-discretionary action on mandatory corporate
actions; and
(i) in general, attend to all nondiscretionary details in
connection with the custody, sale, purchase, transfer and other dealings with
the Property.
Further, the Subcustodian shall use reasonable efforts promptly to reclaim any
foreign withholding tax relating to the Account.
7. Corporate Action. If the Subcustodian shall receive
any proxies, notices, reports or other communications relative to any of the
Securities in the Account in connection with tender offers, reorganizations,
mergers, consolidations, or similar events which may have an impact upon the
issuer thereof, the Subcustodian shall promptly transmit any such communication
to MSTC by such means as will permit MSTC and its clients to take timely action
with respect thereto.
8. Authorized Instructions. For purposes of this
Agreement, "Authorized Instructions" means (a) instructions issued by MSTC in
writing signed by such persons as are designated by MSTC in writing to the
Subcustodian; (b) telex or tested telex instructions of MSTC; (c) facsimile
transmissions of instructions as set out in clause (a) above; (d) other forms
of instruction issued by MSTC in computer readable form as shall be customarily
utilized for the transmission of like information; and (e) such other forms of
communication issued by MSTC as from time to time shall be agreed upon by MSTC
and the Subcustodian.
9. Reports. (a) The Subcustodian shall supply periodic
reports with respect to the safekeeping of Property held by it under this
Agreement. The content of such reports shall include, but not be limited to,
any transfer of Property to or from the Account held by the Subcustodian
hereunder and such other information in such form and substance as MSTC may
reasonably request or which it may require in order to comply with applicable
reporting requirements.
(b) The Subcustodian shall notify MSTC within ten days of
discovery of any losses due to fraud or dishonesty of its agents or employees,
and shall provide MSTC a description of such incident with sufficient
specificity to enable a claim for reimbursement of such loss to be filed under
any governing surety bond or insurance policy.
(c) The Subcustodian shall use its best endeavors to
notify MSTC promptly of any actual or proposed changes in local laws,
regulations and practices that affect the services provided by the Subcustodian
hereunder.
10. Records. In addition to its obligations under
Section 3(b) hereof, the Subcustodian shall maintain such other records as may
be necessary to identify the Property hereunder as belonging to MSTC's clients
or to enable MSTC to comply with applicable reporting and recordkeeping
requirements.
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<PAGE> 5
11. Inspections. The Subcustodian agrees that its books
and records relating to the Property held under this Agreement shall be open
(and that it will obtain an undertaking from any securities depository or
clearing agency in which it deposits any of the Property that the books and
records of such securities depository or clearing agency relating to such
Property shall be open) to the physical, on-premises inspection and audit at
reasonable times by officers of, auditors employed by or other representatives
of MSTC, and by the respective independent public accountants of MSTC's
clients, and such books and records shall be retained for such period as shall
be agreed by MSTC and the Subcustodian.
12. Compensation. The Subcustodian shall be entitled to
reasonable compensation for its services and expenses as Subcustodian under
this Agreement, as agreed upon in writing from time to time by the Subcustodian
and MSTC.
13. Standard of Care. The Subcustodian shall exercise
all due care in the performance of its duties, as are set forth or contemplated
herein or contained in Authorized Instructions given to the Subcustodian which
are not contrary to this Agreement, shall maintain adequate insurance and
agrees to indemnify and hold harmless MSTC and each Account from and against
any loss, damage, cost, expense, liability or claim arising out of or in
connection with the Subcustodian's performance of its obligations hereunder.
The foregoing indemnity shall be the continuing obligation of the Subcustodian
and shall survive the termination of this Agreement.
14. Liens. The Subcustodian hereby represents and agrees
that (a) the Property is not subject to, and the Subcustodian will not cause or
permit the Property to become subject to, any right, charge, security interest,
lien, encumbrance or other claim of any kind in favor of the Subcustodian, any
securities depository or clearing agency in which the Property is held or any
creditor of any of them, except a claim of payment for their safe custody and
administration and (b) the beneficial ownership of the Property shall be freely
transferable without the payment of money or other value other than for safe
custody or administration; provided, that any lien which may be exercised
hereunder over Property in a particular account in the Account shall secure
only such costs of safe custody and administration which are exclusively due in
respect of that particular account.
15. Termination. This Agreement may be terminated by the
Subcustodian or MSTC by 90 days' prior written notice to the other party but
shall be terminable immediately by MSTC in the event that the representations
required in Section 4(a) or 4(b) may no longer be made. The Subcustodian, on
the date this Agreement terminates pursuant to notice which has been given in a
timely fashion, shall deliver the Property to MSTC, unless the Subcustodian has
received from MSTC, seven (7) days prior to the date on which this Agreement is
to be terminated, Authorized Instructions of MSTC specifying the name(s) of the
person(s) to whom the Property shall be delivered, in which case the
Subcustodian shall deliver such Property on such termination date to such
person(s).
16. Confidentiality. The Subcustodian, and its agents
and employees, shall maintain the confidentiality of information relating to
the Property in the Account and shall not disclose such information to any
person or use such information (other than uses in connection
5
<PAGE> 6
with the transactions contemplated by this Agreement). In the event the
Subcustodian is requested or required to disclose any confidential information
concerning the Property, the Subcustodian shall promptly notify MSTC of such
request or requirement so that MSTC may seek a protective order to waive the
Subcustodian's compliance with this Section 16. In the absence of such waiver,
if the Subcustodian is compelled, in the opinion of its counsel, to disclose
any confidential information, the Subcustodian may disclose such information to
such persons as, in the opinion of counsel, is so required.
17. Amendments. This Agreement may not be amended or
modified in any manner except by a written agreement executed by the parties
hereto.
18. Binding Agreement: Assignments. This Agreement shall
extend to and shall be binding upon the parties hereto and their respective
permitted assigns. This Agreement shall not be assignable by any party without
the written consent of the other parties; provided, that MSTC may, without the
consent of the Subcustodian, assign this agreement to any of MSTC's affiliates.
19. Invalidity. The illegality or invalidity of any
provision of this Agreement under the laws of any jurisdiction shall not affect
the legality or validity of any other provision nor shall it affect the
legality or validity of the Agreement under the laws of any other jurisdiction.
20. Remedies and Waivers. No failure by MSTC to
exercise, or delay in exercising its rights hereunder shall operate as a waiver
thereof nor will any single or partial exercise of any such right preclude a
further or other exercise thereof or the exercise of any other right. The
remedies provided herein are cumulative and not exhaustive of any other remedy
provided by law.
21. Entire Agreement. This Agreement and the documents
referred to herein or delivered pursuant hereto which form a part hereof
contain the entire understanding of the parties with respect to the subject
matter contained herein. In the event of a conflict between this Agreement and
any other such documents, the terms of this Agreement shall prevail.
22. Notices. Unless otherwise specified in this
Agreement, all notices with respect to matters contemplated by this Agreement
shall be deemed duly given when sent by registered or certified mail to MSTC or
the Subcustodian at their respective addresses set forth below, or at such
other address as shall be specified in each case in a notice similarly given:
6
<PAGE> 7
To MSTC: Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
Attention: Network Management
To the Subcustodian: [Address]
23. GOVERNING LAW: JURISDICTION. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
EXCLUDING (TO THE GREATEST EXTENT A NEW YORK COURT WOULD PERMIT) ANY RULE OF
LAW THAT WOULD CAUSE APPLICATION OF THE LAW OF ANY JURISDICTION OTHER THAN THE
STATE OF NEW YORK. THE SUBCUSTODIAN AND MSTC HEREBY SUBMIT TO THE EXCLUSIVE
JURISDICTION OF ANY NEW YORK STATE COURT OR UNITED STATES DISTRICT COURT
LOCATED IN NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT
AND HEREBY WAIVE ANY OBJECTION TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT OR ANY DEFENSE OF INCONVENIENT FORUM.
MORGAN STANLEY TRUST COMPANY
By:
------------------------------------
[Name of Subcustodian]
By:
------------------------------------
7
<PAGE> 1
FORM
OF
TRANSFER AGENCY AND REGISTRAR AGREEMENT
AGREEMENT, dated as of ____________________, between ________________,
(the "Fund"), a business trust organized under the laws of Massachusetts and
having its principal place of business at One Tower Square, Hartford,
Connecticut, and FIRST DATA INVESTOR SERVICES GROUP, INC. (MA) (the "Transfer
Agent"), a Massachusetts corporation with principal offices at One Exchange
Place, 53 State Street, Boston, Massachusetts 02109.
W I T N E S S E T H
That for and in consideration of the mutual covenants and promises
hereinafter set forth, the Fund and the Transfer Agent agree as follows:
1. Definitions. Whenever used in this Agreement, the following
words and phrases, unless the context otherwise requires, shall have the
following meanings:
(a) "Articles of Incorporation" shall mean the Articles
of Incorporation, Declaration of Trust, Partnership Agreement, or similar
organizational document as the case may be, of the Fund as the same may be
amended from time to time.
(b) "Authorized person" shall be deemed to include any
person, whether or not such person is an officer or employee of the Fund, duly
authorized to give Oral Instructions or Written Instructions on behalf of the
Fund as indicated in a certificate furnished to the Transfer Agent pursuant to
Section 4(c) hereof as may be received by the Transfer Agent from time to time.
(c) "Board of Directors" shall mean the Board of
Directors, Board of Trustees or, if the Fund is a limited partnership, the
General Partner(s) of the Fund, as the case may be.
(d) "Commission" shall mean the Securities and Exchange
Commission.
(e) "Custodian" refers to any custodian or subcustodian
of securities and other property which the Fund may from time to time deposit,
or cause to be deposited or held under the name or account of such a custodian
pursuant to a Custodian Agreement.
(f) "Fund" shall mean the entity executing this
Agreement, and if it is a series fund, as such term is used in the 1940 Act,
such term shall mean each series of the Fund hereafter created, except that
appropriate documentation with respect to each series must be presented to the
Transfer Agent before this Agreement shall become effective with respect to
each such series.
<PAGE> 2
2
(g) "1940 Act" shall mean the Investment Company Act of
1940.
(h) "Oral Instructions" shall mean instructions, other
than Written Instructions, actually received by the Transfer Agent from a
person reasonably believed by the Transfer Agent to be an Authorized Person;
(i) "Prospectus" shall mean the most recently dated Fund
Prospectus and Statement of Additional Information, including any supplements
thereto if any, which has become effective under the Securities Act of 1933 and
the 1940 Act.
(j) "Shares" refers collectively to such shares of
capital stock, beneficial interest or limited partnership interests, as the
case may be, of the Fund as may be issued from time to time and, if the Fund is
a closed-end or a series fund, as such terms are used in the 1940 Act any other
classes or series of stock, shares of beneficial interest or limited
partnership interests that may be issued from time to time.
(k) "Shareholder" shall mean a holder of shares of
capital stock, beneficial interest or any other class or series, and also
refers to partners of limited partnerships.
(l) "Written Instructions" shall mean a written
communication signed by a person reasonably believed by the Transfer Agent to
be an Authorized Person and actually received by the Transfer Agent. Written
Instructions shall include manually executed originals and authorized
electronic transmissions, including telefacsimile of a manually executed
original or other process.
2. Appointment of the Transfer Agent. The Fund hereby appoints
and constitutes the Transfer Agent or transfer agent, registrar and dividend
disbursing agent for Shares of the Fund and as shareholder servicing agent for
the Fund. The Transfer Agent accepts such appointments and agrees to perform
the duties hereinafter set forth.
3. Compensation.
(a) The Fund will compensate or cause the Transfer Agent
to be compensated for the performance of its obligations hereunder in
accordance with the fees set forth in the written schedule of fees annexed
hereto as Schedule A and incorporated herein. The Transfer Agent will transmit
an invoice to the Fund as soon as practicable after the end of each calendar
month which will be detailed in accordance with Schedule A, and the Fund will
pay to the Transfer Agent the amount of such invoice within thirty (30) days
after the Fund's receipt of the invoice.
In addition, the fund agrees to pay, and will be
billed separately for, reasonable out-of-pocket expenses incurred by the
Transfer Agent in the performance of its duties hereunder. Out-of-pocket
expenses shall include, but shall not be limited to, the items specified in the
written schedule of out-of-pocket charges annexed hereto as Schedule B and
incorporated herein. Unspecified out-of-pocket expenses shall be limited to
those out-of-pocket expenses reasonably incurred by the Transfer Agent in the
performance of its obligations hereunder.
<PAGE> 3
3
Reimbursement by the Fund for expenses incurred by the Transfer Agent in any
month shall be made as soon as practicable but no later than 15 days after the
receipt of an itemized bill from the Transfer Agent.
(b) Any compensation agreed to hereunder may be adjusted
from time to time by attaching to Schedule A, a revised fee schedule executed
and dated by the parties hereto.
4. Documents. In connection with the appointment of the Transfer
Agent the Fund shall deliver or cause to be delivered to the Transfer Agent the
following documents on or before the date this Agreement goes into effect, but
in any case within a reasonable period of time for the Transfer Agent to
prepare to perform its duties hereunder.
(a) If applicable, specimens of the certificates for
Shares of the Fund;
(b) All account application forms and other documents
relating to Shareholder accounts or to any plan, program or service offered by
the Fund;
(c) A signature card bearing the signatures of any
officer of the Fund or other Authorized Person who will sign Written
Instructions or is authorized to give Oral Instructions.
(d) A certified copy of the Articles of Incorporation, as
amended;
(e) A certified copy of the By-laws of the Fund, as
amended;
(f) A copy of the resolution of the Board of Directors
authorizing the execution and delivery of this Agreement;
(g) A certified list of Shareholders of the Fund with the
name, address and taxpayer identification number of each Shareholder, and the
number of Shares of the Fund held by each, certificate numbers and
denominations (if any certificates have been issued), lists of any accounts
against which stop transfer orders have been placed, together with the reasons
therefore, and the number of Shares redeemed by the Fund; and
(h) An opinion of counsel for the Fund with respect to
the validity of the Shares and the status of such Shares under the Securities
Act of 1933, as amended.
(5) Further Documentation. The Fund will also furnish the
Transfer Agent with copies of the following documents promptly after the same
shall become available:
(a) each resolution of the Board of Directors authorizing
the issuance of Shares;
(b) any registration statements filed on behalf of the
Fund and all pre-effective and post-effective amendments thereto filed with the
Commission;
<PAGE> 4
4
(c) a certified copy of each amendment to the Articles of
Incorporation or the By-laws of the Fund;
(d) certified copies of each resolution of the Board of
Directors or other authorization designating Authorized Persons; and
(e) such other certificates, documents or opinions as the
Transfer Agent may reasonably request in connection with the performance of its
duties hereunder.
6. Representations of the Fund. The Fund represents to the
Transfer agent that all outstanding Shares are validly issued, fully paid and
non-assessable. When Shares are hereafter issued in accordance with the terms
of the Fund's Articles of Incorporation and its Prospectus, such Shares shall
be validly issued, fully paid and non-assessable.
7. Distributions Payable in Shares. In the event that the Board
of Directors of the Fund shall declare a distribution payable in Shares, the
Fund shall deliver or cause to be delivered to the Transfer Agent written
notice of such declaration signed on behalf of the Fund by an officer thereof,
upon which the Transfer Agent shall be entitled to rely for all purposes,
certifying (i) the identity of the Shares involved, (ii) the number of Shares
involved, and (iii) that all appropriate action has been taken.
8. Duties of the Transfer Agent. The Transfer Agent shall be
responsible for administering and/or performing those functions typically
performed by a transfer agent; for acting as service agent in connection with
dividend and distribution functions; and for performing shareholder account and
administrative agent functions in connection with the issuance, transfer and
redemption or repurchase (including coordination with the Custodian) of Shares
in accordance with the terms of the Prospectus and applicable law. The
operating standards and procedures to be followed shall be determined from time
to time by agreement between the Fund and the Transfer Agent and shall
initially be as described in Schedule C attached hereto. In addition, the Fund
shall deliver to the Transfer Agent all notices issued by the Fund with respect
to the Shares in accordance with and pursuant to the Articles of Incorporation
or By-laws of the Fund or as required by law and shall perform such other
specific duties as are set forth in the Articles of Incorporation including the
giving of notice of any special or annual meetings of shareholders and any
other notices required thereby.
9. Record Keeping and Other Information. The Transfer Agent
shall create and maintain all records required of it pursuant to its duties
hereunder and as set forth in Schedule C in accordance with all applicable
laws, rules and regulations, including records required by Section 31(a) of the
1940 Act. All records shall be available during regular business hours for
inspection and use by the Fund. Where applicable, such records shall be
maintained by the Transfer Agent for the periods and in the places required by
Rule 31a-2 under the 1940 Act.
Upon reasonable notice by the Fund, the Transfer Agent shall make
available during regular business hours such of its facilities and premises
employed in connection with the performance of its duties under this Agreement
for reasonable visitation by the Fund, or any
<PAGE> 5
5
person retained by the Fund as may be necessary for the Fund to evaluate the
quality of the services performed by the Transfer Agent pursuant hereto.
10. Other Duties. In addition to the duties set forth in Schedule
C, the Transfer Agent shall perform such other duties and functions, and shall
be paid such amounts therefor, as may from time to time be agreed upon in
writing between the Fund and the Transfer Agent. The compensation for such
other duties and functions shall be reflected in a written amendment to
Schedule A or B and the duties and functions shall be reflected in an amendment
to Schedule C, both dated and signed by authorized persons of the parties
hereto.
11. Reliance by Transfer Agent; Instructions.
(a) The Transfer Agent will have no liability when acting
upon Written or Oral Instructions believed to have been executed or orally
communicated by an Authorized Person and will not be held to have any notice of
any change of authority of any person until receipt of a Written Instruction
thereof from the Fund pursuant to Section 4(c). The Transfer Agent will also
have no liability when processing Share certificates which it reasonably
believes to bear the proper manual or facsimile signatures of the officers of
the Fund and the proper countersignature of the Transfer Agent.
(b) At any time, the Transfer Agent may apply to any
authorized Person of the Fund for Written Instructions and may seek advice from
legal counsel for the Fund, or its own legal counsel, with respect to any
matter arising in connection with this Agreement, and it shall not be liable
for any action taken or not taken or suffered by it in good faith in accordance
with such Written Instructions or in accordance with the opinion of counsel for
the Fund or for the Transfer Agent. Written Instructions requested by the
Transfer Agent will be provided by the Fund within a reasonable period of time.
In addition, the Transfer Agent, its officers, agents or employees, shall
accept Oral Instructions or Written Instructions given to them by any person
representing or acting on behalf of the Fund only if said representative is an
Authorized Person. The Fund agrees that all Oral Instructions shall be
followed within one business day by confirming Written Instructions, and that
the Fund's failure to so confirm shall not impair in any respect the Transfer
Agent's right to rely on Oral Instructions. The Transfer Agent shall have no
duty or obligation to inquire into, nor shall the Transfer Agent be responsible
for, the legality of any act done by it upon the request or direction of a
person reasonably believed by the Transfer Agent to be an Authorized Person.
(c) Notwithstanding any of the foregoing provisions of
this Agreement, the Transfer Agent shall be under no duty or obligation to
inquire into, and shall not be liable for: (i) the legality of the issuance or
sale of any Shares or the sufficiency of the amount to be received therefor;
(ii) the legality of the redemption of any Shares, or the propriety of the
amount to be paid therefor; (iii) the legality of the declaration of any
dividend by the Board of Directors, or the legality of the issuance of any
Shares in payment of any dividend; or (iv) the legality of any recapitalization
or readjustment of the Shares.
12. Acts of God, etc. The Transfer Agent will not be liable or
responsible for delays or errors by acts of God or by reason of circumstances
beyond its control, including acts of civil
<PAGE> 6
6
or military authority, national emergencies, labor difficulties, mechanical
breakdown, insurrection, war, riots, or failure or unavailability of
transportation, communication or power supply, fire, flood or other
catastrophe.
13. Duty of Care and Indemnification. Each party hereto (the
"Indemnifying Party") will indemnify the other party (the "Indemnified Party")
against and hold it harmless from any and all losses, claims, damages,
liabilities or expenses of any sort or kind (including reasonable counsel fees
and expenses) resulting from any claim, demand, action or suit or other
proceeding (a "Claim") unless such Claim has resulted from a negligent failure
to act or omission to act or bad faith of the Indemnified Party in the
performance of its duties hereunder. In addition, the Fund will indemnify the
Transfer Agent against and hold it harmless from any Claim, damages,
liabilities or expenses (including reasonable counsel fees) that is a result
of: (i) any action taken in accordance with Written or Oral Instructions, or
any other instructions, or share certificates reasonably believed by the
Transfer Agent to be genuine and to be signed, countersigned or executed, or
orally communicated by an Authorized Person; (ii) any action taken in
accordance with written or oral advice reasonably believed by the Transfer
Agent to have been given by counsel for the Fund or its own counsel; or (iii)
any action taken as a result of any error or omission in any record (including
but not limited to magnetic tapes, computer printouts, hard copies and
microfilm copies) delivered, or caused to be delivered by the Fund to the
Transfer Agent in connection with this Agreement.
In any case in which the Indemnifying Party may be asked to indemnify
or hold the Indemnified Party harmless, the Indemnifying Party shall be advised
of all pertinent facts concerning the situation in question. The Indemnified
Party will notify the Indemnifying Party promptly after identifying any
situation which it believes presents or appears likely to present a claim for
indemnification against the Indemnifying Party although the failure to do so
shall not prevent recovery by the Indemnified Party. The Indemnifying Party
shall have the option to defend the Indemnified Party against any Claim which
may be the subject of this indemnification, and, in the event that the
Indemnifying Party so elects, such defense shall be conducted by counsel chosen
by the Indemnifying Party and satisfactory to the Indemnified Party, and
thereupon the Indemnifying Party shall take over complete defense of the Claim
and the Indemnified Party shall sustain no further legal or other expenses in
respect of such Claim. The Indemnified Party will not confess any Claim or
make any compromise in any case in which the Indemnifying Party will be asked
to provide indemnification, except with the Indemnifying Party's prior written
consent. The obligations of the parties hereto under this Section shall
survive the termination of this Agreement.
14. Consequential Damages. In no event and under no circumstances
shall either party under this Agreement be liable to the other party for
indirect loss of profits, reputation or business or any other party for
indirect loss of profits, reputation or business or any other special damages
under any provision of this Agreement or for any act or failure to act
hereunder.
15. Term and Termination.
(a) This Agreement shall be effective on the date first
written above and shall continue until ________________, and thereafter shall
automatically continue for successive
<PAGE> 7
7
annual periods ending on the anniversary of the date first written above,
provided that it may be terminated by either party upon written notice given at
least 60 days prior to termination.
(b) In the event a termination notice is given by the
Fund, it shall be accompanied by a resolution of the board of Directors,
certified by the Secretary of the Fund, designating a successor transfer agent
or transfer agents. Upon such termination and at the expense of the Fund, the
Transfer Agent will deliver to such successor a certified list of shareholders
of the Fund (with names and addresses), and all other relevant books, records,
correspondence and other Fund records or data in the possession of the Transfer
Agent, and the Transfer Agent will cooperate with the Fund and any successor
transfer agent or agents in the substitution process.
16. Confidentiality. Both parties hereto agree that any non
public information obtained hereunder concerning the other party is
confidential and may not be disclosed to any other person without the consent
of the other party, except as may be required by applicable law or at the
request of the Commission or other governmental agency. The parties further
agree that a breach of this provision would irreparably damage the other party
and accordingly agree that each of them is entitled, without bond or other
security, to an injunction or injunctions to prevent breaches of this
provision.
17. Amendment. This Agreement may only be amended or modified by
a written instrument executed by both parties.
18. Subcontracting. The Fund agrees that the Transfer Agent may,
in its discretion, subcontract for certain of the services described under this
Agreement or the Schedules hereto; provided that the appointment of any such
Transfer Agent shall not relieve the Transfer Agent of its responsibilities
hereunder.
19. Miscellaneous.
(a) Notices. Any notice or other instrument authorized
or required by this Agreement to be given in writing to the Fund or the
Transfer Agent, shall be sufficiently give if addressed to that party and
received by it at its office set forth below or at such other place as it may
from time to time designate in writing.
To the Fund:
----------------------------------
----------------------------------
----------------------------------
Attention:
------------------------
<PAGE> 8
8
To the Transfer Agent
First Data Investor Services Group, Inc.
One Exchange Place
53 State Street
Boston, Massachusetts 02109
Attention: Robert F. Radin, President
with a copy to TSSG Counsel
(b) Successors. This Agreement shall extend to and shall
be binding upon the parties hereto, and their respective successors and
assigns, provided, however, that this Agreement shall not be assigned to any
person other than a person controlling, controlled by or under common control
with the assignor without the written consent of the other party, which consent
shall not be unreasonably withheld.
(c) Governing Law. This Agreement shall be governed
exclusively by the laws of the State of New York without reference to the
choice of law provisions thereof. Each party hereto hereby agrees that (i) the
Supreme Court of New York sitting in New York County shall have exclusive
jurisdiction over any and all disputes arising hereunder; (ii) hereby consents
to the personal jurisdiction of such court over the parties hereto, hereby
waiving any defense of lack of personal jurisdiction; and (iii) appoints the
person to whom notices hereunder are to be sent as agent for service of
process.
(d) Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original; but
such counterparts shall, together, constitute only one instrument.
(e) Captions. The captions of this Agreement are
included for convenience of reference only and in no way define or delimit any
of the provisions hereof or otherwise affect their construction or effect.
(f) Use of Transfer Agent's Name. The Fund shall not use
the name of the Transfer Agent in any Prospectus, Statement of Additional
Information, shareholders' report, sales literature or other material relating
to the Fund in a manner not approved prior thereto in writing; provided, that
the Transfer Agent need only receive notice of all reasonable uses of its name
which merely refer in accurate terms to its appointment hereunder or which are
required by any government agency or applicable law or rule. Notwithstanding
the foregoing, any reference to the Transfer Agent shall include a statement to
the effect that it is a wholly owned subsidiary of First Data Corporation.
(g) Use of Fund's Name. The Transfer Agent shall not use
the name of the Fund or material relating to the Fund on any documents or forms
for other than internal use in a manner not approved prior thereto in writing;
provided, that the Fund need only receive notice of all reasonable uses of its
name which merely refer in accurate terms to the appointment of the Transfer
Agent or which are required by any government agency or applicable law or rule.
<PAGE> 9
9
(h) Independent Contractors. The parties agree that they
are independent contractors and not partners or co-venturers.
(i) Entire Agreement; Severability. This Agreement and
the Schedules attached hereto constitute the entire agreement of the parties
hereto relating to the matters covered hereby and supersede any previous
agreements. If any provision is held to be illegal, unenforceable or invalid
for any reason, the remaining provisions shall not be affected or impaired
thereby.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers, as of the day and
year first above written.
[FUND]
By:
---------------------------------------
Title:
------------------------------------
FIRST DATA INVESTOR SERVICES
GROUP, INC.
By:
---------------------------------------
Title:
------------------------------------
<PAGE> 1
EXHIBIT 11(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this post-effective amendment
No. 27 to the registration statement of Capital Appreciation Fund ("the Fund")
on Form N-1A (File No. 2-76640; 811-3429) of our report dated February 24, 1997,
on our audits of the financial statements and financial highlights of the
Fund, which report is incorporated by reference in the post-effective
amendment to the registration statement.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
April 21, 1998
<PAGE> 1
EXHIBIT 11(B)
Independent Auditors' Consent
To the Shareholders and Board of Trustees of
Capital Appreciation Fund
We consent to the use of our report dated February 10, 1998 for Capital
Appreciation Fund incorporated herein by reference and to the references to our
Firm under the headings "Financial Highlights" in the Prospectus and
"Additional Information" in the Statement of Additional Information.
KPMG Peat Marwick LLP
New York, New York
April 20, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000701388
<NAME> CAPITAL APPRECIATION FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 321,797,976
<INVESTMENTS-AT-VALUE> 418,258,195
<RECEIVABLES> 1,732,444
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 671
<TOTAL-ASSETS> 419,991,310
<PAYABLE-FOR-SECURITIES> 12,011,596
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 278,497
<TOTAL-LIABILITIES> 12,290,093
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 295,792,208
<SHARES-COMMON-STOCK> 8,801,078
<SHARES-COMMON-PRIOR> 6,103,983
<ACCUMULATED-NII-CURRENT> 1,757,481
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13,691,309
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 96,460,219
<NET-ASSETS> 407,701,217
<DIVIDEND-INCOME> 2,593,555
<INTEREST-INCOME> 1,882,080
<OTHER-INCOME> 0
<EXPENSES-NET> 2,718,154
<NET-INVESTMENT-INCOME> 1,757,481
<REALIZED-GAINS-CURRENT> 14,695,393
<APPREC-INCREASE-CURRENT> 50,761,528
<NET-CHANGE-FROM-OPS> 67,214,402
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 2,626
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,339,655
<NUMBER-OF-SHARES-REDEEMED> 642,619
<SHARES-REINVESTED> 59
<NET-CHANGE-IN-ASSETS> 183,569,466
<ACCUMULATED-NII-PRIOR> 219,605
<ACCUMULATED-GAINS-PRIOR> (1,220,919)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,436,487
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,718,154
<AVERAGE-NET-ASSETS> 324,864,933
<PER-SHARE-NAV-BEGIN> 36.72
<PER-SHARE-NII> 00.19
<PER-SHARE-GAIN-APPREC> 09.41
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 46.32
<EXPENSE-RATIO> 00.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
