<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. 30
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 30
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, 1999 pursuant to paragraph (b).
---
60 days after filing pursuant to paragraph (a)(1).
---
on __________ pursuant to paragraph (a)(1)
---
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
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE> 3
CAPITAL APPRECIATION FUND
GOAL -- GROWTH OF CAPITAL
Fund shares are offered only to separate accounts of The Travelers Insurance
Company and The Travelers Life and Annuity Company (together, "The Travelers").
The Fund serves as a funding option for certain variable annuity and variable
life insurance contracts issued by The Travelers.
ONE TOWER SQUARE
HARTFORD, CONNECTICUT 06183
TELEPHONE 800-842-9368
PROSPECTUS
May 1, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
Goals and Investments............... 2
Fund Performance.................... 2
Investments and Practices........... 3
Management.......................... 6
Investment Adviser................ 6
The Subadviser and Portfolio
Manager.......................... 6
Legal Proceedings..................... 6
Year 2000 Compliance.................. 6
Euro Conversion....................... 7
Shareholder Transactions and
Pricing............................... 7
Tax Consequences of Dividends and
Distributions......................... 9
Financial Highlights.................. 10
Appendix A............................ A-1
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE FUND'S SHARES AS AN
INVESTMENT AND HAS NOT DETERMINED THAT THIS PROSPECTUS IS COMPLETE OR ACCURATE.
IT IS AGAINST THE LAW FOR ANYONE TO TELL YOU OTHERWISE. AN INVESTMENT IN THE
FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE> 4
CAPITAL APPRECIATION
Goals and Investments
INVESTMENT ADVISER: TAMIC
SUBADVISER: Janus Capital
Corporation
PORTFOLIO MANAGER: Scott
Schoelzel
FUND'S OBJECTIVE: Growth of capital
KEY INVESTMENTS: Common stock
SELECTION PROCESS: The Fund invests at least 65% of its total
assets in common stock of issuers of any size and industry.
The portfolio manager selects stock primarily through
a company analysis, with a focus on identifying prospective capital growth. The
portfolio manager uses a growth approach to evaluate stocks demonstrating
potential capital growth based on the following characteristics:
- - earnings growth and predictability
- - leading/strong market position
- - management holds significant equity position
- - strong financial position
- - established industry position
- - healthy balance sheet
- - high return on equity with low dividend payout ratio
- - experienced/seasoned management team
- - established record of profitability
- - strong cash flows
- - representing industry with a positive growth outlook
PRINCIPAL RISKS: The Fund is most subject to equities risk, where market values
may change abruptly, sometimes unpredictably, and smaller companies risk, where
market values may be more erratic and stocks more thinly traded than the general
market. Other principal risks may be foreign securities risks, where market
values may be impacted by limited trading, currency exchange, political or
economic instability, or other factors, and fixed-income securities risk, where
market values move in the opposite direction of interest rates, including
lower-quality fixed-income risks, where market values are subject to credit
risks of issuers who may default or otherwise fail to make timely debt payments.
For more information on the Fund's investments and related risks, see
"Investments and Practices", the Appendix to this prospectus and the SAI.
ADDITIONAL INVESTMENTS, INVESTMENT STRATEGIES AND TECHNIQUES: The Fund may
invest up to 35% of its assets in lower-quality fixed-income securities ("junk
bonds") and 25% of its total assets in foreign securities. For a complete list
of all investments available to the Fund, please refer to Appendix A of this
prospectus.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND PERFORMANCE
The chart and table below show how an investment in the Fund has varied over
time. The returns shown assume that any dividends and distributions have been
reinvested in the Fund. The returns are not reduced to reflect any variable
insurance contract charges or fees that may be assessed by The Travelers. The
table compares the Fund's performance with the S&P 500 and the Russell 2000
Indices. Past performance can give some indication of the Fund's risk but does
not guarantee future performance.
YEAR-BY YEAR % TOTAL RETURNS AS OF 12/31
[BAR GRAPH]
<TABLE>
<CAPTION>
CAPITAL
APPRECIATION
<S> <C>
'89 15.71
'90 -6.24
'91 35.16
'92 17.60
'93 15.09
'94 -4.76
'95 36.37
'96 28.21
'97 26.14
'98 61.63
</TABLE>
(Fund commenced operations on 3/19/1982)
Best Quarter: 4th (98) 31.84 %
Worst Quarter: 4th (87) (31.09)%
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/1998
<TABLE>
<CAPTION>
1 year 5 year 10 year Life of Fund
------- ------ ------- ------------
<S> <C> <C> <C> <C>
Capital Apprec. 61.63% 27.67% 21.01% 18.53%
S&P 500 28.58% 24.06% 19.21% 13.84%
Russell 2000 (2.55)% 11.87% 12.92% 19.22%
</TABLE>
2
<PAGE> 5
INVESTMENTS AND PRACTICES
The Fund invests in various instruments subject to its investment policy. The
Fund may invest in all of the following, as described on page 2 of this
prospectus, and in the Statement of Additional Information. For a free copy of
the Statement of Additional Information, see the back cover of this prospectus.
The Fund does not guarantee that it will reach its investment objective, and an
investment in the Fund may lose money.
EQUITIES
The Fund may invest in equity securities. Equity
securities include common and preferred stock,
warrants, rights, depository receipts and shares,
and real estate instruments.
Equities are subject to market risk. Many factors
affect the stock market prices and dividend
payouts of equity investments. These factors
include general business conditions, investor
confidence in the economy, and current conditions
in a particular industry or company. Each company
determines whether or not to pay dividends on
common stock. Equity securities are subject to
financial risks relating to the issuer's earning
stability and overall financial soundness.
Smaller companies are particularly sensitive to
these factors.
GROWTH INVESTING
This investment approach involves buying stocks
with above-average growth rates. Typically,
growth stocks are the stocks of faster growing
companies in more rapidly growing sectors of the
economy. Generally, growth stock valuation levels
will be higher than value stocks and the market
averages.
FIXED INCOME INVESTMENTS
The Fund may invest in fixed income securities.
Fixed income securities include U.S. Government
obligations, certificates of deposit, and
short-term money market instruments, including
Janus money market funds. Fixed income securities
may have all types of interest rate payment and
reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment
in kind and auction rate features.
The value of debt securities varies inversely
with interest rates. This generally means that
the value of these investments increases as
short-term interest rates fall and decreases as
short-term interest rates rise. Yields from
short-term securities may be lower than yields
from longer-term securities. The price of a bond
is affected by the credit quality of its issuer.
An issuer may not always make payments on a fixed
income security. Some fixed income securities,
such as mortgage-backed securities are subject to
prepayment risk, which occurs when an issuer can
prepay the principal owed on a security before
its maturity.
LOWER-QUALITY FIXED-INCOME SECURITIES
These are high-yield, high-risk securities,
commonly referred to as "junk bonds," and are
considered speculative. While generally providing
greater income than investments in higher
3
<PAGE> 6
rated securities, these securities will involve
greater risk of principal and income, including
the possibility of default or bankruptcy of the
issuers of the security.
FOREIGN SECURITIES
An investment in foreign securities involves risk
in addition to those of U.S. securities,
including possible political and economic
instability and the possible imposition of
exchange controls or other restrictions on
investments. The Fund also bears "information"
risk associated with the different account,
auditing, and financial reporting standards in
many foreign countries. If the Fund invests in
securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign
currency rates relative to the U.S. dollar will
affect the U.S. dollar value of the Fund's
assets. Foreign securities may be less liquid
than U.S. securities.
DERIVATIVES AND HEDGING
TECHNIQUES
The Fund may use some type of derivative
contracts, such as futures and options on
securities, for any of the following purposes:
- To hedge against the economic impact of
adverse changes
in the market value of its securities, due to
changes in stock market prices, currency exchange
rates or interest rates;
- As a substitute for buying or selling
securities
- To enhance return
- Forward foreign currency contracts may be used
to hedge against foreign currency exposure
Even a small investment in derivative contracts
can have a big impact on a fund's stock market,
currency and interest rate exposure. Therefore,
using derivatives can disproportionately increase
losses and reduce opportunities for gain when
stock prices, currency rates or interest rates
are changing. For a more complete description of
derivative and hedging techniques, please refer
to the SAI.
OTHER RISK FACTORS
SELECTION RISK
Fund investors are subject to selection risk in
that a strategy used, or stock selected, may fail
to have the desired effect. Specifically, stocks
believed to show potential for capital growth may
not achieve that growth. Strategies or
instruments used to hedge against a possible risk
or loss may fail to protect against the
particular risk or loss.
TEMPORARY DEFENSIVE POSITIONS
The Fund may depart from its principal investment
strategies in response to adverse market,
economic or political conditions and take a
temporary defensive position by investing in debt
securities, including higher-risk debt
securities, and money market instruments. If the
Fund takes a temporary defensive position, it may
be unable to achieve its investment goal.
4
<PAGE> 7
PORTFOLIO TURNOVER
The Fund may actively trade its portfolio
securities in an attempt to achieve its
investment objective. Active trading will cause
the Fund to have an increased portfolio turnover
rate which is likely to generate shorter-term
gains (losses) for its shareholders, which are
taxed at a higher rate than longer-term gains
(losses). Actively trading portfolio securities
increases the Fund's trading costs and may have
an adverse impact on the Fund's performance.
INVESTMENT OBJECTIVE
The Fund's investment objective and, unless noted
as fundamental, its investment policies may be
changed by the Board without approval of
shareholders or holders of variable annuity and
variable life insurance contracts. A change in a
Fund's investment objective or policies may
result in the Fund having a different investment
objective or policies from those that a
policyowner selected as appropriate at the time
of investment.
5
<PAGE> 8
MANAGEMENT
INVESTMENT ADVISER
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION ("TAMIC") provides
investment advice, and, in general, supervises the management and investment
program for the Fund. TAMIC employs a subadviser to manage the Fund's daily
investment operations, subject to the supervision of the Board of Trustees and
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 Citigroup, Inc. TAMIC also acts as an
investment adviser or subadviser for:
- other investment companies used to fund variable products
- individual and pooled pension and profit-sharing accounts
- domestic insurance companies affiliated with The Travelers Insurance
Company (which is affiliated with TAMIC)
- nonaffiliated insurance companies
The maximum advisory fee payable to TAMIC by the Fund is equivalent on an annual
basis to 0.75% of the average daily net assets of the Fund. For the year ended
December 31, 1998, the Fund paid TAMIC 0.75% of the Fund's average daily net
assets.
THE SUBADVISER AND PORTFOLIO MANAGER
The subadviser is Janus Capital Corporation, 100 Filmore Street, Denver,
Colorado, 80206. Janus Capital also acts as an investment adviser to other
investment companies not affiliated with the Fund, as well as to individual,
corporate, charitable and retirement accounts. Mr. Scott Schoelzel has served as
the Fund's day-to-day portfolio manager since August, 1997. Mr. Schoelzel joined
Janus Capital in January, 1994, and is Executive Vice President and Portfolio
Manager of Janus Twenty Fund, also since August, 1997.
LEGAL PROCEEDINGS
There are no material pending legal proceedings affecting the Fund, and it has
been advised by TAMIC and Janus Capital that neither of them have any material
pending legal proceedings affecting them.
YEAR 2000 COMPLIANCE
The Travelers Insurance Company ("the Company") is highly dependent on computer
systems and system applications for conducting its ongoing business functions.
In 1996, the Company began the process of identifying, assessing and
implementing changes to computer programs necessary to address the Year 2000
issue and developed a comprehensive plan to address the issue. This issue
involves the ability of computer systems that have time sensitive programs to
recognize properly the Year 2000. The inability to do so could result in major
failures or miscalculations that would disrupt the Company's ability to meet its
customer and other obligations on a timely basis.
6
<PAGE> 9
The Company has achieved substantial compliance with respect to its business
critical systems in accordance with its Year 2000 plan and is in the process of
certification to validate compliance. The Company anticipates completing the
certification process by June 30, 1999. An ongoing re-certification process will
be put in place for third and fourth quarter 1999 to ensure all systems and
products remain compliant.
The total pre-tax cost associated with the required modifications and
conversions is expected to be between $25 million and $35 million and is being
expensed by the Company as incurred in the period 1996 through 1999. The Company
has incurred approximately $22 million to date on these efforts. The Company
also has third party customers, financial institutions, vendors and others with
which it conducts business and has confirmed their plans to address and resolve
Year 2000 issues on a timely basis. While it is likely that these efforts by
third party vendors and customers will be successful, it is possible that a
series of failures by third parties could have a material adverse effect on
certain results of operations of the Fund.
In addition, the Company is developing contingency plans to address perceived
risks associated with the Year 2000 effort. These include business resumption
plans to address the possibility of internal systems failures and the
possibility of failure of systems or processes outside the Company's control. As
of year-end 1998, the Company has completed initial business resumption
contingency plans which would enable business critical units to function
beginning January 1, 2000 in the event of an unexpected failure. Business
resumption contingency plans are expected to be finalized by June 30, 1999.
Preparations for the management of the date change will continue through 1999.
EURO CONVERSION
On January 1, 1999, 11 participating countries in the European Economic Monetary
Union (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg,
the Netherlands, Portugal, and Spain) adopted the Euro as their official
currency. As of January 1, 1999, governments in participating countries now
issue new debt and redenominate existing debt in Euros, although corporations
may choose whether to issue stocks or bonds in Euros or the national currency.
The new European Central Bank (the "ECB") has assumed responsibility for a
uniform monetary policy in participating countries. Currency conversion occurs
through a "triangulation" process whereby an amount denominated in one national
currency is converted into Euros, which are then converted into the second
national currency. The Euro conversion presents investors with unique risks and
uncertainties, including: (1) the readiness of Euro payment, clearing, and other
operational systems; (2) the legal treatment of debt instruments and financial
contracts denominated in or referring to existing national currencies rather
than the Euro; (3) exchange-rate fluctuations between the Euro and non-Euro
currencies during the transition period of January 1, 1999 through December 31,
2001 and beyond; (4) potential U.S. tax issues with respect to Fund securities;
and (5) the ECB's abilities to manage monetary policies among the participating
countries. Three other EU member countries (Denmark, Greece, and the United
Kingdom) may convert to the Euro at a later date. These and other factors could
adversely affect the value of or income from Fund securities.
SHAREHOLDER TRANSACTIONS AND PRICING
Fund shares are currently sold only to insurance company separate accounts in
connection with the variable annuity and variable life insurance contracts
issued by The Travelers. The term
7
<PAGE> 10
"shareholder" as used in this prospectus refers to any insurance company
separate account that may use Fund shares as a funding option now or in the
future. Fund shares 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 the Fund's custodian receives payment. The separate accounts to which
shares are sold, however, may impose sales and other charges, as described in
the appropriate contract prospectus.
The Fund currently issues only one class of shares. All shares participate
equally in dividends and distributions and have equal voting, liquidation and
other rights. All shares of the Fund participate equally in dividends and
distributions and have equal voting liquidation and other rights. When issued
for the consideration described in the prospectus, shares are fully paid and
nonassessable by the Fund. Shares are redeemable, transferable and freely
assignable as collateral. (See the accompanying separate account prospectus for
a discussion of voting rights applicable to purchasers of variable annuity and
variable life insurance contracts.)
PRICING OF FUND SHARES
The offering price of Fund shares is the net asset value or NAV of a single
share. Normally NAV is computed as of the close of trading (usually 4:00 p.m.
Eastern time) each day the New York Stock Exchange ("Exchange") is open. NAV is
calculated by adding the value of a Fund's investments, cash and other assets,
subtracting its liabilities, and dividing the result by the number of shares
outstanding.
The Fund's assets are valued primarily based on market value. Short-term money
market instruments with remaining maturities of sixty days or less are valued
using the amortized-cost method. This method approximates market value and
minimizes the effect of charges in a security's market value. Foreign securities
are valued on the basis of quotations from the primary market in which they are
traded; the value is then converted into U.S. dollars from the local currency.
In cases where market quotations are not readily available or, for foreign
securities, if the values have been materially impacted by events occurring
after the closing of a foreign market, an asset is valued at fair value as
determined in good faith by the Fund's Board of Trustees ("Board"). However,
this procedure is not used to determine the value of the securities owned by the
Fund if, in the opinion of the Board or the committee appointed by the Board,
some other method (e.g., closing over-the-counter bid prices in the case of debt
instruments traded off an exchange) would more accurately reflect the fair
market value of such securities.
PURCHASES AND REDEMPTIONS
Owners of variable annuity or variable life insurance contracts should follow
the purchase and redemption procedures described in the accompanying separate
account prospectus. The following is general information with regard to
purchases and redemptions of Fund shares by insurance company separate accounts.
Fund shares are purchased and redeemed at the NAV next determined after the Fund
receives a purchase or redemption order. NAVs are adjusted for fractions of a
cent. Upon redemption, a shareholder may receive more or less than the amount
paid at the time of purchase, depending upon changes in the value of the Fund's
investment portfolio between purchase and redemption.
The Fund computes the NAV for purchases and redemptions as of the close of the
Exchange on the day that the Fund has received all proper documentation from the
shareholder. Redemption proceeds are normally wired or mailed either the same or
the next business day, but not more than seven days later.
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<PAGE> 11
The Fund retains the right to refuse a purchase order. The Fund may temporarily
suspend the redemption rights or postpone payments when the Exchange is closed
(other than on weekends and holidays), when trading on the Exchange is
restricted, or when permitted by the SEC.
TAX CONSEQUENCES OF DIVIDENDS AND DISTRIBUTIONS
Capital gains and dividends are distributed in cash or reinvested in additional
Fund shares, without a sales charge. The Fund expects that Fund shares will be
held under a variable annuity or variable life insurance contract. Under current
tax law, distributions that are left to accumulate in the variable annuity or
life insurance contract are not subject to federal income tax until they are
withdrawn from the contract. Contract purchasers should review the accompanying
contract prospectus for a discussion of the tax treatment applicable to variable
annuity or variable life insurance contracts.
The Fund intends to make distributions of income and capital gains in order to
qualify each year as a regulated company under Subchapter M of the Internal
Revenue Code. Further, the Fund intends to meet certain diversification
requirements applicable to mutual funds underlying variable insurance products.
9
<PAGE> 12
FINANCIAL HIGHLIGHTS
CAPITAL APPRECIATION FUND
The financial highlights table provides information to help you understand the
Fund's financial performance for the past 5 years. Certain information presents
financial results for a single Fund share. The total returns in the table
represent the rate that a Fund investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). The information for the years ended December 31, 1998 and 1997
was audited by KPMG LLP, independent auditors, whose report and the Fund's
financial statements are included in the annual report to shareholders, which is
available upon request. Other independent auditors audited all other years
presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996(3) 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period....................... $ 46.32 $ 36.72 $ 33.18 $ 24.50 $ 25.87
Income (loss) from Investment Operations:
Net Investment Income................... 0.06 0.19 0.23 0.24 0.19
Net Gains (Losses) on Securities (both
realized and unrealized)................ 28.07 9.41 8.49 8.61 (1.41)
-------- -------- -------- -------- -------
Total Income (loss) from Investment
Operations.............................. 28.13 9.60 8.72 8.85 (1.22)
Less Distributions(1):
Dividends (from net investment
income)................................. (0.18) -- (0.41) (0.17) (0.15)
Distributions (from capital gains)...... (1.53) (0.00)* (4.77) -- --
-------- -------- -------- -------- -------
Total Distributions....................... 1.71 (0.00)* (5.18) (0.17) (0.15)
-------- -------- -------- -------- -------
Net Asset Value, End of Year.............. $ 72.74 $ 46.32 $ 36.72 $ 33.18 $ 24.50
-------- -------- -------- -------- -------
TOTAL RETURNS(2).......................... 61.63% 26.14% 28.21% 36.37% (4.76)%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (thousands)... $890,861 $407,701 $224,132 $122,155 $78,494
Ratio of Expenses to Average Net
Assets.................................. 0.85% 0.84% 0.83% 0.83% 0.89%
Ratio of Net Investment Income to
Average Net Assets...................... 0.18% 0.54% 0.69% 0.85% 0.79%
Portfolio turnover rate................. 53% 89% 84% 124% 106%
</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.
(2) Total returns are determined by dividing the increase (decrease) in value of
a share during the year, after reflecting the reinvestment of dividends during
the year, by the beginning of year share price. Fund shares are sold only to The
Travelers' separate accounts in connection with the issuance of variable annuity
and variable life insurance contracts. Total Returns do not reflect the
deduction of any contract charges or fees assessed by The Travelers' separate
accounts.
(3) Effective July 1, 1996, TAMIC replaced TIMCO as the investment adviser.
- ---------------
* Amount represents less than $0.01 per share.
10
<PAGE> 13
APPENDIX A
CAPITAL APPRECIATION FUND
The Fund invests in various instruments subject to its investment policy. The
following techniques and practices are all available to the Fund, and are
described together with their risks in the SAI.
American, Global and European Depositary Receipts
Asset-Backed Mortgage Securities
Bankers Acceptances
Buying Put and Call Options
Certificates of Deposit
Commercial Paper
Convertible Securities
Corporate Asset-Backed Securities
Emerging Market Securities
Equity Securities
Floating and Variable Rate Instruments
Foreign Securities
Forward Contracts on Foreign Currency
Futures Contracts
High-Yield High Risk Debt Securities
Illiquid Securities
Index Futures Contracts
Indexed Securities
Investment Company Securities (including Janus money market funds)
Investment Grade Debt Securities
Investment in Unseasoned Companies
Lending Portfolio Securities
Letters of Credit
Loan Participations
Options on Foreign Currencies
Options on Index Futures Contracts
Options on Stock Indices
Other Direct Indebtedness
Real Estate-Related Instruments
Repurchase Agreements
Reverse Repurchase Agreements
Rights and Warrants
Short Sales "Against the Box"
Short-Term Money Market Instruments
Swap Agreements
Temporary Bank Borrowing
U.S. Government Obligations
Variable Amount Master Demand Notes
When-Issued Securities
Writing Covered Call Options
A-1
<PAGE> 14
CAPITAL APPRECIATION FUND
Investors who want more information about the Fund can obtain a statement of
additional information ("SAI") which provides more detailed information on a
number of topics and is made a part of this prospectus. Additional information
about the Fund's investments is available in its annual and semi-annual reports
to shareholders. The Fund's annual report provides a discussion of the market
conditions and investment strategies that particularly impact the Fund's
performance over the past fiscal year. These documents are free of charge. To
obtain a copy, or ask other questions about the fund, do one of the following:
CALL -- 1-800-842-9368
- --------------------------------------------------------------------------------
WRITE -- ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
- --------------------------------------------------------------------------------
ACCESS THE SEC'S WEBSITE -- http://www.sec.gov
Investors may, for a fee, get text-only copies of the above documents from the
SEC Public Reference Room at 1-800-SEC-0330 or write to the SEC Public Reference
Room, Washington, DC, 20549-6009
<PAGE> 15
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 16
STATEMENT OF ADDITIONAL INFORMATION
CAPITAL APPRECIATION FUND
MAY 1, 1999
This Statement of Additional Information ("SAI") is not a prospectus. Investors
should read this SAI with the Capital Appreciation Fund's prospectus dated May
1, 1999 and 1998 annual shareholder report. Investors may obtain a free copy of
the prospectus and annual shareholder report by writing or calling us collect
at:
The Travelers Insurance Company
Annuity Services
One Tower Square
Hartford, Connecticut 06183-5030
Phone number 860-842-9368
or by accessing the Securities and Exchange Commission's website at
http://www.sec.gov.
TABLE OF CONTENTS
PAGE
Investment Objective, Policies and Risks.................................. 2
Investment Restrictions................................................... 13
Valuation and Pricing..................................................... 15
Distributions............................................................. 15
Trustees and Officers..................................................... 15
Declaration of Trust...................................................... 18
Investment Advisory Services.............................................. 18
Redemptions in Kind....................................................... 20
Portfolio Turnover Rate................................................... 20
Brokerage................................................................. 20
Fund Administration....................................................... 21
Shareholder Rights........................................................ 21
Tax Status................................................................ 22
Financial Statements...................................................... 24
Additional Information.................................................... 24
Appendix.................................................................. 25
<PAGE> 17
INVESTMENT OBJECTIVE, POLICIES AND RISKS
Capital Appreciation Fund (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act") with the SEC as an open-end
investment company or mutual fund. The Fund is diversified as that term is
defined under the 1940 Act. It was formed as a Massachusetts business trust on
March 18, 1982.
The Fund's investment objective is to provide growth of capital primarily
through the use of common stocks. To achieve this objective, the Fund invests
principally in common stocks of small to large companies. As described in the
prospectus, the Fund's policy generally is to be fully invested 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.
The Fund's investment objective and, unless noted as fundamental, its investment
policies may be changed by the Board without approval of shareholders or holders
of variable annuity and variable life insurance contracts. A change in the
Fund's investment objective or policies may result in the Fund having a
different investment objective or policies from those that a policyowner
selected as appropriate at the time of investment.
Listed below for quick reference are the other types of investments that the
Fund may make and the Fund's investment techniques. More detailed information
about the Fund's investments and investment techniques follows the chart.
SECURITY/INVESTMENT TECHNIQUE
- ------------------------------------------------------------------
Affiliated Bank Transactions
- ------------------------------------------------------------------
American Depositary Receipts X
- ------------------------------------------------------------------
Asset-Backed Mortgage Securities X
- ------------------------------------------------------------------
Bankers' Acceptances X
- ------------------------------------------------------------------
Buying Put and Call Options X
- ------------------------------------------------------------------
Certificates of Deposit X
- ------------------------------------------------------------------
Commercial Paper X
- ------------------------------------------------------------------
Convertible Securities X
- ------------------------------------------------------------------
Corporate Asset-Backed Securities X
- ------------------------------------------------------------------
Debt Securities X
- ------------------------------------------------------------------
Emerging Market Securities X
- ------------------------------------------------------------------
Equity Securities X
- ------------------------------------------------------------------
Floating & Variable Rate Instruments X
- ------------------------------------------------------------------
Foreign Securities X
- ------------------------------------------------------------------
Forward Contracts on Foreign Currency X
- ------------------------------------------------------------------
Futures Contracts X
- ------------------------------------------------------------------
High-Yield, High-Risk Bonds X
- ------------------------------------------------------------------
Index Futures Contracts X
- ------------------------------------------------------------------
Indexed Securities X
- ------------------------------------------------------------------
Investment Company Securities X
- ------------------------------------------------------------------
Investment in Unseasoned Companies X
- ------------------------------------------------------------------
Lending Portfolio Securities X
- ------------------------------------------------------------------
Letters of Credit X
- ------------------------------------------------------------------
Loan Participations X
- ------------------------------------------------------------------
Options on Stock Indices X
- ------------------------------------------------------------------
Options on Index Futures Contracts X
- ------------------------------------------------------------------
Options on Foreign Currencies X
- ------------------------------------------------------------------
Other Direct Indebtedness X
- ------------------------------------------------------------------
Real Estate-Related Instruments X
- ------------------------------------------------------------------
Repurchase Agreements X
- ------------------------------------------------------------------
Restricted or Illiquid Securities X
- ------------------------------------------------------------------
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<PAGE> 18
- ------------------------------------------------------------------
Reverse Repurchase Agreements X
- ------------------------------------------------------------------
Rights and Warrants X
- ------------------------------------------------------------------
Short Sales "Against the Box" X
- ------------------------------------------------------------------
Short-Term Money Market Instruments X
- ------------------------------------------------------------------
Swap Agreements X
- ------------------------------------------------------------------
Temporary Bank Borrowing X
- ------------------------------------------------------------------
U.S. Government Securities X
- ------------------------------------------------------------------
Variable Amount Master Demand Notes X
- ------------------------------------------------------------------
When-Issued & Delayed Delivery Securities X
- ------------------------------------------------------------------
Writing Covered Call Options X
This section explains more about the investments and investment techniques
listed above. It also includes a brief discussion about the specific risks
associated with a particular investment or investment technique.
COMMON STOCKS. As stated in the prospectus, the Fund invests in common stocks
(equity interests) of issuers of any size. Common stocks represent generally
ownership of a corporation. Over time, equities have provided the greatest
long-term growth potential but over short periods can be subject to great
fluctuations in stock market prices. Stock funds are subject to market risk:
specifically, stock market values are more volatile generally than are bond or
money market values. Volatility means that prices will go down as well as up,
which in turn, means that investors may lose money on an investment in the Fund.
Market risks are affected by many factors, including business conditions,
investor confidence in the economy, current conditions in a particular industry
or company. Equities are subject to financial risks relating to an issuer's
earnings stability and overall soundness. To the extent that the Fund has
invested in equities issued by smaller companies, the Fund may be more subject
to more abrupt or erratic market movements than it would have if it invested
only in securities of larger, more established companies.
WARRANTS AND RIGHTS. The Fund may invest in warrants or rights (other than those
acquired in units or attached to other securities) that entitle the purchaser to
buy equity securities at a specific price for a specific period of time.
Warrants and rights have no voting rights, receive no dividends and have no
rights with respect to the assets of the issuer.
CONVERTIBLE SECURITIES. Convertible securities may include corporate notes or
preferred stock, but ordinarily are long-term debt obligations of an issuer that
are convertible at a stated price or exchange rate into the issuer's common
stock. Convertible securities have characteristics similar to both common stock
and debt obligations. Although to a lesser degree than with debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. In addition,
because of the conversion feature, the market value of convertible securities
tends to vary with fluctuations in the market value of the underlying common
stock and, therefore, reacts to variations in the general stock market. However,
when the market price of the common stock underlying a convertible security
exceeds the conversion price, the price of the convertible security tends to
reflect the value of the underlying common stock. As the market price of the
underlying common stock declines, the convertible security tends to trade
increasingly on a yield basis, and thus may not depreciate to the same extent as
the underlying common stock.
As fixed-income securities, convertible securities are investments that provide
a stable stream of income with generally higher yields than common stocks. Like
all fixed-income securities, there can be no assurance of the current income
because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality because of the
potential through the conversion feature for capital appreciation. There can be
no assurance of capital appreciation because securities prices fluctuate.
Convertible securities generally are subordinated to other similar but
not-convertible debt of the same issuer, although convertible bonds enjoy
seniority payment rights over all equity securities. Convertible preferred stock
is senior to the issuer's common stock. Because of the conversion feature,
however, convertible securities typically have lower ratings than similar
non-convertible securities.
3
<PAGE> 19
A synthetic convertible security is comprised of two distinct securities that
together resemble convertible securities. Synthetic convertible securities
combine non-convertible bonds or preferred stock with warrants or stock call
options. The options that form a portion of the convertible security are listed
on a securities exchange or on the National Association of Securities Dealers
Automated Quotations Systems. The two components of a synthetic convertible
security generally are not offered as a unit but may be purchased and sold by
the Fund at different times. Synthetic convertible securities differ from
convertible securities in that each component of a synthetic convertible
security has a separate market value and responds differently from the other to
market fluctuations. Investing in synthetic convertible securities involves the
risks normally involved in holding the securities comprising the synthetic
convertible security.
As with all debt securities, the market value of convertible securities tends to
decline as interest rates increase and, conversely, to increase as interest
rates decline. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. However, when the
market price of the common stock underlying a convertible security exceeds the
conversion price, the price of the convertible security tends to reflect the
value of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security tends to trade increasingly on a
yield basis, and thus may not depreciate to the same extent as the underlying
common stock.
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.
Writing call options permits the Fund 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.
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.
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 in
the "over-the-counter" market with a broker-dealer as the counterparty. While
the investment 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 pays 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 amount of the
option premium paid.
4
<PAGE> 20
The Fund may sell put and call options prior to their expiration and, thereby,
realize a gain or loss. A call option expires worthless if the price of the
related security is below the contract strike price at the time of expiration; a
put option expires worthless if the price of the related security is above the
contract strike price at the time of expiration.
The Fund uses put and call options for bona fide hedging purposes only. The
investment adviser identifies liquid securities sufficient to fulfill the call
option delivery obligation, and these securities are segregated in an account.
Similarly, the investment adviser identifies deliverable securities sufficient
to fulfill the put option obligation, which also are segregated. In the case of
put options on futures contracts, the investment adviser identifies portfolio
securities whose price volatility is expected to match that of the underlying
futures contract, and these securities are 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.
Writing call options permits the Fund 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.
Options on some securities are relatively new. Accordingly, 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 significantly impair the Fund's
ability to use such options to achieve its investment objectives.
SWAPS. Swaps are over-the-counter (OTC) agreements that typically require
counterparties to make periodic payments to each other for a specified period.
The calculation of these payments is based on an agreed-upon amount (called the
notional amount) that generally is exchanged only in currency swaps. The
periodic payments may be a fixed or floating (variable) amount. Floating
payments may change with fluctuations in interest or currency rates or equity or
commodity prices, depending on the contract terms. Swaps are used to hedge a
risk or obtain more desirable financing terms, and they can be used to profit
from correctly anticipating rate and price movements.
FOREIGN AND EMERGING MARKETS SECURITIES AND ADRS. The Fund may invest up to 25%
of its total assets in foreign securities. These securities may include U.S.
dollar-denominated securities, debt securities of foreign governments (including
provinces and municipalities) or their agencies or instrumentalities, securities
issued or guaranteed by international organizations designated or supported by
multiple governments or entities to promote economic reconstruction or
development, and securities of foreign corporations and financial institutions.
The Fund may invest in American Depositary Receipts ("ADRs"). Due to the absence
of established securities markets in certain foreign countries and restrictions
in certain countries on direct investment by foreign countries and restrictions
in certain countries on direct investment by foreign entities, a Fund may invest
in certain issuers through the purchase of sponsored and unsponsored ADRs or
other similar securities, such as American Depositary Shares, Global Depositary
Shares of International Depositary Receipts. ADRs are receipts typically issued
by U.S. banks evidencing ownership of the underlying securities into which they
are convertible. These securities may or may not be denominated in the same
currency as the underlying securities. Unsponsored ADRs may be created without
the participation of the foreign issuer. Holders of unsponsored ADRs generally
bear all the costs of the ADR facility, whereas foreign issuers typically bear
certain costs in a sponsored ADR. The bank or trust company depository of an
unsponsored ADR may be under no obligation to distribute shareholder
communications received from the foreign issuer or to pass through voting
rights.
5
<PAGE> 21
Subject to any limit on the Fund's investments in foreign securities, there may
be no limit on the amount of assets that may be invested in securities of
issuers domiciled in a single country or market. To the extent that the Fund's
assets are invested substantially in a single country or market, the Fund is
more susceptible to the risks of investing in that country or market than it
would be if its assets were geographically more diversified.
Investments in foreign securities may offer the Fund an opportunity to pursue
the performance potential of an overseas market. Such securities, however, also
entail risks in addition to the risks of U.S. securities. These risks include
differences in accounting, auditing and financial reporting standards, the
possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability that 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. Foreign
settlement procedures and trade regulations may involve higher commission rates
and risks and expenses not present in U.S. settlements. Changes in foreign
exchange rates affects the value of those securities that are denominated or
quoted in currencies other than the U.S. dollar.
Many of the foreign securities held by the Fund are not registered with, nor are
the issuers thereof subject to SEC reporting requirements. 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 or
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. 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.
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
sets 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 is substantially offset by
appreciation in the value of the futures position. Conversely, any appreciation
in the value of the portfolio securities is substantially offset by depreciation
in the value of the futures position.
Positions taken in the futures markets normally are not held to maturity but
instead are liquidated through offsetting transactions that 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 usually are 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
6
<PAGE> 22
of its net assets, after taking into account unrealized profits and unrealized
losses on any such contracts into which it has entered.
All stock index and interest rate futures contracts are traded on exchanges that
are licensed and regulated by the Commodity Futures Trading Commission ("CFTC").
The Fund further seeks to assure that fluctuations in the price of any futures
contracts that it uses for hedging purposes are substantially related to
fluctuations in the price of the securities it holds or expects to purchase, or
for other risk reduction strategies, although 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 investment adviser attempts to reduce this risk by engaging in
futures transactions, to the extent possible, where, in its judgment, 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 investment
adviser's ability to predict correctly movements in the direction of the market.
FORWARD CONTRACTS. A forward contract is an agreement between two parties where
one party is obligated to deliver a stated amount of a particular asset at a
specified future time, 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 to the contract. The contracting parties 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 total net assets. A forward currency contract is an obligation to
buy (sell) an amount of a specified currency for an agreed price, which may be
in U.S. dollars or a foreign currency. In the normal course of business, the
Fund exchanges foreign currencies for U.S. dollars and for other foreign
currencies; it 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 engage in a "position hedge" whereby it hedges some
or all of its investments denominated in a foreign currency (or exposed to
foreign currency fluctuations) against a decline in the value of the foreign
currency relative to the U.S. dollar by entering into forward currency contracts
to sell an amount of that currency approximating the value of some or all of its
portfolio securities denominated in that currency or by participating in options
or futures contracts with respect to the currency. The Fund also may engage in
position hedging with a "proxy" currency (one whose performance is expected to
replicate or exceed the performance of the foreign currency relative to the U.S.
dollar). The Fund also may enter into an "anticipatory" position hedge with
respect to a currency when the Fund is considering the purchase or sale of
investments denominated in that currency. In any of these circumstances, the
Fund may enter into a "cross hedge" whereby it uses 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.
These types of hedging can minimize the effect of currency appreciation as well
as depreciation but do not eliminate fluctuations in the underlying U.S.-dollar
value of the proceeds of or rates of return on the Fund's foreign securities. It
is difficult to match precisely the increase in value of a forward contract to
the decline in the U.S.-dollar value of the foreign asset that is the subject of
the hedge. 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
7
<PAGE> 23
a risk of increased losses to the Fund if the portfolio manager's projection of
future exchange rates is inaccurate. Proxy hedges and cross-hedges may result in
losses if the currency used to hedge does not perform in a similar manner 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 unable 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 foreign
contracts' commitments 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.
U.S. GOVERNMENT SECURITIES. As used in this SAI, "U.S. government securities"
include securities issued by the U.S. Government, its agencies,
instrumentalities and government-sponsored enterprises. U.S. government
securities include a variety of Treasury securities that differ only in their
interest rates, initial maturities and dates of issuance. Treasury bills have
initial maturities of one year or less; Treasury notes have initial maturities
of one to ten years; and Treasury bonds generally have initial maturities of
greater than ten years at the date of issuance.
U.S. government securities include direct obligations of the U.S. Treasury and
securities issued or guaranteed by the Federal Housing Administration,
Export-Import Bank of the U.S., Small Business Administration, Government
National Mortgage Association, Federal Home Loan Mortgage Corporation, The
Tennessee Valley Authority, Student Loan Marketing Association and Federal
National Mortgage Association.
Some U.S. government securities, such as Treasury bills and Government National
Mortgage Association pass-through certificates, are supported by the full faith
and credit of the U.S.; 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
instrumentality or government-sponsored enterprise, a Fund will invest in those
U.S. government securities only when the Fund's investment adviser, Travelers
Asset Management International Corporation ("TAMIC"), determines that the credit
risk with respect to the instrumentality or enterprise 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, instrumentalities or government-sponsored enterprises participate,
such as the World Bank, the Asian Development Bank or the Inter-American
Development Bank, or issues insured by the Federal Deposit Insurance
Corporation.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. The Fund may, from time to time,
purchase new-issue government or agency securities on a "when-issued,"
"delayed-delivery," or "to-be-announced" basis ("when-issued securities"). The
prices of such securities are fixed at the time the commitment to purchase is
made and may be expressed in either dollar-price or yield- maintenance terms.
Delivery and payment may be at a future date beyond customary settlement time.
It is the Fund's customary practice to make when-issued purchases for settlement
no more than 90 days beyond the commitment date.
The commitment to purchase a when-issued security may be viewed as a senior
security, which is marked to market and reflected in the Fund's net asset value
daily from the commitment date. While the adviser intends for the Fund
8
<PAGE> 24
to take physical delivery of these securities, offsetting transactions may be
made prior to settlement, if it is advantageous to do so. The Fund does not make
payment or begin to accrue interest on these securities until settlement date.
To invest its assets pending settlement, the Fund normally invests in short-term
money market instruments and other securities maturing no later than the
scheduled settlement date.
The Fund does not intend to purchase when-issued securities for speculative or
"leverage" purposes. Consistent with Section 18 of the 1940 Act and the position
of the SEC thereunder, when the Fund commits to purchase a security on a
when-issued basis, the adviser identifies and places in a segregated account
high-grade money market instruments and other liquid securities equal in value
to the purchase cost of the when-issued securities.
The adviser believes that purchasing securities in this manner will be
advantageous to the Fund. However, this practice entails certain additional
risks, namely the default of the counterparty on its obligations to deliver the
security as scheduled. In this event, the Fund would experience a gain or loss
equal to the appreciation or depreciation in value from the commitment date. The
adviser employs a rigorous credit quality procedure in determining the
counterparties to deal with in purchasing when-issued securities and, in some
circumstances, require the counterparty to post cash or some other form of
security as margin to protect the value of the delivery obligation pending
settlement.
DEBT SECURITIES. Debt securities held by the Fund may be subject to several
types of investment risk, including market or interest rate risk, which relates
to the change in market value caused by fluctuations in prevailing interest
rates and credit risk, which relates to the ability of the issuer to make timely
interest payments and to repay the principal upon maturity. Call or income risk
relates to corporate bonds during periods of falling interest rates, and
involves the possibility that securities with high interest rates will be
prepaid or "called" by the issuer prior to maturity. Investment-grade debt
securities are generally regarded as having adequate capacity to pay interest
and repay principal, but have speculative characteristics.
Below-investment-grade debt securities (sometimes referred to as
"high-yield/high-risk" or "junk" bonds) have greater speculative
characteristics. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal.
The yield on debt instruments over a period of time should reflect prevailing
interest rates, which depend on a number of factors, including government action
in the capital markets, government fiscal and monetary policy, needs of
businesses for capital goods for expansion, and investor expectations as to
future inflation. The yield on a particular debt instrument is also affected by
the risk that the issuer will be unable to pay principal and interest.
The Fund may invest in corporate debt obligations that are rated below the three
highest rating categories of a nationally recognized statistical rating
organization (AAA, AA, or A for S&P and Aaa, Aa, or A for Moody's (see the
Appendix for more information) or, if unrated, of comparable quality) and may
have speculative characteristics or be speculative. Lower-rated or comparable
unrated bonds include bonds rated BBB by S&P or Baa by Moody's or below and are
commonly referred to as "junk bonds". There is no minimum acceptable rating for
a security to be purchased or held by the Fund, and it may, from time to time,
purchase or hold securities rated in the lowest rating category, including bonds
in default. Credit ratings evaluate the safety of the principal and interest
payments but not the market value of high yield bonds. Further, the value of
such bonds is likely to fluctuate over time.
Lower-rated bonds usually offer higher yields with greater risks than
higher-rated bonds. Lower-rated bonds have more risk associated with them than
the issuer of such bonds will default on principal and interest payments. This
is because of reduced creditworthiness and increased risk of default.
Lower-rated securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities that react
primarily to fluctuations in the general level of interest rates. Short-term
corporate and market developments affecting the price or liquidity of
lower-rated securities could include adverse news affecting major issuers,
underwriters, or dealers of lower-rated corporate debt obligations. In addition,
since there are fewer investors in lower-rated securities, it may be harder to
sell the securities at an optimum time.
As a result of these factors, lower-rated securities tend to have more price
volatility and carry more risk to principal and income than higher-rated
securities.
9
<PAGE> 25
An economic downturn may adversely affect the value of some lower-rated bonds.
Such a downturn may especially affect highly leveraged companies or companies in
cyclically sensitive industries, where deterioration in a company's cash flow
may impair its ability to meet its obligations to pay principal and interest to
bondholders in a timely fashion. From time to time, as a result of changing
conditions, issuers of lower-rated bonds may seek or may be required to
restructure the terms and conditions of securities they have issued. As a result
of these restructuring, holders of lower-rated securities may receive less
principal and interest than they had bargained for at the time such bonds were
purchased. In the event of a restructuring, the Fund may bear additional legal
or administrative expenses in order to maximize recovery from an issuer.
Additionally, an increase in interest rates may also adversely impact the value
of high yield bonds.
The secondary trading market for lower rated bonds is generally less liquid than
the secondary trading market for higher-rated bonds. Adversely publicity and the
perception of investors relating to issuers, underwriters, dealers or underlying
business conditions, whether or not warranted by fundamental analysis, may
affect the price of liquidity of lower-rated bonds. On occasion, therefore, it
may become difficult to price or dispose of a particular security in the
portfolio.
Many corporate debt obligations, including many lower rated bonds, permit the
issuers to call the security and therefore redeem their obligations earlier than
the stated maturity dates. Issuers are more likely to call bonds during periods
of declining interest rates. In these cases, if the Fund owns a bond that is
called, the Fund will receive its return of principal earlier than expected and
would likely be required to reinvest the proceeds at a lower interest rates,
thus reducing income to the Fund.
EVALUATING THE RISKS OF LOWER-RATED SECURITIES. The Fund's adviser generally
follows certain steps to evaluate the risks associated with investing in
lower-rated securities. These techniques include:
CREDIT RESEARCH. The adviser performs its own credit analysis in
addition to using nationally recognized statistical rating organizations
and other sources, including discussions with the issuer's management, the
judgment of other investment analysts, and its own informed judgment. The
credit analysis will consider the issuer's financial soundness, its
responsiveness to changes in interest rates and business conditions, and
its anticipated cash flow, interest or dividend coverage and earnings. In
evaluating an issuer, the adviser or subadviser places special emphasis on
the estimated current value of the issuer's assets rather than historical
costs.
DIVERSIFICATION. The Fund generally invests in securities of many
different issuers, industries, and economic sectors to reduce portfolio
risk.
ECONOMIC ANALYSIS. The adviser also analyzes current developments and
trends in the economy and in the financial markets. When investing in
lower-rated securities, timing and selection are critical and analysis of
the business cycle can be important.
Achievement by the Fund's of its investment objective through investing in these
bonds may be more dependent on the credit analysis of a lower-rated bond than
would be the case if the Fund invested exclusively in higher-rated bonds.
MONEY MARKET INSTRUMENTS. Money market instruments are those with remaining
maturities of 397 days or less, such as commercial paper (including master
demand notes), bank certificates of deposit, bankers' acceptances, and U.S.
government securities, 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 are limited to U.S. dollar-denominated certificates of
U.S. banks that have at least $1 billion in deposits as of the date of their
most recently published financial statements (including foreign branches of U.S.
10
<PAGE> 26
banks, U.S. branches of foreign banks that are members of the Federal Reserve
System or the Federal Deposit Insurance Corporation, and savings and loan
associations that are insured by the Federal Deposit Insurance Corporation).
The Fund does 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.
OBLIGATIONS OF FOREIGN BRANCHES OF U.S. BANKS. The obligations of foreign
branches of U.S. banks may be general obligations of the parent bank as well as
of the issuing branch. They also may be limited by the terms of a specific
obligation and by government regulation. Payment of interest and principal upon
these obligations may also be affected by governmental action in the country of
domicile of the branch (generally referred to as sovereign risk). In addition,
if evidences of ownership of such securities are held outside the U.S., the Fund
is subject to the risks associated with the holding of such property overseas.
Various provisions of federal law governing domestic branches do not apply to
foreign branches of domestic banks.
OBLIGATIONS OF U.S. BRANCHES OF FOREIGN BANKS. Obligations of U.S. branches of
foreign banks may be general obligations of the parent bank as well as of the
issuing branch. They also may be limited by the terms of a specific obligation
and by federal and state regulation as well as by governmental action in the
country in which the foreign bank has its head office. In addition, there may be
less publicly available information about an U.S. branch of a foreign bank than
about a domestic bank.
BANKERS' ACCEPTANCES. Bankers' acceptances in which the Fund may invest are
issued by domestic banks (including their branches located outside the United
States and subsidiaries located in Canada), domestic branches of foreign banks,
savings and loan associations and similar institutions. 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 drawn on a bank by an exporter or importer to obtain
a stated amount of funds to pay for specific merchandise. The draft is then
"accepted" by the bank that, 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. The Fund's investments in commercial paper are limited
to those rated A-1 by S&P or PRIME-1 by Moody's. These and other ratings of
money market instruments are described as follows.
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
11
<PAGE> 27
obligations. Relative strength or weakness of the above factors determines how
the issuer's commercial paper is rated within various categories.
See the Appendix for information with respect to ratings for other debt or
equity securities.
OTHER INVESTMENT COMPANIES. The Fund may invest in other investment companies to
the extent permitted by the 1940 Act, including investing some or all of its
assets in one or more other such investment companies. The Fund indirectly bears
its pro rata share of any investment advisory and other fund expenses paid by
the funds in which it invests.
ILLIQUID SECURITIES. The Fund may make investments in illiquid securities in an
amount not exceeding 15% of the Fund's total asset value. Illiquid securities
are those that are not readily marketable within seven days in the ordinary
course and include restricted securities that may not be publicly sold without
registration under the Securities Act of 1933 (the "1933 Act") and Rule 144A
securities. In most instances such securities are traded at a discount from the
market value of unrestricted securities of the same issuer until the restriction
is eliminated. If the Fund sells such portfolio securities, it may be deemed an
underwriter, as such term is defined in the 1933 Act, with respect to those
sales, and registration of such securities under the 1933 Act may be required.
The Fund will not bear the expense of such registration. In determining
securities subject to the percentage limitation, the Fund will include, in
addition to restricted securities, repurchase agreements maturing in more than
seven days and other securities not having readily available market quotations,
including options traded over-the-counter and other securities subject to
restrictions on resale.
RULE 144A SECURITIES. Certain Rule 144A securities may be considered illiquid
and, therefore, their purchase is subject to the Fund's limitation on the
purchase of illiquid securities, unless the adviser under guidelines approved by
the Board determines on an ongoing basis that an adequate trading market exists
for the securities. If qualified institutional buyers become uninterested for a
time in purchasing Rule 144A securities held by the Fund, the Fund's level of
illiquidity could increase. The Board has established standards and procedures
for determining the liquidity of Rule 144A securities and periodically monitors
the adviser's implementation of the standards and procedures. The ability to
sell to qualified institutional buyers under Rule 144A has developed in recent
years, and the adviser cannot predict how this market will develop.
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, liquid securities, or any combination of cash and liquid
securities, as collateral equal at all times in value to at least 102% of the
market value of the securities loaned. The Fund will not loan securities if,
after a loan, the aggregate of all outstanding securities loans exceeds 15% of
the value of the Fund's total assets taken at their current market value. The
Fund continues to receive interest or dividends on the securities loaned and
simultaneously earns interest on the investment of any 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 Fund may vote the securities if, in the
opinion of the investment adviser, a material event affecting the investment
would occur. There may be risks of delay in receiving additional collateral, 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 ("Board"), when the income to be earned from the loan
justifies the risks.
REPURCHASE AGREEMENTS. The Fund may invest from time to time in repurchase
agreements with approved counterparties. Approved counterparties are limited to
national banks or broker-dealers on the Federal Reserve Bank of New York's list
of primary reporting dealers, in each case meeting the investment adviser's
credit quality standards as presenting minimal risk of default. All repurchase
transactions must be collateralized by U.S. government securities with market
value no less than 102% of the amount of the transaction, including accrued
interest. 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, the counterparty will provide
additional cash or qualifying collateral.
12
<PAGE> 28
In executing a repurchase agreement, the Fund purchases eligible securities
subject to the counterparty's 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. The Fund will engage in repurchase agreements only where it
takes physical delivery or, in the case of "book-entry" securities, the security
is segregated in the counterparty's account at the Federal Reserve for the
benefit of the Fund, to perfect the Fund's claim to the collateral for the term
of the repurchase 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 any transaction costs in disposing of the collateral.
TEMPORARY INVESTMENTS. Permissible temporary investments pending investment or
for defensive or cash management purposes may include debt securities, including
high-yield, high risk debt securities and money market instruments. These
investments also may include preferred stock, corporate bonds and debentures;
U.S. government securities; instruments of banks that are members of the Federal
Deposit Insurance Corporation with 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. When the Fund
is so invested, investment income may increase and constitute a large portion of
the Fund's return, and the Fund probably will not participate in market advances
or declines to the extent that it would if it were fully invested in stocks.
INVESTMENT RESTRICTIONS
Subject to shareholder approval at a meeting held April 30, 1999, the Fund
adopted the following investment policies as fundamental (those that may not be
changed without shareholder approval). The Fund may not:
FUNDAMENTAL POLICIES
The Fund, irrespective of any fundamental or non-fundamental, operating
investment policies, may invest all or a portion of its assets in one or more
investment companies without a shareholder vote.
1. DIVERSIFICATION: with respect to 75% of its assets, purchase a security other
than a security issued or guaranteed by the U. S. Government, its agencies,
instrumentalities, government-sponsored enterprises or a security of an
investment company if, as a result: (1) more than 5% of the Fund's total assets
would be invested in the securities of a single issuer, or (2) the Fund would
own more than 10% of the outstanding voting securities of any single issuer.
2. INDUSTRY CONCENTRATION: purchase a security if, as a result, more than 25% of
the Fund's total assets would be invested in securities of issuers conducting
their principal business activities in the same industry. For purposes of this
policy, there is no limit on: (1) investments in U. S. government securities,
in repurchase agreements covering U. S. government securities, in securities
issued by the states, territories or possessions of the United States
("municipal securities") or in foreign government securities; or (2) investment
in issuers domiciled in a single jurisdiction. Notwithstanding anything to the
contrary, to the extent permitted by the 1940 Act, the Fund may invest in one or
more investment companies; provided that, except to the extent that it invests
in other investment companies pursuant to Section 12(d)(1)(A) of the 1940 Act,
the Fund treats the assets of the investment companies in which it invests as
its own for purposes of this policy.
3. BORROWING: borrow money if, as a result, outstanding borrowings would exceed
an amount equal to one-third of the Fund's total assets.
13
<PAGE> 29
4. REAL ESTATE: purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate or
in securities of companies engaged in the real estate business).
5. LENDING: make loans to other parties if, as a result, more than one-third of
its total assets would be loaned to other parties. For purposes of this policy,
entering into repurchase agreements, lending securities and acquiring any debt
security are not deemed to be the making of loans.
6. COMMODITIES: purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall not
prevent the Fund from purchasing or selling options and futures contracts and
options on futures or from investing in securities or other instruments backed
by physical commodities).
7. UNDERWRITING: be an underwriter (as that term is defined in the 1933 Act ) of
securities issued by other persons except, to the extent that in connection with
the disposition of its assets, the Fund may be deemed to be an underwriter.
8. SENIOR SECURITIES: issue any class of senior securities except to the extent
consistent with the 1940 Act.
NONFUNDAMENTAL POLICIES
Effective May 1, 1999, the Fund also complies with the following nonfundamental
investment policies. The Fund will not:
1. BORROWING: for purpose of the borrowing limitation, the following are not
treated as borrowings to the extent they are fully collateralized: (1) the
delayed delivery of purchased securities (such as the purchase of when-issued
securities); (2) reverse repurchase agreements; (3) dollar-roll transactions;
and (4) the lending of securities ("leverage transactions"). (See Fundamental
Policy No. 3 "Borrowing.")
2. LIQUIDITY: invest more than 15% of its net assets in: (1) securities that
cannot be disposed of within seven days at their then-current value; (2)
repurchase agreements not entitling the holder to payment of principal within
seven days; and (3) securities subject to restrictions on the sale of the
securities to the public without registration under the 1933 Act ("restricted
securities") that are not readily marketable. The Fund may treat certain
restricted securities as liquid pursuant to guidelines adopted by the Trust's
Board of Trustees.
3. EXERCISING CONTROL OF ISSUERS: make investments for the purpose of exercising
control of an issuer. Investments by the Fund in entities created under the laws
of foreign countries solely to facilitate investment in securities in that
country will not be deemed the making of investments for the purpose of
exercising control.
4. OTHER INVESTMENT COMPANIES: invest in securities of another investment
company, except to the extent permitted by the 1940 Act.
5. SHORT SALES: sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short (short
sales "against the box"), provided that transactions in futures contracts and
options are not deemed to constitute selling securities short.
6. PURCHASING ON MARGIN: purchase securities on margin, except that the Fund may
use short-term credit for the clearance of its portfolio transactions, and
provided that initial and variation margin payments in connection with futures
contracts and options on futures contracts shall not constitute purchasing
securities on margin.
7. LENDING: lend a security if, as a result, the amount of loaned securities
would exceed an amount equal to one-third of the Fund's total assets.
8. PLEDGING: pledge its assets except as permitted by the 1940 Act.
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<PAGE> 30
VALUATION AND PRICING
VALUATION. We determine current value for the Fund's portfolio securities 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 unaffiliated reputable brokers or other recognized sources; and,
securities that have a remaining maturity of more than 60 days are valued at
prices based on market quotations for securities of similar type, yield and
maturity. The Fund values short-term money market instruments with maturities of
60 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 fair value as determined in good faith by the Board.
PRICING. We compute the Fund's net asset value per share 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. 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.
We compute the Fund's redemption value as of 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.
DISTRIBUTIONS
The adviser intends to distribute dividends from net investment income and all
net realized capital gains annually in shares or, at the option of the
shareholder, in cash. When the investment adviser makes a distribution, it
intends to distribute only net capital gains and such income as the investment
adviser has determined, to the best of its ability, to be taxable as ordinary
income. Therefore, the investment adviser will not make net investment income
distributions on the basis of distributable income as computed on the Fund's
books but on a federal taxation basis.
TRUSTEES AND OFFICERS
Under Massachusetts law, the Fund's Board has absolute and exclusive control
over the management and disposition of all the Fund's assets. Subject to the
provisions of its Declaration of Trust, the Fund's business and affairs are
managed by the trustees or other parties so designated by the trustees. The
Fund's trustees and officers are listed below.
15
<PAGE> 31
Name and Position
With the Fund Principal Occupation During Last Five Years
------------- -------------------------------------------
*Heath B. McLendon Managing Director (1993-present), Salomon Smith
Chairman and Trustee Barney, Inc. ("Salomon Smith Barney");
388 Greenwich Street President and Director (1994-present), SSBC
New York, NY Fund Management Inc.; Director and President
Age 65 (1996-present), Travelers Investment Adviser,
Inc.; Chairman and Director of fifty-nine
investment companies associated with Salomon
Smith Barney; Trustee (1999) of certain Trusts
of Citifunds' family of Trusts; Trustee, Drew
University; Advisory Director, 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), Partner (1956-1988),
Trustee Edwards & Angell, Attorneys; Member, Advisory
154 Arlington Avenue Board (1973-1994), thirty-one mutual funds
Providence, RI sponsored by Keystone Group, Inc.; Member,
Age 75 Board of Managers, seven Variable Annuity
Separate Accounts of The Travelers Insurance
Company+; Trustee, five Mutual Funds sponsored
by The Travelers Insurance Company.++
Robert E. McGill, III Retired manufacturing executive. Director
Trustee (1983-1995), Executive Vice President
295 Hancock Street (1989-1994) and Senior Vice President, Finance
Williamstown, MA and Administration (1983-1989), The Dexter
Age 67 Corporation (manufacturer of specialty
chemicals and materials); Vice Chairman
(1990-1992), Director (1983-1995), Life
Technologies, Inc. (life science/biotechnology
products); Director, (1994-present), The
Connecticut Surety Corporation (insurance);
Director (1995-present), Chemfab Corporation
(specialty materials manufacturer); Director
(1999-present), Ravenwoods Winery; 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, School of Management (1998-present),
Trustee University at Buffalo; Dean, College of
160 Jacobs Hall Business Administration (1995-1998), Marquette
Buffalo, NY University; Professor of Finance (1980-1995)
Age 56 and Associate Dean (1993-1995), School of
Business Administration, and Director, Center
for Research and Development in Financial
Services(1980-1995), University of Connecticut;
Director (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.++
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<PAGE> 32
Frances M. Hawk, CFA,
CFP Private Investor, (1997-present); Portfolio
Trustee Manager (1992-1997, HLM Management Company,
28 Woodland Street Inc. (investment management); Assistant
Sherborn, MA Treasurer, Pensions and Benefits. Management
Age 51 (1989-1992), United Technologies Corporation
(broad-based designer and manufacturer of high
technology 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),
Secretary to the Board Assistant Secretary (1994-1996), Counsel
One Tower Square Secretary, (1987-present), The Travelers Insurance
Hartford, Connecticut Company; Board of Managers, seven Variable
Age 58 Annuity Separate Accounts of The Travelers
Insurance Company+; Secretary, Board of
Trustees, five Mutual Funds sponsored by The
Travelers Insurance Company.++
Kathleen A. McGah Assistant Secretary and Counsel (1995-present),
Assistant Secretary to The Travelers Insurance Company; Assistant
The Board Secretary, Board of Managers, seven Variable
One Tower Square Annuity Separate Accounts of The Travelers
Hartford, Connecticut Insurance Company+; Assistant Secretary, Board
Age 48 of Trustees, five Mutual Funds sponsored by The
Travelers Insurance Company.++ Prior to January
1995, Counsel, ITT Hartford Life Insurance
Company.
Lewis E. Daidone Managing Director of Salomon Smith Barney,
Treasurer Senior Vice President and Treasurer of 41
388 Greenwich Street investment companies associated with Salomon
New York, New York Smith Barney, and Director and Vice President
Age 40 of SSBC and TIA; Treasurer, Board of Trustees,
five Mutual Funds sponsored by The Travelers
Insurance Company.++
Irving David Vice President of Salomon Smith Barney, Asset
Controller Management Division (March 1994-present);
388 Greenwich Street Controller, Board of Trustees, five Mutual
New York, New York Funds sponsored by The Travelers Insurance
Age 37 Company.++
+ The 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.
++ The five Mutual Funds are: Capital Appreciation Fund, Money Market
Portfolio, High Yield Bond Trust, Managed Assets Trust and The Travelers
Series Trust.
* Mr. McLendon is an "interested person" within the meaning of the 1940 Act
by virtue of his position as Managing Director of Salomon Smith Barney,
Inc., an indirect wholly owned subsidiary of Citigroup Inc., and his
ownership of shares and options to purchase shares of Citigroup Inc., the
indirect parent of The Travelers Insurance Company.
COMMITTEES. To operate more efficiently, the Board established two operating
committees. The Nominating Committee recommends candidates for the nomination as
members of the Board. The Audit Committee reviews the scope and results of the
Fund's annual audits with the Fund's independent auditors and recommends the
17
<PAGE> 33
engagement of the auditors. For the year ended December 31, 1998, the members of
the Nominating and Audit Committees were Knight Edwards, Robert E. McGill III,
Lewis Mandell, and Frances M. Hawk. Trustees do not receive any additional
compensation for their committee services.
COMPENSATION. Members of the Board who are also officers or employees of
Citigroup Inc. or its subsidiaries are not entitled to any fee for their
services to the Fund. Board members who are not employees of Citigroup 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
("The Travelers") and the seven Variable Annuity Separate Accounts established
by The Travelers. 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 an 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. The chart below shows the compensation paid to Board members for the
year ended December 31, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Pension or Total Compensation
Aggregate Retirement Benefits From Fund and Fund
Name of Person, Position Compensation From Accrued As Part of Complex Paid to
Fund(1) Fund Expenses Directors
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Heath B. McLendon N/A N/A N/A
Chairman and Trustee
- ---------------------------------------------------------------------------------------------------
Knight Edwards $10,500 N/A $31,500
Trustee
- ---------------------------------------------------------------------------------------------------
Robert E. McGill, III $11,125 N/A $34,000
Trustee
- ---------------------------------------------------------------------------------------------------
Lewis Mandell $11,125 N/A $34,000
Trustee
- ---------------------------------------------------------------------------------------------------
Frances M. Hawk, CFA, CFP $11,125 N/A $34,000
Trustee
- ---------------------------------------------------------------------------------------------------
</TABLE>
- -----------------
(1) No compensation was deferred for any trustee or officer under a deferred
compensation plan.
DECLARATION OF TRUST
The Fund is organized as a Massachusetts business trust. In accordance with
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 the Fund's
obligations 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 Fund's
obligations.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISER. Travelers Asset Management International Corporation
("TAMIC"), an indirect wholly owned subsidiary of Citigroup, Inc., furnishes the
Fund with investment management and advisory services in accordance with the
terms of an investment advisory agreement that was approved by shareholders on
April 23, 1993 (the "Agreement").
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<PAGE> 34
As required by the 1940 Act, the Agreement continues in effect each year so long
as its continuance is specifically approved at least annually: (1) by a vote of
a majority of the Board, or (2) by a vote of a majority of the outstanding
voting securities of the Fund. In addition, and in either event, the terms of
the Agreement must be approved annually by a vote of a majority of the trustees
who are not parties to, or interested persons of any party to, the Agreement,
cast in person at a meeting called for the purpose of voting on such approval
and at which the Board is furnished such information as may be reasonably
necessary to evaluate the terms of the Agreement. The Agreement further provides
that it terminates 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 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
Fund's outstanding voting securities.
Under the terms of the Agreement, TAMIC shall:
(1) obtain and evaluate pertinent economic, statistical and financial data
and other information relevant to the Fund's investment policy
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 with respect to an
investment program for approval, modification or rejection by the
Board;
(4) take such steps as are necessary to implement the investment program
approved by the Board;
(5) regularly report to the Board 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 a fee, computed daily and payable weekly, at an annual rate
of 0.75% of the Fund's average daily net assets. For the years ended December
31, 1996, 1997 and 1998, the Fund paid TAMIC investment advisory fees of
$1,261,284, $2,436,487 and $4,360,310, respectively.
THE SUBADVISER. Janus Capital, 100 Fillmore Street, Denver, Colorado, has been
employed by TAMIC as a subadviser to manage the Fund's daily investment
operations, subject to the supervision of both TAMIC and the Board. Kansas City
Southern Industries, Inc., a publicly traded holding company whose primary
subsidiaries are engaged in transportation, financial services and real estate,
owns approximately 82% 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.
TAMIC pays Janus Capital Corporation ("Janus Capital") a subadvisory fee, at an
annual rate of 0.55% of the Fund's average daily net assets for Janus Capital's
services as subadviser. For the years ended December 31, 1996, 1997 and 1998,
TAMIC paid Janus Capital subadvisory fees of $378,385, $1,786,757 and
$2,909,592, respectively.
Under a management agreement dated May 1, 1993 with the Fund, The Travelers has
agreed to reimburse the Fund for the amount by which its 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 year. For the year ended December 31, 1998, the Fund received no
reimbursements from The Travelers.
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<PAGE> 35
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. The Fund has obligated itself under the 1940 Act,
however, 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.
PORTFOLIO TURNOVER RATE
The Fund's portfolio turnover rates for the years ended December 31, 1997 and
1998 were 89% and 53%, respectively.
BROKERAGE
Subject to the Board's approval, TAMIC's and Janus Capital's policy, in
executing transactions in portfolio securities, is to seek best execution of
orders at the most favorable prices. Determining what may constitute best
execution and price in the execution of a securities transaction by a broker
involves considering, without limitation:
- - the overall direct net economic result to the Fund, involving both price
paid or received and any commissions and other cost paid;
- - the efficiency with which the transaction is effected;
- - the ability to effect the transaction at all where a large block is
involved;
- - the availability of the broker to stand ready to execute potentially
difficult transactions in the future; and
- - the financial strength and stability of the broker.
Such considerations are judgmental and are weighed by management in determining
the overall reasonableness of brokerage commissions paid. Subject to the
foregoing, a factor in the selection of brokers is the receipt of research
services, analyses and reports concerning issuers, industries, securities,
economic factors and trends, and other statistical and factual information. Any
such research and other statistical and factual information provided by brokers
is considered to be in addition to and not in lieu of services TAMIC or Janus
Capital is required to perform under its investment advisory or subadvisory
agreement. The cost, value, and specific application of such information are
indeterminable and hence are not practicably allocable among the Fund and other
clients of TAMIC or Janus Capital who may indirectly benefit from the
availability of such information. Similarly, the Fund may indirectly benefit
from information made available as a result of transactions for such clients.
Purchases and sales of bonds and money market instruments are usually principal
transactions and normally are purchased directly from the issuer or from the
underwriter or market maker for the securities. There usually are no brokerage
commissions paid for such purchases. Purchases from the underwriters do include
the underwriting commission or concession, and purchases from dealers serving as
market makers do include the spread between the bid and asked prices. Where
transactions are made in the over-the-counter market, the Fund deals with
primary market makers unless more favorable prices are otherwise obtainable.
Brokerage fees are incurred in connection with futures transactions, and the
Fund is required to deposit and maintain funds with brokers as margin to
guarantee performance of future obligations.
TAMIC or Janus Capital may follow a policy of considering the sale of shares of
the Fund a factor in the selection of broker-dealers to execute portfolio
transactions, subject to the requirements of best execution described above.
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<PAGE> 36
TAMIC's or Janus Capital's policy with respect to brokerage is and will be
reviewed by the Board periodically. Because of the possibility of further
regulatory developments affecting the securities exchanges and brokerage
practices generally, the foregoing practices may be changed, modified or
eliminated.
The Fund's total brokerage commissions for the years ended December 31, 1996,
1997, and 1998 were $273,000, $1,166,544 and $561,843, respectively. For the
year ended December 31, 1998, portfolio transactions in the amount of $1,846,785
were placed with certain brokers because of research services, of which $1,987
was paid in commissions with respect to such 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 years.
FUND ADMINISTRATION
The Fund entered into an administrative services agreement during 1996 with The
Travelers to provide pricing and bookkeeping services at an annualized rate of
0.06% of the daily net assets of the Fund. The Travelers at its expense has
appointed a subadministrator, SSBC Fund Management Inc. ("SSBC") (f/k/a/ Mutual
Management Corp.), an affiliate of The Travelers, to provide these services. The
Travelers pays SSBC, as subadministrator, a fee at an annual rate of 0.06% of
the Fund's average daily net assets of the Fund. For the period ended December
31, 1996 and the years ended December 31, 1997 and 1998, the Fund paid
administration fees to The Travelers of $25,243, $183,798 and $380,360,
respectively.
SHAREHOLDER RIGHTS
Fund shares are currently sold only to insurance company separate accounts in
connection with variable annuity and variable life insurance contracts issued by
The Travelers. Fund shares 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 the insurance company makes payment 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 that participate equally in
dividends and distributions and have equal voting, liquidation and other rights.
When issued for the consideration described in the prospectus, the shares are
fully paid and nonassessable by the Fund. Shares 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
separate account prospectus that accompanies the Fund's prospectus for a
discussion of voting rights applicable to purchasers of variable annuity and
variable life insurance contracts.)
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
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.
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<PAGE> 37
TAX STATUS
GENERAL TAX INFORMATION
The Fund qualified in its last taxable year as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Fund intends to so qualify in the future so long as such
qualification is in the best interest of shareholders. If the Fund qualifies as
a regulated investment company and distributes substantially all of its net
income and gains to its shareholders (which it intends to do), then under the
provisions of Subchapter M, the Fund should have little or no income taxable to
it under the Code.
The Fund must meet several requirements to maintain its status as a regulated
investment company. These requirements include the following: (1) at least 90%
of the Fund's gross income must be derived from dividends, interest, payments
with respect to securities loaned, and gains from the sale or disposition of
securities; and (2) at the close of each quarter of the Fund's taxable year, (a)
at least 50% of the value of the Fund's total assets must consist of cash, U.S.
government securities and other securities (no more than 5% of the value of the
Fund may consist of such other securities of any one issuer, and the Fund must
not hold more than 10% of the outstanding voting stock of any issuer), and (b)
the Fund must not invest more than 25% of the value of its total assets in the
securities of any one issuer (other than U.S. government securities).
In order to maintain the qualification of the Fund's status as a regulated
investment company, in its business judgment, the investment adviser may
restrict the Fund's ability to invest in certain types of financial instruments.
For the same reason, the investment adviser may, in its business judgment,
require the Fund to maintain or dispose of its investment in certain types of
financial instruments beyond the time when it might otherwise be advantageous to
do so.
The Fund also intends to comply with section 817(h) of the Code and the
regulations issued thereunder, which impose certain investment diversification
requirements on life insurance companies' separate accounts (such as the
account) that are used to fund benefits under variable life insurance and
variable annuity contracts. These requirements are in addition to the
requirements of subchapter M and of the 1940 Act and may affect the securities
in which the Fund may invest. In order to comply with the current or future
requirements of section 817(h) (or related Code provisions), the Fund may be
required, for example, to alter its investment objective or policies. No such
change of investment policies will take place without notice to the Fund's
shareholders, the approval of a majority of the outstanding voting shares if
necessary, and the approval of the SEC, to the extent legally required.
ADDITIONAL TAX CONSIDERATIONS
If the Fund fails to qualify as a regulated investment company, the Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains (without any deduction for its distributions to its shareholders), and
distributions to its shareholders will constitute ordinary income to the extent
of the Fund's available earnings and profits. Owners of variable life insurance
and annuity contracts that have invested in such a Fund might be taxed currently
on the investment earnings under their contracts and thereby lose the benefit of
tax deferral. In addition, if the Fund failed to comply with the diversification
requirements of section 817(h) of the Code and the regulations thereunder,
owners of variable life insurance and annuity contracts that have invested in
the Fund would be taxed on the investment earnings under their contracts and
thereby lose the benefit of tax deferral. Accordingly, compliance with the above
rules is carefully monitored by the Fund's adviser, and it is intended that the
Fund will comply with these rules as they exist or as they may be modified from
time to time. Compliance with the tax requirements described above may result in
a reduction in the return under the Fund, since, to comply with the above rules,
the investments utilized (and the time at which such investments are entered
into and closed out) may be different from what the Fund's adviser might
otherwise believe to be desirable.
The Fund should not be subject to the 4% federal excise tax imposed on regulated
investment companies that do not distribute substantially all their income and
gains each calendar year because the tax does not apply to a regulated
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<PAGE> 38
investment company whose only shareholders are segregated asset accounts of life
insurance companies held in connection with variable annuity contracts and/or
variable life insurance policies.
FOREIGN INVESTMENTS. Funds investing in foreign securities or currencies may be
required to pay withholding or other taxes to foreign governments. Foreign tax
withholding from dividends and interest, if any, is generally at a rate between
10% and 35%. The investment yield of any fund that invests in foreign securities
or currencies is reduced by these foreign taxes. Owners of variable life
insurance and annuity contracts investing in such fund bear the cost of any
foreign taxes but will not be able to claim a foreign tax credit or deduction
for these foreign taxes. Funds investing in securities of passive foreign
investment companies may be subject to U.S. federal income taxes and interest
charges, and the investment yield of a fund making such investments is reduced
by these taxes and interest charges. Owners of variable life insurance and
annuity contracts investing in such funds bear the cost of these taxes and
interest charges.
OTHER INFORMATION. The discussion of "Tax Consequences of Dividends and
Distributions" in the prospectus and the foregoing discussion of federal income
tax consequences is a general and abbreviated summary based on tax laws and
regulations in effect on the date of the prospectuses. Tax law is subject to
change by legislative, administrative or judicial action. Each prospective
investor should consult his or her own tax advisor as to the tax consequences of
investments in the Fund.
It is not feasible to comment on all of the federal tax consequences concerning
the Fund. No further discussion of those consequences is included in this SAI.
For information concerning the federal income tax consequences to the owners of
variable life insurance and annuity contracts, see the prospectuses for the
contracts.
The following is a partial list of publications that may be noted in the Funds'
sales literature or shareholder materials that contain articles describing
investment results or other data relative to one or more of the insurance
products that purchase Fund shares. Other publications may also be cited.
Across the Board Advertising Age
American Banker Barron's
Best's Review Broker World
Business Insurance Business Month
Business Week Changing Times
Consumer Reports The Economist
Financial Planning Financial World
Forbes Fortune
Inc. Institutional Investor
Insurance Forum Insurance Sales
Insurance Week Journal of Accountancy
Journal of the American Society of CLU & ChFC Journal of Commerce
Life Insurance Selling Life Association News
Manager's Magazine MarketFacts
Money Morningstar, Inc.
National Underwriter Nation's Business
New Choices (formerly 50 Plus) The New York Times
Pensions & Investments Pension World
Rough Notes Round the Table
U.S. Banker VARDs
The Wall Street Journal Working Woman
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<PAGE> 39
FINANCIAL STATEMENTS
The Fund's year-end is December 31st. Financial statements for the Fund's annual
and semi-annual periods will be distributed to shareholders of record.
KPMG LLP, 345 Park Avenue, New York, NY 10154, has been selected as independent
auditors to examine and report on the Fund's financial statements. 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.
ADDITIONAL INFORMATION
On April 15, 1999, The Travelers owned 100% of the Fund's outstanding shares.
The Travelers 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 an indirect
wholly owned subsidiary of Citigroup Inc., a bank holding company. The
Travelers' home office is located at One Tower Square, Hartford, Connecticut
06183, telephone number 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 the Fund's custodians.
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.
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 in the prospectus.
The Fund's prospectus and this SAI omit certain information contained in the
Fund's registration statement filed with the SEC, which investors may obtain
from the SEC's principal office in Washington, D.C. upon payment of the fee
prescribed by the rules and regulations promulgated by the SEC. Otherwise,
investors may obtain the Fund's registration for free by accessing the SEC's
website at http//www.sec.gov.
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<PAGE> 40
APPENDIX
COMMERCIAL PAPER RATINGS
The Fund's investments in commercial paper are limited to those rated A-1 or A-2
by S&P or PRIME-1 or PRIME-2 by Moody's. These ratings and other money market
instruments are described as follows.
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.
Commercial paper rated A-2 by S&P indicates that capacity for timely payment is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
Commercial paper rated 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.
Commercial paper rated PRIME-2 has a strong capacity for repayment of short-term
promissory obligations.
COMMON AND PREFERRED STOCK RATINGS
MOODY'S COMMON STOCK RATINGS
Moody's presents a concise statement of the important characteristics of a
company and an evaluation of the grade (quality) of its common stock. Data
presented include: (a) capsule stock information which reveals short and long
term growth and yield afforded by the indicated dividend, based on a recent
price; (b) a long term price chart which shows patterns of monthly stock price
movements and monthly trading volumes; (c) a breakdown of a company's capital
account which aids in determining the degree of conservatism or financial
leverage in a company's balance sheet; (d) interim earnings for the current year
to date, plus three previous years; (e) dividend information; (f) company
background; (g) recent corporate developments; (h) prospects for a company in
the immediate future and the next few years; and (I) a ten year comparative
statistical analysis.
This information provides investors with information on what a company does, how
it has performed in the past, how it is performing currently, and what its
future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or indication
of quality. The grade is based on an analysis of each company's financial
strength, stability of earnings and record of dividend payments. Other
considerations include conservativeness of capitalization, depth and caliber of
management, accounting practices, technological capabilities and industry
position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
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MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. aaa: An issue that is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
2. aa: An issue that is rated aa is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance that earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
3. a: An issue that is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the aaa
and aa classification, earnings and asset protection are, nevertheless, expected
to be maintained at adequate levels.
4. baa: An issue that is rated baa is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
5. ba: An issue that is rated ba is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. b: An issue that is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
Moody's applies numerical modifiers 1, 2 and 3 in each rating classification:
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.
CORPORATE BOND RATINGS
S&P CORPORATE BOND RATINGS
An 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.
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<PAGE> 42
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 and B - Debt rated BB and B 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. While such debt likely will have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. Aaa - Bonds that 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 exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are not likely to impair the
fundamentally strong position of such issues.
2. Aa - Bonds that 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. Aa bonds are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
that make the long term risks appear somewhat larger than in Aaa securities.
3. A - Bonds that 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 that are rated Baa are considered as medium grade obligations,
that is, 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 that 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 that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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<PAGE> 43
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.
FITCH CORPORATE BOND RATINGS
Fitch ratings are as follows -
1. AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
2. AA - Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-l+".
3. A - Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be strong
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
4. BBB - Bonds considered investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances are more
likely to have adverse impact on these bonds and impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
5. BB - Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
6. B - Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflect the obligor's limited margin of safety
and the need for reasonable business and economic activity through out the life
of the issue.
PLUS (+) MINUS (-) - Plus and minus signs are used (except in "AAA" category)
with a rating symbol to indicate the relative position of a credit within the
rating category.
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CAPITAL APPRECIATION FUND
STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 45
PART C
OTHER INFORMATION
Item 23. Exhibits
(a) 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.)
(b) 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.)
(d)(1) 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.)
(d)(2) 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.)
(g)(1) Form of Custody Agreement between the Registrant and PNC Bank, N.A.
(Incorporated hereby by reference to Exhibit 8(A) to Post-Effective
Amendment No. 27 to the Registration Statement on Form N-1A filed on
April 22, 1998.)
(g)(2) Form of Subcustody Agreement between Morgan Stanley Trust Company and
Subcustodians. (Incorporated hereby by reference to Exhibit 8(B) to
Post-Effective Amendment No. 27 to the Registration Statement on Form
N-1A filed on April 22, 1998.)
(h)(1) 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.)
(h)(2) Form of Transfer Agency and Registrar Agreement between the Trust and
First Data Investor Services Group, Inc (Incorporated hereby by
reference to Exhibit 9(b) to Post-Effective Amendment No. 27 to the
Registration Statement on Form N-1A filed on April 22, 1998.)
(i) 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.)
(j)(1) Consent of KPMG LLP, Independent Certified Public Accountants.
(j)(2) 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.)
(j)(3) 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.)
(n) Financial Data Schedule.
<PAGE> 46
Item 24. Persons Controlled By or Under Common Control With the Fund
Not Applicable.
Item 25. 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> 47
Item 26. 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 Travelers Investment Group*
- ---- ------------------- ---------------------------
<S> <C> <C>
Marc P. Weill Director and Chairman Executive President
Chief Investment Officer
David A. Tyson Director, President and Executive Vice President
Chief Investment Officer
Joseph E. Rueli, Jr. Director, Senior Vice President Senior Vice President
and Chief Financial Officer and Chief Financial Officer
F. Denney Voss Director and Senior Vice Senior Vice President
President Executive Vice President
John R. Britt Director and Secretary Senior Counsel
Gene Collins Senior Vice President Senior Vice President
Thomas Hajdukiewicz Senior Vice President Senior Vice President
Glenn N. Marchak Senior Vice President Senior Vice President
Joseph M. Mullally Senior Vice President Senior Vice President
Kathryn D. Karlic Senior Vice President Vice President
David R. Miller Senior Vice President First Vice President
Jordan M. Stitzer Senior Vice President Senior Vice President
David Amaral Vice President Trader
John R. Calcagni Vice President First Vice President
Allen R. Cantrell Vice President Vice President
A. William Carnduff Vice President Vice President
Angela Pellegrini Degis Vice President Vice President
Craig Farnsworth Vice President First Vice President
Bruce E. Fox Vice President Vice President
Carl Franzetti Vice President First Vice President
Kothandaraman Ganesh Vice President Vice President
John F. Gilsenan Vice President First Vice President
Kimerly M. Polak Guerrero Vice President Vice President
John F. Green Vice President Vice Pesident
Edward Hinchliffe III Vice President and Cashier Vice President
Richard E. John Vice President Vice President
Kurt Lin Vice President Vice President
David R. Martin Vice President Vice President
Paul A. Mataras Vice President Vice President
Emil J. Molinaro Vice President First Vice President
John W. Petchler Vice President First Vice President
Steven A. Rosen Vice President Vice President
Andrew Sanford Vice President Vice President
Eric L. Sappenfield Vice President Trader
Charles H. Silverstein Vice President Vice President
Robert Simmons Vice President Vice President
</TABLE>
<PAGE> 48
<TABLE>
<S> <C> <C>
Joel Strauch Vice President Vice President
Teresa M. Torrey Vice President First Vice President
Pamela D. Westmoreland Vice President Vice President
William M. Gardner Assistant Vice President Private Placement Officer
Jeremy C. Hughes Assistant Vice President Trader
Matthew J. McInerny Assistant Vice President Private Placement Officer
Lisa A. Thomas Assistant Vice President Assistant 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 General Counsel
Andrew Feldman Assistant Secretary Senior Counsel, Corporate Staff
Millie Kim Assistant Secretary General Counsel
Patricia A. Uzzel Compliance Officer Assistant Vice President and
Investment Compliance Officer
Frank J. Fazzina Controller Vice President
</TABLE>
* Positions held with Travelers Investment Group Inc., 388 Greenwich Street,
New York, N.Y.
<PAGE> 49
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 Chairman of Board, Chairman of Trustees and
Director, President and President of Janus Aspen Series
Chief Executive Officer and Janus Investment Fund
Denver, CO
James P. Craig, III Vice Chairman, Trustee and Executive Vice President
Director and Janus Investment Fund and
Chief Investment Officer Janus Aspen Series
and Portfolio Manager Denver, CO
Michael E. Herman Independent Director Chairman Finance Committee
Ewing Marion Kauffman Foundation
Kansas City, Missouri;
President, Kansas City Royals
Baseball Team, Kansas, MO
Thomas A. McDonnell Independent Director Director, President and Chief
Executive Officer
DST Systems Inc., Kansas City, MO;
President, DST Technologies Inc.
Lakewood, KS
Landon H. Rowland Independent Director Chairman of the Board,
President and Chief Executive Officer
Kansas City Southern Industries, Inc.
Michael Stolper Independent Director President, Stolper & Co., Inc.
San Diego, CA
Steven R. Goodbarn Vice President of Finance, Vice President and Chief Financial
Treasurer and Chief of Janus Aspen Series and
Financial Officer Janus Investment Fund;
Vice President of Finance, Treasurer and CFO of Janus
Service Corp., and Janus Capital International Ltd.,
Denver, CO;
Vice President, Treasurer, Chief Financial Officer and
Director of Janus Distributors, Inc.Denver, CO
Marjorie G. Hurd Vice President and President,
Chief Operations Officer Janus Service Corp.
Helen Y. Hayes Vice President and Executive Vice President of
Portfolio Manager Janus Investment Fund and
Janus Aspen Series
Denver, Colorado
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
Position with Janus
Name Capital Corporation* Other Business
- ---- -------------------- --------------
<S> <C> <C>
Mark B. Whiston Vice President and Director and President
Chief Marketing Officer Janus Capital International Ltd.
London
Thomas A. Early Vice President, General --
Counsel and Secretary
Stephen L. Stieneker Asst. General Counsel and --
Chief Compliance Officer
Vice President, Compliance
</TABLE>
* Principal place of business: 100 Fillmore Street, Denver, Colorado
<PAGE> 51
Item 27. Principal Underwriter
Not Applicable.
Item 28. Location of Accounts and Records
(1) SSBC Fund Management Inc.
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 29. Management Services
Not Applicable.
Item 30. 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> 52
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Fund, 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, and state of Connecticut, on the 28th day of April, 1999.
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 the 28th day of April 1999.
*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: /s/Ernest J. Wright, Attorney-in-Fact
Secretary, Board of Trustees
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
--- ----------- ----------------
<S> <C> <C>
(j)(1) Consent of KPMG LLP, Independent Certified Public Electronically
Accountants.
(n) Financial Data Schedule. Electronically
</TABLE>
<PAGE> 1
Exhibit (j)(1)
INDEPENDENT AUDITORS' CONSENT
To the Shareholders and Board of Trustees of
Capital Appreciation Fund
We consent to the use of our report dated February 8, 1999, with respect to the
Capital Appreciation Fund, incorporated herein by reference and to the
references to our Firm under the headings "Financial Highlights" in the
Prospectus and "Financial Statements" in the Statement of Additional
Information.
KPMG LLP
New York, New York
April 26, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000701388
<NAME> CAPTIAL APPRECIATION FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 524,779,620
<INVESTMENTS-AT-VALUE> 889,979,521
<RECEIVABLES> 1,515,905
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 331
<TOTAL-ASSETS> 891,495,757
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 634,834
<TOTAL-LIABILITIES> 634,834
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 494,472,555
<SHARES-COMMON-STOCK> 12,246,916
<SHARES-COMMON-PRIOR> 8,801,078
<ACCUMULATED-NII-CURRENT> 1,059,153
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 30,123,306
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 365,205,909
<NET-ASSETS> 890,860,923
<DIVIDEND-INCOME> 2,871,426
<INTEREST-INCOME> 3,117,890
<OTHER-INCOME> 0
<EXPENSES-NET> 4,926,668
<NET-INVESTMENT-INCOME> 1,062,648
<REALIZED-GAINS-CURRENT> 31,704,572
<APPREC-INCREASE-CURRENT> 268,745,690
<NET-CHANGE-FROM-OPS> 301,512,910
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,757,481
<DISTRIBUTIONS-OF-GAINS> 15,276,070
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,602,035
<NUMBER-OF-SHARES-REDEEMED> 448,218
<SHARES-REINVESTED> 292,021
<NET-CHANGE-IN-ASSETS> 483,159,706
<ACCUMULATED-NII-PRIOR> 1,757,481
<ACCUMULATED-GAINS-PRIOR> 13,691,309
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 4,360,310
<GROSS-ADVISORY-FEES> 4,360,310
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,926,668
<AVERAGE-NET-ASSETS> 582,672,194
<PER-SHARE-NAV-BEGIN> 46.32
<PER-SHARE-NII> 00.06
<PER-SHARE-GAIN-APPREC> 28.07
<PER-SHARE-DIVIDEND> 00.18
<PER-SHARE-DISTRIBUTIONS> 01.53
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 72.74
<EXPENSE-RATIO> 00.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
