<PAGE>
COMPANION FUND
PROSPECTUS
MAY 1, 1995
Companion Fund (the "Fund") seeks long-term growth of capital by investing
principally in common stocks. There is, of course, no guarantee that this in-
vestment objective will be achieved.
This prospectus sets forth concisely the information about the Fund that a pro-
spective investor ought to know before investing. Additional information about
the Fund, contained in a Statement of Additional Information dated May 1, 1995,
has been filed with the Securities and Exchange Commission and is available
upon request without charge by writing to the Fund at 1380 Main Street, Spring-
field, Massachusetts 01103. The Fund's telephone number is (203) 726-3700. The
Statement of Additional Information relating to the Fund having the same date
as this prospectus is incorporated by reference into this prospectus. The
Statement of Additional Information is not a prospectus.
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Please read this prospectus and retain it for future reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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PAGE
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FINANCIAL HIGHLIGHTS....................................................... 2
ABOUT THE FUND............................................................. 2
THE FUND'S OBJECTIVE....................................................... 3
PORTFOLIO TURNOVER......................................................... 4
ELIGIBLE PURCHASERS........................................................ 4
PURCHASE OF FUND SHARES.................................................... 5
COMPUTATION OF NET ASSET VALUE............................................. 5
REDEMPTION OF FUND SHARES.................................................. 6
DISTRIBUTION OF DIVIDENDS AND CAPITAL GAINS................................ 6
TAX MATTERS................................................................ 6
MANAGEMENT OF THE TRUST.................................................... 6
THE TRUST, ITS SHARES AND BOARD OF TRUSTEES................................ 7
</TABLE>
<PAGE>
COMPANION FUND*
FINANCIAL HIGHLIGHTS
The financial highlights for each of the periods identified below and included
in the financial statements of Companion Fund have been examined by Price
Waterhouse LLP, independent accountants, whose report thereon was unqualified.
The following information should be read in conjunction with the financial
statements and notes thereto available with the Statement of Additional Infor-
mation.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $ 9.20 $ 11.94 $ 12.83 $ 10.75 $ 11.94 $ 10.14 $ 9.41 $ 13.37 $ 13.39 $ 11.85
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations
Net investment income
**..................... 0.19 0.16 0.12 0.19 0.26 0.28 0.25 0.25 0.30 0.43
Net realized and
unrealized gains (loss-
es).................... (0.13) 0.22 0.34 3.79 (0.74) 2.67 0.72 0.54 1.31 2.68
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............. 0.06 0.38 0.46 3.98 (0.48) 2.95 0.97 0.79 1.61 3.11
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less: Distributions
Dividends from net in-
vestment income........ (0.14) (0.17) (0.12) (0.20) (0.25) (0.30) (0.24) (0.36) (0.38) (0.44)
Distributions from capi-
tal gains.............. (0.85) (2.95) (1.23) (1.70) (0.46) (0.85) -- (4.39) (1.25) (1.13)
Required for tax
purposes in excess of
realized gains......... (0.08) -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions..... (1.07) (3.12) (1.35) (1.90) (0.71) (1.15) (0.24) (4.75) (1.63) (1.57)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year................... $ 8.19 $ 9.20 $ 11.94 $ 12.83 $ 10.75 $ 11.94 $ 10.14 $ 9.41 $ 13.37 $ 13.39
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return............ 0.67% 2.97% 3.59% 37.46% -3.99% 29.22% 10.33% 3.90% 13.27% 28.26%
Ratios and Supplemental
Data:
Net assets, end of pe-
riod (000)............. $54,728 $61,478 $68,287 $73,446 $60,658 $69,389 $61,504 $70,501 $77,102 $75,167
Ratio of expenses to av-
erage net assets....... 0.78% 0.66% 0.59% 0.56% 0.59% 0.56% 0.54% 0.51% 0.50% 0.48%
Ratio of net investment
income to average net
assets................. 2.23% 1.30% 0.94% 1.38% 2.08% 2.18% 2.16% 1.83% 2.19% 3.45%
Portfolio Turnover...... 4% 1.85%a 82% 77% 63% 55% 38% 75% 70% 43%
</TABLE>
a. During November 1993, the portfolio was indexed to the S&P 500, resulting in
a complete turnover of the portfolio at that time.
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* During periods prior to November 9, 1993, the Fund was actively managed. On
November 9, 1993, the Board of Trustees authorized CIGNA Investments, Inc.,
the investment adviser to the Fund, to change the Fund's investment strategy
to an indexation approach. See "The Fund's Objective". Prior to October 16,
1985, the Fund was a Maryland corporation.
** Net investment income per share has been calculated in accordance with SEC
requirements with the exception that end of the year accumulated
undistributed/(overdistributed) net investment income has not been adjusted
to reflect current year permanent differences between financial and tax ac-
counting.
Certain additional performance and other information concerning the Fund is
contained in the Fund's most recent Annual Report to Shareholders, a copy of
which shall be provided upon request and without charge to each person who re-
ceives a prospectus.
ABOUT THE FUND
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Companion Fund (the "Fund"), is a separate series of shares of CIGNA Variable
Products Group (the "Trust"), a Massachusetts business trust established by a
Master Trust Agreement dated February 4, 1988 and registered under the Invest-
ment Company Act of 1940, as amended, as a diversified, open-end management in-
vestment company (see "The Trust, Its Shares and Board of Trustees"). The Fund
intends to qualify as a regulated investment company for Federal income tax
purposes. Its sole purpose is to serve as the funding vehicle for the invest-
ment of monies paid by holders of variable annuities. Historically these vari-
able annuity contracts have been issued by Connecticut General Life Insurance
Company ("CG Life"), an indirect, wholly-owned subsidiary of
2
<PAGE>
CIGNA Corporation. CIGNA Corporation is an insurance and financial services
holding company. The Fund may also serve as the funding vehicle for variable
annuities issued by other life insurance companies affiliated with CIGNA Corpo-
ration or by life insurance companies which may be unaffiliated with CIGNA Cor-
poration (see "Eligible Purchasers").
Shares are offered only to Eligible Purchasers (see "Eligible Purchasers").
Shares are offered at net asset value without the imposition of a sales load,
sales charge or selling commission.
THE FUND'S OBJECTIVE
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The primary objective of the Fund is long-term growth of capital by investing
principally in common stocks. This objective will not be changed without ap-
proval of the Fund's Shareholders ("Shareholders" indicates Eligible Purchasers
who have purchased shares of the Fund). The Fund will seek to fulfill this ob-
jective by attempting to replicate the composition and total return, reduced by
Fund expenses, of the Standard & Poor's 500 Composite Stock Price Index. Under
normal conditions, the portfolio will invest at least 80% of its total assets
in equity securities of companies which compose the S&P 500. The Fund is de-
signed as a long-term investment vehicle.
The S&P 500 includes 500 selected common stocks, most of which are listed on
the New York Stock Exchange. Each stock in the Index has a unique weighting,
depending on the number of shares outstanding and its current price.
The Fund is subject to market risk--i.e., the possibility that common stock
prices will decline over short or even extended periods. The U.S. stock market
tends to be cyclical, with periods when stock prices generally rise and periods
when prices generally decline.
While the Fund seeks to match the performance of the S&P 500, its stock portfo-
lio performance may not match that of the Index exactly. For example, the
Fund's performance will reflect deductions for advisory fees and other expenses
that are not deducted from the performance figures reported for the S&P 500 In-
dex. In addition, while CII, the investment adviser to the Trust, generally
will seek to match the composition of the S&P 500 as closely as possible, it
may not always invest the Fund's stock portfolio to mirror the Index exactly.
For instance, the Fund may at times have its portfolio weighted differently
from the S&P 500 because of the difficulty and expense of executing relatively
small stock transactions. Under normal conditions, the Fund anticipates holding
at least 480 of the S&P 500 issues at all times.
The Fund may also invest in certain short-term fixed income securities (includ-
ing variable and floating rate instruments or demand instruments) such as cer-
tificates of deposit, commercial paper, commercial loan participations, bank-
ers' acceptances, U.S. Government obligations and repurchase agreements, pend-
ing selection of particular long-term investments or to meet anticipated short-
term cash needs such as dividend payments or redemptions of shares. The per-
centage of the Fund's assets invested in various types of securities will vary
in light of existing economic conditions and other factors as determined by
CII. The Fund will not invest in short-term fixed income securities or hold as-
sets in cash or invest in short-term money market instruments for temporary,
defensive purposes.
It should be recognized that there are risks in the ownership of any security
and that no assurance can be given that the Fund's investment objective will be
achieved.
The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's Cor-
poration ("S&P"). S&P makes no representation or warranty, express or implied,
to the record or beneficial owners of shares of the Fund or any member of the
public regarding the advisability of investing in securities generally, or in
the Fund particularly, or the ability of the S&P 500 Index to track general
stock market performance. S&P's only relationship to CII or the Fund is the li-
censing of certain trademarks and trade names of S&P and of the S&P 500 Index
which is determined, composed and calculated by S&P without regard to CII or
the Fund. S&P has no obligation to take the needs of CII or the Fund or the
record or beneficial owners of the Fund into consideration in determining, com-
posing or calculating the S&P 500
3
<PAGE>
Index. S&P is not responsible for and has not participated in the valuation of
the Fund or the pricing of the Fund's shares or in the determination or calcu-
lation of the equation by which the Fund's portfolio investments are to be con-
verted into cash. S&P has no obligation or liability in connection with the ad-
ministration, marketing or trading of the Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY CII, RECORD OR BENEFICIAL OWNERS OF
THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR
ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EX-
PRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY
FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST
PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Stock Index Futures Contracts and Related Options
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The Fund may invest in stock index futures having an aggregate face value of up
to 20% of the Fund's total assets in order to simulate full investment in the
underlying index while retaining a cash balance for Fund management purposes
and to limit transaction costs should invested assets need to be sold to meet
redemption requests. See the information set forth below and the Statement of
Additional Information for information on the risks associated with these
investments.
Risk Factors Relating To Futures Contracts and Options: The use of stock index
futures contracts and options may involve risks not associated with other types
of instruments which the Fund intends to purchase. In particular, the Fund's
positions in stock index futures contracts and options may be closed out only
on an exchange which provides a liquid secondary market therefor, and there can
be no assurance that a liquid secondary market will exist for any particular
futures contract or option. The inability to close out options and futures po-
sitions could have an adverse impact on the Fund's ability to effectively hedge
its securities and might, in some cases, require the Fund to deposit cash to
meet applicable margin requirements. The Fund's ability to hedge effectively
through transactions in futures contracts or options depends on the degree to
which price movements in its holdings correlate with price movements of the
stock index futures and options. It is possible that there may be an imperfect
correlation between the hedging instrument and the hedged securities, which
would result in an ineffective hedge and a loss to the Fund. It is expected
that even as an index fund, the Fund will not be able to achieve perfect corre-
lation among the Fund, the S&P 500 Index, and stock index futures and options
contracts, although the correlation can be expected to be very close if the
Fund invests only in those contracts whose behavior is expected to resemble
that of the Fund's underlying securities. See the Statement of Additional In-
formation for a further description of the Fund's investments in futures
contracts.
PORTFOLIO TURNOVER
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It is anticipated, given the Fund's policy of attempting to replicate composi-
tion and performance, before expenses, of the S&P 500 Index, that portfolio
turnover will be lower than that of an actively managed fund. The Fund's his-
torical portfolio turnover rates are included in the Financial Highlights table
above.
ELIGIBLE PURCHASERS
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Shares may be purchased only by Eligible Purchasers. Eligible Purchasers are
limited to those separate accounts established by CG Life or by other life in-
surance companies approved by the Board of Trustees of the Trust that are reg-
istered as unit investment trusts under the Investment Company Act of 1940, as
amended, and that serve as the underlying investment
4
<PAGE>
vehicles for variable annuity contracts. Thus, Eligible Purchasers who have
purchased Fund shares are the only Shareholders. Shares may not be purchased by
individuals. The Board of Trustees of the Trust may broaden or limit the defi-
nition of Eligible Purchasers. Purchase of shares is subject to acceptance by
the Fund and is not binding until so accepted. Information concerning deposits
and withdrawals from variable annuity contracts will be found in the prospectus
for the variable annuity contract.
PURCHASE OF FUND SHARES
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Shares of the Fund are sold to Eligible Purchasers on a continuous basis at the
net asset value of such shares next effective after a duly executed purchase
order and payment for the shares is received by State Street Bank and Trust
Company ("State Street").
The Fund handles all Shareholder accounts in an open account system. The ac-
counts are maintained by State Street. Following any transaction in an account,
the Shareholder will receive a written confirmation indicating the number of
Fund shares owned by the Shareholder immediately prior to the current transac-
tion, the nature of the current transaction, the number of shares involved and
the resulting number of shares owned by the Shareholder. The open account sys-
tem makes possible the purchase of full and fractional shares, expressed in
three decimal places. This means that a Shareholder may remit any amount (sub-
ject to applicable minimum limitations) and be assured that regardless of the
offering price then in effect, the full amount will be applied, upon receipt,
to purchase shares of the Fund at such price.
The minimum initial purchase of Fund shares by Eligible Purchasers required to
open a shareholder account is $100,000; the minimum subsequent purchase is
$1,000. An open account is automatically established for each Shareholder of
the Fund.
Certificates will not be issued or delivered to Shareholders unless specifi-
cally requested in writing.
COMPUTATION OF NET ASSET VALUE
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State Street determines the net asset value of Fund shares as of the close of
business on the New York Stock Exchange ("NYSE") on each day the NYSE is open
for trading and on any other day on which there is a sufficient degree of trad-
ing in the Fund's investments that the current net asset value of its shares
might be materially affected. The NYSE is closed on New Year's Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. The computation of net asset value is made by dividing the
number of outstanding shares into the net assets of the Fund. Net assets are
the excess of the Fund's assets over its liabilities. Equity securities, in-
cluding warrants, that are listed on a national securities exchange or that are
part of the NASDAQ National Market System are valued at the last sale price or,
if there has been no sale that day, at the last bid price. Debt and other eq-
uity securities actively traded in the over-the-counter market, including
listed securities whose primary markets are believed to be over-the-counter,
are valued at the most recent bid price, which may be based upon valuations
furnished by a pricing service or from independent securities dealers. Short-
term investments with remaining maturities of up to and including 60 days are
valued at amortized cost which approximates market value. Short-term invest-
ments that mature in more than 60 days are valued at current market quotations.
Other securities and assets of the Fund, with the exception of futures con-
tracts which are discussed below, are appraised at fair value as determined in
good faith by, or under the authority of, the Board of Trustees of the Trust.
The net asset value so computed applies to all purchase orders and redemption
requests in the hands of State Street, duly executed in accordance with appli-
cable instructions, on the day of such determination. Any orders received after
such time are executed at the net asset value next determined.
FUTURES CONTRACTS
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Initial margin deposits made upon entering into futures contracts are recog-
nized as assets due from the broker (the Fund's agent in acquiring the futures
position). During the period the futures contract is open, changes in the value
of the contract are recognized as unrealized gains or losses by "marking-to-
market" on a daily basis to reflect the market value of the contract at the end
of each day's trading. Varia-
5
<PAGE>
tion margin payments are made or received, depending upon whether unrealized
losses or gains are incurred. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or
cost of) the closing transaction and the Fund's basis in the contract.
Options on Futures Contracts
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The premium paid by the Fund for the purchase of a call or put option on
futures contracts is recorded as an investment and subsequently "marked-to-mar-
ket" to reflect the current market value of the option purchased. The current
market value of a purchased option on futures contracts is the last reported
sale price or, if no sales are reported, the last bid price. If an option on
futures contracts which the Fund has purchased expires on the stipulated expi-
ration date, the Fund realizes a loss in the amount of the cost of the option.
If the Fund exercises a purchased put option on futures contracts, it realizes
a gain or loss from the sale of the underlying security and the proceeds from
such sale will be decreased by the premium originally paid. If the Fund exer-
cises a purchased call option on futures contracts, the cost of the security
which the Fund purchases upon exercise will be increased by the premium origi-
nally paid.
REDEMPTION OF FUND SHARES
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Any Shareholder may require the Fund to redeem shares held by such Shareholder
by sending a written request to State Street. The redemption price, which may
be more or less than the Shareholder's cost, is the net asset value of Fund
shares next determined after the redemption request is received in acceptable
form at State Street. The effective date for redemptions by insurance company
separate accounts registered as investment companies, which may differ from the
procedure stated above, is indicated in the prospectuses for variable annuity
contracts participating in such accounts. Payment for shares redeemed will be
made within seven days after receipt of the request for redemption.
DISTRIBUTION OF DIVIDENDS AND CAPITAL GAINS
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The Fund declares and distributes dividends representing substantially all net
investment income and net realized capital gains, if any, on an annual basis.
The Board of Trustees of the Trust may, in its discretion, declare dividends at
more frequent intervals. All such dividends or distributions will be automati-
cally reinvested in shares of the Fund at the net asset value determined on the
record date.
TAX MATTERS
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The Fund intends to qualify as a regulated investment company under the Inter-
nal Revenue Code of 1986, as amended (the "Code"), and intends to take all
other action required to ensure that no Federal income taxes will be payable by
the Fund. As a result, the Fund will generally seek to distribute annually to
Shareholders most or all of its undistributed taxable income and any undistrib-
uted net realized capital gains (after utilization of any available capital
loss carryforwards). Because of this policy, the Fund does not anticipate being
subject to the 4% excise tax imposed on the undistributed income of mutual
funds.
Since the shares of the Fund are sold only to Eligible Purchasers for the pur-
pose of funding variable annuity contracts, the Fund seeks to comply with the
provisions of Section 817(h) of the Code. Under the provisions of Section
817(h), a variable annuity contract--other than a contract issued in connection
with certain tax qualified retirement plans or retirement plans maintained by
certain government employers--will not be treated as an annuity contract for
any period for which the investments of the separate account, such as the Eli-
gible Purchasers, are not "adequately diversified." The Fund intends that the
investments in its portfolio shall be "adequately diversified" so that an in-
vestment in this Fund may be looked through for purposes of this requirement.
See further discussion in the Statement of Additional Information.
MANAGEMENT OF THE TRUST
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The investment adviser to the Trust is CIGNA Investments, Inc. ("CII"), an in-
direct, wholly-owned subsidiary of CIGNA Corporation. CII also serves as in-
vestment adviser for other investment companies including investment companies
sponsored by affiliates of CIGNA Corporation, and for a number of pension, ad-
visory, corporate and other accounts. CII and other affiliates of CIGNA Corpo-
ration manage combined as-
6
<PAGE>
sets of approximately $70 billion. CII's mailing address is Hartford, Connecti-
cut 06152.
Pursuant to a Master Investment Advisory Agreement the Trust, on behalf of the
Fund, employs CII to manage the investment and reinvestment of the assets of
the Fund. Subject to the control and periodic review of the Board of Trustees,
CII determines what investments shall be purchased, held, sold or exchanged by
the Fund and what portion, if any, of the assets of the Fund shall be held in
cash and other temporary investments. CII is also responsible for overall man-
agement of the business affairs of the Trust and the Fund. The Investment Advi-
sory fee payable in 1994 to CII by the Fund was 0.35% of average daily net as-
sets. Total expenses of the Fund in 1994 were 0.78% of average daily net as-
sets.
CII investment personnel may invest in securities for their own account pursu-
ant to a code of ethics that establishes procedures for personal investing and
restricts certain transactions.
State Street Bank and Trust Company ("State Street"), Boston, Massachusetts
02105 serves as transfer agent and dividend disbursing agent for the Fund.
State Street is also custodian of the assets of the Fund.
From time to time, the Fund may pay brokerage commissions on portfolio transac-
tions to brokers who may be deemed to be affiliates of CIGNA Corporation under
the Investment Company Act of 1940, as amended. See the Statement of Additional
Information for further details.
THE TRUST, ITS SHARES AND BOARD OF TRUSTEES
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On April 26, 1988, the shareholders of Companion Fund, a series of shares of
CIGNA Annuity Funds Group, approved an Agreement and Plan of Reorganization and
Liquidation (the "Plan") whereby, upon the effective date of the Plan, Compan-
ion Fund would become a series of the Trust (such series to be known as Compan-
ion Fund) and shareholders of Companion Fund, the series of shares of CIGNA An-
nuity Funds Group, would become shareholders of Companion Fund, a series of
shares of the Trust, in a tax- free exchange of shares. The Plan became effec-
tive on April 26, 1988. The Trust offers a single class of common shares, with-
out par value. The Board of Trustees is authorized in the Master Trust Agree-
ment, to create new series of shares without the necessity of a vote of share-
holders of the Trust.
Under the Master Trust Agreement no annual or regular meetings of shareholders
are required. Meetings of shareholders of a series will be held from time to
time to consider matters requiring a vote of such shareholders in accordance
with the requirements of the Investment Company Act of 1940, as amended, state
law or the provisions of the Master Trust Agreement. It is not expected that
shareholder meetings will be held annually.
The Trustees are a self-perpetuating body and will continue in their positions
until they resign, die, or are removed by a written agreement signed by at
least two-thirds of the Trustees, by vote of the shareholders of the Trust vot-
ing not less than two-thirds of the shares then outstanding, cast in person or
by proxy at any meeting called for that purpose, or by a written declaration
signed by shareholders voting not less than two-thirds of the shares then out-
standing and filed with the Trust's custodian, State Street.
Shares of the Fund are entitled to one vote per share (with proportionate vot-
ing for fractional shares). Currently, Companion Fund is the sole series of
shares of the Trust. In the event additional series of shares are created,
shares of each series of the Trust will entitle their holders to one vote per
share (with proportionate voting for fractional shares), irrespective of the
relative net asset value of the shares of any series. However, on matters af-
fecting an individual series, a separate vote of shareholders of that series
would be required. Shareholders of a series would not be entitled to vote on
any matter which does not affect that series but which would require a separate
vote of another series.
When issued, shares of the Fund are fully paid and nonassessable, have no pre-
emptive or subscription rights, and are fully transferable. There are no con-
version rights. Shares do not have cumulative voting rights, which means that
in situations in which shareholders elect Trustees, holders of more than 50% of
7
<PAGE>
the shares voting for the election of Trustees can elect 100% of the Trustees
of the Trust and the holders of less than 50% of the shares voting for the
election of Trustees will not be able to elect any Trustees.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust. How-
ever, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed on behalf
of the Trust. The Master Trust Agreement provides for indemnification from the
Trust property for all losses and expenses of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder incur-
ring financial loss on account of shareholder liability is limited to circum-
stances in which the Trust itself would be unable to meet its obligations.
A majority of the Trustees is not affiliated with CIGNA Corporation or any of
its subsidiary companies. The Trustees meet quarterly to review the results of
the Fund, to monitor investment activities and practices, and to review and act
upon future plans for the Fund. The role of the Trustees is not to approve spe-
cific investment purchases and sales, but rather to exercise a control and re-
view function.
8
<PAGE>
Custodian and Transfer Agent:
State Street Bank and Trust Company
P.O. Box 2351
Boston, Massachusetts 02107
Investment Adviser:
CIGNA Investments, Inc.
Hartford, Connecticut 06152
Independent Accountants:
Price Waterhouse LLP
160 Federal Street
Boston, Massachusetts 02110
[RECYCLED LOGO APPEARS HERE]
Printed on recycled paper
COMPANION FUND
PROSPECTUS
MAY 1, 1995
<PAGE>
C O M P A N I O N F U N D
--------------------------
S T A T E M E N T O F A D D I T I O N A L I N F O R M A T I O N
M A Y 1, 1 9 9 5
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the prospectus for Companion Fund (the "Fund") having
the same date as the date of this Statement of Additional Information. Much of
the information contained in this Statement of Additional Information expands
upon subjects discussed in the prospectus. No investment in shares of the Fund
should be made without first reading the prospectus for the Fund. A copy of
the prospectus for the Fund may be obtained from Companion Fund, 1380 Main
Street, Springfield, Massachusetts 01103.
The financial statements for Companion Fund for the fiscal year ended December
31, 1994 are contained in the Annual Report dated December 31, 1994 of CG
Variable Annuity Accounts I and II and are hereby incorporated by reference
into this Statement of Additional Information. The financial statements for
the fiscal year ended December 31, 1994, have been examined by Price Waterhouse
LLP, independent accountants, whose report thereon is also incorporated herein
by reference.
The Fund's financial statements will be delivered with this Statement of
Additional Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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Page
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<S> <C>
General History of the Fund.......................... 3
General Information About the Trust.................. 3
Investment Objective and Policies.................... 4
Cross-Reference to Prospectus Sections:
---------------------------------------
About the Fund
The Fund's Objective
Futures Contracts.................................... 7
Options on Futures Contracts......................... 8
Risks as to Futures Contracts and Related Options.... 9
Cross-Reference to Prospectus Section:
--------------------------------------
The Fund's Objective
Investment Restrictions.............................. 10
Tax Matters.......................................... 11
Cross-Reference to Prospectus Sections:
---------------------------------------
Tax Matters
Activities of Affiliated Companies................... 13
Control Persons and Principal Holders of Securities.. 13
Management of the Trust.............................. 14
Cross-Reference to Prospectus Section:
--------------------------------------
The Trust, Its Shares and Board of Trustees
Investment Advisory and Other Services............... 16
Cross-Reference to Prospectus Section:
--------------------------------------
Management of the Trust
Brokerage Allocation................................. 17
Limitation on Transfers.............................. 19
Purchase, Redemption and Pricing of Securities....... 20
Cross-Reference to Prospectus Sections:
---------------------------------------
Purchase of Fund Shares
Redemption of Fund Shares
Computation of Net Asset Value
</TABLE>
2
<PAGE>
GENERAL HISTORY OF THE FUND
---------------------------
On July 30, 1985, the shareholders of Companion Fund, Inc. (the predecessor of
the Fund) approved an Agreement and Plan of Reorganization and Liquidation
under which, Companion Fund, Inc. became a series of shares of CIGNA Annuity
Funds Group, a Massachusetts business trust, registered as an open-end
investment company under the Investment Company Act of 1940, as amended. The
shareholders of Companion Fund, Inc. became shareholders of the series of
shares of the CIGNA Annuity Funds Group known as Companion Fund on October 16,
1985, the effective date of the Agreement and Plan of Reorganization and
Liquidation, in a tax-free exchange of shares. On April 26, 1988, the series
of shares of CIGNA Variable Products Group ("the Trust") known also as
Companion Fund acquired the assets and liabilities of the Companion Fund
(series of shares of CIGNA Annuity Funds Group) in a tax-free exchange of
shares. (see "General Information About the Trust").
Prior to November 9, 1993, the Fund sought to fulfill its investment objective
through an active management strategy, investing primarily in common stocks of
established medium to large-size companies selected by CIGNA Investments, Inc.
("CII"), its investment adviser, as having prospects for above-average earnings
growth. On that date, at the request of CG Life (which through its separate
accounts is the Fund's sole shareholder), the Board of Trustees of the Trust
authorized CII to change the Fund's investment strategy to the indexation
approach described herein.
GENERAL INFORMATION ABOUT THE TRUST
-----------------------------------
CIGNA Variable Products Group is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company, and
was organized as a Massachusetts business trust pursuant to a Master Trust
Agreement dated February 4, 1988. On April 26, 1988, the Trust acquired the
assets and liabilities of Companion Fund, a series of shares of CIGNA Annuity
Funds Group. Under the Master Trust Agreement, the Board of Trustees is
authorized to create new series of shares without the necessity of a vote of
shareholders of the Trust.
The assets received by the Trust from the issue or sale of shares of the Fund,
and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, are specifically allocated to the Fund. They constitute
the underlying assets of the Fund, are required to be segregated on the books
of account, and are to be charged with the expenses in respect to the Fund.
Any general expenses of the Trust not readily identifiable as belonging to a
particular series of its shares shall be allocated by or under the direction of
the Board of Trustees in such manner as the Board determines to be fair and
equitable.
3
<PAGE>
Each share of the Fund represents an equal proportionate interest in the Fund
with each other share and is entitled to such dividends and distributions out
of the income belonging to the Fund as are declared by the Board. Upon any
liquidation of the Trust, shareholders of the Fund are entitled to share pro
rata in the net assets belonging to the Fund available for distribution.
INVESTMENT OBJECTIVE AND POLICIES
---------------------------------
The following information supplements the material contained in the prospectus
regarding the Fund's investment objective and policies.
In order to invest monies for short periods of time the Fund may invest in
certain money market instruments:
U.S. GOVERNMENT DIRECT OBLIGATIONS--issued by the U.S. Treasury and include
bills, notes and bonds.
-- Treasury bills are issued with maturities of up to one year. They
are issued in bearer form, are sold on a discount basis and are
payable at par value at maturity.
-- Treasury notes are longer-term interest bearing obligations with
original maturities of one to ten years.
-- Treasury bonds are longer-term interest bearing obligations with
original maturities from ten to thirty years.
U.S. GOVERNMENT AGENCIES SECURITIES--Certain Federal agencies have been
established as instrumentalities of the U.S. Government to supervise and
finance certain types of activities. These agencies include the Bank for
Cooperatives, Federal Land Banks, Federal Intermediate Credit Banks, Federal
Home Loan Banks, Federal National Mortgage Association, Government National
Mortgage Association, Export-Import Bank, and Tennessee Valley Authority.
Issues of these agencies, while not direct obligations of the U.S. Government,
are either backed by the full faith and credit of the United States or are
guaranteed by the Treasury or supported by the issuing agencies' right to
borrow from the Treasury. There can be no assurance that the U.S. Government
itself will pay interest and principal on securities as to which it is not
legally obligated to do so. The Fund will not invest in obligations of the
Asian Development Bank or the Inter-American Development Bank but may invest in
obligations of the International Bank for Reconstruction and Development (World
Bank).
BANKERS' ACCEPTANCES--A banker's acceptance is a bill of exchange or time draft
drawn on and accepted by a commercial bank. It is used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange. When
the draft is accepted by a bank, the
4
<PAGE>
bank guarantees to pay the face value of the instrument on its maturity date.
An investor can purchase a banker's acceptance in the secondary market at the
going rate of discount for a specific maturity. In addition to purchasing
bankers' acceptances from domestic branches and foreign branches of U.S.
commercial banks, bankers' acceptances denominated in each case in U.S.
dollars, may be purchased from foreign banks having at least one billion
dollars (U.S.) of assets. Maturities are generally six months or less.
CERTIFICATES OF DEPOSIT--A certificate of deposit ("CD") is a negotiable
interest-bearing instrument with a specific maturity. Certificates of deposit
are issued by banks and savings and loan institutions in exchange for the
deposit of funds and normally can be traded in the secondary market, prior to
maturity. The Fund may invest in U.S. dollar denominated CD's issued by
domestic branches and foreign branches of U.S. banks which are members of the
Federal Reserve System, by foreign branches and U.S. branches of foreign banks
and by U.S. domiciled savings and loan institutions having in each case at
least one billion dollars (U.S.) of assets. CD's issued by foreign branches of
U.S. banks are called "Eurodollar CD's" while CD's issued by U.S. branches of
foreign banks are called "Yankee CD's."
U.S. dollar denominated certificates of deposit, time deposits and bankers'
acceptances issued by foreign branches of U.S. banks or by foreign banks either
in the U.S. or abroad may present investment risks in addition to the risks
involved in investments in obligations of, or guaranteed by, domestic banks.
Such risks include future political and economic developments, the possible
imposition of withholding taxes on interest income payable on such obligations,
the possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls or the adoption of other governmental
restrictions. Generally, foreign branches of U.S. banks and U.S. branches of
foreign banks are subject to fewer U.S. regulatory restrictions than are
applicable to domestic banks, and foreign branches of U.S. banks may be subject
to less stringent reserve requirements than domestic banks. U.S. branches of
foreign banks and foreign branches of U.S. banks may provide less public
information than, and may not be subject to the same accounting, auditing and
financial recordkeeping standards as domestic banks. Foreign branches of
foreign banks generally would not be subject to any U.S. regulatory
restrictions or disclosure, financial recordkeeping or accounting requirements.
COMMERCIAL PAPER--Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations and other business entities.
Maturities on these issues vary from a few days to nine months. Commercial
paper may be purchased from U.S. domiciled issuers. Commercial paper may also
be purchased from foreign issuers issued either in the U.S. ("Yankee"
commercial paper) or abroad if, in any case, such paper is denominated in U.S.
dollars.
5
<PAGE>
VARIABLE AND FLOATING RATE INSTRUMENTS--Certain instruments issued, guaranteed
or sponsored by the U.S. Government or its agencies, or state and local
government issuers, and certain debt instruments issued by domestic banks or
corporations, may carry variable or floating rates of interest. Such
instruments bear interest at rates which are not fixed, but which vary with
changes in specified market rates or indices, such as a Federal Reserve
composite index.
TIME DEPOSITS--A time deposit is a non-negotiable receipt issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot
be traded in the secondary market. U.S. dollar denominated time deposits may be
purchased from domestic branches and foreign branches of U.S. banks which are
members of the Federal Reserve System (not including savings and loan
institutions) and from foreign branches and U.S. branches of foreign banks
having at least one billion dollars (U.S.) of assets.
COMMERCIAL LOAN PARTICIPATIONS--Participating interests in loans made by a
bank, or a syndicate of banks represented by an agent bank, to corporate
borrowers. Loan participations may extend for the entire term of the loan or
may extend only for short "strips" that correspond to stated payments on the
underlying loan. The loans underlying such participations may be secured or
unsecured, and a Fund may invest in loans collateralized by mortgages on real
property. For the purposes of the Fund's investment restrictions, each loan
participation will be treated as an obligation of both the originating bank (or
agent bank in the case of loans originated by a syndicate of banks) and the
corporate borrower. In addition, the Fund may only invest up to 5% of the
value of its total assets in loan participations.
Loan participations in which the Fund may invest may vary in legal structure.
Occasionally, lenders assign to another institution both the lender's rights
and obligations under a credit agreement. Since this type of assignment
relieves the original lender of its obligations, it is called a novation. Such
novations are relatively rare since they typically require the consent of the
borrower. More typically, a lender assigns only its right to receive payments
of principal and interest under a promissory note, credit agreement or similar
document. A true assignment shifts to the assignee the direct debtor-creditor
relationship with the underlying borrower.
Alternatively, a lender may assign only part of its rights to receive payments
pursuant to the underlying instrument or loan agreement. Such partial
assignments, which are more accurately characterized as "participating
interests," do not shift the debtor-creditor relationship to the assignee, who
must relay on the original lending institution to collect sums due or to
otherwise enforce its rights against the agent bank which administers the loan
or against the underlying borrower. An active secondary market for particular
loan participations may not develop, which would result in a substantial
6
<PAGE>
restriction on the Fund's ability to liquidate such participations prior to
maturity.
REPURCHASE AGREEMENTS--A repurchase agreement is a contractual undertaking
whereby the seller of securities (limited to U.S. Government securities,
including securities issued or guaranteed by the U.S. Treasury or the various
agencies and instrumentalities of the U.S. Government) agrees to repurchase the
securities at a specified price on a future date determined by negotiations.
The repurchase agreement may be considered a loan by the Fund to the issuer of
the agreement, a bank or securities dealer, with the U.S. Government security
serving as collateral for the loan. The Fund may enter into repurchase
agreements with banks having $1 billion or more of assets and with
broker/dealers having net capital of $100 million or more. Repurchase
agreements could involve certain risks in the event of default or insolvency of
the banks or broker/dealer, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities. CII, in accordance with
procedures adopted by the Board of Trustees of the Trust, monitors and
evaluates the credit-worthiness of banks and dealers with which the Fund
engages in repurchase agreements. The Fund requires that sufficient securities
be subject to a repurchase agreement so that the value of the securities at
least equals the amount of the repurchase agreement. Also, the Fund requires
that the underlying securities be held by the custodian of Fund assets, either
physically or under the Federal Book Entry System.
FUTURES CONTRACTS
-----------------
A stock index assigns relative values to the common stocks included in the
index, and the index fluctuates with changes in the market values of the common
stocks so included. A stock index futures contract is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the stock
index value at the contract expiration settlement price and the price at which
the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made. Currently, stock index futures
contracts can be purchased or sold primarily with respect to broad based stock
indices such as the Standard & Poor's 500 Stock Index, the New York Stock
Exchange Composite Index, the American Stock Exchange Major Market Index, the
NASDAQ - 100 Stock Index and the Value Line Stock Index.
The Fund may hold stock index futures contracts in amounts required to equitize
free funds available for investment (cash and cash equivalents plus net
receivables and payables).
In cases of purchases of future contracts, an amount of cash and cash
equivalents, equal to the market value of the futures contracts (less any
related margin deposits), will be deposited in a segregated account with the
Fund's Custodian to collateralize the position and ensure that the use of such
futures contracts is unleveraged. Unlike when the Fund
7
<PAGE>
purchases or sells a security, no price is paid or received by the Fund upon
the purchase or sale of a futures contract. Initially the Fund will be required
to deposit with the custodian for the Fund for the account of the broker a
stated amount, as called for by the particular contract, of cash or U.S.
Treasury bills. This amount is known as "initial margin." The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called "variation margin," to and from the broker will be
made on a daily basis as the price of the futures contract fluctuates making
the long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." For example, when the Fund has purchased
a stock index futures contract and the price of the underlying stock index has
risen, that position will have increased in value and the Fund will receive
from the broker a variation margin payment with respect to that increase in
value. Conversely, where the Fund has purchased a stock index futures contract
and the price of the underlying stock index has declined, the position would be
less valuable and the Fund would be required to make a variation margin payment
to the broker. At any time prior to expiration of the futures contract, a Fund
may elect to close the position by taking an opposite position which will
operate to terminate the Fund's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Fund and the Fund realizes a loss or a gain.
OPTIONS ON FUTURES CONTRACTS
----------------------------
An option on a futures contract gives the purchaser (the Fund) the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time during the option exercise period.
The writer of the option is required upon exercise to assume an offsetting
futures position (a short position if the option is a call and a long position
if the option is a put) at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
If an option on a futures contract is exercised on the last trading date prior
to the expiration date of the option, the settlement will be made entirely in
cash equal
8
<PAGE>
to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date.
The Fund will purchase put options on futures contracts to hedge against the
risk of falling prices for its portfolio securities. The Fund will purchase
call options on futures contracts as a hedge against a rise in the price of
securities which it intends to purchase. The purchase of a put option on a
futures contract is similar to the purchase of protective put options on
portfolio securities. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on a individual
security. Depending on the pricing of the option compared to either the price
of the futures contract upon which it is based or the price of the underlying
securities, it may or may not be less risky than ownership of the futures
contract or underlying securities.
RISKS AS TO FUTURES CONTRACTS AND RELATED OPTIONS
-------------------------------------------------
There are several risks in connection with the use of futures contracts and
related options as hedging devices. One risk arises because of the imperfect
correlation between movements in the price of hedging instruments and movements
in the price of the securities which are the subject of the hedge. If the
price of a hedging instrument moves less than the price of the securities which
are the subject of the hedge, the hedge will not be fully effective. If the
price of a hedging instrument moves more than the price of the securities, the
Fund will experience either a loss or a gain on the hedging instrument which
will not be completely offset by movements in the price of the securities which
are the subject of the hedge. The use of options on futures contracts involves
the additional risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option.
Successful use of hedging instruments by the Fund is also subject to the
ability of the Fund's investment adviser, CIGNA Investments, Inc. ("CII") to
predict correctly movements in the direction of the stock market. Because of
possible price distortions in the futures and options markets and because of
the imperfect correlation between movements in the prices of hedging
instruments and the investments being hedged, even a correct forecast by CII of
general market trends may not result in a completely successful hedging
transaction.
It is also possible that where the Fund has sold futures contracts to hedge its
portfolio against a decline in the market, the market may advance and the value
of securities held in the Fund's portfolio may decline. If this occurred, the
Fund would lose money on the futures contracts and also experience a decline in
the value of its portfolio securities.
9
<PAGE>
Positions in futures contracts or options may be closed out only on an Exchange
on which such contracts are traded. Although the Fund intends to purchase or
sell futures contracts or purchase options only on Exchanges or Boards of Trade
where there appears to be an active market, there is no assurance that a liquid
market on an Exchange or Board of Trade will exist for any particular contract
or at any particular time. If there is not a liquid market at a particular
time, it may not be possible to close a futures position or purchase an option
at such time. In the event of adverse price movements under those
circumstances, the Fund would continue to be required to make daily cash
payments of maintenance margin on its futures positions. The extent to which
the Fund may engage in futures contracts or related options will be limited by
Internal Revenue Code requirements for qualification as a regulated investment
company and the Fund's intent to continue to qualify as such. The result of a
hedging program cannot be foreseen and may cause the portfolio of the Fund to
suffer losses which it would not otherwise sustain.
INVESTMENT RESTRICTIONS
-----------------------
The Fund is subject to the following restrictions which may not be changed
without approval of the lesser of (i) 67% or more of the Fund's shares present
at a meeting if the holders of more than 50% of the outstanding shares are
present in person or represented by proxy, or (ii) more than 50% of the Fund's
outstanding shares. Any investment restriction which involves a maximum or
minimum percentage of securities or assets shall not be considered to be
violated unless an excess over or a deficiency under the percentage occurs
immediately after, and is caused by, an acquisition or disposition of
securities or utilization of assets by the Fund.
The Fund may not:
1. Purchase the securities of any issuer if such purchase would cause more
than 5% of the value of its assets to be invested in the securities of such
issuer (except U.S. Government securities including securities issued by its
agencies and instrumentalities).
2. Purchase the securities of any issuer if such purchase would cause more
than 5% of the voting securities, or more than 10% of the securities of any
other class of such issuer, to be held by the Fund.
3. Concentrate more than 25% of its investments in a particular industry.
4. Purchase securities of any company with a record of less than three
years' continuous operation (including that of predecessors) if such purchase
would cause the Fund's aggregate investments in all such companies taken at
cost to exceed 5% of the Fund's total assets taken at market value.
10
<PAGE>
5. Invest for the purpose of influencing management or exercising control.
6. Make short sales of securities or purchase securities on margin, but it
may obtain such short-term credits as are necessary for the clearance of
purchases and sales of securities and may make margin payments in connection
with transactions in stock index futures contracts and options thereon.
7. Act as a securities underwriter or purchase securities which are subject
to restrictions on disposition under the Securities Act of l933 or are
otherwise not readily marketable.
8. Purchase or retain the securities of any issuer if those officers and
Trustees of the Trust or officers and directors of its investment adviser who
own beneficially more than 1/2 of 1% of the securities of such issuer together
own more than 3% of the securities of such issuer.
9. Make loans, except (a) through the purchase of a portion of an issue of
bonds or other obligations of types commonly offered publicly and purchased by
financial institutions, and (b) through the purchase of short-term obligations
(maturing within a year), including repurchase agreements.
10. Borrow, except that the Fund may enter into stock index futures contracts
and borrow from banks for emergency purposes, provided that (a) immediately
after such borrowings, and at all times thereafter while any such borrowing is
unrepaid, there will be asset coverage of at least 300% for all borrowings of
the Fund and (b) no borrowings may exceed 5% of the gross assets of the Fund
taken at cost or market, whichever is lower, at the time of borrowing; or
pledge, mortgage or hypothecate any of its assets. (For the purpose of this
restriction, collateral arrangements with respect to margin for a stock index
futures contract are not deemed to be a pledge of assets.)
11. Purchase the securities of any other investment company except as an
investment of compensation otherwise payable to Trustees of the Trust pursuant
to any deferred compensation plan existing at any time between the Trust and
one or more of its Trustees; buy or sell commodities, commodity contracts,
mortgages or real estate, but may invest up to 5% of the value of its assets in
real estate investment trusts and purchase and sell stock index futures
contracts and options thereon.
TAX MATTERS
-----------
The Fund is treated as a separate association taxable as a corporation.
The Fund intends to qualify under the Internal Revenue Code of 1986 (the
"Code"), as amended, as a regulated investment company ("RIC") for each taxable
year. As of the date hereof, the Fund must, among other
11
<PAGE>
things, meet the following requirements: A. The Fund must generally derive at
least 90% of its gross income from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities, foreign currencies, or other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies. B. The Fund must
generally derive less than 30% of its gross income from the sale or disposition
of any of the following held less than three months: i) stock or securities,
ii) options, futures, or forward contracts (other than options, futures, or
forward contracts on foreign currencies), or iii) foreign currencies (or
options, futures, or forward contracts on foreign currencies) but only if such
currencies (or options, futures, or forward contracts) are not directly related
to the Fund's business of investing in stock, securities or options and futures
thereon. Accordingly, the extent to which the Fund may engage in futures
contracts and related options may be materially limited by this 30% test. C.
The Fund must diversify its holdings so that, at the end of each fiscal
quarter: i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities and other securities, with such
other securities limited, with respect to any one issuer, to an amount not
greater than 5% of the Fund's assets and not more than 10% of the outstanding
voting securities of such issuer, and ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities).
As a RIC, the Fund will not be subject to Federal income tax (FIT) on its
income and gains distributed to shareholders if it distributes at least 90% of
its investment company taxable income for the taxable year.
Under the provisions of Section 817(h) of the Code, a variable annuity
contract-other than a contract issued in connection with certain tax qualified
retirement plans or retirement plans maintained by certain government
employers-will not be treated as an annuity contract for any period for which
the investments of the separate account, such as the Eligible Purchasers, are
not "adequately diversified". The Fund intends that the investments in its
portfolio shall be "adequately diversified". In general, the regulations issued
under Section 817(h) provide that a separate account shall be considered
adequately diversified if at the end of each calendar quarter the assets of
such separate account are invested so that no more than 55% of the value of
such assets is represented by any one investment, no more than 70% of such
value is represented by any two investments, no more than 80% of such value is
represented by any three investments and no more than 90% is represented by any
four investments. The Code allows a separate account to "look through" to the
assets of a regulated investment company for purposes of the "adequately
diversified" requirement. For these purposes, all securities of the same issuer
are treated as a single investment. However, in the case of government
securities each government agency or instrumentality is treated as a separate
issuer.
12
<PAGE>
The regulations include a specific definition of "government security"
which includes any security issued, guaranteed or insured by the United States
or any instrumentalities of the United States. In addition, a certificate of
deposit for any of the foregoing securities is included within the definition
of a "government security." Accordingly, certain Fund investments may be
treated as "government securities" for the purpose of Section 817(h) of the
Code, even though such investments may not be treated as a government security
when such phrase is used elsewhere in the prospectus or Statement of Additional
Information.
Section 1092 of the Code affects the taxation of certain transactions involving
futures or options contracts. If a futures or options contract is part of a
"straddle" (which could include another futures contract or underlying stock or
securities), as defined in Section 1092 of the Code, then, generally, losses
are deferred first, to the extent that the modified "wash sale" rules of the
Section 1092 regulations apply, and second to the extent of unrecognized gains
on offsetting positions. Further, the Fund may be required to capitalize,
rather than deduct currently, any interest expense on indebtedness incurred or
continued to purchase or carry any positions that are part of a straddle.
Sections 1092 and 246 of the Code and the Regulations thereunder also suspend
the holding periods for straddle positions with possible adverse effects
regarding long-term capital gain treatment and the corporate dividends-received
deduction. In certain cases, the "wash sale" rules of Section 1091 of the Code
may operate to defer deductions for losses.
Section 1256 of the Code generally requires that futures contracts and options
on future contracts be "marked-to-market" at the end of each year for Federal
income tax purposes. Section 1256 further characterizes 60% of any gain or
loss with respect to a futures contract as long-term capital gain or loss and
40% as short-term capital gain or loss. If such a future or option is held as
an offsetting position and can be considered a straddle under Section 1092 of
the Code, such a straddle will constitute a mixed straddle. A mixed straddle
will be subject to both Section 1256 and Section 1092 unless certain elections
are made by the Fund.
The Fund may enter into certain foreign currency transactions which may be
subject to taxation under Section 988 of the Code.
ACTIVITIES OF AFFILIATED COMPANIES
----------------------------------
From time to time, as purchases of securities are made for the portfolios of
companies affiliated with CIGNA Corporation, it is possible that two or more
portfolios may simultaneously purchase or sell the same security. To the
extent that two or more such portfolios, buying or selling the same security,
increase the total demand or supply, there may be an adverse effect on the
price of such security or on the amount which the Fund can purchase or sell.
13
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
---------------------------------------------------
As of the date of this Statement of Additional Information, the Fund had one
Shareholder, Connecticut General Life Insurance Company ("CG Life"). CG Life
owns its shares on behalf of CG Variable Annuity Account I and CG Variable
Annuity Account II (investment vehicles for variable annuity contracts issued
by CG Life)) and Connecticut General Life Insurance Company Field Individual
Deferred Compensation Plan (a benefit plan established by CG Life or its
affiliates for its employees). Shares are no longer offered to CG Life on
behalf of this benefit plan although shares are issued for the benefit of the
benefit plan upon reinvestment of dividends. As of the date of this Statement
of Additional Information CG Life is a wholly-owned subsidiary of Connecticut
General Corporation, which in turn is wholly-owned by CIGNA Holdings, Inc., a
wholly-owned subsidiary of CIGNA Corporation, an insurance and financial
services holding company. As of December 31, 1994, the officers and Trustees
of the Trust owned beneficially less than 1% of the outstanding shares of the
Fund.
MANAGEMENT OF THE TRUST
-----------------------
The Trustees and the executive officers of the Trust are listed below, together
with information as to their principal occupations during the past five years
and other principal business affiliations. Currently each holds the equivalent
position as Trustee and/or officer of CIGNA Annuity Funds Group, CIGNA
Institutional Funds Group, and CIGNA High Income Shares, and holds a similar
position as Director and/or executive officer of INA Investment Securities,
Inc. Correspondence with any Trustee or officer may be addressed to the Trust,
1380 Main Street, Springfield, Massachusetts 01103.
R. BRUCE ALBRO, TRUSTEE, CHAIRMAN OF THE BOARD, AND PRESIDENT*
Senior Managing Director and Division Head, CIGNA Portfolio Advisers, a
division of CII; Chairman of the Board and President, CIGNA Annuity Funds
Group, CIGNA Institutional Funds Group, CIGNA Variable Products Group, CIGNA
High Income Shares and INA Investment Securities, Inc. Mr. Albro is also an
officer or Director of various other entities which are subsidiaries or
affiliates of CIGNA Corporation. Previously, Trustee, CIGNA Funds Group;
Managing Director - Division Head, CII; Managing Director, CII; Senior Vice
President, CII and CIGNA Investment Management Company and President, CIGNA
Capital Brokerage, Inc.
HUGH R. BEATH, TRUSTEE
Managing Director, AdMedia Corporate Advisors, Inc. and Chairman of the Board
of Directors, Beath Advisors, Inc. Previously, Trustee, CIGNA Funds Group;
Chairman, President and Chief Executive Officer, ADVO-System, Inc. (presently
known as ADVO, Inc.) (direct mail advertising); Executive Vice President,
Operations, John Blair & Company (marketing and communications); President,
Specialty Grocery Products Division, R.J. Reynolds Industries (consumer
products); Vice President and Treasurer, Heublein, Inc. (maker of distilled
spirits).
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<PAGE>
RUSSELL H. JONES, TRUSTEE
Vice President, Kaman Corporation (helicopters and aircraft components,
scientific research); Trustee, Connecticut Policy and Economic Counsel;
Corporator, Hartford Seminary; Secretary, Bloomfield Chamber of Commerce.
PAUL J. MCDONALD, TRUSTEE
Executive Vice President, Finance and Chief Financial Officer, Friendly Ice
Cream Corporation (family restaurants/dairy products); Chairman, Dean's
Advisory Council, University of Massachusetts School of Management; Vice
Chairman, Springfield YMCA; Corporator, Springfield Institution for Savings;
Trustee, Springfield College. Previously, Vice President, Finance and Chief
Financial Officer, Friendly Ice Cream Corporation.
ARTHUR C. REEDS, III, TRUSTEE*
President, CIGNA Investment Management; (formerly known as CIGNA Investment
Division); President and Director, CIGNA Investment Group, Inc. and CII;
Director, CIGNA International Investment Advisors, Ltd. Mr. Reeds is also an
officer or director of various other entities which are subsidiaries or
affiliates of CIGNA. Previously, Trustee, CIGNA Funds Group; Managing Director
and Division Head, CIGNA Portfolio Advisers, a division of CII; and Senior Vice
President, CII.
ALFRED A. BINGHAM III
Vice President and Treasurer, CIGNA Annuity Funds Group, CIGNA Institutional
Funds Group, CIGNA Variable Products Group, CIGNA High Income Shares and INA
Investment Securities, Inc.; Assistant Vice President, CII; Vice President and
Treasurer, CIGNA Capital Brokerage, Inc. Previously Vice President and
Treasurer, CIGNA Funds Group; Senior Vice President and Treasurer, CIGNA
Investment Management Company.
LAWRENCE S. HARRIS
Senior Managing Director, CII. Vice President, CIGNA Annuity Funds Group, CIGNA
Variable Products Group, CIGNA High Income Shares and INA Investment
Securities, Inc.; previously, Managing Director-Division Head, CII; Vice
President, CIGNA Funds Group; Senior Vice President and Director, Alliance
Capital Management L.P.
JEFFREY S. WINER
Counsel, CIGNA Corporation; Vice President and Secretary, CIGNA Annuity Funds
Group, CIGNA Institutional Funds Group, CIGNA Variable Products Group, INA
Investment Securities and CIGNA High Income Shares; previously Attorney, CIGNA
Corporation; Associate, Tarlow, Levy, Harding & Droney (private law firm).
*Trustees identified with an asterisk are considered interested persons within
the meaning of the Investment Company Act of 1940, as amended, because of their
affiliation with CIGNA Corporation or its affiliates.
The Board has created an Audit Committee from among its members which meets
periodically with representatives of Price Waterhouse LLP, independent
accountants for the Trust, a Contracts Committee which, as part of its duties,
considers the terms and the renewal of the Master Investment Advisory Agreement
with CII, and a Nominating Committee
15
<PAGE>
which considers the identification of new members of the Board and the
compensation of Trustees. The Nominating Committee, Audit Committee and
Contracts Committee consist of Trustees who are not affiliated with CIGNA
Corporation or any of its subsidiaries.
The Trust pays no compensation to any of its officers, other than the
reimbursement of the costs of the Office of the Treasurer and the Office of the
Secretary, or to any of its Trustees who are officers or employees of CIGNA
Corporation or its affiliates. The following table sets forth compensation
paid by the Fund and by the CIGNA fund complex to Trustees in 1994:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits Estimated from Fund and
Accrued As Annual CIGNA Fund
Aggregate Part of Benefits Complex Paid
Name of Person, Compensation Fund Upon to Trustees
Position with Fund from Fund Expense Retirement (c)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
R. Bruce Albro, Trustee, $ - $ - $ - $ -
Chairman and President
Hugh R. Beath, Trustee (a) 3,600 - - 22,400
Nathaniel S. Howe, 3,600 - - 22,400
Trustee (b)
Worth Loomis, Trustee 3,600 - - 22,400
Arthur C. Reeds III, - - - -
Trustee ------- ----- ----- -------
$10,800 $67,200
======= =======
</TABLE>
(a) All of Mr. Beath's 1994 compensation was deferred under a deferred
compensation plan for all CIGNA funds (the "Plan") in which he had an
aggregate balance of $62,705 as of December 31, 1994. The Plan permits
Trustees to defer receipt of all compensation or to revoke the election to
defer receipt of Trustee fees and receive payment directly.
(b) All of Mr. Howe's 1994 compensation was deferred under a deferred
compensation plan (the "Plan") for all CIGNA funds in which he had an
aggregate balance of $177,025 as of December 31, 1994. The Plan permits
Trustees to defer receipt of all compensation or to revoke the election to
defer receipt of Trustee fees and receive payment directly.
(c) There were four (4) investment companies besides the Fund in the CIGNA
fund complex.
16
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------
Pursuant to the Master Investment Advisory Agreement, and consistent with the
indexation approach, CII manages the investment and reinvestment of the assets
of the Fund. Subject to control and periodic review by the Board of Trustees
of the Trust, CII determines what investments shall be purchased, held, sold or
exchanged for the account of the Fund and what portion, if any, of the assets
of the Fund shall be held in cash and other temporary investments.
Accordingly, the role of the Trustees is not to approve specific investments,
but rather to exercise a control and review function. CII is an indirect
wholly-owned subsidiary of CIGNA Corporation.
CII, at its own expense, furnishes the Trust with office space and facilities
and, except with respect to the Office of the Treasurer and Office of the
Secretary as provided in the Master Investment Advisory Agreement, all
personnel for managing the affairs of the Trust and the Fund. In return, the
Fund has agreed to pay a monthly fee to CII. The gross management fee is
recorded daily at an annual rate of 0.35% of the average daily net assets of
the Fund during the year. The Trust and other registered investment companies
advised by CII have agreed to reimburse CII for its costs of maintaining the
Office of the Treasurer and the Office of the Secretary as provided in the
Master Investment Advisory Agreement. CII has estimated that in 1995 the total
expenses of the Office of the Treasurer will not exceed $257,000 and the
portion of these expenses allocated to the Fund for calendar year 1995 are not
expected to exceed $38,902. In l995 the expenses of the Office of the
Secretary are not expected to exceed $86,000 and the portion of these expenses
allocated to the Fund is not expected to exceed $13,048. In 1994, the costs
reimbursed by the Fund for the Office of the Treasurer and the Office of the
Secretary were $38,119 and $12,754, respectively.
If total expenses of the Fund (excluding taxes, and interest and portfolio
brokerage commissions, but including the investment advisory fee) exceed 1% per
annum of the average daily net assets of the Fund, CII has agreed to pay any
such excess. The Fund incurred a management fee payable to CII of $201,131,
$226,788 and $237,233 for fiscal years 1994, 1993 and 1992, respectively. The
amounts payable were not reduced by the 1% limitation mentioned above.
The Master Trust Agreement of the Trust acknowledges CIGNA Corporation's
control over the name "CIGNA." The Trust would be obliged to change its name
to eliminate the word "CIGNA" (to the extent it could lawfully do so) in the
event CIGNA Corporation were to withdraw its permission for use of such name.
CIGNA Corporation has agreed not to withdraw such permission from the Trust, so
long as an affiliate of CIGNA Corporation shall be the investment adviser for
the Trust.
The Trust pays all expenses not specifically assumed by CII including
compensation and expenses of Trustees of the Trust who are not
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<PAGE>
directors, officers or employees of CII or any other affiliates of CIGNA
Corporation; registration, filing and other fees in connection with filings
with regulatory authorities; the fees and expenses of independent accountants;
costs of printing and mailing registration statements, prospectuses, proxy
statements, and annual and periodic reports to shareholders; custodian and
transfer agent fees; brokerage commissions and securities transactions costs
incurred by the Fund; taxes and other fees; legal fees incurred in connection
with the affairs of the Fund; and expenses of shareholders' and Trustees'
meetings.
The Trust's Custodian and Transfer Agent is State Street Bank and Trust Company
("State Street"), P.O. Box 2351, Boston, Massachusetts 02107. Under its
Custodian Agreement, State Street maintains the portfolio securities of the
Fund, administers the purchases and sales of portfolio securities, collects
interest and dividends and other distributions made on the securities held in
the portfolio of the Fund, determines the net asset value of shares of the Fund
on a daily basis and performs such other ministerial duties as are included in
the Custodian Agreement, a copy of which is on file with the Securities and
Exchange Commission.
Price Waterhouse LLP acts as independent accountants for the Trust. Its
offices are at 160 Federal Street, Boston, Massachusetts 02110. Price
Waterhouse LLP representatives annually perform an audit of the financial
statements of the Fund and provide accounting advice and services throughout
the year. Price Waterhouse LLP reports its activities and the results of its
audit to the Audit Committee of the Board of Trustees. Price Waterhouse LLP
also provides certain tax advice to the Trust.
BROKERAGE ALLOCATION
--------------------
It is the policy of CII on behalf of its clients, including the Fund, to have
purchases and sales of portfolio securities executed at the most favorable
prices, considering all costs of the transaction, including brokerage
commissions and spreads, and research services received, consistent with
obtaining best execution.
In seeking best execution, CII selects broker/dealers on the basis of their
professional capability and the value and quality of their brokerage services.
Brokerage services include the ability to execute most effectively large orders
without adversely affecting markets and the positioning of securities in order
to effect orderly sales for clients.
The officers of CII determine, generally without limitation, the broker/dealers
through whom, and the commission rates or spreads at which, securities
transactions for client accounts are executed. The officers of CII may select a
broker/dealer who may receive a commission for portfolio transactions exceeding
the amount another broker/dealer
18
<PAGE>
would have charged for the same transaction if they determine that such amount
of commission is reasonable in relation to the value of the brokerage or
research services performed or provided by the executing broker/dealer, viewed
in terms of either that particular transaction or CII's overall
responsibilities to the client for whose account such portfolio transaction is
executed and other accounts advised by CII or accounts advised by other
investment advisers which are related persons of CII.
If two or more broker/dealers are considered able to offer the same favorable
price with the equivalent likelihood of best execution, the officers of CII may
prefer the broker/dealer who has furnished research services. Research
services include market information, analysis of specific issues, presentation
of special situations and trading opportunities on a timely basis, advice
concerning industries, economic factors and trends, portfolio strategy and
performance of accounts.
Research services are used in advising all accounts, including accounts advised
by related persons of CII, and not all such services are necessarily used by
CII in connection with the specific account that paid commissions to the
broker/dealer providing such services.
The overall reasonableness of brokerage commissions paid is evaluated
continually. Such evaluation includes review of what competing broker/dealers
are willing to charge for similar types of services and what discounts are
being granted by brokerage firms. The evaluation also considers the timeliness
and accuracy of the research received.
In addition, CII may, if permitted by applicable law, use brokerage commissions
to pay for products or services (other than brokerage and research services)
obtained from broker/dealers and third parties as interpreted in SEC Release
34-23170 dated April 23, 1986. Pursuant to that release, products and services
which provide lawful and appropriate assistance to CII's investment decision-
making process may be paid for with brokerage commissions to the extent such
products and services are used in that process. Where the research service
product has a mixed use, that is, the product may serve a number of functions
certain of which are not related to the making of investment decisions, CII
allocates the cost of the product on a basis which it deems reasonable,
according to the various uses of the product, and maintains records documenting
the allocation process followed. Only that portion of the cost of the product
allocable to research services is paid with brokerage commissions from the
Fund. The Fund does not acquire research services through the generation of
credits with respect to principal transactions or transactions in financial
futures, except in new issue fixed price underwritings.
The Trust does not presently allocate brokerage commissions to, or place orders
for portfolio transactions with, either directly or indirectly, brokers or
dealers based on their sales of shares of the Fund. Except as noted, the Trust
does not utilize an affiliated
19
<PAGE>
broker-dealer in effecting portfolio transactions and does not recapture
commissions paid in such transactions. During 1994, 1993 and 1992, brokerage
commissions paid by the Fund on portfolio transactions totaled $3,100, $208,900
and $136,500, respectively, substantially all of which were paid to firms which
provided research services to CII.
As of December 31, 1994, Sanford C. Bernstein & Co., Inc. ("SCB") reported
beneficial ownership of approximately 8.80% of the outstanding common stock of
CIGNA Corporation ("CIGNA"). Accordingly, CIGNA may be deemed to be an
affiliated person of SCB pursuant to the provisions of the Investment Company
Act of 1940, as amended. As long as CIGNA may be deemed to be an affiliated
person of SCB, the Fund will not engage in any transaction with SCB when it is
acting for its own account and will engage in brokerage transactions with SCB
only under circumstances where the commission, spread or profit received by SCB
is fair and reasonable pursuant to rules established by the Securities and
Exchange Commission and procedures adopted and monitored by the Board of
Trustees of the Trust.
During 1994, the Fund paid no brokerage commissions to SCB.
LIMITATION ON TRANSFERS
-----------------------
Whenever the Trust or its duly appointed transfer agent is requested to
transfer Fund shares to other than an Eligible Purchaser, the Trust has
the right at its election to purchase such shares at their net asset value next
effective following the time at which the request for transfer is presented;
provided, however, that the Trust must notify the transferee or transferee of
such shares in writing of its election to purchase such shares within seven (7)
days following the date of such request and settlement for such shares shall be
made within such seven-day period.
PURCHASE, REDEMPTION AND PRICING OF SECURITIES
----------------------------------------------
Information describing the purchase, redemption and pricing of shares is found
in the current prospectus for the Fund.
Should the determination of net asset value be suspended because the New York
Stock Exchange is closed, trading is restricted, or an emergency exists as
determined by the Securities and Exchange Commission, and as a result it is not
reasonably practicable for the Trust to dispose of securities held by the Fund
or value the Fund's assets, the right of redemption will also be suspended. It
will, in addition, be suspended if the determination of net asset value is
suspended by the Securities and Exchange Commission for the protection of
Shareholders. In any of these circumstances, the Shareholder may withdraw his
request for redemption or leave it standing as a request for redemption at the
net asset value next determined after the suspension has been terminated.
20
