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THE TRAVELERS SERIES TRUST
ZERO COUPON BOND FUND PORTFOLIOS
(SERIES 1998, 2000, 2005)
ONE TOWER SQUARE
HARTFORD, CONNECTICUT 06183
TELEPHONE 860-277-0111
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The Travelers Series Trust (the "Series Trust") is a diversified open-end
management investment company (mutual fund) which consists of multiple series of
shares (the "Portfolios"), each with its own investment objective and policies.
The Portfolios of the Series Trust described herein are the Zero Coupon Bond
Fund Portfolios (Series 1998, 2000 and 2005).
Shares of the Portfolios are currently offered without a sales charge to
separate accounts of The Travelers Insurance Company and The Travelers Life and
Annuity Company (collectively, "the Company" or "The Travelers"). The Portfolios
serve as investment vehicles for variable annuity and variable life insurance
contracts issued by the Company. All Portfolios described herein may not be
available under all variable contracts. The term "shareholder" as used herein
refers to any insurance company separate account that may use shares of the
Portfolios as investment vehicles now or in the future.
This Prospectus concisely sets forth the information about the Series Trust and
applicable Portfolios that you should know before investing. Please read it and
retain it for future reference. Additional information about the Series Trust
and the Portfolios is contained in a Statement of Additional Information ("SAI")
dated May 1, 1997 which has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated by reference into this Prospectus. A copy
may be obtained, without charge, by writing to The Travelers, Annuity Services,
One Tower Square, Hartford, Connecticut 06183-5030, or by calling 800-842-8573.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR A VARIABLE
ANNUITY OR VARIABLE LIFE INSURANCE CONTRACT ISSUED BY THE TRAVELERS. BOTH THIS
PROSPECTUS AND THE CONTRACT PROSPECTUS SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
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TABLE OF CONTENTS
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FINANCIAL HIGHLIGHTS.................................................................. 3
FUND DESCRIPTION...................................................................... 4
Investment Objective and Policies................................................... 4
Investment Restrictions............................................................. 5
Risk Factors and Special Considerations Relating to Maturity........................ 5
Tax Considerations.................................................................. 7
BOARD OF TRUSTEES..................................................................... 7
INVESTMENT ADVISERS................................................................... 7
TAMIC............................................................................... 7
Portfolio Manager................................................................... 7
Advisory Fees....................................................................... 8
FUND ADMINISTRATION................................................................... 8
SECURITIES TRANSACTIONS............................................................... 8
FUND EXPENSES......................................................................... 8
TRANSFER AGENT........................................................................ 9
SHARES OF THE SERIES TRUST............................................................ 9
NET ASSET VALUE....................................................................... 9
TAX STATUS............................................................................ 10
DIVIDENDS AND DISTRIBUTIONS........................................................... 10
LEGAL PROCEEDINGS..................................................................... 10
ADDITIONAL INFORMATION................................................................ 10
EXHIBIT A............................................................................. 11
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FINANCIAL HIGHLIGHTS
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THE TRAVELERS SERIES TRUST
ZERO COUPON BOND FUND PORTFOLIOS
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following information on per share data for the Zero Coupon Bond Fund
Portfolios (Series 1998, 2000, 2005) for the year ended December 31, 1996 and
the period October 11, 1995 (date operations commenced) to December 31, 1995 has
been audited by Coopers & Lybrand L.L.P., Independent Accountants. Their report
on the per share data for each of the applicable periods ended December 31, 1996
is contained in the Funds' Annual Report which should be read along with this
information and which is incorporated by reference into the SAI.
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YEAR ENDED OCTOBER 11(1) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
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SERIES 1998 SERIES 2000 SERIES 2005 SERIES 1998 SERIES 2000 SERIES 2005
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PER SHARE DATA
Net asset value, beginning of
period........................ $10.25 $ 10.31 $ 10.48 $ 10.00 $ 10.00 $ 10.00
Income from operations
Net investment income........... 0.53 0.50 0.48 0.12 0.13 0.13
Net realized and unrealized gain
(loss)........................ (0.13) (0.22) (0.38) 0.13 0.18 0.35
------------ ----------- ----------- ----------- ----------- -----------
Total from operations......... 0.40 0.28 0.10 0.25 0.31 0.48
Less Distributions From:
Net investment income........... (0.65) (0.63) (0.61) -- -- --
Net realized gains.............. (0.01) -- -- -- -- --
Total Distributions............... (0.66) (0.63) (0.61) -- -- --
------------ ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD.... $ 9.99 $ 9.96 $ 9.97 $ 10.25 $ 10.31 $ 10.48
========= ========= ========= ========= ========= =========
TOTAL RETURN(2)................... 3.94% 2.76% 0.90% 2.50% 3.10% 4.80%
Net assets, end of period
(thousands)................... $1,303 $ 1,565 $ 2,054 $ 1,024 $ 1,029 $ 1,050
RATIO TO AVERAGE NET ASSETS
Expenses(3)..................... 0.15% 0.15% 0.15% 0.15%(4) 0.15%(4) 0.15%(4)
Net investment income........... 5.64% 5.74% 6.14% 5.55%(4) 5.61%(4) 5.89%(4)
Portfolio turnover rate......... 19% 33% 17% 20% 34% 23%
(1) Date operations commenced.
(2) Total return is determined by dividing the increase (decrease) in value of a share during the period, after
reflecting the reinvestment of dividends declared during the period, by the beginning of period share price.
Shares of the three Zero Coupon Bond Fund Portfolios are only sold to The Travelers separate accounts in
connection with the issuance of variable life insurance contracts. The total return does not reflect contract
charges or fees assessed by The Travelers separate accounts. For periods less than one year, total returns are
not annualized.
(3) The ratio of expenses to average net assets reflects an expense reimbursement by The Travelers in connection
with the voluntary expense limitations. Without the expense reimbursements, the ratios of operating expenses
to average net assets would have been, on an annualized basis for 1995, 6.51%, 6.51%, and 6.48% for Series
1998, 2000 and 2005, respectively and 1996, would have been 2.82%, 2.49% and 2.17%, respectively.
(4) Annualized.
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FUND DESCRIPTION
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The Travelers Series Trust (the "Series Trust") is registered with the SEC as an
open-end management investment company. The Series Trust is organized as a
business trust under the laws of the Commonwealth of Massachusetts. An Agreement
and Declaration of Trust dated October 11, 1991 (the "Declaration of Trust")
authorizes the shares of the Series Trust to be divided into two or more series
related to separate portfolios of investments, and further allows the Board of
Trustees to establish additional portfolios at any time.
The Series Trust is currently divided into multiple series (the "Portfolios"),
each with its own investment objective and policies, all of which are
diversified portfolios under the Investment Company Act of 1940, as amended
("1940 Act"). Three Portfolios, as described below, are contained in this
prospectus. The other Portfolios are described in a separate prospectus.
ZERO COUPON BOND FUND PORTFOLIOS
(SERIES 1998, 2000, 2005)
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INVESTMENT OBJECTIVE AND POLICIES
The objective of each of the three Zero Coupon Bond Portfolios is to provide as
high an investment return as is consistent with the preservation of capital.
Each Portfolio's investment objective may be changed only with the approval of a
majority of the Portfolio's outstanding shares. There can be no assurance that a
Portfolio will achieve its investment objective.
Each Portfolio seeks to return a reasonably assured targeted dollar amount,
predictable at the time of investment, on a specific target date in the future
by investing in primarily zero coupon securities that pay no cash income but are
acquired by the Portfolio at substantial discounts from their values at
maturity. The Zero Coupon Bond Portfolios may not be appropriate for contract
owners who do not plan to allocate their premiums to the Portfolios for the
long-term or until maturity.
Under normal circumstances, each Zero Coupon Bond Portfolio will invest at least
65% of its net assets in "Stripped Securities," a term used collectively for
Stripped Treasury Securities, Stripped Government Securities, Stripped Corporate
Securities and Stripped Eurodollar Obligations and other stripped securities,
all described in Exhibit A to this prospectus.
The remaining 35% of each Zero Coupon Bond Portfolio's assets may be invested in
non-zero coupon securities such as common stock and other equity securities,
bonds and other debt securities, and money market instruments.
Each Zero Coupon Bond Portfolio may invest up to 25% of its assets in securities
of foreign issuers. Investments in Stripped Eurodollar Obligations where
delivery takes place outside the U.S. will be made in compliance with any
applicable U.S. and foreign currency restrictions, tax laws and laws limiting
the amount and types of foreign investments. Stripped Eurodollar Obligations
involve special risks associated with investment in foreign securities related
to market, currency, economic, political, and other factors.
To provide income for expenses, redemption payments, and cash dividends, up to
20% of each Portfolio's assets may be invested in money market instruments.
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INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental and may not be
changed without a vote of a majority of the outstanding voting securities of
each Zero Coupon Bond Portfolio, as defined in the 1940 Act. Each of the Zero
Coupon Bond Portfolios will not:
(1) purchase the securities of any issuer (other than U.S. government
securities) if as a result more than 5% of the value of the Portfolio's
total assets would be invested in the securities of the issuer, except
that up to 25% of the value of the Portfolio's total assets may be
invested without regard to this 5% limitation;
(2) purchase more than 10% of the voting securities of any one issuer,
provided that this limitation shall not apply to investments in U.S.
government securities;
(3) purchase securities on margin, except that each Portfolio may obtain
any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or
payment of initial or variation margin in connection with futures
contracts or related options will not be deemed to be a purchase of
securities on margin by a Portfolio;
(4) make short sales of securities or maintain a short position, except to
the extent of 5% of each Portfolio's net assets and except that a
Portfolio may engage in such activities without limit if, at all times
when a short position is open, the Portfolio owns an equal amount of
the securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issuer
as, and at least equal in amount to, the securities sold short;
(5) borrow money, including reverse repurchase agreements, except that each
Portfolio may borrow from banks for temporary or emergency (not
leveraging) purposes including the meeting of redemption requests that
might otherwise require the untimely disposition of securities, in an
amount not exceeding 20% of the value of the Portfolio's total assets
(including the amount borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of a Portfolio's total
assets, the Portfolio will not make any additional investments;
(6) pledge, hypothecate, mortgage or otherwise encumber more than 10% of
the value of a Portfolio's total assets as security for any
indebtedness. For purposes of this restriction (a) the deposit of
assets in escrow in connection with the writing of covered put or call
options and the purchase of securities on a when-issued or
delayed-delivery basis and (b) collateral arrangements with respect to
(i) the purchase and sale of stock options, options on foreign
currencies and options on stock indexes and (ii) initial or variation
margin for futures contracts will not be deemed to be pledges of a
Portfolio's assets;
(7) invest in commodities, except that each Portfolio may purchase or write
futures contracts and options on futures contracts as described in this
Prospectus;
(8) make loans to others, except through the purchase of qualified debt
obligations, loans of portfolio securities and the entry into
repurchase agreements; and
(9) concentrate in any industry.
In addition, the Portfolios will not purchase illiquid securities (such as
repurchase agreements with maturities in excess of seven days) or other
securities that are not readily marketable if more than 15% of the total assets
of a Portfolio would be invested in such securities.
RISK FACTORS AND SPECIAL CONSIDERATIONS RELATING TO MATURITY
Various levels of risk are involved with each Zero Coupon Bond Portfolio. The
risks inherent in investing in any of the Portfolios are that their net asset
value will fluctuate in response to changes in
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economic conditions, interest rates and the market's perception of the
underlying securities of the Portfolios.
Stripped securities investments, like other investments in debt securities, are
subject to certain risks, including credit and market risks. To the extent that
the Portfolios invest in Stripped Securities other than Stripped Treasury
Securities, such investments will be rated at least A by one or more nationally
recognized statistical rating agencies. Such securities are regarded as having
an adequate capacity to pay principal and interest but with greater
vulnerability to adverse economic conditions and have some speculative
characteristics. The Zero Coupon Bond Portfolios will also attempt to minimize
the impact of individual credit risks by diversifying their portfolio
investments.
Stripped Securities do not make any periodic payments of interest prior to
maturity and the stripping of the interest coupons causes the Stripped
Securities to be offered at a substantial or "deep" discount from their face
amounts. The market value of Stripped Securities and, therefore, of the shares
of the Zero Coupon Bond Portfolios, will fluctuate with changes in interest
rates and other factors and may be subject to greater fluctuations in response
to changing interest rates than would a fund consisting of debt obligations of
comparable maturities that pay interest currently. The amount of fluctuation
increases with a longer period of maturity.
Special Considerations Relating to Maturity: The Series Trust currently offers
three separate Zero Coupon Bond Portfolios, each maturing on the third Friday of
December of its specific maturity year (the "Target Date"): 1998, 2000, and
2005. On each Portfolio's Target Date, the Portfolio will be converted to cash
and an investor may invest in another of the Contract's Funds. If an investor
does not complete an instruction form directing what should be done with
liquidation proceeds, the proceeds will be automatically invested in the Smith
Barney Money Market Portfolio or Cash Income Trust, as applicable, and the
Policyholder will be notified of such event.
Because each Portfolio will be primarily invested in zero coupon securities,
investors whose premiums are invested in shares held to maturity, including
those obtained through reinvestment of dividends and distributions, will
experience a return consisting primarily of the amortization of discount on the
underlying securities in the Portfolio. However, the net asset value of a
Portfolio's shares increases or decreases with changes in the market value of
that Portfolio's investments, which tends to vary inversely with changes in
prevailing interest rates. If shares of a Zero Coupon Bond Portfolio are
redeemed prior to the maturity of the Portfolio, an investor may experience a
significantly different investment return than was anticipated at the time of
purchase.
The Portfolio's investment adviser will attempt to maintain the average duration
of each Portfolio to within twelve months of the Portfolio's Target Date.
Duration is a measure of the length of an investment which takes into account,
through present value analysis, the timing and amount of any interest payments
as well as the amount of the principal repayment. Duration is commonly used by
professional managers to help identify and control reinvestment risk. Since each
Portfolio will not be invested entirely in zero coupon securities maturing on
the Target Date, there will be some reinvestment risk with respect to those
other investments. By balancing investments with slightly longer and shorter
durations, the investment adviser believes it can maintain a Portfolio's average
duration within twelve months of the Portfolio's Target Date and thereby reduce
its reinvestment risk. Because they do not pay interest, zero coupon securities
tend to be subject to greater fluctuation of market value in response to changes
in interest rates than interest-paying securities of similar maturities.
Investors can expect more appreciation from a Zero Coupon Bond Portfolio during
periods of declining interest rates than from interest-paying securities of
similar maturity. Conversely, when interest rates rise, a Zero Coupon Bond
Portfolio will normally decline more in price than interest-paying securities of
similar maturity. Price fluctuations are expected to be greatest in the longer-
maturity Funds and are expected to diminish as a Portfolio approaches its
maturity date. Interest rates can change suddenly and unpredictably.
In addition, due to securities maturing prior to the termination of the Zero
Coupon Bond Portfolio, a risk that the proceeds from the sale of such securities
will not be reinvested at the same interest rate which was available at the time
of the contract owner's purchase may exist. As an example, in a
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falling interest rate environment, proceeds for securities that mature prior to
the termination date of a Zero Coupon Bond Portfolio will be reinvested at a
lower rate. Similarly, in a rising interest environment, the proceeds will be
invested at a higher interest rate.
TAX CONSIDERATIONS
Under the federal income tax law, a portion of the difference between the
purchase price of the zero coupon securities and their face value ("original
issue discount") is considered to be income to the Zero Coupon Bond Portfolios
each year, even though such Portfolio will not receive cash payments
representing the discount from these securities. This original issue discount
will comprise a part of the net taxable investment income of such Portfolio
which must be "distributed" to the insurance company shareholders each year,
whether or not such distributions are paid in cash. To the extent such
distributions are paid in cash, the Portfolio may have to generate the required
cash from interest earned on non-zero coupon securities such as corporate bonds
or possibly from the disposition of zero coupon securities.
BOARD OF TRUSTEES
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Under Massachusetts law, the Series Trust's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the
Series Trust. Subject to the provisions of the Declaration of Trust, the
business and affairs of the Series Trust shall be managed by the Trustees or
other parties so designated by the Trustees. Information relating to the Board
of Trustees, including its members and their compensation, is contained in the
SAI.
Additionally, the Board of Trustees annually selects an independent public
accountant, reviews the terms of the management and investment advisory
agreements, recommends any changes in the fundamental investment policies, and
takes any other actions necessary in connection with the operation and
management of the Series Trust.
INVESTMENT ADVISERS
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As described above, the Board of Trustees monitors the activities of those
entities which provide investment advisory services to the Portfolios. Travelers
Asset Management International Corporation (TAMIC) provides investment advice
and, in general, supervises the management and investment programs of the
Portfolios of the Series Trust.
TAMIC
TAMIC is a registered investment adviser which has provided investment advisory
services since its incorporation in 1978. TAMIC is an indirect wholly owned
subsidiary of Travelers Group Inc., a financial services holding company, and
its principal offices are located at One Tower Square, Hartford, Connecticut
06183. In addition to serving as the investment adviser for the U.S. Government
Securities Portfolio, TAMIC acts as investment adviser for other investment
companies used to fund variable products issued by The Travelers and The
Travelers Life and Annuity Company; as well as for individual and pooled pension
and profit-sharing accounts and for offshore insurance companies affiliated with
The Travelers.
PORTFOLIO MANAGER
The Zero Coupon Bond Fund Portfolios are managed by David A. Tyson, Ph.D. and
CFA. Mr. Tyson is currently Senior Vice President and the head of the Company's
Portfolio Management Group. He directly manages The Travelers Annuity, Life
Surplus and Convertible portfolios. His previous responsibilities have included
managing The Travelers Derivatives, Mortgage-Backed and Quantita-
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tive Investment Groups. Mr. Tyson joined The Travelers in 1985 and TAMIC in
1994. He previously spent seven years with the Equitable Investment Management
Corporation where he was responsible for quantitative equity research and new
product development.
ADVISORY FEES
Under its Advisory Agreement with the Zero Coupon Bond Portfolios, TAMIC is paid
an amount equivalent on an annual basis to .10% of the average daily net assets
of each Portfolio. The fees are computed daily and paid weekly. The Travelers
has decided to voluntarily reimburse the Zero Coupon Bond Fund Portfolios for
any expenses above 0.15% (includes the .10% management fee to TAMIC, but
excludes brokerage commissions and interest charges).
FUND ADMINISTRATION
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The Series Trust, on behalf of each of its Portfolios, has entered into an
Administrative Services Agreement, whereby The Travelers Insurance Company will
be responsible for the pricing and bookkeeping services for the Portfolios at an
annualized rate of 0.06% of the daily net assets of the Portfolios. The
Travelers Insurance Company, at its expense, may appoint a sub-administrator to
perform these services. The sub-administrator may be affiliated with The
Travelers Insurance Company.
SECURITIES TRANSACTIONS
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Under policies established by the Board of Trustees, the investment advisers
select broker-dealers to execute transactions subject to the receipt of best
execution. When selecting broker-dealers to execute portfolio transactions for
the Portfolios, the investment advisers may consider the number of Portfolio
shares sold by such broker-dealers. In addition, broker-dealers may from time to
time be affiliated with the Series Trust, the investment advisers or their
affiliates.
The Portfolios may pay higher commissions to broker-dealers that provide
research services. The investment advisers may use these services in advising
the Portfolios, as well as in advising their other clients.
FUND EXPENSES
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In addition to the investment advisory fees discussed above, other expenses of
the Series Trust and the Portfolios include the charges and expenses of the
transfer agent, the custodian, the independent auditors, and any outside legal
counsel employed by either the Series Trust or the Board of Trustees; the
compensation for the unaffiliated members of the Board of Trustees; the costs of
printing and mailing the Series Trust's prospectus, proxy solicitation
materials, and annual, semiannual and periodic reports; brokerage commissions,
interest charges and taxes; and any registration, filing and other fees payable
to government agencies in connection with the registration of the Series Trust
and its shares under federal and state securities laws. Additional high
portfolio turnover may involve greater brokerage commissions and other
transaction costs, which will be borne directly by the Portfolios, as well as
additional gains and/or losses to shareholders.
Pursuant to Management Agreements dated May 1, 1996 between the Series Trust and
The Travelers Insurance Company and between the Series Trust and The Travelers
Life and Annuity Company, each Company agreed to reimburse the Series Trust for
the amount by which each Portfolio's aggregate annual expenses, including
investment advisory fees but excluding brokerage commissions, interest charges
and taxes, exceeds a specific percentage of each Portfolio's average net assets
for any fiscal year. For the three Zero Coupon Bond Fund Portfolios, the amount
is .15%
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The three Zero Coupon Bond Fund Portfolios began operating on October 11, 1995.
Series 1998 paid .15%, Series 2000 paid .15% and Series 2005 paid .15% of their
average assets in expenses. These expenses would have been, on an annualized
basis, 2.82%, 2.49% and 2.17%, of the respective Portfolio's average net assets
if the Company had not paid for any of their expenses.
TRANSFER AGENT
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First Data Investor Services Group Inc., Exchange Place, Boston, MA 02109,
serves as the Series Trust's transfer agent and dividend disbursing agent.
SHARES OF THE SERIES TRUST
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Shares of the Series Trust are currently sold only to insurance company separate
accounts in connection with variable annuity and variable life insurance
contracts issued by the Company and The Travelers Life and Annuity Company.
Shares are not sold to the general public. Shares of the Series Trust are sold
on a continuing basis, without a sales charge, at the net asset value next
computed after payment is made by the insurance company to the Series Trust'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 Series Trust currently issues one class of shares divided into multiple
series. Under the Declaration of Trust, the Board of Trustees is authorized to
create new series of shares without the necessity of a vote of shareholders of
the Series Trust. All shares of each series of the Series Trust have equal
voting, dividend and liquidation rights. When issued and paid for, the shares
will be fully paid and nonassessable by the Series Trust and will have no
preference, conversion, exchange or preemptive rights.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of each series are entitled to vote
separately to approve investment advisory agreements or changes in fundamental
investment restrictions, but shares of all series vote together in the election
of Trustees and the selection of accountants. Shares are redeemable,
transferable and freely assignable as collateral. There are no sinking fund
provisions. (See the accompanying separate account prospectus for a discussion
of voting rights applicable to purchasers of variable annuity and variable life
insurance contracts.)
Although the Series Trust is not currently aware of any disadvantages to
contract owners of either variable annuity or variable life insurance contracts
because the Series Trust'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 Series Trust due to
differences in tax treatment, management of the Trust's investments, or other
considerations. The Series Trust's Board of Trustees will monitor events in
order to identify any material conflicts between variable annuity contract
owners and variable life insurance policy owners, and will determine what
action, if any, should be taken in the event of such a conflict.
NET ASSET VALUE
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The net asset value of a Portfolio share is computed as of the close of trading
on each day on which the New York Stock Exchange is open for trading, except on
days when changes in the value of the Portfolio's securities do not affect the
current net asset value of its shares. The net asset value per share is arrived
at by determining the value of the Portfolio's assets, subtracting its
liabilities, and dividing the result by the number of shares outstanding.
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The Portfolios value short-term money market instruments with maturities of
sixty days or less at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount) which, when combined with
accrued interest approximates market. All other investments are valued at market
value, or where market quotations are not readily available, at fair value as
determined in good faith by the Series Trust's Board of Trustees.
Portfolio shares are redeemed at the redemption value next determined after the
Portfolios receive 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 Portfolio's
securities between purchase and redemption.
The Portfolio computes the redemption value at the close of the New York Stock
Exchange ("Exchange") at the end of the day on which they have 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 Series Trust or the Portfolio may temporarily suspend the right to redeem
their 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 Portfolio's investments
or determination of its net asset value is not reasonably practicable; or (4)
the SEC, for the protection of shareholders, so orders.
TAX STATUS
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The Series Trust and its Portfolios have qualified and intend to qualify in the
future as a regulated investment company under Subchapter M of the Internal
Revenue Code, as amended. A Portfolio qualifies if, among other things, it
distributes to its shareholders at least 90% of its investment company taxable
income during each fiscal year.
DIVIDENDS AND DISTRIBUTIONS
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Capital gains and dividends are distributed in cash or reinvested in additional
shares of a Portfolio without a sales charge. Although purchasers of variable
contracts are not currently subject to federal income taxes on distributions
made by the Portfolios, they may be subject to state and local taxes and should
review the accompanying contract prospectus for a discussion of the tax
treatment applicable to purchasers of variable annuity and variable life
insurance contracts.
LEGAL PROCEEDINGS
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There are no pending material legal proceedings affecting the Series Trust or
the Portfolios.
ADDITIONAL INFORMATION
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Except as otherwise stated in this Prospectus or as required by law, the Series
Trust reserves the right to change the terms of the offer stated in this
Prospectus without shareholder approval, including the right to impose or change
fees for services provided.
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EXHIBIT A
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DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND
INVESTMENT TECHNIQUES AVAILABLE TO THE PORTFOLIOS
The following types of investments and investment techniques are available to
each of the Portfolios. Please refer to the investment objective and policies of
each Portfolio for a list of available investments.
VARIABLE AMOUNT MASTER DEMAND NOTES
Variable amount master demand notes are unsecured obligations that permit the
investment of fluctuating amounts by a Portfolio at varying rates of interest
pursuant to direct arrangements between the Portfolio as lender and the issuer
as borrower. Master demand notes permit daily fluctuations in the interest rate
and daily changes in the amounts borrowed. A Portfolio has the right to increase
the amount under the note at any time up to the full amount provided by the note
agreement, or to decrease the amount, and the borrower may repay up to the full
amount of the note without penalty. Because these types of notes are direct
lending arrangements between the lender and the borrower, it is not generally
contemplated that such instruments will be traded, and there is no secondary
market for these notes, although they are redeemable and thus repayable by the
borrower at face value plus accrued interest at any time. Accordingly, a
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. In connection with master demand note
arrangements, the investment advisers consider earning power, cash flow and
other liquidity ratios of the issuer. These notes, as such, are not typically
rated by credit rating agencies. Unless they are so rated, the Portfolios will
invest in them only if, at the time of an investment, the issuer meets the
criteria set forth for all other commercial paper. Pursuant to procedures
established by the investment advisers, such notes are treated as instruments
maturing in one day and valued at their par value. The investment advisers
intend to continuously monitor factors related to the ability of the borrower to
pay principal and interest on demand.
REPURCHASE AGREEMENTS
Interim cash balances may be invested from time to time in repurchase agreements
with approved counterparties (i.e., national banks or reporting broker-dealers
meeting the investment advisor'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,
additional cash or qualifying collateral will be required from the counterparty.
In executing a repurchase agreement, a Portfolio purchases eligible securities
subject to the seller's simultaneous agreement to repurchase them on a mutually
agreed upon date and at a mutually agreed upon price. The purchase and resale
prices are negotiated with the counterparty on the basis of current short-term
interest rates, which may be more or less than the rate on the securities
collateralizing the transaction. Physical delivery or, in the case of
"book-entry" securities, segregation in the counterparty's account at the
Federal Reserve for the benefit of the Portfolio is required to establish a
perfected claim to the collateral for the term of the agreement in the event the
counterparty fails to fulfill its obligation.
As the securities collateralizing a repurchase transaction are generally of
longer maturity than the term of the transaction, in the event of default by the
counterparty on its obligation, the Portfolio would bear the risks of delay,
adverse market fluctuation and transaction costs in disposing of the collateral.
ZERO-11
<PAGE> 12
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate can usually be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar denominated certificates
of United States banks which have at least $1 billion in deposits as of the date
of their most recently published financial statements (including foreign
branches of U.S. banks, U.S. branches of foreign banks which are members of the
Federal Reserve System or the Federal Deposit Insurance Corporation, and savings
and loan associations which are insured by the FDIC).
The Portfolios will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Portfolios do not
currently intend to purchase such foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank which, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by the Portfolios 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.
FUTURES CONTRACTS
The Portfolios may use exchange-traded financial futures contracts as a hedge to
protect against changes in interest rates or stock prices. Financial futures
contracts consist of stock index futures contracts and futures contracts on debt
securities ("interest rate futures"). An interest rate futures contract is a
contract to buy or sell specified debt securities at a future time for a fixed
price. 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.
Hedging by use of interest rate futures seeks to establish, with more certainty
than would otherwise be possible, the effective rate of return on portfolio
securities. When hedging is successful, any depreciation in the value of
portfolio securities will substantially be offset by appreciation in the value
of the futures position. Conversely, any appreciation in the value of the
portfolio securities will substantially be offset by depreciation in the value
of the futures position. At no time will the Portfolios' transactions in such
financial futures be employed for speculative purposes.
Stock index futures may be used, to a limited extent, to hedge specific common
stocks with respect to market (systematic) risk (involving the market's
assessment of overall economic prospects) as distinguished from stock-specific
risk (involving the market's evaluation of the merits of the issuer of a
particular security). Gains and losses on futures contracts employed as hedges
for specific securities will normally be offset by losses or gains,
respectively, on the hedged security.
When a futures contract is purchased, the Portfolios will set aside securities
equal to the total
ZERO-12
<PAGE> 13
market value of the futures contract, less the amount of the initial margin. The
Portfolios will not purchase or sell futures contracts for which the aggregate
initial margin exceeds five percent (5%) of the fair market value of their
respective assets, after taking into account unrealized profits and unrealized
losses on any such contracts they have entered into.
Positions taken in the futures market are not normally held to maturity, but
instead are liquidated through offsetting transactions which may result in a
profit or a loss. Closing out an open futures contract sale or purchase is
effected by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the debt security and the same
delivery date. If the offsetting purchase price is less than the original sale
price, the Portfolio realizes a gain; if it is more, the Portfolio realizes a
loss. Conversely, if the offsetting sale price is more than the original
purchase price, the Portfolio realizes a gain; if less, a loss. While futures
positions taken by the Portfolios will usually be liquidated in this manner, the
Portfolios may instead make or take delivery of the underlying securities
whenever it appears economically advantageous for them to do so. In determining
gain or loss, transaction costs must be taken into account. There can be no
assurance that the Portfolios will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time.
All interest rate and stock index futures contracts will be traded on exchanges
that are licensed and regulated by the Commodity Futures Trading Commission
("CFTC"). To ensure that its futures transactions meet CFTC standards, the
Portfolios will enter into futures contracts for hedging purposes only, i.e.,
for the purposes or with the intent specified in CFTC regulations and
interpretations, subject to the requirements of the SEC. The Portfolios will
further seek to assure that fluctuations in the price of any futures contracts
that they use for hedging purposes will be substantially related to fluctuations
in the price of the securities which they hold or which they expect to purchase,
or for other risk reduction strategies, though there can be no assurance 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 Portfolios may
benefit from the use of such futures, changes in interest rates or stock price
movements may result in a poorer overall performance for the Portfolios than if
they 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 Portfolios may be exposed to risk of loss. The investment advisers will
attempt to reduce this risk by engaging in futures transactions, to the extent
possible, where, in their 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.
In addition to the possibility that there may be a less than perfect correlation
between movements in the futures contracts and securities in the portfolio being
hedged, the prices of futures contracts may not correlate perfectly with
movements in the underlying security due to certain market distortions. First,
rather than meeting variation margin deposit requirements should a futures
contract value move adversely, investors may close future contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, since margin requirements in the futures
market are less onerous than in the securities market, the futures market may
attract more speculators than the securities market. Increased participation by
speculators may cause temporary price distortions. Due to the possibility of
such price distortion, and also because of the imperfect correlation discussed
above, even a correct forecast of general market trends by the investment
advisers may not result in a successful hedging transaction in the futures
market over a short time period.
Successful use of futures contracts for hedging purposes is also subject to the
investment advisers' ability to predict correctly movements in the direction of
the market. However, the investment advisers believe that over time the value of
the investments of the Portfolios will tend to move in the
ZERO-13
<PAGE> 14
same direction as the market indices which are intended to correlate to the
price movements of the portfolio securities sought to be hedged.
WRITING COVERED CALL OPTIONS
The Portfolios may write (i.e., sell) covered call options. By writing a call
option, a Portfolio becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price.
The Portfolios may only write "covered" options. This means that as long as a
Portfolio 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, a Portfolio might own substantially similar U.S. Treasury
bills.
The principal reason for writing call options is to obtain, through a receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. The Portfolios receive a premium from writing a call option
which they retain whether or not the option is exercised. By writing a call
option, a Portfolio 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 significantly impair a Portfolio's ability
to use such options to achieve its investment objectives.
BUYING PUT AND CALL OPTIONS
The Portfolios 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 Portfolios 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 Portfolios, in
anticipation of or as a substitute for the purchase of the securities
themselves. These options may be listed on a national exchange or executed
"over-the-counter" with a broker-dealer as the counterparty. While the
investment advisers anticipate 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 Portfolios will pay a premium in exchange for the right to purchase (call)
or sell (put) a specific par value of a fixed income or 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, a Portfolio's risk is
limited to the option premium paid.
The Portfolios may sell the put and call options prior to their expiration and
thereby realize a gain or loss. A call option will expire worthless if the price
of the related security is below the contract strike price at the time of
expiration; a put option will expire worthless if the price of the related
security is above the contract strike price at the time of expiration.
Put and call options will be employed for bona fide hedging purposes only.
Liquid securities sufficient to fulfill the call option delivery obligation will
be identified and segregated in an account; deliverable securities sufficient to
fulfill the put option obligation will be similarly identified and segregated.
In the case of put options on futures contracts, portfolio securities whose
price volatility is expected to match that of the underlying futures contract
will be identified and segregated.
STRIPPED SECURITIES
Under normal circumstances, each Zero Coupon Bond Portfolio will invest at least
65% of its net assets in "Stripped Securities," a term used collectively for
Stripped Treasury Securities, Stripped
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<PAGE> 15
Government Securities, Stripped Corporate Securities and Stripped Eurodollar
Obligations and other stripped securities, all described below. The Stripped
Securities in which each Portfolio will invest consist of:
(1) debt obligations issued by the U.S. Treasury that have been stripped of
their unmatured interest coupons; interest coupons that have been
stripped from debt obligations issued by the U.S. Treasury; and
receipts and certificates for stripped debt obligations and stripped
coupons, including U.S. government trust certificates (collectively,
"Stripped Treasury Securities") (but currently not anticipated to be in
excess of 55% of the Funds' assets);
(2) other zero coupon securities issued by the U.S. government and its
agencies and instrumentalities, by a variety of tax-exempt issuers such
as state and local governments and their agencies and instrumentalities
and by "mixed-ownership government corporations" (collectively,
"Stripped Government Securities");
(3) zero coupon securities issued by domestic corporations which consist of
corporate debt obligations without interest coupons, and, if available,
interest coupons that have been stripped from corporate debt
obligations, and receipts and certificates for such stripped debt
obligations and stripped coupons (collectively, "Stripped Corporate
Securities");
(4) zero coupon securities which consist of stripped debt obligations and
coupons of asset-backed securities, or other zero coupon-type
securities which may exist today or may be developed in the future.
These securities may be illiquid and are subject to the 10% limitation
for illiquid securities, as described under Investment Restrictions.
(5) stripped Eurodollar obligations, which are debt securities denominated
in U.S. dollars that are issued by foreign issuers, often subsidiaries
of domestic corporations ("Stripped Eurodollar Obligations").
ZERO-15
<PAGE> 16
THE TRAVELERS SERIES TRUST
ZERO COUPON BOND FUND PORTFOLIOS
(SERIES 1998, 2000, 2005)
TIC Ed. 5-97
L-11788-L Printed in U.S.A.
<PAGE> 17
THE TRAVELERS SERIES TRUST
MFS EMERGING GROWTH PORTFOLIO
ONE TOWER SQUARE
HARTFORD, CONNECTICUT 06183
TELEPHONE 1-860-277-0111
- --------------------------------------------------------------------------------
The Travelers Series Trust (the "Series Trust") is a diversified open-end
management investment company (mutual fund) consisting of multiple series of
shares (the "Portfolios"), each with its own investment objectives and policies.
One of the Portfolios of the Series Trust, MFS Emerging Growth Portfolio, is
described herein.
Shares of the Portfolio are currently offered without a sales charge to certain
separate accounts of The Travelers Insurance Company and Travelers Life and
Annuity Company (collectively, "Company" or "Travelers"). The Portfolio serves
as an investment vehicle for variable annuity and variable life insurance
contracts issued by Travelers. The Portfolio described herein may not be
available under all variable contracts. The term "shareholder" as used herein
refers to any insurance company separate account that may use shares of the
Portfolio as an investment vehicle now or in the future.
This Prospectus concisely sets forth the information about the Series Trust and
the Portfolio that you should know before investing. Please read it and retain
it for future reference. Additional information about the Series Trust and the
Portfolio is contained in a Statement of Additional Information ("SAI") dated
May 1, 1997 has been filed with the Securities and Exchange Commission ("SEC")
and is incorporated by reference into this Prospectus. A copy may be obtained,
without charge, by writing to The Travelers Insurance Company, Annuity Services,
One Tower Square, Hartford, Connecticut 06183-5030, or by calling
1-800-842-8573.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR A VARIABLE
ANNUITY OR VARIABLE LIFE INSURANCE CONTRACT ISSUED BY TRAVELERS. BOTH THIS
PROSPECTUS AND THE CONTRACT PROSPECTUS SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE> 18
TABLE OF CONTENTS
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS.................................................................. 3
FUND DESCRIPTION...................................................................... 3
FUNDAMENTAL INVESTMENT POLICIES....................................................... 3
MFS EMERGING GROWTH PORTFOLIO......................................................... 3
PORTFOLIO TURNOVER.................................................................... 9
BOARD OF TRUSTEES..................................................................... 9
INVESTMENT MANAGER.................................................................... 9
INVESTMENT SUBADVISER................................................................. 10
FUND ADMINISTRATION................................................................... 11
SECURITIES TRANSACTIONS............................................................... 11
FUND EXPENSES......................................................................... 11
TRANSFER AGENT........................................................................ 11
SHARES OF THE SERIES TRUST............................................................ 11
NET ASSET VALUE....................................................................... 12
TAX STATUS............................................................................ 13
DIVIDENDS AND DISTRIBUTIONS........................................................... 13
LEGAL PROCEEDINGS..................................................................... 13
ADDITIONAL INFORMATION................................................................ 13
EXHIBIT A............................................................................. 14
EXHIBIT B............................................................................. 25
</TABLE>
MFS-2
<PAGE> 19
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following information on per share data for the period ended December 31,
1996 has been audited by KPMG Peat Marwick, L.L.P. The auditor's report on the
per share data for this period is contained in the Fund's Annual Report which
should be read along with this information and which is incorporated by
reference into the SAI:
<TABLE>
<CAPTION>
MFS
EMERGING GROWTH
PORTFOLIO(1)
- ----------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......................................... $ 10.00
- ----------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2)................................................... 0.03
Net realized and unrealized gains.......................................... 0.57
- ----------------------------------------------------------------------------------------------
Total Income From Operations................................................. 0.60
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTION FROM:
Net investment income...................................................... (0.03)
Net realized gains......................................................... (0.01)
Capital.................................................................... (0.01)
- ----------------------------------------------------------------------------------------------
Total Distributions.......................................................... (0.05)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................................... $ 10.55
- ----------------------------------------------------------------------------------------------
TOTAL RETURN++............................................................... 6.00%
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000'S)............................................ $12,924
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)................................................................ 0.95%
Net investment income...................................................... 0.55
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE+..................................................... 49%
- ----------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS.................... $ 0.03
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(2) The Travelers has waived all of its fees for the period ended December 31,
1996. In addition, The Travelers has agreed to reimburse the MFS Emerging
Growth Portfolio, $16,407 of the Portfolios' expenses for the period ended
December 31, 1996. If such fees were not waived or reimbursed, the per share
effect on net investment income and the expense ratios would have been $0.06
and 2.09%, respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year. The total return would have been lower had
expenses not been reduced during the period shown.
+ Annualized.
MFS-3
<PAGE> 20
FUND DESCRIPTION
- --------------------------------------------------------------------------------
The Series Trust is registered with the SEC as an open-end management investment
company. The Series Trust is organized as a business trust under the laws of the
Commonwealth of Massachusetts. An Agreement and Declaration of Trust dated
October 11, 1991 (the "Declaration of Trust") authorizes the shares of the
Series Trust to be divided into two or more series related to separate
portfolios of investments, and further allows the Board of Trustees to establish
additional portfolios at any time.
The Series Trust is currently divided into fourteen series (the "Portfolios"),
each with its own investment objective and policies, all of which are
diversified portfolios under the Investment Company Act of 1940, as amended
("1940 Act"). The MFS Emerging Growth Portfolio is described in this prospectus.
The other Portfolios are described in a separate prospectus. While there is no
assurance that the Portfolio will achieve its objective, it endeavors to do so
by following its investment policies as described below.
FUNDAMENTAL INVESTMENT POLICIES
The Portfolio follows certain investment policies and adopts specific investment
techniques which cannot be modified without shareholder approval. These
"fundamental" investment policies are mandated by either the provisions of the
The Investment Company Act of 1940, as amended (the "1940 Act") or pursuant to
procedures that the Board of Trustees has decided to adopt. In contrast, the
Portfolio also follows certain nonfundamental investment policies. Unlike the
fundamental investment policies, nonfundamental policies may be changed, subject
to the approval of the Board, at the discretion of the Investment Adviser or
Subadviser without shareholder approval. Except as noted, all of the investment
policies discussed herein are nonfundamental.
MFS EMERGING GROWTH PORTFOLIO
("MFS PORTFOLIO")
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
MFS Portfolio's investment objective is to seek to provide long-term growth of
capital. Dividend and interest income from portfolio securities, if any, is
incidental to the MFS Portfolio's investment objective.
INVESTMENT POLICY
MFS Portfolio's policy is to invest primarily (i.e., at least 80% of its assets
under normal circumstances) in common stocks of companies that the Subadviser
believes are early in their life cycle but which have the potential to become
major enterprises (emerging growth companies). Such companies generally would be
expected to show earnings growth over time that is well above the growth rate of
the overall economy and the rate of inflation, and would have the products,
technologies, management and market and other opportunities which are usually
necessary to become more widely recognized as growth companies.
Emerging growth companies can be of any size, and the MFS Portfolio may also
invest in more established companies whose rates of earnings growth are expected
to accelerate because of special factors, such as rejuvenated management, new
products, changes in consumer demand, or basic changes in the economic
environment.
The MFS Portfolio is aggressively managed and, therefore, the value of its
shares is subject to greater fluctuation and investments in its shares involve
the assumption of a higher degree of risk than would
MFS-4
<PAGE> 21
be the case with an investment in a conservative equity fund or a growth fund
investing entirely in proven growth equities.
The MFS Portfolio will invest primarily in common stocks. Other investments are
allowed, including, but not limited to those described below. (Refer to Exhibit
A for a discussion of these investment techniques.) MFS may invest in, or write
(as applicable), the following:
- - foreign or convertible securities and warrants when relative values make such
purchases appear attractive either as individual issues or as types of
securities in certain economic environments (see Exhibit A);
- - foreign currency and forward foreign currency exchange contracts for the
purchase or sale of foreign currency for hedging purposes and non-hedging
purposes, including transactions entered into for the purpose of profiting
from anticipated changes in foreign currency exchange rates, as well as
options on foreign currencies;
- - foreign securities (up to 25% of its total assets) which may be traded on
foreign exchanges (not including American Depository Receipts ("ADRs")). (It
expects generally to invest between 0% to 10% in such securities.);
- - emerging market securities;
- - cash equivalents or other forms of debt securities as a reserve for future
purchases of common stock or to meet liquidity needs;
- - corporate asset-backed securities;
- - covered call and put options and may purchase call and put options on
securities and stock indices in an effort to increase current income and for
hedging purposes;
- - stock index futures contracts and options thereon for hedging purposes and for
non-hedging purposes, subject to applicable law;
- - portfolio securities purchased on a "when-issued" or on a "forward delivery"
basis; and
- - loan participations.
While it is not generally MFS Portfolio's policy to invest or trade for
short-term profits, it may dispose of a portfolio security whenever the
Subadviser is of the opinion that such security no longer has an appropriate
appreciation potential or when another security appears to offer relatively
greater appreciation potential. Subject to tax requirements, portfolio changes
are made without regard to the length of time a security has been held, or
whether a sale would result in a profit or loss.
The nature of investing in emerging growth companies involves greater risk than
is customarily associated with investments in more established companies.
Emerging growth companies often have limited product lines, markets or financial
resources, and they may be dependent on one-person management. In addition,
there may be less research available on many promising small and medium sized
emerging growth companies making it more difficult to find and analyze these
companies. The securities of emerging growth companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established growth companies or the market averages
in general. Shares of the MFS Portfolio, therefore, are subject to greater
fluctuation in value than shares of a conservative equity portfolio or of a
growth portfolio which invests entirely in proven growth stocks.
During periods of unusual market conditions when the Subadviser believes that
investing for defensive purposes is appropriate, or in order to meet anticipated
redemption requests, a large portion or all of the assets of MFS Portfolio may
be invested in cash or cash equivalents including, but not limited to,
obligations of banks with assets of $1 billion or more (including certificates
of deposit, bankers' acceptances and repurchase agreements), commercial paper,
short-term notes, obligations issued or guaranteed by the U.S. Government or any
of its agencies, authorities or instrumentalities and related repurchase
agreements. U.S. Government securities also include interests in trusts or other
entities representing interests in obligations that are issued or guaranteed by
the
MFS-5
<PAGE> 22
U.S. Government, its agencies, authorities or instrumentalities. See Exhibit A
to this Prospectus for a description of U.S. Government obligations and certain
short-term investments.
In addition, please see Exhibit A for a discussion of the following investment
activities in which MFS Portfolio may engage: (i) lending of Portfolio
securities; (ii) repurchase agreements; (iii) purchase and sales of restricted
securities; (iv) when-issued securities; (v) corporate asset-backed securities;
(vi) loan participation and other direct indebtedness; (vi) foreign securities;
(vii) ADRs; (viii) emerging market securities; (ix) various futures and option
trading techniques; and (x) lending of Portfolio securities.
INVESTMENT RESTRICTIONS
The MFS Portfolio is subject to certain fundamental investment restrictions
listed below. The MFS Portfolio may not:
- borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed and then only as a temporary measure for extraordinary or
emergency purposes;
- underwrite securities issued by other persons except insofar as the
Portfolio may technically be deemed an underwriter under the Securities
Act of 1933, as amended (the "1933 Act") in selling a portfolio security;
- purchase or sell real estate (including limited partnership interest but
excluding securities secured by real estate or interest therein and
securities of companies, such as real estate investment trusts, which
deal in real estate or interests therein), interests in oil, gas or
mineral leases, commodities or commodity contracts (excluding currencies
and any type of option, future contracts and forward contracts) in the
ordinary course of its business. The Portfolio does however, reserve the
right to hold and sell real estate, mineral leases, commodities or
commodity contracts (including currencies and any type of option, future
contracts and forward contracts) acquired as a result of the ownership of
securities;
- issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any
type of swap, option, forward contract and futures contracts and
collateral arrangements with respect to initial and variation margin are
not deemed to be the issuance of a senior security;
- make loans to other persons. For these purposes, the purchase of
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of the
Portfolio's assets in repurchase agreements, shall not be considered the
making of a loan; or
- purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities
of issuers whose principal business activities are in the same industry
(except there is no limitation with respect to obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities
and repurchase agreements collateralized by such obligations).
In addition to the fundamental investment restrictions listed directly above,
the MFS Portfolio may not:
- invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended, or, in the
case of unlisted securities, where no market exists) if more than 15% of
the Portfolio's assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will
be deemed to be illiquid for purposes of the Portfolio's limitation on
investment in illiquid securities. Securities that are not registered
under the 1933 Act and issued in reliance on Rule 144A thereunder, but
are determined to be liquid by the Trust's Board of Trustees (or its
delegee), will not be subject to this 15% limitation;
MFS-6
<PAGE> 23
- purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act, except when such purchase is part
of a plan of merger or consolidation;
- purchase any securities or evidences of interest therein on margin,
except that the Portfolio may obtain such short-term credit as may be
necessary for the clearance of any transaction and except that the
Portfolio may make margin deposits in connection with any type of swap,
option, futures contracts and forward contracts;
- sell any security which the Portfolio does not own unless by virtue of
its ownership of other securities the Portfolio has at the time of sale a
right to obtain securities without payment of further consideration
equivalent in kind and amount to the securities sold and provided that if
such right is conditional, the sale is made upon the same conditions;
- pledge, mortgage or hypothecate in excess of 33 1/3% of its gross assets.
For purposes of this restriction, collateral arrangements with respect to
any type of swap, option, futures contracts and forward contracts and
payments of initial and variation margin in connection therewith, are not
considered a pledge of assets;
- purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or
sale of (i) warrants where the grantor of the warrants is the issuer of
the underlying securities or (ii) put or call options or combinations
thereof with respect to securities, indices of securities, swaps, foreign
currencies and Futures Contracts;
- invest for the purposes of exercising control or management; or
- invest in the securities of any government agency or instrumentality, at
the end of any calendar quarter (or within 30 days thereafter), to the
extent such holdings would cause the Series to fail to comply with the
diversification requirements imposed by Section 817(h) of the Internal
Revenue Code of 1986, as amended (the "Code"), and Treasury regulations
issued thereunder on segregated asset accounts that fund variable
contracts.
RISK FACTORS
RISK FACTORS REGARDING LOWER RATED SECURITIES -- MFS Portfolio may invest to a
limited extent in lower-rated fixed income securities or comparable unrated
securities. Investments in lower-rated fixed income securities, while generally
providing greater income and opportunity for gain than investments in higher
rated securities, usually entail greater risk of principal and income (including
the possibility of default or bankruptcy of the issuers of such securities), and
involve greater volatility of price (especially during periods of economic
uncertainty or change) than investments in higher rated securities. Because
yields may vary over time, no specified level of income can ever be assured. In
particular, securities rated lower than Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Ratings Services ("S&P") or by Fitch
Investors Services, Inc. ("Fitch") or comparable unrated securities (commonly
known as "junk bonds") are considered speculative.
These lower rated high yielding fixed income securities generally tend to
reflect economic changes (and the outlook for economic growth), short-term
corporate and industry developments and the market's perception of their credit
quality (especially during times of adverse publicity) to a greater extent than
higher rated securities which react primarily to fluctuations in the general
level of interest rates (although these lower rated fixed income securities are
also affected by changes in interest rates). In the past, economic downturns or
an increase in interest rates have under certain circumstances caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on MFS Portfolio's lower rated high yielding fixed
income securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility of
default or bankruptcy of the issuers of such securities. Due to the fixed income
payments of these securities, MFS Portfolio may continue to earn the same level
of interest income while its net asset value declines due to portfolio losses,
which could result in an increase in MFS Portfolio's yield
MFS-7
<PAGE> 24
despite the actual loss of principal. The prices for these securities may be
affected by legislative and regulatory developments.
Changes in the value of securities subsequent to their acquisition will not
affect cash income or yield to maturity to MFS Portfolio but will be reflected
in the net asset value of shares of MFS Portfolio. The market for these lower
rated fixed-income securities may be less liquid than the market for investment
grade fixed-income securities. Furthermore, the liquidity of these lower rated
securities may be affected by the market's perception of their credit quality.
Therefore, the Subadviser's judgment may at times play a greater role in valuing
these securities than in the case of investment grade fixed-income securities,
and it also may be more difficult during times of certain adverse market
conditions to sell these lower rated securities at their fair value to meet
redemption requests or to respond to changes in the market. No minimum rating
standard is required by MFS Portfolio. To the extent MFS Portfolio invests in
these lower rated fixed-income securities, the achievement of its investment
objective may be more dependent on the Subadviser's own credit analysis than in
the case of a Portfolio investing in higher quality bonds. While the Subadviser
may refer to ratings issued by established credit rating agencies, it is not a
policy of MFS Portfolio to rely exclusively on ratings issued by these agencies,
but rather to supplement such ratings with the Subadviser's own independent and
ongoing review of credit quality.
MFS Portfolio may also invest in fixed income securities rated Baa by Moody's or
BBB by S&P and Fitch and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, may have speculative
characteristics and changes in economic conditions and other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
ADDITIONAL RISK FACTORS -- The net asset value of the shares of an open-end
investment company which may invest to a limited extent in fixed income
securities changes as the general levels of interest rates fluctuate. When
interest rates decline, the value of a fixed income portfolio can be expected to
rise. Conversely, when interest rates rise, the value of a fixed income
portfolio can be expected to decline.
THE USE OF OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, FORWARD
CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES MAY RESULT IN THE LOSS OF PRINCIPAL,
PARTICULARLY WHERE SUCH INSTRUMENTS ARE TRADED FOR OTHER THAN HEDGING PURPOSES
(E.G., TO ENHANCE CURRENT YIELD).
As a result of its investments in foreign securities, MFS Portfolio may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
In that event, MFS Portfolio may promptly convert such currencies into dollars
at the then current exchange rate. Under certain circumstances, however, such as
where the Subadviser believes that the applicable exchange rate is unfavorable
at the time the currencies are received or the Subadviser anticipates, for any
other reason, that the exchange rate will improve, MFS Portfolio may hold such
currencies for an indefinite period of time.
In addition, MFS Portfolio may be required to receive delivery of the foreign
currency underlying forward foreign currency contracts it has entered into. This
could occur, for example, if an option written by MFS Portfolio is exercised or
MFS Portfolio is unable to close out a forward contract. MFS Portfolio may hold
foreign currency in anticipation of purchasing foreign securities. MFS Portfolio
may also elect to take delivery of the currencies underlying options or forward
contracts if, in the judgment of the Subadviser, it is in the best interest of
MFS Portfolio to do so. In such instances as well, MFS Portfolio may promptly
convert the foreign currencies to dollars at the then current exchange rate, or
may hold such currencies for an indefinite period of time.
While the holding of currencies will permit MFS Portfolio to take advantage of
favorable movements in the applicable exchange rate, it also exposes MFS
Portfolio to risk of loss if such rates move in a direction adverse to MFS
Portfolio's position. Such losses could reduce any profits or increase any
losses sustained by MFS Portfolio from the sale or redemption of securities, and
could reduce the dollar value of interest or dividend payments received. In
addition, the holding of currencies could adversely affect MFS Portfolio's
profit or loss on currency options or forward contracts, as well as its hedging
strategies.
MFS-8
<PAGE> 25
See Exhibit A and the SAI for further discussion of foreign securities and the
holding of foreign currency as well as the associated risks.
The policies described above are not fundamental and may be changed without
shareholder approval, as may MFS Portfolio's investment objective. A change in
MFS Portfolio's investment objective may result in MFS Portfolio having an
investment objective different from the objective which the shareholder
considered appropriate at the time of investment in MFS Portfolio.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern MFS Portfolio's investment
policies. The specific investment restrictions listed in the SAI may not be
changed without shareholder approval (see "Investment Restrictions" in the SAI).
MFS Portfolio's investment limitations, policies and rating standards are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
PORTFOLIO TURNOVER
- --------------------------------------------------------------------------------
Although the Portfolio does not intend to invest for the purpose of seeking
short-term profits, securities held by the Portfolio will be sold whenever the
Portfolio's investment adviser or Subadviser believes it is appropriate to do so
in light of the Portfolio's investment objective, without regard to the length
of time a particular security may have been held. For 1996, the Portfolio
turnover rate for MFS Emerging Growth Portfolio was 49%.
BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
Under Massachusetts law, the Series Trust's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the
Series Trust. Subject to the provisions of the Declaration of Trust, the
business and affairs of the Series Trust shall be managed by the Trustees or
other parties so designated by the Trustees. Information relating to the Board
of Trustees, including its members and their compensation, is contained in the
SAI.
INVESTMENT MANAGER
- --------------------------------------------------------------------------------
As described above, the Board of Trustees monitors the activities of those
entities which provide investment management and Subadvisory services to the
Portfolio. The Travelers Asset Management International Corporation ("TAMIC,"
also referred to throughout this prospectus as the "Investment Adviser")
provides investment supervision to the MFS Portfolio in accordance with its
investment objectives, policies and restrictions. TAMIC'S responsibilities
generally include the following:
(1) engaging the services of one or more firms to serve as investment
adviser to the Portfolio;
(2) reviewing from time to time the investment policies and restrictions of
the Portfolio in light of the Portfolio's performance and otherwise and
after consultation with the Board, recommending any appropriate changes
to the Board;
(3) supervising the investment program prepared for the Portfolio by the
Subadviser;
(4) monitoring, on a continuing basis, the performance of the Portfolio's
securities;
(5) arranging for the provision of such economic and statistical data as
TAMIC shall determine or as may be requested by the Board; and
(6) providing the Board with such information concerning important economic
and political developments as TAMIC deems appropriate or as the Board
requests.
MFS-9
<PAGE> 26
TAMIC is a registered investment adviser which has provided investment advisory
services since its incorporation in 1978. TAMIC is an indirect wholly owned
subsidiary of Travelers Group, Inc., and its principal offices are located at
One Tower Square, Hartford, Connecticut, 06183. TAMIC also acts as investment
adviser for other investment companies used to fund variable insurance products.
TAMIC also provides investment advice to individual and pooled pension and
profit-sharing accounts and non-affiliated insurance companies. For serving as
investment adviser to the Trust, TAMIC receives a fee, equal to the average
daily net asset value of 0.375% of the MFS Emerging Growth Portfolio. The
Investment Advisory fee is computed daily and paid monthly. These fees do not
reflect the Subadvisory fees paid to the Subadvisers.
INVESTMENT SUBADVISER
- --------------------------------------------------------------------------------
GENERAL
Under the terms of the Investment Advisory and Subadvisory Agreement, the
Subadviser provides an investment program for the Portfolios. The Subadviser
makes all determinations with respect to the purchase and sale of the portfolio
securities (subject to the terms and conditions of the investment objectives,
policies, and restrictions of the Portfolio and to the supervision of the Board
of Trustees and TAMIC) and places, in the name of the Portfolio, call orders for
execution of the portfolio transactions. MFS only places the orders for TAMIC to
execute.
For services rendered to the Portfolios, the Subadviser charges a fee to TAMIC.
The Portfolio does not pay the Subadviser's fee nor any part thereof, nor will
it have any obligation or responsibility to do so. The Subadvisory fee that
TAMIC pays to the Subadviser is not dependent on the Portfolio's performance.
MFS PORTFOLIO
SUBADVISER: MFS
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of MFS were approximately $52.8 billion
on behalf of approximately 2.3 million investor accounts as of February 28,
1997. As of such date, MFS managed approximately $28.9 billion of assets
invested in equity securities and approximately $19.9 billion of assets invested
in fixed income securities. Approximately $4.0 billion of the assets managed by
MFS are invested in securities of foreign issuers and non-U.S. dollar
denominated securities of U.S. issuers. MFS is a subsidiary of Sun Life of
Canada (U.S.), which in turn is a wholly owned subsidiary of Sun Life Assurance
Company of Canada ("Sun Life").
Under its Subadvisory Agreement with TAMIC, MFS is paid an amount equivalent on
an annual basis to .375% of the average daily net assets of the Portfolio. The
fee is accrued daily and paid monthly.
MANAGEMENT OF MFS PORTFOLIO
John W. Ballen a Senior Vice President of MFS, serves as a co-manager of the MFS
Portfolio and in such capacity Mr. Ballen is charged with responsibility for the
day-to-day operations of the MFS Portfolio. Mr. Ballen has been employed as a
portfolio manager by MFS since 1984. Mr. Ballen is a graduate of Harvard
College, University of New South Wales, and Stanford University Graduate School
of Business Administration.
Also charged with management of the Fund is Toni Shimura, who joined MFS in 1987
as a member of the Research Department. A graduate of Wellesley College and the
Sloan School of Management at the Massachusetts Institute of Technology, she was
named Investment Officer in 1990, Assistant Vice President -- Investments in
1991, and Vice President -- Investments in 1992. She also manages MFS Emerging
Growth Series a retail Mutual Fund Series since November 1995.
MFS-10
<PAGE> 27
FUND ADMINISTRATION
- --------------------------------------------------------------------------------
The Series Trust, on behalf of MFS Emerging Growth Portfolio entered into an
Administrative Services Agreement, whereby Travelers Insurance will be
responsible for the pricing and bookkeeping services for the Portfolio at an
annualized rate of .06% of the daily net assets of the Portfolio. The Travelers
Insurance Company at its expense may appoint a sub-administrator to perform
these services. The sub-administrator may be affiliated with The Travelers
Insurance Company.
SECURITIES TRANSACTIONS
- --------------------------------------------------------------------------------
Under policies established by the Board of Trustees, the Subadviser selects
broker-dealers to execute transactions subject to the receipt of best execution.
When selecting broker-dealers to execute portfolio transactions for the
Portfolio, the Subadviser may follow a policy of considering as a factor the
number of shares of the Portfolio sold by such broker-dealers. In addition,
broker-dealers may from time to time be affiliated with the Series Trust, the
investment advisers or their affiliates.
The Portfolio may pay higher commissions to broker-dealers which provide
research services. The Subadviser may use these services in advising the
Portfolio, as well as in advising their other clients.
FUND EXPENSES
- --------------------------------------------------------------------------------
In addition to the investment advisory fees discussed above, the other principal
expenses of the Series Trust and the Portfolio include the charges and expenses
of the transfer agent, the custodian, the independent auditors, and any outside
legal counsel employed by either the Series Trust or the Board of Trustees; the
compensation for the unaffiliated members of the Board of Trustees; the costs of
printing and mailing the Series Trust's prospectus, proxy solicitation
materials, and annual, semiannual and periodic reports; brokerage commissions,
interest charges and taxes; and any registration, filing and other fees payable
to government agencies in connection with the registration of the Series Trust
and its shares under federal and state securities laws. Higher portfolio
turnover may involve correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Portfolio, as well as
additional gains and/or losses to shareholders.
Pursuant to a Management Agreement originally executed on May 1, 1993, between
the Series Trust and the Company, the Company agreed to reimburse the Series
Trust for the amount by which the Portfolio's aggregate annual expenses,
including investment advisory fees but excluding brokerage commissions, interest
charges and taxes, exceed 0.95% of the Portfolio's average net assets for any
fiscal year. This agreement will remain in effect until terminated by either
party upon sixty days' notice.
TRANSFER AGENT
- --------------------------------------------------------------------------------
First Data Investor Services Group, Inc., Exchange Place, Boston, MA 02109
serves as the Series Trust's transfer agent and dividend disbursing agent.
SHARES OF THE SERIES TRUST
- --------------------------------------------------------------------------------
The Series Trust currently issues one class of shares divided into fourteen
separate series. Under the Declaration of Trust, the Board of Trustees is
authorized to create new series of shares without the necessity of a vote of
shareholders of the Series Trust. All shares of each series of the Series Trust
MFS-11
<PAGE> 28
have equal voting, dividend and liquidation rights. When issued and paid for,
the shares will be fully paid and nonassessable by the Series Trust and will
have no preference, conversion, exchange or preemptive rights.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of each series are entitled to vote
separately to approve investment advisory agreements or changes in fundamental
investment restrictions, but shares of all series vote together in the election
of Trustees and the selection of accountants. Shares are redeemable,
transferable and freely assignable as collateral. There are no sinking fund
provisions. (See the accompanying separate account prospectus for a discussion
of voting rights applicable to purchasers of variable annuity and variable life
insurance contracts.)
Shares of the Series Trust are currently sold only to insurance company separate
accounts in connection with variable annuity and variable life insurance
contracts issued by the Company. Shares are not sold to the general public. The
Trust reserves the right to reject any purchase request. Shares of the Series
Trust are sold on a continuing basis, without a sales charge, at the net asset
value next computed after payment is made by the insurance company to the Series
Trust's custodian. However, the separate accounts to which shares are sold may
impose sales and other charges, as described in the appropriate contract
prospectus.
Under Massachusetts law, it is possible that a shareholder of any series may be
held personally liable for a Portfolio's obligations. However, the Series
Trust's Declaration of Trust provides that shareholders shall not be subject to
any personal liability for the Series Trust's obligations and provides
indemnification from Series Trust assets for any shareholder held personally
liable for the Series Trust's obligations. Disclaimers of such liability are
included in each agreement entered into by the Series Trust or its Portfolios.
Although the Series Trust is not currently aware of any disadvantages to
contract owners of either variable annuity or variable life insurance contracts
because the Series Trust'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 Series Trust due to
differences in tax treatment, management of the Trust's investments, or other
considerations. The Series Trust's Board of Trustees will monitor events in
order to identify any material conflicts between variable annuity contract
owners and variable life insurance policy owners, and will determine what
action, if any, should be taken in the event of such a conflict.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of a Portfolio share is computed as of the close of trading
on each day on which the New York Stock Exchange is open for trading, except on
days when changes in the value of the Portfolio's securities do not affect the
current net asset value of its shares. The net asset value per share is arrived
at by determining the value of the Portfolio's assets, subtracting its
liabilities, and dividing the result by the number of shares outstanding.
The Portfolio values short-term money market instruments with maturities of
sixty days or less at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market. All other investments are valued at
market value, or where market quotations are not readily available, at fair
value as determined in good faith by the Series Trust's Board of Trustees or by
a committee appointed by the Trustees. The procedure set forth above need not be
used to determine the value of the securities owned by a portfolio if, in the
opinion of the Trustees or the committee appointed by the Trustees, 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.
MFS-12
<PAGE> 29
Full and fractional shares of the Portfolio may be redeemed on any business day.
Redemptions are effected at the per share net asset value next determined after
receipt by the Portfolio of a proper 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
Portfolio's securities between purchase and redemption.
The Portfolio computes the redemption value at the close of the New York Stock
Exchange ("Exchange") at the end of the day on which they have 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 Series Trust or the Portfolio may temporarily suspend the right to redeem
their 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 Portfolio's investments
or determination of its net asset value is not reasonably practicable; or (4)
the SEC, for the protection of shareholders, so orders.
TAX STATUS
- --------------------------------------------------------------------------------
The Series Trust and its Portfolios have qualified and intend to qualify in the
future as a regulated investment company under Subchapter M of the Internal
Revenue Code, as amended. A Portfolio qualifies if, among other things, it
distributes to its shareholders at least 90% of its investment company taxable
income during each fiscal year.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Capital gains and dividends are distributed in cash or reinvested in additional
shares of a Portfolio without a sales charge. Although purchasers of variable
contracts are not currently subject to federal income taxes on distributions
made by the Portfolios, they may be subject to state and local taxes and should
review the accompanying contract prospectus for a discussion of the tax
treatment applicable to purchasers of variable annuity and variable life
insurance contracts.
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no pending material legal proceedings affecting the Series Trust or
the Portfolio.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Except as otherwise stated in this Prospectus or as required by law, the Series
Trust reserves the right to change the terms of the offer stated in this
Prospectus without shareholder approval, including the right to impose or change
fees for services provided.
MFS-13
<PAGE> 30
EXHIBIT A
- --------------------------------------------------------------------------------
DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND
INVESTMENT TECHNIQUES AVAILABLE TO THE MFS EMERGING GROWTH PORTFOLIO
The following types of investments and investment techniques are available to
the Portfolio as set forth herein or in the prospectus. Please refer to the
investment objective and policies of the Portfolio for a list of available
investments.
CASH INSTRUMENTS
The Portfolio may invest temporarily in cash and cash items during times of
unusual market conditions for defensive purposes and to maintain liquidity. Cash
items may include, but are not limited to, obligations such as: commercial paper
(generally lower-rated); short-term notes; obligations issued or guaranteed as
to principal and interest by the U.S. government or any of its agencies or
instrumentalities (see "U.S. Government Obligations" below).
U.S. GOVERNMENT OBLIGATIONS
The Portfolio may invest in direct obligations of the U.S. Treasury (such as
U.S. Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are backed by
the full faith and credit of the U.S. Treasury.
DEBT SECURITIES
Additionally, the Portfolio's investments may be made in bonds and other debt
instruments used by issuers to borrow money from investors. Debt instruments
involve the promise, by the issuer of the instrument to pay the investor a fixed
or variable rate of interest. Such repayment will occur at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values. In general, bond prices rise
when interest rates fall, and vice versa. Debt securities have varying degrees
of quality and varying levels of sensitivity to changes in interest rates.
Longer-term bonds are generally more sensitive to interest rate changes than
short-term bonds.
Investment-grade debt securities are medium- and high-quality securities. Some,
however, may possess speculative characteristics and may be more sensitive to
economic changes and to changes in the financial condition of issuers.
Lower-quality debt securities (sometimes called "junk bonds") are considered to
have speculative characteristics and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness, or they may already be
in default. The market prices of these securities may fluctuate more than
higher-quality securities and may decline significantly in periods of general
economic difficulty. Certain of the Portfolio's may be permitted to invest in
such lower-quality debt securities.
If market quotations are unavailable, lower-quality debt securities are valued
in accordance with procedures established by the Board of Trustees, including
the use of outside pricing services. Adverse publicity and changing investor'
perceptions may affect the ability of outside pricing services to value
lower-quality debt securities, and the Portfolio's ability to dispose of those
securities.
VARIABLE AMOUNT MASTER DEMAND NOTES
Variable amount master demand notes are unsecured obligations that permit the
investment of fluctuating amounts by a Portfolio at varying rates of interest
pursuant to direct arrangements between the Portfolio as lender and the issuer
as borrower. Master demand notes permit daily fluctuations in the interest rate
and daily changes in the amounts borrowed. A Portfolio has the right to increase
the
MFS-14
<PAGE> 31
amount under the note at any time up to the full amount provided by the note
agreement, or to decrease the amount, and the borrower may repay up to the full
amount of the note without penalty. Because these types of notes are direct
lending arrangements between the lender and the borrower, it is not generally
contemplated that such instruments will be traded, and there is no secondary
market for these notes, although they are redeemable and thus repayable by the
borrower at face value plus accrued interest at any time. Accordingly, a
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. In connection with master demand note
arrangements, the Investment adviser and Subadvisers will consider the earning
power, cash flow and other liquidity ratios of the issuer. These notes, as such,
are not typically rated by credit rating agencies. Unless they are so rated, the
Portfolios will invest in them only if, at the time of an investment, the issuer
meets the criteria set forth for all other commercial paper. Pursuant to
procedures established by the Investment adviser or Subadviser, such notes are
treated as instruments maturing in one day and valued at their par value. The
investment adviser and Subadviser intend to continuously monitor factors related
to the ability of the borrower to pay principal and interest on demand.
REPURCHASE AGREEMENTS
The MFS Portfolio may enter into repurchase agreements. Repurchase agreements
are arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities and or other securities to a
Portfolio and each agrees at the time of the sale to repurchase the securities
at a mutually agreed upon time and price. Interim cash balances may be invested
from time to time in repurchase agreements with approved counterparties (e.g.,
banks or broker-dealers meeting the investment advisor's credit quality
standards as presenting minimal risk of default). Repurchase transactions
generally mature the next business day but, in the event of a transaction of
longer maturity, collateral will be marked to market daily and, when required,
additional cash or qualifying collateral will be required from the counterparty.
In any repurchase agreement, the risk that the original seller does not
repurchase the securities as called for in the repurchase agreement exists. The
Portfolio could receive less than the repurchase price on any sale of such
securities. Additionally, if the seller becomes subject to a proceeding under
the bankruptcy laws or its assets are otherwise subject to a stay order, the
Portfolio's right to liquidate the securities may be restricted (during which
time the value of the securities could decline). The Investment Adviser and
Subadviser, however, each believe that under the regular procedures normally in
effect for custody of the Portfolio's securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the
Portfolio and allow retention or disposition of such securities.
The Portfolio may adopt rules concerning the collateralization of repurchase
agreements so long as the repurchase agreement is collateralized fully.
The Portfolio will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers that are found by the
Portfolio's adviser to be creditworthy pursuant to guidelines established for
the Portfolio.
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 Portfolio would bear the risks of delay,
adverse market fluctuation and transaction costs in disposing of the collateral.
The Portfolio or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
WHEN-ISSUED SECURITIES
The Portfolio may purchase securities on a when-issued or delayed delivery
basis. Transactions of this type are arrangements in which the Portfolio
purchases securities with payment and delivery scheduled for a future time.
Their purpose is to help to ensure the availability of suitable securities.
MFS-15
<PAGE> 32
The prices of such securities will be fixed at the time the commitment to
purchase is made, and may be expressed in either dollar price or yield
maintenance terms. Such commitment to purchase be viewed as a senior security,
and generally will be marked to market and reflected in the Portfolio's
Accumulation Unit Value daily from the commitment date. Delivery and payment may
be at a future date beyond customary settlement time.
While it is the intention of the Portfolio to take physical delivery of these
securities, offsetting transactions may be made prior to settlement, if it is
advantageous to do so.
The Investment Adviser and Subadviser engaged in trades of when-issued
securities each believes that purchasing securities in this manner will be
advantageous. This practice, however does include certain risks, namely the
default of the counterparty on its obligation to deliver the security as
scheduled. In this event, an affected Portfolio would endure a loss (or gain)
equal to the price appreciation (or depreciation) in value from the commitment
date. Further, such failure to complete a transaction may cause the affected
Portfolio to miss other opportunities.
To guard against such risks, the Investment Adviser and Subadviser employ a
rigorous credit quality procedure in determining the counterparties with which
it will deal in when-issued securities and, in some circumstances, will require
the counterparty to post cash or some other form of security as margin to
protect the value of its delivery obligation pending settlement.
It is expected that, under normal circumstances, the Portfolio will take
delivery of such securities. In general, the Portfolio does not pay for the
securities until received and the Portfolio does not start earning interest on
the obligations until the contractual settlement date. While awaiting delivery
of the obligations purchased on such bases, the Portfolio will establish a
segregated account consisting of cash, short-term money market instruments or
high quality debt securities equal to the amount of the commitments to purchase
when-issued securities.
The MFS Portfolio may engage in trades of when-issued securities. The value of
this Portfolio's securities, together with the value of all securities of the
issuer of the "when-issued security" may not exceed 5% of the value of the
Portfolio's total assets at the time that the initial commitment to purchase
such securities is made. An increase in the percentage of the Portfolio's assets
committed to the purchase of securities on a when-issued basis may increase the
volatility of its net asset value.
The Portfolio may dispose of a commitment prior to settlement if the adviser
deems it appropriate to do so. In addition, the Portfolio may enter in
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. A Portfolio may realize short-term profits or losses
upon the sale of such commitments.
FUTURES CONTRACTS
The Portfolio may use exchange-traded financial futures for various purposes
including contracts as a hedge to protect against changes in interest rates or
stock prices. Financial futures contracts consist of stock index futures
contracts and futures contracts on debt securities. An interest rate futures
contract is a contract to buy or sell specified debt securities at a future time
for a fixed price. 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.
Hedging by use of interest rate futures seeks to establish, with more certainty
than would otherwise be possible, the effective rate of return on portfolio
securities. When hedging is successful, any depreciation in the value of
portfolio securities will substantially be offset by appreciation in the value
of the futures position. Conversely, any appreciation in the value of the
portfolio securities will substantially be offset by depreciation in the value
of the futures position. At no time will the Portfolio's futures trading
transactions be employed for speculative purposes.
Stock index futures may be used, to a limited extent, to hedge specific common
stocks with respect to market (systematic) risk (involving the market's
assessment of overall economic prospects) as
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<PAGE> 33
distinguished from stock-specific risk (involving the market's evaluation of the
merits of the issuer of a particular security). Gains and losses on futures
contracts employed as hedges for specific securities will normally be offset by
losses or gains, respectively, on the hedged security.
When a futures contract is purchased, the Portfolio will set aside, in an
identifiable manner, an amount of cash and cash equivalents equal to the total
market value of the futures contract, less the amount of the initial margin.
Positions taken in the futures market are not normally held to maturity, but
instead are liquidated through offsetting transactions which may result in a
profit or a loss. Closing out an open futures contract sale or purchase is
effected by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the debt security and the same
delivery date. If the offsetting purchase price is less than the original sale
price, the Portfolio realizes a gain; if it is more, the Portfolio realizes a
loss. Conversely, if the offsetting sale price is more than the original
purchase price, the Portfolio realizes a gain; if less, a loss. While futures
positions taken by the Portfolio will usually be liquidated in this manner, the
Portfolio may instead make or take delivery of the underlying securities
whenever it appears economically advantageous for them to do so. In determining
gain or loss, transaction costs must be taken into account. There can be no
assurance that the Portfolio will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time.
All interest rate and stock index futures contracts will be traded on exchanges
that are licensed and regulated by the Commodity Futures Trading Commission
("CFTC"). To ensure that its futures transactions meet CFTC standards, the
Portfolio will enter into futures contracts for hedging purposes only, i.e., for
the purposes or with the intent specified in CFTC regulations and
interpretations, subject to the requirements of the SEC. The Portfolio will
further seek to assure that fluctuations in the price of any futures contracts
that they use for hedging purposes will be substantially related to fluctuations
in the price of the securities which they hold or which they expect to purchase,
or for other risk reduction strategies, though there can be no assurance the
expected result will always be achieved.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS: The MFS Portfolio may
enter into transactions in options, futures and forward contracts on a variety
of instruments and indices, in order to protect against declines in the value of
portfolio securities or increases in the cost of securities or other assets to
be acquired and, subject to applicable law, to increase the Portfolio's gross
income.
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 Portfolio may
benefit from the use of such futures, changes in interest rates or stock price
movements may result in a poorer overall performance for the Portfolio 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 Portfolio may be exposed to risk of loss. The investment advisers will
attempt to reduce this risk by engaging in futures transactions, to the extent
possible, where, in their 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.
In addition to the possibility that there may be a less than perfect correlation
between movements in the futures contracts and securities in the Portfolio being
hedged, the prices of futures contracts may not correlate perfectly with
movements in the underlying security due to certain market distortions. First,
rather than meeting variation margin deposit requirements should a futures
contract value move adversely, investors may close future contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, since margin requirements in the futures
market are less onerous than in the securities market, the futures market may
attract more speculators than the securities market. Increased participation by
speculators may
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cause temporary price distortions. Due to the possibility of such price
distortion, and also because of the imperfect correlation discussed above, even
a correct forecast of general market trends by the investment advisers may not
result in a successful hedging transaction in the futures market over a short
time period.
Successful use of futures contracts for hedging purposes is also subject to the
investment advisers' ability to predict correctly movements in the direction of
the market. The Investment Adviser and Subadvisers believe that over time the
value of the investments of the Portfolio will tend to move in the same
direction as the market indices which are intended to correlate to the price
movements of the portfolio securities sought to be hedged.
WRITING COVERED CALL OPTIONS
The MFS Portfolio may write (i.e., sell) covered call options. By writing a call
option, the Portfolio becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price.
The principal reason for writing call options is to obtain, through a receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. Purchases of puts or sales of calls are intended to protect
against price movements in particular securities in a Portfolio's portfolio.
Sales of calls may also generate income. The Portfolio receives a premium from
writing a call option which they retain whether or not the option is exercised.
Certain risks exist in this practice. By writing a call option, the Portfolio
might lose the potential for gain on the underlying security while the option is
open. Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. This requires a
secondary market on an exchange for call or put options which may or may not
exist for any particular call or put option at any specific time. The absence of
a liquid secondary market also may limit the Portfolio's ability to dispose of
the securities underlying an option. The inability to close options also could
have an adverse impact on the Portfolio's ability to effectively hedge.
The Portfolio may only write "covered" options. This means that as long as a
Portfolio 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, a Portfolio might own substantially similar U.S. Treasury
bills.
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 significantly impair a Portfolio's ability
to use such options to achieve its investment objectives.
BUYING PUT AND CALL OPTIONS
The MFS Portfolio 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 Portfolio 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 Portfolio, in
anticipation of or as a substitute for the purchase of the securities
themselves. These options may be listed on a national exchange or executed
"over-the-counter" with a broker-dealer as the counterparty. While the
investment advisers anticipate 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 Portfolio will pay a premium in exchange for the right to purchase (call) or
sell (put) a specific par value of a fixed income or 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, a Portfolio's risk is limited to
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<PAGE> 35
the option premium paid and the risk of depreciation in value of securities on
which it has written call options. By writing a call option on a security,
however, a Portfolio limits its opportunity to profit from any increase in the
market value of the underlying security, since the holder will usually exercise
the call option when the market value of the underlying security exceeds the
exercise price of the call.
The Portfolio may sell the put and call options prior to their expiration and
thereby realize a gain or loss. A call option will expire worthless if the price
of the related security is below the contract strike price at the time of
expiration; a put option will expire worthless if the price of the related
security is above the contract strike price at the time of expiration.
Liquid securities sufficient to fulfill a call option delivery obligation will
be identified and segregated in an account; deliverable securities sufficient to
fulfill the put option obligation will be similarly identified and segregated.
In the case of put options on futures contracts, portfolio securities whose
price volatility is expected to match that of the underlying futures contract
will be identified and segregated.
If the Portfolio writes an option which expires unexercised or is closed out by
the Portfolio at a profit, it will retain the premium paid for the option which
will increase its gross income and will offset in part the reduced value of the
portfolio security underlying the option, or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the underlying
security moves adversely to the Portfolio's position, the option may be
exercised and the Portfolio will be required to purchase or sell the underlying
security at a disadvantageous price, which may only be partially offset by the
amount of the premium. MFS Portfolio may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
Portfolios that engage in buying put and call options may also purchase put or
call options in anticipation of market fluctuations which may adversely affect
the value of its portfolio or the prices of securities that such Portfolio wants
to purchase at a later date. In the event that the expected market fluctuations
occur, the Portfolio may be able to offset the resulting adverse effect on its
portfolio, in whole or in part, through the options purchased. The premium paid
for a put or call option plus any transaction costs will reduce the benefit, if
any, realized by such Portfolio upon exercise or liquidation of the option, and,
unless the price of the underlying security changes sufficiently, the option may
expire without value to the Portfolio.
In certain instances, the Portfolio may enter into options on Treasury
securities which may be referred to as "reset" options or "adjustable strike"
options. These options provide for periodic adjustment of the strike price and
may also provide for the periodic adjustment of the premium during the term of
the option.
OPTIONS ON STOCK INDICES -- The MFS Portfolio may write (sell) covered call and
put options and purchase call and put options on stock indices. The Portfolio
may write options on stock indices for the purpose of increasing its gross
income and to protect its portfolio against declines in the value of securities
it owns or increases in the value of securities to be acquired. When such
Portfolio writes an option on a stock index, and the value of the index moves
adversely to the holder's position, the option will not be exercised, and the
Portfolio will either close out the option at a profit or allow it to expire
unexercised. The Portfolio writing the covered call or put option will thereby
retain the amount of the premium, less related transaction costs, which will
increase its gross income and offset part of the reduced value of portfolio
securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by the Portfolio for the writing of the option, less
related transaction costs. In addition if the value of an underlying index moves
adversely to the Portfolios' option position, the option may be exercised, and
the Portfolios will experience a loss which may only be partially offset by the
amount of the premium received.
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<PAGE> 36
The MFS Portfolio may also purchase put or call options on stock indices in
order, respectively, to hedge its investments against a decline in value or to
attempt to reduce the risk of missing a market or industry segment advance.
INDEX FUTURES CONTRACTS
FUTURES CONTRACTS -- MFS Portfolio may enter into stock index futures contracts
(Index Futures). The Portfolio will utilize Index Futures for hedging and
non-hedging purposes, subject to applicable law. Purchases or sales of stock
index futures contracts for hedging purposes are used to attempt to protect the
Portfolio's current or intended stock investments from broad fluctuations in
stock prices. In the event that an anticipated decrease in the value of
portfolio securities occurs as a result of a general stock market decline, a
general increase in interest rates or a decline in the dollar value of foreign
currencies in which portfolio securities are denominated, the adverse effects of
such changes may be offset, in whole or part, by gains on the sale of futures
contracts. Conversely, the increased cost of portfolio securities to be
acquired, caused by a general rise in the stock market, a general decline in
interest rates or a rise in the dollar value of foreign currencies, may be
offset, in whole or part, by gains on Index Futures contracts purchased by the
Portfolio. A Portfolio will incur brokerage fees when it purchases and sells
Index Futures contracts, and it will be required to make and maintain margin
deposits.
OPTIONS ON INDEX FUTURES CONTRACTS -- MFS Portfolio may purchase and write
options on stock index futures contracts. Such investment strategies will be
used for hedging and non-hedging purposes, subject to applicable law. Put and
call options on futures contracts may be traded by the Portfolio in order to
protect against declines in the values of portfolio securities or against
increases in the cost of securities to be acquired. Purchases of options on
futures contracts may present less risk in hedging the portfolios of the
Portfolio than the purchase or sale of the underlying futures contracts since
the potential loss is limited to the amount of the premium plus related
transaction costs. The writing of such options, however, does not present less
risk than the trading of futures contracts and will constitute only a partial
hedge, up to the amount of the premium received. In addition, if an option is
exercised, the Portfolio may suffer a loss on the transaction.
FORWARD CONTRACTS ON FOREIGN CURRENCY -- MFS Portfolio may enter into contracts
for the purchase or sale of a specific currency at a future date at a price set
at the time of the contract (a "Forward Contract"). The Portfolio will enter
into Forward Contracts for hedging and non-hedging purposes, including
transactions entered into for the purpose of profiting from anticipated changes
in foreign currency exchange rates. Transactions in Forward Contracts entered
into for hedging purposes may include forward purchases or sales of foreign
currencies for the purpose of protecting the dollar value of securities
denominated in a foreign currency or protecting the dollar equivalent of
interest or dividends to be paid on such securities. The Portfolio may also
enter into Forward Contracts for "cross hedging" purposes, e.g., the purchase or
sale of a Forward Contract on one type of currency as a hedge against adverse
fluctuations in the value of a second type of currency. By entering into such
transactions, however, the Portfolio may be required to forgo the benefits of
advantageous changes in exchange rates. The Portfolio may also enter into
transactions in Forward Contracts for other than hedging purposes. For example,
if the Subadviser believes that the value of a particular foreign currency will
increase or decrease relative to the value of the U.S. dollar, the Portfolio may
purchase or sell such currency, respectively, through a Forward Contract. If the
expected changes in the value of the currency occur, the Portfolio will realize
profits which will increase its gross income. Such transactions, however, may be
considered speculative and could involve significant risk of loss, as set forth
below. The Portfolio has established procedures consistent with statements of
the SEC and its staff regarding the use of Forward Contracts by registered
investment companies, which requires use of segregated assets or "cover" in
connection with the purchase and sale of such Contracts.
Forward Contracts are traded over-the-counter, and not on organized commodities
or securities exchanges. As a result, such contracts operate in a manner
distinct from exchange-traded instruments,
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and their use involves certain risks beyond those associated with transactions
in the Futures and Options contracts described above.
OPTIONS ON FOREIGN CURRENCIES -- MFS Portfolio may purchase and write put and
call options on foreign currencies for the purpose of protecting against
declines in the dollar value of portfolio securities, and against increases in
the dollar cost of securities to be acquired. As in the case of other types of
options, however, the writing of an option on foreign currency will constitute
only a partial hedge, up to the amount of the premium received, and the
Portfolio could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Portfolio's position, it may forfeit the entire amount of the premium
plus related transaction costs. As in the case of Forward Contracts, certain
options on foreign currencies are traded over-the-counter and involve risks
which may not be present in the case of exchange-traded instruments.
RESTRICTED AND ILLIQUID SECURITIES
MFS Portfolio may purchase and sell securities that are not registered under the
Securities Act of 1933, as amended (the "1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities"). Sale of this type
of security is typically restricted under the federal securities laws. The above
mentioned Portfolio may also purchase and sell securities that are subject to
transfer restrictions, and may therefore be illiquid.
Some securities may be "illiquid" because sale of these securities may be
difficult and the Portfolio engaging in trading of illiquid securities may not
be able to sell them (or sell them at fair market value) when the investment
adviser or Subadviser believes it is desirable to do so. Accordingly such sales
may be made at less than fair market value or may not be able to sell them when
the investment adviser believes it is desirable to do so.
The Portfolio currently limits the amount of net assets that may be invested in
illiquid securities to 15% of its net assets.
Securities may be illiquid securities for different reasons including, among
others, (i)absence of a readily available market or legal or contractual
restrictions on resale; and (ii) repurchase agreements not terminable within
seven days. Securities eligible for resale under Rule 144A under the Securities
Act that have legal or contractual restrictions on resale but have a readily
available market are not deemed illiquid securities for this purpose.
Each Subadviser will monitor the liquidity of such restricted securities. This
monitoring process will involve a continuing review of the trading markets for
the specific Rule 144A security, whether such security is illiquid and thus
subject to the Portfolio's limitation on investing its net assets in illiquid
investments. In monitoring a restricted security, the Investment adviser or
Subadviser will review the current value of the security based on currently
available information. The Subadviser, however, will retain sufficient oversight
and be ultimately responsible for the determinations.
Subject to the limitation on investments in illiquid investments, the Portfolio
may also invest in restricted securities that may not be sold under Rule 144A,
which presents certain risks. As a result, the Portfolio might not be able to
sell these securities when the Subadviser wishes to do so, or might have to sell
them at less than fair value. In addition, market quotations are less readily
available. Therefore, the judgment of the Subadviser may at times play a greater
role in valuing these securities than in the case of unrestricted securities.
FOREIGN SECURITIES AND AMERICAN DEPOSITORY RECEIPTS
The MFS Portfolio may purchase foreign securities or American Depository
Receipts ("ADRs"). ADRs are U.S. dollar-denominated receipts issued generally by
domestic banks representing the deposit
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<PAGE> 38
with the bank of a security of a foreign issuer. ADRs are publicly traded on
exchanges or over the counter in the United States.
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting
standards, changes in currency rates, generally higher brokerage or commission
rates on foreign trades, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations,
political instability which could affect U.S. investments in foreign countries,
potential difficulties in enforcing contractual relationships, and potential
restrictions on the flow of international capital. Additionally, dividends
payable on foreign securities may be subject to foreign taxes withheld prior to
distribution. Foreign securities often trade with less frequency and volume than
domestic securities and therefore may exhibit greater price volatility. Changes
in foreign exchange rates will affect the value of those securities which are
denominated or quoted in currencies other than the U.S. dollar. Many of the
foreign securities held by a Portfolio will not be registered with, nor will the
issuers thereof be subject to the reporting requirements of, the SEC.
Accordingly, foreign securities are subject to less supervision and there may be
less publicly available information about the securities and the foreign company
or government issuing them than is available about a domestic company of
government entity. Moreover, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment positions.
Certain restrictions may apply concerning the amount of a Portfolio's net assets
which may be invested in foreign securities. For example MFS Portfolio may
invest up to 25% of its net assets in such securities, although it generally
expects to invest between 0% and 10% of its total assets in foreign securities
(not including ADRs).
The Portfolio may hold foreign currency received in connection with investments
in foreign securities when, in the judgment of the Subadviser, it would be
beneficial to convert such currency into U.S. dollars at a later date, based on
anticipated changes in the relevant exchange rate. MFS Portfolio may also hold
foreign currency in anticipation of purchasing foreign securities.
AMERICAN DEPOSITORY RECEIPTS
As noted above, ADRs are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Subadviser does not treat them as
foreign securities. However, they are subject to many of the risks of foreign
securities described above.
EMERGING MARKET SECURITIES
The MFS Portfolio may invest in countries or regions with relatively low gross
national product per capita compared to the world's major economies, and in
countries or regions with the potential for rapid economic growth (emerging
markets). Emerging markets will include any country: (i) having an "emerging
stock market" as defined by the International Finance Corporation; (ii) with
low-to-middle-income economies according to the International Bank for
Reconstruction and Development (the "World Bank"); (iii) listed in World Bank
publications as developing; or (iv) determined by the Subadviser to be an
emerging market as defined above. Additionally, the Portfolio may invest in
securities of: (i) companies the principal securities trading market for which
is an emerging market country; (ii) companies organized under the laws of, and
with a principal office in, an emerging market country; (iii) companies whose
principal activities are located in emerging market countries; or (iv) companies
traded in any market that derives 50% or more of their total revenue from either
goods or services produced in an emerging market or sold in an emerging market.
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<PAGE> 39
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities of many issuers in emerging markets
may be less liquid and more volatile than securities of comparable domestic
issuers. Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions. Delays in settlement could result in temporary periods
when a portion of the assets of a Portfolio is uninvested and no return is
earned thereon. The inability of a Portfolio to make intended security purchases
due to settlement problems could cause the Portfolio to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result in losses to a Portfolio. Emerging nations may
suffer from extreme and volatile debt burdens or inflation rates. Securities of
issuers located in countries with emerging markets may have limited
marketability and may be subject to more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Portfolio could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to a Portfolio of any
restrictions on investments. Investments in certain foreign emerging market debt
obligations may be restricted or controlled to varying degrees. These
restrictions or controls may at times preclude investment in certain foreign
emerging market debt obligations and increase the expenses of a Portfolio.
LENDING PORTFOLIO SECURITIES
The MFS Portfolio is authorized to lend its portfolio securities to brokers,
dealers and other financial organizations. The purpose of this lending activity
is to generate additional income. The primary risk associated with lending
portfolio securities, as with other extensions of credit, consists of possible
loss of rights in the collateral should the borrower fail financially.
As with any securities lending, a risk exists that when the Portfolio lends
portfolio securities, the securities may not be available to the Portfolio on a
timely basis and the Portfolio may, therefore, lose the opportunity to sell the
securities at a desirable price. In addition, in the event that a borrower of
securities files for bankruptcy or becomes insolvent, disposition of the
securities may be delayed pending court action.
The Portfolio engaging in securities lending will follow certain guidelines in
determining whether a particular potential securities borrower is appropriate.
For example, MFS will usually only make loans to member banks of the Federal
Reserve System and member firms (and subsidiaries thereof) of the New York Stock
Exchange (the "Exchange") and would be required to be secured continuously by
collateral in cash, cash equivalents or U. S. Government securities maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. MFS Portfolio would continue to collect the equivalent of the
interest on the securities loaned and would also receive either interest
(through investment of cash collateral) or a fee (if the collateral is U. S.
Government securities or a letter of credit).
In determining whether to lend a security to a particular broker, dealer or
financial institution, the Investment Subadviser will consider all relevant
facts and circumstances, including the creditworthiness of the broker, dealer or
financial institution. A Portfolio will not enter into any portfolio security
lending arrangement having a duration of longer than one year. Any securities
that the Portfolio may receive as collateral will not become part of the
Portfolio's investment Portfolio at the time of the loan
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and, in the event of a default by the borrower, the Portfolio will, if permitted
by law, dispose of such collateral except for such part thereof that is a
security in which the Portfolio is permitted to invest. During the time
securities are on loan, the borrower will pay the Portfolio any accrued income
on those securities and the Portfolio may invest the cash collateral and earn
additional income or receive an agreed upon fee from a borrower that has
delivered cash equivalent collateral. The Portfolio will not lend securities
having a value that exceeds 10% of the current value of its total assets. Loans
of securities will be subject to termination at the Portfolio's or the
borrower's option. The Portfolio may pay reasonable administrative and custodial
fees in connection with a securities loan and may pay a negotiated portion of
the interest or fee earned with respect to the collateral to the borrower or the
placing broker.
TEMPORARY BANK BORROWING
The Portfolio may borrow from banks for temporary purposes, including the
meeting of redemption requests which might require the untimely disposition of
securities.
The MFS Portfolio's policies permit borrowing of up to 33 1/3% of total assets.
CORPORATE ASSET-BACKED SECURITIES
MFS Portfolio may invest in corporate asset-backed securities. These securities,
issued by trusts and special purpose corporations, are backed by a pool of
assets, such as credit card or automobile loan receivables, representing the
obligations of a number of different parties. Corporate asset-backed securities
present certain risks. For instance, in the case of credit card receivables,
these securities may not have the benefit of any security interest in the
related collateral.
ASSET-BACKED MORTGAGE SECURITIES
Securities of this type include interests in pools of lower-rated debt
securities, or consumer loans or mortgages, or complex instruments such as
collateralized mortgage obligations and stripped mortgage-backed securities. The
value of these securities may be significantly affected by changes in interest
rates, the market's perception of the issuers, and the creditworthiness of the
parties involved. Some securities may have a structure that makes their reaction
to interest rates and other factors difficult to predict, making their value
highly volatile. These securities may also be subject to prepayment risk.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
MFS Portfolio may invest a portion of its assets in "loan participations" and
other direct indebtedness. By purchasing a loan participation, the Portfolio
acquires some or all of the interest of a bank or other lending institution in a
loan to a corporate borrower. Many such loans are secured, and most impose
restrictive covenants which must be met by the borrower. These loans are made
generally to finance internal growth, mergers, acquisitions, stock repurchases,
leveraged buy-outs and other corporate activities. Such loans may be in default
at the time of purchase.
MFS Portfolio may also purchase other direct indebtedness such as trade or other
claims against companies, which generally represent money owed by the company to
a supplier of goods and services. These claims may also be purchased at a time
when the company is in default. Certain of the loan participations and other
direct indebtedness acquired by the Portfolio may involve revolving credit
facilities or other standby financing commitments which obligate the Portfolio
to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct indebtedness may
make such loans especially vulnerable to adverse changes in economic or market
conditions. Loan participations and other direct indebtedness may not be in the
form of securities or may be subject to restrictions on transfer, and only
limited opportunities may exist to resell such instruments. As a result, the
Portfolio may be unable to sell such investments at an opportune time or may
have to resell them at less than fair market value. For a further discussion of
loan participations, other direct indebtedness and the risks related to
transactions therein, please review the SAI.
MFS-24
<PAGE> 41
EXHIBIT B
- --------------------------------------------------------------------------------
A. DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS
Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds rated A possess many favorable investment attributes 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 susceptibility to impairment sometime in the future.
Baa -- Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Caa -- Bonds rate Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other market short-comings.
C -- Bonds rate C are the lowest-rated class of bonds and issued so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
B. DESCRIPTION OF STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issued only in small degree.
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.
MFS-25
<PAGE> 42
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas 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.
BB -- Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B -- Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest or repay principal.
CC -- Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -- The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings from AA to CCC may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.
MFS-26
<PAGE> 43
THE TRAVELERS SERIES TRUST
TRAVELERS QUALITY BOND PORTFOLIO
ONE TOWER SQUARE
HARTFORD, CONNECTICUT 06183
TELEPHONE 1-860-277-0111
- --------------------------------------------------------------------------------
The Travelers Series Trust (the "Series Trust") is a diversified open-end
management investment company (mutual fund) consisting of multiple series of
shares (the "Portfolios"), each with its own investment objectives and policies.
Travelers Quality Bond Portfolio is the only Portfolio of the Series Trust
described herein.
Shares of the Portfolio are currently offered without a sales charge to certain
separate accounts of The Travelers Insurance Company and Travelers Life and
Annuity Company (collectively, "Company" or "Travelers"). The Portfolio serves
as an investment vehicle for variable annuity and variable life insurance
contracts issued by Travelers. The term "shareholder" as used herein refers to
any insurance company separate account that may use shares of the Portfolio as
investment vehicles now or in the future.
This Prospectus concisely sets forth the information about the Series Trust and
the Portfolio that you should know before investing. Please read it and retain
it for future reference. Additional information about the Series Trust and the
Portfolio is contained in a Statement of Additional Information ("SAI") dated
May 1, 1997 which has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this Prospectus. A copy may be
obtained, without charge, by writing to The Travelers Insurance Company, Annuity
Services, One Tower Square, Hartford, Connecticut 06183-5030, or by calling
1-800-842-8573.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR A VARIABLE
ANNUITY OR VARIABLE LIFE INSURANCE CONTRACT ISSUED BY TRAVELERS. BOTH THIS
PROSPECTUS AND THE CONTRACT PROSPECTUS SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE> 44
TABLE OF CONTENTS
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS.................................................................. 3
FUND DESCRIPTION...................................................................... 4
FUNDAMENTAL INVESTMENT POLICIES....................................................... 4
TRAVELERS QUALITY BOND PORTFOLIO...................................................... 4
PORTFOLIO TURNOVER.................................................................... 5
BOARD OF TRUSTEES..................................................................... 6
INVESTMENT MANAGER.................................................................... 6
FUND ADMINISTRATION................................................................... 6
SECURITIES TRANSACTIONS............................................................... 7
FUND EXPENSES......................................................................... 7
TRANSFER AGENT........................................................................ 7
SHARES OF THE SERIES TRUST............................................................ 7
NET ASSET VALUE....................................................................... 8
TAX STATUS............................................................................ 9
DIVIDENDS AND DISTRIBUTIONS........................................................... 9
LEGAL PROCEEDINGS..................................................................... 9
ADDITIONAL INFORMATION................................................................ 9
EXHIBIT A............................................................................. 10
EXHIBIT B............................................................................. 15
</TABLE>
QB-2
<PAGE> 45
FINANCIAL HIGHLIGHTS
The following information on per share data for the period ended December 31,
1996 has been audited by KPMG Peat Marwick, L.L.P. The auditor's report on the
per share data for this period is contained in the Fund's Annual Report which
should be read along with this information and which is incorporated by
reference into the SAI:
<TABLE>
<CAPTION>
TRAVELERS
QUALITY BOND
PORTFOLIO(1)
------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................................. $10.00
INCOME FROM OPERATIONS:
Net investment income(2)............................................ 0.19
Net realized and unrealized gains................................... 0.16
Total Income From Operations.......................................... 0.35
LESS DISTRIBUTION FROM:
Net investment income............................................... (0.19)
Net realized gains.................................................. (0.06)
Capital............................................................. --
Total Distributions................................................... (0.25)
NET ASSET VALUE, END OF PERIOD........................................ $10.10
TOTAL RETURN++........................................................ 3.56%
NET ASSETS, END OF PERIOD (000'S)..................................... $5,273
RATIOS TO AVERAGE NET ASSETS+:
Expenses(2)......................................................... 0.75%
Net investment income............................................... 5.62
PORTFOLIO TURNOVER RATE+.............................................. 35%
AVERAGE COMMISSIONS PER SHARE PAID ON EQUITY TRANSACTIONS............. --
</TABLE>
- ---------------
(1) For the period from August 30, 1996 (commencement of operations) to December
31, 1996.
(2) The Travelers has waived all of its fees for the period ended December 31,
1996. In addition, The Travelers has agreed to reimburse the Travelers
Quality Bond Portfolio $10,901 of the Portfolios' expenses for the period
ended December 31, 1996. If such fees were not waived or reimbursed, the per
share effect on net investment income and the expense ratios would have been
$0.03 and 1.76%, respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year. The total return would have been lower had
expenses not been reduced during the period shown.
+ Annualized.
QB-3
<PAGE> 46
FUND DESCRIPTION
- --------------------------------------------------------------------------------
The Series Trust is registered with the SEC as an open-end management investment
company. The Series Trust is organized as a business trust under the laws of the
Commonwealth of Massachusetts. An Agreement and Declaration of Trust dated
October 11, 1991 (the "Declaration of Trust") authorizes the shares of the
Series Trust to be divided into two or more series related to separate
portfolios of investments, and further allows the Board of Trustees to establish
additional portfolios at any time.
The Series Trust is currently divided into fourteen series (the "Portfolios"),
each with its own investment objective and policies, all of which are
diversified portfolios under the Investment Company Act of 1940, as amended
("1940 Act"). Quality Bond Portfolio, as described below, is contained in this
prospectus. The other Portfolios are described in a separate prospectus. While
there is no assurance that the Portfolio will achieve its objective, it
endeavors to do so by following its investment policies as described below.
FUNDAMENTAL INVESTMENT POLICIES
The Portfolio follows certain investment policies and adopts specific investment
techniques which cannot be modified without shareholder approval. These
"fundamental" investment policies are mandated by either the provisions of the
The Investment Company Act of 1940, as amended (the "1940 Act") or pursuant to
procedures that the Board of Trustees has decided to adopt. In contrast, the
Portfolio also follows certain nonfundamental investment policies. Unlike the
fundamental investment policies, nonfundamental policies may be changed, subject
to the approval of the Board, at the discretion of the Investment Adviser
without shareholder approval. Except as noted, all of the investment policies
discussed herein are nonfundamental.
TRAVELERS QUALITY BOND PORTFOLIO
("TRAVELERS BOND PORTFOLIO")
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The basic investment objective of Travelers Bond Portfolio is to seek current
income, moderate capital volatility and total return.
INVESTMENT POLICIES
The assets of Travelers Bond Portfolio will be primarily invested in the
following securities:
- - money market obligations;
- - treasury bills;
- - repurchase agreements;
- - commercial paper;
- - bank certificates of deposit and bankers' acceptances; and
- - publicly traded debt securities, including bonds, notes, debentures, equipment
trust certificates and short-term instruments.
These securities may carry certain equity features such as conversion or
exchange rights or warrants for the acquisition of stocks of the same or
different issuer, or participation based on revenues, sales or profits. It is
currently anticipated that the market value-weighted average maturity of the
portfolio will not exceed five years. (In the case of mortgage-backed
securities, the estimated average life of cash flows will be used instead of
average maturity.) Investment in longer term obligations may be made if the
Investment Adviser concludes that the investment yields justify a longer term
commit-
QB-4
<PAGE> 47
ment. No more than 25% of the value of Travelers Bond Portfolio's assets will be
invested in any one industry.
The Portfolio will be actively managed and investments may be sold prior to
maturity if deemed advantageous in light of factors such as market conditions or
brokerage costs. While the investments of Travelers Bond Portfolio are generally
not listed securities, there are firms which make markets in the type of debt
instruments that Travelers Bond Portfolio holds. No problems of liquidity are
anticipated with regard to the investments of Travelers Bond Portfolio.
From time to time, Travelers Bond Portfolio may commit to purchase new-issue
government or agency securities on a "when-issued" basis (referred to throughout
as "when-issued securities"). Travelers Bond Fund may also purchase and sell
interest rate futures contracts to hedge against changes in interest rates that
might otherwise have an adverse effect upon the value of the Travelers Bond
Portfolios securities. See attached Exhibit A for a more complete description of
these investment techniques.
INVESTMENT RESTRICTIONS
The Travelers Bond Portfolio is subject to certain investment restrictions.
Specifically, the Investment Adviser, on behalf of Travelers Bond Portfolio may:
- - invest up to 15% of the value of its assets in the securities of any one
issuer (exclusive of obligations of the United States government and its
instrumentalities, for which there is no limit);
- - borrow from banks in amounts of up to 5% of its assets, but only for emergency
purposes;
- - purchase interests in real estate represented by securities for which there is
an established market;
- - make loans through the acquisition of a portion of a privately placed issue of
bonds, debentures or other evidences of indebtedness of a type customarily
purchased by institutional investors;
- - acquire up to 10% of the voting securities of any one issuer (it is the
present practice of Travelers Bond Portfolio not to exceed 5% of the voting
securities of any one issuer);
- - make purchases on margin in the form of short-term credits which are necessary
for the clearance of transactions; and place up to 5% of its net asset value
in total margin deposits for positions in futures contracts; and
- - invest up to 15% of its assets in restricted securities (securities which may
not be publicly offered without registration under the Securities Act of
1933).
RISK FACTORS
The Investment Adviser will weigh considerations of risks, yield and ratings in
implementing Travelers Bond Portfolio's fundamental investment policies. There
are no specific criteria with regard to quality or ratings of the investments of
Travelers Bond Portfolio, but it is anticipated that they will be of investment
grade or its equivalent. Debt instruments that the Portfolio purchases may,
however, not be rated since such instruments may be government securities or of
short durations. There may or may not be more risk in investing in debt
instruments where there are no specific criteria with regard to quality or
ratings of the investments.
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.
PORTFOLIO TURNOVER
- --------------------------------------------------------------------------------
Although the Portfolio does not intend to invest for the purpose of seeking
short-term profits, securities held by the Portfolio will be sold whenever the
Portfolio's investment adviser or Subadviser believes it is appropriate to do so
in light of the Portfolio's investment objective, without regard to the
QB-5
<PAGE> 48
length of time a particular security may have been held. For 1996, the Portfolio
turnover rate was 35%.
BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
Under Massachusetts law, the Series Trust's Board of Trustees has absolute and
exclusive control over the management and disposition of all assets of the
Series Trust. Subject to the provisions of the Declaration of Trust, the
business and affairs of the Series Trust shall be managed by the Trustees or
other parties so designated by the Trustees. Information relating to the Board
of Trustees, including its members and their compensation, is contained in the
SAI.
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
TAMIC is a registered investment adviser which has provided investment advisory
services since its incorporation in 1978. TAMIC is an indirect wholly owned
subsidiary of Travelers Group, Inc., and its principal offices are located at
One Tower Square, Hartford, Connecticut, 06183. In addition to providing
investment advice to the Portfolio, TAMIC also acts as investment adviser for
other investment companies used to fund variable insurance products. TAMIC also
provides investment advice to individual and pooled pension and profit-sharing
accounts and non-affiliated insurance companies.
QUALITY BOND PORTFOLIO
INVESTMENT ADVISER: TAMIC
Under its Investment Advisory Agreement with the Trust, TAMIC is paid an amount
equivalent on an annual basis to .3233% of the average daily net assets of the
Portfolio. The fee is computed daily and paid monthly.
PORTFOLIO MANAGER
The Portfolio is managed by F. Denney Voss. Mr. Voss joined The Travelers
Insurance Company in 1980 and currently Mr. Voss is a Senior Vice President of
The Travelers Insurance Company. Mr. Voss is also a Vice President of TAMIC. Mr.
Voss has also managed TAMIC's Quality Bond Account for Variable Annuities since
March 1995 and has been responsible for managing the Travelers portfolios
backing general account insurance products since August 1994. Prior to
transferring to the Travelers Securities Department in 1994, Mr. Voss performed
various sales and trading functions for Smith Barney Inc., a Travelers Group
subsidiary.
FUND ADMINISTRATION
- --------------------------------------------------------------------------------
The Series Trust, on behalf of the Travelers Quality Bond Portfolio entered into
an Administrative Services Agreement, whereby Travelers Insurance will be
responsible for the pricing and bookkeeping services for the Portfolio at an
annualized rate of .06% of the daily net assets of the Portfolio. The Travelers
Insurance Company at its expense may appoint a sub-administrator to perform
these services. The sub-administrator may be affiliated with The Travelers
Insurance Company.
QB-6
<PAGE> 49
SECURITIES TRANSACTIONS
- --------------------------------------------------------------------------------
Under policies established by the Board of Trustees, the Investment Adviser
selects broker-dealers to execute transactions subject to the receipt of best
execution. When selecting broker-dealers to execute portfolio transactions for
the Portfolio, the Investment Adviser may follow a policy of considering as a
factor the number of shares of a Portfolio sold by such broker-dealers. In
addition, broker-dealers may from time to time be affiliated with the Series
Trust, the investment advisers or their affiliates.
The Portfolio may pay higher commissions to broker-dealers which provide
research services. The Investment Adviser may use these services in advising the
Portfolio, as well as in advising their other clients.
FUND EXPENSES
- --------------------------------------------------------------------------------
In addition to the investment advisory fees discussed above, the other principal
expenses of the Series Trust and the Portfolios include the charges and expenses
of the transfer agent, the custodian, the independent auditors, and any outside
legal counsel employed by either the Series Trust or the Board of Trustees; the
compensation for the unaffiliated members of the Board of Trustees; the costs of
printing and mailing the Series Trust's prospectus, proxy solicitation
materials, and annual, semiannual and periodic reports; brokerage commissions,
interest charges and taxes; and any registration, filing and other fees payable
to government agencies in connection with the registration of the Series Trust
and its shares under federal and state securities laws. Higher portfolio
turnover may involve correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Portfolios, as well as
additional gains and/or losses to shareholders.
Pursuant to a Management Agreement originally executed on May 1, 1993 between
the Series Trust and the Company, the Company agreed to reimburse the Series
Trust for the amount by which the Portfolio's aggregate annual expenses,
including investment advisory fees but excluding brokerage commissions, interest
charges and taxes, exceed 0.75% of the Portfolio's average net assets for any
fiscal year. This agreement will remain in effect until terminated by either
party upon sixty days' notice.
TRANSFER AGENT
- --------------------------------------------------------------------------------
First Data Investor Services Group, Inc., Exchange Place, Boston, MA 02109
serves as the Series Trust's transfer agent and dividend disbursing agent.
SHARES OF THE SERIES TRUST
- --------------------------------------------------------------------------------
The Series Trust currently issues one class of shares divided into fourteen
separate series. Under the Declaration of Trust, the Board of Trustees is
authorized to create new series of shares without the necessity of a vote of
shareholders of the Series Trust. All shares of each series of the Series Trust
have equal voting, dividend and liquidation rights. When issued and paid for,
the shares will be fully paid and nonassessable by the Series Trust and will
have no preference, conversion, exchange or preemptive rights.
Shareholders are entitled to one vote for each full share owned and fractional
votes for fractional shares. Shares of each series are entitled to vote
separately to approve investment advisory agreements or changes in fundamental
investment restrictions, but shares of all series vote together in the election
of Trustees and the selection of accountants. Shares are redeemable,
transferable and freely
QB-7
<PAGE> 50
assignable as collateral. There are no sinking fund provisions. (See the
accompanying separate account prospectus for a discussion of voting rights
applicable to purchasers of variable annuity and variable life insurance
contracts.)
Shares of the Series Trust are currently sold only to insurance company separate
accounts in connection with variable annuity and variable life insurance
contracts issued by the Company. Shares are not sold to the general public. The
Trust reserves the right to reject any purchase request. Shares of the Series
Trust are sold on a continuing basis, without a sales charge, at the net asset
value next computed after payment is made by the insurance company to the Series
Trust's custodian. However, the separate accounts to which shares are sold may
impose sales and other charges, as described in the appropriate contract
prospectus.
Under Massachusetts law, it is possible that a shareholder of any series may be
held personally liable for a Portfolio's obligations. However, the Series
Trust's Declaration of Trust provides that shareholders shall not be subject to
any personal liability for the Series Trust's obligations and provides
indemnification from Series Trust assets for any shareholder held personally
liable for the Series Trust's obligations. Disclaimers of such liability are
included in each agreement entered into by the Series Trust or its Portfolios.
Although the Series Trust is not currently aware of any disadvantages to
contract owners of either variable annuity or variable life insurance contracts
because the Series Trust'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 Series Trust due to
differences in tax treatment, management of the Trust's investments, or other
considerations. The Series Trust's Board of Trustees will monitor events in
order to identify any material conflicts between variable annuity contract
owners and variable life insurance policy owners, and will determine what
action, if any, should be taken in the event of such a conflict.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value of a Portfolio share is computed as of the close of trading
on each day on which the New York Stock Exchange is open for trading, except on
days when changes in the value of the Portfolio's securities do not affect the
current net asset value of its shares. The net asset value per share is arrived
at by determining the value of the Portfolio's assets, subtracting its
liabilities, and dividing the result by the number of shares outstanding.
The Portfolio values short-term money market instruments with maturities of
sixty days or less at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market. All other investments are valued at
market value, or where market quotations are not readily available, at fair
value as determined in good faith by the Series Trust's Board of Trustees or by
a committee appointed by the Trustees. The procedure set forth above need not be
used to determine the value of the securities owned by a portfolio if, in the
opinion of the Trustees or the committee appointed by the Trustees, 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.
Full and fractional shares of the Portfolio may be redeemed on any business day.
Redemptions are effected at the per share net asset value next determined after
receipt by the Portfolio of a proper 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
Portfolio's securities between purchase and redemption.
The Portfolio computes the redemption value at the close of the New York Stock
Exchange ("Exchange") at the end of the day on which they have received all
proper documentation from the
QB-8
<PAGE> 51
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 Series Trust or the Portfolio may temporarily suspend the right to redeem
their 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 Portfolio's investments
or determination of its net asset value is not reasonably practicable; or (4)
the SEC, for the protection of shareholders, so orders.
TAX STATUS
- --------------------------------------------------------------------------------
The Series Trust and its Portfolios have qualified and intend to qualify in the
future as a regulated investment company under Subchapter M of the Internal
Revenue Code, as amended. A Portfolio qualifies if, among other things, it
distributes to its shareholders at least 90% of its investment company taxable
income during each fiscal year.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Capital gains and dividends are distributed in cash or reinvested in additional
shares of a Portfolio without a sales charge. Although purchasers of variable
contracts are not currently subject to federal income taxes on distributions
made by the Portfolios, they may be subject to state and local taxes and should
review the accompanying contract prospectus for a discussion of the tax
treatment applicable to purchasers of variable annuity and variable life
insurance contracts.
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no pending material legal proceedings affecting the Series Trust or
the Portfolio.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Except as otherwise stated in this Prospectus or as required by law, the Series
Trust reserves the right to change the terms of the offer stated in this
Prospectus without shareholder approval, including the right to impose or change
fees for services provided.
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EXHIBIT A
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DESCRIPTION OF CERTAIN TYPES OF INVESTMENTS AND
INVESTMENT TECHNIQUES AVAILABLE TO THE PORTFOLIO
The following types of investments and investment techniques are available to
the Portfolios as set forth herein or in the prospectus. Please refer to the
investment objective and policies of the Portfolio for a list of available
investments.
CASH INSTRUMENTS
The Portfolio may invest temporarily in cash and cash items during times of
unusual market conditions for defensive purposes and to maintain liquidity. Cash
items may include, but are not limited to, obligations such as: commercial paper
(generally lower-rated); short-term notes; obligations issued or guaranteed as
to principal and interest by the U.S. government or any of its agencies or
instrumentalities (see "U.S. Government Obligations" below).
U.S. GOVERNMENT OBLIGATIONS
The Portfolio may invest in direct obligations of the U.S. Treasury (such as
U.S. Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are backed by
the full faith and credit of the U.S. Treasury.
DEBT SECURITIES
Additionally, the Portfolio's investments may be made in bonds and other debt
instruments used by issuers to borrow money from investors. Debt instruments
involve the promise, by the issuer of the instrument to pay the investor a fixed
or variable rate of interest. Such repayment will occur at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values. In general, bond prices rise
when interest rates fall, and vice versa. Debt securities have varying degrees
of quality and varying levels of sensitivity to changes in interest rates.
Longer-term bonds are generally more sensitive to interest rate changes than
short-term bonds.
Investment-grade debt securities are medium- and high-quality securities. Some,
however, may possess speculative characteristics and may be more sensitive to
economic changes and to changes in the financial condition of issuers.
Lower-quality debt securities (sometimes called "junk bonds") are considered to
have speculative characteristics and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness, or they may already be
in default. The market prices of these securities may fluctuate more than
higher-quality securities and may decline significantly in periods of general
economic difficulty. The Portfolio may be permitted to invest in such
lower-quality debt securities.
If market quotations are unavailable, lower-quality debt securities are valued
in accordance with procedures established by the Board of Trustees, including
the use of outside pricing services. Adverse publicity and changing investor
perceptions may affect the ability of outside pricing services to value
lower-quality debt securities. and the Portfolio's ability to dispose of those
securities.
VARIABLE AMOUNT MASTER DEMAND NOTES
Variable amount master demand notes are unsecured obligations that permit the
investment of fluctuating amounts by a Portfolio at varying rates of interest
pursuant to direct arrangements between the Portfolio as lender and the issuer
as borrower. Master demand notes permit daily fluctuations in the interest rate
and daily changes in the amounts borrowed. A Portfolio has the right to increase
the amount under the note at any time up to the full amount provided by the note
agreement, or to decrease the amount, and the borrower may repay up to the full
amount of the note without penalty. Because these types of notes are direct
lending arrangements between the lender and the borrower,
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it is not generally contemplated that such instruments will be traded, and there
is no secondary market for these notes, although they are redeemable and thus
repayable by the borrower at face value plus accrued interest at any time.
Accordingly, a Portfolio's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. In connection with master
demand note arrangements, the Investment adviser and Subadvisers will consider
the earning power, cash flow and other liquidity ratios of the issuer. These
notes, as such, are not typically rated by credit rating agencies. Unless they
are so rated, the Portfolios will invest in them only if, at the time of an
investment, the issuer meets the criteria set forth for all other commercial
paper. Pursuant to procedures established by the Investment adviser or
Subadviser, such notes are treated as instruments maturing in one day and valued
at their par value. The investment adviser and Subadviser intend to continuously
monitor factors related to the ability of the borrower to pay principal and
interest on demand.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell U.S. government securities and or other securities to a
Portfolio and each agrees at the time of the sale to repurchase the securities
at a mutually agreed upon time and price. Interim cash balances may be invested
from time to time in repurchase agreements with approved counterparties (e.g.,
banks or broker-dealers meeting the investment advisor's credit quality
standards as presenting minimal risk of default). Repurchase transactions
generally mature the next business day but, in the event of a transaction of
longer maturity, collateral will be marked to market daily and, when required,
additional cash or qualifying collateral will be required from the counterparty.
In any repurchase agreement, the risk that the original seller does not
repurchase the securities as called for in the repurchase agreement exists. A
Portfolio could receive less than the repurchase price on any sale of such
securities. Additionally, if the seller becomes subject to a proceeding under
the bankruptcy laws or its assets are otherwise subject to a stay order, a
Portfolio's right to liquidate the securities may be restricted (during which
time the value of the securities could decline). The Investment Adviser and
Subadviser, however, each believe that under the regular procedures normally in
effect for custody of the Portfolio's securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the
Portfolio and allow retention or disposition of such securities.
The Portfolio may adopt rules concerning the collateralization of repurchase
agreements so long as the repurchase agreement is collateralized fully.
The Portfolio will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers that are found by the
Portfolio's adviser to be creditworthy pursuant to guidelines established for
the Portfolio.
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 Portfolio would bear the risks of delay,
adverse market fluctuation and transaction costs in disposing of the collateral.
The Portfolio or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily.
WHEN-ISSUED SECURITIES
The Portfolio may purchase securities on a when-issued or delayed delivery
basis. Transactions of this type are arrangements in which the particular
Portfolio purchases securities with payment and delivery scheduled for a future
time. Their purpose is to help to ensure the availability of suitable
securities.
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The prices of such securities will be fixed at the time the commitment to
purchase is made, and may be expressed in either dollar price or yield
maintenance terms. Such commitment to purchase may be viewed as a senior
security, and generally will be marked to market and reflected in the
Portfolio's Accumulation Unit Value daily from the commitment date. Delivery and
payment may be at a future date beyond customary settlement time.
It is the customary practice of Travelers Quality Bond Portfolio to make
when-issued purchases for settlement no more than 90 days beyond the commitment
date. The Travelers Quality Bond Portfolio may only purchase when issued
securities of new issue government or agency securities.
While it is the intention of the Portfolio to take physical delivery of these
securities, offsetting transactions may be made prior to settlement, if it is
advantageous to do so. For example, Travelers Quality Bond Portfolio does not
make payment or begin to accrue interest on these securities until settlement
date. In order to invest its assets pending settlement, Travelers Quality Bond
Portfolio will normally invest in short-term money market instruments and other
securities maturing no later than the scheduled settlement date.
Travelers Quality Bond Portfolio does not intend to purchase when-issued
securities for speculative or "leverage" purposes. Consistent with Section 18 of
the 1940 Act and the General Policy Statement of the SEC thereunder, when
Travelers Quality Bond Portfolio commits to purchase a when-issued security, it
will identify and place 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 Investment Adviser engaged in trades of when issued securities each believes
that purchasing securities in this manner will be advantageous. This practice,
however does include certain risks, namely the default of the counterparty on
its obligation to deliver the security as scheduled. In this event, an affected
Portfolio would endure a loss (or gain) equal to the price appreciation (or
depreciation) in value from the commitment date. Further, such failure to
complete a transaction may cause the affected Portfolio to miss other
opportunities.
To guard against such risks, the Investment Adviser employs a rigorous credit
quality procedure in determining the counterparties with which it will deal in
when-issued securities and, in some circumstances, will require the counterparty
to post cash or some other form of security as margin to protect the value of
its delivery obligation pending settlement.
It is expected that, under normal circumstances, the Portfolio will take
delivery of such securities. In general, the Portfolio does not pay for the
securities until received and the Portfolio does not start earning interest on
the obligations until the contractual settlement date. While awaiting delivery
of the obligations purchased on such bases, the Portfolio will establish a
segregated account consisting of cash, short-term money market instruments or
high quality debt securities equal to the amount of the commitments to purchase
when-issued securities.
A Portfolio may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Portfolio may enter in transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. A Portfolio may realize short-term profits or losses upon the sale of
such commitments.
FUTURES CONTRACTS
The Portfolio may use exchange-traded financial futures for various purposes
including contracts as a hedge to protect against changes in interest rates or
stock prices. Financial futures contracts consist of stock index futures
contracts and futures contracts on debt securities. An interest rate futures
contract is a contract to buy or sell specified debt securities at a future time
for a fixed price. 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.
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Hedging by use of interest rate futures seeks to establish, with more certainty
than would otherwise be possible, the effective rate of return on portfolio
securities. When hedging is successful, any depreciation in the value of
portfolio securities will substantially be offset by appreciation in the value
of the futures position. Conversely, any appreciation in the value of the
portfolio securities will substantially be offset by depreciation in the value
of the futures position. At no time will any Portfolios' futures trading
transactions be employed for speculative purposes.
Stock index futures may be used, to a limited extent, to hedge specific common
stocks with respect to market (systematic) risk (involving the market's
assessment of overall economic prospects) as distinguished from stock-specific
risk (involving the market's evaluation of the merits of the issuer of a
particular security). Gains and losses on futures contracts employed as hedges
for specific securities will normally be offset by losses or gains,
respectively, on the hedged security.
When a futures contract is purchased, the Portfolio will set aside liquid
securities equal to the total market value of the futures contract, less the
amount of the initial margin.
Positions taken in the futures market are not normally held to maturity, but
instead are liquidated through offsetting transactions which may result in a
profit or a loss. Closing out an open futures contract sale or purchase is
effected by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the debt security and the same
delivery date. If the offsetting purchase price is less than the original sale
price, the Portfolio realizes a gain; if it is more, the Portfolio realizes a
loss. Conversely, if the offsetting sale price is more than the original
purchase price, the Portfolio realizes a gain; if less, a loss. While futures
positions taken by the Portfolio will usually be liquidated in this manner, the
Portfolio may instead make or take delivery of the underlying securities
whenever it appears economically advantageous for them to do so. In determining
gain or loss, transaction costs must be taken into account. There can be no
assurance that the Portfolio will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time.
All interest rate and stock index futures contracts will be traded on exchanges
that are licensed and regulated by the Commodity Futures Trading Commission
("CFTC"). To ensure that its futures transactions meet CFTC standards, the
Portfolio will enter into futures contracts for hedging purposes only, i.e., for
the purposes or with the intent specified in CFTC regulations and
interpretations, subject to the requirements of the SEC. The Portfolio will
further seek to assure that fluctuations in the price of any futures contracts
that they use for hedging purposes will be substantially related to fluctuations
in the price of the securities which they hold or which they expect to purchase,
or for other risk reduction strategies, though there can be no assurance 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 Portfolio may
benefit from the use of such futures, changes in interest rates or stock price
movements may result in a poorer overall performance for the Portfolio than if
they 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 Portfolio may be exposed to risk of loss. The investment advisers will
attempt to reduce this risk by engaging in futures transactions, to the extent
possible, where, in their 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.
In addition to the possibility that there may be a less than perfect correlation
between movements in the futures contracts and securities in the Portfolio being
hedged, the prices of futures contracts may not correlate perfectly with
movements in the underlying security due to certain market distortions. First,
rather than meeting variation margin deposit requirements should a futures
contract value
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move adversely, investors may close future contracts through offsetting
transactions which could distort the normal relationship between the index and
futures markets. Second, since margin requirements in the futures market are
less onerous than in the securities market, the futures market may attract more
speculators than the securities market. Increased participation by speculators
may cause temporary price distortions. Due to the possibility of such price
distortion, and also because of the imperfect correlation discussed above, even
a correct forecast of general market trends by the investment advisers may not
result in a successful hedging transaction in the futures market over a short
time period.
Successful use of futures contracts for hedging purposes is also subject to the
investment advisers' ability to predict correctly movements in the direction of
the market. The Investment Adviser believes that over time the value of the
investments of the Portfolios will tend to move in the same direction as the
market indices which are intended to correlate to the price movements of the
portfolio securities sought to be hedged.
TEMPORARY BANK BORROWING
The Portfolio may borrow from banks for temporary purposes, including the
meeting of redemption requests which might require the untimely disposition of
securities. Temporary or emergency borrowing in the aggregate may not exceed
15%.
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EXHIBIT B
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A. DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS
Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds rated A possess many favorable investment attributes 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 susceptibility to impairment sometime in the future.
Baa -- Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Caa -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other market short-comings.
C -- Bonds rated C are the lowest-rated class of bonds and issued so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
B. DESCRIPTION OF STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issued only in small degree.
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.
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BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas 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.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B -- Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest or repay principal.
CC -- Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -- The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings from AA to CCC may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.
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THE TRAVELERS SERIES TRUST
L-11788-3QB 5/97
