As filed with the Securities and Exchange Commission
on June 4, 1996
Registration Nos. 33-
811-7651
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [ ]
(Check appropriate box or boxes.)
AETNA VARIABLE PORTFOLIOS, INC.
_________________________________________________
(Exact name of registrant as specified in charter)
151 Farmington Avenue
Hartford, CT 06156-8962
________________________________________ __________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (860) 273-7834
Susan Bryant, Esq.
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4C
Hartford, CT 06156-8962
(Name and Address of Agent For Service)
Copies to:
Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
Approximate Date of
Proposed Public Offering:
As soon as practicable after the effective date of this Filing.
Calculation of Registration Fee under the Securities Act of 1933:
$500 - Registrant is registering an indefinite number of securities under
the Securities Act of 1933 pursuant to Investment Company Act Rule 24f-2.
==============================================================================
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
AETNA VARIABLE PORTFOLIOS, INC.
CROSS REFERENCE SHEET
(as required by Rule 404 (c))
<TABLE>
<CAPTION>
<S> <C> <C>
PART A
N-1A
- --------
Item No. Location
- -------- --------------------------
1. Cover Page........................... Cover Page
2. Synopsis............................. Not Applicable
3. Condensed Financial Information...... Not Applicable
4. General Description of Registrant.... Cover Page; The Company;
Description of the Varia-
ble Portfolios; Investment
Strategies; Investment
Techniques; Investment
Restrictions
5. Management of the Fund............... Management of the Variable
Portfolios
6. Capital Stock and Other Securities... General Information; Sale
and Redemption of Shares;
Net Asset Value; Tax
Matters
7. Purchase of Securities Being Offered. The Company; Net Asset
Value; Sale and
Redemption of Shares
8. Redemption or Repurchase............. Sale and Redemption of
Shares; Net Asset Value
9. Pending Legal Proceedings............ Not Applicable
PART B
10. Cover Page........................... Cover Page
11. Table of Contents.................... Table of Contents
12. General Information and History...... General Information
and History
13. Investment Objectives and Policies... Additional Investment Re-
strictions and Policies
of the Portfolios; De-
scription of Various
Securities and Investment
Techniques
14. Management of the Fund............... Directors and Officers
of the Company
15. Control Persons and Principal Holders Control Persons and
of Securities...................... Principal Shareholders
16. Investment Advisory and Other The Investment Advisory
Services........................... Agreement; The Administra-
tive Services Agreement;
Independent Auditors;
Custodian
17. Brokerage Allocation and Other Brokerage Allocation and
Practices.......................... Trading Practices
18. Capital Stock and Other Securities... Description of Shares;
Voting Rights
19. Purchase, Redemption and Pricing of Net Asset Value; Sale
Securities Being Offered........... and Redemption of Shares
20. Tax Status........................... Tax Status
21. Underwriters......................... Principal Underwriter
22. Calculation of Performance Data..... Performance Information
23. Financial Statements................. Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement.
PART A
AETNA VARIABLE PORTFOLIOS, INC.
151 FARMINGTON AVENUE
HARTFORD, CT 06156-8962
AETNA VARIABLE GROWTH PORTFOLIO
AETNA VARIABLE SMALL COMPANY GROWTH PORTFOLIO
AETNA VARIABLE QUANTITATIVE EQUITY PORTFOLIO
AETNA VARIABLE CAPITAL APPRECIATION PORTFOLIO
PROSPECTUS DATED: _____________, 1996
Aetna Variable Portfolios, Inc. (the "Company") is an open-end diversified
management investment company authorized to issue multiple series of shares,
each representing a diversified portfolio of investments (individually, a
"Portfolio" and collectively, the "Variable Portfolios"). The Company
currently has four series authorized. The Company's shares are offered only
to insurance companies to fund benefits under their variable annuity contracts
(VA Contracts) and variable life insurance policies (VLI Policies).
This Prospectus sets forth concisely the information that a prospective
contract holder or policy holder should know before directing an investment to
a Portfolio and should be read and kept for future reference. A Statement of
Additional Information ("SAI") dated ___________, 1996 contains more
information about the Variable Portfolios. For a free copy of the SAI, call
1-800-_______ or write to Aetna Variable Portfolios, Inc., at the address
listed above. The SAI has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated into this Prospectus by reference.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the securities of the Company in any jurisdiction in which such
sale, offer to sell, or solicitation may not be lawfully made.
INVESTMENTS IN THE COMPANY ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK. SHARES OF THE COMPANY ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE COMPANY IS SUBJECT TO RISK
THAT MAY CAUSE THE VALUE OF THE INVESTMENT TO FLUCTUATE, AND WHEN THE
INVESTMENT IS REDEEMED, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT
ORIGINALLY INVESTED BY THE INVESTOR.
LIKE ALL MUTUAL FUNDS, 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.
PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND RETAIN FOR FUTURE
REFERENCE.
TABLE OF CONTENTS
PAGE
THE COMPANY
DESCRIPTION OF THE VARIABLE PORTFOLIOS
INVESTMENT TECHNIQUES
RISK FACTORS AND OTHER CONSIDERATIONS
INVESTMENT RESTRICTIONS
MANAGEMENT OF THE VARIABLE PORTFOLIOS
SALE AND REDEMPTION OF SHARES
NET ASSET VALUE
GENERAL INFORMATION
PERFORMANCE
TAX MATTERS
APPENDIX A
GLOSSARY OF INVESTMENT TERMS
APPENDIX B
DESCRIPTION OF CORPORATE BOND RATINGS
THE COMPANY
The Company is an open-end, management investment company, consisting of
multiple series. It currently has authorized four series, AETNA VARIABLE
GROWTH PORTFOLIO (Growth Portfolio) AETNA VARIABLE SMALL COMPANY GROWTH
PORTFOLIO (Small Company Growth Portfolio), AETNA VARIABLE QUANTITATIVE EQUITY
PORTFOLIO (Quantitative Equity Portfolio) and AETNA VARIABLE CAPITAL
APPRECIATION PORTFOLIO (Capital Appreciation Portfolio). The Company may
authorize additional series in the future. The Company is intended to serve
as one of the funding vehicles for VA Contracts and VLI Policies to be offered
through the separate accounts of insurance companies. The insurance companies
and not Participants are shareholders of the Company. See "General
information."
The Company does not foresee any disadvantages to the Participants in funding
both VA Contracts and VLI Policies through the Variable Portfolios or in
offering the Variable Portfolios through more than one insurance company. The
Company's Board of Directors has agreed to monitor the Portfolios' activities
to identify any potentially material, irreconcilable conflicts and to take
appropriate action if necessary to resolve any conflicts which may arise.
DESCRIPTION OF THE VARIABLE PORTFOLIOS
Each Portfolio has an investment objective which is a fundamental policy and
may not be changed without the vote of a majority of the holders of that
Portfolio's outstanding shares. There can be no assurance that the Portfolios
will meet their investment objectives. Each Portfolio is subject to
investment policies and restrictions described in this Prospectus and in the
SAI, some of which are fundamental. No fundamental investment policy or
restriction may be changed without the approval of a majority of the
outstanding shares of that Portfolio. A glossary describing various
investment terms relating to securities that may be held by the Portfolios is
contained in Appendix A.
AETNA VARIABLE GROWTH PORTFOLIO
INVESTMENT OBJECTIVE. The Growth Portfolio seeks growth of capital through
investment in a diversified portfolio of common stocks and securities
convertible into common stocks believed to offer growth potential.
INVESTMENT POLICY. The Growth Portfolio will normally invest at least 65% of
its total assets in common stocks which have potential for capital growth. It
may also invest in convertible and non-convertible preferred stocks.
Additionally, the Growth Portfolio may lend portfolio securities, buy and sell
put and call options, and stock index futures and options. The Growth
Portfolio may also enter into repurchase agreements, invest up to 25% of its
assets in foreign securities, engage in currency hedging and purchase
securities on a when-issued, delayed delivery or forward commitment basis.
The Growth Portfolio will not invest more than 15% of the total value of its
assets in high risk, high-yield securities or "junk bonds".
AETNA VARIABLE SMALL COMPANY GROWTH PORTFOLIO
INVESTMENT OBJECTIVE. The Small Company Growth Portfolio seeks growth of
capital primarily through investment in a diversified portfolio of common
stocks and securities convertible into common stocks of companies with smaller
market capitalizations.
INVESTMENT POLICY. The Small Company Growth Portfolio will normally invest at
least 65% of its total assets in the common stock of companies with equity
market capitalizations at the time of purchase of $1 billion or less. The
Small Company Growth Portfolio may also invest in convertible and
non-convertible preferred stocks.
Additionally, the Small Company Growth Portfolio may lend portfolio
securities, buy and sell put and call options and stock index futures and
options. The Small Company Growth Portfolio may also enter into repurchase
agreements, invest up to 25% of its assets in foreign securities, engage in
currency hedging and purchase securities on a when-issued, delayed delivery or
forward commitment basis. The Small Company Growth Portfolio will not invest
more than 15% of the total value of its assets in high risk, high-yield
securities or "junk bonds".
AETNA VARIABLE QUANTITATIVE EQUITY PORTFOLIO
INVESTMENT OBJECTIVE. The Quantitative Equity Portfolio will attempt to
outperform the total return performance of publicly traded common stocks
represented by the S&P 500 Composite Stock Price Index ("S&P 500"), a
broad-based stock market index composed of 500 common stocks selected by the
Standard & Poor's Corporation. The Portfolio uses the S&P 500 as a
comparative benchmark because it represents approximately 2/3 of the total
market value of all U.S. common stocks, and is well known to investors.
INVESTMENT POLICY. The Portfolio will attempt to be fully invested at all
times, and, in any event, at least 65% of the Portfolio's net assets will be
invested in common stocks listed in the S&P 500. Inclusion of a stock in the
S&P 500 in no way implies an opinion by Standard & Poor's Corporation as to
its attractiveness as an investment. The Portfolio is neither sponsored by
nor affiliated with Standard & Poor's Corporation. AN INVESTMENT IN THE
PORTFOLIO INVOLVES RISKS SIMILAR TO THOSE OF INVESTING IN COMMON STOCKS.
There is no assurance that the Portfolio will purchase each of the stocks that
comprise the S&P 500. The Portfolio may also allocate assets to common stocks
which are not a part of the S&P 500.
The weightings of stocks in the S&P 500 are based on each stock's relative
total market capitalization, that is, its market price per share multiplied by
the number of common shares outstanding. The Investment Adviser will attempt
to outperform the investment results of the S&P 500 by creating a portfolio
that has the same market risk characteristics of the S&P 500, but will use
rigorous analysis to identify those stocks having the greatest likelihood of
either outperforming or underperforming the market.
The Portfolio may also purchase securities aside from common stocks. The
value of all non-common stock investments may normally represent no more than
35% of the Portfolio's total assets.
The Portfolio may lend portfolio securities, invest up to 25% of its assets in
foreign securities, buy and sell put and call options on stock indices and on
individual stocks, purchase futures contracts, options contracts (including
options on futures contracts), equity index participations and index
participation contracts, engage in currency hedging and purchase securities on
a when-issued, delayed delivery or forward commitment basis.
AETNA VARIABLE CAPITAL APPRECIATION PORTFOLIO
INVESTMENT OBJECTIVE. The Capital Appreciation Portfolio seeks growth of
capital primarily through investment in a diversified portfolio of common
stocks and securities convertible into common stock. The Portfolio will use a
value-oriented approach in an attempt to outperform the total return
performance of publicly traded common stocks represented by the S&P 500.
INVESTMENT POLICY. The Portfolio will attempt to be fully invested at all
times, and, in any event, at least 65% of the Portfolio's net assets will be
invested in common stocks. AN INVESTMENT IN THE PORTFOLIO INVOLVES RISKS
SIMILAR TO THOSE INVESTING IN COMMON STOCKS.
The Portfolio may also purchase securities aside from common stocks. The
value of all non-common stock investments may normally represent no more than
35% of the Portfolio's total assets.
The Portfolio may lend portfolio securities, invest up to 25% of its assets in
foreign securities, buy and sell put and call options on stock indices and on
individual stocks, purchase futures contracts, options contracts (including
options on futures contracts), equity index participations and index
participation contracts, engage in currency hedging and purchase securities on
a when-issued, delayed delivery or forward commitment basis.
INVESTMENT TECHNIQUES
The Variable Portfolios may use the following investment techniques (see
Appendix A for the definition of certain terms used below):
BORROWING. Each Portfolio may borrow money from banks, but only for temporary
or emergency purposes in an amount up to 15% of the value of the Portfolio's
total assets (including the amount borrowed), valued at the lesser of cost or
market, less liabilities (not including the amount borrowed), at the time the
borrowing is made. When borrowings exceed 5% of a Portfolio's total assets,
the Portfolio will not make additional investments.
The Variable Portfolios do not intend to borrow for leveraging purposes. They
have the authority to do so, but only if, after the borrowing, the value of
the Portfolio's net assets, including proceeds from the borrowings, is equal
to at least 300% of all outstanding borrowings. Leveraging can increase the
volatility of a Portfolio since it exaggerates the effects of changes in the
value of the securities purchased with the borrowed funds.
SECURITIES LENDING. A Portfolio may lend its portfolio securities; however,
the value of the loaned securities (together with all other assets that are
loaned, including those subject to repurchase agreements) may not exceed
one-third of the Portfolio's total assets. A Portfolio will not lend
portfolio securities to affiliates. Though fully collateralized, lending
portfolio securities involves certain risks, including the possibility that
the borrower may become insolvent or default on the loan. In the event of a
disparity between the value of the loaned security and the collateral, there
is the additional risk that the borrower may fail to return the securities or
provide additional collateral.
REPURCHASE AGREEMENTS. Under a repurchase agreement, a Portfolio may acquire
a debt instrument for a relatively short period subject to an obligation by
the seller to repurchase and by the Portfolio to resell the instrument at a
fixed price and time.
The Variable Portfolios may enter into repurchase agreements with domestic
banks and broker-dealers. Such agreements, although fully collateralized,
involve the risk that the seller of the securities may fail to repurchase
them. In that event, a Portfolio may incur costs in liquidating the
collateral or a loss if the collateral declines in value. If the default on
the part of the seller is due to insolvency and the seller initiates
bankruptcy proceedings, the ability of a Portfolio to liquidate the collateral
may be delayed or limited.
The Board of Directors has established credit standards for repurchase
transactions entered into by the Variable Portfolios.
ASSET-BACKED SECURITIES. Each Portfolio may purchase securities
collateralized by a specified pool of assets, including, but not limited to,
credit card receivables, automobile loans, home equity loans, mobile home
loans, or recreational vehicle loans. These securities are subject to
prepayment risk. In periods of declining interest rates, reinvestment of
prepayment proceeds would be made at lower and less attractive interest rates.
ZERO COUPON AND PAY-IN-KIND BONDS. Each Portfolio may invest in zero coupon
securities and pay-in-kind bonds. Zero coupon securities are debt securities
that pay no cash income but are sold at substantial discounts to their value
at maturity. Some zero coupon securities call for the commencement of regular
interest payments at a deferred date. Pay-in-kind bonds pay all or a portion
of their interest in the form of additional debt or equity securities. Zero
coupon securities and pay-in-kind bonds are subject to greater price
fluctuations in response to changes in interest rates than are ordinary
interest-paying instruments with similar maturities; the value of zero coupon
securities and pay-in-kind bonds appreciate more during periods of declining
interest rates and depreciate more during periods of rising interest rates.
BANK OBLIGATIONS. Each Portfolio may invest in obligations (including
banker's acceptances, commercial paper, bank notes, time deposits and
certificates of deposit) issued by domestic or foreign banks, provided the
issuing bank has a minimum of $5 billion in assets and a primary capital ratio
of at least 4.25%.
OPTIONS, FUTURES AND OTHER DERIVATIVE INSTRUMENTS. A derivative is a
financial instrument, the value of which is "derived" from the performance of
an underlying asset (such as a security or index of securities). In addition
to futures and options, derivatives include, but are not limited to, forward
contracts, swaps, structured notes, and collateralized mortgage obligations
("CMOs").
A Portfolio may engage in various strategies using derivatives including
managing its exposure to changing interest rates, securities prices and
currency exchange rates (collectively known as hedging strategies), or
increasing its investment return. For purposes other than hedging, a
Portfolio will invest no more than 5% of its total assets in derivatives which
at the time of purchase are considered by management to involve high risk to
the Portfolio. These would include inverse floaters, interest-only and
principal-only securities.
Each Portfolio may buy and sell options contracts including index options and
options on foreign securities. There is no limit on the amount of a
Portfolio's total assets that may be subject to call options; however, writing
a put option requires the segregation of liquid assets to cover the contract.
A Portfolio will not write a put option if it will require more than 50% of
the Portfolio's net assets to be segregated to cover the put obligation nor
will it write a put option if after it is written more than 3% of the
Portfolio's assets would consist of put options.
Investments in futures contracts and related options with respect to foreign
currencies, fixed income securities and foreign stock indices may also be made
by a Portfolio. Although these investments are primarily made to hedge
against price fluctuations, in some cases, a Portfolio may buy a futures
contract for the purpose of increasing its exposure in a particular asset
class or market segment, which strategy may be considered speculative. This
strategy is typically used to manage better portfolio transaction costs. With
respect to futures contracts or related options that may be entered into for
speculative purposes, the aggregate initial margin for futures contracts and
premiums for options will not exceed 5% of a Portfolio's net assets, after
taking into account realized profits and unrealized losses on such futures
contracts.
A Portfolio may invest in forward contracts on foreign currency ("forward
exchange contracts"). These contracts may involve "cross-hedging," a
technique in which a Portfolio hedges with currencies which differ from the
currency in which the underlying asset is denominated.
A Portfolio may also invest in interest rate swap transactions. Interest rate
swaps are subject to credit risks (if the other party fails to meet its
obligations) and also interest rate risks, because a Portfolio could be
obligated to pay more under its swap agreements than it receives under them as
a result of interest rate changes.
U.S. GOVERNMENT DERIVATIVES. Each Portfolio may purchase separately traded
principal and interest components of certain U.S. Government securities
("STRIPS"). In addition, a Portfolio may acquire custodial receipts that
represent ownership in a U.S. Government security's future interest or
principal payments. These securities are known by such exotic names as TIGRS
and CATS and may be issued at a discount to face value. They are generally
more volatile than normal fixed income securities because interest payments
are accrued rather than paid out in regular installments.
SUPRANATIONAL AGENCIES. Each Portfolio may invest up to 10% of its net assets
in securities of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the "World Bank"),
which was chartered to finance development projects in developing member
countries; the European Community, which is a twelve-nation organization
engaged in cooperative economic activities; the European Coal and Steel
Community, which is an economic union of various European nations' steel and
coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment and provide
technical assistance to member nations in the Asian and Pacific regions.
Securities of supranational agencies are not considered government securities
and are not supported directly or indirectly by the U.S. Government.
ILLIQUID AND RESTRICTED SECURITIES. Each Portfolio may invest up to 15% of
its total assets in illiquid securities. Illiquid securities are securities
that are not readily marketable or cannot be disposed of promptly within seven
days and in the ordinary course of business without taking a materially
reduced price. In addition, a Portfolio may invest in securities that are
subject to legal or contractual restrictions on resale, including securities
purchased under Rule 144A and Section 4(2) of the Securities Act of 1933.
Because of the absence of a trading market for illiquid and certain restricted
securities, it may take longer to liquidate these securities than it would
unrestricted, liquid securities. A Portfolio may realize less than the amount
originally paid by the Portfolio for the security. The Board of Directors has
established a policy to monitor the liquidity of such securities.
CASH OR CASH EQUIVALENTS. Each Portfolio reserves the right to depart from
its investment objectives temporarily by investing up to 100% of its assets in
cash or cash equivalents for defense against potential market declines and to
accommodate cash flows from the purchase and sale of Portfolio shares.
OTHER INVESTMENTS. Each Portfolio may use other investment techniques,
including "when-issued" and "delayed-delivery securities" and variable rate
instruments. These techniques are described in Appendix A and the SAI.
RISK FACTORS AND OTHER CONSIDERATIONS
GENERAL CONSIDERATIONS. The different types of securities purchased and
investment techniques used by a Portfolio involve varying amounts of risk.
For example, equity securities are subject to a decline in the stock market or
in the value of the issuer, and preferred stocks have price risk and some
interest rate and credit risk. The value of debt securities may be affected
by changes in general interest rates and in the creditworthiness of the
issuer. Debt securities with longer maturities (for example, over ten years)
are generally more affected by changes in interest rates and provide less
price stability than securities with short term maturities (for example, one
to ten years). Also, on each debt security, the risk of principal and
interest default is greater with higher-yielding, lower-grade securities.
High risk, high-yield securities may provide a higher return but with added
risk. In addition, foreign securities have currency risk. Some of the risks
involved in the securities acquired by the Variable Portfolios are discussed
in this section. Additional discussion is contained above under "Investment
Techniques" and in the SAI.
PORTFOLIO TURNOVER. Portfolio turnover refers to the frequency of portfolio
transactions and the percentage of portfolio assets being bought and sold in
the aggregate during the year. Although the Variable Portfolios do not
purchase securities with the intention of profiting from short-term trading,
each Portfolio may buy and sell securities when the Investment Adviser or
Sub-Adviser believes such action is advisable. It is anticipated that the
average annual turnover rate of each of the Portfolios may exceed 125%.
Turnover rates in excess of 125% may result in higher transaction costs (which
are borne directly by the respective Portfolio) and a possible increase in
short-term capital gains (or losses). See "Tax Status" in the SAI.
FOREIGN SECURITIES. Investments in securities of foreign issuers or
securities denominated in foreign currencies involve risks not present in
domestic markets. Such risks include: currency fluctuations and related
currency conversion costs; less liquidity; price or income volatility; less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies; possible difficulty in obtaining and enforcing judgments
against foreign entities; adverse foreign political and economic developments;
different accounting procedures and auditing standards; the possible
imposition of withholding taxes on interest income payable on securities; the
possible seizure or nationalization of foreign assets; the possible
establishment of exchange controls or other foreign laws or restrictions which
might adversely affect the payment and transferability of principal, interest
and dividends on securities; higher transaction costs; possible settlement
delays; and less publicly available information about foreign issuers.
DEPOSITARY RECEIPTS. The Variable Portfolios can invest in both sponsored and
unsponsored depositary receipts. Unsponsored depositary receipts, which are
typically traded in the over-the-counter market, may be less liquid than
sponsored depositary receipts and therefore may involve more risk. In
addition, there may be less information available about issuers of unsponsored
depositary receipts.
The Variable Portfolios will generally acquire American Depositary Receipts
("ADRs") which are dollar denominated, although their market price is subject
to fluctuations of the foreign currency in which the underlying securities are
denominated. All depositary receipts will be considered foreign securities
for purposes of a Portfolio's investment limitation concerning investment in
foreign securities. See Appendix A and the SAI for more information.
HIGH RISK, HIGH-YIELD SECURITIES. A Portfolio may invest in high risk,
high-yield securities, often called "junk bonds". These securities tend to
offer higher yields than investment-grade bonds because of the additional
risks associated with them. These risks include: a lack of liquidity; an
unpredictable secondary market; a greater likelihood of default; increased
sensitivity to difficult economic and corporate developments; call provisions
which may adversely affect investment returns; and loss of the entire
principal and interest. Although junk bonds are high risk investments, the
Investment Adviser may purchase these securities if they are thought to offer
good value. This may happen if, for example, the rating agencies have, in the
Investment Adviser's opinion, misclassified the bonds or overlooked the
potential for the issuer's enhanced creditworthiness.
DERIVATIVES. The Variable Portfolios may use derivative instruments as
described above under "Investment Techniques - Options, Futures and Other
Derivative Instruments." Derivatives can be volatile investments and involve
certain risks. A Portfolio may be unable to limit its losses by closing a
position due to lack of a liquid market or similar factors. Losses may also
occur if there is not a perfect correlation between the value of futures or
forward contracts and the related securities. The use of futures may involve a
high degree of leverage because of low margin requirements. As a result, small
price movements in futures contracts may result in immediate and potentially
unlimited gains or losses to a Portfolio. Leverage may exaggerate losses of
principal. The amount of gains or losses on investments in futures contracts
depends on the Investment Adviser's ability to predict correctly the direction
of stock prices, interest rates and other economic factors.
The use of forward exchange contracts may reduce the gain that would otherwise
result from a change in the relationship between the U.S. dollar and a foreign
currency. In an attempt to limit their risk in forward exchange contracts, the
Variable Portfolios limit their exposure to the amount of their respective
assets denominated in the foreign currency being cross-hedged. Cross-hedging
entails a risk of loss on both the value of the security that is the basis of
the hedge and the currency contract that was used in the hedge. These risks
are described in greater detail in the SAI.
VARIABLE RATE INSTRUMENTS, WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS.
When-issued, delayed-delivery and variable rate instruments may be subject to
liquidity risks and risks of loss of principal due to market fluctuations.
Liquid assets in an amount at least equal to the Portfolio's commitments to
purchase securities on a when-issued or delayed-delivery basis will be
segregated at the Portfolio's custodian. For more information about these
securities, see Appendix A and the SAI.
SMALL CAPITALIZATION COMPANIES. The Variable Portfolios may invest in small
capitalization companies. These companies may be in an early developmental
stage or older companies entering a new stage of growth due to management
changes, new technology, products or markets. They may also be undervalued
due to poor economic conditions, market decline or actual or anticipated
unfavorable developments affecting the issuer of the security or its industry.
Securities of small capitalization companies tend to offer greater potential
for growth than securities of larger, more established issuers but there are
additional risks associated with them. These risks include: limited
marketability; more abrupt or erratic market movements than securities of
larger capitalization companies; and less publicly available information
about the issuer. In addition, these companies may be dependent on
relatively few products or services, have limited financial resources and
lack of management depth, and may have less of a track record or historical
pattern of performance.
INVESTMENT RESTRICTIONS
In addition to the restrictions discussed under "Investment Techniques," a
Portfolio will not concentrate its investments in any one industry, except
that a Portfolio may invest up to 25% of its total assets in securities issued
by companies principally engaged in any one industry. For purposes of this
restriction, finance companies will be classified as separate industries
according to the end users of their services, such as automobile finance,
computer finance and consumer finance. This limitation will not apply to
securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities.
Additionally, a Portfolio will not invest more than 5% of its total assets in
the securities of any one issuer (excluding securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities) or purchase more than
10% of the outstanding voting securities of any one issuer. This restriction
applies only to 75% of a Portfolio's total assets. See the SAI for additional
restrictions.
MANAGEMENT OF THE VARIABLE PORTFOLIOS
DIRECTORS. The operations of each Portfolio are managed under the direction
of the Board of Directors ("Directors"). The Directors set broad policies for
the Company and each Portfolio. Information about the Directors is found in
the SAI.
INVESTMENT ADVISER. Aetna Life Insurance and Annuity Company ("ALIAC" or the
"Investment Adviser"), serves as the Investment Adviser for each of the
Variable Portfolios. ALIAC is a Connecticut insurance corporation with its
principal offices at 151 Farmington Avenue, Hartford, Connecticut 06156, and
is registered with the SEC as an investment adviser. As of March 31, 1996,
ALIAC managed over $22 billion in assets. The Investment Adviser is a
wholly-owned subsidiary of Aetna Retirement Holdings, Inc., which is in turn,
a wholly-owned subsidiary of Aetna Retirement Services, Inc., which is in turn
a direct wholly-owned subsidiary of Aetna Life and Casualty Company.
Under the terms of the Investment Advisory Agreement between the Company and
ALIAC with respect to each of the Portfolios, ALIAC, subject to the
supervision of the Directors, is obligated to manage and oversee the Company's
day-to-day operations and to manage the investments of each Portfolio.
The Investment Advisory Agreement gives the Investment Adviser broad latitude
in selecting securities for each Portfolio subject to the Directors'
oversight. Under the Investment Advisory Agreement, the Investment Adviser
may delegate to a subadviser its functions in managing the investments of each
Portfolio, subject to the Investment Adviser's oversight. The Investment
Advisory Agreement allows the Investment Adviser to place trades through
brokers of its choosing and to take into consideration the quality of the
brokers' services and execution, as well as services such as research,
providing equipment to the Company, or paying Company expenses, in setting the
amount of commissions paid to a broker. The Investment Adviser will only use
these commissions for services and expenses to the extent authorized by
applicable law and by the rules and regulations of the SEC. The Investment
Adviser receives a monthly fee from each Portfolio at an annual rate based on
the average daily net assets of each Portfolio as follows:
<TABLE>
<CAPTION>
<S> <C>
Portfolio Fee
_________ ___
Growth Portfolio 0.600%
Small Company Growth Portfolio 0.700%
Quantitative Equity Portfolio 0.450%
Capital Appreciation Portfolio 0.600%
</TABLE>
Under the Investment Advisory Agreement, the Investment Adviser has agreed to
reduce its fee or reimburse a Portfolio if the expenses borne by the Portfolio
would exceed the expense limitations of any jurisdiction in which the
Portfolio's shares are qualified for sale. The Investment Adviser is not
obligated to reimburse a Portfolio for any expenses which exceed the amount of
its advisory fee for that year. The Investment Advisory Agreement also
provides that the Investment Adviser is responsible for all of its own costs
including costs of the Investment Adviser's personnel required to carry out
its investment advisory duties.
SUB-ADVISER. The Investment Adviser has engaged Aeltus Investment Management,
Inc. ("Aeltus"), organized in 1972 under the name Aetna Capital Management,
Inc., as a sub-adviser to each of the Variable Portfolios. Aeltus is a
Connecticut corporation located at 242 Trumbull Street, Hartford, Connecticut
06156. Aeltus is registered as an investment adviser with the SEC. As of
March 31, 1996, Aeltus managed over $11 billion in assets. Aeltus is a part
of the Aetna organization, and is a wholly-owned subsidiary of Aetna
Retirement Holdings, Inc., which is also the parent of the Investment Adviser
and which is a wholly-owned subsidiary of Aetna Retirement Services, Inc.
Aetna Retirement Services Inc. is a wholly-owned subsidiary of Aetna Life and
Casualty Company. John Y. Kim currently serves as the President, Chief
Executive Officer and Chief Investment Officer of Aeltus. Under a Subadvisory
Agreement with the Investment Adviser, Aeltus, subject to the supervision of
the Investment Adviser and the Directors, is responsible for managing the
assets of each respective Portfolio in accordance with its investment
objective and policies. Aeltus pays the salaries and other related costs of
personnel engaged in providing investment advice including office space,
facilities and equipment.
The Investment Adviser has overall responsibility for monitoring the
investment program maintained by Aeltus for compliance with applicable laws
and regulations and the respective Portfolio's investment objective.
The Subadvisory Agreement gives Aeltus broad latitude in selecting securities
for each Portfolio subject to the Investment Adviser's oversight. The
Agreement also allows Aeltus to place trades through brokers of its choosing
and to take into consideration the quality of the brokers' services and
execution, as well as services such as research and providing equipment or
paying Company expenses, in setting the amount of commissions paid to a
broker. The use of research and expense reimbursements in determining and
paying commissions is referred to as "soft dollar" practices. Aeltus will
only use soft dollars for services and expenses to the extent the Investment
Adviser is authorized to do so under the Investment Advisory Agreement, but
only as authorized by applicable law and the rules and regulations of the
SEC.
The Subadvisory Agreement provides that the Investment Adviser will pay Aeltus
a fee at an annual rate up to 0.30% of the average daily net assets of each
Portfolio. This fee is not charged back to, or paid by, the Portfolios; it is
paid by the Investment Adviser out of its own resources, including fees and
charges it receives from or in connection with each Portfolio.
The Subadvisory Agreement requires Aeltus to reduce its fee if the Investment
Adviser is required to reduce its fee under the Investment Advisory Agreement.
The Investment Adviser has agreed to reduce its fee or reimburse a Portfolio
if the expenses borne by the Portfolio would exceed the expense limitations of
any jurisdiction in which the Portfolio's shares are qualified for sale. The
Investment Adviser would not be obligated to reimburse a Portfolio for any
expenses which exceed the amount of its advisory fee for that year. The
Subadvisory Agreement obligates Aeltus to reduce its fee by 60% of the amount
of the Investment Adviser's fee reduction.
PORTFOLIO MANAGEMENT. The following individuals are primarily responsible for
the day-to-day management of the Portfolios, as indicated below. All of the
following individuals may also decide as a group what strategy may benefit all
of the Portfolios.
GROWTH PORTFOLIO AND CAPITAL APPRECIATION PORTFOLIO. Peter B. Canoni,
Managing Director, Aeltus. Mr. Canoni has been with Aetna since 1980 and has
over 20 years of investment experience.
SMALL COMPANY GROWTH PORTFOLIO. Thomas J. DiBella, Investment Officer,
Aeltus. Before joining Aeltus, Mr. DiBella was Investment Officer at
Bethlehem Steel from 1989 to 1991. Mr. DiBella has over 10 years of
investment experience.
QUANTITATIVE EQUITY PORTFOLIO. Geoffrey A. Brod, Vice President, Aeltus. Mr.
Brod has over 30 years of experience in quantitative applications and has over
9 years of experience in equity investments. Mr. Brod has been with Aetna
since 1966.
EXPENSES AND COMPANY ADMINISTRATION. Under an Administrative Services
Agreement with the Company, ALIAC provides all administrative services
necessary for the Company's operations and is responsible for the supervision
of the Company's other service providers. ALIAC also assumes all ordinary
recurring direct costs of the Company, such as custodian fees, directors fees,
transfer agency costs and accounting expenses. For the services provided under
the Administrative Services Agreement, ALIAC receives an annual fee, payable
monthly, at a rate of ____% of the average daily net assets of the Company.
FUND EXPENSES. Each Portfolio bears the costs of its operations. Expenses
directly attributable to a Portfolio are charged to that Portfolio. Some
expenses are allocated proportionately among Portfolios based on the net
assets of each Portfolio and some expenses are allocated equally among
Portfolios.
SALE AND REDEMPTION OF SHARES
Purchases and redemptions of shares may be made only by insurance companies
for their separate accounts at the direction of Participants. Please refer to
the prospectus for your contract or policy for information on how to direct
investments in or redemptions from a Portfolio and any fees that may apply.
Generally, insurance companies aggregate orders received from Participants
during the day and place an order to purchase or redeem the net number of
shares during the night. Orders are generally executed at the net asset value
per share ("NAV") determined at the end of the previous business day. The
Variable Portfolios reserve the right to suspend the offering of shares, or to
reject any specific purchase order. The Variable Portfolios may suspend
redemptions or postpone payments when the New York Stock Exchange is closed or
when trading is restricted for any reason (other than weekends or holidays) or
under emergency circumstances as determined by the SEC.
NET ASSET VALUE
The NAV of each Portfolio is determined as of 4:15 p.m. New York time on each
day that the New York Stock Exchange is open for trading. Each Portfolio's
NAV is computed by taking the total value of a Portfolio's securities, plus
any cash or other assets (including dividends and interest accrued but not
collected) and subtracting all liabilities (including accrued expenses), and
dividing the total by the number of shares outstanding. Portfolio securities
are valued primarily by independent pricing services, based on market
quotations. Short-term debt instruments maturing in less than 60 days are
valued at amortized cost. Securities for which market quotations are not
readily available, are valued at their fair value in such manner as may be
determined under the authority of the Directors.
GENERAL INFORMATION
INCORPORATION. The Company was incorporated under the laws of Maryland on
June 4, 1996.
CAPITAL STOCK. The Company is authorized to issue one billion shares of
capital stock, par value $0.001 per share. All shares are nonassessable,
transferable and redeemable. There are no preemptive rights.
SHAREHOLDER MEETINGS. The Company is not required and does not intend to hold
annual shareholder meetings. The Company's Articles of Incorporation provide
for meetings of shareholders to elect Directors at such times as may be
determined by the Directors or as required by the 1940 Act. If requested by
the holders of at least 10% of the Company's outstanding shares, the Company
will hold a shareholder meeting for the purpose of voting on the removal of
one or more Directors and will assist with communication concerning that
shareholder meeting.
VOTING RIGHTS. Each share of the Company is entitled to one vote for each
full share and fractional votes for fractional shares. Separate votes are
taken by Portfolio only if the matter affects or requires the vote of only
that Portfolio. The insurance companies holding the shares in their separate
accounts will generally request voting instructions from the Participants and
generally must vote the shares in proportion to the voting instructions
received. Voting rights for VA Contracts and VLI Policies are discussed in
the prospectus for the applicable contract or policy.
PERFORMANCE
From time to time advertisements and other sales materials for the Company may
include information concerning the historical performance of the Company. Such
advertisements will also describe the performance of the relevant insurance
company separate accounts. Any such information will include the average
annual total return of the Company calculated on a compounded basis for
specified periods of time. Total return information will be calculated
pursuant to rules established by the SEC. In lieu of or in addition to total
return calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Morningstar, Business Week, Forbes or other industry
publications.
The Company calculates average annual total return by determining the
redemption value at the end of specified periods (assuming reinvestment of
all dividends and distributions) of a $1,000 investment in the Company at
the beginning of the period, deducting the initial $1,000 investment,
annualizing the increase or decrease over the specified period and
expressing the result as a percentage.
Total return figures utilized by the Company are based on historical
performance and are not intended to indicate future performance. Total return
and net asset value per share can be expected to fluctuate over time, and
accordingly, upon redemption, shares may be worth more or less than their
original cost.
PUBLIC FUND PERFORMANCE
The Growth Portfolio and the Small Company Growth Portfolio are newly
organized and do not yet have their own performance records. However, the
Portfolios have the same investment objectives and follow substantially the
same investment strategies as two series of a mutual fund ("public fund")
whose shares are currently sold to the public and managed by the Investment
Adviser and Aeltus.
Set forth below is the historical performance of each of the series of the
public fund. Investors should not consider the performance data of the series
of the public fund as an indication of the future performance of the
Portfolios. The performance figures shown below reflect the deduction of the
historical fees and expenses paid by the series of the public fund, and not
those to be paid by the Portfolios. The figures also do not reflect the
deduction of any insurance fees or charges which are imposed by the insurance
company in connection with its sale of the VA Contracts and VLI Policies.
Investors should refer to the separate account prospectuses describing the VA
Contracts and VLI Policies for information pertaining to these insurance fees
and charges. The insurance separate account fees will have a detrimental
effect on the performance of the Portfolios. The results shown reflect the
reinvestment of dividends and distributions, and were calculated in the same
manner that will be used by the Portfolios to calculate their own performance.
The following tables show average annualized total returns for the time
periods shown for the series of the public fund.
<TABLE>
<CAPTION>
<S> <C> <C>
GROWTH PORTFOLIO
SINCE
Corresponding Series of the 1 YEAR INCEPTION
PUBLIC FUND
Aetna Series Fund, Inc. - 32.69% 19.92%
Aetna Growth Fund
SMALL COMPANY GROWTH PORTFOLIO
SINCE
CORRESPONDING SERIES OF THE 1 YEAR INCEPTION
PUBLIC FUND
Aetna Series Fund, Inc. - 45.38% 24.01%
Aetna Small Company Growth Fund
</TABLE>
Results shown are through the period ended March 31, 1996. The inception date
for each series is January 1, 1994.
PRIVATE ACCOUNT PERFORMANCE
The Quantitative Equity and Capital Appreciation Portfolios are newly
organized and do not yet have their own performance records. However, each of
these Portfolios has investment objectives, policies and strategies which are
substantially similar to those employed by Aeltus with respect to certain
Private Accounts.
Thus, the performance information derived from these Private Accounts is
deemed relevant to the investor. The performance of the Portfolios may vary
from the Private Account composite information because each Portfolio will be
actively managed and its investments will vary from time to time and will not
be identical to the past portfolio investments of the Private Accounts.
Moreover, the Private Accounts are not registered under the Investment Company
Act of 1940 ("1940 Act") and therefore are not subject to certain investment
restrictions that are imposed by the 1940 Act, which, if imposed, could have
adversely affected the Private Accounts' performances.
The chart below shows hypothetical performance information derived from
historical composite performance of the Private Accounts included in the
Quantitative Equity Composite and Capital Appreciation Composite. The
hypothetical performance figures for the Portfolios represent the actual
performance results of the composites of comparable Private Accounts, adjusted
to reflect the deduction of the fees and expenses anticipated to be paid by
the Portfolios. The actual Private Account composite performance figures are
time-weighted rates of return which include all income and accrued income and
realized and unrealized gains or losses, but do not reflect the deduction of
investment advisory fees actually charged to the Private Accounts. The
inception dates were July 1, 1993 for the Quantitative Equity Composite and
January 1, 1993 for the Capital Appreciation Composite.
Investors should not consider the performance data of these Private Accounts
as an indication of the future performance of the respective Portfolios. The
figures also do not reflect the deduction of any insurance fees or charges
which are imposed by the insurance company in connection with its sale of VA
Contracts and VLI Policies. Investors should refer to the separate account
prospectuses describing the VA Contracts and VLI Policies for information
pertaining to these insurance fees and charges. The insurance fees and
charges will have a detrimental effect on the performance of a Portfolio.
HYPOTHETICAL PERFORMANCE INFORMATION DERIVED FROM PRIVATE ACCOUNT COMPOSITE
PERFORMANCE REDUCED BY ANTICIPATED PORTFOLIO FEES AND EXPENSES FOR THE PERIODS
ENDED 12/31/95
HYPOTHETICAL INVESTMENT PORTFOLIO PERFORMANCE
<TABLE>
<CAPTION>
<S> <C> <C>
SINCE
PORTFOLIO 1 YEAR INCEPTION
Quantitative Equity Composite 33.57% 16.81%
(Quantitative Equity Portfolio)
Capital Appreciation Composite 31.20% 18.67%
(Capital Appreciation Portfolio)
</TABLE>
TAX MATTERS
Each Portfolio intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), including requirements with respect to
diversification of assets, distribution of income and sources of income. As
a regulated investment company, a Portfolio generally will not be subject to
tax on its ordinary income and net realized capital gains.
Each Portfolio also intends to comply with the diversification requirements of
Section 817(h) of the Code for variable annuity contracts and variable life
insurance policies so that the VA Contract owners and VLI Policy owners should
not be subject to federal tax on distributions of dividends and income from a
Portfolio to the insurance company separate accounts. Contract owners and
policy owners should review the prospectus for their VA Contract or VLI Policy
for information regarding the tax consequences to them of purchasing a
contract or policy.
APPENDIX A
GLOSSARY OF INVESTMENT TERMS
BANKER'S ACCEPTANCE. A time draft drawn on and accepted by a bank,
customarily used by corporations as a means of financing payment for traded
goods. When a draft is accepted by a bank, the bank guarantees to pay the
face value of the debt at maturity.
CALL OPTION. The right to buy a security, currency or stock index at a stated
price, or strike price, within a fixed period. A call option will be
exercised if the market price rises above the strike price; if not, the option
expires worthless.
CERTIFICATES OF DEPOSIT. For large deposits not withdrawable on demand, banks
issue certificates of deposit ("CDs") as evidence of ownership. CDs are
usually negotiable and traded among investors such as mutual funds and banks.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). Mortgage-backed bonds that
separate mortgage pools into various classes or branches in a predetermined,
specified order such as short-, medium-, and long-term portions.
COMMERCIAL PAPER. Unsecured short-term debt instruments issued by banks,
corporations or other borrowers with a maturity ranging from two to 270 days.
CONVERTIBLE SECURITIES. Corporate securities (usually bonds or preferred
stock) that can be exchanged for a set number of shares of another security,
usually common stock.
COVERED CALL OPTIONS. A call option backed by the securities underlying the
option. The owner of a security will normally sell covered call options to
collect premium income or to reduce price fluctuations of the security. A
covered call option limits the capital appreciation of the underlying
security.
EURODOLLARS. Eurodollars are U.S. dollars held in banks outside the United
States, mainly in Europe but also in other countries, and are commonly used
for the settlement of international transactions. There are many types of
Eurodollar securities including Eurodollar CDS and bonds; these securities are
not registered with the SEC. Certain Eurodollar deposits are not FDIC insured
and may be subject to future political and economic developments and
governmental restrictions.
DEPOSITARY RECEIPTS. Negotiable certificates evidencing ownership of shares
of a non-U.S. corporation, government, or foreign subsidiary of a U.S.
corporation. A U.S. bank typically issues depositary receipts, which are
backed by ordinary shares that remain on deposit with a custodian bank in the
issuer's home market. A depositary receipt can either be "sponsored" by the
issuing company or established without the involvement of the company, which
is referred to as "unsponsored."
FORWARD CONTRACTS. A purchase or sale of a specific quantity of a government
security, foreign currency, or other financial instrument at the current
price, with delivery and settlement at a specified future date.
FUTURES CONTRACTS. An agreement to buy or sell a specific amount of a
financial instrument at a particular price on a stipulated future date. A
futures contract obligates the buyer to purchase and the seller to sell,
unlike an option where one party can choose whether or not to exercise the
option.
HIGH RISK, HIGH-YIELD SECURITIES. Debt instruments rated BB or below by
Standard & Poor's Corporation or BA or below by Moody's Investors Services
Inc., or securities of comparable ratings by other agencies or, if unrated,
considered by the Investment Adviser to be of comparable quality. These
securities are often called "junk bonds" because of the greater possibility of
default.
PREFERRED STOCK. Stock which has a preference over common stock, whether as
to payment of dividends or to assets on liquidation. It ordinarily pays a
fixed dividend.
PRIMARY CAPITAL RATIO. The ratio used to evaluate the creditworthiness of
foreign banks which is based on the ratio of total assets to the common and
preferred stock, loan loss reserves, minority interests and mandatory
convertibles.
PUT OPTION. The right to sell a security, currency or stock index at a stated
price, or strike price, within a fixed period. A put option will be exercised
if the spot price falls below the strike price; if not, the option expires
worthless.
SWAP. An exchange of one security for another. A swap may be executed to
change the maturities of a bond portfolio or the quality of the issues in a
stock or bond portfolio.
U.S. GOVERNMENT SECURITIES. Securities issued by the U.S. Government and its
agencies.
Direct Obligations of the U.S. Government are:
TREASURY BILLS - issued with short maturities (one year or less) and
priced at a discount to face value. The income for investors is the
difference between the purchase price and the face value.
TREASURY NOTES - intermediate-term securities with maturities of between
one to ten years. Income to investors is paid in semiannual interest
payments.
TREASURY BONDS - long-term securities with maturities from ten years to
up to thirty years. Income is paid to investors on a semiannual basis.
In addition, U.S. Government Agencies issue debt securities to finance
activities for the U.S. Government. These agencies include among others the
Federal Home Loan Bank, Federal National Mortgage Association ("FNMA" or
"Fannie Mae"), Government National Mortgage Association ("GNMA" or "Ginnie
Mae"), Export-Import Bank and the Tennessee Valley Authority.
Not all agencies are backed by the full faith and credit of the United States;
for example the FNMA may borrow money from the U.S. Treasury only under
certain circumstances. There is no guarantee that the government will support
these types of securities and they therefore involve more risk than direct
government obligations.
VARIABLE RATE INSTRUMENTS. An instrument the terms of which provide for the
adjustment of its interest rate on set dates and which can reasonably be
expected to have a market value close to par value.
WARRANTS. A security, normally offered with bonds or preferred stock, that
entitles the holder to buy shares of stock at a prescribed price within a
named or stated period, or to perpetuity. The time period is usually longer
than that of a call option.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. When-issued is a transaction
that is made as of a current date, but conditioned on the actual issuance of a
security that is authorized but not yet issued. A delayed-delivery
transaction is one where both parties agree that the security will be
delivered and the transaction completed at a future date.
YANKEE BONDS. A dollar denominated bond issued in the United States by
foreign corporations and banks. Similarly, Yankee CDS are issued in the U.S.
by branches and agencies of foreign banks.
APPENDIX B
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt-edge." Interest payments are protected by a large or by an
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 which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or 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 which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
The modifier 1 indicates that the bond ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates the issuer ranks in the lower end of its rating category.
STANDARD & POOR'S CORPORATION
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
BB -- Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, the bonds face major uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B -- Bonds rated B have a greater vulnerability to default but currently
have 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 ratings from "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
PART B
STATEMENT OF ADDITIONAL INFORMATION DATED:
________________, 1996
AETNA VARIABLE PORTFOLIOS, INC.
151 Farmington Avenue
Hartford, Connecticut 06156-8962
FORM N-1A
PART B
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the current prospectus for Aetna Variable Portfolios,
Inc. dated ________________, 1996. A free prospectus is available upon
request by writing to Aetna Variable Portfolios, Inc. at the address listed
above or calling 1-800-___ - ____.
READ THE PROSPECTUS BEFORE YOU INVEST.
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION AND HISTORY
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES OF THE VARIABLE PORTFOLIOS
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
DIRECTORS AND OFFICERS OF THE COMPANY
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
THE INVESTMENT ADVISORY AGREEMENT
THE SUB-ADVISORY AGREEMENT
THE ADMINISTRATIVE SERVICES AGREEMENT
CUSTODIAN
INDEPENDENT AUDITORS
PRINCIPAL UNDERWRITER
BROKERAGE ALLOCATION AND TRADING POLICIES
DESCRIPTION OF SHARES
SALE AND REDEMPTION OF SHARES
NET ASSET VALUE
PERFORMANCE INFORMATION
TAX STATUS
GENERAL INFORMATION AND HISTORY
Aetna Variable Portfolios, Inc. (the "Company") was incorporated in 1996 in
Maryland. The Company is an open-end diversified management investment
company. The Company is authorized to issue multiple series of shares, each
representing a diversified portfolio of investments with different investment
objectives, policies and restrictions (individually, a "Portfolio" and
collectively, the "Variable Portfolios"). The Company currently has
authorized four series: Aetna Variable Growth Portfolio (Growth Portfolio);
Aetna Variable Small Company Growth Portfolio (Small Company Growth
Portfolio); Aetna Variable Quantitative Equity Portfolio (Quantitative Equity
Portfolio); and Aetna Variable Capital Appreciation Portfolio (Capital
Appreciation Portfolio).
The investment objective and general investment policies of each Portfolio are
described in the Prospectus.
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES OF THE VARIABLE PORTFOLIOS
The investment policies and restrictions of the Variable Portfolios, set forth
below, are matters of fundamental policy for purposes of the Investment
Company Act of 1940 (the "1940 Act") and therefore cannot be changed, with
regard to a particular Portfolio, without the approval of a majority of the
outstanding voting securities of that Portfolio as defined by the 1940 Act.
This means the lesser of: (i) 67% of the shares of a Portfolio present at a
shareholders' meeting if the holders of more than 50% of the shares of that
Portfolio then outstanding are present in person or by proxy; or (ii) more
than 50% of the outstanding voting securities of a Portfolio.
As a matter of fundamental policy, none of the Variable Portfolios will:
(1) hold more than 5% of the value of its total assets in the securities
of any one issuer or hold more than 10% of the outstanding voting securities
of any one issuer. This restriction applies only to 75% of the value of a
Portfolio's total assets. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities are excluded from this
restriction;
(2) concentrate its investments in any one industry, except that a
Portfolio may invest up to 25% of its total assets in securities issued by
companies principally engaged in any one industry. For purposes of this
restriction, finance companies will be classified as separate industries
according to the end user of their services, such as automobile finance,
computer finance and consumer finance. This limitation will not, however,
apply to securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities;
(3) make loans, except that, to the extent appropriate under its
investment program, a Portfolio may (a) purchase bonds, debentures or other
debt securities, including short-term obligations; (b) enter into repurchase
transactions; and (c) lend portfolio securities provided that the value of
such loaned securities does not exceed one-third of the Portfolio's total
assets;
(4) issue any senior security (as defined in the 1940 Act), except that
(a) a Portfolio may enter into commitments to purchase securities in
accordance with that Portfolio's investment program, including reverse
repurchase agreements, delayed delivery and when-issued securities, which may
be considered the issuance of senior securities; (b) a Portfolio may engage in
transactions that may result in the issuance of a senior security to the
extent permitted under applicable regulations, interpretations of the 1940 Act
or an exemptive order; (c) a Portfolio may engage in short sales of securities
to the extent permitted in its investment program and other restrictions; (d)
the purchase or sale of futures contracts and related options shall not be
considered to involve the issuance of senior securities; and (e) subject to
fundamental restrictions, a Portfolio may borrow money as authorized by the
1940 Act;
(5) purchase real estate, interests in real estate or real estate limited
partnership interests except that to the extent appropriate under its
investment program, a Portfolio may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein;
(6) invest in commodity contracts, except that a Portfolio may, to the
extent appropriate under its investment program, purchase securities of
companies engaged in such activities; may enter into transactions in financial
and index futures contracts and related options; may engage in transactions on
a when-issued or forward commitment basis; and may enter into forward currency
contracts;
(7) borrow money, except that (a) a Portfolio may enter into certain
futures contracts and options related thereto; (b) a Portfolio may enter into
commitments to purchase securities in accordance with that Portfolio's
investment program, including delayed delivery and when-issued securities and
reverse repurchase agreements; (c) for temporary or emergency purposes, a
Portfolio may borrow money in amounts not exceeding 15% of the value of its
total assets at the time the loan is made; and (d) for purposes of leveraging,
a Portfolio may borrow money from banks (including its custodian bank) only
if, immediately after such borrowing, the value of that Portfolio's assets,
including the amount borrowed, less its liabilities, is equal to at least 300%
of the amount borrowed, plus all outstanding borrowings. If, at any time, the
value of that Portfolio's assets fails to meet the 300% asset coverage
requirement relative only to leveraging, that Portfolio will, within three
days (not including Sundays and holidays), reduce its borrowings to the extent
necessary to meet the 300% test; or
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by a Portfolio, that
Portfolio may be deemed to be an underwriter under the provisions of the
Securities Act of 1933 (the "1933 Act").
The Company has also adopted certain other investment restrictions reflecting
the current investment practices of the Variable Portfolios which may be
changed by the Company's Directors and without shareholder vote. Some of these
restrictions are described in the Prospectus. In addition, none of the
Portfolios will:
(1) make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction will
not be applied to limit the use of options, futures contracts and related
options, in the manner otherwise permitted by the investment restrictions,
policies and investment programs of each Portfolio, as described here and in
the prospectus;
(2) invest more than 25% of its total assets in securities or obligations
of foreign issuers, including marketable securities of, or guaranteed by,
foreign governments (or any instrumentality or subdivision thereof). A
Portfolio will invest in securities or obligations of foreign banks only if
such banks have a minimum of $5 billion in assets and a primary capital ratio
of at least 4.25%.
(3) invest in companies for the purpose of exercising control or
management;
(4) purchase the securities of any other investment company, except as
permitted under the 1940 Act;
(5) purchase interests in oil, gas or other mineral exploration programs;
however, this limitation will not prohibit the acquisition of securities of
companies engaged in the production or transmission of oil, gas, or other
minerals; or
(6) invest more than 25% of the total value of its assets in high risk,
high-yield securities or "junk bonds" (securities rated BB/Ba or lower by
Standard & Poor's Corporation or Moody's Investors Service, Inc., or if
unrated, considered by the Investment Adviser to be of comparable quality).
(7) invest more than 15% of its total assets in illiquid securities.
Illiquid securities are securities that are not readily marketable or cannot
be disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Such securities include, but are
not limited to, time deposits and repurchase agreements with maturities longer
than seven days. Securities that may be resold under Rule 144A or securities
offered pursuant to Section 4(2) of the 1933 Act, as amended, shall not be
deemed illiquid solely by reason of being unregistered. The Investment
Adviser shall determine whether a particular security is deemed to be liquid
based on the trading markets for the specific security and other factors.
Where a Portfolio's investment objective or policy restricts it to a specified
percentage of its total assets in any type of instrument, that percentage is
measured at the time of purchase. There will be no violation of any
investment policy or restriction if that restriction is complied with at the
time the relevant action its taken, notwithstanding a later change in the
market value of an investment, in net or total assets, in the securities
rating of the investment or any other change.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
OPTIONS, FUTURES AND OTHER DERIVATIVE INSTRUMENTS
The Variable Portfolios may use derivative instruments as described in the
prospectus under "Investment Techniques." The following provides additional
information about these instruments.
FUTURES CONTRACTS - Each Portfolio may enter into futures contracts as
described in the prospectus. A Portfolio may enter into futures contracts
which are traded on national futures exchanges and are standardized as to
maturity date and underlying financial instrument. The futures exchanges and
trading in the United States are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (the "CFTC").
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument(s) or a
specific stock market index for a specified price at a designated date and
time. Brokerage fees are incurred when a futures contract is bought or sold
and at expiration, and margin deposits must be maintained.
Although interest rate futures contracts typically require actual future
delivery of and payment for the underlying instruments, those contracts are
usually closed out before the delivery date. Stock index futures contracts do
not contemplate actual future delivery and will be settled in cash at
expiration or closed out prior to expiration. 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
identical type of underlying instrument and the same delivery date. There can
be no assurance, however, that a Portfolio will be able to enter into an
offsetting transaction with respect to a particular contract at a particular
time. If a Portfolio is not able to enter into an offsetting transaction, it
will continue to be required to maintain the margin deposits on the contract.
The prices of futures contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates and equities
prices, which in turn are affected by fiscal and monetary policies and
national and international political and economic events.
When using futures contracts as a hedging technique, at best, the correlation
between changes in prices of futures contracts and of the securities being
hedged can be only approximate. The degree of imperfection of correlation
depends upon circumstances such as: variations in speculative market demand
for futures and for securities, including technical influences in futures
trading, and differences between the financial instruments being hedged and
the instruments underlying the standard futures contracts available for
trading. Even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or stock market or interest rate trends.
Most United States futures exchanges limit the amount of fluctuation permitted
in interest rates futures contract prices during a single trading day, and
temporary regulations limiting price fluctuations for stock index futures
contracts are also now in effect. The daily limits establishes the maximum
amount that the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading session. Once the
daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
persons engaging in futures transactions to substantial losses.
Sales of futures contracts which are intended to hedge against a change in the
value of securities held by a Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such
securities upon disposition.
"Margin" is the amount of funds that must be deposited by a Portfolio with a
commodities broker in a custodian account in order to initiate futures trading
and to maintain open positions in a Portfolio's futures contracts. A margin
deposit is intended to assure the Portfolio's performance of the futures
contract. The margin required for a particular futures contract is set by the
exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of favorable price
changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will promptly pay the excess to a Portfolio.
These daily payments to and from a Portfolio are called variation margin. At
times of extreme price volatility such as occurred during the week of October
19, 1987, intra-day variation margin payments may be required. In computing
daily net asset values, each Portfolio will mark to market the current value
of its open futures contracts. Each Portfolio expects to earn interest income
on its initial margin deposits. Furthermore, in the case of a futures contract
purchase, each Portfolio has deposited in a segregated account money market
instruments sufficient to meet all futures contract initial margin
requirements.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, small price movements in
futures contracts may result in immediate and potentially unlimited loss or
gain to a Portfolio relative to the size of the margin commitment. For
example, if at the time of purchase 10% of the value of the futures contract
is deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit before any
deduction for the transaction costs, if the contract were then closed out. A
15% decrease in the value of the futures contract would result in a loss equal
to 150% of the original margin deposit, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess
of the amount initially invested in the futures contract. However, a
Portfolio would presumably have sustained comparable losses if, instead of the
futures contract, it had invested in the underlying financial instrument and
sold it after the decline.
A Portfolio can enter into options on futures contacts. See "Covered Call and
Put Options" below. The risk involved in writing options on futures contracts
or market indices is that there could be an increase in the market value of
such contracts or indices. If that occurred, the option would be exercised
and the Portfolio involved would not benefit from any increase in value above
the exercise price. Usually, this risk can be eliminated by entering into an
offsetting transaction. However, the cost to do an offsetting transaction and
terminate the Portfolio's obligation might be more or less than the premium
received when it originally wrote the option. Further, the Portfolio might
occasionally not be able to close the option because of insufficient activity
in the options market.
COVERED CALL AND PUT OPTIONS - Each Variable Portfolio may write (sell)
covered call options and purchase put options and may purchase call and sell
put options including options on securities, indices and futures as discussed
in the prospectus and in this Section. A call option gives the holder (buyer)
the right to buy and obligates the writer (seller) to sell a security or
financial instrument at a stated price (strike price) at any time until a
designated future date when the option expires (expiration date). A put
option gives the holder (buyer) the right to sell and obligates the writer
(seller) to purchase a security or financial instrument at a stated price at
any time until the expiration date. A Portfolio may write or purchase put or
call options listed on national securities exchanges in standard contracts or
may write or purchase put or call options with or directly from investment
dealers meeting the creditworthiness criteria of the Investment Adviser.
So long as the obligation of the writer of a call option continues, the writer
may be assigned an exercise notice by the broker-dealer through which such
option was settled, requiring the writer to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, by the exercise of the call option, or by
entering into an offsetting transaction. To secure the writer's obligation to
deliver the underlying security, a writer of a call option is required to
deposit in escrow the underlying security or other assets in accordance with
the rules of the clearing corporations and of the exchanges. A Portfolio will
only write a call option on a security which it already owns and will not
write call options on when-issued securities.
When writing a call option, in return for the premium, the writer gives
up the opportunity to profit from the price increase in the underlying
security above the exercise price, but conversely retains the risk of loss
should the price of the security decline. If a call option expires
unexercised, the writer will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security during the option period. If the call option is
exercised, the writer would realize a gain or loss from the transaction
depending on what it received from the call and what it paid for the
underlying security.
A Portfolio may purchase and write call options on stock indices, including
the S&P 500, as well as on any individual stock, as described below. The
Portfolio will use these techniques primarily as a temporary substitute for
taking positions in certain securities or in the securities that comprise the
index, particularly if the Investment Adviser considers these instruments to
be undervalued relative to the prices of particular securities or of the
securities that comprise the index.
An option on an index (or a particular security) is a contract that gives the
purchaser of the option, in return for the premium paid, the right to receive
from the writer of the option cash equal to the difference between the closing
price of the index (or security) and the exercise price of the option,
expressed in dollars, times a specified multiple (the "multiplier"). A
Portfolio may, in particular, purchase call options on an index (or a
particular security) to protect against increases in the price of securities
underlying that index (or individual securities) that the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly
manner.
In the case of a put option, as long as the obligation of the put writer
continues, it may be assigned an exercise notice by the broker-dealer through
which such option was sold, requiring the writer to take delivery of the
underlying security against payment of the exercise price. A writer has no
control over when it may be required to purchase the underlying security,
since it may be assigned an exercise notice at any time prior to the
expiration date. This obligation terminates earlier if the writer effects a
closing purchase transaction by purchasing a put of the same series as that
previously sold.
To secure its obligation to pay for the underlying security, the writer of a
put generally must deposit in escrow liquid assets with a value equal to or
greater than the exercise price of the put option. The writer therefore
foregoes the opportunity of investing the segregated assets or writing calls
against those assets. A Portfolio may write put options on debt securities or
futures, only if such puts are covered by segregated liquid assets.
In writing puts, there is the risk that a writer may be required to buy the
underlying security at a disadvantageous price. Writing a put covered by
segregated liquid assets equal to the exercise of the put has the same
economic effect as writing a covered call option. The premium the writer
receives from writing a put option represents a profit, as long as the price
of the underlying instrument remains above the exercise price; however, if the
put is exercised, the writer is obligated during the option period to buy the
underlying instrument from the buyer of the put at the exercise price, even
though the value of the investment may have fallen below the exercise price.
If the put lapses unexercised, the writer realizes a gain in the amount of the
premium. If the put is exercised, the writer may incur a loss, equal to the
difference between the exercise price and the current market value of the
underlying instrument.
A Portfolio may purchase put options when the Investment Adviser believes that
a temporary defensive position is desirable in light of market conditions,
but does not desire to sell a portfolio security. The purchase of put options
for these purposes may be used to protect a Portfolio's holdings in an
underlying security against a substantial decline in market value. Such
protection is, of course, only provided during the life of the put option
when a Portfolio, as the holder of the put option, is able to sell the
underlying security at the put exercise price regardless of any decline in
the underlying security's market price. By using put options in this
manner, a Portfolio will reduce any profit it might otherwise have realized
in its underlying security by the premium paid for the put option and
by transaction costs. The security covering the call or put option
will be segregated at the Portfolio's custodian.
The premium received from writing a call or put option, or paid for purchasing
a call or put option will reflect, among other things, the current market
price of the underlying security, the relationship of the exercise price to
such market price, the historical price volatility of the underlying security,
the length of the option period, and the general interest rate environment.
The premium received by a Portfolio for writing call options will be recorded
as a liability in the statement of assets and liabilities of that Portfolio.
This liability will be adjusted daily to the option's current market value.
The liability will be extinguished upon expiration of the option, by the
exercise of the option, or by entering into an offsetting transaction.
Similarly, the premium paid by a Portfolio when purchasing a put option will
be recorded as an asset in the statement of assets and liabilities of that
Portfolio. This asset will be adjusted daily to the option's current market
value. The asset will be extinguished upon expiration of the option, by
selling an identical option in a closing transaction, or by exercising the
option.
Closing transactions will be effected in order to realize a profit on an
outstanding call or put option, to prevent an underlying security from being
called or put, or to permit the exchange or tender of the underlying security.
Furthermore, effecting a closing transaction will permit a Portfolio to write
another call option, or purchase another put option, on the underlying
security with either a different exercise price or expiration date or both.
If a Portfolio desires to sell a particular security from its portfolio on
which it has written a call option, or purchased a put option, it will seek to
effect a closing transaction prior to, or concurrently with, the sale of the
security. There is, of course, no assurance that a Portfolio will be able to
effect a closing transaction at a favorable price. If a Portfolio cannot
enter into such a transaction, it may be required to hold a security that it
might otherwise have sold, in which case it would continue to be at market
risk on the security. A Portfolio will pay brokerage commissions in
connection with the sale or purchase of options to close out previously
established option positions. Such brokerage commissions are normally higher
as a percentage of underlying asset values than those applicable to purchases
and sales of portfolio securities.
The exercise price of an option may be below, equal to, or above the current
market value of the underlying security at the time the option is written.
From time to time, a Portfolio may purchase an underlying security for
delivery in accordance with an exercise notice of a call option assignment,
rather than delivering such security from its portfolio. In such cases
additional brokerage commissions will be incurred.
A Portfolio will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
the writing of the option; however, any loss so incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
simultaneous or subsequent sale of a different option. Also, because increases
in the market price of a call option will generally reflect increases in the
market price of the underlying security, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by a Portfolio. Any profits
from writing covered call options are considered short-term gain for federal
income tax purposes and, when distributed by a Portfolio, are taxable as
ordinary income.
FOREIGN FUTURES CONTRACTS AND FOREIGN OPTIONS - The Variable Portfolios may
engage in transactions in foreign futures contracts and foreign options.
Participation in foreign futures contracts and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the CFTC, the National Futures Association
("NFA") nor any domestic exchange regulates activities of any foreign boards
of trade including the execution, delivery and clearing of transactions, or
has the power to compel enforcement of the rules of a foreign board of trade
or any applicable foreign laws. Generally, the foreign transaction will be
governed by applicable foreign law. This is true even if the exchange is
formally linked to a domestic market so that a position taken on the market
may be liquidated by a transaction on another market. Moreover, such laws or
regulations will vary depending on the foreign country in which the foreign
futures contract or foreign options transaction occurs. Investors which trade
foreign futures contracts or foreign options contracts may not be afforded
certain of the protective measures provided by domestic exchanges, including
the right to use reparations proceedings before the CFTC and arbitration
proceedings provided by the NFA. In particular, funds received from customers
for foreign futures contracts or foreign options transactions may not be
provided the same protections as funds received for transactions on United
States futures exchanges. The price of any foreign futures contracts or
foreign options contract and, therefore, the potential profit and loss
thereon, may be affected by an variance in the foreign exchange rate between
the time an order is placed and the time it is liquidated, offset or
exercised.
OPTIONS ON FOREIGN CURRENCIES - Each Variable Portfolio may write and purchase
calls on foreign currencies. A Portfolio may purchase and write puts and
calls on foreign currencies that are traded on a securities or commodities
exchange or quoted by major recognized dealers in such options for the
purposes of protecting against declines in the dollar value of foreign
securities and against increases in the dollar cost of foreign securities to
be acquired. If a rise is anticipated in the dollar value of a foreign
currency in which securities to be required are denominated, the increased
cost of such securities may be partially offset by purchasing calls or writing
puts on that foreign currency. If a decline in the dollar value of a foreign
currency is anticipated, the decline in value of portfolio securities
denominated in that currency may be partially offset by writing calls or
purchasing puts on that foreign currency. In the event of rate fluctuations
adverse to a Portfolio's position, it would lose the premium it paid and
transaction costs. A call written on a foreign currency by a Portfolio is
covered if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian) upon conversion or exchange of
other foreign currency held in its portfolio. A call may be written by a
Portfolio on a foreign currency to provide a hedge against a decline due to an
expected adverse change in the exchange rate in the U.S. dollar value of a
security which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option. This is a "cross-hedging"
strategy. In such circumstances, the Portfolio collateralizes the position by
maintaining in a segregated account with the Portfolio's custodian cash or
U.S. Government securities in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
FORWARD EXCHANGE CONTRACTS - Each Variable Portfolio may enter into forward
contracts for foreign currency ("forward exchange contracts"), which obligate
the seller to deliver and the purchaser to take a specific amount of a
specified foreign currency at a future date at a price set at the time of the
contract. These contracts are generally traded in the interbank market
conducted directly between currency traders and their customers. A Portfolio
may enter into a forward exchange contract in order to "lock in" the U.S.
dollar price of a security denominated in a foreign currency which it has
purchased or sold but which has not yet settled (a "transaction hedge"); or to
lock in the value of an existing portfolio security (a "position hedge"); or
to protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and a foreign currency. There is a risk
that use of forward exchange contracts may reduce the gain that would
otherwise result from a change in the relationship between the U.S. dollar and
a foreign currency. Forward exchange contracts include standardized foreign
currency futures contracts which are traded on exchanges and are subject to
procedures and regulations applicable to futures. Each Portfolio may also
enter into a forward exchange contract to sell a foreign currency which
differs from the currency in which the underlying security is denominated.
This is done in the expectation that there is a greater correlation between
the foreign currency of the forward exchange contract and the foreign currency
of the underlying investment than between the U.S. dollar and the foreign
currency of the underlying investment. This technique is referred to as
"cross-hedging." The success of cross-hedging is dependent on many factors,
including the ability of the Investment Adviser to correctly identify and
monitor the correlation between foreign currencies and the U.S. dollar. To
the extent that the correlation is not identical, a Portfolio may experience
losses or gains on both the underlying security and the cross currency hedge.
Each Portfolio may use forward exchange contracts to protect against
uncertainty in the level of future exchange rates. The use of forward
exchange contracts does not eliminate fluctuations in the prices of the
underlying securities the Portfolio owns or intends to acquire, but it does
fix a rate of exchange in advance. In addition, although forward exchange
contracts limit the risk of loss due to a decline in the value of the hedged
currencies, at the same time they limit any potential gain that might result
should the value of the currencies increase.
There is no limitation as to the percentage of a Portfolio's assets that may
be committed to forward exchange contracts. The Portfolios will not enter
into a "cross-hedge," unless it is denominated in a currency or currencies
that the Investment Adviser believes will have price movements that tend to
correlate closely with the currency in which the investment being hedged is
denominated.
The Variable Portfolios' custodian will place cash or U.S. Government
securities or other liquid high-quality debt securities in a separate account
of each Portfolio having a value equal to the aggregate amount of that
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in
the separate account declines, additional cash or securities will be placed in
the account on a daily basis so that the value of the account will equal the
amount of the Portfolio's commitments with respect to such contracts. As an
alternative to maintaining all or part of the separate account, a Portfolio
may purchase a call option permitting the Portfolio to purchase the amount of
foreign currency being hedged by a forward sale contract at a price no higher
than the forward contract price, or a Portfolio may purchase a put option
permitting the Portfolio to sell the amount of foreign currency subject to a
forward purchase contract at a price as high or higher than the forward
contract price. Unanticipated changes in currency prices may result in poorer
overall performance for a Portfolio than if it had not entered into such
contracts.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the forward
contract is entered into and the date it is sold. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign currency on the spot
(i.e., cash) market (and bear the expense of such purchase), if the market
value of the security is less than the amount of foreign currency the
Portfolio is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received
upon the sale of the portfolio security if its market value exceeds the amount
of foreign currency the Portfolio is obligated to deliver. The projection of
short-term currency market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
Forward contracts involve the risk that anticipated currency movements will
not be accurately predicted, causing the Portfolio to sustain losses on these
contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring a Portfolio
to sell a currency, the Portfolio may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Portfolio will obtain, on the same
maturity date, the same amount of the currency that it is obligated to
deliver. Similarly, a Portfolio may close out a forward contract requiring it
to purchase a specified currency by entering into a second contract entitling
it to sell the same amount of the same currency on the maturity date of the
first contract. The Portfolio would realize a gain or loss as a result of
entering into such an offsetting forward contract under either circumstance to
the extent the exchange rate(s) between the currencies involved moved between
the execution dates of the first contract and the offsetting contract.
The cost to a Portfolio of engaging in forward exchange contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved.
Because such contracts are not traded on an exchange, a Portfolio must
evaluate the credit and performance risk of each particular counterparty under
a forward contract.
Although the Variable Portfolios value their assets daily in terms of U.S.
dollars, they do not intend to convert their holdings of foreign currencies
into U.S. dollars on a daily basis. The Portfolios may convert foreign
currency from time to time, and investors should be aware of the costs of
currency conversion. Foreign exchange dealers do not charge a fee for
conversion, but they do seek to realize a profit based on the difference
between the prices at which they buy and sell various currencies. Thus, a
dealer may offer to sell a foreign currency to the Portfolio at one rate,
while offering a lesser rate of exchange should the Portfolio desire to resell
that currency to the dealer.
RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS - CFTC regulations
require that all short futures positions be entered into for the purpose of
hedging the value of securities held, and that all long futures positions
either constitute bona fide hedging transactions, as defined in such
regulations, or have a total value not in excess of an amount determined by
reference to certain cash and securities positions maintained, and accrued
profits on such positions. With respect to futures contracts or related
options that are entered into for purposes that may be considered speculative,
the aggregate initial margin for future contracts and premiums for options
will not exceed 5% of a Portfolio's net assets, after taking into account
realized profits and unrealized losses on such futures contracts.
A Portfolio's ability to engage in the hedging transactions described herein
may be limited by the current federal income tax requirement that a Portfolio
derive less than 30% of its gross income from the sale or other disposition of
stock or securities held for less than three months.
INTEREST RATE SWAP TRANSACTIONS - Swap agreements entail both interest rate
risk and credit risk. There is a risk that, based on movements of interest
rates in the future, the payments made by a Portfolio under a swap agreement
will have been greater than those received by it. Credit risk arises from the
possibility that the counterparty will default. If the counterparty to an
interest rate swap defaults, a Portfolio's loss will consist of the net amount
of contractual interest payments that a Portfolio has not yet received. The
Investment Adviser will monitor the creditworthiness of counterparties to a
Portfolio's interest rate swap transactions on an ongoing basis. A Portfolio
will enter into swap transactions with appropriate counterparties pursuant to
master netting agreements. A master netting agreement provides that all swaps
done between a Portfolio and that counterparty under that master agreement
shall be regarded as parts of an integral agreement. If on any date amounts
are payable in the same currency in respect of one or more swap transactions,
the net amount payable on that date in that currency shall be paid. In
addition, the master netting agreement may provide that if one party defaults
generally or on one swap, the counterparty may terminate the swaps with that
party. Under such agreements, if there is a default resulting in a loss to one
party, the measure of that party's damages is calculated by reference to the
average cost of a replacement swap with respect to each swap (i.e., the
mark-to-market value at the time of the termination of each swap). The gains
and losses on all swaps are then netted, and the result is the counterparty's
gain or loss on termination. The termination of all swaps and the netting of
gains and losses on termination is generally referred to as "aggregation."
ADDITIONAL RISK FACTORS IN USING DERIVATIVES - In addition to any risk factors
which may be described elsewhere in this section, or in the prospectus under
"Investment Techniques" and "Risk Factors and Other Considerations," the
following sets forth certain information regarding the potential risks
associated with the Portfolio's transactions in derivatives.
Risk of Imperfect Correlation - A Portfolio's ability to hedge
effectively all or a portion of its portfolio through transactions in futures,
options on futures or options on securities and indexes depends on the degree
to which movements in the value of the securities or index underlying such
hedging instrument correlate with movements in the value of the assets being
hedged. If the values of the assets being hedged do not move in the same
amount or direction as the underlying security or index, the hedging strategy
for a Portfolio might not be successful and the Portfolio could sustain losses
on its hedging transactions which would not be offset by gains on its
portfolio. It is also possible that there may be a negative correlation
between the security or index underlying a futures or option contract and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the
Portfolio's overall return could be less than if the hedging transactions had
not been undertaken. Stock index futures or options based on a narrower index
of securities may present greater risk than options or futures based on a
broad market index, as a narrower index is more susceptible to rapid and
extreme fluctuations resulting from changes in the value of a small number of
securities. The Portfolio would, however, effect transactions in such futures
or options only for hedging purposes (or to close out open positions).
The trading of futures and options on indices involves the additional risk of
imperfect correlation between movements in the futures or option price and the
value of the underlying index. The anticipated spread between the prices may
be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures and options market. The purchase
of an option on a futures contract also involves the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. The risk of imperfect correlation, however,
generally tends to diminish as the maturity date of the futures contract or
termination date of the option approaches. The risk incurred in purchasing an
option on a futures contract is limited to the amount of the premium plus
related transaction costs, although it may be necessary under certain
circumstances to exercise the option and enter into the underlying futures
contract in order to realize a profit. Under certain extreme market
conditions, it is possible that a Portfolio will not be able to establish
hedging positions, or that any hedging strategy adopted will be insufficient
to completely protect the Portfolio.
The Variable Portfolios will purchase or sell futures contracts or options for
hedging purposes, only if, in the Investment Adviser's judgment, there is
expected to be a sufficient degree of correlation between movements in the
value of such instruments and changes in the value of the assets being hedged
for the hedge to be effective. There can be no assurance that the Investment
Adviser's judgment will be accurate.
Potential Lack of a Liquid Secondary Market - The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. First, all participants
in the futures markets are subject to initial deposit and variation margin
requirements. This could require a Portfolio to post additional cash or cash
equivalents as the value of the position fluctuates. Rather than meeting
additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of
the futures or options market may be lacking. Prior to exercise or
expiration, a futures or option position may be terminated only by entering
into a closing purchase or sale transaction, which requires a secondary market
on the exchange on which the position was originally established. While a
Portfolio will establish a futures or option position only if there appears to
be a liquid secondary market therefor, there can be no assurance that such a
market will exist for any particular futures or option contract at any
specific time. In such event, it may not be possible to close out a position
held by the Portfolio, which could require the Portfolio to purchase or sell
the instrument underlying the position, make or receive a cash settlement, or
meet ongoing variation margin requirements. The inability to close out
futures or option positions also could have an adverse impact on the
Portfolio's ability effectively to hedge its portfolio, or the relevant
portion thereof.
The liquidity of a secondary market in a futures contract or an option on a
futures contract may be adversely affected by "daily price fluctuation limits"
established by the exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange
or clearing house equipment failures, government intervention, insolvency of
the brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
Risk of Predicting Interest Rate Movements - Investments in futures
contracts on fixed income securities and related indices involve the risk that
if the Investment Adviser's judgment concerning the general direction of
interest rates is incorrect, a Portfolio's overall performance may be poorer
than if it had not entered into any such contract. For example, if a
Portfolio has been hedged against the possibility of an increase in interest
rates which would adversely affect the price of bonds held in its portfolio
and interest rates decrease instead, the Portfolio will lose part or all of
the benefit of the increased value of its bonds which have been hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell bonds
from its portfolio to meet daily variation margin requirements, possibly at a
time when it may be disadvantageous to do so. Such sale of bonds may be, but
will not necessarily be, at increased prices which reflect the rising market.
Trading and Position Limits - Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Company does not believe that these
trading and position limits will have an adverse impact on the hedging
strategies regarding the Variable Portfolios.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards established
by the Company's Board of Directors. A repurchase agreement allows a Portfolio
to determine the yield during the Portfolio's holding period. This results in
a fixed rate of return insulated from market fluctuations during such period.
Such underlying debt instruments serving as collateral will meet the quality
standards of a Portfolio. The market value of the underlying debt instruments
will, at all times, be equal to the dollar amount invested. Repurchase
agreements, although fully collateralized, involve the risk that the seller of
the securities may fail to repurchase them from a Portfolio. In that event, a
Portfolio may incur (a) disposition costs in connection with liquidating the
collateral, or (b) a loss if the collateral declines in value. Also, if the
default on the part of the seller is due to insolvency and the seller
initiates bankruptcy proceedings, a Portfolio's ability to liquidate the
collateral may be delayed or limited. Under the 1940 Act, repurchase
agreements are considered loans by a Portfolio. Repurchase agreements
maturing in more than seven days will not exceed 15 percent of the total
assets of a Portfolio.
VARIABLE RATE DEMAND INSTRUMENTS
Variable rate demand instruments (including floating rate instruments) held by
a Portfolio may have maturities of more than one year, provided: (i) the
Portfolio is entitled to the payment of principal at any time, or during
specified intervals not exceeding one year, upon giving the prescribed notice
(which may not exceed 30 days), and (ii) the rate of interest on such
instruments is adjusted at periodic intervals not to exceed one year. In
determining whether a variable rate demand instrument has a remaining maturity
of one year or less, each instrument will be deemed to have a maturity equal
to the longer of the period remaining until its next interest rate adjustment
or the period remaining until the principal amount can be recovered through
demand. A Portfolio will be able (at any time or during specified periods not
exceeding one year, depending upon the note involved) to demand payment of the
principal of a note. If an issuer of a variable rate demand note defaulted
on its payment obligation, a Portfolio might be unable to dispose of the note
and a loss would be incurred to the extent of the default. A Portfolio may
invest in variable rate demand notes only when the investment is deemed to
involve minimal credit risk. The continuing creditworthiness of issuers of
variable rate demand notes held by a Portfolio will also be monitored to
determine whether such notes should continue to be held. Variable and
floating rate instruments with demand periods in excess of seven days and
which cannot be disposed of promptly within seven business days and in the
usual course of business without taking a reduced price will be treated as
illiquid securities that are subject to the Portfolio's policies and
restrictions on illiquid securities.
SECURITIES LENDING
The Variable Portfolios can lend securities in its portfolio subject to the
following conditions: (a) the borrower will provide collateral equal to an
amount of at least 100% of the then current market value of the loaned
securities throughout the life of the loan; (b) loans will be made subject to
the rules of the New York Stock Exchange; (c) the loan collateral will be
either cash, direct obligations of the U.S. government or agencies thereof or
irrevocable letters of credit; (d) cash collateral will be invested only in
highly liquid short-term investments; (e) during the existence of a loan, a
Portfolio will continue to receive any distributions paid on the borrowed
securities or amounts equivalent thereto; and (f) no more than one-third of
the net assets of a Portfolio will be on loan at any one time. A loan may be
terminated at any time by the borrower or lender upon proper notice.
In the Investment Adviser's opinion, lending portfolio securities to qualified
broker-dealers affords a Portfolio a means of increasing the yield on its
portfolio. A Portfolio will be entitled either to receive a fee from the
borrower or to retain some or all of the income derived from its investment of
cash collateral. A Portfolio will continue to receive the interest or
dividends paid on any securities loaned, or amounts equivalent thereto.
Although voting rights will pass to the borrower of the securities, whenever a
material event affecting the borrowed securities is to be voted on, the
Investment Adviser will regain or direct the vote with respect to loaned
securities.
The primary risk a Portfolio assumes in loaning securities is that the
borrower may become insolvent on a day on which the loaned security is rapidly
increasing in price. In such event, if the borrower fails to return the
loaned securities, the existing collateral might be insufficient to purchase
back the full amount of the security loaned, and the borrower would be unable
to furnish additional collateral. The borrower would be liable for any
shortage, but a Portfolio would be an unsecured creditor as to such shortage
and might not be able to recover all or any of it.
FOREIGN SECURITIES
Investments in foreign securities, including futures and options contracts,
offer potential benefits not available solely through investment in securities
of domestic issuers. Foreign securities offer the opportunity to invest in
foreign issuers that appear to offer growth potential, or in foreign countries
with economic policies or business cycles different from those of the United
States, or to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers.
Such risks include fluctuations in exchange rates, adverse foreign political
and economic developments, and the possible imposition of exchange controls or
other foreign governmental laws or restrictions. Since the Variable
Portfolios may invest in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates will affect
the value of securities in the portfolio and the unrealized appreciation or
depreciation of investments so far as U.S. investors are concerned. In
addition, with respect to certain countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social
instability, or diplomatic developments that could adversely affect
investments in those countries.
There may be less publicly available information about a foreign issuer than
about a U.S. issuer, and foreign issuers may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or
as uniform as those of U.S. issuers. Foreign securities markets, while
growing in volume, have, for the most part, substantially less volume than
U.S. markets. Securities of many foreign issuers are less liquid and their
prices more volatile than securities of comparable U.S. issuers.
Transactional costs in non-U.S. securities markets are generally higher than
in U.S. securities markets. There is generally less government supervision
and regulation of exchanges, brokers, and issuers than there is in the U.S.
The Company might have greater difficulty taking appropriate legal action with
respect to foreign investments in non-U.S. courts than with respect to
domestic issuers in U.S. courts. In addition, transactions in foreign
securities may involve greater time from the trade date until settlement than
domestic securities transactions and involve the risk of possible losses
through the holding of securities by custodians and securities depositories in
foreign countries.
Currently, direct investment in equity securities in China and Taiwan is
restricted, and investments may be made only through a limited number of
approved vehicles. At present this includes investment in listed and unlisted
investment companies, subject to limitations under the 1940 Act. Investment
in these closed-end funds may involve the payment of additional premiums to
acquire shares in the open-market and the yield of these securities will be
reduced by the operating expenses of such companies. In addition, an investor
should recognize that he will bear not only his proportionate share of the
expenses of the Portfolio, but also indirectly bear similar expenses of the
underlying closed-end fund. Also, as a result of a Portfolio's policy of
investing in closed-end mutual funds, investors in the Portfolio may receive
taxable capital gains distributions to a greater extent than if he or she had
invested directly in the underlying closed-end fund.
Dividend and interest income from foreign securities may generally be subject
to withholding taxes by the country in which the issuer is located and may not
be recoverable by a Portfolio or its investors.
Depositary receipts are typically dollar denominated, although their market
price is subject to fluctuations of the foreign currency in which the
underlying securities are denominated. Depositary receipts include: (a)
American Depositary Receipts (ADRs), which are typically designed for U.S.
investors and held either in physical form or in book entry form; (b) European
Depositary Receipts (EDRs), which are similar to ADRs but may be listed and
traded on a European exchange as well as in the United States. Typically,
these securities are traded on the Luxembourg exchange in Europe; and (c)
Global Depositary Receipts (GDRS), which are similar to EDRS although they may
be held through foreign clearing agents such as Euroclear and other foreign
depositories.
MORTGAGE-RELATED DEBT SECURITIES
Federal mortgage-related securities include obligations issued or
guaranteed by the Government National Mortgage Association (GNMA), the
Federal National Mortgage Association (FNMA) and the Federal Home Loan
Mortgage Corporation (FHLMC). GNMA is a wholly owned corporate
instrumentality of the United States, the securities and guarantees of which
are backed by the full faith and credit of the United States. FNMA, a
federally chartered and privately owned corporation, and FHLMC, a
federal corporation, are instrumentalities of the United States with
Presidentially-appointed board members. The obligations of FNMA and FHLMC
are not explicitly guaranteed by the full faith and credit of the federal
government.
Pass-through, mortgage-related securities are characterized by monthly
payments to the holder, reflecting the monthly payments made by the borrowers
who received the underlying mortgage loans. The payments to the security
holders, like the payments on the underlying loans, represent both principal
and interest. Although the underlying mortgage loans are for specified
periods of time, often twenty or thirty years, the borrowers can repay such
loans sooner. Thus, the security holders frequently receive repayments of
principal, in addition to the principal which is part of the regular monthly
payment. A borrower is more likely to repay a mortgage which bears a
relatively high rate of interest. This means that in times of declining
interest rates, some higher yielding securities held by a Portfolio might be
converted to cash, and the Portfolio could be expected to reinvest such cash
at the then prevailing lower rates. The increased likelihood of prepayment
when interest rates decline also limits market price appreciation of
mortgage-related securities. If a Portfolio buys mortgage-related securities
at a premium, mortgage foreclosures or mortgage prepayments may result in
losses of up to the amount of the premium paid since only timely payment of
principal and interest is guaranteed.
As noted in the Prospectus, the Variable Portfolios may also invest in
collateralized mortgage obligations (CMOs). CMOs are securities which are
collateralized by mortgage pass-through securities. Cash flows from
underlying mortgages are allocated to various classes or tranches in a
predetermined, specified order. Each sequential tranche has a "stated
maturity" - the latest date by which the tranche can be completely repaid,
assuming no repayments - and has an "average life" - the average time to
receipt of a principal payment weighted by the size of the principal payment.
The average life is typically used as a proxy for maturity because the debt is
amortized, rather than being paid off entirely at maturity, as would be the
case in a straight debt instrument.
CMOs are typically structured as "pass-through" securities. In these
arrangements, the underlying mortgages are held by the issuer, which then
issues debt collateralized by the underlying mortgage assets. The security
holder thus owns an obligation of the issuer and payment of interest and
principal on such obligations is made from payments generated by the
underlying mortgage assets. The underlying mortgages may be guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
Government such as GNMA or otherwise backed by FNMA or FHLMC. Alternatively,
such securities may be backed by mortgage insurance, letters of credit or
other credit enhancing features. CMOs are issued by private entities. They
are not directly guaranteed by any government agency and are secured by the
collateral held by the issuer.
ASSET-BACKED SECURITIES
Asset-backed securities are collateralized by short-term loans such as
automobile loans, home equity loans, or credit card receivables. The payments
from the collateral are passed through to the security holder. As noted above
with respect to CMOs, the average life for these securities is the
conventional proxy for maturity. Asset-backed securities may pay all interest
and principal to the holder, or they may pay a fixed rate of interest, with
any excess over that required to pay interest going either into a reserve
account or to a subordinate class of securities, which may be retained by the
originator. The originator may guarantee interest and principal payments.
These guarantees often do not extend to the whole amount of principal, but
rather to an amount equal to a multiple of the historical loss experience of
similar portfolios.
Two varieties of asset-backed securities are CARs and CARDs. CARs are
securities, representing either ownership interests in fixed pools of
automobile receivables, or debt instruments supported by the cash flows from
such a pool. CARDs are participations in fixed pools of credit accounts.
These securities have varying terms and degrees of liquidity.
Asset-backed securities may be subject to the type of prepayment risk
discussed above due to the possibility that prepayments on the underlying
assets will alter the cash flow. Faster prepayments will shorten the average
life and slower prepayments will lengthen it.
The coupon rate of interest on mortgage-related and asset-backed securities is
lower than the interest rates paid on the mortgages included in the underlying
pool, by the amount of the fees paid to the mortgage pooler, issuer, and/or
guarantor. Actual yield may vary from the coupon rate, however, if such
securities are purchased at a premium or discount, trade in the secondary
market at a premium or discount, or to the extent that the underlying assets
are prepaid as noted above.
HIGH RISK, HIGH-YIELD SECURITIES
The Variable Portfolios may invest in high risk, high-yield securities ("junk
bonds"), which are fixed income securities that offer a current yield above
that generally available on higher quality debt securities. These securities
are regarded as speculative and generally involve more risk of loss of
principal and income than higher-rated securities. Also their yields and
market values tend to fluctuate more. Fluctuations in value do not affect the
cash income from the securities but are reflected in a Portfolio's net asset
value. The greater risks and fluctuations in yield and value occur, in part,
because investors generally perceive issuers of lower-rated and unrated
securities to be less creditworthy. Lower ratings, however, may not
necessarily indicate higher risks. In pursuing a Portfolio's objectives, the
Investment Adviser seeks to identify situations in which the rating agencies
have not fully perceived the value of the security or in which the Investment
Adviser believes that future developments will enhance the creditworthiness
and the ratings of the issuer.
The yields earned on high risk, high-yield securities (junk bonds) generally
are higher than those of higher quality securities with the same maturities
because of the additional risks associated with them. These risks include:
(1) SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. High risk,
high-yield securities (junk bonds) are more sensitive to adverse economic
changes or individual corporate developments but less sensitive to interest
rate changes than are investment grade bonds. As a result, when interest
rates rise, causing bond prices to fall, the value of these securities may not
fall as much as investment grade corporate bonds. Conversely, when interest
rates fall, these securities may underperform investment grade corporate bonds
because the prices of high risk, high-yield securities (junk bonds) tend not
to rise as much as the prices of those other bonds.
Also, the financial stress resulting from an economic downturn or adverse
corporate developments could have a greater negative effect on the ability of
issuers of these securities to service their principal and interest
payments, to meet projected business goals and to obtain additional
financing, than on more creditworthy issuers. Holders of these securities
could also be at greater risk because these securities are generally
unsecured and subordinated to senior debt holders and secured creditors.
If the issuer of a high risk, high-yield security (junk bonds) owned by a
Portfolio defaults, the Portfolio may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and changes can
be expected to result in increased volatility of market prices of these
securities and a Portfolio's net asset value. Furthermore, in the case of
high risk, high-yield securities (junk bonds) structured as zero coupon or
pay-in-kind securities, their market prices are affected to a greater extent
by interest rate changes and thereby tend to be more speculative and volatile
than securities which pay interest periodically and in cash.
(2) PAYMENT EXPECTATIONS. High risk, high-yield securities (junk bonds),
like other debt instruments, present risks based on payment expectations.
For example, these securities may contain redemption or call provisions. If
an issuer exercises these provisions in a declining interest rate market, the
Portfolio may have to replace the securities with a lower yielding security,
resulting in a decreased return for investors. Also, the value of these
securities may decrease in a rising interest rate market. In addition, there
is a higher risk of non-payment of interest and/or principal by issuers of
these securities than in the case of investment grade bonds.
(3) LIQUIDITY AND VALUATION RISKS. Some high risk, high-yield securities
(junk bonds) are traded among a small number of broker-dealers rather than in
a broad secondary market. Many of these securities may not be as liquid as
investment grade bonds. The ability to value or sell these securities will be
adversely affected to the extent that such securities are thinly traded or
illiquid. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease or increase the value and liquidity of
these securities more than other securities, especially in a thinly-traded
market.
(4) LIMITATIONS OF CREDIT RATINGS. The credit ratings assigned to high
risk, high-yield securities (junk bonds) may not accurately reflect the true
risks of an investment. Credit ratings typically evaluate the safety of
principal and interest payments rather than the market value risk of such
securities. In addition, credit agencies may fail to adjust credit ratings to
reflect rapid changes in economic or company conditions that affect a
security's market value. Although the ratings of recognized rating services
such as Moody's Investors Service, Inc. and Standard & Poor's Corporation are
considered, the Investment Adviser primarily relies on its own credit analysis
which includes a study of existing debt, capital structure, ability to service
debts and to pay dividends, the issuer's sensitivity to economic conditions,
its operating history and the current trend of earnings. Thus the achievement
of a Portfolio's investment objective may be more dependent on the Investment
Adviser's own credit analysis than might be the case for a fund which does not
invest in these securities.
(5) LEGISLATION. Legislation may have a negative impact on the market
for high risk, high-yield securities (junk bonds), such as legislation
requiring federally-insured savings and loan associations to divest themselves
of their investments in these securities.
ZERO COUPON AND PAY-IN-KIND SECURITIES
The Variable Portfolios may invest in zero coupon securities and pay-in-kind
securities. In addition, the Portfolios may invest in STRIPS (Separate
Trading of Registered Interest and Principal of Securities). Zero coupon or
deferred interest securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
date when the securities begin paying current interest (the "cash payment
date") and therefore are issued and traded at a discount from their face
amounts or par value. The discount varies, depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of
the security and the perceived credit quality of the issuer. The discount, in
the absence of financial difficulties of the issuer, decreases as the final
maturity or cash payment date of the security approaches. STRIPS are created
by the Federal Reserve Bank by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. The market prices of zero coupon, STRIPS and deferred interest
securities generally are more volatile than the market prices of securities
with similar maturities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero
coupon securities having similar maturities and credit quality.
The risks associated with lower-rated debt securities apply to these
securities. Zero coupon and pay-in-kind securities are also subject to the
risk that in the event of a default, a Portfolio may realize no return on its
investment, because these securities do not pay cash interest.
CONVERTIBLES
A convertible bond or convertible preferred stock gives the holder the option
of converting these securities into common stock. Some convertible securities
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
WARRANTS
Warrants allow the holder to subscribe for new shares in the issuing company
within a specified time period, according to a predetermined formula governing
the number of shares per warrant and the price to be paid for those shares.
Warrants may be issued separately or in association with a new issue of bonds,
preferred stock, common stock or other securities.
Covered warrants allow the holder to purchase existing shares in the issuing
company, or in a company associated with the issuer, or in a company in which
the issuer has or may have a share stake which covers all or part of the
warrants' subscription rights.
WHEN-ISSUED OR DELAYED-DELIVERY SECURITIES
During any period that a Portfolio has outstanding a commitment to purchase
securities on a when-issued or delayed-delivery basis, that Portfolio will
maintain a segregated account consisting of cash, U.S. Government securities
or other high-quality debt obligations with its custodian bank. To the extent
that the market value of securities held in this segregated account falls
below the amount that the Portfolio will be required to pay on settlement,
additional assets may be required to be added to the segregated account. Such
segregated accounts could affect the Portfolio's liquidity and ability to
manage its portfolio. When a Portfolio engages in when-issued or
delayed-delivery transactions, it is effectively relying on the seller of such
securities to consummate the trade; failure of the seller to do so may result
in the Portfolio's incurring a loss or missing an opportunity to invest
securities held in the segregated account more advantageously. A Portfolio
will not pay for securities purchased on a when-issued or delayed-delivery
basis, or start earning interest on such securities, until the securities are
actually received. However, any security so purchased will be recorded as an
asset of the purchasing Portfolio at the time the commitment is made. Because
the market value of securities purchased on a when-issued or delayed-delivery
basis may increase or decrease prior to settlement as a result of changes in
interest rates or other factors, such securities will be subject to changes in
market value prior to settlement and a loss may be incurred if the value of
the security to be purchased declines prior to settlement.
PORTFOLIO TURNOVER
The Variable Portfolios' policies on portfolio turnover are discussed in the
prospectus.
DIRECTORS AND OFFICERS OF THE COMPANY
The investments and administration of the Company are under the direction of
the Board of Directors. The Directors and executive officers of the Company
and their principal occupations for the past five years are listed below.
Those Directors who are "interested persons," as defined in the 1940 Act, are
indicated by an asterisk (*). All Directors and officers hold similar
positions with other investment companies in the same Fund Complex managed by
ALIAC as the Investment Adviser. The Fund Complex presently consists of Aetna
Series Fund, Inc., Aetna Variable Fund, Aetna Income Shares, Aetna Variable
Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund (Series B),
Aetna Generation Portfolios, Inc. and Aetna Variable Portfolios, Inc.
<TABLE>
<CAPTION>
Principal Occupation During Past Five Years
Position(s) (and Positions held with Affiliated Persons
Held with or Principal Underwriters of the
Name, Address and Age Registrant Registrant)
<S> <C> <C>
Shaun P. Mathews* Director and Chief Executive, Aetna Investment Services,
151 Farmington Avenue President Inc., October, 1995 to Present; President,
Hartford, Connecticut Aetna Investment Services, Inc., March, 1994
Age 40 to Present; Director and Chief Operations
Officer, Aetna Investment Services, Inc.,
July 1993 to Present; Director and Senior
Vice President, Aetna Insurance Company of
America, February 1993 to Present; Senior
Vice President and Director of Aetna Life
Insurance and Annuity Company ("ALIAC"),
March 1991 to Present; Vice President of
Aetna Life Insurance Company, 1991 to
Present.
James C. Hamilton Vice President Chief Financial Officer, Aetna Investment
151 Farmington Avenue and Treasurer Services, Inc., July 1993 to Present;
Hartford, Connecticut Director, Vice President and
Age 54 Treasurer, Aetna Insurance Company of
America, February 1993 to Present; Director,
Aetna Private Capital, Inc., November 1990
to Present; Vice President and Treasurer
of ALIAC, October 1988 to Present; Vice
President and Actuary, Aetna Life Insurance
Company, 1988 to Present.
Susan E. Bryant Secretary Counsel, ALIAC and Aetna Life and Casualty
151 Farmington Avenue Company, March 1993 to Present; General
Hartford, Connecticut Counsel and Corporate Secretary, First
Age 48 Investors Corporation, April 1991 to March
1993.
Morton Ehrlich Director Chairman and Chief Executive Officer,
1000 Venetian Way Integrated Management Corp. (an entrepre-
Miami, Florida neurial company) and Universal Research
Age 61 Technologies, January 1992 to Present;
Director and Chairman, Audit Committee,
National Bureau of Economic Research, 1985
to 1992; President, LIFECO Travel Services
Corp., October 1988 to December 1991.
Maria T. Fighetti Director Attorney, New York City Department of
325 Piermont Road Mental Health, 1973 to Present.
Closter, New Jersey
Age 52
David L. Grove Director Private Investor; Economic/Financial Con-
5 The Knoll sultant, December 1988 to Present.
Armonk, New York
Age 77
Timothy A. Holt* Director Director, Aeltus, April, 1996 to Present.
151 Farmington Avenue Director, Senior Vice President and Chief
Hartford, Connecticut Financial Officer, ALIAC, February 1996 to
Age 43 Present; Senior Vice President, Business
Strategy & Finance, Aetna Retirement
Services, Inc., February 1996 to Present;
Vice President, Portfolio Management/
Investment Group, Aetna Life and Casualty
Company, August 1992 to February 1996;
Vice President - Finance and Treasurer,
Aetna Life and Casualty Company, August,
1989 through July, 1991; Treasurer, Aetna
Capital Management, Inc., February 1990
to June 1991.
Daniel P. Kearney* Director Chairman (since February 1996), Director
151 Farmington Avenue (since March 1991) and President (since
Hartford, Connecticut March 1994), ALIAC; Executive Vice President
Age 56 (since December 1993), and Group Executive,
Investment Division (from February 1991 to
December 1993), Aetna Life and Casualty
Company. Director, Aeltus, April, 1996
to Present.
Sidney Koch Director Senior Adviser, Hambro America, Inc.,
455 East 86th Street January, 1993 to Present; Senior Adviser,
New York, New York Daiwa Securities America, Inc. January 1991
Age 60 to January 1993.
Corine T. Norgaard** Director, Chair Dean of the School of Management, State
School of Management Audit Committee University of New York (Binghamton), August
Binghamton University and Contract 1993 to Present; Professor, Accounting,
Binghamton, New York Committee University of Connecticut (Storrs,
Age 58 Connecticut), September 1969 to June 1993;
Director, The Advest Group, Inc. (holding
company for brokerage firm) from August,
1983 to Present.
Richard G. Scheide Director Private Banking Consultant, July 1992 to
11 Lily Street Present; Consultant, Fleet Bank, from July
Nantucket, Massachusetts 1991 to July 1992; Executive Vice President
Age 66 and Manager, Trust and Private Banking, Bank
of New England, N.A., and Bank of New
England Company, June 1976 to July 1991.
<FN>
** Dr. Norgaard is a director of a holding company that has as a subsidiary a
broker-dealer that sells contracts for ALIAC. The Portfolios are offered as investment
options under the contracts. Her position as a director of the holding company may cause
her to be an "interested person" for purposes of the 1940 Act.
</TABLE>
During the year ended December 31, 1995, members of the Boards of the Funds
within the Aetna Fund Complex who are also directors, officers or employees of
Aetna Life and Casualty Company and its affiliates were not entitled to any
compensation from the Funds. Effective November 1, 1995, members of the Boards
who are not affiliated as employees of Aetna or its subsidiaries are entitled
to receive an annual retainer of $30,000 for service on the Boards of the
Funds within the Aetna Fund Complex. In addition, each such member will
receive a fee of $5,000 per meeting for each regularly scheduled Board
meeting; $5,000 for each Contract Committee meeting which is held on any day
on which a regular Board meeting is not scheduled; and $3,000 for each
committee meeting other than for a Contract Committee meeting on any day on
which a regular Board meeting is not scheduled. A Committee Chairperson fee of
$2,000 each will be paid to the Chairperson of the Contract and Audit
Committees. All of the above fees are to be allocated proportionately to each
Fund within the Aetna Fund Complex based on the net assets of the Fund as of
the date compensation is earned.
<TABLE>
<CAPTION>
<S> <C> <C>
Total Compensation from
Aggregate Compensa- Registrant and Fund
Name of Person, Position tion from Registrant Complex Paid to Directors
Corine Norgaard $ -0- $ 51,000
Director and Chairman,
Audit and Contract Committees
Sidney Koch $ -0- $ 47,000
Director and Member,
Audit and Contract Committees
Maria T. Fighetti $ -0- $ 46,000
Director and Member,
Audit and Contract Committees
Morton Ehrlich $ -0- $ 46,000
Director and Member,
Audit and Contract Committees
Richard G. Scheide $ -0- $ 46,500
Director and Member,
Audit and Contract Committees
David L. Grove $ -0- $ 46,500*
Director and Member,
Audit and Contract Committees
<FN>
* Mr. Grove elected to defer all such compensation.
</TABLE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
Shares of the Variable Portfolios will be owned by insurance companies as
depositors of separate accounts which are used to fund variable annuity
contracts ("VA Contracts") and variable life insurance policies ("VLI
Policies"). It is currently expected that all shares will be held by separate
accounts of ALIAC and its subsidiary, Aetna Insurance Company of America,
Inc., on behalf of their respective separate accounts. See "Voting Rights"
below.
ALIAC is a wholly-owned subsidiary of Aetna Retirement Holdings, Inc., which
is in turn a wholly-owned subsidiary of Aetna Retirement Services, Inc., which
is in turn a direct wholly-owned subsidiary of Aetna Life and Casualty
Company. ALIAC's principal office is located at 151 Farmington Avenue,
Hartford, Connecticut 06156. ALIAC is registered with the SEC as an investment
adviser and manages over $22 billion in assets.
THE INVESTMENT ADVISORY AGREEMENT
On ________, 1996, the Company's Board of Directors approved an investment
advisory agreement (Advisory Agreement) between the Company and ALIAC for each
of the Variable Portfolios.
Under the Advisory Agreement and subject to the direction of the Board of
Directors of the Company, the Investment Adviser has responsibility for (i)
supervising all aspects of the operations of each Portfolio; (ii) selecting
the securities to be purchased, sold or exchanged by each Portfolio or
otherwise represented in its investment portfolio, placing trades for all such
securities and regulatory reporting thereon to the Board of Directors; (iii)
formulating and implementing continuing programs for the purchase and sale of
securities; (iv) obtaining and evaluating pertinent information about
significant developments and economic, statistical and financial data,
domestic foreign or otherwise, whether affecting the economy generally, the
Portfolios, securities held by or under consideration for each Portfolio, or
the issuers of those securities; (v) providing economic research and
securities analyses as the Investment Adviser considers necessary or advisable
in connection with the Investment Adviser's performance of its duties
thereunder; (vi) obtaining the services of, contracting with, and providing
instructions to custodians and/or sub-custodians of each Portfolio's
securities, transfer agents, dividend paying agents, pricing services and
other service providers as are necessary to carry out the terms of the
Agreement; (vii) preparing financial and performance reports, calculating and
reporting daily net asset values, and preparing any other financial data or
reports, as the Investment Adviser from time to time, deems necessary or as is
requested by the Board; and (viii) taking any other actions which appear to
the Investment Adviser and the Board to be necessary.
The Advisory Agreement provides that ALIAC shall pay (a) the salaries,
employment benefits and other related costs of those of its personnel engaged
in providing investment advice to the Company, including, without limitation,
office space, office equipment, telephone and postage costs and (b) any fees
and expenses of all Directors, officers and employees, if any, of the Company
who are employees of ALIAC or an affiliated entity and any salaries and
employment benefits payable to those persons. The Advisory Agreement provides
that each Portfolio will pay (i) investment advisory fees; (ii) brokers'
commissions and certain other transaction fees including the portion of such
fees, if any, which is attributable to brokerage research services; (iii) fees
and expenses of the Portfolio's independent auditors and outside legal
counsel; (iv) expenses of printing and distributing proxies, proxy statements,
prospectuses and reports to shareholders of each Portfolio, except as such
expenses may be borne by the distributor; (v) interest and taxes; (vi) fees
and expenses of those of the Company's Directors who are not "interested
persons" (as defined by the 1940 Act) of the Company or ALIAC; (vii) costs and
expenses of promoting the sale of shares in each Portfolio, including
preparing prospectuses and reports to shareholders of each Portfolio; (viii)
administrator, transfer agent, custodian and dividend disbursing agent fees
and expenses; (ix) fees of dividend, accounting and pricing agents appointed
by each Portfolio; (x) fees payable to the SEC or in connection with the
registration of shares of each Portfolio under the laws of any state or
territory of the United States or the District of Columbia; (xi) fees and
assessments of the Investment Company Institute or other association
memberships approved by the Board of Directors; (xii) such nonrecurring or
extraordinary expenses as may arise; (xiii) all other ordinary business
expenses incurred in the operations of each Portfolio, unless specifically
allocable otherwise by the Advisory Agreement; (xiv) costs attributable to
investor services, administering shareholder accounts and handling shareholder
relations; (xv) all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption; and (xvi) insurance premiums on
property or personnel (including officers and Directors) of the Company which
benefit the Company. Some of the costs payable by each Portfolio under the
Advisory Agreement are being assumed by ALIAC under the terms of the
Administrative Services Agreement (see "Administrative Services Agreement").
The Advisory Agreement provides that it will remain in effect from
year-to-year if approved annually by a majority vote of the Directors,
including a majority of the Directors who are not "interested persons," in
person at a meeting called for that purpose. The Advisory Agreement may be
terminated as to a particular Portfolio without penalty at any time on sixty
days' written notice by (i) the Directors, (ii) a majority vote of the
outstanding voting securities of that Portfolio, or (iii) the Investment
Adviser. The Advisory Agreement terminates automatically in the event of
assignment.
The service mark of the Variable Portfolios and the name "Aetna" have been
adopted by the Company with the permission of Aetna Life and Casualty Company
and their continued use is subject to the right of Aetna Life and Casualty
Company to withdraw this permission in the event the Investment Adviser or
another subsidiary or affiliated corporation of Aetna Life and Casualty
Company should not be the investment adviser of the Variable Portfolios.
THE SUB-ADVISORY AGREEMENT
On ____________, 1996, the Company's Board of Directors approved a
sub-advisory agreement (Sub-Advisory Agreement) between the Investment Adviser
and Aeltus Investment Management, Inc. (Aeltus) with respect to each of the
Variable Portfolios. The Sub-Advisory Agreement remains in effect from
year-to-year if approved annually by a majority vote of the Directors,
including a majority of the Directors who are not "interested persons," in
person, at a meeting called for that purpose. The Sub-Advisory Agreement may
be terminated without penalty at any time on sixty days' written notice by (i)
the Directors, (ii) a majority vote of the outstanding voting securities of
the respective Portfolios, (iii) the Investment Adviser, or (iv) Aeltus. The
Sub-Advisory Agreement terminates automatically in the event of its assignment
or in the event of the termination of the Investment Advisory Agreement with
ALIAC.
Under the Sub-Advisory Agreement, Aeltus supervises the investment and
reinvestment of cash and securities comprising the assets of the Portfolios.
The Sub-Advisory Agreement also directs Aeltus to (a) determine the securities
to be purchased or sold by the Portfolios, and (b) take any actions necessary
to carry out its investment sub-advisory responsibilities.
Aeltus pays the salaries, employment benefits and other related costs of
personnel engaged in providing investment advice including office space,
facilities and equipment.
As compensation, the Investment Adviser pays the sub-adviser a monthly fee as
described in the prospectus.
The Investment Adviser has certain obligations under the Sub-Advisory
Agreement and retains overall responsibility for monitoring the investment
program maintained by Aeltus for compliance with applicable laws and
regulations and each Portfolio's respective investment objectives. The
Investment Adviser will also obtain and evaluate data regarding economic
trends in the United States and industries in which the Portfolios invest and
consult with the sub-adviser on such data and trends. In addition, the
Investment Adviser will consult with and assist the sub-adviser in maintaining
appropriate policies, procedures and records and oversee matters relating to
promotion, marketing materials and reports by the sub-adviser to the Company's
Board of Directors.
THE ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to an Administrative Services Agreement, between the Company and
ALIAC, ALIAC has agreed to provide all administrative services in support of
the Portfolios. In addition, ALIAC has agreed to pay on behalf of each
Portfolio, all ordinary recurring direct costs of the Portfolio that it would
otherwise be required to pay under the terms of the Investment Advisory
Agreement except brokerage costs and other transaction costs in connection
with the purchase and sale of securities for its portfolios (Transaction
Costs). As a result, the Portfolios' costs and fees are limited to its
advisory fee, the administrative services charge and Transaction Costs. For
the services under the Administrative Services Agreement, ALIAC will receive
an annual fee, payable monthly, at a rate of _____% of the average daily net
assets of the Portfolio.
The Administrative Services Agreement will remain in effect until __________,
1997. It will then remain in effect from year-to-year if approved annually by
a majority of the Directors. It may be terminated by either party on sixty
days' written notice.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, PA, 15258 serves as
custodian for the assets of the Variable Portfolios. The custodian does not
participate in determining the investment policies of a Portfolio or in
deciding which securities are purchased or sold by a Portfolio. A Portfolio,
however, may invest in obligations of the custodian and may purchase or sell
securities from or to the custodian.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Hartford, Connecticut 06103 will serve as independent
auditors to the Variable Portfolios. KPMG Peat Marwick LLP provides audit
services, assistance and consultation in connection with SEC filings.
PRINCIPAL UNDERWRITER
Shares of the Variable Portfolios are offered on a continuous basis. ALIAC has
agreed to use its best efforts to distribute the shares as the principal
underwriter of the Portfolios pursuant to an Underwriting Agreement between it
and the Company. The Agreement was approved on __________ to continue through
__________. The Underwriting Agreement may be continued from year to year if
approved annually by the Directors or by a vote of holders of a majority of
each Variable Portfolio's shares, and by a vote of a majority of the Directors
who are not "interested persons," as that term is defined in the 1940 Act, of
ALIAC, and who are not interested persons of the Company, appearing in person
at a meeting called for the purpose of approving such Agreement. This
Agreement terminates automatically upon assignment, and may be terminated at
any time on sixty (60) days' written notice by the Directors or ALIAC or by
vote of holders of a majority of a Variable Portfolio's shares without the
payment of any penalty.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Directors, ALIAC and Aeltus have
responsibility for making the Variable Portfolios' investment decisions, for
effecting the execution of trades for the Variable Portfolios and for
negotiating any brokerage commissions thereof. It is the policy of ALIAC and
Aeltus to obtain the best quality of execution available, giving attention to
net price (including commissions where applicable), execution capability
(including the adequacy of a brokerage firm's capital position), research and
other services related to execution; the relative priority given to these
factors will depend on all of the circumstances regarding a specific trade.
In implementing their trading policy, ALIAC and Aeltus may place a Portfolio's
transactions with such brokers or dealers and for execution in such markets
as, in the opinion of the Company, will lead to the best overall quality of
execution for the Portfolio.
ALIAC and Aeltus currently receive a variety of brokerage and research
services from brokerage firms in return for the execution by such brokerage
firms of trades in securities held by the Portfolios. These brokerage and
research services include, but are not limited to, quantitative and
qualitative research information and purchase and sale recommendations
regarding securities and industries, analyses and reports covering a broad
range of economic factors and trends, statistical data relating to the
strategy and performance of the Portfolio and other investment companies and
accounts, services related to the execution of trades in a Portfolio's
securities and advice as to the valuation of securities. ALIAC and Aeltus
consider the quantity and quality of such brokerage and research services
provided by a brokerage firm along with the nature and difficulty of the
specific transaction in negotiating commissions for trades in a Portfolio's
securities and may pay higher commission rates than the lowest available when
it is reasonable to do so in light of the value of the brokerage and research
services received generally or in connection with a particular transaction.
ALIAC's and Aeltus' policy in selecting a broker to effect a particular
transaction is to seek to obtain "best execution," which means prompt and
efficient execution of the transaction at the best obtainable price with
payment of commissions which are reasonable in relation to the value of the
services provided by the broker, taking into consideration research and other
services provided. When either ALIAC or Aeltus believes that more than one
broker can provide best execution, preference may be given to brokers who
provide additional services to ALIAC or Aeltus.
Consistent with securities laws and regulations, ALIAC and Aeltus may
obtain such brokerage and research services regardless of whether they are
paid for (1) by means of commissions; or (2) by means of separate,
non-commission payments. ALIAC's and Aeltus' judgment as to whether and
how they will obtain the specific brokerage and research services will be
based upon their analysis of the quality of such services and the cost
(depending upon the various methods of payment which may be offered by
brokerage firms) and will reflect ALIAC's and Aeltus' opinion as to which
services and which means of payment are in the long-term best interests of
a Portfolio. The Variable Portfolios have no present intention to effect any
brokerage transactions in portfolio securities with ALIAC or any affiliate
of the Variable Portfolios or ALIAC except inaccordance with applicable SEC
rules. All transactions will comply with Rule 17e-1 under the 1940 Act.
Certain officers of ALIAC and Aeltus also manage the securities portfolios of
ALIAC's own accounts. Further, ALIAC and Aeltus also act as investment
adviser to other investment companies registered under the 1940 Act and other
client accounts. ALIAC and Aeltus have adopted policies designed to prevent
disadvantaging the Portfolios in placing orders for the purchase and sale of
securities for the Variable Portfolios.
To the extent ALIAC or Aeltus desires to buy or sell the same publicly traded
security at or about the same time for more than one client, the purchases or
sales will normally be allocated as nearly as practicable on a pro rata basis
in proportion to the amounts to be purchased or sold by each, taking into
consideration the respective investment objectives of the clients, the
relative size of portfolio holdings of the same or comparable securities,
availability of cash for investment, and the size of their respective
investment commitments. Orders for different clients received at
approximately the same time may be bunched for purposes of placing trades, as
authorized by regulatory directives. Prices are averaged for those
transactions. In some cases, this procedure may adversely affect the size of
the position obtained for or disposed of by a Portfolio or the price paid or
received by a Portfolio.
The Board of Directors has adopted a policy allowing trades to be made between
registered investment companies provided they meet the terms of Rule 17a-7
under the 1940 Act. Pursuant to this policy, a Portfolio may buy a security
from or sell another security to another registered investment company advised
by ALIAC.
The Board of Directors has also adopted a Code of Ethics governing personal
trading by persons who manage, or who have access to trading activity by, a
Portfolio. The Code allows trades to be made in securities that may be held
by a Portfolio, however, it prohibits a person from taking advantage of
Portfolio trades or from acting on inside information. ALIAC and Aeltus have
adopted Codes of Ethics which the Board of Directors of the Company review
annually.
DESCRIPTION OF SHARES
The Articles of Incorporation authorize the Company to issue one billion
shares of common stock with a par value of $.001 per share. The shares are
nonassessable, transferable, redeemable and do not have pre-emptive rights or
cumulative voting rights. The shares may be issued as whole or fractional
shares and are uncertificated.
The shares may be issued in series or portfolios having separate assets and
separate investment objectives and policies. Upon liquidation of a portfolio,
its shareholders are entitled to share pro rata in the net assets of that
portfolio available for distribution to shareholders. Shares, when issued,
will be fully paid and nonassessable.
SALE AND REDEMPTION OF SHARES
Shares of a Portfolio are sold and redeemed at the net asset value next
determined after receipt of a purchase or redemption order in acceptable form
as described in the Prospectus under "Sale and Redemption of Shares" and "Net
Asset Value."
NET ASSET VALUE
Securities of the Variable Portfolios are generally valued by independent
pricing services. The values for equity securities traded on registered
securities exchanges are based on the last sale price or, if there has been no
sale that day, at the mean of the last bid and asked price on the exchange
where the security is principally traded. Securities traded over the counter
are valued at the mean of the last bid and asked price if current market
quotations are not readily available. Short-term debt securities which have a
maturity date of more than sixty days will be valued at the mean of the last
bid and asked price obtained from principal market makers. Long-term debt
securities are valued at the mean of the last bid and asked price of such
securities obtained from a broker who is a market-maker in the securities or a
service providing quotations based upon the assessment of market-makers in
those securities.
Options are valued at the mean of the last bid and asked price on the exchange
where the option is primarily traded. Stock index futures contracts and
interest rate futures contracts are valued daily at a settlement price based
on rules of the exchange where the futures contract is primarily traded.
PERFORMANCE INFORMATION
Total return of a Portfolio for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $1,000
investment in the Portfolio made at the beginning of each period, then
calculating the average annual compounded rate of return which would produce
the same investment return on the $1,000 investment over the same period.
Total return for a period of one year or less is equal to the actual
investment return on a $1,000 investment in the Portfolio during that period.
Total return calculations assume that all Portfolio distributions are
reinvested at net asset value on their respective reinvestment dates.
From time to time, the Investment Adviser may reduce its compensation or
assume expenses in respect of the operations of a Portfolio in order to reduce
the Portfolio's expenses. Any such waiver or assumption would increase a
Portfolio's yield and total return during the period of the waiver or
assumption.
The performance of the Portfolios may, from time to time, be compared to that
of other mutual funds tracked by mutual fund rating services, to broad groups
of comparable mutual funds, or to unmanaged indices which may assume
investment of dividends but generally do not reflect deductions for
administrative and management costs.
The Prospectus contains historical performance information of the Aetna Growth
Fund and the Aetna Small Company Growth Fund which are series of a public
mutual fund which have the same investment objective and follow substantially
the same investment strategies as the Growth Portfolio and the Small Company
Growth Portfolio, respectively.
The performance of these two series of Aetna Series Fund, Inc. is
commonly measured as total return. An average annual compounded rate of
return ("T") may be computed by using the redeemable value at the end of a
specified period ("ERV") of a hypothetical initial investment of $1,000 ("P")
over a period of time ["n"] according to the formula:
n
P ( 1 + T ) = ERV
Investors should not consider this performance data as an indication of the
future performance of any of the Portfolios of the Company.
A Portfolio's investment results will vary from time to time depending upon
market conditions, the composition of its investment portfolio and its
operating expenses. Performance information of any Portfolio will not be
compared in advertisements with such information for funds that offer their
shares directly to the public, because Portfolio performance data does not
reflect charges imposed by the insurance company on the VA Contracts and VLI
Policies. The total return for a Portfolio should be distinguished from the
rate of return of a corresponding division of the insurance company's separate
account, which rate will reflect the deduction of additional insurance
charges, including mortality and expense risk charges, and will therefore be
lower. Accordingly, performance figures for a Portfolio will only be
advertised if comparable performance figures for the corresponding division of
the separate account are included in the advertisements. VA Contract owners
and VLI Policy owners should consult their contract and policy prospectuses,
respectively, for further information. Each Portfolio's results also should
be considered relative to the risks associated with its investment objectives
and policies.
TAX STATUS
The following is only a summary of certain additional tax considerations
generally affecting each Variable Portfolio and its shareholders which are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of each Portfolio or its shareholders, and
the discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Variable Portfolio has elected to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, a Portfolio is not subject
to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains over
capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) and at least 90% of its tax-exempt income (net of
expenses allocable thereto) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described in this section. Distributions by a Portfolio made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and
gains of the taxable year and can therefore satisfy the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the
sale or other disposition of stock or securities or foreign currencies (to the
extent such currency gains are directly related to the regulated investment
company's principal business of investing in stock or securities) and other
income (including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "Income Requirement"); and (2) derive less than
30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less
than three months (the "Short-Short Gain Test"). For purposes of these
calculations, gross income includes tax-exempt income. However, foreign
currency gains, including those derived from options, futures and forwards,
will not in any event be characterized as Short-Short Gain if they are
directly related to the regulated investment company's investments in stock or
securities (or options or futures thereon). Because of the Short-Short Gain
Test, a Portfolio may have to limit the sale of appreciated securities that it
has held for less than three months. However, the Short-Short Gain Test will
not prevent a Portfolio from disposing of investments at a loss, since the
recognition of a loss before the expiration of the three-month holding period
is disregarded for this purpose. Interest (including original issue discount)
received by a Portfolio at maturity or upon the disposition of a security held
for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of the
Short-Short Gain Test. However, income that is attributable to realized
market appreciation will be treated as gross income from the sale or other
disposition of securities for this purpose.
In general, gain or loss recognized by a Portfolio on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation (including municipal obligations) purchased
by a Portfolio at a market discount (generally, at a price less than its
principal amount) will be treated as ordinary income to the extent of the
portion of the market discount which accrued during the period of time the
Portfolio held the debt obligation. In addition, under the rules of Code
Section 988, gain or loss recognized on the disposition of a debt obligation
denominated in a foreign currency or an option with respect thereto (but only
to the extent attributable to changes in foreign currency exchange rates), and
gain or loss recognized on the disposition of a foreign currency forward
contract, futures contract, option or similar financial instrument, or of
foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless the Portfolio elects otherwise),
will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by a Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset
is used to close a "short sale" (which includes for certain purposes the
acquisition of a put option ) or is substantially identical to another asset
so used, (2) the asset is otherwise held by the Portfolio as part of a
"straddle" (which term generally excludes a situation where the asset is stock
and the Portfolio grants a qualified covered call option (which, among other
things, must not be deep-in-the-money) with respect thereto) or (3) the asset
is stock and the Portfolio grants an in-the-money qualified covered call
option with respect thereto. However, for purposes of the Short-Short Gain
Test, the holding period of the asset disposed of may be reduced only in the
case of clause (1) above. In addition, a Portfolio may be required to defer
the recognition of a loss on the disposition of an asset held as part of a
straddle to the extent of any unrecognized gain on the offsetting position.
Any gain recognized by a Portfolio on the lapse of, or any gain or loss
recognized by a Portfolio from a closing transaction with respect to, an
option written by the Portfolio will be treated as a short-term capital
gain or loss. For purposes of the Short-Short Gain Test, the holding period of
an option written by a Portfolio will commence on the date it is written and
end on the date it lapses or the date a closing transaction is entered
into. Accordingly, a Portfolio may be limited in its ability to write
options which expire within three months and to enter into closing
transactions at a gain within three months of the writing of options.
Transactions that may be engaged in by a Portfolio (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes
and futures contracts) will be subject to special tax treatment as "Section
1256 contracts." Section 1256 contracts are treated as if they are sold for
their fair market value on the last day of the taxable year, even though a
taxpayer's obligations (or rights) under such contracts have not terminated
(by delivery, exercise, entering into a closing transaction or otherwise) as
of such date. Any gain or loss recognized as a consequence of the year-end
deemed disposition of Section 1256 contracts is taken into account for the
taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section
1256 contracts (including any capital gain or loss arising as a consequence of
the year-end deemed sale of such contracts) is generally treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. A
Portfolio, however, may elect not to have this special tax treatment apply to
Section 1256 contracts that are part of a "mixed straddle" with other
investments of the Portfolio that are not Section 1256 contracts. The IRS has
held in several private rulings that gains arising from Section 1256 contracts
will be treated for purposes of the Short-Short Gain Test as being derived
from securities held for not less than three months if the gains arise as a
result of a constructive sale under Code Section 1256, provided that the
contract is actually held by the Portfolio uninterrupted for a total of at
least three months.
Because only a few regulations regarding the treatment of swap agreements and
other financial derivatives have been issued, the tax consequences of
transactions in these types of instruments are not always entirely clear. The
Company intends to account for derivatives transactions in a manner deemed by
it to be appropriate, but the Internal Revenue Service might not necessarily
accept such treatment. If it did not, the status of a Company as a regulated
investment company and/or its compliance with the diversification requirement
under Code Section 817(h) might be affected. The Company intends to monitor
developments in this area. Certain requirements that must be met under the
Code in order for the Company to qualify as a regulated investment company may
limit the extent to which it will be able to engage in swap agreements.
A Portfolio may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICS") for
federal income tax purposes. If a Portfolio invests in a PFIC, it may elect
to treat the PFIC as a qualifying electing portfolio (a "QEP") in which event
the Portfolio will each year have ordinary income equal to its pro rata share
of the PFIC's ordinary earnings for the year and long-term capital gain equal
to its pro rata share of the PFIC's net capital gain for the year, regardless
of whether the Portfolio receives distributions of any such ordinary earnings
or capital gain from the PFIC. If a Portfolio does not (because it is unable
to, chooses not to or otherwise) elect to treat the PFIC as a QEP, then in
general (1) any gain recognized by the Portfolio upon sale or other
disposition of its interest in the PFIC or any excess distribution received by
the Portfolio from the PFIC will be allocated ratably over the Portfolio's
holding period of its interest in the PFIC, (2) the portion of such gain or
excess distribution so allocated to the year in which the gain is recognized
or the excess distribution is received shall be included in the Portfolio's
gross income for such year as ordinary income (and the distribution of such
portion by the Portfolio to shareholders will be taxable as an ordinary income
dividend, but such portion will not be subject to tax at the Portfolio level),
(3) the Portfolio shall be liable for tax on the portions of such gain or
excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated
to such prior year multiplied by the highest tax rate (individual or
corporate) in effect for such prior year plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a
return for such prior year until the date for filing a return for the year in
which the gain is recognized or the excess distribution is received at the
rates and methods applicable to underpayments of tax for such period, and (4)
the distribution by the portfolio to shareholders of the portions of such gain
or excess distribution so allocated to prior years (net of the tax payable by
the Portfolio thereon) will again be taxable to the shareholders as an
ordinary income dividend.
Under recently proposed Treasury Regulations a Portfolio can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the Portfolio's adjusted
tax basis in that share ("mark to market gain"). Such mark to market gain
will be included by the Portfolio as ordinary income, such gain will not be
subject to the Short-Short Gain Test, and the Portfolio's holding period with
respect to such PFIC stock commences on the first day of the next taxable
year. If a Portfolio makes such election in the first taxable year it holds
PFIC stock, the Portfolio will include ordinary income from any mark to market
gain, if any, and will not incur the tax described in the previous paragraph.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, each Portfolio
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a
Portfolio's taxable year, at least 50% of the value of the Portfolio's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which the Portfolio has not invested more than 5% of the value of the
Portfolio's total assets in securities of such issuer and as to which the
Portfolio does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or of two
or more issuers which the Portfolio controls and which are engaged in the same
or similar trades or businesses or related trades or businesses. Generally, an
option (call or put) with respect to a security is treated as issued by the
issuer of the security not the issuer of the option. However, with regard to
forward currency contracts, there does not appear to be any formal or informal
authority which identifies the issuer of such instrument. For purposes of
asset diversification testing, obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal Agricultural
Mortgage Corporation, the Farm Credit System Financial Assistance Corporation,
a Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, the
Federal National Mortgage Association, the Government National Mortgage
Corporation, and the Student Loan Marketing Association are treated as U.S.
Government securities.
If for any taxable year a Portfolio does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current
and accumulated earnings and profits. Such distributions generally will be
eligible for the dividends-received deduction in the case of corporate
shareholders.
QUALIFICATION OF SEGREGATED ASSET ACCOUNTS
Under Code Section 817(h), a segregated asset account upon which a variable
annuity contract or variable life insurance policy is based must be
"adequately diversified." A segregated asset account will be adequately
diversified if it satisfies one of two alternative tests set forth in the
Treasury Regulations. Specifically, the Treasury Regulations provide, that
except as permitted by the "safe harbor" discussed below, as of the end of
each calendar quarter (or within 30 days thereafter) no more than 55% of a
Portfolio's total assets may be represented by any one investment, no more
than 70% by any two investments, no more than 80% by any three investments and
no more than 90% by any four investments. For this purpose, all securities of
the same issuer are considered a single investment, and while each U.S.
Government agency and instrumentality is considered a separate issuer, a
particular foreign government and its agencies, instrumentalities and
political subdivisions may be considered the same issuer. As a safe harbor, a
separate account will be treated as being adequately diversified if the
diversification requirements under Subchapter M are satisfied and no more than
55% of the value of the account's total assets are cash and cash items, U.S.
government securities and securities of other regulated investment companies.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be entitled
to "look through" the regulated investment company to its pro rata portion of
the regulated investment company's assets, provided the regulated investment
company satisfies certain conditions relating to the ownership of the shares.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or,
at the election of a regulated investment company having a taxable year ending
November 30 or December 31, for its taxable year (a "taxable year election")).
Tax-exempt interest on municipal obligations is not subject to the excise
tax. The balance of such income must be distributed during the next calendar
year. For the foregoing purposes, a regulated investment company is treated
as having distributed any amount on which it is subject to income tax for any
taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses from Section 998 transactions incurred after October
31 of any year (or after the end of its taxable year if it has made a taxable
year election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar
year).
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax.
However, investors should note that a Portfolio may in certain circumstances
be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
PORTFOLIO DISTRIBUTIONS
Each Portfolio anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be
taxable to the shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they may qualify for the dividends-received
deduction for corporate shareholders to the extent discussed below.
Each Portfolio may either retain or distribute to the shareholders its net
capital gain for each taxable year. Each Portfolio currently intends to
distribute any such amounts. If net capital gain is distributed and
designated as a capital gain dividend, it will be taxable to the shareholders
as long-term capital gain, regardless of the length of time the shareholders
have held shares or whether such gain was recognized by the Variable Portfolio
prior to the date on which the shareholder acquired the shares.
If a Portfolio elects to retain its net capital gain, the Portfolio will be
taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. Where a Portfolio elects to retain its net
capital gain, it is expected that the Portfolio also will elect to have
shareholders of record on the last day of its taxable year treated as if each
received a distribution of its pro rata share of such gain, with the result
that each shareholder will be required to report its pro rata share of such
gain on its tax return as long-term capital gain, will receive a refundable
tax credit for its pro rata share of tax paid by the Portfolio on the gain,
and will increase the tax basis for its shares by an amount equal to the
deemed distribution less the tax credit. All distributions paid to ALIAC,
whether characterized as ordinary income or capital gain, are not taxable to
VA Contract or VLI Policy holders.
Ordinary income dividends paid by a Portfolio with respect to a taxable year
may qualify for the dividends-received deduction generally available to
corporations (other than corporations, such as S corporations, which are not
eligible for the deduction because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and
the personal holding company tax) to the extent of the amount of qualifying
dividends received by a Portfolio from domestic corporations for the taxable
year and if the shareholder meets eligibility requirements in the Code. A
dividend received by the Portfolio will not be treated as a qualifying
dividend (1) if it has been received with respect to any share of stock that
the Portfolio has held for less than 46 days (91 days in the case of certain
preferred stock), excluding for this purpose under the rules of Code Section
246(c)(3) and (4): (i) any day more than 45 days (or 90 days in the case of
certain preferred stock) after the date on which the stock becomes ex-dividend
and (ii) any period during which the Portfolio has an option to sell, is under
a contractual obligation to sell, has made and not closed a short sale of, is
the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or
has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that
the Portfolio is under an obligation (pursuant to a short sale or otherwise)
to make related payments with respect to positions in substantially similar or
related property; or (3) to the extent the stock on which the dividend is paid
is treated as debt-financed under the rules of Code Section 246(a). Moreover,
the dividends-received deduction for a corporate shareholder may be disallowed
or reduced (i) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Portfolio or (ii) by
application of Code Section 246(b) which in general limits the
dividends-received deduction.
Alternative Minimum Tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate
of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. In addition, under the Superfund Amendments and
Reauthorization Act of 1986, a tax is imposed for taxable years beginning
after 1986 and before 1996 at the rate of 0.12% on the excess of a corporate
taxpayer's AMTI (determined without regard to the deduction for this tax and
the AMT net operating loss deduction) over $2 million. For purposes of the
corporate AMT and the environmental super-fund tax (which are discussed
above), the corporate dividends-received deduction is not itself an item of
tax preference that must be added back to taxable income or is otherwise
disallowed in determining a corporation's AMTI. However, corporate
shareholders will generally be required to take the full amount of any
dividend received from a Variable Portfolio into account (without a
dividends-received deduction) in determining its adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its
AMTI (determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Investment income that may be received by a Portfolio from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle a Portfolio to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of a Portfolio's assets to be invested in various
countries is not known.
Distributions by a Portfolio that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Distributions paid to shareholders are generally reinvested in additional
shares. Shareholders receiving a distribution in the form of additional
shares will be treated as receiving a distribution in an amount equal to the
fair market value of the shares received, determined as of the reinvestment
date. In addition, if the net asset value at the time a shareholder purchases
shares of a Portfolio reflects undistributed net investment income or
recognized capital gain net income, or unrealized appreciation in the value of
the assets of the Portfolio, distributions of such amounts will be taxable to
the shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Portfolio
into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Portfolio) on December
31 of such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the
year.
SALE OR REDEMPTION OF SHARES
Shareholders generally will recognize gain or loss on the sale or redemption
of shares of a Portfolio in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if
the shareholder purchases other shares of the Portfolio within 30 days before
or after the sale or redemption. In general, any gain or loss arising from
(or treated as arising from) the sale or redemption of shares of a Portfolio
will be considered capital gain or loss and will be long-term capital gain or
loss if the shares were held for longer than one year. However, any capital
loss arising from the sale or redemption of shares held, or deemed under Code
rules to be held, for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares.
TAX EFFECT ON CONTRACT OWNERS AND POLICY OWNERS
Owners of VA Contracts and VLI Policies are taxed through prior ownership of
such contracts and policies, as described in the insurance company's
prospectus for the applicable contract or policy.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this Statement of Additional Information. Future legislative
or administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated investment
companies often differ from the rules for U.S. federal income taxation
described above. Shareholders are urged to consult their tax advisers as to
the consequences of these and other state and local tax rules affecting
investment in a Portfolio.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (and fractional
votes for fractional shares held) and will vote in the election of Directors
(to the extent hereinafter provided) and on other matters submitted to the
vote of the shareholders. The shareholders of the Portfolios are the
insurance companies for their separate accounts using the Portfolios to fund
VA Contracts and VLI Policies. The insurance company depositors of the
separate accounts pass voting rights attributable to shares held for VA
Contracts and VLI Policies through to Contract owners and Policy owners as
described in the prospectus for the applicable VA Contract or VLI Policy.
Once the initial Board of Directors is elected, no meeting of the shareholders
for the purpose of electing Directors will be held unless and until such time
as less than a majority of the Directors holding office have been elected by
the shareholders, or shareholders holding 10% or more of the outstanding
shares request such a vote. The Directors then in office will call a
shareholder meeting for election of Directors. Vacancies occurring between
any such meeting shall be filled as allowed by law, provided that immediately
after filling any such vacancy, at least two-thirds of the Directors holding
office have been elected by the shareholders.
Special shareholder meetings may be called when requested in writing by the
holders of not less than 10% of the outstanding voting shares of a
Portfolio. Any request must state the purposes of the proposed meeting.
Except as set forth above, the Directors shall continue to hold office and may
appoint successor Directors. Directors may be removed from office (1) at any
time by two-thirds vote of the Directors; (2) by a majority vote of Directors
where any Director becomes mentally or physically incapacitated; (3) at a
special meeting of shareholders by a two-thirds vote of the outstanding shares
(4) by written declaration filed with Mellon Bank, N.A., the Variable
Portfolio's custodian, signed by two-thirds of a Variable Portfolio's
shareholders. Any Director may also voluntarily resign from office. Voting
rights are not cumulative, so that the holders of more than 50% of the shares
voting in the election of Directors can, if they choose to do so, elect all
the Directors of the Variable Portfolios, in which event the holders of the
remaining shares will be unable to elect any person as a Director.
The Articles may be amended by an affirmative vote of a majority of the shares
at any meeting of shareholders or by written instrument signed by a majority
of the Directors and consented to by a majority of the shareholders. The
Directors may also amend the Articles without the vote or consent of
shareholders if they deem it necessary to conform the Articles to the
requirements of applicable federal laws or regulations or the requirements of
the regulated investment company provisions of the Code, but the Directors
shall not be liable for failing to do so.
FINANCIAL STATEMENTS
[TO BE FILED BY AMENDMENT]
PART C
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. FINANCIAL STATEMENTS
To be filed by amendment.
B. EXHIBITS
(1) Articles of Incorporation
(2) By-laws (to be filed by amendment)
(3) Not Applicable
(4) Not Applicable
(5)(a) Form of Investment Advisory Agreement between each Portfolio and
Aetna Life Insurance and Annuity Company ("ALIAC") (to be filed
by amendment)
(5)(b) Form of Subadvisory Agreement between Aetna Life Insurance and
Annuity Company and Aeltus Investment Management, Inc. (to be
filed by amendment)
(6) Form of Underwriting Agreement between the Registrant and ALIAC
(to be filed by amendment)
(7) Not Applicable
(8) Form of Custodian Agreement - Mellon Bank, N.A. (to be filed by
amendment)
(9)(a) Form of Administrative Services Agreement (to be filed by amend-
ment)
(9)(b) License Agreement (to be filed by amendment)
(10)(a) Consent of Counsel (to be filed by amendment)
(10)(b) Opinion of Counsel (to be filed by amendment)
(11) Consent of Independent Auditors (to be filed by amendment)
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Schedule for Computation of Performance Data (to be filed by
amendment)
(17) Not Applicable
(18) Not Applicable
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
None
ITEM 28. INDEMNIFICATION
Article 9, Section (d) of the Registrant's Articles of Incorporation, provides
for indemnification of directors and officers. In addition, the Registrant's
officers and directors are covered under a directors and officers errors and
omissions liability insurance policy issued by Gulf Insurance Company which
expires in October, 1996.
Reference is also made to Section 2-418 of the Corporations and Associations
Article of the Annotated Code of Maryland which provides generally that (1) a
corporation may (but is not required to) indemnify its directors for
judgments, fines and expenses in proceedings in which the director is named a
party solely by reason of being a director, provided the director has not
acted in bad faith, dishonestly or unlawfully, and provided further that the
director has not received any "improper personal benefit"; and (2) that a
corporation must (unless otherwise provided in the corporation's charter or
articles of incorporation) indemnify a director who is successful on the
merits in defending a suit against him by reason of being a director for
"reasonable expenses." The statutory provisions are not exclusive; i.e., a
corporation may provide greater indemnification rights than those provided by
statute.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Investment Adviser is an insurance company that issues variable and fixed
annuities, variable and universal life insurance policies and acts as
depositor for separate accounts holding assets for variable contracts and
policies. The following table summarizes the business connections of the
directors and principal officers of the Investment Adviser.
<TABLE>
<CAPTION>
Positions and Offices Other Principal Position(s) Held
Name with Investment Adviser Within Last Two Years/Addresses*/**
- -------------------- ---------------------------- --------------------------------------------
<S> <C> <C>
Daniel P. Kearney Director, President and Chairman (since February 1996), Director
Chairman, Executive (since March 1991) and President (since
Committee (Principal March 1994), ALIAC; Executive Vice President
Executive Officer) (since December 1993), and Group Executive,
Investment Division (from February 1991 to
December 1993), Aetna Life and Casualty
Company. Director, Aeltus, April, 1996
to Present.
Christopher J. Burns Director (1991); Senior Director, Aetna Financial Services,
Vice President Inc. (since January 1996); Director
(since July 1993) of Aetna Investment
Services, Inc.; Director (1992 -
April 1995) and Senior Vice President,
North American Operations (1993 - April
1995) of Aetna International, Inc.
Laura R. Estes Director and Senior Vice Director, Aetna Financial Services,
President Inc. (since January 1996); Director
and Senior Vice President, Aetna
Insurance Company of America (since
February 1993); Director, Aetna
Investment Services, Inc. (since
July 1993).
Timothy A. Holt Director, Senior Vice Director, Aeltus, April, 1996 to Present.
President and Chief Director, Senior Vice President and Chief
Financial Officer (1996) Financial Officer, ALIAC, February 1996 to
Present; Senior Vice President, Business
Strategy & Finance, Aetna Retirement
Services, Inc., February 1996 to Present;
Vice President, Portfolio Management/
Capital Group, Aetna Life and Casualty
Company, August 1992 to February 1996;
Vice President - Finance and Treasurer,
Aetna Life and Casualty Company, August,
1989 through July, 1991; Treasurer, Aetna
Capital Management, Inc., February 1990
to June 1991.
Gail P. Johnson Director and Vice President Vice President, Service and Retain
Customers, Aetna Retirement Services
(since February 1996); Vice
President, Defined Benefit Services
(September 1994 - February 1996);
Vice President, Plan Services,
Pensions and Financial Services
(December 1992 - September 1994).
John Y. Kim Director and Senior Vice President, Aeltus Investment
President Management, Inc. (since December 1995);
Chief Investment Officer, Aetna
Life and Casualty Company (since May
1994); Managing Director, Mitchell
Hutchins Institutional Investors,
New York, NY (September 1993 - April
1994).
Shaun P. Mathews Director and Vice President Chief Executive, Aetna Investment Services,
Inc., October, 1995 to Present; President,
Aetna Investment Services, Inc., March, 1994
to Present; Director and Chief Operations
Officer, Aetna Investment Services, Inc.,
July 1993 to Present; Director and Senior
Vice President, Aetna Insurance Company of
America, February 1993 to Present; Senior
Vice President and Director of ALIAC,
March 1991 to Present; Vice President of
Aetna Life Insurance Company, 1991 to
Present.
Glen Salow Director and Vice President Vice President, Information
Technology, Investment, and
Financial Services (February 1995 -
February 1996); Vice President,
Investment Systems, AIT (1992 - 1995).
Creed R. Terry Director and Vice President Vice President, Select and Manage
Markets, Aetna Retirement Services
(since February 1996); ALIAC Market
Strategist (August 1995 - February
1996); President, Chemical
Technology Corporation (a subsidiary
of Chemical Bank) (1993 - 1995).
Zoe Baird Senior Vice President and Senior Vice President and General
General Counsel Counsel of Aetna Life and Casualty
Company (since April 1992).
Susan E. Schechter Counsel and Corporate Counsel, Aetna Life and Casualty
Secretary Company (since November 1993).
Eugene M. Trovato Vice President and Vice President and Controller,
Treasurer, Corporate (February 1995 - Present), Assistant
Controller Vice President, Planning, Reporting,
and Analysis (October 1992 - February
1995), Aetna Life Insurance and Annuity
Company.
Diane B. Horn Vice President and Chief Senior Compliance Officer (August 1993
Compliance Officer - Present) Aetna Life Insurance and
Annuity Company and Aetna Life Insurance
Company.
<FN>
* The principal business address of each person named is 151 Farmington Avenue, Hartford,
Connecticut 06156.
** Certain officers and directors of the investment adviser currently hold (or have held during
the past two years) other positions with affiliates of the Registrant which are not deemed to be
principal positions.
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) In addition to serving as the principal underwriter for the
Registrant, Aetna Life Insurance and Annuity Company (ALIAC) also acts as the
principal underwriter for Aetna Series Fund, Inc., Aetna Variable Fund, Aetna
Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund,
Inc., Aetna GET Fund, and Aetna Generation Portfolios, Inc. (all registered
management investment companies under the 1940 Act), and for Variable Annuity
Accounts B, C and G, and Variable Life Account B (separate accounts of ALIAC
registered as unit investment trusts under the 1940 Act), and Variable Annuity
Account I (a separate account of Aetna Insurance Company of America registered
as a unit investment trust under the 1940 Act). ALIAC is also the depositor of
Variable Life Account B, and Variable Annuity Accounts B, C and G.
Additionally, ALIAC is the investment adviser for Aetna Series Fund, Inc.,
Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna
Investment Advisers Fund, Inc., Aetna GET Fund, and Aetna Generation
Portfolios, Inc.
(b) The following are the directors and principal officers of the
Underwriter:
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
- -------------------- ----------------------------------- ----------------------
Daniel P. Kearney Director and President Director
Timothy A. Holt Director, Senior Vice President Director
and Chief Financial Officer
Christopher J. Burns Director and Senior Vice President None
Laura R. Estes Director and Senior Vice President None
Gail P. Johnson Director and Vice President None
John Y. Kim Director and Senior Vice President None
Shaun P. Mathews Director and Vice President Director and President
Glen Salow Director and Vice President None
Creed R. Terry Director and Vice President None
Zoe Baird Senior Vice President and General None
Counsel
Susan E. Schechter Corporate Secretary and Counsel None
Eugene M. Trovato Vice President and Treasurer, None
Corporate Controller
Diane B. Horn Vice President and Chief Compliance None
Officer
<FN>
* The principal business address of all directors and officers listed is 151
Farmington Avenue, Hartford, Connecticut 06156.
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
As required by Section 31(a) of the 1940 Act and the Rules promulgated
thereunder, the Registrant and its investment adviser, ALIAC, maintain
physical possession of each account, book or other documents at its principal
offices at 151 Farmington Avenue, Hartford, Connecticut 06156.
ITEM 31. MANAGEMENT SERVICES
Not Applicable
ITEM 32. UNDERTAKINGS
The Registrant undertakes that if requested by the holders of at least 10% of
a Portfolio's outstanding shares, the Registrant will hold a shareholder
meeting for the purpose of voting on the removal of one or more Directors and
will assist with communication concerning that shareholder meeting as if
Section 16(c) of the Investment Company Act of 1940 applied.
The Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the portfolio's latest annual report to shareholders, upon
request and without charge.
The Registrant undertakes to file a Post-Effective Amendment to this
Registration Statement, using financial statements which need not be
certified, within four to six months from the effective date of Registrant's
1933 Act Registration Statement.
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
Aetna Variable Portfolios, Inc. has duly caused this Registration Statement to
be signed on its behalf by the undersigned thereto duly authorized, in the
City of Hartford, and State of Connecticut, on the 4th day of June,
1996.
AETNA VARIABLE PORTFOLIOS, INC.
______________________________________
Registrant
By: /s/ Shaun P. Mathews
___________________________________
Shaun P. Mathews
Director
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons on the 4th day of
June, 1996 in the capacities indicated.
SIGNATURE AND TITLE
<TABLE>
<CAPTION>
<S> <C>
/s/ Shaun P. Mathews Director
- ---------------------
Shaun P. Mathews
/s/ Timothy F. Bannon Director
- ----------------------
Timothy F. Bannon
Director
- ----------------------
Susan E. Bryant
</TABLE>
AETNA VARIABLE PORTFOLIOS, INC.
EXHIBIT INDEX
Exhibit No. Exhibit Page
__________ _______ ____
99-b(1) Articles of Incorporation
ARTICLES OF INCORPORATION
OF
AETNA VARIABLE PORTFOLIOS, INC.
The undersigned, Susan E. Bryant, hereby adopts the following Articles of
Incorporation on behalf of Aetna Variable Portfolios, Inc.:
1. INCORPORATOR. The incorporator is SUSAN E. BRYANT, with an address of 151
Farmington Avenue, RE4C, Hartford, Connecticut 06156;
(i) she is over eighteen years of age; and
(ii) she is forming this Corporation under the General Laws of the State
of Maryland.
2. NAME. The name of the Corporation is AETNA VARIABLE PORTFOLIOS, INC.
3. PURPOSE. The Corporation is formed for the purpose of acting as an
open-end, management investment company as defined by the Investment Company
Act of 1940.
4. ADDRESS. The address of the principal office of the Corporation is 151
Farmington Avenue, Hartford, Connecticut, 06156. The principal office in
Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Balt., MD
21202.
5. AGENT. The name and address of the resident agent of the Corporation in
the State of Maryland is Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202.
6. AUTHORIZED CAPITAL
(i) The Corporation has the authority to issue an aggregate of
1,000,000,000 shares of Capital Stock (hereinafter referred to as "Shares");
(ii) 1,000,000,000 Shares shall be classified in the following series
(Portfolios):
100,000,000 Shares in Aetna Variable Quantitative Equity Portfolio;
100,000,000 Shares in Aetna Variable Small Company Growth Portfolio;
100,000,000 Shares in Aetna Variable Growth Portfolio; and
100,000,000 Shares in Aetna Variable Capital Appreciation Portfolio;
600,000,000 Shares may be classified in one or more additional
Portfolios as the Board of Directors may determine;
(iii) the par value of each Share of each Portfolio is $0.001 per share;
(iv) the aggregate par value of all Shares is $1,000,000.
7. PORTFOLIOS. Each Portfolio of the Corporation shall have the following
preferences, rights, powers, restrictions, limitations, qualifications and
terms and conditions of redemption, subject to the right of the Board of
Directors acting by properly adopted resolution to amend, add to or remove
such preferences, rights, powers, restrictions, limitations, qualifications
and terms and conditions of redemption:
(i) ASSETS. All consideration received by the Corporation for the sale
and/or issuance of Shares of a Portfolio, together with all assets in which
such consideration is invested or reinvested, all income, earnings, profits,
and proceeds thereof, including any proceeds derived from the sale, exchange
or liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Portfolio for all purposes, subject only to the
rights of creditors of that Portfolio, and shall be so recorded upon the books
and accounts of the Corporation; any assets, income, earnings, profits, and
proceeds thereof, funds, or payments of the Corporation which are not readily
identifiable as belonging to any particular Portfolio (collectively "General
Items"), such General Items shall be allocated by or under the supervision of
the Board of Directors to and among any one or more of the Portfolios of the
Corporation and designated from time to time in such manner and on such basis
as the Board of Directors, in its sole discretion, deems fair and equitable
and any General Items so allocated to a particular Portfolio shall belong to
that Portfolio; each such allocation by the Board of Directors shall be
conclusive and binding for all purposes; and all such consideration, assets,
income, earnings, profits, and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds
or payments derived from any reinvestment of such proceeds, in whatever form
the same may be, together with any General Items allocated to the Portfolio,
are herein referred to as "assets belonging to" that Portfolio.
(ii) LIABILITIES. The assets belonging to a Portfolio shall be charged
with the liabilities of the Corporation incurred on behalf of the Portfolio
and all expenses, costs, charges and reserves attributable to the Portfolio;
any general liabilities, expenses, costs, charges or reserves of the
Corporation which are not readily identifiable as belonging to any particular
Portfolio shall be allocated and charged by or under the supervision of the
Board of Directors to and among any one or more of the Portfolio established
and designated from time to time in such manner and on such basis as the Board
of Directors, in its sole discretion, deems fair and equitable; each
allocation of liabilities, expenses, costs, charges and reserves by the Board
of Directors shall be conclusive and binding for all purposes; and the
liabilities, expenses, costs, charges and reserves allocated and so charged to
the Portfolio are herein referred to as "liabilities belonging to" the
Portfolio.
(iii) INCOME. The Board of Directors shall have full discretion, to the
extent not inconsistent with the Maryland Corporations and Associations Code
and the Investment Company Act of 1940 ("1940 Act") to determine which items
shall be treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding. "Income
belonging to" the Portfolio, includes all income, earnings and profits derived
from assets belonging to the Portfolio, less any expenses, costs, charges or
reserves belonging to the Portfolio, for the relevant time period.
(iv) DIVIDENDS. Dividends and distributions on Shares of the Portfolio
may be declared and paid with such frequency, in such form and in such amount
as the Board of Directors may from time to time determine. Dividends may be
declared daily or otherwise pursuant to a standing resolution or resolutions
adopted only once or with such frequency as the Board of Directors may
determine, after providing for actual and accrued liabilities belonging to the
Portfolio. All dividends on Shares of the Portfolio shall be paid only out of
the income belonging to the Portfolio and capital gains distributions on
Shares of the Portfolio shall be paid only out of the capital gains belonging
to the Portfolio. All dividends and distributions on Shares of the Portfolio
shall be distributed pro rata to the holders of the Portfolio in proportion to
the number of Shares of the Portfolio held by such holders at the date and
time of record established for the payment of such dividends or distributions,
except that in connection with any dividend or distribution program or
procedure the Board of Directors may determine that no dividend or
distribution shall be payable on Shares as to which the Shareholder's purchase
order and/or payment have not been received by the time or times established
by the Board of Directors under such program or procedure. The Board of
Directors shall have the power, in its sole discretion, to distribute in any
fiscal year as dividends, including dividends designated in whole or in part
as capital gains distributions, amounts sufficient, in the opinion of the
Board of Directors, to enable the Corporation and each Portfolio to qualify as
a regulated investment company under the Internal Revenue Code of 1986 as
amended, or any successor or comparable statute thereto, and regulations
promulgated thereunder, and to avoid liability of the Corporation or Portfolio
for Federal income tax in respect of that year. However, nothing in the
foregoing shall limit the authority of the Board of Directors to make
distributions greater than or less than the amount necessary to qualify as a
regulated investment company and to avoid liability of the Corporation or
Portfolio for such tax. Dividends and distributions may be paid in cash,
property or Shares, or a combination thereof, as determined by the Board of
Directors or pursuant to any program that the Board of Directors may have in
effect at the time. Dividends or distributions paid in Shares will be paid at
the current net asset value thereof as defined in subsection (vii).
(v) LIQUIDATION. In the event of liquidation of the Corporation or of
any Portfolio, the Shareholders of the Portfolio, shall be entitled to
receive, as a Portfolio, when and as declared by the Board of Directors, the
excess of the assets belonging to the Portfolio over the liabilities belonging
to it. The holders of Shares of such Portfolio shall not be entitled thereby
to any distribution upon liquidation of any other Portfolio. The assets so
distributable to the Shareholders of the Portfolio shall be distributed among
such Shareholders in proportion to the number of Shares of the Portfolio held
by them and recorded on the books of the Corporation. The liquidation of the
Portfolio in which there are Shares then outstanding may be authorized by vote
of a majority of the Board of Directors then in office, subject to the
approval of a majority of the outstanding Shares of the Portfolio, as defined
in the 1940 Act.
(vi) VOTING. On each matter submitted to a vote of the Shareholders,
each holder of a Share shall be entitled to one vote for each Share
outstanding in his name on the books of the Corporation, and all shares of the
Portfolio shall vote as a single Portfolio ("Single Portfolio Voting");
provided, however, that (i) as to any matter with respect to which a separate
vote of the Portfolio is required by the 1940 Act or by the Maryland
Corporations and Associations Code, such requirement as to a separate vote by
that Portfolio shall apply in lieu of Single Portfolio Voting as described
above; ((ii) in the event that the separate vote requirements referred to in
(i) above apply with respect to one or more Portfolio, then subject to (iii)
below, the Shares of all other Portfolio shall vote as a single Portfolio; and
(iii) as to any matter which does not affect the interest of a particular
Portfolio, only the holders of Shares of the one or more affected Portfolio
shall be entitled to vote.
(vii) NET ASSET VALUE. The net asset value per Share of the Portfolio
shall be the quotient obtained by dividing the value of the net assets of the
Portfolio (being the value of the assets belonging to the Portfolio less the
liabilities belonging to the Portfolio) by the total number of outstanding
Shares of the Portfolio.
(viii) EQUALITY. All Shares of the Portfolio shall represent an equal
proportionate interest in the assets belonging to the Portfolio (subject to
the liabilities belonging to the Portfolio), and each Share of the Portfolio
shall be equal to each other Share of the Portfolio. The Board of Directors
may from time to time divide or combine the Shares of the Portfolio into a
greater or lesser number of Shares of the Portfolio without thereby changing
the proportionate beneficial interest in the assets belonging to the Portfolio
or in any way affecting the rights of Shares of any other Portfolio.
(ix) CONVERSION OR EXCHANGE RIGHTS. Subject to compliance with the
requirements of the 1940 Act, the Board of Directors shall have the authority
to provide that holders of shares of the Portfolio shall have the right to
convert or exchange said Shares into Shares of one or more other Portfolio of
Shares in accordance with such requirements and procedures as may be
established by the Board of Directors.
(x) REDEMPTION BY THE CORPORATION. The Board of Directors may cause the
Corporation to redeem at current net asset value the shares of the Portfolio
from a shareholder whose shares have an aggregate current net asset value less
than an amount established by the Board of Directors. No such redemption
shall be effected unless the Corporation has given the shareholder reasonable
notice of its intention to redeem the shares and an opportunity to purchase a
sufficient number of additional shares to bring the aggregate current net
asset value of his shares to the minimum amount established. Upon redemption
of shares pursuant to this section, the Corporation shall cause prompt payment
of the full redemption price to be made to the holder of shares so redeemed.
Each Share is subject to redemption by the Corporation at the redemption price
computed in the manner set forth in subparagraph (vii) of this Article 7, if
at any time the Board of Directors, in its sole discretion, determines that
failure to so redeem may result in the Corporation being classified as a
personal holding company as defined in the Internal Revenue Code of 1986, as
it may be amended from time to time (the "Code").
(xi) REDEMPTION BY SHAREHOLDERS. To the extent the Corporation has funds
or property legally available therefor, each Shareholder of the Corporation
shall have the right at such times as may be permitted by the Corporation, but
no less frequently than once each day, to require the Corporation to redeem
all or any part of his or her Shares at a redemption price equal to the net
asset value per Share next determined after the Shares are tendered for
redemption; said determination of the net asset value per Share to be made in
accordance with the requirements of the 1940 Act and the applicable rules and
regulations of the Securities and Exchange Commission (or any succeeding
governmental authority) and in conformity with generally accepted accounting
practices and principles. Notwithstanding the foregoing, the Corporation may
postpone payment or deposit of the redemption price and may suspend the right
of the Shareholders to require the Corporation to redeem Shares pursuant to
the applicable rules and regulations, or any order, of the Securities and
Exchange Commission.
(xiii) TRANSFER. Transfer of Shares will be recorded on the stock
transfer records of the Corporation at the request of the holders thereof at
any time during normal business hours of the Corporation unless the Board of
Directors of the Corporation determines, in its sole discretion, that allowing
such transfer may result in the Corporation being classified as a personal
holding company as defined in the Code.
8. DIRECTORS
(i) The number of Directors of the Corporation shall be determined by the
Board of Directors in the manner provided by the bylaws of the Corporation but
shall not be less than three (3).
(ii) The names of the Directors who shall act until the first Annual
Meeting or until their successors are duly chosen and qualify are:
Shaun P. Mathews
Susan E. Bryant
Timothy F. Bannon
9. POWERS TO ISSUE SHARES AND DESIGNATE CLASSES AND PORTFOLIO. The Board of
Directors is empowered to authorize the issuance from time to time of Shares
of the Corporation, whether now or hereafter authorized; provided, however,
that the consideration per Share to be received by the Corporation upon the
issuance or sale of any Shares shall be the net asset value per Share
determined in accordance with the requirements of the 1940 Act and the
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) and in conformity with generally
accepted accounting practices and principles. The Shares may be issued in one
or more Portfolio, and each Portfolio may consist of one or more classes.
Each Portfolio of Shares and each class of a Portfolio shall be issued upon
such terms and conditions, and shall confer upon its owners such rights as the
Board of Directors may determine, consistent with the requirements of the laws
of the State of Maryland and the 1940 Act and the applicable rules and
regulations of the Securities and Exchange Commission (or any succeeding
governmental authority), these Articles of Incorporation and the bylaws of
this Corporation. In addition, the Board of Directors is hereby expressly
authorized to change the designation of any Portfolio or class, and to
increase or decrease the number of Shares of any Portfolio or class, but the
number of Shares of any Portfolio or class shall not be decreased by the Board
of Directors below the number of Shares then outstanding.
10. ADDITIONAL POWERS. Except as limited specifically by the provisions of
this Article 10 or any other provision of these Articles, the Corporation
shall have and may exercise and generally enjoy all of the powers, rights and
privileges granted to, or conferred upon, a corporation by the General Laws of
the State of Maryland now or hereafter in force. The following provisions are
hereby adopted for the purpose of defining, limiting and regulating the powers
of the Corporation and of the Directors and Shareholders:
(i) NO PREEMPTIVE RIGHTS. No Shareholder shall have any preemptive or
preferential right of subscription to any Shares of any class or Portfolio
whether now or hereafter authorized. The Board of Directors may issue Shares
without offering the same either in whole or in part to the Shareholders.
(ii) CONTRACTS WITH AFFILIATES. The Corporation may enter into exclusive
or nonexclusive contract(s) for the sale of its Shares and may also enter into
contracts, including but not limited to investment advisory, management,
custodial, transfer agency and administrative services. The terms and
conditions, methods of authorization, renewal, amendment and termination of
the aforesaid contracts shall be as determined at the discretion of the Board
of Directors; subject, however, to the provisions of these Articles of
Incorporation, the bylaws of the Corporation, applicable state law, and the
1940 Act and the rules and regulations of the Securities and Exchange
Commission thereunder.
(iii) CONFLICTS. Subject to and in compliance with the provisions of the
General Laws of the State of Maryland respecting interested director
transactions, the Corporation may enter into a written underwriting contract,
management contract or contracts for research, advisory or administrative
services with Aeltus Investment Management, Inc., Aetna Life Insurance and
Annuity Company or their parents, affiliates or subsidiaries thereof, or their
respective successors, or otherwise do business with such corporations,
notwithstanding the fact that one or more of the Directors of the Corporation
and some or all of its officers are, have been, or may become directors,
officers, employees or stockholders of Aeltus Investment Management, Inc.,
Aetna Life Insurance and Annuity Company or their parents, affiliates or
subsidiaries or successors, and in the absence of actual fraud the Corporation
may deal freely with Aeltus Investment Management, Inc., Aetna Life Insurance
and Annuity Company or their parents, affiliates, subsidiaries or successors,
and neither such underwriting contract, management contract or contract for
research, advisory or administrative services, nor any other contract or
transaction between the Corporation and Aeltus Investment Management, Inc.,
Aetna Life Insurance and Annuity Company or their parents, affiliates,
subsidiaries or successors shall be invalidated or in any way affected
thereby, nor shall any Director or officer of the Corporation be liable to the
Corporation or to any Shareholder or creditor of the Corporation or to any
other person for any loss incurred under or by reason of any such contract or
transaction.
Notwithstanding the foregoing, no officer or director or underwriter or
investment adviser of the Corporation shall be protected against any liability
to the Corporation or to its security holders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
(iv) INDEMNIFICATION. The Corporation shall indemnify its officers,
directors, employees and agents, and any person who serves at the request of
the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise as follows:
(a) Every person who is or has been a director, officer, employee or
agent of the Corporation, and persons who serve at the Corporation's request
as director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall be indemnified by the
Corporation to the fullest extent permitted by law against liability and
against all expenses reasonably incurred or paid by him in connection with any
debt, claim, action, demand, suit, proceeding, judgment, decree, liability or
obligation of any kind in which he becomes involved as a party or otherwise by
virtue of his being or having been a director, officer, employee or agent of
the Corporation or of another corporation, partnership, joint venture, trust
or other enterprise at the request of the Corporation, and against amounts
paid or incurred by him in the settlement thereof.
(b) The words "claim," "action," "suit" or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal, administrative,
legislative, investigative or other, including appeals), actual or threatened,
and the words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(c) No indemnification shall be provided hereunder to a director,
officer, employee or agent against any liability to the Corporation or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
(d) The rights of indemnification provided herein may be insured
against by policies maintained by the Corporation, shall be severable, shall
not affect any other rights to which any director, officer, employee or agent
may now or hereafter be entitled, shall continue as to a person who has ceased
to be such director, officer, employee, or agent, and shall inure to the
benefit of the heirs, executors and administrators of such a person.
(e) In the absence of a final decision on the merits by a court or
other body before which such proceeding was brought, an indemnification
payment will not be made, except as provided in subparagraph (f) of this
paragraph (iv), unless in the absence of such a decision, a reasonable
determination based upon a factual review has been made:
(1) by a majority vote of a quorum of non-party Directors who
are not "interested" persons of the Corporation (as defined in the 1940 Act),
or
(2) by independent legal counsel in a written opinion that the
indemnitee was not liable for an act of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duties.
(f) The Corporation further undertakes that advancement of expenses
incurred in the defense of a proceeding (upon undertaking for repayment unless
it is ultimately determined that indemnification is appropriate) against an
officer, director or controlling person of the Corporation will not be made
absent the fulfillment of at least one of the following conditions: (1) the
indemnitee provides security for his undertaking, (2) the Corporation is
insured against losses arising by reason of any lawful advances or (3) a
majority of a quorum of non-party Directors who are not "interested" persons
or independent legal counsel in a written opinion makes a factual
determination that there is a reason to believe the indemnitee will be
entitled to indemnification.,
(v) BOOKS AND RECORDS. The Board of Directors shall, subject to the
General Laws of the State of Maryland, have the power to determine, from time
to time, whether and to what extent and at what times and places and under
what conditions and regulations any accounts and books of the Corporation, or
any of them, shall be open to the inspection of Shareholders.
(vi) VOTING. Notwithstanding any provision of law requiring a greater
proportion than a majority of the votes of all classes of Shares entitled to
be cast to take or authorize any action, the Corporation may take or authorize
any action upon the concurrence of a majority of the aggregate number of the
votes entitled to be cast thereon.
(vii) AMENDMENTS. The Corporation reserves the right from time to time
to make any amendment to its Articles of Incorporation now or thereafter
authorized by law, including any amendment which alters the rights, as
expressly set forth in its Articles of Incorporation, of any outstanding
Shares, except that no action affecting the validity or assessibility of such
Shares shall be taken without the unanimous approval of the outstanding Shares
affected thereby.
(viii) ADDITIONAL POWERS. In addition to the powers and authority
conferred upon them by the Articles of Incorporation of the Corporation or
bylaws, the Board of Directors may exercise all such powers and authority and
do all such acts and things as may be exercised or done by the Corporation,
subject, nevertheless, to the provisions of applicable state law and the
Articles of Incorporation and bylaws of the Corporation.
(ix) FINANCIAL MATTERS. The Board of Directors is expressly authorized
to determine in accordance with generally accepted accounting principles and
practices what constitutes net profits, earnings, surplus or net assets in
excess of capital, and to determine what accounting periods shall be used by
the Corporation for any purpose, whether annual or any other period, including
daily; to set apart from any funds of the Corporation such reserves for such
purposes as it shall determine and to abolish the same; to declare and pay
dividends and distributions in cash, securities or other property from surplus
or any funds legally available therefor, at such intervals (which may be as
frequent as daily) or on such other periodic basis, as it shall determine; to
declare such dividends or distributions by means of a formula or other method
of determination, at meetings held less frequently than the frequency of the
effectiveness of such declarations; to establish payment dates for dividends
or any other distributions on any basis, including dates occurring less
frequently than the effectiveness of declarations thereof; and to provide for
the payment of declared dividends on a date earlier or later than the
specified payment date in the case of Shareholders redeeming their entire
ownership of Shares.
11. The Corporation acknowledges that it is adopting its corporate name
through permission of Aetna Life and Casualty Company, a Connecticut
corporation, and agrees that Aetna Life and Casualty Company reserves to
itself and any successor to its business the right to withdraw from the
Corporation the use of the name "Aetna" and reserves to itself and any
successor to its business the right to grant the non-exclusive right to use
the name "Aetna" or any similar name to any other investment company or
business enterprise.
12. The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, the undersigned has signed these Articles of Incorporation
on the 31st day of May, 1996 and by her signature hereby acknowledges the same
to be her act and that, to the best of her knowledge, the matters and facts
set forth herein are true in all material respects under the penalties of
perjury.
/S/ SUSAN E. BRYANT
________________________________________
Susan E. Bryant
STATE OF CONNECTICUT )
) ss: Hartford
COUNTY OF HARTFORD )
I hereby certify that on May 31, 1996, before me, the subscriber, a Notary
Public of the State of Connecticut, in and for the County of Hartford,
personally appeared Susan E. Bryant, who acknowledged the foregoing Articles
of Incorporation to be her act.
WITNESS my hand and notarial seal or stamp the day and year last above
written.
/S/ CHERYL SHELTON
____________________________________
Notary Public
My Commission Expires June 30, 1996
