As filed with the Securities and Exchange File No. 333-05173
Commission on March 7, 1997 File No. 811-7651
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 1
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 2
AETNA VARIABLE PORTFOLIOS, INC.
151 Farmington Avenue RC4A, Hartford, Connecticut 06156
(860) 273-7834
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RC4A, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
X on May 1, 1997 pursuant to paragraph (a)(3) of Rule 485
-------- (Request for acceleration has been included with this
filing).
Aetna Variable Portfolios, Inc. has registered an indefinite number of its
securities under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940. The Registrant filed its Rule 24f-2 Notice for
its fiscal year ended December 31, 1996 on February 28, 1997.
<PAGE>
Aetna Variable Portfolios, Inc.
Cross-Reference Sheet
<TABLE>
<CAPTION>
FORM N-1A
ITEM NO. PART A Caption in Prospectus
<S> <C> <C>
1 Cover Page........................................... Cover Page
2 Synopsis............................................. Not Applicable
3 Condensed Financial Information...................... Financial Highlights
4 General Description of Registrant.................... Cover Page; The Fund; Description of the
Variable Portfolios; Investment
Techniques; Risk Factors and Other
Considerations; Investment Restrictions
5 Management of the Fund............................... Management of the Variable Portfolios
5A Management's Discussion of Fund Performance.......... Not Applicable
6 Capital Stock and Other Securities................... General Information; Purchase and
Redemption of Shares; Net Asset Value;
Tax Matters
7 Purchase of Securities Being Offered................. The Fund; Net Asset Value; Purchase and
Redemption of Shares
8 Redemption or Repurchase............................. Purchase and Redemption of Shares; Net
Asset Value
9 Pending Legal Proceedings............................ Not Applicable
<PAGE>
FORM N-1A Caption in Statement of Additional
ITEM NO. PART B Information
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 Restrictions and
Policies of the Variable Portfolios;
Description of Various Securities and
Investment Techniques
14 Management of the Fund............................... Directors and Officers of the Fund
15 Control Persons and Principal Holders of Securities.. Control Persons and Principal Shareholders
16 Investment Advisory and Other Services............... The Investment Advisory Agreement; The
Subadvisory Agreement; The Administrative
Services Agreement; Custodian;
Independent Auditors
17 Brokerage Allocation and Other Practices............. Brokerage Allocation and Trading Polices
18 Capital Stock and Other Securities................... Description of Shares; Purchase and
Redemption of Shares; Voting Rights
19 Purchase, Redemption and Pricing of Securities Being Net Asset Value; Purchase and Redemption
Offered.............................................. of Shares
20 Tax Status........................................... Tax Status
21 Underwriters......................................... Principal Underwriter
22 Calculation of Performance Data...................... Performance Information
23 Financial Statements................................. Financial Statements
</TABLE>
<PAGE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
<PAGE>
AETNA VARIABLE GROWTH PORTFOLIO
AETNA VARIABLE SMALL COMPANY PORTFOLIO
AETNA VARIABLE INDEX PLUS PORTFOLIO
AETNA VARIABLE CAPITAL APPRECIATION PORTFOLIO
AETNA VARIABLE PORTFOLIOS, INC.
151 FARMINGTON AVENUE
HARTFORD, CT 06156-8962
Prospectus dated: May 1, 1997
Aetna Variable Portfolios, Inc. (Fund) is an open-end 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 Fund currently has four Portfolios
authorized. The Fund'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 (Statement) dated May 1, 1997 contains more information
about the Variable Portfolios. For a free copy of the Statement, call
1-800-525-4225 or write to Aetna Variable Portfolios, Inc., at the address
listed above. The Statement has been filed with the Securities and Exchange
Commission (Commission) 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 Fund in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made.
INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. SHARES OF THE FUND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND 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.
<PAGE>
TABLE OF CONTENTS
Page
THE FUND 3
DESCRIPTION OF THE VARIABLE PORTFOLIOS 3
FINANCIAL HIGHLIGHTS 4
INVESTMENT TECHNIQUES 5
RISK FACTORS AND OTHER CONSIDERATIONS 7
INVESTMENT RESTRICTIONS 9
MANAGEMENT OF THE VARIABLE PORTFOLIOS 9
PURCHASE AND REDEMPTION OF SHARES 10
NET ASSET VALUE 10
GENERAL INFORMATION 11
PERFORMANCE 11
TAX MATTERS 13
APPENDIX A -- GLOSSARY OF INVESTMENT TERMS 14
APPENDIX B -- DESCRIPTION OF CORPORATE BOND RATINGS 16
2
<PAGE>
THE FUND
The Fund is an open-end, management investment company, consisting of multiple
Portfolios. It currently has authorized four Portfolios, AETNA VARIABLE GROWTH
PORTFOLIO (Growth) AETNA VARIABLE SMALL COMPANY PORTFOLIO (Small Company), AETNA
VARIABLE INDEX PLUS PORTFOLIO (Index Plus) and AETNA VARIABLE CAPITAL
APPRECIATION PORTFOLIO (Capital Appreciation). The Fund's Board of Directors
(Directors) may authorize additional Portfolios in the future. The Fund 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, not retirement plan participants (Participants), are
shareholders of the Fund. See "General Information."
The Fund 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 Fund's
Directors have 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 that 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 Statement, 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
Growth 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
Growth 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, Growth may lend portfolio securities, buy and sell put and call
options and stock index futures and options. Growth 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 PORTFOLIO
Investment Objective
Small Company 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
Small Company 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. Small Company may also invest in convertible and
non-convertible preferred stocks.
Additionally, Small Company may lend portfolio securities, buy and sell put and
call options and stock index futures and options. Small Company 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. Small Company will not invest more
than 15% of the total value of its assets in high-risk, high-yield securities or
"junk bonds".
3
<PAGE>
AETNA VARIABLE INDEX PLUS PORTFOLIO
Investment Objective
Index Plus 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 stock market index composed of 500 common stocks selected by the
Standard & Poor's Corporation.
Investment Policy
Index Plus will attempt to be fully invested in common stocks. Under normal
circumstances, Index Plus will invest at least 90% of its assets in common
stocks represented 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 the stock's
attractiveness as an investment. Index Plus 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 GENERALLY. As
Index Plus invests primarily in common stocks, the Portfolio is subject to
market risk -- i.e. the possibility that common stock prices will decline over
short or even extended periods. The U.S. stock market tends to be cyclical, with
periods when stock prices generally rise and periods when prices generally
decline.
Under normal circumstances, Index Plus will generally include approximately 400
stocks included in the S&P 500. Index Plus intends, under normal circumstances,
to exclude common stocks which are not part of the S&P 500 and to exclude Aetna
Inc. common stock.
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 similar market risk characteristics to the S&P 500, but will use a
disciplined analysis to identify those stocks having the greatest likelihood of
either outperforming or underperforming the market.
AETNA VARIABLE CAPITAL APPRECIATION PORTFOLIO
Investment Objective
Capital Appreciation seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stock. Capital Appreciation 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
Capital Appreciation will normally invest at least 65% of the Portfolio's net
assets in common stocks.
Capital Appreciation may also purchase securities aside from common stocks. The
value of all non-common stock investments may normally represent no more than
35% of Capital Appreciation's total assets.
Capital Appreciation 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.
FINANCIAL HIGHLIGHTS
The selected data presented below for the period ended December 31, 1996 are
derived from the financial statements of the Portfolios, which statements have
been audited by KPMG Peat Marwick LLP, independent auditors.
<TABLE>
<CAPTION>
Capital(1) Index(2) Small(3)
Appreciation Growth(1) Plus Company
------------- --------- -------- --------
<S> <C> <C> <C> <C>
Net asset value per share, beginning of period $10.000 $10.000 $10.000 $10.000
------- ------- ------- -------
Income From Investment Operations
Net investment income 0.015 0.011 0.047 0.008
Net realized and unrealized gain on
investments 0.200 0.147 0.919 0.115
------- ------- ------- -------
Total from investment operations 0.215 0.158 0.966 0.123
------- ------- ------- -------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Capital(1) Index(2) Small(3)
Appreciation Growth(1) Plus Company
------------- --------- -------- --------
<S> <C> <C> <C> <C>
Less Distributions
Dividends from net investment income (0.016) (0.012) (0.047) (0.010)
Distribution from net realized gains on
investments -0- -0- (0.013) -0-
------- ------- ------- -------
Total distributions (0.016) (0.012) (0.060) (0.010)
------- ------- ------- -------
Net asset value per share, end of year $10.199 $10.146 $10.906 $10.113
======= ======= ======= =======
Total Return* 2.15% 1.57% 9.64% 1.23%
Net assets, end of year (millions) $ 5.2 $ 5.2 $ 19.4 $ 5.2
Ratio of total expenses to average net assets** 0.67% 0.67% 0.50% 0.55%
Ratio of net investment income to average net
assets** 2.73% 1.99% 1.89% 5.96%
Portfolio turnover rate -- 1.97% 5.18% --
Average Commission rate paid per share $0.0300 $0.0364 $0.0358 --
</TABLE>
(1) Date of initial capitalization was December 13, 1996
(2) Date of initial capitalization was September 16, 1996
(3) Date of initial capitalization was December 27, 1996
* The total return percentage does not reflect any separate account charges
under VA contracts and VLI policies.
** Annualized.
Additional information about the performance of the Portfolios are contained in
each Portfolio's Annual Report dated December 31, 1996. The Annual Reports and
independent auditors' reports thereon are incorporated herein by reference and
are available, without charge, by writing to the Fund at the address listed on
the cover of this Prospectus or by calling 1-800-525-4225.
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 5% 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.
The Portfolios do not intend to borrow for leveraging purposes. Each Portfolio
has 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 because 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 Portfolio may incur costs in
liquidating the collateral or a loss if the collateral declines in value. 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 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 security (or other collateral) or a
loss if the security or other 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.
5
<PAGE>
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
appreciates more during periods of declining interest rates and depreciates 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 an 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 purchase call options, write (sell) covered call options, and
purchase and write (sell) put options, including options on securities, indices
and futures. 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.
As with all derivatives, the use of call options involves certain risks, which
are described in detail under "Risk Factors and Other Considerations" and in the
Statement. In that there is no limit on the amount of a Portfolio's total assets
that may be subject to call options, these risks may be heightened should a
Portfolio choose to engage extensively in such transactions.
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 better manage 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 that 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 to 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.
6
<PAGE>
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
(except up to 10%, under normal circumstances, with respect to the Index Plus
Portfolio). 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 the purchase of
variable rate instruments. These techniques are described in Appendix A and
the Statement.
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 Statement.
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 subadviser believes such action is
advisable. It is anticipated that the average annual turnover rate of each of
the Portfolios may exceed 125%. Turnover
7
<PAGE>
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 Statement.
Foreign Securities
Investments in securities of foreign issuers or securities denominated in
foreign currencies involve risks not present in domestic markets. These 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 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 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 Statement 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 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 Statement.
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 Statement.
8
<PAGE>
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. The securities of small capitalization companies 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 invest more than 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. The 25% limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
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. These latter restrictions apply
only to 75% of a Portfolio's total assets. In addition, the Small Company,
Growth and Capital Appreciation Portfolios do not invest in the securities of
companies determined by the Adviser to be primarily involved in the production
or distribution of tobacco products. See the Statement for additional investment
restrictions.
MANAGEMENT OF THE VARIABLE PORTFOLIOS
Directors
The operations of each Portfolio are managed under the supervision of the
Directors. The Directors set broad policies for the Fund and each Portfolio.
Information about the Directors is found in the Statement.
Investment Adviser
Aetna Life Insurance and Annuity Company (Aetna), serves as the investment
adviser for each of the Variable Portfolios. Aetna is a Connecticut insurance
corporation with its principal offices at 151 Farmington Avenue, Hartford,
Connecticut 06156, and is registered with the Commission as an investment
adviser. Aetna is an indirect, wholly-owned subsidiary of Aetna Retirement
Services, Inc., which is in turn an indirect, wholly-owned subsidiary of Aetna
Inc.
Under the terms of the Investment Advisory Agreement between the Fund and Aetna
with respect to each of the Portfolios, Aetna, subject to the supervision of the
Directors, is obligated to manage and oversee the Fund's day-to-day operations
and to manage the investments of each Portfolio.
The Investment Advisory Agreement gives Aetna broad latitude in selecting
securities for each Portfolio subject to the Directors' oversight. Under the
Investment Advisory Agreement, Aetna may delegate to a subadviser its functions
in managing the investments of each Portfolio, subject to Aetna's oversight. The
Investment Advisory Agreement allows Aetna 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
Fund, or paying Fund expenses, in setting the amount of commissions paid to a
broker. Aetna 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.
Aetna receives a monthly fee from each Portfolio at an annual rate based on the
average daily net assets of each Portfolio as follows:
Portfolio Fee
--------- ---
Growth 0.600%
Small Company 0.750%
Index Plus 0.350%
Capital Appreciation 0.600%
Aetna is not obligated to reimburse a Portfolio for any expenses that exceed the
amount of its advisory fee for that year. The Investment Advisory Agreement also
provides that Aetna is responsible for all of its own costs including costs of
Aetna's personnel required to carry out its investment advisory duties.
9
<PAGE>
Subadviser
Aetna has engaged Aeltus Investment Management, Inc. (Aeltus), organized in 1972
under the name Aetna Capital Management, Inc., as a subadviser to each of the
Variable Portfolios. Aeltus is a Connecticut corporation located at 242 Trumbull
Street, Hartford, Connecticut 06103-1205. Aeltus is registered as an investment
adviser with the Commission. Aeltus is a part of the Aetna organization, and is
an indirect, wholly-owned subsidiary of Aetna Retirement Services, Inc., which
is in turn an indirect, wholly-owned subsidiary of Aetna Inc. John Y. Kim
currently serves as the President, Chief Executive Officer and Chief Investment
Officer of Aeltus. Under a Subadvisory Agreement with Aetna, Aeltus, subject to
the supervision of Aetna 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.
Aetna 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 Aetna's oversight. The Subadvisory 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 Fund 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 authorized under the Investment Advisory Agreement, but
only as authorized by applicable law and the rules and regulations of the
Commission.
The Subadvisory Agreement provides that Aetna will pay Aeltus a fee at an annual
rate up to 0.45% 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 Aetna 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 Aetna is required
to reduce its fee under the Investment Advisory Agreement. Aetna would not be
obligated to reimburse a Portfolio for any expenses that exceed the amount of
its advisory fee for that year. The Subadvisory Agreement obligates Aeltus to
reduce its fee by approximately 60% of the amount of Aetna'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 and Capital Appreciation
Peter B. Canoni, Managing Director, Aeltus. Mr. Canoni has been with the
Aetna organization since 1980 and has over 20 years of investment experience.
Small Company
Thomas J. DiBella, Vice President, 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.
Index Plus
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 the Aetna organization since 1966.
Expenses and Fund Administration
Under an Administrative Services Agreement with the Fund, Aetna provides all
administrative services necessary for the Fund's operations and is responsible
for the supervision of the Fund's other service providers. Aetna also assumes
all ordinary recurring direct costs of the Fund, such as custodian fees,
directors fees, transfer agency costs and accounting expenses. For the services
provided under the Administrative Services Agreement, Aetna receives an annual
fee, payable monthly, at a rate of 0.15% of the average daily net assets of the
Fund.
PURCHASE 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.
Orders for the purchase or redemption of shares of each Portfolio
10
<PAGE>
that are received before the close of regular trading on the New York Stock
Exchange (normally 4 p.m. eastern time) are effected at the respective net asset
value per share determined that day, as described below (see Net Asset Value).
The Portfolios reserve the right to suspend the offering of shares, or to reject
any specific purchase order. The 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 Commission.
NET ASSET VALUE
The net asset value per share (NAV) of each Portfolio is determined as of the
earlier of 15 minutes after the close of the New York Stock Exchange (NYSE) or
4:15 p.m. eastern time on each day that NYSE 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,
from time to time, in good faith, by or under the authority of, the Directors.
GENERAL INFORMATION
Incorporation
The Fund was incorporated under the laws of Maryland on June 4, 1996.
Capital Stock
The Fund 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 Fund is not required and does not intend to hold annual shareholder
meetings. The Fund'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 Fund's outstanding shares, the Fund 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 Fund 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 Fund may
include information concerning the historical performance of each Portfolio.
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 Portfolio calculated on a compounded basis for specified
periods of time. Total return information will be calculated pursuant to rules
established by the Commission. 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.
Each Portfolio 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 Portfolio 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 Fund are based on historical performance
and are not intended to indicate future performance. Total return and NAV per
share can be expected to fluctuate over time, and accordingly, upon redemption,
shares may be worth more or less than their original cost.
11
<PAGE>
Public Fund Performance
Small Company is recently organized and does not yet have a long term
performance record. However, Small Company has the same investment objective and
follows substantially the same investment strategies as a series of a mutual
fund (public fund) whose shares are currently sold to the public and managed by
Aetna and Aeltus.
Set forth below is the historical performance of the comparable 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 Portfolio. 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 paid by the
Portfolio. The figures also do not reflect the deduction of any insurance fees
or charges that 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
Portfolio. The results shown reflect the reinvestment of dividends and
distributions, and were calculated in the same manner that will be used by the
Portfolio to calculate its own performance.
The following table shows average annualized total returns for the time periods
shown for the Select Class shares of the series of the public fund, as well as a
comparison with the Russell 2000 Growth Index, a small cap stock benchmark.
SMALL COMPANY
1 YEAR SINCE INCEPTION
------ ---------------
Aetna Series Fund, Inc.
Aetna Small Company 13.62% 19.53%
Russell 2000 Growth Index 11.26% 12.47%
Results shown are through the period ended December 31, 1996. The inception date
is January 1, 1994.
Private Account Performance
Index Plus, Capital Appreciation and Growth are recently organized and do not
yet have long term performance records. However, each of these Portfolios has an
investment objective, policy and strategy substantially similar to those
employed by Aeltus with respect to certain noninvestment company advisory
accounts (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 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'
performance.
The chart below shows hypothetical performance information derived from
historical composite performance of the Private Accounts included in the Index
Plus Composite, Capital Appreciation Composite and Growth Composite. The
performance figures represent the actual performance results of the composites
of comparable Private Accounts, adjusted to reflect the deduction of the fees
and expenses paid by each Portfolio. The 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.
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 that
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.
The following tables show performance information derived from private account
composite performance reduced by actual Portfolio fees and expenses, as well as
comparisons with the S&P 500, an unmanaged index generally considered to be
representative of the stock market.
12
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PRIVATE ACCOUNT COMPOSITE PERFORMANCE
INDEX PLUS 1 YEAR 5 YEARS SINCE INCEPTION
------ ------- ---------------
Index Plus Composite* 24.92% 15.49% 16.72%
S&P 500 Stock Index 22.95% 15.22% 16.22%
CAPITAL APPRECIATION 1 YEAR 5 YEARS SINCE INCEPTION
------ ------- ---------------
Capital Appreciation Composite* 27.69% 17.84% 22.67%
S&P 500 Stock Index 22.95% 15.22% 18.49%
GROWTH 1 YEAR 5 YEARS 10 YEARS
------ ------- --------
Growth Composite* 27.77% 13.79% 16.04%
S&P 500 Stock Index 22.95% 15.22% 15.29%
* The Composite reflects the Aeltus "Quantitative Equity" Composite.
Results shown are through the period ended December 31, 1996. The inception
dates are October 1, 1991 for the Index Plus Composite, October 1, 1990 for the
Capital Appreciation Composite and January 1, 1983 for the Growth Composite.
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 (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 personal tax consequences of purchasing a contract or
policy.
13
<PAGE>
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 tranches 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 Commission. 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
ALIAC 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 market 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 or its
agencies.
14
<PAGE>
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.
15
<PAGE>
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.
16
<PAGE>
AETNA VARIABLE PORTFOLIOS, INC.
151 Farmington Avenue
Hartford, Connecticut 06156-8962
Statement of Additional Information Dated: May 1, 1997
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 May 1, 1997. A free prospectus is available upon
request by writing to Aetna Variable Portfolios, Inc. at the address listed
above or calling 1-800-525-4225.
Read the prospectus before you invest.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL INFORMATION AND HISTORY 3
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES OF THE VARIABLE PORTFOLIOS 3
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES 4
DIRECTORS AND OFFICERS OF THE FUND 14
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS 17
THE INVESTMENT ADVISORY AGREEMENT 17
THE SUBADVISORY AGREEMENT 17
THE ADMINISTRATIVE SERVICES AGREEMENT 18
CUSTODIAN 18
INDEPENDENT AUDITORS 18
PRINCIPAL UNDERWRITER 18
BROKERAGE ALLOCATION AND TRADING POLICIES 18
DESCRIPTION OF SHARES 19
PURCHASE AND REDEMPTION OF SHARES 20
NET ASSET VALUE 20
PERFORMANCE INFORMATION 20
TAX STATUS 21
VOTING RIGHTS 25
FINANCIAL STATEMENTS 26
</TABLE>
2
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GENERAL INFORMATION AND HISTORY
Aetna Variable Portfolios, Inc. (Fund) was incorporated in 1996 in Maryland. The
Fund is an open-end management investment company. The Fund 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
Fund currently has authorized four Portfolios: Aetna Variable Growth Portfolio
(Growth); Aetna Variable Small Company Portfolio (Small Company); Aetna Variable
Index Plus Portfolio (Index Plus); and Aetna Variable Capital Appreciation
Portfolio (Capital Appreciation).
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 (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) with respect to 75% of the value of a Portfolio's total assets, 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. Securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities are excluded from these restrictions;
(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 or
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 or related
options shall not be considered to involve the issuance of a senior
security; 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 or 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 5% 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 (1933 Act).
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The Fund has also adopted certain other investment restrictions reflecting the
current investment practices of the Variable Portfolios that may be changed by
the Fund's Board of Directors (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 or by Order of the Commission;
(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 policies restrict 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 of
purchase, 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 that 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 (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 certain futures
contracts 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 and continue to bear the risk of market improvement.
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:
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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. With regard to transactions involving futures contracts, the Fund
maintains a segregated account holding liquid assets in accordance with
applicable Commission staff positions.
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.
Call and Put Options--Each Variable Portfolio may write (sell) covered call
options (Call Options) and purchase put options (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 Aetna.
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
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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 that 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 Aetna 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 (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 Aetna 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.
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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 (transaction hedge); or to lock in the value of an
existing portfolio security (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
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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 Aetna 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 Aetna
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,
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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. Aetna 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
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 Aetna'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 Aetna'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
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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 Aetna'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 that 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 Fund 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 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
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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 Aetna'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, Aetna 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 Fund 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
(typically Luxembourg) as well as in the United States; 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. Depositary receipts are not considered foreign securities for
purposes of a Portfolio's investment limitation concerning investment in foreign
securities.
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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 that is part of the regular monthly payment. A
borrower is more likely to repay a mortgage that 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 that 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
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to be less creditworthy. Lower ratings, however, may not necessarily indicate
higher risks. In pursuing a Portfolio's objectives, Aetna seeks to identify
situations in which the rating agencies have not fully perceived the value of
the security or in which Aetna 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, Aetna 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 Aetna'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.
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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 FUND
The investments and administration of the Fund are under the supervision of the
Directors. The Directors and executive officers of the Fund 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 Aetna 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 and Series C), Aetna Generation Portfolios,
Inc. and Aetna Variable Portfolios, Inc.
<TABLE>
<CAPTION>
Principal Occupation During Past Five Years
Position(s) Held (and Positions held with Affiliated Persons or
Name, Address and Age with Registrant Principal Underwriters of the Registrant)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shaun P. Mathews* Director and President Vice President/Senior Vice President, Aetna, March
151 Farmington Avenue 1991 to present and Vice President, Aetna Life
Hartford, Connecticut Insurance Company, 1991 to present. Director and
Age 41 President, Aetna Investment Services, Inc.; and
Director and Senior
Vice President, Aetna
Insurance Company of
America, March 1991 to
present.
- ------------------------------------------------------------------------------------------------------------------
Wayne F. Baltzer Vice President Assistant Vice President, Aetna, May 1991 to present;
151 Farmington Avenue Vice President, Aetna Investment Services, Inc. July
Hartford, Connecticut 1993 to present.
Age 53
- ------------------------------------------------------------------------------------------------------------------
Martin T. Conroy Vice President Assistant Treasurer, Aetna, October 1991 to present;
151 Farmington Avenue
Hartford, Connecticut
Age 57
- ------------------------------------------------------------------------------------------------------------------
14
<PAGE>
Principal Occupation During Past Five Years
Position(s) Held (and Positions held with Affiliated Persons or
Name, Address and Age with Registrant Principal Underwriters of the Registrant)
- ------------------------------------------------------------------------------------------------------------------
J. Scott Fox Vice President and Director, Managing Director, Chief Operating Officer,
242 Trumbull Street Treasurer Chief Financial Officer and Treasurer, Aeltus
Hartford, Connecticut Investment Management, Inc. (Aeltus), April 1994 to
Age 42 present; Managing Director and Treasurer, Equitable
Capital Management Corp., March 1987 to September
1993. Director and Chief Financial Officer, Aeltus
Capital, Inc. and Aeltus Trust Company, Inc.;
Director, President and Chief Executive Officer, Aetna
Investment Management, (Bermuda) Holding, Ltd.
- ------------------------------------------------------------------------------------------------------------------
Susan E. Bryant Secretary Counsel, Aetna Inc. (formerly Aetna Life and Casualty
151 Farmington Avenue Company) March 1993 to present; General Counsel and
Hartford, Connecticut Corporate Secretary, First Investors Corporation,
Age 49 April 1991 to March 1993. Secretary, Aetna Investment
Services, Inc. and Vice President and Senior Counsel,
Aetna Financial Services, Inc.
- ------------------------------------------------------------------------------------------------------------------
Morton Ehrlich Director Chairman and Chief Executive Officer, Integrated
1000 Venetian Way Management Corp. (an entrepreneurial company) and
Miami, Florida Universal Research Technologies, 1992 to present;
Age 62 Director and Chairman, Audit Committee, National
Bureau of Economic Research, 1985 to 1992.
- ------------------------------------------------------------------------------------------------------------------
Maria T. Fighetti Director Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation and
Closter, New Jersey Alcohol Services, 1973 to present.
Age 53
- ------------------------------------------------------------------------------------------------------------------
David L. Grove Director Private Investor; Economic/Financial Consultant,
5 The Knoll December 1985 to present.
Armonk, New York
Age 78
- ------------------------------------------------------------------------------------------------------------------
Timothy A. Holt* Director Director, Senior Vice President and Chief Financial
151 Farmington Avenue Officer, Aetna, February 1996 to present; Vice
Hartford, Connecticut President, Portfolio Management/Investment Group,
Age 43 Aetna Inc. (formerly Aetna Life and Casualty Company),
June 1991 to February 1996. Director March 1996 to present
and Vice President September 1996 to present Aetna
Retirement Holdings, Inc.
- ------------------------------------------------------------------------------------------------------------------
Daniel P. Kearney* Director Director, President, and Chief Executive Officer,
151 Farmington Avenue Aetna, December 1993 to present; Executive Vice
Hartford, Connecticut President, Aetna Inc. (formerly Aetna Life and
Age 57 Casualty Company), December 1993 to present; Group
Executive, Aetna Inc. (formerly Aetna Life and
Casualty Company), 1991 to 1993; Director, Aetna
Investment Services, Inc., November 1994 to present;
Director, Aetna Insurance Company of America, May 1994
to present.
- ------------------------------------------------------------------------------------------------------------------
Sidney Koch Director Financial Adviser, self-employed, January 1993 to
455 East 86th Street present; Senior Adviser, Daiwa Securities America,
New York, New York Inc., January 1992 to January 1993; Executive Vice
Age 61 President, Member of Executive Committee, Daiwa
Securities America, Inc., January 1986 to January
1992.
15
<PAGE>
Principal Occupation During Past Five Years
Position(s) Held (and Positions held with Affiliated Persons or
Name, Address and Age with Registrant Principal Underwriters of the Registrant)
- ------------------------------------------------------------------------------------------------------------------
Corine T. Norgaard Director, Chair Audit Dean of the Barney School of Business, University of
556 Wormwood Hill Committee and Contract Hartford, (West Hartford, CT), August 1996 to present;
Mansfield Center, Committee Professor, Accounting and Dean of the School of
Connecticut Management, Binghamton University, (Binghamton, NY),
Age 59 August 1993 to August 1996; Professor, Accounting,
University of Connecticut, (Storrs, Connecticut),
September 1969 to June 1993; Director, The Advest Group
(holding company for brokerage firm) through September
1996.
- ------------------------------------------------------------------------------------------------------------------
Richard G. Scheide Director Trust and Private Banking Consultant, David Ross
11 Lily Street Palmer Consultants, July 1991 to present.
Nantucket, Massachusetts
Age 67
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Interested persons as defined in the 1940 Act.
During the year ended December 31, 1996, members of the Boards of the Funds
within the Aetna Fund Complex who are also directors, officers or employees of
Aetna Inc. 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.
As of December 31, 1996, the unaffiliated members of the Board of Directors were
compensated as follows:
<TABLE>
<CAPTION>
Aggregate
Compensation Total Compensation from Registrant
Name of Person, Position from Registrant and Fund Complex Paid to Directors
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Corine Norgaard $37.00 $72,950.00
Director and Chairman,
Audit and Contract Committees
- --------------------------------------------------------------------------------------------
Sidney Koch $37.00 $72,950.00
Director and Member,
Audit and Contract Committees
- --------------------------------------------------------------------------------------------
Maria T. Fighetti $33.00 $63,950.00
Director and Member,
Audit and Contract Committees
- --------------------------------------------------------------------------------------------
Morton Ehrlich $33.00 $63,950.00
Director and Member,
Audit and Contract Committees
- --------------------------------------------------------------------------------------------
Richard G. Scheide $35.00 $68,950.00
Director and Member,
Audit and Contract Committees
- --------------------------------------------------------------------------------------------
David L. Grove $35.00 $68,950.00
Director and Member,
Audit and Contract Committees
- --------------------------------------------------------------------------------------------
</TABLE>
* Mr. Grove elected to defer all such compensation under an existing deferred
compensation plan.
The Fund has applied for an order by the Securities and Exchange Commission to
allow the Members of the Board of Directors who are not affiliated with Aetna
Inc. or any of its subsidiaries to defer all or a portion of their compensation
in accordance with the terms of a new Deferred Compensation Plan (the "Plan").
Under the Plan, compensation deferred by an unaffiliated Director is
periodically adjusted as though an equivalent amount had been invested and
reinvested in shares of one or more series of Aetna Series Fund, Inc. designated
by the Director. The amount paid to the unaffiliated Director under the Plan
will be based upon the performance of such investments. Deferral of compensation
in accordance with the Plan will have a negligible effect on the assets,
liabilities, and net income per share, and will not obligate the Fund to retain
the services of any Director or to pay any particular level of compensation to
the Director.
16
<PAGE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
Shares of the Variable Portfolios may 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).
All shares are currently held by separate accounts of Aetna and its subsidiary,
Aetna Insurance Company of America, Inc., on behalf of their respective separate
accounts. See "Voting Rights" below.
Aetna is an indirect wholly-owned subsidiary of Aetna Retirement Services, Inc.,
which is in turn an indirect wholly-owned subsidiary of Aetna Inc. Aetna's
principal office is located at 151 Farmington Avenue, Hartford, Connecticut
06156. Aetna is registered with the Commission as an investment adviser.
THE INVESTMENT ADVISORY AGREEMENT
On June 18, 1996, the Directors approved an investment advisory agreement
(Investment Advisory Agreement) between the Fund and Aetna for each of the
Variable Portfolios to continue through December 31, 1997.
Under the Investment Advisory Agreement and subject to the supervision of the
Directors, Aetna 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 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 Aetna considers necessary or advisable in connection
with Aetna'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 Aetna from time to time, deems necessary or
as is requested by the Directors; and (viii) taking any other actions which
appear to Aetna and the Directors to be necessary.
The Investment Advisory Agreement provides that Aetna shall pay (a) the
salaries, employment benefits and other related costs of those of its personnel
engaged in providing investment advice to the Fund, 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
Fund who are employees of Aetna or an affiliated entity and any salaries and
employment benefits payable to those persons. The Investment 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 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 Directors who are not "interested persons" (as defined
by the 1940 Act) of the Fund or Aetna; (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 Commission 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 Investment 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 Fund which
benefit the Fund. Some of the costs payable by each Portfolio under the
Investment Advisory Agreement are being assumed by Aetna under the terms of the
Administrative Services Agreement (see "Administrative Services Agreement").
The Investment 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 Investment 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) Aetna.
The Investment 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 Fund with the permission of Aetna Inc. and their continued use is
subject to the right of Aetna Inc. to withdraw this permission in the event
Aetna or another subsidiary or affiliated corporation of Aetna Inc. should not
be the investment adviser of the Variable Portfolios.
THE SUBADVISORY AGREEMENT
On June 18, 1996, the Directors approved a subadvisory agreement (Subadvisory
Agreement) between Aetna and Aeltus Investment Management, Inc. (Aeltus) with
respect to each of the Variable Portfolios to continue through December 31,
1997. The Subadvisory
17
<PAGE>
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
Subadvisory 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) Aetna, or (iv)
Aeltus. The Subadvisory Agreement terminates automatically in the event of its
assignment or in the event of the termination of the Investment Advisory
Agreement with Aetna.
Under the Subadvisory Agreement, Aeltus supervises the investment and
reinvestment of cash and securities comprising the assets of the Portfolios. The
Subadvisory 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 subadvisory 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, Aetna pays the subadviser a monthly fee as described in the
prospectus.
Aetna has certain obligations under the Subadvisory 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. Aetna will also obtain and evaluate data
regarding economic trends in the United States and industries in which the
Portfolios invest and consult with the subadviser on such data and trends. In
addition, Aetna will consult with and assist the subadviser in maintaining
appropriate policies, procedures and records and oversee matters relating to
promotion, marketing materials and reports by the subadviser to the Directors.
THE ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to an Administrative Services Agreement, between the Fund and Aetna,
Aetna has agreed to provide all administrative services in support of the
Portfolios. In addition, Aetna 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, Aetna will receive an annual fee, payable monthly, at a rate
of 0.15% of the average daily net assets of the Portfolio.
The Administrative Services Agreement will remain in effect until December 31,
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 06103-4103 serves as independent
auditors to the Variable Portfolios. KPMG Peat Marwick LLP provides audit
services, assistance and consultation in connection with Commission filings.
PRINCIPAL UNDERWRITER
Shares of the Variable Portfolios are offered on a continuous basis. Aetna 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 Fund. The Agreement was approved on June 18, 1996 to continue through
December 31, 1997. 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
Aetna, and who are not interested persons of the Fund, 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 Aetna 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 supervision of the Directors, Aetna 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 Aetna and
Aeltus to obtain the best quality of execution available, giving attention to
net price (including commissions
18
<PAGE>
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, Aetna 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 Fund, will lead to the best overall quality of execution
for the Portfolio.
Aetna 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. Aetna 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. Aetna'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 Aetna or Aeltus believes that more than one
broker can provide best execution, preference may be given to brokers who
provide additional services to Aetna or Aeltus.
Consistent with securities laws and regulations, Aetna 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.
Aetna'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 Aetna'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 Aetna or any
affiliate of the Variable Portfolios or Aetna except in accordance with
applicable Commission rules. All transactions will comply with Rule 17e-1 under
the 1940 Act.
Certain officers of Aetna and Aeltus also manage the securities portfolios of
Aetna's own accounts. Further, Aetna and Aeltus also act as investment adviser
to other investment companies registered under the 1940 Act and other client
accounts. Aetna and Aeltus have adopted policies designed to prevent
disadvantaging the Variable Portfolios in placing orders for the purchase and
sale of securities for the Variable Portfolios.
To the extent Aetna or Aeltus desires to buy or sell the same 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 Directors have 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 Aetna.
For 1996, the Fund paid brokerage commissions of $3,292, $11,234 and $2,562 for
Growth, Index Plus and Capital Appreciation, respectively.
For the fiscal year ended December 31, 1996, no portfolio transactions were
directed to any brokers because of research services. No brokerage business was
placed with any brokers affiliated with Aetna during 1996.
The Directors have 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. Aetna and Aeltus have adopted Codes of Ethics
which the Directors review annually.
DESCRIPTION OF SHARES
The Articles of Incorporation authorize the Fund 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.
19
<PAGE>
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.
PURCHASE AND REDEMPTION OF SHARES
Shares of a Portfolio are purchased 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 "Purchase and Redemption of Shares" and "Net
Asset Value."
The value of shares redeemed may be more or less than the shareholder's costs,
depending upon the market value of the portfolio securities at the time of
redemption. Payment for shares redeemed will be made to the Company by the Fund
within seven days or the maximum period allowed by law, if shorter, after the
redemption request is received by the Company acting as the transfer agent for
the Fund. The right to redeem shares of the Fund may be suspended or payment
therefore postponed for any period during which (a) trading on the New York
Stock Exchange is restricted as determined by the Commission or such exchange is
closed for other than weekends and holidays; (b) an emergency exists, as
determined by the Commission, as a result of which (i) disposal by the Fund of
portfolio securities owned by it is not reasonably practicable, or (ii) it is
not reasonably practicable for the Fund to determine fairly the value of its net
assets; or (c) the Commission by order so permits, for the protection of
shareholders of the Fund.
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. Short-term debt securities maturing
in sixty days or less at the date of purchase will be valued using the
"amortized cost" method of valuation. This involves valuing an instrument at its
cost and thereafter assuming a constant amortization of premium or increase of
discount. 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.
Call options written by the Fund and put options are valued at the mean of the
last bid and asked price on the principal exchange where the option is 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, Aetna 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 Small
Company Growth Fund which is a series of a public mutual fund which has the same
investment objective and follows substantially the same investment strategies as
the Small Company Portfolio.
The performance of this 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
The total returns of the Portfolios calculated on the basis described above are
9.64% for Index Plus for the period from September 16, 1996 to December 31,
1996; 1.23% for Small Company for the period from December 27, 1996 to December
31, 1996; and 1.57% for Growth and 2.15% for Capital Appreciation, each for the
period from December 13, 1996 to December 31, 1996.
20
<PAGE>
Investors should not consider this performance data as an indication of the
future performance of any of the Portfolios of the Fund.
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, (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
(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 (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.
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
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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
Fund 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 Portfolio as a regulated
investment company and/or its compliance with the diversification requirement
under Code Section 817(h) might be affected. The Fund intends to monitor
developments in this area. Certain requirements that must be met under the Code
in order for a Portfolio to qualify as a regulated investment company may limit
the extent to which a Portfolio 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 (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.
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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.
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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 Aetna, 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
Port-
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folio, 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
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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
Financial Statements for each Portfolio of Aetna Variable Portfolios, Inc. and
independent auditors' reports thereon are incorporated herein by reference to
the Annual Reports dated December 31, 1996. The Annual Reports are available
upon request and without charge by calling 1-800-525-4225 or by writing to Aetna
Variable Portfolios, Inc. at 151 Farmington Avenue, Hartford, CT 06156.
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A:
Financial Highlights
(2) Included in Part B by incorporation by reference to each
Portfolio's Annual Report dated December 31, 1996, as
filed electronically with the Securities and Exchange
Commission on March 7, 1997 (File No. 811-7651):
Variable Index Plus Portfolio
-Portfolio of Investments as of December 31, 1996
-Statement of Assets and Liabilities as of December 31,
1996
-Statements of operations and changes in net assets for
the period from September 16, 1996 to December 31, 1996
-Notes to Financial Statements
-Independent Auditors' Report
Variable Small Company Portfolio
-Portfolio of Investments as of December 31, 1996
-Statement of Assets and Liabilities as of December 31,
1996
-Statements of operations and changes in net assets for
the period from December 27, 1996 to December 31, 1996
-Notes to Financial Statements
-Independent Auditors' Report
Variable Capital Appreciation Portfolio
-Portfolio of Investments as of December 31, 1996
-Statement of Assets and Liabilities as of December 31,
1996
-Statements of operations and changes in net assets for
the period from December 13, 1996 to December 31, 1996
-Notes to Financial Statements
-Independent Auditors' Report
Variable Growth Portfolio
-Portfolio of Investments as of December 31, 1996
-Statement of Assets and Liabilities as of December 31,
1996
-Statements of operations and changes in net assets for
the period from December 13, 1996 to December 31, 1996
-Notes to Financial Statements
-Independent Auditors' Report
(b) Exhibits
(1)(a) Articles of Incorporation(1)
(1)(b) Articles of Amendment (October 10, 1996)
(2) Amended Bylaws
(3) Not applicable
(4) Instruments Defining Rights of Holders (set forth in the
Articles of Incorporation which are incorporated by
reference)(1)
(5)(a) Form of Investment Advisory Agreement between Aetna Life
Insurance and Annuity Company and Aetna Variable Portfolios,
Inc.
(5)(b) Form of Subadvisory Agreement between Aetna Life Insurance and
Annuity Company and Aeltus Investment Management, Inc.
(6) Underwriting Agreement between the Registrant and Aetna Life
Insurance and Annuity Company
(7) Not applicable
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(8) Custodian Agreement - Mellon Bank, N.A.
(9)(a) Form of Administrative Services Agreement between Aetna Life
Insurance and Annuity Company and Aetna Variable Portfolios,
Inc.
(9)(b) License Agreement
(10)(a) Opinion of Counsel(2)
(10)(b) Consent of Counsel
(11) Consent of Independent Auditors
(12) Not applicable
(13) Agreement re: Initial Contribution to Working Capital
(14) Not applicable
(15) Not applicable
(16) Schedule for Computation of Performance Data
(17) See exhibit 27 below
(18) Not applicable
(19) Powers of Attorney(3)
(27) Financial Data Schedule
1. Incorporated by reference to Form N-1A (File No. 333-05173), as filed
electronically with the Securities and Exchange Commission on June 4, 1996.
2. Incorporated by reference to Registrant's Rule 24f-2 notice for the fiscal
year ended December 31, 1996, as filed electronically with the Securities
and Exchange Commission on February 28, 1997.
3. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-1A (File No. 333-05173), as filed electronically with
the Securities and Exchange Commission on September 9, 1996.
<PAGE>
Item 25. Persons Controlled by or Under Common Control
Registrant is a Maryland Corporation for which separate financial
statements are filed.
A list of all persons directly or indirectly controlled by or
under common control with the Registrant is incorporated herein by
reference to Item 26 of Post-Effective Amendment No. 12 to the
Registration Statement on Form N-4 (File No. 33-75964), as filed
electronically with the Securities and Exchange Commission on
February 11, 1997
Item 26. Number of Holders of Securities
(1) Title of Portfolio (2) Number of Record Holders
------------------ ------------------------
Capital Appreciation 2
Growth 2
Index Plus 4
Small Company 2
Item 27. Indemnification
Article 10, Section (iv) of the Registrant's Articles of Incorporation which are
incorporated by reference to Registration Statement on Form N-1A (File No.
333-05173), as filed electronically with the Securities and Exchange Commission
on June 4, 1996, 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, 1997.
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.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
<PAGE>
asserted by such trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
The Investment Adviser, Aetna Life Insurance and Annuity Company
(Aetna), is an insurance company that issues variable and fixed
annuities, variable and universal life insurance policies and acts
as principal underwriter and depositor for separate accounts
holding assets for variable contracts and policies. It also acts as
the principal underwriter and investment adviser for the Registrant
and 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
management investment companies registered under the Investment
Company Act of 1940 (1940Act)). Additionally, Aetna acts as the
principal underwriter and depositor for Variable Annuity Account B
of Aetna, Variable Annuity Account C of Aetna, Variable Annuity
Account G of Aetna, and Variable Life Account B of Aetna (separate
accounts of Aetna registered as unit investment trusts under the
1940 Act). Aetna is also the principal underwriter for Variable
Annuity Account I of Aetna Insurance Company of America (AICA) (a
separate account of AICA registered as a unit investment trust
under the 1940 Act).
The following table summarizes the business connections of the
directors and principal officers of the Investment Adviser.
<TABLE>
<CAPTION>
------------------------------ ----------------------------------- ----------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
------------------------------ ----------------------------------- ----------------------------------------------
<S> <C> <C>
Daniel P. Kearney Director, President and, President (since December 1995) -- Aetna
Executive Officer Retirement Services, Inc.; President (since
December 1993) -- Aetna Life Insurance
and Annuity Company; Executive
Vice President (since December 1993) --
Aetna Inc. (formerly Aetna Life and Casualty
Company); Director (since 1992) -- MBIA,
Inc.
<PAGE>
------------------------------ ----------------------------------- ----------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
------------------------------ ----------------------------------- ----------------------------------------------
Christopher J. Burns Director and Senior Vice Director -- Aetna Financial Services, Inc.
President (since January 1996) and Aetna Investment
Services, Inc. (since July 1992); President
and Chief Executive and Operating Officer
(since November 1996) -- Aetna Investment
Services, Inc.
Laura R. Estes Director and Senior Vice Senior Vice President (since March 1991) --
President Aetna Life Insurance and Annuity Company.
Timothy A. Holt Director, Senior Vice President Senior Vice President and Chief Financial
and Chief Financial Officer Officer (since February 1996) -- Aetna Life
Insurance and Annuity Company; Vice
President (June 1991 - February 1996) --
Portfolio Management/Investment Group, Aetna
Inc. (formerly known as Aetna Life and
Casualty Company); Director (since March
1996)-- Aetna Retirement Holdings, Inc.;
Vice President (since September 1996) --
Aetna Retirement Holdings, Inc.
Gail P. Johnson Director and Vice President Vice President (since December 1992) --
Aetna Life Insurance and Annuity Company.
John Y. Kim Director and Senior Vice President President (since December 1995) -- Aeltus
Investment Management, Inc.; Chief
Investment Officer (since May 1994) -- Aetna
Life Insurance and Annuity Company.
<PAGE>
------------------------------ ----------------------------------- ----------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
------------------------------ ----------------------------------- ----------------------------------------------
Shaun P. Mathews Director and Vice President Vice President (since February 1996), Senior
Vice President (March 1991 - Present) --
Aetna Life Insurance and Annuity Company;
Director -- Aetna Investment Services, Inc.
(since July 1993) and Aetna Insurance
Company of America (since February 1993).
Glen Salow Director and Vice President Vice President (Since 1992) -- Aetna Life
Insurance and Annuity Company.
Creed R. Terry Director and Vice President Vice President (since February 1996), Market
Strategist (August 1995 - February 1996) --
Aetna Life Insurance and Annuity Company;
President (1991 - 1995) Chemical Technology
Corporation (a subsidiary of Chemical Bank).
Kirk P. Wickman Vice President, General Counsel Vice President, General Counsel and
and Secretary Secretary (since January 1997) -- Aetna Life
Insurance and Annuity Company; Counsel (June
1994 to December 1996) -- Aetna Life
Insurance Company.
Deborah Koltenuk Vice President and Treasurer, Vice President, Investment Planning and
Corporate Controller Financial Reporting (April 1996 to July
1996) -- Aetna Life Insurance Company; Vice
President, Investment Planning and Financial
Reporting (October 1994 to April 1996) --
Aetna Life Insurance Company, The Aetna
Casualty and Surety Company and The Standard
Fire and Insurance Company.
Frederick D. Kelsven Vice President and Chief Director of Compliance (January 1985 to
Compliance Officer September 1996) -- Nationwide Life Insurance
Company.
</TABLE>
<PAGE>
* 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 that are not deemed to be principal
positions.
For information regarding Aeltus Investment Management, Inc. ("Aeltus"), the
subadviser for each Portfolio of the Fund, reference is hereby made to
"Management of The Variable Portfolios" in the Prospectus. For information as to
the business, profession, vocation or employment of a substantial nature of each
of the officers and directors of Aeltus, reference is hereby made to the current
Form ADV (File No. 801-9046) of Aeltus filed under the Investment Advisers Act
of 1940, incorporated herein by reference.
Item 29. Principal Underwriters
(a) In addition to serving as the principal underwriter and investment
adviser for the Registrant, Aetna also acts as the principal
underwriter and 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. (all management investment companies registered under
the 1940 Act). Additionally, Aetna acts as the principal underwriter
and depositor for Variable Annuity Account B of Aetna, Variable Annuity
Account C of Aetna, Variable Annuity Account G of Aetna, and Variable
Life Account B of Aetna (separate accounts of Aetna registered as unit
investment trusts under the 1940 Act). Aetna is also the principal
underwriter for Variable Annuity Account I of Aetna Insurance Company
of America (AICA) (a separate account of AICA registered as a unit
investment trust under the 1940 Act).
(b) The following are the directors and principal officers of the
Underwriter:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with
Business Address* Positions and Offices with Depositor Registrant
- ------------------ ------------------------------------ --------------------------
<S> <C> <C>
Daniel P. Kearney Director, President and Executive Officer Director
Christopher J. Burns Director and Senior Vice President None
Laura R. Estes Director and Senior Vice President None
Timothy A. Holt Director, Senior Vice President and Chief Director
Financial Officer
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
<PAGE>
Name and Principal Positions and Offices with
Business Address* Positions and Offices with Depositor Registrant
- ------------------ ------------------------------------ --------------------------
Kirk P. Wickman Vice President, General Counsel and Secretary None
Deborah Koltenuk Vice President and Treasurer, Corporate None
Controller
Frederick D. Kelsven Vice President and Chief Compliance Officer None
</TABLE>
* The principal business address of all directors and officers listed is 151
Farmington Avenue, Hartford, Connecticut 06156.
(c) Not applicable
Item 30. Location of Accounts and Records
As required by Section 31(a) of the 1940 Act and the rules
thereunder, the Registrant and its investment adviser, ALIAC,
maintain physical possession of each account, book or other
documents, at their principal place of business located 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 1940 Act applied.
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
<PAGE>
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of
1940, Aetna Variable Portfolios, Inc. has duly caused this Post-Effective
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Hartford, State of
Connecticut, on the 7th day of March, 1997.
AETNA VARIABLE PORTFOLIOS, INC.
---------------------------------------
(Registrant)
By: Shaun P. Mathews*
---------------------------------------
Shaun P. Mathews
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons on March 7, 1997 in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Shaun P. Mathews* President and Director
- ------------------------------------ (principal executive officer) )
Shaun P. Mathews )
)
Morton Ehrlich* Director )
- ----------------------------------- )
Morton Ehrlich )
)
Maria T. Fighetti* Director ) March
- ------------------------------------ ) 7, 1997
Maria T. Fighetti )
)
David L. Grove* Director )
- ------------------------------------ )
David L. Grove )
)
Daniel P. Kearney* Director )
- ------------------------------------ )
Daniel P. Kearney )
<PAGE>
)
Sidney Koch* Director )
- ------------------------------------ )
Sidney Koch )
)
Corine T. Norgaard* Director )
- ------------------------------------ )
Corine T. Norgaard )
)
Richard G. Scheide* Director )
- ------------------------------------ )
Richard G. Scheide )
)
J. Scott Fox* Treasurer )
- ------------------------------------ (principal financial and accounting )
J. Scott Fox officer) )
</TABLE>
By: /s/ Susan E. Bryant
--------------------------------------------
*Susan E. Bryant
Attorney-in-Fact
<PAGE>
Aetna Variable Portfolios, Inc.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
99-B.1.a Articles of Incorporation *
99-B.1.b Articles of Amendment (October 10, 1996)
-----------------
99-B.2 Amended Bylaws
-----------------
99-B.4 Instruments Defining Rights of Holders *
99-B.5.a Form of Investment Advisory Agreement between Aetna and Aetna Variable
Portfolios, Inc.
-----------------
99-B.5.b Form of Subadvisory Agreement between Aetna and Aeltus Investment
Management, Inc.
-----------------
99-B.6 Underwriting Agreement between the Registrant and Aetna Life Insurance and
Annuity Company
-----------------
99-B.8 Custodian Agreement - Mellon Bank, N.A.
-----------------
99-B.9.a Form of Administrative Services Agreement between Aetna and Aetna Variable
Portfolios, Inc.
-----------------
99-B.9.b License Agreement
-----------------
99-B.10(a) Opinion of Counsel *
99-B.10(b) Consent of Counsel
-----------------
99-B.11 Consent of Independent Auditors
-----------------
99-B.13 Agreement re: Initial Contribution to Working Capital
-----------------
99-B.16 Schedule for Computation of Performance Data
-----------------
99-B.19 Powers of Attorney *
27 Financial Data Schedule
-----------------
</TABLE>
*Incorporated by reference
AETNA VARIABLE PORTFOLIOS, INC.
ARTICLES OF AMENDMENT
AETNA VARIABLE PORTFOLIOS, INC., a Maryland corporation registered as an
open-end investment company under the Investment Company Act of 1940 and having
its principal office in the State of Maryland in Baltimore City, Maryland
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland that:
The Board of Directors of the Corporation, by unanimous written
consent dated on or about August 20, 1996, and pursuant to Section 2-602 of
the Maryland Corporations and Associations Code and Article 9 of the
Charter of the Corporation, redesignated two series ("Portfolios") of the
Corporation as follows:
Aetna Variable Quantitative Equity Portfolio is redesignated
Aetna Variable Index Plus Portfolio
Aetna Variable Small Company Growth Portfolio is redesignated
Aetna Variable Small Company Portfolio,
such redesignations to apply to all issued and outstanding and
authorized but unissued shares of these Portfolios.
This amendment has been approved by a majority of the entire Board of
Directors of the Corporation and no stock entitled to be voted on the matter has
been subscribed for at the time of the approval of this amendment.
IN WITNESS WHEREOF, Aetna Variable Portfolios, Inc. has caused these
Articles of Amendment to be signed in its name on its behalf by its authorized
officers who acknowledge that these Articles of Amendment are the act of the
Corporation, that to the best of their knowledge, information and belief, all
matters and facts set forth herein relating to the authorization and approval of
these Articles of Amendment are true in all material respects and that this
statement is made under the penalties of perjury.
Date: October 10, 1996
----------------
[CORPORATE SEAL] AETNA VARIABLE PORTFOLIOS,
Attest: /s/ Susan E. Bryant By: /s/Shaun P. Mathews
-------------------- -------------------------
Susan E. Bryant Shaun P. Mathews
Secretary President
AETNA VARIABLE PORTFOLIOS, INC.
AMENDED BYLAWS
ARTICLE I
MEETING OF SHAREHOLDERS
Section 1. ANNUAL MEETINGS. An Annual Meeting of Shareholders shall be held
in those years in which it is required under the Investment Company Act of 1940
or at such times as approved by the Board of Directors. At such annual meeting,
any other proper business within the power of shareholders may be transacted.
Section 2. SPECIAL MEETINGS. Special meetings of Shareholders may be called
by the President or by the Board of Directors; and shall be called by the
President, Secretary or any Director at the request in writing of the holders of
not less than 10% of the outstanding voting shares of the capital stock of the
Corporation (hereinafter, the outstanding voting shares of the capital stock of
the Corporation are referred to as "Shares"). Any such request shall state the
purposes of the proposed meeting.
Section 3. PLACE OF MEETINGS. All meetings of the Shareholders shall be
held at the office of the Corporation in Hartford, Connecticut, or at such other
place within or without the State of Maryland as may be fixed by the party or
parties making the call as stated in the notice thereof.
Section 4. NOTICE. Not less than ten or more than ninety days before the
date of every Annual or Special Meeting of Shareholders, the Secretary or an
Assistant Secretary shall give to each Shareholder of record notice of such
meeting by mail, telegraph, cable or radio. Such notice shall be deemed to have
been given when deposited in the mail or with a telegraph or cable office or
radio station for transmission to the Shareholder at his address appearing on
the books of the Corporation. It shall not be necessary to set forth the
business proposed to be transacted in the notice of any Annual Meeting, except
that any proposal to amend the Articles of Incorporation of the Corporation
shall be set forth in such notice. Notice of a Special Meeting shall state the
purpose or purposes for which it is called.
Section 5. QUORUM. At all meetings of the Shareholders (including meetings
of Shareholders of a particular series), the presence in person or by proxy of
Shareholders entitled to cast a majority in number of votes shall be necessary
to constitute a quorum for the transaction of business. In the absence of a
quorum at any meeting, a majority of those Shareholders present in person or by
proxy may adjourn the meeting from time to time to be held at the same place
without further notice other than by announcement until a quorum, as above
defined, shall be present, whereupon any business may be transacted which might
have been transacted at the meeting originally called had the same been held at
the time so called.
<PAGE>
Section 6. VOTING. At all meetings of Shareholders, each Shareholder shall
be entitled to one vote or fraction thereof for each Share standing in his name
on the books of the Corporation on the date for the determination of
Shareholders entitled to vote at such meeting. On any matter submitted to a vote
of Shareholders, all Shares of the Corporation then issued and outstanding and
entitled to vote shall be voted in the aggregate and not by class except that
(1) when otherwise expressly required by the Maryland General Corporation Law or
the Investment Company Act of 1940, as amended, Shares shall be voted by
individual class; and (2) only Shares of the respective portfolios are entitled
to vote on matters concerning only that portfolio.
Section 7. PROXIES. Any Shareholder entitled to vote at any meeting of
Shareholders may vote either in person or by proxy, but no proxy which is dated
more than eleven months before the meeting named therein shall be accepted.
Every proxy shall be in writing subscribed by the Shareholder or his duly
authorized attorney and dated, but need not be sealed, witnessed or
acknowledged. All proxies shall be filed with and verified by the Secretary or
an Assistant Secretary of the Corporation or, if the meeting shall so decide, by
the Secretary of the Meeting.
Section 8. CONSENTS. Any action required or permitted to be taken at any
meeting of Shareholders may be taken without a meeting if a written consent,
setting forth such action, is signed by all the Shareholders entitled to vote on
the subject matter thereof, and such consent is filed with the records of the
Corporation.
ARTICLE II
BOARD OF DIRECTORS
Section 1. POWERS. The Board of Directors shall have control and management
of the affairs, business and properties of the Corporation. They shall have and
exercise in the name and on behalf of the Corporation all the rights and
privileges legally exercisable by the Corporation except as otherwise provided
by law, the Articles of Incorporation or these Bylaws.
Section 2. NUMBER, QUALIFICATIONS, MANNER OF ELECTION AND TERM OF OFFICE.
The number of directors of the Corporation shall be fixed from time to time by a
majority of the entire Board of Directors but shall be not less than three nor
more than twenty. Subject to the foregoing, the Board of Directors may from time
to time by a majority of the entire Board increase or decrease the number of
directors to such number as they deem expedient and fill the vacancies so
created. The term of office of a Director shall not be affected by any decrease
in the number of Directors made by the Board pursuant to the foregoing
authorization. Directors need not be Shareholders. Until the first Annual
Meeting of Shareholders or until successors are duly elected and qualify, the
Board of Directors shall consist of the persons named as such in the Articles of
Incorporation. The members of the Board of Directors shall be elected by the
Shareholders at the Annual Meeting of Shareholders. Each Director shall hold
office until the Annual Meeting next held after his election or until his
successor shall be elected and qualified.
2
<PAGE>
Section 3. PLACE OF MEETING. The Board of Directors may hold its meetings
at such place or places within or without the State of Maryland as the Board may
from time to time determine.
Section 4. ANNUAL MEETINGS. The Board of Directors shall meet for the
election of officers annually in March of each year or at such other time as is
approved by the Board. At such annual meeting, any other proper business within
the power of the Directors may be transacted.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such intervals and on such dates as the Board may from time to
time designate.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be held at such times and at such places as may be designated in the call of
such meeting. Special meetings shall be called by the Secretary or Assistant
Secretary at the request of the President or any Director.
Section 7. NOTICE. The Secretary or Assistant Secretary shall give notice
of each Annual, Regular or Special Meeting of the Board of Directors to each
member of the Board at least two days before the meeting by mail, telegram or
telephone to his last known address. It should not be necessary to state the
purpose or business to be transacted in the notice of any Annual or Regular
meeting. The notice of a Special Meeting shall state the purpose or purposes for
which it is called. Personal attendance at any meeting by a Director other than
to protest the validity of said meeting shall constitute a waiver of the
foregoing requirement of notice.
Section 8. CONDUCT OF MEETINGS AND BUSINESS. The Board of Directors may
adopt such rules and regulations for the conduct of their meetings and the
management of the affairs of the Corporation as they may deem proper and not
inconsistent with applicable law, the Articles of Incorporation of the
Corporation or these Bylaws.
Section 9. QUORUM. A majority of the total membership of the Board of
Directors shall constitute a quorum at any meeting of the Board of Directors.
The action of a majority of Directors present at any meeting at which a quorum
is present shall be the action of the Board of Directors unless the concurrence
of a greater proportion is required by applicable law, the Articles of
Incorporation of the Corporation or these Bylaws. In the absence of a quorum at
any meeting a majority of the Directors present may adjourn the meeting from day
to day or for such longer periods as they may designate without notice other
than by announcement at the meeting.
Section 10. RESIGNATIONS. Any Director of the Corporation may resign at any
time by mailing or delivering, or transmitting by radio, telegraph or cable,
written notice to the President or to the Secretary of the Corporation. The
resignation of any Director shall take effect at the time specified therein and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
3
<PAGE>
Section 11. REMOVAL. At any meeting of Shareholders duly called for the
purpose, any Director may by the vote of a majority of all of the Shares
entitled to vote be removed from office. At the same meeting, the vacancy in the
Board of Directors may be filled by the election of a Director to serve for the
remainder of the term and until the election and qualification of his successor.
Section 12. VACANCIES. Except as otherwise provided by the Investment
Company Act of 1940 or other applicable law, any vacancy occurring in the Board
of Directors for any cause other than by reason of an increase in the number of
Directors may be filled by a majority of the remaining members of the Board of
Directors although such majority is less than a quorum, and any vacancy
occurring by reason of an increase in the number of Directors may be filled by
action of a majority of the entire Board of Directors; provided, however, that
upon the death, resignation or removal during any consecutive period of twelve
months of more than one-half of the Directors holding office at the beginning of
such period, a Shareholders' Meeting shall be called for the purpose of electing
an entire new Board, including the vacancies filled pursuant to this Section of
the Bylaws. A Director elected by the Board to fill a vacancy shall be elected
to hold office until the next Annual Meeting of Shareholders or until his
successor is duly elected and qualified. Notwithstanding the foregoing, the
Shareholders may, at any time during the term of such director, elect to fill a
vacancy or elect some other person to fill said vacancy and thereupon the
election by the Board shall be superseded and the election by the Shareholders
shall be deemed a filling of the vacancy and not a removal and may be made at
any meeting called for such purpose.
Section 13. COMPENSATION OF DIRECTORS. The Directors may receive a stated
salary for their services as Directors, and by Resolution of the Board of
Directors a fixed fee and expenses of attendance may be allowed for attendance
at each Meeting. Nothing herein contained shall be construed to preclude any
Director from serving the Corporation in any other capacity, as an officer,
agent or otherwise, and receiving compensation therefor.
Section 14. TELEPHONE PARTICIPATION. Unless otherwise restricted by law,
the Articles of Incorporation of the Corporation or these Bylaws, any member of
the Board of Directors may participate in any meeting of the Board by conference
telephone or similar communications equipment whereby all persons participating
in the meeting can hear each other, and such participation shall constitute
presence in person at the meeting.
4
<PAGE>
Section 15. CONSENTS. Any action required or permitted to be taken at any
Annual, Regular or Special Meeting of the Board of Directors may be taken
without a meeting if a written consent, setting forth such action, is signed by
all members of the Board and such consent is filed with the minutes of
proceedings of the Board.
Section 16. POWER TO DECLARE DIVIDENDS. 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 out of 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 on any series 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.
ARTICLE III
EXECUTIVE AND OTHER COMMITTEES
Section 1. APPOINTMENT AND TERM OF OFFICE. The Board of Directors, by
resolution passed by a vote of at least a majority of the entire Board, may
appoint an Executive Committee, which shall consist of two (2) or more
Directors.
Section 2. VACANCIES. Vacancies occurring in the Executive Committee from
any cause shall be filled by the Board of Directors at any Meeting thereof by a
vote of the majority of the entire Board.
Section 3. REPORTS TO BOARD. All actions by the Executive Committee shall
be reported to the Board of Directors at its meeting next succeeding such
action.
Section 4. PROCEDURES. The Executive Committee shall fix its own rules of
procedure not inconsistent with these Bylaws or with any directions of the Board
of Directors. It shall meet at such times and places and upon such notice as
shall be provided by such rules or by resolution of the Board of Directors. The
presence of a majority shall constitute a quorum for the transaction of
business, and the vote of a majority of the members of the Committee present at
which a quorum is present shall be necessary for the taking of any action.
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Section 5. POWERS OF EXECUTIVE COMMITTEE. During the intervals between the
meetings of the Board of Directors, the Executive Committee, except as limited
by the Bylaws of the Corporation or by specific directions of the Board of
Directors, shall possess and may exercise all the powers of the Board of
Directors in the management and direction of the business and conduct of the
affairs of the Corporation in such manner as the Executive Committee shall deem
to be in the best interests of the Corporation, and shall have power to
authorize the Seal of the Corporation to be affixed to all instruments and
documents requiring same. Notwithstanding the foregoing, the Executive Committee
shall not have the power to elect Directors, increase or decrease the number of
Directors, elect or remove any officer, declare dividends, issue shares or
recommend to Shareholders any action requiring Shareholder approval.
Section 6. OTHER COMMITTEES. From time to time the Board of Directors may
appoint any other Committee or Committees for any purpose or purposes to the
extent lawful, which shall have such powers as shall be specified in the
resolution of appointment.
Section 7. COMPENSATION. The members of any duly appointed Committee shall
receive such compensation and/or fees as may be fixed from time to time by the
Board of Directors.
Section 8. TELEPHONE PARTICIPATION. Unless otherwise restricted by law, the
Articles of Incorporation or these Bylaws, any member of any Committee of the
Board may participate in any meeting of such Committee by conference telephone
or similar communications equipment whereby all persons participating in the
meeting can hear each other, and such participation shall constitute presence in
person at the meeting.
Section 9. CONSENTS. Any action required or permitted to be taken at any
meeting of the Executive Committee or any other duly appointed Committee may be
taken without a meeting if a written consent, setting forth such action, is
signed by all members of such Committee and such consent is filed with the
minutes of the proceedings of such Committee.
ARTICLE IV
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall be the
President, one or more Vice Presidents, a Treasurer and a Secretary. The Board
of Directors shall elect or appoint such other officers or agents as the
business of the Corporation may require, including one or more Assistant Vice
Presidents, one or more Assistant Secretaries and one or more Assistant
Treasurers. The same person may hold any two offices except those of President
and Vice President.
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Section 2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers shall
be elected annually by the Board of Directors at its Annual Meeting following
the Annual Meeting of Shareholders, if an Annual Meeting of Shareholders is
held. Each officer shall hold office until the Annual Meeting in the next year
and until the election and qualification of his successor. Any vacancy in any of
the offices may be filled for the unexpired portion of the term by the Board of
Directors at any Regular or Special Meeting of the Board. The Board of Directors
may elect or appoint additional officers or agents at any Regular or Special
Meeting of the Board.
Section 3. REMOVAL. Any officer elected by the Board of Directors may be
removed with or without cause at any time upon a vote of the majority of the
entire Board of Directors. Any other employee of the Corporation may be removed
or dismissed at any time by the President.
Section 4. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors. Any such resignation shall take effect
at the date of receipt of each notice or at any later time specified therein,
and unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective.
Section 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed in these Bylaws for
regular election or appointment to such office.
Section 6. PRESIDENT. The President shall be the chief executive officer of
the Corporation. The President shall, unless other provisions are made therefor
by the Board or Executive Committee, employ and define the duties of all
employees of the Corporation; have the power to discharge any such employees;
exercise general supervision over the affairs of the Corporation; and perform
such other duties as may be assigned from time to time by the Board of
Directors. In the absence of the President, an officer or Director appointed by
the President shall preside at all meetings of Shareholders.
Section 7. VICE PRESIDENT. The Vice President (or if more than one, the
senior Vice President) in the absence of the President shall perform all duties
and may exercise any of the powers of the President subject to the control of
the Board. Each Vice President shall perform such other duties as may be
assigned from time to time by the Board of Directors, the Executive Committee,
or the President.
Section 8. SECRETARY. The Secretary shall (i) keep or cause to be kept in
books provided for the purpose the Minutes of the Meetings of the Shareholders
and of the Board of Directors; (ii) see that all Notices are duly given in
accordance with the provisions of these Bylaws and as required by law; (iii) be
custodian of the records and of the Seal of the Corporation and see that the
Seal is affixed to all documents which have been duly authorized to be executed
on behalf of the Corporation under its seal; (iv) keep directly or through a
transfer agent a register of the post office address of each Shareholder and
make all proper changes in such register, retaining and filing his authority for
such entries; (v) see that the books, reports,
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statements, certificates and all other documents and records required by law are
properly kept and filed; and (vi) in general perform all duties incident to the
office of Secretary and such other duties as may, from time to time, be assigned
by the Board of Directors, the Executive Committee, or the President.
Section 9. TREASURER. The Treasurer shall have supervision of the custody
of the funds and securities of the Corporation, subject to the Articles of
Incorporation of the Corporation and applicable law. The Treasurer shall submit
to the Annual Meeting of Shareholders a statement of the financial condition of
the Corporation and whenever required by the Board of Directors shall make and
render a statement of the accounts of the Corporation and such other statements
as may be required. The Treasurer shall cause to be kept in books of the
Corporation a full and accurate account of all moneys received and paid out for
the account of the Corporation and perform such other duties as may be from time
to time be assigned by the Board of Directors, the Executive Committee, or the
President.
Section 10. ASSISTANT VICE PRESIDENT. The Assistant Vice President or Vice
Presidents of the Corporation shall have such authority and perform such duties
as may be assigned to them by the Board of Directors, the Executive Committee,
or the President of the Corporation.
Section 11. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Assistant
Secretary or Secretaries and the Assistant Treasurer or Treasurers of the
Corporation shall perform the duties of the Secretary and of the Treasurer,
respectively, in the absence of those officers and shall have such further
powers and perform such other duties as may be assigned to them, respectively,
by the Board of Directors, the Executive Committee or the President.
Section 12. SALARIES. The salaries of the officers shall be fixed from time
to time by the Board of Directors. No officer shall be prevented from receiving
such salary by reason of the fact that he is also a Director of the Corporation.
ARTICLE V
SHARES AND THEIR TRANSFER
Section 1. REGISTER OF SHARES. A register of shares shall be kept at the
principal office of the Corporation or of any transfer agent duly appointed by
the Board of Directors and shall contain the names and addresses of all the
shareholders, the number of shares held by them and a record of all transfers
thereof. Fractional shares may be issued. Share certificates will not be issued.
Section 2. TRANSFER OF SHARES. Shares shall be transferable on the books of
the Corporation by request of the holder thereof in person or by duly authorized
attorney.
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Section 3. CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE. The Board of
Directors may fix in advance a date as the record date for the purpose of
determining Shareholders entitled to notice of or to vote at any Meeting of
Shareholders or Shareholders entitled to receive payment of any dividend. Such
date shall in any case not be more than 60 days and, in case of a Meeting of
Shareholders, not less than 10 days prior to the date on which the particular
action is to be taken. In lieu of fixing a record date, the Board of Directors
may provide that the share transfer books of the Corporation shall be closed for
a stated period not to exceed in any case 20 days. If the share transfer books
are closed for the purpose of determining Shareholders entitled to notice of or
to vote at a Meeting of Shareholders, such books shall be closed for at least 10
days immediately preceding such meeting.
Section 4. TRANSFER AGENT; REGULATIONS. The Board of Directors shall have
power and authority to make all such rules and regulations as they may deem
expedient concerning the issuance and transfer of shares and may appoint a
Transfer Agent for that purpose.
ARTICLE VI
AGREEMENTS, CHECKS, DRAFTS, ENDORSEMENTS, ETC.
Section 1. AGREEMENTS, ETC. The Board of Directors or the Executive
Committee may authorize any officer or officers or agent or agents of the
Corporation to enter into any Agreement or execute and deliver any instrument in
the name and on behalf of the Corporation, and such authority may be general or
confined to specific instances. Unless so authorized by the Board of Directors
or by the Executive Committee or these Bylaws, no officer, agent or employee
shall have any power or authority to bind the Corporation by any Agreement or
engagement, to pledge its credit, or to render it liable pecuniarily for any
purpose or to any amount.
Section 2. CHECKS, DRAFTS, ETC. All checks, drafts, or orders for the
payment of money, notes and other evidences of indebtedness shall be signed by
such officer or officers, employee or employees, or agent or agents as shall be
from time to time designated by the Board of Directors or the Executive
Committee, or as may be specified in or pursuant to the agreement between the
Corporation and the bank or trust company appointed as custodian, pursuant to
the provisions of the Articles of Incorporation of the Corporation.
Section 3. ENDORSEMENTS, ASSIGNMENTS AND TRANSFER OF SECURITIES. All
endorsements, assignments, stock powers or other instruments of transfer of
securities standing in the name of the Corporation or its nominee, or directions
for the transfer of securities belonging to the Corporation, shall be made by
such officer or officers, employee or employees, or agent or agents as may be
authorized by the Board of Directors or the Executive Committee.
Section 4. EVIDENCE OF AUTHORITY. Anyone dealing with the Corporation shall
be fully justified in relying on a copy of a resolution of the Board of
Directors or of any Committee
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thereof empowered to act in the premises which is certified as true by the
Secretary or an Assistant Secretary under the Seal of the Corporation.
Section 5. DESIGNATION OF A CUSTODIAN. The Corporation shall place and at
all times maintain in the custody of a Custodian all funds, securities and
similar investments owned by the Corporation, with the exception of securities
loaned under a properly authorized securities loan agreement. The Custodian
shall be a bank having not less than $5,000,000 aggregate capital, surplus and
undivided profits and shall be appointed from time to time by the Board of
Directors, which shall fix its remuneration.
Section 6. ACTION UPON TERMINATION OF A CUSTODIAN AGREEMENT. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the Board of Directors shall promptly appoint a successor custodian,
but in the event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Board of Directors shall call as
promptly as possible a Special Meeting of the Shareholders to determine whether
the Corporation shall function without a custodian or shall be liquidated. If so
directed by vote of the holders of a majority of the outstanding Shares, the
Custodian shall deliver and pay over all property of the Corporation held by it
as specified in such vote.
Section 7. WHEN TO DETERMINE NET ASSET VALUE. The net asset value per Share
of the outstanding Shares shall be determined at such times as the Board of
Directors shall prescribe, provided that such net asset value shall be
determined at least weekly.
ARTICLE VII
MISCELLANEOUS
Section 1. SEAL. The Seal of the Corporation shall be a disk inscribed with
the words "AETNA VARIABLE PORTFOLIOS, INC."
Section 2. WAIVER OF NOTICE. Whenever under the provisions of these Bylaws
or of any law, the Shareholders or Directors or members of the Executive
Committee or other Committee are authorized to hold any meeting after notice or
after the lapse of any prescribed period of time, such meeting may be held
without notice or without such lapse of time by the written waiver of notice
signed by every person entitled to notice, or if every person entitled to notice
shall be present at such meeting.
Section 3. BOOKS AND RECORDS. The books and records of the Corporation,
including the stock ledger or ledgers, may be kept in or outside the State of
Maryland at such office or agency of the Corporation as may from time to time be
determined by the Board of Directors.
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ARTICLE VIII
AMENDMENTS
Section 1. BY THE DIRECTORS. The Board of Directors shall have the power,
at any Regular or Special Meeting, if notice thereof be included in the notice
of such Special Meeting, to alter, amend or repeal any Bylaws of the Corporation
and to make new Bylaws.
Section 2. BY THE SHAREHOLDERS. The Shareholders shall have the power, at
any Annual or Special Meeting if notice thereof be included in the notice of
such Special Meeting, to alter, amend or repeal any Bylaws of the Corporation or
to make new Bylaws.
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INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between AETNA LIFE INSURANCE AND ANNUITY COMPANY,
a Connecticut insurance corporation (the "Adviser"), and AETNA VARIABLE
PORTFOLIOS, INC., a Maryland corporation (the "Fund"), on behalf of its Aetna
Variable Capital Appreciation Portfolio as of the Date set forth below.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company
consisting of multiple investment portfolios under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, pursuant to authority granted by the Fund's Articles of Incorporation,
the Fund has established the Portfolio as a separate investment portfolio; and
WHEREAS, the Adviser is registered with the Commission as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and
is in the business of acting as an investment adviser; and
WHEREAS, the Fund, on behalf of the Portfolio, and the Adviser desire to enter
into an agreement to provide for investment advisory and management services for
the Portfolio on the terms and conditions hereinafter set forth;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement and the policies and
control of the Fund's Board of Directors (the "Board"), the Fund, on behalf of
the Portfolio, hereby appoints the Adviser to serve as the investment adviser to
the Portfolio, to provide the investment advisory services set forth below in
Section II. The Adviser agrees that, except as required to carry out its duties
under this Agreement or otherwise expressly authorized, it is acting as an
independent contractor and not as an agent of the Portfolio and has no authority
to act for or represent the Portfolio in any way.
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II. DUTIES OF THE ADVISER
In carrying out the terms of this Agreement, the Adviser shall do the following:
1. supervise all aspects of the operations of the Portfolio;
2. select the securities to be purchased, sold or exchanged by the
Portfolio or otherwise represented in the Portfolio's investment
portfolio, place trades for all such securities and regularly
report thereon to the Board;
3. formulate and implement continuing programs for the purchase and
sale of securities and regularly report thereon to the Board;
4. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy
generally, the Portfolio, securities held by or under
consideration for the Portfolio, or the issuers of those
securities;
5. provide economic research and securities analyses as the Adviser
considers necessary or advisable in connection with the Adviser's
performance of its duties hereunder;
6. obtain the services of, contract with, and provide instructions
to custodians and/or subcustodians of the Portfolio's securities,
transfer agents, dividend paying agents, pricing services and
other service providers as are necessary to carry out the terms
of this Agreement;
7. prepare financial and performance reports, calculate and report
daily net asset values, and prepare any other financial data or
reports, as the Adviser from time to time, deems necessary or as
are requested by the Board; and
8. take any other actions which appear to the Adviser and the Board
necessary to carry into effect the purposes of this Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Adviser
Adviser hereby represents and warrants to the Fund as follows:
1. Due Incorporation and Organization. The Adviser is duly organized
and is in good standing under the laws of the State of
Connecticut and is fully authorized to enter into this Agreement
and carry out its duties and obligations hereunder.
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2. Registration. The Adviser is registered as an investment adviser
with the Commission under the Advisers Act, and is registered or
licensed as an investment adviser under the laws of all
jurisdictions in which its activities require it to be so
registered or licensed. The Adviser shall maintain such
registration or license in effect at all times during the term of
this Agreement.
3. Best Efforts. The Adviser at all times shall provide its best
judgment and effort to the Portfolio in carrying out its
obligations hereunder.
B. Representations and Warranties of the Portfolio and the Fund,
The Fund, on behalf of the Portfolio, hereby represents and warrants to the
Adviser as follows:
1. Due Incorporation and Organization. The Fund has been duly
incorporated under the laws of the State of Maryland and it is
authorized to enter into this Agreement and carry out its
obligations hereunder.
2. Registration. The Fund is registered as an investment company
with the Commission under the 1940 Act and shares of the
Portfolio are registered or qualified for offer and sale to the
public under the Securities Act of 1933, as amended (the "1933
Act") and all applicable state securities laws. Such
registrations or qualifications will be kept in effect during the
term of this Agreement.
IV. DELEGATION OF RESPONSIBILITIES
A. Appointment of Subadviser
Subject to the approval of the Board and the shareholders of the Portfolio,
the Adviser may enter into a Subadvisory Agreement to engage a subadviser
(the "Subadviser") to the Adviser with respect to the Portfolio.
B. Duties of Subadviser
Under a Subadvisory Agreement, the Subadviser may be delegated some or all
of the following duties of the Adviser:
1. select the securities to be purchased, sold or exchanged by the
Portfolio or otherwise represented in the Portfolio's investment
portfolio, place trades for all such securities and regularly
report thereon to the Board;
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2. formulate and implement continuing programs for the purchase and
sale of the securities of such issuers and regularly report
thereon to the Board;
3. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy
generally, the Portfolio, securities held by or under
consideration for the Portfolio, or the issuers of those
securities;
4. provide economic research and securities analyses as the Adviser
considers necessary or advisable in connection with the Adviser's
performance of its duties hereunder;
5. give instructions to the custodian and/or sub-custodian of the
Portfolio appointed by the Board, as to deliveries of securities,
transfers of currencies and payments of cash for the Portfolio as
required to carry out the investment activities of the Portfolio,
in relation to the matters contemplated by this Agreement; and
6. provide such financial support, administrative services and other
duties as the Adviser deems necessary and appropriate.
C. Duties of the Adviser
In the event the Adviser delegates certain responsibilities hereunder to a
Subadviser, the Adviser shall, among other things:
1. monitor the investment program maintained by the Subadviser for
the Portfolio and the Subadviser's compliance program to ensure
that the Portfolio's assets are invested in compliance with the
Subadvisory Agreement and the Portfolio's investment objectives
and policies as adopted by the Board and described in the most
current effective amendment of the registration statement for the
Portfolio, as filed with the Commission under the 1933 Act and
the 1940 Act ("Registration Statement");
2. review all data and financial reports prepared by the Subadviser
to assure that they are in compliance with applicable
requirements and meet the provisions of applicable laws and
regulations;
3. establish and maintain regular communications with the Subadviser
to share information it obtains with the Subadviser concerning
the effect of developments and data on the investment program
maintained by the Subadviser; and
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4. oversee all matters relating to the offer and sale of the
Portfolio's shares, the Fund's corporate governance, reports to
the Board, contracts with all third parties on behalf of the
Portfolio for services to the Portfolio, reports to regulatory
authorities and compliance with all applicable rules and
regulations affecting the Portfolio's operations.
V. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Adviser, at its own expense, shall place all orders for the purchase
and sale of portfolio securities for the Portfolio with brokers or dealers
selected by the Adviser, which may include brokers or dealers affiliated
with the Adviser. The Adviser shall use its best efforts to seek to execute
portfolio transactions at prices that are advantageous to the Portfolio and
at commission rates that are reasonable in relation to the benefits
received.
B. Selection of Broker-Dealers
In selecting broker-dealers qualified to execute a particular transaction,
brokers or dealers may be selected who also provide brokerage and research
services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to the Portfolio and/or the other accounts over which
the Adviser or its affiliates exercise investment discretion. The Adviser
may also select brokers or dealers to effect transactions for the Portfolio
who provide payment for expenses of the Portfolio. The Adviser is
authorized to pay a broker or dealer who provides such brokerage and
research services or expenses, a commission for executing a portfolio
transaction for the Portfolio that is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction
if the Adviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer and is paid in compliance with Section
28(e) or other rules and regulations of the Commission. This determination
may be viewed in terms of either that particular transaction or the overall
responsibilities that the Adviser and its affiliates have with respect to
accounts over which they exercise investment discretion. The Board shall
periodically review the commissions paid by the Portfolio to determine if
the commissions paid over representative periods of time were reasonable in
relation to the benefits received.
VI. CONTROL BY THE BOARD
Any investment program undertaken by the Adviser pursuant to this Agreement, as
well as any other activities undertaken by the Adviser on behalf of the
Portfolio pursuant thereto, shall at all times be subject to any directives of
the Board.
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VII. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Adviser shall at all
times conform to:
1. all applicable provisions of the 1940 Act, the Advisers Act and any
rules and regulations adopted thereunder;
2. all policies and procedures of the Fund as adopted by the Board and as
described in the Registration Statement;
3. the provisions of the Fund's Articles of Incorporation, as amended;
4. the provisions of the Bylaws of the Fund, as amended; and
5. any other applicable provisions of state and federal law.
VIII. COMPENSATION
For the services to be rendered, the facilities furnished and the expenses
assumed by the Adviser, the Fund, on behalf of the Portfolio, shall pay to the
Adviser an annual fee, payable monthly, equal to .60% of the average daily net
assets of the Portfolio. Except as hereinafter set forth, compensation under
this Agreement shall be calculated and accrued daily at the rate of 1/365 of
.60% of the daily net assets of the Portfolio. If this Agreement becomes
effective subsequent to the first day of a month or terminates before the last
day of a month, compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the calculation of the fees
set forth above. Subject to the provisions of Section X hereof, payment of the
Adviser's compensation for the preceding month shall be made as promptly as
possible. For so long as a Subadvisory Agreement is in effect, the Portfolio
acknowledges on behalf of the Portfolio that the Adviser will pay to the
Subadviser, as compensation for acting as Subadviser to the Portfolio, the fees
specified in the Subadvisory Agreement.
IX. EXPENSES
The expenses in connection with the management of the Portfolio shall be
allocated between the Portfolio and the Adviser as follows:
A. Expenses of the Adviser
The Adviser shall pay:
1. the salaries, employment benefits and other related costs and
expenses of those of its personnel engaged in providing
investment advice to the
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Portfolio, including without limitation, office space, office
equipment, telephone and postage costs;
2. all fees and expenses of all directors, officers and employees,
if any, of the Fund who are employees of the Adviser or an
affiliated entity, including any salaries and employment benefits
payable to those persons;
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B. Expenses of the Portfolio
The Portfolio shall pay:
1. investment advisory fees pursuant to this Agreement;
2. brokers' commissions, issue and transfer taxes or other
transaction fees payable in connection with any transactions in
the securities in the Portfolio's investment portfolio or other
investment transactions incurred in managing the Portfolio's
assets, including portions of commissions that may be paid to
reflect brokerage research services provided to the Adviser;
3. fees and expenses of the Portfolio's independent accountants and
legal counsel and the independent directors' legal counsel;
4. fees and expenses of any administrator, transfer agent,
custodian, dividend, accounting, pricing or disbursing agent of
the Portfolio;
5. interest and taxes;
6. fees and expenses of any membership in the Investment Company
Institute or any similar organization in which the Board deems it
advisable for the Fund to maintain membership;
7. insurance premiums on property or personnel (including officers
and directors) of the Fund which benefit the Portfolio;
8. all fees and expenses of the Company's directors, who are not
"interested persons" (as defined in the 1940 Act) of the Fund or
the Adviser;
9. expenses of preparing, printing and distributing proxies, proxy
statements, prospectuses and reports to shareholders of the
Portfolio, except for those expenses paid by third parties in
connection with the distribution of Portfolio shares and all
costs and expenses of shareholders' meetings;
10. all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in shares of the
Portfolio or in cash;
11. costs and expenses of promoting the sale of shares in the
Portfolio, including preparing prospectuses and reports to
shareholders of the Portfolio, provided, nothing in this
Agreement shall prevent the charging of such costs to third
parties involved in the distribution and sale of Portfolio
shares;
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12. fees payable by the Portfolio to the Commission or to any state
securities regulator or other regulatory authority for the
registration of shares of the Portfolio in any state or territory
of the United States or of the District of Columbia;
13. all costs attributable to investor services, administering
shareholder accounts and handling shareholder relations,
(including, without limitation, telephone and personnel
expenses), which costs may also be charged to third parties by
the Adviser; and
14. any other ordinary, routine expenses incurred in the management
of the Portfolio's assets, and any nonrecurring or extraordinary
expenses, including organizational expenses, litigation affecting
the Portfolio and any indemnification by the Fund of its
officers, directors or agents.
X. EXPENSE LIMITATION
If, for any fiscal year, the total of all ordinary business expenses payable by
the Portfolio, including all investment advisory fees but excluding brokerage
commissions, distribution fees, taxes, interest and extraordinary expenses and
certain other excludable expenses, would exceed the most restrictive expense
limits imposed by any statute or regulatory authority of any jurisdiction in
which shares of the Portfolio are offered for sale (unless a waiver is
obtained), the Adviser shall reduce its advisory fee to the extent necessary to
meet such expense limit, but the Adviser will not be required to reimburse the
Portfolio for any ordinary business expenses which exceed the amount of its
advisory fee for such fiscal year. The amount of any such reduction is to be
borne by the Adviser and shall be deducted from the monthly advisory fee
otherwise payable to the Adviser during such fiscal year. For the purposes of
this paragraph, the term "fiscal year" shall exclude the portion of the current
fiscal year which shall have elapsed prior to the date hereof and shall include
the portion of the then current fiscal year which shall have elapsed at the date
of termination of this Agreement.
XI. ADDITIONAL SERVICES
Upon the request of the Board, the Adviser may perform certain accounting,
shareholder servicing or other administrative services on behalf of the
Portfolio that are not required by this Agreement. Such services will be
performed on behalf of the Portfolio and the Adviser may receive from the
Portfolio such reimbursement for costs or reasonable compensation for such
services as may be agreed upon between the Adviser and the Board on a finding by
the Board that the provision of such services by the Adviser is in the best
interests of the Portfolio and its shareholders. Payment or assumption by the
Adviser of any Portfolio expense that the Adviser is not otherwise required to
pay or assume under this Agreement shall not relieve the Adviser of any of its
obligations to the Portfolio nor obligate the Adviser to pay or assume any
similar Portfolio expense on any subsequent occasions. Such services may
include, but are not limited
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to, (a) the services of a principal financial officer of the Fund (including
applicable office space, facilities and equipment) whose normal duties consist
of maintaining the financial accounts and books and records of the Fund and the
Portfolio and the services (including applicable office space, facilities and
equipment) of any of the personnel operating under the direction of such
principal financial officer; (b) the services of staff to respond to shareholder
inquiries concerning the status of their accounts, providing assistance to
shareholders in exchanges among the investment companies managed or advised by
the Adviser, changing account designations or changing addresses, assisting in
the purchase or redemption of shares; or otherwise providing services to
shareholders of the Portfolio; and (c) such other administrative services as may
be furnished from time to time by the Adviser to the Fund or the Portfolio at
the request of the Board.
XII. NONEXCLUSIVITY
The services of the Adviser to the Portfolio are not to be deemed to be
exclusive, and the Adviser shall be free to render investment advisory or other
services to others (including other investment companies) and to engage in other
activities, so long as its services under this Agreement are not impaired
thereby. It is understood and agreed that officers and directors of the Adviser
may serve as officers or directors of the Fund, and that officers or directors
of the Fund may serve as officers or directors of the Adviser to the extent
permitted by law; and that the officers and directors of the Adviser are not
prohibited from engaging in any other business activity or from rendering
services to any other person, or from serving as partners, officers, directors
or trustees of any other firm or trust, including other investment companies.
XIII. TERM
This Agreement shall become effective at the close of business on September 12,
1996, and shall remain in force and effect through December 31, 1997, unless
earlier terminated under the provisions of Article XV.
XIV. RENEWAL
Following the expiration of its initial term, the Agreement shall continue in
force and effect from year to year, provided that such continuance is
specifically approved at least annually:
1. a. by the Board, or
b. by the vote of a majority of the Portfolio's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act), and
2. by the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a director of the Fund), by votes cast in
person at a meeting specifically called for such purpose.
- 10 -
<PAGE>
XV. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Board or by vote of a majority of the Portfolio's
outstanding voting securities (as defined in Section 2(a)(42) of the 1940 Act),
or by the Adviser, on sixty (60) days' written notice to the other party. The
notice provided for herein may be waived by the party required to be notified.
This Agreement shall automatically terminate in the event of its "assignment",
as that term is defined in Section 2(a)(4) of the 1940 Act.
XVI. LIABILITY
The Adviser shall be liable to the Portfolio and shall indemnify the Portfolio
for any losses incurred by the Portfolio, whether in the purchase, holding or
sale of any security or otherwise, to the extent that such losses resulted from
an act or omission on the part of the Adviser or its officers, directors or
employees, that is found to involve willful misfeasance, bad faith or
negligence, or reckless disregard by the Adviser of its duties under this
Agreement, in connection with the services rendered by the Adviser hereunder.
XVII. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such addresses shall be:
if to the Fund, on behalf of the Portfolio or the Adviser:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attn: Secretary
XVIII. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940 Act
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or, in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Commission issued pursuant to the 1940 Act. In addition, where the effect
of a requirement of the 1940 Act reflected in the provisions of this Agreement
is revised by rule, regulation or order of the Commission, such provisions shall
be deemed to incorporate the effect of such rule, regulation or order.
- 11 -
<PAGE>
XIX. SERVICE MARK
The service mark of the Fund and the Portfolio and the name "Aetna" have been
adopted by the Fund 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 Adviser or another subsidiary or
affiliated corporation of Aetna Life and Casualty Company should not be the
investment adviser of the Portfolio.
- 12 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 13th day of September, 1996.
AETNA LIFE INSURANCE AND ANNUITY
COMPANY
Attest: By: /s/Shaun P. Mathews
------------------------------
Name:Shaun P. Mathews
-----------------------------
Title:Vice President
----------------------------
/s/DeAnn S. Anastasio
- --------------------------
Assistant Secretary
AETNA VARIABLE PORTFOLIOS, INC.
on behalf of its
Aetna Variable Capital Appreciation Portfolio
Attest: By:/s/Shaun P. Mathews
------------------------------
Name:Shaun P. Mathews
----------------------------
Title:President
---------------------------
/s/Susan E. Bryant
- -------------------------
Secretary
- 13 -
<PAGE>
Investment Advisory Agreement
Schedule Pursuant to Rule 483(d)(2) under the Securities Act of 1933
Investment Advisory Agreements have been entered into by Aetna Variable
Portfolios, Inc. on behalf of the following portfolios in substantially the same
form and type as exhibit 24(b)(5)(a) - Investment Advisory Agreement between
Aetna Life Insurance and Annuity Company and Aetna Variable Portfolios, Inc.,
included herewith.
<TABLE>
<CAPTION>
Date Portfolio Difference - Compensation
---- --------- -------------------------
<S> <C> <C>
9/13/96 Aetna Variable Growth Portfolio .60% of average daily net assets in the
Portfolio
9/13/96 Aetna Variable Small Company .75% of average daily net assets in the
Portfolio Portfolio
9/13/96 Aetna Variable Index Plus Portfolio .35% of the average daily net assets in
the Portfolio
</TABLE>
SUBADVISORY AGREEMENT
THIS AGREEMENT is made by and among AETNA LIFE INSURANCE AND ANNUITY COMPANY, a
Connecticut corporation (the "Adviser"), AETNA VARIABLE PORTFOLIOS, INC., a
Maryland Corporation, (the "Fund"), on behalf of its AETNA VARIABLE CAPITAL
APPRECIATION PORTFOLIO (the "Portfolio") and AELTUS INVESTMENT MANAGEMENT, INC.,
a Connecticut corporation (the "Subadviser") as of the date set forth below.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company
consisting of multiple investment portfolios, under the Investment Company Act
of 1940, as amended (the "1940 Act"); and
WHEREAS, pursuant to authority granted by the Fund's Articles of Incorporation,
the Fund has established the Portfolio as a separate investment portfolio; and
WHEREAS, both the Adviser and the Subadviser are registered with the Commission
as investment advisers under the Investment Advisers Act of 1940, as amended
(the "Advisers Act") and both are in the business of acting as investment
advisers; and
WHEREAS, the Adviser has entered into an Investment Advisory Agreement with the
Fund, on behalf of the Portfolio, (the "Investment Advisory Agreement") which
appoints the Adviser as the investment adviser for the Portfolio; and
WHEREAS, Article IV of the Investment Advisory Agreement authorizes the Adviser
to delegate all or a portion of its obligations under the Investment Advisory
Agreement to a subadviser;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement, the Adviser and the Fund,
on behalf of the Portfolio, hereby appoint the Subadviser to manage the assets
of the Portfolio as set forth below in Section II, under the supervision of the
Adviser and subject to the approval and direction of the Fund's Board of
Directors (the "Board"). The Subadviser hereby accepts such appointment and
agrees that it shall, for all purposes herein, undertake such obligations as an
independent contractor and not as an agent of the Adviser. The Subadviser
agrees, that except as
<PAGE>
required to carry out its duties under this Agreement or otherwise expressly
authorized, it has no authority to act for or represent the Portfolio in any
way.
2
<PAGE>
II. DUTIES OF THE SUBADVISER AND THE ADVISER
A. Duties of the Subadviser
The Subadviser shall regularly provide investment advice with respect to
the assets held by the Portfolio and shall continuously supervise the
investment and reinvestment of cash, securities and instruments or other
property comprising the assets of the Portfolio. In carrying out these
duties, the Subadviser shall:
1. select the securities to be purchased, sold or exchanged by
the Portfolio or otherwise represented in the Portfolio's
investment portfolio, place trades for all such securities and
regularly report thereon to the Adviser and, at the request of
the Adviser, to the Board;
2. formulate and implement continuing programs for the
purchase and sale of securities and regularly report
thereon to the Adviser and, at the request of the Adviser
or the Portfolio, to the Board;
3. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy
generally, the Portfolio, securities held by or under
consideration for the Portfolio, or the issuers of those
securities;
4. provide economic research and securities analyses as
requested by the Adviser from time to time, or as the
Adviser considers necessary or advisable in connection with
the Subadviser's performance of its duties hereunder; and
5. give instructions to the custodian and/or sub-custodian of the
Portfolio appointed by the Board, concerning deliveries of
securities, transfers of currencies and payments of cash for
the Portfolio, as required to carry out the investment
activities of the Portfolio as contemplated by this Agreement;
and
6. provide such financial support, administrative and other
services, such as preparation of financial data, determination
of the Portfolio's net asset value, preparation of financial
and performance reports, as the Adviser from time to time,
deems necessary and appropriate and which the Subadviser is
willing and able to provide.
B. Duties of the Adviser
3
<PAGE>
The Adviser shall retain responsibility for oversight of all activities of
the Subadviser and for monitoring its activities on behalf of the
Portfolio. In carrying out its obligations under this Agreement and the
Investment Advisory Agreement, the Adviser shall:
1. monitor the investment program maintained by the Subadviser
for the Portfolio and the Subadviser's compliance program
to ensure that the Portfolio's assets are invested in
compliance with the Subadvisory Agreement and the
Portfolio's investment objectives and policies as adopted
by the Board and described in the most current effective
amendment of the registration statement for the Portfolio,
as filed with the Commission under the Securities Act of
1933, as amended (the "1933 Act"), and the 1940 Act
("Registration Statement");
2. review all data and financial reports prepared by the
Subadviser to assure that they are in compliance with
applicable requirements and meet the provisions of
applicable laws and regulations;
3. file all periodic reports required to be filed by the
Portfolio with the applicable regulatory authorities;
4. review and deliver to the Board all financial, performance
and other reports prepared by the Subadviser under the
provisions of this Agreement or as requested by the Adviser;
5. establish and maintain regular communications with the
Subadviser to share information it obtains concerning the
effect of developments and data on the investment program
maintained by the Subadviser;
6. maintain contact with and enter into arrangements with the
custodian, transfer agent, auditors, outside counsel, and
other third parties providing services to the Portfolio;
7. oversee all matters relating to (i) the offer and sale of
shares of the Portfolio, including promotions, marketing
materials, preparation of prospectuses, filings with the
Commission and state securities regulators, and
negotiations with broker-dealers; (ii) shareholder
services, including, confirmations, correspondence and
reporting to shareholders; (iii) all corporate matters on
behalf of the Portfolio, including monitoring the corporate
records of the Portfolio, maintaining contact with the
Board, preparing for, organizing and attending meetings of
the Board and the Portfolio's shareholders; (iv)
preparation of proxies when required; and (v) any other
matters not expressly delegated to the Subadviser by this
Agreement.
4
<PAGE>
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Subadviser
The Subadviser hereby represents and warrants to the Adviser as
follows:
1. Due Incorporation and Organization. The Subadviser is duly
organized and is in good standing under the laws of the
State of Connecticut and is fully authorized to enter into
this Agreement and carry out its duties and obligations
hereunder.
2. Registration. The Subadviser is registered as an investment
adviser with the Commission under the Advisers Act, and is
registered or licensed as an investment adviser under all of
the laws of all jurisdictions in which its activities require
it to be so registered or licensed. The Subadviser shall
maintain such registration or license in effect at all times
during the term of this Agreement.
3. Regulatory Orders. The Subadviser is not subject to any stop
orders, injunctions or other orders of any regulatory
authority affecting its ability to carry out the terms of this
Agreement. The Subadviser will notify the Adviser and the
Portfolio immediately if any such order is issued or if any
proceeding is commenced that could result in such an order.
4. Compliance. The Subadviser has in place compliance systems
and procedures designed to meet the requirements of the
Advisers Act and the 1940 Act and it shall at all times
assure that its activities in connection with managing the
Portfolio follow these procedures.
5. Authority. The Subadviser is authorized to enter into this
Agreement and carry out the terms hereunder.
6. Best Efforts. The Subadviser at all times shall provide
its best judgment and effort to the Portfolio in carrying
out its obligations hereunder.
B. Representations and Warranties of the Adviser
The Adviser hereby represents and warrants to the Subadviser as
follows:
1. Due Incorporation and Organization. The Adviser is duly
organized and is in good standing under the laws of the
State of Connecticut and is fully authorized to enter into
this Agreement and carry out its duties and obligations
hereunder.
5
<PAGE>
2. Registration. The Adviser is registered as an investment
adviser with the Commission under the Advisers Act, and is
registered or licensed as an investment adviser under all of
the laws of all jurisdictions in which its activities require
it to be so registered or licensed. The Adviser shall maintain
such registration or license in effect at all times during the
term of this Agreement.
3. Regulatory Orders. The Adviser is not subject to any stop
orders, injunctions or other orders of any regulatory
authority affecting its ability to carry out the terms of this
Agreement. The Adviser will notify the Subadviser and the
Portfolio immediately if any such order is issued or if any
proceeding is commenced that could result in such an order.
4. Authority. The Adviser is authorized to enter into this
Agreement and carry out the terms hereunder.
5. Best Efforts. The Adviser at all times shall provide its
best judgment and effort to the Portfolio in carrying out
its obligations hereunder.
C. Representations and Warranties of the Portfolio and the Fund
The Fund, on behalf of the Portfolio, hereby represents and warrants
to the Adviser as follows:
1. Due Incorporation and Organization. The Fund has been duly
incorporated as a Corporation under the laws of the State
of Maryland and it is authorized to enter into this
Agreement and carry out its obligations hereunder.
2. Registration. The Fund is registered as an investment company
with the Commission under the 1940 Act and shares of the
Portfolio are registered or qualified for offer and sale to
the public under the 1933 Act and all applicable state
securities laws. Such registrations or qualifications, will be
kept in effect during the term of this Agreement.
IV. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Subadviser shall place all orders for the purchase and sale of
portfolio securities for the Portfolio with brokers or dealers selected by
the Subadviser, which may include brokers or dealers affiliated with the
Subadviser. The Subadviser shall use its best efforts to seek to execute
portfolio transactions at prices that are advantageous to the Portfolio
6
<PAGE>
giving consideration to the services and research provided and at
commission rates that are reasonable in relation to the benefits received.
B. Selection of Broker-Dealers
In selecting broker-dealers qualified to execute a particular transaction,
brokers or dealers may be selected who also provide brokerage and research
services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to the Portfolio and/or the other accounts over
which the Subadviser or its affiliates exercise investment discretion. The
Subadviser may also select brokers or dealers to effect transactions for
the Portfolio who provide payment for expenses of the Portfolio. The
Subadviser is authorized to pay a broker or dealer who provides such
brokerage and research services or expenses, a commission for executing a
portfolio transaction for the Portfolio that is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if the Subadviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage,
research and other services provided by such broker or dealer and is paid
in compliance with Section 28(e) or other rules and regulations of the
Commission. This determination may be viewed in terms of either that
particular transaction or the overall responsibilities that the Subadviser
and its affiliates have with respect to accounts over which they exercise
investment discretion. The Board shall periodically review the commissions
paid by the Portfolio to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
received.
V. CONTROL BY THE BOARD OF TRUSTEES
Any investment program undertaken by the Subadviser pursuant to this Agreement,
as well as any other activities undertaken by the Subadviser at the direction of
the Adviser on behalf of the Portfolio, shall at all times be subject to any
directives of the Board.
VI. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Subadviser shall at
all times conform to:
1. all applicable provisions of the 1940 Act, the Advisers Act and
any rules and regulations adopted thereunder;
2. all policies and procedures of the Portfolio as adopted by the
Board and as described in the Registration Statement;
3. the provisions of the Articles of Incorporation of the Fund, as
amended from time to time;
4. the provisions of the Bylaws of the Fund, as amended from time to
time; and
7
<PAGE>
5. any other applicable provisions of state or federal law.
VII. COMPENSATION
A. Payment Schedule
The Adviser shall pay the Subadviser, as compensation for services
rendered hereunder, from its own assets, an annual fee of up to .375% of
the average daily net assets in the Portfolio, payable monthly. Except as
hereinafter set forth, compensation under this Agreement shall be
calculated and accrued daily at the rate of 1/365 of the annual
Subadvisory fee of up to .375% applied to the daily net assets of the
Portfolio. If this Agreement becomes effective subsequent to the first day
of a month or shall terminate before the last day of a month, compensation
for that part of the month this Agreement is in effect shall be prorated
in a manner consistent with the calculation of the fees set forth above.
B. Reduction
Payment of the Subadviser's compensation for the preceding month shall be
made as promptly as possible, except as provided below. The Subadviser
acknowledges that, pursuant to the Investment Advisory Agreement, the
Adviser has agreed to reduce its fee or reimburse the Portfolio if the
expenses borne by the Portfolio exceed the expense limitations applicable
to the Portfolio imposed by the securities laws or regulations of any
jurisdiction in which the Portfolio shares are qualified for sale.
Accordingly, the Subadviser agrees that, if, for any fiscal year, the
total of all ordinary business expenses of the Portfolio, including all
investment advisory fees but excluding brokerage commissions, distribution
fees, taxes, interest, extraordinary expenses and certain other excludable
expenses, would exceed the most restrictive expense limits imposed by any
statute or regulatory authority of any jurisdiction in which shares of the
Portfolio are offered for sale (unless a waiver is obtained), the
Subadviser shall reduce its advisory fee to the extent necessary to meet
such expense limit, but will not be required to reimburse the Portfolio
for any ordinary business expenses which exceed the amount of its advisory
fee for the fiscal year. The Subadviser shall contribute to the amount of
such reduction by reimbursing the Adviser in proportion to the amounts
which the Adviser and Subadviser would have been entitled to receive for
such year. For the purposes of this paragraph, the term "fiscal year"
shall exclude the portion of the current fiscal year which elapsed prior
to the effective date of this Agreement, but shall include the portion of
the then current fiscal year has elapsed at the date of termination of
this Agreement.
VIII. ALLOCATION OF EXPENSES
The Subadviser shall pay the salaries, employment benefits and other related
costs of those of its personnel engaged in providing investment advice to the
Portfolio hereunder, including, but not
8
<PAGE>
limited to, office space, office equipment, telephone and postage costs. In the
event the Subadviser incurs any expense that is the obligation of the Adviser as
set out in this Agreement, the Adviser shall reimburse the Subadviser for such
expense on presentation of a statement indicating the expenses incurred and the
amount paid by the Subadviser.
IX. NONEXCLUSIVITY
The services of the Subadviser with respect to the Portfolio are not to be
deemed to be exclusive, and the Subadviser shall be free to render investment
advisory and administrative or other services to others (including other
investment companies) and to engage in other activities. It is understood and
agreed that officers or directors of the Subadviser may serve as officers or
directors of the Adviser or officers or directors of the Fund; that officers or
directors of the Adviser or officers or directors of the Fund may serve as
officers or directors of the Subadviser to the extent permitted by law; and that
the officers and directors of the Subadviser are not prohibited from engaging in
any other business activity or from rendering services to any other person, or
from serving as partners, officers, directors or trustees of any other firm or
trust, including other investment advisory companies.
X. TERM
This Agreement shall become effective at the close of business on September 12,
1996, and shall remain in force and effect through December 31, 1997, unless
earlier terminated under the provisions of Article XI. Following the expiration
of its initial term, the Agreement shall continue in force and effect for one
year periods, provided such continuance is specifically approved at least
annually:
1. (a) by the Board or (b) by the vote of a majority of the
Portfolio's outstanding voting securities (as defined in Section
2(a)(42) of the 1940 Act), and
2. by the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a director of the Fund), by votes cast in
person at a meeting specifically called for such purpose.
XI. TERMINATION
This Agreement may be terminated:
1. at any time, without the payment of any penalty, by vote of the
Board or by vote of a majority of the outstanding voting
securities of the Portfolio; or
2. by the Adviser, the Fund, on behalf of the Portfolio, or the
Subadviser on sixty (60) days' written notice to the other party,
unless written notice is waived by the party required to be
notified; or
9
<PAGE>
3. automatically in the event there is an "assignment" of this
Agreement, as defined in Section 2 (a) (4) of the 1940 Act.
XII. LIABILITY
The Subadviser shall be liable to the Portfolio and the Adviser and shall
indemnify the Portfolio and the Adviser for any losses incurred by the
Portfolio, or the Adviser whether in the purchase, holding or sale of any
security or otherwise, to the extent that such losses resulted from an act or
omission on the part of the Subadviser or its officers, directors or employees,
that is found to involve willful misfeasance, bad faith or negligence, or
reckless disregard by the Subadviser of its duties under this Agreement, in
connection with the services rendered by the Subadviser hereunder.
10
<PAGE>
XIII. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such address shall be:
if to the Fund, on behalf of the Portfolio or the Adviser:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attn: Secretary
if to the Subadviser:
242 Trumbull Street
Hartford, Connecticut 06103-1205
Fax number: 860/275-4440
Attention: President
XIV. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940 Act
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or, in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Commission issued pursuant to the 1940 Act. In addition, where the effect
of a requirement of the 1940 Act reflected in any provision of the Agreement is
revised by rule, regulation or order of the Commission, such provision shall be
deemed to incorporate the effect of such rule, regulation or order.
XV. SERVICE MARK
The service mark of the Fund and the Portfolio and the name "Aetna" have been
adopted by the Fund 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 Subadviser or another subsidiary or
affiliated corporation of Aetna Life and Casualty Company should not be the
investment adviser of the Portfolio.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 13th day of September, 1996.
Aetna Life Insurance and Annuity Company
Attest: By: /s/Shaun P. Mathews
-------------------
Name:Shaun P. Mathews
-------------------
Title:Vice President
-------------------
/s/DeAnn S. Anastasio
- ---------------------
Assistant Secretary
Aeltus Investment Management, Inc.
Attest: By:/s/John Y. Kim
-------------------
Name:John Y. Kim
-------------------
Title:President
-------------------
/s/Susan Byrne
- --------------
Assistant Secretary
Aetna Variable Portfolios, Inc.
on behalf of its
Aetna Variable Capital Appreciation
Portfolio
Attest: By:/s/Shaun P. Mathews
-------------------
Name:Shaun P. Mathews
-------------------
Title:President
-------------------
/s/Susan E. Bryant
- ------------------
Secretary
<PAGE>
Subadvisory Agreement
Schedule Pursuant to Rule 483(d)(2) under the Securities Act of 1933
Subadvisory Agreements have been entered into by Aetna Variable Portfolios, Inc.
on behalf of the following portfolios in substantially the same form and type as
exhibit 24(b)(5)(b) - Subadvisory Agreement between Aetna Life Insurance and
Annuity Company and Aeltus Investment Management, Inc., included herewith.
<TABLE>
<CAPTION>
Date Portfolio Difference - Compensation
---- --------- -------------------------
<S> <C> <C>
9/13/96 Aetna Variable Growth Portfolio .375% of the average daily net assets in
the Portfolio
9/13/96 Aetna Small Company Portfolio .45% of the average daily net assets in
the Portfolio
9/13/96 Aetna Variable Index Plus Portfolio .25% of the average daily net assets in
the Portfolio
</TABLE>
AETNA VARIABLE PORTFOLIOS, INC.
UNDERWRITING AGREEMENT
THIS AGREEMENT, is entered into this 19th day of June, 1996, by and between
Aetna Life Insurance and Annuity Company, Inc., a Connecticut corporation
(Aetna), and Aetna Variable Portfolios, Inc., a Maryland corporation ("Fund") on
behalf of its investment portfolios (the "Portfolios").
WHEREAS, the Fund is an open-end management investment company registered with
the Securities and Exchange Commission (Commission) under the Investment Company
Act of 1940, as amended (1940 Act) authorized to issue shares of distinct
investment portfolios; and
WHEREAS the Fund has registered the shares of its common stock (Shares) in its
Portfolios for offer and sale to the public under the Securities Act of 1933, as
amended; and
WHEREAS, the Fund wishes to retain Aetna, and Aetna is willing to act, as
principal underwriter in connection with the offer and sale of the Shares; and
NOW, THEREFORE, in consideration of the promises and mutual covenants herein
contained, the parties agree as follows:
1. Appointment of Underwriter. The Fund hereby appoints Aetna and Aetna hereby
accepts appointment as underwriter in connection with the distribution of the
Shares. The Fund authorizes Aetna to solicit orders for the purchase of the
Shares as set forth in the Registration Statement currently effective with the
Commission for the Shares. It is understood that the Shares are offered only
through variable annuity contracts and variable life policies issued by Aetna
and its affiliates.
2. Compensation. Aetna shall receive no separate compensation for providing
services under this Agreement. It is understood that the compensation Aetna
receives in connection with the issuance of the variable annuity contracts or
variable life policies shall be the only consideration it receives for serving
as underwriter hereunder.
3. Aetna Expenses. Aetna shall be responsible for any costs of printing and
distributing prospectuses and statements of additional information necessary to
offer and sell the Shares, and such other sales literature, reports, forms and
advertisements in connection as it elects to prepare, provided such materials
comply with the applicable provisions of federal and state law.
4. Fund Expenses. The Fund shall be responsible for the costs of registering the
Shares with the Commission and for the costs of preparing prospectuses,
statements of additional information and such other documents as are required to
maintain the registration of the Shares with the Commission.
<PAGE>
5. Share Certificates. The Fund shall not issue certificates representing
Shares.
6. Status of underwriter and Other Persons. Aetna is an independent contractor
and shall be agent for the Fund only in respect to the sale and redemption of
the Shares. Any person, even though also an officer, director, employee or agent
of Aetna, who may be or become an officer, director, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Aetna even though paid by Aetna.
7. Nonexclusivity. The services of Aetna to the Fund under this Agreement are
not to be deemed exclusive, and Aetna shall be free to render similar services
or other services to others and to engage in other activities related or
unrelated to those provided under this agreement.
8. Effectiveness and Termination of Agreement. This Agreement shall become
effective at the close of business on the date set forth in the first paragraph
of this Agreement and shall remain in force and effect, through December 31,
1997, unless earlier terminated under the provisions of Section 9. Following the
expiration of its initial term, the Agreement shall continue in force and effect
for one year periods, provided such continuance is specifically approved at
least annually by the Fund's trustees, or by the vote of a majority of the
Fund's outstanding voting securities (as defined in Section 2(a)(42) of the 1940
Act.
9. Termination. This Agreement may be terminated at any time, by either party,
without the payment of any penalty, on sixty (60) days' written notice to the
other party.
10. Liability of Aetna. Aetna shall be liable to the Fund and shall indemnify
the Fund for any losses incurred by the Fund, to the extent that such losses
resulted from an act or omission on the part of Aetna or its officers, directors
or employees in carrying out its duties hereunder, that is found to involve
willful misfeasance, bad faith or negligence, or reckless disregard by Aetna of
its duties under this Agreement.
11. Amendments. This Agreement may be amended or changed only by an instrument
in writing signed by both parties.
12. Applicable Law. This Agreement shall be construed in accordance with the
laws of the State of Connecticut and the 1940 Act. To the extent that the
applicable laws of the State of Connecticut conflict with the applicable
provisions of the 1940 Act, however, the latter shall control.
13. Notices. Any notices under this Agreement shall be in writing, addressed and
delivered, mailed postage paid, or sent by other delivery service, or by
facsimile transmission to each party at such address as each party may designate
for the receipt of notice. Until further notice, such addresses shall be:
- 2 -
<PAGE>
if to the Fund orAetna:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
14. Questions of Interpretation. This Agreement shall be governed by the laws of
the State of Connecticut. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the 1940 Act shall be resolved by reference to such term or
provision of the 1940 Act and to interpretations thereof, if any, by the United
States Courts or, in the absence of any controlling decision of any such court,
by rules, regulations or orders of the Commission issued pursuant to the 1940
Act. In addition, where the effect of a requirement of the 1940 Act reflected in
the provisions of this Agreement is revised by rule, regulation or order of the
Commission, such provisions shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 19th day of June, 1996.
AETNA LIFE INSURANCE AND ANNUITY
COMPANY
Attest: By: /s/Shaun P. Mathews
----------------------------
Name:Shaun P. Mathews
---------------------------
Title:Vice President
--------------------------
/s/DeAnn S. Anastasio
- --------------------------
Assistant Secretary
AETNA VARIABLE PORTFOLIOS, INC.
Attest: By:/s/Shaun P. Mathews
-----------------------------
Name:Shaun P. Mathews
---------------------------
Title:President
--------------------------
/s/Susan E. Bryant
- --------------------------
Secretary
- 3 -
- --------------------------------------------------------------------------------
Custodian Agreement
between
Mellon Bank, N.A.
and
Aetna Variable Portfolios, Inc.
- --------------------------------------------------------------------------------
<PAGE>
INDEX
Page
1. Appointment...................................................2
2. Application of this Agreement.................................2
3. Delivery of Documents.........................................3
4. Definitions...................................................4
5. Delivery and Registration of the Property.....................6
6. Receipt and Disbursement of Money.............................6
7. Receipt of Securities; Subcustodian...........................7
8. Use of Book-Entry System......................................8
9. Instructions Consistent with Charter, Etc.....................9
10. Transactions Not Requiring Instructions......................10
11. Transactions Requiring Instructions..........................12
12. Segregated Accounts; Securities Lending......................13
13. Dividends and Distributions..................................16
14. Purchases of Securities......................................16
15. Sales of Securities..........................................17
16. Records......................................................17
17. Reports......................................................18
18. Cooperation with Accountants.................................19
19. Confidentiality..............................................19
20. Right to Receive Advice......................................19
21. Compensation.................................................20
22. Indemnification..............................................21
23. Responsibility of the Bank...................................21
24. Collections..................................................23
25. Duration and Termination.....................................24
26. Notices......................................................26
27. Further Actions..............................................26
28. Amendments...................................................26
29. Counterparts.................................................27
30. Miscellaneous................................................27
EXHIBIT A........................................................1
i
<PAGE>
CUSTODIAN AGREEMENT
THIS AGREEMENT is made by and between AETNA VARIABLE PORTFOLIOS, INC., a
Maryland corporation (the "Company"), and MELLON BANK, N.A., a national banking
association (the "Bank").
W I T N E S S E T H :
WHEREAS, the Company is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Company is authorized to issue one or more series of shares,
each of which represents a separate investment portfolio, and which may create
additional series in the future; and
WHEREAS, the Company currently has authorized four series, entitled Aetna
Variable Index Plus Portfolio, Aetna Variable Small Company Portfolio, Aetna
Variable Capital Appreciation Portfolio, and Aetna Variable Growth Portfolio
(each individually a "Fund" and collectively the "Funds"); and
WHEREAS, Aetna Life Insurance and Annuity Company ("Adviser") will serve as
investment adviser to the Funds pursuant to Investment Advisory Agreements
between the Fund, on behalf of each of the Funds, and the Adviser; and
WHEREAS, the Company and the Adviser desire to retain the Bank to serve as
the custodian for each of the Funds, as well as for some or all of any
additional series created by the
<PAGE>
Fund in the future, and the Bank is willing to serve as custodian for each of
the Funds set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment
The Company hereby appoints the Bank to act as custodian of the portfolio
securities, cash and other property belonging to the Funds for the period and on
the terms set forth in this Agreement. The Bank accepts such appointment and
agrees to furnish the services herein set forth in return for the compensation
as provided in Paragraph 21 of this Agreement. The Bank agrees to comply with
all relevant provisions of the 1940 Act and applicable rules and regulations
thereunder. It is understood that each of the Funds represent a separate
investment portfolio of the Company and, accordingly, that the Bank shall
identify to each such Fund Property belonging to such Fund and in such reports,
confirmations and notices to the Company called for under this Agreement shall
identify the Fund to which such report, confirmation or notice pertains.
2. Application of this Agreement
(a) It is expressly understood that the Company is entering into this
Agreement on behalf of each Fund individually and not jointly with any other
Fund. The responsibilities and benefits set forth in this Agreement shall refer
to each Fund severally and not jointly.
(b) Any breach of this Agreement regarding the Company with respect to
any Fund shall not create a right or obligation with respect to any other Fund.
2
<PAGE>
(c) Under no circumstances shall the Bank have the right to set off
claims relating to a Fund by applying Property of any other Fund. No Fund shall
have the right to set off against the assets held by any other Fund.
(d) The business and contractual relationships created by this
Agreement and the consequences of such relationships relate solely to the
particular Fund to which such relationship was created. All Property held by the
Bank on behalf of a particular Fund shall relate solely to that particular Fund.
3. Delivery of Documents
The Company has furnished the Bank with copies properly certified or
authenticated of each of the following:
(a) Resolutions of the Company's Board of Directors authorizing the
appointment of the Bank as custodian of the portfolio securities, cash and other
property belonging to the Fund and approving this Agreement;
(b) Appendix A identifying and containing the signatures of the
Company's officers and/or officers of the Fund's Adviser authorized to issue
Oral Instructions and to sign Written Instructions, as hereinafter defined, on
behalf of the Fund;
(c) The Company's Articles of Incorporation as filed with the
Department of Assessments and Taxation of the State of Maryland and all
amendments thereto (such Articles of Incorporation, as presently in effect and
as they shall from time to time be amended, are herein called the "Charter");
3
<PAGE>
(d) The Company's By-Laws and all amendments thereto (such By-Laws, as
presently in effect and as they shall from time to time be amended, are herein
called the "By-Laws");
(e) The Investment Advisory Agreement currently in effect (the
"Advisory Agreement") between each of the Funds and its Adviser; and
(f) The Company's most recent prospectus and statement of additional
information relating to shares of the Company's Common Stock ("Shares") (such
prospectus and statement of additional information as presently in effect and
all amendments and supplements thereto are herein called the "Prospectus");
The Company will furnish the Bank from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
4. Definitions
(a) "Authorized Person". As used in this Agreement, the term
"Authorized Person" means any of the officers of the Company or the Adviser
(whether or not any such person is an officer or employee of the Company): (i)
who is duly authorized by the Board of Directors of the Company or under the
terms of the Advisory Agreement, the Charter or the By-Laws, as each may from
time to time be amended, to act on behalf of the Fund; and (ii) whose name is
listed on the Certificate annexed hereto as Appendix A or any amendment thereto
as may be received by the Bank from time to time.
(b) "Book-Entry System". As used in this Agreement, the term
"Book-Entry System" means the Federal Reserve Treasury book-entry system for
United States and federal agency securities, its successor or successors and its
nominee or nominees and any book-entry
4
<PAGE>
system maintained by a clearing agency registered with the Securities and
Exchange Commission (the "SEC") under Section 17A of the Securities Exchange Act
of 1934 (the "1934 Act") and authorized to act as a depository for the Company's
portfolio securities by the Company's Board of Directors including, without
limitation, Participants Trust Company, Depository Trust Company, CEDEL and
Euroclear, and their respective successor or successors and nominee or nominees.
(c) "Cash" or "Money" or "Monies" shall mean all uninvested funds (in
the form of currency or checks) but shall not include funds represented by cash
equivalents such as repurchase agreements, certificates of deposit, Treasury
bills or notes, or similar instruments.
(d) "Oral Instructions". As used in this Agreement, the term "Oral
Instructions" means oral instructions actually received by the Bank from an
Authorized Person or from a person reasonably believed by the Bank to be an
Authorized Person. The Company agrees to deliver to the Bank, at the time and in
the manner specified in Paragraph 8(b) of this Agreement, Written Instructions
confirming Oral Instructions.
(e) "Property". The term "Property", as used in this Agreement, means:
(i) any and all securities and other property which the Fund may
from time to time deposit, or cause to be deposited, with the Bank or which the
Bank may from time to time hold for the Fund;
(ii) all income in respect of any of such securities or other
property;
(iii) all proceeds of the sale of any such securities or other
property; and
(iv) all proceeds of the sale of securities issued by the
Company, which are received by the Bank from time to time from or on behalf of
the Company.
5
<PAGE>
(f) "Written Instructions". As used in this Agreement, the term
"Written Instructions" means written instructions delivered by hand (including
Federal Express or other express courier), certified or registered mail, return
receipt requested, tested telegram, cable, telex or facsimile sending device,
received by the Bank and signed by an Authorized Person and shall also include
computer transmission with coded access as agreed upon by the Bank and the
Company.
5. Delivery and Registration of the Property
The Company will deliver or cause to be delivered to the Bank all
securities and all moneys owned by it, including cash received for the issuance
of Shares, at any time during the period of this Agreement. The Bank will not be
responsible for such securities and such moneys until actually received by it.
All securities delivered to the Bank (other than in bearer form) shall be
registered in the name of the Company or in the name of a nominee of the Company
or in the name of any nominee of the Bank (with or without indication of
fiduciary status), or in the name of any sub-custodian or any nominee of any
such sub-custodian appointed pursuant to Paragraph 7 hereof or shall be properly
endorsed and in form for transfer satisfactory to the Bank.
6. Receipt and Disbursement of Money
(a) Not less frequently than once on the afternoon of each business day,
all cash held in the custody account, other than cash required to settle
securities transactions on such business day, shall be transferred to the
trustee under a Trust Agreement of even date herewith between the Bank and the
Company and attached hereto as Exhibit A.
6
<PAGE>
The Bank shall make payments of cash to, or for the account of, the Company
from such cash only (i) for the purchase of securities for the Fund's portfolio
as provided in Paragraph 13 hereof; (ii) upon receipt of Written Instructions,
for the payment of interest, dividends, taxes, fees or expenses of the Fund;
(iii) upon receipt of Written instructions, for payments in connection with the
conversion, exchange or surrender of securities owned or subscribed to by the
Fund and held by or to be delivered to the Bank; (iv) to a sub-custodian
pursuant to Paragraph 7 hereof; (v) for the redemption of Shares; (vi) for
payment of the amount of dividends received in respect of securities sold short
against the box; or (vii) upon receipt of Written Instructions, for other proper
Fund purposes. No payment pursuant to (i) above shall be made unless the Bank
has received a copy of the broker's or dealer's confirmation or the payee's
invoice, as appropriate.
(b) The Bank is hereby authorized to endorse and collect all checks, drafts
or other orders for the payment of money received as custodian for the account
of the Fund.
7. Receipt of Securities; Subcustodian
(a) Except as provided by Paragraph 8 hereof, the Bank shall hold and
physically segregate in a separate account, identifiable at all times from those
of any other persons, firms, or corporations, all securities and non-cash
property received by it for the account of the Fund. All such securities and
non-cash property are to be held or disposed of by the Bank for the Fund
pursuant to the terms of this Agreement. In the absence of Written Instructions
accompanied by a certified resolution of the Company's Board of Directors
authorizing the transaction, the Bank shall have no power or authority to
withdraw, deliver, assign, hypothecate, pledge or otherwise dispose of any such
securities and investments except in accordance with the express terms
7
<PAGE>
provided for in this Agreement. In no case may any director, officer, employee
or agent of the Company withdraw any securities.
(b) Where securities are transferred to an account of the Fund established
pursuant to Paragraph 8 hereof, the Bank shall also by book-entry or otherwise
identify as belonging to the Fund the quantity of securities in a fungible bulk
of securities registered in the name of the Bank (or its nominee) or shown in
the Bank's account on the books of the Book-Entry System. The Bank shall furnish
the Company with reports relating to Property held for the Fund under this
Agreement in accordance with Paragraph 17 hereof.
In connection with its duties under this Paragraph 7, the Bank may, at its
own expense, enter into sub-custodian agreements with other banks or trust
companies for the receipt of certain securities and cash to be held by the Bank
for the account of the Company pursuant to this Agreement, provided that each
such bank or trust company has an aggregate capital, surplus and undivided
profits, as shown by its last published report, of not less than ten million
dollars ($10,000,000) and that such bank or trust company agrees with the Bank
to comply with all relevant provisions of the 1940 Act and applicable rules and
regulations thereunder. The Bank shall remain responsible for the performance of
all of its duties under this Agreement and shall hold the Fund harmless from the
acts and omissions, under the standards of care applicable to the Bank under
Paragraph 23 hereof, of any bank or trust company that it might choose pursuant
to this Paragraph 7 or of the Book-Entry System.
8. Use of Book-Entry System
The Company shall deliver to the Bank certified resolutions of the Board of
Directors of the Company approving, authorizing and instructing the Bank on a
continuous and on-going basis
8
<PAGE>
until instructed to the contrary by Oral or Written Instructions actually
received by the Bank (a) to deposit in the Book-Entry System all securities
belonging to the Funds and eligible for deposit therein and (b) to use the
Book-Entry System to the extent possible in connection with settlements of
purchases and sales of securities by the Fund, and deliveries and returns of
securities loaned, subject to repurchase agreements or used as collateral in
connection with borrowings. Without limiting the generality of such use, it is
agreed that the following provisions shall apply thereto:
(a) Securities and any cash of the Funds deposited in the Book-Entry System
will at all times be segregated from any assets and cash controlled by the Bank
in other than a fiduciary or custodian capacity but may be commingled with other
assets held in such capacities.
(b) All books and records maintained by the Bank which relate to the Funds'
participation in the Book-Entry System will at all times during the Bank's
regular business hours be open to the inspection of the Company's duly
authorized employees or agents, and the Company will be furnished with all
information in respect of the services rendered to it as it may require.
(c) The Bank will provide the Company with copies of any report obtained by
the Bank on the system of internal accounting control of the Book-Entry System
promptly after receipt of such a report by the Bank. The Bank will also provide
the Company with such reports on its own system of internal control as the
Company may reasonably request from time to time.
9. Instructions Consistent with Charter, Etc.
(a) Unless otherwise provided in this Agreement, the Bank shall act only
upon Oral and Written Instructions. Although the Bank may know of the provisions
of the Charter and
9
<PAGE>
By-Laws of the Company, the Bank may assume that any Oral or Written
Instructions received hereunder are not in any way inconsistent with any
provisions of such Charter or By-Laws or any vote, resolution or proceeding or
the Company's shareholders, or of its board of directors, or of any committee
thereof.
(b) the Bank shall be entitled to rely upon any Oral Instructions and any
Written Instructions actually received by the Bank pursuant to this Agreement.
The Company agrees to forward to the Bank Written Instructions confirming Oral
Instructions in such manner that the Written Instructions are received by the
Bank by the close of business of the same day that such Oral Instructions are
given to the Bank. The Company agrees that the fact that such confirming Written
Instructions are not received by the Bank shall in no way affect the validity of
the transactions or enforceability of the transactions authorized by the Company
by giving Oral Instructions. The Company agrees that the Bank shall incur no
liability to the Company in acting upon Oral Instructions given to the Bank
hereunder concerning such transactions, provided such instructions reasonably
appear to the Bank to have been received from an Authorized Person.
10. Transactions Not Requiring Instructions
In the absence of contrary Written Instructions, the Bank is authorized to
take the following actions:
(a) Collections of Income and Other Payments. The Bank shall, on
behalf of each Fund:
(i) collect and receive for the account of the Fund, all income
and other payments and distributions, including (without limitation) stock
dividends, rights, bond coupons, option premiums and similar items, included or
to be included in the Property, and promptly
10
<PAGE>
advise the Fund of such receipt and shall credit such income, as collected, to
the Fund's custodian account;
(ii) endorse and deposit for collection, in the name of the Fund,
checks, drafts, or other orders for the payment of money on the same day as
received;
(iii) receive and hold for the account of the Fund all securities
received as a distribution on the Fund's portfolio securities as a result of a
stock dividend, share split-up or reorganization, recapitalization, readjustment
or other rearrangement or distribution of rights or similar securities issued
with respect to any portfolio securities belonging to the Fund held by the Bank
hereunder;
(iv) present for payment and collect the amount payable upon all
securities which may mature or be called, redeemed, or retired, or otherwise
become payable on the date such securities become payable; and
(v) take any action which may be necessary and proper in
connection with the collection and receipt of such income and other payments and
the endorsement for collection of checks, drafts, and other negotiable
instruments as described in Paragraph 24 of this Agreement.
(b) Miscellaneous Transactions. The Bank is authorized to deliver or
cause to be delivered Property against payment or other consideration or written
receipt therefor in the following cases:
(i) for examination by a broker selling for the account of the
Fund in accordance with street delivery custom;
(ii) for the exchange of interim receipts or temporary securities
for definitive securities; and
11
<PAGE>
(iii) for transfer of securities into the name of the Fund or the
Bank or nominee of either, or for exchange of securities for a different number
of bonds, certificates, or other evidence, representing the same aggregate face
amount or number of units bearing the same interest rate, maturity date and call
provisions, if any; provided that, in any such case, the new securities are to
be delivered to the Bank.
11. Transactions Requiring Instructions
Upon receipt of Oral or Written Instructions and not otherwise, the Bank,
directly or through the use of the Book-Entry System, shall:
(a) execute and deliver to such persons as may be designated in such
Oral or Written Instructions, proxies, consents, authorizations, and any other
instruments whereby the authority of the Company as owner of any securities may
be exercised;
(b) deliver any securities held for a Fund against receipt of other
securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, tender offer, merger, consolidation or
recapitalization of any corporation, or the exercise of any conversion
privilege;
(c) deliver any securities held for a Fund to any protective
committee, reorganization committee or other person in connection with the
reorganization, refinancing, merger, consolidation, recapitalization or sale of
assets of any corporation, and receive and hold under the terms of this
Agreement such certificates of deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such delivery;
(d) make such transfers or exchanges of the assets of a Fund and take
such other steps as shall be stated in said Oral or Written Instructions to be
for the purpose of effectuating
12
<PAGE>
any duly authorized plan of liquidation, reorganization, merger, consolidation
or recapitalization of the Fund;
(e) release securities belonging to a Fund to any bank or trust
company for the purpose of pledge or hypothecation to secure any loan incurred
by such Fund; provided, however, that securities shall be released only upon
payment to the Bank of the monies to be received by the Bank in accordance with
such Oral or Written Instructions, except that in cases where additional
collateral is required to secure a borrowing already made, in which case and
subject to receipt by the Bank of "Oral or Written Instructions", further
securities may be released for that purpose; an repay such loan upon redelivery
to it of the securities pledged or hypothecated therefor and upon surrender of
the note or notes evidencing the loan;
(f) release and deliver securities owned by a Fund in connection with
any repurchase agreement entered into on behalf of the Fund, but only on receipt
of payment therefor; and pay out moneys of the Fund in connection with such
repurchase agreements, but only upon the delivery of the securities; and
(g) otherwise transfer, exchange or deliver securities in accordance
with Oral or Written Instructions.
12. Segregated Accounts; Securities Lending
(a) the Bank shall upon receipt of Written or Oral Instructions
establish and maintain a segregated account or accounts on its records for and
on behalf of each of the Funds, into which account or accounts may be
transferred cash and/or securities, including securities in the Book-Entry
System (i) for the purposes of compliance by the Fund with the procedures
required by a securities or option exchange, provided such procedures comply
with the 1940 Act
13
<PAGE>
and Investment Company Act Release No. 10666 (April 18, 1979) or any subsequent
release or releases of the SEC relating to the maintenance of segregated
accounts by registered investment companies, and (ii) for other proper corporate
purposes, but only, in the case of clause (ii), upon receipt of Written
Instructions.
(b) The Bank hereby acknowledges that the Company may require it to
enter into one or more third-party custodial agreements regarding Funds'
purchases and sales of futures contracts and options thereon, and that any such
third-party agreement with a futures commission merchant may contain any
provisions which the Company and the futures commission merchant reasonably deem
necessary and which do not subject the Bank to higher standards of care (except
as may be required by law) than does this Agreement.
(c) The Company may, from time to time, furnish the Bank with copies
of securities loan agreements (singly "Securities Loan Agreement" and
collectively "Securities Loan Agreements"), pursuant to which the Company may
lend securities of any Fund to the respective brokerage firms named therein
(singly the "Brokerage Firm" and collectively the "Brokerage Firms").
In each such case, and until the Company shall have given the Bank Written
Instructions that such Securities Loan Agreement has terminated, the Company
authorizes the Bank, as its agent in connection with the lending of securities
from time to time upon receipt by the Bank of Oral or Written Instructions: (a)
to deliver to the Brokerage Firm named in the Securities Loan Agreement specific
securities held in the specified Fund, it being understood that in each case the
Bank will give prompt notice thereof to the Company; (b) to receive from the
Brokerage Firm a certified or bank cashier's check, in immediately available
funds, or obligations of the U. S.
14
<PAGE>
Government in an amount equal to the then market value of the securities, as
specified in such Instructions.
The Company will evaluate on a daily basis its rights and obligations under
each Securities Loan Agreement, such as marking to market, and will demand that
additional collateral be delivered to the Bank by the Brokerage Firm under
proper advice to the Bank, or shall give Oral or Written Instructions to the
Bank to release excess collateral to the Brokerage Firm.
The Bank may, through its commercial, trust or other departments, be a
creditor for its own account, or represent in a fiduciary capacity other
creditors and/or customers, or any Brokerage Firm, even though any of such
interests may potentially be in conflict with those of the Company.
The Company represents that it has the power and authority to lend the
securities in accordance with a Securities Loan Agreement and that such lending
as provided in such Securities Loan Agreement and as provided herein, has been
duly authorized by all necessary action, has received any required regulatory
approval and will not violate any law, regulation, Charter, By-law or other
instrument, restriction or provision applicable to the Company.
With respect to acting as agent for the Company in connection with the
lending of securities to Brokerage Firms pursuant to Securities Loan Agreements,
the Bank shall have no duties or responsibilities except those expressly set
forth herein and the Company will indemnify the Bank against any liability which
it may incur in connection with such lending in accordance with Paragraph 22
hereof. The Bank shall have no responsibility in connection with the present or
future financial condition of any such Brokerage Firm or any failure on the part
of any such Brokerage Firm or any failure on the part of any such Brokerage Firm
to return any such securities for any reason whatsoever or to comply with any
provision of any Securities Loan
15
<PAGE>
Agreement or any failure on the part of any such Brokerage Firm to comply with
any law or regulation, all such risks being assumed by the Company.
13. Dividends and Distributions
The Company shall furnish the Bank with appropriate evidence of action by
the Company's Board of Directors declaring and authorizing the payment of any
dividends and distributions. Upon receipt by the Bank of Written Instructions
with respect to dividends and distributions declared by the Company's Board of
Directors and payable to shareholders of the Fund who have elected in the proper
manner to receive their distributions or dividends in cash, and in conformance
with procedures mutually agreed upon by the Bank, the Company, and the Company's
transfer agent, the Bank shall pay to the Fund's transfer agent, as agent for
the Fund's shareholders, an amount equal to the amount indicated in said Written
Instructions as payable by the Fund to such shareholders for distribution in
cash by the transfer agent to such shareholders.
14. Purchases of Securities
Promptly after each decision to purchase securities by the Adviser, the
Company, through the Adviser, shall deliver to the Bank Written or Oral
Instructions specifying with respect to each such purchase: (a) the name of the
issuer and the title of the securities, (b) the number of shares or the
principal amount purchased and accrued interest, if any, (c) the date of
purchase and settlement, (d) the purchase price per unit, (e) the total amount
payable upon such purchase and (f) the name of the person from whom or the
broker through whom the purchase was made. Oral Instructions shall be confirmed
by Written Instructions. The Bank shall upon receipt of securities purchased by
or for the Fund pay out of the moneys held for the account of the Fund
16
<PAGE>
the total amount payable to the person from whom or the broker through whom the
purchase was made, provided that the same conforms to the total amount payable
as set forth in such Oral Instructions in accordance with current industry
practices.
15. Sales of Securities
Promptly after each decision to sell securities by the Adviser or exercise
of an option written by the Company, the Company, through the Adviser, shall
deliver to the Bank Oral or Written Instructions, specifying with respect to
each such sale: (a) the name of the issuer and the title of the security, (b)
the number of shares or principal amount sold, and accrued interest, if any, (c)
the date of sale and settlement, (d) the sale price per unit, (e) the total
amount payable to the Fund upon such sale, and (f) the name of the broker
through whom or the person to whom the sale was made. The Bank shall deliver the
securities upon receipt of the total amount payable to the Fund upon such sale,
provided that the same conforms to the total amount payable as set forth in such
Oral Instructions in accordance with current industry practice. Subject to the
foregoing, the Bank may accept payment in such form as shall be satisfactory to
it, and may deliver securities and arrange for payment in accordance with the
customs prevailing among dealers in securities.
16. Records
The books and records pertaining to the Fund which are in the possession of
the Bank shall be the property of the Funds. Such books and records shall be
prepared and maintained as required by the 1940 Act and other applicable
securities laws and regulations. The Company, or the Company's authorized
representatives, shall have access to such books and records at all
17
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times during the Bank's normal business hours. Upon the reasonable request of
the Company, copies of any such books and records shall be provided by the Bank
to the Company or authorized representative at the Company's expense.
17. Reports
(a) The Bank shall furnish the Company the following reports:
(1) such periodic and special reports as the Company may
reasonably request;
(2) a daily report detailing all transactions (cash and
securities) that have been posted to each Fund's account; such report, which
shall be in such form as may be agreed upon by the Bank and the Company from
time to time, shall be received not later than the morning of the business day
next following the day to which the report relates;
(3) statements, at such intervals as the Company may reasonably
request but not less frequently than monthly, summarizing all transactions and
entries for the account of the Funds, listing the portfolio securities belonging
to the Funds with the adjusted average cost of each issue and the market value
at the end of such month, and stating the cash account of the Fund including
disbursements;
(4) the reports to be furnished to the Company pursuant to Rule
17f-4 under the 1940 Act; and
(5) such other information as may be agreed upon from time to
time between the Company and the Bank.
(b) The Bank shall transmit promptly to the Company any proxy
statement, proxy materials, notice of a call or conversion or similar
communications received by it as Custodian of the Property.
18
<PAGE>
18. Cooperation with Accountants
The Bank shall cooperate with the Company's independent public accountants
and shall take all reasonable action in the performance of its obligations under
this Agreement to assure that the necessary information is made available to
such accountants for the expression of their opinion, as such may be required
from time to time by the Company.
19. Confidentiality
The Bank agrees on behalf of itself and its employees to treat
confidentially all records and other information relative to the Fund and its
prior, present, or potential shareholders, except, after prior notification to
and approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where the Bank may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
20. Right to Receive Advice
(a) Advice of Fund. If the Bank shall be in doubt as to any action to
be taken or omitted by it, it may request, and shall receive, from the Company
directions or advice, including Oral or Written Instructions where appropriate.
(b) Advice of Counsel. If the Bank shall be in doubt as to any
question of law involved in any action to be taken or omitted by the Bank, it
may request advice at its own cost from counsel of its own choosing (who may be
counsel for the Adviser, the Company or the Bank, at the option of the Bank).
19
<PAGE>
(c) Conflicting Advice. In case of conflict between directions, advice
or Oral or Written Instructions received by the Bank pursuant to subparagraph
(a) of this Paragraph and advice received by the Bank pursuant to subparagraph
(b) of this Paragraph, the Bank shall be entitled to rely on and follow the
advice received pursuant to the latter provision alone.
(d) Protection of the Bank. The Bank shall be protected in any action
or inaction which it takes in reliance on any directions, advice or Oral or
Written Instructions received pursuant to subparagraphs (a) or (b) of this
Paragraph which the Bank, after receipt of any such directions, advice or Oral
or Written Instructions, in good faith believes to be consistent with such
directions, advice or Oral or Written Instructions, as the case may be. However,
nothing in this Paragraph shall be construed as imposing upon the Bank any
obligation (i) to seek such directions, advice or Oral or Written Instructions,
or (ii) to act in accordance with such directions, advice or Oral or Written
Instructions when received, unless, under the terms of another provision of this
Agreement, the same is a condition to the Bank's properly taking or omitting to
take such action. Nothing in this subsection shall excuse the Bank when an
action or omission on the part of the Bank constitutes willful misfeasance, bad
faith, negligence or reckless disregard by the Bank of any duties or obligations
under this Agreement.
21. Compensation
As compensation for the services rendered by the Bank during the term of
this Agreement, the Company will pay to the Bank fees in accordance with the fee
schedule agreed upon from time to time in writing by the Bank and the Company.
20
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22. Indemnification
The Company, as sole owner of the Property, agrees to indemnify and hold
harmless the Bank and its nominees from all taxes, charges, expenses,
assessments, claims and liabilities and expenses, including attorneys' fees and
disbursements, arising directly or indirectly from any action or thing which the
Bank takes or does or omits to take or do upon receipt of Oral or Written
Instructions or under this Agreement, provided, that neither the Bank nor any of
its nominees shall be indemnified against any liability to the Company or to its
shareholders (or any expenses incident to such liability) arising out of the
Bank's or such nominee's own willful misfeasance, bad faith, negligence or
reckless disregard of its duties or responsibilities under this Agreement.
23. Responsibility of the Bank
(a) In the performance of its duties hereunder, the Bank shall be
obligated to exercise care and diligence and to act in good faith and to use its
best efforts to assure the accuracy and completeness of all services performed
under this Agreement. Except as provided in (b) below, the Bank shall be
responsible for all direct losses occasioned by the Bank's negligent failure to
perform its duties under this Agreement, including but not limited to losses
related to inaccuracies in the daily reports (upon which the Company and its
agents rely in calculating the Fund's net asset value and in determining whether
the Company and the Funds are in compliance with the 1940 Act and the
requirements of Subchapter M of the Internal Revenue Code of 1986 (as amended)
to be provided under Paragraph 17 hereof or otherwise. However, the Bank shall
not be liable for any incidental, consequential or punitive damages.
21
<PAGE>
(b) The Bank shall assume entire responsibility for loss occasioned by
robbery, burglary, fire, theft or mysterious disappearance irrespective of
whether such losses occur while such Property is in possession of the Bank or
the possession of one of the Bank's agents, nominees, depositories,
correspondents or sub-custodians appointed pursuant to Paragraph 7 hereof or any
Book-Entry System. In the event of any such loss the Bank's liability shall be
limited to the replacement value thereof as of the date of the discovery of such
loss and the Bank, at the Company's option, shall make prompt replacement of
Property with like kind and quality or shall make prompt restitution to the Fund
for such loss. In addition, in the event of any loss of the Property due to any
other cause, unless the Bank can prove that it and its agents, nominees,
depositories and correspondents were not negligent and did not act with willful
misconduct, the Bank will be liable for such loss. Notwithstanding the
foregoing, the Bank shall not be liable for losses occurring by reason of acts
of civil or military authority, national emergencies, floods, acts of God,
insurrections, wars, riots or similar catastrophes.
(c) The Bank shall not have any duty or obligation to inquire (i) into
the validity or invalidity or authority or lack thereof of any Oral or Written
Instruction, notice or other instrument which conforms to the applicable
requirements of this Agreement, if any, and which the Bank reasonably believes
to be genuine; (ii) the validity or invalidity of the issuance of any securities
included or to be included in the Property, the legality or illegality of the
purchase of such securities, or the propriety or impropriety of the amount paid
therefor; (iii) the legality or illegality of the sale (or exchange) of any
Property or the propriety or impropriety of the amount for which such Property
is sold (or exchanged); or (iv) whether any Property at any time delivered to or
held by the Bank may properly be held by or for the Fund.
22
<PAGE>
24. Collections
All collections of monies or other property in respect, or which are to
become part, of the Property (but not the safekeeping thereof upon receipt by
the Bank) shall be at the sole risk of the Company, provided that the Bank
agrees to the following procedures:
(i) upon maturity of any security held by a Fund, proceeds will be
credited and available for investment by the Fund on the maturity date;
(ii) with respect to sales of securities held by a Fund and provided
the Bank receives timely and accurate notification of any such sale, sale
proceeds will be credited and available for investment by the Fund on the
settlement date for transactions settled in Federal funds, and on settlement
date plus one for transactions settled in Clearinghouse funds;
(iii) with respect to income and principal from securities held by the
Fund, where the precise amount to be received is known prior to payable date,
such moneys will be credited to the Fund on the payable date and will be made
available to the Fund for investment on such date in cases where such moneys are
to be received in Federal funds or, in cases where such moneys are to be
received in Clearinghouse funds, on the day following the payable date;
(iv) with respect to any income and principal payment on securities
held by a Fund a amount of which is unknown either by the Bank or the Adviser,
such payments will be credited to the Fund upon receipt by the Bank, it being
understood that the Bank will make every effort to collect such payments as
quickly as possible.
With respect to items referred to in (i), (ii) and (iii) above, in any case
where the Bank does not receive any payment due to the Fund within a reasonable
time after the Bank has made proper demands for the same, it shall so notify the
Company in writing, including copies of all
23
<PAGE>
demand letters, any written responses thereto, and memoranda of all oral
responses thereto and to telephonic demands, and shall thereafter have the right
to reverse the credit previously posted to the Fund with respect to such item.
The Bank shall not be obliged to take legal action for collection of any unpaid
item unless and until reasonably indemnified to its satisfaction.
25. Duration and Termination
This Agreement shall continue until termination by the Company on 60 days
written notice or by the Bank on 120 days' written notice. In the event of such
notice of termination, the Company's Board of Directors shall, by resolution
duly adopted, promptly appoint a Successor Custodian to serve upon the terms set
forth in this Agreement. Upon termination hereof the Company shall pay to the
Bank such compensation as may be due as of the date of such termination and
shall likewise reimburse the Bank for its reasonable costs, expenses and
disbursements incurred prior to such termination. The Bank shall have no lien,
right of set-off, or claim of any kind whatsoever against any Property of the
Funds (including records relating to the Fund maintained by the Bank) in the
possession of the Bank.
If a Successor Custodian is appointed by the Directors, the Bank shall,
upon termination, deliver to such Successor Custodian the records of the Bank
with respect to the Funds, and duly endorsed and in form for transfer, all
securities then held hereunder and all funds or other properties of the Fund
deposited with or held by the Bank under this Agreement.
In the event that no such Successor Custodian is appointed within 90 days
after the date of such notice of termination by the Bank, the Company will
promptly submit to the shareholders of each of the Funds the question whether
they wish to terminate the Fund or to function without a bank custodian, and the
Bank shall deliver the funds and property of the Funds to the Company
24
<PAGE>
only pursuant to a certified copy of a resolution of the Company's Board of
Directors, signed by a majority of the Board of Directors of the Fund in the
exercise of such power conferred upon the Fund by its shareholders, such
delivery to be made in accordance with such resolution.
In the event that the Bank is not notified of the appointment of a
Successor Custodian on or before the date of the termination of this Agreement,
the Bank shall have the right to deliver to a bank or trust company of its own
selection (a) with significant experience in serving as a custodian for
registered investment companies; and (b) having an aggregate capital, surplus,
and undivided profits, as shown by its last published report, of not less than
$10,000,000, all securities, records, and other properties then held by the Bank
to be held by such bank or trust company provided that such bank or trust
company agrees to serve as custodian for such securities, records and other
properties substantially in accordance with the term hereof and in accordance
with its customary fee schedule for such services.
In the event that securities, funds, and other properties remain in the
possession of the Bank after the date of termination hereof owing to failure of
the Board of Directors to appoint a Successor Custodian, the Bank shall be
entitled to fair compensation for its services during such period and the
provisions of this Agreement relating to the duties and obligations of the Bank
shall remain in full force and effect. If any Property remains in the custody of
the Bank pursuant to the preceding sentence for more than six months, the Bank
shall be entitled to receive a premium of one and one-half percent over the fees
to which it would otherwise be entitled for its services for each succeeding
month during which the Bank remains in possession of such property.
25
<PAGE>
26. Notices
All notices and other communications (collectively referred to as "Notice"
or "Notices" in this Paragraph) under this Agreement (other than Written or Oral
Instructions as defined in this Agreement and as referred to in Paragraph 9 (b))
must be in writing and will be deemed to have been duly given or delivered when
delivered by hand (including by Federal Express or similar express courier) or
three days after being mailed by prepaid registered or certified mail, return
receipt requested: (a) if to the Bank at the Bank's address, 1735 Market Street,
Philadelphia, Pennsylvania 19101-7899, marked for the attention of Donna Owens,
Trust Officer (or her successor); (b) if to the Company, at the address of the
Fund, 151 Farmington Avenue, Hartford, CT 06156-8962, marked for the attention
of the Fund's Treasurer; or (c) to such other address as shall have been last
designated by Notice in accordance with this on Paragraph 26. All postage,
cable, telegram, telex and facsimile sending device charges arising from the
sending of a Notice hereunder shall be paid by the sender.
27. Further Actions
Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof.
28. Amendments
This Agreement or any part hereof may be changed or waived only by an
instrument in writing signed by the party against which enforcement of such
change or waiver is sought.
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29. Counterparts
This Agreement may be executed in two or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.
30. Miscellaneous
This Agreement embodies the entire agreement and understanding between the
parties hereto, and supersedes all prior agreements and understandings relating
to the subject matter hereof, provided that the parties hereto may embody in one
or more separate documents their agreement, if any, with respect to delegated
and/or Oral Instructions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement shall be deemed to be a contract made in Pennsylvania and governed by
Pennsylvania law. If any provision of this Agreement shall be held or made
invalid by a court decision, statue, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be binding and
shall inure to the benefit of the parties hereto and their respective
successors.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on this 26th day of August, 1996.
[SEAL] MELLON BANK, N. A.
Attest: /s/ Linda Jones By /s/ Donna Owens
-------------------- -------------------
[SEAL] AETNA VARIABLE PORTFOLIOS, INC.
Attest: By /s/ Stephanie A. Taylor
-------------------- -----------------------
28
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EXHIBIT A
TRUST AGREEMENT
THIS TRUST AGREEMENT is made between AETNA VARIABLE PORTFOLIOS, INC., a
Maryland corporation (the "Fund") as Settlor, and MELLON BANK, N. A., a national
banking association (the "Bank") as Trustee.
I. Background: The background of this Agreement is as follows:
A. The Fund is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940, as
amended, and [currently issues four classes of shares,] each of
which represents a separate investment portfolio;
B. The Fund has retained the Bank to serve as the Fund's custodian
under a Custodian Agreement of even date herewith ("Custodian
Agreement") for its Portfolios as follows: Aetna Variable Index
Plus Portfolio, Aetna Variable Small Company Portfolio, Aetna
Variable Growth Portfolio, Aetna Variable Capital Appreciation
Portfolio and for such additional portfolios as may from time to
time be offered by the Fund on the terms set forth herein (each,
a "Portfolio"), and the Bank is willing to serve as such; and
C. The Fund intends to transfer to the Bank to hold as trustee under
this Agreement all the income and principal cash balances which
are transferred to it in accordance with Paragraph 6(a) of the
Custodian Agreement (the Bank in such capacity is hereinafter
referred to as the "Trustee"), and hereby directs the Trustee to
hold such cash balances in accordance with the following terms.
II. Dispositive Terms: The Trustee shall invest and manage the income and
principal cash balances of each Portfolio in accordance with the
provisions of Article III hereof. Distributions to or from the trust
shall be as directed from time to time by the Fund.
III. Management Provisions: The Trustee shall invest as it deems
appropriate in any one or more money market demand accounts of the
Bank or of any other bank, provided the accounts are fully insured by
the FDIC and any excess above the insurance limit is collateralized by
securities in accordance with Regulation 9.10(b) of the Comptroller of
the Currency, 12 CFR 9.10 (b).
IV. Accounting: The Trustee will send the Fund statements at least monthly
showing the transactions in the trust. The Fund must report any errors
to the Trustee, including the non-receipt of a statement, within 90
days after the Fund normally receives a statement. Otherwise, the
Fund, at the Trustee's discretion, may be deemed to have accepted the
transactions as stated.
<PAGE>
V. Provisions Regarding the Trustee:
A. The "Authorized Person" to act for the Fund and the methods of
properly acting for the Fund under this Agreement shall be the
same as specified in the Custodian Agreement, as that may be
amended from time to time;
B. The fact that the Bank is Trustee and in such capacity deposits
trust assets in banking accounts of the Bank shall no be deemed a
conflict of interest. The Bank may receive its usual charges or
profits for that service; and
C. The Trustee may resign upon 120 days' notice to the Fund; Settlor
may terminate this Agreement at any time. Immediately upon
termination the Trustee shall pay all trust assets held hereunder
to the Successor Custodian or the Fund in accordance with
Paragraph 25 of the Custodian Agreement.
VI. Situs and Governing Law: The situs of this Trust shall be in
Pennsylvania, and all questions as to the construction, validity,
effect or administration of this trust shall be governed by
Pennsylvania law.
VII. Rights Reserved: The Fund reserves the right to revoke this trust by
writing delivered to the Trustee and to amend this trust with the
Trustee's approval.
Signed August 21, 1996
ATTEST: AETNA VARIABLE PORTFOLIOS, INC.
By: /s/Stephanie A. Taylor
- ------------------------------------ ----------------------------------
The foregoing trust was delivered, and is hereby accepted in Pennsylvania on
August 26, 1996.
ATTEST: MELLON BANK, N.A.
/s/ Linda Jones By: /s/ Donna Owens
- ------------------------------------ ----------------------------------
2
ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT is made by and between AETNA LIFE INSURANCE AND ANNUITY COMPANY,
a Connecticut insurance corporation (the "Adviser"), and AETNA VARIABLE
PORTFOLIOS, INC., a Maryland corporation (the "Fund"), on behalf of its Aetna
Variable Capital Appreciation Portfolio as of the Date set forth below.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund has established the Portfolio; and
WHEREAS, the Administrator is registered with the Commission as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act") and has entered into an agreement with the Fund for the benefit of the
Portfolio to serve as investment adviser to the Portfolio; and
WHEREAS, the Fund, on behalf of the Portfolio, desires that the Administrator
provide certain administrative services for the Portfolio in connection with the
operation and management of the Portfolio;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT OF THE ADMINISTRATOR
Subject to the terms and conditions of this Agreement and the policies and
control of the Fund's Board of Directors (the "Board"), the Fund, on behalf of
the Portfolio, hereby appoints the Administrator to provide the administrative
services and assume the obligations described below, for the compensation set
forth in Section VI. The Administrator agrees that, except as required to carry
out its duties under this Agreement or otherwise expressly authorized, it is
acting as an independent contractor and not as an agent of the Portfolio and has
no authority to act for or represent the Portfolio in any way.
<PAGE>
II. DUTIES OF THE ADMINISTRATOR
A. Services
The Administrator agrees to use its best judgment, efforts and facilities
in providing services to the Portfolio and in connection therewith, it
agrees that those administrative services will consist of:
1. providing office space, equipment and facilities (which may be the
Administrator's or its affiliates') for maintaining the Fund's
business organization and for performing administrative services
hereunder;
2. supervising and managing all aspects of the Portfolio's operations
(other than investment advisory activities) including administering
relations with, and monitoring the performance of, custodians,
depositories, transfer and pricing agents, accountants, attorneys,
underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary and desirable by the Board;
3. calculating and arranging for the publication of the net asset value
of the Portfolio;
4. providing noninvestment related statistical and research data and such
other reports, evaluations and information as the Portfolio or the
Board may request from time to time;
5. providing internal clerical, accounting and legal services, and
stationery and office supplies;
6. preparing, to the extent requested by the Fund, the Portfolio's
prospectus, statement of additional information, and annual and
semi-annual reports to shareholders;
7. arranging for the printing and mailing (at the Portfolio 's expense)
of proxy statements and other reports or other materials provided to
the Portfolio's shareholders;
8. preparing for execution and filing all the Portfolio 's federal and
state tax returns and required tax filings other than those required
to be made by the Portfolio's custodian and transfer agent;
9. preparing periodic reports to and filings with the Securities and
Exchange Commission and state Blue Sky authorities with the advice of
the Portfolio's counsel;
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<PAGE>
10. maintaining the Fund's existence, and its corporate records and during
such times as the shares of the Portfolio are publicly offered,
maintaining the registration and qualification of the Portfolio's
shares under federal and state law;
11. keeping and maintaining the financial accounts and records of the
Portfolio;
12. developing and implementing, if appropriate, management and
shareholder services designed to enhance the value or convenience of
the Portfolio as an investment vehicle; and
13. providing the Board on a regular basis with reports and analyses of
the Portfolio's operations and the operations of comparable investment
companies.
B. Expenses
During the term of this Agreement, the Administrator shall be responsible
for all of its costs and expenses incurred in carrying out the services
described in Paragraph A of this Section. In addition, it agrees that it
shall be responsible for, and pay or reimburse the Portfolio for, all of
the following expenses that would otherwise be payable by the Portfolio:
1. fees and expenses of the Portfolio's independent accountants and legal
counsel;
2. fees and expenses of any transfer agent, custodian, dividend,
accounting, pricing or disbursing agent of the Portfolio;
3. insurance premiums on property or personnel (including officers and
directors) of the Fund which benefit the Fund or its directors;
4. all fees and expenses of the Fund's directors, who are not "interested
persons" (as defined in the 1940 Act) of the Fund or the Adviser;
5. expenses of preparing, printing and distributing prospectuses and
reports to shareholders of the Portfolio, except for those expenses
paid by third parties in connection with the distribution of Portfolio
shares;
6. all expenses incident to the payment of any dividend, distribution,
withdrawal or redemption, whether in shares of the Portfolio or in
cash;
-3-
<PAGE>
7. costs and expenses of promoting the sale of shares in the Portfolio,
including preparing prospectuses and reports to shareholders of the
Portfolio, provided, nothing in this Agreement shall prevent the
charging of such costs to third parties involved in the distribution
and sale of Portfolio shares;
8. fees payable by the Portfolio to the Commission or to any state
securities regulator or other regulatory authority for the
registration of shares of the Portfolio in any state or territory of
the United States or in the District of Columbia;
9. all costs attributable to investor services, administering shareholder
accounts and handling shareholder relations, (including, without
limitation, telephone and personnel expenses), which costs may also be
charged to third parties by the Adviser;
10. all dues and fees payable to the ICI or successor organization; and
11. any other ordinary, recurring expenses incurred in the management of
the Portfolio's assets or administering its affairs.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Administrator
The Administrator hereby represents and warrants to the Fund as follows:
1. Due Incorporation and Organization. The Administrator is duly
organized and is in good standing under the laws of the State of
Connecticut and is fully authorized to enter into this Agreement and
carry out its duties and obligations hereunder.
2. Best Efforts. The Administrator at all times shall provide its best
judgment and effort to the Portfolio in carrying out its obligations
hereunder.
B. Representations and Warranties of the Portfolio and the Fund
The Fund, on behalf of the Portfolio, hereby represents and warrants to
the Administrator as follows:
-4-
<PAGE>
1. Due Organization. The Fund has been duly incorporated under the laws
of the State of Maryland and it is authorized to enter into this
Agreement and carry out its obligations hereunder.
2. Registration. The Company is registered as an investment company with
the Commission under the 1940 Act and shares of the Portfolio are
registered or qualified for offer and sale to the public under the
Securities Act of 1933, as amended (the "1933 Act") and all applicable
state securities laws. Such registrations or qualifications will be
kept in effect during the term of this Agreement.
IV. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Administrator shall
comply with the following:
A. all applicable provisions of the 1940 Act;
B. all terms and provisions described in the most current effective
amendment of the registration statement for the Portfolio, as filed
with the Commission under the 1933 Act and the 1940 Act ("Registration
Statement") and all policies adopted by the Board;
C. the provisions of the Fund's Articles of Incorporation, as amended;
D. the Bylaws of the Fund, as amended; and
E. any other applicable provisions of state or federal law, or any rules
or regulations issued by such regulatory authorities.
V. DELEGATION OF RESPONSIBILITIES
All services to be provided by the Administrator under this Agreement may be
furnished by any directors, officers or employees of the Administrator, by any
affiliates of the Administrator under the Administrator's supervision, or by any
party to which such services may lawfully be delegated.
VI. COMPENSATION
For the services to be rendered, the facilities furnished, and the expenses
paid, by the Administrator, the Portfolio shall pay to the Administrator an
annual fee, at a rate of 0.15% of the average daily net assets of the Portfolio
payable monthly in arrears. Except
-5-
<PAGE>
as hereinafter set forth, compensation under this Agreement shall be calculated
and accrued daily at the rate of 1/365 of 0.15% of the daily net assets of the
Portfolio. If this Agreement becomes effective subsequent to the first day of a
month or terminates before the last day of a month, compensation for that part
of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fees as set forth above.
-6-
<PAGE>
VII. NONEXCLUSIVITY
The services of the Administrator to the Portfolio are not to be deemed to be
exclusive, and the Administrator shall be free to render administrative or other
services to others (including other investment companies) and to engage in other
activities, so long as its services under this Agreement are not impaired
thereby. It is understood and agreed that officers and directors of the
Administrator may serve as officers or directors of the Fund, and that officers
or directors of the Fund may serve as officers or directors of the Administrator
to the extent permitted by law; and that the officers and directors of the
Administrator are not prohibited from engaging in any other business activity or
from rendering services to any other person, or from serving as partners,
officers, directors or trustees of any other firm or corporation, including
other investment companies.
VIII. TERM
This Agreement shall become effective at the close of business on the date
hereof and shall continue through December 31, 1997. Thereafter it shall
continue for successive annual periods, provided such continuance is
specifically approved at least annually by the Fund's directors who are not
parties to this Agreement or "interested persons" as defined in the 1940 Act
("disinterested directors"), or by the vote of the holders of a "majority" as
defined in Section 2(a)(42) of the 1940 Act ("majority") of the outstanding
voting securities of the Portfolio and by a majority of the disinterested
directors.
IX. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Fund's directors or by vote of a majority of the
Portfolio's outstanding voting securities or by the Administrator, on sixty (60)
days' written notice to the other party.
X. LIABILITY OF ADMINISTRATOR
The Administrator shall be liable to the Portfolio and shall indemnify the
Portfolio for any losses incurred by the Portfolio, whether in the purchase,
holding or sale of any security or otherwise, to the extent that such losses
resulted from an act or omission on the part of the Administrator or its
officers, directors or employees, that is found to involve willful misfeasance,
bad faith or negligence, or reckless disregard by the Administrator of its
duties under this Agreement, in connection with the services rendered by the
Administrator hereunder.
-7-
<PAGE>
XI. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such address shall be:
if to the Fund, the Portfolio or the Administrator:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attn.: Secretary
XII. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940 Act
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Commission issued pursuant to the 1940 Act. In addition, where the effect
of a requirement of the 1940 Act reflected in the provisions of this Agreement
is revised by rule, regulation or order of the Commission, such provisions shall
be deemed to incorporate the effect of such rule, regulation or order.
XIII. SERVICE MARK
The service mark of the Fund and the Portfolio and the name "Aetna" have been
adopted by the Fund 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 Administrator or another subsidiary
or affiliated corporation of Aetna Life and Casualty Company should not be the
administrator of the Portfolio.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 19th day of June, 1996.
AETNA VARIABLE PORTFOLIOS, INC. on
behalf of its series, Aetna Variable Capital
Appreciation Portfolio
Attest: By:/s/Shaun P. Mathews
---------------------------
Name:Shaun P. Mathews
-------------------------
Title:President
------------------------
/s/Susan E. Bryant
- ------------------------
Secretary
AETNA LIFE INSURANCE AND ANNUITY
COMPANY
Attest: By: /s/Shaun P. Mathews
-------------------------
Name:Shaun P. Mathews
------------------------
Title:Vice President
-----------------------
/s/DeAnn S. Anastasio
- ------------------------
Assistant Secretary
-9-
<PAGE>
Administrative Services Agreement
Schedule Pursuant to Rule 483(d)(2) under the Securities Act of 1933
Administrative Services Agreements have been entered into by Aetna Variable
Portfolios, Inc. on behalf of the following portfolios in substantially the same
form and type as exhibit 24(b)(9)(a) - Administrative Service Agreement between
Aetna Life Insurance and Annuity Company and Aetna Variable Portfolios, Inc. on
behalf of its Aetna Capital Appreciation Portfolio, included herewith.
<TABLE>
<CAPTION>
Date Portfolio Difference
---- --------- ----------
<S> <C> <C>
6/19/96 Aetna Variable Growth Portfolio None
6/19/96 Aetna Small Company Portfolio None
6/19/96 Aetna Variable Index Plus Portfolio None
</TABLE>
LICENSE AGREEMENT
This Agreement, made at Hartford, Connecticut, to be effective as of the
19th day of June, 1996 by and between Aetna Services, Inc., a Connecticut
corporation with its principal place of business at 151 Farmington Avenue,
Hartford, Connecticut, 06156 ("Licensor") and Aetna Variable Portfolios, Inc., a
Maryland corporation with its principal place of business at 151 Farmington
Avenue, Hartford, Connecticut 06156 ("Licensee").
WITNESSETH:
WHEREAS, Licensor either directly or by its affiliated companies has
adopted and is using and is the owner of the name "AETNA" and the associated
service marks and registrations listed on Schedule A hereto (collectively, the
"Licensed Service Marks"), which service marks have become valuable and
important in identifying the high quality of services rendered under the marks
by Licensor; and
WHEREAS, Licensee is a related company of Licensor by virtue of the
management of the assets of Licensee by Aetna Life Insurance and Annuity Company
and Aeltus Investment Management, Inc., both wholly-owned subsidiaries of
Licensor; and
WHEREAS, the parties deem it in the interest of each, and it is the
intention and desire of the parties, that Licensee be permitted to use the
Licensed Service Marks to identify the services of Licensee specified
hereinafter and that it be permitted to use the name of "Aetna" as a part of its
corporate or trade name; and
WHEREAS, both parties recognize the desire to maintain and preserve the
validity and integrity of the Licensed Service Marks;
NOW, THEREFORE, in consideration of their mutual promises and undertakings
and for good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Licensor grants to Licensee and Licensee accepts a nonexclusive,
nontransferable license to use the Licensed Service Marks throughout the United
States and Canada in connection with and for identifying the investment
facilities provided by Licensee. The license granted in this paragraph 1
includes the grant of permission to Licensee to use the name "Aetna" as part of
its corporate or trade name as follows: Aetna Variable Portfolios, Inc. and as
part of the name of any investment portfolios which it issues, including but not
limited to Aetna Variable Index Plus Portfolio, Aetna Variable Small Company
Portfolio, Aetna Variable Growth Portfolio, and Aetna Variable Capital
Appreciation Portfolio. No change in said corporate or trade name shall be made
by Licensee except with the prior written consent of Licensor.
<PAGE>
2. Licensee agrees not to use any service marks other than the Licensed
Service Marks in connection with the services of Licensee listed in paragraph 1
hereof, either alone or in combination with the Licensed Service Marks.
3. No right is granted to Licensee to use any other service mark of
Licensor not now or hereafter listed in Schedule A.
4. Licensor shall have the right to specify and control the nature and
quality of the services performed by Licensee under the Licensed Service Marks
and Licensee agrees to maintain, in the sole judgment of Licensor, the same high
quality of services as are maintained by Licensor. Licensee agrees that it will
use the Licensed Service Marks only in accordance with the performance and usage
standards established by Licensor, including, without limitation, corporate
identity and graphic standards as prescribed by Licensor. Licensee shall submit
to Licensor such evidence as Licensor may reasonably require to insure
Licensee's compliance with its obligations set forth herein. Licensor shall have
the right to inspect Licensee's business operations at any time during
Licensee's regular business hours in order to assure Licensor that Licensee is
observing the terms and conditions of this Agreement.
5. It is expressly stipulated that the use of the Licensed Service Marks by
Licensee shall inure to the benefit of Licensor and any registration of said
marks covering the services performed by Licensee under this Agreement shall be
registered in the name of Licensor, it being understood that the present license
will not in any way affect the ownership by Licensor of the Licensed Service
Marks, each of which shall continue to be the exclusive property of Licensor.
Licensee shall not at any time during the term of this Agreement do or cause to
be done any act contesting or in any way impairing or tending to impair
Licensor's entire right, title and interest in the Licensed Service Marks and
the registrations thereof.
6. Licensor shall have the right to control the form and manner in which
the Licensed Service Marks are used by Licensee upon or in connection with
advertisements, brochures, audio or visual presentations, or any other materials
used in the sale or advertising of Licensee's services. Licensee agrees, upon
request of Licensor, to furnish Licensor with specimens of all such materials
which are not or cease to be approved by Licensor.
7. Licensee shall not be deemed by virtue of this Agreement to be the agent
or legal representative of Licensor and shall not by virtue of this Agreement
have the right or authority to pledge the credit of or incur any obligation,
express or implied, on behalf of Licensor. Neither this Agreement nor the use of
the Licensed Service Marks by Licensee shall create, or be deemed to create, any
responsibility for liability on the part of Licensor for the acts or omissions
of Licensee. With the exception of suits for infringement of the Licensed
Service Marks, Licensee shall indemnify and hold Licensor harmless from any
loss, claim, damage, cost or expense of any kind, including reasonable
2
<PAGE>
attorneys' fees and costs that arise in connection with Licensee's use of the
Licensed Service Marks.
8. The right to institute and prosecute actions for infringement of the
Licensed Service Marks is reserved exclusively to Licensor, and Licensor shall
have the right to join Licensee in any such actions as a formal party. Licensee
agrees to assist Licensor to the best of its ability and at Licensor's expense
in any such action brought by Licensor. It is understood, however, that Licensor
is not obligated to institute and prosecute any such actions in any case in
which it, in its sole judgment, may consider it inadvisable to do so.
9. Unless sooner terminated as hereinafter provided, this Agreement shall
continue in full force and effect for a period of one (1) year from its
effective date and shall automatically renew for successive one (1) year terms.
Licensor shall have the unrestricted right to cancel this Agreement, for any
reason or no reason, at any time upon written notice to Licensee.
10. This Agreement shall automatically terminate in the event that:
a) Licensee does not comply with any provision of this Agreement and the
breach is not remedied within twenty (20) days of written notice
thereof by Licensor;
b) Licensor is no longer able to specify or control, directly or
indirectly, the nature and quality of the services performed by
Licensee under this Agreement;
c) Licensee becomes subject to dissolution, liquidation, bankruptcy,
statutory reorganization, receivership, compulsory composition, or
similar proceedings, or if creditors of Licensee take over its
management, or if Licensee otherwise enters into any scheme or
composition with creditors, or makes an assignment for the benefit of
creditors, or if any significant part of Licensee's undertakings or
property are impounded or confiscated by action of any court or
government; or
d) Licensee attempts to assign, sublicense or otherwise transfer this
Agreement or any of Licensee's rights under this Agreement.
11. Licensee is granted no rights to use the Licensed Service Marks, other
than those rights specifically described and expressly granted in this
Agreement.
12. Neither this Agreement nor any rights hereunder may be assigned,
sublicensed or otherwise transferred by Licensee nor shall they inure to the
benefit of any trustee in bankruptcy, receiver or successor of Licensee, whether
by operation of law or otherwise, without the prior written consent of Licensor.
Any assignment, sublicense or transfer without such consent shall be null and
void.
3
<PAGE>
13. Upon termination of this Agreement, Licensee shall immediately
discontinue all use of the Licensed Service Marks and shall not thereafter use
any names or marks which are similar or likely to cause confusion therewith.
14. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all previous oral or
written agreements between the parties.
15. This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of Connecticut and the United States of
America.
IN WITNESS WHEREOF, the parties hereto by their duly authorized
representatives have executed this Agreement effective as of the date first
written above.
AETNA SERVICES, INC.
By: /s/Lucille M. Nickerson
-----------------------------------------
(Print or type name)
Title:Vice President and Corporate Secretary
---------------------------------------
Date:September 24, 1996
----------------------------------------
AETNA VARIABLE PORTFOLIOS, INC.
By:/s/Shaun P. Mathews
------------------------------------------
(Print or type name)
Title:President
---------------------------------------
Date:September 25, 1996
----------------------------------------
4
<PAGE>
SCHEDULE A
The following service marks and registrations are hereby licensed by Aetna
Services, Inc. (Licensor) to Aetna Variable Portfolios, Inc. (Licensee) in
accordance with the terms of the Agreement dated June 19, 1996 by and between
Licensor and Licensee.
1. AETNA (word block design, without legend)
2. AETNA (word)
3. Registration No. 822,577, Class 102, issued January 17, 1967 in the
United States Patent Office.
5
<PAGE>
APPLICATION FOR LICENSE TO USE AETNA NAME
1. Name of entity to be Licensed (Licensee)
Aetna Variable Portfolios, Inc.
---------------------------------------------------------------------------
2. Name of person submitting application: Susan E. Bryant
----------------------------------
Phone Number: (860) 273-7834
---------------------------------------------------------
3. Address of Licensee's principal place of business:
151 Farmington Avenue
---------------------------------------------------------------------------
Hartford, Connecticut 06156
---------------------------------------------------------------------------
4. State of Incorporation of filing: Maryland
---------------------------------------
5. Type of entity - e.g., Corporation, Partnership: Corporation
-------------------------
6. Any other name under which Licensee operates: None
---------------------------
7. Nature of Licensee's business Diversified open-end management investment
--------------------------------------------
company (mutual fund)
---------------------
8. Does Licensee want to use the orange block logo? Yes
------------------------
9. Does Licensee want to use the logo with the words "Aetna Services, Inc."
beneath it? If so, explain briefly why. No
---------------------------------
10. Trace ownership of Licensee back to Aetna Services, Inc. - Show exact
percentages of holdings of each Aetna affiliate in the ownership chain.
At the date of this application, Licensee has not issued any shares of
---------------------------------------------------------------------------
stock. It is anticipated that subsidiaries of Aetna Services, Inc. will
---------------------------------------------------------------------------
provide initial capital to Licensee.
---------------------------------------------------------------------------
11. If Licensee will be doing any business out of the United States, what has
the Tax Section of the Law Department recommended as an annual fee?
Not Applicable
---------------------------------------------------------------------------
6
151 Farmington Avenue
Hartford, CT 06156
March 7, 1997 Susan E. Bryant
Counsel
Law Division, RC4A
Investments & Financial Services
(860) 273-7834
Fax: (860) 273-0356
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir or Madam:
As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I hereby
consent to the use of my opinion dated February 28, 1997 (incorporated by
reference to the Rule 24f-2 Notice for the fiscal year ended December 31, 1996
filed on behalf of Aetna Variable Portfolios, Inc.) as an exhibit to this
Post-Effective Amendment No. 1 on Form N-1A to Registration Statement (File Nos.
333-05173 and 811-7651).
Sincerely,
/s/ Susan E. Bryant
Susan E. Bryant
Consent of Independent Auditors
The Board of Directors
Aetna Variable Portfolios, Inc.
We consent to the use of our reports incorporated herein by reference and to the
references to our firm under the headings "Financial Highlights" in the
prospectus and "Independent Auditors" in the Statement of Additional
Information.
/s/ KPMG Peat Marwick
KPMG Peat Marwick LLP
Hartford, Connecticut
March 7, 1997
151 Farmington Avenue Susan E. Schechter
Hartford, CT 06156 Corporate Secretary and Counsel
Aetna Life Insurance and Annuity
Company, RE4C
(860) 273-5663
Fax: (860) 273-8340
August 27, 1996
Board of Directors
Aetna Variable Portfolios, Inc.
151 Farmington Avenue
Hartford, CT 06156
Ladies and Gentlemen:
Aetna Life Insurance and Annuity Company ("ALIAC") will provide on or before
August 28, 1996 a minimum of $100,000 of initial capital to each of the various
series ("Series") of Aetna Variable Portfolios, Inc. (the "Fund") to enable the
Fund to meet the requirements of Section 14(a)(1) of the Investment Company Act
of 1940 prior to commencing a public offering of shares of its Series.
Form N-1A under the Securities Act of 1933 and the Investment Company Act of
1940 requires that there be filed with the Fund's registration statement, as an
exhibit, "copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the underwriter,
adviser, promoter or initial stockholders and written assurances from promoters
or initial stockholders that their purchases were made for investment purposes
without any present intention of redeeming or reselling;...."
This will advise you that, while there are no formal agreements or
understandings between the Fund and ALIAC in consideration for ALIAC's providing
the initial capital, ALIAC hereby assures you that its purchase of $100,000
worth of shares of each Series was made for investment purposes and that ALIAC
has no present intention of redeeming or reselling those shares. ALIAC does,
however, reserve the right to make additional investments in shares of the
Series and to redeem any or all of its shares, with regard to the possible
redemption in the future at a time and in a manner which would be consistent
with the Securities Act of 1933 and the Investment Company Act of 1940.
Sincerely,
/s/Susan E. Schechter
Susan E. Schechter
Corporate Secretary and Counsel
Aetna Life Insurance and Annuity Company
SCHEDULE FOR COMPUTATION OF PERFORMANCE DATA
Aetna Variable Index Plus Portfolio
TOTAL RETURN CALCULATION
Period from September 16, 1996 to December 31, 1996
n
Formula P(1+T) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 10,906.00 = ERV
Period from 9/16/96 to 12/31/96 .2932 = n
TOTAL RETURN FOR THE PERIOD 9.64% = T
Aetna Variable Growth Portfolio
TOTAL RETURN CALCULATION
Period from December 13, 1996 to December 31, 1996
n
Formula P(1+T) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 10,146.00 = ERV
Period from 12/13/96 to 12/31/96 .0521 = n
TOTAL RETURN FOR THE PERIOD 1.57% = T
<PAGE>
Aetna Variable Capital Appreciation Portfolio
TOTAL RETURN CALCULATION
Period from December 13, 1996 to December 31, 1996
n
Formula P(1+T) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 10,199.00 = ERV
Period from 12/13/96 to 12/31/96 .0521 = n
TOTAL RETURN FOR THE PERIOD 2.15% = T
Aetna Variable Small Company Portfolio
TOTAL RETURN CALCULATION
Period from December 27, 1996 to December 31, 1996
n
Formula P(1+T) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 10,113.00 = ERV
Period from 12/27/96 to 12/31/96 .0136 = n
TOTAL RETURN FOR THE PERIOD 1.23% = T
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> Aetna Variable Portfolios, Inc.
<SERIES>
<NUMBER> 02
<NAME> Aetna Variable Growth Portfolio
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> DEC-13-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 5,164,349
<INVESTMENTS-AT-VALUE> 5,242,006
<RECEIVABLES> 1,396
<ASSETS-OTHER> 428
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,243,830
<PAYABLE-FOR-SECURITIES> 61,547
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,676
<TOTAL-LIABILITIES> 69,223
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,100,000
<SHARES-COMMON-STOCK> 510,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (515)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (2,535)
<ACCUM-APPREC-OR-DEPREC> 77,657
<NET-ASSETS> 5,174,607
<DIVIDEND-INCOME> 1,396
<INTEREST-INCOME> 5,766
<OTHER-INCOME> 0
<EXPENSES-NET> (1,811)
<NET-INVESTMENT-INCOME> 5,351
<REALIZED-GAINS-CURRENT> (2,535)
<APPREC-INCREASE-CURRENT> 77,657
<NET-CHANGE-FROM-OPS> 80,473
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,866)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 510,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,174,607
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,449
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,811
<AVERAGE-NET-ASSETS> 5,188,998
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.011
<PER-SHARE-GAIN-APPREC> 0.147
<PER-SHARE-DIVIDEND> (0.012)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.146
<EXPENSE-RATIO> 0.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> Aetna Variable Portfolios, Inc.
<SERIES>
<NUMBER> 04
<NAME> Aetna Variable Small Company Portfolio
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> DEC-27-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 5,100,541
<INVESTMENTS-AT-VALUE> 5,159,038
<RECEIVABLES> 3,046
<ASSETS-OTHER> 977
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,163,061
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,486
<TOTAL-LIABILITIES> 5,486
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,100,000
<SHARES-COMMON-STOCK> 510,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (922)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 58,497
<NET-ASSETS> 5,157,575
<DIVIDEND-INCOME> 3,046
<INTEREST-INCOME> 1,518
<OTHER-INCOME> 0
<EXPENSES-NET> (386)
<NET-INVESTMENT-INCOME> 4,178
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 58,497
<NET-CHANGE-FROM-OPS> 62,675
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,100)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 510,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,157,575
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 322
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 386
<AVERAGE-NET-ASSETS> 5,135,130
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.008
<PER-SHARE-GAIN-APPREC> 0.115
<PER-SHARE-DIVIDEND> (0.010)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.113
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> Aetna Variable Portfolios, Inc.
<SERIES>
<NUMBER> 03
<NAME> Aetna Variable Index Plus Portfolio
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> SEP-16-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 18,562,213
<INVESTMENTS-AT-VALUE> 19,651,771
<RECEIVABLES> 57,419
<ASSETS-OTHER> 1,877
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19,711,067
<PAYABLE-FOR-SECURITIES> 72,411
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 228,199
<TOTAL-LIABILITIES> 300,610
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,345,726
<SHARES-COMMON-STOCK> 1,779,788
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (69)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (24,758)
<ACCUM-APPREC-OR-DEPREC> 1,089,558
<NET-ASSETS> 19,410,457
<DIVIDEND-INCOME> 85,282
<INTEREST-INCOME> 20,634
<OTHER-INCOME> 0
<EXPENSES-NET> (22,113)
<NET-INVESTMENT-INCOME> 83,803
<REALIZED-GAINS-CURRENT> (1,609)
<APPREC-INCREASE-CURRENT> 1,089,558
<NET-CHANGE-FROM-OPS> 1,171,752
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (83,638)
<DISTRIBUTIONS-OF-GAINS> (23,383)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,235,617
<NUMBER-OF-SHARES-REDEEMED> (462,133)
<SHARES-REINVESTED> 6,304
<NET-CHANGE-IN-ASSETS> 19,410,457
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15,479
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 22,113
<AVERAGE-NET-ASSETS> 15,152,686
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.047
<PER-SHARE-GAIN-APPREC> 0.919
<PER-SHARE-DIVIDEND> (0.047)
<PER-SHARE-DISTRIBUTIONS> (0.013)
<RETURNS-OF-CAPITAL> 0
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<TABLE> <S> <C>
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<CIK> 0001015965
<NAME> Aetna Variable Portfolios, Inc.
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<NAME> Aetna Variable Capital Appreciation Portfolio
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