As filed with the Securities and Exchange File No. 333-05173
Commission on September 26, 1997 File No. 811-7651
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- -------------------------------------------------------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 2
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 3
AETNA VARIABLE PORTFOLIOS, INC.
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
(860) 273-1409
Amy R. Doberman, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
- -------------------------------------------------------------------------------
It is proposed that this filing will become effective:
[X] on December 10, 1997 pursuant to paragraph (a)(2) of Rule 485
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>
<S> <C> <C>
Form N-1A
Item No. Part A Caption in Prospectus
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 Offered...................... Net Asset Value; Purchase and Redemption of
Shares
20 Tax Status.................................... Tax Status
21 Underwriters.................................. Principal Underwriter
22 Calculation of Performance Data............... Performance Information
23 Financial Statements.......................... Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
<PAGE>
AETNA VARIABLE GROWTH PORTFOLIO
AETNA VARIABLE CAPITAL APPRECIATION PORTFOLIO
AETNA MID CAP PORTFOLIO
AETNA VARIABLE SMALL COMPANY PORTFOLIO
AETNA INTERNATIONAL PORTFOLIO
AETNA REAL ESTATE SECURITIES PORTFOLIO
AETNA VARIABLE INDEX PLUS PORTFOLIO
AETNA INDEX PLUS SMALL CAP PORTFOLIO
AETNA INDEX PLUS MID CAP PORTFOLIO
AETNA INDEX PLUS BOND PORTFOLIO
AETNA HIGH YIELD PORTFOLIO
AETNA VARIABLE PORTFOLIOS, INC.
151 FARMINGTON AVENUE
HARTFORD, CT 06156-8962
Prospectus dated: _____________, 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 eleven
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 _________, 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.
The Commission maintains a Web Site (http://www.sec.gov) that contains the
Statement, material incorporated by reference and other information regarding
the Fund.
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 VARIABLE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, ANY BANK. SHARES OF THE VARIABLE PORTFOLIOS ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A PORTFOLIO 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...................................................... 10
INVESTMENT TECHNIQUES..................................................... 11
RISK FACTORS AND OTHER CONSIDERATIONS..................................... 13
INVESTMENT RESTRICTIONS................................................... 15
MANAGEMENT OF THE VARIABLE PORTFOLIOS..................................... 16
PURCHASE AND REDEMPTION OF SHARES......................................... 18
NET ASSET VALUE........................................................... 18
GENERAL INFORMATION....................................................... 18
PERFORMANCE............................................................... 19
TAX MATTERS............................................................... 22
<PAGE>
THE FUND
The Fund is an open-end, management investment company, consisting of multiple
Portfolios. It currently has authorized eleven Portfolios:
<TABLE>
<S> <C>
[bullet] Aetna Variable Growth Portfolio ("Growth") [bullet] Aetna Variable Capital Appreciation Portfolio
[bullet] Aetna Mid Cap Portfolio ("Mid Cap") ("Capital Appreciation")
[bullet] Aetna International Portfolio ("International") [bullet] Aetna Variable Small Company Portfolio ("Small
[bullet] Aetna Variable Index Plus Portfolio ("Index Plus") Company")
[bullet] Aetna Index Plus Mid Cap Portfolio ("Index Plus Mid Cap") [bullet] Aetna Real Estate Securities Portfolio ("Real
[bullet] Aetna High Yield Portfolio ("High Yield") Estate")
[bullet] Aetna Index Plus Small Cap Portfolio ("Index Plus
Small Cap")
[bullet] Aetna Index Plus Bond Portfolio ("Index Plus Bond")
</TABLE>
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."
DESCRIPTION OF THE VARIABLE PORTFOLIOS
Each Portfolio has an investment objective that is a fundamental policy. As with
all mutual funds, 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. A fundamental investment policy or restriction applicable to a
particular Portfolio may not be changed without the approval of a majority of
the outstanding shares of that Portfolio.
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 invest in options and futures (including options on
futures). Growth may also enter into repurchase agreements, invest up to 25% of
its assets in foreign securities, invest in fixed income securities, engage in
currency hedging and purchase securities on a when-issued, delayed-delivery or
forward-commitment basis. Growth will not invest more than 15% of the total
value of its assets in high-yield, below investment grade fixed income
securities ("high-yield bonds").
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.
Investment Policy
Capital Appreciation will normally invest at least 65% of its total assets in
common stocks. Capital Appreciation will use a value-oriented approach. It may
also invest in convertible and non-convertible preferred stocks.
<PAGE>
Additionally, Capital Appreciation may invest in options and futures (including
options on futures). Capital Appreciation may also enter into repurchase
agreements, invest up to 25% of its assets in foreign securities, invest in
fixed income securities, engage in currency hedging and purchase securities on a
when-issued, delayed-delivery or forward-commitment basis. Capital Appreciation
will not invest more than 15% of the total value of its assets in high-yield
bonds.
AETNA MID CAP PORTFOLIO
Investment Objective
Mid Cap seeks growth of capital primarily through investment in a diversified
portfolio consisting of common stocks included in the S&P Mid Cap 400 index (S&P
400).
Investment Policy
Under normal circumstances, Mid Cap will invest at least 65% of its assets in
common stocks and will generally exclude common stocks that are not of a size
(as measured by market capitalization) similar to stocks in the S&P 400.
Additionally, Mid Cap may invest in options and futures (including options on
futures). Mid Cap may also enter into repurchase agreements, invest up to 25% of
its assets in foreign securities, invest in fixed income securities, engage in
currency hedging and purchase securities on a when-issued, delayed-delivery or
forward-commitment basis. Mid Cap will not invest more than 15% of the total
value of its assets in high-yield 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 invest in options and futures (including options
on futures). Small Company may also enter into repurchase agreements, invest up
to 25% of its assets in foreign securities, invest in fixed income 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-yield bonds.
AETNA INTERNATIONAL PORTFOLIO
Investment Objective
International seeks long-term capital growth primarily through investment in a
diversified portfolio of common stocks principally traded in countries outside
of the U.S. International will not target any given level of current income.
Investment Policy
International will normally invest at least 65% of its total assets in
securities principally traded in three or more countries outside the United
States. International will invest primarily in equity securities including
securities convertible into stocks.
<PAGE>
Additionally, International may invest in options and futures (including options
on futures). International may also enter into repurchase agreements, invest in
fixed income securities, engage in currency hedging and purchase securities on a
when-issued, delayed-delivery or forward-commitment basis.
Investments in securities of foreign companies and in securities denominated in
foreign currencies involve additional risks not present in U.S. securities.
Please refer to "Risk Factors and Other Considerations" below for further
information.
AETNA REAL ESTATE SECURITIES PORTFOLIO
Investment Objective
Real Estate seeks maximum total return primarily through investment in a
diversified portfolio of equity securities issued by real estate companies, the
majority of which are real estate investment trusts (REITs).
Investment Policy
Real Estate will normally invest at least 65% of its total assets in income
producing equity securities of publicly traded companies principally engaged in
the real estate industry. Real Estate may also invest in convertible securities
and preferred stocks.
Additionally, Real Estate may invest in options and futures (including options
on futures). Real Estate may also enter into repurchase agreements, invest up to
25% of its assets in foreign securities, invest in fixed income securities,
engage in currency hedging and purchase securities on a when-issued,
delayed-delivery or forward-commitment basis. Real Estate will not invest more
than 15% of the total value of its assets in high-yield bonds.
AETNA VARIABLE INDEX PLUS PORTFOLIO
Investment Objective
Index Plus seeks to outperform the total return performance of publicly traded
common stocks represented in the S&P 500.
Investment Policy
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 S&P as to the stock's attractiveness as an
investment. Index Plus is neither sponsored by nor affiliated with S&P. AN
INVESTMENT IN THE PORTFOLIO INVOLVES RISKS SIMILAR TO THOSE OF INVESTING IN
COMMON STOCKS GENERALLY. 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 will 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 Subadviser will attempt to outperform
the investment results of the S&P 500 by creating a portfolio that has market
risk characteristics similar to the S&P 500, but will use a disciplined analysis
to attempt to identify those stocks having the greatest likelihood of either
outperforming or underperforming the market.
Additionally, Index Plus may invest in options and futures (including options on
futures). Index Plus may also enter into repurchase agreements, invest up to 25%
of its assets in foreign securities, invest in fixed income securities, engage
in currency hedging and purchase securities on a when-issued, delayed-delivery
or forward-commitment basis. Index Plus will not invest more than 15% of the
total value of its assets in high-yield bonds.
<PAGE>
AETNA INDEX PLUS MID CAP PORTFOLIO
Investment Objective
Index Plus Mid Cap seeks to outperform the total return performance of
publicly traded common stocks represented in the S&P 400.
Investment Policy
Under normal circumstances, Index Plus Mid Cap will invest at least 90% of its
assets in common stocks represented in the S&P 400. Inclusion of a stock in the
S&P 400 in no way implies an opinion by S&P as to the stock's attractiveness as
an investment. Index Plus Mid Cap is neither sponsored by nor affiliated with
S&P. AN INVESTMENT IN THE PORTFOLIO INVOLVES RISKS SIMILAR TO THOSE OF INVESTING
IN COMMON STOCKS GENERALLY.
Under normal circumstances, Index Plus Mid Cap will generally exclude common
stocks which are not part of the S&P 400 and will exclude Aetna Inc. common
stock.
The weightings of stocks in the S&P 400 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 400 by creating a portfolio that
has similar market risk characteristics to the S&P 400, but will use a
disciplined analysis to identify those stocks having the greatest likelihood of
either outperforming or underperforming the market.
Index Plus Mid Cap may also invest in convertible and non-convertible preferred
stocks. Additionally, Index Plus Mid Cap may invest in options and futures
(including options on futures). Index Plus Mid Cap may also enter into
repurchase agreements, invest up to 25% of its assets in foreign securities,
invest in fixed income securities, engage in currency hedging and purchase
securities on a when-issued, delayed-delivery or forward-commitment basis. Index
Plus Mid Cap will not invest more than 15% of the total value of its assets in
high-yield bonds.
AETNA INDEX PLUS SMALL CAP PORTFOLIO
Investment Objective
Index Plus Small Cap seeks to outperform the total return performance of
publicly traded common stocks represented by the S&P 600 Small Cap Index (S&P
600), a stock market index composed of 600 common stocks selected by S&P.
Investment Policy
Under normal circumstances, Index Plus Small Cap will invest at least 90% of its
assets in common stocks represented in the S&P 600. Inclusion of a stock in the
S&P 600 in no way implies an opinion by S&P as to the stock's attractiveness as
an investment. Index Plus Small Cap is neither sponsored by nor affiliated with
S&P. AN INVESTMENT IN THE PORTFOLIO INVOLVES RISKS SIMILAR TO THOSE OF INVESTING
IN COMMON STOCKS GENERALLY.
Under normal circumstances, Index Plus Small Cap will generally exclude common
stocks which are not part of the S&P 600 and will exclude Aetna Inc. common
stock.
The weightings of stocks in the S&P 600 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 600 by creating a portfolio that
has similar market risk characteristics to the S&P 600, but will use a
disciplined analysis to identify those stocks having the greatest likelihood of
either outperforming or underperforming the market.
Index Plus Small Cap may also invest in convertible and non-convertible
preferred stocks. Additionally, Index Plus Small Cap may invest in options and
futures (including options on futures). Index Plus Small Cap may also enter into
repurchase agreements, invest up to 25% of its assets in foreign securities,
invest in fixed income securities, engage in currency hedging and purchase
securities on a when-issued, delayed-delivery or forward-commitment basis. Index
Plus Small Cap will not invest more than 15% of the total value of its assets in
high-yield bonds.
<PAGE>
AETNA INDEX PLUS BOND PORTFOLIO
Investment Objective
Index Plus Bond seeks to maximize total return consistent with preservation of
capital primarily through investment in a diversified portfolio of fixed income
securities, which will be chosen to substantially replicate the characteristics
of the Lehman Brothers Aggregate Bond Index ("LBAB"), an unmanaged index
composed of approximately 6,000 securities.
Investment Policy
Index Plus Bond will be actively managed in an attempt to achieve a total
return, which, before the recognition of fund expenses, exceeds the LBAB. Under
normal circumstances, Index Plus Bond will invest at least 90% of its assets in
fixed income investments and will exclude Aetna Inc. securities. Index Plus Bond
is neither sponsored by nor affiliated with Lehman Brothers. AN INVESTMENT IN
THE PORTFOLIO INVOLVES RISKS SIMILAR TO THOSE OF INVESTING IN FIXED INCOME
SECURITIES GENERALLY.
Index Plus Bond may also invest in convertible and non-convertible preferred
stocks. Additionally, Index Plus Bond may invest in options and futures
(including options on futures). Index Plus Bond 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. Index Plus Bond will not invest more than 15% of the
total value of its assets in high-yield bonds.
AETNA HIGH YIELD PORTFOLIO
Investment Objective
High Yield seeks high current income and growth of capital primarily through
investment in a diversified portfolio of fixed income securities rated lower
than BBB- by S&P or lower than Baa3 by Moody's.
Investment Policy
High Yield will normally invest at least 65% of its total assets in high-yield
bonds. High Yield may also invest in other fixed income securities, equity
interests, private securities, convertible securities and zero-coupon
securities.
Additionally, High Yield may invest in options and futures (including options on
futures). High Yield 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.
For more information about the risks associated with investing in high-yield
bonds, see "Risk Factors and Other Considerations - High-Yield Bonds."
<PAGE>
FINANCIAL HIGHLIGHTS
The selected data presented below for the periods 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. The selected data
presented below for the six months ended June 30, 1997 have been taken from the
records of the Portfolios which are unaudited.
<TABLE>
<CAPTION>
Capital Appreciation Growth Index Plus Small Company
Six-month Period Six-month Period from Six-month Period from Six-month Period
period from Dec. period ended Dec. 13, period Sept. 16, period from Dec.
ended June 13, 1996 June 30, 1997 1996 to ended June 1996 to ended June 27, 1996
30, 1997 to Dec. (unaudited) Dec. 31, 30, 1997 Dec. 31, 30, 1997 to Dec.
(unaudited) 31, 1996 1996 (unaudited) 1996 (unaudited) 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value per share,
beginning of period $10.199 $10.000 $10.146 $10.000 $10.906 $10.000 $10.113 $10.000
Income From
Investment Operations:
Net investment income 0.062 0.015 0.026 0.011 0.059 0.047 0.006 0.008
Net realized and unrealized
gain on investments 2.001 0.200 1.608 0.147 2.237 0.919 1.653 0.115
Total from investment
operations 2.063 0.215 1.634 0.158 2.296 0.966 1.659 0.123
Less Distributions:
Dividends from net
investment income - (0.016) - (0.012) - (0.047) - (0.010)
Distribution from net
realized gains on
investments - - - - - (0.013) - -
Total distributions - (0.016) - (0.012) - (0.060) - (0.010)
Net asset value per share,
end of period $12.262 $10.199 $11.780 $10.146 $13.202 $10.906 $11.772 $10.113
Total Return* 20.22% 2.15% 16.10% 1.57% 21.05% 9.64% 16.41% 1.23%
Net assets, end of period
(000) $6,310 $5,202 $6,040 $5,175 $58,601 $19,410 $6,267 $5,158
Ratio of total expenses to
average net assets** 0.75% 0.67% 0.75% 0.67% 0.50% 0.50% 0.90% 0.55%
Ratio of net investment
income to average net
assets** 1.14% 2.73% 0.50% 1.99% 1.51% 1.89% 0.12% 5.96%
Portfolio turnover rate 64.95% - 80.38% 1.97% 38.23% 5.18% 101.56 -
Average Commission rate
paid per share $0.0584 $0.0300 $0.0571 $0.0364 $0.0377 $0.0358 $0.0567 -
</TABLE>
* The Total Return percentage does not reflect any separate account charges
under VA contracts and VLI policies.
** Annualized for periods of less than one year.
Additional information about the performance of the Portfolios included in this
table is contained in the Fund's Annual and Semi-Annual Reports dated December
31, 1996 and June 30, 1997, respectively. The Reports 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.
<PAGE>
INVESTMENT TECHNIQUES
The Variable Portfolios may use the following investment techniques:
Borrowing
Each Portfolio may borrow money from banks 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.
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.
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.
<PAGE>
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 invest in options and futures (including options on futures).
There is no limit on the amount of a Portfolio's total assets that may be
subject to call options. 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 purchase a put option if, after it is purchased,
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, market or
market segment, within the limitations set forth herein. Each Series may invest
up to 30% of its assets in lower risk derivatives for hedging, to gain
additional exposure to certain markets for investment purposes, and in order to
maintain liquidity to meet shareholder redemptions or to minimize trading costs.
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.
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.
<PAGE>
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.
REITs
Real estate investment trusts ("REITs") are pooled investment vehicles that
invest in real estate or real estate loans or interests. In order to qualify as
a REIT, a company generally must, among other things, derive at least 95% of its
gross income from various real estate sources and dividends and interest, and
must derive at least 75% of its gross income from various real estate sources,
dividend distributions and gains related to investments and other REITs,
mortgage interest and qualified temporary investment income. Real property,
mortgage loans, cash and certain securities must comprise 75% of a company's
assets. In order to qualify as a REIT, a company must also make distributions to
shareholders of at least 95% of its annual REIT taxable income.
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.
<PAGE>
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-yield bonds.
High-yield bonds 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 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 and dividend 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.
<PAGE>
High-Yield Bonds
All the Portfolios, except International, may invest in high-yield 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 high-yield bonds are high-risk investments, the
Subadviser may purchase these securities if they are thought to offer good
value. This may happen if, for example, the rating agencies have, in the
Subadviser'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 Subadviser'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 by the Portfolio's custodian. For more information about these
securities, see the Statement.
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 may 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.
<PAGE>
Risks Relating to the Real Estate Securities Portfolio
The Real Estate Securities Portfolio may invest more than 25% of its total
assets in any sector of the real estate industry. Due to the Portfolio's policy
of concentration in the real estate industry, adverse developments in that
industry will have a greater impact on the Portfolio, and consequently
shareholders, than a fund with broader diversification. Special considerations
to an investment in the Portfolio include those risks associated with the direct
ownership of real estate: declines in the value of real estate, risks related to
general and local economic conditions, over-building and increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
casualty or condemnation losses, limitations on rents, changes in neighborhood
values, the appeal of properties to tenants, and increases in interest rates.
The value of securities of companies which service the real estate industry may
also be affected by such risks.
In addition to the risks discussed above, equity REITs may be affected by any
changes in the value of the underlying property owned by such REITs, while
mortgage REITs may be affected by the quality of any credit extended. Equity and
mortgage REITs are dependent on the REITs' management skill and may not be
diversified. The Portfolio could conceivably own real estate directly as a
result of a default on debt obligations it owns. Changes in prevailing interest
rates also may inversely affect the value of the debt obligations in which the
Portfolio may invest.
The Subadviser believes, however, that diversification of the Portfolio's assets
among different types of real estate investments will help mitigate, although it
cannot eliminate, the inherent risks of such industry concentration.
INVESTMENT RESTRICTIONS
In addition to the restrictions discussed under "Investment Techniques," a
Portfolio, other than Real Estate, 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 restrictions apply only
to 75% of a Portfolio's total assets. In addition, the Small Company, Growth,
Real Estate, Mid Cap, International, High Yield and Capital Appreciation
Portfolios do not invest in the securities of companies determined by the
Subadviser to be primarily involved in the production or distribution of tobacco
products. See the Statement for additional investment restrictions.
<PAGE>
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 Portfolio. Aetna is a Connecticut insurance corporation with
its principal offices located at 151 Farmington Avenue, Hartford, Connecticut
06156. Aetna is registered with the Commission as an investment adviser, and has
overall responsibility for monitoring the investment program maintained by the
Subadviser for compliance with applicable laws and regulations and each
Portfolio's investment objective and policies.
Subadviser
The Fund and Aetna have engaged Aeltus Investment Management, Inc. (Aeltus), as
subadviser of each Portfolio. Aeltus is a Connecticut corporation with its
principal offices located at 242 Trumbull Street, Hartford, Connecticut
06103-1205. Aeltus is registered as an investment adviser with the Commission.
Under the Subadvisory Agreement, Aeltus is responsible for managing the assets
of each Portfolio in accordance with the Portfolio's investment objective and
policies subject to the supervision of Aetna and the Directors. Aeltus
determines what securities and other instruments are purchased and sold by each
Portfolio and handles certain related accounting and administrative functions,
including determining each Portfolio's net asset value on a daily basis and
preparing and providing such reports, data and information as Aetna or the
Directors request from time to time.
Advisory Fees. 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 Advisory Fee Subadvisory Fee
Growth 0.600% 0.375%
Capital Appreciation 0.600% 0.375%
Mid Cap 0.750% 0.475%
Small Company 0.750% 0.450%
International 0.850% 0.575%
Real Estate Securities 0.750% 0.475%
Index Plus 0.350% 0.250%
Index Plus Mid Cap 0.400% 0.300%
Index Plus Small Cap 0.400% 0.300%
Index Plus Bond 0.300% 0.225%
High Yield 0.650% 0.400%
The Investment Advisory Agreement 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.
The Subadvisory Agreement provides that Aetna will pay Aeltus a fee as described
above. 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.
<PAGE>
Portfolio Management
The following individuals are primarily responsible for the day-to-day
management of the Portfolios, as indicated below.
Growth and Capital Appreciation
Peter B. Canoni, Managing Director, Aeltus. Mr. Canoni has been with the Aetna
organization since 1980 and has over 26 years of investment experience.
Small Company
Thomas J. DiBella, Vice President, Aeltus. Mr. DiBella has been with the Aetna
organization since 1991 and has over 10 years of investment experience.
Index Plus, Index Plus Small Cap and Index Plus Mid Cap
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.
International
Vince Fioramonti, Vice President, Aeltus. Mr. Fioramonti currently manages
international stocks and non-U.S. dollar government bonds for several investment
funds managed by Aeltus. Mr. Fioramonti joined the Aetna organization in 1994
after serving as Vice President for Travelers Investment Management Company.
Index Plus Bond
Christie Bull, Vice President, Aeltus. Ms. Bull currently manages fixed income
securities for several private accounts managed by Aeltus. Ms. Bull is also the
Director of Fixed Income Research for Aeltus. Ms. Bull has been with the Aetna
organization since 1979.
Real Estate Securities
Yaniv Tepper, Vice President, Aeltus. Mr. Tepper currently manages real estate
securities for several investment funds managed by Aeltus. Mr. Tepper joined the
Aetna organization in 1994 as an Associate in the Real Estate Investments Group.
Prior thereto, Mr. Tepper consulted in the area of real estate finance.
High Yield
Gail Bruhn, Vice President, Aeltus. Ms. Bruhn currently manages high yield
securities for several private investment funds managed by Aeltus. Ms. Bruhn
joined Aeltus in 1995 as High Yield Portfolio Manager after spending 10 years
with CIGNA Investments.
Mid Cap
Donald Townswick, Vice President, Aeltus. Mr. Townswick currently manages small
and mid-cap stocks for several investment funds managed by Aeltus. Mr. Townswick
joined the Aetna organization in July, 1994 after serving as a Vice President at
INVESCO Management and Research for two years.
<PAGE>
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 0.30% of the average daily net assets for
International, 0.20% of the average daily net assets for Index Plus Mid Cap,
Index Plus Small Cap, Mid Cap and Real Estate and 0.15% of the average daily net
assets for the other Portfolios.
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 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 the 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 two billion shares of capital stock, par value
$0.001 per share. All shares are non-assessable, 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
<PAGE>
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.
Performance of Similarly Managed Funds
Small Company, International, Real Estate and Mid Cap are recently organized and
do not yet have long term performance records. However, Small Company and
International have the same investment objective and follow substantially the
same investment strategies as two separate series of an investment company
registered under the 1940 Act whose shares are currently sold to the public
(public fund) and managed by Aetna and Aeltus. Real Estate and Mid Cap have the
same investment objective and follow substantially the same investment
strategies as segments of separate series of public funds (segments) managed
by Aetna and Aeltus.
Set forth below is the historical performance of each of the comparable series
or segments of the public funds. Investors should not consider the performance
data of the series of the public funds or segments as an indication of the
future performance of the Portfolios. The performance figures shown below
reflect the deduction of the historical fees and expenses paid by the series of
the public fund or segments, and not those paid by the Portfolios. The results
shown reflect the reinvestment of dividends and distributions, and were
calculated in the same manner that will be used by the Portfolios to calculate
their own performance.
The 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
<PAGE>
insurance fees and charges. The insurance separate account fees will have a
detrimental effect on the performance of the Portfolios.
The following table shows average annualized total returns for the period ended
June 30, 1997 for the comparable series or segments and their respective
benchmark indices.
SMALL COMPANY 1 YEAR SINCE INCEPTION(1)
Aetna Series Fund, Inc.
Aetna Small Company 19.52% 21.43%
(Select Class)
Russell 2000 Index 16.33% 14.76%
INTERNATIONAL SINCE
1 YEAR 5 YEARS INCEPTION(1)
Aetna Series Fund, Inc.
Aetna International 29.64% 13.46% 11.19%
(Select Class)
MSCI-EAFE Index 13.16% 13.17% 9.81%
(1) The inception dates for Small Company and International are January 1, 1994
and January 1, 1992, respectively.
MID CAP
1 YEAR SINCE INCEPTION(2)
Mid Cap Account 35.00% 24.60%
S&P 400 Stock Index 22.87% 21.96%
REAL ESTATE
1 YEAR SINCE INCEPTION(2)
Real Estate Account 36.67% 26.46%
National Association of Real
Estate Investment Trusts
(NAREIT) Equity Index 33.88% 24.87%
(2) The inception dates for the Real Estate and Mid Cap segments are July 1,
1995 and January 1, 1996, respectively. The results shown above reflect the
deduction of management and administrative fees of 1.05%, which represents the
highest level of fees charged by a fund including both segments.
Private Account Performance
Index Plus, Capital Appreciation, Growth, Index Plus Bond and High Yield are
recently organized and do not yet have long-term performance records. However,
each of those Portfolios has an investment objective, policies and strategies
which are substantially similar to those employed by Aeltus with respect to
certain Private Accounts. The performance of Index Plus, Capital Appreciation,
Growth, Index Plus Bond and High Yield may vary from the Private Account
information because the Private Accounts are not subject to certain investment
limitations, diversification requirements and other restrictions imposed by the
1940 Act and the Internal Revenue Code of 1986, as amended, which, if
applicable, may have adversely affected the performance results of the Private
Accounts.
The chart below shows performance information derived from historical composite
performance of the Private Accounts included in the Index Plus, Capital
Appreciation, Growth, Index Plus Bond and High Yield Composites.
<PAGE>
The actual Private Account composite performance figures are time-weighted rates
of return which include all income and accrued income and realized and
unrealized gains or losses and reflect the deduction of investment advisory fees
and other expenses 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 a Portfolio.
The following tables show private account historical composite performance as
well as comparisons with an appropriate index for each Portfolio.
PRIVATE ACCOUNT COMPOSITE PERFORMANCE
INDEX PLUS PRIVATE ACCOUNT COMPOSITE SINCE
1 YEAR 5 YEARS INCEPTION
Index Plus Composite* 36.75 20.56% 19.10%
S&P 500 Stock Index 34.70% 19.78% 18.51%
CAPITAL APPRECIATION PRIVATE ACCOUNT COMPOSITE SINCE
1 YEAR 5 YEARS INCEPTION
Capital Appreciation Composite 33.58% 22.45% 23.74%
S&P 500 Stock Index 34.70% 19.78% 20.30%
GROWTH PRIVATE ACCOUNT COMPOSITE
1 YEAR 5 YEARS 10 YEARS
Growth Composite 30.10% 19.29% 15.24%
S&P 500 Stock Index 34.70% 19.78% 14.63%
INDEX PLUS BOND PRIVATE ACCOUNT COMPOSITE
1 YEAR 5 YEARS 10 YEARS
Index Plus Bond
Composite** 8.21% 7.15% 8.72%
LBAB Index** 8.15% 7.12% 8.66%
HIGH YIELD PRIVATE ACCOUNT COMPOSITE
1 YEAR SINCE INCEPTION
High Yield Account 14.02% 13.18%
Morningstar High Yield Index 14.61% 13.14%
Merrill Lynch High Yield Index 14.31% 11.82%
* The Composite reflects the Aeltus "Quantitative Equity" Composite.
** The Composite reflects the Aeltus "Market Plus" Composite.
***The inception dates are October 1, 1991 for the Index Plus Composite, October
1, 1990 for the Capital Appreciation Composite, January 1, 1983 for the Growth
Composite, April 1, 1987 for the Index Plus Bond Composite and January 1, 1996
for the High Yield Composite.
<PAGE>
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.
<PAGE>
AETNA VARIABLE PORTFOLIOS, INC.
151 Farmington Avenue
Hartford, Connecticut 06156-8962
Statement of Additional Information Dated: ________________, 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 _______, 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.
TABLE OF CONTENTS
Page
GENERAL INFORMATION AND HISTORY............................................. 2
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES OF THE VARIABLE PORTFOLIOS . 2
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES ................ 3
DIRECTORS AND OFFICERS OF THE FUND.......................................... 14
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS ................................. 16
THE INVESTMENT ADVISORY AGREEMENT .......................................... 16
THE SUBADVISORY AGREEMENT................................................... 17
THE ADMINISTRATIVE SERVICES AGREEMENT ...................................... 17
CUSTODIAN................................................................... 18
INDEPENDENT AUDITORS........................................................ 18
PRINCIPAL UNDERWRITER....................................................... 18
BROKERAGE ALLOCATION AND TRADING POLICIES................................... 18
DESCRIPTION OF SHARES....................................................... 19
PURCHASE AND REDEMPTION OF SHARES........................................... 19
NET ASSET VALUE............................................................. 20
PERFORMANCE INFORMATION..................................................... 20
TAX STATUS.................................................................. 21
VOTING RIGHTS............................................................... 25
FINANCIAL STATEMENTS........................................................ 26
<PAGE>
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 eleven Portfolios: Aetna Variable Growth Portfolio
(Growth); Aetna Variable Capital Appreciation Portfolio (Capital Appreciation);
Aetna Mid Cap Portfolio (Mid Cap); Aetna Variable Small Company Portfolio (Small
Company); Aetna International Portfolio (International); Aetna Real Estate
Securities Portfolio (Real Estate); Aetna Variable Index Plus Portfolio (Index
Plus); Aetna Index Plus Mid Cap Portfolio (Index Plus Mid Cap); Aetna Index Plus
Small Cap Portfolio (Index Plus Small Cap); Aetna Index Plus Bond Portfolio
(Index Plus Bond); and Aetna High Yield Portfolio (High Yield).
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) except for the Real Estate Portfolio, 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) except for the Real Estate Portfolio, 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
2
<PAGE>
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).
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) except for the International Portfolio, 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) except for the High Yield Portfolio, invest more than 15% of the total
value of its assets in high-yield 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
3
<PAGE>
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: 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.
4
<PAGE>
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 the Investment Adviser or Subadviser
(collectively the "Adviser").
So long as the obligation of the writer of a call option continues, the writer
may be assigned an exercise notice by the broker-dealer through which such
option was settled, requiring the writer to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, by the exercise of the call option, or by
entering into an offsetting transaction. To secure the writer's obligation to
deliver the underlying security, a writer of a call option is required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the clearing corporations and of the exchanges. A Portfolio will only
write a call option on a security 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 the Adviser considers these instruments to be undervalued
relative to the prices of particular securities or of the securities that
comprise the index.
An option on an index (or a particular security) is a contract that gives the
purchaser of the option, in return for the premium paid, the right to receive
from the writer of the option cash equal to the difference between the closing
price of the index (or security) and the exercise price of the option, expressed
in dollars, times a specified multiple (multiplier). A Portfolio may, in
particular, purchase call options on an index (or a particular security) to
protect against increases in the price of securities underlying that index (or
individual securities) that the Portfolio intends to purchase pending its
ability to invest in such securities in an orderly manner.
In the case of a put option, as long as the obligation of the put writer
continues, it may be assigned an exercise notice by the broker-dealer through
which such option was sold, requiring the writer to take delivery of the
underlying security against payment of the exercise price. A writer has no
control over when it may be required to purchase the underlying security, since
it may be assigned an exercise notice at any time prior to the expiration date.
This obligation terminates earlier if the writer effects a closing purchase
transaction by purchasing a put of the same series as that previously sold.
To secure its obligation to pay for the underlying security, the writer of a put
generally must deposit in escrow liquid assets with a value equal to or greater
than the exercise price of the put option. The writer therefore foregoes the
opportunity of investing the segregated assets or writing calls against those
assets. A Portfolio may write put options on debt securities or futures, only if
such puts are covered by segregated liquid assets.
In writing puts, there is the risk that a writer may be required to buy the
underlying security at a disadvantageous price. Writing a put covered by
segregated liquid assets equal to the exercise of the put has the same economic
effect as writing a covered call option. The premium the writer receives from
writing a put option represents a profit, as long as the price of the underlying
instrument remains above the exercise price; however, if the put is exercised,
the writer is obligated during the option period to buy the underlying
instrument from the buyer of the put at the exercise price, even though the
value of the investment may have fallen below the exercise price. If the put
lapses unexercised, the writer realizes a gain in the amount of the premium. If
the put is exercised, the writer may incur a loss, equal to the difference
between the exercise price and the current market value of the underlying
instrument.
A Portfolio may purchase put options when the Adviser believes that a temporary
defensive position is desirable in light of market conditions, but does not
desire to sell a portfolio security. The purchase of put options for these
purposes may be used to protect a Portfolio's holdings in an underlying security
against a substantial decline in market value. Such protection is, of course,
only provided during the life of the put option when a Portfolio, as the holder
of the put option, is able to sell the underlying security at the put exercise
price regardless of any decline in the underlying security's market price. By
using put options in this manner, a Portfolio will reduce any profit it might
otherwise have realized in its underlying security by the premium paid for the
put option and by transaction costs. The security covering the call or put
option will be segregated at the Portfolio's custodian.
5
<PAGE>
The premium received from writing a call or put option, or paid for purchasing a
call or put option will reflect, among other things, the current market price of
the underlying security, the relationship of the exercise price to such market
price, the historical price volatility of the underlying security, the length of
the option period, and the general interest rate environment. The premium
received by a Portfolio for writing call options will be recorded as a liability
in the statement of assets and liabilities of that Portfolio. This liability
will be adjusted daily to the option's current market value. The liability will
be extinguished upon expiration of the option, by the exercise of the option, or
by entering into an offsetting transaction. Similarly, the premium paid by a
Portfolio when purchasing a put option will be recorded as an asset in the
statement of assets and liabilities of that Portfolio. This asset will be
adjusted daily to the option's current market value. The asset will be
extinguished upon expiration of the option, by selling an identical option in a
closing transaction, or by exercising the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call or put option, to prevent an underlying security from being
called or put, or to permit the exchange or tender of the underlying security.
Furthermore, effecting a closing transaction will permit a Portfolio to write
another call option, or purchase another put option, on the underlying security
with either a different exercise price or expiration date or both. If a
Portfolio desires to sell a particular security from its portfolio on which it
has written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security.
There is, of course, no assurance that a Portfolio will be able to effect a
closing transaction at a favorable price. If a Portfolio cannot enter into such
a transaction, it may be required to hold a security that it might otherwise
have sold, in which case it would continue to be at market risk on the security.
A Portfolio will pay brokerage commissions in connection with the sale or
purchase of options to close out previously established option positions. Such
brokerage commissions are normally higher as a percentage of underlying asset
values than those applicable to purchases and sales of portfolio securities. The
exercise price of an option may be below, equal to, or above the current market
value of the underlying security at the time the option is written. From time to
time, a Portfolio may purchase an underlying security for delivery in accordance
with an exercise notice of a call option assignment, rather than delivering such
security from its portfolio. In such cases additional brokerage commissions will
be incurred.
A Portfolio will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from the
writing of the option; however, any loss so incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
simultaneous or subsequent sale of a different option. Also, because increases
in the market price of a call option will generally reflect increases in the
market price of the underlying security, any loss resulting from the repurchase
of a call option is likely to be offset in whole or in part by appreciation of
the underlying security owned by a Portfolio. Any profits from writing covered
call options are considered short-term gain for federal income tax purposes and,
when distributed by a Portfolio, are taxable as ordinary income.
Foreign Futures Contracts and Foreign Options--The Variable Portfolios may
engage in transactions in foreign futures contracts and foreign options.
Participation in foreign futures contracts and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the CFTC, the National Futures Association (NFA)
nor any domestic exchange regulates activities of any foreign boards of trade
including the execution, delivery and clearing of transactions, or has the power
to compel enforcement of the rules of a foreign board of trade or any applicable
foreign laws. Generally, the foreign transaction will be governed by applicable
foreign law. This is true even if the exchange is formally linked to a domestic
market so that a position taken on the market may be liquidated by a transaction
on another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures contract or foreign options
transaction occurs. Investors which trade foreign futures contracts or foreign
options contracts may not be afforded certain of the protective measures
provided by domestic exchanges, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the NFA. In
particular, funds received from customers for foreign futures contracts or
foreign options transactions may not be provided the same protections as funds
received for transactions on United States futures exchanges. The price of any
foreign futures contracts or foreign options contract and, therefore, the
potential profit and loss thereon, may be affected by an variance in the foreign
exchange rate between the time an order is placed and the time it is liquidated,
offset or exercised.
Options on Foreign Currencies--Each Variable Portfolio may write and purchase
calls on foreign currencies. A Portfolio may purchase and write puts and calls
on foreign currencies that are traded on a securities or commodities exchange or
quoted by major recognized dealers in such options for the purposes of
protecting against declines in the dollar value of foreign securities and
against increases in the dollar cost of foreign securities to be acquired. If a
rise is anticipated in the dollar value of a foreign currency in which
securities to be required are denominated, the increased cost of such securities
may be partially offset by purchasing calls or writing puts on that foreign
currency. If a decline in the dollar value of a foreign currency is anticipated,
the decline in value of portfolio securities denominated in that currency may be
partially offset by writing calls or purchasing puts on that foreign currency.
In the event of rate fluctuations adverse to a Portfolio's position, it would
lose the premium it paid and transaction costs. A call written on a foreign
currency by a Portfolio is covered if the Portfolio owns the underlying foreign
currency covered by the call or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
may be written by a Portfolio on a foreign currency to provide a hedge against a
decline due to an expected adverse change in the exchange rate in the U.S.
dollar value of a security which the Portfolio owns or has the right to acquire
and which is denominated in the currency underlying the option. This is a
"cross-hedging" strategy. In such
6
<PAGE>
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 differs from the currency in which the underlying
security is denominated. This is done in the expectation that there is a greater
correlation between the foreign currency of the forward exchange contract and
the foreign currency of the underlying investment than between the U.S. dollar
and the foreign currency of the underlying investment. This technique is
referred to as "cross-hedging." The success of cross-hedging is dependent on
many factors, including the ability of the Adviser to correctly identify and
monitor the correlation between foreign currencies and the U.S. dollar. To the
extent that the correlation is not identical, a Portfolio may experience losses
or gains on both the underlying security and the cross currency hedge.
Each Portfolio may use forward exchange contracts to protect against uncertainty
in the level of future exchange rates. The use of forward exchange contracts
does not eliminate fluctuations in the prices of the underlying securities the
Portfolio owns or intends to acquire, but it does fix a rate of exchange in
advance. In addition, although forward exchange contracts limit the risk of loss
due to a decline in the value of the hedged currencies, at the same time they
limit any potential gain that might result should the value of the currencies
increase.
There is no limitation as to the percentage of a Portfolio's assets that may be
committed to forward exchange contracts. The Portfolios will not enter into a
"cross-hedge," unless it is denominated in a currency or currencies that the
Adviser believes will have price movements that tend to correlate closely with
the currency in which the investment being hedged is denominated.
The Variable Portfolios' custodian will place cash or U.S. Government securities
or other liquid high-quality debt securities in a separate account of each
Portfolio having a value equal to the aggregate amount of that Portfolio's
commitments under forward contracts entered into with respect to position hedges
and cross-hedges. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Portfolio's
commitments with respect to such contracts. As an alternative to maintaining all
or part of the separate account, a Portfolio may purchase a call option
permitting the Portfolio to purchase the amount of foreign currency being hedged
by a forward sale contract at a price no higher than the forward contract price,
or a Portfolio may purchase a put option permitting the Portfolio to sell the
amount of foreign currency subject to a forward purchase contract at a price as
high or higher than the forward contract price. Unanticipated changes in
currency prices may result in poorer overall performance for a Portfolio than if
it had not entered into such contracts.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the forward contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase), if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Portfolio is
obligated to deliver. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Portfolio to sustain losses on these contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring a Portfolio
to sell a currency, the Portfolio may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, a
Portfolio may close out a forward contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. The Portfolio
would realize a gain or loss as a result of entering into such an offsetting
forward contract under either circumstance to the extent the exchange rate(s)
between the currencies involved moved between the execution dates of the first
contract and the offsetting contract.
The cost to a Portfolio of engaging in forward exchange contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees
7
<PAGE>
or commissions are involved. Because such contracts are not traded on an
exchange, a Portfolio must evaluate the credit and performance risk of each
particular counterparty under a forward contract.
Although the Variable Portfolios value their assets daily in terms of U.S.
dollars, they do not intend to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. The Portfolios may convert foreign currency from
time to time, and investors should be aware of the costs of currency conversion.
Foreign exchange dealers do not charge a fee for conversion, but they do seek to
realize a profit based on the difference between the prices at which they buy
and sell various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer.
Restrictions on the Use of Futures and Option Contracts--CFTC regulations
require that all short futures positions be entered into for the purpose of
hedging the value of securities held, and that all long futures positions either
constitute bona fide hedging transactions, as defined in such regulations, or
have a total value not in excess of an amount determined by reference to certain
cash and securities positions maintained, and accrued profits on such positions.
With respect to futures contracts or related options that are entered into for
purposes that may be considered speculative, the aggregate initial margin for
future contracts and premiums for options will not exceed 5% of a Portfolio's
net assets, after taking into account realized profits and unrealized losses on
such futures contracts.
A Portfolio's ability to engage in the hedging transactions described herein may
be limited by the current federal income tax requirement that a Portfolio derive
less than 30% of its gross income from the sale or other disposition of stock or
securities held for less than three months.
Interest Rate Swap Transactions--Swap agreements entail both interest rate risk
and credit risk. There is a risk that, based on movements of interest rates in
the future, the payments made by a Portfolio under a swap agreement will have
been greater than those received by it. Credit risk arises from the possibility
that the counterparty will default. If the counterparty to an interest rate swap
defaults, a Portfolio's loss will consist of the net amount of contractual
interest payments that a Portfolio has not yet received. The Adviser will
monitor the creditworthiness of counterparties to a Portfolio's interest rate
swap transactions on an ongoing basis. A Portfolio will enter into swap
transactions with appropriate counterparties pursuant to master netting
agreements. A master netting agreement provides that all swaps done between a
Portfolio and that counterparty under that master agreement shall be regarded as
parts of an integral agreement. If on any date amounts are payable in the same
currency in respect of one or more swap transactions, the net amount payable on
that date in that currency shall be paid. In addition, the master netting
agreement may provide that if one party defaults generally or on one swap, the
counterparty may terminate the swaps with that party. Under such agreements, if
there is a default resulting in a loss to one party, the measure of that party's
damages is calculated by reference to the average cost of a replacement swap
with respect to each swap (i.e., the mark-to-market value at the time of the
termination of each swap). The gains and losses on all swaps are then netted,
and the result is the counterparty's gain or loss on termination. The
termination of all swaps and the netting of gains and losses on termination is
generally referred to as "aggregation."
Additional Risk Factors in Using Derivatives--In addition to any risk factors
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.
8
<PAGE>
Under certain extreme market conditions, it is possible that a Portfolio will
not be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect the Portfolio.
The Variable Portfolios will purchase or sell futures contracts or options for
hedging purposes, only if, in the Adviser's judgment, there is expected to be a
sufficient degree of correlation between movements in the value of such
instruments and changes in the value of the assets being hedged for the hedge to
be effective. There can be no assurance that the Adviser's judgment will be
accurate.
Potential Lack of a Liquid Secondary Market--The ordinary spreads between prices
in the cash and futures markets, due to differences in the natures of those
markets, are subject to distortions. First, all participants in the futures
markets are subject to initial deposit and variation margin requirements. This
could require a Portfolio to post additional cash or cash equivalents as the
value of the position fluctuates. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures or options market may be
lacking. Prior to exercise or expiration, a futures or option position may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the exchange on which the position was originally
established. While a Portfolio will establish a futures or option position only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures or option
contract at any specific time. In such event, it may not be possible to close
out a position held by the Portfolio, which could require the Portfolio to
purchase or sell the instrument underlying the position, make or receive a cash
settlement, or meet ongoing variation margin requirements. The inability to
close out futures or option positions also could have an adverse impact on the
Portfolio's ability effectively to hedge its portfolio, or the relevant portion
thereof.
The liquidity of a secondary market in a futures contract or an option on a
futures contract may be adversely affected by "daily price fluctuation limits"
established by the exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day and prohibit trading beyond such
limits once they have been reached. The trading of futures and options contracts
also is subject to the risk of trading halts, suspensions, exchange or clearing
house equipment failures, government intervention, insolvency of the brokerage
firm or clearing house or other disruptions of normal trading activity, which
could at times make it difficult or impossible to liquidate existing positions
or to recover excess variation margin payments.
Risk of Predicting Interest Rate Movements--Investments in futures contracts on
fixed income securities and related indices involve the risk that if the
Adviser's judgment concerning the general direction of interest rates is
incorrect, a Portfolio's overall performance may be poorer than if it had not
entered into any such contract. For example, if a Portfolio has been hedged
against the possibility of an increase in interest rates which would adversely
affect the price of bonds held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its bonds which have been hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements, possibly at a time when it may be disadvantageous
to do so. Such sale of bonds may be, but will not necessarily be, at increased
prices 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
9
<PAGE>
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.
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.
10
<PAGE>
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.
11
<PAGE>
High-Yield Bonds
All the Variable Portfolios, except International, may invest in high-yield
bonds, which are fixed income securities that offer a current yield above that
generally available on higher quality debt securities. These securities are
regarded as speculative and generally involve more risk of loss of principal and
income than higher-rated securities. Also their yields and market values tend to
fluctuate more. Fluctuations in value do not affect the cash income from the
securities but are reflected in a Portfolio's net asset value. The greater risks
and fluctuations in yield and value occur, in part, because investors generally
perceive issuers of lower-rated and unrated securities to be less creditworthy.
Lower ratings, however, may not necessarily indicate higher risks. In pursuing a
Portfolio's objectives, the Adviser seeks to identify situations in which the
rating agencies have not fully perceived the value of the security or in which
the Adviser believes that future developments will enhance the creditworthiness
and the ratings of the issuer.
The yields earned on high-yield 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-yield 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-yield 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-yield bond 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-yield 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-yield 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-yield 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-yield
bonds may not accurately reflect the true risks of an investment. Credit ratings
typically evaluate the safety of principal and interest payments rather than the
market value risk of such securities. In addition, credit agencies may fail to
adjust credit ratings to reflect rapid changes in economic or company conditions
that affect a security's market value. Although the ratings of recognized rating
services such as Moody's Investors Service, Inc. and Standard & Poor's
Corporation are considered, the Adviser primarily relies on its own credit
analysis which includes a study of existing debt, capital structure, ability to
service debts and to pay dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend of earnings. Thus the
achievement of a Portfolio's investment objective may be more dependent on the
Adviser's own credit analysis than might be the case for a fund which does not
invest in these securities.
(5) Legislation. Legislation may have a negative impact on the market for
high-yield 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
12
<PAGE>
varies, depending on the time remaining until maturity or cash payment date,
prevailing interest rates, liquidity of the security and the perceived credit
quality of the issuer. The discount, in the absence of financial difficulties of
the issuer, decreases as the final maturity or cash payment date of the security
approaches. STRIPS are created by the Federal Reserve Bank by separating the
interest and principal components of an outstanding U.S. Treasury bond and
selling them as individual securities. The market prices of zero coupon, STRIPS
and deferred interest securities generally are more volatile than the market
prices of securities with similar maturities that pay interest periodically and
are likely to respond to changes in interest rates to a greater degree than do
non-zero coupon securities having similar maturities and credit quality.
The risks associated with lower-rated debt securities apply to these securities.
Zero coupon and pay-in-kind securities are also subject to the risk that in the
event of a default, a Portfolio may realize no return on its investment, because
these securities do not pay cash interest.
Convertibles
A convertible bond or convertible preferred stock gives the holder the option of
converting these securities into common stock. Some convertible securities
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
Warrants
Warrants allow the holder to subscribe for new shares in the issuing company
within a specified time period, according to a predetermined formula governing
the number of shares per warrant and the price to be paid for those shares.
Warrants may be issued separately or in association with a new issue of bonds,
preferred stock, common stock or other securities.
Covered warrants allow the holder to purchase existing shares in the issuing
company, or in a company associated with the issuer, or in a company in which
the issuer has or may have a share stake which covers all or part of the
warrants' subscription rights.
When-Issued or Delayed-Delivery Securities
During any period that a Portfolio has outstanding a commitment to purchase
securities on a when-issued or delayed-delivery basis, that Portfolio will
maintain a segregated account consisting of cash, U.S. Government securities or
other high-quality debt obligations with its custodian bank. To the extent that
the market value of securities held in this segregated account falls below the
amount that the Portfolio will be required to pay on settlement, additional
assets may be required to be added to the segregated account. Such segregated
accounts could affect the Portfolio's liquidity and ability to manage its
portfolio. When a Portfolio engages in when-issued or delayed-delivery
transactions, it is effectively relying on the seller of such securities to
consummate the trade; failure of the seller to do so may result in the
Portfolio's incurring a loss or missing an opportunity to invest securities held
in the segregated account more advantageously. A Portfolio will not pay for
securities purchased on a when-issued or delayed-delivery basis, or start
earning interest on such securities, until the securities are actually received.
However, any security so purchased will be recorded as an asset of the
purchasing Portfolio at the time the commitment is made. Because the market
value of securities purchased on a when-issued or delayed-delivery basis may
increase or decrease prior to settlement as a result of changes in interest
rates or other factors, such securities will be subject to changes in market
value prior to settlement and a loss may be incurred if the value of the
security to be purchased declines prior to settlement.
Portfolio Turnover
The Variable Portfolios' policies on portfolio turnover are discussed in the
prospectus.
13
<PAGE>
DIRECTORS AND OFFICERS
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 Life Insurance and Annuity
Company (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., Aetna Variable
Portfolios, Inc. and Portfolio Partners, Inc.
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation During Past Five Years (and Positions held
Name, Address and Age with Registrant with Affiliated Persons or Principal Underwriters of the Registrant)
--------------------- --------------- --------------------------------------------------------------------
<S> <C> <C>
Shaun P. Mathews* Director and President Vice President/Senior Vice President, Aetna Life Insurance and Annuity
151 Farmington Avenue Company, March 1991 to present; Vice President, Aetna Life Insurance
Hartford, Connecticut Company, 1991 to present; Director and President, Aetna InvestmentServices,
Age 42 Inc., July 1993 to present; Director and Senior Vice President, Aetna
Insurance Company of America, September 1992 to present.
Wayne F. Baltzer Vice President Assistant Vice President, Aetna Life Insurance and Annuity Company, May
151 Farmington Avenue 1991 to present; Vice President, Aetna Investment Services, Inc., July 1993
Hartford, Connecticut to present.
Age 54
Martin T. Conroy Vice President Assistant Treasurer, Aetna Retirement Holdings, Inc., September 1997 to
151 Farmington Avenue present; Assistant Treasurer, Aetna Life Insurance and Annuity Company,
Hartford, Connecticut October 1991 to present.
Age 57
J. Scott Fox Vice President and Vice President, Aetna Retirement Services, Inc., March 1997 to present;
151 Farmington Avenue Treasurer Director and Senior Vice President, Aetna Retirement Holdings, Inc., April
Hartford, Connecticut 1997 to present; Director and President, Aetna Life Assignment Company,
Age 42 September 1997 to present; Director and Senior Vice President, Aetna Life
Insurance and Annuity Company, March 1997 to present; Director, Managing
Director, Chief Operating Officer, Chief Financial Officer and Treasurer,
Aeltus Investment Management, Inc. (Aeltus), April 1994 to March 1997;
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.
Amy R. Doberman Secretary Counsel, Aetna Life Insurance and Annuity Company, December 1996 to
151 Farmington Avenue present; Attorney, Securities and Exchange Commission, March 1990 to
Hartford, Connecticut November 1996.
Age 35
Maria T. Fighetti Director Manager/Attorney, Health Services, New York City Department of Mental
325 Piermont Road Health, Mental Retardation and Alcohol Services, 1973 to present.
Closter, New Jersey
Age 54
David L. Grove Director, Chairperson Private Investor; Economic/Financial Consultant, December 1985 to present.
5 The Knoll Contract Committee
Armonk, New York
Age 79
14
<PAGE>
Position(s) Held Principal Occupation During Past Five Years (and Positions held
Name, Address and Age with Registrant with Affiliated Persons or Principal Underwriters of the Registrant)
--------------------- --------------- --------------------------------------------------------------------
Timothy A. Holt* Director Director, Senior Vice President and Chief Financial Officer, Aetna
151 Farmington Avenue Life Insurance and Annuity Company, February 1996 to present;
Hartford, Connecticut Senior Vice President, Aetna Retirement Holdings, Inc., September
1997 to present; Age 44 Director, Aetna Investment Services, Inc.,
September 1997 to present; Vice President, Portfolio Management/Investment
Group, Aetna Inc. (formerly Aetna Life and Casualty Company), June 1991 to
February 1996; Director, Aetna Retirement Holdings, Inc., March 1996 to
present; Vice President, Aetna Retirement Holdings, Inc., September 1996 to
September 1997.
Sidney Koch Director Financial Adviser, self-employed, January 1993 to present; Senior
455 East 86th Street Adviser, Daiwa Securities America, Inc., January 1992 to January 1993.
New York, New York
Age 62
Corine T. Norgaard Director Dean of the Barney School of Business, University of Hartford, (West
556 Wormwood Hill Hartford, CT), August 1996 to present; Professor, Accounting and Dean of
Mansfield Center, the School of Management, Binghamton University, (Binghamton, NY), August
Connecticut 1993 to August 1996; Professor, Accounting, University of Connecticut,
Age 60 (Storrs, CT), September 1969 to June 1993; Director, The Advest Group
(holding company for brokerage firm) through September 1996.
Richard G. Scheide Director, Chairperson Trust and Private Banking Consultant, David Ross Palmer Consultants, July
11 Lily Street Audit Committee 1991 to present.
Nantucket, Massachusetts
Age 68
</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 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 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 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 and
Name of Person, Position from Registrant Fund Complex Paid to Directors
<S> <C> <C>
Corine Norgaard $37.00 $72,950.00
Director and Member,
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
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation from Registrant and
Name of Person, Position from Registrant Fund Complex Paid to Directors
<S> <C> <C>
Richard G. Scheide $35.00 $68,950.00
Director, Chairperson
Audit Committee, Member
Contract Committee
David L. Grove $35.00* $68,950.00*
Director, Chairperson
Contract Committee, Member
Audit Committee
</TABLE>
* Mr. Grove elected to defer all such compensation under an existing deferred
compensation plan.
The Fund has obtained an order from 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.
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 Growth, Capital
Appreciation, Small Company and Index Plus to continue through December 31,
1997. On September 24, 1997, the Directors approved an Investment Advisory
Agreement between the Fund and Aetna for Mid Cap, International, Real Estate,
Index Plus Mid Cap, Index Plus Small Cap, Index Plus Bond and High Yield to
continue through December 31, 1998.
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
16
<PAGE>
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 Services, Inc. and their
continued use is subject to the right of Aetna Services, Inc. to withdraw this
permission in the event Aetna or another subsidiary or affiliated corporation of
Aetna Services, 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 Growth, Capital Appreciation, Small Company and Index Plus to
continue through December 31, 1997. On September 24, 1997, the Directors
approved a Subadvisory Agreement between Aetna and Aeltus with respect to Mid
Cap, International, Real Estate, Index Plus Mid Cap, Index Plus Small Cap, Index
Plus Bond and High Yield to continue through December 31, 1998. The Subadvisory
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
17
<PAGE>
Administrative Services Agreement, Aetna will receive an annual fee, payable
monthly, as described in the Prospectus.
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, Pennsylvania, 15258
serves as custodian for the assets of all Portfolios except the International.
Brown Brothers Harriman & Company, 40 Water Street, Boston, Massachusetts 02109
serves as custodian for the assets of International. Neither custodian
participates 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.
Regarding portfolio securities which are purchased outside the United States,
Brown Brothers Harriman & Company has entered into sub-custodian agreements with
several foreign banks or clearing agencies that are designed to comply with Rule
17f-5 under the 1940 Act with respect to portfolio securities held in custody by
foreign banks.
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 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 Variable 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
18
<PAGE>
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 Fund is subject to a Code of Ethics, adopted by the Directors, governing
personal trading by persons who manage, or who have access to trading activity
by, a Portfolio. Aetna and Aeltus have adopted Codes of Ethics which the
Directors review annually. All Codes allow trades to be made in securities that
may be held by a Portfolio. However, they prohibit a person from taking
advantage of Portfolio trades or from acting on inside information.
DESCRIPTION OF SHARES
The Articles of Incorporation authorize the Fund to issue two billion shares of
common stock with a par value of $.001 per share. The shares are nonassessable,
transferable, redeemable and do not have pre-emptive rights or cumulative voting
rights. The shares may be issued as whole or fractional shares and are
uncertificated.
The shares may be issued in series or portfolios having separate assets and
separate investment objectives and policies. Upon liquidation of a portfolio,
its shareholders are entitled to share pro rata in the net assets of that
portfolio available for distribution to shareholders. Shares, when issued, will
be fully paid and nonassessable.
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
19
<PAGE>
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 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:
P(1 + T)n = 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.
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,
20
<PAGE>
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 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.
21
<PAGE>
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.
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
22
<PAGE>
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.
23
<PAGE>
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
Portfolio, distributions
24
<PAGE>
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
25
<PAGE>
may also voluntarily resign from office. Voting rights are not cumulative, so
that the holders of more than 50% of the shares voting in the election of
Directors can, if they choose to do so, elect all the Directors of the Variable
Portfolios, in which event the holders of the remaining shares will be unable to
elect any person as a Director.
The Articles may be amended by an affirmative vote of a majority of the shares
at any meeting of shareholders or by written instrument signed by a majority of
the Directors and consented to by a majority of the shareholders. The Directors
may also amend the Articles without the vote or consent of shareholders if they
deem it necessary to conform the Articles to the requirements of applicable
federal laws or regulations or the requirements of the regulated investment
company provisions of the Code, but the Directors shall not be liable for
failing to do so.
FINANCIAL STATEMENTS
The Financial Statements and the independent auditors' reports, thereon,
appearing in the Fund's Annual Report for the fiscal year ended December 31,
1996, and the Financial Statements appearing in the Fund's Semi-Annual Report
for the six months ended June 30, 1997, are incorporated by reference in this
Statement of Additional Information. The Annual and Semi-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.
26
<PAGE>
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
*Audited Financial Statements as of December 31, 1996, which
include the following:
Aetna Variable Index Plus Portfolio
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of
December 31, 1996
Statement 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
Aetna Variable Small Company Portfolio
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of
December 31, 1996
Statement 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
Aetna Variable Capital Appreciation Portfolio
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of
December 31, 1996
Statement 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
Aetna Variable Growth Portfolio
Portfolio of Investments as of December 31, 1996
Statement of Assets and Liabilities as of
December 31, 1996
Statement 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
*Incorporated by reference to the Fund's Annual Report dated
December 31, 1996 on Form N-30D (File No. 811-7651), as
filed electronically with the Securities and Exchange
Commission on March 7, 1997 (Accession Nos.
0000950146-97-000326; 0000950146-97-000330;
0000950146-97-000331; and 0000950146-97-000332).
<PAGE>
*Unaudited Financial Statements for Aetna Variable
Index Plus Portfolio, Aetna Variable Small Company
Portfolio, Aetna Variable Capital Appreciation
Portfolio and Aetna Variable Growth Portfolio as of
June 30, 1997, which include the following:
Portfolios of Investments as of June 30, 1997
Statements of Assets and Liabilities as of
June 30, 1997
Statements of Operations for the six month period
ended June 30, 1997
Statements of Changes in Net Assets for the six month
period ended June 30, 1997 and the periods ended
December 31, 1996
Notes to Financial Statements
*Incorporated by reference to the Fund's Semi-Annual
Report dated June 30, 1997 on Form N-30D (File No.
811-7651), as filed electronically with the Securities
and Exchange Commission on September 5, 1997
(Accession No. 0000950146-97-001406).
(b) Exhibits
(1)(a) Articles of Incorporation(1)
(1)(b) Articles of Amendment (October 10, 1996)(2)
(1)(c) Form of Articles Supplementary
(2) Amended Bylaws(2)
(3) Not applicable
(4) Instruments Defining Rights of Holders (set forth in the
Articles of Incorporation which are incorporated by
reference)(1)
(5)(a) Investment Advisory Agreement between Aetna Life Insurance and
Annuity Company ("Aetna") and Aetna Variable Portfolios, Inc.
(for Aetna Variable Capital Appreciation Portfolio, Aetna
Variable Growth Portfolio, Aetna Variable Index Plus
Portfolio, and Aetna Variable Small Company Portfolio)(2)
(5)(b) Form of Investment Advisory Agreement between Aetna and Aetna
Variable Portfolios, Inc. (for Aetna Index Plus Bond
Portfolio, Aetna Index Plus Mid Cap Portfolio, Aetna Mid Cap
Portfolio, Aetna Index Plus Small Cap Portfolio, Aetna High
Yield Portfolio, Aetna Real Estate Securities Portfolio, and
Aetna International Portfolio)
(5)(c) Subadvisory Agreement between Aetna, Aetna Variable
Portfolios, Inc. and Aeltus Investment Management, Inc.
("Aeltus") (for Aetna Variable Capital Appreciation Portfolio,
Aetna Variable Growth Portfolio, Aetna Variable Index Plus
Portfolio, and Aetna Variable Small Company Portfolio)(2)
(5)(d) Form of Subadvisory Agreement between Aetna, Aetna Variable
Portfolios, Inc. and Aeltus (for Aetna Index Plus Bond
Portfolio, Aetna Index Plus Mid Cap Portfolio, Aetna Mid Cap
Portfolio, Aetna Index Plus Small Cap Portfolio, Aetna High
Yield Portfolio, Aetna Real Estate Securities Portfolio, and
Aetna International Portfolio)
(6) Underwriting Agreement between the Registrant and Aetna(2)
(7) Not applicable
(8)(a) Custodian Agreement between Aetna Variable Portfolios, Inc.
and Mellon Bank, N.A. (for Aetna Variable Capital Appreciation
Portfolio, Aetna Variable Growth Portfolio, Aetna Variable
Index Plus Portfolio, and Aetna Variable Small Company
Portfolio)(2)
(8)(b) Form of Custodian Agreement between Aetna Variable Portfolios,
Inc. and Brown Brothers Harriman & Co. (for International
Portfolio)
<PAGE>
(8)(c) Form of Amendment to Custodian Agreement between Aetna
Variable Portfolios, Inc. and Mellon Bank, N.A. (for Aetna
Index Plus Bond Portfolio, Aetna Index Plus Mid Cap Portfolio,
Aetna Mid Cap Portfolio, Aetna Index Plus Small Cap Portfolio,
Aetna High Yield Portfolio, and Aetna Real Estate Securities
Portfolio
(9)(a) Administrative Services Agreement between Aetna and Aetna
Variable Portfolios, Inc. (for Aetna Variable Capital
Appreciation Portfolio, Aetna Variable Growth Portfolio, Aetna
Variable Index Plus Portfolio, and Aetna Variable Small
Company Portfolio)(2)
(9)(b) Form of Administrative Services Agreement between Aetna and
Aetna Variable Portfolios, Inc. (for Aetna Index Plus Bond
Portfolio, Aetna Index Plus Mid Cap Portfolio, Aetna Mid Cap
Portfolio, Aetna Index Plus Small Cap Portfolio, Aetna High
Yield Portfolio, Aetna Real Estate Securities Portfolio, and
Aetna International Portfolio)
(9)(c) License Agreement(2)
(10) Opinion and Consent of Counsel
(11) Consent of Independent Auditors
(12) Not applicable
(13)(a) Agreement re: Initial Contribution to Working Capital
(August 27, 1996)(2)
(13)(b) Agreement re: Initial Contribution to Working Capital
(September 24, 1997)
(14) Not applicable
(15) Not applicable
(16) Schedule for Computation of Performance Data(2)
(17) See exhibit 27 below
(18) Not applicable
(19)(a) Powers of Attorney(3)
(19)(b) Authorization for Signatures
(27) Financial Data Schedule
1. Incorporated by reference to the Registration Statement on Form N-1A (File
No. 333-05173), as filed electronically with the Securities and Exchange
Commission on June 4, 1996 (Accession No. 0000928389-96-000122).
2. Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form N-1A (File No. 333-05173), as filed electronically on
March 7, 1997 (Accession No. 0000950146-97-000336).
3. Incorporated by reference to Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A (File No. 33-27247), as filed
electronically on April 11, 1997 (Accession No. 0000950146-97-000577).
<PAGE>
Item 25. Persons Controlled by or Under Common Control
Registrant is a Maryland corporation for which separate financial
statements are filed. As of August 29, 1997 Aetna Life Insurance
and Annuity Company owned 96.93% of the Registrant's outstanding
voting securities.
Aetna Life Insurance and Annuity Company is an indirect
wholly-owned subsidiary of Aetna Inc.
A list of all persons directly or indirectly under common control
with the Registrant and a list which indicates the principal
business of each such company referenced in the diagram are
incorporated herein by reference to Item 25 of Post-Effective
Amendment No. 22 to the Registration Statement on Form N-1A (File
No. 33-41694), as filed electronically with the Securities and
Exchange Commission on July 9, 1997 (Accession No.
0000950146-97-001049).
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders
-------------- ------------------------
Aetna Variable Capital Appreciation Portfolio 4
Aetna Variable Growth Portfolio 4
Aetna Variable Index Plus Portfolio 2
Aetna Variable Small Company Portfolio 4
Aetna Index Plus Bond Portfolio 0
Aetna Index Plus Mid Cap Portfolio 0
Aetna Mid Cap Portfolio 0
Aetna Index Plus Small Cap Portfolio 0
Aetna High Yield Portfolio 0
Aetna Real Estate Securities Portfolio 0
Aetna International Portfolio 0
Item 27. Indemnification
Article 10, Section (iv) of the Registrant's Articles of
Incorporation which are incorporated by reference to Registrant's
Registration Statement on Form N-1A (File No. 333-05173), as filed
electronically 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
<PAGE>
"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 ("1933 Act") 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 1933 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
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 1933 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, and 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 Variable Fund, Aetna Income Shares, Aetna Variable Encore
Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund, Aetna
Generation Portfolios, Inc. and Portfolio Partners, Inc. (all
management investment companies registered under the Investment
Company Act of 1940 ("1940 Act")) and acts only as investment
adviser for Aetna Series Fund, Inc. 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).
<PAGE>
The following table summarizes the business connections of the
directors and principal officers of the Investment Adviser.
<TABLE>
<CAPTION>
---------------------------------------------------------- ----------------------------------------------
<S> <C> <C>
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
---------------------------------------------------------- ----------------------------------------------
Thomas J. McInerney Director and President President (since August 1997) -- Aetna
Retirement Services, Inc.; Director and
President (since September 1997) -- Aetna
Life Insurance and Annuity Company; Director
and President (since September 1997) -- Aetna
Retirement Holdings, Inc.; Director and
President (since September 1997) -- Aetna
Insurance Company of America; Executive Vice
President (since August 1997) -- Aetna Inc.;
Vice President, Strategy (March 1997 - August
1997) -- Aetna Inc.; Vice President,
Marketing and Sales (December 1996 - March
1997) -- Aetna U.S. Healthcare; Vice
President, National Accounts (April 1996 -
December 1996) -- Aetna U.S. Healthcare; Vice
President, Strategy, Finance, &
Administration (July 1995 - April 1996) --
Aetna Inc.; Vice President, Guaranteed
Products (November 1992 - July 1995) -- Aetna
Inc.
Christopher J. Burns Director and Senior Vice President, Chief Operations Officer (since
President November 1996) -- Aetna Investment Services,
Inc.; Director (since March 1996) -- Aetna
Retirement Holdings, Inc.; Director (since
January 1996) -- Aetna Financial Services,
Inc.; Director (since July 1992) -- Aetna
Investment Services, Inc.
<PAGE>
J. Scott Fox Director and Senior Vice President Director and President (since September
1997) -- Aetna Life Assignment Company;
Director and Senior Vice President (since
April 1997) -- Aetna Retirement Holdings,
Inc.; Senior Vice President (since March
1997) -- Aetna Life Insurance and Annuity
Company; Managing Director, Chief Operating
Officer, Chief Financial Officer, Treasurer
(April 1994 - March 1997) -- Aeltus
Investment Management, Inc.
Timothy A. Holt Director, Senior Vice President Senior Vice President (since September 1997)
and Chief Financial Officer -- Aetna Retirement Holdings, Inc.; Director
(since September 1997) -- Aetna Investment
Services, Inc.; Senior Vice President and
Chief Financial Officer (since February 1996)
-- Aetna Life Insurance and Annuity Company;
Director (since March 1996) -- Aetna
Retirement Holdings, Inc.; Vice President
(September 1996 - September 1997) -- Aetna
Retirement Holdings, Inc.; Vice President
(June 1991 - February 1996) -- Portfolio
Management/Investment Group, Aetna Inc.
(formerly known as Aetna Life and Casualty
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>
Shaun P. Mathews Director and Senior Vice President Director (since December 1996) -- Aetna
Insurance Agency Holding Company, Inc.;
Senior Vice President (since September 1997),
Vice President (February 1996 - September
1997), Senior Vice President (March 1991 -
February 1996) -- Aetna Life Insurance and
Annuity Company; Director (since July 1993)
-- Aetna Investment Services, Inc.; Director
(since February 1993) -- Aetna Insurance
Company of America.
Glen Salow Director and Vice President Vice President (since 1992) -- Aetna Life
Insurance and Annuity Company.
Kirk P. Wickman Vice President, General Counsel Vice President, General Counsel and
and Corporate Secretary Corporate Secretary (since March 1997) --
Aetna Retirement Holdings, Inc.; Vice
President, General Counsel and Corporate
Secretary (since November 1996) -- Aetna Life
Insurance and Annuity Company; Vice President
and Counsel (June 1992 - November 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; Vice President and
Treasurer, Corporate Controller (since March
1996) -- Aetna Retirement Holdings, Inc.
<PAGE>
---------------------------------------------------------- ----------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
---------------------------------------------------------- ----------------------------------------------
Frederick D. Kelsven Vice President and Chief Director of Compliance (January 1985 to
Compliance Officer September 1996) -- Nationwide Life Insurance
Company.
</TABLE>
* 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 Variable Fund, Aetna
Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers
Fund, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., and
Portfolio Partners, Inc. (all management investment companies
registered under the 1940 Act) and acts only as investment adviser for
Aetna Series Fund, Inc. 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>
Thomas J. McInerney Director and President None
Christopher J. Burns Director and Senior Vice President None
J. Scott Fox Director and Senior Vice President Vice President and Treasurer
Timothy A. Holt Director, Senior Vice President and Chief Director
Financial Officer
John Y. Kim Director and Senior Vice President None
<PAGE>
Shaun P. Mathews Director and Senior Vice President Director and President
Glen Salow Director and Vice President None
Kirk P. Wickman Vice President, General Counsel and Corporate None
Secretary
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, Aetna,
maintain physical possession of each account, book and 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 the Registrant'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 its latest annual report to
shareholders, upon request and without charge.
Insofar as indemnification for liability arising under the 1933
Act 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
<PAGE>
1933 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 1933 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 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 26th day of September, 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 to the Registration Statement has been signed by the
following persons on September 26, 1997 in the capacities indicated.
Signature Title Date
Shaun P. Mathews* President and Director )
- -------------------------- (principal executive officer) )
Shaun P. Mathews )
)
Maria T. Fighetti* Director )
- -------------------------- )
Maria T. Fighetti )
)
David L. Grove* Director )
- -------------------------- )
David L. Grove )September 26, 1997
)
Sidney Koch* Director )
- -------------------------- )
Sidney Koch )
)
Corine T. Norgaard* Director )
- -------------------------- )
Corine T. Norgaard )
)
Richard G. Scheide* Director )
- -------------------------- )
Richard G. Scheide )
)
J. Scott Fox* Vice President and Treasurer )
- -------------------------- (principal financial and )
J. Scott Fox accounting officer) )
By: /s/ Amy R. Doberman
------------------------------------
*Amy R. Doberman
Attorney-in-Fact
<PAGE>
Aetna Variable Portfolios, Inc.
EXHIBIT INDEX
Exhibit No. Exhibit Page
99-B.1(a) Articles of Incorporation *
99-B.1(b) Articles of Amendment (October 10, 1996) *
99-B.1(c) Form of Articles Supplementary ______
99-B.2 Amended Bylaws *
99-B.4 Instruments Defining Rights of Holders *
99-B.5(a) Investment Advisory Agreement between Aetna Life *
Insurance and Annuity Company ("Aetna") and Aetna
Variable Portfolios, Inc. (for Aetna Variable Capital
Appreciation Portfolio, Aetna Variable Growth
Portfolio, Aetna Variable Index Plus Portfolio, and
Aetna Variable Small Company Portfolio)
99-B.5(b) Form of Investment Advisory Agreement between Aetna ______
and Aetna Variable Portfolios, Inc. (for Aetna Index
Plus Bond Portfolio, Aetna Index Plus Mid Cap
Portfolio, Aetna Mid Cap Portfolio, Aetna Index Plus
Small Cap Portfolio, Aetna High Yield Portfolio,
Aetna Real Estate Securities Portfolio, and Aetna
International Portfolio)
99-B.5(c) Subadvisory Agreement between Aetna, Aetna Variable *
Portfolios, Inc. and Aeltus Investment Management,
Inc. ("Aeltus") (for Aetna Variable Capital
Appreciation Portfolio, Aetna Variable Growth
Portfolio, Aetna Variable Index Plus Portfolio, and
Aetna Variable Small Company Portfolio)
99-B.5(d) Form of Subadvisory Agreement between Aetna, Aetna ______
Variable Portfolios, Inc. and Aeltus (for Aetna Index
Plus Bond Portfolio, Aetna Index Plus Mid Cap
Portfolio, Aetna Mid Cap Portfolio, Aetna Index Plus
Small Cap Portfolio, Aetna High Yield Portfolio,
Aetna Real Estate Securities Portfolio, and Aetna
International Portfolio)
99-B.6 Underwriting Agreement between the Registrant and *
Aetna
99-B.8(a) Custodian Agreement between Aetna Variable *
Portfolios, Inc. and Mellon Bank, N.A. (for Aetna
Variable Capital Appreciation Portfolio, Aetna
Variable Growth Portfolio, Aetna Variable Index Plus
Portfolio, and Aetna Variable Small Company
Portfolio)
<PAGE>
99-B.8(b) Form of Custodian Agreement between Aetna Variable ______
Portfolios, Inc. and Brown Brothers Harriman & Co.
(for Aetna International Portfolio)
99-B.8(c) Form of Amendment to Custodian Agreement between
Aetna Variable Portfolios, Inc. and Mellon Bank, N.A. ______
(for Aetna Index Plus Bond Portfolio, Aetna Index
Plus Mid Cap Portfolio, Aetna Mid Cap Portfolio,
Aetna Index Plus Small Cap Portfolio, Aetna High
Yield Portfolio, and Aetna Real Estate Securities
Portfolio)
99-B.9(a) Administrative Services Agreement between Aetna and *
Aetna Variable Portfolios, Inc. (for Aetna Variable
Capital Appreciation Portfolio, Aetna Variable Growth
Portfolio, Aetna Variable Index Plus Portfolio, and
Aetna Variable Small Company Portfolio)
99-B.9(b) Form of Administrative Services Agreement between ______
Aetna and Aetna Variable Portfolios, Inc. (for Aetna
Index Plus Bond Portfolio, Aetna Index Plus Mid Cap
Portfolio, Aetna Mid Cap Portfolio, Aetna Index Plus
Small Cap Portfolio, Aetna High Yield Portfolio,
Aetna Real Estate Securities Portfolio, and Aetna
International Portfolio)
99-B.9(c) License Agreement *
99-B.10 Opinion and Consent of Counsel ______
99-B.11 Consent of Independent Auditors ______
99-B.13(a) Agreement re: Initial Contribution to Working Capital *
(August 27, 1996)
99-B.13(b) Agreement re: Initial Contribution to Working ______
Capital (September 24, 1997)
99-B.16 Schedule for Computation of Performance Data *
99-B.19(a) Powers of Attorney *
99-B.19(b) Authorization for Signatures ______
27 Financial Data Schedule
*Incorporated by reference
FORM OF AETNA VARIABLE PORTFOLIOS, INC.
ARTICLES SUPPLEMENTARY
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:
FIRST: The Board of Directors, at its meeting held on September 24, 1997,
adopted a resolution to increase the total number of shares which the
Corporation shall have authority to issue to two billion (2,000,000,000) shares
of common stock at the par value of $0.001 per share and of the aggregate par
value of two billion dollars ($2,000,000,000); and
SECOND: The Board of Directors, at its meeting held on September 24, 1997,
by resolutions did designate seven hundred million (700,000,000) shares of
common stock of the Corporation into seven (7) New Portfolios ("Portfolios") as
follows:
Number of
Name of Portfolio Shares Allocated
- ----------------- ----------------
Aetna Index Plus Bond Portfolio 100,000,000
Aetna Index Plus Mid Cap Portfolio 100,000,000
Aetna Mid Cap Portfolio 100,000,000
Aetna Index Plus Small Cap Portfolio 100,000,000
Aetna High Yield Portfolio 100,000,000
Aetna Real Estate Securities Portfolio 100,000,000
Aetna International Portfolio 100,000,000
THIRD: The shares of the Corporation authorized pursuant to Articles First
of these Articles Supplementary have been so authorized by the Board of
Directors under the authority contained in the Charter of the Corporation. The
number of shares of capital stock of the various series that the Corporation has
authority to issues has been established by the Board of Directors in accordance
with Section 2-105(c) of the Maryland General Corporation Law.
FOURTH: Immediately prior to the effectiveness of these Articles
Supplementary, the Corporation had the authority to issue one billion
(1,000,000,000) shares of Common Stock of the par value of $0.001 per share and
of the aggregate par value of one million dollars ($1,000,000), of which the
Board of Directors had designated and classified four hundred million shares as
follows:
<PAGE>
Number of
Name of Portfolio Shares Allocated
- ----------------- ----------------
AETNA VARIABLE INDEX PLUS PORTFOLIO 100,000,000
AETNA VARIABLE SMALL COMPANY PORTFOLIO 100,000,000
AETNA VARIABLE GROWTH PORTFOLIO 100,000,000
AETNA VARIABLE CAPITAL APPRECIATION PORTFOLIO 100,000,000
FIFTH: The seven new Portfolios shall be subject to all provisions of the
Articles of Incorporation relating to shares of the corporation generally.
Portfolios. Each Portfolio of the Corporation shall have the following
preferences, rights, powers, restrictions, limitations, qualifications and terms
and conditions of redemption, subject to the right of the Board of Directors
acting by properly adopted resolution to amend, add to or remove such
preferences, rights, powers, restrictions, limitations, qualifications and terms
and conditions of redemption:
(i) Assets. All consideration received by the Corporation for the sale
and/or issuance of Shares of a Portfolio, together with all assets in
which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof, including any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in whatever form
the same may be, shall irrevocably belong to that Portfolio for all
purposes, subject only to the rights of creditors of that Portfolio, and
shall be so recorded upon the books and accounts of the Corporation; any
assets, income, earnings, profits, and proceeds thereof, funds, or
payments of the Corporation which are not readily identifiable as
belonging to any particular Portfolio (collectively "General Items"),
such General Items shall be allocated by or under the supervision of the
Board of Directors to and among any one or more of the Portfolios of the
Corporation and designated from time to time in such manner and on such
basis as the Board of Directors, in its sole discretion, deems fair and
equitable and any General Items so allocated to a particular Portfolio
shall belong to that Portfolio; each such allocation by the Board of
Directors shall be conclusive and binding for all purposes; and all such
consideration, assets, income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any reinvestment of
such proceeds, in whatever form the same may be, together with any
General Items allocated to the Portfolio, are herein referred to as
"assets belonging to" that Portfolio.
(ii) Liabilities. The assets belonging to a Portfolio shall be charged with
the liabilities of the Corporation incurred on behalf of the Portfolio
and all expenses, costs, charges and reserves attributable to the
Portfolio; any general liabilities, expenses, costs, charges or reserves
of the Corporation which are not readily identifiable as belonging to
any particular Portfolio shall be allocated and charged by or under the
supervision of the Board of Directors to and among any one or more of
the Portfolio established and designated from time to time in such
manner and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable; each allocation of
2
<PAGE>
liabilities, expenses, costs, charges and reserves by the Board of
Directors shall be conclusive and binding for all purposes; and the
liabilities, expenses, costs, charges and reserves allocated and so
charged to the Portfolio are herein referred to as "liabilities
belonging to" the Portfolio.
(iii) Income. The Board of Directors shall have full discretion, to the extent
not inconsistent with the Maryland Corporations and Associations Code
and the Investment Company Act of 1940 ("1940 Act") to determine which
items shall be treated as income and which items as capital; and each
such determination and allocation shall be conclusive and binding.
"Income belonging to" the Portfolio, includes all income, earnings and
profits derived from assets belonging to the Portfolio, less any
expenses, costs, charges or reserves belonging to the Portfolio, for the
relevant time period.
(iv) Dividends. Dividends and distributions on Shares of the Portfolio may be
declared and paid with such frequency, in such form and in such amount
as the Board of Directors may from time to time determine. Dividends may
be declared daily or otherwise pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Board of
Directors may determine, after providing for actual and accrued
liabilities belonging to the Portfolio. All dividends on Shares of the
Portfolio shall be paid only out of the income belonging to the
Portfolio and capital gains distributions on Shares of the Portfolio
shall be paid only out of the capital gains belonging to the Portfolio.
All dividends and distributions on Shares of the Portfolio shall be
distributed pro rata to the holders of the Portfolio in proportion to
the number of Shares of the Portfolio held by such holders at the date
and time of record established for the payment of such dividends or
distributions, except that in connection with any dividend or
distribution program or procedure the Board of Directors may determine
that no dividend or distribution shall be payable on Shares as to which
the Shareholder's purchase order and/or payment have not been received
by the time or times established by the Board of Directors under such
program or procedure. The Board of Directors shall have the power, in
its sole discretion, to distribute in any fiscal year as dividends,
including dividends designated in whole or in part as capital gains
distributions, amounts sufficient, in the opinion of the Board of
Directors, to enable the Corporation and each Portfolio to qualify as a
regulated investment company under the Internal Revenue Code of 1986 as
amended, or any successor or comparable statute thereto, and regulations
promulgated thereunder, and to avoid liability of the Corporation or
Portfolio for Federal income tax in respect of that year. However,
nothing in the foregoing shall limit the authority of the Board of
Directors to make distributions greater than or less than the amount
necessary to qualify as a regulated investment company and to avoid
liability of the Corporation or Portfolio for such tax. Dividends and
distributions may be paid in cash, property or Shares, or a combination
thereof, as determined by the Board of Directors or pursuant to any
program that the Board of Directors may have in effect at the time.
Dividends or distributions paid in Shares will be paid at the current
net asset value thereof as defined in subsection (vii).
(v) Liquidation. In the event of liquidation of the Corporation or of any
Portfolio, the Shareholders of the Portfolio, shall be entitled to
receive, as a Portfolio, when and as declared by the Board of Directors,
the excess of the assets belonging to the Portfolio over the liabilities
belonging to it. The holders of Shares of such Portfolio shall not be
entitled thereby to any distribution upon liquidation of any other
Portfolio. The assets so distributable to the Shareholders of the
Portfolio shall be distributed among such Shareholders in proportion to
the number of Shares of the Portfolio held by them and recorded on the
books of the Corporation. The liquidation of the
3
<PAGE>
Portfolio in which there are Shares then outstanding may be authorized
by vote of a majority of the Board of Directors then in office, subject
to the approval of a majority of the outstanding Shares of the
Portfolio, as defined in the 1940 Act.
(vi) Voting. On each matter submitted to a vote of the Shareholders, each
holder of a Share shall be entitled to one vote for each Share
outstanding in his name on the books of the Corporation, and all shares
of the Portfolio shall vote as a single Portfolio ("Single Portfolio
Voting"); provided, however, that (i) as to any matter with respect to
which a separate vote of the Portfolio is required by the 1940 Act or by
the Maryland Corporations and Associations Code, such requirement as to
a separate vote by that Portfolio shall apply in lieu of Single
Portfolio Voting as described above; (ii) in the event that the separate
vote requirements referred to in (i) above apply with respect to one or
more Portfolio, then subject to (iii) below, the Shares of all other
Portfolio shall vote as a single Portfolio; and (iii) as to any matter
which does not affect the interest of a particular Portfolio, only the
holders of Shares of the one or more affected Portfolio shall be
entitled to vote.
(vii) Net Asset Value. The net asset value per Share of the Portfolio shall be
the quotient obtained by dividing the value of the net assets of the
Portfolio (being the value of the assets belonging to the Portfolio less
the liabilities belonging to the Portfolio) by the total number of
outstanding Shares of the Portfolio.
(viii) Equality. All Shares of the Portfolio shall represent an equal
proportionate interest in the assets belonging to the Portfolio (subject
to the liabilities belonging to the Portfolio), and each Share of the
Portfolio shall be equal to each other Share of the Portfolio. The Board
of Directors may from time to time divide or combine the Shares of the
Portfolio into a greater or lesser number of Shares of the Portfolio
without thereby changing the proportionate beneficial interest in the
assets belonging to the Portfolio or in any way affecting the rights of
Shares of any other Portfolio.
(ix) Conversion or Exchange Rights. Subject to compliance with the
requirements of the 1940 Act, the Board of Directors shall have the
authority to provide that holders of shares of the Portfolio shall have
the right to convert or exchange said Shares into Shares of one or more
other Portfolio of Shares in accordance with such requirements and
procedures as may be established by the Board of Directors.
(x) Redemption by the Corporation. The Board of Directors may cause the
Corporation to redeem at current net asset value the shares of the
Portfolio from a shareholder whose shares have an aggregate current net
asset value less than an amount established by the Board of Directors.
No such redemption shall be effected unless the Corporation has given
the shareholder reasonable notice of its intention to redeem the shares
and an opportunity to purchase a sufficient number of additional shares
to bring the aggregate current net asset value of his shares to the
minimum amount established. Upon redemption of shares pursuant to this
section, the Corporation shall cause prompt payment of the full
redemption price to be made to the holder of shares so redeemed. Each
Share is subject to redemption by the Corporation at the redemption
price computed in the manner set forth in subparagraph (vii) of this
Article 7, if at any time the Board of Directors, in its sole
discretion, determines that failure to so redeem may result in the
Corporation being classified as a personal holding company as defined in
the Internal Revenue Code of 1986, as it may be amended from time to
time (the "Code").
4
<PAGE>
(xi) Redemption by Shareholders. To the extent the Corporation has funds or
property legally available therefor, each Shareholder of the Corporation
shall have the right at such times as may be permitted by the
Corporation, but no less frequently than once each day, to require the
Corporation to redeem all or any part of his or her Shares at a
redemption price equal to the net asset value per Share next determined
after the Shares are tendered for redemption; said determination of the
net asset value per Share to be made in accordance with the requirements
of the 1940 Act and the applicable rules and regulations of the
Securities and Exchange Commission (or any succeeding governmental
authority) and in conformity with generally accepted accounting
practices and principles. Notwithstanding the foregoing, the Corporation
may postpone payment or deposit of the redemption price and may suspend
the right of the Shareholders to require the Corporation to redeem
Shares pursuant to the applicable rules and regulations, or any order,
of the Securities and Exchange Commission.
(xiii) Transfer. Transfer of Shares will be recorded on the stock transfer
records of the Corporation at the request of the holders thereof at any
time during normal business hours of the Corporation unless the Board of
Directors of the Corporation determines, in its sole discretion, that
allowing such transfer may result in the Corporation being classified as
a personal holding company as defined in the Code.
IN WITNESS WHEREOF, Aetna Variable Portfolios, Inc. has caused these Articles
Supplementary to be signed in its name on its behalf by its authorized officers
who acknowledge that these Articles Supplementary 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 Supplementary are true in all material respects and that this
statement is made under the penalties of perjury.
Date: _______________, 1997
[CORPORATE SEAL] Aetna Variable Portfolios, Inc.
By:
-----------------------------------
Name: Shaun P. Mathews
Title: President
Attest:
- ---------------------------------------------
Amy R. Doberman
Secretary
5
FORM OF
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
____________________ Portfolio (the "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.
<PAGE>
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
-2-
<PAGE>
authorized to register into this Agreement and carry out its
duties and obligations hereunder.
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:
-3-
<PAGE>
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;
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");
-4-
<PAGE>
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
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
-5-
<PAGE>
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.
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 ________ 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
______ 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.
-6-
<PAGE>
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 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;
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;
-7-
<PAGE>
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;
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.
-8-
<PAGE>
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 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.
-9-
<PAGE>
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 the date
hereof and shall remain in force and effect through December 31, 1999.
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.
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.
-10-
<PAGE>
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 Services, Inc. and their
continued use is subject to the right of Aetna Services, Inc. to withdraw this
permission in the event the Adviser or another subsidiary or affiliated
corporation of Aetna Services, Inc. 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 ___ day of _______________,
199__.
AETNA LIFE INSURANCE AND ANNUITY
COMPANY
By:
----------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Attest:
- -----------------------------------------
Name Title
AETNA VARIABLE PORTFOLIOS, INC.
on behalf of
Aetna ______________ Portfolio
By:
----------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Attest:
- -----------------------------------------
Name Title
-13-
FORM OF
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 ____________________
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
<PAGE>
independent contractor and not as an agent of the Adviser. The Subadviser
agrees, that except as 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.
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
2
<PAGE>
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
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,
3
<PAGE>
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.
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.
4
<PAGE>
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.
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.
5
<PAGE>
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
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.
6
<PAGE>
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
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 __________% 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 _________% 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
7
<PAGE>
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 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 the date
hereof and shall remain in force and effect through December 31, 1999, 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:
8
<PAGE>
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
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.
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
9
<PAGE>
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 Services, Inc. and their
continued use is subject to the right of Aetna Services, Inc. to withdraw this
permission in the event the Subadviser or another subsidiary or affiliated
corporation of Aetna Services, Inc. should not be the investment adviser of the
Portfolio.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the ______ day of ______________,
19__.
Aetna Life Insurance and Annuity Company
By:
------------------------------------------
Attest: Name:
----------------------------------------
Title:
---------------------------------------
- ---------------------------------
Name Title
Aeltus Investment Management, Inc.
Attest: By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
- --------------------------------
Name Title
Aetna Variable Portfolios, Inc.
on behalf of
Aetna _________________ Portfolio
By:
-----------------------------------------
Name:
---------------------------------------
Attest: Title:
--------------------------------------
- --------------------------------
Name Title
11
FORM OF
AGREEMENT BETWEEN
BROWN BROTHERS HARRIMAN & CO.
AND
Aetna Variable Portfolios, Inc.
on behalf of
AETNA INTERNATIONAL PORTFOLIO
<PAGE>
FORM OF
CUSTODIAN AGREEMENT
AGREEMENT made this ____ day of _____________, 1997, between AETNA VARIABLE
PORTFOLIOS, INC. (the "Fund") on behalf of Aetna International Portfolio and
Brown Brothers Harriman & Co. (the "Custodian");
WITNESSETH: That in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. Employment of Custodian: The Fund hereby employs and appoints the
Custodian as a custodian for the term and subject to the provisions of this
Agreement. The Custodian shall not be under any duty or obligation to require
the Fund to deliver to it any securities or funds owned by the Fund and shall
have no responsibility or liability for or on account of securities or funds not
so delivered. The Fund will deposit with the Custodian copies of the Declaration
of Trust or Certificate of Incorporation and By-Laws (or comparable documents)
of the Fund and all amendments thereto, and copies of such votes and other
proceedings of the Fund as may be necessary for or convenient to the Custodian
in the performance of its duties.
2. Powers and Duties of the Custodian with respect to Property of the Fund
held by the Custodian in the United States: Except for securities and funds held
by any Subcustodians appointed pursuant to the provisions of Section 3 hereof,
the Custodian shall have and perform the following powers and duties:
A. Safekeeping - To keep safely the securities and other assets of the
Fund that have been delivered to the Custodian and, on behalf of the Fund, from
time to time to receive delivery of securities for safekeeping.
2
<PAGE>
B. Manner of Holding Securities - To hold securities of the Fund (1)
by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form, or (2) in book-entry
form by a Securities System (as said term is defined in Section 2U).
C. Registered Name; Nominee - To hold registered securities of the
Fund (1) in the name or any nominee name of the Custodian or the Fund, or in the
name or any nominee name of any Agent appointed pursuant to Section 6F, or (2)
in street certificate form, so-called, and in any case with or without any
indication of fiduciary capacity, provided that securities are held in an
account of the Custodian containing only assets of the Fund or only assets held
as fiduciary or custodian for customers.
D. Purchases - Upon receipt of proper instructions, as defined in
Section 2X, insofar as funds are available for the purpose, to pay for and
receive securities purchased for the account of the Fund, payment being made
only upon receipt of the securities; provided, however, that the Custodian may
make payment, which may be prior to receipt of securities, and may accept
delivery of securities, including the form of securities received, in accordance
with governmental regulations, the rules of Securities Systems or other U.S.
securities depositories and clearing agencies, or generally accepted trade
practice in the applicable U.S. market. Receipt of securities on behalf of the
Fund shall be by the Custodian or a Subcustodian or by credit to an account
which one of them may have with a bank, Securities System, other U.S. securities
depositary or clearing agency, or other financial institution approved by the
Fund.
E. Exchanges - Upon receipt of proper instructions, to exchange
securities held by it for the account of the Fund for other securities in
connection with any reorganization, recapitalization, split-up of shares, change
of par value, conversion or other event, relating to the
3
<PAGE>
securities or the issuer of such securities, and to deposit any such securities
in accordance with the terms of any reorganization or protective plan. Without
proper instructions, the Custodian may surrender securities in temporary form
for definitive securities, may surrender securities for transfer into a name or
nominee name as permitted in Section 2C, and may surrender securities for a
different number of certificates or instruments representing the same number of
shares or same principal amount of indebtedness, provided the securities to be
issued are to be delivered to the Custodian.
F. Sales of Securities - Upon receipt of proper instructions, to make
delivery of securities which have been sold for the account of the Fund but only
against payment therefor; provided, however, that the Custodian may make
delivery, which may be prior to receipt of payment, and may accept payment,
including the form of payment received, in accordance with governmental
regulations, the rules of Securities Systems or other U.S. securities
depositories and clearing agencies, or generally accepted trade practice in the
applicable U.S. market. Receipt of payment on behalf of the Fund shall be by the
Custodian or a Subcustodian or by credit to an account which one of them may
have with a bank, Securities System, other U.S. securities depositary or
clearing agency, or other financial institution approved by the Fund.
G. Depositary Receipts - Upon receipt of proper instructions, to
instruct a Subcustodian or an Agent to surrender securities to the depositary
used by an issuer of American Depositary Receipts or International Depositary
Receipts (hereinafter collectively referred to as "ADRs") for such securities
against a written receipt therefor adequately describing such securities and
written evidence satisfactory to the Subcustodian or Agent that the depositary
has acknowledged receipt of instructions to issue with respect to such
securities ADRs in the name of the Custodian, or a nominee of the Custodian, for
delivery to the Custodian in Boston, Massachusetts, or at such other place as
the Custodian may from time to time designate. Upon receipt of proper
instructions, to surrender ADRs to the issuer thereof against a written receipt
therefor adequately describing the ADRs surrendered and written evidence
satisfactory to the Custodian that the issuer of the ADRs has acknowledged
receipt of instructions to cause its depositary to deliver the securities
underlying such ADRs to a Subcustodian or an Agent.
4
<PAGE>
H. Exercise of Rights; Tender Offers - Upon timely receipt of proper
instructions, to deliver to the issuer or trustee thereof, or to the agent of
either, warrants, puts, calls, rights or similar securities for the purpose of
being exercised or sold, provided that the new securities and cash, if any,
acquired by such action are to be delivered to the Custodian, and, upon receipt
of proper instructions, to deposit securities upon invitations for tenders of
securities, provided that the consideration is to be paid or delivered or the
tendered securities are to be returned to the Custodian.
I. Stock Dividends, Rights, Etc. - To receive and collect all stock
dividends, rights and other items of like nature; and to deal with the same
pursuant to proper instructions relative thereto.
J. Options - Upon receipt of proper instructions, to receive and
retain confirmations or other documents evidencing the purchase of writing of an
option on a security or securities index by the Fund; to deposit and maintain in
a segregated account, either physically or by book-entry in a Securities System,
securities subject to a covered call option written by the Fund; and to release
and/or transfer such securities or other assets only in accordance with the
provisions of any agreement among the Fund, the Custodian and a broker-dealer
relating to such securities or other assets a notice or other communication
evidencing the expiration, termination or exercise of such covered option
furnished by The Options Clearing Corporation, the securities or options
5
<PAGE>
exchange on which such covered option is traded or such other organization as
may be responsible for handling such options transactions.
K. Borrowings - Upon receipt of proper instructions, to deliver
securities of the Fund to lenders or their agents as collateral for borrowings
effected by the Fund, provided that such borrowed money is payable to or upon
the Custodian's order as Custodian for the Fund.
L. Demand Deposit Bank Accounts - To open and operate an account or
accounts in the name of the Fund on the Custodian's books subject only to draft
or order by the Custodian. All funds received by the Custodian from or for the
account of the Fund shall be deposited in said account(s). The responsibilities
of the Custodian to the Fund for deposits accepted on the Custodian's books
shall be that of a U.S. bank for a similar deposit.
If and when authorized by proper instructions, the Custodian may open
and operate an additional account(s) in such other banks or trust companies as
may be designated by the Fund in such instructions (any such bank or trust
company so designated by the Fund being referred to hereafter as a "Banking
Institution"), provided that such account(s) (hereinafter collectively referred
to as "demand deposit bank accounts") shall be in the name of the Custodian for
account of the Fund and subject only to the Custodian's draft or order. Such
demand deposit accounts may be opened with Banking Institutions in the United
States and in other countries and may be denominated in either U.S. Dollars or
other currencies as the Fund may determine. All such deposits shall be deemed to
be portfolio securities of the Fund and accordingly the responsibility of the
Custodian therefore shall be the same as and no greater than the Custodian's
responsibility in respect of other portfolio securities of the Fund.
6
<PAGE>
M. Interest Bearing Call or Time Deposits - To place interest bearing
fixed term and call deposits with such banks and in such amounts as the Fund may
authorize pursuant to proper instructions. Such deposits may be placed with the
Custodian or with Subcustodians or other Banking Institutions as the Fund may
determine. Deposits may be denominated in U.S. Dollars or other currencies and
need not be evidenced by the issuance or delivery of a certificate to the
Custodian, provided that the Custodian shall include in its records with respect
to the assets of the Fund appropriate notation as to the amount and currency of
each such deposit, the accepting Banking Institution and other appropriate
details, and shall retain such forms of advice or receipt evidencing the
deposit, if any, as may be forwarded to the Custodian by the Banking
Institution. Such deposits, other than those placed with the Custodian, shall be
deemed portfolio securities of the Fund and the responsibilities of the
Custodian therefor shall be the same as those for demand deposit bank accounts
placed with other banks, as described in Section L of this Agreement. The
responsibility of the Custodian for such deposits accepted on the Custodian's
books shall be that of a U.S. bank for a similar deposit.
N. Foreign Exchange Transactions and Futures Contracts - Pursuant to
proper instructions, to enter into foreign exchange contracts or options to
purchase and sell foreign currencies for spot and future delivery on behalf and
for the account of the Fund. Such transactions may be undertaken by the
Custodian with such Banking Institutions, including the Custodian and
Subcustodian(s) as principals, as approved and authorized by the Fund. Foreign
exchange contracts and options other than those executed with the Custodian,
shall be deemed to be portfolio securities of the Fund and the responsibilities
of the Custodian therefor shall be the same as those for demand deposit bank
accounts placed with other banks as described in Section 2-L of this agreement.
Upon receipt of proper instructions, to receive and retain confirmations
7
<PAGE>
evidencing the purchase or sale of a futures contract or an option on a futures
contract by the Fund; to deposit and maintain in a segregated account, for the
benefit of any futures commission merchant or to pay to such futures commission
merchant, assets designated by the fund as initial, maintenance or variation
"margin" deposits intended to secure the Fund's performance of its obligations
under any futures contracts purchased or sold or any options on futures
contracts written by the Fund, in accordance with the provisions of any
agreement or agreements among any of the Fund, the Custodian and such futures
commission merchant, designated to comply with the rules of the Commodity
Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding such margin deposits; and to release
and/or transfer assets in such margin accounts only in accordance with any such
agreements or rules.
0. Stock Loans - Upon receipt of proper instructions, to deliver
securities of the Fund, in connection with loans of securities by the Fund, to
the borrower thereof prior to receipt of the collateral, if any, for such
borrowing, provided that for stock loans secured by cash collateral the
Custodian's instructions to the Securities System require that the Securities
System may deliver the securities to the borrower thereof only upon receipt of
the collateral for such borrowing.
P. Collections - (i) To collect and receive all income, payments of
principal and other payments with respect to the securities held hereunder, and
in connection therewith to deliver the certificates or other instruments
representing the securities to the issuer thereof or its agent when securities
are called, redeemed, retired, mature or otherwise become payable; provided that
the payment is to be made in such form and at such time as is in accordance with
the terms of the agreement relating to the security, or such proper instructions
as the Custodian may receive, or governmental regulations, the rules of
Securities Systems or other U.S. securities
8
<PAGE>
depositories and clearing agencies, or generally accepted trade practice in the
applicable U.S. market; (ii) to execute ownership and other certificates and
affidavits for all federal and state tax purposes in connection with receipt of
income, principal or other payments with respect to securities of the Fund or in
connection with transfer of securities; and (iii) pursuant to proper
instructions to take such other actions with respect to the collection or
receipt of funds or transfer of securities which involve an investment decision.
Q. Dividends, Distributions and Redemptions - Upon receipt of proper
instructions from the Fund, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities to the Shareholder Servicing Agent
or otherwise apply funds or securities, insofar as available, for the payment of
dividends or other distributions to Fund shareholders. Upon receipt of proper
instructions from the Fund, or upon receipt of instructions from the Shareholder
Servicing Agent (given by such person or persons and in such manner on behalf of
the Shareholder Servicing Agent as the Fund shall have authorized), the
Custodian shall release funds or securities, insofar as available, to the
Shareholder Servicing Agent or as such Agent shall otherwise instruct for
payment to Fund shareholders who have delivered to such Agent a request for
repurchase or redemption of their shares of capital stock of the Fund.
R. Proxies, Notices, Etc. - Promptly to deliver or mail to the
Fund all forms of proxies and all notices of meetings and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, and upon receipt of proper instructions, to execute
and deliver or cause its nominee to execute and deliver such
9
<PAGE>
proxies or other authorizations as may be required. Neither the Custodian nor
its nominee shall vote upon any of such securities or execute any proxy to vote
thereon or give any consent or take any other action with respect thereto
(except as otherwise herein provided) unless ordered to do so by proper
instructions.
S. Nondiscretionary Details - Without the necessity of express
authorization from the Fund, (1) to attend to all nondiscretionary details in
connection with the sale, exchange, substitution, purchase, transfer or other
dealings with securities, funds or other property of the Portfolio held by the
Custodian except as otherwise directed from time to time by the Directors or
Trustees of the Fund, and (2) to make payments to itself or others for minor
expenses of handling securities or other similar items relating to the
Custodian's duties under this Agreement, provided that all such payments shall
be accounted for to the Fund.
T. Bills - Upon receipt of proper instructions, to pay or cause to be
paid, insofar as funds are available for the purpose, bills, statements, or
other obligations of the Fund.
U. Deposit of Fund Assets in Securities Systems The Custodian may
deposit and/or maintain securities owned by the Fund in (i) The Depository Trust
Company, (ii) any book-entry system as provided in Subpart 0 of Treasury
Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, or the book-entry
regulations of federal agencies substantially in the form of Subpart 0, or (iii)
any other domestic clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934 which acts
as a securities depository and whose use the Fund has previously approved in
writing (each of the foregoing being referred to in this Agreement as a
"Securities System"). Utilization of a Securities System shall be in accordance
with applicable Federal Reserve Board and Securities and Exchange Commission
rules and regulations, if any, and subject to the following provisions:
10
<PAGE>
1) The Custodian may deposit and/or maintain Fund securities,
either directly or through one or more Agents appointed by the Custodian
(provided that any such agent shall be qualified to act as a custodian of the
Fund pursuant to the Investment Company Act of 1940 and the rules and
regulations thereunder), in a Securities System provided that such securities
are represented in an account ("Account") of the Custodian or such Agent in the
Securities System which shall not include any assets of the Custodian or Agent
other than assets held as a fiduciary, custodian, or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall identify by book-entry
those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the Securities System that
such securities have been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such payment and transfer for
the account of the Fund. The Custodian shall transfer securities sold for the
account of the Fund upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices from the Securities
System of transfers of securities for the account of the Fund shall identify the
Fund, be maintained for the Fund by the Custodian or an Agent as referred to
above, and be provided to the Fund at its request. The Custodian shall furnish
the Fund confirmation of each transfer to or from the account of the Fund in the
form of a written advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the Securities System
for the account of the Fund on the next business day;
11
<PAGE>
4) The Custodian shall provide the Fund with any report obtained
by the Custodian or any Agent as referred to above on the Securities System's
accounting system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System; and the Custodian and such Agents
shall send to the Fund such reports on their own systems of internal accounting
control as the Fund may reasonably request from time to time.
5) At the written request of the Fund, the Custodian will
terminate the use of any such Securities System on behalf of the Fund as
promptly as practicable.
V. Other Transfers - Upon receipt of proper instructions, to deliver
securities, funds and other property of the Fund to a Subcustodian or another
custodian of the Fund; and, upon receipt of proper instructions, to make such
other disposition of securities, funds or other property of the Fund in a manner
other than or for purposes other than as enumerated elsewhere in this Agreement,
provided that the instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
securities to be delivered and the name of the person or persons to whom
delivery is to be made.
W. Investment Limitations - In performing its duties generally, and
more particularly in connection with the purchase, sale and exchange of
securities made by or for the Fund, the Custodian may assume unless and until
notified in writing to the contrary that proper instructions received by it are
not in conflict with or in any way contrary to any provisions of the Fund's
Declaration of Trust or Certificate of Incorporation or By-Laws (or comparable
documents) or votes or proceedings of the shareholders or Directors of the Fund.
The Custodian shall in no event be liable to the Fund and shall be indemnified
by the Fund for any violation which occurs in the course of carrying out
instructions given by the Fund of any investment
12
<PAGE>
limitations to which the Fund is subject or other limitations with respect to
the Fund's powers to make expenditures, encumber securities, borrow or take
similar actions affecting the Fund.
X. Proper Instructions - Proper instructions shall mean a tested telex
from the Fund or a written request, direction, instruction or certification
signed or initialed on behalf of the Fund by one or more person or persons as
the Board of Trustees or Directors of the Fund shall have from time to time
authorized, provided, however, that no such instructions directing the delivery
of securities or the payment of funds to an authorized signatory of the Fund
shall be signed by such person. Those persons authorized to give proper
instructions may be identified by the Board of Trustees or Directors by name,
title or position and will include at least one officer empowered by the Board
to name other individuals who are authorized to give proper instructions on
behalf of the Fund. Telephonic or other oral instructions given by any one of
the above persons will be considered proper instructions if the Custodian
reasonably believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. Oral instructions will be
confirmed by tested telex or in writing in the manner set forth above but the
lack of such confirmation shall in no way affect any action taken by the
Custodian in reliance upon such oral instructions. The Fund authorizes the
Custodian to tape record any and all telephonic or other oral instructions given
to the Custodian by or on behalf of the Fund (including any of its officers,
Trustees, Directors, employees or agents) and will deliver to the Custodian a
similar authorization from any investment manager or adviser or person or entity
with similar responsibilities which is authorized to give proper instructions on
behalf of the Fund to the Custodian. Proper instructions may relate to specific
transactions or to types or classes of transactions, and may be in the form of
standing instructions. Proper instructions may include communications effected
directly between electro-mechanical or
13
<PAGE>
electronic devices or systems, in addition to tested telex, provided that the
Fund and the Custodian agree to the use of such device or system.
Y. Segregated Account - The Custodian shall upon receipt of proper
instructions establish and maintain on its books a segregated account or
accounts for and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities of the Fund, including securities maintained
by the Custodian pursuant to Section 2U hereof, (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. (or any futures commission
merchant registered under the Commodity Exchange Act) relating to compliance
with the rules of the Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash or securities in connection with
options purchased, sold or written by the Fund or commodity futures contracts or
options thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies, and (iv) as mutually agreed from time to time
between the Fund and the Custodian.
3. Powers and Duties of the Custodian with Respect to the Appointment of
Subcustodians Outside the United States: Securities, funds and other property of
the Fund may be held by subcustodians appointed pursuant to the provisions of
this Section 3
14
<PAGE>
(a "Subcustodian"). The Custodian may, at any time and from time to time,
appoint any bank or trust company (meeting the requirements of a custodian or an
"eligible foreign custodian" under the Investment Company Act of 1940 and the
rules and regulations thereunder) to act as a Subcustodian for the Fund, and the
Custodian may also utilize directly and any Subcustodian may utilize such
securities depositories located outside the United States (as shall be approved
in writing by Fund) and as meet the requirements of an "eligible foreign
custodian" as aforesaid, provided that the Fund shall have approved in writing
(1) any such bank or trust company and the subcustodian agreement to be entered
into between such bank or trust company and the Custodian, and (2) if the
Subcustodian is a bank organized under the laws of a country other than the
United States, the country or countries in which the Subcustodian is authorized
to hold securities, cash and other property of the Fund, and (3) the securities
depositories, if any, through which the Subcustodian or the Custodian is
authorized to hold securities, cash and other property of the Fund. Upon such
approval by the Fund, the Custodian is authorized on behalf of the Fund to
notify each Subcustodian of its appointment as such. The Custodian may, at any
time in its discretion, remove any bank or trust company that has been appointed
as a Subcustodian but will promptly notify the Fund of any such action.
Those Subcustodians, and the countries where and the securities
depositories through which they or the Custodian may hold securities, cash and
other property of the Fund which the Fund has approved to date are set forth on
Appendix A hereto. Such Appendix shall be amended from time to time as
Subcustodians, and/or countries and/or securities depositories are changed,
added or deleted. The Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be held in a
country not listed on Appendix A, in order that there shall be sufficient time
for the Fund to give the approval required by the
15
<PAGE>
preceding paragraph and for the Custodian to put the appropriate arrangements in
place with such Subcustodian, including negotiation of a subcustodian agreement
and submission of such subcustodian agreement to the Fund for approval.
If the Fund shall have invested in a security to be held in a country
before the foregoing procedures have been completed, such security shall be held
by such agent as the Custodian may appoint. In any event, the Custodian shall be
liable to the Fund for the actions of such agent if and only to the extent the
Custodian shall have recovered from such agent for any damages caused the Fund
by such agent. At the request of the Fund, Custodian agrees to remove any
securities held on behalf of the Fund by such agent, if practical, to an
approved Subcustodian. Under such circumstances Custodian will collect income
and respond to corporate actions on a best efforts basis.
With respect to securities and funds held by a Subcustodian, either
directly or indirectly (including by a securities depository or clearing
agency), notwithstanding any provision of this Agreement to the contrary,
payment for securities purchased and delivery of securities sold may be made
prior to receipt of the securities or payment, respectively, and securities or
payment may be received in a form, in accordance with governmental regulations,
rules of securities depositories and clearing agencies, or generally accepted
trade practice in the applicable local market.
With respect to the securities and funds held by a Subcustodian, either
directly or indirectly, (including by a securities depository or a clearing
agency) including demand and interest bearing deposits, currencies or other
deposits and foreign exchange contracts as referred to in Sections 2L, 2M or 2N,
the Custodian shall be liable to the Fund for any losses caused the Fund by any
act or omission of any Subcustodian which constitutes a failure of the
Subcustodian
16
<PAGE>
to exercise reasonable care in the performance of its obligations under the
applicable subcustodian agreement. The Custodian hereby represents to the Fund
that each subcustodian agreement in effect while this Custodian Agreement is in
effect does and will require the Subcustodian to exercise reasonable care in the
performance of its obligations. The Custodian shall nevertheless be liable to
the Fund for its own negligence in transmitting any instructions received by it
from the Fund and for its own negligence in connection with the delivery of any
securities or funds held by it to any such Subcustodian.
In the event that any Subcustodian appointed pursuant to the provisions
of this Section 3 fails to perform any of its obligations under the terms and
conditions of the applicable subcustodian agreement, the Custodian shall use its
best efforts to cause such Subcustodian to perform such obligations. In the
event that the Custodian is unable to cause such Subcustodian to perform fully
its obligations thereunder, the Custodian shall forthwith upon the Fund's
request terminate such Subcustodian in accordance with the termination
provisions under the applicable subcustodian agreement and, if necessary or
desirable, appoint another subcustodian in accordance with the provisions of
this Section 3. At the election of the Fund, it shall have the right to enforce,
to the extent permitted by the subcustodian agreement and applicable law, the
Custodian's rights against any such Subcustodian for loss or damage caused the
Fund by such Subcustodian.
At the written request of the Fund, the Custodian will terminate any
subcustodian appointed pursuant to the provisions of Section 3 in accordance
with the termination provisions under the applicable subcustodian agreement. The
Custodian will not amend any subcustodian agreement or agree to change or permit
any changes thereunder except upon the prior written approval of the Fund.
17
<PAGE>
The Custodian may, at any time in its discretion upon notification to the
Fund, terminate any Subcustodian of the Fund in accordance with the termination
provisions under the applicable Subcustodian Agreement, and at the written
request of the Fund, the Custodian will terminate any Subcustodian in accordance
with the termination provisions under the applicable Subcustodian Agreement.
If necessary or desirable, the Custodian may appoint another subcustodian
to replace a Subcustodian terminated pursuant to the foregoing provisions of
this Section 3, such appointment to be made upon approval of the successor
subcustodian by the Fund's Board of Directors or Trustees in accordance with the
provisions of this Section 3.
In the event the Custodian intends to make any payment to a Subcustodian
under the indemnification provisions of any subcustodian agreement, the
Custodian shall give the Fund written notice of such intention no less than
thirty (30) days prior to the date such payment is to be made. The Fund shall be
obligated promptly to reimburse the Custodian the amount of such payment, unless
the Fund shall object in writing within twenty-one (21) days of receipt of the
Custodian's notice to such payment to the Subcustodian or to reimbursement of
the Custodian (i) because the Fund disputes the right of the Subcustodian to be
so indemnified or (ii) because the Fund believes that the Custodian is
responsible by reason of the Custodian's negligence or misconduct for the event
or occurrence giving rise to the Subcustodian's demand for indemnification. In
the event the Fund shall give the aforesaid written notice of objection and the
reasons therefor, the Custodian may nevertheless make such payment to the
Subcustodian without prejudice to the Custodian's right to bring an action
against and recover from the Fund for such reimbursement; or in the alternative,
the Custodian may refuse to pay the indemnification demanded by the Subcustodian
and the Fund shall in such event indemnify and
18
<PAGE>
hold the Custodian harmless in respect of any recovery the Subcustodian may
obtain against the Custodian, together with the Custodian's costs and expenses,
including reasonable attorneys' fees and out-of-pocket expenses, of defending
against any judicial or other proceeding pursuant to which such recovery was
obtained.
The Custodian shall furnish annually to the Fund information concerning
foreign subcustodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with the
initial approval of the foreign subcustodians by the Fund's Board of Directors.
In addition, the Custodian will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the financial condition of a
foreign subcustodian or is notified by a foreign banking institution employed as
a foreign subcustodian that there appears to be a substantial likelihood that
its shareholders' equity has declined or will decline below the minimum
shareholder's equity required by Rule 17f-5.
4. Assistance by the Custodian as to Certain: The Custodian may assist
generally in the preparation of reports to Fund shareholders and others, audits
of accounts, and other ministerial matters of like nature.
5. Powers and Duties of the Custodian with Respect to its Role as Financial
Agent: The Fund hereby also appoints the Custodian as the Fund's financial
agent. With respect to the appointment as financial agent, the Custodian shall
have and perform the following powers and duties:
A. Records - To create, maintain and retain such records relating to
its activities and obligations under this Agreement as are required under the
Investment Company Act of 1940 and the rules and regulations thereunder
(including Section 31 thereof and Rules 3la-1 and 3la-2 thereunder) and under
applicable Federal and State tax laws. All such records will be
19
<PAGE>
the property of the Fund and in the event of termination of this Agreement shall
be delivered to the successor custodian.
B. Accounts - To keep books of account and render statements,
including interim monthly and complete quarterly financial statements, or copies
thereof, from time to time as reasonably requested by proper instructions.
C. Access to Records - The books and records maintained by the
Custodian pursuant to Sections 5A and 5B shall at all times during the
Custodian's regular business hours be open to inspection and audit by officers
of, attorneys for and auditors employed by the Fund and by employees and agents
of the Securities and Exchange Commission, provided that all such individuals
shall observe all security requirements of the Custodian applicable to its own
employees having access to similar records within the Custodian and such
regulations as may be reasonably imposed by the Custodian.
D. Calculation of Net Asset Value - To compute and determine the net
asset value per share of capital stock of the Fund as of the close of business
on the New York Stock Exchange on each day on which such Exchange is open,
unless otherwise directed by proper instructions. Such computation and
determination shall be made in accordance with (1) the provisions of the Fund's
Declaration of Trust or Certificate of Incorporation or By-Laws, as they may
from time to time be amended and delivered to the Custodian, (2) the votes of
the Board of Trustees or Directors of the Fund at the time in force and
applicable, as they may from time to time be delivered to the Custodian, and (3)
proper instructions from such officers of the Fund or other persons as are from
time to time authorized by the Board of Trustees or Directors of the Fund to
give instructions with respect to computation and determination of the net asset
value. On each day that the Custodian shall compute the net asset value per
share of the Fund, the
20
<PAGE>
Custodian shall provide the Fund with written reports which permit the Fund to
verify that portfolio transactions have been recorded in accordance with the
Fund's instructions and are reconciled with the Fund's trading records.
In computing the net asset value, the Custodian may rely upon any
information furnished by proper instructions, including without limitation any
information (1) as to accrual of liabilities of the Fund and as to liabilities
of the Fund not appearing on the books of account kept by the Custodian, (2) as
to the existence, status and proper treatment of reserves, if any, authorized by
the Fund, (3) as to the sources of quotations to be used in computing the net
asset value, including those listed in Appendix B, (4) as to the fair value to
be assigned to any securities or other property for which price quotations are
not readily available, and (5) as to the sources of information with respect to
"corporate actions" affecting portfolio securities of the Fund, including those
listed in Appendix B. (Information as to "corporate actions" shall include
information as to dividends, distributions, stock splits, stock dividends,
rights offerings, conversions, exchanges, recapitalizations, mergers,
redemptions, calls, maturity dates and similar transactions, including the ex-
and record dates and the amounts or other terms thereof.)
In like manner, the Custodian shall compute and determine the net
asset value as of such other times as the Board of Trustees or Directors of the
Fund from time to time may reasonably request.
Notwithstanding any other provisions of this Agreement, including
Section 6C, the following provisions shall apply with respect to the Custodian's
foregoing responsibilities in this Section 5D: The Custodian shall be held to
the exercise of reasonable care in computing and determining net asset value as
provided in this Section 5D, but shall not be held accountable or liable for any
losses, damages or expenses the Fund or any shareholder or former shareholder of
21
<PAGE>
the Fund may suffer or incur arising from or based upon errors or delays in the
determination of such net asset value unless such error or delay was due to the
Custodian's negligence, gross negligence or reckless or willful misconduct in
determination of such net asset value. (The parties hereto acknowledge, however,
that the Custodian's causing an error or delay in the determination of net asset
value may, but does not in and of itself, constitute negligence, gross
negligence or reckless or willful misconduct.) In no event shall the Custodian
be liable or responsible to the Fund, any present or former shareholder of the
Fund or any other party for any error or delay which continued or was undetected
after the date of an audit performed by the certified public accountants
employed by the Fund if, in the exercise of reasonable care in accordance with
generally accepted accounting standards, such accountants should have become
aware of such error or delay in the course of performing such audit. The
Custodian's liability for any such negligence, gross negligence or reckless or
willful misconduct which results in an error in determination of such net asset
value shall be limited to the direct, out-of-pocket loss the Fund, shareholder
or former shareholder shall actually incur, measured by the difference between
the actual and the erroneously computed net asset value, and any expenses the
Fund shall incur in connection with correcting the records of the Fund affected
by such error (including charges made by the Fund's registrar and transfer agent
for making such corrections) or communicating with shareholders or former
shareholders of the Fund affected by such error.
Without limiting the foregoing, the Custodian shall not be held
accountable or liable to the Fund, any shareholder or former shareholder thereof
or any other person for any delays or losses, damages or expenses any of them
may suffer or incur resulting from (1) the Custodian's failure to receive timely
and suitable notification concerning quotations or corporate actions relating to
or affecting portfolio securities of the Fund or (2) any errors in the
computation of the
22
<PAGE>
net asset value based upon or arising out of quotations or information as to
corporate actions if received by the Custodian either (i) from a source which
the Custodian was authorized pursuant to the second paragraph of this Section 5D
to rely upon, or (ii) from a source which in the Custodian's reasonable judgment
was as reliable a source for such quotations or information as the sources
authorized pursuant to that paragraph. Nevertheless, the Custodian will use its
best judgment in determining whether to verify through other sources any
information it has received as to quotations or corporate actions if the
Custodian has reason to believe that any such information might be incorrect.
In the event of any error or delay in the determination of such net
asset value for which the Custodian may be liable, the Fund and the Custodian
will consult and make good faith efforts to reach agreement on what actions
should be taken in order to mitigate any loss suffered by the Fund or its
present or former shareholders, in order that the Custodian's exposure to
liability shall be reduced to the extent possible after taking into account all
relevant factors and alternatives. Such actions might include the Fund or the
Custodian taking reasonable steps to collect from any shareholder or former
shareholder who has received any overpayment upon redemption of shares such
overpaid amount or to collect from any shareholder who has underpaid upon a
purchase of shares the amount of such underpayment or to reduce the number of
shares issued to such shareholder. It is understood that in attempting to reach
agreement on the actions to be taken or the amount of the loss which should
appropriately be borne by the Custodian, the Fund and the Custodian will
consider such relevant factors as the amount of the loss involved, the Fund's
desire to avoid loss of shareholder good will, the fact that other persons or
entitles could have been reasonably expected to have detected the error sooner
than the time it was actually discovered, the appropriateness of limiting or
eliminating the benefit which shareholders or
23
<PAGE>
former shareholders might have obtained by reason of the error, and the
possibility that other parties providing services to the fund might be induced
to absorb a portion of the loss incurred.
E. Disbursements - Upon receipt of proper instructions, to pay or
cause to be paid, insofar as funds are available for the purpose, bills,
statements and other obligations of the Fund (including but not limited to
interest charges, taxes, management fees, compensation to Fund officers and
employees, and other operating expenses of the Fund).
6. Standard of Care and Related Matters:
A. Liability of the Custodian with Respect to Proper Instruction;
Evidence of Authority; Etc. The Custodian shall not be liable for any action
taken or omitted in reliance upon proper instructions believed by it to be
genuine or upon any other written notice, request, direction, instruction,
certificate or other instrument believed by it to be genuine and signed by the
proper party or parties.
The Secretary or Assistant Secretary of the Fund shall certify to the
Custodian the names, signatures and scope of authority of all persons authorized
to give proper instructions or any other such notice, request, direction,
instruction, certificate or instrument on behalf of the Fund, the names and
signatures of the officers of the Fund, the name and address of the Shareholder
Servicing Agent, and any resolutions, votes, instructions or directions of the
Fund's Board of Trustees or Directors or shareholders. Such certificate may be
accepted and relied upon by the Custodian as conclusive evidence of the facts
set forth therein and may be considered in full force and effect until receipt
of a similar certificate to the contrary.
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement.
24
<PAGE>
The Custodian shall be without liability for any action reasonably
taken or omitted pursuant to advice received from (i) counsel regularly retained
by the Custodian in respect of custodian matters, (ii) counsel for the Fund, or
(iii) such other counsel as the Fund and the Custodian may agree upon, provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 6C. The Custodian may be entitled, subject to prior
approval of the Fund, to seek reimbursement for such legal expenses as may be
agreed upon between the Fund and the Custodian.
B. Liability of the Custodian with Respect to Use of Securities System
- - With respect to the portfolio securities, cash and other property of the Fund
held by a Securities System, the Custodian shall be liable to the Fund only for
any loss or damage to the Fund resulting from use of the Securities System if
caused by any negligence, misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees or from any failure of the
Custodian or any such agent to enforce effectively such rights as it may have
against the Securities System. At the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any claim
against the Securities System or any other person which the Custodian may have
as a consequence of any such loss or damage to the Fund if and to the extent
that the Fund has not been made whole for any such loss or damage.
C. Standard of Care; Liability; Indemnification The Custodian shall be
held only to the exercise of reasonable care and diligence in carrying out the
provisions of this Agreement, provided that the Custodian shall not thereby be
required to take any action which is in contravention of any applicable law. The
Fund agrees to indemnify and hold harmless the Custodian and its nominees from
all claims and liabilities (including counsel fees) incurred or
25
<PAGE>
assessed against it or its nominees in connection with the performance of this
Agreement, except such as may arise from its or its nominee's breach of the
relevant standard of conduct set forth in this Agreement. Without limiting the
foregoing indemnification obligation of the Fund, the Fund agrees to indemnify
the Custodian and any nominee in whose name portfolio securities or other
property of the Fund is registered against any liability the Custodian or such
nominee may incur by reason of taxes assessed to the Custodian or such nominee
or other costs, liability or expense incurred by the Custodian or such nominee
resulting directly or indirectly from the fact that portfolio securities or
other property of the Fund is registered in the name of the Custodian or such
nominee.
It is also understood that the Custodian shall not be liable for any
loss involving any securities, currencies, deposits or other property of the
Fund, whether maintained by it, a Subcustodian, a securities depository, an
agent of the Custodian or a Subcustodian, a Securities System, or a Banking
Institution, or for any loss arising from a foreign currency transaction or
contract, where the loss results from a Sovereign Risk or where the entity
maintaining such securities, currencies, deposits or other property of the Fund,
whether the Custodian, a Subcustodian, a securities depository, an agent of the
Custodian or a Subcustodian, a Securities System or a Banking Institution, has
exercised reasonable care maintaining such property or in connection with the
transaction involving such property. A "Sovereign Risk" shall mean
nationalization, expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental authority, de
facto or de jure; or enactment, promulgation, imposition or enforcement by any
such governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting the Fund's property; or
26
<PAGE>
acts of war, terrorism, insurrection or revolution; or any other act or event
beyond the Custodian's control.
D. Reimbursement of Advances - The Custodian shall be entitled to
receive reimbursement from the Fund on demand, in the manner provided in Section
7, for its cash disbursements, expenses and charges (including the fees and
expenses of any Subcustodian or any Agent) in connection with this Agreement,
but excluding salaries and usual overhead expenses.
E. Security for Obligations to Custodian - If the Fund shall require
the Custodian to advance cash or securities for any purpose for the benefit of
the Fund, including in connection with foreign exchange contracts or options
(collectively, an "Advance"), or if the Custodian or any nominee thereof shall
incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Agreement (collectively a
"Liability"), except such as may arise from its or such nominee's breach of the
relevant standard of conduct set forth in this Agreement, then in such event any
property at any time held for the account of the Fund by the Custodian or a
Subcustodian shall be security for such Advance or Liability and if the Fund
shall fail to repay or indemnify the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Fund's property,
including securities, to the extent necessary to obtain reimbursement or
indemnification.
F. Appointment of Agents - The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other bank or trust
company as its agent (an "Agent") to carry out such of the provisions of this
Agreement as the Custodian may from time to time direct, provided, however, that
the appointment of such Agent (other than an Agent
27
<PAGE>
appointed pursuant to the third paragraph of Section 3) shall not relieve the
Custodian of any of its responsibilities under this Agreement.
G. Powers of Attorney - Upon request, the Fund shall deliver to the
Custodian such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the performance by the
Custodian or any Subcustodian of their respective obligations under this
Agreement or any applicable subcustodian agreement.
7. Compensation of the Custodian: The Fund shall pay the Custodian a
custody fee based on such fee schedule as may from time to time be agreed upon
in writing by the Custodian and the Fund. Such fee, together with all amounts
for which the Custodian is to be reimbursed in accordance with Section 6D, shall
be billed to the Fund in such a manner as to permit payment by a direct cash
payment to the Custodian.
8. Termination; Successor Custodian: This Agreement shall continue in full
force and effect until terminated by either party by an instrument in writing
delivered or mailed, postage prepaid, to the other party, such termination to
take effect not sooner than seventy five (75) days after the date of such
delivery or mailing. In the event of termination the Custodian shall be entitled
to receive prior to delivery of the securities, funds and other property held by
it all accrued fees and unreimbursed expenses the payment of which is
contemplated by Sections 6D and 7, upon receipt by the Fund of a statement
setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is agreed that
the funds and securities owned by the Fund and held by the Custodian or any
Subcustodian shall be delivered to the successor custodian, and the Custodian
agrees to cooperate with the Fund in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
28
<PAGE>
9. Amendment: This Agreement constitutes the entire understanding and
agreement of the parties hereto with respect to the subject matter hereof. No
provision of this Agreement may be amended or terminated except by a statement
in writing signed by the party against which enforcement of the amendment or
termination is sought.
In connection with the operation of this Agreement, the Custodian and the
Fund may agree in writing from time to time on such provisions interpretative of
or in addition to the provisions of this Agreement as may in their joint opinion
be consistent with the general tenor of this Agreement. No interpretative or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Agreement.
The section headings in this Agreement are for the convenience of the
parties and in no way alter, amend, limit or restrict the contractual
obligations of the parties set forth in this Agreement.
10. Governing Law: This instrument is executed and delivered in The
Commonwealth of Massachusetts and shall be governed by and construed according
to the laws of said Commonwealth.
11. Notices: Notices and other writings delivered or mailed postage prepaid
to the Fund addressed to the Fund at 151 Farmington Ave. PPJE Hartford, CT 06156
or to such other address as the Fund may have designated to the Custodian in
writing, or to the Custodian at 40 Water Street, Boston, Massachusetts 02109,
Attention: Manager, Securities Department, or to such other address as the
Custodian may have designated to the Fund in writing, shall be deemed to have
been properly delivered or given hereunder to the respective addressee.
12. Binding Effect: This Agreement shall be binding on and shall inure to
the benefit of the Fund and the Custodian and their respective successors and
assigns, provided that neither
29
<PAGE>
party hereto may assign this Agreement or any of its rights or obligations
hereunder without the prior written consent of the other party.
13. Counterparts: This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
Aetna Variable Portfolios, Inc.
on behalf of
AETNA INTERNATIONAL PORTFOLIO BROWN BROS HARRIMAN & CO.
By per pro
------------------------- --------------------
30
<PAGE>
BROWN BROTHERS HARRIMAN & CO - GLOBAL CUSTODY NETWORK
AETNA INTERNATIONAL PORTFOLIO
APPENDIX A
<TABLE>
<CAPTION>
CENTRAL
COUNTRY SUBCUSTODIAN DEPOSITORY
------- ------------ ----------
<S> <C> <C>
ARGENTINA CITIBANK N A, BUENOS AIRES AGMT NONE
7/16/81*
AUSTRALIA NATIONAL AUSTRALIA BANK LTD AGMT AUSTRACLEAR
5/1/85
AUSTRIA CREDITANSTALT BANKVEREIN AGMT KONTROLLBANK
12/18/89
BELGIUM BANQUE BRUXELLES LAMBERT AGMT CIK
11/15/90
BRAZIL THE FIRST NATIONAL BANK OF BOSTON NONE
RIO DE JANEIRO AND SAO PAULO AGMT 1/5/88
CANADA ROYAL TRUST CORP AGMT 3/15/88 CDS
CHILE CITIBANK N A, SANTIAGO AGMT 7/16/81* NONE
DENMARK DEN DANSKE/PROVINSBANKEN AGMT 1/1/89 VP
DEN DANSKE SIDE LTR 7/23/91
FINLAND UNION BANK OF FINLAND AGMT 2/27/89 NONE
FRANCE BANQUE INDOSUEZ AGMT 7/19/90 SICOVAM
GERMANY BERLINER HANDELS UND BANK AGMT KASSENVEREIN
6/28/90
GREECE CITBANK N A, ATHENS AGMT 7/16/81* NONE
HONG KONG CHASE MANHATTAN BANK, HONG KONG AGMT NONE
6/4/79 CMB HONG KONG AGMT AMENDMENT
9/17/90
INDONESIA CITIBANK N A, JAKARTA AGMT 7/16/81* NONE
IRELAND ALLIED IRISH BANKS PLC AGMT 1/10/89 NONE
31
<PAGE>
BROWN BROTHERS HARRIMAN & CO - GLOBAL CUSTODY NETWORK
AETNA INTERNATIONAL PORTFOLIO
APPENDIX A (CONT'D)
CENTRAL
COUNTRY SUBCUSTODIAN DEPOSITORY
------- ------------ ----------
ITALY BANCA COMMERCIALE ITALALIANA AGMT MONTE TITOLI
5/8/89
JAPAN MITSUI TRUST & BANKING CO LTD AGMT NONE
3/1/89
KOREA CITIBANK N A, SEOUL AGMT 7/16/81* KSSC
MALAYSIA HONGKONG & SHANGHAI BKG CORP, KUALA NONE
LUMPUR HSBC REGIONAL AGMT DTD 4/19/91
MEXICO CITIBANK N A, MEXICO CITY AGMT INDEVAL
7/16/81*
NETHERLANDS AMRO BANK AGMT 12/19/88 NECIGEF
NEW ZEALAND NATIONAL AUSTRALIA BANK LTD AGMT NONE
5/1/85 NEW ZEALAND ADDENDUM 3/7/89
NORWAY CHRISTIANA BANK AGMT 2/3/89 VPS
PHILLIPINES CITIBANK N A, MANILA AGMT 7/16/81* NONE
PORTUGAL BANKCO ESPIRITO SANTO E COMMERCIAL NONE
DE LISBOA AGMT 4/26/89
SINGAPORE HONGKONG & SHANGHAI BANKING CORP CDP
HSBC REGIONAL AGMT 4/19/91
SPAIN BANCO SANTANDER AGMT 12/14/88 NONE
SWEDEN SKANDINAVISKA ENSKILDA BKN AGMT VPC
2/20/89*
SWITZERLAND UNION BANK OF SWITZERLAND AGMT SEGA
12/20/88
TAIWAN CITIBANK N A, TAIWAN AGMT 7/16/81* TSCD
32
<PAGE>
BROWN BROTHERS HARRIMAN & CO - GLOBAL CUSTODY NETWORK
AETNA INTERNATIONAL PORTFOLIO
APPENDIX A (CONT'D)
CENTRAL
COUNTRY SUBCUSTODIAN DEPOSITORY
------- ------------ ----------
THAILAND HONGKONG & SHANGHAI BKG CORP, NONE
SINGAPORE FOR BANGKOK - HSBC
REGIONAL AGMT 4/19/91
TRANSNATIONAL BROWN BROTHERS HARRIMAN & CO EUROCLEAR
CEDEL
TURKEY CITIBANK N A, ISTANBUL AGMT 7/16/81* NONE
UNITED KINGDOM MIDLAND BANK PLC AGMT 8/8/90* TALISMAN
CGO, CMO
VENEZUALA CITIBANK N A, CARACAS AGMT 7/16/81* NONE
*CITIBANK N A AGREEMENT AMENDMENT DATED 8/31/90
</TABLE>
33
<PAGE>
APPENDIX B
Aetna Variable Portfolios, Inc.
AETNA INTERNATIONAL PORTFOLIO
THE FOLLOWING AUTHORIZED SOURCES ARE TO BE USED FOR PRICING AND
FOREIGN EXCHANGE QUOTATIONS, CORPORATE ACTIONS, DIVIDENDS AND
RIGHTS OFFERINGS:
AUTHORIZED SOURCES
------------------
QUOTRON
REUTERS
INTERACTIVE DATA CORPORATION
VALORINFORM (GENEVA)
TELEKURS
SUBSCRIPTION BANKS
FUND MANAGERS
EXTEL (LONDON)
REPUTABLE FOREIGN BROKERS
APPROVED: _______________________________________________
DATE
34
<PAGE>
Aetna International Portfolio
Proposed Global Custody Fee Schedule
October, 1994
<TABLE>
<CAPTION>
Market Asset Charge (BP) Transaction Charge (USD)
- ------ ----------------- ------------------------
<S> <C> <C>
Australia 8 50
Austria 15 50
Belgium 12 50
Brazil 25 50
Canada 5 20
Denmark 8 50
Finland 15 75
France 6 60
Germany 8 30
Greece 50 150
Hong Kong 8 75
Indonesia 20 50
Ireland 10 35
Italy 8 60
Japan 5 30
Korea 25 50
Luxembourg 12 50
Malaysia 8 75
Mexico 16 60
Netherlands 7 20
New Zealand 10 35
Norway 10 75
Philippines 25 50
Portugal 40 100
Singapore 7 75
Spain 10 55
Sri Lanka 25 50
Sweden 8 50
Switzerland 5 50
Taiwan 30 100
Thailand 12 75
United Kingdom 6 45
United States 1 10 book entry; 25 physical
Venezuela 35 75
Euroclear and 6 15 at Euroclear;
Cedel 35 outside Euroclear
</TABLE>
o Annual Minimum Custody Fee: $10,000 per account
o Automation: This schedule assumes machine readable trade instruction
o Wires: $6 per incoming/outgoing wire
o Futures, Options, Currency Hedge and Third-party Foreign Exchange: $25.00
per transaction
35
<PAGE>
Fund Accounting Fee Proposal
Payable quarterly on value of assets:
.0008 on first $50 million
.0004 on all over $50 million
Minimum Annual Fee: $40,000
The above schedule provides for daily portfolio valuation and complete general
ledger reporting.
Out-of-Pocket Expenses
Out-of-pocket expenses including but not limited to communications expenses,
wire charges, telex, legal, telephone and postage will be for the account of
Aetna. Direct expenses including but not limited to stamp duties, commissions,
Euroclear deposit and withdrawal charges, dividend and income collection
charges, proxy, taxes, certificate fees, special handling, transfer and
registration fees will be for the account of Aetna.
Additional Countries
For countries not listed above, fees will be negotiated at the time of
investment.
36
FORM OF
AMENDMENT TO CUSTODIAN AGREEMENT
between
AETNA VARIABLE PORTFOLIOS, INC.
and
MELLON BANK, N.A.
WITNESSETH:
WHEREAS, Aetna Variable Portfolios, Inc. (the "Fund"), and Mellon Bank,
N.A. ("Mellon"), entered into a Custodian Agreement (the "Agreement") on
_________________, 1996 with respect to the assets of certain Portfolio of the
Fund and some or all additional Portfolio that the Fund may establish from time
to time ("Portfolio"); and
WHEREAS, the Fund has authorized the creation of a new Portfolio,
_____________________, and has amended its registration statement on Form N-1A
to register shares of beneficial interest of the Portfolio with the Securities
and Exchange Commission; and
WHEREAS, the Fund desires to appoint Mellon as custodian of the assets
for such Portfolio;
NOW THEREFORE, it is agreed as follows:
1. The Fund, on behalf of the Portfolio, hereby appoints Mellon, and
Mellon hereby accepts appointment, as the custodian of the assets of the
Portfolio, in accordance with all the terms and conditions set forth in the
Agreement.
2. The Fund is entering into this Agreement incorporating the Agreement
on behalf of each Portfolio individually and not jointly with any other
Portfolio. In the Agreement, the term "Fund" shall refer to the Fund solely on
behalf of each Portfolio individually to which a particular Futures Contract
transaction or other obligation under the Agreement relates. The
responsibilities and benefits set forth in the Agreement shall refer to each
Portfolio severally and not jointly. No individual Portfolio shall have any
responsibility for any obligation arising out of a Futures Contract transaction
entered into by any other Portfolio. Without otherwise limiting the generality
of the foregoing,
<PAGE>
(a) any breach of the Agreement regarding the Fund with respect to any one
Portfolio shall not create a right or obligation with respect to any
other Portfolio;
(b) under no circumstances shall Mellon have the right to set off claims
relating to a Portfolio by applying property of any other Portfolio;
(c) no Portfolio shall have the right of set off against the assets held
by any other Portfolio;
(d) the business and contractual relationships created by the Agreement as
amended hereby, and the consequences of such relationships relate
solely to the particular Portfolio to which such relationship was
created; and
(e) all property held by Mellon on behalf of a particular Portfolio shall
relate solely to the particular Portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the date mentioned below.
Mellon Bank, N.A. Aetna Variable Portfolios, Inc. on behalf of
[Portfolio]
By:______________________________ By:___________________________________
Name:____________________________ Name:_________________________________
Title:___________________________ Title:________________________________
Date:____________________________ Date:_________________________________
FORM OF
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
______________ Portfolio (the "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;
-2-
<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 __________% of the average daily net assets of the
Portfolio payable monthly in arrears.
-5-
<PAGE>
Except as hereinafter set forth, compensation under this Agreement shall be
calculated and accrued daily at the rate of 1/365 of __________% 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.
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, 1999. 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
-6-
<PAGE>
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.
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.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the _______ day of ______________,
1997.
AETNA LIFE INSURANCE
AND ANNUITY COMPANY
Attest:
By
-----------------------------------
Name Title
- ------------------------------------
Name Title
AETNA VARIABLE
PORTFOLIOS, INC.
on behalf of
Aetna ______________ Portfolio
Attest:
By
-----------------------------------
Name Title
- ------------------------------------
Name Title
-8-
[Aetna Letterhead]
[Aetna Logo] 151 Farmington Avenue
Hartford, CT 06156
September 26, 1997 Amy R. Doberman
Counsel
Law Division, RE4A
Investments & Financial Services
(860) 273-1409
Fax: (860) 273-9407
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Filing Desk
Re: Aetna Variable Portfolios, Inc.
Post-Effective Amendment No. 2 to
Registration Statement on Form N-1A
(File No. 333-05173 and 811-7651)
Dear Sir or Madam:
The undersigned serves as counsel to Aetna Life Insurance and Annuity Company
(ALIAC), the investment adviser to Aetna Variable Portfolios, Inc., a Maryland
corporation (the "Company"). It is my understanding that the Company has
registered an indefinite number of shares of beneficial interest under the
Securities Act of 1933 (the "1933 Act") pursuant to Rule 24f-2 under the
Investment Company Act of 1940 (the "1940 Act").
Insofar as it relates or pertains to the Company, I have reviewed the prospectus
and the Company's Registration Statement on Form N-1A, as amended to the date
hereof, filed with the Securities and Exchange Commission under the 1933 Act and
the 1940 Act, pursuant to which the Shares will be sold (the "Registration
Statement"). I have also examined originals or copies, certified or otherwise
identified to my satisfaction, of such documents and other instruments I have
deemed necessary or appropriate for the purpose of this opinion. For purposes of
such examination, I have assumed the genuineness of all signatures on original
documents and the conformity to the original of all copies.
I am admitted to practice law in Maryland and the District of Columbia. My
opinion herein as to Maryland law is based upon a limited inquiry thereof that I
have deemed appropriate under the circumstances.
<PAGE>
Based upon the foregoing, and assuming the securities are issued and sold in
accordance with the provisions of the Company's Articles of Incorporation and
the Registration Statement, I am of the opinion that the securities will when
sold be legally issued, fully paid and nonassessable.
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Amy R. Doberman
Amy R. Doberman
Counsel
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Aetna Variable Portfolios, Inc.:
We consent to the use of our reports dated February 14, 1997 included herein by
references in the registration statement (No. 333-05173) on Form N-1A and to
reference to our firm under "Independent Auditors" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Hartford, Connecticut
September 26, 1997
[Aetna letterhead]
[Aetna logo]
151 Farmington Avenue
Hartford, CT 06156
Shaun P. Mathews
Senior Vice President
Aetna Life Insurance and Annuity
September 24, 1997 Company, TN41
(860) 273-4908
Fax: (860) 273-4247
Board of Directors
Aetna Variable Portfolios, Inc.
151 Farmington Avenue
Hartford, CT 06156
Ladies and Gentlemen:
Aetna Life Insurance and Annuity Company ("Aetna") will provide on or before
December 19, 1997 a minimum of $100,000.00 of initial capital to each of Aetna
Index Plus Small Cap Portfolio, Aetna Index Plus Mid Cap Portfolio, Aetna Mid
Cap Portfolio, Aetna International Portfolio, Aetna Real Estate Securities
Portfolio, Aetna Index Plus Bond Portfolio, and Aetna High Yield Portfolio
("Portfolios"), new Portfolios of Aetna Variable Portfolios, Inc. (the "Fund").
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 Aetna in consideration for Aetna's providing
the initial capital, Aetna hereby assures you that its purchase of $100,000.00
worth of shares of each of the Portfolios will be made for investment purposes
and that Aetna has no present intention of redeeming or reselling those shares.
Aetna does, however, reserve the right to make additional investments in shares
of each of the Portfolios and to redeem any or all of its shares in a manner
which would be consistent with the Securities Act of 1933 and the Investment
Company Act of 1940.
Sincerely,
/s/ Shaun P. Mathews
Shaun P. Mathews
Senior Vice President
Aetna Life Insurance and Annuity Company
I, Amy R. Doberman, Secretary of Aetna Variable Fund, Aetna Variable Encore
Fund, Aetna Income Shares, Aetna Get Fund, Aetna Investment Advisers Fund, Inc.,
Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc., and Aetna
Series Fund, Inc. (the "Funds"), hereby certify that the following resolution
was duly adopted by the Boards of Directors/Trustees of the Funds in accordance
with applicable laws of Maryland and Massachusetts on September 25, 1996, and
that such resolution has not been rescinded and is still in full force and
effect:
RESOLVED, that the following officers of each of Aetna Variable Fund, Aetna
Variable Encore Fund, Aetna Income Shares, Aetna Get Fund, Aetna Investment
Advisers Fund, Inc., Aetna Generation Portfolios, Inc., Aetna Variable
Portfolios, Inc., and Aetna Series Fund, Inc. (the "Fund" or "Funds"),
President
Treasurer
Corporate Secretary
Assistant Corporate Secretary
(1) is hereby authorized to sign in the name of a Fund or any
Portfolio or Series of a Fund
(a) any written instrument which such officer is requested to
approve in the normal course of such officer's activities in
connection with the Fund's operations; and
(b) any other written instrument when specifically authorized by
the Board of Directors/Trustees, or the President of a Fund
above, and
(2) is further authorized (i) to delegate all or any part of the one
or more officers, employees or agents of the Fund, provided that
each such delegation is in writing and a copy thereof is filed
with the corporate records of the Fund, or (ii) to designate any
attorney at law representing the Fund, to sign the name of the
Fund or any Portfolio or Series of the Fund on any document which
the officer is authorized to sign.
September 26, 1997
/s/ Amy R. Doberman
--------------------------------------
Amy R. Doberman
Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> Aetna Variable Portfolios, Inc.
<SERIES>
<NUMBER> 02
<NAME> Aetna Variable Growth Portfolio
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 5,478,531
<INVESTMENTS-AT-VALUE> 6,086,776
<RECEIVABLES> 28,755
<ASSETS-OTHER> 4,565
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,120,096
<PAYABLE-FOR-SECURITIES> 76,215
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,658
<TOTAL-LIABILITIES> 79,873
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,131,347
<SHARES-COMMON-STOCK> 512,737
<SHARES-COMMON-PRIOR> 510,000
<ACCUMULATED-NII-CURRENT> 12,998
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 287,633
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 608,245
<NET-ASSETS> 6,040,223
<DIVIDEND-INCOME> 27,335
<INTEREST-INCOME> 6,568
<OTHER-INCOME> 0
<EXPENSES-NET> (20,390)
<NET-INVESTMENT-INCOME> 13,513
<REALIZED-GAINS-CURRENT> 290,168
<APPREC-INCREASE-CURRENT> 530,588
<NET-CHANGE-FROM-OPS> 834,269
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,862
<NUMBER-OF-SHARES-REDEEMED> (15,125)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 865,616
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (515)
<OVERDIST-NET-GAINS-PRIOR> (2,535)
<GROSS-ADVISORY-FEES> 16,312
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 20,390
<AVERAGE-NET-ASSETS> 5,482,940
<PER-SHARE-NAV-BEGIN> 10.146
<PER-SHARE-NII> 0.026
<PER-SHARE-GAIN-APPREC> 1.608
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.780
<EXPENSE-RATIO> 0.75
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 5,495,205
<INVESTMENTS-AT-VALUE> 6,229,713
<RECEIVABLES> 163,860
<ASSETS-OTHER> 4,986
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,398,559
<PAYABLE-FOR-SECURITIES> 123,036
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,454
<TOTAL-LIABILITIES> 131,490
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,357,039
<SHARES-COMMON-STOCK> 532,372
<SHARES-COMMON-PRIOR> 510,000
<ACCUMULATED-NII-CURRENT> 2,231
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 173,291
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 734,508
<NET-ASSETS> 6,267,069
<DIVIDEND-INCOME> 19,253
<INTEREST-INCOME> 7,779
<OTHER-INCOME> 0
<EXPENSES-NET> (23,879)
<NET-INVESTMENT-INCOME> 3,153
<REALIZED-GAINS-CURRENT> 173,291
<APPREC-INCREASE-CURRENT> 676,011
<NET-CHANGE-FROM-OPS> 852,455
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 61,187
<NUMBER-OF-SHARES-REDEEMED> (38,815)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,109,494
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (922)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 19,899
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 23,879
<AVERAGE-NET-ASSETS> 5,352,086
<PER-SHARE-NAV-BEGIN> 10.113
<PER-SHARE-NII> 0.006
<PER-SHARE-GAIN-APPREC> 1.653
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.772
<EXPENSE-RATIO> 0.90
<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> 6-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 52,724,344
<INVESTMENTS-AT-VALUE> 59,095,563
<RECEIVABLES> 313,707
<ASSETS-OTHER> 8,384
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 59,417,654
<PAYABLE-FOR-SECURITIES> 794,426
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22,158
<TOTAL-LIABILITIES> 816,584
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 50,712,968
<SHARES-COMMON-STOCK> 4,438,729
<SHARES-COMMON-PRIOR> 1,779,788
<ACCUMULATED-NII-CURRENT> 259,616
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,257,267
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,371,219
<NET-ASSETS> 58,601,070
<DIVIDEND-INCOME> 300,763
<INTEREST-INCOME> 44,778
<OTHER-INCOME> 0
<EXPENSES-NET> (85,856)
<NET-INVESTMENT-INCOME> 259,685
<REALIZED-GAINS-CURRENT> 1,282,025
<APPREC-INCREASE-CURRENT> 5,281,661
<NET-CHANGE-FROM-OPS> 6,823,371
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,411,480
<NUMBER-OF-SHARES-REDEEMED> (752,539)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 39,190,613
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (69)
<OVERDIST-NET-GAINS-PRIOR> (24,758)
<GROSS-ADVISORY-FEES> 60,099
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 85,856
<AVERAGE-NET-ASSETS> 34,637,387
<PER-SHARE-NAV-BEGIN> 10.906
<PER-SHARE-NII> 0.059
<PER-SHARE-GAIN-APPREC> 2.237
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.202
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> Aetna Variable Portfolios, Inc.
<SERIES>
<NUMBER> 01
<NAME> Aetna Variable Capital Appreciation Portfolio
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 5,296,429
<INVESTMENTS-AT-VALUE> 6,036,103
<RECEIVABLES> 613,218
<ASSETS-OTHER> 4,087
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,653,408
<PAYABLE-FOR-SECURITIES> 359,355
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,816
<TOTAL-LIABILITIES> 343,171
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,157,790
<SHARES-COMMON-STOCK> 514,634
<SHARES-COMMON-PRIOR> 510,000
<ACCUMULATED-NII-CURRENT> 31,168
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 381,605
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 739,674
<NET-ASSETS> 6,310,237
<DIVIDEND-INCOME> 46,274
<INTEREST-INCOME> 6,727
<OTHER-INCOME> 0
<EXPENSES-NET> (21,057)
<NET-INVESTMENT-INCOME> 31,944
<REALIZED-GAINS-CURRENT> 381,605
<APPREC-INCREASE-CURRENT> 637,285
<NET-CHANGE-FROM-OPS> 1,050,834
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29,060
<NUMBER-OF-SHARES-REDEEMED> (24,426)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,108,624
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (776)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 16,846
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 21,057
<AVERAGE-NET-ASSETS> 5,660,528
<PER-SHARE-NAV-BEGIN> 10.199
<PER-SHARE-NII> 0.062
<PER-SHARE-GAIN-APPREC> 2.001
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.262
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<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
<PER-SHARE-NAV-END> 10.906
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> Aetna Variable Portfolios, Inc.
<SERIES>
<NUMBER> 01
<NAME> Aetna Variable Capital Appreciation 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> 5,105,349
<INVESTMENTS-AT-VALUE> 5,207,738
<RECEIVABLES> 3,978
<ASSETS-OTHER> 56
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,211,592
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,979
<TOTAL-LIABILITIES> 9,979
<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> (776)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 102,389
<NET-ASSETS> 5,201,613
<DIVIDEND-INCOME> 3,798
<INTEREST-INCOME> 5,405
<OTHER-INCOME> 0
<EXPENSES-NET> (1,819)
<NET-INVESTMENT-INCOME> 7,384
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 102,389
<NET-CHANGE-FROM-OPS> 109,773
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,160)
<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> 5,201,613
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,455
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,819
<AVERAGE-NET-ASSETS> 5,209,819
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.015
<PER-SHARE-GAIN-APPREC> 0.200
<PER-SHARE-DIVIDEND> (0.016)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.199
<EXPENSE-RATIO> 0.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
