As filed with the Securities and Exchange File No. 333-05173
Commission on February 26, 1998 File No. 811-7651
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 3
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
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
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
[X] on May 1, 1998 pursuant to paragraph (a)(1) of Rule 485
<PAGE>
Aetna Variable Portfolios, Inc.
Cross-Reference Sheet
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
Concentration
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.. Purchase and Redemption
of Shares
Net Asset Value
General Information
Tax Matters
7 Purchase of Securities Being
Offered............................. The Fund
Purchase and Redemption
of Shares
Net Asset Value
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
Item No. Part B Additional 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
15 Control Persons and Principal
Holders of Securities............... Control Persons and Principal
Shareholders
16 Investment Advisory and Other
Services............................ The Investment Advisory
Agreements
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......... Purchase and Redemption of Shares
Net Asset Value
20 Tax Status.......................... Tax Status
21 Underwriters........................ Principal Underwriter
22 Calculation of Performance Data..... Performance Information
23 Financial Statements................ Financial Statements
<PAGE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
<PAGE>
================================================================================
AETNA HIGH YIELD VP
AETNA REAL ESTATE SECURITIES VP
AETNA VALUE OPPORTUNITY VP
AETNA GROWTH VP
AETNA MID CAP VP
AETNA SMALL COMPANY VP
AETNA INTERNATIONAL VP
AETNA INDEX PLUS LARGE CAP VP
AETNA INDEX PLUS MID CAP VP
AETNA INDEX PLUS SMALL CAP VP
AETNA INDEX PLUS BOND VP
AETNA VARIABLE PORTFOLIOS, INC.
151 FARMINGTON AVENUE
HARTFORD, CT 06156-8962
Prospectus dated: May 1, 1998
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 May 1, 1998 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
FINANCIAL HIGHLIGHTS...................................................... 3
THE FUND.................................................................. 8
DESCRIPTION OF THE VARIABLE PORTFOLIOS.................................... 8
INVESTMENT TECHNIQUES ....................................................13
RISK FACTORS AND OTHER CONSIDERATIONS.....................................15
CONCENTRATION.............................................................17
PERFORMANCE...............................................................18
MANAGEMENT OF THE VARIABLE PORTFOLIOS.....................................20
REIMBURSEMENTS/FEE WAIVER ARRANGEMENTS....................................22
PURCHASE AND REDEMPTION OF SHARES.........................................23
NET ASSET VALUE...........................................................23
GENERAL INFORMATION.......................................................23
TAX MATTERS...............................................................24
YEAR 2000.................................................................24
2
<PAGE>
FINANCIAL HIGHLIGHTS
The selected data presented below for, and as of the end of, each of the periods
listed are obtained from the financial statements of Aetna Variable Portfolios,
Inc., which have been _____________________, independent auditors. Additional
information about the performance of each Portfolio included in the tables is
contained in _______________________________________________
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Value Opportunity
High Yield Real Estate (formerly Capital
Appreciation)
Period Period from Period from
from Dec. Dec. 15, Dec. 13,
10, 1997 to 1997 to Year ended 1996 to
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1997 1997 1996
<S> <C> <C> <C> <C>
Net asset value per share, beginning of period $10.000 $10.000 $10.199 $10.000
Income From Investment Operations:
Net investment income 0.050 0.050 0.107 0.015
Net realized and change in unrealized
gain (loss) 0.098 0.309 3.899 0.200
-------- ------- ------- -------
Total from investment operations 0.148 0.359 4.006 0.215
Less Distributions:
Dividends from net investment income (0.050) (0.053) (0.104) (0.016)
Dividends from net realized gains on
investments - - (2.185) -
-------- ------- ------- -------
Total distributions (0.050) (0.053) (2.289) (0.016)
Net asset value per share, end of period $10.098 $10.306 $11.916 $10.199
======== ======= ======= =======
Total Return* 1.48% 3.59% 39.36% 2.15%
Net assets, end of period (000's) $ 10,098 $ 5,153 $ 9,147 $ 5,202
Ratio of total expenses to average net 0.80%(1) 0.95%(1) 0.75% 0.67%(1)
assets
Ratio of net investment income to
average net assets 7.81%(1) 9.99%(1) 1.06% 2.73%(1)
Portfolio turnover rate 69.39% - 187.84% -
Average commission rate paid per share $ - $0.0448 $0.0599 $0.0300
</TABLE>
* The Total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
(1) Annualized.
3
<PAGE>
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Growth Mid Cap
Period from Period
Dec. 13, from Dec.
Year ended 1996 to 17, 1997 to
Dec. 31, Dec. 31, Dec. 31,
1997 1996 1997
<S> <C> <C> <C>
Net asset value per share, beginning of period $10.146 $10.000 $10.000
Income From Investment Operations:
Net investment income 0.039 0.011 0.009
Net realized and change in unrealized
gain (loss) 3.271 0.147 0.171
------- ------- -------
Total from investment operations 3.310 0.158 0.180
Less Distributions:
Dividends from net investment income (0.034) (0.012) (0.013)
Dividends from net realized gains on
investments (3.576) - -
------- ------- -------
Total distributions (3.610) (0.012) (0.013)
Net asset value per share, end of period $ 9.846 $10.146 $10.167
======= ======= =======
Total Return* 33.01% 1.57% 1.80%
Net assets, end of period (000's) $ 5,964 $ 5,175 $ 5,084
Ratio of total expenses to average net assets 0.75% 0.67%(1) 0.95%(1)
Ratio of net investment income to
average net assets 0.29% 1.99%(1) 2.10%(1)
Portfolio turnover rate 207.41% 1.97% 0.95%
Average commission rate paid per share $0.0589 $0.0364 $0.0286
</TABLE>
* The Total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
(1) Annualized.
4
<PAGE>
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Small Company International
Period from Period
Dec. 27, from Dec.
Year ended 1996 to 22, 1997 to
Dec. 31, Dec. 31, Dec. 31,
1997 1996 1997
<S> <C> <C> <C>
Net asset value per share, beginning of period $10.113 $10.000 $10.000
Income From Investment Operations:
Net investment income 0.042 0.008 (0.002)
Net realized and change in unrealized
gain (loss) 3.439 0.115 0.276
------- ------- -------
Total from investment operations 3.481 0.123 0.274
Less Distributions:
Dividends from net investment income (0.030) (0.010) -
Dividends from net realized gains on
investments (0.794) - -
------- ------- -------
Total distributions (0.824) (0.010) -
Net asset value per share, end of period $12.770 $10.113 $10.274
======= ======= =======
Total Return* 34.49% 1.23% 2.74%
Net assets, end of period (000's) $18,102 $ 5,158 $15,412
Ratio of total expenses to average net assets 0.90% 0.55%(1) 1.15%(1)
Ratio of net investment income to
average net assets 0.78% 5.96%(1) (0.98)%(1)
Portfolio turnover rate 180.25% - 0.71%
Average commission rate paid per share $0.0519 $ - $0.0440
</TABLE>
* The Total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
(1) Annualized.
5
<PAGE>
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Index Plus Large Cap Index Plus
(formerly Index Plus) Mid Cap
Period from Period
Sept. 16, from Dec.
Year ended 1996 to 16, 1997 to
Dec. 31, Dec. 31, Dec. 31,
1997 1996 1997
<S> <C> <C> <C>
Net asset value per share, beginning of period $ 10.906 $10.000 $10.000
Income From Investment Operations:
Net investment income 0.102 0.047 0.006
Net realized and change in unrealized
gain (loss) 3.594 0.919 0.344
-------- ------- -------
Total from investment operations 3.696 0.966 0.350
Less Distributions:
Dividends from net investment income (0.096) (0.047) (0.008)
Dividends from net realized gains on
investments (0.489) (0.013) -
-------- ------- -------
Total distributions (0.585) (0.060) (0.008)
Net asset value per share, end of period $ 14.017 $10.906 $10.342
======== ======= =======
Total Return* 33.89% 9.64% 3.50%
Net assets, end of period (000's) $132,517 $19,410 $ 7,756
Ratio of total expenses to average net assets 0.50% 0.50%(1) 0.60%(1)
Ratio of net investment income to
average net assets 1.38% 1.89%(1) 1.37%(1)
Portfolio turnover rate 76.83% 5.18% -
Average commission rate paid per share $ 0.0372 $0.0358 $0.0481
</TABLE>
* The Total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
(1) Annualized.
6
<PAGE>
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Index Plus Index Plus
Small Cap Bond
Period Period from
from Dec. Dec. 18,
19, 1997 to 1997 to
Dec. 31, Dec. 31,
1997 1997
<S> <C> <C>
Net asset value per share, beginning of period $10.000 $10.000
Income From Investment Operations:
Net investment income 0.007 0.022
Net realized and change in unrealized
gain (loss) 0.426 0.005
------- -------
Total from investment operations 0.433 0.027
Less Distributions:
Dividends from net investment income (0.010) (0.021)
Dividends from net realized gains on
investments - -
------- -------
Total distributions (0.010) (0.021)
Net asset value per share, end of period $10.423 $10.006
======= =======
Total Return* 4.33% 0.27%
Net assets, end of period (000's) $ 7,817 $15,009
Ratio of total expenses to average net 0.60%(1) 0.45%(1)
assets
Ratio of net investment income to
average net assets 1.90%(1) 5.23%(1)
Portfolio turnover rate - -
Average commission rate paid per share $0.0797 $ -
</TABLE>
* The Total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
(1) Annualized.
7
<PAGE>
THE FUND
The Fund is an open-end, management investment company, consisting of multiple
Portfolios. It currently has authorized eleven Portfolios:
[bullet] Aetna High Yield VP(High Yield)
[bullet] Aetna Real Estate Securities VP (Real Estate)
[bullet] Aetna Value Opportunity VP (Value Opportunity, formerly Aetna Variable
Capital Appreciation Portfolio)
[bullet] Aetna Growth VP (Growth, formerly Aetna Variable Growth Portfolio)
[bullet] Aetna Mid Cap VP (Mid Cap)
[bullet] Aetna Small Company VP (Small Company, formerly Aetna Variable Small
Company Portfolio)
[bullet] Aetna International VP (International, formerly Aetna Variable
International Growth Portfolio)
[bullet] Aetna Index Plus Large Cap VP (Index Plus Large Cap, formerly Aetna
Variable Index Plus Portfolio)
[bullet] Aetna Index Plus Mid Cap VP (Index Plus Mid Cap)
[bullet] Aetna Index Plus Small Cap VP (Index Plus Small Cap)
[bullet] Aetna Index Plus Bond VP (Index Plus Bond)
The Fund's Board of Directors (Directors) may authorize additional Portfolios in
the future. The Portfolios are intended to serve as 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." Aeltus
Investment Management, Inc. (Aeltus) serves as the investment adviser for each
of the Portfolios. See "Management of the Variable Portfolios" for further
information. The Directors do not foresee any disadvantages or conflicts to the
Participants in funding both VA Contracts and VLI Policies through the
Portfolios or in the offering the Portfolios through more than one insurance
company. The Directors have agreed to monitor the Portfolios' activities to
identify any potentially material, irreconcilable conflicts and to take
appropriate action if necessary to resolve any conflicts which may arise.
DESCRIPTION OF THE VARIABLE PORTFOLIOS
Each Portfolio has an investment objective that is a fundamental policy. 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 HIGH YIELD VP
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 Standard and Poor's Corporation (S&P) or lower than Baa3 by Moody's
Investors Service, Inc. (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), as more fully described below. High Yield may also enter into
repurchase agreements, invest up to 25% of its total 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."
8
<PAGE>
AETNA REAL ESTATE SECURITIES VP
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, which include those companies that, at the
time of purchase, derive a significant proportion (at least 50%) of their
revenues or profits from real estate operations or related services. Real Estate
may also invest in convertible securities and preferred stocks.
Additionally, Real Estate may invest in options and futures (including options
on futures), as more fully described below. Real Estate may also enter into
repurchase agreements, invest up to 25% of its total 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.
For more information about the risks associated with investing in real estate
securities, see "Risk Factors and Other Considerations - Real Estate
Securities."
AETNA VALUE OPPORTUNITY VP
Investment Objective
Value Opportunity seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stock.
Investment Policy
Value Opportunity will normally invest at least 65% of its total assets in
common stocks. It may also invest in convertible and non-convertible preferred
stocks. Value Opportunity will use a value-oriented approach to stock selection.
Additionally, Value Opportunity may invest in options and futures (including
options on futures), as more fully described below. Value Opportunity may also
enter into repurchase agreements, invest up to 25% of its total 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. Value Opportunity will not invest more than 15% of the
total value of its assets in high-yield bonds.
AETNA GROWTH VP
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
that Aeltus believes have significant 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), as more fully described below. Growth may also enter into repurchase
agreements, invest up to 25% of its total 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 bonds.
9
<PAGE>
AETNA MID CAP VP
Investment Objective
Mid Cap seeks growth of capital primarily through investment in a diversified
portfolio of common stocks and securities convertible into common stocks of
companies having medium market capitalizations.
Investment Policy
Under normal circumstances, Mid Cap will invest at least 65% of its assets in
common stocks having market capitalizations at the time of purchase of between
$800 million and $10 billion and will generally exclude common stocks that are
not of a similar size (as measured by market capitalization) as stocks in the
S&P 400.
Additionally, Mid Cap may invest in options and futures (including options on
futures), as more fully described below. Mid Cap may also enter into repurchase
agreements, invest up to 25% of its total 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 SMALL COMPANY VP
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), as more fully described below. Small Company may also enter into
repurchase agreements, invest up to 25% of its total 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 VP
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 invest at least 65% of its total assets among securities
principally traded in three or more countries outside of North America.
International will invest primarily in equity securities including securities
convertible into stocks. International will invest in a broad spectrum of
companies and industries. Further, from time to time International may hold up
to 10% of its total assets in long-term debt securities with an S&P or Moody's
rating of AA/Aa or above, or, if unrated, are considered by Aeltus to be of
comparable quality.
Additionally, International may invest in options and futures (including options
on futures), as more fully described below. International may also enter into
repurchase agreements, engage in currency hedging and purchase securities on a
when-issued, delayed-delivery or forward-commitment basis.
10
<PAGE>
AETNA INDEX PLUS LARGE CAP VP
Investment Objective
Index Plus Large Cap seeks to outperform the total return performance of
publicly traded common stocks represented in the S&P 500 Composite Stock Price
Index (S&P 500).
Investment Policy
Index Plus Large Cap will attempt to be fully invested in common stocks. Under
normal circumstances, Index Plus Large Cap will invest at least 90% of its
assets in certain 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 Large Cap is neither sponsored by
nor affiliated with S&P. AN INVESTMENT IN INDEX PLUS LARGE CAP INVOLVES RISKS
SIMILAR TO THOSE OF INVESTING IN COMMON STOCKS GENERALLY. As Index Plus Large
Cap invests primarily in common stocks, Index Plus Large Cap is subject to
market risk, i.e. the possibility that common stock prices will decline over
short or even extended periods. The U.S. stock market tends to be cyclical, with
periods when stock prices generally rise and periods when prices generally
decline.
Index Plus Large Cap will generally include approximately 400 stocks included in
the S&P 500. Index Plus Large Cap intends under normal circumstances to exclude
common stocks which are not part of the S&P 500, and to exclude Aetna Inc.
common stock.
The weightings of stocks in the S&P 500 are based on each stock's relative total
market capitalization, that is, its market price per share multiplied by the
number of common shares outstanding. Aeltus will attempt to outperform the
investment results of the S&P 500 by creating a portfolio that has similar
market risk characteristics to the S&P 500, but will use a disciplined analysis
to identify those stocks having the greatest likelihood of either outperforming
or underperforming the market.
Index Plus Large Cap may also invest in convertible and non-convertible
preferred stocks. Additionally, Index Plus Large Cap may invest in options and
futures (including options on futures), as more fully described below. Index
Plus Large Cap may also enter into repurchase agreements, invest up to 25% of
its total 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 Large Cap will not
invest more than 10% of the total value of its assets in high-yield bonds.
It is a reasonable expectation that there will be a close correlation between
the performance of Index Plus Large Cap and that of the S&P 500 in both rising
and falling markets. Index Plus Large Cap expects to achieve a correlation
between the performance of its portfolio and that of the S&P 500 of at least
0.95, without taking into account expenses. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net asset value (NAV) of
Index Plus Large Cap, including the value of its dividends and capital gains
distributions, increases or decreases in exact proportion to changes in the S&P
500.
AETNA INDEX PLUS MID CAP VP
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. The S&P 400 is an unmanaged
index comprising common stocks of approximately 400 mid-capitalization
companies. 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 INDEX PLUS MID
CAP INVOLVES RISKS SIMILAR TO THOSE OF INVESTING IN COMMON STOCKS GENERALLY.
Index Plus Mid Cap will generally exclude common stocks which are not part of
the S&P 400.
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. Aeltus will attempt to
11
<PAGE>
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), as more fully described below. Index Plus Mid
Cap may also enter into repurchase agreements, invest up to 25% of its total
assets in foreign securities, invest in fixed income securities, engage in
when-issued, delayed-delivery or forward-commitment basis. Index Plus Mid Cap
will not invest more than 10% of the total value of its assets in high-yield
bonds.
It is a reasonable expectation that there will be a close correlation between
the performance of Index Plus Mid Cap and that of the S&P 400 in both rising and
falling markets. Index Plus Mid Cap expects to achieve a correlation between the
performance of its portfolio and that of the S&P 400 of at least 0.95, without
taking into account expenses. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset value (NAV) of Index
Plus Mid Cap, including the value of its dividends and capital gains
distributions, increases or decreases in exact proportion to changes in the S&P
400.
AETNA INDEX PLUS SMALL CAP VP
Investment Objective
Index Plus Small Cap seeks to outperform the total return performance of
publicly traded common stocks represented by the S&P SmallCap 600 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. The S&P 600 is an unmanaged
index comprising common stocks of approximately 600 small-capitalization
companies. 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 INDEX PLUS SMALL
CAP INVOLVES RISKS SIMILAR TO THOSE OF INVESTING IN COMMON STOCKS GENERALLY.
Index Plus Small Cap will generally exclude common stocks which are not part of
the S&P 600.
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. Aeltus 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), as more fully described below. Index
Plus Small Cap may also enter into repurchase agreements, invest up to 25% of
its total 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 10% of the total value of its assets in high-yield bonds.
It is a reasonable expectation that there will be a close correlation between
the performance of Index Plus Small Cap and that of the S&P 600 in both rising
and falling markets. Index Plus Small Cap expects to achieve a correlation
between the performance of its portfolio and that of the S&P 600 of at least
0.95, without taking into account expenses. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net asset value (NAV) of
Index Plus Small Cap, including the value of its dividends and capital gains
distributions, increases or decreases in exact proportion to changes in the S&P
600.
AETNA INDEX PLUS BOND VP
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
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characteristics of the Lehman Brothers Aggregate Bond Index (LBAB), an unmanaged
index comprised 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. The LBAB is comprised
of securities from the Lehman Brothers Government/Corporate Bond Index, Lehman
Brothers Mortgage-Backed Securities Index, and the Lehman Brothers Asset-Backed
Securities Index. Total return comprises price appreciation/depreciation and
income as a percentage of the original investment. Each of the Lehman Brothers
Indices are rebalanced monthly by market capitalization. Inclusion of a security
in the LBAB in no way implies an opinion by Lehman Brothers as to the security's
attractiveness as an investment. Index Plus Bond is neither sponsored by nor
affiliated with Lehman Brothers. AN INVESTMENT IN INDEX PLUS BOND 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), as more fully described below. Index Plus Bond
may also enter into repurchase agreements, invest up to 25% of its total 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 invests more than 10% of the total value of its assets in high-yield bonds.
It is a reasonable expectation that there will be a close correlation between
the performance of Index Plus Bond and that of the LBAB in both rising and
falling markets. Index Plus Bond expects to achieve a correlation between the
performance of its portfolio and that of the LBAB of at least 0.95, without
taking into account expenses. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset value (NAV) of Index
Plus Bond, including the value of its dividends and capital gains distributions,
increases or decreases in exact proportion to changes in the LBAB.
INVESTMENT TECHNIQUES
The Variable Portfolios may use the following investments:
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
Each Portfolio may enter into repurchase agreements with domestic banks and
broker-dealers. 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.
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 Directors have established credit standards for counterparties to repurchase
agreements entered into by the Portfolios.
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Zero Coupon and Pay-in-Kind Bonds
Each Portfolio may invest in zero coupon securities and pay-in-kind bonds. Zero
coupon securities are debt securities that pay no cash income but are sold at
substantial discounts to their value at maturity. Some zero coupon securities
call for the commencement of regular interest payments at a deferred date.
Pay-in-kind bonds pay all or a portion of their interest in the form of
additional debt or equity securities. Zero coupon securities and pay-in-kind
bonds are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying instruments with similar
maturities; the value of zero coupon securities and pay-in-kind bonds
appreciates more during periods of declining interest rates and depreciates more
during periods of rising interest rates.
Bank Obligations
Each Portfolio may invest in obligations (including banker's acceptances,
commercial paper, bank notes, time deposits and certificates of deposit) issued
by domestic or foreign banks, provided the issuing bank has a minimum of $5
billion in assets and a primary capital ratio of at least 4.25%.
Options, Futures and Other Derivative Instruments
In order to manage exposure to changing interest rates, securities prices and
currency exchange rates, or to increase investment return, a Portfolio may
engage in hedging and other strategies using derivatives. A derivative is a
financial instrument the value of which depends on (or derives from) the value
of an underlying asset, such as a security, interest rate, currency exchange
rate or index. Derivatives that may be used by a Portfolio include forward
contracts, swaps, structured notes, futures (see "Futures Contracts" below),
options (see "Options" below), collateralized mortgage obligations (CMOs) (see
"Mortgage-Backed Securities" below), and U.S. Government derivatives (see "U.S.
Government Derivatives" below). In addition, derivatives may be used to enhance
a Portfolio's yield. See the Statement for additional information on the use of
and risks associated with derivatives.
Some of these strategies, such as selling futures contracts, buying puts and
writing calls, are designed to hedge against price fluctuations. Other
strategies, such as writing puts, and buying futures contracts, calls, and
interest rate swaps, tend to increase market exposure. In some cases, a
Portfolio may buy a futures contract for the purpose of increasing its exposure
in a particular market segment, which may be considered speculative, rather than
for hedging.
For purposes other than hedging, a Portfolio will invest no more than 5% of its
assets in derivatives which at the time of purchase are considered by management
to involve high risk to the Portfolio, such as inverse floaters, interest-only
and principal-only debt instruments. Each Portfolio may invest up to 30% of its
assets in lower risk derivatives for hedging or to gain additional exposure to
certain markets for investment purposes while maintaining liquidity to meet
shareholder redemptions and minimizing trading costs.
Futures Contracts - Futures contracts are agreements that obligate the buyer to
buy and the seller to sell a specific quantity of securities at a specific price
on a specific date. Investments in futures contracts or options on futures may
be made subject to the limits discussed in the Statement.
Options - Each Portfolio may purchase and write (sell) call options and put
options, including options on securities, indices and futures. Options on
securities may be written only if covered. Options are agreements that for a fee
or premium, give the holder the right, but not the obligation, to pay or settle
for cash a certain amount of securities during a specified period or on a
specified date. Options are used to minimize principal fluctuation or to
generate additional premium income.
Mortgage-Backed Securities and Asset-Backed Securities - The Portfolios may
invest in mortgage-backed, asset-backed and other securities which represent
interest in pools of mortgages or assets, as the case may be, and which pass
through to the holders of the securities payments of principal, interest or
other cash flow generated by the underlying mortgages or assets. In the case of
certain mortgage-backed securities, payments of interest, principal or both may
be guaranteed by an agency or instrumentality of the U. S. Government, such as
GNMA, FHLMC and FNMA. Other mortgage-backed securities, such as commercial
mortgage-backed securities (CMOs) and real estate mortgage investment conduits
(REMICs) and many asset-backed securities generally are secured by the
underlying pool of mortgages and assets or the backing of a third party, and are
rated similarly to corporate bonds. Additional information about CMOs and REMICs
is contained in the Statement. Mortgage-backed and asset-backed securities are
subject to prepayment risk.
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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.
Forward-Exchange Contracts - Each Portfolio may engage in forward-exchange
contracts. 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.
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 Index Plus Large Cap, Index Plus Mid Cap, Index Plus Small Cap and Index
Plus Bond which are limited to 10%). 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 pursuant to
Rule 144A under, 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 Directors have
established a policy to monitor the liquidity of such securities.
Cash or Cash Equivalents
Each Portfolio reserves the right to depart from its investment objectives
temporarily by investing up to 100% of its assets in cash or cash equivalents
for defense against potential market declines and to accommodate cash flows from
the purchase and sale of Portfolio shares.
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
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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 Aeltus does not purchase securities with the intention of
profiting from short-term trading, Aeltus buys and sells securities on behalf of
the Portfolios whenever Aeltus believes such action is appropriate. Turnover
rates for each of the Portfolios in excess of 100% 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 "Financial
Highlights" for the actual turnover rates for the respective Portfolios in 1997.
The average annual turnover rate of each of Real Estate, Mid Cap, International,
Index Plus Mid Cap, Index Plus Small Cap, and Index Plus Bond is not expected to
exceed 175%. The average annual turnover rate of High Yield is not expected to
exceed 250%.
Foreign Securities
The purchase of foreign securities may involve certain additional risks. Such
risks include: currency fluctuations and related currency conversion costs; less
liquidity; price or income volatility; less government supervision and
regulation of foreign stock exchanges, brokers and listed companies; possible
difficulty in obtaining and enforcing judgments against foreign entities;
adverse foreign political and economic developments; different accounting
procedures and auditing standards; the possible imposition of withholding taxes
on interest income payable on securities; the possible seizure or
nationalization of foreign assets; the possible establishment of exchange
controls or other foreign laws or restrictions which might adversely affect the
payment and transferability of principal, interest and dividends on securities;
higher transaction costs; possible settlement delays; and less publicly
available information about foreign issuers.
Depositary Receipts
The Portfolios may 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.
High-Yield Bonds
The Portfolios (other than International) may invest in high-yield bonds. These
fixed income securities are rated BB/Ba (by S&P and Moody's, respectively) or
below, or if unrated, are considered by Aeltus to be of comparable quality.
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, they may be purchased if
Aeltus believes they offer good value. This may happen if, for example, the
rating agencies have, in Aeltus' opinion, misclassified the bonds or overlooked
the potential for the issuer's enhanced creditworthiness.
Options and Futures
Generally, the risks involved in using derivatives include the risk that the
derivative may experience greater price swings than other securities and may be
less liquid than other securities. Certain risks are involved in futures
contracts including but not limited to: transactions to close out futures
contracts may not be able to be effected at favorable prices; possible reduction
in a Portfolio's total return and yield; possible reduction in value of the
futures instrument; the inability of a Portfolio to limit losses by closing its
position due to lack of a liquid secondary market or due to daily limits of
price fluctuation; imperfect correlation between the value of the futures
contracts and the related securities; and potential losses in excess of the
amount invested in the futures contracts themselves.
The use of futures involves a high degree of leverage because of the low margin
requirements. As a result, small price movements in futures contracts may result
in immediate and potentially unlimited losses or gains to
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a Portfolio. The amount of gains or losses on investments in futures contracts
depends on the portfolio manager's ability to predict correctly the direction of
stock prices, interest rates and other economic factors.
In writing puts, there is the risk that a Portfolio may be required to buy the
underlying security (or other instrument) at a disadvantageous price. Writing
call options involves the risk of not being able to effect closing transactions
at favorable prices or to participate in the appreciation of the underlying
securities. Purchasing put and call options involve the risk of losing the
entire purchase price of the option.
Variable-Rate Instruments, When-Issued and Delayed-Delivery Transactions
When-issued, delayed-delivery and variable-rate instruments may be subject to
liquidity risks and risks of loss of principal due to market fluctuations.
Liquid assets in an amount at least equal to the Portfolio's commitments to
purchase securities on a when-issued or delayed-delivery basis will be
segregated at the Portfolio's custodian. For more information about these
securities, see the Statement.
Small-Capitalization Companies
These securities are issued by smaller, less well-known U.S. companies with
equity market capitalization generally less than $1 billion. These companies may
be in an early developmental stage or may be 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 unanticipated unfavorable
developments affecting the companies.
Securities of small-capitalization companies tend to offer greater potential for
growth than securities of larger, more established issuers but there are
additional risks associated with them. These risks include: limited
marketability; more abrupt or erratic market movements than securities of larger
capitalization companies; and less publicly available information about the
company and its securities. 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.
Real Estate Securities
Real estate securities include interests in REITs, real estate development, real
estate operating companies, and companies engaged in other real estate related
businesses. Equity REITs are trusts that sell shares to investors and use the
proceeds to invest in real estate or interests in real estate. A REIT may focus
on a particular project, such as apartment complexes, or geographic region, such
as the Northeastern United States, or both.
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.
Real Estate may invest more than 25% of its total assets in 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.
CONCENTRATION
The Portfolios (other than Real Estate) generally will not concentrate
investments in any one industry. A Portfolio may, however, invest up to 25% of
its total assets in securities issued by companies principally engaged in any
one industry. For purposes of this restriction, finance companies will be
classified as separate industries according to the end users of their services,
such as automobile finance, computer finance and consumer finance. The 25%
limitation does not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
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With respect to 75% of a Portfolio's total assets, 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. See the Statement for additional investment
restrictions.
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 net asset
value (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 and International 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
Investment Company Act of 1940 (1940 Act) whose shares are currently sold to the
public (public fund) and managed by Aeltus.
Set forth below is the historical performance of each of the comparable series
of the public fund. Investors should not consider the performance data of the
series of the public fund as an indication of the future performance of the
Portfolios. The performance figures shown below reflect the deduction of the
historical fees and expenses paid by the series of the public fund, and not
those 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
prospectus describing the VA Contracts and VLI Policies for information
pertaining to these insurance fees and charges. The insurance separate account
fees will have a detrimental effect on the performance of the Portfolios.
The following table shows average annualized total returns for the period ended
December 31, 1997 for the comparable series and their respective benchmark
indices.
SINCE
SMALL COMPANY 1 YEAR INCEPTION(1)
Aetna Series Fund, Inc.,
Aetna Small Company Fund (Class I) 33.28% 22.84%
Russell 2000 Growth Index 22.36% 15.79%
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SINCE
INTERNATIONAL 1 YEAR 5 YEARS INCEPTION(1)
Aetna Series Fund, Inc.,
Aetna International Fund (Class I) 15.91% 14.79% 10.06%
MSCI-EAFE Index 2.06% 11.71% 7.39%
(1) The inception dates for Small Company and International are January 4, 1994
and January 3, 1992, respectively.
Private Account Performance
Index Plus Large Cap, Value Opportunity, 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 Large Cap,
Value Opportunity, 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 Private Account Performance data, shown below, was calculated in accordance
with recommended standards of the Association for Investment Management and
Research (AIMR). AIMR is a non-profit membership and education organization
that, among other things, has formulated a set of performance presentation
standards for investment advisers.
The chart below shows performance information derived from historical composite
performance of the Private Accounts included in the Index Plus Large Cap, Value
Opportunity, Growth, Index Plus Bond and High Yield Composites. The Private
Account composite performance figures are time-weighted rates of return which
include all income and accrued income and realized and unrealized gains or
losses and reflect the deduction of investment advisory fees and other expenses
actually charged to the Private Accounts. The fees and expenses charged to the
Private Accounts are significantly lower than those charged to any Portfolio.
Had higher expenses been charged to the Private Accounts, performance would have
been lower.
Investors should not consider the performance data of these Private Accounts as
an indication of the future performance of a Portfolio.
The following table shows average annualized total returns for the period ended
December 31, 1997 for the comparable private accounts and their respective
benchmark indices.
PRIVATE ACCOUNT COMPOSITE PERFORMANCE
SINCE
INDEX PLUS LARGE CAP COMPOSITE 1 YEAR 5 YEARS INCEPTION
Aetna Series Fund, Inc.,
Aetna Index Plus Large Cap Fund
(Class I) 33.93% N/A 30.30%
Index Plus Large Cap Composite 34.58% 20.90% 19.45%
S&P 500 Stock Index 33.36% 20.27% 18.81%
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SINCE
VALUE OPPORTUNITY 1 YEAR 5 YEARS INCEPTION
COMPOSITE
Value Opportunity Composite 26.26% 21.02% 23.13%
S&P 500 Stock Index 33.36% 20.27% 20.44%
SINCE
GROWTH COMPOSITE 1 YEAR 5 YEARS INCEPTION
Aetna Series Fund, Inc.,
Aetna Growth Fund (Class I) 22.75% N/A 20.79%
Growth Composite 24.88% 18.79% 17.92%
S&P 500 Stock Index 33.36% 20.27% 18.05%
SINCE
HIGH YIELD PRIVATE ACCOUNT 1 YEAR 5 YEARS INCEPTION
COMPOSITE
High Yield Account 18.38% N/A 14.98%
Merrill Lynch High Yield Index 12.83% N/A 12.09%
INDEX PLUS BOND COMPOSITE 1 YEAR 5 YEARS 10 YEARS
Index Plus Bond Composite 9.11% 7.44% 9.05%
LBAB Index 9.65% 7.48% 9.18%
The inception dates are October 1, 1991 for the Index Plus Large Cap Composite,
October 1, 1990 for the Value Opportunity Composite, January 1, 1983 for the
Growth Composite, June 1, 1995 for the High Yield Composite and April 1, 1987
for the Index Plus Bond Composite.
MANAGEMENT OF THE VARIABLE PORTFOLIOS
Management
Directors
Each Portfolio is managed under the supervision of the Fund's Board of
Directors. The Directors set broad policies for the Fund and each of its
Portfolios. Information about the Directors is found in the Statement.
Investment Adviser
Aeltus has entered into an investment advisory agreement with the Fund on behalf
of each Portfolio which provides that Aeltus is responsible for managing the
assets of each Portfolio in accordance with its investment objective and
policies. Aeltus is a Connecticut corporation with its principal offices located
at 242 Trumbull Street, Hartford, Connecticut 06103-1205. Aeltus is an indirect
wholly-owned subsidiary of Aetna Retirement Services, Inc., which is, in turn,
an indirect wholly-owned subsidiary of Aetna Inc. Aeltus is registered as an
investment adviser with the Commission.
Advisory Fees
Aeltus is entitled to receive a monthly fee from each Portfolio at an annual
rate based on the average daily net assets of each Portfolio as follows:
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Portfolio Advisory Fee
High Yield 0.650%
Real Estate 0.750%
Value Opportunity 0.600%
Growth 0.600%
Mid Cap 0.750%
Small Company 0.750%
International 0.850%
Index Plus Large Cap 0.350%
Index Plus Mid Cap 0.400%
Index Plus Small Cap 0.400%
Index Plus Bond 0.300%
Portfolio Management
The following individuals are primarily responsible for the day-to-day
management of the Portfolios, as indicated below.
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 12 years
with CIGNA Investments.
Real Estate
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 Investment Group.
Prior thereto, Mr. Tepper consulted in the area of real estate finance.
Value Opportunity
Peter B. Canoni, Managing Director, Aeltus. Mr. Canoni has been with the Aetna
organization since 1980 and has over 26 years of investment experience.
Growth
Peter B. Canoni, Managing Director, Aeltus, and Kenneth H. Bragdon, Vice
President, Aeltus, are the co-managers for Growth. Mr. Canoni managed the
portfolio since its inception, with Mr. Bragdon's assistance. Mr. Bragdon became
co-manager in mid-1997. Mr. Bragdon has been with the Aetna organization since
1978 and has 27 years of experience in the investment business.
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.
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.
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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 of Travelers Investment Management Company.
Index Plus Large Cap, 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.
Index Plus Bond
Christie Bull, Vice President, Aeltus. Ms. Bull currently manages fixed income
securities for several investment funds 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.
Administrator
The Fund, on behalf of each Portfolio, has appointed Aeltus as administrator for
each Portfolio. Aeltus has responsibility for certain administrative and
internal accounting and reporting services, maintenance of relationships with
third party service providers such as the Transfer Agent and custodians,
shareholder communications, calculation of the NAV and other financial reports
prepared for the Portfolios (collectively referred to as "Administrative
Services").
Listed below are the fees each Portfolio pays Aeltus on an annual rate based on
average daily net assets of the Fund:
Administrative Fee Fund Assets
0.075% On the first $5 billion
0.050% On all assets over $5 billion
As administrator, Aeltus may contract with other entities to perform certain
Administrative Services.
REIMBURSEMENTS/FEE WAIVER ARRANGEMENTS
Aeltus has agreed to waive a portion of its fee or to reimburse the Portfolios
for certain expenses so that aggregate expenses do not exceed the following
percentage of each Portfolio's net assets:
Fund Total Expenses After
Reimbursement
High Yield 0.80%
Real Estate 0.95%
Value Opportunity 0.80%
Growth 0.80%
Mid Cap 0.95%
Small Company 0.95%
International 1.15%
Index Plus Large Cap 0.55%
Index Plus Mid Cap 0.60%
Index Plus Small Cap 0.60%
Index Plus Bond 0.45%
These reimbursement/fee waiver arrangements are voluntary on Aeltus' part and
may be modified or eliminated at any time. These reimbursement/fee waiver
arrangements will increase total return.
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<PAGE>
Without these arrangements, Total Expenses for Value Opportunity, Growth, Small
Company and Index Plus Large Cap would have been 1.20%, 1.24%, 1.35% and 0.58%,
respectively. These expenses are estimates based on expenses incurred for the
year ended December 31, 1997 restated to reflect changes in the Administrative
Services agreement.
Without these arrangements, Total Expenses for High Yield, Real Estate, Mid Cap,
International, Index Plus Mid Cap, Index Plus Small Cap and Index Plus Bond are
estimated to be 0.98%, 1.08%, 1.08%, 1.23%, 0.73%, 0.73% and 0.63%,
respectively. These Portfolios commenced operations in December 1997. These
Total Expenses are estimated amounts for the current fiscal year based on
expenses of comparable funds. Actual expenses may be greater or less than
estimated.
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
documents pertaining to 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 NAV per share
determined that day, as described below (see "Net Asset Value"). The insurance
company shall be the designee of the Fund (and thus the Portfolios) for receipt
of purchase and redemption orders. Therefore, receipt of an order by the
insurance company constitutes receipt by the Fund, provided that the Fund
receives notice of the orders by 9:30 the next day on which the New York Stock
Exchange is open for trading. The Fund reserves the right to suspend the
offering of shares, or to reject any specific purchase order. The Fund may
suspend redemptions or postpone payments when the New York Stock Exchange is
closed or when trading is restricted for any reason or under emergency
circumstances as determined by the Commission.
NET ASSET VALUE
The NAV per share of each Portfolio is determined as of the earlier of 15
minutes after the close of the New York Stock Exchange (NYSE) or 4:15 p.m.
eastern time on each day that NYSE is open for trading. Each Portfolio's NAV is
computed by taking the total value of a Portfolio's securities, plus any cash or
other assets (including dividends and interest accrued but not collected) and
subtracting all liabilities (including accrued expenses), and dividing the total
by the number of shares outstanding. Portfolio securities are valued primarily
by independent pricing services, based on market quotations. Short-term debt
instruments maturing in less than 60 days are valued at amortized cost.
Securities for which market quotations are not readily available are valued at
their fair value in such manner as may be determined, from time to time, in good
faith, by or under the authority of, the Directors.
GENERAL INFORMATION
Incorporation
The Fund was incorporated under the laws of Maryland on June 4, 1996.
Capital Stock
The Fund is authorized to issue two billion shares of capital stock, par value
$0.001 per share. All shares are nonassessable, transferable and redeemable.
There are no preemptive rights.
Shareholder Meetings
The Fund is not required and does not intend to hold annual shareholder
meetings. The Fund's Articles of Incorporation provide for meetings of
shareholders to elect Directors at such times as may be determined by the
Directors or as required by the 1940 Act. If requested by the holders of at
least 10% of the Fund's outstanding shares, the Fund will hold a shareholder
meeting for the purpose of voting on the removal of one or more Directors and
will assist with communication concerning that shareholder meeting.
Voting Rights
Each share of the Fund is entitled to one vote for each full share and
fractional votes for fractional shares.
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<PAGE>
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.
Principal Underwriter
Aetna Life Insurance and Annuity Company (ALIAC) is the principal underwriter
for the Fund. ALIAC is a Connecticut corporation, and is a wholly-owned
subsidiary of Aetna Retirement Holdings, Inc. and an indirect wholly-owned
subsidiary of Aetna Inc. ALIAC contracts with various broker-dealers, including
one or more of its affiliates, for distribution of shares.
Custodian
Mellon Bank, N.A., is the custodian for all Portfolios except International.
Brown Brothers Harriman & Company is the custodian for International.
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.
YEAR 2000
Aetna Inc. (referred to collectively with its subsidiaries and affiliates as
"Aetna") has developed and is currently executing a plan to make its computer
systems and applications accommodate date-sensitive information relating to the
Year 2000. The plan covers four stages including (i) inventory, (ii) assessment,
(iii) remediation and (iv) testing and certification. Aetna is currently in the
assessment or remediation stages of its plan for the systems and applications
related to the Fund, including those relating to Aeltus. Testing and
certification of these systems is targeted for completion by mid-1999. The costs
of these efforts will not affect the Fund.
Aeltus and the Fund also have relationships with broker dealers, transfer
agents, custodians and other securities industry participants and service
providers that are not affiliated with Aetna. Aetna is currently examining its
relationships with third parties as part of its Year 2000 plan. While Aeltus
believes that United States securities industry participants generally are
preparing their computer systems and applications to accommodate Year 2000
date-sensitive information, preparation by third parties is outside Aeltus' and
the Fund's control. There can be no assurance that failure of third parties to
complete adequate preparations in a timely manner, and any resulting systems
interruptions or other consequences, would not have an adverse effect, directly
or indirectly, on the Fund, including, without limitation, its operation or the
valuation of its assets.
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AETNA VARIABLE PORTFOLIOS, INC.
151 Farmington Avenue
Hartford, Connecticut 06156-8962
Statement of Additional Information Dated: May 1, 1998
This Statement of Additional Information (Statement) is not a prospectus and
should be read in conjunction with the current prospectus for Aetna Variable
Portfolios, Inc. dated May 1, 1998. 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 ...................4
DIRECTORS AND OFFICERS........................................................14
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS ...................................17
THE INVESTMENT ADVISORY AGREEMENTS............................................17
THE ADMINISTRATIVE SERVICES AGREEMENT ........................................18
CUSTODIAN.....................................................................18
INDEPENDENT AUDITORS .........................................................19
PRINCIPAL UNDERWRITER.........................................................19
BROKERAGE ALLOCATION AND TRADING POLICIES.....................................19
DESCRIPTION OF SHARES ........................................................20
PURCHASE AND REDEMPTION OF SHARES ............................................20
NET ASSET VALUE ..............................................................20
PERFORMANCE INFORMATION.......................................................21
TAX STATUS ...................................................................22
VOTING RIGHTS ................................................................26
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").
Aeltus Investment Management, Inc. (Aeltus) serves as the investment adviser for
each of the Portfolios. The Fund currently has authorized eleven Portfolios:
<TABLE>
<S> <C>
[bullet] Aetna High Yield VP (High Yield) [bullet] Aetna International VP (International,
[bullet] Aetna Real Estate Securities VP formerly Aetna Variable International
(Real Estate) Growth Portfolio)
[bullet] Aetna Value Opportunity VP (Value [bullet] Aetna Index Plus Large Cap VP (Index
Opportunity, formerly Aetna Variable Plus Large Cap, formerly Aetna
Capital Appreciation Portfolio) Variable Index Plus Portfolio)
[bullet] Aetna Growth VP (Growth, formerly Aetna [bullet] Aetna Index Plus Mid Cap VP (Index
Variable Growth Portfolio) Plus Mid Cap)
[bullet] Aetna Mid Cap VP (Mid Cap) [bullet] Aetna Index Plus Small Cap VP
[bullet] Aetna Small Company VP (Small (Index Plus Small Cap)
Company, formerly Aetna Variable [bullet] Aetna Index Plus Bond VP (Index
Small Company Portfolio) Plus Bond)
</TABLE>
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 Real Estate, 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 Real Estate, 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
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<PAGE>
of companies engaged in such activities; may enter into transactions in
financial and index futures contracts and related options; may engage in
transactions on a when-issued or forward commitment basis; and may enter
into forward currency contracts;
(7) borrow money, except that (a) a Portfolio may enter into certain futures
contracts or options related thereto; (b) a Portfolio may enter into
commitments to purchase securities in accordance with that Portfolio's
investment program, including delayed delivery and when-issued securities
and reverse repurchase agreements; (c) for temporary or emergency purposes,
a Portfolio may borrow money in amounts not exceeding 5% of the value of its
total assets at the time the loan is made; and (d) for purposes of
leveraging, a Portfolio may borrow money from banks (including its custodian
bank) only if, immediately after such borrowing, the value of that
Portfolio's assets, including the amount borrowed, less its liabilities, is
equal to at least 300% of the amount borrowed, plus all outstanding
borrowings. If, at any time, the value of that Portfolio's assets fails to
meet the 300% asset coverage requirement relative only to leveraging, that
Portfolio will, within three days (not including Sundays and holidays),
reduce its borrowings to the extent necessary to meet the 300% test; or
(8) act as an underwriter of securities except to the extent that, in connection
with the disposition of portfolio securities by a Portfolio, that Portfolio
may be deemed to be an underwriter under the provisions of the Securities
Act of 1933 (1933 Act).
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 International, 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;
(6) except for High Yield, invest more than 15% (10% for Index Plus Large Cap,
Index Plus Mid Cap, Index Plus Small Cap, and Index Plus Bond) of the total
value of its assets in high-yield bonds (securities rated BB/Ba or lower by
Standard & Poor's Corporation (S&P))or Moody's Investors Service, Inc.,
(Moody's) or, if unrated, considered by Aeltus to be of comparable quality).
International will not purchase high-yield bonds;
(7) invest more than 15% of its total assets in illiquid securities (10% in the
case of Index Plus Large Cap, Index Plus Mid Cap, Index Plus Small Cap, and
Index Plus Bond). 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. Aeltus shall determine whether a particular security is deemed
to be liquid based on the trading markets for the specific security and
other factors; or
(8) except for Index Plus Large Cap, Index Plus Mid Cap, Index Plus Small Cap
and Index Plus Bond invest in securities issued by any entity listed in the
Wall Street Journal's Quarterly "Corporate Performance Report" under the
heading "Consumer, Noncyclical-Tobacco," or are otherwise determined by
Aeltus to be primarily involved in the production or distribution of tobacco
products.
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.
3
<PAGE>
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
Options, Futures and Other Derivative Instruments
Each Portfolio may use derivative instruments as described below and 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 but subject to restrictions described below under
"Restrictions on the Use of Futures and Related Option Contracts." A Portfolio
may enter into futures contracts or options thereon, which are traded on
national futures exchanges and are standardized as to maturity date and
underlying financial instrument. The futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the Commodities Futures
Trading Commission (the "CFTC").
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific commodity, financial
instrument(s) or a specific stock market index for a specified price at a
designated date, time, and place. Brokerage fees are incurred when a futures
contract is bought or sold and at expiration, and margin deposits must be
maintained.
Although interest rate futures contracts typically require actual future
delivery of and payment for the underlying instruments or commodities, those
contracts are usually closed out before the delivery date. Stock index futures
contracts do not contemplate actual future delivery and will be settled in cash
at expiration or closed out prior to expiration. Closing out an open futures
contract sale or purchase is effected by entering into an offsetting futures
contract purchase or sale, respectively, for the same aggregate amount of the
identical type of underlying instrument and the same delivery date. There can be
no assurance, however, that a Portfolio will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If a
Portfolio is not able to enter into an offsetting transaction, it will continue
to be required to maintain the margin deposits on the contract.
The prices of futures contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates and equities prices,
which in turn are affected by fiscal and monetary policies and national and
international political and economic events.
When using futures contracts as a hedging technique, at best, the correlation
between changes in prices of futures contracts and of the securities being
hedged can be only approximate. The degree of imperfection of correlation
depends upon circumstances such as: variations in speculative market demand for
futures and for securities, including technical influences in futures trading,
and differences between the financial instruments being hedged and the
instruments underlying the standard futures contracts available for trading.
Even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or stock market or interest rate trends.
Most United States futures exchanges limit the amount of fluctuation permitted
in interest rate futures contract prices during a single trading day, and, as
noted, temporary regulations limiting price fluctuations for stock index futures
contracts are also now in effect. The daily limit 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 Portfolios' 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
intra-day variation margin payments may be required. In computing daily
4
<PAGE>
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.
When a Portfolio buys or sells a futures contract, unless it already owns an
offsetting position, it will maintain in a segregated account held by the
custodian, cash and/or liquid securities having an aggregate value at least
equal to the full "notional" value of the futures contract, thereby insuring
that the leveraging effect of such futures contract is minimized, in accordance
with regulatory 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.
A Portfolio can enter into options on futures contracts. See "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 Portfolios' obligation might be more or less than the premium
received when it originally wrote the option. Further, the Portfolio might
occasionally not be able to close the option because of insufficient activity in
the options market.
Call and Put Options-- Each Portfolio may purchase and write (sell) call options
and put options on securities, indices and futures as discussed in the
prospectus, subject to the restrictions described in this section and under
"Restrictions on the Use of Futures and Related Option Contracts." Calls on
securities may be written only if covered. A call option gives the holder
(buyer) the right to buy and to obligate 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 to obligate 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 Aeltus.
No Portfolio may buy put options if more than 3% of its assets immediately
following such purchase would consist of put options. The Portfolios are subject
to the following restriction: each Portfolio may purchase call and sell put
options on equity securities only to close out positions previously opened. No
Portfolio will write a call option on a security unless the call is "covered,"
i.e., it already owns the underlying security. Securities it "already owns"
include any stock which it has the right to acquire without any additional
payment, at its discretion for as long as the put or call remains outstanding.
The Portfolios will not write call options on when-issued securities. The
Portfolios are subject to the following restriction: no Portfolio may have call
options outstanding at any one time on more than 30% of its total assets.
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.
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 call option sold by a Portfolio is "covered" if the Portfolio owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration upon conversion or exchange
of other securities held in its portfolio. A call option is considered offset,
and thus held in accordance with regulatory requirements, if a Portfolio holds a
call on the same security and in the same principal amount as the call sold when
the exercise price of the call held (a) is equal to or less than the exercise
price of the call sold or (b) is greater than the exercise price of the call
sold if the difference is maintained by the Portfolio in liquid securities in a
segregated account with its custodian.
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The Portfolios may purchase and write call options on indices as well as on any
individual security, as described below. The Portfolios will use these
techniques primarily as a temporary substitute for taking positions in certain
securities or in the securities that comprise a relevant index, particularly if
Aeltus considers these instruments to be undervalued relative to the prices of
particular securities or of the securities that comprise that index.
An option on an index (or a particular security) is a contract that gives the
purchaser of the option, in return for the premium paid, the right to receive
from the writer of the option cash equal to the difference between the closing
price of the index (or security) and the exercise price of the option, expressed
in dollars, times a specified multiple (the "multiplier"). The Portfolios 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(s) 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.
If a put option is sold by a Portfolio, the Portfolio will maintain cash and/or
liquid securities with a value equal to the exercise price in a segregated
account with its custodian, or else will hold a put on the same security and in
the same principal amount as the put sold where the exercise price of the put
held is less than the exercise price of the put sold if the Portfolio maintains
in a segregated account with the custodian, liquid securities with an aggregate
value equal to the difference. The writer of a put 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. A Portfolio will not write a
put if it will require more than 50% of the Portfolio's net assets to be
segregated to cover the put obligation.
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 Aeltus 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 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 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
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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. 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 call 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 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 (the "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 contracts 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 any 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 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 purpose 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 acquired 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 transactions costs. A call written on a foreign currency by a Portfolio
is covered if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call may be written by a Portfolio on
a foreign currency to provide a hedge against a decline due to an expected
adverse change in the exchange rate in the U.S. dollar value of a security which
the Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option. This is a "cross-hedging" strategy. In such
circumstances, the Portfolio collateralizes the position by maintaining in a
segregated account with the Portfolio's custodian cash or U.S. Government
securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
Forward Exchange Contracts--Each Portfolio may enter into forward contracts for
foreign currency (forward exchange contracts), which obligate the seller to
deliver and the purchaser to take a specific amount of a specified foreign
currency at a future date at a price set at the time of the contract. These
contracts are generally traded in the interbank market conducted directly
between currency traders and their customers. A Portfolio may enter into a
forward exchange contract in order to "lock in" the U.S. dollar price of a
security denominated in a foreign currency which it has purchased or sold but
which has not yet settled (a "transaction hedge"); or to lock in the value of an
existing portfolio security (a "position hedge"); or to protect against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and a foreign currency. There is a risk that use of forward exchange
contracts may reduce the gain that would otherwise result from a change in the
relationship between the U.S. dollar and a foreign currency. Forward exchange
contracts include standardized foreign currency futures contracts which are
traded on exchanges and are subject to procedures and regulations applicable to
futures. Each Portfolio may also enter into a forward exchange contract to sell
a foreign currency which differs from the currency in which the underlying
security is denominated. This is done in the expectation that there is a greater
correlation between the foreign currency of the forward exchange contract and
the foreign currency of the underlying investment than between the U.S. dollar
and the foreign currency of the
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underlying investment. This technique is referred to as "cross hedging." The
success of cross hedging is dependent on many factors, including the ability of
Aeltus 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 Aeltus
believes will have price movements that tend to correlate closely with the
currency in which the investment being hedged is denominated.
The Fund's custodian will segregate cash and/or liquid securities of a 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 segregated 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 Portfolios to
purchase the amount of foreign currency being hedged by a forward sale contract
at a price no higher than the forward contract price, or a Portfolio may
purchase a put option permitting the Portfolio to sell the amount of foreign
currency subject to a forward purchase contract at a price as high or higher
than the forward contract price. Unanticipated changes in currency prices may
result in poorer overall performance for a Portfolio than if it had not entered
into such contracts.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the forward contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase), if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Portfolio is
obligated to deliver. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Portfolio to sustain losses on these contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring a Portfolio
to sell a currency, the Portfolio may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, a
Portfolio may close out a forward contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. The Portfolio
would realize a gain or loss as a result of entering into such an offsetting
forward contract under either circumstance to the extent the exchange rate(s)
between the currencies involved moved between the execution dates of the first
contract and the offsetting contract.
The cost to a Portfolio of engaging in forward exchange contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such contracts are not traded on an exchange, a Portfolio must evaluate the
credit and performance risk of each particular counterparty under a forward
contract.
Although the 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.
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 Related Option Contracts-- A Portfolio
may purchase and sell futures contracts and related options under the following
conditions: at the time of entering into a contract (a) the then-current
aggregate futures market prices of financial instruments required to be
delivered and purchased under open futures contracts shall not exceed 30% of a
Portfolio's total assets at market value; and (b) no more than 5% of the assets
shall be committed to margin deposits in relation to futures contracts. CFTC
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regulations require that to prevent a Portfolio from being a commodity pool the
Portfolios enter into all short futures 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. As evidence of its
hedging intent, each Portfolio expects that at least 75% of futures contract
purchases will be "completed"; that is, upon the sale of these long contracts,
equivalent amounts of related securities will have been or are then being
purchased by that Portfolio in the cash market. 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.
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. Aeltus will monitor the
creditworthiness of counterparties to a Portfolio's interest rate swap
transactions on an ongoing basis. A Portfolio will enter into swap transactions
with appropriate counterparties pursuant to master netting agreements. A master
netting agreement provides that all swaps done between a Portfolio and that
counterparty under that master agreement shall be regarded as parts of an
integral agreement. If on any date amounts are payable in the same currency in
respect of one or more swap transactions, the net amount payable on that date in
that currency shall be paid. In addition, the master netting agreement may
provide that if one party defaults generally or on one swap, the counterparty
may terminate the swaps with that party. Under such agreements, if there is a
default resulting in a loss to one party, the measure of that party's damages is
calculated by reference to the average cost of a replacement swap with respect
to each swap (i.e., the mark-to-market value at the time of the termination of
each swap). The gains and losses on all swaps are then netted, and the result is
the counterparty's gain or loss on termination. The termination of all swaps and
the netting of gains and losses on termination is generally referred to as
"aggregation."
Additional Risk Factors in Using Derivatives--In addition to any risk factors
which may be described elsewhere in this section, or in the prospectus, the
following sets forth certain information regarding the potential risks
associated with a Portfolio's transactions in derivatives.
Risk of Imperfect Correlation--A Portfolio's ability to hedge effectively all or
a portion of its portfolio through transactions in futures, options on futures
or options on securities and indexes depends on the degree to which movements in
the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the assets being hedged. If the values
of the assets being hedged do not move in the same amount or direction as the
underlying security or index, the hedging strategy for a Portfolio might not be
successful and the Portfolio could sustain losses on its hedging transactions
which would not be offset by gains on its portfolio. It is also possible that
there may be a negative correlation between the security or index underlying a
futures or option contract and the portfolio securities being hedged, which
could result in losses both on the hedging transaction and the portfolio
securities. In such instances, the Portfolio's overall return could be less than
if the hedging transactions had not been undertaken. Stock index futures or
options based on a narrower index of securities may present greater risk than
options or futures based on a broad market index, as a narrower index is more
susceptible to rapid and extreme fluctuations resulting from changes in the
value of a small number of securities. The Portfolio would, however, effect
transactions in such futures or options only for hedging purposes (or to close
out open positions).
The trading of futures and options on indices involves the additional risk of
imperfect correlation between movements in the futures or option price and the
value of the underlying index. The anticipated spread between the prices may be
distorted due to differences in the nature of the markets, such as differences
in margin requirements, the liquidity of such markets and the participation of
speculators in the futures and options market. The purchase of an option on a
futures contract also involves the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the futures contract or termination date of the
option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the option
and enter into the underlying futures contract in order to realize a profit.
Under certain extreme market conditions, it is possible that a Portfolio will
not be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect the Portfolio.
Each Portfolio will purchase or sell futures contracts or options for hedging
purposes only if, in Aeltus' 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 relevant portion of the assets being hedged for the
hedge to be effective. There can be no assurance that Aeltus' 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
market 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.
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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 Aeltus'
judgment concerning the general direction of interest rates is incorrect, a
Portfolio's overall performance may be poorer than if it had not entered into
any such contract. For example, if a Portfolio has been hedged against the
possibility of an increase in interest rates which would adversely affect the
price of bonds held in its portfolio and interest rates decrease instead, the
Portfolio will lose part or all of the benefit of the increased value of its
bonds which have been hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements, possibly at a time when it may be disadvantageous
to do so. Such sale of bonds may be, but will not necessarily be, at increased
prices which reflect the rising market.
Trading and Position Limits--Each contract market on which futures and option
contracts are traded has established a number of limitations governing the
maximum number of positions which may be held by a trader, whether acting alone
or in concert with others. The Fund does not believe that these trading and
position limits will have an adverse impact on the hedging strategies regarding
the Portfolios.
Repurchase Agreements
Each Portfolio may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards established
by the Directors. A repurchase agreement allows a Portfolio to determine the
yield during the Portfolio's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period. Such underlying
debt instruments serving as collateral will meet the quality standards of a
Portfolio. The market value of the underlying debt instruments will, at all
times, be equal to the dollar amount invested. Repurchase agreements, although
fully collateralized, involve the risk that the seller of the securities may
fail to repurchase them from a Portfolio. In that event, a Portfolio may incur
(a) disposition costs in connection with liquidating the collateral, or (b) a
loss if the collateral declines in value. Also, if the default on the part of
the seller is due to insolvency and the seller initiates bankruptcy proceedings,
a Portfolio's ability to liquidate the collateral may be delayed or limited.
Under the 1940 Act, repurchase agreements are considered loans by a Portfolio.
Repurchase agreements maturing in more than seven days will not exceed 15
percent of the total assets of a Portfolio.
Variable Rate Demand Instruments
Variable rate demand instruments (including floating rate instruments) held by a
Portfolio may have maturities of more than one year, provided: (i) the Portfolio
is entitled to the payment of principal at any time, or during specified
intervals not exceeding one year, upon giving the prescribed notice (which may
not exceed 30 days), and (ii) the rate of interest on such instruments is
adjusted at periodic intervals not to exceed one year. In determining whether a
variable rate demand instrument has a remaining maturity of one year or less,
each instrument will be deemed to have a maturity equal to the longer of the
period remaining until its next interest rate adjustment or the period remaining
until the principal amount can be recovered through demand. A Portfolio will be
able (at any time or during specified periods not exceeding one year, depending
upon the note involved) to demand payment of the principal of a note. If an
issuer of a variable rate demand note defaulted on its payment obligation, a
Portfolio might be unable to dispose of the note and a loss would be incurred to
the extent of the default. A Portfolio may invest in variable rate demand notes
only when the investment is deemed to involve minimal credit risk. The
continuing creditworthiness of issuers of variable rate demand notes held by a
Portfolio will also be monitored to determine whether such notes should continue
to be held. Variable and floating rate instruments with demand periods in excess
of seven days and which cannot be disposed of promptly within seven business
days and in the usual course of business without taking a reduced price will be
treated as illiquid securities that are subject to the Portfolio's policies and
restrictions on illiquid securities.
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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 United States. 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 considered foreign securities for purposes
of a Portfolio's investment limitation concerning investment in foreign
securities.
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
11
<PAGE>
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) and real estate mortgage investment
conduits (REMICs).
CMOs and REMICs 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.
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 prepayments--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.
Both CMOs and REMICs are issued by private entities. Their securities are not
directly guaranteed by any government agency and are secured by the collateral
held by the issuer. 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.
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 and REMICs, 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 security's 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, traded in the secondary
market at a premium or discount, or to the extent that the underlying assets are
prepaid as noted above.
High-Yield Bonds
Each Portfolio (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, Aeltus seeks to identify situations in which the rating
agencies have not fully perceived the value of the security or in which Aeltus
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:
12
<PAGE>
(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 and S&P
are considered, Aeltus 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
Aeltus' 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 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.
13
<PAGE>
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
For the years ended December 31, 1996 and December 31, 1997, the portfolio
turnover rates were as follows:
<TABLE>
<S> <C> <C> <C>
1996 1997 Commencement Date
High Yield N/A 69.39% 12/10/97
Real Estate N/A 0.00% 12/22/97
Value Opportunity 0.00% 187.84% 12/13/96
Growth 1.97% 207.41% 12/13/96
Mid Cap N/A 0.95% 12/17/97
Small Company 0.00% 180.25% 12/27/96
International N/A 0.71% 12/22/97
Index Plus Large Cap 5.18% 76.83% 09/16/96
Index Plus Mid Cap N/A 0.00% 12/16/97
Index Plus Small Cap N/A 0.00% 12/19/97
Index Plus Bond N/A 0.00% 12/18/97
</TABLE>
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 certain other
investment companies in the same Fund Complex. 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.
14
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During Past Five Years (and
Position(s) Held with Positions held with Affiliated Persons or Principal
Name Address and Age the Fund Underwriters of the Fund)
<S> <C> <C>
J. Scott Fox* Director and President Director, Managing Director, Chief Operating
242 Trumbull Street Officer, Chief Financial Officer, Aeltus Investment
Hartford, Connecticut Management, Inc. (Aeltus), October 1997 to present;
Age 42 Vice President, Aetna Retirement Services, Inc.,
April 1997 to present; Director and Senior Vice
President, Aetna Retirement Holdings, Inc., April 1997
to present; Director and President, Aetna Life
Assignment Company, 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, April 1994 to
March 1997; Managing Director and Treasurer, Equitable
Capital Management Corp., March 1987 to September 1993;
Director, Aeltus Capital, Inc., March 1996 to July 1997;
Managing Director, Chief Financial Officer,
Aeltus Capital, Inc., March 1996 to April 1997; Director,
Aeltus Trust Company, Inc., May 1996 to July 1997;
Managing Director, Chief Operating Officer, Chief
Financial Officer and Treasurer, Aeltus Trust Company,
Inc., May 1996 to April 1997; Director and President,
Aetna Investment Management (Bermuda) Holding, Ltd.,
May 1996 to October 1997.
Wayne F. Baltzer Vice President Assistant Vice President, Aetna Life Insurance and
242 Trumbull Street Annuity Company, May 1991 to present; Vice President,
Hartford, Connecticut Aetna Investment Services, Inc., July 1993 to present.
Age 54
Amy R. Doberman Secretary Counsel, Aetna Life Insurance and Annuity Company,
151 Farmington Avenue December 1996 to present; Attorney, Securities and
Hartford, Connecticut Exchange Commission, March 1990 to November 1996.
Age 35
Maria T. Fighetti Director Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation and
Closter, New Jersey Alcohol Services, 1973 to present.
Age 54
David L. Grove Director, Chairperson Private Investor; Economic/Financial Consultant,
5 The Knoll Contract Committee December 1985 to present.
Armonk, New York
Age 79
John Y. Kim* Director Director, President, Chief Executive Officer, Chief
242 Trumbull Street Investment Officer, Aeltus Investment Management,
Hartford, Connecticut Inc., December 1995 to present; Director, Aetna Life
Age 37 Insurance and Annuity Company, February 1995 to
present; Senior Vice President, Aetna Life Insurance
and Annuity Company, September 1994 to present.
Sidney Koch Director Financial Adviser, self-employed, January 1993 to
455 East 86th Street present.
New York, New York
Age 62
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During Past Five Years (and
Position(s) Held with Positions held with Affiliated Persons or Principal
Name Address and Age the Fund Underwriters of the Fund)
<S> <C> <C>
Frank Litwin Vice President Managing Director, Aeltus Investment Management,
242 Trumbull Street Inc., August 1997 to present; Vice President,
Hartford, Connecticut Fidelity Investments Institutional Services Company,
Age 48 April to August 1997.
Shaun P. Mathews* Director Vice President/Senior Vice President, Aetna Life
151 Farmington Avenue Insurance and Annuity Company, March 1991 to present;
Hartford, Connecticut Vice President, Aetna Life Insurance Company, 1991 to
Age 42 present; Director and Senior Vice President, Aetna
Investment Services, Inc., July 1993 to present; Director
and Senior Vice President, Aetna Insurance Company
of America, September 1992 to present.
Corine T. Norgaard Director Dean of the Barney School of Business, University of
556 Wormwood Hill Hartford (West Hartford, CT), August 1996 to present;
Mansfield Center, Professor, Accounting and Dean of the School of
Connecticut Management, Binghamton University (Binghamton, NY),
Age 60 August 1993 to August 1996; Professor, Accounting,
University of Connecticut (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
11 Lily Street Audit Committee Palmer Consultants, July 1991 to present.
Nantucket, Massachusetts
Age 68
Stephanie A. Taylor Treasurer and Chief Director Mutual Fund Accounting, Aeltus Investment
242 Trumbull Street Financial Officer Management, Inc., November 1995 to present; Director
Hartford, Connecticut Mutual Fund Accounting, Aetna Life Insurance and
Age 44 Annuity Company, August 1994 to November 1995;
Assistant Vice President, Investors Bank & Trust, January
1993 to August 1994.
</TABLE>
During the period ended December 31, 1997, members of the Board of Directors who
are also directors, officers or employees of Aetna Inc. and its affiliates were
not entitled to any compensation from the Fund. Members of the Board of
Directors who are not affiliated as employees of Aetna Inc. or its subsidiaries
received an annual retainer of $30,000 for service on the Board, and a fee of
$5,000 for each meeting of such Board (equal to an aggregate annual fee of
$20,000). They also received a fee of $3,000 per Audit Committee meeting, and
$5,000 per Contract Committee meeting.
As of December 31, 1997, the unaffiliated members of the Board of Directors
received compensation in the amounts included in the following table. None of
these Directors were entitled to receive pension or retirement benefits.
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation from the Fund
Name of Person, Position from the Fund and Fund Complex Paid to Directors
<S> <C> <C>
Corine Norgaard $634 $55,500
Director
Sidney Koch $640 $56,000
Director
Maria T. Fighetti $634 $55,500
Director
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation from the Fund
Name of Person, Position from the Fund and Fund Complex Paid to Directors
<S> <C> <C>
Richard G. Scheide $697 $61,000
Director, Chairperson
Audit Committee
David L. Grove $657* $57,500*
Director, Chairperson
Contract 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
(Commission) which allows 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 of any Portfolio and
will not obligate the Fund to retain the services of any Director or to pay any
particular level of compensation to any 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 Life Insurance and
Annuity Company (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 AGREEMENTS
The Fund, on behalf of each Portfolio, has entered into investment advisory
agreements (Advisory Agreements) appointing Aeltus as the Investment Adviser of
each Portfolio. These Advisory Agreements were approved by the Directors on
December 10, 1997, and replace investment advisory agreements with Aetna. Each
Advisory Agreement will be effective through December 31, 1998. The Advisory
Agreements will remain in effect thereafter if approved at least annually by a
majority of the Directors, including a majority of the Directors who are not
"interested persons" of the Fund, as defined by the 1940 Act (Independent
Directors), at a meeting called for that purpose, and held in person. Each
Advisory Agreement may be terminated without penalty upon sixty (60) days'
written notice by the Directors or by a majority vote of the outstanding voting
securities of that Portfolio, or by Aeltus. The Advisory Agreements terminate
automatically in the event of assignment. Under the Advisory Agreements and
subject to the supervision of the Directors of the Fund, Aeltus has
responsibility for supervising all aspects of the operations of each Portfolio
including the selection, purchase and sale of securities on behalf of each
Portfolio. Under the Advisory Agreements, Aeltus is given the right to delegate
any or all of its obligations to a subadviser.
The Advisory Agreements provide that Aeltus is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
officers or Directors of the Fund and each Portfolio is responsible for payment
of all other of its costs.
For the services under the Advisory Agreements, Aeltus will receive an annual
fee, payable monthly, as described in the Prospectus.
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 Aeltus or another subsidiary or affiliated corporation
of Aetna Services, Inc. should not be the investment adviser of the Variable
Portfolios.
Prior to the date of this Statement, Aetna served as investment adviser to the
Portfolios. For the years ended December 31, 1996 and December 31, 1997, Aetna
received the following amounts in advisory fees from each Portfolio:
17
<PAGE>
<TABLE>
<CAPTION>
1996 1997 Commencement Date
<S> <C> <C> <C>
High Yield N/A 12/10/97
Real Estate N/A 12/22/97
Value Opportunity 12/13/96
Growth 12/13/96
Mid Cap N/A 12/17/97
Small Company 12/27/96
International N/A 12/22/97
Index Plus Large Cap 09/16/96
Index Plus Mid Cap N/A 12/16/97
Index Plus Small Cap N/A 12/19/97
Index Plus Bond N/A 12/18/97
</TABLE>
THE ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to an Administrative Services Agreement, Aeltus acts as administrator
and provides certain administrative and shareholder services necessary for Fund
operations and is responsible for the supervision of other service providers.
The services provided by Aeltus include: (1) internal accounting services; (2)
monitoring regulatory compliance, such as reports and filings with the
Commission and state securities commissions; (3) preparing financial information
for proxy statements; (4) preparing semiannual and annual reports to
shareholders; (5) calculating net asset values; (6) the preparation of certain
shareholder communications; (7) supervision of the custodians and transfer
agent; and (8) reporting to the Directors.
For its services, each Portfolio pays Aeltus an annual fee, payable monthly, as
described in the prospectus.
The Administrative Services Agreement will remain in effect until December 31,
1998. It will remain in effect from year-to-year thereafter if approved annually
by a majority of the Directors. It may be terminated by either party on sixty
(60) days' written notice.
Prior to the date of this Statement Aetna acted as Administrator. For the years
ended December 31, 1996, and December 31, 1997, Aetna received the following
administrative fees from the Fund:
<TABLE>
<CAPTION>
1996 1997 Commencement Date
<S> <C> <C> <C>
High Yield N/A 12/10/97
Real Estate N/A 12/22/97
Value Opportunity 12/13/96
Growth 12/13/96
Mid Cap N/A 12/17/97
Small Company 12/27/96
International N/A 12/22/97
Index Plus Large Cap 09/16/96
Index Plus Mid Cap N/A 12/16/97
Index Plus Small Cap N/A 12/19/97
Index Plus Bond N/A 12/18/97
</TABLE>
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258
serves as custodian for the assets of all Portfolios except 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 and held outside the United
States, Mellon Bank, N.A. and Brown Brothers Harriman & Company have entered
into subcustodian agreements (which are designed to comply with Rule 17f-5 under
the 1940 Act) with several foreign banks or clearing agencies.
18
<PAGE>
INDEPENDENT AUDITORS
_______________________________, Hartford, Connecticut 06103-4103 serves as
independent auditors to the Variable Portfolios. 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 originally approved on June 18, 1996 and is
scheduled to continue through December 31, 1998. 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, Aeltus has responsibility for
making investment decisions, for effecting the execution of trades and for
negotiating any brokerage commissions thereon. It is Aeltus' policy to obtain
the best quality of execution available, giving attention to net price
(including commissions where applicable), execution capability (including the
adequacy of a 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.
Aeltus receives a variety of brokerage and research services from brokerage
firms in return for the execution by such brokerage firms of trades on behalf of
the Fund. 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 Portfolios and other investment
companies, services related to the execution of trades in a Portfolio's
securities and advice as to the valuation of securities, the providing of
equipment used to communicate research information and specialized consultations
with Portfolio personnel with respect to computerized systems and data furnished
to the Portfolios as a component of other research services. Aeltus considers
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. Aeltus' policy in selecting a
broker to effect a particular transaction is to seek to obtain "best execution,"
which means prompt and efficient execution of the transaction at the best
obtainable price with payment of commissions which are reasonable in relation to
the value of the services provided by the broker, taking into consideration
research and brokerage services provided. When the trader believes that more
than one broker can provide best execution, preference may be given to brokers
who provide additional services to Aeltus.
Research services furnished by brokers through whom the Fund effects securities
transactions may be used by Aeltus in servicing all of its accounts; not all
such services will be used by Aeltus to benefit the Fund.
Consistent with Federal law, 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. Aeltus' judgment as to
whether and how it will obtain the specific brokerage and research services will
be based upon its 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 Aeltus' opinion as to which services and which means of
payment are in the long-term best interests of the Portfolios.
The Portfolios have not effected and have no present intention of effecting any
brokerage transactions in portfolio securities with Aeltus or any other
affiliated person of the Fund. If Aeltus effects brokerage transactions through
any affiliated person of the Fund or with any affiliated person of such person
in the future, all such transactions will comply with Rule 17e-1 under the 1940
Act.
Aeltus acts as investment adviser to other investment companies registered under
the 1940 Act. The Directors and Aeltus have adopted policies designed to prevent
disadvantaging the Portfolios in placing orders for the purchase and sale of
securities.
A Portfolio and another advisory client of Aeltus or Aeltus itself, may desire
to buy or sell the same security at or about the same time. In such a case, the
purchases or sales will normally be aggregated, and then allocated as nearly as
practicable on a pro rata basis in proportion to the amounts to be purchased or
sold by each. In some cases the smaller orders will be filled first. In
determining the amounts to be purchased and sold, the main factors to be
considered are the respective investment objectives of a Portfolio, the relative
size of Portfolio
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<PAGE>
holdings of the same or comparable securities, availability of cash for
investment, and the size of their respective investment commitments. Prices are
averaged for aggregated trades.
For the year ended December 31, 1997, the Fund paid brokerage commissions as
follows:
Total Commissions Paid:
Real Estate $ 7,806
Value Opportunity 21,014
Growth 18,822
Mid Cap 3,390
Small Cap 49,510
Index Plus Large Cap 107,388
Index Plus Mid Cap 9,197
Index Plus Small Cap 20,614
For the fiscal year ended December 31, 1997, commissions in the amounts listed
below were paid with respect to portfolio transactions directed to certain
brokers because of research services provided:
Real Estate $ 426
Value Opportunity 2,790
Growth 4,378
Small Company 696
Index Plus Large Cap 43,464
The Fund is subject to a Code of Ethics, approved by the Directors, governing
personal trading by persons who manage, or who have access to trading activity
by, a Portfolio. The Code allows personal trades to be made in securities that
may be held by a Portfolio; however, it prohibits a person from taking advantage
of Portfolio trades or from acting on inside information. Aeltus also has
adopted a Code of Ethics which the Directors review annually.
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 by the Fund within seven
days or the maximum period allowed by law, if shorter, after the redemption
request is received by Aetna.
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 (other than high-yield bonds) are valued at
the mean of the last bid and asked price of such securities obtained from a
broker who is a market-
20
<PAGE>
maker in the securities or a service providing quotations based upon the
assessment of market-makers in those securities. High-yield bonds are valued at
the last bid price of such securities obtained from a broker.
Call options 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
Performance information for each Portfolio including the yield of High Yield VP
and Index Plus Bond VP and the total return of all Portfolios, may appear in
reports or promotional literature to current or prospective shareholders.
Average Annual Total Return
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, Aeltus 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 performance of the Portfolios are commonly measured as total return. An
average annual compounded rate of return ("T") may be computed by using the
redeemable value at the end of a specified period ("ERV") of a hypothetical
initial investment of $1,000 ("P") over a period of time ["n"] according to the
formula:
(n)
P(1 + T) = ERV
Total Return Quotations as of December 31, 1997:
<TABLE>
<CAPTION>
1 Year Since Inception Inception Date
<S> <C> <C> <C>
High Yield N/A 1.48% 12/10/97
Real Estate N/A 3.59% 12/15/97
Value Opportunity 39.36% 39.89% 12/13/96
Growth 33.01% 33.10% 12/13/96
Mid Cap N/A 1.80% 12/17/97
Small Company 34.49% 35.58% 12/27/96
International N/A 2.74% 12/22/97
Index Plus Large Cap 33.89% 34.56% 09/16/96
Index Plus Mid Cap N/A 3.50% 12/16/97
Index Plus Small Cap N/A 4.33% 12/19/97
Index Plus Bond N/A 0.27% 12/18/97
</TABLE>
Investors should not consider this performance data as an indication of the
future performance of any of the Portfolios of the Fund.
A Portfolio's investment results will vary from time to time depending upon
market conditions, the composition of its investment portfolio and its operating
expenses. Performance information of any Portfolio will not be compared in
advertisements with such information for funds that offer their shares directly
to the public, because Portfolio performance data does not reflect charges
imposed by the insurance company on the VA Contracts and VLI Policies. The total
return for a Portfolio should be distinguished from the rate of return of a
corresponding division of the insurance company's separate account, which rate
will reflect the deduction of additional insurance charges, including mortality
and expense risk charges, and will therefore be lower. Accordingly, performance
figures for a Portfolio will only be advertised if comparable performance
figures for the corresponding division of the separate account are included in
the advertisements. VA Contract owners and VLI Policy owners should consult
their contract and policy prospectuses, respectively, for further information.
Each Portfolio's results also should be considered relative to the risks
associated with its investment objectives and policies.
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30-Day Yield
Quotations of yield for High Yield and Index Plus Bond will be based on all
investment income per share earned during a particular 30-day period, less
expenses accrued during the period (net investment income), and will be computed
by dividing net investment income by the value of a share on the last day of the
period, according to the following formula:
(6)
YIELD = 2[(a - b + 1) - 1]
-----
cd
Where:
a = dividends and interest earned during the period
b = the expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
High Yield and Index Plus Bond commenced operations on December 10, 1997 and
December 18, 1997 respectively.
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 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).
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. 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.
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<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.
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.
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, and the Portfolio's holding period with
respect to such PFIC stock commences on the first day of the next taxable year.
If a Portfolio makes such election in the first taxable year it holds PFIC
stock, the Portfolio will include ordinary income from any mark to market gain,
if any, and will not incur the tax described in the previous paragraph.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it has made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss incurred after October
31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, each Portfolio must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a
Portfolio's taxable year, at least 50% of the value of the Portfolio's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which the Portfolio has not invested more than 5% of the value of the
Portfolio's total assets in securities of such issuer and as to which the
Portfolio does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than
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<PAGE>
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
If a Portfolio has shareholders that are not VA Contract or VLI Policy holders
and those shareholders have invested more than $250,000 in the Portfolio for any
portion of the Portfolio's fiscal year, that Portfolio will be subject to a 4%
non-deductible excise tax unless it meets certain requirements. In order to
avoid the excise tax, a regulated investment company must distribute in each
calendar year an amount equal to 98% of ordinary taxable income for the calendar
year and 98% of capital gain net income for the one-year period ended on October
31 of such calendar year (or, at the election of a regulated investment company
having a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). Tax-exempt interest on municipal obligations is not
subject to the excise tax. The balance of such income must be distributed during
the next calendar year. For the foregoing purposes, a regulated investment
company is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall (1) reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year; and (2) exclude foreign currency
gains and losses from Section 998 transactions incurred after October 31 of any
year (or after the end of its taxable year if it has made a taxable year
election) in determining the amount of ordinary taxable income for the current
calendar year (and, instead, include such gains and losses in determining
ordinary taxable income for the succeeding calendar year).
Each Portfolio intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Portfolio may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
Portfolio Distributions
Each Portfolio anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to the shareholders as ordinary income and treated as dividends for federal
income tax purposes, but they may qualify for the dividends-received deduction
for corporate shareholders to the extent discussed below.
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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 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.
25
<PAGE>
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.
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. 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 Fund's custodian,
signed by two-thirds of a Variable Portfolio's shareholders. Any Director may
also voluntarily resign from office. Voting rights are not cumulative, so that
the holders of more than 50% of the shares voting in the election of Directors
can, if they choose to do so, elect all the Directors of the Variable
Portfolios, in which event the holders of the remaining shares will be unable to
elect any person as a Director.
The Articles may be amended by an affirmative vote of a majority of the shares
at any meeting of shareholders or by written instrument signed by a majority of
the Directors and consented to by a majority of the shareholders. The Directors
may also amend the Articles without the vote or consent of shareholders if they
deem it necessary to conform the Articles to the requirements of applicable
federal laws or regulations or the requirements of the regulated investment
company provisions of the Code, but the Directors shall not be liable for
failing to do so.
FINANCIAL STATEMENTS
The Financial Statements and independent auditors' reports, thereon, appearing
in the Fund's Annual Report for the fiscal year ended
________________________________. The Annual Report is 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) Incorporated by reference in Part B to the Fund's Annual Report
dated December 31, 1997 on Form N-30D (File No. 811-7651), as
filed electronically with the Securities and Exchange
Commission on ________, 1998 (Accession No. _____________):
Audited Financial Statements for Aetna Variable Index Plus
Portfolio(1), Aetna Variable Small Company Portfolio(2),
Aetna Variable Capital Appreciation Portfolio(3) and Aetna
Variable Growth Portfolio(4) as of December 31, 1997, which
include the following:
Portfolios of Investments
Statements of Assets and Liabilities as of December 31,
1997
Statements of Operations for the year ended December 31,
1997
Statements of Changes in Net Assets for the year ended
December 31, 1997 and the periods ended December 31,
1996
Notes to Financial Statements
Independent Auditors' Reports
1. Renamed Aetna Index Plus Large Cap VP effective May
1, 1998.
2. Renamed Aetna Small Company VP effective May 1,
1998.
3. Renamed Aetna Value Opportunity VP effective May 1,
1998.
4. Renamed Aetna Growth VP effective May 1, 1998.
Audited Financial Statements as of December 31, 1997, which
include the following:
Aetna High Yield Portfolio(1)
Portfolio of Investments
Statement of Assets and Liabilities as of December 31,
1997
Statement of Operations for the year ended December 31,
1997
Statement of Changes in Net Assets for the period from
December 10, 1997 to December 31, 1997
Notes to Financial Statements
Independent Auditors' Report
<PAGE>
Aetna Index Plus Bond Portfolio(2)
Portfolio of Investments
Statement of Assets and Liabilities as of December 31,
1997
Statement of Operations for the year ended December 31,
1997
Statement of Changes in Net Assets for the period from
December 18, 1997 to December 31, 1997
Notes to Financial Statements
Independent Auditors' Report
Aetna Index Plus Mid Cap Portfolio(3)
Portfolio of Investments
Statement of Assets and Liabilities as of December 31,
1997
Statement of Operations for the year ended December 31,
1997
Statement of Changes in Net Assets for the period from
December 15, 1997 to December 31, 1997
Notes to Financial Statements
Independent Auditors' Report
Aetna Index Plus Small Cap Portfolio(4)
Portfolio of Investments
Statement of Assets and Liabilities as of December 31,
1997
Statement of Operations for the year ended December 31,
1997
Statement of Changes in Net Assets for the period from
December 19, 1997 to December 31, 1997
Notes to Financial Statements
Independent Auditors' Report
Aetna International Portfolio(5)
Portfolio of Investments
Statement of Assets and Liabilities as of December 31,
1997
Statement of Operations for the year ended December 31,
1997
Statement of Changes in Net Assets for the period from
December 22, 1997 to December 31, 1997
Notes to Financial Statements
Independent Auditors' Report
Aetna Mid Cap Portfolio(6)
Portfolio of Investments
Statement of Assets and Liabilities as of December 31,
1997
Statement of Operations for the year ended December 31,
1997
Statement of Changes in Net Assets for the period from
December 17, 1997 to December 31, 1997
Notes to Financial Statements
Independent Auditors' Report
<PAGE>
Aetna Real Estate Securities Portfolio(7)
Portfolio of Investments
Statement of Assets and Liabilities as of December 31,
1997
Statement of Operations for the year ended December 31,
1997
Statement of Changes in Net Assets for the period from
December 16, 1997 to December 31, 1997
Notes to Financial Statements
Independent Auditors' Report
1. Renamed Aetna High Yield VP effective May 1, 1998.
2. Renamed Aetna Index Plus Bond VP effective May 1,
1998.
3. Renamed Aetna Index Plus Mid Cap VP effective May
1, 1998.
4. Renamed Aetna Index Plus Small Cap VP effective May
1, 1998.
5. Renamed Aetna International VP effective May 1,
1998.
6. Renamed Aetna Mid Cap VP effective May 1, 1998.
7. Renamed Aetna Real Estate Securities VP effective
May 1, 1998.
(b) Exhibits
(1)(a) Articles of Incorporation(1)
(1)(b) Articles of Amendment(2)
(1)(c) 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) Investment Advisory Agreement between Aeltus Investment
Management, Inc. ("Aeltus") and Aetna Variable Portfolios, Inc.,
on behalf of Aetna Value Opportunity VP, Aetna Growth VP, Aetna
Small Company VP, Aetna Index Plus Large Cap VP, Aetna High
Yield VP, Aetna Index Plus Bond VP, Aetna Index Plus Mid Cap VP,
Aetna Index Plus Small Cap VP, Aetna International VP, Aetna Mid
Cap VP and Aetna Real Estate Securities VP
(6) Underwriting Agreement between Aetna Variable Portfolios, Inc.
and Aetna Life Insurance and Annuity Company(2)
(7) Directors' Deferred Compensation Plan
(8)(a) Custodian Agreement between Aetna Variable Portfolios, Inc. and
Mellon Bank, N.A. for Aetna Value Opportunity VP, Aetna Growth
VP, Aetna Index Plus Large Cap VP and Aetna Small Company VP(2)
(8)(b) Amendment to Custodian Agreement between Aetna Variable
Portfolios, Inc. and Mellon Bank, N.A. for Aetna Index Plus Bond
VP, Aetna Index Plus Mid Cap VP, Aetna Mid Cap VP, Aetna Index
Plus Small Cap VP, Aetna High Yield VP and Aetna Real Estate
Securities VP
(8)(c) Custodian Agreement between Aetna Variable Portfolios, Inc. and
Brown Brothers Harriman & Co. for Aetna International VP*
(9)(a) Administrative Services Agreement between Aeltus and Aetna
Variable Portfolios, Inc., on behalf of Aetna Value Opportunity
VP, Aetna Growth VP, Aetna Small Company VP, Aetna Index Plus
Large Cap VP, Aetna High Yield
<PAGE>
VP, Aetna Index Plus Bond VP, Aetna Index Plus Mid Cap VP, Aetna
Index Plus Small Cap VP, Aetna International VP, Aetna Mid Cap
VP and Aetna Real Estate Securities VP
(9)(b) 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 for Aetna
Value Opportunity VP, Aetna Growth VP, Aetna Index Plus Large
Cap VP and Aetna Small Company VP(2)
(13)(b) Agreement re: Initial Contribution to Working Capital for Aetna
Index Plus Bond VP, Index Plus Mid Cap VP, Aetna Mid Cap VP,
Index Plus Small Cap VP, Aetna High Yield VP, Aetna Real Estate
Securities VP and Aetna International VP(3)
(14) Not applicable
(15) Not applicable
(16) Schedule for Computation of Performance Data(2)
(17) See exhibit 27 below
(18) Not applicable
(19)(a) Power of Attorney(4)
(19)(b) Authorization for Signatures(3)
(27) Financial Data Schedule*
* To be filed by amendment
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. 2 to Registration
Statement on Form N-1A (File No. 333-05173), as filed electronically on
September 26, 1997 (Accession No. 0000950146-97-001480).
4. Incorporated by reference to Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A (File No. 33-41694), as filed electronically on
January 16, 1998 (Accession No. 0000950146-98-000093).
<PAGE>
Item 25. Persons Controlled by or Under Common Control
Registrant is a Maryland corporation for which separate financial
statements are filed. As of January 31, 1998 Aetna Life Insurance and
Annuity Company ("Aetna") owned 91.26% of the Registrant's
outstanding voting securities.
Aetna 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 26 of Post-Effective Amendment No. 16 to
the Registration Statement on Form N-4 (File No. 33-75964), as filed
electronically with the Securities and Exchange Commission on
February 9, 1998 (Accession No. 0000950146-98-000179).
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders
as of January 31, 1998
Aetna Value Opportunity VP (formerly Aetna
Variable Capital Appreciation Portfolio) 2
Aetna Growth VP
(formerly Aetna Variable Growth Portfolio) 2
Aetna Index Plus Large Cap VP
(formerly Aetna Variable Index Plus Portfolio) 2
Aetna Small Company VP (formerly Aetna
Variable Small Company Portfolio) 2
Aetna Index Plus Bond (formerly Aetna
Index Plus Bond Portfolio) 2
Aetna Index Plus Mid Cap VP (formerly
Aetna Index Plus Mid Cap Portfolio) 2
Aetna Mid Cap VP
(formerly Aetna Mid Cap Portfolio) 2
Aetna Index Plus Small Cap VP (formerly
Aetna Index Plus Small Cap Portfolio) 2
Aetna High Yield VP (formerly
Aetna High Yield Portfolio) 2
Aetna Real Estate Securities VP (formerly
Aetna Real Estate Securities Portfolio) 2
Aetna International VP (formerly
Aetna International Portfolio) 2
<PAGE>
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 (Accession No. 0000950146-96-000122),
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 October 1, 1999.
Section XI.B of the Administrative Services Agreement filed herewith
as Exhibit 9(a)) provides for indemnification of the Administrator.
Reference is also made to Section 2-418 of the Corporations and
Associations Article of the Annotated Code of Maryland which provides
generally that (1) a corporation may (but is not required to)
indemnify its directors for judgments, fines and expenses in
proceedings in which the director is named a party solely by reason
of being a director, provided the director has not acted in bad
faith, dishonestly or unlawfully, and provided further that the
director has not received any "improper personal benefit"; and (2)
that a corporation must (unless otherwise provided in the
corporation's charter or articles of incorporation) indemnify a
director who is successful on the merits in defending a suit against
him by reason of being a director for "reasonable expenses." The
statutory provisions are not exclusive; i.e., a corporation may
provide greater indemnification rights than those provided by
statute.
Item 28. Business and Other Connections of Investment Adviser
The investment adviser, Aeltus Investment Management, Inc. ("Aeltus"),
is registered as an investment adviser with the Securities and
Exchange Commission. In addition to serving as investment adviser and
administrator for Aetna Variable Portfolios, Inc., Aeltus acts as
investment adviser and administrator for Aetna Variable Fund, Aetna
Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers
Fund, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc., and
Aetna Series Fund, Inc. (all management investment companies
registered under the Investment Company Act of 1940 (the "1940 Act")).
It also acts as investment adviser to certain private accounts.
<PAGE>
The following table summarizes the business connections of the
directors and principal officers of the investment adviser.
-------------- -------------------------- ----------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1995/Addresses*/**
-------------- -------------------------- ----------------------------------
J. Scott Fox Director, Managing Director and President (since
Director, Chief Operating September 1997) -- Aetna Life
Officer, Chief Financial Assignment Company; Vice President
Officer (since April 1997) -- Aetna
Retirement Services, Inc.; Director
and Senior Vice President (since
April 1997) --Aetna Retirement
Holdings, Inc.; Director and 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.; Director (March
1996 - July 1997) -- Aeltus Capital,
Inc.; Managing Director, Chief
Financial Officer (March 1996 - April
1997) -- Aeltus Capital, Inc.;
Director (May 1996 - July 1997) --
Aeltus Trust Company, Inc.; Managing
Director, Chief Operating Officer,
Chief Financial Officer and Treasurer
(May 1996 - April 1997) --Aeltus
Trust Company, Inc.; Director and
President (May 1996 - October 1997)
-- Aetna Investment Management
(Bermuda) Holding, Ltd.
Timothy A. Holt Director Senior Vice President (since
September 1997) -- 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, Portfolio
Management/Investment Group (June
1991 - February 1996) -- Aetna Inc.
(formerly known as Aetna Life and
Casualty Company).
John Y. Kim Director, President, Chief Investment Officer (since May
Chief Executive 1994) -- Aetna Life Insurance and
Officer, Chief Annuity Company; Director (since
Investment Officer February 1995) -- Aetna Life
Insurance and Annuity Company; Senior
Vice President (since September 1994)
-- Aetna Life Insurance and Annuity
Company.
<PAGE>
-------------- -------------------------- ----------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1995/Addresses*/**
-------------- -------------------------- ----------------------------------
Thomas J. McInerney Director 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.
Peter B. Canoni Managing Director, Managing Director (since January
Equity Investments 1996) -- Aeltus Trust Company;
Registered Representative (since
March 1994) -- Aeltus Capital, Inc.
Lennart A. Carlson Managing Director, Managing Director (since January
Fixed Income 1996) -- Aeltus Trust Company;
Investments Registered Representative (since
February 1993) -- Aeltus Capital,
Inc.
Steven C. Huber Managing Director, Portfolio Manager (August 1991 -
Fixed Income August 1996) -- Aetna Life Insurance
Investments and Annuity Company; Managing
Director (since August 1996) --
Aeltus Trust Company.
Brian K. Kawakami Vice President, Chief Compliance Officer & Director
Chief Compliance (since January 1996) - Aeltus Trust
Officer Company; Chief Compliance Officer
(since August 1993) -- Aeltus
Capital, Inc.
Frank Litwin Managing Director, Vice President, Strategic Marketing
Retail Marketing (April, 1992 - August, 1997) --
and Sales Fidelity Investments Institutional
Services Company.
Kevin M. Means Managing Director, Managing Director (July 1994 - August
Equity Investments 1996) -- Aetna Life Insurance and
Annuity Company; Managing Director
(since August 1996) -- Aeltus Trust
Company.
<PAGE>
-------------- -------------------------- ----------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1995/Addresses*/**
-------------- -------------------------- ----------------------------------
Jeanne Wong-Boehm Managing Director, Portfolio Manager (March 1982 -
Fixed Income August 1996) -- Aetna Life Insurance
Investments and Annuity Company; Portfolio
Manager (March 1982 - August 1996) --
Aetna Inc.; Managing Director (since
August 1996) -- Aeltus Trust Company;
Registered Representative (since
August 1996) -- Aeltus Capital, Inc.
* Except with respect to Messrs. Holt and McInerney, the principal
business address of each person named is 242 Trumbull Street, Hartford,
Connecticut 06103-1205. The address of Messrs. Holt and McInerney 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.
Item 29. Principal Underwriters
(a) In addition to serving as the principal underwriter for the Registrant,
Aetna also acts as the principal underwriter 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). Additionally, Aetna acts as the
principal underwriter and depositor for Aetna Variable Annuity Account B
of Aetna, Variable Annuity Account C of Aetna, Variable Annuity Account
G of Aetna, and Aetna 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>
(b) The following are the directors and principal officers of the
Underwriter:
Positions and
Name and Principal Positions and Offices with Principal Offices with
Business Address* Underwriter Registrant
- ------------------ ------------------------------------ -------------
Thomas J. McInerney Director and President None
Robert D. Friedhoff Director and Senior Vice President None
John Y. Kim Director and Senior Vice President Director
Shaun P. Mathews Director and Senior Vice President Director
Catherine H. Smith Director, Chief Financial Officer and None
Senior Vice President
Thomas P. Waldron Director and Vice President None
Kirk P. Wickman Vice President, General Counsel and None
Corporate Secretary
Deborah Koltenuk Vice President and Treasurer, Corporate None
Controller
Frederick D. Kelsven Vice President and Chief Compliance None
Officer
* Except with respect to Messrs. Fox and Kim, the principal business address
of all directors and officers listed is 151 Farmington Avenue, Hartford,
Connecticut 06156. The address of Messrs. Fox and Kim is 242 Trumbull
Street, Hartford, Connecticut 06103-1205.
(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, Aeltus,
maintain physical possession of each account, book or other
document, at 151 Farmington Avenue, Hartford, Connecticut 06156
or 242 Trumbull Street, Hartford, Connecticut 06103-1205.
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.
<PAGE>
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 Securities
Act of 1933 (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 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.
The Registrant undertakes to file a Post-Effective Amendment to this
Registration Statement, using financial statements which need not be
certified for Aetna Index Plus Large Cap VP (formerly Aetna Index
Plus Bond Portfolio), Aetna Index Plus Mid Cap VP (formerly Aetna
Index Plus Mid Cap Portfolio), Aetna Mid Cap VP (formerly Aetna Mid
Cap Portfolio), Aetna Index Plus Small Cap VP (formerly Aetna Index
Plus Small Cap Portfolio), Aetna High Yield VP (formerly Aetna High
Yield Portfolio), Aetna Real Estate Securities VP (formerly Aetna
Real Estate Securities Portfolio) and Aetna International VP
(formerly Aetna International Portfolio), within four to six months
from the effective date of Post-Effective Amendment No. 2.
<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 February, 1998.
AETNA VARIABLE PORTFOLIOS, INC.
---------------------------------
(Registrant)
By: J. Scott Fox*
---------------------------------
J. Scott Fox
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 February 26, 1998 in the capacities indicated.
Signature Title Date
J. Scott Fox* President and Director )
- ---------------------- (Principal Executive Officer) )
J. Scott Fox )
)
)
Maria T. Fighetti* Director ) February
- ---------------------- )
Maria T. Fighetti ) 26, 1998
)
)
David L. Grove* Director )
- ---------------------- )
David L. Grove )
)
)
John Y. Kim* Director )
- ---------------------- )
John Y. Kim )
)
)
Sidney Koch* Director )
- ---------------------- )
Sidney Koch )
)
)
Shaun P. Mathews* Director )
- ---------------------- )
Shaun P. Mathews )
)
)
Corine T. Norgaard* Director )
- ---------------------- )
Corine T. Norgaard )
<PAGE>
)
Richard G. Scheide* Director )
- ---------------------- )
Richard G. Scheide )
)
)
Stephanie A. Taylor* Treasurer and Chief Financial Officer )
- ---------------------- (Principal Financial and )
Stephanie A. Taylor Accounting Officer) )
)
By: /s/ Amy R. Doberman
--------------------------
*Amy R. Doberman
Attorney-in-Fact
(Executed pursuant to Power of Attorney dated December 10, 1997 and filed with
the Securities and Exchange Commission on January 16, 1998 (Accession No.
0000950146-98-000093)).
<PAGE>
Aetna Variable Portfolios, Inc.
EXHIBIT INDEX
Exhibit Exhibit Page
No.
99-B.1(a) Articles of Incorporation *
99-B.1(b) Articles of Amendment *
99-B.1(c) Articles Supplementary ____
99-B.2 Amended Bylaws
99-B.4 Instruments Defining Rights of Holders *
99-B.5 Investment Advisory Agreement between Aeltus Investment ____
Management, Inc. ("Aeltus") and Aetna Variable Portfolios,
Inc., on behalf of Aetna Value Opportunity VP, Aetna
Growth VP, Aetna Small Company VP, Aetna Index Plus Large
Cap VP, Aetna High Yield VP, Aetna Index Plus Bond VP,
Aetna Index Plus Mid Cap VP, Aetna Index Plus Small Cap
VP, Aetna International VP, Aetna Mid Cap VP and Aetna
Real Estate Securities VP
99-B.6 Underwriting Agreement between Aetna Variable Portfolios, *
Inc. and Aetna Life Insurance and Annuity Company
99-B.7 Directors' Deferred Compensation Plan ____
99-B.8(a) Custodian Agreement between Aetna Variable Portfolios, *
Inc. and Mellon Bank, N.A. for Aetna Value Opportunity VP,
Aetna Growth VP, Aetna Index Plus Large Cap VP and Aetna
Small Company VP
99-B.8(b) Amendment to Custodian Agreement between Aetna Variable ____
Portfolios, Inc. and Mellon Bank, N.A. for Aetna Index
Plus Bond VP, Aetna Index Plus Mid Cap VP, Aetna Mid Cap
VP, Aetna Index Plus Small Cap VP, Aetna High Yield VP and
Aetna Real Estate Securities VP
99-B.8(c) Custodian Agreement between Aetna Variable Portfolios, **
Inc. and Brown Brothers Harriman & Co. for Aetna
International VP
*Incorporated by reference.
** To be filed by amendment.
<PAGE>
Exhibit No. Exhibit Page
99-B.9(a) Administrative Services Agreement between Aeltus and Aetna ____
Variable Portfolios, Inc., on behalf of Aetna Value
Opportunity VP, Aetna Growth VP, Aetna Small Company VP,
Aetna Index Plus Large Cap VP, Aetna High Yield VP, Aetna
Index Plus Bond VP, Aetna Index Plus Mid Cap VP, Aetna
Index Plus Small Cap VP, Aetna International VP, Aetna Mid
Cap VP and Aetna Real Estate Securities VP
99-B.9(b) 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 for *
Aetna Value Opportunity VP, Aetna Growth VP, Aetna Index
Plus Large Cap VP and Aetna Small Company VP
99-B.13(b) Agreement re: Initial Contribution to Working Capital for *
Aetna Index Plus Bond VP, Index Plus Mid Cap VP, Aetna Mid
Cap VP, Index Plus Small Cap VP, Aetna High Yield VP,
Aetna Real Estate Securities VP and Aetna International VP
99-B.16 Schedule for Computation of Performance Data *
99-B.19(a) Power of Attorney *
99-B.19(b) Authorization for Signatures *
27 Financial Data Schedule **
*Incorporated by reference.
**To be filed by amendment.
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 of the Corporation, at its
meeting held on September 24, 1997, adopted a resolution increasing
the total number of shares of stock which the Corporation shall have
authority to issue to two billion (2,000,000,000) shares of common
stock of the par value of $0.001 per share and of the aggregate par
value of two million dollars ($2,000,000); and
SECOND: The Board of Directors, at its meeting held on
September 24, 1997, by resolutions, did designate and classify seven
hundred million (700,000,000) shares of common stock of the
Corporation into seven new portfolios (individually, "Portfolio") 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: Each Portfolio of the Corporation shall have
preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of
shares as set forth in paragraph SEVENTH and elsewhere in the
Corporation's Articles of Incorporation.
FOURTH: The shares of the Corporation authorized and
classified pursuant to paragraphs FIRST and SECOND of these Articles
Supplementary have been so authorized and classified by the Board of
Directors under the authority contained in the Charter of the
Corporation. The total number of shares of capital stock that the
Corporation has authority to issue has been increased by the Board of
Directors in accordance with Section 2-105(c) of the Maryland General
Corporation Law.
<PAGE>
FIFTH: 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 (400,000,000) shares as follows:
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
SIXTH: Immediately following the effectiveness of these
Articles Supplementary, the Corporation will have authority to issue
two billion (2,000,000,000) shares of common stock of the par value of
$0.001 per share and of the aggregate par value of two million dollars
($2,000,000) of which the Board has designated and classified one
billion, one hundred million (1,100,000,000) shares as set forth in
paragraphs SECOND and FIFTH of these Articles Supplementary.
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.
ATTEST: AETNA VARIABLE PORTFOLIOS, INC.
/s/ Amy R. Doberman By: /s/ Shaun P. Mathews
Amy R. Doberman Shaun P. Mathews
Secretary President
Date: October 28, 1997
Hartford, Connecticut
CORPORATE SEAL
2
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between AELTUS INVESTMENT MANAGEMENT, INC., a
Connecticut corporation (the "Adviser") and AETNA VARIABLE PORTFOLIOS, INC., a
Maryland corporation (the "Fund"), on behalf of its portfolio, Aetna Value
Opportunity VP (the "Portfolio"), with respect to the following recital of
facts:
R E C I T A L
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 (the "1940 Act"); and
WHEREAS, the Fund has established the Portfolio; and
WHEREAS, the Adviser is registered with the Commission as an investment adviser
under the Investment Advisers Act of 1940 (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.
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;
<PAGE>
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; and
7. take any other actions which appear to the Adviser and the Board
necessary to carry into effect the purposes of this Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Adviser
Adviser hereby represents and warrants to the Fund as follows:
1. Due Incorporation and Organization. The Adviser is duly
organized and is in good standing under the laws of the State
of Connecticut and is fully authorized to enter into this
Agreement and carry out its duties and obligations hereunder.
2. Registration. The Adviser is registered as an investment
adviser with the Commission under the Advisers Act. The Adviser
shall maintain such registration 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.
2
<PAGE>
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 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
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 to the
Adviser with respect to the Portfolio.
V. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Adviser 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 or research
services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to the Adviser 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 that provide payment for expenses of the Portfolio. The Adviser
is authorized to pay a broker or dealer who provides such brokerage or
research services or expenses, and that has provided assistance in the
distribution of shares of the Portfolio to the extent permitted by law, 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
3
<PAGE>
reasonable in relation to the value of the brokerage or research services
provided by such broker or dealer and is paid in compliance with Section
28(e). This determination may be viewed in terms of either that particular
transaction or the overall responsibilities that the Adviser and its
affiliates have with respect to accounts over which they exercise
investment discretion. The Board shall periodically review the commissions
paid by the Portfolio to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
received.
VI. CONTROL BY THE BOARD
Any investment program undertaken by the Adviser pursuant to this Agreement, as
well as any other activities undertaken by the Adviser on behalf of the
Portfolio pursuant thereto, shall at all times be subject to any directives of
the Board.
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;
2. the provisions of the current Registration Statement of the Fund;
3. the provisions of the Fund's Articles of Incorporation, as amended;
4. the provisions of the Bylaws of the Fund, as amended; and
5. any other applicable provisions of state and federal law.
VIII. COMPENSATION
For the services to be rendered, the facilities furnished and the expenses
assumed by the Adviser, the Fund, on behalf of the Portfolio, shall pay to the
Adviser an annual fee, payable monthly, equal to .60% of the average daily net
assets of the Portfolio. Except as hereinafter set forth, compensation under
this Agreement shall be calculated and accrued daily at the rate of 1/365 of
.60% of the daily net assets of the Portfolio. If this Agreement becomes
effective subsequent to the first day of a month or terminates before the last
day of a month, compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the calculation of the fees
set forth above. Subject to the provisions of Section X hereof, payment of the
Adviser's compensation for the preceding month shall be made as promptly as
possible.
4
<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; and
2. all fees and expenses of all directors, officers and employees,
if any, of the Fund who are employees of the Adviser, 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;
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;
5
<PAGE>
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 (other than those detailed in paragraph 9
above) 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.
X. 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
6
<PAGE>
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 on the Portfolio at
the request of the Board.
XII. NONEXCLUSIVITY
The services of the Adviser to the Portfolio are not to be deemed to be
exclusive, and the Adviser shall be free to render investment advisory or other
services to others (including other investment companies) and to engage in other
activities, so long as its services under this Agreement are not impaired
thereby. It is understood and agreed that officers and directors of the Adviser
may serve as officers or directors of the Fund, and that officers or directors
of the Fund may serve as officers or directors of the Adviser to the extent
permitted by law; and that the officers and directors of the Adviser are not
prohibited from engaging in any other business activity or from rendering
services to any other person, or from serving as partners, officers, directors
or trustees of any other firm or trust, including other investment companies.
XIII. TERM
This Agreement shall become effective on May 1, 1998, and shall remain in force
and effect through December 31, 1998, unless earlier terminated under the
provisions of Article XV.
XIV. RENEWAL
Following the expiration of its initial term, the Agreement shall continue in
force and effect from year to year, provided that such continuance is
specifically approved at least annually:
1. a. by the Board, or
b. by the vote of a majority of the Portfolio's outstanding
voting securities (as defined in Section 2(a)(42) of the
1940 Act), and
2. by the affirmative vote of a majority of the directors who are
not parties to this Agreement or interested persons of a party
to this Agreement (other than as a
7
<PAGE>
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."
XVI. LIABILITY
The Adviser shall be liable to the Fund and shall indemnify the Fund for any
losses incurred by the Fund, 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:
151 Farmington Avenue
Hartford, Connecticut 06156
Fax number 860/273-8340
if to the Adviser:
242 Trumbull Street
Hartford, Connecticut 06103-1205
Fax number 860/275-4440
8
<PAGE>
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 or orders of the
Commission issued pursuant to the 1940 Act, or contained in no-action and
interpretive positions taken by the Commission staff. In addition, where the
effect of a requirement of the 1940 Act reflected in the provisions of this
Agreement is revised by rule or order of the Commission, such provisions shall
be deemed to incorporate the effect of such rule or order.
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. (formerly known
as Aetna Life and Casualty Company) and their continued use is subject to the
right of Aetna Services, Inc. to withdraw this permission in the event the
Adviser or another affiliated corporation of Aetna Services, Inc. should not be
the investment adviser of the Portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 18th day of February, 1998.
Aeltus Investment Management, Inc.
Attest: /s/ Arnold B. West By: /s/ John Y. Kim
- ---------------------------- -----------------------------------
Name: Arnold B. West Name: John Y. Kim
- ---------------------------- -----------------------------------
Title: Secretary Title: Chief Executive Officer
- ---------------------------- -----------------------------------
Aetna Variable Portfolios, Inc.
on behalf of its portfolio,
Aetna Value Opportunity VP
Attest: /s/ DeAnn S. Anastasio By: /s/ J. Scott Fox
- --------------------------------- ------------------------
Name: DeAnn S. Anastasio Name: J. Scott Fox
- --------------------------------- ------------------------
Title: Assistant Secretary Title: President
- --------------------------------- ------------------------
9
<PAGE>
Schedule Pursuant to Rule 483(d)(2) under the Securities Act of 1933
Investment Advisory Agreements have been entered into by Aetna Variable
Portfolios, Inc. on behalf of the following portfolios in substantially the same
form and type as exhibit 24(b)(5) - Investment Advisory Agreement between Aeltus
Investment Management Inc. and Aetna Variable Portfolios, Inc., included
herewith.
Date Portfolio Difference
---- --------- ----------
2/18/98 Aetna Growth VP .60% of average daily net assets
2/18/98 Aetna Small Company VP .75% of average daily net assets
2/18/98 Aetna Index Plus Large Cap VP .35% of average daily net assets
2/18/98 Aetna High Yield VP .65% of average daily net assets
2/18/98 Aetna Index Plus Bond VP .30% of average daily net assets
2/18/98 Aetna Index Plus Mid Cap VP .40% of average daily net assets
2/18/98 Aetna Index Plus Small Cap VP .40% of average daily net assets
2/18/98 Aetna International VP .85% of average daily net assets
2/18/98 Aetna Mid Cap VP .75% of average daily net assets
2/18/98 Aetna Real Estate Securities VP .75% of average daily net assets
10
AETNA VARIABLE PORTFOLIOS, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
I. INTRODUCTION
1.01 This Deferred Compensation Plan (the "Plan") has been established
by resolution of the Boards of Trustees/Directors (the "Board")
of Aetna Variable Portfolios, Inc. (the "Fund") using the format
that has been established for use by all open-end management
investment companies, whether now existing or to be created, that
are advised by Aetna Life Insurance and Annuity Company ("ALIAC")
or its successor. The purpose of the Plan is to provide
retirement benefits for those directors or trustees, as the case
may be, of the Fund who are not employees of the Fund, its
distributor or administrator, or ALIAC, or any affiliate of
ALIAC.
1.02 The Plan shall be administered by the Board or by such person or
persons as the Board may designate to carry out administrative
functions hereunder (the "Plan Administrator"). The Plan
Administrator shall have complete discretion to interpret and
administer the Plan in accordance with its terms, and its
determinations shall be binding on all persons except for the
provisions of ARTICLE VIII, whereunder action by the full Board
shall be required.
II. DEFINITIONS
2.01 Beneficiary or Beneficiaries: The person, persons, or legal
entities designated by the Participant in the Participant's
Deferral Agreement who are entitled to receive payments under
this Plan that become payable to such person, persons, or legal
entities in the event of the Participant's death. If more than
one designated beneficiary survives the Participant, payments
shall be made equally, unless otherwise provided in the
beneficiary designation. Nothing herein shall prevent the
Participant from designating primary and secondary beneficiaries.
Secondary beneficiaries are considered designated beneficiaries
and are entitled to payments under the Plan only in the event
that there are no primary beneficiaries surviving the
Participant.
2.02 Compensation. The annual retainer fees earned by a Participant
for service as a director of the Fund; the annual retainer fee
earned by a Participant for membership to a Committee of the
Board; and any fees earned by a Participant for attendance at
meetings of the Board and any of its Committees, all or a portion
of which may be deferred.
<PAGE>
2.03 Deferral Agreement: The agreement between the Fund and the
Participant to defer Compensation under the Plan.
2.04 Deferred Compensation: The amount, as mutually agreed to by the
Participant and the Fund, by which any Compensation not yet
earned shall be reduced in return for the benefits provided under
this Plan.
2.05 Lump Sum: A single payment of the entire balance credited to the
Participant's bookkeeping account under ARTICLE IV.
2.06 Notional Fund: Any open-end management investment company
registered under the Investment Company Act of 1940 with respect
to which ALIAC serves as investment adviser, shares of which are
sold to the public, and which the Plan Administrator designates
as a Notional Fund under the Plan.
2.07 Participant: Any Eligible Director of the Fund who fulfills the
eligibility and enrollment requirements of ARTICLE III.
2.08 Retirement: The time at which the Participant ceases to serve as
an Eligible Director of the Fund in conformity with the
Retirement Policy of the Board in effect at the time of such
cessation of service.
2.09 Termination of Services: The time at which the Participant ceases
to serve as an Eligible Director of the Fund for any reason other
than Retirement or death.
2.10 Unforeseeable Emergency: An unanticipated emergency that is
caused by an event beyond the control of the Participant and that
would result in severe financial hardship to the individual if
early withdrawal were not permitted in accordance with ARTICLE
VII hereof.
III. PARTICIPATION IN THE PLAN
3.01 Eligibility: Any director or trustee of the Fund who is not an
employee of the Fund or of the Fund's distributor or
administrator, or who is not an employee of ALIAC or any
affiliate of ALIAC, and who is not eligible to participate in the
Retirement Plan for Employees of Aetna Inc. ("Eligible
Director"), is eligible to participate in the Plan.
3.02 Enrollment in the Plan:
(a) An Eligible Director may become a Participant by executing
a Deferral Agreement whereunder that Eligible Director
agrees to
2
<PAGE>
defer all or a portion of Compensation not yet earned and
agrees to the provisions of the Plan.
(b) An election by the Eligible Director to defer Compensation
under the Plan for any calendar year shall not be
effective unless such election is made on or before
December 31 of the preceding year, except that
(1) in the year in which the Plan is first implemented,
the Eligible Director may elect to participate in
the Plan within thirty days of the date on which
the Plan is implemented, with deferral of
Compensation to begin on the first day of the month
subsequent to the month in which the election is
made, or
(2) An Eligible Director may elect to participate in
the Plan within thirty days of the date upon which
such Director first meets the eligibility
requirements of Section 3.01, with deferral of
Compensation to begin on the first day of the month
subsequent to the month in which the election is
made.
(c) An Eligible Director who defers Compensation may not
modify the Eligible Director's Deferral Agreement to
change the amount deferred except with respect to
Compensation earned in a subsequent calendar year where
the Participant notifies the Plan Administrator in writing
or except as provided in ARTICLE VII hereof with respect
to WITHDRAWALS.
(d) A Participant may elect the manner in which benefits will
be distributed under the Deferral Agreement. The
distribution election may be subsequently changed by the
Participant by notifying the Plan Administrator in writing
of the Participant's election, but such amendment will
only be effective with respect to the distribution of
Compensation earned and amounts credited on such
Compensation in the Participant's bookkeeping account in
calendar years following the year in which the amendment
is requested.
IV. ACCUMULATION OF DEFERRED COMPENSATION
4.01 The Plan Administrator shall establish a bookkeeping account on
behalf of the Participant, the value of which at any given time
shall determine the benefits payable to the Participant under
ARTICLES V and VI and the Withdrawal values under ARTICLE VII.
Beginning on the date the
3
<PAGE>
Participant first enrolls in the Plan, the account shall be
credited with an amount equal to the Participant's Deferred
Compensation at such times as the Compensation subject to
deferral would otherwise have been paid. Until the account is
removed from the books of the Fund, the account shall be further
adjusted for notional investment experience as described in
Section 4.02.
4.02 Amounts credited to the Participant's bookkeeping account shall
be periodically adjusted for notional investment experience. In
each case such notional investment experience shall be determined
by treating such account as though an equivalent dollar amount
had been invested and reinvested in one or more of the Notional
Funds. The Notional Funds used as a basis for determining
notional investment experience with respect to the Participant's
account shall be designated by the Participant in writing by
instrument of election and may be changed prospectively by
similar written election no later than thirty days before the end
of a calendar quarter effective as of the first day of the
subsequent calendar quarter. The Plan Administrator may from time
to time limit the Notional Funds available for purposes of such
election. If at any time any Notional Fund that has previously
been designated by the Participant as a notional investment shall
cease to exist or shall be unavailable for any reason, or if the
Participant fails to designate one or more Notional Funds
pursuant to this Section 4.02, the Plan Administrator may, at its
discretion and upon notice to the Participant, treat any amounts
previously notionally invested or to be notionally invested in
such Notional Fund as being invested in Aetna Money Market Fund
or if such Notional Fund ceases to exist or is unavailable for
any reason, such other short-term high-quality fixed-income
Notional Fund as the Plan Administrator may from time to time
designate, in all cases only until such time as the Participant
shall have made another investment election in accordance with
the foregoing procedures. The Participant's bookkeeping account
shall continue to be adjusted for notional investment experience
until distributed in full in accordance with the distribution
methods set forth in this Plan.
4.03 It is specifically provided that neither the Plan Administrator
nor the Fund shall be obligated to make actual cash deposits in
the account, but only to make bookkeeping entries as if deposits
had been made. If for its own convenience the Fund should make
deposits, it is further provided that any sums thus deposited
shall remain a general unrestricted asset of the Fund and shall
not be deemed as being held in trust, escrow, or in any other
fiduciary manner for the benefit of the Participant. The
Participant understands that the value of the Participant's
bookkeeping account will fluctuate due to the investment
experience of the Notional Funds and that at the time at which
benefits become payable under the Plan, the value of the
Participant's bookkeeping account may be less than the total
amount of Compensation deferred under the Plan. The Fund is not
responsible or liable for any amount by which the total amount of
4
<PAGE>
Compensation deferred exceeds the value of the bookkeeping
account and the Fund shall have no obligation to restore any such
difference.
V. BENEFITS ON RETIREMENT
5.01 If the Participant continues in the service of the Fund until
Retirement, the Fund shall pay to such Participant the amount
then and thereafter standing credited to the bookkeeping account
described in ARTICLE IV at the time and in the manner as elected
by the Participant in the Participant's Deferral Agreement. If
monthly or annual installments are elected by the Participant,
the estimated payments must be at least $1,000 per month or
$10,000 per year; if the applicable minimum is not met, the
payout duration will be adjusted to meet the minimums.
Installment payments shall be substantially equal over the period
elected. Any excess amounts remaining in the account shall be
paid out in the final installment. With respect to benefits
payable in a Lump Sum, the Lump Sum shall be an amount equal to
the current value of the Participant's bookkeeping account on the
date of the Participant's Retirement. The Lump Sum shall be paid
to the Participant no later than the fifteenth day of the month
following the date of the Participant's Retirement.
5.02 Should the Participant die at any time after Retirement, whether
prior to or after the Participant has begun to receive the
retirement payments provided for in Section 5.01, the
Participant's designated Beneficiary or Beneficiaries shall be
entitled to receive the balance of such payments as they fall
due, or, in the sole discretion of the Plan Administrator, in a
Lump Sum equal to the current value of the deceased Participant's
bookkeeping account on the date of the Participant's death. If no
Beneficiary or Beneficiaries are designated as provided in
Section 2.01 of this Plan at the time the Participant dies, then
the Participant's estate shall be paid by the Plan as promptly as
possible after due proof of death a Lump Sum amount equal to the
value of the Participant's bookkeeping account on the date of the
Participant's death. If a designated Beneficiary or Beneficiaries
survive the death of the Participant, and said designated
Beneficiary or Beneficiaries do not survive the period during
which payments are to be made under this Plan, then:
(a) If there is only one designated Beneficiary, then the
designated Beneficiary's estate shall be paid by the Plan
as promptly as possible after due proof of death a Lump
Sum amount equal to the value of the Participant's
bookkeeping account on the date of the designated
Beneficiary's death, or
5
<PAGE>
(b) If there is more than one designated Beneficiary, then the
death of any designated Beneficiary who is not the last to
die shall cause all prospective payments under this Plan
previously designated to the deceased Beneficiary to be
redistributed proportionately among the surviving
designated Beneficiaries.
Upon the death of the last designated Beneficiary, such
designated Beneficiary's estate shall be paid by the Plan as
promptly as possible after due proof of death a Lump Sum amount
equal to the value of the Participant's bookkeeping account on
the date of the designated Beneficiary's death.
VI. BENEFITS ON TERMINATION OF SERVICES OR DEATH PRIOR TO RETIREMENT
6.01 In the event there is a Termination of Services, the Fund shall
pay to the Participant the amount then and thereafter standing
credited to the bookkeeping account described in ARTICLE IV at
the time and in the manner as elected by the Participant in the
Participant's Deferral Agreement. If monthly or annual
installments are elected by a Participant, the estimated payments
must be at least $1,000 per month or $10,000 per year; if the
applicable minimum is not met, the payout duration will be
adjusted to meet the minimums. Installment payments shall be
substantially equal over the period elected. Any excess amounts
remaining in the account shall be paid out in the final
installment. With respect to benefits payable in a Lump Sum, the
Lump Sum shall be an amount equal to the current value of the
Participant's bookkeeping account on the date of Termination of
Services. The Lump Sum shall be paid to the Participant no later
than the fifteenth day of the month following the date of
Termination of Services.
6.02 In the event the Participant dies before the Participant's
Retirement or the Participant dies prior to receiving all of the
payments under Section 6.01, the Participant's designated
Beneficiary or Beneficiaries shall be entitled to receive the
balance remaining of such payments as they fall due, or, in the
sole discretion of the Plan Administrator, in a Lump Sum equal to
the current value of the deceased Participant's bookkeeping
account on the date of the Participant's death. If no Beneficiary
or Beneficiaries are designated as provided in Section 2.01 of
this Plan at the time the Participant dies, then the
Participant's estate shall be paid by the Plan as promptly as
possible after due proof of death a Lump Sum amount equal to the
value of the Participant's bookkeeping account on the date of the
Participant's death. If a designated Beneficiary or Beneficiaries
survive the death of the Participant, and said designated
Beneficiary or Beneficiaries
6
<PAGE>
do not survive the period during which payments are to be made
under this Plan, then:
(a) If there is only one designated Beneficiary, then the
designated Beneficiary's estate shall be paid by the Plan
as promptly as possible after due proof of death a Lump
Sum amount equal to the value of the Participant's
bookkeeping account on the date of the designated
Beneficiary's death, or
(b) If there is more than one designated Beneficiary, then the
death of any designated Beneficiary who is not the last to
die shall cause all prospective payments under this Plan
previously designated to the deceased Beneficiary to be
redistributed proportionately among the surviving
designated Beneficiaries.
Upon the death of the last designated Beneficiary, such
designated Beneficiary's estate shall be paid by the Plan
as promptly as possible after due proof of death a Lump
Sum amount equal to the value of the Participant's
bookkeeping account on the date of the designated
Beneficiary's death.
VII. WITHDRAWALS
In the event of an Unforeseeable Emergency, the Participant may
apply to the Plan Administrator for early withdrawal from the
Plan of an amount limited to that which is necessary to meet the
emergency. If such application for withdrawal is approved by the
Plan Administrator, the withdrawal will be effective at the
latter of the date specified in the Participant's application or
the date of approval by the Plan Administrator. Whenever an
application for withdrawal is honored, the Plan Administrator
shall pay the Participant from the Participant's bookkeeping
account described in ARTICLE IV only those amounts necessary to
meet the emergency. The Participant's bookkeeping account shall
be appropriately adjusted to reflect the amounts withdrawn. An
Unforeseeable Emergency shall include the following: bankruptcy
or impending bankruptcy, unexpected and nonreimbursable major
expenses resulting from illness to person or accident to person
or property and other types of unexpected and nonreimbursable
expenses of a major or emergency nature where withdrawal of funds
would be necessary to prevent serious financial hardship to the
Participant. Withdrawals for foreseeable expenditures such as the
down payment on a home, vacation expenses, purchase of an
automobile, or education expenses will not be permitted. As
provided in Section 1.02, the Plan Administrator shall make the
required findings under this provision and such findings shall be
binding upon all persons.
7
<PAGE>
VIII. AMENDMENT OR TERMINATION OF PLAN
8.01 The Board may at any time terminate this Plan. Upon such
termination, the Participant will be deemed to have revoked the
election to defer Compensation as of the date of such
termination. Upon termination, no part of the Participant's
Compensation will be deferred and the Participant shall be
treated as if there had been a Termination of Services under
Section 6.01 on the date of the termination for purposes of
payment of benefits under the Plan.
8.02 The Board may amend the provisions of this Plan at any time
provided, however, that no amendment shall adversely affect the
rights of the Participant or the designated Beneficiary or
Beneficiaries, if any, as to the receipt of payments under the
Plan to the extent of any Compensation deferred before the time
of the amendment.
IX. PARTICIPANT STATUS
The Participant in the Plan shall have only the status of general
unsecured creditor of the Fund. The Plan constitutes a mere
promise by the Fund to make payments in the future.
X. NON-ASSIGNABILITY CLAUSE
It is expressly provided that neither the Participant nor the
Participant's Beneficiary or Beneficiaries, nor any other
designee, shall have any right to commute, sell, assign, transfer
or otherwise convey the right to receive any payments hereunder
which payments and rights thereto are expressly declared to be
non-assignable and non-transferable and, in the event of any
attempted assignment or transfer, the Fund shall have no further
liability hereunder. Moreover, no unpaid benefits shall be
subject to attachment, garnishment or execution, or be
transferable by operation of law in the event of bankruptcy or
insolvency, except to the extent otherwise required by law. The
right of the Participant or the Participant's Beneficiary or
Beneficiaries to payments under the Plan are not subject in any
manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors of
the Participant or the Participant's Beneficiary or
Beneficiaries.
XI. APPLICABLE LAW
This Plan shall be construed under the law of the State of
Connecticut.
8
<PAGE>
XII. EFFECTIVE DATE
This Plan shall be effective on the date of its adoption by the
Fund's Board of Directors or on such later date as may be
provided in the vote, resolution or consent in which such
adoption takes place.
Adopted by the Board, by resolution, on September 24, 1997.
9
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 August
26, 1996 with respect to the assets of certain portfolios of the Fund and some
or all additional portfolios that the Fund may establish from time to time; and
WHEREAS, the Fund has authorized the creation of new portfolios, Aetna
Index Plus Small Cap Portfolio, Aetna Index Plus Mid Cap Portfolio, Aetna Mid
Cap Portfolio, Aetna Real Estate Securities Portfolio, Aetna Index Plus Bond
Portfolio, and Aetna High Yield Portfolio ("Portfolios"), and has amended its
registration statement on Form N-1A to register shares of beneficial interest of
the Portfolios with the Securities and Exchange Commission; and
WHEREAS, the Fund desires to appoint Mellon as custodian of the assets
for such Portfolios;
NOW THEREFORE, it is agreed as follows:
1. The Fund, on behalf of the Portfolios, hereby appoints Mellon, and
Mellon hereby accepts appointment, as the custodian of the assets of the
Portfolios, 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,
(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;
<PAGE>
(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.
Aetna Variable Portfolios, Inc. on behalf of
Aetna Index Plus Small Cap Portfolio
Aetna Index Plus Mid Cap Portfolio
Aetna Mid Cap Portfolio
Aetna Real Estate Securities Portfolio
Aetna Index Plus Bond Portfolio
Mellon Bank, N.A. Aetna High Yield Portfolio
By: /s/ Christi R. Caperton By: /s/ Stephanie A. Taylor
Name: Christi R. Caperton Name: Stephanie A. Taylor
Title: Vice President Title: Asst. Treasurer
Mellon Bank, N.A.
Date: 12/21/97 Date: 11/11/97
ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT is made by and between AETNA VARIABLE PORTFOLIOS, INC., a
Maryland Corporation (the "Fund"), on behalf of each of its portfolios, Aetna
Value Opportunity VP, Aetna Growth VP, Aetna Small Company VP, Aetna Index Plus
Large Cap VP, Aetna High Yield VP, Aetna Real Estate Securities VP, Aetna Mid
Cap VP, Aetna Index Plus Mid Cap VP, Aetna Index Plus Small Cap VP, Aetna Index
Plus Bond VP, and Aetna International VP (the "Portfolios"), and AELTUS
INVESTMENT MANAGEMENT, INC., a Connecticut corporation (the "Administrator"),
with respect to the following recital of facts:
R E C I T A L
WHEREAS, the Fund is registered as an open-end diversified management
investment company under the Investment Company Act of 1940 (the "1940 Act");
and
WHEREAS, the Administrator is registered as an investment adviser under
the Investment Advisers Act of 1940 (the "Advisers Act"), and engages in the
business of acting as an investment adviser and an administrator of investment
companies; and
WHEREAS, the Fund has established the Portfolios; and
WHEREAS, the Fund, on behalf of each of its Portfolios, and the
Administrator desire to enter into an agreement to provide for administrative
services for the Portfolios on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable considerations, the receipt of which is hereby
acknowledged, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADMINISTRATOR
The Administrator is hereby appointed to serve as the Administrator to
the Portfolios, to provide the administrative services described herein and
assume the obligations set forth in Section II, subject to the terms of this
Agreement and the control of the Fund's Board of Directors (the "Board"). The
Administrator shall, for all purposes herein, be deemed an independent
contractor and shall have, unless otherwise expressly provided or authorized, no
authority to act for or represent the Portfolios in any way or otherwise be
deemed an agent of the Portfolios.
<PAGE>
II. DUTIES OF THE ADMINISTRATOR
In carrying out the terms of this Agreement, the Administrator shall:
A. provide office space, equipment and facilities (which may be the
Administrator's or its affiliates') for maintaining the Fund's organization, for
meetings of the Fund's Board and shareholders, and for performing administrative
services hereunder;
B. supervise and manage all aspects of the Portfolios' operations (other
than investment advisory activities), supervise relations with, and monitor 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;
C. provide internal clerical and legal services, and stationery and
office supplies;
D. provide accounting services, including:
1. determining and arranging for the publication of the net asset
value of each Portfolio;
2. preparing financial information for presentation to the Fund's
Board and management;
3. preparing and monitoring the Fund's annual expense budget, and
establishing daily accruals;
4. coordinating payment of fund expenses;
5. calculating periodic dividend rates to be declared in accordance
with management guidelines;
6. calculating total return information as defined in the current
prospectus and statement of additional information;
7. coordinating audit packages for use by independent public
accountants;
8. responding to regulatory audits;
E. provide non-investment related statistical and research data and such
other reports, evaluations and information as the Portfolios may request from
time to time;
F. monitor each Portfolio's compliance with the current prospectus and
statement of additional information, the 1940 Act, the Internal Revenue Code and
other applicable laws and regulations;
G. prepare, to the extent requested by the Fund, registration
statements, proxy statements and annual and semi-annual reports to shareholders;
-2-
<PAGE>
H. arrange for the printing and mailing (at the Portfolios' expense) of
proxy statements and other reports or other materials provided to the
Portfolios' shareholders;
I. support outside auditors in preparing and filing all the Portfolios'
federal and state tax returns and required tax filings other than those required
to be made by the Portfolios' custodian and transfer agent;
J. prepare periodic reports to and filings with the Securities and
Exchange Commission (the "SEC") and state Blue Sky authorities with the advice
of the Portfolios' counsel;
K. maintain the Fund's existence, and during such times as the shares of
the Portfolios are publicly offered, maintain the registration and qualification
of the Portfolios' shares under federal and state law;
L. keep and maintain the financial accounts and records of the
Portfolios;
M. provide the Board on a regular basis with reports and analyses of the
Portfolios' operations and the operations of comparable investment companies;
and
N. take any other actions which appear to the Administrator and the
Board necessary to carry into effect the purposes of this Agreement.
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 Portfolios in carrying
out its obligations hereunder.
B. REPRESENTATIONS AND WARRANTIES OF THE PORTFOLIOS AND
THE FUND
The Fund, on behalf of each of its Portfolios, hereby represents
and warrants to the Administrator 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
terms.
-3-
<PAGE>
2. Registration. The Fund is registered as an investment company
with the SEC under the 1940 Act and shares of the Portfolios
are registered or qualified for offer and sale to the public
under the Securities Act of 1933 (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. CONTROL BY THE BOARD OF DIRECTORS
Any activities undertaken by the Administrator pursuant to this
Agreement on behalf of the Portfolios shall at all times be subject to any
directives of the Board.
V. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Administrator
shall at all times conform to:
A. all applicable provisions of the 1940 Act;
B. the provisions of the registration statement of the Fund under the
1933 Act and the 1940 Act;
C. the provisions of the Fund's Articles of Incorporation, as amended;
D. the provisions of the By-Laws of the Fund, as amended; and
E. any other applicable provisions of state and federal law.
VI. 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 or
by any affiliates of the Administrator under the Administrator's supervision.
VII. COMPENSATION
For the services to be rendered, the facilities furnished and the
expenses assumed by the Administrator, the Fund, on behalf of each of its
Portfolios, shall pay to the Administrator an annual fee, payable monthly (in
arrears), based upon the following average daily net assets of each of its
Portfolios:
-4-
<PAGE>
Rate Net Assets
---- ----------
.075% on the 1st $5 billion
.05% over $5 billion
Except as hereinafter set forth, compensation under this Agreement shall be
calculated and accrued daily at the rate of 1/365 of the annual administration
fee applied to the daily net assets of the Portfolios. 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 as set forth above.
VIII. NON-EXCLUSIVITY
The services of the Administrator to the Portfolios 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 trust, including other
investment companies.
IX. TERM
This Agreement shall become effective on May 1, 1998, and shall continue
through December 31, 1998. Thereafter it shall continue for successive annual
periods, provided such continuance is specifically approved at least annually:
1. a. by the Board, or
b. by the vote of a majority of the Portfolios' 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.
X. 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
Portfolios' outstanding voting securities, as defined in Section 2(a)(42) of the
1940 Act, or by the Administrator, on sixty (60) days' written notice to the
other party.
-5-
<PAGE>
XI. LIABILITY OF ADMINISTRATOR AND INDEMNIFICATION
A. LIABILITY
The Administrator shall be liable to the Fund and shall indemnify the
Fund for any losses incurred by the Fund, whether in the purchase, holding or
sale of any security or otherwise, to the extent that such losses resulted from
an act or omission on the part of the Administrator or its officers, directors
or employees, that is found to involve willful misfeasance, bad faith or
negligence, or reckless disregard by the Administrator of its duties under this
Agreement, in connection with the services rendered by the Administrator
hereunder.
B. INDEMNIFICATION
In the absence of willful misfeasance, bad faith, negligence or reckless
disregard of obligations or duties hereunder on the part of the Administrator or
any officer, director or employee of the Administrator, to the extent permitted
by applicable law, the Fund hereby agrees to indemnify and hold the
Administrator harmless from and against all claims, actions, suits and
proceedings at law or in equity, whether brought or asserted by a private party
or a governmental agency, instrumentality or entity of any kind, relating to the
sale, purchase, pledge of, advertisement of, or solicitation of sales or
purchases of any security (whether of the Portfolios or otherwise) by the Fund,
its officers, directors, employees or agents in alleged violation of applicable
federal, state or foreign laws, rules or regulations.
XII. NOTICES
Any notices under this Agreement shall be in writing, addressed and
delivered or mailed postage paid to the other party at such address as such
other party may designate for the receipt of such notice. Until further notice
to the other party, it is agreed that the address of the Administrator for this
purpose shall be 242 Trumbull Street, Hartford, Connecticut 06103-1205, and the
address of the Fund for this purpose shall be 151 Farmington Avenue, Hartford,
Connecticut 06156.
XIII. QUESTIONS OF INTERPRETATIONS
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 or orders
of the SEC issued pursuant to the 1940 Act, or contained in no-action and
interpretive positions taken by the SEC staff. In addition, where the effect of
a requirement of the 1940 Act reflected in the provisions of this Agreement is
revised by rule or order of the SEC, such provisions shall be deemed to
incorporate the effect of such rule or order.
-6-
<PAGE>
XIV. SERVICE MARK
The service mark of the Fund and the Portfolios and the name "Aetna"
have been adopted by the Fund with the permission of Aetna Services, Inc.
(formerly known as Aetna Life and Casualty Company) and their continued use is
subject to the right of Aetna Services, Inc. to withdraw this permission in the
event the Administrator or another subsidiary or affiliated corporation of Aetna
Services, Inc. should not be the Administrator of the Portfolios.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers as of the 18th day of
February, 1998.
AETNA VARIABLE PORTFOLIOS, INC.
on behalf of each of its Portfolios,
Aetna Value Opportunity VP
Aetna Growth VP
Aetna Small Company VP
Aetna Index Plus Large Cap VP
Aetna High Yield VP
Aetna Real Estate Securities VP
Aetna Mid Cap VP
Aetna Index Plus Mid Cap VP
Aetna Index Plus Small Cap VP
Aetna Index Plus Bond VP
AELTUS INVESTMENT Aetna International VP
MANAGEMENT, INC.
By: /s/ John Y. Kim By: /s/ J. Scott Fox
- --------------------------------- ----------------------
Name: John Y. Kim Name: J. Scott Fox
- --------------------------------- ----------------------
Title: Chief Executive Officer Title: President
- --------------------------------- ----------------------
Attest: /s/ Arnold B. West Attest: /s/ DeAnn S. Anastasio
- ---------------------------- ---------------------------------
Name: Arnold B. West Name: DeAnn S. Anastasio
- ---------------------------- ---------------------------------
Title: Secretary Title: Assistant Secretary
- ---------------------------- ---------------------------------
-7-
[Aetna letterhead] Aetna Inc.
[Aetna logo 151 Farmington Avenue
Hartford, CT 06156-3124
February 26, 1998
Amy R. Doberman
Counsel
Law Division, RE4A
Investments & Financial Services
(860) 273-1409
Fax: (860) 273-0356
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. 3 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>
Page 2
February 26, 1998
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
