As filed with the Securities and Exchange File No. 333-05173
Commission on April 27, 1998 File No. 811-7651
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
- --------------------------------------------------------------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 4
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 5
AETNA VARIABLE PORTFOLIOS, INC.
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
(860) 273-1409
Amy R. Doberman, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective:
[X] on May 1, 1998 pursuant to paragraph (b) 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 Additional
Item No. Part B Information
- --------- ------ ----------------------------------
10 Cover Page............................... Cover Page
11 Table of Contents........................ Table of Contents
12 General Information and History.......... General Information and History
13 Investment Objectives and Policies....... Additional Investment
Restrictions and Policies of the
Variable Portfolios
Description of Various Securities
and Investment Techniques
14 Management of the Fund................... Directors and Officers
15 Control Persons and Principal Holders Control Persons and Principal
of Securities............................ Shareholders
16 Investment Advisory and Other Services... The Investment Advisory Agreement
The Administrative Services
Agreement
Custodian
Independent Auditors
17 Brokerage Allocation and Other Practices. Brokerage Allocation and Trading
Polices
18 Capital Stock and Other Securities....... Description of Shares
Purchase and Redemption of Shares
Voting Rights
19 Purchase, Redemption and Pricing of
Securities Being Offered................. 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
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Highlights ........................... 3
The Fund ....................................... 8
Description of the Variable Portfolios ......... 8
Investment Techniques .......................... 12
Risk Factors and Other Considerations .......... 14
Concentration .................................. 16
Performance .................................... 17
Management of the Variable Portfolios .......... 19
Reimbursements/Fee Waiver Arrangements ......... 22
Purchase and Redemption of Shares .............. 22
Net Asset Value ................................ 22
General Information ............................ 22
Tax Matters .................................... 23
Year 2000 ...................................... 23
</TABLE>
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 audited by KPMG Peat Marwick LLP,
independent auditors. Additional information about the performance of each
Portfolio included in the tables is contained in the Fund's Annual Report dated
December 31, 1997.
(for one share outstanding throughout each period)
<TABLE>
<CAPTION>
HIGH YIELD
--------------------
Period From
Dec. 10, 1997
to
Dec. 31, 1997
--------------------
<S> <C>
Net asset value, beginning of period .................. $10.000
-------
Income From Investment Operations:
Net investment income ................................ 0.050
Net realized and change in unrealized gain on
investments ......................................... 0.098
-------
Total from investment operations .................... 0.148
-------
Less Distributions:
From net investment income ........................... (0.050)
From net realized gains on investments ............... --
-------
Total distributions ................................. (0.050)
-------
Net asset value, end of period ........................ $10.098
=======
Total Return* ......................................... 1.48%
Net assets, end of period (000's) ..................... $10,098
Ratio of total expenses to average net assets ......... 0.80%(1)
Ratio of net investment income to average net assets 7.81%(1)
Portfolio turnover rate ............................... 69.39%
Average commission rate paid per share of equity
securities traded .................................... $ --
<CAPTION>
VALUE OPPORTUNITY
REAL ESTATE (formerly Capital Appreciation)
-------------------- ------------------------------------
Period From Period From
Dec. 15, 1997 Dec. 13, 1996
to Year Ended to
Dec. 31, 1997 Dec. 31, 1997 Dec. 31, 1996
-------------------- --------------- --------------------
<S> <C> <C> <C>
Net asset value, beginning of period .................. $10.000 $ 10.199 $10.000
------- --------- ------
Income From Investment Operations:
Net investment income ................................ 0.050 0.107 0.015
Net realized and change in unrealized gain on
investments ......................................... 0.309 3.899 0.200
------- --------- ------
Total from investment operations .................... 0.359 4.006 0.215
------- --------- ------
Less Distributions:
From net investment income ........................... (0.053) (0.104) (0.016)
From net realized gains on investments ............... -- (2.185) --
-------- --------- -------
Total distributions ................................. (0.053) (2.289) (0.016)
-------- --------- -------
Net asset value, end of period ........................ $10.306 $ 11.916 $10.199
======== ========= =======
Total Return* ......................................... 3.59% 39.36% 2.15%
Net assets, end of period (000's) ..................... $ 5,153 $ 9,147 $ 5,202
Ratio of total expenses to average net assets ......... 0.95%(1) 0.75% 0.67%(1)
Ratio of net investment income to average net assets 9.99%(1) 1.06% 2.73%(1)
Portfolio turnover rate ............................... -- 187.84% --
Average commission rate paid per share of equity
securities traded .................................... $0.0448 $ 0.0599 $0.0300
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
3
<PAGE>
(for one share outstanding throughout each period)
<TABLE>
<CAPTION>
GROWTH MID CAP
------------------------------------- -------------------
Period From Period From
Dec. 13, 1996 Dec. 17, 1997
Year Ended to to
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1997
--------------- ------------------- -------------------
<S> <C> <C> <C>
Net asset value, 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 on
investments ......................................... 3.271 0.147 0.171
-------- ------ -------
Total from investment operations .................... 3.310 0.158 0.180
-------- ------ -------
Less Distributions:
From net investment income ........................... (0.034) (0.012) (0.013)
From net realized gains on investments ............... (3.576) -- --
-------- ------- --------
Total distributions ................................. (3.610) (0.012) (0.013)
-------- ------- --------
Net asset value, 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 of equity
securities traded .................................... $0.0589 $0.0364 $0.0286
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
4
<PAGE>
(for one share outstanding throughout each period)
<TABLE>
<CAPTION>
SMALL COMPANY INTERNATIONAL
------------------------------------- -------------------
Period From Period From
Dec. 27, 1996 Dec. 22, 1997
Year Ended to to
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1997
--------------- ------------------- -------------------
<S> <C> <C> <C>
Net asset value, 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 on
investments ......................................... 3.439 0.115 0.276
-------- ------ --------
Total from investment operations .................... 3.481 0.123 0.274
-------- ------ --------
Less Distributions:
From net investment income ........................... (0.030) (0.010) --
From net realized gains on investments ............... (0.794) -- --
-------- ------ --------
Total distributions ................................. (0.824) (0.010) --
-------- ------ --------
Net asset value, 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 of equity
securities traded .................................... $0.0519 $ -- $0.0440
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
5
<PAGE>
(for one share outstanding throughout each period)
<TABLE>
<CAPTION>
INDEX PLUS LARGE CAP INDEX PLUS
(formerly Index Plus) MID CAP
------------------------------------- -------------------
Period From Period From
Sept. 16, 1996 Dec. 15, 1997
Year Ended to to
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1997
--------------- ------------------- -------------------
<S> <C> <C> <C>
Net asset value, 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 on
investments ......................................... 3.594 0.919 0.344
-------- ------ ------
Total from investment operations .................... 3.696 0.966 0.350
-------- ------ ------
Less Distributions:
From net investment income ........................... (0.096) (0.047) (0.008)
From net realized gains on investments ............... (0.489) (0.013) --
-------- -------
Total distributions ................................. (0.585) (0.060) (0.008)
-------- ------- -------
Net asset value, 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 of equity
securities traded .................................... $ 0.0372 $0.0358 $0.0481
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
6
<PAGE>
(for one share outstanding throughout each period)
<TABLE>
<CAPTION>
INDEX PLUS INDEX PLUS
SMALL CAP BOND
------------------- -------------------
Period From Period From
Dec. 19, 1997 Dec. 18, 1997
to to
Dec. 31, 1997 Dec. 31, 1997
------------------- -------------------
<S> <C> <C>
Net asset value, 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 on investments .............. 0.426 0.005
------- ----------
Total from investment operations ...................................... 0.433 0.027
------- ----------
Less Distributions:
From net investment income ............................................. (0.010) (0.021)
From net realized gains on investments ................................. -- --
-------- ----------
Total distributions ................................................... (0.010) (0.021)
-------- ----------
Net asset value, 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 assets ........................... 0.60%(1) 0.45%(1)
Ratio of net investment income to average net assets .................... 1.90%(1) 5.23%(1)
Portfolio turnover rate ................................................. -- --
Average commission rate paid per share of equity securities traded ...... $0.0797 $ --
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
7
<PAGE>
THE FUND
The Fund is an open-end, management investment company, consisting of multiple
Portfolios. It currently has authorized eleven Portfolios:
<TABLE>
<S> <C>
[bullet] Aetna High Yield VP (High Yield) [bullet] Aetna International VP (International, formerly Aetna
[bullet] Aetna Real Estate Securities VP (Real Estate) Variable International Growth Portfolio)
[bullet] Aetna Value Opportunity VP (Value Opportunity, [bullet] Aetna Index Plus Large Cap VP (Index Plus Large Cap,
formerly Aetna Variable Capital Appreciation Portfolio) formerly Aetna Variable Index Plus Portfolio)
[bullet] Aetna Growth VP (Growth, formerly Aetna Variable [bullet] Aetna Index Plus Mid Cap VP (Index Plus Mid Cap)
Growth Portfolio) [bullet] Aetna Index Plus Small Cap VP (Index Plus Small Cap)
[bullet] Aetna Mid Cap VP (Mid Cap) [bullet] Aetna Index Plus Bond VP (Index Plus Bond)
[bullet] Aetna Small Company VP (Small Company, formerly
Aetna Variable Small Company Portfolio)
</TABLE>
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."
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
8
<PAGE>
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.
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 Mid Cap 400 Index (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.
9
<PAGE>
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.
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
10
<PAGE>
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 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
11
<PAGE>
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 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 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 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 investment techniques:
Borrowing
Each Portfolio may borrow money from banks for temporary or emergency purposes
in an amount up to 5% of the value of the Portfolio's total assets (including
the amount borrowed), valued at the lesser of cost or market, less liabilities
(not including the amount borrowed), at the time the borrowing is made.
12
<PAGE>
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.
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. Call 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.
13
<PAGE>
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 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.
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 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--
14
<PAGE>
yield bonds. High-yield bonds may provide a higher return but with added risk.
In addition, foreign securities have currency risk. Some of the risks involved
in the securities acquired by the Variable Portfolios are discussed in this
section. Additional discussion is contained above under "Investment Techniques"
and in the Statement.
Portfolio Turnover
Portfolio turnover refers to the frequency of portfolio transactions and the
percentage of portfolio assets being bought and sold in the aggregate during
the year. Although 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). 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 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 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.
15
<PAGE>
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.
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.
16
<PAGE>
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, International, Index Plus Large Cap and Growth are recently
organized and do not yet have long-term performance records. However, these
Portfolios have the same investment objective and follow substantially the same
investment strategies as certain 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 annual total returns for the period ended
March 31, 1998 for the Portfolios, the comparable series and their respective
benchmark indices.
<TABLE>
<CAPTION>
1/31/94
1 YEAR THROUGH 3/31/98
SMALL COMPANY ------- ---------------
<S> <C> <C> <C> <C>
Aetna Variable Portfolios, Inc., Small Company(1) 55.55% N/A
Aetna Series Fund, Inc., Aetna Small Company
Fund (Class I)(1) 55.01% 24.41%
Russell 2000 Index 42.01% 16.93%
12/31/97 1/31/92
INTERNATIONAL THROUGH 3/31/98* 1 YEAR 5 YEARS THROUGH 3/31/98
--------------- ------- -------- ---------------
Aetna Variable Portfolios, Inc., International(2) 17.14% N/A N/A N/A
Aetna Series Fund, Inc., Aetna International
Fund (Class I)(2) 16.97% 29.18% 17.20% 12.43%
MSCI-EAFE Index 14.79% 18.93% 12.24% 9.98%
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
12/31/96
1 YEAR THROUGH 3/31/98
INDEX PLUS LARGE CAP ------- ---------------
<S> <C> <C>
Aetna Variable Portfolios, Inc., Index Plus
Large Cap(3) 49.02% 40.55%
Aetna Series Fund, Inc., Aetna Index Plus
Large Cap Fund (Class I)(3) 49.08% 40.66%
S&P 500 Stock Index 48.01% 39.90%
1/31/94
1 YEAR THROUGH 3/31/98
GROWTH ------- ---------------
Aetna Variable Portfolios, Inc., Growth(4) 59.46% N/A
Aetna Series Fund, Inc., Aetna Growth Fund
(Class I)(4) 46.53% 23.43%
S&P 500 Stock Index 48.01% 24.84%
</TABLE>
- ----------------
(1)Through March 31, 1998, the since inception average annual returns of Small
Company, a Portfolio of Aetna Variable Portfolios, Inc., and Aetna Small
Company Fund (Class I), a series of Aetna Series Fund, Inc., was 41.62%
(inception December 27, 1996) and 25.18% (inception December 23, 1993),
respectively.
(2)Through March 31, 1998, the since inception (not annualized) performance of
International, a Portfolio of Aetna Variable Portfolios, Inc., and the
average annual return of Aetna International Fund (Class I), a series of
Aetna Series Fund, Inc., was 20.30% (inception December 22, 1997) and 12.44%
(inception December 27, 1991), respectively.
(3)Through March 31, 1998, the since inception average annual returns of Index
Plus Large Cap, a Portfolio of Aetna Variable Portfolios, Inc., and Aetna
Index Plus Large Cap Fund (Class I), a series of Aetna Series Fund, Inc., was
39.87% (inception September 16, 1996) and 37.25% (inception December 10,
1996), respectively.
(4)Through March 31, 1998, the since inception average annual returns of Growth,
a Portfolio of Aetna Variable Portfolios, Inc., and Aetna Growth Fund
(Class I), a series of Aetna Series Fund, Inc., was 41.53% (inception
December 13, 1996) and 24.12% (inception December 23, 1993), respectively.
* Not annualized.
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 the Index Plus Large Cap, Value Opportunity, Growth, Index
Plus Bond and High Yield Private Account Performance Data. The Private Account
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 annual total returns for the period ended
March 31, 1998 for the Portfolios, the comparable private accounts and their
respective benchmark indices.
PRIVATE ACCOUNT PERFORMANCE
<TABLE>
<CAPTION>
5 YEARS
1 YEAR (OR SINCE INCEPTION)
INDEX PLUS LARGE CAP COMPOSITE --------- --------------------
<S> <C> <C>
Aetna Variable Portfolios, Inc., Index Plus
Large Cap 49.02% 39.87% (09/16/96)
Index Plus Large Cap Composite 50.40% 23.13%
S&P 500 Stock Index 48.01% 22.40%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
5 YEARS
1 YEAR (OR SINCE INCEPTION)
VALUE OPPORTUNITY COMPOSITE --------- --------------------
<S> <C> <C> <C> <C>
Aetna Variable Portfolios, Inc., Value
Opportunity 51.78% 43.32% (12/13/96)
Value Opportunity Composite 38.46% 22.00%
S&P 500 Stock Index 48.01% 22.40%
5 YEARS
GROWTH COMPOSITE 1 YEAR (OR SINCE INCEPTION) 10 YEARS
--------- -------------------- ----------
Aetna Variable Portfolios, Inc., Growth 59.46% 41.53% (12/13/96) N/A
Growth Composite 43.40% 21.68% 19.15%
S&P 500 Stock Index 48.01% 22.40% 18.94%
12/31/97
THROUGH 1 YEAR
HIGH YIELD PRIVATE ACCOUNT 03/31/98* (OR SINCE INCEPTION)
-------- --------------------
Aetna Variable Portfolios, Inc., High Yield 6.53% 8.13% (12/10/97)*
High Yield Account 5.84% 23.84%
Merrill Lynch High Yield Index 2.78% 14.77%
12/31/97
THROUGH 1 YEAR
INDEX PLUS BOND COMPOSITE 03/31/98* (OR SINCE INCEPTION) 5 YEARS 10 YEARS
-------- -------------------- --------- ----------
Aetna Variable Portfolios, Inc., Index Plus
Bond 1.50% 1.81% (12/18/97)* N/A N/A
Index Plus Bond Composite 1.64% 11.57% 6.93% 8.81%
LBAB Index 1.54% 11.97% 6.94% 8.94%
* NOT ANNUALIZED.
</TABLE>
MANAGEMENT OF THE VARIABLE PORTFOLIOS
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.
Portfolio Transactions and Commissions
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 may also consider the sale
of shares of registered investment companies advised by Aeltus as a factor in
the selection of brokerage firms to execute the Fund's portfolio transactions,
subject to its duty to obtain best execution. See the Statement for more
information.
19
<PAGE>
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:
<TABLE>
<CAPTION>
Portfolio Advisory Fee
- ------------------------ -------------
<S> <C>
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%
</TABLE>
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
Kenneth H. Bragdon, Vice President, Aeltus, is the manager for Growth. 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.
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.
20
<PAGE>
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:
<TABLE>
<CAPTION>
Administrative Fee Fund Assets
- -------------------- ------------------------------
<S> <C>
0.075% On the first $5 billion
0.050% On all assets over $5 billion
</TABLE>
As administrator, Aeltus may contract with other entities to perform certain
Administrative Services.
21
<PAGE>
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:
<TABLE>
<CAPTION>
Total Expenses After
Fund Reimbursement
- ------------------------ ---------------------
<S> <C>
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%
</TABLE>
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.
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
(NYSE) (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 NYSE 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 NYSE 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 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.
22
<PAGE>
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. 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 (Aetna) is the principal underwriter
for the Fund. Aetna is a Connecticut corporation, and is a wholly-owned
subsidiary of Aetna Retirement Holdings, Inc. and an indirect wholly-owned
subsidiary of Aetna Inc.
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 Inc.") 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
Inc. 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 Inc. Aetna Inc. 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
Aetna Inc.'s, 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.
23
<PAGE>
[boxed text]
INVESTMENT ADVISER
Aeltus Investment Management, Inc.
242 Trumbull Street
Hartford, Connecticut 06103-1205
CUSTODIAN
Mellon Bank N.A.
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
TRANSFER, DIVIDEND DISBURSING
AND REDEMPTION AGENT
Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
CityPlace II
Hartford, Connecticut 06103-4103
[end boxed text]
Aetna Life Insurance and Annuity Company
<PAGE>
[Aetna logo]
<PAGE>
Statement of Additional Information Dated: May 1, 1998
AETNA VARIABLE
PORTFOLIOS, INC.
151 Farmington Avenue
Hartford, Connecticut 06156-8962
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
<TABLE>
<S> <C>
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 .................................................... 18
Control Persons and Principal Shareholders ................................ 22
The Investment Advisory Agreements ........................................ 22
The Administrative Services Agreement ..................................... 23
Custodian ................................................................. 23
Independent Auditors ...................................................... 24
Principal Underwriter ..................................................... 24
Brokerage Allocation and Trading Policies ................................. 24
Description of Shares ..................................................... 26
Purchase and Redemption of Shares ......................................... 26
Net Asset Value ........................................................... 26
Per formance Information .................................................. 26
Tax Matters ............................................................... 28
Voting Rights ............................................................. 33
Financial Statements ...................................................... 34
</TABLE>
<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, formerly
[bullet] Aetna Real Estate Securities VP (Real Estate) Aetna Variable International Growth Portfolio)
[bullet] Aetna Value Opportunity VP (Value [bullet] Aetna Index Plus Large Cap VP (Index Plus
Opportunity, formerly Aetna Variable Capital Large Cap, formerly Aetna Variable Index Plus
Appreciation Portfolio) Portfolio)
[bullet] Aetna Growth VP (Growth, formerly Aetna [bullet] Aetna Index Plus Mid Cap VP (Index Plus Mid
Variable Growth Portfolio) Cap)
[bullet] Aetna Mid Cap VP (Mid Cap) [bullet] Aetna Index Plus Small Cap VP (Index Plus
[bullet] Aetna Small Company VP (Small Company, Small Cap)
formerly Aetna Variable Small Company [bullet] Aetna Index Plus Bond VP (Index Plus Bond)
Portfolio)
</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, includ-
2 Aetna Variable Portfolios, Inc.
<PAGE>
ing 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 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;
Aetna Variable Portfolios, Inc. 3
<PAGE>
(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.
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 assur-
4 Aetna Variable Portfolios, Inc.
<PAGE>
ance, 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 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
Aetna Variable Portfolios, Inc. 5
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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
6 Aetna Variable Portfolios, Inc.
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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.
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 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, 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.
Aetna Variable Portfolios, Inc. 7
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The premium received from writing a call or put option, or paid for purchasing
a call or put option will reflect, among other things, the current market price
of the underlying security, the relationship of the exercise price to such
market price, the historical price volatility of the underlying security, the
length of the option period, and the general interest rate environment. The
premium received by a Portfolio for writing call options will be recorded as a
liability in the statement of assets and liabilities of that Portfolio. This
liability will be adjusted daily to the option's current market value. The
liability will be extinguished upon expiration of the option, by the exercise
of the option, or by entering into an offsetting transaction. Similarly, the
premium paid by a Portfolio when purchasing a put option will be recorded as an
asset in the statement of assets and liabilities of that Portfolio. This asset
will be adjusted daily to the option's current market value. The asset will be
extinguished upon expiration of the option, by selling an identical option in a
closing transaction, or by exercising the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call or put option, to prevent an underlying security from being
called or put, or to permit the exchange or tender of the underlying security.
Furthermore, effecting a closing transaction will permit a Portfolio to write
another call option, or purchase another put option, on the underlying security
with either a different exercise price or expiration date or both. If a
Portfolio desires to sell a particular security from its portfolio on which it
has written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security.
There is, of course, no assurance that a Portfolio will be able to effect a
closing transaction at a favorable price. If a Portfolio cannot enter into such
a transaction, it may be required to hold a security that it might otherwise
have sold, in which case it would continue to be at market risk on the
security. A Portfolio will pay brokerage commissions in connection with the
sale or purchase of options to close out previously established option
positions. Such brokerage commissions are normally higher as a percentage of
underlying asset values than those applicable to purchases and sales of
portfolio securities.
The exercise price of an option may be below, equal to, or above the current
market value of the underlying security at the time the option is written. From
time to time, a Portfolio may purchase an underlying security for delivery in
accordance with an exercise notice of a call option assignment, rather than
delivering such security. 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 pro-
8 Aetna Variable Portfolios, Inc.
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tections 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, cash and/or liquid 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 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.
Aetna Variable Portfolios, Inc. 9
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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.
10 Aetna Variable Portfolios, Inc.
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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
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. 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).
Aetna Variable Portfolios, Inc. 11
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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. 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
12 Aetna Variable Portfolios, Inc.
<PAGE>
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.
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 gov-
Aetna Variable Portfolios, Inc. 13
<PAGE>
ernmental 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.
14 Aetna Variable Portfolios, Inc.
<PAGE>
Pass-through, mortgage-related securities are characterized by monthly payments
to the holder, reflecting the monthly payments made by the borrowers who
received the underlying mortgage loans. The payments to the security holders,
like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, often twenty or thirty years, the borrowers can repay such loans sooner.
Thus, the security holders frequently receive repayments of principal, in
addition to the principal that is part of the regular monthly payment. A
borrower is more likely to repay a mortgage that bears a relatively high rate
of interest. This means that in times of declining interest rates, some higher
yielding securities held by a Portfolio might be converted to cash, and the
Portfolio could be expected to reinvest such cash at the then prevailing lower
rates. The increased likelihood of prepayment when interest rates decline also
limits market price appreciation of mortgage-related securities. If a Portfolio
buys mortgage-related securities at a premium, mortgage foreclosures or
mortgage prepayments may result in losses of up to the amount of the premium
paid since only timely payment of principal and interest is guaranteed.
As noted in the prospectus, the Variable Portfolios may also invest in
collateralized mortgage obligations (CMOs) 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.
Aetna Variable Portfolios, Inc. 15
<PAGE>
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:
(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.
16 Aetna Variable Portfolios, Inc.
<PAGE>
(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.
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 liquid securities. 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
Aetna Variable Portfolios, Inc. 17
<PAGE>
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>
<CAPTION>
1996 1997 Commencement Date
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield N/A 69.39% 12/10/97
Real Estate N/A 0.00% 12/15/97
Value Opportunity (Formerly Capital
Appreciation) 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 (Formerly Index Plus) 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.
18 Aetna Variable Portfolios, Inc.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Principal Occupation During Past Five
Years (and Positions held with
Position(s) Held Affiliated Persons or Principal
Name, Address and Age with Each Fund Underwriters of the Fund)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
J. Scott Fox* Director and Director, Managing Director, Chief Operating
242 Trumbull Street President Officer, Chief Financial Officer, Aeltus
Hartford, Connecticut Investment Management, Inc. (Aeltus),
Age 42 October 1997 to present; Vice President,
Aetna Retirement Services, Inc., April 1997 to
present; Director and Senior Vice President,
Aetna Retirement Holdings, Inc., April 1997 to
February 1998; 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 February 1998;
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
242 Trumbull Street Insurance and Annuity Company, May 1991
Hartford, Connecticut to present; Vice President, Aetna Investment
Age 54 Services, Inc., July 1993 to present.
- ------------------------------------------------------------------------------------------------------------
Amy R. Doberman Secretary Counsel, Aetna Life Insurance and Annuity
151 Farmington Avenue Company, December 1996 to present;
Hartford, Connecticut Attorney, Securities and Exchange
Age 36 Commission, March 1990 to November 1996.
- ------------------------------------------------------------------------------------------------------------
Maria T. Fighetti Director Manager/Attorney, Health Services, New
325 Piermont Road York City Department of Mental Health,
Closter, New Jersey Mental Retardation and Alcohol Services,
Age 54 1973 to present.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Aetna Variable Portfolios, Inc. 19
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Principal Occupation During Past Five
Years (and Positions held with
Position(s) Held Affiliated Persons or Principal
Name, Address and Age with Each Fund Underwriters of the Fund)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
David L. Grove Director, Private Investor; Economic/Financial
5 The Knoll Chairperson Consultant, December 1985 to present.
Armonk, New York Contract
Age 79 Committee
Director
- ------------------------------------------------------------------------------------------------------------
John Y. Kim* Director, President, Chief Executive Officer,
242 Trumbull Street Chief Investment Officer, Aeltus Investment
Hartford, Connecticut Management, Inc., December 1995 to
Age 37 present; Director, Aetna Life 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
455 East 86th Street 1993 to present.
New York, New York
Age 62
- ------------------------------------------------------------------------------------------------------------
Frank Litwin Vice President Managing Director, Aeltus Investment
242 Trumbull Street Management, Inc., August 1997 to present;
Hartford, Connecticut Vice President, Fidelity Investments
Age 48 Institutional Services Company, April 1992 to
August 1997.
- ------------------------------------------------------------------------------------------------------------
Shaun P. Mathews* Director Vice President/Senior Vice President, Aetna
151 Farmington Avenue Life Insurance and Annuity Company, March
Hartford, Connecticut 1991 to present; Vice President, Aetna Life
Age 42 Insurance Company, 1991 to 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,
556 Wormwood Hill University of Hartford (West Hartford, CT),
Mansfield Center, August 1996 to present; Professor,
Connecticut Accounting and Dean of the School of
Age 60 Management, Binghamton University
(Binghamton, NY), 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.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
20 Aetna Variable Portfolios, Inc.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Principal Occupation During Past Five
Years (and Positions held with
Position(s) Held Affiliated Persons or Principal
Name, Address and Age with Each Fund Underwriters of the Fund)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard G. Scheide Director, Trust and Private Banking Consultant, David
11 Lily Street Chairperson Ross Palmer Consultants, July 1991 to
Nantucket, Audit Committee present.
Massachusetts
Age 68
- ------------------------------------------------------------------------------------------------------------
Stephanie A. Taylor Vice President, Vice President Mutual Fund Accounting,
242 Trumbull Street Treasurer Aeltus Investment Management, Inc.,
Hartford, Connecticut and Chief November 1995 to present; Director Mutual
Age 44 Financial Fund Accounting, Aetna Life Insurance and
Officer 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. 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>
- ----------------------------------------------------------------------------
Total Compensation from the
Name of Person, Aggregate Compensa- Fund and Fund Complex
Position tion from the Fund 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
- ----------------------------------------------------------------------------
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.
Aetna Variable Portfolios, Inc. 21
<PAGE>
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:
22 Aetna Variable Portfolios, Inc.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1996 1997 Commencement Date
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield N/A 4,133 12/10/97
Real Estate N/A 1,869 12/15/97
Value Opportunity 1,455 38,520 12/13/96
Growth 1,449 36,432 12/13/96
Mid Cap N/A 1,627 12/17/97
Small Company 322 52,841 12/27/96
International N/A 3,178 12/22/97
Index Plus Large Cap 15,479 235,280 09/16/96
Index Plus Mid Cap N/A 1,396 12/16/97
Index Plus Small Cap N/A 1,159 12/19/97
Index Plus Bond N/A 1,854 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, ALIAC acted as Administrator. For the
years ended December 31, 1996, and December 31, 1997, ALIAC received the
following administrative fees from the Fund:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1996 1997 Commencement Date
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield N/A 954 12/10/97
Real Estate N/A 498 12/15/97
Value Opportunity 364 9,630 12/13/96
Growth 362 9,108 12/13/96
Mid Cap N/A 434 12/17/97
Small Company 64 10,568 12/27/96
International N/A 1,122 12/22/97
Index Plus Large Cap 6,634 100,834 09/16/96
Index Plus Mid Cap N/A 698 12/16/97
Index Plus Small Cap N/A 579 12/19/97
Index Plus Bond N/A 927 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
Aetna Variable Portfolios, Inc. 23
<PAGE>
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.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Hartford, Connecticut 06103-4103 serves as independent
auditors to the Variable Portfolios. KPMG Peat Marwick LLP provides audit
services, assistance and consultation in connection with Commission filings.
PRINCIPAL UNDERWRITER
Shares of the Variable Portfolios are offered on a continuous basis. Aetna has
agreed to use its best efforts to distribute the shares as the principal
underwriter of the Portfolios pursuant to an Underwriting Agreement between it
and the Fund. The Agreement was 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
24 Aetna Variable Portfolios, Inc.
<PAGE>
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 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, 1996 and 1997, the Fund paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
Total Commissions Paid:
- ------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Real Estate $ 7,806 N/A
Value Opportunity 21,014 $ 2,562
Growth 18,822 3,292
Mid Cap 3,390 N/A
Small Company 49,510 0
Index Plus Large Cap 107,388 11,234
Index Plus Mid Cap 9,197 N/A
Index Plus Small Cap 20,614 N/A
</TABLE>
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:
<TABLE>
<S> <C>
--------------------------------
Real Estate $ 426
Value Opportunity 2,790
Growth 4,378
Small Company 696
Index Plus Large Cap 43,464
--------------------------------
</TABLE>
Aetna Variable Portfolios, Inc. 25
<PAGE>
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-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.
26 Aetna Variable Portfolios, Inc.
<PAGE>
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:
P(1 + T)n = ERV
Total Return Quotations as of March 31, 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1 Year Since Inception Inception Date
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield N/A 8.13% 12/10/97
Real Estate N/A 3.42% 12/15/97
Value Opportunity 51.78% 43.32% 12/13/96
Growth 59.46% 41.53% 12/13/96
Mid Cap N/A 13.24% 12/17/97
Small Company 55.55% 41.62% 12/27/96
International N/A 20.30% 12/22/97
Index Plus Large Cap 49.02% 39.87% 09/16/96
Index Plus Mid Cap N/A 14.58% 12/16/97
Index Plus Small Cap N/A 14.41% 12/19/97
Index Plus Bond N/A 1.81% 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.
Aetna Variable Portfolios, Inc. 27
<PAGE>
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:
YIELD = 2[(a-b + 1)(6)-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 MATTERS
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). For purposes of the calculations, gross income
includes tax-exempt income.
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
28 Aetna Variable Portfolios, Inc.
<PAGE>
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.
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 business 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
Aetna Variable Portfolios, Inc. 29
<PAGE>
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 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.
Spe-
30 Aetna Variable Portfolios, Inc.
<PAGE>
cifically, 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.
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
Aetna Variable Portfolios, Inc. 31
<PAGE>
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.
32 Aetna Variable Portfolios, Inc.
<PAGE>
Distributions paid to shareholders are generally reinvested in additional
shares. Shareholders receiving a distribution in the form of additional shares
will be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment date. In
addition, if the net asset value at the time a shareholder purchases shares of
a Portfolio reflects undistributed net investment income or recognized capital
gain net income, or unrealized appreciation in the value of the assets of the
Portfolio, distributions of such amounts will be taxable to the shareholder in
the manner described above, although such distributions economically constitute
a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Portfolio into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Portfolio) on December
31 of such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
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
Aetna Variable Portfolios, Inc. 33
<PAGE>
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 Report thereon, are
incorporated herein by reference to the Annual Report dated December 31,
1997. 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.
34 Aetna Variable Portfolios, Inc.
<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 March 5,
1998 (Accession No. 0000950146-98-000359):
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), which include the following:
Portfolios of Investments as of December 31, 1997
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 period ended December 31, 1996
Notes to Financial Statements
Financial Highlights for the year ended December 31, 1997 and
the period ended December 31, 1996
Independent Auditors Report
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 for the following:
Aetna High Yield Portfolio(1)
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the period from December 10, 1997
to December 31, 1997
Statement of Changes in Net Assets for the period from December
10, 1997 to December 31, 1997
Notes to Financial Statements
Financial Highlights for the period ended December 31, 1997
Independent Auditors' Report
<PAGE>
Aetna Index Plus Bond Portfolio(2)
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the period from December 18, 1997
to December 31, 1997
Statement of Changes in Net Assets for the period from December
18, 1997 to December 31, 1997
Notes to Financial Statements
Financial Highlights for the period ended December 31, 1997
Independent Auditors' Report
Aetna Index Plus Mid Cap Portfolio(3)
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the period from December 16, 1997
to December 31, 1997
Statement of Changes in Net Assets for the period from December
16, 1997 to December 31, 1997
Notes to Financial Statements
Financial Highlights for the period ended December 31, 1997
Independent Auditors' Report
Aetna Index Plus Small Cap Portfolio(4)
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the period from December 19, 1997
to December 31, 1997
Statement of Changes in Net Assets for the period from December
19, 1997 to December 31, 1997
Notes to Financial Statements
Financial Highlights for the period ended December 31, 1997
Independent Auditors' Report
Aetna International Portfolio(5)
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the period from December 22, 1997
to December 31, 1997
Statement of Changes in Net Assets for the period from December
22, 1997 to December 31, 1997
Notes to Financial Statements
Financial Highlights for the period ended December 31, 1997
Independent Auditors' Report
Aetna Mid Cap Portfolio(6)
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the period from December 17, 1997
to December 31, 1997
Statement of Changes in Net Assets for the period from December
17, 1997 to December 31, 1997
Notes to Financial Statements
Financial Highlights for the period ended December 31, 1997
Independent Auditors' Report
<PAGE>
Aetna Real Estate Securities Portfolio(7)
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31, 1997
Statement of Operations for the period from December 15, 1997
to December 31, 1997
Statement of Changes in Net Assets for the period from December
15, 1997 to December 31, 1997
Notes to Financial Statements
Financial Highlights for the period ended December 31, 1997
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(3)
(1)(d) Articles of Amendment
(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,
Estate Aetna International VP, Aetna Mid Cap VP and Aetna
Real Securities VP(3)
(6) Underwriting Agreement between Aetna Variable Portfolios,
Inc. and Aetna Life Insurance and Annuity Company(2)
(7) Directors' Deferred Compensation Plan(3)
(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(3)
(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(3)
(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(4)
(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(5)
(19)(b) Authorization for Signatures(4)
(27) Financial Data Schedule
1. Incorporated by reference to the Registration Statement on Form N-1A
(File No. 333-05173), as filed electronically with the Securities and
Exchange Commission on June 4, 1996 (Accession No.
0000928389-96-000122).
2. Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A (File No. 333-05173), as filed
electronically on March 7, 1997 (Accession No. 0000950146-97-000336).
3. Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-1A (File No. 333-05173), as filed
electronically on February 26, 1998 (Accession No.
0000950146-98-000289).
4. 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).
5. 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 March 31, 1998 Aetna Life Insurance
and Annuity Company ("Aetna") owned 100% 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. 9 to the Registration Statement on Form N-4 (File
No. 333-01107), as filed electronically with the Securities and
Exchange Commission on April 7, 1998 (Accession No.
0000950146-98-000564).
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders
as of March 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 VP (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) 3
<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 the Registrant, Aeltus acts as investment adviser and
administrator for Aetna Variable Fund, Aetna Income Shares, Aetna
Variable Encore Fund, Aetna Balanced VP, Inc. (formerly Aetna
Investment Adviser 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)
Officer, Chief Financial -- Aetna Life Assignment Company;
Officer Vice President (since April 1997) --
Aetna Retirement Services, Inc.;
Director and Senior Vice President
(April 1997 - February 1998) -- Aetna
Retirement Holdings, Inc.; Director
and Senior Vice President (March 1997
- February 1998) -- 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.
<PAGE>
- --------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1995/Addresses*/**
----------------------- ---------------------------------
-------------------------------------------------------------------------------
Timothy A. Holt Director Senior Vice President (September 1997
- February 1998) -- Aetna Retirement
Holdings, Inc.; Director (since
September 1997) -- Aetna Investment
Services, Inc.; Senior Vice President
and Chief Financial Officer (February
1996 - February 1998) -- Aetna Life
Insurance and Annuity Company;
Director (March 1996 - February 1998)
-- 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
Chief Executive Officer, May 1994) Chief Investment Officer --
Aetna Chief Life Insurance and
Annuity Company; Director (since
February 1995) -- Aetna Life
Insurance and Annuity Company; Senior
Vice President (since September 1994)
-- Aetna Life Insurance and Annuity
Company.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
---- with Investment Adviser Since Oct. 31, 1995/Addresses*/**
----------------------- ---------------------------------
-------------------------------------------------------------------------------
<S> <C> <C>
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. Canon 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,
Fixed Income Managing Director (since January
Investments 1996) -- Aeltus Trust Company;
Registered Representative (since
February 1993) -- Aeltus Capital,
Inc.
Steven C.Huber Managing Director, Portfolio Manager (August 1991 -
Fixed Income August 1996) -- Investments Aetna
Life Insurance 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.
<PAGE>
- --------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
---- with Investment Adviser Since Oct. 31, 1995/Addresses*/**
----------------------- ---------------------------------
-------------------------------------------------------------------------------
Neil Kochen Managing Director, Managing Director (since April 1996)
Product Development -- Aeltus Investment Management,
Inc.; Managing Director (since April
1996) -- Aeltus Trust Company;
Managing Director (since August 1996)
-- Aeltus Capital, Inc.; Managing
Director (July 1994 - August 1996) --
Aetna Life Insurance and Annuity
Company.
Frank Litwin Managing Director, Vice President, Strategic Marketing
and Sales (April, 1992 - August, 1997) --
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.
L. Charles Meythaler Managing Director, Managing Director (since April 1997)
Institutional -- Aeltus Investment Management,
Marketing and Sales Inc.; Director (since July 1997) --
Aeltus Trust Company; Managing
Director (since June 1997) -- Aeltus
Trust Company; President (June 1993 -
April 1997) -- New England Investment
Association.
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.
</TABLE>
* 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.
<PAGE>
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 Balanced VP, Inc.
(formerly Aetna Investment Adviser Fund, Inc.), Aetna GET Fund and Aetna
Generation Portfolios, Inc. and as investment adviser, principal
underwriter and administrator for 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).
(b) The following are the directors and principal officers of the Underwriter:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Principal Positions and Offices
Business Address* Underwriter with Registrant
- ------------------ ------------------------------------------ ---------------------
<S> <C> <C>
Thomas J. McInerney Director and President None
Robert D. Friedhoff Senior Vice President None
John Y. Kim Senior Vice President Director
Shaun P. Mathews Director and Senior Vice President Director
Catherine H. Smith Director, Senior Vice President and Chief None
Financial Officer
Kirk P. Wickman Vice President, General Counsel and Corporate None
Secretary
Deborah Koltenuk Vice President and Treasurer, Corporate None
Controller
Frederick D. Kelsven Vice President and Chief Compliance Officer None
</TABLE>
* Except with respect to Mr. Kim, the principal business address of all
directors and officers listed is 151 Farmington Avenue, Hartford,
Connecticut 06156. Mr. Kim's address is 242 Trumbull Street, Hartford,
Connecticut 06103-1205.
(c) Not applicable
<PAGE>
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.
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 (the "1933 Act") may be permitted to
directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
Aetna Variable Portfolios, Inc. certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Post-Effective Amendment to
the Registration Statement on Form N-1A (File No. 333-05173) and has duly caused
this Post-Effective Amendment to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of Hartford, State of Connecticut, on the
27th day of April, 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 April 27, 1998 in the capacities indicated.
Signature Title Date
- --------- ----- ----
J. Scott Fox* President and Director
- ---------------------------- (Principal Executive Officer) )
J. Scott Fox )
)
Maria T. Fighetti* Director ) April
- ---------------------------- )
Maria T. Fighetti ) 27, 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 )
Stephanie A. Taylor (Principal Financial )
and 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
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ----- ----
<S> <C> <C>
99-B.1(a) Articles of Incorporation *
99-B.1(b) Articles of Amendment *
99-B.1(c) Articles Supplementary *
99-B.1(d) Articles of Amendment --------------
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
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 Mi
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
-------------
</TABLE>
*Incorporated by reference
AETNA VARIABLE PORTFOLIOS, INC.
ARTICLES OF AMENDMENT
AETNA VARIABLE PORTFOLIOS, INC., a Maryland corporation registered as
an open-end investment company under the Investment Company Act of 1940 and
having its principal office in the State of Maryland in Baltimore City, Maryland
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland (the "Department") that:
The Board of Directors of the Corporation, by action taken on December
10, 1997, and pursuant to Section 2-602 of the Maryland General Corporation Law
("MGCL"), redesignated eleven portfolios of stock of the Corporation as follows:
1. Aetna Variable Capital Appreciation Portfolio is redesignated
Aetna Value Opportunity VP; and
2. Aetna Variable Growth Portfolio is redesignated
Aetna Growth VP; and
3. Aetna Variable Small Company Portfolio is redesignated
Aetna Small Company VP; and
4. Aetna Variable Index Plus Portfolio is redesignated
Aetna Index Plus Large Cap VP; and
5. Aetna Index Plus Bond Portfolio is redesignated
Aetna Index Plus Bond VP; and
6. Aetna Index Plus Mid Cap Portfolio is redesignated
Aetna Index Plus Mid Cap VP; and
7. Aetna Mid Cap Portfolio is redesignated
Aetna Mid Cap VP; and
8. Aetna Index Plus Small Cap Portfolio is redesignated
Aetna Index Plus Small Cap VP; and
9. Aetna High Yield Portfolio is redesignated
Aetna High Yield VP; and
10. Aetna Real Estate Securities Portfolio is redesignated
Aetna Real Estate Securities VP; and
11. Aetna International Portfolio is redesignated
Aetna International VP,
<PAGE>
such redesignations are to apply to all issued and outstanding and
authorized but unissued shares of the portfolios.
This amendment has been approved by a majority of the entire Board of
Directors of the Corporation and is limited to a change expressly permitted by
Section 2-605 of the MGCL to be made without action by the stockholders of the
Corporation.
Furthermore, this amendment shall become effective on Friday, May 1,
1998 at 7:59 a.m., which date does not exceed thirty (30) days after these
Articles of Amendment have been accepted for record by the Department, in
accordance with and pursuant to Section 2.610-1 of the MGCL.
IN WITNESS WHEREOF, Aetna Variable Portfolios, Inc. has caused these
Articles of Amendment to be signed in its name on its behalf by its authorized
officers who acknowledge that these Articles of Amendment are the act of the
Corporation, that to the best of their knowledge, information and belief, all
matters and facts set forth herein relating to the authorization and approval of
these Articles of Amendment are true in all material respects and that this
statement is made under the penalties of perjury.
Date: April 6, 1998
AETNA VARIABLE PORTFOLIOS, INC.
(CORPORATE SEAL)
By: /s/ J. Scott Fox
---------------------------
J. Scott Fox
President
Attest:
/s/ Amy R. Doberman
- --------------------------------------------
Amy R. Doberman
Secretary
2
AGREEMENT BETWEEN
BROWN BROTHERS HARRIMAN & CO.
AND
AETNA VARIABLE PORTFOLIOS, Inc. -
AETNA INTERNATIONAL PORTFOLIO
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made this 10th day of December, 1997, between AETNA VARIABLE
PORTFOLIOS, Inc. - AETNA INTERNATIONAL PORTFOLIO (the "Fund") and Brown Brothers
Harriman & Co. (the "Custodian");
WITNESSETH: That in consideration of the mutual covenants and
agreements herein contained, the parties hereto agree as follows:
1. Employment of Custodian: The Fund hereby employs and appoints the
Custodian as a custodian for the term and subject to the provisions of this
Agreement. The Custodian shall not be under any duty or obligation to require
the Fund to deliver to it any securities or funds owned by the Fund and shall
have no responsibility or liability for or on account of securities or funds not
so delivered. The Fund will deposit with the Custodian copies of the Declaration
of Trust or Certificate of Incorporation and By-Laws (or comparable documents)
of the Fund and all amendments thereto, and copies of such votes and other
proceedings of the Fund as may be necessary for or convenient to the Custodian
in the performance of its duties.
2. Powers and Duties of the Custodian with respect to Property of the
Fund held by the Custodian in the United States: Except for securities and funds
held by any Subcustodians appointed pursuant to the provisions of Section 3
hereof, the Custodian shall have and perform the following powers and duties:
A. Safekeeping - To keep safely the securities and other assets of
the Fund that have been delivered to the Custodian and, on behalf of the Fund,
from time to time to receive delivery of securities for safekeeping.
B. Manner of Holding Securities - To hold securities of the Fund
(1) by physical possession of the share certificates or other instruments
representing such securities in registered or bearer form, or (2) in book-entry
form by a Securities System (as said term is defined in Section 2U).
C. Registered Name; Nominee - To hold registered securities of the
Fund (1) in the name or any nominee name of the Custodian or the Fund, or in the
name or any nominee name of any Agent appointed pursuant to Section 6F, or (2)
in street certificate form, so-called, and in any case with or without any
indication of fiduciary capacity, provided that securities are held in an
account of the Custodian containing only assets of the Fund or only assets held
as fiduciary or custodian for customers.
<PAGE>
D. Purchases - Upon receipt of proper instructions, as defined in
Section 2X, insofar as funds are available for the purpose, to pay for and
receive securities purchased for the account of the Fund, payment being made
only upon receipt of the securities; provided, however, that the Custodian may
make payment, which may be prior to receipt of securities, and may accept
delivery of securities, including the form of securities received, in accordance
with governmental regulations, the rules of Securities Systems or other U.S.
securities depositories and clearing agencies, or generally accepted trade
practice in the applicable U.S. market. Receipt of securities on behalf of the
Fund shall be by the Custodian or a Subcustodian or by credit to an account
which one of them may have with a bank, Securities System, other U.S. securities
depositary or clearing agency, or other financial institution approved by the
Fund.
E. Exchanges - Upon receipt of proper instructions, to exchange
securities held by it for the account of the Fund for other securities in
connection with any reorganization, recapitalization, split-up of shares, change
of par value, conversion or other event, relating to the securities or the
issuer of such securities, and to deposit any such securities in accordance with
the terms of any reorganization or protective plan. Without proper instructions
the Custodian may surrender securities in temporary form for definitive
securities, may surrender securities for transfer into a name or nominee name as
permitted in Section 2C, and may surrender securities for a different number of
certificates or instruments representing the same number of shares or same
principal amount of indebtedness, provided the securities to be issued are to be
delivered to the Custodian.
F. Sales of Securities - Upon receipt of proper instructions, to
make delivery of securities which have been sold for the account of the Fund but
only against payment therefor; provided, however, that the Custodian may make
delivery, which may be prior to receipt of payment, and may accept payment,
including the form of payment received, in accordance with governmental
regulations, the rules of Securities Systems or other U.S. securities
depositories and clearing agencies, or generally accepted trade practice in the
applicable U.S. market. Receipt of payment on behalf of the Fund shall be by the
Custodian or a Subcustodian or by credit to an account which one of them may
have with a bank, Securities System, other U.S. securities depositary or
clearing agency, or other financial institution approved by the Fund.
G. Depositary Receipts - Upon receipt of proper instructions, to
instruct a Subcustodian or an Agent to surrender securities to the depositary
used by an issuer of American Depositary Receipts or
<PAGE>
International Depositary Receipts (hereinafter collectively referred to as
"ADRs") for such securities against a written receipt therefor adequately
describing such securities and written evidence satisfactory to the
Subcustodian or Agent that the depositary has acknowledged receipt of
instructions to issue with respect to such securities ADRs in the name of the
Custodian, or a nominee of the Custodian, for delivery to the Custodian in
Boston, Massachusetts, or at such other place as the Custodian may from time to
time designate.
Upon receipt of proper instructions, to surrender ADRs to the issuer
thereof against a written receipt therefor adequately describing the ADRs
surrendered and written evidence satisfactory to the Custodian that the issuer
of the ADRs has acknowledged receipt of instructions to cause its depositary to
deliver the securities underlying such ADRs to a Subcustodian or an Agent.
H. Exercise of Rights; Tender Offers - Upon timely receipt of
proper instructions, to deliver to the issuer or trustee thereof, or to the
agent of either, warrants, puts, calls, rights or similar securities for the
purpose of being exercised or sold, provided that the new securities and cash,
if any, acquired by such action are to be delivered to the Custodian, and, upon
receipt of proper instructions, to deposit securities upon invitations for
tenders of securities, provided that the consideration is to be paid or
delivered or the tendered securities are to be returned to the Custodian.
I. Stock Dividends, Rights, Etc. - To receive and collect all stock
dividends, rights and other items of like nature; and to deal with the same
pursuant to proper instructions relative thereto.
J. Options - Upon receipt of proper instructions, to receive and
retain confirmations or other documents evidencing the purchase of writing of an
option on a security or securities index by the Fund; to deposit and maintain in
a segregated account, either physically or by book-entry in a Securities System,
securities subject to a covered call option written by the Fund; and to release
and/or transfer such securities or other assets only in accordance with the
provisions of any agreement among the Fund, the Custodian and a broker-dealer
relating to such securities or other assets a notice or other communication
evidencing the expiration, termination or exercise of such covered option
furnished by The Options Clearing Corporation, the securities or options
exchange on which such covered option is traded or such other organization as
may be responsible for handling such options transactions.
<PAGE>
K. Borrowings - Upon receipt of proper instructions, to deliver
securities of the Fund to lenders or their agents as collateral for borrowings
effected by the Fund, provided that such borrowed money is payable to or upon
the Custodian's order as Custodian for the Fund.
L. Demand Deposit Bank Accounts - To open and operate an account or
accounts in the name of the Fund, subject only to draft or order by the
Custodian, and to hold in such account or accounts all deposits accepted on the
Custodian's books denominated in U.S. and foreign currency, received for the
account of the Fund, other than deposits with Banking Institutions held in
accordance with the last paragraph of this Section 2.L. The obligation of the
Custodian for deposits accepted on the Custodian's books and denominated in U.S.
currency shall be that of a U. S. bank for a similar deposit. The obligation of
the Custodian for deposits denominated in any foreign currency shall have the
benefit of and be subject to the provisions of the last paragraph of Section 6.C
of the Agreement, and accordingly in the event and to the extent the Custodian
shall be unable to make payment due to a Sovereign Risk or other factor
described in said paragraph, the Custodian's obligation to repay the Fund in
respect of such foreign currency obligation shall similarly be deferred or
relieved until and to the extent the Custodian is able to make payment in the
currency in which the deposit is denominated and shall not be payable on demand
in U.S. currency.
If and when authorized by Proper Instructions, the Custodian may open
and operate an additional account(s) with such other banks, trust companies or
similar institutions as may be designated by the Fund in such proper
instructions (any such bank, trust company or similar institution so designated
by the Fund being referred to hereafter as a "Banking Institution"), and may
hold in such account or accounts deposits of the Fund denominated in U.S. or
foreign currency, provided that such account(s) (hereinafter collectively
referred to as "demand deposit bank accounts") shall be in the name of the
Custodian or a nominee of the Custodian for the account of the Fund or for the
account of the Custodian's customers generally and shall be subject only to the
Custodian's draft or order; provided that such demand deposit bank account.
Shall contain only assets held by the Custodian as a fiduciary or custodian for
the Fund and/or other customers and that the records of the Custodian shall
indicate at all times the Fund and/or other customers for which such funds are
held in such account and the respective interests therein. Such demand deposit
accounts may be opened with Banking Institutions in the United States and in
other countries and may be denominated in either U. S. Dollars or other
currencies as the Fund may determine. The records for
<PAGE>
each such account will be maintained by the Custodian but the deposits in any
such account shall not constitute a deposit liability of the Custodian. All
such deposits, including with Subcustodians, shall be deemed to be portfolio
securities of the Fund and accordingly the responsibility of the Custodian
therefor shall be the same as and no greater than the Custodian's
responsibility in respect of other portfolio securities of the Fund. The
authorization by the Fund to appoint a Subcustodian as such shall also
constitute a proper instruction to open a demand deposit bank account subject
to the provisions of this paragraph with Subcustodian.
M. Interest Bearing Call or Time Deposits - To place interest
bearing fixed term and call deposits with such banks and in such amounts as the
Fund may authorize pursuant to Proper Instructions. Such deposits may be placed
with the Custodian or with Subcustodians or other Banking Institutions as the
Fund may determine, in the name of the Custodian or a nominee of the Custodian
for the account of the Fund or the account of the Custodian's customers
generally and subject only to the Custodian's draft or order; provided that any
such deposit shall be held in an account containing only assets held by the
Custodian as a fiduciary or custodian for the Fund and/or other customers and
that the records of the Custodian shall indicate at all times the Fund and/or
other customers for which such funds are held in such account and the respective
interests therein. Deposits may be denominated in U.S. Dollars or other
currencies and need not be evidenced by the issuance or delivery of a
certificate to the Custodian, provided that the Custodian shall include in its
records with respect to the assets of the Fund appropriate notation as to the
amount and currency of each such deposit, the accepting Banking Institution and
other appropriate details, and shall retain such forms of advice or receipt
evidencing the deposit, if any, as may be forwarded to the Custodian by the
Banking Institution. Funds, other than those accepted on the Custodian's books
as a deposit, but including those placed with Subcustodians, shall be deemed
portfolio securities of the Fund and the responsibilities of the Custodian
therefor shall be the same as those for demand deposit bank accounts placed with
other banks, as described in the section 2.L. of this Agreement. The
responsibility of the Custodian for such funds accepted on the Custodian's books
as a deposit shall be that of a U.S. bank for a similar deposit.
N. Foreign Exchange Transactions and Futures Contracts - Pursuant
to proper instructions, to enter into foreign exchange contracts or options to
purchase and sell foreign currencies for spot and future delivery on behalf and
for the account of the Fund. Such transactions may be undertaken by the
Custodian with such Banking Institutions, including the Custodian and
Subcustodian(s) as principals, as approved and authorized
<PAGE>
by the Fund. Foreign exchange contracts and options other than those executed
with the Custodian, shall be deemed to be portfolio securities of the Fund and
the responsibilities of the Custodian therefor shall be the same as those for
demand deposit bank accounts placed with other banks as described in Section
2-L of this agreement. Upon receipt of proper instructions, to receive and
retain confirmations evidencing the purchase or sale of a futures contract or
an option on a futures contract by the Fund; to deposit and maintain in a
segregated account, for the benefit of any futures commission merchant or to
pay to such futures commission merchant, assets designated by the fund as
initial, maintenance or variation "margin" deposits intended to secure the
Fund's performance of its obligations under any futures contracts purchased or
sold or any options on futures contracts written by the Fund, in accordance
with the provisions of any agreement or agreements among any of the Fund, the
Custodian and such futures commission merchant, designated to comply with the
rules of the Commodity Futures Trading Commission and/or any contract market,
or any similar organization or organizations, regarding such margin deposits;
and to release and/or transfer assets in such margin accounts only in
accordance with any such agreements or rules.
O. Stock Loans - Upon receipt of proper instructions, to deliver
securities of the Fund, in connection with loans of securities by the Fund, to
the borrower thereof prior to receipt of the collateral, if any, for such
borrowing, provided that for stock loans secured by cash collateral the
Custodian's instructions to the Securities System require that the Securities
System may deliver the securities to the borrower thereof only upon receipt of
the collateral for such borrowing.
P. Collections - (i) To collect and receive all income, payments of
principal and other payments with respect to the securities held hereunder, and
in connection therewith to deliver the certificates or other instruments
representing the securities to the issuer thereof or its agent when securities
are called, redeemed, retired, mature or otherwise become payable; provided that
the payment is to be made in such form and at such time as is in accordance with
the terms of the agreement relating to the security, or such proper instructions
as the Custodian may receive, or governmental regulations, the rules of
Securities Systems or other U.S. securities depositories and clearing agencies,
or generally accepted trade practice in the applicable U.S. market; (ii) to
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income, principal or other
payments with respect to securities of the Fund or in connection with transfer
of
<PAGE>
securities; and (iii) pursuant to proper instructions to take such other actions
with respect to the collection or receipt of funds or transfer of securities
which involve an investment decision.
Q. Dividends, Distributions and Redemptions - Upon receipt of
proper instructions from the Fund, or upon receipt of instructions from the
Fund's shareholder servicing agent or agent with comparable duties (the
"Shareholder Servicing Agent") (given by such person or persons and in such
manner on behalf of the Shareholder Servicing Agent as the Fund shall have
authorized), the Custodian shall release funds or securities to the Shareholder
Servicing Agent or otherwise apply funds or securities, insofar as available,
for the payment of dividends or other distributions to Fund shareholders. Upon
receipt of proper instructions from the Fund, or upon receipt of instructions
from the Shareholder Servicing Agent (given by such person or persons and in
such manner on behalf of the Shareholder Servicing Agent as the Fund shall have
authorized), the Custodian shall release funds or securities, insofar as
available to the Shareholder Servicing Agent or as such Agent shall otherwise
instruct for payment to Fund shareholders who have delivered to such Agent a
request for repurchase or redemption of their shares of capital stock of the
Fund.
R. Proxies, Notices, Etc. - Promptly to deliver or mail to the Fund
all forms of proxies and all notices of meetings and any other notices or
announcements affecting or relating to securities owned by the Fund that are
received by the Custodian, and upon receipt of proper instructions, to execute
and deliver or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its nominee shall
vote upon any of such securities or execute any proxy to vote thereon or give
any consent or take any other action with respect thereto (except as otherwise
herein provided) unless ordered to do so by proper instructions.
S. Nondiscretionary Details - Without the necessity of express
authorization from the Fund, (1) to attend to all nondiscretionary details in
connection with the sale, exchange, substitution, purchase, transfer or other
dealings with securities, funds or other property of the Portfolio held by the
Custodian except as otherwise directed from time to time by the Directors or
Trustees of the Fund, and (2) to make payments to itself or others for minor
expenses of handling securities or other similar items relating to the
Custodian's duties under this Agreement, provided that all such payments shall
be accounted for to the Fund.
<PAGE>
T. Bills - Upon receipt of proper instructions to pay or cause to
be paid, insofar as funds are available for the purpose, bills, statements, or
other obligations of the Fund.
U. Deposit of Fund Assets in Securities Systems - The Custodian may
deposit and/or maintain securities owned by the Fund in (i) The Depository Fund,
(ii) any book-entry system as provided in Subpart O of Treasury Circular No.
300, 31 CFR 306, Subpart B of 31 CFR Part 350, or the book-entry regulations of
federal agencies substantially in the form O of Subpart O, or (iii) any other
domestic clearing agency registered with the Securities and Exchange Commission
under Section 17A of the Securities Exchange Act of 1934 which acts as a
securities depository and whose use the Fund has previously approved in writing
(each of the foregoing being referred to in this Agreement as a "Securities
System"). Utilization of a Securities System shall be in accordance with
applicable Federal Reserve Board and Securities and Exchange Commission rules
and regulations, if any, and subject to the following provisions:
1) The Custodian may deposit and/or maintain Fund securities,
either directly or through one or more Agents appointed by the Custodian
(provided that any such agent shall be qualified to act as a custodian of the
Fund pursuant to the Investment Company Act of 1940 and the rules and
regulations thereunder), in a Securities System provided that such securities
are represented in an account ("Account") of the Custodian or such Agent in the
Securities System which shall not include any assets of the Custodian or Agent
other than assets held as a fiduciary, custodian, or otherwise for customers;
2) The records of the Custodian with respect to securities of
the Fund which are maintained in a Securities System shall identify by
book-entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the Securities System that
such securities have been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such payment and transfer for
the account of the Fund. The Custodian shall transfer securities sold for the
account of the Fund upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices from the Securities
System of transfers of securities for the account of the Fund shall identify the
Fund, be maintained for the Fund by the Custodian or an Agent as referred to
above, and be provided to the Fund at its
<PAGE>
request. The Custodian shall furnish the Fund confirmation of each transfer to
or from the account of the Fund in the form of a written advice or notice and
shall furnish to the Fund copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of the Fund on the
next business day;
4) The Custodian shall provide the Fund with any report obtained
by the Custodian or any Agent as referred to above on the Securities System's
accounting system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System; and the Custodian and such Agents
shall send to the Fund such reports on their own systems of internal accounting
control as the Fund may reasonably request from time to time.
5) At the written request of the Fund, the Custodian will
terminate the use of any such Securities System on behalf of the Fund as
promptly as practicable.
V. Other Transfers - Upon receipt of proper instructions, to
deliver securities, funds and other property of the Fund to a Subcustodian or
another custodian of the Fund; and, upon receipt of proper instructions, to make
such other disposition of securities, funds or other property of the Fund in a
manner other than or for purposes other than as enumerated elsewhere in this
Agreement, provided that the instructions relating to such disposition shall
include a statement of the purpose for which the delivery is to be made, the
amount of securities to be delivered and the name of the person or persons to
whom delivery is to be made.
W. Investment Limitations - In performing its duties generally, and
more particularly in connection with the purchase, sale and exchange of
securities made by or for the Fund, the Custodian may assume unless and until
notified in writing to the contrary that proper instructions received by it are
not in conflict with or in any way contrary to any provisions of the Fund's
Declaration of Trust or Certificate of Incorporation or By-Laws (or comparable
documents) or votes or proceedings of the shareholders or Directors of the Fund.
The Custodian shall in no event be liable to the Fund and shall be indemnified
by the Fund for any violation which occurs in the course of carrying out
instructions given by the Fund of any investment limitations to which the Fund
is subject or other limitations with respect to the Fund's powers to make
expenditures, encumber securities, borrow or take similar actions affecting the
Fund.
X. Proper Instructions - Proper instructions shall mean a tested
telex from the Fund or a written request, direction, instruction or
certification signed or initialed on behalf of the Fund by one or more person
<PAGE>
or persons as the Board of Trustees or Directors of the Fund shall have from
time to time authorized, provided, however, that no such instructions directing
the delivery of securities or the payment of funds to an authorized signatory
of the Fund shall be signed by such person. Those persons authorized to give
proper instructions may be identified by the Board of Trustees or Directors by
name, title or position and will include at least one officer empowered by the
Board to name other individuals who are authorized to give proper instructions
on behalf of the Fund. Telephonic or other oral instructions given by any one
of the above persons will be considered proper instructions if the Custodian
reasonably believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. Oral instructions will
be confirmed by tested telex or in writing in the manner set forth above but
the lack of such confirmation shall in no way affect any action taken by the
Custodian in reliance upon such oral instructions. The Fund authorizes the
Custodian to tape record any and all telephonic or other oral instructions
given to the Custodian by or on behalf of the Fund (including any of its
officers, Trustees, Directors, employees or agents) and will deliver to the
Custodian a similar authorization from any investment manager or adviser or
person or entity with similar responsibilities which is authorized to give
proper instructions on behalf of the Fund to the Custodian. Proper instructions
may relate to specific transactions or to types or classes of transactions, and
may be in the form of standing instructions.
Proper instructions may include communications effected directly
between electro-mechanical or electronic devices or systems, in addition to
tested telex, provided that the Fund and the Custodian agree to the use of such
device or system.
Y. Segregated Account - The Custodian shall upon receipt of proper
instructions establish and maintain on its books a segregated account or
accounts for and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities of the Fund, including securities maintained
by the Custodian pursuant to Section 2U hereof, (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. (or any futures commission
merchant registered under the Commodity Exchange Act) relating to compliance
with the rules of the Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions
<PAGE>
by the Fund, (ii) for purposes of segregating cash or securities in connection
with options purchased, sold or written by the Fund or commodity futures
contracts or options thereon purchased or sold by the Fund, (iii) for the
purposes of compliance by the Fund with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of segregated
accounts by registered investment companies, and (iv) as mutually agreed from
time to time between the Fund and the Custodian.
3. Powers and Duties of the Custodian with Respect to the Appointment
of Subcustodians Outside the United States: Securities, funds and other property
of the Fund may be held by subcustodians appointed pursuant to the provisions of
this Section 3 (a "Subcustodian"). The Custodian may, at any time and from time
to time, appoint any bank or trust company (meeting the requirements of a
custodian or an "eligible foreign custodian" under the Investment Company Act of
1940 and the rules and regulations thereunder) to act as a Subcustodian for the
Fund, and the Custodian may also utilize directly and any Subcustodian may
utilize such securities depositories located outside the United States (as shall
be approved in writing by Fund) and as meet the requirements of an "eligible
foreign custodian" as aforesaid, provided that the Fund shall have approved in
writing (1) any such bank or trust company and the subcustodian agreement to be
entered into between such bank or trust company and the Custodian, and (2) if
the Subcustodian is a bank organized under the laws of a county other than the
United States, the country or countries in which the Subcustodian is authorized
to hold securities, cash and other property of the Fund, and (3) the securities
depositories, if any, through which the Subcustodian or the Custodian is
authorized to hold securities, cash and other property of the Fund. Upon such
approval by the Fund, the Custodian is authorized on behalf of the Fund to
notify each Subcustodian of its appointment as such. The Custodian may, at any
time in its discretion, remove any bank or trust Company that has been appointed
as a Subcustodian but will promptly notify the Fund of any such action.
Those Subcustodians, and the countries where and the securities
depositories through which they or the Custodian may hold securities, cash and
other property of the Fund which the Fund has approved to date are set forth on
Appendix A hereto. Such Appendix shall be amended from time to time as
Subcustodians, and/or countries and/or securities depositories are changed,
added or deleted. The Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be held in a
country not listed on Appendix
<PAGE>
A, in order that there shall be sufficient time for the Fund to give the
approval required by the preceding paragraph and for the Custodian to put the
appropriate arrangements in place with such Subcustodian, including negotiation
of a subcustodian agreement and submission of such subcustodian agreement to
the Fund for approval.
If the Fund shall have invested in a security to be held in a country
before the foregoing procedures have been completed, such security shall be held
by such agent as the Custodian may appoint. In any event, the Custodian shall be
liable to the Fund for the actions of such agent if and only to the extent the
Custodian shall have recovered from such agent for any damages caused the Fund
by such agent. At the request of the Fund, Custodian agrees to remove any
securities held on behalf of the Fund by such agent, if practical, to an
approved Subcustodian. Under such circumstances Custodian will collect income
and respond to corporate actions on a best efforts basis.
With respect to securities and funds held by a Subcustodian, either
directly or indirectly (including by a securities depository or clearing
agency), notwithstanding any provision of this Agreement to the contrary,
payment for securities purchased and delivery of securities sold may be made
prior to receipt of the securities or payment, respectively, and securities or
payment may be received in a form, in accordance with governmental regulations,
rules of securities depositories and clearing agencies, or generally accepted
trade practice in the applicable local market.
With respect to the securities and funds held by a Subcustodian,
either directly or indirectly (including by a securities depository or a
clearing agency) including demand and interest bearing deposits, currencies or
other deposits and foreign exchange contracts as referred to in Sections 2L, 2M
or 2N, the Custodian shall be liable to the Fund for any losses caused the Fund
by any act or omission of any Subcustodian which constitutes a failure of the
Subcustodian to exercise reasonable care in the performance of its obligations
under the applicable subcustodian agreement. The Custodian hereby represents to
the Fund that each subcustodian agreement in effect while this Custodian
Agreement is in effect does and will require the Subcustodian to exercise
reasonable care in the performance of its obligations. The Custodian shall
nevertheless be liable to the Fund for its own negligence in transmitting any
instructions received by it from the Fund and for its own negligence in
connection with the delivery of any securities or funds held by it to any such
Subcustodian.
In the event that any Subcustodian appointed pursuant to the
provisions of this Section 3 fails to perform any of its obligations under the
terms and conditions of the applicable subcustodian agreement, the Custodian
shall
<PAGE>
use its best efforts to cause such Subcustodian to perform such obligations. In
the event that the Custodian is unable to cause such Subcustodian to perform
fully its obligations thereunder, the Custodian shall forthwith upon the Fund's
request terminate such Subcustodian in accordance with the termination
provisions under the applicable subcustodian agreement and, if necessary or
desirable, appoint another subcustodian in accordance with the provisions of
this Section 3. At the election of the Fund, it shall have the right to
enforce, to the extent permitted by the subcustodian agreement and applicable
law, the Custodian's rights against any such Subcustodian for loss or damage
caused the Fund by such Subcustodian.
At the written request of the Fund, the Custodian will terminate any
subcustodian appointed pursuant to the provisions of Section 3 in accordance
with the termination provisions under the applicable subcustodian agreement. The
Custodian will not amend any subcustodian agreement or agree to change or permit
any changes thereunder except upon the prior written approval of the Fund.
The Custodian may, at any time in its discretion upon notification to
the Fund, terminate any Subcustodian of the Fund in accordance with the
termination provisions under the applicable Subcustodian Agreement, and at the
written request of the Fund, the Custodian will terminate any Subcustodian in
accordance with the termination provisions under the applicable Subcustodian
Agreement.
If necessary or desirable, the Custodian may appoint another
subcustodian to replace a Subcustodian terminated pursuant to the foregoing
provisions of this Section 3, such appointment to be made upon approval of the
successor subcustodian by the Fund's Board of Directors or Trustees in
accordance with the provisions of this Section 3.
In the event the Custodian intends to make any payment to a
Subcustodian under the indemnification provisions of any subcustodian agreement,
the Custodian shall give the Fund written notice of such intention no less than
thirty (30) days prior to the date such payment is to be made. The Fund shall be
obligated promptly to reimburse the Custodian the amount of such payment, unless
the Fund shall object in writing within twenty-one (21) days of receipt of the
Custodian's notice to such payment to the Subcustodian or to reimbursement of
the Custodian (i) because the Fund disputes the right of the Subcustodian to be
so indemnified or (ii) because the Fund believes that the Custodian is
responsible by reason of the Custodian's negligence or misconduct for the event
or occurrence giving rise to the Subcustodian's demand for indemnification. In
the event the Fund shall give the aforesaid written
<PAGE>
notice of objection and the reasons therefor, the Custodian may nevertheless
make such payment to the Subcustodian without prejudice to the Custodian's
right to bring an action against and recover from the Fund for such
reimbursement; or in the alternative, the Custodian may refuse to pay the
indemnification demanded by the Subcustodian and the Fund shall in such event
indemnify and hold the Custodian harmless in respect of any recovery the
Subcustodian may obtain against the Custodian, together with the Custodian's
costs and expenses including reasonable attorneys' fees and out-of-pocket
expenses, of defending against any judicial or other proceeding pursuant to
which such recovery was obtained.
The Custodian shall furnish annually to the Fund information
concerning foreign subcustodians employed by the Custodian. Such information
shall be similar in kind and scope to that furnished to the Fund in connection
with the initial approval of the foreign subcustodians by the Fund's Board of
Directors. In addition, the Custodian will promptly inform the Fund in the event
that the Custodian learns of a material adverse change in the financial
conditions of a foreign subcustodian or is notified by a foreign banking
institution employed as a foreign subcustodian that there appears to be a
substantial likelihood that its shareholders' equity has declined or will
decline below the minimum shareholders' equity required by Rule 17f-5.
4. Assistance by the Custodian as to Certain: The Custodian may assist
generally in the preparation of reports to Fund shareholders and others, audits
of accounts, and other ministerial matters of like nature.
5. Powers and Duties of the Custodian with Respect to its Role as
Financial Agent: The Fund hereby also appoints the Custodian as the Fund's
financial agent. With respect to the appointment as financial agent, the
Custodian shall have and perform the following powers and duties:
A. Records - To create, maintain and retain such records relating
to its activities and obligations under this Agreement as are required under the
Investment Company Act of 1940 and the rules and regulations thereunder
(including Section 31 thereof and Rules 3la-1 and 3la-2 thereunder) and under
applicable Federal and State tax laws. All such records will be the property of
the Fund and in the event of termination of this Agreement shall be delivered to
the successor custodian.
B. Accounts - To keep books of account and render statements,
including interim monthly and complete quarterly financial statements, or copies
thereof, from time to time as reasonably requested by proper instructions.
<PAGE>
C. Access to Records - The books and records maintained by the
Custodian pursuant to Sections 5A and 5B shall at all times during the
Custodian's regular business hours be open to inspection and audit by officers
of, attorneys for and auditors employed by the Fund and by employees and agents
of the Securities and Exchange Commission, provided that all such individuals
shall observe all security requirements of the Custodian applicable to its own
employees having access to similar records within the Custodian and such
regulations as may be reasonably imposed by the Custodian.
D. Calculation of Net Asset Value - To compute and determine the
net asset value per share of capital stock of the Fund as of the close of
business on the New York Stock Exchange on each day on which such Exchange is
open, unless otherwise directed by proper instructions. Such computation and
determination shall be made in accordance with (1) the provisions of the Fund's
Declaration of Trust or Certificate of Incorporation or By-Laws, as they may
from time to time be amended and delivered to the Custodian, (2) the votes of
the Board of Trustees or Directors of the Fund at the time in force and
applicable as they may from time to time be delivered to the Custodian, and (3)
proper instructions from such officers of the Fund or other persons as are from
time to time authorized by the Board of Trustees or Directors of the Fund to
give instructions with respect to computation and determination of the net asset
value. On each day that the Custodian shall compute the net asset value per
share of the Fund, the Custodian shall provide the Fund with written reports
which permit the Fund to verify that portfolio transactions have been recorded
in accordance with the Fund's instructions and are reconciled with the Fund's
trading records.
In computing the net asset value, the Custodian may rely upon any
information furnished by proper instructions, including without limitation any
information (1) as to accrual of liabilities of the Fund and as to liabilities
of the Fund not appearing on the books of account kept by the Custodian, (2) as
to the existence, status and proper treatment of reserves, if any, authorized by
the Fund, (3) as to the sources of quotations to be used in computing the net
asset value, including those listed in Appendix B, (4) as to the fair value to
be assigned to any securities or other property for which price quotations are
not readily available, and (5) as to the sources of information with respect to
"corporate actions" affecting portfolio securities of the Fund, including those
listed in Appendix B. (Information as to "corporate actions" shall include
information as to dividends, distributions, stock
<PAGE>
splits, stock dividends, rights offerings, conversions, exchanges,
recapitalizations, mergers, redemptions, calls, maturity dates and similar
transactions, including the ex- and record dates and the amounts or other terms
thereof.)
In like manner, the Custodian shall compute and determine the net
asset value as of such other times as the Board of Trustees or Directors of the
Fund from time to time may reasonably request.
Notwithstanding any other provisions of this Agreement, including
Section 6C, the following provisions shall apply with respect to the Custodian's
foregoing responsibilities in this Section 5D: The Custodian shall be held to
the exercise of reasonable care in computing and determining net asset value as
provided in this Section 5D, but shall not be held accountable or liable for any
losses, damages or expenses the Fund or any shareholder or former shareholder of
the Fund may suffer or incur arising from or based upon errors or delays in the
determination of such net asset value unless such error or delay was due to the
Custodian's negligence, gross negligence or reckless or willful misconduct in
determination of such net asset value. (The parties hereto acknowledge, however,
that the Custodian's causing an error or delay in the determination of net asset
value may, but does not in and of itself, constitute negligence, gross
negligence or reckless or willful misconduct.) In no event shall the Custodian
be liable or responsible to the Fund, any present or former shareholder of the
Fund or any other party for any error or delay which continued or was undetected
after the date of an audit performed by the certified public accountants
employed by the Fund if, in the exercise of reasonable care in accordance with
generally accepted accounting standards, such accountants should have become
aware of such error or delay in the course of performing such audit. The
Custodian's liability for any such negligence, gross negligence or reckless or
willful misconduct which results in an error in determination of such net asset
value shall be limited to the direct, out-of-pocket loss the Fund, shareholder
or former shareholder shall actually incur, measured by the difference between
the actual and the erroneously computed net asset value, and any expenses the
Fund shall incur in connection with correcting the records of the Fund affected
by such error (including charges made by the Fund's registrar and transfer agent
for making such corrections) or communicating with shareholders or former
shareholders of the Fund affected by such error.
Without limiting the foregoing, the Custodian shall not be held
accountable or liable to the Fund, any shareholder or former shareholder thereof
or any other person for any delays or losses, damages or expenses any of them
may suffer or incur resulting from (1) the Custodian's failure to receive timely
and suitable notification
<PAGE>
concerning quotations or corporate actions relating to or affecting portfolio
securities of the Fund or (2) any errors in the computation of the net asset
value based upon or arising out of quotations or information as to corporate
actions if received by the Custodian either (i) from a source which the
Custodian was authorized pursuant to the second paragraph of this Section 5D to
rely upon, or (ii) from a source which in the Custodian's reasonable judgment
was as reliable a source for such quotations or information as the sources
authorized pursuant to that paragraph. Nevertheless, the Custodian will use its
best judgment in determining whether to verify through other sources any
information it has received as to quotations or corporate actions if the
Custodian has reason to believe that any such information might be incorrect.
In the event of any error or delay in the determination of such net
asset value for which the Custodian may be liable, the Fund and the Custodian
will consult and make good faith efforts to reach agreement on what actions
should be taken in order to mitigate any loss suffered by the Fund or its
present or former shareholders, in order that the Custodian's exposure to
liability shall be reduced to the extent possible after taking into account all
relevant factors and alternatives. Such actions might include the Fund or the
Custodian taking reasonable steps to collect from any shareholder or former
shareholder who has received any overpayment upon redemption of shares such
overpaid amount or to collect from any shareholder who has underpaid upon a
purchase of shares the amount of such underpayment or to reduce the number of
shares issued to such shareholder. It is understood that in attempting to reach
agreement on the actions to be taken or the amount of the loss which should
appropriately be borne by the Custodian, the Fund and the Custodian will
consider such relevant factors as the amount of the loss involved, the Fund's
desire to avoid loss of shareholder good will, the fact that other persons or
entitles could have been reasonably expected to have detected the error sooner
than the time it was actually discovered, the appropriateness of limiting or
eliminating the benefit which shareholders or former shareholders might have
obtained by reason of the error, and the possibility that other parties
providing services to the fund might be induced to absorb a portion of the loss
incurred.
E. Disbursements - Upon receipt of proper instructions, to pay or
cause to be paid, insofar as funds are available for the purpose, bills,
statements and other obligations of the Fund (including but not limited to
interest charges, taxes, management fees, compensation to Fund officers and
employees, and other operating expenses of the Fund).
<PAGE>
6. Standard of Care and Related Matters:
A. Liability of the Custodian with Respect to Proper Instruction;
Evidence of Authority; Etc. The Custodian shall not be liable for any action
taken or omitted in reliance upon proper instructions believed by it to be
genuine or upon any other written notice, request, direction, instruction,
certificate or other instrument believed by it to be genuine and signed by the
proper party or parties.
The Secretary or Assistant Secretary of the Fund shall certify to
the Custodian the names, signatures and scope of authority of all persons
authorized to give proper instructions or any other such notice, request,
direction, instruction, certificate or instrument on behalf of the Fund, the
names and signatures of the officers of the Fund, the name and address of the
Shareholder Servicing Agent, and any resolutions, votes, instructions or
directions of the Fund's Board of Trustees or Directors or shareholders. Such
certificate may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and may be considered in full force and
effect until receipt of a similar certificate to the contrary.
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement.
The Custodian shall be without liability for any action reasonably
taken or omitted pursuant to advice received from (i) counsel regularly retained
by the Custodian in respect of custodian matters, (ii) counsel for the Fund, or
(iii) such other counsel as the Fund and the Custodian may agree upon, provided,
however, with respect to the performance of any action or omission of any action
upon such advice, the Custodian shall be required to conform to the standard of
care set forth in Section 6C. The Custodian may be entitled, subject to prior
approval of the Fund, to seek reimbursement for such legal expenses as may be
agreed upon between the Fund and the Custodian.
B. Liability of the Custodian with Respect to Use of Securities
System - With respect to the portfolio securities, cash and other property of
the Fund held by a Securities System, the Custodian shall be liable to the Fund
only for any loss or damage to the Fund resulting from use of the Securities
System if caused by any negligence, misfeasance or misconduct of the Custodian
or any of its agents or of any of its or their employees or from any failure of
the Custodian or any such agent to enforce effectively such rights as it may
have against the
<PAGE>
Securities System. At the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claim against the
Securities System or any other person which the Custodian may have as a
consequence of any such loss or damage to the Fund if and to the extent that
the Fund has not been made whole for any such loss or damage.
C. Standard of Care; Liability; Indemnification - The Custodian
shall be held only to the exercise of reasonable care and diligence in carrying
out the provisions of this Agreement, provided that the Custodian shall not
thereby be required to take any action which is in contravention of any
applicable law. The Fund agrees to indemnify and hold harmless the Custodian and
its nominees from all claims and liabilities (including counsel fees) incurred
or assessed against it or its nominees in connection with the performance of
this Agreement, except such as may arise from its or its nominee's breach of the
relevant standard of conduct set forth in this Agreement. Without limiting the
foregoing indemnification obligation of the Fund, the Fund agrees to indemnify
the Custodian and any nominee in whose name portfolio securities or other
property of the Fund is registered against any liability the Custodian or such
nominee may incur by reason of taxes assessed to the Custodian or such nominee
or other costs, liability or expense incurred by the Custodian or such nominee
resulting directly or indirectly from the fact that portfolio securities or
other property of the Fund is registered in the name of the Custodian or such
nominee.
It is also understood that the Custodian shall not be liable for any
loss involving any securities, currencies, deposits or other property of the
Fund, whether maintained by it, a Subcustodian, a securities depository, an
agent of the Custodian or a Subcustodian, a Securities System, or a Banking
Institution, or for any loss arising from a foreign currency transaction or
contract, where the loss results from a Sovereign Risk or where the entity
maintaining such securities, currencies, deposits or other property of the Fund,
whether the Custodian, a Subcustodian, a securities depository, an agent of the
Custodian or a Subcustodian, a Securities System or a Banking Institution, has
exercised reasonable care maintaining such property or in connection with the
transaction involving such property. A "Sovereign Risk" shall mean
nationalization, expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental authority, de
facto or de jure; or enactment, promulgation, imposition or enforcement by any
such governmental authority of currency restrictions, exchange
<PAGE>
controls, taxes, levies or other charges affecting the Fund's property; or acts
of war, terrorism, insurrection or revolution; or any other act or event beyond
the Custodian's control.
The Fund bears all risks that rules or procedures imposed by
Securities Depositories, exchange controls, asset freezes or other laws or
regulations shall prohibit or impose burdens on or costs relating to the
transfer of, by or for the account of the Fund's cash or currency held outside
the United States or denominated in a currency other than U.S. dollars or on the
conversion of any currency so held. The Custodian shall in no event be obligated
to substitute another currency (including U.S. dollars) for a currency whose
transferability, convertibility or availability has been affected by any such
law, regulation, rule or procedure. Provided that the Custodian and it Agents
have exercised reasonable care in the safekeeping of such currency deposits,
neither the Custodian nor any Subcustodian or other agent of the Custodian shall
be liable to the Fund for any loss or delay which results from the foregoing
events.
D. Reimbursement of Advances - The Custodian shall be entitled to
receive reimbursement from the Fund on demand, in the manner provided in Section
7, for its cash disbursements, expenses and charges (including the fees and
expenses of any Subcustodian or any Agent) in connection with this Agreement,
but excluding salaries and usual overhead expenses.
E. Security for Obligations to Custodian - If the Fund shall
require the Custodian to advance cash or securities for any purpose for the
benefit of the Fund, including in connection with foreign exchange contracts or
options (collectively, an "Advance"), or if the Custodian or any nominee thereof
shall incur or be assessed any taxes, charges, expenses, assessments claims or
liabilities in connection with the performance of this Agreement (collectively a
"Liability"), except such as may arise from its or such nominee's breach of the
relevant standard of conduct set forth in this Agreement, then in such event any
property at any time held for the account of the Fund by the Custodian or a
Subcustodian shall be security for such Advance or Liability and if the Fund
shall fail to repay or indemnify the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Fund's property,
including securities, to the extent necessary to obtain reimbursement or
indemnification.
F. Appointment of Agents - The Custodian may at any time or times
in its discretion appoint (and may at any time remove) any other bank or trust
company as its agent (an "Agent") to carry out such of
<PAGE>
the provisions of this Agreement as the Custodian may from time to time direct,
provided, however, that the appointment of such Agent (other than an Agent
appointed pursuant to the third paragraph of Section 3) shall not relieve the
Custodian of any of its responsibilities under this Agreement.
G. Powers of Attorney - Upon request, the Fund shall deliver to the
Custodian such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the performance by the
Custodian or any Subcustodian of their respective obligations under this
Agreement or any applicable subcustodian agreement.
7. Compensation of the Custodian: The Fund shall pay the Custodian a
custody fee based on such fee schedule as may from time to time be agreed upon
in writing by the Custodian and the Fund. Such fee, together with all amounts
for which the Custodian is to be reimbursed in accordance with Section 6D, shall
be billed to the Fund in such a manner as to permit payment by a direct cash
payment to the Custodian.
8. Termination; Successor Custodian: This Agreement shall continue in
full force and effect until terminated by either party by an instrument in
writing delivered or mailed, postage prepaid, to the other party, such
termination to take effect not sooner than seventy five (75) days after the date
of such delivery or mailing. In the event of termination, the Custodian shall be
entitled to receive prior to delivery of the securities, funds and other
property held by it all accrued fees and unreimbursed expenses the payment of
which is contemplated by Sections 6D and 7, upon receipt by the Fund of a
statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is agreed
that the funds and securities owned by the Fund and held by the Custodian or any
Subcustodian shall be delivered to the successor custodian, and the Custodian
agrees to cooperate with the Fund in execution of documents and performance of
other actions necessary or desirable in order to substitute the successor
custodian for the Custodian under this Agreement.
9. Amendment: This Agreement constitutes the entire understanding and
agreement of the parties hereto with respect to the subject matter hereof. No
provision of this Agreement may be amended or terminated except by a statement
in writing signed by the party against which enforcement of the amendment or
termination is sought.
In connection with the operation of this Agreement, the Custodian and
the Fund may agree in writing from time to time on such provisions
interpretative of or in addition to the provisions of this Agreement as may in
their
<PAGE>
joint opinion be consistent with the general tenor of this Agreement. No
interpretative or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Agreement.
The section headings in this Agreement are for the convenience of the
parties and in no way alter, amend, limit or restrict the contractual
obligations of the parties set forth in this Agreement.
10. Governing Law: This instrument is executed and delivered in The
Commonwealth of Massachusetts and shall be governed by and construed according
to the laws of said Commonwealth.
11. Notices: Notices and other writings delivered or mailed postage
prepaid to the Fund addressed to the Fund at 151 Farmington Avenue, PPJE,
Hartford, CT 06156 or to such other address as the Fund may have designated to
the Custodian in writing, or to the Custodian at 40 Water Street, Boston,
Massachusetts 02109, Attention: Manager, Securities Department, or to such other
address as the Custodian may have designated to the Fund in writing, shall be
deemed to have been properly delivered or given hereunder to the respective
addressee.
12. Binding Effect: This Agreement shall be binding on and shall inure
to the benefit of the Fund and the Custodian and their respective successors and
assigns, provided that neither party hereto may assign this Agreement or any of
its rights or obligations hereunder without the prior written consent of the
other party.
13. Counterparts: This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
AETNA VARIABLE PORTFOLIOS, Inc. -
AETNA INTERNATIONAL PORTFOLIO BROWN BROS HARRIMAN & Co.
By /s/ Stephanie A. Taylor By /s/ Douglas A. Donahue
---------------------------------- -----------------------------------
<PAGE>
APPENDIX B
AETNA VARIABLE PORTFOLIOS, Inc. -
AETNA INTERNATIONAL PORTFOLIO
THE FOLLOWING AUTHORIZED SOURCES ARE TO BE USED FOR PRICING AND FOREIGN EXCHANGE
QUOTATIONS, CORPORATE ACTIONS, DIVIDENDS AND RIGHTS OFFERINGS:
AUTHORIZED SOURCES
BLOOMBERG
EXTEL (LONDON)
FUND MANAGERS
INTERACTIVE DATA CORPORATION
REPUTABLE BROKERS
REUTERS
SUBCUSTODIAN BANKS
THE CUSTODIAN
TELEKURS
VALORINFORM (GENEVA)
REPUTABLE FINANCIAL PUBLICATIONS
STOCK EXCHANGES
FINANCIAL INFORMATION INC. CARD
JJ KENNY
FRI CORPORATION
APPROVED: /s/ Stephanie A. Taylor 12/10/97
-----------------------------------------------------------
DATE
[Aetna Letterhead] Aetna Inc.
[Aetna Logo] 151 Farmington Avenue
Hartford, CT 06156-3124
Amy R. Doberman
Counsel
Law Division, RE4A
April 27, 1998 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. 4 to
Registration Statement on Form N-1A
(File No. 333-05173 and 811-7651)
Dear Sir or Madam:
The undersigned serves as counsel to Aeltus Investment Management, Inc., the
investment adviser, effective May 1, 1998, 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
April 27, 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
Consent of Independent Auditors
The Board of Directors and Shareholders of
Aetna Variable Portfolios, Inc:
We consent to the use of our report dated February 13, 1998 incorporated by
reference herein this Post-Effective Amendment No. 4 to Registration Statement
(No. 333-05173) on Form N1-A and to the references to our firm under the
headings "Financial Highlights" in the prospectus and "Independent Auditors" in
the statement of additional information.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Hartford, Connecticut
April 27, 1998
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<NAME> Aetna Variable Portfolio, Inc.
<SERIES>
<NUMBER> 01
<NAME> Aetna Variable Captial Appreciation Portfolio
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 9,528,785
<INVESTMENTS-AT-VALUE> 9,938,259
<RECEIVABLES> 100,172
<ASSETS-OTHER> 236
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,038,667
<PAYABLE-FOR-SECURITIES> 886,772
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,118
<TOTAL-LIABILITIES> 891,890
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,431,800
<SHARES-COMMON-STOCK> 767,619
<SHARES-COMMON-PRIOR> 510,000
<ACCUMULATED-NII-CURRENT> 1,435
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 304,068
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 409,474
<NET-ASSETS> 9,146,777
<DIVIDEND-INCOME> 89,294
<INTEREST-INCOME> 26,622
<OTHER-INCOME> 0
<EXPENSES-NET> (48,150)
<NET-INVESTMENT-INCOME> 67,766
<REALIZED-GAINS-CURRENT> 1,683,762
<APPREC-INCREASE-CURRENT> 307,085
<NET-CHANGE-FROM-OPS> 2,058,613
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (65,555)
<DISTRIBUTIONS-OF-GAINS> (1,379,694)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 664,790
<NUMBER-OF-SHARES-REDEEMED> (528,943)
<SHARES-REINVESTED> 121,772
<NET-CHANGE-IN-ASSETS> 3,945,164
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (776)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 38,520
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 48,150
<AVERAGE-NET-ASSETS> 6,401,063
<PER-SHARE-NAV-BEGIN> 10.199
<PER-SHARE-NII> 0.107
<PER-SHARE-GAIN-APPREC> 3.899
<PER-SHARE-DIVIDEND> (0.104)
<PER-SHARE-DISTRIBUTIONS> (2.185)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.916
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> Aetna Variable Portfolio, Inc.
<SERIES>
<NUMBER> 02
<NAME> Aetna Variable Growth Portfolio
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 5,725,070
<INVESTMENTS-AT-VALUE> 6,007,121
<RECEIVABLES> 216,938
<ASSETS-OTHER> 348
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,224,407
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 260,563
<TOTAL-LIABILITIES> 260,563
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,816,862
<SHARES-COMMON-STOCK> 605,682
<SHARES-COMMON-PRIOR> 510,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (393)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (134,676)
<ACCUM-APPREC-OR-DEPREC> 282,051
<NET-ASSETS> 5,963,844
<DIVIDEND-INCOME> 47,706
<INTEREST-INCOME> 15,711
<OTHER-INCOME> 0
<EXPENSES-NET> (45,540)
<NET-INVESTMENT-INCOME> 17,877
<REALIZED-GAINS-CURRENT> 1,465,898
<APPREC-INCREASE-CURRENT> 204,394
<NET-CHANGE-FROM-OPS> 1,688,169
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (15,218)
<DISTRIBUTIONS-OF-GAINS> (1,600,576)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 500,364
<NUMBER-OF-SHARES-REDEEMED> (552,097)
<SHARES-REINVESTED> 147,415
<NET-CHANGE-IN-ASSETS> 789,237
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (515)
<OVERDIST-NET-GAINS-PRIOR> (2,535)
<GROSS-ADVISORY-FEES> 36,432
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 45,540
<AVERAGE-NET-ASSETS> 6,060,520
<PER-SHARE-NAV-BEGIN> 10.146
<PER-SHARE-NII> 0.039
<PER-SHARE-GAIN-APPREC> 3.271
<PER-SHARE-DIVIDEND> (0.034)
<PER-SHARE-DISTRIBUTIONS> (3.576)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.846
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> Aetna Variable Portfolio, Inc.
<SERIES>
<NUMBER> 03
<NAME> Aetna Variable Index Plus Portfolio
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 124,144,831
<INVESTMENTS-AT-VALUE> 134,168,802
<RECEIVABLES> 426,173
<ASSETS-OTHER> 8,651
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 134,603,626
<PAYABLE-FOR-SECURITIES> 1,484,029
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 603,079
<TOTAL-LIABILITIES> 2,087,108
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 121,363,803
<SHARES-COMMON-STOCK> 9,453,894
<SHARES-COMMON-PRIOR> 1,779,788
<ACCUMULATED-NII-CURRENT> 53,091
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,075,653
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,023,971
<NET-ASSETS> 132,516,518
<DIVIDEND-INCOME> 1,110,697
<INTEREST-INCOME> 146,436
<OTHER-INCOME> 0
<EXPENSES-NET> (336,114)
<NET-INVESTMENT-INCOME> 921,019
<REALIZED-GAINS-CURRENT> 5,527,485
<APPREC-INCREASE-CURRENT> 8,934,413
<NET-CHANGE-FROM-OPS> 15,382,917
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (867,859)
<DISTRIBUTIONS-OF-GAINS> (4,427,074)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,195,022
<NUMBER-OF-SHARES-REDEEMED> (898,689)
<SHARES-REINVESTED> 377,773
<NET-CHANGE-IN-ASSETS> 113,106,061
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (69)
<OVERDIST-NET-GAINS-PRIOR> (24,758)
<GROSS-ADVISORY-FEES> 235,280
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 336,114
<AVERAGE-NET-ASSETS> 66,891,822
<PER-SHARE-NAV-BEGIN> 10.906
<PER-SHARE-NII> 0.102
<PER-SHARE-GAIN-APPREC> 3.594
<PER-SHARE-DIVIDEND> (0.096)
<PER-SHARE-DISTRIBUTIONS> (0.489)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.017
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
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<SERIES>
<NUMBER> 04
<NAME> Aetna Variable Small Company Portfolio
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 17,837,358
<INVESTMENTS-AT-VALUE> 18,695,562
<RECEIVABLES> 470,900
<ASSETS-OTHER> 1,451
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19,167,913
<PAYABLE-FOR-SECURITIES> 1,054,577
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,521
<TOTAL-LIABILITIES> 1,066,098
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,000,272
<SHARES-COMMON-STOCK> 1,417,551
<SHARES-COMMON-PRIOR> 510,000
<ACCUMULATED-NII-CURRENT> 14,573
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 183,466
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 903,504
<NET-ASSETS> 18,101,815
<DIVIDEND-INCOME> 70,904
<INTEREST-INCOME> 46,702
<OTHER-INCOME> 0
<EXPENSES-NET> (63,409)
<NET-INVESTMENT-INCOME> 54,197
<REALIZED-GAINS-CURRENT> 1,204,297
<APPREC-INCREASE-CURRENT> 845,007
<NET-CHANGE-FROM-OPS> 2,103,501
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (38,702)
<DISTRIBUTIONS-OF-GAINS> (1,020,831)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,353,068
<NUMBER-OF-SHARES-REDEEMED> (529,179)
<SHARES-REINVESTED> 83,662
<NET-CHANGE-IN-ASSETS> 12,944,240
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (922)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 52,841
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63,409
<AVERAGE-NET-ASSETS> 7,004,711
<PER-SHARE-NAV-BEGIN> 10.113
<PER-SHARE-NII> 0.042
<PER-SHARE-GAIN-APPREC> 3.439
<PER-SHARE-DIVIDEND> (0.030)
<PER-SHARE-DISTRIBUTIONS> (0.794)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.770
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> Aetna Variable Portfolio, Inc.
<SERIES>
<NUMBER> 05
<NAME> Aetna High Yield Portfolio
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1997
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