CAPITAL APPRECIATION PORTFOLIOS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MID CAP
----------
<S> <C>
ASSETS:
Cash ......................................................... $35,626
Receivable for:
Dividends and interest ...................................... 1,175
Reimbursement from Investment Advisor........................ 20
Prepaid expenses ............................................. 31
-------
Total assets ............................................ 36,852
-------
LIABILITIES:
Accrued investment advisory fees ............................. 2,650
Accrued administrative service fees .......................... 265
Accrued custody fees ......................................... 2,701
Other liabilities ............................................ 5,986
-------
Total liabilities ....................................... 11,602
-------
NET ASSETS .................................................. $25,250
=======
Net assets represented by:
Paid-in capital .............................................. $25,000
Undistributed net investment income .......................... 236
Accumulated net realized gain on investments ................. 14
-------
NET ASSETS .................................................. $25,250
=======
CAPITAL SHARES:
Authorized ................................................... Two Billion
Par value .................................................... $ 0.001
Outstanding .................................................. 2,653
Net asset value, offering and redemption price per share
(net assets divided by shares outstanding) ................... $ 9.52
</TABLE>
See Notes to Financial Statements. 1
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MID CAP
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
INVESTMENT INCOME:
Dividends ..................................................... $ 47,299
Interest ...................................................... 12,270
---------
59,569
Foreign taxes withheld on dividends ........................... (344)
---------
Total investment income .................................. 59,225
---------
INVESTMENT EXPENSES:
Investment advisory fees ...................................... 38,188
Administrative services fees .................................. 6,004
Printing and postage .......................................... 2,975
Custody fees .................................................. 3,672
Transfer agent fees ........................................... 2,160
Audit fees .................................................... 10,584
Directors' fees ............................................... 86
Miscellaneous expenses ........................................ 57
---------
Expenses before reimbursement and waiver from Investment
Advisor ...................................................... 63,726
Expense reimbursement and waiver from Investment Advisor ...... (15,125)
---------
Net expenses ............................................. 48,601
---------
Net investment income ......................................... 10,624
---------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on investments .............................. 230,315
Net change in unrealized gain or loss on investments .......... (83,008)
---------
Net realized and change in unrealized gain or loss on
investments................................................... 147,307
---------
Net increase in net assets resulting from operations .......... $ 157,931
---------
</TABLE>
2 See Notes to Financial Statements.
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MID CAP
---------------------------------------
PERIOD FROM
DECEMBER 17, 1997
(COMMENCEMENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, 1998 TO DECEMBER 31, 1997
----------------- --------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income............... $ 10,624 $ 4,574
Net realized gain on investments.... 230,315 2,331
Net change in unrealized gain or
loss on investments................ (83,008) 83,008
----------- ----------
Net increase in net assets
resulting from operations.......... 157,931 89,913
----------- ----------
DISTRIBUTION TO SHAREHOLDERS:
From net investment income......... (11,043) (6,250)
From net realized gains on
investments....................... (230,301) --
----------- ----------
Decrease in net assets from
distributions to shareholders...... (241,344) (6,250)
----------- ----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold.......... -- 5,000,000
Payments for shares redeemed....... (4,975,000) --
----------- ----------
Net increase (decrease) in net
assets from fund share transactions (4,975,000) 5,000,000
----------- ----------
Net change in net assets............ (5,058,413) 5,083,663
NET ASSETS:
Beginning of period................. 5,083,663 --
----------- ----------
End of period....................... $ 25,250 $5,083,663
=========== ==========
End of period net assets includes
undistributed net investment income $ 236 $ --
=========== ==========
SHARE TRANSACTIONS:
Number of shares sold.............. -- 500,000
Number of shares redeemed.......... (497,347) --
----------- ----------
Net increase (decrease)............ (497,347) 500,000
=========== ==========
</TABLE>
See Notes to Financial Statements. 3
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION
Aetna Variable Portfolios, Inc. (Fund) is registered under the Investment
Company Act of 1940 (the Act) as an open-end management investment company. It
was incorporated under the laws of Maryland on June 4, 1996. The Articles of
Incorporation permit the Company to offer separate portfolios, each of which has
its own investment objective, policies and restrictions.
The Fund currently offers eleven portfolios. This report covers one portfolio:
Aetna Mid Cap VP (the Portfolio).
The following is the Portfolio's investment objective:
AETNA MID CAP VP (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.
Shares of the Portfolio are currently owned by insurance companies as depositors
of separate accounts which are used to fund variable annuity contracts and
variable life insurance policies. All shares are currently held by separate
accounts of Aetna Life Insurance and Annuity Company (ALIAC) and its subsidiary,
Aetna Insurance Company of America.
At December 31, 1998, Aetna was the sole shareholder of the Portfolio. The
intention of the Fund is to liquidate the Portfolio. The matter will be
addressed with the Board of Directors at their next meeting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of the Portfolio have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the
Portfolio.
A. VALUATION OF INVESTMENTS
Investments are stated at market values based upon prices furnished by external
pricing sources as reported on national securities exchanges or, for
over-the-counter securities, at the mean of the bid and asked prices. Short-term
investments maturing in more than sixty days for which market quotations are
readily available are valued at current market value. Short-term investments
maturing in less than sixty days are valued at amortized cost, which when
combined with accrued interest, approximates market value. Securities and fixed
income investments for which market quotations are not considered to be readily
available are valued using methods approved by the Board of Directors.
B. ILLIQUID AND RESTRICTED SECURITIES
Illiquid securities are securities that are not readily marketable. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Portfolios to sell them promptly
at an acceptable price. Restricted securities are those which can only be sold
under Rule 144A of the Securities Act of 1933 (1933 Act) or are securities
offered pursuant to Section 4(2) of the 1933 Act, and are subject to legal or
contractual restrictions on resale and may not be publicly sold without
registration under the 1933 Act. Illiquid and restricted securities are valued
using market quotations when readily available. In the absence of market
quotations, the securities are valued based upon their fair value determined
under procedures approved by the Board of Directors. The Portfolio may invest up
to 15% of its total assets in illiquid securities. The Portfolio will not pay
the costs of disposition of restricted securities other than ordinary brokerage
fees, if any.
C. FEDERAL INCOME TAXES
The Portfolio intends to meet the requirements to be taxed as a regulated
investment company for the current year. As such, the Portfolio is relieved of
federal income taxes by distributing all of its net taxable investment income
and capital gains, if any, in compliance with the applicable provisions of the
Internal Revenue Code. Futhermore, by distributing substantially all of its net
taxable investment income and capital gains during the calendar year, the
Portfolio will avoid federal excise taxes in accordance with the applicable
provisions of the Internal Revenue Code. Thus, the financial statements contain
no provision for federal taxes.
4
<PAGE>
- --------------------------------------------------------------------------------
D. DISTRIBUTIONS
Distributions are recorded on the ex-dividend date. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. In addition, distributions
of realized gains from sales of securities held one year or less are taxable to
shareholders at ordinary income tax rates rather than preferred capital gain tax
rates in accordance with the applicable provisions of the Internal Revenue Code.
E. OTHER
Investment transactions are accounted for on the day following trade date,
except same day settlements which are accounted for on the trade date. Interest
income is recorded on an accrual basis. Discounts and premiums on securities
purchased are accreted or amortized, respectively, using an effective yield
method over the life of the security. Dividend income and stock splits are
recorded on the ex-dividend date. Realized gains and losses from investment
transactions are determined on an identified cost basis.
3. INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES FEES
The Portfolio pays Aeltus a monthly fee expressed as a percentage of its average
daily net assets. Below is the Portfolios' annual Investment Advisory fee, as of
December 31, 1998:
<TABLE>
<CAPTION>
ADVISORY FEE
------------
<S> <C>
Mid Cap 0.75%
</TABLE>
Aeltus has served as the Investment Adviser for the Portfolio since May 1, 1998.
Prior to May 1, 1998, ALIAC served as Investment Adviser and Aeltus served as
Sub-Adviser. As Sub-Adviser, Aeltus supervised the investment and reinvestment
of cash and securities and provided certain related administrative services. For
the period January 1, 1998 through April 30, 1998, ALIAC collected $13,218 from
the Portfolio, of which it paid $8,292 to Aeltus.
Effective May 1, 1998, the Portfolio pays expenses incurred in exchange for
services provided by auditors, legal firms, transfer agents, custodian banks and
financial printers. The Portfolio pays its proportionate share of compensation
paid to the Fund's Board of Directors and its proportionate share of insurance
premiums. The Portfolio pays its direct costs incurred to mail shareholder
reports, register its shares with the Securities and Exchange Commission and any
other costs incurred by the Portfolio. In addition, the Portfolio pays Aeltus an
administrative services fee in exchange for receiving certain administrative and
shareholder services and to compensate Aeltus for supervising the Portfolios'
other service providers. The Portfolio pays Aeltus an administrative services
fee at an annual rate based on its average daily net assets. The rate is 0.075%
on the first $5 billion in Portfolio assets and 0.050% on all Portfolio assets
over $5 billion.
Prior to May 1, 1998, ALIAC acted as Administrator to the Portfolio. As
Administrator, ALIAC paid all the expenses of the Portfolio on behalf of the
Portfolio, supervised the Portfolios' other service providers and provided the
Portfolio with certain administrative and shareholder services. In exchange for
these services, ALIAC received an administrative services fee at an annual rate
of up to 0.30% of the Portfolio's average daily net assets. For the period
January 1, 1998 through April 30, 1998, ALIAC collected $3,525 in administrative
services fees from the Portfolio.
Aeltus has entered into a Service Agreement with ALIAC under which ALIAC will
provide various administrative and shareholder services for the Portfolio, in
exchange for fees payable by Aeltus, of 0.375% of the Portfolios' average daily
net assets. For the period May 1, 1998 through December 31, 1998, Aeltus paid
ALIAC $12,597.
5
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
4. REIMBURSEMENT AND WAIVER FROM INVESTMENT ADVISER
Aeltus is contractually obligated through December 31, 1999 to reimburse the
Portfolio for some or all of its operating expenses or to waive fees in order to
maintain a certain expense ratio. Reimbursement and waiver arrangements will
increase a Portfolio's yield and total return.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES
Purchases and sales of investment securities, excluding short-term investments,
for the year ended December 31, 1998 were:
<TABLE>
<CAPTION>
COST OF PURCHASES PROCEEDS FROM SALES
----------------- -------------------
<S> <C> <C>
Mid Cap $8,869,877 $14,095,644
</TABLE>
6
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
ADDITIONAL INFORMATION
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
FEDERAL TAX STATUS OF DIVIDENDS DECLARED DURING THE FISCAL YEAR (UNAUDITED)
In accordance with federal tax authorities, certain portions of the dividends
taxable as ordinary income qualify for the corporate dividends received
deduction. The following percentages reflect the portions of such dividends
paid:
<TABLE>
<S> <C>
Mid Cap 17.62%
</TABLE>
YEAR 2000 (UNAUDITED)
The Portfolios receive services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer systems and software to distinguish the
year 2000 from the year 1900. Aeltus is taking steps that it believes are
reasonably designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolios' other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolios from this problem.
7
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
FINANCIAL HIGHLIGHT
MID CAP
- --------------------------------------------------------------------------------
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17, 1997
YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, OPERATIONS)
1998 TO DECEMBER 31, 1997
------------ --------------------
<S> <C> <C>
Net asset value, beginning of period .... $ 10.17 $10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................. 0.02 0.01+
Net realized and change in unrealized
gain or loss on investments ............ 0.63 0.17
------- ------
Total from investment operations ..... 0.65 0.18
------- ------
LESS DISTRIBUTIONS:
From net investment income ............. (0.06) (0.01)
From net realized gains on investments . (1.24) --
------- ------
Total distributions .................. (1.30) (0.01)
------- ------
Net asset value, end of period .......... $ 9.52 $10.17
======= ======
Total return* ........................... 6.88% 1.80%
Net assets, end of period (000's) ....... $ 25 $5,084
Ratio of net expenses to average net
assets.................................. 0.95% 0.95%(1)
Ratio of net investment income to average
net assets ............................. 0.21% 2.10%(1)
Ratio of expenses before reimbursement
and waiver to average net assets ....... 1.25% --
Portfolio turnover rate ................. 190.70% 0.95%
</TABLE>
(1) Annualized.
*The total return percentage does not reflect any separate account charges under
variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
8 See Notes to Financial Statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Variable Portfolios, Inc.:
We have audited the accompanying statement of assets and liabilities of Aetna
Mid Cap VP (the Fund), a portfolio of the Aetna Variable Portfolios, Inc., as of
December 31, 1998 and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years or periods
in the two-year period then ended and financial highlights for the year ended
December 31, 1998 and for the period from December 17, 1997 (commencement of
operations) to December 31, 1997. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Aetna
Mid Cap VP as of December 31, 1998, results of its operations for the year then
ended, changes in its net assets for each of the years or periods in the
two-year period then ended and financial highlights for the year ended December
31, 1998 and the period from December 17, 1997 (commencement of operations) to
December 31, 1997, in conformity with generally accepted accounting principles.
KPMG LLP
Hartford, Connecticut
January 29, 1999
9
