As filed with the Securities and Exchange File No. 333-05173
Commission on April 27, 1999 File No. 811-7651
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 8
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9
AETNA VARIABLE PORTFOLIOS, INC.
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151 Farmington Avenue, Hartford, Connecticut 06156
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(860) 275-2032
Amy R. Doberman, Counsel
10 State House Square SH11, Hartford, Connecticut 06103-3602
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(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
X on May 3, 1999 pursuant to paragraph (b) of Rule 485
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<PAGE>
AETNA VARIABLE PORTFOLIOS, INC.
Prospectus
May 3, 1999
Aetna Growth VP (Growth)
Aetna International VP (International)
Aetna Small Company VP (Small Company)
Aetna Value Opportunity VP (Value Opportunity)
Aetna Real Estate Securities VP (Real Estate)
Aetna High Yield VP (High Yield)
Aetna Index Plus Bond VP (Index Plus Bond)
Aetna Index Plus Large Cap VP (Index Plus Large Cap)
Aetna Index Plus Mid Cap VP (Index Plus Mid Cap)
Aetna Index Plus Small Cap VP (Index Plus Small Cap)
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is truthful or complete.
Anyone who represents to the contrary has committed a criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
----
THE PORTFOLIOS' INVESTMENTS ................................................. 3
Investment Objectives, Principal Investment Strategies and Risks, Investment
Performance ................................................................ 3
PORTFOLIO EXPENSES .......................................................... 24
OTHER CONSIDERATIONS ........................................................ 25
MANAGEMENT OF THE PORTFOLIOS ................................................ 26
INVESTMENTS IN AND REDEMPTIONS FROM THE PORTFOLIOS .......................... 28
TAX INFORMATION ............................................................. 29
PERFORMANCE OF SIMILARLY MANAGED ACCOUNTS ................................... 29
FINANCIAL HIGHLIGHTS ........................................................ 32
ADDITIONAL INFORMATION ...................................................... 37
</TABLE>
2 Aetna Variable Portfolios, Inc.
<PAGE>
THE PORTFOLIOS' INVESTMENTS
Investment Objectives, Principal Investment Strategies and Risks, Investment
Performance
o Aetna Variable Portfolios, Inc. (Fund) consists of 10 separate
portfolios (Portfolios). Below is a description of each Portfolio's
investment objective, the principal investment strategies employed on
behalf of each Portfolio, and the principal risks associated with
investing in each Portfolio.
o A performance bar chart is provided for each Portfolio. If a Portfolio
has been in existence for at least two full calendar years, the bar
chart shows changes in the Portfolio's performance from year to year.
The fluctuation in returns illustrates each Portfolio's performance
volatility. The chart is accompanied by the Portfolio's best and worst
quarterly returns throughout the years noted in the bar chart.
o A table for each Portfolio shows its average annual total return. The
table gives some indication of the risks of an investment in the
Portfolio by comparing the Portfolio's performance with a broad-based
securities market index. Each index is a widely recognized, unmanaged
index of securities. A Portfolio's past performance is not necessarily
an indication of how it will perform in the future.
o The performance numbers appearing in the bar charts and tables for each
Portfolio do not reflect the deduction of any insurance fees or
charges. If such charges were deducted, performance would be lower.
o Additional information on the Portfolios' investment strategies and
risks is included, on page 25.
o Aeltus Investment Management, Inc. (Aeltus) serves as investment
adviser to the Portfolios.
o Bradley, Foster & Sargent, Inc. (Bradley) serves as subadviser to Value
Opportunity.
Shares of the Portfolios will rise and fall in value and you could lose money
by investing in them. There is no guaranty the Portfolios will achieve their
investment objectives. Shares of the Portfolios are not bank deposits and are
not guaranteed, endorsed or insured by any financial institution, the FDIC or
any other government agency.
Shares of the Portfolios are offered to insurance company separate accounts
that fund both annuity and life insurance contracts and to certain
tax-qualified retirement plans. Due to differences in tax treatment or other
considerations, the interests of various contract owners participating in the
Portfolios and the interests of qualified plans investing in the Portfolios
might at some time be in conflict. The Fund's Board of Directors (Board) will
monitor the Fund for any material conflicts and determine what action, if any,
should be taken to resolve these conflicts.
Aetna Variable Portfolios, Inc. 3
<PAGE>
Aetna Growth VP (Growth)
Investment Objective. Seeks growth of capital through investment in a
diversified portfolio consisting primarily of common stocks and securities
convertible into common stocks believed to offer growth potential.
Principal Investment Strategies. Under normal market conditions, Growth invests
at least 65% of its total assets in common stocks.
In managing Growth, Aeltus:
o Emphasizes stocks of larger companies, although it may invest in
companies of any size.
o Uses internally developed quantitative computer models to evaluate the
financial characteristics (for example, earnings growth consistency,
earnings momentum and price/ earnings ratio) of approximately 1,000
companies. Aeltus analyzes these characteristics in an attempt to
identify companies it believes have strong growth characteristics or
demonstrate a positive trend in earnings estimates, but whose full
value is not reflected in the stock price.
o Focuses on companies that it believes have strong, sustainable and
improving earnings growth, and established market positions in a
particular industry.
Principal Risks. The principal risks of investing in Growth are those generally
attributable to stock investing. They include sudden and unpredictable drops in
the value of the market as a whole and periods of lackluster or negative
performance.
Growth-oriented stocks typically sell at relatively high valuations as compared
to other types of stocks. If a growth stock does not exhibit the consistent
level of growth expected, its price may drop sharply. Historically,
growth-oriented stocks have been more volatile than value-oriented stocks.
4 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA GROWTH VP
Year-by-Year Total Return
[Start Chart]
Years Ended December 31,
1997 1998
33.01% 37.68%
[End Chart]
[arrow point up] Best Quarter:
fourth quarter 1998,
up 24.37%
[arrow point down] Worst Quarter:
third quarter 1998,
down 10.04%
As of December 31, 1998
<TABLE>
<CAPTION>
As of December 31, 1998
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Growth 37.68% 35.37% 12/13/96
S&P 500 Index* 28.57% 28.30% 11/30/96
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in the Portfolio.
* The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
Aetna Variable Portfolios, Inc. 5
<PAGE>
Aetna International VP (International)
Investment Objective. 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.
Principal Investment Strategies. Under normal market conditions, International
invests at least 65% of its total assets in securities principally traded in
three or more countries outside of the United States. These securities may
include common stocks as well as securities convertible into common stocks.
In managing International, Aeltus:
o Diversifies the Portfolio by investing in a mix of stocks that it
believes have the potential for long-term growth, as well as stocks
that appear to be trading below their real value.
o Allocates assets among several geographic regions and individual
countries, investing primarily in those areas that it believes have the
greatest potential for growth as well as stable exchange rates.
o Invests primarily in established foreign securities markets.
o Typically invests in approximately 90 to 120 different securities at
any one time, and looks to allocate no more than 3% of the Portfolio's
total assets to a single security.
o Uses internally developed quantitative computer models to evaluate the
financial characteristics of over 2,000 companies. Aeltus analyzes cash
flows, earnings and dividends of each company, in an attempt to select
companies with long-term sustainable growth characteristics.
o Employs currency hedging strategies in an effort to protect the
Portfolio from adverse effects on the U.S. dollar.
Principal Risks. The principal risks of investing in International are those
generally attributable to stock investing. They include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Other principal risks of foreign investing include:
o Stocks of foreign companies tend to be less liquid and more volatile
than their U.S. counterparts.
o Accounting standards and market regulations tend to be less
standardized in certain foreign countries, and economic and political
climates tend to be less stable.
o Stocks of foreign companies may be denominated in foreign currency.
Exchange rate fluctuations may reduce or eliminate gains or create
losses. A hedging strategy adds to the Portfolio's expenses and may not
perform as expected.
6 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA INTERNATIONAL VP
Year-by-Year Total Return
[Start Chart]
Years Ended December 31,
1998
18.92%
[End Chart]
[arrow point up] Best Quarter:
fourth quarter 1998,
up 17.14%
[arrow point down] Worst Quarter:
third quarter 1998,
down 15.75%
As of December 31, 1998
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
International 18.92% 21.54% 12/22/97
MSCI-EAFE Index* 20.33% 20.33% 12/31/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in the Portfolio.
* The Morgan Stanley Capital International-Europe, Australia and Far East Index
is a market value-weighted average of the performance of more than 900
securities listed on the stock market exchanges of countries in Europe,
Australia and the Far East.
Aetna Variable Portfolios, Inc. 7
<PAGE>
Aetna Small Company VP (Small Company)
Investment Objective. 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.
Principal Investment Strategies. Under normal market conditions, Small Company
invests at least 65% of its total assets in common stocks of
small-capitalization companies, defined as:
o The 2,000 smallest of the 3,000 largest U.S. companies (as measured by
market capitalization).
o All companies not included above that are included in the Standard &
Poor's SmallCap 600 Index or the Russell 2000 Index.
o Companies with market capitalizations lower than any companies included
in the first two categories.
For purposes of the 65% policy, the largest company in this group in which
Small Company intends to invest currently has a market capitalization of
approximately $1.5 billion.
In managing Small Company, Aeltus:
o Invests in stocks that it believes have the potential for long-term
growth, as well as those that appear to be trading below their real
value.
o Uses internally developed quantitative computer models to evaluate
financial characteristics (for example, changes in earnings, earnings
estimates and price momentum) of over 2,000 companies. Aeltus analyzes
these characteristics in an attempt to identify companies whose full
value is not reflected in the stock price.
o Considers the potential of each company to create or take advantage of
unique product opportunities, its potential to achieve long-term
sustainable growth and the quality of its management.
Principal Risks. The principal risks of investing in Small Company are those
generally attributable to stock investing. They include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Other principal risks include:
o Stocks of smaller companies carry higher risks than stocks of larger
companies. This is because smaller companies may lack the management
experience, financial resources, product diversification and
competitive strengths of larger companies.
o In many instances, the frequency and volume of trading in these stocks
is substantially less than is typical of stocks of larger companies. As
a result, the stocks of smaller companies may be subject to wider price
fluctuations or may be less liquid.
o When selling a large quantity of a particular stock, the Portfolio may
have to sell at a discount from quoted prices or may have to make a
series of small sales over an extended period of time due to the more
limited trading volume of smaller company stocks.
o Stocks of smaller companies can be particularly sensitive to expected
changes in interest rates, borrowing costs and earnings.
8 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA SMALL COMPANY VP
Year-by-Year Total Return
[Start Chart]
Years Ended December 31,
1997 1998
34.49% 1.10%
[End Chart]
[arrow point up] Best Quarter:
third quarter 1997,
up 18.77%
[arrow point down] Worst Quarter:
third quarter 1998,
down 19.38%
As of December 31, 1998
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Small Company 1.10% 17.22% 12/27/96
Russell 2000 Index* -2.55% 9.20% 12/31/96
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in the Portfolio.
* The Russell 2000 Index consists of the smallest 2,000 companies in the
Russell 3000 Index and represents approximately 10% of the Russell 3000
total market capitalization. The Russell 2000 Index assumes reinvestment of
all dividends and is unmanaged.
Aetna Variable Portfolios, Inc. 9
<PAGE>
Aetna Value Opportunity VP (Value Opportunity)
Investment Objective. Seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stock.
Principal Investment Strategies. Under normal market conditions, Value
Opportunity invests at least 65% of its total assets in common stocks. In
managing Value Opportunity, Bradley tends to invest in larger companies it
believes are trading below their real value, although it may invest in
companies of any size. Bradley believes that Value Opportunity's investment
objective can best be achieved by investing in companies whose stock price has
been excessively discounted due to perceived problems. In searching for
investments, Bradley evaluates financial and other characteristics of
companies, attempting to find those companies that appear to possess a catalyst
for positive change, such as strong management, solid assets, or market
position, rather than those companies whose stocks are simply inexpensive.
Bradley looks to sell a security when company business fundamentals deviate
from expectations or when stop-loss levels are triggered.
Principal Risks. The principal risks of investing in Value Opportunity are
those generally attributable to stock investing. They include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Stocks that appear to be undervalued may never appreciate to the extent
expected. Further, because the prices of value-oriented stocks tend to
correlate more closely with economic cycles than growth-oriented stocks, they
are more sensitive to changing economic conditions, such as changes in interest
rates, corporate earnings and industrial production.
10 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA VALUE OPPORTUNITY VP
Year-by-Year Total Return
[Start Chart]
Years Ended December 31,
1997 1998
39.38% 22.39%
[End Chart]
[arrow point up] Best Quarter:
fourth quarter 1998,
up 30.76%
[arrow point down] Worst Quarter:
third quarter 1998,
down 16.64%
As of December 31, 1998
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Value Opportunity 22.39% 31.12% 12/13/96
S&P 500 Index* 28.57% 28.30% 11/30/96
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in the Portfolio.
* The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
Aetna Variable Portfolios, Inc. 11
<PAGE>
Aetna Real Estate Securities VP (Real Estate)
Investment Objective. Seeks maximum total return primarily through investment
in a diversified portfolio of equity securities of real estate companies, the
majority of which are real estate investment trusts (REITs).
Principal Investment Strategies. Under normal market conditions, Real Estate
invests at least 65% of its total assets in stocks, convertible securities and
preferred stocks of companies principally engaged in the real estate industry.
These companies may invest in, among other things, shopping malls, healthcare
facilities, office parks and apartment communities, or may provide real estate
management and development services.
In selecting investments from a universe of equity securities of REITs and real
estate operating companies, Aeltus uses internally developed quantitative
models to forecast the returns of each security. Aeltus evaluates real estate
companies based on their earnings history and long-term growth prospects,
analyst estimates of future earnings, safety and growth in dividends, balance
sheet strength and quality of management. Aeltus also considers whether the
securities appear to be trading below their real value. Aeltus allocates assets
among property types and economic and geographic regions. Aeltus attempts to
construct Real Estate's portfolio so that the overall level of risk is not in
excess of its benchmark index, the National Association of Real Estate
Investment Trusts Equity (NAREIT) Index.
Principal Risks. Concentrating in stocks of real estate-related companies
presents certain risks that are more closely associated with investing in real
estate directly than with investing in the stock market generally. Those risks
include:
o Periodic declines in the value of real estate, generally, or in the
rents and other income generated by real estate.
o Periodic over-building, which creates gluts in the market, as well as
changes in laws (such as zoning laws) that impair the property rights
of real estate owners.
o Adverse developments in the real estate industry, which may have a
greater impact on Real Estate than a portfolio that is more broadly
diversified.
The performance of the Portfolio also may be adversely affected by sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. Although Real Estate is subject to the
risks generally attributable to stock investing, because the Portfolio has
concentrated its assets in one industry it may be subject to more abrupt swings
in value than would a fund that does not concentrate its assets in one
industry.
12 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA REAL ESTATE SECURITIES VP
Year-by-Year Total Return
[Start Chart]
Year Ended December 31,
1998
-12.85%
[End Chart]
[arrow point down] Best Quarter:
fourth quarter 1998,
down 0.19%
[arrow point down] Worst Quarter:
third quarter 1998,
down 7.47%
As of December 31, 1998
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Real Estate -12.85% -9.30% 12/15/97
NAREIT* -17.51% -14.46% 11/30/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in the Portfolio.
* The NAREIT Index is a market weighted index of all tax-qualified REITs listed
on the New York Stock Exchange, American Stock Exchange, and the NASDAQ
National Market System.
Aetna Variable Portfolios, Inc. 13
<PAGE>
Aetna High Yield VP (High Yield)
Investment Objective. 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 (S&P) or lower than Baa3 by Moody's
Investors Service, Inc. (Moody's).
Principal Investment Strategies. Under normal market conditions, High Yield
invests at least 65% of its total assets in high-yield, high-risk bonds
(high-yield bonds). High-yield bonds are bonds rated below investment grade in
terms of quality, and may include bonds of companies in default or bankruptcy.
In managing High Yield, Aeltus:
o Looks to meet the investment objective and reduce volatility by
constructing a diversified portfolio consisting of securities with
varying maturities and credit ratings. Aeltus, however, also looks
beyond credit ratings in an effort to select investments that it
believes offer opportunities for high income, growth and credit
improvement.
o Uses a quantitative process for evaluating the financial criteria of
issuers, such as cash flow and profitability.
o Evaluates other, less quantitative factors, such as market share,
strength of management and management's equity stake in the company.
Principal Risks. When the economy weakens, cash flows weaken, making it more
difficult for issuers to pay principal and interest. For all bonds, there is a
risk that an issuer will default. This risk is even greater with high-yield
bonds. Moreover, high-yield bonds, as a group, often decline in value when the
market anticipates or experiences a large number of issuers defaulting or
declaring bankruptcy.
Additional principal risks include:
o The performance of High Yield may be affected by weak equity markets,
when issuers of high-yield bonds generally find it difficult to reduce
debt by replacing debt with equity.
o Generally, when interest rates rise, bond prices fall, which may cause
the value of the Portfolio's securities to fall as well.
14 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA HIGH YIELD VP
Year-by-Year Total Return
[Start Chart]
Year Ended December 31,
1998
-0.27%
[End Chart]
[arrow point up] Best Quarter:
fourth quarter 1998,
up 6.53%
[arrow point down] Worst Quarter:
third quarter 1998,
down 8.19%
As of December 31, 1998
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
High Yield -0.27% 1.16% 12/10/97
Merrill Lynch High Yield Master Index* 3.66% 4.28% 11/30/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in the Portfolio.
* The Merrill Lynch High Yield Master Index consists of publicly placed
nonconvertible, coupon-bearing US debt carrying a term to maturity of at
least one year. In addition, issues must be rated by S&P or by Moody's as
less than investment grade but not in default.
Aetna Variable Portfolios, Inc. 15
<PAGE>
Aetna Index Plus Bond VP (Index Plus Bond)
Investment Objective. Seeks maximum 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 6,900 securities.
Principal Investment Strategies. Index Plus Bond invests at least 90% of its
total assets in bonds, including U.S. Treasuries, corporate bonds and
mortgage-related securities.
In managing Index Plus Bond, Aeltus:
o Attempts to achieve a total return which, before deducting Portfolio
expenses, exceeds that of the LBAB.
o Allocates assets among various sectors, as well as among individual
securities, that it believes will outperform those in the LBAB, while
underweighting (or avoiding) those sectors and securities it believes
will underperform.
o In determining which bonds to purchase, evaluates various criteria,
such as the financial strength of the issuer and the issuer's potential
for strong, sustained earnings growth as well as the potential for
interest rates to rise or fall.
Although the Portfolio will not hold all of the securities in the LBAB, Aeltus
expects 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.
Principal Risks. The principal risks of investing in Index Plus Bond are those
generally attributable to bond investing. Generally, when interest rates rise,
bond prices fall. Bonds with longer maturities tend to be more sensitive to
changes in interest rates. For all bonds there is a risk that an issuer will
default.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
The success of the Portfolio's strategy depends significantly on Aeltus' skill
in choosing investments, and in determining which sectors or securities to
overweight, underweight or avoid altogether.
16 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA INDEX PLUS BOND VP
Year-by-Year Total Return
[Start Chart]
Year Ended December 31,
1998
8.17%
[End Chart]
[arrow point up] Best Quarter:
third quarter 1998,
up 3.39%
[arrow point down] Worst Quarter:
fourth quarter 1998,
down 0.83%
As of December 31, 1998
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Index Plus Bond 8.17% 8.20% 12/18/97
LBAB Index* 8.69% 8.69% 12/31/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in the Portfolio.
* The Lehman Brothers Aggregate Bond Index (LBAB) is an unmanaged index
comprised of approximately 6,900 securities.
Aetna Variable Portfolios, Inc. 17
<PAGE>
Aetna Index Plus Large Cap VP (Index Plus Large Cap)
Investment Objective. Seeks to outperform the total return performance of the
Standard & Poor's 500 Composite Index (S&P 500), while maintaining a market
level of risk.
Principal Investment Strategies. Index Plus Large Cap invests at least 80% of
its net assets in stocks included in the S&P 500 (other than Aetna Inc. common
stock). The S&P 500 is a stock market index comprised of common stocks of 500
of the largest companies in the U.S. selected by S&P. Index Plus Large Cap
seeks to outperform the S&P 500 after deducting Portfolio expenses.
In managing Index Plus Large Cap, Aeltus attempts to achieve the Portfolio's
objective by overweighting those stocks in the S&P 500 that Aeltus believes
will outperform the index, and underweighting (or avoiding altogether) those
stocks that Aeltus believes will underperform the index. In determining stock
weightings, Aeltus uses internally developed quantitative computer models to
evaluate various criteria, such as the financial strength of each company and
its potential for strong, sustained earnings growth. At any one time, Aeltus
generally includes in Index Plus Large Cap approximately 400 of the stocks
included in the S&P 500. Although the Portfolio will not hold all the stocks in
the S&P 500, Aeltus expects 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, as the Portfolio is designed to have risk characteristics
(e.g. price-to-earnings ratio, dividend yield, volatility) which approximate
those of the S&P 500.
Principal Risks. The principal risks of investing in Index Plus Large Cap are
those generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. The success of the Portfolio's strategy
depends significantly on Aeltus' skill in determining which securities to
overweight, underweight or avoid altogether.
18 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA INDEX PLUS LARGE CAP VP
Year-by-Year Total Return
[Start Chart]
Year Ended December 31,
1997 1998
33.89% 31.60%
[End Chart]
[arrow point up] Best Quarter:
fourth quarter 1998,
up 22.83%
[arrow point down] Worst Quarter:
third quarter 1998,
down 9.71%
As of December 31, 1998
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Index Plus Large Cap 31.60% 33.32% 9/16/96
S&P 500 Index* 28.57% 33.49% 8/31/96
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in the Portfolio.
* The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
Aetna Variable Portfolios, Inc. 19
<PAGE>
Aetna Index Plus Mid Cap VP (Index Plus Mid Cap)
Investment Objective. Seeks to outperform the total return performance of the
Standard & Poor's MidCap 400 Index (S&P 400), while maintaining a market level
of risk.
Principal Investment Strategies. Index Plus Mid Cap invests at least 80% of its
net assets in stocks included in the S&P 400. The S&P 400 is a stock market
index comprised of common stocks of 400 mid-capitalization companies in the
U.S. selected by S&P. Index Plus Mid Cap seeks to outperform the S&P 400 after
deducting Portfolio expenses.
In managing Index Plus Mid Cap, Aeltus attempts to achieve the Portfolio's
objective by overweighting those stocks in the S&P 400 that Aeltus believes
will outperform the index, and underweighting (or avoiding altogether) those
stocks that Aeltus believes will underperform the index. In determining stock
weightings, Aeltus uses internally developed quantitative computer models to
evaluate various criteria, such as the financial strength of each issuer and
its potential for strong, sustained earnings growth. Although the Portfolio
will not hold all the stocks in the S&P 400, Aeltus expects 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, as the Portfolio is designed to
have risk characteristics (e.g. price-to-earnings ratio, dividend yield,
volatility) which approximate those of the S&P 400.
Principal Risks. The principal risks of investing in Index Plus Mid Cap are
those generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. In addition, stocks of medium sized
companies tend to be more volatile and less liquid than stocks of larger
companies.
The success of the Portfolio's strategy depends significantly on Aeltus' skill
in determining which securities to overweight, underweight or avoid altogether.
20 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA INDEX PLUS MID CAP VP
Year-by-Year Total Return
[Start Chart]
Year Ended December 31,
1998
24.30%
[End Chart]
[arrow point up] Best Quarter:
fourth quarter 1998,
up 29.17%
[arrow point down] Worst Quarter:
third quarter 1998,
down 12.18%
As of December 31, 1998
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Index Plus Mid Cap 24.30% 27.35% 12/16/97
S&P 400 Index* 19.11% 21.72% 11/30/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in the Portfolio.
* The Standard & Poor's MidCap 400 Index consists of 400 stocks chosen for
market size, liquidity and industry group representation. It is a
market-weighted index with each stock affecting the index in proportion to
its market value.
Aetna Variable Portfolios, Inc. 21
<PAGE>
Aetna Index Plus Small Cap VP (Index Plus Small Cap)
Investment Objective. Seeks to outperform the total return performance of the
Standard and Poor's SmallCap 600 Index (S&P 600), while maintaining a market
level of risk.
Principal Investment Strategies. Index Plus Small Cap invests at least 80% of
its net assets in stocks included in the S&P 600. The S&P 600 is a stock market
index comprised of common stocks of 600 small-capitalization companies in the
U.S. selected by S&P. Index Plus Small Cap seeks to outperform the S&P 600
after deducting Portfolio expenses.
In managing Index Plus Small Cap, Aeltus attempts to achieve the Portfolio's
objective by overweighting those stocks in the S&P 600 that Aeltus believes
will outperform the index, and underweighting (or avoiding altogether) those
stocks that Aeltus believes will underperform the index. In determining stock
weightings, Aeltus uses internally developed quantitative computer models to
evaluate various criteria, such as the financial strength of each issuer and
its potential for strong, sustained earnings growth. Although the Portfolio
will not hold all the stocks in the S&P 600, Aeltus expects 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, as the Portfolio is designed to
have risk characteristics (e.g. price-to-earnings ratio, dividend yield,
volatility) which approximate those of the S&P 600.
Principal Risks. The principal risks of investing in Index Plus Small Cap are
those generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Other principal risks include:
o Stocks of smaller companies carry higher risks than stocks of larger
companies because smaller companies may lack the management experience,
financial resources, product diversification, and competitive strengths
of larger companies.
o In many instances, the frequency and volume of trading in these stocks
is substantially less than is typical of stocks of larger companies. As
a result, the stocks of smaller companies may be subject to wider price
fluctuations.
o When selling a large quantity of a particular stock, the Portfolio may
have to sell holdings at a discount from quoted prices or may have to
make a series of small sales over an extended period of time due to the
more limited trading volume of smaller company stocks.
o Stocks of smaller companies tend to be more volatile than stocks of
larger companies and can be particularly sensitive to expected changes
in interest rates, borrowing costs and earnings.
Finally, the success of the Portfolio's strategy depends significantly on
Aeltus' skill in determining which securities to overweight, underweight or
avoid altogether.
22 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA INDEX PLUS SMALL CAP VP
Year-by-Year Total Return
[Start Chart]
Years Ended December 31,
1998
-1.35%
[End Chart]
[arrow point up] Best Quarter:
fourth quarter 1998,
up 17.61%
[arrow point down] Worst Quarter:
third quarter 1998,
down 19.74%
As of December 31, 1998
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Index Plus Small Cap -1.35% 2.80% 12/19/97
S&P 600 Index* -1.30% -1.30% 12/31/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in the Portfolio.
* The Standard & Poor's SmallCap 600 Index consists of 600 stocks chosen for
market size, liquidity, and industry group representation. It is a
market-weighted index with each stock affecting the index in proportion to
its market value.
Aetna Variable Portfolios, Inc. 23
<PAGE>
PORTFOLIO EXPENSES
The following table describes Portfolio expenses. Shareholder fees are paid
directly by shareholders. Annual Portfolio Operating Expenses are deducted from
Portfolio assets every year, and are thus paid indirectly by all shareholders.
Shareholders who acquired Portfolio shares through an insurance company separate
account should refer to the applicable contract prospectus, prospectus summary
or disclosure statement for a description of insurance charges which may apply.
<TABLE>
<CAPTION>
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge Maximum Deferred Sales Charge
(Load) on Purchases (as a (Load) (as a percentage
percentage of purchase price) of gross redemption proceeds)
<S> <C> <C>
Growth None None
International None None
Small Company None None
Value Opportunity None None
Real Estate None None
High Yield None None
Index Plus Bond None None
Index Plus Large Cap None None
Index Plus Mid Cap None None
Index Plus Small Cap None None
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses (1, 2)
(expenses that are deducted from Portfolio assets)
Distribution Total Fee Waiver/
Management (12b-1) Other Operating Expense Net
Fee Fee Expenses Expenses Reimbursement Expenses
------------ -------------- ---------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Growth 0.60% None 0.15% 0.75% -- --
International 0.85% None 1.22% 2.07% 0.92% 1.15%
Small Company 0.75% None 0.14% 0.89% -- --
Value Opportunity 0.60% None 0.14% 0.74% -- --
Real Estate 0.75% None 0.73% 1.48% 0.53% 0.95%
High Yield 0.65% None 0.40% 1.05% 0.25% 0.80%
Index Plus Bond 0.30% None 0.26% 0.56% 0.11% 0.45%
Index Plus Large Cap 0.35% None 0.10% 0.45% -- --
Index Plus Mid Cap 0.40% None 0.51% 0.91% 0.31% 0.60%
Index Plus Small Cap 0.40% None 0.61% 1.01% 0.41% 0.60%
</TABLE>
(1) Aeltus is contractually obligated through December 31, 1999 to waive all or
a portion of its investment advisory fees and/or its administrative services
fees for certain Portfolios and/or to reimburse a portion of those
Portfolios' other expenses in order to ensure that the Portfolios' total
operating expenses do not exceed the percentage of the Portfolios' average
daily net assets reflected in the table under Net Expenses. Each Porfolio is
subject to a fee waiver/expense reimbursement obligation.
(2) Prior to May 1, 1998, the investment adviser provided administrative
services to each Portfolio and assumed each Portfolio's ordinary recurring
direct expenses under an administrative services agreement. Effective May 1,
1998, under the current Administrative Services Agreement, Aeltus provides
administrative services to each Portfolio but will not assume the
Portfolios' ordinary recurring direct costs. The "Other Expenses" shown are
not based on actual figures for the year ended December 31, 1998, but
reflect the fee payable under the current Administrative Services Agreement
and estimate each Portfolio's ordinary recurring direct costs.
24 Aetna Variable Portfolios, Inc.
<PAGE>
Example
The following example is designed to help you compare the costs of investing in
the Portfolios with the costs of investing in other mutual funds. Using the
annual portfolio operating expense percentages above, you would pay the
following expenses on a $10,000 investment, assuming a 5% annual return and
redemption at the end of each of the periods shown:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Growth $ 77 $240 $ 417 $ 930
International 117 560 1,029 2,327
Small Company 91 284 493 1,096
Value Opportunity 76 237 411 918
Real Estate 97 416 758 1,723
High Yield 82 309 555 1,260
Index Plus Bond 46 168 302 691
Index Plus Large Cap 46 144 252 567
Index Plus Mid Cap 61 259 474 1,091
Index Plus Small Cap 61 281 518 1,199
</TABLE>
* Aeltus is contractually obligated to waive fees and/or reimburse expenses
through December 31, 1999. Therefore, all figures reflect a
waiver/reimbursement for the first year of the period.
This example should not be considered an indication of prior or future
expenses. Actual expenses for the current year may be greater or less than
those shown.
OTHER CONSIDERATIONS
In addition to the principal investments and strategies described above, the
Portfolios may also invest in other securities, engage in other practices, and
be subject to additional risks, as discussed below and in the Statement of
Additional Information (SAI).
Futures Contracts and Options. Each Portfolio may enter into futures contracts
and use options. The Portfolios primarily use futures contracts and options to
hedge against price fluctuations or increase exposure to a particular asset
class. To a limited extent, the Portfolios also may use these instruments for
speculation (investing for potential income or capital gain).
o 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.
o Options are agreements that give the holder the right, but not the
obligation, to purchase or sell a certain amount of securities or
futures contracts during a specified period or on a specified date.
The main risk with futures contracts and options is that they can amplify a
gain or loss, potentially earning or losing substantially more money than the
actual cost of the instrument. In addition, while a hedging strategy can guard
against potential risks for a Portfolio as a whole, it adds to the Portfolio's
expenses and may reduce or eliminate potential gains. There is also a risk that
a futures contract or option intended as a hedge may not perform as expected.
Defensive Investing. In response to unfavorable market conditions, each
Portfolio (except Index Plus Bond, Index Plus Large Cap, Index Plus Mid Cap and
Index Plus Small Cap) may make temporary investments that are not consistent
with its principal investment objective and policies. In that event, the
Portfolio may not achieve its investment objective.
Aetna Variable Portfolios, Inc. 25
<PAGE>
Year 2000. The date-related computer issue known as the "Year 2000 problem"
could have an adverse impact on the quality of services provided to each
Portfolio and its shareholders. However, each Portfolio understands that its
key service providers, including but not limited to Aeltus and its affiliates,
the transfer agent, the custodian, and broker-dealers through which its trades
are executed, are taking steps to address the issue. The costs of these efforts
will not affect the Portfolios. The Year 2000 problem also may adversely affect
the issuers in which a Portfolio invests. For example, issuers may incur
substantial costs to address the problem. They may also suffer losses caused by
corporate and governmental data processing errors. The Portfolios and Aeltus
will continue to monitor developments relating to this issue.
Risks of Conversion to Euro. On January 1, 1999, 11 of the countries in the
European Monetary Union adopted the Euro as their official currency. However,
their original currencies (for example, the franc, the mark, and the lire) will
continue in use for cash transactions until January 1, 2002. After that date,
it is expected that only the Euro will be used in those countries. Although a
common currency is expected to confer some benefits in those markets, the
conversion to the new currency may affect issuers in which the Portfolios
invest, because of changes in the competitive environment from a consolidated
currency market, and greater operational costs from converting to the new
currency. This could depress the value of their stock. Any negative impact of
the conversion to the Euro would be most significant for International.
Portfolio Turnover. Portfolio turnover refers to the frequency of portfolio
transactions and the percentage of portfolio assets being bought and sold during
the year. For the fiscal year ended December 31, 1998, Growth, International,
Small Company, High Yield and Index Plus Mid Cap each had a portfolio turnover
rate in excess of 150%. A high portfolio turnover rate increases a Portfolio's
transaction costs.
MANAGEMENT OF THE PORTFOLIOS
Aeltus Investment Management, Inc., 10 State House Square, Hartford,
Connecticut 06103-3602, serves as investment adviser to the Portfolios. Aeltus
is responsible for managing the assets of each Portfolio in accordance with its
investment objective and policies, subject to oversight by the Fund's Board of
Directors (Board). Aeltus has acted as adviser or subadviser to mutual funds
since 1994 and has managed institutional accounts since 1972.
Advisory Fees
o Listed below are the aggregate advisory fees paid by each Portfolio for its
most recent fiscal year. These numbers reflect the advisory fees after the
applicable fee waiver and expense reimbursement. See the Annual Portfolio
Operating Expenses table for the advisory fee (Management Fee) Aeltus was
entitled to receive.
<TABLE>
<CAPTION>
Aggregate Advisory Fees as a Percentage of Average
Portfolio Name Net Assets for Year Ended December 31, 1998
- ---------------------- ---------------------------------------------------
<S> <C>
Growth 0.60%
International 0.23%
Small Company 0.75%
Value Opportunity 0.60%
Real Estate 0.38%
High Yield 0.48%
Index Plus Bond 0.22%
Index Plus Large Cap 0.35%
Index Plus Mid Cap 0.18%
Index Plus Small Cap 0.13%
</TABLE>
26 Aetna Variable Portfolios, Inc.
<PAGE>
On October 1, 1998, Bradley, Foster & Sargent, Inc., City Place II, 185 Asylum
Street, Hartford, Connecticut 06103, was appointed as subadviser to Value
Opportunity. While Bradley had not previously served as an investment adviser
or subadviser to a mutual fund, it has managed private client assets as well as
401(k), profit sharing and other retirement plan assets since 1994.
Bradley is responsible for making equity investment decisions for Value
Opportunity. Aeltus, as adviser, remains responsible for all other aspects of
managing Value Opportunity, including trade execution and cash management.
Aeltus pays Bradley a monthly subadvisory fee at an annual rate of 0.15% of
Value Opportunity's average daily net assets on the first $250 million of
assets, and 0.10% on assets above $250 million.
Portfolio Management. The following people are primarily responsible for the
day-to-day management of the Portfolios.
Growth. Kenneth H. Bragdon, Portfolio Manager, Aeltus, has been managing Growth
since July 1997. Previously, Mr. Bragdon co-managed the Portfolio. Mr. Bragdon
has been with the Aetna organization since 1978 and has 27 years of experience
in the investment business.
International. Vince Fioramonti, Portfolio Manager, Aeltus, has been managing
International since its inception in December 1997. Mr. Fioramonti manages
international stocks and non-U.S. dollar government bonds for several Aetna
investment funds. Mr. Fioramonti joined Aetna in 1994 after serving as Vice
President of The Travelers Investment Management Company. He began his
investment career with Travelers in 1988.
Small Company. Thomas DiBella, Portfolio Manager, Aeltus, has been managing
Small Company since its inception in December, 1996. Mr. DiBella joined Aeltus
in 1991 and is currently responsible for the management of several
small-capitalization portfolios.
Value Opportunity. Peter Canoni, Principal, Bradley, manages Value Opportunity.
Before joining Bradley, Mr. Canoni was a Managing Director of Aeltus and the
portfolio manager of Value Opportunity from its inception in December 1996
through August 3, 1998. Mr. Canoni had been with the Aetna organization since
1980 and has over 26 years of investment experience.
Real Estate. Yaniv Tepper, Portfolio Manager, Aeltus, has been managing Real
Estate since its inception in December 1997. He has been managing real estate
securities for several investment funds since 1994, when he joined Aeltus. He
has over 10 years of experience in direct real estate and real estate
securities investments.
High Yield. Gail Bruhn, Portfolio Manager, Aeltus, has been managing High Yield
since its inception in December 1997. Ms. Bruhn joined Aeltus in 1995 after
spending 12 years with CIGNA Investments. She currently manages high-yield
securities for several institutional accounts.
Index Plus Bond. Christie Bull, Portfolio Manager, Aeltus, has been managing
Index Plus Bond since its inception in December 1997. Ms. Bull is also the
Director of Fixed Income Research for Aeltus. Ms. Bull has been with the Aetna
organization since 1979, and has been managing fixed-income securities for
several institutional accounts since 1993.
Index Plus Large Cap. Geoffrey A. Brod, Portfolio Manager, Aeltus, has been
managing Index Plus Large Cap since its inception in September 1996. He has
over 30 years of experience in quantitative applications and has over 11 years
of experience in equity investments. Mr. Brod has been with the Aetna
organization since 1966.
Index Plus Mid Cap, Index Plus Small Cap. Geoffrey A. Brod, Portfolio Manager,
Aeltus, and Michael F. Farrell, Portfolio Manager, Aeltus, serve as co-managers
of Index Plus Mid Cap and Index Plus Small Cap. Mr. Brod served as the sole
manager of Index Plus Mid Cap and Index Plus Small Cap from each
Aetna Variable Portfolios, Inc. 27
<PAGE>
Portfolio's inception in December 1997 through April 1999. Mr. Farrell has been
with the Aetna organization since 1991 and has been responsible for
quantitative research and development of equity models.
Administrator
The Fund 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 net asset value (NAV) and other financial reports prepared for the
Portfolios. As administrator, Aeltus may contract with other entities to
perform certain administrative services.
Listed below are the fees each Portfolio pays Aeltus on an annual rate based on
average daily net assets of the Portfolio:
<TABLE>
<CAPTION>
Administrative Fee Portfolio Assets
- -------------------- ------------------------------
<S> <C>
0.075% On the first $5 billion
0.050% On all assets over $5 billion
</TABLE>
INVESTMENTS IN AND REDEMPTIONS FROM THE PORTFOLIOS
Investors purchasing shares in connection with an insurance company contract or
policy should refer to the documents pertaining to the contract or policy for
information on how to direct investments in or redemptions from (including
making exchanges into or out of) the Portfolios, and any fees that may apply.
Orders for the purchase or redemption of Portfolio shares that are received
before the close of regular trading on the New York Stock Exchange (normally
4:00 p.m. eastern time) are effected at the net asset value (NAV) per share
determined that day, as described below. The insurance company has been
designated an agent of the Portfolios for receipt of purchase and redemption
orders. Therefore, receipt of an order by the insurance company constitutes
receipt by a Portfolio, provided that the Portfolio receives notice of the
orders by 9:30 a.m. eastern time the next day on which the New York Stock
Exchange is open for trading.
Net Asset Value. The NAV of each Portfolio is determined as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. eastern
time).
In calculating the NAV, securities are valued primarily by independent pricing
services using market quotations. Short-term debt securities maturing in less
than 60 days are valued using amortized cost. Securities for which market
quotations are not readily available are valued at their fair value, subject to
procedures adopted by the Board.
Business Hours. The Portfolios are open on the same days as the New York Stock
Exchange (generally, Monday through Friday). Representatives are available from
8:00 a.m. to 8:00 p.m. eastern time on those days.
Each Portfolio may refuse to accept any purchase order, especially if as a
result of such order, in Aeltus' judgment, it would be too difficult to invest
effectively in accordance with a Portfolio's investment objective.
The Portfolios reserve the right to suspend the offering of shares, or to
reject any specific purchase order. The Portfolios may suspend redemptions or
postpone payments when the New York Stock Exchange is closed or when trading is
restricted for any reason or under emergency circumstances as determined by the
Securities and Exchange Commission.
The Portfolios are not designed for professional market timing organizations or
other entities using programmed or frequent exchanges. The Portfolios reserve
the right to reject any specific purchase or exchange request, including a
request made by a market timer.
28 Aetna Variable Portfolios, Inc.
<PAGE>
TAX INFORMATION
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 those investors who acquire shares through
variable annuity contracts and variable life insurance policies so that those
contract owners and policy owners should not be subject to federal tax on
distributions from a Portfolio to the insurance company separate accounts.
Contract owners and policy owners should review the applicable contract
prospectus, prospectus summary or disclosure statement for information
regarding the personal tax consequences of purchasing a contract or policy.
Dividends and Distribution. Dividends are declared and paid semiannually.
Capital gains distributions, if any, are paid on an annual basis around the end
of the year, December 31. To comply with federal tax regulations, the
Portfolios may also pay an additional capital gains distribution, usually in
June.
Both income dividends and capital gains distributions are paid by each
Portfolio on a per share basis. As a result, at the time of payment, the share
price of the Portfolio will be reduced by the amount of the payment.
PERFORMANCE OF SIMILARLY MANAGED ACCOUNTS
Public Fund Performance
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 investment objectives, policies and strategies substantially
similar to 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 are managed by Aeltus. Therefore, the performance
of the Public Fund is provided below. The performance of Small Company,
International, Index Plus Large Cap and Growth will vary over time and their
investments will not be identical to the past portfolio investments of the
comparable Public Fund.
The results shown below for the Public Funds reflect the reinvestment of
dividends and distributions, and were calculated in the same manner used by the
Portfolios to calculate their own performance. All Public Fund performance data:
o Was calculated on a total return basis and includes all dividends and
interest, accrued income and realized and unrealized gains and losses.
o Reflects the deduction of the historical fees and expenses paid by the
Public Fund, and not those paid by the Portfolios.
o Includes cash and cash equivalents.
The figures also do not reflect the deduction of any insurance fees or charges
that are imposed by an insurance company in connection with its sale of certain
contracts and policies. Investors should refer to the contract or policy
prospectus or other disclosure document for information pertaining to insurance
fees and charges. Had insurance company fees and expenses been reflected,
performance would have been lower.
The following table shows average annual total returns for the period ended
March 31, 1999 for the Portfolios, the comparable Public Fund and their
respective benchmark indices. Investors should not
Aetna Variable Portfolios, Inc. 29
<PAGE>
consider the historical performance of the Public Fund to be an indication of
the future performance of the Portfolios.
<TABLE>
<CAPTION>
SMALL COMPANY
1 Year 5 Years Since Inception
<S> <C> <C> <C>
Small Company -15.48% N/A 12.78% (12/27/96)
Aetna Series Fund, Inc., Aetna Small
Company Fund, Class I -14.76% 17.00% 16.33% (1/4/94)
Russell 2000 Index -16.26% 11.22% 10.09% (1/1/94)
INTERNATIONAL
1 Year 5 Years Since Inception
International 5.46% N/A 20.59% (12/22/97)
Aetna Series Fund, Inc., Aetna
International Fund, Class I 4.72% 13.69% 11.34% (1/3/92)
MSCI-EAFE Index 6.37% 9.06% 9.04% (1/1/92)
INDEX PLUS LARGE CAP
1 Year Since Inception
Index Plus Large Cap 21.56% 32.39% (9/16/96)
Aetna Series Fund, Inc., Aetna Index
Plus Large Cap Fund, Class I 22.74% 30.80% (12/10/96)
S&P 500 Index 18.45% 27.55% (12/1/96)
GROWTH
1 Year 5 Years Since Inception
Growth 26.22% N/A 34.77% (12/13/96)
Aetna Series Fund, Inc., Aetna
Growth Fund, Class I 25.46% 25.06% 24.39% (1/4/94)
S&P 500 Index 18.45% 26.25% 23.94% (1/1/94)
</TABLE>
Private Account Performance
Index Plus Large Cap, Growth, High Yield and Index Plus Bond are recently
organized and do not yet have long-term performance records. However, these
Portfolios have investment objectives, policies and strategies substantially
similar to those employed by Aeltus in managing accounts for certain
institutional investors (Private Accounts). Therefore, the performance of these
Private Accounts is provided below. Note that the Private Accounts, unlike the
Portfolios, are not subject to certain investment limitations, diversification
requirements and other restrictions imposed by the 1940 Act and the Code which,
if applicable, could have adversely affected the Private Accounts' performance.
The Private Account Performance data, shown below, was calculated in accordance
with the standards established by the Association for Investment Management and
Research (AIMR). AIMR is a non-profit membership and educational organization
that, among other things, has formulated a set of performance presentation
standards for investment advisers. AIMR has not been involved in the
preparation or review of the performance shown.
All Private Account Performance data:
o Was calculated on a time-weighted total return basis and includes all
dividends and interest, accrued income and realized and unrealized
gains and losses.
30 Aetna Variable Portfolios, Inc.
<PAGE>
o Reflects the deduction of investment advisory fees and brokerage
commissions paid by the Private Accounts, but does not reflect the
deduction of custodial fees.
o Includes cash and cash equivalents.
The historical fees and expenses paid by the Private Accounts are significantly
lower than those paid by the corresponding Portfolio. Had Portfolio level
expenses been charged to the Private Accounts, performance would have been
lower.
The following table shows average annual total returns for the periods ended
March 31, 1999 for the Portfolios, the comparable Private Accounts and their
respective benchmark indices. Investors should not consider the historical
performance of the Private Accounts as an indication of the future performance
of a comparably managed Portfolio.
<TABLE>
<CAPTION>
INDEX PLUS LARGE CAP COMPOSITE
1 Year 5 Years
<S> <C> <C>
Index Plus Large Cap 21.56% N/A
Index Plus Large Cap Composite 21.16% 27.34%
S&P 500 Index 18.45% 26.25%
GROWTH COMPOSITE
1 Year 5 Years
Growth 26.22% N/A
Growth Composite 31.20% 27.57%
S&P 500 Index 18.45% 26.25%
HIGH YIELD ACCOUNT
1 Year 3 Years
High Yield -1.63% N/A
High Yield Account 2.43% 12.30%
Merrill Lynch High Yield Master Index 1.94% 8.98%
INDEX PLUS BOND COMPOSITE
1 Year 5 Years
Index Plus Bond 6.05% N/A
Index Plus Bond Composite 6.05% 7.62%
LBAB Index 6.49% 7.79%
<CAPTION>
INDEX PLUS LARGE CAP COMPOSITE
Since
Inception
<S> <C> <C>
Index Plus Large Cap 32.39% (9/16/96)
Index Plus Large Cap Composite 21.13% (10/1/91)
S&P 500 Index 20.15% (10/1/91)
GROWTH COMPOSITE
Since
10 Years Inception
Growth N/A 34.77% (12/13/96)
Growth Composite 20.79% N/A
S&P 500 Index 18.97% N/A
HIGH YIELD ACCOUNT
Since
Inception
High Yield 4.85% (12/10/97)
High Yield Account 12.24% (1/1/95)
Merrill Lynch High Yield Master Index 11.27% (1/1/95)
INDEX PLUS BOND COMPOSITE
Since
10 Years Inception
Index Plus Bond N/A 6.17% (12/18/97)
Index Plus Bond Composite 8.91% N/A
LBAB Index 9.08% N/A
</TABLE>
Aetna Variable Portfolios, Inc. 31
<PAGE>
FINANCIAL HIGHLIGHTS
These highlights are intended to help you understand each Portfolio's
performance since its commencement of operations. Certain information reflects
financial results for a single Portfolio share. The total returns in the tables
represent the rate an investor would have earned (or lost) on an investment in
each Portfolio (assuming reinvestment of all dividends and distributions). The
information in these tables has been audited by KPMG LLP, independent auditors,
whose reports, along with the Portfolios' Financial Statements, are included in
the Portfolios' Annual Reports, which are available upon request.
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Growth International
------------------------------------------------- ---------------------------------
Period From Period From
December 13, 1996 December 22, 1997
Year Ended Year Ended (Commencement of Year Ended (Commencement of
December 31, December 31, Operations) to December 31, Operations) to
1998 1997 December 31, 1996 1998 December 31, 1997
-------------- -------------- ------------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 9.85 $ 10.15 $ 10.00 $ 10.27 $ 10.00
-------- -------- -------- -------- ---------
Income from investment
operations:
Net investment income 0.03 0.04+ 0.01+ 0.07 --
Net realized and change in
unrealized gain or loss on
investments 3.68 3.27 0.15 1.87 0.27
-------- -------- -------- -------- ---------
Total from investment
operations 3.71 3.31 0.16 1.94 0.27
-------- -------- -------- -------- ---------
Less distributions:
From net investment income (0.03) (0.03) (0.01) (0.01) --
From net realized gains on
investments -- (3.58) -- (0.61) --
-------- -------- -------- -------- ---------
Total distributions (0.03) (3.61) (0.01) (0.62) --
-------- -------- -------- -------- ---------
Net asset value, end of period $ 13.53 $ 9.85 $ 10.15 $ 11.59 $ 10.27
======== ======== ======== ======== =========
Total return* 37.68% 33.01% 1.57% 18.92% 2.74%
Net assets,
end of period (000's) $142,363 $ 5,964 $ 5,175 $ 16,242 $ 15,412
Ratio of net expenses to
average net assets 0.75% 0.75% 0.67%(1) 1.15% 1.15%(1)
Ratio of net investment income
to average net assets 0.40% 0.29% 1.99%(1) 0.55% (0.98)%(1)
Ratio of expenses before
reimbursement and waiver
to average net assets -- -- -- 1.77% --
Portfolio turnover rate 152.99% 207.41% 1.97% 158.02% 0.71%
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and variable life insurance policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
32 Aetna Variable Portfolios, Inc.
<PAGE>
<TABLE>
<CAPTION>
Small Company Value Opportunity
- ----------------------------------------------------- ----------------------------------------------------
Period From Period From
December 27, 1996 December 13, 1996
Year Ended Year Ended (Commencement of Year Ended Year Ended (Commencement of
December 31, December 31, Operations) to December 31, December 31, Operations) to
1998 1997 December 31, 1996 1998 1997 December 31, 1996
- -------------- -------------- ------------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
$ 12.77 $ 10.11 $ 10.00 $ 11.92 $ 10.20 $ 10.00
-------- -------- -------- -------- -------- --------
0.07 0.04+ 0.01+ 0.09 0.11+ 0.02+
0.07 3.44 0.11 2.56 3.90 0.20
-------- -------- -------- -------- -------- --------
0.14 3.48 0.12 2.65 4.01 0.22
-------- -------- -------- -------- -------- --------
(0.08) (0.03) (0.01) (0.08) (0.10) (0.02)
(0.04) (0.79) -- (0.08) (2.19) --
-------- -------- -------- -------- -------- --------
(0.12) (0.82) (0.01) (0.16) (2.29) (0.02)
-------- -------- -------- -------- -------- --------
$ 12.79 $ 12.77 $ 10.11 $ 14.41 $ 11.92 $ 10.20
======== ======== ======== ======== ======== ========
1.10% 34.49% 1.23% 22.39% 39.36% 2.15%
$ 99,823 $ 18,102 $ 5,158 $ 76,109 $ 9,147 $ 5,202
0.89% 0.90% 0.55%(1) 0.74% 0.75% 0.67%(1)
0.93% 0.78% 5.96%(1) 0.93% 1.06% 2.73%(1)
-- -- -- -- -- --
185.29% 180.25% -- 125.72% 187.84% --
</TABLE>
Aetna Variable Portfolios, Inc. 33
<PAGE>
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Real Estate High Yield
------------------------------------ -----------------------------------
Period From Period From
December 15, 1997 December 10, 1997
Year Ended (Commencement of Year Ended (Commencement of
December 31, Operations) to December 31, Operations) to
1998 December 31, 1997 1998 December 31, 1997
-------------- ------------------- -------------- ------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $ 10.31 $ 10.00 $ 10.10 $ 10.00
-------- ------- ------- --------
Income from investment
operations:
Net investment income 0.45 0.05+ 1.07 0.05+
Net realized and change in
unrealized gain or loss on
investments (1.78) 0.31 (1.09) 0.10
-------- ------- ------- --------
Total from investment
operations (1.33) 0.36 (0.02) 0.15
-------- ------- ------- --------
Less distributions:
From net investment income (0.45) (0.05) (1.02) (0.05)
From net realized gains on
investments -- -- (0.02) --
-------- ------- ------- --------
Total distributions (0.45) (0.05) (1.04) (0.05)
-------- ------- ------- --------
Net asset value, end of period $ 8.53 $ 10.31 $ 9.04 $ 10.10
======== ======= ======= ========
Total return* (12.85)% 3.59% (0.27)% 1.48%
Net assets, end of period (000's) $ 5,500 $ 5,153 $ 8,767 $ 10,098
Ratio of net expenses to
average net assets 0.95% 0.95%(1) 0.80% 0.80%(1)
Ratio of net investment income
to average net assets 5.24% 9.99%(1) 9.14% 7.81%(1)
Ratio of expenses before
reimbursement and waiver to
average net assets 1.32% -- 0.97% --
Portfolio turnover rate 55.79% -- 178.39% 69.39%
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and variable life insurance policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
34 Aetna Variable Portfolios, Inc.
<PAGE>
<TABLE>
<CAPTION>
Index Plus Bond Index Plus Large Cap
- ------------------------------------ -----------------------------------------------------
Period From Period From
December 18, 1997 September 16, 1996
Year Ended (Commencement of Year Ended Year ended (Commencement of
December 31, Operations) to December 31, December 31, Operations) to
1998 December 31, 1997 1998 1997 December 31, 1996
- -------------- ------------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C>
$ 10.01 $ 10.00 $ 14.02 $ 10.91 $ 10.00
-------- -------- -------- -------- --------
0.60 0.02+ 0.12 0.10+ 0.05+
0.21 0.01 4.30 3.60 0.92
-------- -------- -------- -------- --------
0.81 0.03 4.42 3.70 0.97
-------- -------- -------- -------- --------
(0.59) (0.02) (0.12) (0.10) (0.05)
(0.04) -- (0.73) (0.49) (0.01)
-------- -------- -------- -------- --------
(0.63) (0.02) (0.85) (0.59) (0.06)
-------- -------- -------- -------- --------
$ 10.19 $ 10.01 $ 17.59 $ 14.02 $ 10.91
======== ======== ======== ======== ========
8.17% 0.27% 31.60% 33.89% 9.64%
$ 15,107 $ 15,009 $496,059 $132,517 $ 19,410
0.45% 0.45%(1) 0.46% 0.50% 0.50%(1)
5.67% 5.23%(1) 1.07% 1.38% 1.89%(1)
0.53% -- -- -- --
19.52% -- 98.61% 76.83% 5.18%
</TABLE>
Aetna Variable Portfolios, Inc. 35
<PAGE>
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Index Plus Mid Cap Index Plus Small Cap
------------------------------------ -----------------------------------
Period From Period From
December 16, 1997 December 19, 1997
Year Ended (Commencement of Year Ended (Commencement of
December 31, Operations) to December 31, Operations) to
1998 December 31, 1997 1998 December 31, 1997
-------------- ------------------- -------------- ------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $ 10.34 $ 10.00 $10.42 $ 10.00
------- ------- ------ -------
Income from investment
operations:
Net investment income 0.07 0.01+ 0.04 0.01+
Net realized and change in
unrealized gain or loss on
investments 2.42 0.34 (0.19) 0.42
------- ------- ------ -------
Total from investment
operations 2.49 0.35 (0.15) 0.43
------- ------- ------ -------
Less distributions:
From net investment income (0.07) (0.01) (0.04) (0.01)
From net realized gains on
investments (0.56) -- (0.37) --
------- -------- ------- -------
Total distributions (0.63) (0.01) (0.41) (0.01)
------- -------- ------- -------
Net asset value, end of period $ 12.20 $ 10.34 $ 9.86 $ 10.42
======= ======== ======= =======
Total return* 24.30% 3.50% (1.35)% 4.33%
Net assets, end of period (000's) $ 9,923 $ 7,756 $7,599 $ 7,817
Ratio of net expenses to
average net assets 0.60% 0.60%(1) 0.60% 0.60%(1)
Ratio of net investment income to
average net assets 0.68% 1.37%(1) 0.38% 1.90%(1)
Ratio of expenses before
reimbursement and waiver to
average net assets 0.82% -- 0.87% --
Portfolio turnover rate 165.70% -- 141.99% --
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and variable life insurance policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
36 Aetna Variable Portfolios, Inc.
<PAGE>
ADDITIONAL INFORMATION
The SAI, which is incorporated by reference into this Prospectus, contains
information about each Portfolio. The most recent annual and semi-annual
reports also contain information about each Portfolio's investments, as well
as a discussion of the market conditions and investment strategies that
significantly affected each Portfolio's performance during the past fiscal
year.
You may request free of charge the current SAI or the most recent annual and
semi-annual reports, or other information about the Portfolios, by calling
1-800-525-4225 or writing to:
Aetna Variable Portfolios, Inc.
151 Farmington Avenue
Hartford, Connecticut 06156-8962
The SEC also makes available to the public reports and information about the
Portfolios. Certain reports and information, including the SAI, are available
on the SEC's website (http://www.sec.gov) or at the SEC's Public Reference Room
in Washington, D.C. You may call 1-800-SEC-0330 to get information about the
operations of the public reference room or you may write to Public Reference
Section, Washington, D.C. 20549-6009 to get information from the Public
Reference Section. The Public Reference Section will charge a duplicating fee
for copying and sending any information you request.
Investment Company Act File No. 811-7651
Aetna Variable Portfolios, Inc. 37
<PAGE>
Statement of Additional Information Dated: May 3, 1999
AETNA VARIABLE PORTFOLIOS, INC.
AETNA GENERATION PORTFOLIOS, INC.
Aetna Variable Encore Fund d/b/a
AETNA MONEY MARKET VP
AETNA BALANCED VP, INC.
Aetna Income Shares d/b/a
AETNA BOND VP
Aetna Variable Fund d/b/a
AETNA GROWTH AND INCOME VP
This Statement of Additional Information (Statement) is not a Prospectus and
should be read in conjunction with the current Prospectuses for Aetna Variable
Portfolios, Inc. (AVPI), Aetna Generation Portfolios, Inc. (AGPI), Aetna Money
Market VP (Money Market), Aetna Balanced VP, Inc. (Balanced), Aetna Bond VP
(Bond Fund), and Aetna Growth and Income VP (Growth and Income) (each a "Fund"
and collectively the "Funds"). Capitalized terms not defined herein are used as
defined in the Prospectuses. AVPI and AGPI each are 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 "Portfolios"). AVPI
currently has authorized ten Portfolios:
<TABLE>
<S> <C>
o Aetna High Yield VP (High Yield) o Aetna Index Plus Large Cap VP (Index Plus
o Aetna Real Estate Securities VP (Real Estate) Large Cap)
o Aetna Value Opportunity VP (Value Opportunity) o Aetna Index Plus Mid Cap VP (Index Plus
o Aetna Growth VP (Growth) Mid Cap)
o Aetna Small Company VP (Small Company) o Aetna Index Plus Small Cap VP (Index Plus
o Aetna International VP (International) Small Cap)
o Aetna Index Plus Bond VP (Index Plus Bond)
AGPI currently has authorized three Portfolios:
o Aetna Ascent VP (Ascent)
o Aetna Crossroads VP (Crossroads)
o Aetna Legacy VP (Legacy)
</TABLE>
The Financial Statements for each Fund or Portfolio and the independent
auditors' report thereon, included in each Fund's Annual Report, are
incorporated by reference in this Statement. A free copy of each Fund's Annual
Report and Prospectus is available upon request by writing to the respective
Fund at: 151 Farmington Avenue, Hartford, Connecticut 06156, or by calling:
(800) 525-4225.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information .................................................. 3
Additional Investment Restrictions and Policies ...................... 4
Investment Techniques, Risk Factors and Other Considerations ......... 6
Trustees and Officers ................................................ 20
Control Persons and Principal Shareholders ........................... 22
Investment Advisory Agreements ....................................... 22
The Subadvisory Agreement ............................................ 24
Administrative Services Agreements ................................... 25
Custodian ............................................................ 26
Transfer Agent ....................................................... 26
Independent Auditors ................................................. 26
Principal Underwriter ................................................ 26
Purchase and Redemption of Shares .................................... 26
Brokerage Allocation and Trading Policies ............................ 26
Net Asset Value ...................................................... 28
Tax Status ........................................................... 29
Performance Information .............................................. 30
Financial Statements ................................................. 32
</TABLE>
2
<PAGE>
GENERAL INFORMATION
Organization--AVPI, AGPI and Balanced were incorporated in Maryland in 1996,
1994 and 1988, respectively.
Bond Fund, Money Market and Growth and Income were originally established as
Maryland corporations in 1973, 1974 and 1974, respectively. Each was converted
to a Massachusetts business trust on May 1, 1984. Each currently operates under
a Declaration of Trust (Declaration) dated January 25, 1984.
Capital Stock--Shares of each Fund or Portfolio have no preemptive or
conversion rights. Each share of a Fund or Portfolio has the same rights to
share in dividends declared by a Fund or Portfolio. Upon liquidation of any
Fund or Portfolio, shareholders in that Fund or Portfolio are entitled to share
pro rata in the net assets of the Fund or Portfolio available for distribution
to shareholders. Shares of each Fund or Portfolio are fully paid and
nonassessable.
Shareholder Liability--Money Market, Bond Fund and Growth and Income each are
organized as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of a Fund, which is not true
in the case of a corporation. The Declaration of each Fund provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of that Fund and that every written agreement, obligation,
instrument or undertaking made by that Fund shall contain a provision to the
effect that shareholders are not personally liable thereunder. With respect to
tort claims, contract claims where the provision referred to is omitted from
the undertaking, and claims for taxes and certain statutory liabilities in
other jurisdictions, a shareholder may be held personally liable to the extent
that claims are not satisfied by a Fund. However, upon payment of any such
liability the shareholder will be entitled to reimbursement from the general
assets of the Fund. The Board of Trustees intends to conduct the operations of
each Fund, with the advice of counsel, in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Fund.
Voting Rights--Shareholders of each Fund or Portfolio 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 or Trustees, as the case may be
(hereafter, Trustees) (to the extent hereinafter provided) and on other matters
submitted to the vote of shareholders. Participants who select a Fund for
investment through their variable annuity contract (VA Contract) or variable
life insurance policy (VLI Policy) are not the shareholders of the Fund. The
insurance companies who issue the separate accounts are the true shareholders,
but generally pass through voting to Participants as described in the
prospectus for the applicable VA Contract or VLI Policy. Once the initial Board
of Directors/Trustees (Board) is elected, no meeting of the shareholders for
the purpose of electing Trustees will be held unless and until such time as
less than a majority of the Trustees holding office have been elected by the
shareholders, or shareholders holding 10% or more of the outstanding shares
request such a vote. The Trustees then in office will call a shareholder
meeting for election of Trustees. 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 Trustees holding office have been
elected by the shareholders. Except as set forth above, the Trustees shall
continue to hold office and may appoint successor Trustees. Trustees of Money
Market, Bond Fund and Growth and Income may be removed from office (1) at any
time by two-thirds vote of the Trustees; (2) by a majority vote of Trustees
where any Trustee becomes mentally or physically incapacitated; (3) at a
special meeting of shareholders by a two-thirds vote of the outstanding shares;
or (4) by written declaration filed with Mellon Bank, N.A., the Fund's
custodian, signed by two-thirds of the Fund's shareholders. Trustees of AVPI,
AGPI and Balanced may be removed at any meeting of shareholders by the vote of
a majority of all shares entitled to vote. Any Trustee 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 Trustees can, if they
choose to do so, elect all the Trustees of a Fund, in which event the holders
of the remaining shares will be unable to elect any person as a Trustee.
1940 Act Classification--Each Fund is an open-end management investment
company, as that term is defined under the Investment Company Act of 1940 (1940
Act). Each Fund or Portfolio is a diversified
3
<PAGE>
company, as that term is defined under the 1940 Act. The 1940 Act generally
requires that with respect to 75% of its total assets, a diversified company
may not invest more than 5% of its total assets in the securities of any one
issuer. Money Market is subject to this restriction with respect to 100% of its
total assets.
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES
The investment objectives and certain investment policies of each Fund or
Portfolio are matters of fundamental policy for purposes of the 1940 Act and
therefore cannot be changed without the approval of a majority of the
outstanding voting securities of that Fund or Portfolio. This means the lesser
of (a) 67% of the shares of a Fund or Portfolio present at a shareholders'
meeting if the holders of more than 50% of the shares of that Fund or Portfolio
then outstanding are present in person or by proxy; or (b) more than 50% of the
outstanding voting securities of the Fund or Portfolio.
As a matter of fundamental policy, a Fund or Portfolio will not:
(1) 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. This restriction applies only to 75% (100% in the case of
Money Market) of the value of a Fund's or Portfolio's total assets.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities are excluded from this restriction;
(2) except for Real Estate, concentrate its investments in any one industry,
although a Fund or 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, each Fund or Portfolio, except for
Balanced, Bond Fund, and Growth and Income, will classify finance
companies as separate industries according to the end user of their
services, such as automobile finance, computer finance and consumer
finance. In addition, for purposes of this restriction, Ascent, Crossroads
and Legacy (Generation Portfolios) will classify real estate stocks as
separate industries according to property type, such as apartment, retail,
office and industrial. This limitation will not apply to any Fund's or
Portfolio's investment in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Additionally for Generation Portfolios and Money Market, investments in the
following shall not be subject to the 25% limitation: securities invested
in, or repurchase agreements for, U.S. Government securities, certificates
of deposit, bankers' acceptances, and securities of banks;
(3) make loans, except that, to the extent appropriate under its investment
program, a Fund or Portfolio may (i) purchase bonds, debentures or other
debt instruments, including short-term obligations; (ii) enter into
repurchase transactions; and (iii) lend portfolio securities provided that
the value of such loaned securities does not exceed one-third of the
Fund's or Portfolio's total assets;
(4) issue any senior security (as defined in the 1940 Act), except that (i) a
Fund or Portfolio may enter into commitments to purchase securities in
accordance with that Fund's or Portfolio's investment program, including
reverse repurchase agreements, delayed delivery and when-issued
securities, which may be considered the issuance of senior securities;
(ii) a Fund or 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; (iii)
a Fund (other than Money Market) or Portfolio may engage in short sales of
securities to the extent permitted in its investment program and other
restrictions; (iv) the purchase or sale of futures contracts and related
options shall not be considered to involve the issuance of senior
securities; and (v) subject to certain fundamental restrictions set forth
below, a Fund or 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: (i) to the extent
appropriate under its investment program, a Fund or Portfolio (other than
Money Market, Bond and High Yield) may invest in securities secured by
real estate or
4
<PAGE>
interests therein or issued by companies, including real estate investment
trusts, which deal in real estate or interests therein; and (ii) the
Generation Portfolios may acquire real estate as a result of ownership of
securities or other interests (this could occur for example if a Portfolio
holds a security that is collateralized by an interest in real estate and
the security defaults);
(6) invest in commodity contracts, except that a Fund or Portfolio may, to the
extent appropriate under its investment program: (i) purchase securities
of companies engaged in such activities; (ii) (other than Money Market)
enter into transactions in financial and index futures contracts and
related options; and (iii) enter into forward currency contracts;
(7) borrow money, except that (i) a Fund (other than Money Market) or Portfolio
may enter into certain futures contracts and options related thereto; (ii)
a Fund or Portfolio may enter into commitments to purchase securities in
accordance with that Fund's or Portfolio's investment program, including
delayed delivery and when-issued securities and reverse repurchase
agreements; (iii) for temporary emergency purposes, a Fund or Portfolio
may borrow money in amounts not exceeding 5% of the value of its total
assets at the time the loan is made; and (iv) for purposes of leveraging,
a Fund (other than Money Market) or Portfolio may borrow money from banks
(including its custodian bank) only if, immediately after such borrowing,
the value of that Fund's or 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 Fund's or Portfolio's assets fails to meet the 300% asset coverage
requirement relative only to leveraging, that Fund or Portfolio will,
within three days (not including Sundays and holidays), reduce its
borrowings to the extent necessary to meet the 300% test;
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by a Fund or
Portfolio, that Fund or Portfolio may be deemed to be an underwriter under
the provisions of the Securities Act of 1933 (1933 Act).
The Board has adopted the following other investment restrictions which may be
changed by the Board and without shareholder vote. A Fund or Portfolio will
not:
(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 Fund or Portfolio
as described in this Statement and in the Prospectuses;
(2) except for International and the Generation Portfolios, 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 Fund or 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%. Money Market may only purchase foreign securities or
obligations that are U.S.-dollar denominated;
(3) invest in companies for the purpose of exercising control or management;
(4) 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;
(5) invest more than 15% (10% for Money Market, Index Plus Bond, Index Plus
Large Cap, Index Plus Mid Cap and Index Plus Small Cap) of its net assets
in illiquid securities. Illiquid securities are securities that are not
readily marketable or cannot be disposed of promptly within seven days and
in the usual course of business without taking a materially reduced price.
Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities
that may be resold under Rule 144A under, or securities offered pursuant
to
5
<PAGE>
Section 4(2) of the 1933 Act, shall not be deemed illiquid solely by reason
of being unregistered. Aeltus Investment Management, Inc. (Aeltus), the
Funds' investment adviser, shall determine whether a particular security is
deemed to be liquid based on the trading markets for the specific security
and other factors;
6. except for High Yield, invest more than 15% (10% for Index Plus Large Cap,
Index Plus Mid Cap and Index Plus Small Cap) of the total value of its
assets in high-yield bonds (securities rated below BBB- by Standard &
Poor's Corporation (S&P) or Baa3 by Moody's Investors Service, Inc.
(Moody's), or, if unrated, considered by Aeltus to be of comparable
quality).
Where a Fund's or Portfolio's investment objective or policy restricts it to
holding or investing a specified percentage of its 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 the relevant action is taken, 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.
INVESTMENT TECHNIQUES, RISK FACTORS AND OTHER CONSIDERATIONS
Options, Futures and Other Derivative Instruments
Each Fund or Portfolio may use certain derivative instruments as a means of
achieving its investment objective. For purposes other than hedging, a Fund or
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
Fund or Portfolio, such as inverse floaters and interest-only and
principal-only debt instruments.
Each Fund (except Money Market) or Portfolio may use the derivative instruments
described below and in the Prospectuses. Derivatives that may be used by a Fund
(other than Money Market) or Portfolio include forward contracts, swaps,
structured notes, futures and options. Each Fund or Portfolio may invest up to
30% of its assets in 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. Forward exchange
contracts are not subject to this 30% limitation.
The following provides additional information about those derivative
instruments each Fund (except Money Market) may use.
Futures Contracts--Each Fund or Portfolio may enter into futures contracts and
options thereon subject to the restrictions described below under "Additional
Restrictions on the Use of Futures and Option Contracts." A Fund or Portfolio
may enter into futures contracts or options thereon that are traded on national
futures exchanges and are standardized as to maturity date and underlying
financial instrument. The futures exchanges and trading in the U.S. are
regulated under the Commodity Exchange Act by the Commodities Futures Trading
Commission (CFTC).
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a financial instrument or a specific
stock market index for a specified price on a designated date. 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, those contracts are
usually closed out before the delivery date. Stock index futures contracts do
not contemplate actual future delivery and will be settled in cash at
expiration or closed out prior to expiration. Closing out an open futures
contract sale or purchase is effected by entering into an offsetting futures
contract purchase or sale, respectively, for the same aggregate amount of the
identical type of underlying instrument and the same delivery date. There can
be no assurance, however, that a Fund or Portfolio will be able to enter into
an offsetting transaction with respect to a particular contract at a particular
time. If a Fund or Portfolio is not able to enter into an offsetting
transaction, it will continue to be required to maintain the margin deposits on
the contract.
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The prices of futures contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates and equity prices,
which in turn are affected by fiscal and monetary policies and national and
international political and economic events. Small price movements in futures
contracts may result in immediate and potentially unlimited loss or gain to a
Fund or Portfolio relative to the size of the margin commitment. A purchase or
sale of a futures contract may result in losses in excess of the amount
initially invested in the futures contract.
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 as well as
the expenses associated with creating the hedge.
Most U.S. 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.
"Margin" is the amount of funds that must be deposited by a Fund or Portfolio
with a commodities broker in a custodian account in order to initiate futures
trading and to maintain open positions in a Fund's or Portfolio's futures
contracts. A margin deposit is intended to assure the Fund's or Portfolio's
performance under the terms 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 the
margin requirement, 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 Fund or Portfolio. These daily
payments to and from a Fund or 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 Fund or Portfolio will
mark-to-market the current value of its open futures contracts. Each Fund or
Portfolio expects to earn interest income on its initial margin deposits.
When a Fund or Portfolio buys or sells a futures contract, unless it already
owns an offsetting position, it will designate 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.
A Fund or Portfolio can buy and write (sell) options on futures contracts. A
Fund or Portfolio may purchase and sell futures contracts and related options
under the following conditions: (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 Fund's or Portfolio's total
assets (100% in the case of Ascent and 60% in the case of Crossroads) at market
value at the time of entering into a contract and
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(b) no more than 5% of the assets, at market value at the time of entering into
a contract, shall be committed to margin deposits in relation to futures
contracts. See "Call and Put Options" below for additional restrictions.
Call and Put Options--Each Fund or Portfolio may purchase and write (sell) call
options and put options on securities, indices and futures as discussed in the
Prospectuses, subject to the restrictions described in this section and under
"Additional Restrictions on the Use of Futures and Option Contracts." 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 Fund or 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.
Each Fund or Portfolio, except Generation Portfolios, is prohibited from having
written call options outstanding at any one time on more than 30% of its total
assets. A Fund or Portfolio will not write a put if it will require more than
50% of the Fund's or Portfolio's net assets to be designated to cover all put
obligations. No Fund or Portfolio may buy put options if more than 3% of its
assets immediately following such purchase would consist of put options. Each
Fund or Portfolio may purchase call and sell put options on equity securities
only to close out positions previously opened; the Generation Portfolios are
not subject to this restriction. No Fund or 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 call remains outstanding. This restriction does not apply to the
writing of calls on securities indices or futures contracts. No Fund or
Portfolio is permitted to write call options on when-issued securities. The
Funds and Portfolios purchase call options primarily as a temporary substitute
for taking positions in certain securities or in the securities that comprise a
relevant index, particularly if Aeltus (or Bradley, in the case of Value
Opportunity) considers these instruments to be undervalued relative to the
prices of particular securities or of the securities underlying that index. A
Fund or Portfolio may also purchase call options on an index to protect against
increases in the price of securities underlying that index that the Fund or
Portfolio intends to purchase pending its ability to invest in such securities
in an orderly manner.
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.
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.
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).
A Fund or Portfolio may write calls on securities indices and futures contracts
provided that it enters into an appropriate offsetting position or that it
designates liquid assets in an amount sufficient to cover the underlying
obligation in accordance with regulatory requirements. The risk involved in
writing call options on futures contracts or market indices is that a Fund or
Portfolio would not benefit from any increase in
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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 Fund's or Portfolio's obligation might be more or
less than the premium received when it originally wrote the option. Further, a
Fund or Portfolio might occasionally not be able to close the option because of
insufficient activity in the options market.
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 Fund or Portfolio, the Fund or Portfolio will
designate liquid securities with a value equal to the exercise price, or else
will hold an offsetting position in accordance with regulatory requirements. In
writing puts, there is the risk that a writer may be required to buy the
underlying security at a disadvantageous price. 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. If the put is
exercised, however, 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 Fund or Portfolio may purchase put options when Aeltus (or Bradley, in the
case of Value Opportunity) 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 Fund's
or 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 Fund or 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 Fund or Portfolio will reduce any profit it might otherwise have
realized in its underlying security by the premium paid for the put option and
by transaction costs.
The premium received from writing a call or put option, or paid for purchasing
a call or put option will reflect, among other things, the current market price
of the underlying security, the relationship of the exercise price to such
market price, the historical price volatility of the underlying security, the
length of the option period, and the general interest rate environment. The
premium received by a Fund or Portfolio for writing call options will be
recorded as a liability in the statement of assets and liabilities of that Fund
or 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 Fund or Portfolio when purchasing a put option
will be recorded as an asset in the statement of assets and liabilities of that
Fund or 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 Fund or 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 Fund or 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 Fund or Portfolio will be
able to effect a closing transaction at a favorable price. If a Fund or
Portfolio
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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 Fund or Portfolio will pay brokerage commissions
in connection with the sale or purchase of options to close out previously
established option positions. These brokerage commissions are normally higher
as a percentage of underlying asset values than those applicable to purchases
and sales of portfolio securities.
Foreign Futures Contracts and Foreign Options--Each Fund or Portfolio may
engage in transactions in foreign futures contracts and foreign options.
Participation in foreign futures contracts and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the CFTC, the National Futures Association
(NFA) nor any domestic exchange regulates activities of any foreign boards of
trade including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign laws. Generally, the foreign transaction will be governed by
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures contracts or
foreign options transaction occurs. Investors that trade foreign futures
contracts or foreign options contracts may not be afforded certain of the
protective measures provided by domestic exchanges, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided by
the NFA. In particular, funds received from customers for foreign futures
contracts or foreign options transactions may not be provided the same
protections as funds received for transactions on U.S. futures exchange. 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 Fund or Portfolio may write and purchase
calls on foreign currencies. A Fund or 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 such circumstances, the Fund or Portfolio collateralizes
the position by designating 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. In the event of rate fluctuations adverse to a Fund's or
Portfolio's position, it would lose the premium it paid and transactions costs.
A call written on a foreign currency by a Fund or Portfolio is covered if the
Fund or 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 specially
designated) upon conversion or exchange of other foreign currency held in its
portfolio.
Additional Restrictions on the Use of Futures and Option Contracts--CFTC
regulations require that to prevent a Fund or Portfolio from being a commodity
pool, each Fund or Portfolio enter into all short futures for the purpose of
hedging the value of securities held, and that all long futures positions
either constitute bona fide hedging transactions, as defined in such
regulations, or have a total value not in excess of an amount determined by
reference to certain cash and securities positions maintained, and accrued
profits on such positions. As evidence of its hedging intent, each Fund or
Portfolio expects that at least 75% of futures contract purchases will be
"completed"; that is, upon the sale of these long contracts, equivalent amounts
of related securities will have been or are then being purchased by that Fund
or Portfolio in the cash market. With respect to futures contracts or related
options that are entered into for purposes that
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may be considered speculative, the aggregate initial margin for future
contracts and premiums for options will not exceed 5% of a Fund's or
Portfolio's net assets, after taking into account realized profits and
unrealized losses on such futures contracts.
Forward Exchange Contracts--Each Fund or 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 Fund or 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. 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 Fund
or Portfolio may also enter into a forward exchange contract to sell a foreign
currency that 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 Fund or Portfolio may experience
losses or gains on both the underlying security and the cross currency hedge.
Each Fund or 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 Fund or 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.
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 Fund or 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
Fund or 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 Fund or 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 Fund or Portfolio to sustain losses on
these contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring a Fund or
Portfolio to sell a currency, the Fund or 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 Fund or Portfolio will
obtain, on the same maturity date, the same amount of the currency that it is
obligated to deliver. Similarly, a Fund or 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 Fund or 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.
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The cost to a Fund or 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, Aeltus must evaluate the
credit and performance risk of each particular counterparty under a forward
contract.
Although the Funds or 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 Funds or 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 Funds or Portfolios at one
rate, while offering a lesser rate of exchange should the Funds or Portfolios
desire to resell that currency to the dealer.
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 Fund or 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 Fund's or Portfolio's loss will consist of the
net amount of contractual interest payments that a Fund or Portfolio has not
yet received. Aeltus will monitor the creditworthiness of counterparties to a
Fund's or Portfolio's interest rate swap transactions on an ongoing basis. A
Fund or 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 Fund or 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."
Mortgage-Related Debt Securities--Money Market, Balanced, Bond Fund, Growth and
Income, Real Estate, High Yield, Index Plus Bond, and Generation Portfolios may
invest in mortgage-related debt securities, collateralized mortgage obligations
(CMOs) and real estate mortgage investment conduits (REMICs). 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 U.S., the securities and
guarantees of which are backed by the full faith and credit of the U.S. FNMA, a
federally chartered and privately owned corporation, and FHLMC, a federal
corporation, are instrumentalities of the U.S. with Presidentially appointed
board members. The full faith and credit of the federal government do not
explicitly guarantee the obligations of FNMA and FHLMC.
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, and typically do, 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 bearing a relatively
high rate of interest. This means that in times of declining interest rates,
some higher yielding securities held by a Fund or Portfolio might be converted
to cash, and the Fund or Portfolio could be expected to reinvest such cash at
the then prevailing
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<PAGE>
lower rates. The increased likelihood of prepayment when interest rates decline
also limits market price appreciation of mortgage-related securities. If a Fund
or 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.
CMOs and REMICs are securities, which are collateralized by mortgage
pass-through securities. Cash flows from underlying mortgages are allocated to
various classes or tranches in a predetermined, specified order. Each
sequential tranche has a "stated maturity"--the latest date by which the
tranche can be completely repaid, assuming no repayments--and has an "average
life"--the average time to receipt of a principal payment weighted by the size
of the principal payment. The average life is typically used as a proxy for
maturity because the debt is amortized, rather than being paid off entirely at
maturity, as would be the case in a straight debt instrument.
CMOs 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. The underlying mortgages may or may not 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. Both CMOs and REMICs are issued by private entities.
They are not directly guaranteed by any government agency and are secured by
the collateral held by the issuer. CMOs and REMICs are subject to the type of
prepayment risk described above due to the possibility that prepayments on the
underlying assets will alter the cash flow.
Asset-Backed Securities--Each Fund or Portfolio may invest in 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 generally 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.
The collateral behind certain asset-backed securities (such as CARs and CARDs)
tends to have prepayment rates that do not vary with interest rates; the
short-term nature of the loans may also tend to reduce the impact of any change
in prepayment level. Other asset-backed securities, such as home equity
asset-backed securities, have prepayment rates that are sensitive to interest
rates. Faster prepayments will shorten the average life and slower prepayments
will lengthen it. Asset-backed securities may be pass-through, representing
actual equity ownership of the underlying assets, or pay-through, representing
debt instruments supported by cash flows from the underlying assets.
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.
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Zero Coupon and Pay-in-Kind Securities--Each Fund or Portfolio may invest in
zero coupon securities and each Fund, except Money Market, or Portfolio may
invest in pay-in-kind securities. In addition, each Fund or Portfolio 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.
Zero coupon and pay-in-kind securities are also subject to the risk that in the
event of a default, a Fund or Portfolio may realize no return on its
investment.
Additional Risk Factors in Using Derivatives
In addition to any risk factors which may be described elsewhere in this
section, or in the Prospectuses, the following sets forth certain information
regarding the potential risks associated with a Fund's or Portfolio's
transactions in derivatives.
Risk of Imperfect Correlation--A Fund's or 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
Fund or Portfolio might not be successful and the Fund or 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 Fund's
or Portfolio's overall return could be less than if the hedging transactions
had not been undertaken.
Potential Lack of a Liquid Secondary Market--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 Fund or 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 Fund
or Portfolio which could require the Fund or 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 Fund's or Portfolio's
ability effectively to hedge its portfolio, or the relevant portion thereof.
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, the
overall performance of a Fund or Portfolio may be poorer than if it had not
entered
14
<PAGE>
into any such contract. For example, if a Fund or Portfolio has been hedged
against the possibility of an increase in interest rates which would adversely
affect the price of bonds held in its portfolio and interest rates decrease
instead, the Fund or 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 Fund or 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 Funds do not believe that these trading and
position limits will have an adverse impact on the hedging strategies regarding
the Funds or Portfolios.
Counterparty Risk--With some derivatives, whether used for hedging or
speculation, there is also the risk that the counterparty may fail to honor its
contract terms, causing a loss for the Fund.
Investment in Equity and Debt Securities
Each Fund or Portfolio may invest in equity and debt securities (except that
Money Market may not invest in equity securities). Equity securities are
subject to a decline in the stock market or in the value of the issuing company
and preferred stocks have price risk and some interest rate and credit risk.
The value of fixed income or 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 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,
for each debt security, there is a risk of principal and interest default which
will be greater with higher-yielding, lower-grade securities. 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. Balanced generally maintains at least 25% of its
total assets in debt securities.
Repurchase Agreements
Each Fund or Portfolio may enter into repurchase agreements with domestic banks
and broker-dealers meeting certain size and creditworthiness standards approved
by the Board. Under a repurchase agreement, a Fund or Portfolio may acquire a
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund or Portfolio
to resell the instrument at a fixed price and time, thereby determining the
yield during the Fund's or 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 Fund or 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 Fund or Portfolio.
In that event, the Fund or 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 Fund's or
Portfolio's ability to liquidate the collateral may be delayed or limited.
Repurchase agreements maturing in more than seven days will not exceed 10% of
the total assets of a Fund or Portfolio.
Variable Rate Demand Instruments
Each Fund or Portfolio, except International, may invest in variable rate
demand instruments. Variable rate demand instruments (including floating rate
instruments) held by a Fund or Portfolio may have maturities of more than one
year, provided: (i) the Fund or 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
15
<PAGE>
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 Fund or 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 Fund or Portfolio might be
unable to dispose of the note and a loss would be incurred to the extent of the
default. A Fund or 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 Fund or
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.
Foreign Securities
Each Fund or Portfolio may invest in foreign securities. Investments in
securities of foreign issuers involve certain risks not ordinarily associated
with investments in securities of domestic issuers. Such risks include
fluctuations in exchange rates, adverse foreign political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. Because each Fund (other than Money Market)
or Portfolio 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. company, and foreign issuers may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or
as uniform as those of U.S. issuers. Foreign securities markets, while growing
in volume, have, for the most part, substantially less volume than U.S.
markets. Securities of many foreign issuers are less liquid and their prices
more volatile than securities of comparable U.S. issuers. Transactional costs
in non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the U.S. The Funds 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.
All these risks usually are higher in emerging markets, such as most countries
in Africa, Asia, Latin America and the Middle East, than in more established
markets, such as Western Europe.
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 as well as in the U.S. (typically, these
securities are traded on the Luxembourg exchange in Europe); 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 denominated in U.S. dollars will not be
considered foreign securities for purposes of the investment limitation
concerning investment in foreign securities.
High-Yield Bonds
Each Fund, except Money Market, or Portfolio, except International, may invest
in high-yield bonds, subject to the limits described above and in the
Prospectuses. High-yield bonds are fixed income securities that offer a current
yield above that generally available on debt securities rated in the four
16
<PAGE>
highest categories by Moody's and S&P or other rating agencies, or, if unrated,
are considered to be of comparable quality by Aeltus. These securities include:
(a) fixed rate corporate debt obligations (including bonds, debentures and
notes) rated below Baa3 by Moody's or BBB- by S&P;
(b) preferred stocks that have yields comparable to those of high-yielding debt
securities; and
(c) any securities convertible into any of the foregoing.
Debt obligations rated below Baa3/BBB- generally involve more risk of loss of
principal and income than higher-rated securities. 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 the net asset value of a Fund
or a Portfolio. 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 Fund's or Portfolio's objectives, Aeltus
seeks to identify situations in which Aeltus believes that future developments
will enhance the creditworthiness and the ratings of the issuer.
Some of the risks associated with high-yield bonds include:
Sensitivity to Interest Rate and Economic Changes--High-yield bonds are more
sensitive to adverse economic changes or individual corporate developments but
generally 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.
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. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of market prices of
these securities and the net asset value of a Fund or Portfolio. 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.
Payment Expectations--High-yield bonds 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 Funds or Portfolios, may have to replace the securities with a
lower yielding security, resulting in a decreased return for investors. 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.
Liquidity and Valuation Risks--Some issuers of high-yield bonds may be traded
among a limited 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.
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
17
<PAGE>
and the current trend of earnings. Thus the achievement of a Fund's or
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.
Convertibles
Each Fund or Portfolio may invest in convertible securities. 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.
Real Estate Securities
Each Fund, except Money Market and Bond Fund, or Portfolio, except High Yield,
may invest in real estate securities, including interests in real estate
investment trusts (REITs), real estate development, real estate operating
companies, and companies engaged in other real estate related businesses. REITs
are trusts that sell securities 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 U.S., or both.
Equity Securities of Smaller Companies
Each Fund, other than Money Market and Bond Fund, or Portfolio, other than High
Yield and Index Plus Bond, may invest in equity securities issued by U.S.
companies with smaller market capitalizations. 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.
Supranational Agencies
Each Fund or Portfolio, except Real Estate, International, Small Company and
Growth, may invest up to 10% of its net assets in securities of supranational
agencies. These securities are not considered government securities and are not
supported directly or indirectly by the U.S. Government. Examples of
supranational agencies include, but are not limited to, 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.
Borrowing
Each Fund or Portfolio may borrow up to 5% of the value of its total assets
from a bank for temporary or emergency purposes. The Funds or Portfolios do not
intend to borrow, except that they may invest in leveraged derivatives which
have certain risks as outlined above. Each Fund or Portfolio may borrow for
leveraging purposes only if after the borrowing, the value of the Fund's or
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 Fund or Portfolio since it exaggerates the effects of changes
in the value of the securities purchased with the borrowed funds.
18
<PAGE>
Bank Obligations
Each Fund or Portfolio may invest in obligations issued by domestic or foreign
banks (including banker's acceptances, commercial paper, bank notes, time
deposits and certificates of deposit) provided the issuing bank has a minimum
of $5 billion in assets and a primary capital ratio of at least 4.25%.
Portfolio Turnover
The portfolio turnover rate for Index Plus Large Cap was significantly higher
in 1998 than in 1997 because of increased volatility in the quantitative
rankings used in managing the Portfolio. The portfolio turnover rate for Growth
and Income was significantly higher in 1998 than in 1997 because of an unusual
amount of market volatility and extreme divergence between the returns of
different market segments. The portfolio turnover rates for International, Real
Estate, High Yield, Index Plus Bond, Index Plus Mid Cap and Index Plus Small
Cap were significantly higher in 1998 than in 1997 because those Portfolios had
only commenced operations in December 1997.
Year 2000
As a healthcare and financial services enterprise, Aetna Inc. (referred to
collectively with its affiliates and subsidiaries as "Aetna Inc."), is
dependent on computer systems and applications to conduct its business. Aetna
Inc. has developed and is currently executing a comprehensive risk-based plan
designed to make its mission-critical information technology (IT) systems and
embedded systems Year 2000 ready. The plan for IT systems covers five stages
including (i) assessment, (ii) remediation, (iii) testing, (iv) implementation
and (v) Year 2000 approval. At year-end 1997, Aetna Inc., including Aeltus, had
substantially completed the assessment stage. The remediation of
mission-critical IT systems was completed year-end 1998. Testing of all
mission-critical IT systems is underway with Year 2000 approval targeted for
completion by mid-1999. The costs of these efforts will not affect the Funds or
Portfolios.
Aeltus and the Funds or Portfolios thereof, also have relationships with
broker-dealers, transfer agents, custodians or other securities industry
participants or other service providers that are not affiliated with Aetna Inc.
Aetna Inc., including Aeltus, has initiated communication with its critical
external relationships to determine the extent to which Aetna Inc. may be
vulnerable to such parties' failure to resolve their own Year 2000 issues.
Aetna Inc. and Aeltus have assessed and are prioritizing responses in an
attempt to mitigate risks with respect to the failure of these parties to be
Year 2000 ready. 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 Funds or Portfolios, including, without limitation, their
operation or the valuation of their assets.
19
<PAGE>
TRUSTEES AND OFFICERS
The investments and administration of each Fund are under the supervision of
its Board. The Trustees and executive officers of each Fund and their principal
occupations for the past five years are listed below. Those Trustees who are
"interested persons," as defined in the 1940 Act, are indicated by an asterisk
(*). Trustees and officers hold the same positions with other investment
companies in the same Fund Complex: Aetna GET Fund and Aetna Series Fund, Inc.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Occupation During Past Five
Years (and Positions held with
Position(s) Held Affiliated Persons or Principal
Name, Address and Age with the Company Underwriters of the Company)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
J. Scott Fox* Trustee and President Director, Managing Director, Chief Operating
10 State House Square Officer, Chief Financial Officer, Aeltus
Hartford, Connecticut Investment Management, Inc., October 1997
Age 44 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.
- -----------------------------------------------------------------------------------------------------
Wayne F. Baltzer Vice President Vice President, Aeltus Capital, Inc., May 1998
10 State House Square to present.
Hartford, Connecticut
Age 55
- -----------------------------------------------------------------------------------------------------
Albert E. DePrince, Jr. Trustee Professor, Middle Tennessee State
3029 St. Johns Drive University, 1991 to present.
Murfreesboro, Tennessee
Age 58
- -----------------------------------------------------------------------------------------------------
Stephanie A. DeSisto Vice President, Vice President, Mutual Fund Accounting,
10 State House Square Treasurer and Chief Aeltus Investment Management, Inc.,
Hartford, Connecticut Financial Officer November 1995 to present; Director, Mutual
Age 45 Fund Accounting, Aetna Life Insurance and
Annuity Company, August 1994 to November
1995; Assistant Vice President, Investors
Bank & Trust, January 1993 to August 1994.
- -----------------------------------------------------------------------------------------------------
Amy R. Doberman Secretary General Counsel, Aeltus Investment
10 State House Square Management, Inc., February 1999 to present;
Hartford, Connecticut Counsel, Aetna Life Insurance and Annuity
Age 37 Company, December 1996 to present;
Attorney, Securities and Exchange
Commission, March 1990 to November 1996.
- -----------------------------------------------------------------------------------------------------
Maria T. Fighetti Trustee Manager/Attorney, Health Services, New
325 Piermont Road York City Department of Mental Health,
Closter, New Jersey Mental Retardation and Alcohol Services,
Age 55 1973 to present.
- -----------------------------------------------------------------------------------------------------
David L. Grove Trustee Private Investor; Economic/Financial
5 The Knoll Consultant, December 1985 to present.
Armonk, New York
Age 81
- -----------------------------------------------------------------------------------------------------
</TABLE>
20
<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 the Company Underwriters of the Company)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
John Y. Kim* Trustee Director, President, Chief Executive Officer,
10 State House Square Chief Investment Officer, Aeltus Investment
Hartford, Connecticut Management, Inc., December 1995 to
Age 38 present; Director, Aetna Life Insurance and
Annuity Company, February 1995 to March
1998; Senior Vice President, Aetna Life
Insurance and Annuity Company, September
1994 to present.
- -----------------------------------------------------------------------------------------------------
Sidney Koch Trustee Financial Adviser, self-employed, January
455 East 86th Street 1993 to present.
New York, New York
Age 64
- -----------------------------------------------------------------------------------------------------
Frank Litwin Vice President Managing Director, Aeltus Investment
10 State House Square Management, Inc., August 1997 to present;
Hartford, Connecticut Managing Director, Aeltus Capital, Inc., May
Age 49 1998 to present; Vice President, Fidelity
Investments Institutional Services Company,
April 1992 to August 1997.
- -----------------------------------------------------------------------------------------------------
Shaun P. Mathews* Trustee Vice President/Senior Vice President, Aetna
151 Farmington Avenue Life Insurance and Annuity Company, March
Hartford, Connecticut Age 1991 to present; Director, Aetna Investment
43 Services, Inc., July 1993 to present; Senior
Vice President, Aetna Investment Services,
Inc., July 1993 to February 1999.
- -----------------------------------------------------------------------------------------------------
Corine T. Norgaard Trustee 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 61 Management, SUNY Binghamton
(Binghamton, NY), August 1993 to August
1996
- -----------------------------------------------------------------------------------------------------
Richard G. Scheide Trustee Trust and Private Banking Consultant, David
11 Lily Street Ross Palmer Consultants, July 1991 to
Nantucket, present.
Massachusetts
Age 70
- -----------------------------------------------------------------------------------------------------
</TABLE>
During the year ended December 31, 1998, members of the Board who are also
directors, officers or employees of Aetna Inc. or its affiliates were not
entitled to any compensation from the Funds. As of December 31, 1998, the
unaffiliated members of the Board received compensation in the amounts included
in the following table. None of these Trustees was entitled to receive pension
or retirement benefits.
21
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Aggregate Aggregate
Compensation Compensation Aggregate
from Aetna from Aetna Compensation
Name of Person Variable Generation from Money
Position Portfolios, Inc. Portfolios, Inc. Market
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Corine Norgaard 2,181 2,052 3,271
Trustee
- -----------------------------------------------------------------------------------
Sidney Koch 2,190 2,065 3,295
Trustee
- -----------------------------------------------------------------------------------
Maria T. Fighetti* 2,171 2,039 3,248
Trustee
- -----------------------------------------------------------------------------------
Richard G. Scheide 2,367 2,230 3,551
Trustee, Chairperson
Audit Committee
- -----------------------------------------------------------------------------------
David L. Grove* 2,338 2,191 3,480
Trustee, Chairperson
Contract Committee
- -----------------------------------------------------------------------------------
Albert E. DePrince, Jr. 1,805 1,583 2,457
Trustee
- -----------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------
Total
Compensation
Aggregate Aggregate from the Funds
Compen- Compen- Aggregate and Fund
sation sation Compensation Complex
Name of Person from from from Growth Paid to
Position Balanced Bond VP and Income Trustees
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corine Norgaard 7,603 3,166 41,329 68,500
Trustee
- -----------------------------------------------------------------------------------
Sidney Koch 7,659 3,190 41,640 69,000
Trustee
- -----------------------------------------------------------------------------------
Maria T. Fighetti* 7,546 3,142 41,018 68,000
Trustee
- -----------------------------------------------------------------------------------
Richard G. Scheide 8,266 3,438 44,973 74,500
Trustee, Chairperson
Audit Committee
- -----------------------------------------------------------------------------------
David L. Grove* 8,097 3,366 44,041 73,000
Trustee, Chairperson
Contract Committee
- -----------------------------------------------------------------------------------
Albert E. DePrince, Jr. 5,621 2,346 30,319 50,778
Trustee
- -----------------------------------------------------------------------------------
</TABLE>
* During the fiscal year ended December 31, 1998, Ms. Fighetti and Dr. Grove
elected to defer $20,000 and $73,000, respectively.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of March 31, 1999, Aetna and its affiliates owned 100% of the shares of
AVPI, 100% of the shares of AGPI, 100% of the shares of Money Market, 100% of
the shares of Balanced, 99.41% of the shares of Bond Fund and 99.61% of the
shares of Growth and Income which were allocated to variable annuity and
variable life insurance separate accounts to fund obligations under VA
Contracts and VLI Policies. Contract holders in these separate accounts are
provided the right to direct the voting of Fund or Portfolio shares at
shareholder meetings. Aetna and its affiliates vote the shares that they own in
these separate accounts in accordance with contract holders' directions.
Undirected shares of a Fund or Portfolio will be voted for each account in the
same proportion as directed shares.
As of December 31, 1998, officers and Trustees owned less than 1% of the
outstanding shares of each Fund or Portfolio.
Aetna (like Aeltus) 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.
INVESTMENT ADVISORY AGREEMENTS
Each Fund, on its own behalf or on behalf of its Portfolios, entered into an
investment advisory agreement(s) (Advisory Agreements) appointing Aeltus as the
Investment Adviser of the Fund or its Portfolios. Under the Advisory Agreements
and subject to the supervision of the Trustees of each Fund, Aeltus has
responsibility for supervising all aspects of the operations of each Fund or
Portfolio including the selection, purchase and sale of portfolio securities.
Under the Advisory Agreements, Aeltus is given the right to delegate any or all
of its obligations to a subadviser. Aeltus is an indirect wholly-owned
subsidiary of Aetna Inc., a publicly-owned holding company whose principal
operating subsidiaries engage in the health benefits, insurance and financial
services businesses in the U.S. and internationally.
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 Trustees of the Fund and that each Fund or Portfolio is responsible
for payment of all other of its costs.
22
<PAGE>
Listed below are the Advisory Fees that Aeltus is entitled to receive from each
Fund or Portfolio at an annual rate based on average daily net assets of each
Fund or Portfolio.
<TABLE>
<CAPTION>
Advisory Fee
-------------
<S> <C>
Ascent 0.60%
Balanced 0.50%
Bond Fund 0.40%
Crossroads 0.60%
Growth 0.60%
Growth and Income 0.50%
High Yield 0.65%
Index Plus Bond 0.30%
Index Plus Large Cap 0.35%
Index Plus Mid Cap 0.40%
Index Plus Small Cap 0.40%
International 0.85%
Legacy 0.60%
Money Market 0.25%
Real Estate 0.75%
Small Company 0.75%
Value Opportunity 0.60%
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, investment advisory fees
were paid to Aetna (investment adviser prior to May 1, 1998) and Aeltus (for
the period May 1, 1998 to December 31, 1998) as follows:
<TABLE>
<CAPTION>
Total Investment Net Advisory
Year Ended December 31, 1998 Advisory Fees Waiver Fees Paid
- ------------------------------ ------------------ ---------- -------------
<S> <C> <C> <C>
Ascent 1,107,075 0 1,107,075
Balanced 8,810,398 0 8,810,398
Bond Fund 2,935,908 0 2,935,908
Crossroads 1,013,082 0 1,013,082
Growth 338,707 0 338,707
Growth and Income 47,851,987 0 47,851,987
High Yield 68,620 17,237 51,383
Index Plus Bond 46,975 11,856 35,119
Index Plus Large Cap 971,046 0 971,046
Index Plus Mid Cap 34,602 18,635 15,967
Index Plus Small Cap 31,659 21,262 10,397
International 146,226 106,431 39,795
Legacy 745,715 0 745,715
Money Market 1,930,191 0 1,930,191
Real Estate 40,863 19,932 20,931
Small Company 469,286 0 469,286
Value Opportunity 281,489 0 281,489
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Total Investment Net Advisory
Year Ended December 31, 1997 Advisory Fees Waiver Fees Paid
- ------------------------------ ----------------- -------- --------------
<S> <C> <C> <C>
Ascent 584,891 0 584,891
Balanced 7,561,696 0 7,561,696
Bond Fund 2,576,345 0 2,576,345
Crossroads 495,598 0 495,598
Growth 36,432 0 36,432
Growth and Income 41,563,182 0 41,563,182
High Yield* 4,133 0 4,133
Index Plus Bond* 1,854 0 1,854
Index Plus Large Cap 235,280 0 235,280
Index Plus Mid Cap* 1,396 0 1,396
Index Plus Small Cap* 1,159 0 1,159
International* 3,178 0 3,178
Legacy 315,966 0 315,966
Money Market 1,622,840 0 1,622,840
Real Estate* 1,869 0 1,869
Small Company 52,841 0 52,841
Value Opportunity 38,520 0 38,520
</TABLE>
<TABLE>
<CAPTION>
Total Investment Net Advisory
Year Ended December 31, 1996 Advisory Fees Waiver Fees Paid
- ------------------------------ ------------------ -------- -------------
<S> <C> <C> <C>
Ascent 136,513 0 136,513
Balanced 4,616,886 0 4,616,886
Bond Fund 2,033,785 0 2,033,785
Crossroads 129,138 0 129,138
Growth** 1,449 0 1,449
Growth and Income 22,537,554 0 22,537,554
Index Plus Large Cap** 15,479 0 15,479
Legacy 105,706 0 105,706
Money Market 1,386,027 0 1,386,027
Small Company** 322 0 322
Value Opportunity** 1,455 0 1,455
</TABLE>
* High Yield, Index Plus Bond, Index Plus Mid Cap, Index Plus Small Cap,
International, and Real Estate commenced operations on December 10, 1997,
December 18, 1997, December 16, 1997, December 19, 1997, December 22, 1997,
and December 15, 1997, respectively.
** Growth, Index Plus Large Cap, Small Company, and Value Opportunity commenced
operations on December 13, 1996, September 16, 1996, December 27, 1996, and
December 13, 1996, respectively.
THE SUBADVISORY AGREEMENT
Aeltus and AVPI, on behalf of Value Opportunity, have entered into an agreement
(Subadvisory Agreement) with Bradley effective October 1, 1998 appointing
Bradley as subadviser of Value Opportunity. Bradley is managed by its six
principals, Robert H. Bradley, Peter B. Canoni, Timothy H. Foster, Jeffrey G.
Marsted, J. Edward Roney, Jr., and Joseph D. Sargent.
The Subadvisory Agreement gives Bradley broad latitude to select equity
securities for Value Opportunity consistent with the investment objective and
policies of the Portfolio, subject to Aeltus' oversight. The Agreement
contemplates that Bradley will be responsible only for making equity investment
decisions. Aeltus remains responsible for all other aspects of managing and
administering Value Opportunity, including trade execution and cash management.
24
<PAGE>
For the services under the Subadvisory Agreement, Aeltus pays Bradley a
subadvisory fee, to be paid monthly at an annual rate of 0.15% of the
Portfolio's average daily net assets on the first $250 million of assets, and
0.10% of the Portfolio's average daily net assets above $250 million.
For the three month period ended December 31, 1998, Aeltus paid Bradley
subadvisory fees of $21,668.
Aeltus has also retained Bradley to provide certain shareholder communication
services and marketing assistance with respect to Value Opportunity, through
December 31, 1999. The fee for these services is $13,000 per month and is paid
out of Aeltus' revenues, not the assets of the Portfolio.
ADMINISTRATIVE SERVICES AGREEMENTS
Pursuant to an Administrative Services Agreement with respect to each Fund,
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 NAV; (6) the preparation of certain shareholder communications; (7)
supervision of the custodians and transfer agent; and (8) reporting to the
Trustees.
Listed below are the fees that Aeltus is entitled to receive from each Fund or
Portfolio at an annual rate based on average daily net assets of each Fund or
Portfolio:
<TABLE>
<CAPTION>
Administrative Fee Fund Assets
- -------------------- ------------------------------
<S> <C>
0.075% On the first $5 billion
0.050% On all assets over $5 billion
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, administrative services
fees were paid to Aetna (administrator prior to May 1, 1998) and Aeltus (for
the period May 1, 1998 to December 31, 1998) as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ --------------
<S> <C> <C> <C>
Ascent 179,401 146,223 34,751
Balanced 1,349,637 1,209,871 851,380
Bond Fund 561,856 515,269 430,403
Crossroads 162,576 123,899 26,567
Growth* 45,786 9,108 362
Growth and Income 5,950,715 4,987,583 3,258,759
High Yield** 10,505 954 N/A
Index Plus Bond** 15,466 927 N/A
Index Plus Large Cap* 253,167 100,834 6,634
Index Plus Mid Cap** 9,814 698 N/A
Index Plus Small Cap** 9,263 579 N/A
International** 25,419 1,122 N/A
Legacy 117,097 78,991 21,226
Money Market 636,338 649,136 447,624
Real Estate** 6,153 498 N/A
Small Company* 56,587 10,568 64
Value Opportunity* 42,429 9,630 364
</TABLE>
* Growth, Index Plus Large Cap, Small Company, and Value Opportunity commenced
operations on December 13, 1996, September 16, 1996, December 27, 1996, and
December 13, 1996, respectively.
** High Yield, Index Plus Bond, Index Plus Mid Cap, Index Plus Small Cap,
International, and Real Estate commenced operations on December 10, 1997,
December 18, 1997, December 16, 1997, December 19, 1997, December 22, 1997,
and December 15, 1997, respectively.
25
<PAGE>
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258,
serves as custodian for the assets of all Funds and 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 Fund
or Portfolio nor in deciding which securities are purchased or sold by a Fund
or Portfolio. A Fund or Portfolio may, however, invest in obligations of the
custodian and may purchase or sell securities from or to the custodian.
For portfolio securities which are purchased and held outside the U.S., Mellon
Bank, N.A. and Brown Brothers Harriman & Company have entered into
sub-custodian agreements (which are designed to comply with Rule 17f-5 under
the 1940 Act) with certain foreign banks or clearing agencies.
TRANSFER AGENT
First Data Investor Services Group, Inc. 4400 Computer Drive, Westborough,
Massachusetts 01581 serves as the transfer agent and dividend-paying agent to
the Funds and Portfolios.
INDEPENDENT AUDITORS
KPMG LLP, CityPlace II, Hartford, Connecticut 06103 serves as independent
auditors to the Funds. KPMG LLP provides audit services, assistance and
consultation in connection with the Commission filings.
PRINCIPAL UNDERWRITER
Shares of the Funds and Portfolios are offered on a continuous basis. As
principal underwriter for each Fund, Aetna has agreed to use its best efforts
to distribute the shares of each Fund or Portfolio thereof.
PURCHASE AND REDEMPTION OF SHARES
Shares of a Fund or Portfolio are purchased and redeemed at the NAV next
determined after receipt of a purchase or redemption order in acceptable form
as described in each Fund's prospectus.
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 a Fund or Portfolio
within seven days or the maximum period allowed by law, if shorter, after the
redemption request is received by the Fund or by Aetna.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the supervision of each Fund's Trustees, 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 Funds' portfolio transactions,
subject to Aeltus' duty to obtain best execution.
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 Funds or Portfolios. These brokerage and research services include, but
are not limited to, quantitative and qualitative research information and
purchase and sale recommendations regarding securities and industries, analyses
and reports covering a broad range of economic factors and trends, statistical
data relating to the strategy and performance of the Funds or Portfolios and
other investment companies, services related to the execution of trades
26
<PAGE>
on behalf of a Fund or Portfolio and advice as to the valuation of securities,
the providing of equipment used to communicate research information and
specialized consultations with Fund personnel with respect to computerized
systems and data furnished to the Funds or 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 Fund's or Portfolio's securities and may pay higher commission rates than the
lowest available when it is reasonable to do so in light of the value of the
brokerage and research services received generally or in connection with a
particular transaction. Aeltus' policy in selecting a broker to effect a
particular transaction is to seek to obtain "best execution," which means
prompt and efficient execution of the transaction at the best obtainable price
with payment of commissions which are reasonable in relation to the value of
the services provided by the broker, taking into consideration research and
brokerage services provided. When the trader believes that more than one broker
can provide best execution, preference may be given to brokers that provide
additional services to Aeltus.
Research services furnished by brokers through whom the Funds or Portfolios
effect 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 Funds or
Portfolios.
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 Funds or
Portfolios.
The Funds and 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 Funds.
A Fund or 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 Fund or Portfolio
and the other accounts, 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.
Brokerage commissions were paid as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Ascent $ 605,437 $ 416,625 $ 97,427
Balanced 1,766,765 2,113,501 2,131,638
Bond Fund 0 0 3,622
Crossroads 449,865 264,845 69,844
Growth* 183,496 18,822 3,292
Growth and Income 28,161,389 19,942,448 12,769,947
High Yield** 0 0 N/A
Index Plus Bond** 0 0 N/A
Index Plus Large Cap* 549,604 107,388 11,234
Index Plus Mid Cap** 15,110 9,197 N/A
Index Plus Small Cap** 11,422 20,614 N/A
International** 129,012 N/A N/A
Legacy 244,885 126,465 39,942
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
Money Market 0 0 0
Real Estate** 13,938 7,806 N/A
Small Company* 341,963 49,510 0
Value Opportunity* 157,158 21,014 2,562
</TABLE>
* Growth, Index Plus Large Cap, Small Company, and Value Opportunity commenced
operations on December 13, 1996, September 16, 1996, December 27, 1996, and
December 13, 1996, respectively.
** High Yield, Index Plus Bond, Index Plus Mid Cap, Index Plus Small Cap,
International, and Real Estate commenced operations on December 10, 1997,
December 18, 1997, December 16, 1997, December 19, 1997, December 22, 1997,
and December 15, 1997, respectively.
For the fiscal year ended December 31, 1998, commissions in the amounts listed
below were paid with respect to portfolio transactions directed to certain
brokers because of research services:
<TABLE>
<CAPTION>
Company Name Commissions Paid on Total Transactions
- ------------------------- ---------------------------------------
<S> <C>
Growth $ 15,864
International 3,964
Small Company 7,689
Value Opportunity* 15,462
Balanced 628,830
Growth and Income 5,294,115
Real Estate* 1,692
Bond Fund 0
High Yield* 0
Money Market 0
Index Plus Bond** 0
Index Plus Large Cap 205,248
Index Plus Mid Cap*** 0
Index Plus Small Cap*** 0
Ascent 78,436
Crossroads 53,773
Legacy 26,345
</TABLE>
* Value Opportunity, Real Estate and High Yield commenced operations on
February 2, 1998.
** Index Plus Bond commenced operations on February 4, 1998.
*** Index Plus Mid Cap and Index Plus Small Cap commenced operations on
February 3, 1998.
The Board has adopted a policy allowing trades to be made between affiliated
registered investment companies or series thereof provided they meet the terms
of Rule 17a-7 under the 1940 Act.
The Board has also adopted a Code of Ethics governing personal trading by
persons who manage, or who have access to trading activity by, a Fund or
Portfolio. The Code of Ethics allows trades to be made in securities that may
be held by a Fund or Portfolio. However, it prohibits a person from taking
advantage of Fund or Portfolio trades or from acting on inside information.
Aeltus also has adopted a Code of Ethics, which the Board reviews annually.
NET ASSET VALUE
Securities of the Funds or Portfolios are generally valued by independent
pricing services which have been approved by the Board. 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 that have a maturity date of more than sixty days and long-term
debt securities
28
<PAGE>
are valued at the mean of the last bid and asked price of such securities
obtained from a broker that is a market-maker in the securities or a service
providing quotations based upon the assessment of market-makers in those
securities. Short-term debt securities maturing in sixty days or less at the
date of purchase, and all securities in Money Market, 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. Options are valued at the mean of the last bid and asked price on
the exchange where the option is primarily traded. Futures contracts are valued
daily at a settlement price based on rules of the exchange where the futures
contract is primarily traded. 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
Board.
TAX STATUS
The following is only a limited discussion of certain additional tax
considerations generally affecting each Fund or Portfolio. No attempt is made
to present a detailed explanation of the tax treatment of each Fund or
Portfolio and no explanation is provided with respect to the tax treatment of
any Fund or Portfolio shareholder. The discussions here and in the Prospectuses
are not intended as substitutes for careful tax planning. Holders of VA
Contracts or VLI Policies must consult the contract prospectus, prospectus
summary or disclosure statement for information concerning the federal income
tax consequences of owning such VA Contracts or VLI Policies.
Qualification as a Regulated Investment Company
Each Fund or Portfolio has elected to be taxed as a regulated investment
company under Subchapter M of the Code. If for any taxable year a Fund or
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 Fund's or Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Qualification of Segregated Asset Accounts
Under Code section 817(h), a segregated asset account upon which a variable
annuity contract or variable life insurance policy is based must be "adequately
diversified." A segregated asset account will be adequately diversified if it
satisfies one of two alternative tests set forth in the Treasury Regulations.
Specifically, the Treasury Regulations provide, that except as permitted by the
"safe harbor" discussed below, as of the end of each calendar quarter (or
within 30 days thereafter) no more than 55% of a fund'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.
Foreign Investments
Investment income from foreign securities may be subject to foreign taxes
withheld at the source. It is impossible to determine the effective rate of
foreign tax in advance since the amount of a Fund's or Portfolio's assets to be
invested in various countries is not known.
29
<PAGE>
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on the undistributed income of a
regulated investment company that fails to distribute in each calendar year an
amount equal to 98% of ordinary taxable income for the calendar year and 98% of
capital gain net income for the one-year period ended on October 31 of such
calendar year (or, at the election of a regulated investment company having a
taxable year ending November 30 or December 31, for its taxable year (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.
Each Fund or 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 Fund or Portfolio may in certain
circumstances be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
PERFORMANCE INFORMATION
Performance information for each Fund or Portfolio including the yield and
effective yield of Money Market, the yield of Bond Fund, High Yield and Index
Plus Bond, the dividend yield of Money Market, Bond Fund, High Yield and Index
Plus Bond and the total return of all Funds or Portfolios, may appear in
reports or promotional literature to current or prospective shareholders.
Money Market Yields
Current yield for Money Market will be based on a recently ended seven-day
period, computed by determining the net change, exclusive of capital changes
and income other than investment income, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from that
shareholder account, and dividing the difference by the value of the account at
the beginning of the base period to obtain the base period return. This base
period return is then multiplied by 365/7 with the resulting yield figure
carried to at least the nearest hundredth of one percent. Calculation of
"effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
Effective Yield = [(Base Period Return + 1)(365/7)]-1
The yield and effective yield for Money Market for the seven days ended March
31, 1999 were 4.76% and 4.87%, respectively.
30-Day Yield for Certain Non-Money Market Funds or Portfolios
Quotations of yield for Bond Fund, 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
30
<PAGE>
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), interest earned on debt obligations held by the
Fund or Portfolio is calculated by computing the yield to maturity of each
obligation held by the Fund or Portfolio based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest), and
dividing the result by 360 and multiplying the quotient by the market value of
the obligation (including actual and accrued interest). For purposes of this
calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the discount or
premium. The amortization schedule will be adjusted from time to time to
reflect changes in the market value of such debt obligations.
Undeclared earned income will be subtracted from the net asset value per share
(variable "d" in the formula). Undeclared earned income is the net investment
income which, at the end of the base period, has not been declared as a
dividend, but is reasonably expected to be and is declared as a dividend
shortly thereafter.
For the 30-day period ended March 31, 1999:
<TABLE>
<CAPTION>
Fund Yield
---- ------
<S> <C>
Bond Fund 5.86%
High Yield 9.15%
Index Plus Bond 5.82%
</TABLE>
Average Annual Total Return
Quotations of average annual total return for any Fund or Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Fund or Portfolio over a period of one, five and
ten years (or, if less, up to the life of the Fund or Portfolio), calculated
pursuant to the formula:
P(1 + T)(n) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = an average annual total return
n = the number of years
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5, or 10 year period at the end of the 1, 5, or 10
year period (or fractional portion thereof).
31
<PAGE>
Total Return Quotations as of March 31, 1999
<TABLE>
<CAPTION>
Since Inception
Fund Name 1 Year 5 Years 10 Years Inception Date*
- ---------------------- ------------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Ascent -6.84% N/A N/A 14.69% 7/5/95
Balanced 9.88% 16.92% N/A 12.83% 4/3/89
Bond Fund 6.48% 7.38% 9.08% N/A N/A
Crossroads -3.15% N/A N/A 13.19% 7/5/95
Growth 26.22% N/A N/A 34.77% 12/13/96
Growth and Income 5.41% 20.82% 16.17% N/A N/A
High Yield -1.63% N/A N/A 4.85% 12/10/97
Index Plus Bond 6.05% N/A N/A 6.17% 12/18/97
Index Plus Large Cap 21.56% N/A N/A 32.39% 9/16/96
Index Plus Mid Cap 4.98% N/A N/A 15.43% 12/16/97
Index Plus Small Cap -17.64% N/A N/A -4.54% 12/19/97
International 5.46% N/A N/A 20.59% 12/22/97
Legacy 0.32% N/A N/A 11.42% 7/5/95
Money Market 5.27% 5.37% 5.63% N/A N/A
Real Estate -17.69% N/A N/A -11.73% 12/15/97
Small Company -15.48% N/A N/A 12.78% 12/27/96
Value Opportunity 10.25% N/A N/A 27.90% 12/13/96
</TABLE>
Performance information for a Fund or Portfolio may be compared, in reports and
promotional literature, to: (a) the Standard & Poor's 500 Index, the Russell
2000 Index, the Russell 3000 Index, Lehman Brothers Aggregate Bond Index,
Lehman Brothers Intermediate Government Bond Index, Merrill Lynch High Yield
Index, Salomon Brothers Broad Investment Grade Bond Index, Dow Jones Industrial
Average, or other indices (including, where appropriate, a blending of indices)
that measure performance of a pertinent group of securities widely regarded by
investors as representative of the securities markets in general; (b) other
groups of investment companies tracked by Morningstar or Lipper Analytical
Services, widely used independent research firms that rank mutual funds and
other investment companies by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications, or persons who
rank such investment companies on overall performance or other criteria; and
(c) the Consumer Price Index (measure for inflation) to assess the real rate of
return from an investment in a Fund or Portfolio.
FINANCIAL STATEMENTS
The Financial Statements and the independent auditors' reports thereon are
incorporated by reference in this Statement. The Funds' Annual Reports are
available upon request and without charge by calling (800) 525-4225.
Statement of Additional Information
32
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
(a.1) Articles of Incorporation (June 4, 1996)(1)
(a.2) Articles of Amendment (October 15, 1996)(2)
(a.3) Articles Supplementary (October 29, 1997)(3)
(a.4) Articles of Amendment (May 1, 1998)(4)
(a.5) Articles of Amendment (April 1, 1999)
(b) Amended Bylaws(2)
(c) Instruments Defining Rights of Holders (set forth in the
Articles of Incorporation which are incorporated by
reference)(1)
(d.1) 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 and Aetna Real Estate Securities VP(5)
(d.2) Subadvisory Agreement between Bradley, Foster & Sargent, Inc.
and Aetna Variable Portfolios, Inc., on behalf of Aetna Value
Opportunity VP(6)
(e) Underwriting Agreement between Aetna Variable Portfolios, Inc.
and Aetna Life Insurance and Annuity Company(2)
(f) Directors' Deferred Compensation Plan(3)
(g.1) 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)
(g.2) 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 Index Plus Small
Cap VP, Aetna High Yield VP and Aetna Real Estate Securities
VP(3)
(g.3) Custodian Agreement between Aetna Variable Portfolios, Inc.
and Brown Brothers Harriman & Co. for Aetna International
VP(4)
(h.1) 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 and Aetna Real Estate
Securities VP(5)
(h.2) License Agreement(2)
(i) Opinion and Consent of Counsel
(j) Consent of Independent Auditors
(k) Not applicable
(l.1) 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)
<PAGE>
(l.2) Agreement re: Initial Contribution to Working Capital for
Aetna Index Plus Bond VP, Index Plus Mid Cap VP, Index Plus
Small Cap VP, Aetna High Yield VP, Aetna Real Estate
Securities VP and Aetna International VP(7)
(m) Not applicable
(n) See exhibit 27 below
(o) Not applicable
(p.1) Power of Attorney (November 6, 1998)(8)
(p.2) Authorization for Signatures(7)
(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.
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.
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.
4. Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-1A (File No. 333-05173), as filed
electronically on April 27, 1998.
5. Incorporated by reference to Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A (File No. 333-05173), as filed
electronically on February 10, 1999.
6. Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-1A (File No. 333-05173), as filed
electronically on September 30, 1998.
7. 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.
8. Incorporated by reference to Post-Effective Amendment No. 29 to
Registration Statement on Form N-1A (File No. 33-41694), as filed
electronically on December 17, 1998.
<PAGE>
Item 24. Persons Controlled by or Under Common Control
Registrant is a Maryland corporation for which separate financial
statements are filed. As of March 31, 1999, Aetna Life Insurance and
Annuity Company (Aetna), and its affiliates, had the following interest
in the portfolios of the Registrant, through direct ownership or through
one of Aetna's separate accounts:
<TABLE>
<CAPTION>
% Aetna
-------
<S> <C>
Aetna Value Opportunity VP 100%
Aetna Growth VP 100%
Aetna Index Plus Large Cap VP 100%
Aetna Small Company VP 100%
Aetna Index Plus Bond VP 100%
Aetna Index Plus Mid Cap VP 100%
Aetna Index Plus Small Cap VP 100%
Aetna International VP 100%
Aetna High Yield VP 100%
Aetna Real Estate Securities VP 100%
</TABLE>
Aetna and Aetna Life Insurance Company are indirect wholly-owned
subsidiaries 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 24 of Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A (File No. 33-12723), as filed
electronically with the Securities and Exchange Commission on March 10,
1999.
Item 25. Indemnification
Article 10, Section (iv) of the Registrant's Articles of Incorporation,
incorporated herein by reference to Exhibit (a.1) of this Post-Effective
Amendment, 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, incorporated
herein by reference to Exhibit (h.1) of this Post-Effective Amendment,
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
<PAGE>
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 26. 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., Aetna GET Fund, Aetna
Generation Portfolios, Inc., and Aetna Series Fund, Inc. (all management
investment companies registered under the Investment Company Act of 1940
(1940 Act)). It also acts as investment adviser to certain private
accounts.
The following table summarizes the business connections of the directors
and principal officers of the investment adviser.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1996/Addresses*
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John Y. Kim Director, President, Chief Director (February 1995 - March 1998) -- Aetna
Executive Officer, Chief Investment Life Insurance and Annuity Company; Senior Vice
Officer President (since September 1994) -- Aetna Life
Insurance and Annuity Company.
J. Scott Fox Director, Managing Director, Chief Vice President (since April 1997) -- Aetna
Operating Officer, Chief Financial Retirement Services, Inc.; Director and Senior
Officer 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1996/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; 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.
Catherine H. Smith Director Chief Financial Officer (since February 1998) --
Aetna Retirement Services, Inc.; Director, Senior
Vice President and Chief Financial Officer (since
February 1998) -- Aetna Life Insurance and Annuity
Company; Vice President, Strategy, Finance and
Administration, Financial Relations (September
1996 - February 1998) -- Aetna Inc.
Lennart A. Carlson Vice President, Fixed Income Managing Director (since January 1996) -- Aeltus
Investments Trust Company.
Stephanie A. DeSisto Vice President
Amy R. Doberman Vice President, General Counsel and Counsel (since December 1996) -- Aetna Life
Secretary Insurance and Annuity Company; Attorney (March 1990
- November 1996) -- Securities and Exchange
Commission.
Steven C. Huber Vice President, Fixed Income Managing Director (since August 1996) -- Aeltus
Investments Trust Company.
Brian K. Kawakami Vice President, Chief Compliance Chief Compliance Officer & Director (since January
Officer 1996) -- Aeltus Trust Company; Chief Compliance
Officer (since August 1993) -- Aeltus Capital, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1996/Addresses*
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Neil Kochen Managing Director, Product Managing Director (since April 1996) -- Aeltus
Development Trust Company; Managing Director (since August
1996) -- Aeltus Capital, Inc.
Frank Litwin Managing Director, Retail Marketing Vice President, Strategic Marketing (April, 1992 -
and Sales August, 1997) -- Fidelity Investments
Institutional Services Company.
Kevin M. Means Managing Director, Equity Managing Director (since August 1996) -- Aeltus
Investments Trust Company.
L. Charles Meythaler Managing Director, Institutional Director (since July 1997) -- Aeltus Trust
Marketing and Sales Company; Managing Director (since June 1997) --
Aeltus Trust Company; President (June 1993 - April
1997) -- New England Investment Association.
</TABLE>
* Except with respect to Mr. McInerney and Ms. Smith, the principal business
address of each person named is 10 State House Square, Hartford, Connecticut
06103-3602. The address of Mr. McInerney and Ms. Smith is 151 Farmington
Avenue, Hartford, Connecticut 06156.
For information regarding Bradley, Foster & Sargent, Inc. (Bradley), the
subadviser for Aetna Value Opportunity VP, reference is made to the section
entitled "Subadviser" in the Prospectus dated May 1, 1999 and the Statement of
Additional Information dated May 1, 1999. For information as to the business,
profession, vocation or employment of a substantial nature of each of the
officers of Bradley, reference is made to Bradley's current Form ADV (File No.
801-46616) filed under the Investment Advisers Act of 1940, incorporated herein
by reference.
Item 27. 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., 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 Variable Annuity Account B of
Aetna, Variable Annuity Account C of Aetna, Variable Annuity Account G
of Aetna, and Variable Life Account B of Aetna (separate accounts of
Aetna registered as unit investment trusts under the 1940 Act).
<PAGE>
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
Shaun P. Mathews Director and Senior Vice President Director
Catherine H. Smith Director, Senior Vice President and Chief None
Financial Officer
Allan Baker Senior Vice President None
David E. Bushong Senior Vice President None
Robert D. Friedhoff Senior Vice President None
Steven A. Haxton Senior Vice President None
John Y. Kim Senior Vice President Director
Deborah Koltenuk Vice President, Treasurer and Corporate None
Controller
Therese Squillacote Vice President and Chief Compliance Officer None
Thomas P. Waldron Senior Vice President None
Kirk P. Wickman Senior Vice President, General Counsel and None
Corporate Secretary
</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 10 State House Square, Hartford,
Connecticut 06103-3602.
(c) Not applicable
Item 28. 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 and 10 State House Square, Hartford,
Connecticut 06103-3602, respectively.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, Aetna Variable Portfolios, Inc. certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement under Rule 485(b) under the Securities Act and has duly
caused this Post-Effective Amendment to be signed on its behalf by the
undersigned, duly authorized, in the City of Hartford, and State of Connecticut,
on the 27th day of April, 1999.
AETNA VARIABLE PORTFOLIOS, INC.
--------------------------------
Registrant
By: J. Scott Fox*
--------------------------------
J. Scott Fox
President
Pursuant to the requirements of the Securities Act, this registration statement
has been signed below by the following persons in the capacities and on the
date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
J. Scott Fox* President and Director
- ----------------------------- (Principal Executive Officer)
J. Scott Fox )
)
)
Albert E. DePrince, Jr.* Director )
- ----------------------------- )
Albert E. DePrince, Jr. )
)
)
Maria T. Fighetti* Director ) April
- ----------------------------- )
Maria T. Fighetti ) 27, 1999
)
)
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 )
)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Corine T. Norgaard* Director )
- ----------------------------- )
Corine T. Norgaard )
)
)
Richard G. Scheide* Director )
- ----------------------------- )
Richard G. Scheide )
)
)
Stephanie A. DeSisto* Treasurer and Chief Financial )
- ----------------------------- Officer(Principal Financial and )
Stephanie A. DeSisto Accounting Officer) )
)
)
By: /s/ Amy R. Doberman
-----------------------------
*Amy R. Doberman
Attorney-in-Fact
</TABLE>
* Executed pursuant to Power of Attorney dated November 6, 1998 and filed with
the Securities and Exchange Commission on December 17, 1998.
<PAGE>
Aetna Variable Portfolios, Inc.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
99-(a.5) Articles of Amendment (April 1, 1999)
-------------------
99-(i) Opinion and Consent of Counsel
-------------------
99-(j) Consent of Independent Auditors
-------------------
(27) Financial Data Schedule
-------------------
</TABLE>
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 referred to as the "Corporation") hereby certifies to the State
Department of Assessments and Taxation of Maryland (the "Department") that:
FIRST: In connection with and in furtherance of a plan of liquidation
of the Aetna Mid Cap VP, a separate fund, and class of stock of the Corporation
(the "Mid Cap Fund"), the Corporation hereby amends its Charter as currently in
effect, consisting of Articles of Incorporation filed with the Department on
June 4, 1996, Articles of Amendment filed with the Department on October 10,
1996, and Articles Supplementary filed with the Department on October 29, 1997
(the "Charter"), to include the following:
A. As of the Effective Date (as hereinafter defined):
(i) each unissued Share of the Mid Cap Fund class of
stock of the Corporation, par value $0.01 per Share, is hereby
reclassified into, and shall become, one unissued unclassified Share of
capital stock of the Corporation; and
(ii) the Corporation shall have sold and liquidated all
assets belonging to the Mid Cap Fund, and shall have paid from the
proceeds thereof, all liabilities belonging to the Mid Cap Fund. The
remaining proceeds from the sale and liquidation of the assets
belonging to the Mid Cap Fund shall have been distributed among the
holders of Mid Cap Fund Shares in proportion to the number of such
shares held by them and recorded on the books of the Corporation.
B. Upon the reclassification of all unissued Mid Cap Fund
Shares into unissued, unclassified shares of capital stock of the Corporation,
the provisions of the Charter designating and classifying shares of stock of the
Corporation into Mid Cap Fund Shares, establishing and describing the
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of Mid Cap Fund Shares and
the description, and terms and conditions, of various classes of Mid Cap Fund
Shares shall be deleted from the Charter of the Corporation. Such deletions from
the Charter of the Corporation shall include only provisions of the Charter as
they relate to Mid Cap Fund Shares, and to the extent which any provisions of
the Charter of the Corporation relate both to Mid Cap Fund Shares and one or
more other classes of Shares of stock of the Corporation, such provisions shall
remain in the Charter but shall be deemed to apply only to such one or more
other classes of stock of the Corporation.
SECOND: The amendments to the Charter of the Corporation herein set
forth were duly advised by the Board of Directors of the Corporation, as
required by the Charter and Bylaws of the Corporation and applicable law.
THIRD: The amendments set forth herein do not increase the authorized
capital stock of the Corporation.
FOURTH: The amendments set forth herein shall become effective as of
the close of business on the date (the "Effective Date") which is the later of:
(i) April 30, 1999; and (ii) the date on which these Articles of Amendment,
having been duly advised, approved, signed, acknowledged and sealed by the
Corporation as required by the laws of the State of Maryland, and not having
been abandoned prior to the Effective Date by majority vote of the entire Board
of Directors of the Corporation, are filed for record with the Department.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to be executed in its name and on its behalf by its undersigned
President and witnessed or attested to by its undersigned Secretary as of the
1st day of April, 1999 and its undersigned President acknowledges that these
Articles of Amendment are the act and deed of the Corporation and, under
penalties of perjury, that the matters and facts set forth herein are true in
all material respects to the best of his knowledge, information and belief.
AETNA VARIABLE PORTFOLIOS, INC.
By: /s/ J. Scott Fox
----------------------------
J. Scott Fox, President
ATTEST:
By: /s/ Amy R. Doberman
----------------------------
Amy R. Doberman, Secretary
[Aetna letterhead] 10 State House Square, SH11
[Aetna logo] Hartford, CT 06103-3602
Amy R. Doberman
Counsel
Aetna Variable Portfolios, Inc.
April 27, 1999 (860) 275-2032
Fax: (860) 275-2158
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. 8 to
Registration Statement on Form N-1A
(File No. 333-05173 and 811-7651)
Dear Sir or Madam:
The undersigned serves as counsel to Aetna 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 Connecticut, 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.
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.
<PAGE>
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
Aetna Variable Portfolios, Inc.:
We consent to the use of our report dated January 29, 1999 incorporated by
reference herein on Form N-1A relating to Aetna Growth VP, Aetna International
VP, Aetna Small Company VP, Aetna Value Opportunity VP, Aetna Real Estate
Securities VP, Aetna High Yield VP, Aetna Index Plus Bond VP, Aetna Index Plus
Large Cap VP, Aetna Index Plus Mid Cap VP and Aetna Index Plus Small Cap VP, 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 LLP
KPMG LLP
Hartford, Connecticut
April 27, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> Aetna Variable Portfolios, Inc.
<SERIES>
<NUMBER> 08
<NAME> Aetna International VP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 13,428,143
<INVESTMENTS-AT-VALUE> 15,554,445
<RECEIVABLES> 931,112
<ASSETS-OTHER> 1,011,001
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,496,558
<PAYABLE-FOR-SECURITIES> 1,070,684
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 183,538
<TOTAL-LIABILITIES> 1,254,222
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,892,819
<SHARES-COMMON-STOCK> 1,401,826
<SHARES-COMMON-PRIOR> 1,500,000
<ACCUMULATED-NII-CURRENT> 117,527
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 162,713
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,069,277
<NET-ASSETS> 16,242,336
<DIVIDEND-INCOME> 272,815
<INTEREST-INCOME> 21,677
<OTHER-INCOME> 0
<EXPENSES-NET> (199,745)
<NET-INVESTMENT-INCOME> 94,747
<REALIZED-GAINS-CURRENT> 1,023,371
<APPREC-INCREASE-CURRENT> 1,651,337
<NET-CHANGE-FROM-OPS> 2,769,455
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,927)
<DISTRIBUTIONS-OF-GAINS> (813,619)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 971,299
<NUMBER-OF-SHARES-REDEEMED> (1,139,958)
<SHARES-REINVESTED> 70,485
<NET-CHANGE-IN-ASSETS> 830,728
<ACCUMULATED-NII-PRIOR> 8,604
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (14,936)
<GROSS-ADVISORY-FEES> 146,226
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 306,176
<AVERAGE-NET-ASSETS> 17,156,878
<PER-SHARE-NAV-BEGIN> 10.27
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> 1.85
<PER-SHARE-DIVIDEND> (0.01)
<PER-SHARE-DISTRIBUTIONS> (0.61)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.59
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015965
<NAME> Aetna Variable Portfolios, Inc.
<SERIES>
<NUMBER> 04
<NAME> Aetna Small Company VP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 90,225,655
<INVESTMENTS-AT-VALUE> 96,046,889
<RECEIVABLES> 8,445,272
<ASSETS-OTHER> 5,052
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 104,497,213
<PAYABLE-FOR-SECURITIES> 4,580,688
<SENIOR-LONG-TERM-DEBT> 0
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<NAME> Aetna Variable Portfolios, Inc.
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<NAME> Aetna Variable Portfolios, Inc.
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<NAME> Aetna Index Plus Small Cap VP
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<CIK> 0001015965
<NAME> Aetna Variable Portfolios, Inc.
<SERIES>
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<NAME> Aetna Index Plus Bond VP
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</TABLE>
