As filed with the Securities and Exchange File No. 333-05173
Commission on April 25, 2000 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. 12
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 13
AETNA VARIABLE PORTFOLIOS, INC.
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151 Farmington Avenue TS31, 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 1, 2000 pursuant to paragraph (b) of Rule 485.
<PAGE>
<PAGE>
AETNA VARIABLE PORTFOLIOS, INC.
Prospectus
May 1, 2000
Aetna Growth VP (Growth)
Aetna International VP (International)
Aetna Small Company VP (Small Company)
Aetna Value Opportunity VP (Value Opportunity)
Aetna Technology VP (Technology)
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>
<CAPTION>
Page
----
<S> <C>
THE PORTFOLIOS' INVESTMENTS ................................................. 1
Investment Objectives, Principal Investment Strategies and Risks, Investment
Performance ................................................................ 1
PORTFOLIO EXPENSES .......................................................... 24
OTHER CONSIDERATIONS ........................................................ 25
MANAGEMENT OF THE PORTFOLIOS ................................................ 26
INVESTMENTS IN AND REDEMPTIONS FROM THE PORTFOLIOS .......................... 27
TAX INFORMATION ............................................................. 28
PERFORMANCE OF SIMILARLY MANAGED ACCOUNTS ................................... 28
FINANCIAL HIGHLIGHTS ........................................................ 30
ADDITIONAL INFORMATION ...................................................... 37
</TABLE>
<PAGE>
THE PORTFOLIOS' INVESTMENTS
Investment Objectives, Principal Investment Strategies and Risks, Investment
Performance
o Aetna Variable Portfolios, Inc. (Fund) consists of multiple 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 Effective May 15, 2000, Real Estate, High Yield and Index Plus Bond
will no longer be available for new investments. After that date, these
portfolios will only accept purchases that are made pursuant to
standing customer instructions (e.g., payroll deduction allocations,
dollar cost averaging, etc.) in effect before the close of business on
May 12, 2000. Proxy materials are anticipated to be mailed to
shareholders on or about June 1, 2000, with a proposed liquidation date
of September 1, 2000.
o A performance bar chart is provided for each Portfolio that has been in
existence for at least one full calendar year. 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 that has been in existence for at least one
full calendar year 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 Because Technology is new, it does not have performance information an
investor may find useful in evaluating the risks of investing in the
Fund.
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 of the Portfolios.
o Elijah Asset Management, LLC (EAM) serves as subadviser of Technology.
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
respective investment objectives. Investments in the Portfolios are not bank
deposits and are not insured or guaranteed by the Federal Deposit Insurance
Corporation 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. 1
<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 and securities convertible
into common stock.
In managing Growth, Aeltus:
o Emphasizes stocks of larger companies, although Growth 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.
2 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA GROWTH VP
Year-by-Year Total Return
[BAR CHART PLOT POINTS]
Years Ended December 31,
<TABLE>
<S> <C>
1997 33.01%
1998 37.68%
1999 34.97%
</TABLE>
[END BAR CHART]
[arrow up] Best Quarter:
fourth quarter 1998,
up 24.37%
[arrow down] Worst Quarter:
third quarter 1998,
down 10.04%
As of December 31, 1999
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since Inception Inception Date
<S> <C> <C> <C>
Growth 34.97% 35.20% 12/13/96
Russell 1000 Growth Index* 33.16% 27.78% 12/13/96
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in Growth. All figures assume reinvestment of dividends
and distributions.
* The Russell 1000 Growth Index measures the performance of the 1,000 largest
companies in the Russell 3000 Index with higher price-to-book ratios and
higher forecasted growth values.
Aetna Variable Portfolios, Inc. 3
<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 stock.
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 perceived 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 although it
may invest in emerging markets as well.
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 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. Hedging strategies intended to reduce this risk may not perform
as expected.
o Investments in emerging markets are subject to the same risks
applicable to foreign investments generally, although those risks may
be increased due to conditions in such countries.
4 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA INTERNATIONAL VP
Year-by-Year Total Return
[BAR CHART PLOT POINTS]
Years Ended December 31,
<TABLE>
<S> <C>
1998 18.92%
1999 51.33%
</TABLE>
[END BAR CHART]
[arrow up] Best Quarter:
fourth quarter 1999,
up 31.30%
[arrow down] Worst Quarter:
third quarter 1998,
down 15.75%
As of December 31, 1999
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
International 51.33% 35.44% 12/22/97
MSCI-EAFE Index* 27.30% 23.77% 12/31/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in International. All figures assume reinvestment of
dividends and distributions.
* 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. 5
<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 and securities
convertible into common stock 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
perceived 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
perceived 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. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Other 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 small cap
stocks are substantially less than of stocks of larger companies. As a
result, the stocks of smaller companies may be subject to wider price
fluctuations and/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.
6 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA SMALL COMPANY VP
Year-by-Year Total Return
[BAR CHART PLOT POINTS]
Years Ended December 31,
<TABLE>
<S> <C>
1997 34.49%
1998 1.10%
1999 30.85%
</TABLE>
[END BAR CHART]
[arrow up] Best Quarter:
fourth quarter 1999,
up 24.55%
[arrow down] Worst Quarter:
third quarter 1998,
down 19.38%
As of December 31, 1999
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Small Company 30.85% 21.56% 12/27/96
Russell 2000 Index* 21.26% 13.08% 12/31/96
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in Small Company. All figures assume reinvestment of
dividends and distributions.
* 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.
Aetna Variable Portfolios, Inc. 7
<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 and
securities convertible into common stock. In managing Value Opportunity, Aeltus
tends to invest in larger companies it believes are trading below their
perceived value, although it may invest in companies of any size. Aeltus
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 or for other reasons. In searching for investments, Aeltus
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. Aeltus looks to sell a security
when company business fundamentals deteriorate or when price objectives are
reached.
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
generally are more sensitive to changing economic conditions, such as changes
in interest rates, corporate earnings and industrial production.
8 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA VALUE OPPORTUNITY VP
Year-by-Year Total Return
[BAR CHART PLOT POINTS]
Years Ended December 31,
<TABLE>
<S> <C>
1997 39.36%
1998 22.39%
1999 19.58%
</TABLE>
[END BAR CHART]
[arrow up] Best Quarter:
fourth quarter 1998,
up 30.76%
[arrow down] Worst Quarter:
third quarter 1998,
down 16.64%
As of December 31, 1999
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Value Opportunity 19.58% 27.21% 12/13/96
S&P 500 Index* 21.04% 27.78% 12/13/96
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in Value Opportunity. All figures assume reinvestment of
dividends and distributions.
* The S&P 500 is a value-weighted, unmanaged index of 500 widely held stocks
and is considered to be representative of the stock market in general.
Aetna Variable Portfolios, Inc. 9
<PAGE>
Aetna Technology VP (Technology)
Investment Objective. Seeks long-term capital appreciation.
Principal Investment Strategies. Technology primarily invests in common stocks
and securities convertible into common stock of companies in the information
technology industry sector.
Companies in the information technology industries include companies that EAM
considers to be principally engaged in the development, production, or
distribution of products or services related to the processing, storage,
transmission, or presentation of information or data. The following examples
illustrate the wide range of products and services provided by these
industries:
o Computer hardware and software of any kind, including, for example,
semiconductors, minicomputers, and peripheral equipment.
o Telecommunications products and services.
o Multimedia products and services, including, for example, goods and
services used in the broadcast and media industries.
o Data processing products and services.
o Financial services companies that collect or disseminate market,
economic, and financial information.
o Internet companies and other companies engaged in, or providing
products or services for, e-commerce.
EAM considers a company to be principally engaged in the information technology
industries if at the time of investment at least 50% of the company's assets,
gross income, or net profits are committed to, or derived from, those
industries. EAM will also consider a company to be principally engaged in the
information technology industries if it has the potential for capital
appreciation primarily as a result of particular products, technology, patents,
or other market advantages in those industries.
In selecting stocks for Technology, EAM looks at a company's valuation relative
to its potential long-term growth rate. EAM may look to see whether a company
offers a new or improved product, service, or business operation; whether it
has experienced a positive change in its financial or business condition;
whether the market for its goods or services has expanded or experienced a
positive change; and whether there is a potential catalyst for positive change
in the company's business or stock price. Technology may sell a security if EAM
determines that the company has become overvalued due to price appreciation or
has experienced a change in its business fundamentals, if the company's growth
rate slows substantially, or if EAM believes that another investment offers a
better opportunity.
Principal Risks. The principal risks of investing in Technology 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. Stocks of smaller companies tend to be less
liquid and more volatile than stocks of larger companies. Further, stocks of
smaller companies also can be particularly sensitive to expected changes in
interest rates, borrowing costs and earnings.
Because Technology's investments are concentrated in the information technology
industries, Technology may be subject to more abrupt swings in value than would
a fund which invests in a broader range of industries.
10 Aetna Variable Portfolios, Inc.
<PAGE>
Investments in information technology companies may be highly volatile. Changes
in their prices may reflect changes in investor evaluation of a particular
product or group of products, of the prospects of a company to develop and
market a particular technology successfully, or of information technology
investments generally.
Technology may experience difficulty in establishing or closing out positions
in these securities at prevailing market prices. Also, there may be less
publicly available information about small companies or less market interest in
their securities as compared to larger companies, and it may take longer for
the prices of the securities to reflect the full value of their issuers'
earnings potential or assets.
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 perceived 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 on 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 portfolio 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
[BAR CHART PLOT POINTS]
Years Ended December 31,
<TABLE>
<S> <C>
1998 -12.85%
1999 -4.22%
</TABLE>
[END BAR CHART]
[arrow up] Best Quarter:
second quarter 1999,
up 12.59%
[arrow down] Worst Quarter:
third quarter 1998,
down 7.47%
As of December 31, 1999
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Real Estate - 4.22% - 6.85% 12/15/97
NAREIT* - 4.62% - 9.86% 11/30/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in Real Estate. All figures assume reinvestment of
dividends and distributions.
* The NAREIT Index is a market-weighted total return 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, attempts to
looks beyond credit ratings 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.
The High Yield may also invest up to 35% of its total assets in foreign
securities.
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 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.
Foreign securities present additional risks. Some foreign securities tend to be
less liquid and more volatile than their U.S. counterparts. In addition,
accounting standards and market regulations tend to be less standardized in
certain foreign countries, and economic and political climates can be less
stable.
14 Aetna Variable Portfolios, Inc.
<PAGE>
Investment Performance
AETNA HIGH YIELD VP
Year-by-Year Total Return
[BAR CHART PLOT POINTS]
Years Ended December 31,
<TABLE>
<S> <C>
1998 -0.27%
1999 7.05%
</TABLE>
[END BAR CHART]
[arrow up] Best Quarter:
first quarter 1998,
up 6.53%
[arrow down] Worst Quarter:
third quarter 1998,
down 8.19%
As of December 31, 1999
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
High Yield 7.05% 3.98% 12/10/97
Merrill Lynch High Yield Master Index* 1.57% 2.83% 12/10/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in High Yield. All figures assume reinvestment of
dividends and distributions.
* The Merrill Lynch High Yield Master Index is an unmanaged index of secured
and subordinated debt securities rated by S&P or by Moody's as less than
investment grade (i.e. BBB or Baa) 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
[BAR CHART PLOT POINTS]
Years Ended December 31,
<TABLE>
<S> <C>
1998 8.17%
1999 -1.08%
</TABLE>
[END BAR CHART]
[arrow up] Best Quarter:
third quarter 1998,
up 3.39%
[arrow down] Worst Quarter:
second quarter 1999,
down 1.09%
As of December 31, 1999
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Index Plus Bond - 1.08% 3.54% 12/18/97
LBAB Index* - 0.82% 3.89% 12/18/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in Index Plus Bond. All figures assume reinvestment of
dividends and distributions.
* The LBAB is an unmanaged index and is comprised of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index
and the Asset-Backed Securities Index.
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.
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
[BAR CHART PLOT POINTS]
Years Ended December 31,
<TABLE>
<S> <C>
1997 33.89%
1998 31.60%
1999 24.30%
</TABLE>
[END BAR CHART]
[arrow up] Best Quarter:
fourth quarter 1998,
up 22.83%
[arrow down] Worst Quarter:
third quarter 1998,
down 9.71%
As of December 31, 1999
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Index Plus Large Cap 24.30% 30.47% 9/16/96
S&P 500 Index* 21.04% 28.13% 9/16/96
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in Index Plus Large Cap. All figures assume reinvestment
of dividends and distributions.
* The S&P 500 is a value-weighted, unmanaged index of 500 widely held stocks
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.
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
[BAR CHART PLOT POINTS]
Years Ended December 31,
<TABLE>
<S> <C>
1998 24.30%
1999 15.81%
</TABLE>
[END BAR CHART]
[arrow up] Best Quarter:
fourth quarter 1998,
up 29.17%
[arrow down] Worst Quarter:
third quarter 1998,
down 12.18%
As of December 31, 1999
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Index Plus Mid Cap 15.81% 21.56% 12/16/97
S&P MidCap 400 Index* 14.72% 18.14% 12/16/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in Index Plus Mid Cap. All figures assume reinvestment of
dividends and distributions.
* The S&P MidCap 400 is an unmanaged index used to measure stock market
performance composed of companies with a weighted average market value of
$3.6 billion.
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.
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 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 small cap
stocks are substantially less than 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 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
[BAR CHART PLOT POINTS]
Years Ended December 31,
<TABLE>
<S> <C>
1998 -1.35%
1999 10.79%
</TABLE>
[END BAR CHART]
[arrow up] Best Quarter:
fourth quarter 1998,
up 17.61%
[arrow down] Worst Quarter:
third quarter 1998,
down 19.74%
As of December 31, 1999
<TABLE>
<CAPTION>
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Index Plus Small Cap 10.79% 6.65% 12/19/97
S&P SmallCap 600 Index* 12.40% 7.34% 12/19/97
</TABLE>
The performance table and bar chart provide an indication of the historical
risk of an investment in Index Plus Small Cap. All figures assume reinvestment
of dividends and distributions.
* The S&P SmallCap 600 is an unmanaged index used to measure stock market
performance composed of companies with a weighted average market value of
$903 million.
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>
All Portfolios None None
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses1
(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 0.11% 0.71% 0.00% 0.71%
International 0.85% None 0.77% 1.62% 0.47% 1.15%
Small Company 0.75% None 0.13% 0.88% 0.00% 0.88%
Value Opportunity 0.60% None 0.13% 0.73% 0.00% 0.73%
Technology2 0.95% None 0.25% 1.20% 0.05% 1.15%
Real Estate 0.75% None 0.74% 1.49% 0.54% 0.95%
High Yield 0.65% None 0.48% 1.13% 0.33% 0.80%
Index Plus Bond 0.30% None 0.33% 0.63% 0.18% 0.45%
Index Plus Large Cap 0.35% None 0.10% 0.45% 0.00% 0.45%
Index Plus Mid Cap 0.40% None 0.40% 0.80% 0.20% 0.60%
Index Plus Small Cap 0.40% None 0.50% 0.90% 0.30% 0.60%
</TABLE>
1 Aeltus is waiving all or a portion of its investment advisory fees and/or its
administrative services fees for certain Portfolios and/or reimbursing 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 Portfolio is subject to a contractual fee
waiver/reimbursement obligation through December 31, 2000.
2 Technology commenced operations on May 1, 2000. Amounts reflected in "Other
Expenses" and "Total Operating Expenses" are estimated amounts for the
current fiscal year based on expenses for comparable funds. Actual expenses
may vary from those shown.
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 $ 73 $227 $395 $ 883
International* 117 465 837 1,882
Small Company 90 281 488 1,084
Value Opportunity 75 233 406 906
Technology* 117 376 655 1,450
Real Estate* 97 418 762 1,733
High Yield* 82 326 590 1,345
Index Plus Bond* 46 184 333 769
Index Plus Large Cap 46 144 252 567
Index Plus Mid Cap* 61 235 425 971
Index Plus Small Cap* 61 257 469 1,080
</TABLE>
* Aeltus is contractually obligated to waive fees and/or reimburse expenses
through December 31, 2000. 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 vary from 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 of investing in 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 investment. In addition, while 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 options 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
Aetna Variable Portfolios, Inc. 25
<PAGE>
investments that are not consistent with its principal investment objective and
policies. In that event, the Portfolio may not achieve its investment
objective.
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, 1999, International and
Small Company each had a portfolio turnover rate in excess of 150%. A high
portfolio turnover rate increases a Portfolio's transaction costs and may
increase your tax liability.
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 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 (except
Technology) for its most recent fiscal year. These numbers reflect the
advisory fees after fee waiver and expense reimbursement, if applicable. See
the Annual Portfolio Operating Expenses table for the advisory fee
(Management Fee) Aeltus was entitled to receive.
o In the case of Technology, Aeltus is entitled to receive an annual advisory
fee, payable monthly, of 0.95% of the daily net assets.
<TABLE>
<CAPTION>
Aggregate Advisory Fees as a Percentage of Average
Portfolio Name Net Assets for Year Ended December 31, 1999
- -------------- ---------------------------------------------------
<S> <C>
Growth 0.60%
International 0.38%
Small Company 0.75%
Value Opportunity 0.60%
Real Estate 0.21%
High Yield 0.32%
Index Plus Bond 0.12%
Index Plus Large Cap 0.35%
Index Plus Mid Cap 0.20%
Index Plus Small Cap 0.10%
</TABLE>
Subadvisory Fee
Elijah Asset Management, LLC, 100 Pine St., Suite 420, San Francisco,
California 94111, a Delaware limited liability company, serves as subadviser to
Technology. Subject to such policies as the Board or Aeltus may determine, EAM
manages Technology's assets in accordance with Technology's investment
objective, policies, and limitations. EAM makes investment decisions for
Technology as to those assets and places orders to purchase and sell securities
and other investments for Technology.
Aeltus pays EAM a subadvisory fee at an annual rate of 0.50% of Technology's
average daily net assets.
Portfolio Management. The following discusses who 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 1979 and has 28 years of experience
in the investment business.
26 Aetna Variable Portfolios, Inc.
<PAGE>
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. Value Opportunity is managed by a team of Aeltus equity
investment specialists.
Technology. Ronald E. Elijah managing member of EAM, has been managing
Technology since its inception. Prior to founding EAM in March 1999, Mr. Elijah
was a portfolio manager with Robertson Stephens Investment Management.
Roderick R. Berry, a member of EAM, serves as a co-portfolio manager of
Technology. Prior to joining EAM in March 1999, Mr. Berry was a member of the
Robertson Stephens Investment Management research team. Prior to joining
Robertson Stephens Investment Management, Mr. Berry worked for USL Capital for
six years as both an investment officer and a financial manager.
Real Estate. Real Estate is managed by a team of Aeltus equity investment
specialists.
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. Index Plus Bond is managed by a team of Aeltus fixed-income
specialists.
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 12 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 Hugh T. M. Whelan, Portfolio Manager, Aeltus, serve as co-managers
of Index Plus Mid Cap and Index Plus Small Cap. Mr. Brod has managed each Fund
since its inception in February 1998. Mr. Whelan has been co-managing each
Portfolio since April 2000. Mr. Whelan previously provided quantitative
research in support of these Portfolios. Prior thereto, Mr. Whelan was a
quantitative portfolio manager in Aeltus' fixed income group with emphasis on
selecting corporate securities.
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.
Aetna Variable Portfolios, Inc. 27
<PAGE>
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. High yield securities are priced at bid by
external pricing sources or brokers making a market in the security. Short-term
debt securities maturing in 60 days or less are valued using amortized cost,
which when combined with accrued interest, approximates market value.
Securities for which market quotations are not readily available are valued at
their fair value, subject to procedures adopted by the Board. With respect to
any Portfolio that invests in foreign securities, because those securities may
be traded on markets that are open on days when the Portfolio does not price
its shares, the Portfolio's value may change even though Portfolio shareholders
may not be permitted to sell or redeem Portfolio shares.
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 Monday through Friday.
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.
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 and capital gains distributions, if any,
are paid on an annual basis. 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
International and Technology 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
28 Aetna Variable Portfolios, Inc.
<PAGE>
Act) whose shares are currently sold to the public (Public Fund) and, in the
case of International, are managed by Aeltus and, in the case of Technology are
subadvised by EAM. Therefore, the performance of the Public Funds are provided
below. The performance of International and Technology will vary over time and
their investments will not be identical to the past portfolio investments of
the comparable Public Fund.
The Public Fund, in the case of Technology, has been managed since its
inception by Mr. Elijah and Mr. Berry, the portfolio managers for Technology.
Both Mr. Elijah and Mr. Berry are currently members of EAM, the subadviser of
Technology.
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 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. 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, 2000 for the Portfolios, the comparable Public Fund and their
respective benchmark indices. Investors should not consider the historical
performance of the Public Funds to be an indication of the future performance
of the Portfolios.
INTERNATIONAL
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception
<S> <C> <C> <C>
International 62.88% N/A 37.66% (12/22/97)
Aetna Series Fund, Inc., Aetna
International Fund, Class I 62.88% 25.58% 16.60% (1/3/92)
MSCI-EAFE Index25.40 25.40% 12.71% 10.89% (12/31/91)
TECHNOLOGY
1 Year Since Inception
The Information Age Fund 128.46% 44.77% (11/15/95)
Goldman Sachs Technology Index 97.07% 55.58% (11/15/95)
</TABLE>
Aetna Variable Portfolios, Inc. 29
<PAGE>
FINANCIAL HIGHLIGHTS
These financial 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 share outstanding throughout each period)
<TABLE>
<CAPTION>
Growth
---------------------------------------------------------------------
Period From
December 13, 1996
Year Ended Year Ended Year Ended (Commencement of
December 31, December 31, December 31, Operations) to
1999 1998 1997 December 31, 1996
-------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period ........................... $ 13.53 $ 9.85 $ 10.15 $ 10.00
------- ------- ------- --------
Income from investment
operations:
Net investment income ............ 0.03 0.03 0.04+ 0.01+
Net realized and change in
unrealized gain or loss on
investments ..................... 4.62 3.68 3.27 0.15
------- ------- ------- --------
Total from investment
operations .................... 4.65 3.71 3.31 0.16
------- ------- ------- --------
Less distributions:
From net investment
income .......................... (0.02) (0.03) (0.03) (0.01)
From net realized gains on
investments ..................... (0.84) -- (3.58) --
-------- -------- -------- --------
Total distributions ............ (0.86) (0.03) (3.61) (0.01)
-------- -------- -------- --------
Net asset value, end of period..... $ 17.32 $ 13.53 $ 9.85 $ 10.15
======== ======== ======== ========
Total return* ..................... 34.97% 37.68% 33.01% 1.57%
Net assets,
end of period (000's) ............ $369,845 $142,363 $ 5,964 $ 5,175
Ratio of net expenses to
average net assets ............... 0.71% 0.75% 0.75% 0.67%(1)
Ratio of net investment income
to average net assets ............ 0.20% 0.40% 0.29% 1.99%(1)
Ratio of expenses before
reimbursement and waiver
to average net assets ............ N/A N/A N/A N/A
Portfolio turnover rate ........... 138.03% 152.99% 207.41% 1.97%
</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.
30 Aetna Variable Portfolios, Inc.
<PAGE>
<TABLE>
<CAPTION>
International Small Company
- ------------------------------------------------- ---------------------------------------------------------------
Period From Period From
December 22, 1997 December 27, 1996
Year Ended Year Ended (Commencement of Year Ended Year Ended Year Ended (Commencement of
December 31, December 31, Operations) to December 31, December 31, December 31, Operations) to
1999 1998 December 31, 1997 1999 1998 1997 December 31, 1996
- -------------- -------------- ------------------- -------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$ 11.59 $ 10.27 $ 10.00 $ 12.79 $ 12.77 $ 10.11 $ 10.00
-------- ------- -------- ------- ------- ------- -------
(0.01) 0.07 -- 0.08 0.07 0.04 + 0.01+
5.78 1.87 0.27 3.84 0.07 3.44 0.11
--------- ------- -------- ------- ------- ------- -------
5.77 1.94 0.27 3.92 0.14 3.48 0.12
--------- ------- -------- ------- ------- ------- -------
(0.15) (0.01) -- (0.06) (0.08) (0.03) (0.01)
(1.29) (0.61) -- (0.13) (0.04) (0.79) --
--------- -------- -------- -------- -------- -------- --------
(1.44) (0.62) -- (0.19) (0.12) (0.82) (0.01)
--------- -------- -------- -------- -------- -------- --------
$ 15.92 $ 11.59 $ 10.27 $ 16.52 $ 12.79 $ 12.77 $ 10.11
========= ======== ========= ======== ======== ======== ========
51.33% 18.92% 2.74% 30.85% 1.10% 34.49% 1.23%
$ 43,548 $16,242 $ 15,412 $149,416 $ 99,823 $ 18,102 $ 5,158
1.15% 1.15% 1.15%(1) 0.88% 0.89% 0.90% 0.55%(1)
0.13% 0.55% (0.98%)(1) 0.64% 0.93% 0.78% 5.96%(1)
162% 1.77% N/A N/A N/A N/A N/A
168.88% 158.02% 0.71% 256.09% 185.29% 180.25% --
</TABLE>
Aetna Variable Portfolios, Inc. 31
<PAGE>
(for one share outstanding throughout each period)
<TABLE>
<CAPTION>
Value Opportunity
---------------------------------------------------------------------
Period From
December 13, 1996
Year Ended Year Ended Year Ended (Commencement of
December 31, December 31, December 31, Operations) to
1999 1998 1997 December 31, 1996
-------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period ........................... $ 14.41 $ 11.92 $ 10.20 $ 10.00
-------- ------- ------- -------
Income from investment
operations:
Net investment income ............ 0.10 0.09 0.11+ 0.02+
Net realized and change in
unrealized gain or loss on
investments ..................... 2.71 2.56 3.90 0.20
-------- ------- ------- -------
Total from investment
operations .................... 2.81 2.65 4.01 0.22
-------- ------- ------- -------
Less distributions:
From net investment
income ............................ (0.08) (0.08) (0.10) (0.02)
From net realized gains on
investments ..................... (0.72) (0.08) (2.19) --
-------- -------- -------- --------
Total distributions ............ (0.80) (0.16) (2.29) (0.02)
-------- -------- -------- --------
Net asset value, end of period..... $ 16.42 $ 14.41 $ 11.92 $ 10.20
======== ======== ======== ========
Total return* .................. 19.58% 22.39% 39.36% 2.15%
Net assets, end of period (000's). $ 85,030 $76,109 $ 9,147 $ 5,202
Ratio of net expenses to
average net assets ............... 0.73% 0.74% 0.75% 0.67%(1)
Ratio of net investment income
to average net assets ............ 0.69% 0.93% 1.06% 2.73%(1)
Ratio of expenses before
reimbursement and waiver
to average net assets ............ N/A N/A N/A N/A
Portfolio turnover rate ........... 124.80% 125.72% 187.84% --
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
32 Aetna Variable Portfolios, Inc.
<PAGE>
<TABLE>
<CAPTION>
Real Estate High Yield
- ----------------------------------------------------- ----------------------------------------------------
Period From Period From
December 15, 1997 December 10, 1997
Year Ended Year Ended (Commencement of Year Ended Year Ended (Commencement of
December 31, December 31, Operations) to December 31, December 31, Operations) to
1999 1998 December 31, 1997 1999 1998 December 31, 1997
- -------------- -------------- ------------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
$ 8.53 $ 10.31 $ 10.00 $ 9.04 $ 10.10 $ 10.00
-------- -------- ------- ------- ------- --------
0.52 0.45 0.05+ 0.86 1.07 0.05+
(0.90) (1.78) 0.31 (0.22) (1.09) 0.10
--------- -------- ------- -------- ------- --------
(0.38) (1.33) 0.36 0.64 (0.02) 0.15
--------- -------- ------- -------- ------- --------
(0.42) (0.45) (0.05) (0.88) (1.02) (0.05)
-- -- -- -- (0.02) --
--------- -------- ------- -------- ------- --------
(0.42) (0.45) (0.05) (0.88) (1.04) (0.05)
--------- -------- ------- -------- ------- --------
$ 7.73 $ 8.53 $ 10.31 $ 8.80 $ 9.04 $ 10.10
========= ======== ======= ======== ======= ========
(4.22)% (12.85%) 3.59% 7.05% (0.27)% 1.48%
$ 4,994 $ 5,500 $ 5,153 $ 9,216 $ 8,767 $ 10,098
0.95% 0.95% 0.95%(1) 0.80% 0.80% 0.80%(1)
5.05% 5.24% 9.99%(1) 9.68% 9.14% 7.81%(1)
1.49% 1.32% N/A 1.13% 0.97% N/A
34.77% 55.79% -- 131.04% 178.39% 69.39%
</TABLE>
Aetna Variable Portfolios, Inc. 33
<PAGE>
(for one share outstanding throughout each period)
<TABLE>
<CAPTION>
Index Plus Bond
----------------------------------------------------
Period From
December 18, 1997
Year Ended Year Ended (Commencement of
December 31, December 31, Operations) to
1999 1998 December 31, 1997
-------------- -------------- ------------------
<S> <C> <C> <C>
Net asset value, beginning of
period ........................... $ 10.19 $ 10.01 $ 10.00
------- ------- -------
Income from investment
operations: ......................
Net investment income ............ 0.60 0.60 0.02+
Net realized and change in
unrealized gain or loss on
investments ..................... (0.70) 0.21 0.01
------- ------- -------
Total from investment
operations .................... (0.10) 0.81 0.03
------- ------- -------
Less distributions: ...............
From net investment
income ............................ (0.60) (0.59) (0.02)
From net realized gains on
investments ..................... (0.01) (0.04) --
------- ------- -------
Total distributions ............ (0.61) (0.63) (0.02)
------- ------- --------
Net asset value, end of period..... $ 9.48 $ 10.19 $ 10.01
======= ======= ========
Total return* .................. (1.08)% 8.17% 0.27%
Net assets,
end of period (000's) ............ $11,434 $15,107 $15,009
Ratio of net expenses to
average net assets ............... 0.45% 0.45% 0.45%(1)
Ratio of net investment income
to average net assets ............ 5.86% 5.67% 5.23%(1)
Ratio of expenses before
reimbursement and waiver
to average net assets ............ 0.63% 0.53% N/A
Portfolio turnover rate ........... 60.16% 19.52% --
</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 Large Cap Index Plus Mid Cap
- ------------------------------------------------------------------- ------------------------------------------------
Period From Period From
September 16, 1996 December 16, 1997
Year Ended Year Ended Year ended (Commencement of Year Ended Year Ended (Commencement of
December 31, December 31, December 31, Operations) to December 31, December 31, Operations) to
1999 1998 1997 December 31, 1996 1999 1998 December 31, 1997
- -------------- -------------- -------------- -------------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$ 17.59 $ 14.02 $ 10.91 $ 10.00 $ 12.20 $ 10.34 $ 10.00
---------- -------- -------- ------- ------- ------- -------
0.12 0.12 0.10+ 0.05+ 0.06 0.07 0.01+
4.09 4.30 3.60 0.92 1.76 2.42 0.34
---------- -------- -------- ------- ------- ------- -------
4.21 4.42 3.70 0.97 1.82 2.49 0.35
---------- -------- -------- ------- ------- ------- -------
( 0.10) (0.12) (0.10) (0.05) (0.06) (0.07) (0.01)
( 0.83) (0.73) (0.49) (0.01) (1.56) (0.56) --
---------- -------- -------- ------- ------- -------- -------
( 0.93) (0.85) (0.59) (0.06) (1.62) (0.63) (0.01)
---------- -------- -------- -------- ------- -------- -------
$ 20.87 $ 1 7.59 $ 14.02 $ 10.91 $ 12.40 $ 12.20 $ 10.34
========== ======== ======== ======= ======= ======== =======
24.30% 31.60% 33.89% 9.64% 15.81% 24.30% 3.50%
$1,162,472 $496,059 $132,517 $19,410 $19,244 $ 9,923 $ 7,756
0.45% 0.46% 0.50% 0.50%(1) 0.60% 0.60% 0.60%(1)
0.78% 1.07% 1.38% 1.89%(1) 0.68% 0.68% 1.37%(1)
0.45% N/A N/A N/A 0.80% 0.82% N/A
88.04% 98.61% 76.83% 5.18% 143.02% 165.70% --
</TABLE>
Aetna Variable Portfolios, Inc. 35
<PAGE>
(for one share outstanding throughout each period)
<TABLE>
<CAPTION>
Index Plus Small Cap
----------------------------------------------------
Period From
December 18, 1997
Year Ended Year Ended (Commencement of
December 31, December 31, Operations) to
1999 1998 December 31, 1997
-------------- -------------- ------------------
<S> <C> <C> <C>
Net asset value, beginning of
period ........................... $ 9.86 $ 10.42 $ 10.00
-------- ------- -------
Income from investment
operations: ......................
Net investment income ............ 0.02 0.04 0.01+
Net realized and change in
unrealized gain or loss on
investments ..................... 1.04 (0.19) 0.42
-------- ------- -------
Total from investment
operations .................... 1.06 (0.15) 0.43
-------- ------- -------
Less distributions: ...............
From net investment
income ............................ (0.02) (0.04) (0.01)
From net realized gains on
investments ..................... -- (0.37) --
-------- ------- -------
Total distributions ............ (0.02) (0.41) (0.01)
-------- ------- --------
Net asset value, end of period..... $ 10.90 $ 9.86 $ 10.42
======== ======= =======
Total return* .................... 10.79% (1.35)% 4.33%
Net assets, end of period (000's). $ 12,484 $ 7,599 $ 7,817
Ratio of net expenses to
average net assets ............... 0.60% 0.60% 0.60%(1)
Ratio of net investment income
to average net assets ............ 0.28% 0.38% 1.90%(1)
Ratio of expenses before
reimbursement and waiver
to average net assets ............ 0.90% 0.87% N/A
Portfolio turnover rate ........... 106.89% 141.99% --
</TABLE>
36 Aetna Variable Portfolios, Inc.
<PAGE>
ADDITIONAL INFORMATION
The SAI, which is incorporated by reference into this Prospectus, contains
additional 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
1-800-262-3862 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 EDGAR Database on the SEC's website (http://www.sec.gov) or at the SEC's
public reference room in Washington, D.C. You may call 1-202-942-8090 to get
information about the operations of the public reference room. You may obtain
copies of reports and other information about the Portfolios, after paying a
duplicating fee, by sending an e-mail request to: [email protected], or by
writing to the SEC's Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act File No. 811-7651
Aetna Variable Portfolios, Inc. 37
<PAGE>
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
Statement of Additional Information dated May 1, 2000
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 VP), 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
multiple Portfolios:
<TABLE>
<S> <C>
o Aetna Growth VP (Growth) o Aetna High Yield VP (High Yield)
o Aetna International VP (International) o Aetna Index Plus Bond VP (Index Plus Bond)
o Aetna Small Company VP (Small Company) o Aetna Index Plus Large Cap VP (Index Plus
o Aetna Value Opportunity VP (Value Opportunity) Large Cap)
o Aetna Technology VP (Technology) o Aetna Index Plus Mid Cap VP (Index Plus Mid Cap)
o AetnaReal Estate Securities VP (Real Estate) o Aetna Index Plus Small Cap VP (Index Plus
Small Cap)
</TABLE>
AGPI currently has authorized three Portfolios:
o Aetna Ascent VP (Ascent)
o Aetna Crossroads VP (Crossroads)
o Aetna Legacy VP (Legacy)
The Financial Statements for each Fund or Portfolio and the independent
auditors' report thereon, included in each Fund's Annual Report, are
incorporated herein 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) 262-3862.
1
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION...........................................................3
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES...............................4
INVESTMENT TECHNIQUES, RISK FACTORS AND OTHER CONSIDERATIONS..................7
TRUSTEES AND OFFICERS........................................................25
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS...................................28
INVESTMENT ADVISORY AGREEMENTS...............................................28
THE SUBADVISORY AGREEMENT....................................................31
ADMINISTRATIVE SERVICES AGREEMENTS...........................................31
CUSTODIAN....................................................................32
TRANSFER AGENT...............................................................32
INDEPENDENT AUDITORS.........................................................33
PRINCIPAL UNDERWRITER........................................................33
PURCHASE AND REDEMPTION OF SHARES............................................33
BROKERAGE ALLOCATION AND TRADING POLICIES....................................33
NET ASSET VALUE..............................................................35
TAX STATUS...................................................................36
PERFORMANCE INFORMATION......................................................37
FINANCIAL STATEMENTS.........................................................40
2
<PAGE>
GENERAL INFORMATION
Organization AVPI, AGPI and Balanced were incorporated in Maryland in 1996, 1994
and 1988, respectively.
Bond VP, 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 that 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 VP 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 VP and
Growth and Income may be removed from
3
<PAGE>
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 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.
As a matter of operating policy, Money Market may invest no more than 5% of its
total assets in the securities of any one issuer (as determined pursuant to Rule
2a-7 under the 1940 Act), except that Money Market may invest up to 25% of its
total assets in the first tier securities (as defined in Rule 2a-7) of a single
issuer for a period of up to three business days. Fundamental policy number (1),
as set forth below, would give Money Market the ability to invest, with respect
to 25% of its assets, more than 5% of its assets in any one issuer for more than
three business days only in the event Rule 2a-7 is amended in the future.
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% 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 and Technology, 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 VP, 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
4
<PAGE>
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 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
5
<PAGE>
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) except for Technology, 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% (35% for High Yield) 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). 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 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, or
Elijah Asset Management, LLC (EAM), subadviser to Technology, 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
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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. With respect to
fundamental policy number (2), industry classifications are determined in
accordance with the classifications established by the Standard & Poor's
Corporation, except that the industry classifications for Growth are determined
in accordance with the classifications established by the Frank Russell Company
and the industry classifications for International have been selected by Aeltus.
Aeltus believes that the industry classifications it has selected are reasonable
and not so broad that the primary economic characteristics of the companies in a
single class are materially different. Industry classifications may be changed
at any time to reflect changes in the market place.
Money Market will invest at least 95% of its total assets in high-quality
securities. High-quality securities are those receiving the highest short-term
credit rating by any two nationally recognized statistical rating organizations
(or one, if only one rating organization has rated the security) and meet
certain other conditions of Rule 2a-7 under the 1940 Act. High-quality
securities may also include unrated securities if Aeltus determines the security
to be of comparable quality.
The remainder of Money Market's assets will be invested in securities rated
within the two highest short term rating categories by any two nationally
recognized statistical rating organizations (or one, if only one rating
organization has rated the security) and unrated securities if Aeltus determines
the security to be of comparable quality. With respect to this group of
securities, Money Market generally may not, however, invest more than 1% of the
market value of its total assets or $1 million, whichever is greater, in the
securities or obligations of a single issuer.
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. Each Fund or Portfolio may use the
derivative instruments described below and in the Prospectuses. 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.
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 (except Money Market) or Portfolio may invest up to 30% of its assets in
derivatives for hedging purposes or to gain additional exposure to certain
markets for investment purposes while maintaining liquidity to meet shareholder
redemptions and minimizing trading costs. Mortgage-related and asset-backed
securities other than those described in the preceding paragraph, STRIPS
(Separate Trading of Registered Interest and Principal of Securities) and
forward exchange contracts are not subject to this 30% limitation.
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The following provides additional information about those derivative instruments
each Fund may use. Money Market may not use futures, options, forward exchange
contracts, or swaps.
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.
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 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.
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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 the 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 (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.
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Each Fund or Portfolio, except the 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 a put option on a security that it already owns
and on stock indices; each Generation Portfolio may also purchase a put option
on a security that it does not own. 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 on
indices primarily as a temporary substitute for taking positions in certain
securities or in the securities that comprise a relevant 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 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.
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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 EAM, in the case of
Technology) 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
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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 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.
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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 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 (or EAM, in the case of Technology) 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
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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.
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.
Swap Transactions Each Fund or Portfolio may enter into interest rate swaps,
currency swaps and other types of swap agreements, including swaps on securities
and indices. Swap transactions are described in the Prospectuses. 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).
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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 VP, Growth and Income, Real Estate, High Yield,
Index Plus Bond, and the 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 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.
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<PAGE>
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, equipment leases 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 or other party 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.
STRIPS (Separate Trading of Registered Interest and Principal of Securities)
Each Fund or Portfolio may invest in STRIPS. STRIPS are created by the Federal
Reserve Bank by separating the interest and principal components of an
outstanding U.S. Treasury or agency bond and selling them as individual
securities. The market prices of STRIPS 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.
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<PAGE>
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' (or
EAM's, in the case of Technology) 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 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
17
<PAGE>
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. Technology may only invest in
investment grade debt securities, which are debt securities with an S&P or
Moody's rating of BBB/Baa or above or, if unrated, are considered by EAM 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.
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<PAGE>
Variable Rate Demand Instruments
Each Fund or Portfolio, may invest in variable rate demand instruments. Variable
rate demand 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 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.
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).
Foreign Securities
Each Fund or Portfolio may invest in foreign securities subject to the limits
described above and in the Prospectuses. 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
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<PAGE>
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.
Supranational Agencies
Each Fund or Portfolio 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.
High Yield Bonds
Each Fund (except Money Market) or Portfolio (except International and
Technology) 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 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
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(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
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<PAGE>
primarily relies on its own credit analysis which includes a study of existing
debt, capital structure, ability to service debts and to pay dividends, the
issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. Thus the achievement of a 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.
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. 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. A pay-in-kind bond pays interest during
the initial few years in additional bonds rather than in cash. Later the bond
may pay cash interest. Pay-in-kind bonds are typically callable at about the
time they begin paying cash interest. The market prices of zero coupon and
deferred interest securities generally are more volatile than the market prices
of securities with similar maturities that pay interest periodically and are
likely to respond to changes in interest rates to a greater degree than do
non-zero coupon securities having similar maturities and credit quality.
The risks associated with lower debt securities apply to these securities. Zero
coupon and pay-in-kind securities are also subject to the risk that in the event
of a default, a Fund or Portfolio may realize no return on its investment,
because these securities do not pay cash interest.
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 or Portfolio 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.
Risks of real estate securities include those risks that are more closely
associated with investing in real estate directly than with investing in the
stock market generally. Those risks include: periodic declines in the value of
real estate generally, or in the rents and other income generated by real
estate; 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; and adverse developments in the real estate industry.
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<PAGE>
Equity Securities of Smaller Companies
Each Fund, other than Money Market and Bond VP, or Portfolio, other than 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.
Short Sales
Technology may seek to hedge investments or realize additional gains through
short sales of equity securities. Short sales are transactions in which an
unowned security is sold, in anticipation of a decline in the market value of
that security. To complete such a transaction, the security must be borrowed to
make delivery to the buyer. The borrower (or short seller) then is obligated to
replace the security borrowed by purchasing it at the market price at or prior
to the time of replacement. The price at such time may be more or less than the
price at which the security was sold. Until the security is replaced, the
borrower is required to repay the lender any dividends or interest that accrue
during the period of the loan. The borrower may also be required to pay a
premium, which would increase the cost of the security sold. The net proceeds of
the short sale will be retained by the broker (or by the custodian in a special
custody account), to the extent necessary to meet margin requirements, until the
short position is closed out. There are also transaction costs incurred in
effecting short sales.
A loss may be incurred as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
borrowed security is replaced. A gain will be realized if the security declines
in price between those dates. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of the premium, dividends, interest
or expenses required to be paid in connection with a short sale. An increase in
the value of a security sold short over the price at which it was sold short
will result in a loss, and there can be no assurance that the position may be
closed out at any particular time or at an acceptable price.
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. 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
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<PAGE>
borrowed funds. The Funds do not intend to borrow for leveraging purposes,
except that they may invest in leveraged derivatives which have certain risks as
outlined above.
Maturity Policies
The average dollar-weighted maturity of securities in Money Market's portfolio
will not exceed ninety days. In addition, all investments in Money Market's
portfolio will have a maturity at the time of purchase, as defined under the
federal securities laws, of 397 calendar days or less.
Portfolio Turnover
The portfolio turnover rate for Bond VP was significantly higher in 1999 than in
1998 because of a shift toward a more active investment management process. The
portfolio turnover rate for International was higher in 1999 than in 1998
because of a shift toward a more focused portfolio. The portfolio turnover rate
for Small Company was significantly higher in 1999 than in 1998 because of the
volatility in the market and an increased emphasis on healthcare (including
biotechnology) sector securities.
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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
Name, Position(s) Held Positions held with Affiliated Persons or
Address and Age with each Fund Principal Underwriters of the Fund)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
J. Scott Fox* Trustee and President Director, Managing Director, Chief Operating
10 State House Square (Principal Executive Officer) Officer, Chief Financial Officer, Aeltus
Hartford, Connecticut Investment Management, Inc., October 1997 to
Age 45 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 to
10 State House Square present.
Hartford, Connecticut
Age 56
- -------------------------------------------------------------------------------------------------------------------
Albert E. DePrince, Jr. Trustee Professor, Middle Tennessee State University,
3029 St. Johns Drive 1991 to present.
Murfreesboro, Tennessee
Age 59
- -------------------------------------------------------------------------------------------------------------------
Stephanie A. DeSisto Vice President, Vice President, Mutual Fund Accounting, Aeltus
10 State House Square Treasurer and Chief Investment Management, Inc., November 1995 to
Hartford, Connecticut Financial Officer (Principal present; Director, Mutual Fund Accounting, Aetna
Age 46 Financial and Accounting Life Insurance and Annuity Company, August 1994
Officer) to November 1995.
- -------------------------------------------------------------------------------------------------------------------
Amy R. Doberman Secretary General Counsel, Aeltus Investment Management,
10 State House Square Inc., February 1999 to present; Counsel, Aetna
Hartford, Connecticut Retirement Services, Inc., December 1996 to
Age 38 present; Attorney, Securities and Exchange
Commission, March 1990 to November 1996.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maria T. Fighetti Trustee Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation
Closter, New Jersey and Alcohol Services, 1973 to present.
Age 56
- -------------------------------------------------------------------------------------------------------------------
David L. Grove Trustee Private Investor; Economic/Financial Consultant,
5 The Knoll December 1985 to present.
Armonk, New York
Age 81
- -------------------------------------------------------------------------------------------------------------------
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 present;
Age 39 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 1993 to
455 East 86th Street present.
New York, New York
Age 65
- -------------------------------------------------------------------------------------------------------------------
Frank Litwin Vice President Managing Director, Aeltus Investment Management,
10 State House Square Inc., August 1997 to present; Managing Director,
Hartford, Connecticut Aeltus Capital, Inc., May 1998 to present; Vice
Age 50 President, Fidelity Investments Institutional
Services Company, April 1992 to August 1997.
- -------------------------------------------------------------------------------------------------------------------
Shaun P. Mathews* Trustee Vice President/Senior Vice President, Aetna Life
151 Farmington Avenue Insurance and Annuity Company, March 1991 to
Hartford, Connecticut Age 44 present; Director, Aetna Investment Services,
Inc., July 1993 to present; Senior Vice
President, Aetna Investment Services, Inc., July
1993 to February 1999.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corine T. Norgaard Trustee Dean of the Barney School of Business, University
556 Wormwood Hill of Hartford (West Hartford, CT), August 1996 to
Mansfield Center, Connecticut present; Professor, Accounting and Dean of the
Age 62 School of Management, SUNY Binghamton
(Binghamton, NY), August 1993 to August 1996
- -------------------------------------------------------------------------------------------------------------------
Richard G. Scheide Trustee Trust and Private Banking Consultant, David Ross
11 Lily Street Palmer Consultants, July 1991 to present.
Nantucket, Massachusetts
Age 71
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
During the year ended December 31, 1999, 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. For the year ended December 31,
1999, 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Aggregate Aggregate Aggregate Aggregate Aggregate Aggregate Total
Name of Person Compensation Compensation Compensation Compensation Compensation Compensation Compensation
Position from Aetna from Aetna from Money from Balanced from Bond VP from Growth from the Funds
Variable Generation Market and Income and Fund Complex
Portfolios, Portfolios, Paid to Trustees
Inc. Inc.
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Corine Norgaard
Trustee 6,683 1,945 4,144 7,112 2,565 35,857 75,500
- --------------------------------------------------------------------------------------------------------------------------------
Sidney Koch
Trustee 6,683 1,945 4,144 7,112 2,565 35,857 75,500
- --------------------------------------------------------------------------------------------------------------------------------
Maria T. Fighetti*
Trustee 6,904 2,010 4,281 7,347 2,650 37,044 78,000
- --------------------------------------------------------------------------------------------------------------------------------
Richard G. Scheide
Trustee, Chairperson 7,125 2,074 4,418 7,583 2,735 38,232 80,500
Audit Committee
- --------------------------------------------------------------------------------------------------------------------------------
David L. Grove*
Trustee, Chairperson 7,125 2,074 4,418 7,583 2,735 38,232 80,500
Contract Committee
- --------------------------------------------------------------------------------------------------------------------------------
Albert E. DePrince,
Jr. 6,904 2,010 4,281 7,347 2,650 37,044 78,000
Trustee
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*During the fiscal year ended December 31, 1999, Ms. Fighetti and Dr. Grove
elected to defer $25,000 and $80,500, respectively.
27
<PAGE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of March 31, 2000, Aetna Life Insurance and Annuity Company (Aetna) and its
affiliates owned 99.09% of the shares of AVPI, 98.81% of the shares of AGPI,
96.51% of the shares of Money Market, 98.64% of the shares of Balanced, 96.95%
of the shares of Bond VP and 97.81% 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, 1999, officers and Trustees owned less than 1% of the
outstanding shares of each Fund or Portfolio.
Aetna is an indirect parent company of Aeltus. Aetna is also 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 Board 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.
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.
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 VP 0.40%
Crossroads 0.60%
Growth 0.60%
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
Growth and Income 0.50% on first $10 billion
0.45% on next $ 5 billion
0.425% over $15 billion
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%
Technology 0.95%
Value Opportunity 0.60%
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, investment advisory fees
were paid to Aeltus and Aetna (for the period January 1, 1997 to April 30, 1998)
as follows:
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Total Investment Net Advisory
Advisory Fees Waiver Fees Paid
<S> <C> <C> <C>
Ascent $1,216,353 $ 0 $1,216,353
Balanced 9,564,010 0 9,564,010
Bond VP 3,050,254 0 3,050,254
Crossroads 1,146,645 0 1,146,645
Growth 1,477,828 0 1,477,828
Growth and Income 48,426,000 0 48,426,000
High Yield 61,843 (31,073) 30,770
Index Plus Bond 42,193 (25,669) 16,524
Index Plus Large Cap 2,955,393 (14,859) 2,940,534
Index Plus Mid Cap 50,910 (25,306) 25,604
Index Plus Small Cap 37,659 (28,202) 9,457
International 216,793 (120,367) 96,426
Legacy 809,797 (2,427) 807,370
Money Market 2,534,715 0 2,534,715
Real Estate 38,557 (27,907) 10,650
Small Company 834,103 0 834,103
Value Opportunity 465,367 0 465,367
</TABLE>
29
<PAGE>
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Total Investment Net Advisory
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 VP 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>
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Total Investment Net Advisory
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>
*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.
30
<PAGE>
Bradley, Foster & Sargent, Inc. ("Bradley") served as subadviser of Value
Opportunity from October 1, 1998 through December 31, 1999. For the years ended
December 31, 1999 and December 31, 1998, Aeltus paid Bradley subadvisory fees of
$113,534 and $21,668, respectively. The subadvisory agreement was terminated as
of December 31, 1999.
THE SUBADVISORY AGREEMENT
Aeltus and AVPI, on behalf of Technology, have entered into an agreement
(Subadvisory Agreement) with EAM effective May 1, 2000 appointing EAM as
subadviser of Technology. Aeltus owns 25% of the outstanding voting securities
of EAM.
The Subadvisory Agreement gives EAM broad latitude to select securities for
Technology consistent with the investment objective and policies of the Fund,
subject to Aeltus' oversight. The Agreement contemplates that EAM will be
responsible for all aspects of managing Technology, including trade execution.
However, the Agreement contemplates that Aeltus will be primarily responsible
for cash management.
For the services under the Subadvisory Agreement, EAM will receive an annual fee
payable monthly as described in the Prospectuses.
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> <C>
0.075% On the first $5 billion
0.050% On all assets over $5 billion
</TABLE>
31
<PAGE>
For the years ended December 31, 1999, 1998 and 1997, administrative services
fees were paid to Aeltus and Aetna (for the period January 1, 1997 to April 30,
1998) as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Ascent 152,044 179,401 146,223
Balanced 1,434,602 1,349,637 1,209,871
Bond VP 571,923 561,856 515,269
Crossroads 143,331 162,576 123,899
Growth 184,729 45,786 9,108
Growth and Income 6,089,176 5,950,715 4,987,583
High Yield* 7,136 10,505 954
Index Plus Bond* 10,548 15,466 927
Index Plus Large Cap 633,299 253,167 100,834
Index Plus Mid Cap* 9,546 9,814 698
Index Plus Small Cap* 7,061 9,263 579
International* 19,129 25,419 1,122
Legacy 101,225 117,097 78,991
Money Market 760,415 636,338 649,136
Real Estate* 3,856 6,153 498
Small Company 83,410 56,587 10,568
Value Opportunity 58,171 42,429 9,630
</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.
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
arrangements (which are designed to comply with Rule 17f-5 under the 1940 Act)
with certain foreign banks and clearing agencies.
TRANSFER AGENT
PFPC Inc., 4400 Computer Drive, Westborough, Massachusetts 01581 serves as the
transfer agent and dividend-paying agent to the Funds and Portfolios.
32
<PAGE>
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 Board, Aeltus (or EAM, in the case of
Technology) has responsibility for making investment decisions, for effecting
the execution of trades and for negotiating any brokerage commissions thereon.
It is Aeltus' (or EAM's, in the case of Technology) 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 portfolio transactions on behalf of each Fund or
Portfolio or in the designation of a portion of the commissions charged on those
transactions to be paid to other broker-dealers, subject to Aeltus' duty to
obtain best execution.
Aeltus (or EAM, in the case of Technology) 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 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 (or EAM, in the
case of Technology) 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' (or EAM's, in the case of Technology) policy in
selecting a broker to effect
33
<PAGE>
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 (or EAM, in the case of Technology).
Research services furnished by brokers through whom the Funds or Portfolios
effect securities transactions may be used by Aeltus (or EAM, in the case of
Technology) in servicing all of its accounts; not all such services will be used
by Aeltus (or EAM, in the case of Technology) to benefit the Funds or
Portfolios.
Consistent with federal law, Aeltus (or EAM, in the case of Technology) 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' (or EAM's, in the case of Technology) 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' (or EAM's, in the case of Technology) 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 EAM) or Aeltus (or
EAM) 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Ascent $ 689,378 $ 605,437 $ 416,625
Balanced 2,182,753 1,766,765 2,113,501
Bond VP 8,110 0 0
Crossroads 487,213 449,865 264,845
Growth 570,118 183,496 18,822
Growth and Income 22,329,976 28,161,389 19,942,448
High Yield* 0 0 0
Index Plus Bond* 0 0 0
Index Plus Large Cap 1,599,430 549,604 107,388
Index Plus Mid Cap* 17,692 15,110 9,197
Index Plus Small Cap* 12,096 11,422 20,614
International* 217,262 129,012 N/A
Legacy 234,090 244,885 126,465
Money Market 0 0 0
Real Estate* 8,450 13,938 7,806
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C> <C>
Small Company 690,902 341,963 49,510
Value Opportunity 175,939 157,158 21,014
</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.
For the fiscal year ended December 31, 1999, 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 $ 83,760
International 10,790
Small Company 47,708
Value Opportunity 39,522
Balanced 639,271
Growth and Income 4,346,408
Real Estate 282
Bond VP 0
High Yield 0
Money Market 0
Index Plus Bond 0
Index Plus Large Cap 862,735
Index Plus Mid Cap 0
Index Plus Small Cap 0
Ascent 89,188
Crossroads 65,294
Legacy 30,597
</TABLE>
The Board has adopted a policy allowing trades to be made between affiliated
registered investment companies or series thereof provided such trades meet the
terms of Rule 17a-7 under the 1940 Act.
The Funds, Aeltus, EAM, and Aetna each have adopted a Code of Ethics (in
accordance with Rule 17j-1 under the 1940 Act). The Codes of Ethics allow
personnel subject to the Codes to invest in securities, including securities
that may be purchased or held by a Fund. However, it prohibits a person from
taking advantage of Fund trades or from acting on inside information.
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 (except as otherwise noted
below) 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 last
sale price or, if there has been no sale that day, at the mean of the last bid
and asked price. Readily marketable securities listed on a foreign securities
exchange whose operations are similar to those of the United States
35
<PAGE>
over-the-counter market are valued at the mean of the current bid and asked
prices as reported by independent pricing sources. Fixed-income securities may
be valued on the basis of prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securities. The prices
provided by a pricing service take into account many factors, including
institutional size trading in similar groups of securities and any developments
related to specific securities. Securities for which prices are not obtained
from a pricing service are valued based upon the assessment of market-makers in
those securities. Debt securities maturing in sixty days or less at the date of
valuation 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.
With respect to any Fund or Portfolio that invests in foreign securities,
because those securities may be traded on markets that are open on days when the
Fund or Portfolio does not price its shares, the value of the Fund or Portfolio
may change even though shareholders may not be permitted to sell or redeem
shares.
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 Internal Revenue Code of 1986, as amended. 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.
Qualification of Segregated Asset Accounts
Under Code section 817(h), a segregated asset account upon which a VA Contract
or VLI 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
36
<PAGE>
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.
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 VP, High Yield and Index Plus
Bond, the dividend yield of Money Market, Bond VP, 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.
37
<PAGE>
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, 2000 were 5.86% and 6.04%, respectively.
30-Day Yield for Certain Non-Money Market Funds or Portfolios
Quotations of yield for Bond VP, 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
For purposes of determining net investment income during the period (variable
"a" in the formula), interest earned on debt obligations held by the fund is
calculated each day during the period according to the formulas below, and then
added together for each day in the period:
o Certain mortgage-backed, asset-backed and CMO securities: Generally,
interest is computed by taking daily interest income (coupon rate times
face value divided by 360 or 365, as the case may be) adjusted by that
day's pro-rata share of the most recent paydown gain or loss from the
security;
o Other debt obligations: Generally, interest is calculated by computing the
yield to maturity of each debt obligation held based on the market value of
the obligation (including current interest accrued) at the close of each
day, dividing the result by 360 and multiplying the quotient by the market
value of the obligation (including current accrued interest).
For purposes of this calculation, it is assumed that each month contains 30
days.
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.
38
<PAGE>
For the 30-day period ended March 31, 2000:
<TABLE>
<CAPTION>
Fund Yield
<S> <C>
Bond VP 6.79%
High Yield 10.26%
Index Plus Bond 6.78%
</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).
Total Return Quotations as of March 31, 2000
<TABLE>
<CAPTION>
Fund Name 1 Year 5 Years 10 Years Since Inception Inception Date
<S> <C> <C> <C> <C> <C>
Ascent 23.75% N/A N/A 16.54% 7/5/95
Balanced 17.14% 18.97% 13.72% - N/A
Bond VP 0.49% 6.71% 7.89% - N/A
Crossroads 16.22% N/A N/A 13.82% 7/5/95
Growth 39.92% N/A N/A 36.27% 12/13/96
Growth and Income 19.22% 23.19% 16.27% - N/A
High Yield 0.71% N/A N/A 3.04% 12/10/97
Index Plus Bond 1.72% N/A N/A 4.19% 12/18/97
Index Plus Large Cap 21.08% N/A N/A 29.06% 9/16/96
Index Plus Mid Cap 42.40% N/A N/A 26.52% 12/16/97
Index Plus Small Cap 24.19% N/A N/A 7.14% 12/19/97
International 62.88% N/A N/A 37.66% 12/22/97
Legacy 12.22% N/A N/A 11.58% 7/5/95
Money Market 5.38% 5.48% 5.27% - N/A
Real Estate 3.85% N/A N/A -5.24% 12/15/97
Small Company 75.84% N/A N/A 29.22% 12/27/96
Value Opportunity 23.04% N/A N/A 26.40% 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
39
<PAGE>
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. Each Fund's or Portfolio's Annual
Report is available upon request and without charge by calling (800) 262-3862.
Statement of Additional Information
40
<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)(5)
(a.6) Articles Supplementary (February 9, 2000)
(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. (AVPI), on behalf
of Aetna Value Opportunity VP, Aetna Growth VP, Aetna Small Company
VP, Aetna Index Plus Large Cap VP, Aetna High Yield VP, Aetna Index
Plus Bond VP, Aetna Index Plus Mid Cap VP, Aetna Index Plus Small
Cap VP, Aetna International VP, Aetna Real Estate Securities VP and
Aetna Technology VP
(d.2) Subadvisory Agreement between Elijah Asset Management, Inc. and AVPI
on behalf of Aetna Technology VP
(e) Underwriting Agreement between AVPI and Aetna Life Insurance and
Annuity Company (Aetna)
(f) Directors' Deferred Compensation Plan(3)
(g.1) Custodian Agreement between AVPI 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 AVPI 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) Amendment to Custodian Agreement between AVPI and Mellon Bank, N.A.
for Aetna Technology VP
(g.4) Custodian Agreement between AVPI and Brown Brothers Harriman & Co.
for Aetna International VP(4)
(h.1) Administrative Services Agreement between Aeltus and AVPI 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(6)
(h.2) Amendment to Administrative Services Agreement between Aeltus and
AVPI 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
<PAGE>
(h.3) Amendment No. 3 to Administrative Services Agreement between Aeltus
and AVPI on behalf of Aetna Technology VP
(h.4) 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)
(l.2) Agreement re: Initial Contribution to Working Capital for Aetna
Index Plus Bond VP, Aetna Index Plus Mid Cap VP, Aetna Index Plus
Small Cap VP, Aetna High Yield VP, Aetna Real Estate Securities VP
and Aetna International VP(7)
(m) Not applicable
(n) Not applicable
(o) Not applicable
(p.1) Aeltus Code of Ethics
(p.2) Aetna Code of Ethics
(p.3) Aetna Mutual Funds Code of Ethics
(p.4) Elijah Asset Management, LLC Code of Ethics
(q.1) Power of Attorney (November 6, 1998)(8)
(q.2) Authorization for Signatures(7)
1. Incorporated by reference to the Registration Statement on Form N-1A (File
No. 333-05173), as filed 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 with
the Securities and Exchange Commission 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 with
the Securities and Exchange Commission 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 with
the Securities and Exchange Commission on April 27, 1998.
5. Incorporated by reference to Post-Effective Amendment No. 8 to
Registration Statement on Form N-1A (File No. 333-05173), as filed with
the Securities and Exchange Commission on April 27, 1999.
6. Incorporated by reference to Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A (File No. 333-05173), as filed with
the Securities and Exchange Commission on February 10, 1999.
7. Incorporated by reference to Post-Effective Amendment No. 2 to
Registration Statement on Form N-1A (File No. 333-05173), as filed with
the Securities and Exchange Commission 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 with the
Securities and Exchange Commission 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, 2000, 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:
% Aetna
-------
Aetna Value Opportunity VP 99.84%
Aetna Growth VP 99.99%
Aetna Index Plus Large Cap VP 98.40%
Aetna Small Company VP 99.68%
Aetna Index Plus Bond VP 100.00%
Aetna Index Plus Mid Cap VP 100.00%
Aetna Index Plus Small Cap VP 100.00%
Aetna International VP 100.00%
Aetna High Yield VP 100.00%
Aetna Real Estate Securities VP 100.00%
Aetna is an indirect wholly owned subsidiary of Aetna Inc.
A list of all persons directly or indirectly under common control with the
Registrant and a list which indicates the principal business of each such
company referenced in the diagram are incorporated herein by reference to
Item 24 of Post-Effective Amendment No. 38 to the Registration Statement
on Form N-1A (File No. 33-41694), as filed electronically with the
Securities and Exchange Commission on February 23, 2000.
Item 25. Indemnification
Article 10, Section (iv) of the Registrant's Articles of Incorporation,
incorporated herein by reference to Exhibit (a.1) to Registrant's
Registration Statement on Form N-1A (File No. 333-05173), as filed on June
4, 1996, provides for indemnification of directors and officers. In
addition, the Registrant's officers and directors are currently covered
under a directors and officers errors and omissions liability insurance
policy issued by ICI Mutual Insurance Company, which expires October 1,
2002.
Section XI.B of the Administrative Services Agreement, incorporated herein
by reference to Exhibit (h.1) to Registrant's Registration Statement on
Form N-1A (File No. 333-05173), as filed on February 10, 1999, provides
for indemnification of Aeltus, 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
<PAGE>
"improper personal benefit"; and (2) that a corporation must (unless
otherwise provided in the corporation's charter or articles of
incorporation) indemnify a director who is successful on the merits in
defending a suit against him by reason of being a director for "reasonable
expenses." The statutory provisions are not exclusive; i.e., a corporation
may provide greater indemnification rights than those provided by statute.
Item 26. Business and Other Connections of Investment Adviser
The investment adviser, 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
the 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 Dec. 31, 1997/Addresses*
----------------------- --------------------------------
- ------------------------------ -------------------------------- ---------------------------------------------------------
<S> <C> <C>
John Y. Kim Director, President, Chief Director (February 1995 - March 1998) -- Aetna;
Executive Officer, Chief Director, President, Chief Executive Officer, Chief
Investment Officer Investment Officer (since May 1996) -- Aeltus Trust
Company; Senior Vice President (since September 1994)
-- Aetna.
J. Scott Fox Director, Managing Director, Vice President (since April 1997) -- Aetna Retirement
Chief Operating Officer, Chief Services, Inc.; Director and Senior Vice President
Financial Officer (March 1997 - February 1998) -- Aetna.
Thomas J. McInerney Director President (since August 1997) -- Aetna Retirement
Services, Inc.; Director and President (since September
1997) -- Aetna; Executive Vice President (since August
1997) -- Aetna Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------ -------------------------------- ---------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Dec. 31, 1997/Addresses*
----------------------- --------------------------------
- ------------------------------ -------------------------------- ---------------------------------------------------------
<S> <C> <C>
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; Vice President, Strategy,
Finance and Administration, Financial Relations
(September 1996 - February 1998) -- Aetna Inc.
Stephanie A. DeSisto Vice President
Amy R. Doberman Vice President, General Counsel (since December 1996) -- Aetna Retirement
Counsel and Secretary Services, Inc.
Brian K. Kawakami Vice President, Chief Chief Compliance Officer (since January 1996) -- Aeltus
Compliance Officer Trust Company; Chief Compliance Officer (since August
1993) -- Aeltus Capital, Inc.
Neil Kochen Managing Director, Chief Managing Director (since August 1996) -- Aeltus
Investment Officer, Equity Capital, Inc.
Investments
Frank Litwin Managing Director, Retail Managing Director (since May 1998) -- Aeltus Capital,
Marketing and Sales Inc.
L. Charles Meythaler Managing Director, Director (since July 1997) -- Aeltus Trust Company.
Institutional Marketing
and Sales
James Sweeney Managing Director, Fixed
Income Investments
</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.
<PAGE>
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 the 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). 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 None
Chief Financial Officer
Allan Baker Senior Vice President None
David E. Bushong Senior Vice President None
Paul R. Donovan Senior Vice President None
Steven A. Haxton Senior Vice President None
Gary J. Hegedus Senior Vice President None
Willard I. Hill, Jr. Senior Vice President None
John Y. Kim Senior Vice President and Chief Director
Investment Officer
Martin T. Conroy Vice President and Treasurer None
Kathleen A. Murphy Senior Vice President and Deputy None
General Counsel
Therese Squillacote Vice President and Chief None
Compliance Officer
Thomas P. Waldron Senior Vice President None
Kirk P. Wickman Senior Vice President, General None
Counsel and Corporate Secretary
</TABLE>
<PAGE>
* 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 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 25th day of April, 2000.
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.
Signature Title Date
- --------- ----- ----
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 25,
- -------------------------- ) 2000
Maria T. Fighetti )
)
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 )
)
<PAGE>
Corine T. Norgaard* Director )
- -------------------------- )
Corine T. Norgaard )
)
Richard G. Scheide* Director )
- -------------------------- )
Richard G. Scheide )
)
Stephanie A. DeSisto* Treasurer and Chief Financial )
- -------------------------- Officer (Principal Financial )
Stephanie A. DeSisto and Accounting Officer) )
By: /s/ Amy R. Doberman
------------------------------------------
*Amy R. Doberman
Attorney-in-Fact
*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
Exhibit No. Exhibit Page
- ----------- ------- ----
99-(a.6) Articles Supplementary (February 9, 2000)
------------
99-(d.1) Investment Advisory Agreement between Aeltus
Investment Management, Inc. (Aeltus) and Aetna
Variable Portfolios, Inc. (AVPI), on behalf of
Aetna Value Opportunity VP, Aetna Growth VP, Aetna
Small Company VP, Aetna Index Plus Large Cap VP,
Aetna High Yield VP, Aetna Index Plus Bond VP,
Aetna Index Plus Mid Cap VP, Aetna Index Plus Small
Cap VP, Aetna International VP, Aetna Real Estate
Securities VP and Aetna Technology VP
------------
99-(d.2) Subadvisory Agreement between Elijah Asset
Management, Inc. and AVPI on behalf of Aetna
Technology VP
------------
99-(e) Underwriting Agreement between AVPI and Aetna Life
Insurance and Annuity Company (Aetna)
------------
99-(g.3) Amendment to Custodian Agreement between AVPI and
Mellon Bank, N.A. for Aetna Technology VP
------------
99-(h.2) Amendment to Administrative Services Agreement
between Aeltus and AVPI 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
------------
99-(h.3) Amendment No. 3 to Administrative Services
Agreement between Aeltus and AVPI on behalf of
Aetna Technology VP
------------
99-(i) Opinion and Consent of Counsel
------------
99-(j) Consent of Independent Auditors
------------
99-(p.1) Aeltus Code of Ethics
------------
99-(p.2) Aetna Code of Ethics
------------
99-(p.3) Aetna Mutual Funds Code of Ethics
------------
99-(p.4) Elijah Asset Management, LLC Code of Ethics
------------
AETNA VARIABLE PORTFOLIOS, INC.
ARTICLES SUPPLEMENTARY
AETNA VARIABLE PORTFOLIOS, INC., a Maryland corporation registered as an
open-end investment company under the Investment Company Act of 1940 and having
its principal office in the State of Maryland in Baltimore City, Maryland
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation at its meeting held on
December 15, 1999, adopted a resolution increasing the total number of shares of
stock which the Corporation shall have authority to issue to two billion, one
hundred million (2,100,000,000) shares of common stock of the par value of
$0.001 per share and of the aggregate par value of two million, one hundred
thousand dollars ($2,100,000); and
SECOND: The Board of Directors, at its meeting held on December 15, 1999,
by resolutions, did designate and classify one hundred million (100,000,000)
shares of common stock of the Corporation into a new portfolio ("Portfolio") as
follows:
Number of
Name of Portfolio Shares Allocated
----------------- ----------------
Aetna Technology VP 100,000,000
THIRD: The Portfolio of the Corporation shall have preferences, rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of shares as set forth in paragraph SEVENTH
and elsewhere in the Corporation's Articles of Incorporation.
FOURTH: The shares of the Corporation authorized and classified pursuant
to paragraphs FIRST and SECOND of these Articles Supplementary have been so
authorized and classified by the Board of Directors under the authority
contained in the Charter of the Corporation. The total number of shares of
capital stock that the Corporation has authority to issue has been increased by
the Board of Directors in accordance with Section 2-105(c) of the Maryland
General Corporation Law.
FIFTH: Immediately prior to the effectiveness of these Articles
Supplementary, the Corporation had the authority to issue two billion
(2,000,000,000) shares of common stock of the par value of $0.001 per share and
of the aggregate par value of two million dollars ($2,000,000), of which the
Board of Directors had designated and classified one billion (1,000,000,000)
shares as follows:
<PAGE>
Number of
Name of Portfolio Shares Allocated
----------------- ----------------
Aetna Index Plus Bond VP 100,000,000
Aetna Index Plus Mid Cap VP 100,000,000
Aetna Index Plus Small Cap VP 100,000,000
Aetna High Yield VP 100,000,000
Aetna Real Estate Securities VP 100,000,000
Aetna International VP 100,000,000
Aetna Index Plus VP 100,000,000
Aetna Small Company VP 100,000,000
Aetna Growth VP 100,000,000
Aetna Value Opportunity VP 100,000,000
SIXTH: Immediately following the effectiveness of these Articles
Supplementary, the Corporation will have authority to issue two billion, one
hundred million (2,100,000,000) shares of common stock of the par value of
$0.001 per share and of the aggregate par value of two million, one hundred
thousand dollars ($2,100,000) of which the Board has designated and classified
one billion, one hundred million (1,100,000,000) shares as set forth in
paragraphs SECOND and FIFTH of these Articles Supplementary.
IN WITNESS WHEREOF, Aetna Variable Portfolios, Inc. has caused these Articles
Supplementary to be signed in its name on its behalf by its authorized officers
who acknowledge that these Articles Supplementary are the act of the
Corporation, that to the best of their knowledge, information and belief, all
matters and facts set forth herein relating to the authorization and approval of
these Articles Supplementary are true in all material respects and that this
statement is made under the penalties of perjury.
ATTEST: AETNA VARIABLE PORTFOLIOS, INC.
/s/ Amy R. Doberman By: /s/ J. Scott Fox
- ----------------------------------- --------------------------
Amy R. Doberman J. Scott Fox
Secretary President
Date: February 9, 2000
Hartford, Connecticut
CORPORATE SEAL
2
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between AELTUS INVESTMENT MANAGEMENT, INC. a
Connecticut corporation (the "Adviser") and AETNA VARIABLE PORTFOLIOS, INC., a
Maryland corporation (the "Fund"), on behalf of its portfolio, Aetna Value
Opportunity VP (the "Portfolio"), as of the date set forth above the parties'
signatures.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company under
the Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, the Fund has established the Portfolio; and
WHEREAS, the Adviser is registered with the Commission as an investment adviser
under the Investment Advisers Act of 1940 (the "Advisers Act"), and is in the
business of acting as an investment adviser; and
WHEREAS, the Fund, on behalf of the Portfolio, and the Adviser desire to enter
into an agreement to provide for investment advisory and management services for
the Portfolio on the terms and conditions hereinafter set forth;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement and the policies and
control of the Fund's Board of Directors (the "Board"), the Fund, on behalf of
the Portfolio, hereby appoints the Adviser to serve as the investment adviser to
the Portfolio, to provide the investment advisory services set forth below in
Section II. The Adviser agrees that, except as required to carry out its duties
under this Agreement or otherwise expressly authorized, it is acting as an
independent contractor and not as an agent of the Portfolio and has no authority
to act for or represent the Portfolio in any way.
II. DUTIES OF THE ADVISER
In carrying out the terms of this Agreement, the Adviser shall do the following:
1. supervise all aspects of the operations of the Portfolio;
<PAGE>
2. select the securities to be purchased, sold or exchanged by the
Portfolio or otherwise represented in the Portfolio's investment
portfolio, place trades for all such securities and regularly report
thereon to the Board;
3. formulate and implement continuing programs for the purchase and
sale of securities and regularly report thereon to the Board;
4. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally, the
Portfolio, securities held by or under consideration for the
Portfolio, or the issuers of those securities;
5. provide economic research and securities analyses as the Adviser
considers necessary or advisable in connection with the Adviser's
performance of its duties hereunder;
6. obtain the services of, contract with, and provide instructions to
custodians and/or subcustodians of the Portfolio's securities,
transfer agents, dividend paying agents, pricing services and other
service providers as are necessary to carry out the terms of this
Agreement; and
7. take any other actions which appear to the Adviser and the Board
necessary to carry into effect the purposes of this Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Adviser
Adviser hereby represents and warrants to the Fund as follows:
1. Due Incorporation and Organization. The Adviser is duly
organized and is in good standing under the laws of the State
of Connecticut and is fully authorized to enter into this
Agreement and carry out its duties and obligations hereunder.
2. Registration. The Adviser is registered as an investment
adviser with the Commission under the Advisers Act. The
Adviser shall maintain such registration in effect at all
times during the term of this Agreement.
3. Best Efforts. The Adviser at all times shall provide its best
judgment and effort to the Portfolio in carrying out its
obligations hereunder.
-2-
<PAGE>
B. Representations and Warranties of the Portfolio and the Fund
The Fund, on behalf of the Portfolio, hereby represents and warrants to
the Adviser as follows:
1. Due Incorporation and Organization. The Fund has been duly
incorporated under the laws of the State of Maryland and it is
authorized to enter into this Agreement and carry out its
obligations hereunder.
2. Registration. The Fund is registered as an investment company
with the Commission under the 1940 Act and shares of the
Portfolio are registered or qualified for offer and sale to
the public under the Securities Act of 1933 and all applicable
state securities laws. Such registrations or qualifications
will be kept in effect during the term of this Agreement.
IV. DELEGATION OF RESPONSIBILITIES
Subject to the approval of the Board and the shareholders of the
Portfolio, the Adviser may enter into a Subadvisory Agreement to engage a
subadviser to the Adviser with respect to the Portfolio.
V. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Adviser shall place all orders for the purchase and sale of portfolio
securities for the Portfolio with brokers or dealers selected by the
Adviser, which may include brokers or dealers affiliated with the Adviser.
The Adviser shall use its best efforts to seek to execute portfolio
transactions at prices that are advantageous to the Portfolio and at
commission rates that are reasonable in relation to the benefits received.
B. Selection of Broker-Dealers
In selecting broker-dealers qualified to execute a particular transaction,
brokers or dealers may be selected who also provide brokerage or research
services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to the Adviser and/or the other accounts over which
the Adviser or its affiliates exercise investment discretion. The Adviser
is authorized to pay a broker or dealer who provides such brokerage or
research services a commission for executing a portfolio transaction for
the Portfolio that is in excess of the amount of commission another broker
or dealer would have charged for effecting that transaction if the Adviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage or research services provided by
such broker or dealer and is paid in compliance with Section 28(e). This
determination may be viewed in terms of either that particular transaction
or the overall responsibilities that the Adviser and its affiliates have
with respect to accounts over which they exercise investment discretion.
The Adviser may consider the sale of
-3-
<PAGE>
shares of the Portfolio and of other investment companies advised by the
Adviser as a factor in the selection of brokers or dealers to effect
transactions for the Portfolio, subject to the Adviser's duty to seek best
execution. The Adviser may also select brokers or dealers to effect
transactions for the Portfolio that provide payment for expenses of the
Portfolio. The Board shall periodically review the commissions paid by the
Portfolio to determine if the commissions paid over representative periods
of time were reasonable in relation to the benefits received.
VI. CONTROL BY THE BOARD
Any investment program undertaken by the Adviser pursuant to this Agreement, as
well as any other activities undertaken by the Adviser on behalf of the
Portfolio pursuant thereto, shall at all times be subject to any directives of
the Board.
VII. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Adviser shall at all
times conform to:
1. all applicable provisions of the 1940 Act;
2. the provisions of the current Registration Statement of the Fund;
3. the provisions of the Fund's Articles of Incorporation, as amended;
4. the provisions of the Bylaws of the Fund, as amended; and
5. any other applicable provisions of state and federal law.
VIII. COMPENSATION
For the services to be rendered, the facilities furnished and the expenses
assumed by the Adviser, the Fund, on behalf of the Portfolio, shall pay to the
Adviser an annual fee, payable monthly, equal to 0.60% of the average daily net
assets of the Portfolio. Except as hereinafter set forth, compensation under
this Agreement shall be calculated and accrued daily at the rate of 1/365 of
0.60% of the daily net assets of the Portfolio. If this Agreement becomes
effective subsequent to the first day of a month or terminates before the last
day of a month, compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the calculation of the fees
set forth above. Subject to the provisions of Section X hereof, payment of the
Adviser's compensation for the preceding month shall be made as promptly as
possible.
-4-
<PAGE>
IX. EXPENSES
The expenses in connection with the management of the Portfolio shall be
allocated between the Portfolio and the Adviser as follows:
A. Expenses of the Adviser
The Adviser shall pay:
1. the salaries, employment benefits and other related costs and
expenses of those of its personnel engaged in providing
investment advice to the Portfolio, including without
limitation, office space, office equipment, telephone and
postage costs; and
2. all fees and expenses of all directors, officers and
employees, if any, of the Fund who are employees of the
Adviser, including any salaries and employment benefits
payable to those persons.
B. Expenses of the Portfolio
The Portfolio shall pay:
1. investment advisory fees pursuant to this Agreement;
2. brokers' commissions, issue and transfer taxes or other
transaction fees payable in connection with any transactions
in the securities in the Portfolio's investment portfolio or
other investment transactions incurred in managing the
Portfolio's assets, including portions of commissions that may
be paid to reflect brokerage research services provided to the
Adviser;
3. fees and expenses of the Portfolio's independent accountants
and legal counsel and the independent directors' legal
counsel;
4. fees and expenses of any administrator, transfer agent,
custodian, dividend, accounting, pricing or disbursing agent
of the Portfolio;
5. interest and taxes;
6. fees and expenses of any membership in the Investment Company
Institute or any similar organization in which the Board deems
it advisable for the Fund to maintain membership;
7. insurance premiums on property or personnel (including
officers and directors) of the Fund;
-5-
<PAGE>
8. all fees and expenses of the Fund's directors, who are not
"interested persons" (as defined in the 1940 Act) of the Fund
or the Adviser;
9. expenses of preparing, printing and distributing proxies,
proxy statements, prospectuses and reports to shareholders of
the Portfolio, except for those expenses paid by third parties
in connection with the distribution of Portfolio shares and
all costs and expenses of shareholders' meetings;
10. all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in shares of
the Portfolio or in cash;
11. costs and expenses (other than those detailed in paragraph 9
above) of promoting the sale of shares in the Portfolio,
including preparing prospectuses and reports to shareholders
of the Portfolio, provided, nothing in this Agreement shall
prevent the charging of such costs to third parties involved
in the distribution and sale of Portfolio shares;
12. fees payable by the Portfolio to the Commission or to any
state securities regulator or other regulatory authority for
the registration of shares of the Portfolio in any state or
territory of the United States or of the District of Columbia;
13. all costs attributable to investor services, administering
shareholder accounts and handling shareholder relations,
(including, without limitation, telephone and personnel
expenses), which costs may also be charged to third parties by
the Adviser; and
14. any other ordinary, routine expenses incurred in the
management of the Portfolio's assets, and any nonrecurring or
extraordinary expenses, including organizational expenses,
litigation affecting the Portfolio and any indemnification by
the Fund of its officers, directors or agents.
Notwithstanding the above, the Adviser may waive a portion or all of the fees it
is entitled to receive.
In addition, the Adviser may reimburse the Fund, on behalf of a Portfolio, for
expenses allocated to a Portfolio.
The Adviser has agreed to waive fees and/or reimburse expenses through December
31, 2000 so that the total annual operating expenses (excluding distribution
fees) do not exceed 0.80% of the average daily net assets.
-6-
<PAGE>
X. ADDITIONAL SERVICES
Upon the request of the Board, the Adviser may perform certain accounting,
shareholder servicing or other administrative services on behalf of the
Portfolio that are not required by this Agreement. Such services will be
performed on behalf of the Portfolio and the Adviser may receive from the
Portfolio such reimbursement for costs or reasonable compensation for such
services as may be agreed upon between the Adviser and the Board on a finding by
the Board that the provision of such services by the Adviser is in the best
interests of the Portfolio and its shareholders. Payment or assumption by the
Adviser of any Portfolio expense that the Adviser is not otherwise required to
pay or assume under this Agreement shall not relieve the Adviser of any of its
obligations to the Portfolio nor obligate the Adviser to pay or assume any
similar Portfolio expense on any subsequent occasions.
XI. NONEXCLUSIVITY
The services of the Adviser to the Portfolio are not to be deemed to be
exclusive, and the Adviser shall be free to render investment advisory or other
services to others (including other investment companies) and to engage in other
activities, so long as its services under this Agreement are not impaired
thereby. It is understood and agreed that officers and directors of the Adviser
may serve as officers or directors of the Fund, and that officers or directors
of the Fund may serve as officers or directors of the Adviser to the extent
permitted by law; and that the officers and directors of the Adviser are not
prohibited from engaging in any other business activity or from rendering
services to any other person, or from serving as partners, officers, directors
or trustees of any other firm or trust, including other investment companies.
XII. TERM
This Agreement shall become effective on January 1, 2000, and shall remain in
force and effect through December 31, 2000 unless earlier terminated under the
provisions of Article XIV.
XIII. RENEWAL
Following the expiration of its initial term, the Agreement shall continue in
force and effect from year to year, provided that such continuance is
specifically approved at least annually:
1. a. by the Board, or
b. by the vote of a majority of the Portfolio's outstanding
voting securities (as defined in Section 2(a)(42) of the 1940
Act), and
2. by the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a director of the Fund), by votes cast in
person at a meeting specifically called for such purpose.
-7-
<PAGE>
XIV. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Board or by vote of a majority of the Portfolio's
outstanding voting securities (as defined in Section 2(a)(42) of the 1940 Act),
or by the Adviser, on sixty (60) days' written notice to the other party. The
notice provided for herein may be waived by the party required to be notified.
This Agreement shall automatically terminate in the event of its "assignment."
XV. LIABILITY
The Adviser shall be liable to the Fund and shall indemnify the Fund for any
losses incurred by the Fund, whether in the purchase, holding or sale of any
security or otherwise, to the extent that such losses resulted from an act or
omission on the part of the Adviser or its officers, directors or employees,
that is found to involve willful misfeasance, bad faith or negligence, or
reckless disregard by the Adviser of its duties under this Agreement, in
connection with the services rendered by the Adviser hereunder.
XVI. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such addresses shall be:
if to the Fund, on behalf of the Portfolio:
10 State House Square
Hartford, Connecticut 06103
Fax number 860/275-2158
if to the Adviser:
10 State House Square
Hartford, Connecticut 06103
Fax number 860/275-4440
XVII. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940 Act
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States courts or, in the absence
of any controlling decision of any such court, by rules or orders of the
Commission issued pursuant to the 1940 Act, or contained in no-action and
interpretive positions taken by the Commission staff. In addition,
-8-
<PAGE>
where the effect of a requirement of the 1940 Act reflected in the provisions of
this Agreement is revised by rule or order of the Commission, such provisions
shall be deemed to incorporate the effect of such rule or order.
XVIII. SERVICE MARK
The service mark of the Fund and the Portfolio and the name "Aetna" have been
adopted by the Fund with the permission of Aetna Services, Inc. (formerly known
as Aetna Life and Casualty Company) and their continued use is subject to the
right of Aetna Services, Inc. to withdraw this permission in the event the
Adviser or another affiliated corporation of Aetna Services, Inc. should not be
the investment adviser of the Portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 30th day of December, 1999.
Aeltus Investment Management, Inc.
By: /s/ Amy R. Doberman
Attest: /s/ Daniel E. Burton Name: Amy R. Doberman
Name: Daniel E. Burton Title: Vice President
Title: Assistant Secretary
Aetna Variable Portfolios, Inc.
on behalf of its Portfolio
Aetna Value Opportunity VP
By: /s/ J. Scott Fox
Attest: /s/ Michael Gioffre Name: J. Scott Fox
Name: Michael Gioffre Title: President
Title: Assistant Secretary
-9-
<PAGE>
Investment Advisory Agreement
Schedule Pursuant to Rule 483(d)(2) under the Securities Act of 1933
Investment Advisory Agreements have been entered into by Aetna Variable
Portfolios, Inc. on behalf of the following series in substantially the same
form and type as exhibit (d.1) - Investment Advisory Agreement, included
herewith.
<TABLE>
<CAPTION>
Difference in Difference in
Date Portfolio Compensation Expenses
---- --------- ------------ --------
<S> <C> <C> <C>
12/30/99 Aetna Growth VP .60% of average daily net total annual
assets operating fees do
not exceed 0.80% of
average daily net
assets
12/30/99 Aetna Small Company VP .75% of average daily net total annual
assets operating fees do
not exceed 0.95% of
average daily net
assets
12/30/99 Aetna Index Plus Large .35% of average daily net total annual
Cap VP assets operating fees do
not exceed 0.55% of
average daily net
assets
12/30/99 Aetna High Yield VP .65% of average daily net total annual
assets operating fees do
not exceed 0.80% of
average daily net
assets
12/30/99 Aetna Index Plus Bond VP .30% of average daily net total annual
assets operating fees do
not exceed 0.45% of
average daily net
assets
12/30/99 Aetna Index Plus Mid .40% of average daily net total annual
Cap VP assets operating fees do
not exceed 0.60% of
average daily net
assets
12/30/99 Aetna Index Plus Small .40% of average daily net total annual
Cap VP assets operating fees do
not exceed 0.60% of
average daily net
assets
</TABLE>
-10-
<PAGE>
<TABLE>
<S> <C> <C> <C>
12/30/99 Aetna International VP .85% of average daily net total annual
assets operating fees do
not exceed 1.15% of
average daily net
assets
12/30/99 Aetna Real Estate .75% of average daily net total annual
Securities VP assets operating fees do
not exceed 0.95% of
average daily net
assets
4/20/00 Aetna Technology VP .95% of average daily net total annual
assets operating fees do
not exceed 1.15% of
average daily net
assets
</TABLE>
-11-
SUBADVISORY AGREEMENT
THIS AGREEMENT is made by and among AELTUS INVESTMENT MANAGEMENT, INC., a
Connecticut corporation (the "Adviser"), AETNA VARIABLE PORTFOLIOS, INC., a
Maryland Corporation (the "Fund"), on behalf of its AETNA TECHNOLOGY VP (the
"Series") and Elijah Asset Management, LLC, a Delaware limited liability
corporation (the "Subadviser"), as of the date set forth below.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company
consisting of multiple investment portfolios, under the Investment Company Act
of 1940, as amended (the "1940 Act"); and
WHEREAS, pursuant to authority granted by the Fund's Articles of Incorporation,
the Fund has established the Series as a separate investment portfolio; and
WHEREAS, both the Adviser and the Subadviser are registered with the Commission
as investment advisers under the Investment Advisers Act of 1940, as amended
(the "Advisers Act") and both are in the business of acting as investment
advisers; and
WHEREAS, the Adviser has entered into an Investment Advisory Agreement with the
Fund, on behalf of the Series (the "Investment Advisory Agreement"), which
appoints the Adviser as the investment adviser for the Series; and
WHEREAS, the Investment Advisory Agreement authorizes the Adviser to delegate
all or a portion of its obligations under the Investment Advisory Agreement to a
subadviser;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement, the Adviser and the Fund,
on behalf of the Series, hereby appoint the Subadviser to manage the assets of
the Series as set forth below in Section II, under the supervision of the
Adviser and subject to the approval and direction of the Fund's Board of
Directors (the "Board"). The Subadviser hereby accepts such appointment and
agrees that it shall, for all purposes herein, undertake such obligations as an
independent contractor and not as an agent of the Adviser. The Subadviser agrees
that except as required to carry out its duties under this Agreement or as
otherwise expressly authorized, it has no authority to act for or represent the
Series, the Fund or the Adviser in any way. The Subadviser agrees that the
Adviser shall have the right at all times upon reasonable notice to inspect the
offices and the records of the Subadviser that relate to the Subadviser's
performance of this Agreement.
II. DUTIES OF THE SUBADVISER AND THE ADVISER
A. Duties of the Subadviser
The Subadviser shall regularly provide investment advice with respect to
the assets held by the Series and shall continuously supervise the
investment and reinvestment of securities, instruments or other property
(excluding cash and cash instruments) comprising the assets of the Series.
In carrying out these duties, the Subadviser shall:
<PAGE>
1. select the securities (other than cash instruments) to be purchased,
sold or exchanged by the Series or otherwise represented in the
Series' investment portfolio and regularly report thereon to the
Adviser and, at the request of the Adviser, to the Board;
2. place trade orders with broker-dealers. The Subadviser shall use its
best efforts to seek to execute portfolio transactions at prices
that are advantageous to the Series giving consideration to the
services and research provided and at commission rates that are
reasonable in relation to the benefits received;
3. formulate and implement continuing programs for the purchase and
sale of securities (other than cash instruments) and regularly
report thereon to the Adviser and, at the request of the Adviser or
the Series, to the Board;
4. inform the Adviser on a daily basis of the amount of Series assets
that will need to be invested or reinvested in cash and cash
instruments; and
5. establish and maintain appropriate policies and procedures
including, but not limited to, a code of ethics, which are designed
to ensure that the management of the Series is implemented in
compliance with the 1940 Act, the Advisers Act, and the rules
thereunder.
B. Duties of the Adviser
The Adviser shall retain responsibility for oversight of all activities of the
Subadviser and for monitoring its activities on behalf of the Series. The
Adviser also is responsible for the investment and reinvestment of cash and cash
instruments maintained by the Series. In carrying out its obligations under this
Agreement and the Investment Advisory Agreement, the Adviser shall:
1. monitor the investment program maintained by the Subadviser for the
Series and the Subadviser's compliance program to ensure that the
Series' assets are invested in compliance with the Subadvisory
Agreement and the Series' investment objectives and policies as
adopted by the Board and described in the most current effective
amendment of the registration statement for the Fund, as filed with
the Commission under the Securities Act of 1933, as amended (the
"1933 Act"), and the 1940 Act ("Registration Statement");
2. formulate and implement continuing programs for the purchase and
sale of cash and cash instruments;
3. file all periodic reports pertaining to the Series required to be
filed with the applicable regulatory authorities;
4. review and deliver to the Board all financial, performance and other
reports prepared by the Subadviser and/or Adviser under the
provisions of this Agreement or as requested by the Board;
5. maintain contact with and enter into arrangements with the
custodian, transfer agent, auditors, outside counsel, and other
third parties providing services to the Series; and
6. give instructions to the custodian and/or sub-custodian of the
Series, concerning deliveries of securities and payments of cash for
the Series, as required to carry out the investment activities of
the Series as contemplated by this Agreement.
2
<PAGE>
To the extent that the Series incurs a loss as a result of the Adviser's failure
to adequately fulfill its duties hereunder, and not as a result of the
Subadviser's negligence, the Adviser agrees that it shall be solely responsible
to make the Series whole.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Subadviser
The Subadviser hereby represents and warrants to the Fund and Adviser as
follows:
1. Due Organization and Authorization. The Subadviser is duly
organized and is in good standing under the laws of the State
of Delaware and is fully authorized to enter into this
Agreement and carry out its duties and obligations hereunder.
2. Registration. The Subadviser is registered as an investment
adviser with the Commission under the Advisers Act. The
Subadviser shall maintain such registration in effect at all
times during the term of this Agreement.
3. Regulatory Orders. The Subadviser is not subject to any stop
orders, injunctions or other orders of any regulatory
authority affecting its ability to carry out the terms of this
Agreement. The Subadviser will notify the Adviser and the
Series immediately if any such order is issued or if any
proceeding is commenced that could result in such an order.
4. Compliance. The Subadviser has in place compliance systems and
procedures designed to meet the requirements of the Advisers
Act and the 1940 Act and it shall at all times assure that its
activities in connection with managing the Series follow these
procedures.
B. Representations and Warranties of the Adviser
The Adviser hereby represents and warrants to the Subadviser as follows:
1. Due Organization and Authorization. The Adviser is duly
organized and is in good standing under the laws of the State
of Connecticut and is fully authorized to enter into this
Agreement and carry out its duties and obligations hereunder.
2. Registration. The Adviser is registered as an investment
adviser with the Commission under the Advisers Act. The
Adviser shall maintain such registration or license in effect
at all times during the term of this Agreement.
3. Regulatory Orders. The Adviser is not subject to any stop
orders, injunctions or other orders of any regulatory
authority affecting its ability to carry out the terms of this
Agreement. The Adviser will notify the Subadviser and the
Series immediately if any such order is issued or if any
proceeding is commenced that could result in such an order.
4. Compliance. The Adviser has in place compliance systems and
procedures designed to meet the requirements of the Advisers
Act and the 1940 Act and it shall at all times assure that its
activities in connection with managing the Series follow these
procedures.
C. Representations and Warranties of the Fund
3
<PAGE>
The Fund hereby represents and warrants to the Adviser and Subadviser as
follows:
1. Due Organization and Authorization. The Fund has been duly
incorporated as a Corporation under the laws of the State of
Maryland and it is authorized to enter into this Agreement and
carry out its obligations hereunder.
2. Registration. The Fund is registered as an investment company
with the Commission under the 1940 Act and shares of the Fund
are registered or qualified for offer and sale to the public
under the 1933 Act and all applicable state securities laws.
Such registrations or qualifications will be kept in effect
during the term of this Agreement.
IV. BROKER-DEALER RELATIONSHIPS
In selecting broker-dealers qualified to execute a particular equity
transaction, brokers or dealers may be selected who also provide brokerage or
research services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to the Subadviser and/or the other accounts over which the
Subadviser or its affiliates exercise investment discretion. The Subadviser is
authorized to pay a broker or dealer that provides such brokerage or research
services a commission for executing a portfolio transaction for the Series that
is in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if the Subadviser determines in good
faith that such amount of commission is reasonable in relation to the value of
the brokerage or research services provided by such broker or dealer and is paid
in compliance with Section 28(e). This determination may be viewed in terms of
either that particular transaction or the overall responsibilities that the
Subadviser and its affiliates have with respect to accounts over which they
exercise investment discretion. The Subadviser may consider the sale of shares
of the Series and of other investment companies advised by the Adviser as a
factor in the selection of brokers or dealers to effect transactions for the
Series, subject to the Subadviser's duty to seek best execution. The Subadviser
may also select brokers or dealers to effect transactions for the Series that
provide payment for expenses of the Series. The Board shall periodically review
the commissions paid by the Series to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
received.
V. CONTROL BY THE BOARD OF DIRECTORS
Any investment program undertaken by the Subadviser pursuant to this Agreement,
as well as any other activities undertaken by the Subadviser at the direction of
the Adviser on behalf of the Series, shall at all times be subject to any
directives of the Board.
VI. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Adviser and Subadviser
shall at all times conform to:
1. all applicable provisions of the 1940 Act, the Advisers Act
and any rules and regulations adopted thereunder;
2. all policies and procedures of the Series as adopted by the
Board and as described in the Registration Statement;
3. the provisions of the Articles of Incorporation of the Fund,
as amended from time to time;
4. the provisions of the Bylaws of the Fund, as amended from time
to time; and
4
<PAGE>
5. any other applicable provisions of state or federal law.
VII. COMPENSATION
The Adviser shall pay the Subadviser, as compensation for services rendered
hereunder, from its own assets, an annual fee equal to 0.50% of the average
daily net assets in the Series. The fee shall be payable monthly. Except as
hereinafter set forth, compensation under this Agreement shall be calculated and
accrued daily at the rate of 1/365 of the annual fee applied to the daily net
assets of the Series. If this Agreement becomes effective subsequent to the
first day of a month or shall terminate prior to the last day of a month,
compensation for that part of the month this Agreement is in effect shall be
prorated in a manner consistent with the calculation of the fees set forth
above.
VIII. ALLOCATION OF EXPENSES
The Subadviser shall pay the salaries, employment benefits and other related
costs of those of its personnel engaged in providing investment advice to the
Series hereunder, including, but not limited to, office space, office equipment,
telephone and postage costs. The Subadviser shall not be responsible for any
other expenses related to the operation of the Fund.
IX. NONEXCLUSIVITY
The services of the Subadviser with respect to the Series are not to be deemed
to be exclusive, and the Subadviser shall be free to render investment advisory
and administrative or other services to others (including other investment
companies) and to engage in other activities. It is understood that officers or
directors of the Subadviser are not prohibited from engaging in any other
business activity or from rendering services to any other person, or from
serving as partners, officers, directors or trustees of any other firm or trust,
including other investment advisory companies.
X. TERM
This Agreement shall become effective at the close of business on the date
hereof and shall remain in force and effect through December 31, 2001, unless
earlier terminated under the provisions of Article XI. Following the expiration
of its initial term, the Agreement shall continue in force and effect for one
year periods, provided such continuance is specifically approved at least
annually:
1. (a) by the Board or (b) by the vote of a majority of the
Series' outstanding voting securities (as defined in Section
2(a)(42) of the 1940 Act), and
2. by the affirmative vote of a majority of the directors who are
not parties to this Agreement or interested persons of a party
to this Agreement (other than as a director of the Fund), by
votes cast in person at a meeting specifically called for such
purpose.
5
<PAGE>
XI. TERMINATION
This Agreement may be terminated:
1. at any time, without the payment of any penalty, by vote of
the Board, including a majority of its disinterested
directors, or by vote of a majority of the outstanding voting
securities of the Series; or
2. by the Subadviser on sixty (60) days' written notice to both
the Adviser and the Fund, unless written notice is waived by
the party(ies) required to be notified; or
3. automatically in the event there is an "assignment" of this
Agreement, as defined in the 1940 Act.
XII. LIABILITY
The Subadviser shall be liable to the Series and the Subadviser and shall
indemnify the Series and the Adviser for any losses incurred by the Series or
the Adviser whether in the purchase, holding, or sale of any security or
otherwise, to the extent that such losses resulted from an act or omission on
the part of the Subadviser or its officers, directors or employees, that is
found to involve willful misfeasance, bad faith or negligence, or reckless
disregard by the Subadviser of its duties under this Agreement, in connection
with the services rendered by the Subadviser hereunder.
The Adviser shall be liable to the Series and the Subadviser and shall indemnify
the Series and the Subadviser for any losses incurred by the Series or the
Subadviser whether in the purchase, holding, or sale of any security or
otherwise, to the extent that such losses resulted from an act or omission on
the part of the Adviser or its officers, directors or employees, that is found
to involve willful misfeasance, bad faith or negligence, or reckless disregard
by the Adviser of its duties under this Agreement, in connection with the
services rendered by the Adviser hereunder.
Nothing herein shall relieve the Adviser of its responsibilities to the Fund, as
set forth in the Investment Advisory Agreement.
XIII. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such address shall be:
if to the Fund, on behalf of the Series or the Adviser:
10 State House Square, SH11
Hartford, Connecticut 06103-3602
Fax number: 860/275-2158
Attn: Secretary
if to the Subadviser:
100 Pine Street, Suite 420
San Francisco, California 94111
Fax number: 415/274-2461
Attention: Chief Executive Officer
6
<PAGE>
XIV. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Either
party shall have the right to require that any dispute arising under the
Agreement be submitted to binding arbitration at the American Arbitration
Association ("AAA") located in New York, New York, in accordance with the AAA's
applicable rules and procedures for dispute resolution.
XV. SALES PROMOTION
The Subadviser may not use any sales literature, advertising material (including
material disseminated through radio, television, or other electronic media) or
other communications concerning Series shares or that include the name of the
Series or the Adviser without obtaining the Adviser's prior written approval.
Notwithstanding the foregoing, nothing herein shall prohibit the Subadviser or
any of its principals from using the name of the Fund, the Series or the Adviser
in a biographical description of the Subadviser or its principals or prohibit
the use of the performance of the Fund or the Series (to the extent permissible
under the U.S. federal and state securities laws) in sales literature,
advertising material or other communications of the Subadviser that describes
the composite performance record of the Subadviser or its principals.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 19th day of January, 2000.
Aeltus Investment Management, Inc.
Attest:
By /s/ Daniel E. Burton By /s/ Amy R. Doberman
--------------------------- ------------------------------
Name Daniel E. Burton Name Amy R. Doberman
------------------------ ---------------------------
Title Assistant Secretary Title Vice President &
-------------------------- ----------------------------
General Counsel
Elijah Asset Management, LLC
Attest:
By /s/ Michael S. Dunn By /s/ Ronald E. Elijah
--------------------------- ------------------------------
Name Michael S. Dunn Name Ronald E. Elijah
------------------------ ---------------------------
Title C.O.O. Title CEO
-------------------------- ----------------------------
Aetna Variable Portfolios, Inc.
on behalf of Aetna Technology VP
Attest:
By /s/ Michael Gioffre By /s/ J. Scott Fox
--------------------------- ------------------------------
Name Michael Gioffre Name J. Scott Fox
------------------------ ---------------------------
Title Assistant Secretary Title President
-------------------------- ----------------------------
7
AETNA VARIABLE PORTFOLIOS, INC.
UNDERWRITING AGREEMENT
THIS AGREEMENT, is entered into this 19th day of June, 1996, by and between
Aetna Life Insurance and Annuity Company, Inc., a Connecticut corporation
(Aetna), and Aetna Variable Portfolios, Inc., a Maryland corporation ("Fund") on
behalf of its investment portfolios (the "Portfolios").
WHEREAS, the Fund is an open-end management investment company registered with
the Securities and Exchange Commission (Commission) under the Investment Company
Act of 1940, as amended (1940 Act) authorized to issue shares of distinct
investment portfolios; and
WHEREAS the Fund has registered the shares of its common stock (Shares) in its
Portfolios for offer and sale to the public under the Securities Act of 1933, as
amended; and
WHEREAS, the Fund wishes to retain Aetna, and Aetna is willing to act, as
principal underwriter in connection with the offer and sale of the Shares; and
NOW, THEREFORE, in consideration of the promises and mutual covenants herein
contained, the parties agree as follows:
1. Appointment of Underwriter. The Fund hereby appoints Aetna and Aetna hereby
accepts appointment as underwriter in connection with the distribution of the
Shares. The Fund authorizes Aetna to solicit orders for the purchase of the
Shares as set forth in the Registration Statement currently effective with the
Commission for the Shares. It is understood that the Shares are offered only
through variable annuity contracts and variable life policies issued by Aetna
and its affiliates.
2. Compensation. Aetna shall receive no separate compensation for providing
services under this Agreement. It is understood that the compensation Aetna
receives in connection with the issuance of the variable annuity contracts or
variable life policies shall be the only consideration it receives for serving
as underwriter hereunder.
3. Aetna Expenses. Aetna shall be responsible for any costs of printing and
distributing prospectuses and statements of additional information necessary to
offer and sell the Shares, and such other sales literature, reports, forms and
advertisements in connection as it elects to prepare, provided such materials
comply with the applicable provisions of federal and state law.
4. Fund Expenses. The Fund shall be responsible for the costs of registering the
Shares with the Commission and for the costs of preparing prospectuses,
statements of additional information and such other documents as are required to
maintain the registration of the Shares with the Commission.
<PAGE>
5. Share Certificates. The Fund shall not issue certificates representing
Shares.
6. Status of underwriter and Other Persons. Aetna is an independent contractor
and shall be agent for the Fund only in respect to the sale and redemption of
the Shares. Any person, even though also an officer, director, employee or agent
of Aetna, who may be or become an officer, director, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Aetna even though paid by Aetna.
7. Nonexclusivity. The services of Aetna to the Fund under this Agreement are
not to be deemed exclusive, and Aetna shall be free to render similar services
or other services to others and to engage in other activities related or
unrelated to those provided under this agreement.
8. Effectiveness and Termination of Agreement. This Agreement shall become
effective at the close of business on the date set forth in the first paragraph
of this Agreement and shall remain in force and effect, through December 31,
1997, unless earlier terminated under the provisions of Section 9. Following the
expiration of its initial term, the Agreement shall continue in force and effect
for one year periods, provided such continuance is specifically approved at
least annually by the Fund's trustees, or by the vote of a majority of the
Fund's outstanding voting securities (as defined in Section 2(a)(42) of the 1940
Act.
9. Termination. This Agreement may be terminated at any time, by either party,
without the payment of any penalty, on sixty (60) days' written notice to the
other party.
10. Liability of Aetna. Aetna shall be liable to the Fund and shall indemnify
the Fund for any losses incurred by the Fund, to the extent that such losses
resulted from an act or omission on the part of Aetna or its officers, directors
or employees in carrying out its duties hereunder, that is found to involve
willful misfeasance, bad faith or negligence, or reckless disregard by Aetna of
its duties under this Agreement.
11. Amendments. This Agreement may be amended or changed only by an instrument
in writing signed by both parties.
12. Applicable Law. This Agreement shall be construed in accordance with the
laws of the State of Connecticut and the 1940 Act. To the extent that the
applicable laws of the State of Connecticut conflict with the applicable
provisions of the 1940 Act, however, the latter shall control.
13. Notices. Any notices under this Agreement shall be in writing, addressed and
delivered, mailed postage paid, or sent by other delivery service, or by
facsimile transmission to each party at such address as each party may designate
for the receipt of notice. Until further notice, such addresses shall be:
-2-
<PAGE>
if to the Fund orAetna:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
14. Questions of Interpretation. This Agreement shall be governed by the laws of
the State of Connecticut. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the 1940 Act shall be resolved by reference to such term or
provision of the 1940 Act and to interpretations thereof, if any, by the United
States Courts or, in the absence of any controlling decision of any such court,
by rules, regulations or orders of the Commission issued pursuant to the 1940
Act. In addition, where the effect of a requirement of the 1940 Act reflected in
the provisions of this Agreement is revised by rule, regulation or order of the
Commission, such provisions shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 19th day of June, 1996.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Attest: By: /s Shaun P. Mathews
-----------------------
Name: Shaun P. Mathews
---------------------
Title: President
--------------------
/sDeAnn S. Anastasio
- --------------------
Assistant Secretary
AETNA VARIABLE PORTFOLIOS, INC
Attest: By: Shaun P. Mathews
------------------------
Name: Shaun P. Mathews
----------------------
Title: President
---------------------
/s/ Susan E. Bryant
- -------------------
Secretary
-3-
<PAGE>
Schedule A
LIST OF PORTFOLIOS
Updated as of December 15, 1999
Aetna High Yield VP
Aetna Real Estate Securities VP
Aetna Value Opportunity VP
Aetna Growth VP
Aetna Small Company VP
Aetna International VP
Aetna Index Plus Large Cap VP
Aetna Index Plus Mid Cap VP
Aetna Index Plus Small Cap VP
Aetna Index Plus Bond VP
Aetna Technology VP
-4-
AMENDMENT TO CUSTODIAN AGREEMENT
between
AETNA VARIABLE PORTFOLIOS, INC.
and
MELLON BANK, N.A.
WITNESSETH:
WHEREAS, Aetna Variable Portfolios, Inc. (the "Fund") and Mellon Bank,
N.A. ("Mellon") entered into a Custodian Agreement (the "Agreement") on August
26, 1996 with respect to the assets of certain portfolios of the Fund and some
or all additional portfolios that the Fund may establish from time to time; and
WHEREAS, the Fund has authorized the creation of a new portfolio, Aetna
Technology VP ("Portfolio"), and has amended its registration statement on Form
N-1A to register shares of beneficial interest of the Portfolio with the
Securities and Exchange Commission; and
WHEREAS, the Fund desires to appoint Mellon as custodian of the assets for
such Portfolio;
NOW THEREFORE, it is agreed as follows:
1. The Fund, on behalf of the Portfolio, hereby appoints Mellon, and
Mellon hereby accepts appointment, as the custodian of the assets of the
Portfolio, in accordance with all the terms and conditions set forth in the
Agreement.
2. The Fund is entering into this agreement incorporating the Agreement on
behalf of the Portfolio individually and not jointly with any other portfolio.
In the Agreement, the term "Fund" shall refer to the Fund solely on behalf of
the portfolio individually to which a particular Futures Contract transaction or
other obligation under the Agreement relates. The responsibilities and benefits
set forth in the Agreement shall refer to each portfolio severally and not
jointly. No individual portfolio shall have any responsibility for any
obligation arising out of a Futures Contract transaction entered into by any
other portfolio. Without otherwise limiting the generality of the foregoing,
(a) any breach of the Agreement regarding the Fund with respect to
any one portfolio shall not create a right or obligation with
respect to any other portfolio;
<PAGE>
(b) under no circumstances shall Mellon have the right to set off
claims relating to a portfolio by applying property of any
other portfolio;
(c) no portfolio shall have the right of set off against the
assets held by any other portfolio;
(d) the business and contractual relationships created by the
Agreement as amended hereby, and the consequences of such
relationships relate solely to the particular portfolio to
which such relationship was created; and
(e) all property held by Mellon on behalf of a particular
portfolio shall relate solely to the particular portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the date mentioned below.
Mellon Bank, N.A. Aetna Variable Portfolios,
Inc. on behalf of
Aetna Technology VP
By: /s/ Christi R. Caperton By: /s/ A Shaer, Jr.
----------------------- ----------------------
Name: Christi R. Caperton Name: Allan Shaer, Jr.
Title: Vice President Title: Assistant Treasurer
Mellon Bank, N.A.
Date: April 6, 2000 Date: March 14, 2000
AMENDMENT
TO
ADMINISTRATIVE SERVICES AGREEMENT
WHEREAS, AETNA VARIABLE PORTFOLIOS, INC., a Maryland corporation, on
behalf of each of its portfolios, Aetna Index Plus Large Cap VP, Aetna Small
Company VP, Aetna Growth VP, Aetna Value Opportunity VP, Aetna High Yield VP,
Aetna Index Plus Bond VP, Aetna Index Plus Mid Cap VP, Index Plus Small Cap VP,
Aetna International VP and Aetna Real Estate Securities VP (each a "Portfolio"),
has entered into an Administrative Services Agreement (the "Agreement") with
AELTUS INVESTMENT MANAGEMENT, INC., a Connecticut corporation (the
"Administrator"), effective January 1, 1999;
NOW THEREFORE, it is agreed as follows:
The fee waiver provision in Section VII of the Agreement is amended as
follows:
Notwithstanding the above, the Administrator may waive a portion or all of
the fees it is entitled to receive. Through December 31, 2000, the
Administrator has agreed to waive fees so that the total annual operating
expenses (excluding distribution fees) do not exceed the percentage of the
average daily net assets outlined below for each Portfolio:
Aetna Index Plus Large Cap VP 0.55%
Aetna Small Company VP 0.95%
Aetna Growth VP 0.80%
Aetna Value Opportunity VP 0.80%
Aetna High Yield VP 0.80%
Aetna Index Plus Bond VP 0.45%
Aetna Index Plus Mid Cap VP 0.60%
Aetna Index Plus Small Cap VP 0.60%
Aetna International VP 1.15%
Aetna Real Estate Securities VP 0.95%
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers as of the 30th day of
December, 1999.
AELTUS INVESTMENT
MANAGEMENT, INC.
Attest: /s/ Daniel E. Burton By: /s/ Amy R. Doberman
---------------------------- ------------------------
Name: Daniel E. Burton Name: Amy R. Doberman
---------------------------- ---------------------
Title: Assistant Secretary Title: Vice President
------------------------------ ----------------------
<PAGE>
AETNA VARIABLE PORTFOLIOS, INC.
on behalf of its Portfolios,
Aetna Index Plus Large Cap VP
Aetna Small Company VP
Aetna Growth VP
Aetna Value Opportunity VP
Aetna High Yield VP
Aetna Index Plus Bond VP
Aetna Index Plus Mid Cap VP
Aetna Index Plus Small Cap VP
Aetna International VP
Aetna Real Estate Securities VP
Attest: /s/ Michael Gioffre By: /s/ J. Scott Fox
---------------------------- ------------------------
Name: Michael Gioffre Name: J. Scott Fox
---------------------------- ---------------------
Title: Assistant Secretary Title: President
------------------------------ ----------------------
2
AMENDMENT No. 3
TO
THE ADMINISTRATIVE SERVICES AGREEMENT
WHEREAS, Aetna Variable Portfolios, Inc. (the "Company") and Aeltus
Investment Management, Inc. ("Aeltus") entered into an Administrative Services
Agreement (the "Agreement") effective January 1, 1999 with respect to certain
portfolios of the Company; and
WHEREAS, the Company has authorized the creation of a new portfolio, Aetna
Technology VP ("Portfolio"), and has amended its registration statement on Form
N-1A to register shares of beneficial interest of the Portfolio with the
Securities and Exchange Commission; and
WHEREAS, the Company desires to appoint Aeltus as Administrator of the
assets for such Portfolio;
NOW THEREFORE, it is agreed as follows:
The Company, on behalf of the Portfolio, hereby appoints Aeltus, and
Aeltus hereby accepts appointment, as the Administrator for the Portfolio, in
accordance with all the terms and conditions set forth in the Agreement, and for
an annual fee payable monthly (in arrears) based on the average daily net assets
of the Portfolio as follows:
Rate Net Assets
---- ----------
0.075% on the 1st $5 billion
0.05% over $5 billion
Notwithstanding the above, the Administrator may waive a portion or all of the
fees it is entitled to receive. Through December 31, 2000, the Administrator has
agreed to waive fees so that the total annual operating expenses do not exceed
1.15% of the Portfolio's average daily net assets.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their officers designated below on the date mentioned below.
Aeltus Investment Management, Inc. Aetna Variable Portfolios, Inc.
on behalf of Aetna Technology VP
By: /s/ Frank J. Litwin By: /s/ J. Scott Fox
------------------------------ --------------------------
Name: Frank J. Litwin Name: J. Scott Fox
------------------------------ --------------------------
Title: Managing Director Title: President
------------------------------ --------------------------
Date: April 20, 2000 Date: April 19, 200
------------------------------ --------------------------
<PAGE>
Attest: Attest:
By: /s/ Daniel E. Burton By: /s/ Michael Gioffre
------------------------------ --------------------------
Name: Daniel E. Burton Name: Michael Gioffre
------------------------------ --------------------------
Title: Assistant Secretary Title: Assistant Secretary
------------------------------ --------------------------
Date: April 20, 2000 Date: April 19, 2000
------------------------------ --------------------------
2
10 State House Square, SH11
Hartford, CT 06103-3602
Amy R. Doberman
Counsel
Aetna Variable Portfolios, Inc.
April 25, 2000 (860) 275-2032
Fax: (860) 275-2158
U.S. Secuities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Filing Desk
Re: Aetna Variable Portfolios, Inc.
Post-Effective Amendment No. 12 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 February 4, 2000 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 25, 2000
CODE OF ETHICS
Aeltus Investment Management, Inc.
March 1, 1999
<PAGE>
CODE OF ETHICS
Aeltus Investment Management, Inc.
Introduction
- --------------------------------------------------------------------------------
Aeltus has the privilege of being retained by our clients to manage their
assets. As investment managers, we are fiduciaries to our clients. And, as
fiduciaries, we must always put our clients' best interests first,
avoiding even the appearance of conflicts of interest with our clients.
The Code of Ethics (Code) has been adopted by Aeltus' Senior Management
and applies to all directors, officers and employees (including
consultants and part-time hires) of Aeltus Investment Management, Inc. and
its subsidiaries (Aeltus). The Code covers personal securities
transactions by Aeltus directors, officers, employees, members of their
immediate families, persons who reside with them, and relatives who are
supported by them.
Administration of the Code is the responsibility of our Compliance
Officers. Enforcement of the Code is the responsibility of Senior
Management. Our Compliance Officers are responsible for reviewing and
investigating any reported or suspected violations of the Code and
reporting their findings to Senior Management. If the investigation
discloses that a violation has occurred, Senior Management will recommend
appropriate actions and sanctions, which may include termination of
employment.
Senior Management believes that compliance with the Code will help prevent
actual or perceived conflicts of interest caused by personal securities
transactions. Senior Management also believes that the Code is reasonable
and that it is not overly restrictive.
From time to time, the Code may be revised. If you have any questions
regarding the Code, please contact one of our Compliance Officers.
2
<PAGE>
Definitions
- --------------------------------------------------------------------------------
Whenever used in the Code, and unless the context indicates otherwise, the
following terms have the following meanings:
1. "Employee" means every officer, director or person employed (including
consultants and part-time employees) by Aeltus Investment Management or
its subsidiaries.
2. "Pre-Clearance Officer" are those Employees designated by Senior
Management to pre-clear personal securities transactions and whose
names are shown on Appendix A.
3. "Restricted List" means the list that the investment department
provides to the Compliance Department, which includes those securities
that are being purchased or sold for client accounts and securities
that are prohibited from purchase or sale by client accounts or
Employees for various reasons (e.g., large concentrated ownership
positions or possession of material, non-public information).
NOTE: Because of the nature of the selection process regarding
securities being purchased or sold pursuant to a computer-determined
program trade ("Program Trade"), securities involved in a Program
Trade may not be included on the Restricted List.
4. "Security" means ALL securities EXCEPT:
o shares of registered open-end investment companies (mutual
funds);
o direct obligations of the U.S. Government (but not its
agencies or instrumentalities e.g., FNMA or GNMA, etc.);
o bankers' acceptances;
o bank certificates of deposit;
o commercial paper;
o money market instruments, including repurchase agreements and
other high-quality short-term debt instruments.
These exceptions will hereinafter be referred to as "exempt securities".
5. "Account" for which pre-clearance is required means:
o an Employee's own account;
o an account in which an Employee has a beneficial interest and can
influence investment decisions;
o a personal account of a member of the Employee's household; and
o an account over which an Employee exercises investment discretion in
a capacity other than as an Employee.
3
<PAGE>
Policy
- --------------------------------------------------------------------------------
Parallel Investing.
Subject to the provisions of the Code, Employees may own the same
securities as those acquired by Aeltus for its clients.
Priority of Client Interests.
Every Employee must give priority to the interests of Aeltus clients over
his or her own interest in making a personal investment.
To effect this policy:
o Employees may not knowingly execute a securities transaction in
securities listed on the Restricted List.
o Equity Department Employees may not knowingly execute a securities
transaction without complying with the "Pre-Clearance of
Investments" provision in the Procedures Section of the Code.
o Portfolio managers are prohibited from knowingly buying or selling a
security within seven (7) calendar days before and seven (7)
calendar days after a client that he or she manages trades in that
security.
NOTE: Even though securities involved in a Program Trade may not be
listed on the Restricted List, portfolio managers whose clients are
buying or selling securities in a Program Trade are prohibited from
knowingly buying or selling these securities in their personal
accounts (refer to "Account For Which Pre-Clearance Is Required" in
the Procedures Section of the Code).
NOTE: Because of the nature of the selection process regarding
securities being purchased or sold pursuant to a Program Trade,
portfolio managers whose clients purchased or sold securities in a
Program Trade are not restricted to the seven (7) calendar day
prohibition mentioned above.
Conflict with Clients.
No Employee may knowingly buy, sell or dispose in any manner, including by
gift, a personal securities investment which would cause, or appear to
cause, a conflict with the interests of an Aeltus client.
Responsibility to Disclose Possible Conflict Before Client Transaction.
Before an Employee recommends, directs, executes or participates in any
security transaction involving an Aeltus client, such Employee will
disclose to a Pre-Clearance Officer all relevant details concerning any
possible conflict, or appearance of conflict, between his or her personal
investments and the interests of an Aeltus client. For example, the
capitalization and trading volume of a security owned by an Employee may
be relevant in determining whether there is a possible conflict of
interest if that Employee participates in a decision to buy or sell that
security for an Aeltus client. Moreover, an Employee is expected to use
common sense and professional judgment
4
<PAGE>
to determine if he or she should disclose personal information as a
possible basis for conflict of interest.
Full Disclosure of Personal Securities Investments.
In order to enable Aeltus to determine compliance with the Code, every
Employee, when requested by a Compliance Officer, will disclose all
information about his or her Accounts and personal securities investments.
The following reports of Accounts will be required of all Employees:
o within seven (7) calendar days of their employment start date (or
appointment in the case of certain directors or consultants), the
New Hire Holdings Report (see Appendix B), which describes all
Securities holdings as of their employment start date by Aeltus. Any
Employee who fails to submit the report within seven (7) calendar
days of their employment start date will be prohibited from engaging
in any personal securities transactions;
o within ten (10) days of the end of each calendar quarter, the
Quarterly Securities Transactions Report (see Appendix C) which
describes all Securities transactions made during the previous
quarter;
o within ten (10) days of the end of the calendar year, the Annual
Report of Holdings (see Appendix D) which lists all Securities
holdings.
Aeltus Influence.
No Employee will use the influence of his or her position to obtain a
personal trading advantage.
Change in Ownership of Securities by Clients.
No Employee will conduct any personal securities transaction on the basis
of knowledge of: (i) a client's plans; (ii) a change, or possible change
in Aeltus' investment policy; (iii) a buying or selling program for Aeltus
clients; or (iv) the investment results Aeltus anticipates generating for
a client. For example, an Employee will neither purchase a security nor
sell his or her position in that security when he or she knows that Aeltus
intends to purchase or sell that security for its clients.
Pre-Clearance of Trades.
No Employee shall buy, sell or transfer by gift any Security unless the
Employee has obtained "Pre-Clearance" in accordance with the pre-clearance
procedures described in the Procedures section of the Code.
Material Non-Public Information.
No Employee will trade or recommend trading in securities on the basis of
material non-public information. Employees are subject to the provisions
of Aeltus' Policies and Procedures Governing Insider Trading Activity.
5
<PAGE>
Founder's Stock.
No Employee will purchase, or otherwise acquire in any manner, founder's
stock of any corporation.
Initial Public Offerings.
No Employee will purchase any security in an initial public offering.
Non-Public Securities.
Personal investments in non-public securities are subject to the same
rules as personal investments in publicly traded securities, including the
Pre-Clearance process described in the Procedures section of the Code.
In the event that an Employee is granted permission to make a personal
investment in a non-public security, that Employee will not participate in
the consideration of whether clients should invest in that issuer's public
or non-public securities. Such consideration will be subject to
independent review by investment personnel with no personal investment in
that issuer.
Pre-Clearance of Gifts.
No Employee will dispose of securities by gift without having obtained
"Pre-Clearance" in accordance with the pre-clearance procedures described
in the Procedures section of the Code.
Receipt of Gifts.
No Employee may receive any gift or other thing of more than de minimus
value from any person or entity that does business with Aeltus. Employees
who receive a gift or other thing of more than de minimus value from any
person or entity that does business with Aeltus should immediately contact
a Compliance Officer to determine the proper disposition of such gift.
Short-Term Trading.
Employees should focus their energy toward providing Aeltus and its
clients with their maximum attention and effort. Senior Management
believes that if Employees were to systematically engage in a pattern of
short-term trading (i.e., effecting frequent securities transactions) for
their Accounts, they would be doing so at the expense of Aeltus and its
clients as such Employee's attention would be diverted from their
responsibility to Aeltus and its clients to their own personal needs.
Accordingly, Employees should not effect frequent securities transactions
for their Accounts.
In addition, Senior Management believes that Employees should not profit
in the purchase and sale, or sale and purchase of the same security within
60 calendar days. While Senior Management recognizes that short-term
trading strategies are generally well within the parameters of existing
legal requirements, a general prohibition on short-term trading profits
(i.e., the purchase and sale, or sale and purchase of the same or
equivalent securities within 60 calendar days) can serve as an important
prophylactic device against allegations of conflicts of interest (e.g.,
front-running client transactions).
6
<PAGE>
Accordingly, the prohibition against short-term trading profits is
designed to minimize the possibility that Employees will capitalize
inappropriately on the market impact of trades involving client
transactions to which they possibly may be privy.
Senior Management understands that while this policy may impose a standard
more onerous than that presently common throughout the investment
management industry, it believes that this policy will help to reduce
allegations of conflicts of interest. In certain circumstances, and as
determined on a case-by-case basis, exceptions may be allowed when no
abuse is involved and the fairness of the situation strongly supports an
exemption.
Employees who breach the above policies may be subject to certain
sanctions including, but not limited to, reprimand, disgorgement of
profits, suspension and terminations.
NOTE: Short-term trading profits obtained in an Account from the exercise
of employee stock options and the subsequent sale of the underlying stock
are exempt from this prohibition and are, instead, viewed as a form of
employee compensation.
Service as a Director or Officer.
Absent prior approval of Senior Management, Employees may not serve as
directors or officers of unaffiliated public or private companies.
Aetna Inc. Code of Conduct.
All Employees are subject to the Aetna Inc. Code of Conduct and must abide
by all its requirements, including its requirements pertaining to
transactions in Aetna securities.
7
<PAGE>
Procedures
- --------------------------------------------------------------------------------
Absence of Conflict of Interest.
Before buying or selling a security in his or her Account, an Employee
should ask the following questions:
o "Will the investment cause my economic interest to conflict, or
appear to conflict, with the interests of an Aeltus client either
now or at some later time?"
o "Would I be embarrassed if The Wall Street Journal had an article
regarding my personal investment?"
o "Would I be embarrassed to discuss the matter with my mother or
father?"
Unless the answer is a confident "NO", the investment should not be made.
Pre-Clearance of Investments.
Employees must obtain approval from a Pre-Clearance Officer prior to
entering an order to buy, sell or transfer by gift all Securities in an
Account, except Exempt Securities.
NOTE: Equity Department Employees must pre-clear their equity transactions
through pre-clearance officers listed under "For Equity Department
Employees" on Appendix A.
NOTE: In order to avoid any appearance of impropriety where an employee is
asked to pre-clear a personal securities transaction submitted by his or
her supervisor, persons occupying the following offices will pre-clear as
follows:
(1) Chief Executive Officer through Equity Department Pre-Clearance
Officers and countersigned by Compliance Department Pre-Clearance
Officers;
(2) Chief Operating Officer through Equity Department Pre-Clearance
Officers and countersigned by Compliance Department
Pre-Clearance Officers;
(3) Head of Equity Department through Equity Department Pre-Clearance
Officers (except himself or herself) and countersigned by Compliance
Department Pre-Clearance Officers;
(4) Head Equity Trader through Head of Equity Department;
(5) Chief Compliance Officer through Equity Department Pre-Clearance
Officers.
Account For Which Pre-Clearance Is Required.
Employees must obtain pre-clearance of trades for all Securities
transactions made in an Account.
It is not necessary to obtain pre-clearance for investments which are made
by an independent fiduciary (i.e., a discretionary account) for an
Account, securities purchased through an automatic payroll deduction
program where the timing of purchases is controlled by someone other than
the Employee, purchases which are part of an automatic dividend
reinvestment plan, and purchases effected upon the exercise of rights
issued by an issuer pro-rata to all holders of a class of its securities,
to the extent
8
<PAGE>
such rights were acquired from such issuer. Sales of Securities obtained
as a result of the exercise of such rights, however, must be pre-cleared.
Evaluation of Request for Pre-Clearance.
A Pre-Clearance Officer will evaluate a request for pre-clearance and
consider whether the transaction would violate any provisions of the Code.
It is expected that in making such determination, a Pre-Clearance Officer
may consider the following information:
o The information regarding the transaction;
o Previously submitted requests for pre-clearance of personal trades;
o Information from the portfolio managers regarding securities
currently under consideration for purchase or sale by Aeltus'
clients;
o The Aeltus electronic trading system as to all securities owned by
Aeltus' clients;
o The Restricted List; and
o Other appropriate sources.
Response to Request for Pre-Clearance.
A Pre-Clearance Officer's response to the request for pre-clearance will
include:
o Making a telephone call to the Employee requesting pre-clearance, to
either approve or deny the request, and
o Filing a copy of the Pre-Clearance form with the Compliance
Department (a sample copy of which is included as Appendix E).
Time for Which A Transaction is Approved.
An Employee may authorize his or her broker to execute a transaction only
on the day on which approval for that transaction is given. If the
transaction is not completed on that day, the Employee must again obtain
pre-clearance for the transaction on each day that the Employee would like
to effect the transaction.
Post Execution Reporting.
At the close of each calendar quarter, the Compliance Department will
forward a copy of the Personal Securities Transactions Quarterly Report
(see Appendix C) to every Employee. Within ten (10) calendar days of the
end of each calendar quarter, every Employee must complete and return to
the Compliance Department the Quarterly Report, which describes all
reportable securities transactions of personal investments executed during
the preceding three months.
At the close of each calendar year, the Compliance Department will forward
a copy of the Annual Securities Holdings Report (see Appendix D) to every
Employee. Within ten (10) calendar days of the end of each calendar year,
every Employee must complete
9
<PAGE>
and return to the Compliance Department the Annual Report, which describes
all reportable securities then held in the Employee's account(s).
Confidentiality.
All information submitted to the Aeltus Compliance Department pursuant to
pre-clearance and post execution reporting procedures will be treated as
confidential information. It may, however, be made available to
governmental and securities industry self regulatory agencies with
regulatory authority over Aeltus as well as to Aeltus' auditors and legal
advisors, if appropriate.
Supervisory Procedures
- --------------------------------------------------------------------------------
Exceptions to Policy and Procedures.
Because all fact situations cannot be contemplated, Aeltus' Chief
Compliance Officer and Senior Management retain the authority to permit
exceptions to the above policies and procedures when to do so is
consistent with the interests of Aeltus and its clients.
Administration of the Code.
In order to ensure observance of these policies and procedures relating to
personal investments, Senior Management will:
o Distribute the Code to all Employees;
o Provide educational programs to familiarize Employees with relevant
policies and procedures;
o Set an example by their personal actions of compliance with the
letter and spirit of Aeltus' policies and procedures;
o Require observance of Aeltus' policies and procedures and, if such
policies and procedures are violated, determine the appropriate
sanction for the offender, which may include termination of
employment;
o Review on a regular basis and update as necessary Aeltus' policies
and procedures;
o Reconcile Pre-Clearance approvals with Quarterly Report forms;
o Take appropriate actions to ensure compliance with the policies and
procedures of the Code; and
o Maintain and review records related to personal securities
transactions.
Each Employee will be required periodically to certify that they have read
and understood the policies and procedures contained in the Code (see
Appendix F).
10
<PAGE>
APPENDIX A
Pre-Clearance Officers
William Bartol (860) 275 - 2266
Marlene Brigham (860) 275 - 2110
Brian Kawakami (860) 275 - 3599
Patricia Vazquez (860) 275 - 4069
For Equity Department Employees
Heather Bentley (860) 275 - 2436
James Chiecko (860) 275 - 3746
Neil Kochen (860) 275 - 2423
Sara Pihl (860) 275 - 3747
Kristen Pinchera (860) 275 - 2445
Nancy Postel (860) 275 - 2434
Peter Walsh (860) 275 - 3749
11
<PAGE>
APPENDIX B
NEW HIRE HOLDINGS REPORT
Date of Hire: ____________, 199_
Filing of Report is required as of your employment start date of hire. Please
note that you do not have to report holdings of Exempt Securities (as defined in
the Code of Ethics).
[_] No Holdings To Report (Check if applicable)
Print Name
--------------------------------------------
Title of Quantity Broker * Disclaimer
Security* Held or Bank (Check if applicable, give reasons)
- --------- ------- ------- ----------
* The undersigned declares that the recording of the holding checked in this
column shall not be construed as an admission that he/she had any direct
or indirect ownership in the security described.
IF YOU WISH, YOU MAY ATTACH A COPY OF YOUR MOST RECENT ACCOUNT STATEMENT(S) AS
PROVIDED TO YOU BY YOUR BROKER, BANK, OR CUSTODIAN. IF YOU HAVE ANY QUESTIONS OR
CONCERNS RELATED TO THIS FORM, PLEASE FEEL FREE TO CONTACT ONE OF THE FIRM'S
COMPLIANCE OFFICERS.
Date:
-----------------
Signature:
------------------------------
PLEASE FORWARD TO THE CHIEF COMPLIANCE OFFICER, SH11.
12
<PAGE>
APPENDIX C
QUARTERLY SECURITIES TRANSACTIONS REPORT
For Quarter Ending _________________
Filing of Report is required whether or not transactions occurred. Please note
that you do not have to report transactions in Exempt Securities.
[_] No Transactions To Report (Check if applicable)
Print Name
Trade ** Quantity ** Quantity Broker
Date Title of Security* Purchased Sold rice or Bank
- ------ ------------------ ---------- ------------ ------- -------
*** Disclaimer
----------
(Check if applicable, give reasons)
* The undersigned declares that the recording of the transaction checked in
this column shall not be construed as an admission that he/she had any
direct or indirect ownership in the security described in the transaction.
** If you have acquired or disposed of a security in a transaction other than
a purchase or sale (e.g., by gift), please describe the nature of the
transaction.
*** The undersigned declares that the recording of the transaction listed in
this column shall not be construed as an admission that he/she has or had
any direct or indirect ownership in the security described in the
transaction.
IF YOU WISH, YOU MAY ATTACH A COPY OF YOUR ACCOUNT STATEMENTS AS PROVIDED TO YOU
BY YOUR BROKER, BANK, OR CUSTODIAN.
Date: Signature:
------------ ------------------------------------
13
<PAGE>
APPENDIX D
Aeltus Investment Management, Inc.
ANNUAL REPORT OF PERSONAL SECURITIES HOLDINGS
Filing of Report is required within ten (10) days of calendar year-end. Please
note that you do not have to report holdings of Exempt Securities.
[_] No Holdings To Report (Check if applicable)
Print Name _____________________________________________
Title of Quantity Broker
Security Held or Bank * Disclaimer (Check if applicable,
- -------- ------- ------- ---------- give reasons)
* The undersigned declares that the recording of the transaction listed in
this column shall not be construed as an admission that he/she has or had
any direct or indirect ownership in the security described in the
transaction.
PLEASE FORWARD TO THE CHIEF COMPLIANCE OFFICER, SH11.
IF YOU WISH, YOU MAY ATTACH A COPY OF YOUR ACCOUNT STATEMENTS AS PROVIDED TO YOU
BY YOUR BROKER, BANK, OR CUSTODIAN.
Date:
-----------------
Signature:
--------------------------
14
<PAGE>
APPENDIX E
Aeltus Investment Management, Inc.
REQUEST FOR PERSONAL SECURITIES TRANSACTION
PRE-CLEARANCE FORM
Name:
---------------------------------------------------------------------
Department:
---------------------------------------------------------------------
Date:
---------------------------------------------------------------------
Time:
---------------------------------------------------------------------
Security:
---------------------------------------------------------------------
Type of Account
Individual Joint Spousal Other:
--------- ---------- ----------- ----------------
Type of Transaction
Purchase Sale Gift Other/Describe
---------- --------- ------- -------------
Have you bought/sold the same or an equivalent security within the past 60 days?
Yes __ No __
If yes, please discuss this transaction with the Compliance Department prior to
entering into the transaction.
Transaction is: Approved _________ Not Approved
If Approved, approval valid for TRADE DATE:
---------------------------------
PLEASE FORWARD TO THE CHIEF COMPLIANCE OFFICER, SH11.
Pre-Clearance Officer:
15
<PAGE>
APPENDIX F
Aeltus Investment Management, Inc.
EMPLOYEE CERTIFICATION
Aeltus Code of Ethics
I certify that I have read and understood the Aeltus Code of Ethics, and
acknowledge that I am subject to the policies and procedures contained therein.
Please sign and return this certification to the attention of the Chief
Compliance Officer, SH11, as soon as possible.
Print Name:
----------------------------
Signature:
----------------------------
Date:
----------------------------
16
Exhibit 99(B)(p)(2)
CODE OF ETHICS
Aetna Life Insurance and Annuity Company
September 3, 1997
<PAGE>
Introduction
- --------------------------------------------------------------------------------
This Code of Ethics (the "Code") is adopted on behalf of Aetna Life Insurance
and Annuity Company ("ALIAC"), in its capacity as investment adviser and
principal underwriter to registered investment companies ("Funds"), in
accordance with the requirements of Section 17(j) of the Investment Company Act
of 1940 ("1940 Act") and Rule 17j-1 thereunder, and the requirements of Section
204A of the Investment Advisers Act of 1940 (the "Advisers Act").
Rule 17j-1(a) makes it unlawful for any "Access Person" of ALIAC or a Fund
(defined below), in connection with the purchase or sale by such person of a
security "held or to be acquired" by any Fund:
1. To employ any device, scheme or artifice to defraud the Fund;
2. To make to the Fund any untrue statement of a material fact or to omit
to state to the Fund a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not misleading;
3. To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon the Fund; or
4. To engage in any manipulative practice with respect to the Fund.
A security is "held or to be acquired" if within the most recent 15 days it (i)
is or has been held by a Fund, or (ii) is being or has been considered by a Fund
or the Fund's respective investment adviser or subadviser for purchase by the
Fund.
Both the Advisers Act and the Securities Exchange Act of 1934 prohibit Access
Persons from using for their personal benefit material non-public information
obtained in the course of their duties with respect to a Fund. Knowledge about a
Fund's impending securities transactions constitutes material non-public
information for these purposes. Further, Section 206 of the Advisers Act imposes
on ALIAC a fiduciary duty with respect to its relationship with its advisory
clients that prohibits ALIAC and its officers, directors and employees from
engaging in any business activity that would operate as a fraud or deceit upon a
client.
There are numerous ways that an Access Person could misuse material non-public
information about securities held or to be acquired by a Fund. The most common
example of this is "front running," which is generally defined as trading a
security ahead of a Fund in an attempt to take advantage of a move in the market
price of the security caused by the Fund's transaction. Access Persons are also
prohibited from using their relationship with a Fund to obtain personal
investment opportunities or other advantages that would otherwise be
unavailable. This Code is designed to prevent and to detect the misuse of
material non-public information about Fund portfolio transactions and to prevent
certain conflicts of interest between a Fund and ALIAC Access Persons that could
give rise to a breach of fiduciary duty.
2
<PAGE>
Administration and Enforcement
- --------------------------------------------------------------------------------
Administration of the Code is the responsibility of the Chief Compliance Officer
of ALIAC, currently Fred Kelsven. Questions concerning the Code or any
transactions that may be subject to provisions of the Code may be directed to
him at (860) 273-1854 or via Fax at (860) 273-4898.
Enforcement of the Code is the responsibility of each Fund's Code of Ethics
Review Committee ("Committee"), which is comprised of ALIAC's Chief Compliance
Officer, the President of the Fund, and legal counsel to the Fund. The Committee
is responsible for investigating any reported or suspected violations of the
Code. If the investigation discloses that a violation has occurred, the
Committee has been given the authority by the Board of Directors of ALIAC, and
the Board of Directors or Board of Trustees of each Fund, as appropriate, to
determine the appropriate sanction and to direct the Chief Compliance Officer to
administer the sanction. The President of a Fund will report to the Board any
material violations of this Code affecting that Fund, the investigations
conducted and any resulting sanctions.
Definitions
- --------------------------------------------------------------------------------
Whenever used in the Code, the following terms have the following
meanings:
1. "Access Person" includes (i) each director, trustee or officer of a
Fund, and (ii) each director, officer or employee of ALIAC, who, in
connection with his regular duties, makes, participates in, or
obtains information about the purchase or sale of a security on
behalf of a Fund or whose functions relate to the making of any
recommendations with respect to such purchases or sales, and any
person in a control relationship to a Fund.
2. "Security" means ALL securities EXCEPT:
o shares of registered open-end investment companies (mutual funds);
o securities issued by the U.S. government, its agencies or
instrumentalities (e.g., Treasury Bills, FNMA or GNMA, etc.);
o bankers' acceptances;
o bank certificates of deposit;
o commercial paper.
"Security" includes options to purchase or sell such security.
3. "Fund" means any registered investment company or investment
portfolio thereof for which ALIAC serves as investment adviser
and/or principal underwriter.
3
<PAGE>
Policy
- --------------------------------------------------------------------------------
Priority of Client Interests.
Each Access Person is required to give priority to the interests of the
Funds over his or her own interest in making or maintaining a personal
investment.
No Access Person shall purchase or sell a security for his/her own account
when the person knows, or has reason to know, that during the 15-day
period immediately preceding or after the date of his/her personal
transaction such security was purchased or sold by a Fund or was
considered for purchase or sale on behalf of a Fund.
Access persons also are prohibited from engaging in any personal
securities transaction on the basis of knowledge of a change, or possible
change, in a Fund's investment strategy.
Initial Public Offerings.
Access Persons are prohibited from purchasing any security in an initial
public offering.
Receipt of Gifts.
No Access Person may receive any gift or other thing of more than de
minimus value from any person or entity that does business with a Fund,
ALIAC, or a subadviser for any Fund. An Access Person who receives a gift
or other thing of more than de minimus value from any such person or
entity should immediately contact ALIAC's Chief Compliance Officer to
determine the proper disposition of such gift.
Service as a Director or Officer.
Absent prior approval of the Chief Compliance Officer, an Access Person
may not serve as a director or officer of a public or private company.
Aetna Inc. Code of Conduct.
All Access Persons are subject to the Aetna Inc. Code of Conduct and must
abide by all its requirements, including its requirements pertaining to
transactions in Aetna securities.
Procedures
- --------------------------------------------------------------------------------
Post-Execution Reporting.
At the close of each calendar quarter, the Chief Compliance Officer will
forward a copy of the Personal Securities Transactions Quarterly Report
(see Exhibit A) to every Access Person. Within ten calendar days of the
end of each calendar quarter, every Access Person must complete and return
to the Compliance Department the Quarterly Report,
4
<PAGE>
which describes all personal Securities transactions executed during the
preceding three months.
Full Disclosure of Personal Securities Investments.
Every Access Person, when requested by the Chief Compliance Officer or
his/her designee, will disclose all information about his or her personal
securities investments.
Confidentiality.
All information submitted to the Compliance Department pursuant to these
procedures will be treated as confidential information. It may, however,
be made available to governmental and securities industry self regulatory
agencies with regulatory authority over ALIAC or the Funds as well as to
ALIAC's or the Funds' auditors and legal advisors, if appropriate.
Exceptions to Policy and Procedures.
Because all fact situations cannot be contemplated, the Chief Compliance
Officer retains the authority to permit an exception to the above policies
and procedures requested by persons subject to this Code when to do so is
consistent with the interests of the Funds. Any exceptions and the reasons
therefor will be documented in writing. These written records will be
maintained in accordance with the recordkeeping requirements of the 1940
Act.
Distribution
This Code will be distributed to all Access Persons.
Sanctions
- --------------------------------------------------------------------------------
An Access Person who breaches the above policies may be subject to certain
sanctions including, but not limited to, reprimand, disgorgement of
profits, suspension and termination.
5
<PAGE>
EXHIBIT A
QUARTERLY SECURITIES TRANSACTIONS REPORT
For Quarter Ending ____________, 199_
Filing of Report is required whether or not transactions occurred.
[ ] No Transactions To Report (Check if applicable)
Print Name _______________________________________
Trade * Quantity * Quantity Broker
Date Title of Security Purchased Sold Price or Bank
- ---- ----------------- --------- ---- ----- -------
* If you have acquired or disposed of a security in a transaction other than a
purchase or sale (e.g., by gift), please describe the nature of the
transaction.
IF YOU WISH, YOU MAY ATTACH A COPY OF YOUR ACCOUNT STATEMENTS AS PROVIDED TO YOU
BY YOUR BROKER, BANK, OR CUSTODIAN.
Date:_____________ Signature: _____________________
Exhibit 99(B)(p)(3)
Aetna Variable Fund
Aetna Variable Encore Fund
Aetna Income Shares
Aetna GET Fund
Aetna Balanced VP, Inc.
Aetna Generation Portfolios, Inc.
Aetna Variable Portfolios, Inc.
Aetna Series Fund, Inc.
CODE OF ETHICS
Effective
May 1, 1998
<PAGE>
Introduction
- --------------------------------------------------------------------------------
This Code of Ethics (the "Code") is adopted for each of the Funds (as defined
below) in accordance with Section 17(j) of the Investment Company Act of 1940
(the "1940 Act") and Rule 17j-1 thereunder. The Code is being adopted by each of
the Funds and applies to directors/trustees ("Directors") and officers of each
Fund.
Persons who are affiliated with the Funds and Aeltus Investment Management, Inc.
("Aeltus") are prohibited from using non-public information obtained in the
course of their business for their personal benefit. This would include
profiting at the expense of a Fund, purposefully trading ahead of a Fund and
using his or her relationship with a Fund to obtain favors that would otherwise
be unavailable to whomever receives them. This Code is designed to prevent such
improper conduct.
Administration of the Code is the responsibility of the Chief Compliance Officer
of Aeltus. Questions concerning the Code or any transactions that may be subject
to provisions of the Code may be directed to the Chief Compliance Officer.
Enforcement of Code provisions is the responsibility of the Code of Ethics
Review Committee ("Committee"). The Committee is comprised of Aeltus' Chief
Compliance Officer, the President of the Funds, and legal counsel to the Funds.
The Committee is responsible for investigating any reported or suspected
violations of the Code. If the investigation discloses that a violation has
occurred, the Committee has been given the authority by the Boards of
Trustees/Directors ("Board") of the Funds, as appropriate, to determine the
appropriate sanction and to direct the Chief Compliance Officer to administer
the sanction. The President of the Funds will report to the Board any material
violations of the Code, the investigations conducted and any resulting
sanctions.
Definitions
- --------------------------------------------------------------------------------
Whenever used in the Code, the following terms have the following
meanings:
1. "Pre-Clearance Officers" are those persons designated to pre-clear
personal securities transactions and whose names are shown on
Appendix A.
2. "Reporting Person" (Appendix B) includes every person who is an
officer or director of any Fund who meets the definition of
"interested person" set forth in Section 2(a)(19) of the 1940 Act.
"Reporting Person" does not include any person meeting the above
criteria who is subject to a code of ethics adopted by the Fund's
adviser.
3. "Disinterested Director" means those directors of the Fund who fall
outside the definition of Reporting Person.
<PAGE>
4. "Restricted List" means the list, produced by the investment
department of Aeltus for the Aeltus Compliance Department, that
identifies those securities being purchased or sold for client
(including Fund) accounts (unless pursuant to a program trading
program) and other securities that are prohibited from purchase or
sale by Fund accounts or employees for various reasons (e.g., large
concentrated ownership positions or possession of material,
non-public information).
5. "Security" means any security EXCEPT:
o shares of registered open-end investment companies (mutual
funds);
o securities issued by the U.S. government (but not its agencies
or instrumentalities);
o bankers' acceptances;
o bank certificates of deposit;
o commercial paper;
o money market instruments, including repurchase agreements and
other high quality, short-term debt.
These exceptions will hereinafter be referred to as "exempt
securities."
6. "Fund" means the following registered investment companies: Aetna
Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares,
Aetna GET Fund, Aetna Balanced VP, Inc., Aetna Generation
Portfolios, Inc., Aetna Variable Portfolios, Inc., and Aetna Series
Fund, Inc.
Policy
- --------------------------------------------------------------------------------
Prohibited Conduct.
It is unlawful for any Reporting Person or Disinterested Director:
(1) to employ any device, scheme or artifice to defraud any Fund;
(2) to make to a Fund any untrue statement of a material fact or omit to
state to a Fund a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not
misleading;
(3) to engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any Fund; or
(4) to engage in any manipulative practice with respect to any Fund.
2
<PAGE>
Priority of Client Interests.
Each Reporting Person must give priority to the interests of the Funds
over his or her own interest in making or maintaining a personal
investment.
To effect this policy, Reporting Persons may not execute a transaction in
a security listed on the Restricted List on a day during which Aeltus has
a pending "buy" or "sell" order for that same security.
Conflict with Clients.
No Reporting Person may buy, sell or dispose in any manner, including by
gift, a personal securities investment that would cause, or appear to
cause, a conflict with the interests of a Fund.
Responsibility to Disclose Possible Conflict Before Client Transaction.
Before a Reporting Person recommends, directs, executes or participates in
any security transaction involving a Fund, such Reporting Person will
disclose to a Pre-Clearance Officer all relevant details concerning any
possible conflict, or appearance of conflict, between his or her personal
investments and the interests of a Fund. For example, the capitalization
and trading volume of a security owned by a Reporting Person may be
relevant in determining whether there is a possible conflict of interest
if that Reporting Person participates in a decision to buy or sell that
security for a Fund. Moreover, a Reporting Person is expected to use
common sense and professional judgment to determine whether he or she
should disclose personal information as a possible basis for conflict of
interest.
Full Disclosure of Personal Securities Investments.
Every Reporting Person, when requested by a Compliance Officer, will
disclose all information about his or her personal securities investments.
Within ten (10) days of the end of the calendar year, the Annual Report of
Holdings (see Appendix C) which lists all Securities holdings will be
mailed to every Reporting Person for completion.
Change in Portfolio of a Fund.
No Reporting Person may conduct any personal securities transaction on the
basis of knowledge of: (i) a Fund's intention to buy or sell a Security;
or (ii) a change or possible change in a Fund's investment strategy.
3
<PAGE>
Pre-Clearance of Trades.
No Reporting Person may buy, sell or transfer by gift any security unless
the Reporting Person has obtained "Pre-Clearance" in accordance with the
pre-clearance procedures described in the Procedures section of the Code.
Material Non-Public Information.
No Reporting Person will trade or recommend trading in securities on the
basis of material non-public information.
Founder's Stock.
No Reporting Person will purchase, or otherwise acquire in any manner,
founder's stock of any corporation.
Initial Public Offerings.
No Reporting Person will purchase any security in an initial public
offering.
Non-Public Securities.
Personal investments in non-public Securities are subject to the same
rules as personal investments in publicly traded securities, including the
Pre-Clearance process described in the Procedures section of the Code.
In the event that a Reporting Person is granted permission to make a
personal investment in a non-public Security, that Reporting Person will
not participate in the consideration of whether the Funds should invest in
that issuer's public or non-public Securities. Such consideration will be
subject to independent review by investment personnel with no personal
investment in that issuer.
Pre-Clearance of Gifts.
No Reporting Person will dispose of Securities received by gift without
having obtained "Pre-Clearance" in accordance with the pre-clearance
procedures described in the Procedures section of the Code.
Receipt of Gifts.
No Reporting Person may receive any gift or other thing of more than de
minimus value from any person or entity that does business with Aeltus, a
Fund, or any other affiliates of Aeltus. A Reporting Person who receives a
gift or other thing of more than de minimus value from any such person or
entity should immediately contact Aeltus' Chief Compliance Officer to
determine the proper disposition of such gift.
4
<PAGE>
Short-Term Trading.
Reporting Persons should not profit in the purchase and sale, or sale and
purchase of the same or equivalent Securities within 60 calendar days.
NOTE: Short-term trading profits obtained from the exercise of Aetna Inc.
employee stock options and the subsequent sale of the underlying Aetna
Inc. stock are exempt from this prohibition.
Sanctions.
Reporting Persons who breach the above policies may be subject to
sanctions including, but not limited to, reprimand, disgorgement of
profits, suspension and termination.
Service as a Director or Officer.
Absent prior approval of the Code of Ethics Review Committee, a Reporting
Person may not serve as a director or an officer of a public or private
company.
Trading Restrictions for Disinterested Directors.
Disinterested Directors are required to pre-clear and report a transaction
in a security only if the Director knows, or in the ordinary course of
fulfilling his official duties as a Director of a Fund, should have known,
that during the 15 day period immediately preceding the date of the
transaction in a Security by the Director that Security is or was
purchased or sold by a Fund, such a purchase or sale is or was considered
by a Fund or such a purchase or sale is being considered by a Fund within
15 days after the Director proposes to engage in a transaction in such
Security.
Procedures
Pre-Clearance of Investments.
Reporting Persons must obtain approval from a Pre-Clearance Officer prior
to entering an order to buy, sell or transfer by gift a personal
investment in all securities except Exempt Securities.
Account For Which Pre-Clearance Is Required.
Reporting Persons must obtain pre-clearance of trades for:
1. His or her own account;
2. An account in which he or she has a beneficial interest and can
influence investment decisions; and
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<PAGE>
3. A personal account of a member of his or her household.
It is not necessary to obtain Pre-clearance for investments that are made
by an independent fiduciary (i.e., a discretionary account) on behalf of a
Reporting Person or members of his or her household, securities purchased
through an automatic payroll deduction program where the timing of
purchases is controlled by someone other than the Reporting Person,
purchases that are part of an automatic dividend reinvestment plan, and
purchases effected upon the exercise of rights issued by an issuer
pro-rata to all holders of a class of its securities, to the extent such
rights were acquired from such issuer. Sales of Securities obtained as a
result of the exercise of such rights however, must be pre-cleared.
Evaluation of Request for Pre-Clearance.
A Pre-Clearance Officer will evaluate a request for Pre-clearance and
consider whether the transaction would violate any provisions of the Code.
In making such determination, a Pre-Clearance Officer may consider the
following information:
1. The information regarding the transaction;
2. Previously submitted requests for pre-clearance of personal trades;
3. Information from the portfolio managers regarding securities
currently under consideration for purchase or sale by the Funds;
4. The Aeltus electronic trading system as to all securities owned by
Aeltus' clients;
5. The Restricted List; and
6. Other appropriate sources.
Response to Request for Pre-Clearance.
A Pre-Clearance Officer's response to the request for Pre-clearance will
include:
1. Making a telephone call to the Reporting Person who requested
Pre-clearance to either approve or deny the request, and
2. Filing a copy of the Pre-Clearance form with the Aeltus Compliance
Department (a sample copy of which is included as Appendix D).
6
<PAGE>
Time for which a Transaction is Approved.
The Reporting Person may authorize his or her broker to execute a
transaction only on the day on which approval for that transaction is
given. If the transaction is not completed on that day, the Reporting
Person must once again obtain Pre-clearance for the transaction.
Post-Execution Reporting.
At the close of each calendar quarter, the Aeltus Compliance Department
will forward a copy of the Personal Securities Transactions Quarterly
Report (see Appendix E) to every Reporting Person. Within ten calendar
days of the end of each calendar quarter, every Reporting Person must
complete and return to the Aeltus Compliance Department the Quarterly
Report, which describes all reportable Securities transactions of personal
investments executed during the preceding three months.
Confidentiality.
All information submitted to the Aeltus Compliance Department pursuant to
Pre-clearance and Post-execution reporting procedures will be treated as
confidential information. It may, however, be made available to
governmental and securities industry self-regulatory agencies with
regulatory authority over Aeltus as well as to Aeltus' and the Funds'
auditors and legal advisors, if appropriate.
Exceptions to Policy and Procedures.
Because all fact situations cannot be contemplated, Aeltus' Chief
Compliance Officer retains the authority to permit an exception to the
above policies and procedures requested by persons subject to this Code
when to do so is consistent with the interests of the Funds and is
approved in writing.
Distribution.
This Code will be distributed to all Reporting Persons.
7
<PAGE>
APPENDIX A
Pre-Clearance Officers
Marlene Brigham (860) 275 - 2110
William Bartol (860) 275 - 2266
Brian Kawakami (860) 275 - 3599
8
<PAGE>
APPENDIX B
Reporting Persons
Shaun P. Mathews
Amy R. Doberman
Daniel E. Burton
Michael J. Gioffre
9
<PAGE>
APPENDIX C
Aeltus Investment Management, Inc.
ANNUAL REPORT OF PERSONAL SECURITIES HOLDINGS
Filing of Report is required within ten (10) days of calendar year-end. Please
note that you do not have to report holdings of Exempt Securities.
[ ] No Holdings To Report (Check if applicable)
Print Name ________________________________________
Title of Quantity Broker
Security Held or Bank * Disclaimer (Check if applicable, give reasons)
- -------- ---- ------- ------------
* The undersigned declares that the recording of the transaction listed in
this column shall not be construed as an admission that he/she has or had
any direct or indirect ownership in the security described in the
transaction.
PLEASE FORWARD TO THE CHIEF COMPLIANCE OFFICER, ALT5.
IF YOU WISH, YOU MAY ATTACH A COPY OF YOUR ACCOUNT STATEMENTS AS PROVIDED TO YOU
BY YOUR BROKER, BANK, OR CUSTODIAN.
Date: __________________
Signature: ________________________
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<PAGE>
APPENDIX D
Aeltus Investment Management, Inc.
REQUEST FOR PERSONAL SECURITIES TRANSACTION
PRE-CLEARANCE FORM
Name: ______________________________________________________________________
Department: ________________________________________________________________
Date: ______________________________________________________________________
Time: ______________________________________________________________________
Security: __________________________________________________________________
Type of Account
Individual _____ Joint _____ Spousal _____ Other: ___________________
Type of Transaction
Purchase ________ Sale ______ Gift _____ Other/Describe _________________
Have you bought/sold the same or an equivalent security within the past 60 days?
Yes __ No __
If yes, please discuss this transaction with the Compliance Department prior to
entering into the transaction.
Transaction is Approved ______________ Disapproved _______________________
If Approved, approval valid for TRADE DATE: ________________________________
Pre-Clearance Officer: _____________________________________________________
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APPENDIX E
QUARTERLY SECURITIES TRANSACTIONS REPORT
For Quarter Ending ____________, 199_
Filing of Report is required whether or not transactions occurred. Please note
that you do not have to report transactions in Exempt Securities.
[ ] No Transactions To Report (Check if applicable)
Print Name ______________________________________________________
<TABLE>
<CAPTION>
Trade ** Quantity ** Quantity Broker
Date Title of Security* Purchased Sold Price or Bank *** Disclaimer
- ---- ------------------ --------- ---- ----- ------- --------------
(Check if applicable, give reasons)
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
* The undersigned declares that the recording of the transaction checked in
this column shall not be construed as an admission that he/she had any
direct or indirect ownership in the security described in the transaction.
** If you have acquired or disposed of a security in a transaction other than
a purchase or sale (e.g., by gift), please describe the nature of the
transaction.
*** The undersigned declares that the recording of the transaction listed in
this column shall not be construed as an admission that he/she has or had
any direct or indirect ownership in the security described in the
transaction.
IF YOU WISH, YOU MAY ATTACH A COPY OF YOUR ACCOUNT STATEMENTS AS PROVIDED TO YOU
BY YOUR BROKER, BANK, OR CUSTODIAN.
Date: _________________ Signature: _________________
12
Exhibit 99(B)(p)(4)
March 1, 1999
ELIJAH ASSET MANAGEMENT, LLC
---------------------------
CODE OF ETHICS
---------------------------
Elijah Asset Management, LLC (the "Firm") is committed to the highest standards
of ethical and professional conduct.
I. Scope and Summary
(a) Rule 17j-1 under the Investment Company Act of 1940, as amended (the "1940
Act"), requires every investment company, as well as every investment adviser to
and principal underwriter for an investment company, to have a written Code of
Ethics which specifically deals with trading practices by Access Persons (as
defined below). Rule 17j-1 also requires that reasonable diligence be used and
procedures instituted to prevent violations of this Code of Ethics.
(b) Section 204A of the Investment Advisers Act of 1940 further requires all
investment advisers to establish, maintain and enforce written policies and
procedures to prevent the misuse of material nonpublic information.
(c) Common law fiduciary principles require that an investment adviser, i.e.,
the Firm, avoid placing itself in a position of conflict of interest with its
clients.
(d) The "Blue Ribbon" Advisory Group on Personal Investing in its report to the
Investment Company Institute also articulated the following three general
fiduciary principles which the Firm believes should govern the personal
investment activities of investment company advisory and distributor personnel:
(i) the duty at all times is to place the interests of investment
company shareholders first;
(ii) the requirement that all personal securities transactions be
conducted consistent with a Code of Ethics and in such a manner as
to avoid any actual or potential conflict of interest or any abuse
of an individual's position of trust and responsibility; and
(iii) the fundamental standard that investment company advisory and
distributor personnel should not take inappropriate advantage of
their positions.
(e) This Code of Ethics is designed to satisfy the above-referenced legal
requirements and ethical principles as applicable to the Firm in its role as
adviser to the Robertson Stephens Information Age Fund and the Robertson
Stephens Value & Growth Fund (a "Fund" or the "Robertson Stephens Funds") and
its other clients. It is important that all members, officers, directors and
employees of the Firm to whom this Code of Ethics applies observe these ethical
standards.
(f) This Code of Ethics is not intended to cover all possible areas of potential
liability under the 1940 Act or under the federal securities laws in general.
For example, other provisions of Section 17 of the 1940 Act prohibit various
transactions between a registered investment company and affiliated persons,
including the knowing sale or purchase of property to or from a registered
investment company on a principal basis, and joint transactions (e.g., concerted
market activity or commingling of funds) between an investment company and an
affiliated person.
<PAGE>
(g) It is expected that Access Persons, defined below, will be sensitive to all
areas of potential conflict, even if this Code of Ethics does not specifically
address an area of fiduciary responsibility.
(h) Exceptions to specific provisions of this Code of Ethics may be granted by
the Firm's Compliance Officer, if warranted by circumstances and if the
exception is requested in a timely manner.
(i) Summary. Under the Code of Ethics, all Access Persons are required to:
(i) Pre-clear all trades in individual securities. [Note: certain
securities are excepted: mutual funds and money market instruments
are "excepted securities."]
(ii) Reverse "same way" trades that involve securities subsequently
purchased or sold by a Fund within the applicable blackout period.
(iii) Observe a minimum 90 day holding period for all securities (except
"excepted securities"). This policy only applies to profitable
trades.
(iv) Avoid IPOs.
(v) Receive special clearance for private placements.
(vi) Avoid directorships of companies in which Fund assets may be
invested.
(vii) Promptly disclose all security transactions and file quarterly
transaction reports and annual ownership reports.
(viii) Avoid securities transactions in which they possess material
non-public information with regard to the particular security.
II. Definitions
(a) "Access Person" means: (i) any director or officer of the Firm or any
employee who, in the ordinary course of his or her business, makes, participates
in or obtains information regarding the purchases and sales of securities for
Firm clients or whose ordinary business functions and duties relate to the
making of recommendations to Firm clients regarding the purchase and sale of
securities. Members of the immediate family of an Access Person are covered by
this Code of Ethics to the same extent as the Access Person.
(b) A security is "being considered for purchase or sale" when a recommendation
to purchase or sell a security has been made and communicated, and, with respect
to a person making a recommendation, when such person seriously considers making
such a recommendation.
(c) "Beneficial ownership" shall mean any person who, directly or indirectly
through any contract, arrangement, understanding, relationship or otherwise, has
or shares a direct or indirect pecuniary interest in securities, subject to the
following:
(i) The term "pecuniary interest" in any securities shall mean the
opportunity, directly or indirectly, to profit or share in any
profit derived from a transaction in the securities.
(ii) The term "indirect pecuniary interest" in any securities shall
include, but not be limited to:
(A) securities held by members of a person's immediate family
sharing the same
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<PAGE>
household provided, however, that the presumption of such
beneficial ownership may be rebutted;
(B) a general partner's proportionate interest in the portfolio
securities held by a general or limited partnership;
(C) a performance-related fee, other than an asset-based fee,
received by any broker, dealer, bank, insurance company,
investment company, investment adviser, investment manager,
trustee or person or entity performing a similar function;
(D) A person's right to dividends that is separated or separable
from the underlying securities. Otherwise, a right to
dividends alone shall not represent a pecuniary interest in
the securities;
(E) A person's interest in securities held by a trust; and
(F) A person's right to acquire equity securities through the
exercise or conversion of any derivative security, whether or
not presently exercisable.
(iii) A shareholder shall not be deemed to have a pecuniary interest in
the portfolio securities held by a corporation or similar entity in
which the person owns securities if the shareholder is not a
controlling shareholder of the entity and does not have or share
investment control over the entity's portfolio.
The following interests are deemed not to confer beneficial ownership:
(i) Interests in portfolio securities held by any holding company
registered under the Public Utility Holding Company Act of 1935;
(ii) Interests in portfolio securities held by any investment company
registered under the Investment Company Act of 1940; and
(iii) Interests in securities comprising part of a broad-based, publicly
traded market basket or index of stocks, approved for trading by the
appropriate federal governmental authority.
(d) "Control" means the power to exercise a controlling influence over the
management or policies of a company, unless such power is solely the result of
an official position, as further defined in Section 2(a)(9) of the 1940 Act.
(e) "Purchase or sale of a security" includes, among other things, the writing
of an option to purchase or sell a security.
(f) "Security" means any note, stock, treasury stock, bond, debenture, evidence
of indebtedness, certificate of interest of participation in any profit-sharing
agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil,
gas, or other mineral rights, any put, call, straddle, option, or privilege on
any security (including a certificate of deposit) or on any group or index of
securities (including any interest therein or based on the value thereof), or
exchange relating to foreign currency, or, in general, any interest or
instrument commonly known as a security, or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, guarantee
of , or warrant or right to subscribe to or purchase, any of the foregoing,
except that it shall not include excepted securities (as defined below).
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<PAGE>
(g) "Excepted securities" include shares of registered open-end investment
companies, securities issued by the government of the United States (including
government agencies), short term debt securities which are "government
securities" within the meaning of Section 2(a)(16) of the 1940 Act, bankers'
acceptances, bank certificates of deposit, commercial paper and other money
market instruments. Stock Index Options are also considered "excepted
securities" for all purposes except the quarterly and annual reporting
obligations.
(h) "Material Non-Public Information" is information relating to dividend
increases or decreases, earnings estimates, changes in previously released
earnings estimates, significant expansion or curtailment of operations, a
significant increase or decline of orders, significant merger or acquisition
proposals or agreements, significant new products or discoveries, extraordinary
borrowing, major litigation, liquidity problems, extraordinary management
developments, purchase or sale of substantial assets or any other information a
reasonable investor might consider to be of importance in making an investment
decision to buy, sell or hold. Information should be deemed non-public if it has
not been widely disseminated by wire service, in one or more newspapers of
general circulation, or by communication from the company involved to its
shareholders or in a press release.
(i) An "Immediate Family Member means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law, and shall include
adoptive relationships.
III. Prohibited Trading Practices
(a) General anti-fraud prohibition. If a security:
(i) is being considered for purchase or sale by a Firm client;
(ii) is in the process of being purchased or sold by a Firm client; or
(iii) is or has been held by a Firm client within the most recent 15 day
period;
no Access Person shall knowingly purchase, sell or otherwise directly or
indirectly acquire or dispose of any direct or indirect beneficial ownership
interest in that security if such action by such Access Person would defraud a
Firm client, operate as a fraud or deceit upon a Firm client, or constitute a
manipulative practice with respect to a Firm client.
(b) Pre-clearance. No Access Person shall purchase or sell any individual
security (i.e., any security other than an "excepted security") without
pre-clearance (see Section 5 for procedure). After pre-clearance has been
granted, the trade must be completed by the end of the following business day,
or the approval is void and the form must be resubmitted. Obtaining
pre-clearance for a trade does not guarantee that the trade will not be later
reversed should a client effect a subsequent trade in the same security.
(c) Blackout period. A security (other than an "excepted security") will not be
considered eligible for purchase or sale by an Access Person during an
appropriate blackout period before and immediately following activity by a Firm
client in the same direction in the same security or a related security of the
same issuer (e.g., common stock is a related security to an option on common
stock). In general, the blackout period will be the five (5) business days
preceding the first client purchase or sale of that security and will include
the entire business day on which the last client purchase or sale activity
occurs. Blackout periods only apply to "same way" trades -- i.e., purchases when
a client subsequently commences a buy program or sales before a client initiates
a sell program. If a "same way" trade is made during the blackout period
applicable to a security, the Access Person will be required to liquidate (or
buy back) the position with any gain disgorged to the client (any loss will be
absorbed by the Access Person). An Access Person will be allowed to trade in a
security owned or sold by a client generally on
4
<PAGE>
the next business day following the completion of all client purchases or sales
currently under contemplation by a portfolio manager, subject to pre-clearance
and further subject to the commencement of subsequent blackout periods if client
activity in the security is resumed. Because client activity cannot be
accurately predicted, an Access Person is always exposed to some level of risk
that the trade will have to be reversed if the trade involves securities that
are of interest to a client.
(d) Trades in shares of the Robertson Stephens Funds. Please note that purchases
and sales of shares of the Robertson Stephens Fund do not need pre-clearance,
but the possibility of appearance of conflict of interest in such transactions
is high. Accordingly, all purchases and sales of shares of the Robertson
Stephens Funds:
(i) should be made well in advance of the closing price calculation each
day, and
(ii) should not be made when in possession of material nonpublic
information.
(e) No IPOs. No Access Person shall acquire any securities offered in an initial
public offering.
(f) Private placements. No Access Person shall acquire any securities in a
private placement without both pre-clearance and special approval by the
Compliance Officer.
(g) Personal Accounts. Access Persons must submit required quarterly reports of
securities transactions (or furnish brokerage statements) and must sign off, at
least annually, on receipt of and compliance with the Code of Ethics.
(h) Other restrictions. (i) No Access Person shall engage in short term trading
or make other investments in contravention of the general policies that may be
established from time to time, and (ii) no Access Person shall serve as a
director of a publicly traded company or a private company in which a Firm
client may invest.
IV. Exempted Transactions/Securities
The prohibitions of Section III of this Code shall not apply to:
(a) Purchases or sales effected in any account over which the Access Person has
no direct or indirect influence or control.
(b) Purchases or sales of securities which are not eligible for purchase or sale
by any Firm client.
(c) Purchases or sales which are non-volitional on the part of either the Access
Person or a Firm Client (e.g., receipt of gifts).
(d) Purchases which are part of an automatic dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer pro rata
to all holders of a class of its securities, to the extent such rights were
acquired from such issuer, and sales of such rights so acquired.
(f) Purchases and sales which have received the prior approval of the Compliance
Officer.
(g) Purchases and sales of securities which are not included in the definition
of "Security" in Section II.g or are "excepted securities" as defined in Section
II.h. -- i.e., mutual fund shares (but not shares of Robertson Stephens Funds),
stock index options, government securities and money market instruments.
5
<PAGE>
V. Reporting
(a) Pre-clearance and immediate reporting. All Firm employees are currently
required to report all individual securities transactions (and purchases/sales
of shares of the Robertson Stephens Funds). Access Persons must also have a
duplicate confirmation of the transaction sent to the Firm's Compliance Officer
promptly following the transaction. After pre-clearance has been granted, the
trade must be completed by the end of the following business day, or the
approval is void and the form must be resubmitted. Trades for which
pre-clearance is required include all securities except, open-end mutual funds,
stock index options, government securities and money market securities.
Obtaining pre-clearance for a trade does not guarantee that the trade will not
be later reversed should a Firm client effect a subsequent trade in the same
security. The only securities for which such pre-clearance and immediate
reporting are not required are "excepted securities."
(b) Quarterly reports. In addition to contemporaneous reporting, all Access
Persons are required to review, and if necessary, correct or make
additions to quarterly reports generated within 10 days of the end of each
calendar quarter, listing all securities transactions except transactions
in "excepted securities." See subsection (c) below.
(c) Every quarterly report shall be made not later than ten (10) days after the
end of each calendar quarter and shall contain the following information:
(i) The date of the transaction, the title and the number of shares, and
the principal amount of each security involved;
(ii) The nature of the transaction (i.e., purchase, sale, or any other
type of acquisition or disposition);
(iii) The price at which the transaction was effected; and
(iv) The name of the broker, dealer, or bank with or through whom the
transaction was effected.
(d) Copies of statements or confirmations containing the information specified
in paragraph (c) above may be submitted in lieu of listing the transactions.
Persons submitting statements will be deemed to have satisfied this reporting
requirement, and need only sign off quarterly on having complied.
(e) For periods in which no reportable transactions were effected, the quarterly
report shall contain a representation that no transactions subject to the
reporting requirements were effected during the relevant time period.
(f) Annually, in conjunction with the quarterly report for the quarter ending
December 31, each Access Person shall be required to review, and if necessary,
correct or make additions to, an annual report, which lists all securities
positions in which such Access Person has a direct or indirect beneficial
interest.
(g) Any quarterly or annual report may contain a statement that the report shall
not be construed as an admission by the person making such report that he has
any direct or indirect beneficial ownership in the securities to which the
report relates.
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<PAGE>
VI. Implementation
(a) The Compliance Officer has been designated by the Firm to implement this
Code of Ethics. In his absence, Ron Elijah, CEO, Rod Berry, President, and Mike
Dunn, COO, have been designated alternates.
(b) The Compliance Officer shall circulate a copy of this Code of Ethics to each
Access Person at least once per year.
(c) The Compliance Officer or a compliance officer delegate is charged with
responsibility for insuring that the pre-clearance and reporting requirements of
this Code of Ethics are adhered to by all Access Persons. The Compliance Officer
or compliance officer delegate shall be responsible for ensuring that the review
requirements of this Code of Ethics (see Section VII) are performed in a prompt
manner.
VII. Review
(a) The Compliance Officer shall review all reports of personal securities
transactions and compare such reports with pre-clearance forms and with
completed and contemplated portfolio transactions of each client to determine
whether noncompliance with the Code of Ethics and/or other applicable trading
procedures may have occurred. The Firm's President shall review the Compliance
Officer's report. The Compliance Officer may delegate this function to one or
more persons.
(b) No person shall review his or her own reports. Before making any
determination that a noncompliant transaction may have been made by any person,
the Compliance Officer shall give such person an opportunity to supply
additional explanatory material. If a securities transaction of the Compliance
Officer is under consideration, an alternate shall act in all respects in the
manner prescribed for the designated Compliance Officer.
(c) If the Compliance Officer determines that noncompliance with the Code of
Ethics has or may have occurred, he or she shall, following consultation with
counsel, submit his or her written determination, together with the transaction
report, if any, and any additional explanatory material provided by the
individual, to Ronald Elijah, who shall make an independent determination of
whether a violation has occurred. If Ronald Elijah is believed to be
noncompliant, the Compliance Officer shall consult with the Firm's Management
Committee.
(d) The Compliance Officer shall be responsible for maintaining a current list
of all Access Persons and for identifying all reporting Access Persons on such
list, and shall take steps to ensure that all reporting Access Persons have
submitted reports in a timely manner. The Compliance Officer may delegate the
compilation of this information to appropriate persons. Failure to submit timely
reports will be communicated to Ronald Elijah.
VIII. Sanctions
(a) If a violation of this Code occurs or a preliminary determination is made
that a violation may have occurred, a report of the alleged violation shall be
made to Ronald Elijah and the Management Committee.
(b) The Compliance Officer may impose such sanctions as it deems appropriate,
including, a letter of censure, suspension, or termination of employment, and/or
a disgorging of any profits made.
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<PAGE>
================================================================================
I fully understand and hereby subscribe to this Code of Ethics.
--------------------------
Name
--------------------------
Signature
--------------------------
Date
================================================================================
8
<PAGE>
ELIJAH ASSET MANAGEMENT, LLC
Preauthorization for Personal Trades
To: [Compliance Officer]
Phone: (415)
Fax: (415)
From: ______________________________ Date: ______________
________________________________________________________________________________
I wish to effect the following trade for my personal account, an account in
which I have a beneficial interest, or an account belonging to one of my
immediate relatives living in the same household.
NAME/TICKER_________________________ # OF SHARES_______________
BROKERAGE FIRM & ACCOUNT # _____________________________________________________
THE PURCHASE / SALE (CIRCLE ONE) IS BASED ON PERSONAL RESEARCH YES [ ] NO [ ]
(You may be required to provide documentation should there be
a potential conflict).
I AM AWARE OF AN INTENDED OR POSSIBLE CLIENT
TRADE IN THIS SECURITY YES [ ] NO [ ]
I agree that if I do not effect the above trade on the day indicated below, the
approval is null and void and the request must be resubmitted. I realize that if
I am an employee with investment decision making authority, and any Firm client
transactions occur within 7 days of my transaction that involve a client over
which I have authority and the above security, the trade will be broken at my
expense. I realize that if I do not have such authority, and any client
transactions occur on the same day as my transaction, the trade will be broken
at my expense.
______________________ ______________________
SIGNED AUTHORIZED
______________________ ______________________
PRINT NAME PRINT NAME
______________________
DATE
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