As filed with the Securities and Exchange File No. 333-05173
Commission on February 11, 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. 11
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 12
Aetna Variable Portfolios, Inc.
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 (a)(2) of Rule 485.
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<PAGE>
{Front Cover}
Aetna Variable Portfolios, Inc.
Prospectus
May ___, 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.....................................................................3
Investment Objectives, Principal Investment Strategies and Risks, Investment
Performance..................................................................................3
Portfolio Expenses.............................................................................26
Other Considerations...........................................................................28
Management of the Portfolios...................................................................28
Investments in and Redemptions from the Portfolios.............................................30
Tax Information................................................................................31
Performance of Similarly Managed Accounts......................................................31
Financial Highlights...........................................................................35
Additional Information.........................................................................40
</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 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 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 ___.
o Aeltus Investment Management, Inc. (Aeltus) serves as investment adviser
to 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
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.
3
<PAGE>
Aetna Growth VP (Growth)
Investment Objective Seeks growth of capital through investment in a
diversified portfolio consisting primarily of common stocks and securities
convertible into common stocks believed to offer growth potential.
Principal Investment Strategies Under normal market conditions, Growth invests
at least 65% of its total assets in common stocks 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.
4
<PAGE>
Investment Performance
Aetna Growth VP
[Chart]
Year-by-Year Total Return
[Arrow up] Best Quarter: Years ended December 31,
_____ quarter ____, up ____% 1997 1998 1999
[Arrow down] Worst Quarter:
_____ quarter ____, down ____% 0.00% 0.00% 0.00%
[End Chart]
<TABLE>
<CAPTION>
As of December 31, 1999
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Growth % % 12/13/96
S&P 500 Index* % % __/__/96
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Portfolio. All figures assume reinvestment of dividends
and distributions.
* The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks and is considered to be representative of the stock market
in general.
5
<PAGE>
Aetna International VP (International)
Investment Objective Seeks long-term capital growth primarily through
investment in a diversified portfolio of common stocks principally traded in
countries outside of the U.S. International will not target any given level of
current income.
Principal Investment Strategies Under normal market conditions, International
invests at least 65% of its total assets in securities principally traded in
three or more countries outside of the United States. These securities may
include common stocks as well as securities convertible into common 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 Typically invests in approximately 80 to 110 different securities at any
one time, and looks to allocate no more than 3% of the Portfolio's total
assets to a single security.
o Uses internally developed quantitative computer models to evaluate the
financial characteristics of over 2,000 companies. Aeltus analyzes cash
flows, earnings and dividends of each company, in an attempt to select
companies with long-term sustainable growth characteristics.
o Employs currency hedging strategies in an effort to protect the Portfolio
from adverse effects on the U.S. dollar.
Principal Risks The principal risks of investing in International are those
generally attributable to stock investing. They include sudden and unpredictable
drops in the value of the market as a whole and periods of lackluster or
negative performance.
Other 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.
6
<PAGE>
Investment Performance
Aetna International VP
[Chart]
Year-by-Year Total Return
[Arrow up] Best Quarter: Years ended December 31,
_____ quarter 19__, up ____% 1998 1999
[Arrow down] Worst Quarter:
_____ quarter 19__, down ____% 0.00% 0.00%
[End Chart]
<TABLE>
<CAPTION>
As of December 31, 1999
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
International % % 12/22/97
MSCI-EAFE Index* % % __/__/97
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Portfolio. 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.
7
<PAGE>
Aetna Small Company VP (Small Company)
Investment Objective Seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stocks of companies with smaller market capitalizations.
Principal Investment Strategies Under normal market conditions, Small Company
invests at least 65% of its total assets in common stocks 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.
8
<PAGE>
Investment Performance
AETNA SMALL COMPANY VP
[Chart]
Year-by-Year Total Return
[Arrow up] Best Quarter: Years ended December 31,
_____ quarter 19__, up ____% 1997 1998 1999
[Arrow down] Worst Quarter:
_____ quarter 19__, down ____% 0.00% 0.00% 0.00%
[End Chart]
<TABLE>
<CAPTION>
As of December 31, 1999
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Small Company ___% ___% 12/22/96
Russell 2000 Index* ___% ___% __/__/96
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Portfolio. 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.
9
<PAGE>
Aetna Value Opportunity VP (Value Opportunity)
Investment Objective Seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stock.
Principal Investment Strategies Under normal market conditions, Value
Opportunity invests at least 65% of its total assets in common stocks 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.
10
<PAGE>
Investment Performance
Aetna Value Opportunity VP
[Chart]
Year-by-Year Total Return
[Arrow up] Best Quarter: Years ended December 31,
_____ quarter 19__, up ____% 1997 1998 1999
[Arrow down] Worst Quarter:
_____ quarter 19__, down ____% 0.00% 0.00% 0.00%
[End Chart]
<TABLE>
<CAPTION>
As of December 31, 1999
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Value Opportunity ____% ____% 12/13/96
S&P 500 Index* ____% ____% __/__/96
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Portfolio. All figures assume reinvestment of dividends
and distributions.
* The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks and is considered to be representative of the stock market
in general.
11
<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.
o Health care companies, including biotechnology companies.
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.
12
<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.
13
<PAGE>
Aetna Real Estate Securities VP (Real Estate)
Investment Objective Seeks maximum total return primarily through investment in
a diversified portfolio of equity securities of real estate companies, the
majority of which are real estate investment trusts (REITs).
Principal Investment Strategies Under normal market conditions, Real Estate
invests at least 65% of its total assets in stocks, convertible securities and
preferred stocks of companies principally engaged in the real estate industry.
These companies may invest in, among other things, shopping malls, healthcare
facilities, office parks and apartment communities, or may provide real estate
management and development services.
In selecting investments from a universe of equity securities of REITs and real
estate operating companies, Aeltus uses internally developed quantitative models
to forecast the returns of each security. Aeltus evaluates real estate companies
based on their earnings history and long-term growth prospects, analyst
estimates of future earnings, safety and growth in dividends, balance sheet
strength and quality of management. Aeltus also considers whether the securities
appear to be trading below their real value. Aeltus allocates assets among
property types and economic and geographic regions. Aeltus attempts to construct
Real Estate's portfolio so that the overall level of risk is not in excess of
its benchmark index, the National Association of Real Estate Investment Trusts
Equity (NAREIT) Index.
Principal Risks Concentrating in stocks of real estate-related companies
presents certain risks that are more closely associated with investing in real
estate directly than with investing in the stock market generally. Those risks
include:
o Periodic declines in the value of real estate, generally, or in the rents
and other income generated by real estate.
o Periodic over-building, which creates gluts in the market, as well as
changes in laws (such as zoning laws) that impair the property rights of
real estate owners.
o Adverse developments in the real estate industry, which may have a
greater impact on Real Estate than 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 fund that does not concentrate its assets in one industry.
14
<PAGE>
Investment Performance
Aetna Real Estate Securities VP
[Chart]
Year-by-Year Total Return
[Arrow up] Best Quarter: Years ended December 31,
_____ quarter 19__, up ____% 1998 1999
[Arrow down] Worst Quarter:
_____ quarter 19__, down ____% 0.00% 0.00%
[End Chart]
<TABLE>
<CAPTION>
As of December 31, 1999
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Real Estate ____% ____% 12/15/97
NAREIT* ____% ____% __/__/97
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Portfolio. All figures assume the 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 and the NASDAQ National Market System.
15
<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 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 Portfolio 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.
16
<PAGE>
Investment Performance
Aetna High Yield VP
[Chart]
Year-by-Year Total Return
[Arrow up] Best Quarter: Years ended December 31,
_____ quarter 19__, up ____% 1998 1999
[Arrow down] Worst Quarter:
_____ quarter 19__, down ____% 0.00% 0.00%
[End Chart]
<TABLE>
<CAPTION>
As of December 31, 1999
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
High Yield ____% ____% 12/10/97
Merrill Lynch High Yield Master
Index* ____% ____% __/__/97
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Portfolio. All figures assume the reinvestment of
dividends and distributions.
* The Merrill Lynch High Yield Master Index is an unmanaged index of secured
and subordinated debt securities rated by Standard & Poor's or by Moody's
Investors Service as less than investment grade (i.e. BBB or Baa) but not in
default.
17
<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.
18
<PAGE>
Investment Performance
Aetna Index Plus Bond VP
[Chart]
Year-by-Year Total Return
[Arrow up] Best Quarter: Years ended December 31,
_____ quarter 19__, up ____% 1998 1999
[Arrow down] Worst Quarter:
_____ quarter 19__, down ____% 0.00% 0.00%
[End Chart]
<TABLE>
<CAPTION>
As of December 31, 1999
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Index Plus Bond ____% ____% 12/18/97
LBAB Index* ____% ____% __/__/97
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Portfolio. All figures assume the reinvestment of
dividends and distributions.
* The Lehman Brothers Aggregate Bond Index (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.
19
<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.
20
<PAGE>
Investment Performance
Aetna Index Plus Large Cap VP
[Chart]
Year-by-Year Total Return
[Arrow up] Best Quarter: Years ended December 31,
_____ quarter 19__, up ____% 1997 1998 1999
[Arrow down] Worst Quarter:
_____ quarter 19__, down ____% 0.00% 0.00% 0.00%
[End Chart]
<TABLE>
<CAPTION>
As of December 31, 1999
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Index Plus Large Cap ___% ___% 9/16/96
S&P 500 Index* ___% ___% __/__/96
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Portfolio. All figures assume reinvestment of dividends
and distributions.
* The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks and is considered to be representative of the stock market
in general.
21
<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.
22
<PAGE>
Investment Performance
Aetna Index Plus Mid Cap VP
[Chart]
Year-by-Year Total Return
[Arrow up] Best Quarter: Years ended December 31,
_____ quarter 19__, up ____% 1998 1999
[Arrow down] Worst Quarter:
_____ quarter 19__, down ____% 0.00% 0.00%
[End Chart]
<TABLE>
<CAPTION>
As of December 31, 1999
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Index Plus Mid Cap ___% ___% 12/16/97
S&P 400 Index* ___% ___% __/__/97
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Portfolio. All figures assume reinvestment of dividends
and distributions.
* The Standard & Poor's MidCap 400 Index is an unmanaged index used to measure
stock market performance composed of companies with a weighted average market
value of $3.6 billion.
23
<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.
24
<PAGE>
Investment Performance
Aetna Index Plus Small Cap VP
[Chart]
Year-by-Year Total Return
[Arrow up] Best Quarter: Years ended December 31,
_____ quarter 19__, up ____% 1998 1999
[Arrow down] Worst Quarter:
_____ quarter 19__, down ____% 0.00% 0.00%
[End Chart]
<TABLE>
<CAPTION>
As of December 31, 1999
Average Annual Total Return 1 Year Since inception Inception date
<S> <C> <C> <C>
Index Plus Small Cap ___% ___% 12/19/97
S&P 600 Index* ___% ___% __/__/97
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Portfolio. All figures assume reinvestment of dividends
and distributions.
* The Standard & Poor's SmallCap 600 Index consists of 600 domestic stocks
chosen for market size, liquidity, and industry group representation. It is a
market-weighted index, with each stock affecting the index in proportion to
its market value.
25
<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 (Load) Maximum Deferred Sales Charge
on Purchases (as a percentage (Load) (as a percentage of
of purchase price) gross redemption proceeds)
<S> <C> <C>
Growth None None
International None None
Small Company None None
Value Opportunity None None
Technology None None
Real Estate None None
High Yield None None
Index Plus Bond None None
Index Plus Large Cap None None
Index Plus Mid Cap None None
Index Plus Small Cap None None
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses(1)
(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 % None % % -- --
International % None % % % %
Small Company % None % % -- --
Value Opportunity % None % % -- --
Technology(2) % None % % -- --
Real Estate % None % % % %
High Yield % None % % % %
Index Plus Bond % None % % % %
Index Plus Large Cap % None % % -- --
Index Plus Mid Cap % None % % % %
Index Plus Small Cap % None % % % %
</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.
26
<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 $ $ $ $
International*
Small Company
Value Opportunity
Technology
Real Estate*
High Yield*
Index Plus Bond*
Index Plus Large Cap
Index Plus Mid Cap*
Index Plus Small Cap*
</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.
27
<PAGE>
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 instrument. In addition, while a hedging strategy
can guard against potential risks for a Portfolio as a whole, it adds to the
Portfolio's expenses and may reduce or eliminate potential gains. There is also
a risk that a futures contract or option intended as a hedge may not perform as
expected.
Defensive Investing In response to unfavorable market conditions, each
Portfolio (except Index Plus Bond, Index Plus Large Cap, Index Plus Mid Cap and
Index Plus Small Cap) may make temporary investments that are not consistent
with its principal investment objective and policies. In that event, the
Portfolio may not achieve its investment objective.
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, _________________________
_________________________ 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 fee,
payable monthly, of 0.95% of the daily net assets.
<TABLE>
<CAPTION>
Portfolio Name Aggregate Advisory Fees as a Percentage of Average
-------------- --------------------------------------------------
28
<PAGE>
Net Assets for Year Ended December 31, 1999
-------------------------------------------
<S> <C>
Growth %
International %
Small Company %
Value Opportunity %
Real Estate %
High Yield %
Index Plus Bond %
Index Plus Large Cap %
Index Plus Mid Cap %
Index Plus Small Cap %
</TABLE>
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.
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. He has served on the
management team of Technology since its inception. 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.
29
<PAGE>
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 Michael F. Farrell, Portfolio Manager,
Aeltus, served as a co-manager of Index Plus Mid Cap and Index Plus Small Cap
since March 1, 1999 and has been managing Index Plus Mid Cap and Index Plus
Small Cap since May 1, 2000. Mr. Farrell has been with the Aetna organization
since 1991 and has been responsible for quantitative research and development of
equity models.
Investments in and Redemptions from the Portfolios
Investors purchasing shares in connection with an insurance company contract or
policy should refer to the documents pertaining to the contract or policy for
information on how to direct investments in or redemptions from (including
making exchanges into or out of) the Portfolios, and any fees that may apply.
Orders for the purchase or redemption of Portfolio shares that are received
before the close of regular trading on the New York Stock Exchange (normally
4:00 p.m. eastern time) are effected at the net asset value (NAV) per share
determined that day, as described below. The insurance company has been
designated an agent of the Portfolios for receipt of purchase and redemption
orders. Therefore, receipt of an order by the insurance company constitutes
receipt by a Portfolio, provided that the Portfolio receives notice of the
orders by 9:30 a.m. eastern time the next day on which the New York Stock
Exchange is open for trading.
Net Asset Value The NAV of each Portfolio is determined as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. eastern
time).
In calculating the NAV, securities are valued primarily by independent pricing
services using market quotations. Short-term debt securities maturing in 60 days
or less are valued using amortized cost. Securities for which market quotations
are not readily available are valued at their fair value, subject to procedures
adopted by the Board. 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 NAV 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'
30
<PAGE>
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 are declared and paid semiannually.
Capital gains distributions, if any, are paid on an annual basis around the end
of the year. 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
Growth, International, Small Company, Technology, and Index Plus Large Cap are
recently organized and do not yet have long term performance records. However,
these Portfolios have investment objectives, policies and strategies
substantially similar to separate series of an investment company registered
under the Investment Company Act of 1940 (1940 Act) whose shares are currently
sold to the public (Public Fund) and are managed by Aeltus (and subadvised by
EAM, in the case of Technology). Therefore, the performance of the Public Fund
is provided below. The performance of Small Company, Technology, International,
Index Plus Large Cap and Growth will vary over time and their investments will
not be identical to the past portfolio investments of the comparable Public
Fund.
31
<PAGE>
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 to 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 Fund to be an indication of the future performance of
the Portfolios.
<TABLE>
<CAPTION>
GROWTH
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Growth ___% N/A ___% (12/13/96)
Aetna Series Fund, Inc., Aetna Growth Fund,
Class I ___% ___% ___% (1/4/94)
S&P 500 Index ___% ___% ___% (1/1/94)
<CAPTION>
INTERNATIONAL
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
International ___% N/A ___% (12/22/97)
Aetna Series Fund, Inc., Aetna International
Fund, Class I ___% ___% ___% (1/3/92)
MSCI-EAFE Index ___% ___% ___% (1/1/92)
<CAPTION>
SMALL COMPANY
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Small Company ___% N/A ___% (12/27/96)
Aetna Series Fund, Inc., Aetna Small Company
Fund, Class I ___% ___% ___% (1/4/94)
Russell 2000 Index ___% ___% ___% (1/1/94)
32
<PAGE>
<CAPTION>
TECHNOLOGY
1 YEAR SINCE INCEPTION
<S> <C> <C>
The Information Age Fund ___% ___% (11/15/95)
Goldman Sachs
Technology Index ___% ___% (11/15/95)
<CAPTION>
INDEX PLUS LARGE CAP
1 YEAR SINCE INCEPTION
<S> <C> <C>
Index Plus Large Cap ___% ___% (9/16/96)
Aetna Series Fund, Inc., Aetna Index Plus Large
Cap Fund, Class I ___% ___% (12/10/96)
S&P 500 Index ___% ___% (12/1/96)
</TABLE>
Private Account Performance
Growth, Index Plus Bond, and Index Plus Large Cap are recently organized and do
not yet have long-term performance records. However, these Portfolios have
investment objectives, policies and strategies substantially similar to those
employed by Aeltus in managing accounts for certain institutional investors
(Private Accounts). Therefore, the performance of these Private Accounts is
provided below. Note that the Private Accounts, unlike the Portfolios, are not
subject to certain investment limitations, diversification requirements and
other restrictions imposed by the 1940 Act and the Code which, if applicable,
could have adversely affected the Private Accounts' performance.
The Private Account Performance data, shown below, was calculated in accordance
with the standards established by the Association for Investment Management and
Research (AIMR). AIMR is a non-profit membership and educational organization
that, among other things, has formulated a set of performance presentation
standards for investment advisers. AIMR has not been involved in the preparation
or review of the performance shown.
All Private Account Performance data:
o Was calculated on a time-weighted total return basis and includes all
dividends and interest, accrued income and realized and unrealized gains
and losses.
o Reflects the deduction of investment advisory fees and brokerage
commissions paid by the Private Accounts, but does not reflect the
deduction of custodial fees.
o Includes cash and cash equivalents.
The historical fees and expenses paid by the Private Accounts are significantly
lower than those paid by the corresponding Portfolio. Had Portfolio level
expenses been charged to the Private Accounts, performance would have been
lower.
The following table shows average annual total returns for the periods ended
March 31, 2000 for the Portfolios, the comparable Private Accounts and their
respective benchmark indices. Investors should not consider the historical
performance of the Private Accounts as an indication of the future performance
of a comparably managed Portfolio.
33
<PAGE>
<TABLE>
<CAPTION>
GROWTH COMPOSITE
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
<S> <C> <C> <C> <C>
Growth __% N/A N/A __% (12/13/96)
Growth Composite __% __% __% N/A
S&P 500 Index __% __% __% N/A
<CAPTION>
INDEX PLUS BOND COMPOSITE
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
<S> <C> <C> <C> <C>
Index Plus Bond __% N/A N/A __% (12/18/97)
Index Plus Bond Composite __% __% __% N/A
LBAB Index __% __% __% N/A
<CAPTION>
INDEX PLUS LARGE CAP COMPOSITE
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
Index Plus Large Cap __% N/A __% (9/16/96)
Index Plus Large Cap Composite __% __% __% (10/1/91)
S&P 500 Index __% __% __% (10/1/91)
</TABLE>
34
<PAGE>
Financial Highlights
These highlights are intended to help you understand each Portfolio's
performance since its commencement of operations. Certain information reflects
financial results for a single Portfolio share. The total returns in the tables
represent the rate an investor would have earned (or lost) on an investment in
each Portfolio (assuming reinvestment of all dividends and distributions). The
information in these tables has been audited by ___________, independent
auditors, whose reports, along with the Portfolios' Financial Statements, are
included in the Portfolios' Annual Reports, which are available upon request.
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Growth International
---------------------------------------------------------- --------------------------------------------
Period From Period From
December 13, 1996 December 22, 1997
Year Ended Year Ended 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> <C>
Net asset value,
beginning of period.... $ $ $ $ $ $ $
- - - - - - -
Income from investment
operations:
Net investment income.
Net realized and
change in unrealized
gain or loss on
investments..........
Total from
investment
operations.........
Less distributions:
From net investment
income...............
From net realized
gains on investments.
Total distributions.
Net asset value, end of
period.
Total return*...........
Net assets,
end of period (000's).
Ratio of net expenses to
average net assets....
Ratio of net investment
income to average net
assets.
Ratio of expenses before
reimbursement and
waiver to average net
assets................
Portfolio turnover rate.
</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.
35
<PAGE>
<TABLE>
<CAPTION>
Small Company
----------------------------------------------------------
Period From
December 27, 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.... $ $ $ $
- - - -
Income from investment
operations:
Net investment income.
Net realized and
change in unrealized
gain or loss on
investments..........
Total from
investment
operations.........
Less distributions:
From net investment
income...............
From net realized
gains on investments.
Total distributions.
Net asset value, end of
period.
Total return*...........
Net assets,
end of period (000's).
Ratio of net expenses to
average net assets....
Ratio of net investment
income to average net
assets.
Ratio of expenses before
reimbursement and
waiver to average net
assets................
Portfolio turnover rate.
<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.... $ $ $ $
- - - -
Income from investment
operations:
Net investment income.
Net realized and
change in unrealized
gain or loss on
investments..........
Total from
investment
operations.........
Less distributions:
From net investment
income...............
From net realized
gains on investments.
Total distributions.
Net asset value, end of
period.
Total return*...........
Net assets,
end of period (000's).
Ratio of net expenses to
average net assets....
Ratio of net investment
income to average net
assets.
Ratio of expenses before
reimbursement and
waiver to average net
assets................
Portfolio turnover rate.
36
<PAGE>
<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> <C>
Net asset value,
beginning of period.... $ $ $ $ $ $
- - - - - -
Income from investment
operations:
Net investment income.
Net realized and
change in unrealized
gain or loss on
investments..........
Total from
investment
operations.........
Less distributions:
From net investment
income...............
From net realized
gains on investments.
Total distributions.
Net asset value, end of
period.
Total return*...........
Net assets,
end of period (000's).
Ratio of net expenses to
average net assets....
Ratio of net investment
income to average net
assets.
Ratio of expenses before
reimbursement and
waiver to average net
assets................
Portfolio turnover rate.
</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.
37
<PAGE>
<TABLE>
<CAPTION>
Index Plus Bond Index Plus Large Cap
----------------------------------------------------------- --------------------------------------------
Period From Period From
December 18, 1997 September 16, 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> <C>
Net asset value,
beginning of period.... $ $ $ $ $ $ $
- - - - - - -
Income from investment
operations:
Net investment income.
Net realized and
change in unrealized
gain or loss on
investments..........
Total from
investment
operations.........
Less distributions:
From net investment
income...............
From net realized
gains on investments.
Total distributions.
Net asset value, end of
period.
Total return*...........
Net assets,
end of period (000's).
Ratio of net expenses to
average net assets....
Ratio of net investment
income to average net
assets.
Ratio of expenses before
reimbursement and
waiver to average net
assets................
Portfolio turnover rate.
38
<PAGE>
(for one outstanding share throughout each period)
<CAPTION>
Index Plus Mid Cap Index Plus Small Cap
---------------------------------------------- -----------------------------------------------
Period From Period From
December 16, 1997 December 19, 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> <C>
Net asset value,
beginning of period.... $ $ $ $ $ $
- - - - - -
Income from investment
operations:
Net investment income.
Net realized and
change in unrealized
gain or loss on
investments..........
Total from
investment
operations.........
Less distributions:
From net investment
income...............
From net realized
gains on investments.
Total distributions.
Net asset value, end of
period.
Total return*...........
Net assets,
end of period (000's).
Ratio of net expenses to
average net assets....
Ratio of net investment
income to average net
assets.
Ratio of expenses before
reimbursement and
waiver to average net
assets................
Portfolio turnover rate.
</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.
39
<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
40
<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 __, 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 Large
Cap)
o Aetna Value Opportunity VP (Value o Aetna Index Plus Mid Cap VP (Index Plus Mid
Opportunity) Cap)
o Aetna Technology VP (Technology) o Aetna Index Plus Small Cap VP (Index Plus Small
Cap)
o Aetna Real Estate Securities VP (Real Estate)
</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.........................................................32
PRINCIPAL UNDERWRITER........................................................32
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
6
<PAGE>
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.
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 or to gain additional exposure to certain markets for
investment purposes while maintaining liquidity to meet shareholder redemptions
and minimizing trading costs. Forward exchange contracts are not subject to this
30% limitation.
The following provides additional information about those derivative instruments
each Fund 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.
7
<PAGE>
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. 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.
8
<PAGE>
"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.
Each Fund or Portfolio, except Generation Portfolios, is prohibited from having
written call options outstanding at any one time on more than 30% of its total
assets. A Fund or Portfolio will not write a put if it will require more than
50% of the Fund's or Portfolio's net assets to be designated to cover all put
obligations. No Fund or Portfolio may buy put options if more than 3% of its
assets immediately following
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such purchase would consist of put options. Each Fund or Portfolio may purchase
call and sell put options on equity securities only to close out positions
previously opened; the Generation Portfolios are not subject to this
restriction. No Fund or Portfolio will write a call option on a security unless
the call is "covered" (i.e., it already owns the underlying security).
Securities it "already owns" include any stock which it has the right to acquire
without any additional payment, at its discretion for as long as the call
remains outstanding. This restriction does not apply to the writing of calls on
securities indices or futures contracts. No Fund or Portfolio is permitted to
write call options on when-issued securities. The Funds and Portfolios purchase
call options 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 exercise price or expiration date or both. If
Fund or Portfolio desires to sell a particular security from its
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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 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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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.
Zero Coupon and Pay-in-Kind Securities
Each Fund or Portfolio may invest in zero coupon securities and each Fund,
except Money Market, or Portfolio may invest in pay-in-kind securities. In
addition, each Fund or Portfolio may invest in STRIPS (Separate Trading of
Registered Interest and Principal of Securities). Zero coupon or deferred
interest securities are debt obligations that do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date when the
securities begin paying current interest (the "cash payment date") and therefore
are issued and traded at a discount from their face amounts or par value. The
discount varies, depending on the time remaining until maturity or cash payment
date, prevailing interest rates, liquidity of
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the security and the perceived credit quality of the issuer. The discount, in
the absence of financial difficulties of the issuer, decreases as the final
maturity or cash payment date of the security approaches. STRIPS are created by
the Federal Reserve Bank by separating the interest and principal components of
an outstanding U.S. Treasury bond and selling them as individual securities. The
market prices of zero coupon, STRIPS and deferred interest securities generally
are more volatile than the market prices of securities with similar maturities
that pay interest periodically and are likely to respond to changes in interest
rates to a greater degree than do non-zero coupon securities having similar
maturities and credit quality.
The risks associated with lower 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.
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
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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 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
18
<PAGE>
at a fixed price and time, thereby determining the yield during the Fund's or
Portfolio's holding period. This results in a fixed rate of return insulated
from market fluctuations during such period. Such underlying debt instruments
serving as collateral will meet the quality standards of a Fund or Portfolio.
The market value of the underlying debt instruments will, at all times, be equal
to the dollar amount invested. Repurchase agreements, although fully
collateralized, involve the risk that the seller of the securities may fail to
repurchase them from a Fund or Portfolio. In that event, the Fund or Portfolio
may incur (a) disposition costs in connection with liquidating the collateral,
or (b) a loss if the collateral declines in value. Also, if the default on the
part of the seller is due to insolvency and the seller initiates bankruptcy
proceedings, a Fund's or Portfolio's ability to liquidate the collateral may be
delayed or limited. Repurchase agreements maturing in more than seven days will
not exceed 10% of the total assets of a Fund or Portfolio.
Variable Rate Demand Instruments
Each Fund or Portfolio, 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.
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.
19
<PAGE>
There may be less publicly available information about a foreign issuer than
about a U.S. company, and foreign issuers may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or as
uniform as those of U.S. issuers. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than U.S. markets.
Securities of many foreign issuers are less liquid and their prices more
volatile than securities of comparable U.S. issuers. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the U.S. The Funds might have
greater difficulty taking appropriate legal action with respect to foreign
investments in non-U.S. courts than with respect to domestic issuers in U.S.
courts. In addition, transactions in foreign securities may involve greater time
from the trade date until settlement than domestic securities transactions and
involve the risk of possible losses through the holding of securities by
custodians and securities depositories in foreign countries.
All these risks usually are higher in emerging markets, such as most countries
in Africa, Asia, Latin America and the Middle East, than in more established
markets, such as Western Europe.
Depositary receipts are typically dollar denominated, although their market
price is subject to fluctuations of the foreign currency in which the underlying
securities are denominated. Depositary receipts include: (a) American Depositary
Receipts (ADRs), which are typically designed for U.S. investors and held either
in physical form or in book entry form; (b) European Depositary Receipts (EDRs),
which are similar to ADRs but may be listed and traded on a European exchange as
well as in the U.S. (typically, these securities are traded on the Luxembourg
exchange in Europe); and (c) Global Depositary Receipts (GDRs), which are
similar to EDRs although they may be held through foreign clearing agents such
as Euroclear and other foreign depositories. Depositary receipts denominated in
U.S. dollars will not be considered foreign securities for purposes of the
investment limitation concerning investment in foreign securities.
High-Yield Bonds
Each Fund (except Money Market) or Portfolio (except International 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
(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.
20
<PAGE>
The greater risks and fluctuations in yield and value occur, in part, because
investors generally perceive issuers of lower-rated and unrated securities to be
less creditworthy. Lower ratings, however, may not necessarily indicate higher
risks. In pursuing a Fund's or Portfolio's objectives, Aeltus seeks to identify
situations in which Aeltus believes that future developments will enhance the
creditworthiness and the ratings of the issuer.
Some of the risks associated with high-yield bonds include:
Sensitivity to Interest Rate and Economic Changes High-yield bonds are more
sensitive to adverse economic changes or individual corporate developments but
generally less sensitive to interest rate changes than are investment grade
bonds. As a result, when interest rates rise, causing bond prices to fall, the
value of these securities may not fall as much as investment grade corporate
bonds. Conversely, when interest rates fall, these securities may underperform
investment grade corporate bonds.
Also, the financial stress resulting from an economic downturn or adverse
corporate developments could have a greater negative effect on the ability of
issuers of these securities to service their principal and interest payments, to
meet projected business goals and to obtain additional financing, than on more
creditworthy issuers. In addition, periods of economic uncertainty and changes
can be expected to result in increased volatility of market prices of these
securities and the net asset value of a Fund or Portfolio. Furthermore, in the
case of high-yield bonds structured as zero coupon or pay-in-kind securities,
their market prices are affected to a greater extent by interest rate changes
and thereby tend to be more speculative and volatile than securities which pay
interest periodically and in cash.
Payment Expectations High-yield bonds present risks based on payment
expectations. For example, these securities may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest rate
market, the Funds or Portfolios, may have to replace the securities with a lower
yielding security, resulting in a decreased return for investors. In addition,
there is a higher risk of non-payment of interest and/or principal by issuers of
these securities than in the case of investment-grade bonds.
Liquidity and Valuation Risks Some issuers of high-yield bonds may be traded
among a limited number of broker-dealers rather than in a broad secondary
market. Many of these securities may not be as liquid as investment grade bonds.
The ability to value or sell these securities will be adversely affected to the
extent that such securities are thinly traded or illiquid. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
or increase the value and liquidity of these securities more than other
securities, especially in a thinly-traded market.
Limitations of Credit Ratings The credit ratings assigned to high-yield bonds
may not accurately reflect the true risks of an investment. Credit ratings
typically evaluate the safety of principal and interest payments rather than the
market value risk of such securities. In addition, credit agencies may fail to
adjust credit ratings to reflect rapid changes in economic or company conditions
that affect a security's market value. Although the ratings of recognized rating
services such as Moody's and S&P are considered, Aeltus primarily relies on its
own credit analysis which includes a study of existing debt, capital structure,
ability to service debts and to pay dividends, the issuer's sensitivity to
economic conditions, its operating history 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.
21
<PAGE>
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.
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.
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
22
<PAGE>
Community, which is an economic union of various European nations' steel and
coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment and provide
technical assistance to member nations in the Asian and Pacific regions.
Borrowing
Each Fund or Portfolio may borrow up to 5% of the value of its total assets from
a bank for temporary or emergency purposes. Each Fund or Portfolio may borrow
for leveraging purposes only if after the borrowing, the value of the Fund's or
Portfolio's net assets including proceeds from the borrowings, is equal to at
least 300% of all outstanding borrowings. Leveraging can increase the volatility
of a Fund or Portfolio since it exaggerates the effects of changes in the value
of the securities purchased with the borrowed funds. 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.
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).
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.
23
<PAGE>
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 Balanced was significantly higher in 1999 than
in 1998 because of a change in portfolio managers for the small cap component,
which led to a reallocation of its assets. The portfolio turnover rate for Index
Plus Bond was significantly higher in 1999 than in 1998 because of a change in
portfolio managers and a shift toward a more active investment management
process. 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 Ascent was significantly higher in 1999
than in 1998 because of increased volatility in the market for small and mid-cap
stocks, increased volatility in the quantitative rankings used in managing
Ascent, and a shift toward a more active investment management process with
respect to fixed-income investments.
24
<PAGE>
TRUSTEES AND OFFICERS
The investments and administration of each Fund are under the supervision of its
Board. The Trustees and executive officers of each Fund and their principal
occupations for the past five years are listed below. Those Trustees who are
"interested persons," as defined in the 1940 Act, are indicated by an asterisk
(*). Trustees and officers hold the same positions with other investment
companies in the same Fund Complex: Aetna GET Fund and Aetna Series Fund, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Principal Occupation During Past Five
Years (and Positions held with
Name, Position(s) Held Affiliated Persons or Principal
Address and Age with each Fund 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.
- --------------------------------------------------------------------------------------------------------------------
25
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
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>
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate Aggregate Aggregate Aggregate Aggregate Aggregate Total
Name of Person Compensation Compensation Compensation Compensation Compensation Compensation Compensation from
Position from Aetna from Aetna from Money from from Bond VP from Growth the Funds and
Variable Generation Market Balanced and Income Fund Complex Paid
Portfolios, Inc. Portfolios, Inc. to Trustees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Corine Norgaard
Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Sidney Koch
Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Maria T. Fighetti*
Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Richard G. Scheide
Trustee, Chairperson
Audit Committee
- ------------------------------------------------------------------------------------------------------------------------------------
David L. Grove*
Trustee, Chairperson
Contract Committee
- ------------------------------------------------------------------------------------------------------------------------------------
Albert E. DePrince, Jr.
Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*During the fiscal year ended December 31, 1999, Ms. Fighetti and Dr. Grove
elected to defer $______ and $______, respectively.
27
<PAGE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of January 31, 2000, Aetna Life Insurance and Annuity Company (Aetna) and its
affiliates owned 97.91% of the shares of AVPI, 98.83% of the shares of AGPI,
96.94% of the shares of Money Market, 98.55% of the shares of Balanced, 96.57%
of the shares of Bond VP and 97.84% 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%
28
<PAGE>
<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%
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
Balanced
Bond VP
Crossroads
Growth
Growth and Income
High Yield
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
International
Legacy
Money Market
Real Estate
Small Company
Value Opportunity
</TABLE>
29
<PAGE>
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Total Investment Net Advisory
Advisory Fees Waiver Fees Paid
------------- ------ ---------
<S> <C> <C> <C>
Ascent
Balanced
Bond VP
Crossroads
Growth
Growth and Income
High Yield*
Index Plus Bond*
Index Plus Large Cap
Index Plus Mid Cap*
Index Plus Small Cap*
International*
Legacy
Money Market
Real Estate*
Small Company
Value Opportunity
</TABLE>
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Total Investment Net Advisory
Advisory Fees Waiver Fees Paid
------------- ------ ---------
<S> <C> <C> <C>
Ascent
Balanced
Bond VP
Crossroads
Growth
Growth and Income
Index Plus Large Cap
Legacy
Money Market
Small Company
Value Opportunity
</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.
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
$_____ and $____, respectively. The subadvisory agreement was terminated as of
December 31, 1999.
30
<PAGE>
THE SUBADVISORY AGREEMENT
Aeltus and the Company, 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>
0.075% On the first $5 billion
0.050% On all assets over $5 billion
</TABLE>
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
Balanced
Bond VP
Crossroads
Growth
Growth and Income
High Yield*
31
<PAGE>
Index Plus Bond*
Index Plus Large Cap
Index Plus Mid Cap*
Index Plus Small Cap*
International*
Legacy
Money Market
Real Estate*
Small Company
Value Opportunity
</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.
INDEPENDENT AUDITORS
_______________, CityPlace II, Hartford, Connecticut 06103 serves as independent
auditors to the Funds. ________________ 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.
32
<PAGE>
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, 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 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.
33
<PAGE>
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
Balanced
Bond VP
Crossroads
Growth
Growth and Income
High Yield*
Index Plus Bond*
Index Plus Large Cap
Index Plus Mid Cap*
Index Plus Small Cap*
International*
Legacy
Money Market
Real Estate*
Small Company
Value Opportunity
</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.
34
<PAGE>
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
International
Small Company
Value Opportunity
Balanced
Growth and Income
Real Estate
Bond VP
High Yield
Money Market
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
Ascent
Crossroads
Legacy
</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
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
35
<PAGE>
will be valued using the "amortized cost" method of valuation. This involves
valuing an instrument at its cost and thereafter assuming a constant
amortization of premium or increase of discount. Options are valued at the mean
of the last bid and asked price on the exchange where the option is primarily
traded. Futures contracts are valued daily at a settlement price based on rules
of the exchange where the futures contract is primarily traded. Securities for
which market quotations are not readily available are valued at their fair value
in such manner as may be determined, from time to time, in good faith, by or
under the authority of, the Board.
TAX STATUS
The following is only a limited discussion of certain additional tax
considerations generally affecting each Fund or Portfolio. No attempt is made to
present a detailed explanation of the tax treatment of each Fund or Portfolio
and no explanation is provided with respect to the tax treatment of any Fund or
Portfolio shareholder. The discussions here and in the Prospectuses are not
intended as substitutes for careful tax planning. Holders of VA Contracts or VLI
Policies must consult the contract prospectus, prospectus summary or disclosure
statement for information concerning the federal income tax consequences of
owning such VA Contracts or VLI Policies.
Qualification as a Regulated Investment Company
Each Fund or Portfolio has elected to be taxed as a regulated investment company
under Subchapter M of the 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 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
36
<PAGE>
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. 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
37
<PAGE>
The yield and effective yield for Money Market for the seven days ended March
31, 2000 were ___% and ___%, 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.
For the 30-day period ended March 31, 2000:
<TABLE>
<CAPTION>
Fund Yield
---- -----
<S> <C>
Bond VP %
High Yield %
Index Plus Bond %
</TABLE>
38
<PAGE>
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 % N/A N/A % 7/5/95
Balanced % % N/A % 4/3/89
Bond VP % % % N/A
Crossroads % N/A N/A % 7/5/95
Growth % N/A N/A % 12/13/96
Growth and Income % % % N/A
High Yield % N/A N/A % 12/10/97
Index Plus Bond % N/A N/A % 12/18/97
Index Plus Large Cap % N/A N/A % 9/16/96
Index Plus Mid Cap % N/A N/A % 12/16/97
Index Plus Small Cap % N/A N/A % 12/19/97
International % N/A N/A % 12/22/97
Legacy % N/A N/A % 7/5/95
Money Market % % % N/A
Real Estate % N/A N/A % 12/15/97
Small Company % N/A N/A % 12/27/96
Value Opportunity % N/A N/A % 12/13/96
</TABLE>
Performance information for a Fund or Portfolio may be compared, in reports and
promotional literature, to: (a) the Standard & Poor's 500 Index, the Russell
2000 Index, the Russell 3000 Index, Lehman Brothers Aggregate Bond Index, Lehman
Brothers Intermediate Government Bond Index, Merrill Lynch High Yield Index,
Salomon Brothers Broad Investment Grade Bond Index, Dow Jones Industrial
Average, or other indices (including, where appropriate, a blending of indices)
that measure performance of a pertinent group of securities widely regarded by
investors as representative of the securities markets in general; (b) other
groups of investment companies tracked by Morningstar or Lipper Analytical
Services, widely used independent research firms that rank mutual funds and
other investment companies by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications, or persons who
rank such investment companies on overall performance or other criteria; and (c)
the Consumer Price Index (measure for inflation) to assess the real rate of
return from an investment in a Fund or Portfolio.
39
<PAGE>
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 of Amendment (___________)*
(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*
(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*
(h.3) Amendment 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)
* To be filed by amendment.
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 January 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:
<TABLE>
<CAPTION>
% Aetna
<S> <C>
Aetna Value Opportunity VP 99.83%
Aetna Growth VP 99.99%
Aetna Index Plus Large Cap VP 98.24%
Aetna Small Company VP 99.60%
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%
</TABLE>
Aetna is an indirect wholly owned subsidiary of Aetna Inc.
A list of all persons directly or indirectly under common control with
the Registrant and a list which indicates the principal business of each
such company referenced in the diagram are incorporated herein by
reference to Item 26 of the Registration Statement on Form N-4 (File No.
333-56297), as filed electronically with the Securities and Exchange
Commission on November 23, 1999.
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 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
investment adviser and administrator for Aetna Variable Fund, Aetna
Income Shares, Aetna Variable Encore Fund, Aetna Balanced VP, Inc., Aetna
GET Fund, Aetna Generation Portfolios, Inc., and Aetna Series Fund, Inc.
(all management investment companies registered under the Investment
Company Act of 1940 (1940 Act)). It also acts as investment adviser to
certain private accounts.
The following table summarizes the business connections of the directors
and principal officers of the investment adviser.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1997/Addresses*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John Y. Kim Director, President, Chief Director (February 1995 - March 1998) -- Aetna
Executive Officer, Chief Investment Life Insurance and Annuity Company; Senior Vice
Officer President (since September 1994) -- Aetna Life
Insurance and Annuity Company.
J. Scott Fox Director, Managing Director, Chief Vice President (since April 1997) -- Aetna
Operating Officer, Chief Financial Retirement Services, Inc.; Director and Senior
Officer Vice President (March 1997 - February 1998) -
Aetna Life Insurance and Annuity Company.
Thomas J. McInerney Director President (since August 1997) -- Aetna Retirement
Services, Inc.; Director and President (since
September 1997) -- Aetna Life Insurance and
Annuity Company; Executive Vice President (since
August 1997) -- Aetna Inc.
</TABLE>
<PAGE>
<TABLE>
<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 Life Insurance and Annuity
Company; 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 Counsel (since December 1996) -- Aetna Retirement
and Secretary Services, Inc.
Brian K. Kawakami Vice President, Chief Compliance Chief Compliance Officer & Director (since January
Officer 1996) -- Aeltus Trust Company; Chief Compliance
Officer (since August 1993) -- Aeltus Capital, Inc.
Neil Kochen Managing Director, Equity Managing Director (since April 1996) -- Aeltus
Investments Trust Company; Managing Director (since August
1996) -- Aeltus Capital, Inc.
Frank Litwin Managing Director, Retail Marketing
and Sales
L. Charles Meythaler Managing Director, Institutional Director (since July 1997) -- Aeltus Trust
Marketing and Sales Company; Managing Director (since June 1997) --
Aeltus Trust Company.
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.
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
<PAGE>
Fund, Aetna Balanced VP, Inc., Aetna GET Fund and Aetna Generation
Portfolios, Inc. and as investment adviser, principal underwriter and
administrator for Portfolio Partners, Inc. (all management investment
companies registered under the 1940 Act). Additionally, Aetna acts as
the principal underwriter and depositor for Variable Annuity Account B
of Aetna, Variable Annuity Account C of Aetna, Variable Annuity Account
G of Aetna, and Variable Life Account B of Aetna (separate accounts of
Aetna registered as unit investment trusts under the 1940 Act). Aetna
is also the principal underwriter for Variable Annuity Account I of
Aetna Insurance Company of America ("AICA") (a separate account of AICA
registered as a unit investment trust under the 1940 Act).
(b) The following are the directors and principal officers of the
Underwriter:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Principal Positions and Offices
Business Address* Underwriter with Registrant
------------------ ------------------------------------ ----------------------
<S> <C> <C>
Thomas J. McInerney Director and President None
Shaun P. Mathews Director and Senior Vice President Director
Catherine H. Smith Director, Senior Vice President and Chief None
Financial Officer
Allan Baker Senior Vice President None
David E. Bushong Senior Vice President None
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 Investment Director
Officer
Martin T. Conroy Vice President and Treasurer None
Kathleen A. Murphy Senior Vice President and Deputy General None
Counsel
Therese Squillacote Vice President and Chief Compliance Officer None
Thomas P. Waldron Senior Vice President None
Kirk P. Wickman Senior Vice President, General Counsel and None
Corporate Secretary
</TABLE>
* Except with respect to Mr. Kim, the principal business address of all
directors and officers listed is 151 Farmington Avenue, Hartford,
Connecticut 06156. Mr. Kim's address is 10 State House Square, Hartford,
Connecticut 06103-3602.
<PAGE>
(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. 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 11th day of February, 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
J. Scott Fox* President and Director
- ------------------------------------- (Principal Executive Officer) )
J. Scott Fox )
)
Albert E. DePrince, Jr.* Director )
- ------------------------------------- )
Albert E. DePrince, Jr. )
)
Maria T. Fighetti* Director ) February
- ------------------------------------- )
Maria T. Fighetti ) 11, 2000
)
David L. Grove* Director )
- ------------------------------------- )
David L. Grove )
)
John Y. Kim* Director )
- ------------------------------------- )
John Y. Kim )
)
Sidney Koch* Director )
- ------------------------------------- )
Sidney Koch )
)
Shaun P. Mathews* Director )
- ------------------------------------- )
Shaun P. Mathews )
)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Corine T. Norgaard* Director )
- ------------------------------------- )
Corine T. Norgaard )
)
Richard G. Scheide* Director )
- ------------------------------------- )
Richard G. Scheide )
)
Stephanie A. DeSisto* Treasurer and Chief Financial Officer )
- ------------------------------------- (Principal Financial and Accounting Officer) )
Stephanie A. DeSisto
</TABLE>
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
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ---------- ------- ----
<S> <C> <C>
99-(i) Opinion and Consent of Counsel
-------------------
</TABLE>
10 State House Square, SH11
Hartford, CT 06103-3602
Amy R. Doberman
Counsel
Aetna Variable Portfolios, Inc.
February 11, 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. 11 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>
Page 2
February 11, 2000
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Amy R. Doberman
- -------------------
Amy R. Doberman
Counsel
