As filed with the Securities and Exchange
Commission on April 25, 2000
Registration Nos. 333-32575
811-8319
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment
No. 4 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment
No. 4 [X]
PORTFOLIO PARTNERS, INC.
------------------------
(Exact name of registrant as specified in charter)
151 Farmington Avenue
Hartford, CT 06156-8962
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (860) 273-1409
Susan C. Mosher, Esq.
Investors Bank & Trust Company
200 Clarendon Street
Mail Code LEG13
Boston, MA 02116
(Name and Address of Agent For Service)
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on May 1, 2000 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
<PAGE>
PORTFOLIO PARTNERS, INC.
Portfolio Partners, Inc. (the Fund) is a mutual fund authorized to issue
multiple series of shares, each representing a diversified portfolio of
investments. Each series is individually called a Portfolio, and collectively
the series are called the Portfolios. Aetna Life Insurance and Annuity Company
(Aetna) serves as the Investment Adviser of each Portfolio, and each Portfolio
has a Sub-adviser. The Fund's five Portfolios (and their Sub-advisers) are:
o MFS CAPITAL OPPORTUNITIES PORTFOLIO (formerly MFS Value Equity Portfolio) -
(Sub-adviser: Massachusetts Financial Services Company)
o MFS EMERGING EQUITIES PORTFOLIO - (Sub-adviser: Massachusetts Financial
Services Company)
o MFS RESEARCH GROWTH PORTFOLIO - (Sub-adviser: Massachusetts Financial
Services Company)
o SCUDDER INTERNATIONAL GROWTH PORTFOLIO - (Sub-adviser: Scudder Kemper
Investments, Inc.)
o T. ROWE PRICE GROWTH EQUITY PORTFOLIO - (Sub-adviser: T. Rowe Price
Associates, Inc.)
Each Portfolio's shares are offered only to insurance companies to fund
benefits under their variable annuity and variable life insurance contracts.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
May 1, 2000
<PAGE>
TABLE OF CONTENTS
Page
MFS Capital Opportunities Portfolio....................................... 1
MFS Emerging Equities Portfolio........................................... 3
MFS Research Growth Portfolio............................................. 5
Scudder International Growth Portfolio.................................... 7
T. Rowe Price Growth Equity Portfolio..................................... 9
Additional Information About Investment Strategies and Risks.............. 11
Management of the Portfolios.............................................. 17
Shareholder Information................................................... 19
Performance............................................................... 21
Financial Highlights...................................................... 22
Appendix: Investment Techniques and Practices............................ A-1
<PAGE>
MFS CAPITAL OPPORTUNITIES PORTFOLIO
(FORMERLY, MFS VALUE EQUITY PORTFOLIO)
SUB-ADVISER: MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS")
INVESTMENT OBJECTIVE
Capital appreciation
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily (at least 65% of its total assets) in common
stocks and related securities, such as preferred stocks, convertible securities
and depositary receipts. The Portfolio focuses on companies that MFS believes
have favorable growth prospects and attractive valuations based on current and
expected earnings or cash flows. The Portfolio's investments may include
securities listed on a securities exchange or traded in the over-the-counter
markets.
MFS selects securities based upon fundamental analysis (such as an analysis of
earnings, cash flows, competitive position and management's abilities)
performed by the Portfolio's manager and MFS' large group of equity research
analysts.
The Portfolio may invest in foreign securities (including emerging market
securities) and may have exposure to foreign currencies through its investment
in these securities, its direct holdings of foreign currencies or through its
use of foreign currency exchange contracts for the purchase or sale of a fixed
quantity of a foreign currency at a future date.
The Portfolio has engaged and may engage in active and frequent trading to
achieve its principal investment strategy.
PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO
As with any mutual fund, you could lose money on your investment in the
Portfolio. Your investment in the Portfolio is subject to the following
principal risks:
o MARKET AND COMPANY RISK: The value of the securities in which the
Portfolio invests may decline due to changing economic, political
or market conditions, or due to the financial condition of the
company which issued the security. In addition, securities of
growth companies may be more volatile since such companies usually
invest a high portion of their earnings in their businesses and may
lack the dividends of value companies, which can cushion the
security prices in a declining market.
o OVER THE COUNTER RISK: Equity securities that are traded over the
counter may be more volatile than exchange-listed securities and
the Portfolio may experience difficulty in purchasing or selling
these securities at a fair price.
1
<PAGE>
o FOREIGN MARKETS RISK: Investment in foreign securities involves
additional risks relating to political, social and economic
developments abroad. Other risks from these investments result from
the differences between the regulations to which U.S. and foreign
issuers and markets are subject.
o EMERGING MARKETS RISK: Emerging markets are generally defined as
countries in the initial stages of their industrialization cycles
with low per capita income. Investments in emerging markets
securities involve all of the risks of investments in foreign
securities, and also have additional risks.
o CURRENCY RISK: The Portfolio's exposure to foreign currencies may
cause the value of the Portfolio to decline in the event that the
U.S. dollar strengthens against these currencies, or in the event
that foreign governments intervene in the currency markets.
o ACTIVE OR FREQUENT TRADING RISK: The Portfolio has engaged and may
engage in active and frequent trading to achieve its principal
investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to
a fund with less active trading policies. Frequent trading also
increases transaction costs, which could detract from the
Portfolio's performance.
PORTFOLIO PERFORMANCE
The bar chart and table below show how the Portfolio has performed in the past
and provide an indication of the risks of investing in the Portfolio by showing
changes in the Portfolio's performance from year to year. Both assume that all
dividends and distributions are reinvested in the Portfolio. How the Portfolio
has performed in the past is not necessarily an indication of how it will
perform in the future.
Year 1998 26.74%
1999 48.79%
The best calendar quarter return since inception of the Portfolio was 29.27% in
the fourth quarter of 1999; the worst was -14.40% in the third quarter of 1998.
2
<PAGE>
PERIODS ENDED DECEMBER 31, 1999
1 YEAR SINCE INCEPTION
MFS Capital Opportunities Portfolio 48.79% 36.37%
S&P 500 Index 21.04% 24.58%
Morningstar Large Cap Blend Fund
Average 19.47% 20.19%
In the table, the Portfolio's total return for the year ended December 31,
1999, and the average annual total return for the life of the Portfolio, are
compared with the S&P 500 Index and the Morningstar Large Cap Blend Fund
Average The Stanard & Poor's 500 Index (S&P 500 Index) is an unmanaged index of
500 widely held stocks considered to be representative of the stock market in
general. The Morningstar Large Cap Blend Fund Average is a composite index of
the annual returns of mutual funds that have an investment style similar to
that of the Portfolio. The Portfolio commenced operations on November 28, 1997.
The performance information shown does not reflect the impact of the variable
annuity or variable life insurance contract charges. If these charges were
reflected, total returns would be lower.
PORTFOLIO FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
SHAREHOLDER TRANSACTION EXPENSES (FEES YOU PAY DIRECTLY FROM YOUR INVESTMENT)
There are no fees or sales loads charged to your account when you buy or sell
Portfolio shares.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO
ASSETS)
Management Fees 0.65%
Other Expenses 0.25%
-----
Total Annual Portfolio Operating Expenses 0.90%
-----
-----
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your
3
<PAGE>
investment has a 5% return each year and that the Portfolio's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$92 $287 $498 $1,108
4
<PAGE>
MFS EMERGING EQUITIES PORTFOLIO
SUB-ADVISER: MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS")
INVESTMENT OBJECTIVE
Long-term growth of capital
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily (at least 65% of its total assets) in common
stocks and related securities, such as preferred stocks, convertible securities
and depositary receipts, of emerging growth companies. Emerging growth
companies are companies that MFS believes are early in their life cycle and
have the potential to become major enterprises, or are major enterprises whose
rates of earnings growth MFS believes will accelerate. The Portfolio's
investments may include securities listed on a securities exchange or traded in
the over-the-counter markets.
MFS selects securities based upon fundamental analysis (such as an analysis of
earnings, cash flows, competitive position and management's abilities)
performed by the Portfolio's manager and MFS' large group of equity research
analysts.
The Portfolio may invest in foreign securities (including emerging market
securities) and may have exposure to foreign currencies through its investment
in these securities, its direct holdings of foreign currencies or through its
use of foreign currency exchange contracts for the purchase or sale of a fixed
quantity of foreign currency at a future date.
The Portfolio has engaged and may engage in active and frequent trading to
achieve its principal investment strategies.
PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO
As with any mutual fund, you could lose money on your investment in the
Portfolio. Your investment in the Portfolio is subject to the following
principal risks:
o MARKET AND COMPANY RISK: The value of the securities in which the
Portfolio invests may decline due to changing economic, political
or market conditions, or due to the financial condition of the
company which issued the security.
o EMERGING GROWTH RISK: The Portfolio's performance is particularly
sensitive to changes in the value of emerging growth companies.
Investments in emerging growth companies may be subject to more
abrupt or erratic market movements and may involve greater risks
than investments in more established companies. A decline in the
value of these types of securities may result in a decline in the
Portfolio's net asset value and the value of your investment.
5
<PAGE>
o OVER THE COUNTER RISK: Equity securities that are traded over the
counter may be more volatile than exchange-listed securities and
the Portfolio may experience difficulty in purchasing or selling
these securities at a fair price.
o FOREIGN MARKETS RISK: Investment in foreign securities involves
additional risks relating to political, social and economic
developments abroad. Other risks from these investments result from
the differences between the regulations to which U.S. and foreign
issuers and markets are subject.
o CURRENCY RISK: The Portfolio's exposure to foreign currencies may
cause the value of the Portfolio to decline in the event that the
U.S. dollar strengthens against these currencies, or in the event
that foreign governments intervene in the currency markets.
o EMERGING MARKETS RISK: Emerging markets are generally defined as
countries in the initial states of their industrialization cycles
with low per capita income. Investments in emerging markets
securities involve all of the risks of investments in foreign
securities, and also have additional risks:
* All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries.
* The markets of emerging markets countries have been more volatile
than the markets of developed countries with more mature
economies. These markets often have provided significantly
higher or lower rates of return than developed markets, and
significantly greater risks, to investors.
o ACTIVE OR FREQUENT TRADING RISK: The Portfolio has engaged and may
engage in active and frequent trading to achieve its principal
investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to
a fund with less active trading policies. Frequent trading also
increases transaction costs, which could detract from the
Portfolio's performance.
PORTFOLIO PERFORMANCE
The bar chart and table below show how the Portfolio has performed in the past
and provide an indication of the risks of investing in the Portfolio by showing
changes in the Portfolio's performance from year to year. Both assume that all
dividends and distributions are reinvested in the Portfolio. How the Portfolio
has performed in the past is not necessarily an indication of how it will
perform in the future.
6
<PAGE>
Year 1998 29.67%
1999 50.88%
The best calendar quarter return since inception of the Portfolio was 34.33% in
the fourth quarter of 1999; the worst was -16.21% in the third quarter of 1998.
PERIODS ENDED DECEMBER 31, 1999
1 YEAR SINCE INCEPTION
MFS Emerging Equities Portfolio 50.88% 37.11%
Russell 2000 Index 21.26% 9.22%
S&P 500 Index 21.04% 24.58%
Morningstar Large Cap Growth Fund
Average 38.63% 34.86%
In the table, the Portfolio's total return for the year ended December 31,
1999, and the average annual total return since inception of the Portfolio are
compared to the Russell 2000 Index, the S&P 500 Index and the Morningstar Large
Cap Growth Fund Average. The Russell 2000 Index is a value-weighted, unmanaged
index of small capitalization stock performance. The Standard & Poor's 500
Index (S&P 500 Index) is an unmanaged index of 500 widely held stocks
considered to be representative of the stock market in general. The Morningstar
Large Cap Growth Fund Average is a composite of the annual returns of mutual
funds that have investment characteristics similar to that of the Portfolio.
The Portfolio commenced operations on November 28, 1997.
The performance information shown does not reflect the impact of the variable
annuity or variable life insurance contract charges. If these charges were
reflected, total returns would be lower.
PORTFOLIO FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
7
<PAGE>
SHAREHOLDER TRANSACTION EXPENSES (FEES YOU PAY DIRECTLY FROM YOUR INVESTMENT)
There are no fees or sales loads charged to your account when you buy or sell
Portfolio shares.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO
ASSETS)
Management Fees 0.67%
Other Expenses 0.13%
-----
Total Annual Portfolio Operating Expenses 0.80%
-----
-----
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each
year and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$82 $255 $444 $990
8
<PAGE>
MFS RESEARCH GROWTH PORTFOLIO
SUB-ADVISER: MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS")
INVESTMENT OBJECTIVE
Long-term growth of capital and future income
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily (at least 80% of its total assets) in common
stocks and related securities, such as preferred stocks, convertible securities
and depositary receipts. The Portfolio focuses on companies that MFS believes
have favorable prospects for long-term growth, attractive valuations based on
current and expected earnings or cash flow, dominant or growing market share
and superior management. The Portfolio may invest in companies of any size. The
Portfolio's investments may also include securities traded on securities
exchanges or in the over-the-counter markets.
MFS selects securities based upon fundamental analysis performed by a committee
of investment research analysts employed by MFS and its wholly-owned subsidiary
MFS International (U.K.) Limited.
The Portfolio may invest in foreign securities (including emerging market
securities) and may have exposure to foreign currencies through its investment
in these securities, its direct holdings of foreign currencies or through its
use of foreign currency exchange contracts for the purchase or sale of a fixed
quantity of foreign currency at a future date.
PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO
As with any mutual fund, you could lose money on your investment in the
Portfolio. Your investment in the Portfolio is subject to the following
principal risks:
o MARKET AND COMPANY RISK: The value of the securities in which the
Portfolio invests may decline due to changing economic, political
or market conditions, or due to the financial condition of the
company which issued the security. In addition, securities of
growth companies may be more volatile since such companies usually
invest a high portion of their earnings in their businesses and may
lack the dividends of value companies, which can cushion the
security prices in a declining market. Also earnings
disappointments often lead to sharply falling prices because
investors buy growth stocks in anticipation of superior earnings
growth.
o OVER THE COUNTER RISK: Equity securities that are traded over the
counter may be more volatile than exchange-listed securities and
the Portfolio may experience difficulty in purchasing or selling
these securities at a fair price.
9
<PAGE>
o FOREIGN MARKETS RISK: Investment in foreign securities involves
additional risks relating to political, social and economic
developments abroad. Other risks from these investments result from
the differences between the regulations to which U.S. and foreign
issuers and markets are subject.
o CURRENCY RISK: The Portfolio's exposure to foreign currencies may
cause the value of the Portfolio to decline in the event that the
U.S. dollar strengthens against these currencies, or in the event
that foreign governments intervene in the currency markets.
PORTFOLIO PERFORMANCE
The bar chart and table below show how the Portfolio has performed in the past
and provide an indication of the risks of investing in the Portfolio by showing
changes in the Portfolio's performance from year to year. Both assume that all
dividends and distributions are reinvested in the Portfolio. How the Portfolio
has performed in the past is not necessarily an indication of how it will
perform in the future.
Year 1998 23.00%
1999 24.03%
The best calendar quarter return since inception of the Portfolio was 22.71% in
the fourth quarter of 1998; the worst was -15.07% in the third quarter of 1998.
PERIODS ENDED DECEMBER 31, 1999
1 YEAR SINCE INCEPTION
MFS Research Growth Portfolio 24.03% 21.32%
S&P 500 Index 21.04% 24.58%
Morningstar Large Cap Growth Fund
Average 38.63% 34.86%
In the table, the Portfolio's total return for the year ended December 31,
1999, and the average annual total return since inception of the Portfolio, are
compared with the S&P 500 Index and the Morningstar Large Cap Growth Fund
Average. The Standard & Poor's 500 Index (S&P 500 Index) is an unmanaged index
of 500 widely held stocks considered to be representative of the
10
<PAGE>
stock market in general. The Morningstar Large Cap Growth Fund Average is a
composite of the annual returns of mutual funds that have investment
characteristics similar to that of the Portfolio. The Portfolio commenced
operations on November 28, 1997.
The performance information shown does not reflect the impact of the variable
annuity or variable life insurance contract charges. If these charges were
reflected, total returns would be lower.
PORTFOLIO FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
SHAREHOLDER TRANSACTION EXPENSES (FEES YOU PAY DIRECTLY FROM YOUR INVESTMENT)
There are no fees or sales loads charged to your account when you buy or sell
Portfolio shares.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO
ASSETS)
Management Fees 0.70%
Other Expenses 0.15%
-----
Total Annual Portfolio Operating Expenses 0.85%
-----
-----
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each
year and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$87 $271 $471 $1,049
11
<PAGE>
SCUDDER INTERNATIONAL GROWTH PORTFOLIO
SUB-ADVISER: SCUDDER KEMPER INVESTMENTS, INC. ("SCUDDER KEMPER")
INVESTMENT OBJECTIVE
Long-term growth of capital
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily (at least 65% of its total assets) in the
equity securities of foreign companies that Scudder Kemper believes have high
growth potential. The Portfolio will normally invest in securities of at least
three different countries other than the U.S. and will invest in securities in
both developed and developing markets. The Portfolio will seek to invest in
those companies that Scudder Kemper believes are best able to capitalize on the
growth and changes taking place within and between various regions of the
world. Typically, these are companies with leading or rapidly-developing
business franchises, strong financial positions, and high quality management,
capable of defining and implementing company strategies to take advantage of
local, regional or global market changes.
The Portfolio also may invest in debt securities issued by foreign and U.S.
companies, including non-investment grade debt securities.
PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO
As with any mutual fund, you could lose money on your investment in the
Portfolio. Your investment in the Portfolio is subject to the following
principal risks:
o MARKET AND COMPANY RISK: The value of the securities in which the
Portfolio invests may decline due to changing economic, political
or market conditions, or due to the financial condition of the
company which issued the security.
o FOREIGN MARKETS RISK: The Portfolio's investment in foreign
securities involves additional risks relating to political, social
and economic developments abroad. Other risks from these
investments result from the differences between the regulations to
which U.S. and foreign issuers and markets are subject.
o CURRENCY RISK: The Portfolio's exposure to foreign currencies may
cause the value of the Portfolio to decline in the event that the
U.S. dollar strengthens against these currencies, or in the event
that foreign governments intervene in the currency markets.
o EMERGING GROWTH RISK: The Portfolio's performance is particularly
sensitive to changes in the value of emerging growth companies.
Investments in emerging growth companies may be subject to more
abrupt or erratic market movements and may involve greater risks
than investments in more established companies. A decline in the
value of these types of securities may result in a decline in the
Portfolio's net asset value and the value of your investment.
12
<PAGE>
o INTEREST RATE RISK: The Portfolio's investment in debt securities
involves risks relating to interest rate movement. If interest
rates go up, the value of any debt securities held by the Portfolio
will decline.
o CREDIT RISK: The Portfolio's investment in non-investment grade
debt securities involves credit risk because issuers of
non-investment grade securities may be more likely to have
difficulty making timely payments of interest or principal.
PORTFOLIO PERFORMANCE
The bar chart and table below show how the Portfolio has performed in the past
and provide an indication of the risks of investing in the Portfolio by showing
changes in the Portfolio's performance from year to year. Both assume that all
dividends and distributions are reinvested in the Portfolio. How the Portfolio
has performed in the past is not necessarily an indication of how it will
perform in the future.
Year 1998 19.09%
1999 58.41%
The best calendar quarter return since inception of the Portfolio was 30.92% in
the fourth quarter of 1999; the worst was -14.45% in the third quarter of 1998.
13
<PAGE>
PERIODS ENDED DECEMBER 31, 1999
1 YEAR SINCE INCEPTION
Scudder International 58.41% 36.50%
Growth Portfolio
MSCI EAFE Index 26.96% 14.26%
Morningstar Foreign Stock Fund
Average 44.31% 26.15%
In the table, the Portfolio's total return for the year ended December 31,
1999, and the average annual total return for the life of the Portfolio, are
compared with the MSCI EAFE Index and the Morningstar Foreign Stock Fund
Average. The MSCI EAFE Index is an unmanaged index that includes securities
traded on 16 exchanges in Europe, Australia and the Far East. The Morningstar
Foreign Stock Fund Average is a composite of the annual returns of mutual funds
that have investment characteristics similar to that of the Portfolio. The
Portfolio commenced operations on November 28, 1997.
The performance information shown does not reflect the impact of the variable
annuity or variable life insurance contract charges. If these charges were
reflected, total returns would be lower.
PORTFOLIO FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
SHAREHOLDER TRANSACTION EXPENSES (FEES YOU PAY DIRECTLY FROM YOUR INVESTMENT)
There are no fees or sales loads charged to your account when you buy or sell
Portfolio shares.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO
ASSETS)
Management Fees 0.80%
Other Expenses 0.20%
-----
Total Annual Portfolio Operating Expenses 1.00%
-----
-----
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds.
14
<PAGE>
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each
year and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$102 $318 $552 $1,225
15
<PAGE>
T. ROWE PRICE GROWTH EQUITY PORTFOLIO
SUB-ADVISER: T. ROWE PRICE ASSOCIATES, INC. ("T. ROWE")
INVESTMENT OBJECTIVE
Long-term capital growth, and secondarily, increasing dividend income
PRINCIPAL INVESTMENT STRATEGIES
The Portfolio invests primarily (at least 65% of its total assets) in the
common stocks of a diversified group of growth companies. T. Rowe seeks to
purchase the securities of companies that have the ability to pay increasing
dividends through strong cash flow and whose rate of earnings growth is
considered above-average. In addition, T. Rowe seeks companies with a lucrative
niche in the economy that T. Rowe believes will give them the ability to
sustain earnings momentum even during times of slow economic growth. It is T.
Rowe's belief that when a company's earnings grow faster than both inflation
and the overall economy, the market will eventually reward it with a higher
stock price.
The Portfolio may sell securities for a variety of reasons such as to secure
gains, limit losses or redeploy assets into more promising opportunities.
The Portfolio may invest in foreign securities and may have exposure to foreign
currencies through its investment in these securities, its direct holdings of
foreign currencies or through its use of foreign currency exchange contracts
for the purchase or sale of a fixed quantity of foreign currency at a future
date.
PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIO
As with any mutual fund, you could lose money on your investment in the
Portfolio. Your investment in the Portfolio is subject to the following
principal risks:
o MARKET AND COMPANY RISK: The value of the securities in which the
Portfolio invests may decline due to changing economic, political
or market conditions, or due to the financial condition of the
company which issued the security. In addition, securities of
growth companies may be more volatile since such companies usually
invest a high portion of their earnings in their businesses and may
lack the dividends of value companies, which can cushion the
security prices in a declining market. Also, earnings
disappointments often lead to sharply falling prices because
investors buy growth stocks in anticipation of superior earnings
growth.
o GROWTH STOCK RISK: Growth stock companies usually invest a high
portion of earnings in their business, and they may lack the
dividends of value stocks that can cushion stock prices in a
falling market. In addition, earnings disappointments often lead to
16
<PAGE>
sharply falling prices because investors buy growth stocks in
anticipation of superior earnings growth.
o FOREIGN MARKETS RISK: The Portfolio's investment in foreign
securities involves additional risks relating to political, social
and economic developments abroad. Other risks from these
investments result from the differences between the regulations to
which U.S. and foreign issuers and markets are subject.
o CURRENCY RISK: The Portfolio's exposure to foreign currencies may
cause the value of the Portfolio to decline in the event that the
U.S. dollar strengthens against these currencies, or in the event
that foreign governments intervene in the currency markets.
PORTFOLIO PERFORMANCE
The bar chart and table below show how the Portfolio has performed in the past
and provide an indication of the risks of investing in the Portfolio by showing
changes in the Portfolio's performance from year to year. Both assume that all
dividends and distributions are reinvested in the Portfolio. How the Portfolio
has performed in the past is not necessarily an indication of how it will
perform in the future.
Year 1998 27.60%
1999 22.32%
The best calendar quarter return since inception of the Portfolio was 23.08% in
the fourth quarter of 1998; the worst was -11.03% in the third quarter of 1998.
PERIODS ENDED DECEMBER 31, 1999
1 YEAR SINCE INCEPTION
T. Rowe Price Growth Equity Portfolio 22.32% 24.94%
S&P 500 Index 21.04% 24.58%
Morningstar Large Cap Growth Fund
Average 38.63% 34.86%
In the table, the Portfolio's total return for the year ended December 31,
1999, and the average annual total return since inception of the Portfolio, are
compared with the S&P 500 Index and the
17
<PAGE>
Morningstar Large Cap Growth Fund Average. The Standard & Poor's 500 Index (S&P
500 Index) is an unmanaged index of 500 widely held stocks considered to be
representative of the stock market in general. The Morningstar Large Cap Growth
Fund Average is a composite of the annual returns of mutual funds that have
investment characteristics similar to that of the Portfolio. The Portfolio
commenced operations on November 28, 1997.
The performance information shown does not reflect the impact of the variable
annuity or variable life insurance contract charges. If these charges were
reflected, total returns would be lower.
PORTFOLIO FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
SHAREHOLDER TRANSACTION EXPENSES (FEES YOU PAY DIRECTLY FROM YOUR INVESTMENT)
There are no fees or sales loads charged to your account when you buy or sell
Portfolio shares.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO
ASSETS)
Management Fees 0.60%
Other Expenses 0.15%
-----
Total Annual Portfolio Operating Expenses 0.75%
-----
-----
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each
year and that the Portfolio's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$77 $240 $417 $930
18
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT STRATEGIES AND RISKS
TEMPORARY DEFENSIVE INVESTMENT STRATEGY
Each Portfolio may depart from its principal investment strategies by taking
temporary defensive positions in response to adverse market, economic or
political conditions. The MFS Capital Opportunities, MFS Emerging Equities and
MFS Research Growth Portfolios may, for temporary defensive purposes, invest in
cash (including foreign currency) or cash equivalents, including, but not
limited to, obligations of banks (including certificates of deposit, bankers'
acceptances, time deposits and repurchase agreements), commercial paper,
short-term notes, U.S. Government securities and related repurchase agreements.
Scudder International Growth Portfolio may, for temporary defensive purposes,
invest all or a portion of its assets in Canadian or U.S. Government
obligations or currencies, or securities of companies incorporated in and
having their principal activities in Canada or the U.S. T. Rowe Price Growth
Equity Portfolio may, for temporary defensive purposes, invest in short-term,
high-quality, U.S. and foreign dollar-denominated money market securities,
including repurchase agreements. It is impossible to accurately predict how
long such alternative strategies may be utilized. During these times, a
Portfolio may not achieve its investment goals.
ACTIVE TRADING STRATEGY
The MFS Capital Opportunities Portfolio and the MFS Emerging Equities Portfolio
may engage in active trading to achieve their investment goals. This may cause
these Portfolios to realize higher capital gains as compared to a fund with
less active trading, which could increase your tax liability. Frequent trading
also increases transaction costs, which could lower these Portfolios'
performance.
MFS CAPITAL OPPORTUNITIES PORTFOLIO
PRINCIPAL INVESTMENT STRATEGIES. The Portfolio's investment objective is
capital appreciation. In order to achieve its investment objective, the
Portfolio invests primarily in common stocks and related securities, such as
preferred stocks, convertible securities and depositary receipts for those
securities. The Portfolio focuses on companies, which MFS believes, have
favorable growth prospects and attractive valuations based on current and
expected earnings or cash flow.
MFS selects securities based upon fundamental analysis (such as an analysis of
earnings, cash flows, competitive position and management's abilities)
performed by the Portfolio's manager and MFS' large group of equity research
analysts.
The Portfolio may invest in foreign securities (including emerging market
securities), and may have exposure to foreign currencies through its investment
in these securities, its direct holdings
19
<PAGE>
of foreign currencies or through its use of foreign currency exchange contracts
for the purchase or sale of a fixed quantity of a foreign currency at a future
date.
A list of the types of securities in which the Portfolio may invest is found in
the Appendix. The types of securities in which the Portfolio invests and the
investment techniques and practices in which the Portfolio may engage that are
not principal investment strategies are discussed, together with their risks,
in the Fund's Statement of Additional Information (referred to as the SAI),
which you may obtain by contacting the Fund (see back cover for address and
phone number).
PRINCIPAL RISKS. The principal risks of investing in the Portfolio and the
circumstances reasonably likely to cause the value of your investment in the
Portfolio to decline are described below. As with any non-money market mutual
fund, the share price of a Portfolio will change daily based on changes in the
value of the securities that the Portfolio holds. Please note that there are
many circumstances that are not described here which could cause the value of
your investment in the Portfolio to decline, and which could prevent the
Portfolio from achieving its objective.
The principal risks of investing in the Portfolio are:
o MARKET RISK: This is the risk that the price of a security held by
the Portfolio will fall due to changing economic, political or
market conditions or disappointing earnings results.
o COMPANY RISK: Prices of securities react to the economic condition
of the company that issued the security. The Portfolio's equity
investments in an issuer may rise and fall based on the issuer's
actual and anticipated earnings, changes in management and the
potential for takeovers and acquisitions.
o OVER THE COUNTER RISK: Over-the-counter (OTC) transactions involve
risks in addition to those associated with transactions in
securities traded on exchanges. OTC listed companies may have
limited product lines, markets or financial resources. Many OTC
securities trade less frequently and in smaller volume than
exchange-listed securities. The values of these securities may be
more volatile than exchange- listed securities, and the Portfolio
may experience difficulty in establishing or closing out positions
in these securities at prevailing market prices.
o FOREIGN MARKETS AND CURRENCY RISK: Investing in foreign markets and
securities involves risks relating to political, social and
economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include:
* The seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio
assets, and political or social instability.
20
<PAGE>
* The Enforcement of legal rights which may be difficult,
costly and slow in foreign countries, and which may be
complicated by special problems enforcing claims against
foreign governments.
* Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information about
their operations.
* Foreign markets may be less liquid and more volatile than
U.S. markets.
* Foreign securities often trade in currencies other than
the U.S. dollar, and the Portfolio may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes in
currency exchange rates will affect the Portfolio's net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
Portfolio to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the Portfolio's foreign currency
holdings. By entering into forward foreign currency
exchange contracts, the Portfolio may be required to
forego the benefits of advantageous changes in exchange
rates and, in the case of forward contracts entered into
for the purpose of increasing return, the Portfolio may
sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the
risk that the party with which the Portfolio contracts
may fail to perform its obligations to the Portfolio.
o EMERGING MARKETS RISK: Emerging markets are generally defined as
countries in the initial stages of their industrialization cycles
with low per capita income. Investments in emerging markets
securities involve all of the risks of investments in foreign
securities, and also have additional risks:
* All of the risks of investing in foreign securities, as
described above, are heightened by investing in emerging
markets countries.
* The markets of emerging markets countries have been more
volatile than the markets of developed countries with
more mature economies. These markets often have provided
higher rates of return, and significantly greater risks
to investors.
MFS EMERGING EQUITIES PORTFOLIO
PRINCIPAL INVESTMENT STRATEGIES. The Portfolio's investment objective is long
term growth of capital. In order to achieve its investment objective, the
Portfolio invests primarily in common
21
<PAGE>
stocks and related securities, such as
preferred stocks, convertible securities and depositary receipts for those
securities, of emerging growth companies. Emerging growth companies are
companies, which MFS believes, are:
o early in their life cycle and that have the potential to become
major enterprises, or
o major enterprises whose rates of earnings growth MFS believes will
accelerate because of special factors, such as rejuvenated
management, new products, changes in consumer demand, or basic
changes in the economic environment.
Emerging growth companies may be of any size, and MFS believes that these
companies have products, technologies, management, markets and opportunities
which will facilitate earnings growth, that, over time, is well above the
growth rate of the overall economy and the rate of inflation. The Portfolio's
investments in emerging growth companies may include securities listed on a
securities exchange or traded in the over-the-counter markets.
MFS selects securities based upon fundamental analysis (such as an analysis of
earnings, cash flows, competitive position and management's abilities)
performed by the Portfolio's manager and MFS' large group of equity research
analysts.
A list of the types of securities in which the Portfolio may invest is found in
the Appendix. The types of securities in which the Portfolio may invest and the
investment techniques and practices in which the Portfolio may engage that are
not principal investment strategies are discussed, together with their risks,
in the Fund's SAI, which you may obtain by contacting the Fund (see back cover
for address and phone number).
PRINCIPAL RISKS. The principal risks of investing in the Portfolio and the
circumstances that are reasonably likely to cause the value of your investment
in the Portfolio to decline are described below. As with any non-money market
mutual fund, the share price of a Portfolio will change daily based on changes
in the value of the securities that the Portfolio holds. Please note that there
are many circumstances that are not described here which could cause the value
of your investment in the Portfolio to decline, and which could prevent the
Portfolio from achieving its objective.
The principal risks of investing in the Portfolio are:
o MARKET RISK: This is the risk that the price of a security held by
the Portfolio will fall due to changing economic, political or
market conditions or disappointing earnings results.
o COMPANY RISK: Prices of securities react to the economic condition
of the company that issued the security. The Portfolio's equity
investments in an issuer may rise and fall based on the issuer's
actual and anticipated earnings, changes in management and the
potential for takeovers and acquisitions.
o EMERGING GROWTH RISK: Prices of securities react to the economic
condition of the company that issued the security. The Portfolio's
equity investments in an issuer may
22
<PAGE>
rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions. Investments in emerging growth companies may be
subject to more abrupt or erratic market movements and may involve
greater risks than investments in other more established companies.
Emerging growth companies often
may:
* have limited product lines, markets and financial
resources
* be dependent on management by one or a few key
individuals
* have limited marketability when, for example,
disappointing earnings reports are announced
o OVER THE COUNTER RISK: Over-the-counter (OTC) transactions involve
risks in addition to those associated with transactions in
securities traded on exchanges. OTC listed companies may have
limited product lines, markets or financial resources. Many OTC
securities trade less frequently and in smaller volume than
exchange-listed securities. The values of these securities may be
more volatile than exchange- listed securities, and the Portfolio
may experience difficulty in establishing or closing out positions
in these stocks at prevailing market prices.
o FOREIGN MARKETS AND CURRENCY RISK: Investing in foreign markets and
securities involves risks relating to political, social and
economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include:
* The seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio
assets, and political or social instability.
* The enforcement of legal rights which may be difficult,
costly and slow in foreign countries, and which may be
complicated by special problems enforcing claims against
foreign governments.
* Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information about
their operations.
* Foreign markets may be less liquid and more volatile than
U.S. markets.
* Foreign securities often trade in currencies other than
the U.S. dollar, and the Portfolio may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes in
currency exchange rates will affect the Portfolio's net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to
23
<PAGE>
these other currencies may cause the value of the
Portfolio to decline. Certain foreign currencies may be
particularly volatile and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the Portfolio's foreign currency
holdings. By entering into forward foreign currency
exchange contracts, the Portfolio may be required to
forego the benefits of advantageous changes in exchange
rates and, in the case of forward contracts entered into
for the purpose of increasing return, the Portfolio may
sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the
risk that the party with which the Portfolio contracts
may fail to perform its obligations to the Portfolio.
MFS RESEARCH GROWTH PORTFOLIO
PRINCIPAL INVESTMENT STRATEGIES. The Portfolio's investment objective is
long-term growth of capital and future income. In order to achieve its
investment objective, the Portfolio invests primarily in common stocks and
related securities, such as preferred stocks, convertible securities and
depositary receipts. The Portfolio focuses on companies that MFS believes have
favorable prospects for long-term growth; attractive valuations based on
current and expected earnings or cash flow, dominant or growing market share
and superior management. The Portfolio may invest in companies of any size. The
Portfolio's investments may include securities traded on securities exchanges
or in the over-the-counter markets.
A committee of investment research analysts selects portfolio securities for
the Portfolio. This committee includes investment analysts employed not only by
MFS, but also by MFS investment advisory affiliates. The committee allocates
the Portfolio's assets among various industries. Individual analysts then
select what they view as the securities best suited to achieve the Portfolio's
investment objective within their assigned industry responsibility.
The Portfolio may invest in foreign equity securities (including emerging
market securities), and may have exposure to foreign currencies through its
investment in these securities, its direct holdings of foreign currencies or
through its use of foreign currency exchange contracts for the purchase or sale
of a fixed quantity of foreign currency at a future date.
A list of the types of securities in which the Portfolio may invest is found in
the Appendix. The types of securities in which the Portfolio may invest and the
investment techniques and practices in which the Portfolio may engage that are
not principal investment strategies are discussed, together with their risks,
in the Fund's SAI, which you may obtain by contacting the Fund (see back cover
for address and phone number).
PRINCIPAL RISKS. The principal risks of investing in the Portfolio and the
circumstances that are reasonably likely to cause the value of your investment
in the Portfolio to decline are described below. As with any non-money market
mutual fund, the share price of a Portfolio will change daily based on changes
in the value of the securities that the Portfolio holds. Please note that there
are many circumstances that are not described here which could cause the value
of your
24
<PAGE>
investment in the Portfolio to decline, and which could prevent the Portfolio
from achieving its objective.
The principal risks of investing in the Portfolio are:
o MARKET RISK: This is the risk that the price of a security held by
the Portfolio will fall due to changing economic, political or
market conditions or disappointing earnings results.
o COMPANY RISK: Prices of securities react to the economic condition
of the company that issued the security. The Portfolio's equity
investments in an issuer may rise and fall based on the issuer's
actual and anticipated earnings, changes in management and the
potential for takeovers and acquisitions.
o OVER THE COUNTER RISK: Over-the-counter (OTC) transactions involve
risks in addition to those associated with transactions in
securities traded on exchanges. OTC listed companies may have
limited product lines, markets or financial resources. Many OTC
securities trade less frequently and in smaller volume than
exchange-listed securities. The values of these securities may be
more volatile than exchange- listed securities, and the Portfolio
may experience difficulty in establishing or closing out positions
in these securities at prevailing market prices.
o FOREIGN MARKETS AND CURRENCY RISK: Investing in foreign markets and
securities involves risks relating to political, social and
economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include:
* The seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio
assets, and political or social instability.
* The enforcement of legal rights which may be difficult,
costly and slow in foreign countries, and which may be
complicated by special problems enforcing claims against
foreign governments.
* Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information about
their operations.
* Foreign markets may be less liquid and more volatile than
U.S. markets.
* Foreign securities often trade in currencies other than
the U.S. dollar, and the Portfolio may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes in
currency exchange rates will affect the Portfolio's net
asset value, the value of dividends and interest earned,
and gains and losses realized on the
25
<PAGE>
sale of securities. An increase in the strength of the
U.S. dollar relative to these other currencies may cause
the value of the Portfolio to decline. Certain foreign
currencies may be particularly volatile, and foreign
governments may intervene in the currency markets,
causing a decline in value or liquidity in the
Portfolio's foreign currency holdings. By entering into
forward foreign currency exchange contracts, the
Portfolio may be required to forego the benefits of
advantageous changes in exchange rates and, in the case
of forward contracts entered into for the purpose of
increasing return, the Portfolio may sustain losses which
will reduce its gross income. Forward foreign currency
exchange contracts involve the risk that the party with
which the Portfolio contracts may fail to perform its
obligations to the Portfolio.
SCUDDER INTERNATIONAL GROWTH PORTFOLIO
PRINCIPAL INVESTMENT STRATEGIES. The Portfolio's investment objective is
long-term growth of capital. In order to achieve its investment objective, the
Portfolio invests primarily in foreign equity securities with prospects for
growth. The Portfolio invests in securities issued by companies, wherever
organized, which do business primarily outside the U.S., including emerging
market countries. The Portfolio intends to diversify investments among several
countries and to have represented, in substantial proportions, business
activities in not less than three countries. The Portfolio generally invests in
equity securities issued by established companies listed on foreign exchanges
that Scudder Kemper believes have favorable characteristics. The Portfolio also
may invest in debt securities. Scudder Kemper will select debt securities on
the basis of, among other things, yield, credit quality, and the fundamental
outlook for currency and interest rate trends in different parts of the globe.
Investment ideas are generated through the integration of three analytical
disciplines:
GLOBAL THEMES - The analysis of major global themes helps Scudder Kemper
identify economic sectors and industries most likely to gain or lose value
during specific phases of a theme's cycle.
COUNTRY ANALYSIS - A view of a regional and local market opportunities are
developed through a qualitative assessment of each country's fundamental and
political characteristics.
COMPANY ANALYSIS - To identify companies with exceptional opportunities,
Scudder Kemper looks for unique attributes such as a franchise or monopoly,
above average growth potential, innovation, and scarcity.
These complimentary disciplines suggest investment candidates, who are
evaluated on a global, regional and industry basis.
A list of the types of securities in which the Portfolio may invest is found in
the Appendix. The types of securities in which the Portfolio invests and the
investment techniques and practices in
26
<PAGE>
which the Portfolio may engage that are not principal investment strategies are
discussed, together with their risks, in the Fund's SAI, which you may obtain
by contacting the Fund (see back cover for address and phone number).
PRINCIPAL RISKS. The principal risks of investing in the Portfolio and the
circumstances that are reasonably likely to cause the value of your investment
in the Portfolio to decline are described below. As with any non-money market
mutual fund, the share price of a Portfolio will change daily based on changes
in the value of the securities that the Portfolio holds. Please note that there
are many circumstances that are not described here which could cause the value
of your investment in the Portfolio to decline, and which could prevent the
Portfolio from achieving its objective.
The principal risks of investing in the Portfolio are:
o MARKET RISK: This is the risk that the price of a security held by
the Portfolio will fall due to changing economic, political or
market conditions or disappointing earnings results.
o COMPANY RISK: Prices of securities react to the economic condition
of the company that issued the security. The Portfolio's equity
investments in an issuer may rise and fall based on the issuer's
actual and anticipated earnings, changes in management and the
potential for takeovers and acquisitions.
o FOREIGN MARKETS AND CURRENCY RISK: Investing in foreign markets and
securities involves risks relating to political, social and
economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include:
* The seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio
assets, and political or social instability.
* The enforcement of legal rights which may be difficult,
costly and slow in foreign countries, and which may be
complicated by special problems enforcing claims against
foreign governments.
* Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information about
their operations.
* Foreign markets may be less liquid and more volatile than
U.S. markets.
* Foreign securities often trade in currencies other than
the U.S. dollar, and the Portfolio may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes in
currency exchange rates will affect the Portfolio's net
asset value, the
27
<PAGE>
value of dividends and interest earned, and gains and
losses realized on the sale of securities. An increase in
the strength of the U.S. dollar relative to these other
currencies may cause the value of the Portfolio to
decline. Certain foreign currencies may be particularly
volatile, and foreign governments may intervene in the
currency markets, causing a decline in value or liquidity
in the Portfolio's foreign currency holdings. By entering
into forward foreign currency exchange contracts, the
Portfolio may be required to forego the benefits of
advantageous changes in exchange rates and, in the case
of forward contracts entered into for the purpose of
increasing return, the Portfolio may sustain losses which
will reduce its gross income. Forward foreign currency
exchange contracts involve the risk that the party with
which the Portfolio contracts may fail to perform its
obligations to the Portfolio.
o EMERGING MARKETS RISK: Emerging markets are generally defined as
countries in the initial stages of their industrialization cycles
with low per capita income. Investments in emerging markets
securities involve all of the risks of investments in foreign
securities, and also have additional risks:
* All of the risks of investing in foreign securities as
described above are heightened by investing in emerging
markets countries.
* The markets of emerging markets countries have been more
volatile than the markets of developed countries with
more mature economies. These markets often have provided
higher rates of return, and significantly greater risks,
to investors.
o INTEREST RATE RISK: The Portfolio's investment in debt securities
involves risks relating to interest rate movement. If interest
rates go up, the value of any debt securities held by the Portfolio
will decline.
o CREDIT RISK: The Portfolio's investment in non-investment grade
debt securities involves credit risk because issuers of
non-investment grade securities may be more likely to have
difficulty making timely payments of interest or principal.
28
<PAGE>
T. ROWE PRICE GROWTH EQUITY PORTFOLIO
PRINCIPAL INVESTMENT STRATEGIES. The Portfolio's investment objective is
long-term capital growth, and secondarily, increasing dividend income. In order
to achieve its investment strategy, the Portfolio invests primarily in the
common stock of a diversified group of growth companies. T. Rowe normally (but
not always) seeks to invest in companies that have the ability to pay
increasing dividends through strong cash flow. T. Rowe generally looks for
companies with an above-average rate of earnings growth and a lucrative niche
in the economy that gives them the ability to sustain earnings momentum even
during times of slow economic growth. T. Rowe believes that when a company's
earnings grow faster than both inflation and the overall economy, the market
will eventually reward it with a higher stock price.
The Portfolio may sell securities for a variety of reasons such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
The Portfolio may invest in foreign securities and may have exposure to foreign
currencies through its investment in these securities, its direct holdings of
foreign currencies or through its use of foreign currency exchange contracts
for the purchase or sale of a fixed quantity of foreign currency at a future
date.
A list of the types of securities in which the Portfolio may invest is found in
the Appendix. The types of securities in which the Portfolio invests and the
investment techniques and practices in which the Portfolio may engage that are
not principal investment strategies are discussed, together with their risks,
in the Fund's SAI, which you may obtain by contacting the Fund (see back cover
for address and phone number).
PRINCIPAL RISKS. The principal risks of investing in the Portfolio and the
circumstances that are reasonably likely to cause the value of your investment
in the Portfolio to decline are described below. As with any non-money market
mutual fund, the share price of a Portfolio will change daily based on changes
in the value of the securities that the Portfolio holds. Please note that there
are many circumstances that are not described here which could cause the value
of your investment in the Portfolio to decline, and which could prevent the
Portfolio from achieving its objective.
The principal risks of investing in the Portfolio are:
o MARKET RISK: This is the risk that the price of a security held by
a Portfolio will fall due to changing economic, political or market
conditions or disappointing earnings results.
o COMPANY RISK: Prices of securities react to the economic condition
of the company that issued the security. The Portfolio's equity
investments in an issuer may rise and fall based on the issuer's
actual and anticipated earnings, changes in management and the
potential for takeovers and acquisitions.
29
<PAGE>
o GROWTH STOCK RISK: Growth stocks can be volatile for several
reasons. Since they usually invest a high portion of earnings in
their businesses, they may lack the dividends of value stocks that
can cushion stock prices in a falling market. In addition, earnings
disappointments may lead to sharply falling prices because
investors buy growth stocks in anticipation of superior earnings
growth.
o FOREIGN MARKETS AND CURRENCY RISK: Investing in foreign markets and
securities involves risks relating to political, social and
economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include:
* The seizure by the government of company assets,
excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio
assets, and political or social instability.
* Enforcing legal rights may be difficult, costly and slow
in foreign countries, and there may be special problems
enforcing claims against foreign governments.
* Foreign companies may not be subject to accounting
standards or governmental supervision comparable to U.S.
companies, and there may be less public information about
their operations.
* Foreign markets may be less liquid and more volatile than
U.S. markets.
* Foreign securities often trade in currencies other than
the U.S. dollar, and the Portfolio may directly hold
foreign currencies and purchase and sell foreign
currencies through forward exchange contracts. Changes in
currency exchange rates will affect the Portfolio's net
asset value, the value of dividends and interest earned,
and gains and losses realized on the sale of securities.
An increase in the strength of the U.S. dollar relative
to these other currencies may cause the value of the
Portfolio to decline. Certain foreign currencies may be
particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in
value or liquidity in the Portfolio's foreign currency
holdings. By entering into forward foreign currency
exchange contracts, the Portfolio may be required to
forego the benefits of advantageous changes in exchange
rates and, in the case of forward contracts entered into
for the purpose of increasing return, the Portfolio may
sustain losses which will reduce its gross income.
Forward foreign currency exchange contracts involve the
risk that the party with which the Portfolio enters the
contract may fail to perform its obligations to the
Portfolio.
30
<PAGE>
MANAGEMENT OF THE PORTFOLIOS
INVESTMENT ADVISER. Aetna Life Insurance and Annuity Company (the Adviser)
serves as the investment adviser for each of the Portfolios. The Adviser is a
Connecticut insurance corporation with its principal offices at 151 Farmington
Avenue, Hartford, Connecticut 06156, and is registered with the Securities and
Exchange Commission as an investment adviser. As of December 31, 1999, the
Adviser and its wholly-owned subsidiaries managed over $54.5 billion in assets.
Aetna Life Insurance and Annuity Company is an indirect, wholly-owned
subsidiary of Aetna Inc.
The Adviser, subject to the supervision of the Board of Directors of the Fund
(the "Directors," each a "Director"), manages and oversees the Fund's
day-to-day operations and manages the investments of each Portfolio. The
Adviser may delegate to a sub-adviser the responsibility for day-to-day
management of the investments of each Portfolio, subject to the Adviser's
oversight. For the fiscal year ended December 31, 1999, the Adviser received
advisory fees from each Portfolio as a percentage of the average net assets of
each Portfolio as follows:
PORTFOLIO FEE
--------- ---
MFS Capital Opportunities Portfolio.... 0.65% of average daily net assets
MFS Emerging Equities Portfolio........ 0.67% of average daily net assets
MFS Research Growth Portfolio.......... 0.70% of average daily net assets
Scudder International Growth Portfolio. 0.80% of average daily net assets
T. Rowe Price Growth Equity Portfolio.. 0.60% of average daily net assets
The Adviser is responsible for all of its own costs, including costs of the
Adviser's personnel, required to carry out its investment advisory duties.
SUB-ADVISERS. MFS CAPITAL OPPORTUNITIES PORTFOLIO, MFS EMERGING EQUITIES
PORTFOLIO AND MFS RESEARCH GROWTH PORTFOLIO. The Adviser has engaged MFS, 500
Boylston Street, Boston, Massachusetts 02116, as Sub-adviser to MFS Capital
Opportunities, MFS Emerging Equities and MFS Research Growth Portfolios. MFS
has been engaged in the investment management business since 1924 and is an
indirect subsidiary of Sun Life Assurance Company of Canada. Net assets under
management of MFS were approximately $136.7 billion as of December 31, 1999.
Maura A. Shaughnessy, a Senior Vice President of MFS, became portfolio manager
of MFS Capital Opportunities in February 1999. Ms. Shaughnessy has been
employed by MFS since 1991, first as an equity analyst and then as a portfolio
manager. John W. Ballen, the President of MFS, is portfolio manager of MFS
Emerging Equities. Mr. Ballen has been employed as a portfolio manager by MFS
since 1984 and has managed MFS Emerging Equities since its
31
<PAGE>
inception in November 1997. Portfolio securities of MFS Research Growth are
selected by a committee of investment research analysts. This committee
includes investment analysts employed not only by MFS but also by MFS
International (U.K.) Limited, a wholly-owned subsidiary of MFS. MFS Research
Growth's assets are allocated among industries by the analysts acting together
as a group. Individual analysts are then responsible for selecting what they
view as the securities best suited to meet MFS Research Growth's investment
objective within their assigned industry responsibility.
SCUDDER INTERNATIONAL GROWTH PORTFOLIO. The Adviser has engaged Scudder Kemper
a Delaware corporation, 345 Park Avenue, New York, New York 10154 as
Sub-adviser to Scudder International Growth Portfolio. On June 26, 1997,
Scudder, Stevens & Clark ("SSC") entered into a Transaction Agreement with
Zurich Insurance Company ("Zurich"). Under the terms of the Agreement, Zurich
acquired a majority interest in SSC, and Zurich Kemper Investments, Inc., a
Zurich subsidiary, became part of Scudder Kemper with the resultant name
change. Scudder Kemper (and its predecessor SSC) has been engaged in the
investment management business since 1919. Scudder Kemper managed in excess of
$295 billion as of December 31, 1999. Scudder Kemper provides investment
management services for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family
and individual accounts.
Scudder International Growth Portfolio is managed by a team of investment
professionals. Irene T. Cheng is the Lead Manager and is primarily responsible
for the day-to-day management of the Portfolio. She works with the other
members of the team in developing and executing the Portfolio's investment
program. Ms. Cheng joined Scudder Kemper in 1993 as Portfolio Manager and has
managed the Scudder International Growth Portfolio since its inception in
November 1997. Ms. Cheng is also a Managing Director of International Equity
Management for Scudder Kemper.
T. ROWE PRICE GROWTH EQUITY PORTFOLIO. The Adviser has engaged T. Rowe, 100
East Pratt Street, Baltimore, Maryland 21202 as Sub-adviser to T. Rowe Price
Growth Equity Portfolio. T. Rowe has been engaged in the investment management
business since 1937. T. Rowe and its affiliates managed over $179 billion as of
December 31, 1999, for over 8 million individual and institutional accounts. T.
Rowe Price Growth Equity Portfolio is managed by a committee. The committee
chairman, Robert W. Smith, has day-to-day responsibility for managing the T.
Rowe Price Growth Equity Portfolio and works with the committee in developing
and executing its investment program. Mr. Smith joined T. Rowe in 1992 as an
equity analyst and has managed the T. Rowe Price Growth Stock Fund since 1997,
as well as the U.S. stock portion of the T. Rowe Price Global Stock Fund since
its inception in 1995.
Each Sub-adviser, subject to the supervision of the Adviser and the Directors,
is responsible for managing the assets of its respective Portfolio(s) in
accordance with the Portfolio's investment objective and policies. Each
Sub-adviser pays the salaries and other related costs of personnel engaged in
providing investment advice, including office space, facilities and equipment.
32
<PAGE>
The Adviser has overall responsibility for monitoring the investment program
maintained by each Sub-adviser for compliance with applicable laws and
regulations and the respective Portfolio's investment objective.
The Adviser pays each Sub-adviser a fee at an annual rate based on the average
daily net asset value of each Portfolio. The Adviser pays the sub-advisory fee
out of its advisory fee.
SHAREHOLDER INFORMATION
NET ASSET VALUE
The net asset value per share (NAV) of each Portfolio is determined as of the
later of 15 minutes following the close of the New York Stock Exchange or 4:15
p.m. Eastern time on each day that the New York Stock Exchange is open for
trading. The New York Stock Exchange is generally open for trading every Monday
through Friday, except for national holidays. Each Portfolio's NAV is computed
by taking the total value of a Portfolio's securities, plus any cash or other
assets (including dividends and interest accrued but not collected) and
subtracting all liabilities (including accrued expenses), and dividing the
total by the number of shares outstanding. Portfolio securities are valued
primarily by independent pricing services, based on market quotations.
Short-term debt instruments maturing in 60 days or less are valued at amortized
cost which when combined with accrued interest approximates market value.
Securities for which market quotations are not readily available are valued at
their fair value in such manner as may be determined, from time to time, in
good faith, by or under the authority of the Directors.
Sometimes, the price of a security trading on a foreign stock exchange may be
affected by events that happen after that exchange closes. If this happens, the
fair value of the security may be determined using other factors and may not
reflect the security's last quoted price. In addition, foreign securities may
trade on days when shares of the Portfolios are not priced. As a result, the
NAV of a Portfolio holding these securities may change on days when you would
not be able to buy or sell Portfolio shares.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions of shares may be made only by insurance companies for
their separate accounts at the direction of variable annuity and variable life
insurance contract owners. Please refer to the prospectus for your contract or
policy for information on how to direct investments in, or redemptions from, a
Portfolio and any fees that may apply. Orders received by the insurance company
before the earlier of 4:00 p.m. Eastern time or the close of regular trading on
the New York Stock Exchange will be priced at the NAV calculated that day, as
described above. 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
33
<PAGE>
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.
It is possible that certain conflicts of interest may arise when shares of a
Portfolio are purchased to find both variable annuity and variable life
insurance contracts (mixed funding). Conflicts also may arise if shares of a
Portfolio are purchased by more than one insurance company (shared funding).
Aetna currently does not foresee any disadvantage to owners of variable annuity
or variable life insurance contracts because of mixed or shared funding. The
Directors, however, will monitor the Fund and the Portfolios in order to
identify any material, irreconcilable conflicts of interest which may possibly
arise, and to determine what action, if any, should be taken in response to any
such conflicts.
DIVIDENDS
Dividends from net investment income are declared and paid by each Portfolio at
least annually. Over the course of the year, accrued and paid dividends will
equal all or substantially all of each Portfolio's net investment income. Each
Portfolio will also pay dividends from net realized capital gains, reduced by
available capital losses, at least annually. All dividends and capital gain
distributions will be automatically reinvested in additional shares of a
Portfolio at the NAV of such shares on the payment date, unless a participating
insurance company's separate account is permitted to hold cash and elects to
receive payment in cash. From time to time, a portion of a Portfolio's
dividends may constitute a return of capital.
TAX MATTERS
Each Portfolio intends to qualify as a regulated investment company for federal
income tax purposes by satisfying the requirements under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), including requirements
with respect to diversification of assets, distribution of income and sources
of income. As a regulated investment company, a Portfolio generally will not be
subject to tax on its ordinary income and net realized capital gains. Each
Portfolio also intends to comply with the diversification requirements of
Section 817(h) of the Code for variable annuity and variable life insurance
contracts so that the owners of these contracts should not be subject to
federal tax on distributions of dividends and income from a Portfolio to the
insurance company's separate accounts. Contract owners should review the
prospectus for their variable annuity or variable life insurance contract for
information regarding the tax consequences of purchasing a contract.
PERFORMANCE
PERFORMANCE OF SIMILARLY MANAGED MUTUAL FUNDS. Each Portfolio has only a
two-year performance record. Each Portfolio, however, has substantially the
same investment objective, policies and strategies as one or more existing
mutual funds (Comparable Funds) that are either sold directly to the public or
through variable products, and that are advised by MFS, Scudder Kemper or T.
Rowe, as the case may be. While the Portfolios are managed in a manner similar
34
<PAGE>
to that of the Comparable Funds presented, investors should be aware that the
Portfolios are not the same funds and will not have the same performance.
Investments made by the Portfolios at any given time may not be the same as
those made by the Comparable Funds. Different performance will result due to
factors such as differences in the cash flows into and out of the Portfolios,
different fees and expenses, and differences in portfolio size and positions.
Each Comparable Fund has its own prospectus and information about the
Comparable Funds may be obtained by calling Aetna at 1-800-262-3862.
The historical performance of the Comparable Funds is presented below. You
should not consider the performance of the Comparable Funds as an indication of
the future performance of a Portfolio. The performance figures shown below
reflect the deduction of the historical fees and expenses paid by each
Comparable Fund and not those to be paid by the Portfolio. The figures do not
reflect the deduction of any insurance fees or charges that are imposed by the
insurance company in connection with its sale of variable annuity or variable
life insurance contracts. You should refer to the separate account prospectuses
describing the variable annuity or variable life insurance contracts for
information pertaining to these insurance fees and charges. The insurance
separate account fees will have a detrimental effect on the performance of the
Portfolios. The results shown below reflect the reinvestment of dividends and
distributions, and were calculated in the same manner that will be used by each
Portfolio to calculate its own performance.
The following table shows the average annual total return of the Comparable
Funds for the stated periods ended December 31, 1999, as well as a comparison
with the performance of the applicable benchmark.(1)
1 Year 3 Years 5 Years 10 Years
MFS Capital Opportunities Fund
(formerly MFS Value Fund)
(Class I)(2)........................48.01% 33.72% 32.11% 20.29%
(Model for MFS Capital
Opportunities)(3)
S&P 500 Index(1).....................21.04% 27.56% 28.55% 18.21%
Morningstar Large Cap Blend Fund
Average.............................19.47% 22.62% 23.89% 15.71%
MFS Emerging Growth Fund
(Class I)(2)........................50.56% 31.47% 29.37% 25.31%
(Model for MFS Emerging Equities)(3)
Russell 2000 Index(1)................21.26% 13.08% 16.69% 13.40%
S&P 500 Index(1) ....................21.04% 27.56% 28.55% 18.21%
Morningstar Large Cap Growth Fund
Average.............................38.63% 31.38% 28.47% 18.63%
MFS Research Fund (Class I)(2).......24.27% 22.85% 26.18% 18.35%
(Model for MFS Research Growth)(3)
S&P 500 Index........................21.04% 27.56% 28.55% 18.21%
Morningstar Large Cap Growth Fund
Average.............................38.63% 31.38% 28.47% 18.63%
35
<PAGE>
Scudder VLIF International Portfolio.54.51% 25.92% 20.56% 13.25%
(Model for Scudder International
Growth)
Scudder International Fund...........57.89% 26.46% 21.06% 13.06%
(Model for Scudder International
Growth)
MSCI EAFE Index(1)...................27.30% 16.06% 13.15% 7.33%
Morningstar Foreign Stock Fund
Average.............................44.31% 18.65% 15.11% 10.23%
T. Rowe Price Growth Stock Fund......22.15% 25.35% 25.71% 17.39%
(Model for T. Rowe Price Growth
Equity)
S&P 500 Index (1)....................21.04% 27.56% 28.55% 18.21%
Morningstar Large Cap Growth Fund
Average.............................38.63% 31.38% 28.47% 18.63%
(1)The S&P 500 (Standard & Poor's 500) Index is a value-weighted, unmanaged
index of 500 widely held stocks considered to be representative of the stock
market in general. The Morningstar averages are unmanaged composites of the
annual returns of mutual funds that have investment characteristics similar
to the Portfolio. The Russell 2000 Index is a value-weighted, unmanaged
index of small capitalization stocks. The Morgan Stanley Capital
International-Europe, Australia, Far East (MSCI EAFE) Index is an unmanaged,
market value-weighted average of the performance of more than 900 securities
listed on the stock exchanges of countries in Europe, Australia and the Far
East. All indices assume reinvestment of all dividends. It is not possible
to invest directly in an index.
(2)MFS Emerging Growth Fund and MFS Research Fund commenced offering Class I
shares on January 2, 1997; MFS Capital Opportunities Fund commenced offering
Class I shares on January 3, 1997. For periods preceding those dates, Class
I performance was calculated by using the performance of the oldest class of
shares for each Comparable Fund (Class B for MFS Emerging Growth Fund and
Class A for MFS Research and MFS Capital Opportunities Fund), adjusted to
reflect that Class I shares have no front-end load or contingent deferred
sales charge. No adjustment was made for differences in the internal
expenses among classes.
(3)MFS also manages three series of the MFS Variable Insurance Trust (VIT)
with substantially similar investment objectives, policies and strategies as
the comparable Portfolio Partners Portfolios. The performance of these funds
was not included in the chart because each has a relatively short track
record. The one-year, three year and since inception performance (as of
December 31, 1999) of the VIT--Emerging Growth Series and VIT--Research
Series funds is as follows: VIT--Emerging Growth Series 86.79%, 50.12% and
36.84%, respectively (inception July 24, 1995); VIT--Research Series:
33.39%, 27.07% and 23.82%, respectively (inception July 26, 1995). The one
year and since inception performance (as of December 31, 1999) of the VIT--
Capital Opportunities Series is 62.50%, 40.28% and 34.84%, respectively
(inception August 14, 1996).
36
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand each
Portfolio's financial performance for the period of its operations. Certain
information reflects financial results for a single Portfolio share. The total
returns in the table represent the rate that an investor would have earned or
lost on an investment in a Portfolio (assuming reinvestment of all dividends
and distributions). This information has been audited by KPMG LLP, independent
auditors, whose report, along with the Fund's financial statements, are
included in the annual report. The annual report is available upon request
without charge by calling 1-800-525-4225.
APPENDIX
INVESTMENT TECHNIQUES AND PRACTICES
In pursuing their investment objectives and investment policies, the Portfolios
may engage in the following investment techniques and practices, which are
described, together with their risks, in the SAI.
SYMBOLS
< permitted
_ not permitted
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
INVESTMENT TECHNIQUES/PRACTICES MFS MFS MFS SCUDDER T. ROWE
CAPITAL EMERGING RESEARCH INT'L. PRICE
OPPORTUNITIES EQUITIES GROWTH GROWTH GROWTH
- ----------------------------------------------------------------------------------------
Debt Securities
- ----------------------------------------------------------------------------------------
Asset-Backed Securities
- ----------------------------------------------------------------------------------------
Collateralized Mortgage
Obligations and Multi-class - - - <
Pass-Through Securities -
- ----------------------------------------------------------------------------------------
Corporate Asset-Backed - - - < -
Securities
- ----------------------------------------------------------------------------------------
Mortgage Pass-Through - - - - -
Securities
- ----------------------------------------------------------------------------------------
Stripped Mortgage-Backed - - - - <
Securities
- ----------------------------------------------------------------------------------------
Corporate Securities < < < < <
- ----------------------------------------------------------------------------------------
Loans and Other Direct - - - - -
Indebtedness
- ----------------------------------------------------------------------------------------
Lower Rated Bonds < < < < -
- ----------------------------------------------------------------------------------------
Municipal Bonds - - - - -
- ----------------------------------------------------------------------------------------
Speculative Bonds < < < < -
- ----------------------------------------------------------------------------------------
U.S. Government Securities < < < < <
- ----------------------------------------------------------------------------------------
Variable and Floating Rate < < < < -
Obligations
- ----------------------------------------------------------------------------------------
Zero Coupon Bonds, Deferred < < - - -
Interest Bonds and PIK Bonds
- ----------------------------------------------------------------------------------------
Equity Securities < < < < <
- ----------------------------------------------------------------------------------------
Foreign Securities Exposure
- ----------------------------------------------------------------------------------------
Brady Bonds < - - < -
- ----------------------------------------------------------------------------------------
Depository Receipts < < < < <
- ----------------------------------------------------------------------------------------
Dollar-Denominated Foreign Debt - - < < <
Securities
- ----------------------------------------------------------------------------------------
37
<PAGE>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
INVESTMENT TECHNIQUES/PRACTICES MFS MFS MFS SCUDDER T. ROWE
CAPITAL EMERGING RESEARCH INT'L. PRICE
OPPORTUNITIES EQUITIES GROWTH GROWTH GROWTH
- ----------------------------------------------------------------------------------------
Emerging Markets < < < < <
- ----------------------------------------------------------------------------------------
Foreign Securities < < < < <
- ----------------------------------------------------------------------------------------
Forward Contracts < < < < <
- ----------------------------------------------------------------------------------------
Futures Contracts < < - < <
- ----------------------------------------------------------------------------------------
Indexed Securities/Structured Products - - < < <
- ----------------------------------------------------------------------------------------
Inverse Floating Rate Obligations - - - - -
- ----------------------------------------------------------------------------------------
Investment in Other Investment
Companies
- ----------------------------------------------------------------------------------------
Open-End < < < < <
- ----------------------------------------------------------------------------------------
Closed-End < < < < <
- ----------------------------------------------------------------------------------------
Lending of Portfolio Securities < < < - <
- ----------------------------------------------------------------------------------------
Laddering - - - - -
- ----------------------------------------------------------------------------------------
Leveraging Transactions
- ----------------------------------------------------------------------------------------
Bank Borrowings - - - - -
- ----------------------------------------------------------------------------------------
Mortgage "Dollar Roll" - - - - -
Transactions
- ----------------------------------------------------------------------------------------
Reverse Repurchase Agreements - - - - -
- ----------------------------------------------------------------------------------------
Options
- ----------------------------------------------------------------------------------------
Options on Foreign Currencies < < - < <
- ----------------------------------------------------------------------------------------
Options on Futures Contracts < < - < <
- ----------------------------------------------------------------------------------------
Options on Securities < < - < <
- ----------------------------------------------------------------------------------------
Options on Stock Indices < < - < <
- ----------------------------------------------------------------------------------------
Reset Options - - - < -
- ----------------------------------------------------------------------------------------
"Yield Curve" Options _ - - - -
- ----------------------------------------------------------------------------------------
Repurchase Agreements < < < < <
- ----------------------------------------------------------------------------------------
Restricted Securities < < < < <
- ----------------------------------------------------------------------------------------
Short Sales _ _ _ _ _
- ----------------------------------------------------------------------------------------
Short Sales Against the Box < - < < <
- ----------------------------------------------------------------------------------------
Short Term Instruments < < < < <
- ----------------------------------------------------------------------------------------
Swaps and Related Derivative - - - < -
Instruments
- ----------------------------------------------------------------------------------------
Temporary Borrowings < < < < <
- ----------------------------------------------------------------------------------------
Temporary Defensive Positions < < < < <
- ----------------------------------------------------------------------------------------
Warrants < < < < <
- ----------------------------------------------------------------------------------------
"When-issued" Securities < < - < <
- ----------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
PORTFOLIO PARTNERS, INC.
151 FARMINGTON AVENUE
HARTFORD, CT 06156-8962
For investors who want more information about the Fund, the following documents
are available free upon request:
o STATEMENT OF ADDITIONAL INFORMATIOn ("SAI"): The SAI, dated May 1, 2000,
contains more detailed information about the Fund and is incorporated by
reference into (made legally a part of) this prospectus.
o ANNUAL/SEMI-ANNUAL REPORTS: Additional information about the Fund's
investments is available in the Fund's annual and semi-annual reports to
shareholders. In the Fund's annual report you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
For a free copy of the SAI or the Fund's annual and semi-annual reports call
1-800-262-3862, or write to Portfolio Partners, Inc., at the address listed
above.
The Securities and Exchange Commission (SEC) maintains an Internet website
(http://www.sec.gov) that contains the SAI, material incorporated by reference,
and other information about the Funds. You can also copy and review this
information at the SEC's Public Reference Room in Washington, D.C., or you can
obtain copies, upon payment of a duplicating fee, by writing to the Public
Reference Room of the SEC, Washington, D.C., 20549-0102 or by electronic
request at the following E-mail address: [email protected]. You can obtain
information on the operation of the Public Reference Room by calling the SEC at
1-202-942-8090.
39
Investment Company Act File No. 811-8319
<PAGE>
PORTFOLIO PARTNERS, INC.
151 FARMINGTON AVENUE
HARTFORD, CONNECTICUT 06156-8962
MFS CAPITAL OPPORTUNITIES PORTFOLIO
(FORMERLY MFS VALUE EQUITY PORTFOLIO)
MFS EMERGING EQUITIES PORTFOLIO
MFS RESEARCH GROWTH PORTFOLIO
SCUDDER INTERNATIONAL GROWTH PORTFOLIO
T. ROWE PRICE GROWTH EQUITY PORTFOLIO
Statement of Additional Information dated: May 1, 2000
This Statement of Additional Information ("SAI") is not a prospectus but should
be read in conjunction with the current prospectus for Portfolio Partners, Inc.
dated May 1, 2000 (the "Prospectus"). This SAI is incorporated by reference in
its entirety into the Prospectus. The Financial Statements for each Portfolio
and the independent auditors' report thereon, included in each Portfolio's
Annual Report, are incorporated herein by reference in this SAI. Free copies of
the Prospectus and SAI are available upon request by writing to Portfolio
Partners, Inc., at the address listed above or by calling 1-800-262-3862.
TABLE OF CONTENTS
PAGE
----
Fund History............................................................. 2
Description of the Fund and Its Investments and Risks.................... 2
Description of Various Securities and Investment Policies and Practices.. 4
Futures Contracts and Options on Futures Contracts....................... 13
Risks Associated With Investing in Options, Futures and Forward
Transactions............................................................ 16
Management of the Fund................................................... 22
Control Persons and Principal Shareholders............................... 23
Investment Advisory and Other Services................................... 24
Principal Underwriter.................................................... 26
Brokerage Allocation and Trading Policies................................ 27
Description of Shares.................................................... 28
Voting Rights............................................................ 28
Net Asset Value.......................................................... 28
Tax Status............................................................... 29
Performance Information.................................................. 32
Financial Statements..................................................... 33
Appendix ................................................................ 34
<PAGE>
FUND HISTORY
Portfolio Partners, Inc. (the "Fund"), was incorporated in 1997 in Maryland and
commenced operations on November 28, 1997.
DESCRIPTION OF THE FUND
AND ITS INVESTMENTS AND RISKS
The Fund is an open-end management investment company 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"). The Fund
currently has authorized five Portfolios: MFS Capital Opportunities Portfolio
("MFS Capital Opportunities"); MFS Emerging Equities Portfolio ("MFS Emerging
Equities"); MFS Research Growth Portfolio ("MFS Research Growth"); Scudder
International Growth Portfolio ("Scudder International Growth"); and T. Rowe
Price Growth Equity Portfolio ("T. Rowe Price Growth Equity"). Effective May 1,
2000, MFS Value Equity Portfolio changed its name to MFS Capital Opportunities
Portfolio. Much of the information contained in this SAI expands on subjects
discussed in the Prospectus. Capitalized terms not defined herein are used as
defined in the Prospectus.
The investment policies and restrictions of the Portfolios, set forth below,
are matters of fundamental policy for purposes of the Investment Company Act of
1940 (the "1940 Act"), and therefore cannot be changed, with regard to a
particular Portfolio, without the approval of a majority of the outstanding
voting securities of that Portfolio as defined by the 1940 Act. This means the
lesser of: (i) 67% of the shares of a Portfolio present at a shareholders'
meeting if the holders of more than 50% of the shares of that Portfolio then
outstanding are present in person or by proxy; or (ii) more than 50% of the
outstanding voting securities of a Portfolio.
As a matter of fundamental policy, no Portfolio will:
1. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a
Portfolio from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical commodities).
2. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio from
investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business).
3. Issue any senior security (as defined in the 1940 Act), except that (a) a
Portfolio may engage in transactions that may result in the issuance of senior
securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) a Portfolio may
acquire other securities, the acquisition of which may result in the issuance
of a senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; and (c) subject to the restrictions set forth
below, a Portfolio may borrow money as authorized by the 1940 Act.
4. Borrow money, except that (a) a Portfolio may enter into commitments to
purchase securities in accordance with its investment program, including
when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33-1/3% of the Portfolio's
total assets; and (b) a Portfolio may borrow money in an amount not to exceed
33-1/3% of the value of its total assets at the time the loan is made.
5. Lend any security or make any other loan if, as a result, more than 33-1/3%
of its total assets would be lent to other parties, but this limitation does
not apply to purchases of publicly issued debt securities or to repurchase
agreements.
6. Underwrite securities issued by others, except to the extent that a
Portfolio may be considered an underwriter within the meaning of the Securities
Act of 1933 (the "1933 Act") in the disposition of restricted securities.
2
<PAGE>
7. Purchase the securities of an issuer if, as a result, more than 25% of its
total assets would be invested in the securities of companies whose principal
business activities are in the same industry. This limitation does not apply to
securities issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities.
With respect to MFS Capital Opportunities, MFS Emerging Equities and MFS
Research Growth only:
8. No Portfolio will 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 program of the Portfolio.
9. With respect to 100% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities) if, as a result, (a) more than 5% of
the Portfolio's total assets would be invested in the securities of that
issuer, or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer.
With respect to Scudder International Growth and T. Rowe Price Growth Equity
only:
10. With respect to 75% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities) if, as a result, (a) more than 5% of
the Portfolio's total assets would be invested in the securities of that
issuer, or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer.
The following restrictions are not fundamental and may be changed without
shareholder approval:
a. No Portfolio will invest more than 15% 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 at approximately the price at which a Portfolio has valued them. 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, securities offered pursuant to Section 4(2) of, or
securities otherwise subject to restrictions on resale under, the 1933 Act
("Restricted Securities"), shall not be deemed illiquid solely by reason of
being unregistered. A Sub-adviser determines whether a particular security is
deemed to be liquid based on the trading markets for the specific security and
other factors.
b. No Portfolio will borrow for leveraging purposes.
c. No Portfolio will make short sales of securities, other than short sales
"against the box." This restriction does not apply to transactions involving
options, futures contracts and related options, and other strategic
transactions.
d. No Portfolio will lend portfolio securities.
With respect to Scudder International Growth and T. Rowe Price Growth Equity
only:
e. No Portfolio will 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 program of the Portfolio.
GENERAL. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a Portfolio's assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Portfolio's acquisition of such security or other asset,
except in the case of borrowing (or other activities that may be deemed to
result in the issuance of a "senior security" under the 1940 Act). Accordingly,
any subsequent change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with the
Portfolio's investment policies and limitations. If the value of a Portfolio's
holdings of illiquid securities at
3
<PAGE>
any time exceeds the percentage limitation applicable at the time of
acquisition due to subsequent fluctuations in value or other reasons, the
Directors will consider what actions, if any, are appropriate to maintain
adequate liquidity. With respect to fundamental policy number 7, industry
classifications of domestic issuers for Scudder International Growth and T.
Rowe Price Growth Equity are determined in accordance with the current
Directory of Companies Filing Annual Reports with the Securities and Exchange
Commission. Industry classifications of foreign issuers for these Portfolios
are based on data provided by Bloomberg L.P. and other industry data sources.
All industry classifications for MFS Capital Opportunities, MFS Emerging
Equities and MFS Research Growthhave been selected by Massachusetts Financial
Services Company ("MFS"), the sub-adviser for those Portfolios. MFS believes
the industry characteristics it has selected are reasonable and not so broad
that the primary economic characteristics of the companies in a single class
are materially different. The industry classifications selected by MFS may be
changed from time to time to reflect
changes in the marketplace.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT POLICIES AND PRACTICES
"WHEN-ISSUED" SECURITIES--Each Portfolio (except MFS Research Growth) may
purchase securities on a "when-issued" or on a "forward delivery" basis. It is
expected that, under normal circumstances, a Portfolio will take delivery of
such securities. When a Portfolio commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the applicable interpretations of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of a Portfolio's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, a
Portfolio will always have cash, short-term money market instruments or other
liquid securities sufficient to fulfill any commitments or to limit any
potential risk. However, although such purchases will not be made for
speculative purposes and SEC policies will be adhered to, purchases of
securities on such bases may involve more risk than other types of purchases.
For example, a Portfolio may have to sell assets which have been set aside in
order to meet redemptions. Also, if a Portfolio determines it is necessary to
sell the "when-issued" or "forward delivery" securities before delivery, it may
incur a loss because of market fluctuations since the time the commitment to
purchase such securities was made. When the time comes to pay for "when-issued"
or "forward delivery" securities, a Portfolio will meet its obligations from
the then-available cash flow on the sale of securities, or, although it would
not normally expect to do so, from the sale of the "when-issued" or "forward
delivery" securities themselves (which may have a value greater or less than
the Portfolio's payment obligation).
CORPORATE ASSET-BACKED SECURITIES--Scudder International Growth may invest in
corporate asset-backed securities. These securities, issued by trusts and
special purpose corporations, are backed by a pool of assets, such as credit
card and automobile loan receivables, representing the obligations of a number
of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
4
<PAGE>
Portfolio will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in
such a security.
REPURCHASE AGREEMENTS--Each of the Portfolios may enter into repurchase
agreements with sellers that are member firms (or subsidiaries thereof) of the
New York Stock Exchange, members of the Federal Reserve System, recognized
primary U.S. Government securities dealers or institutions which the
Sub-adviser has determined to be of comparable creditworthiness. The securities
that a Portfolio purchases and holds through its agent are U.S. Government
securities, the values, including accrued interest, of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to a Portfolio, or the purchase and repurchase prices may be same, with
interest at a standard rate due to the Portfolio together with the repurchase
price on repurchase. In either case, the income to a Portfolio is unrelated to
the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, a Portfolio will have the right to liquidate the securities. If, at the
time a Portfolio is contractually entitled to exercise its right to liquidate
the securities, the seller is subject to a proceeding under the bankruptcy laws
or its assets are otherwise subject to a stay order, the Portfolio's exercise
of its right to liquidate the securities may be delayed and result in certain
losses and costs to the Portfolio. The Fund has adopted and follows procedures
which are intended to minimize the risks of repurchase agreements. For example,
a Portfolio only enters into repurchase agreements after its Sub-adviser has
determined that the seller is creditworthy, and the Sub-adviser monitors the
seller's creditworthiness on an ongoing basis. Moreover, under such agreements,
the value, including accrued interest, of the securities (which are marked to
market every business day) is required to be greater than the repurchase price,
and the Portfolio has the right to make margin calls at any time if the value
of the securities falls below the agreed upon margin.
FOREIGN SECURITIES--The Portfolios may invest in foreign securities (and
foreign currencies) as described in the Prospectus. Investing in foreign
securities generally presents a greater degree of risk than investing in
domestic securities. As a result of its investments in foreign securities, a
Portfolio may receive interest or dividend payments, or the proceeds of the
sale or redemption of such securities, in the foreign currencies in which such
securities are denominated. Under certain circumstances, such as where a
Sub-adviser believes that the applicable exchange rate is unfavorable at the
time the currencies are received or the Sub-adviser anticipates, for any other
reason, that the exchange rate will improve, a Portfolio may hold such
currencies for an indefinite period of time. A Portfolio may also hold foreign
currency in anticipation of purchasing foreign securities. While the holding of
currencies will permit the Portfolio to take advantage of favorable movements
in the applicable exchange rate, such strategy also exposes the Portfolio to
risk of loss if exchange rates move in a direction adverse to the Portfolio's
position. Such losses could reduce any profits or increase any losses sustained
by a Portfolio from the sale or redemption of securities and could reduce the
dollar value of interest or dividend payments received.
AMERICAN DEPOSITARY RECEIPTS--Each Portfolio may invest in ADRs, which are
certificates issued by a U.S. depository (usually a bank) that represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information
to the ADR holders at the request of the issuer of the deposited securities.
The depository of an unsponsored ADR, on the other hand, is under no obligation
to distribute shareholder communications received from the issuer of the
deposited securities or to pass through voting rights to ADR holders in respect
of the deposited securities. A Portfolio may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depository receipts in the United
States can reduce costs and delays as well as potential currency exchange and
other difficulties. A Portfolio may purchase securities in local markets and
direct delivery of these ordinary shares to the local depository of an ADR
agent bank in the foreign country. Simultaneously, the ADR agents create a
certificate that settles at the Portfolio's custodian in five days. A Portfolio
may also execute trades on the U.S. markets using existing ADRs. A foreign
issuer of the security
5
<PAGE>
underlying an ADR is generally not subject to the same reporting requirements
in the United States as a domestic issuer. Accordingly the information
available to a U.S. investor will be limited to the information the foreign
issuer is required to disclose in its own country and the market value of an
ADR may not reflect undisclosed material information concerning the issuer of
the underlying security. ADRs may also be subject to exchange rate risks if the
underlying foreign securities are traded in foreign currency.
WARRANTS--The Portfolios may acquire warrants. Warrants are pure speculation in
that they have no voting rights, pay no dividends, and have no rights with
respect to the assets of the corporation issuing them. Warrants basically are
options to purchase equity securities at a specific price valid for a specific
period of time. They do not represent ownership of the securities, but only the
right to buy them. Warrants differ from call options in that warrants are
issued by the issuer of the security which may be purchased on their exercise,
whereas call options may be written or issued by anyone. The prices of warrants
do not necessarily move parallel to the prices of the underlying securities.
ZERO COUPON, DEFERRED INTEREST AND PIK BONDs--Fixed income securities that MFS
Capital Opportunities and MFS Emerging Equities may invest in include zero
coupon bonds, deferred interest bonds and bonds on which the interest is
payable in kind ("PIK bonds"). Zero coupon and deferred interest bonds are debt
obligations which are issued at a significant discount from face value. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at a
rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations which
provide that the issuer thereof may, at its option, pay interest on such bonds
in cash or in the form of additional debt obligations. Such investments benefit
the issuer by mitigating its need for cash to meet debt service, but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations that make regular payments of interest. The
Portfolio will accrue income on such investments for tax and accounting
purposes, as required, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the liquidation
of other portfolio securities to satisfy the Portfolio's distribution
obligations.
RISK OF INVESTING IN LOWER RATED FIXED-INCOME SECURITIES--Certain of the
Portfolios may invest in lower rated fixed-income securities rated Baa by
Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings
Group ("S&P") or by Fitch IBCA, Inc. ("Fitch") and comparable unrated
securities. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade fixed income
securities.
A Portfolio may also invest in high-yield, below investment grade fixed-income
securities, which are rated Ba or lower by Moody's or BB or lower by S&P or by
Fitch, or, if unrated, of comparable quality. No minimum rating standard is
required by the Portfolios. These securities are considered speculative and,
while generally providing greater income than investments in higher rated
securities, will involve greater risk of principal and income (including the
possibility of default or bankruptcy of the issuers of such securities) and may
involve greater volatility of price (especially during periods of economic
uncertainty or change) than securities in the higher rating categories and
because yields vary over time, no specific level of income can ever be assured.
High-yield, below investment grade, fixed-income securities generally tend to
reflect economic changes (and the outlook for economic growth), short-term
corporate and industry developments and the market's perception of their credit
quality (especially during times of adverse publicity) to a greater extent than
higher rated securities which react primarily to fluctuations in the general
level of interest rates (although these lower rated fixed income securities are
also affected by changes in interest rates). In the past, economic downturns or
an increase in interest rates have, under certain circumstances, caused a
higher incidence of default by the issuers of these securities and may do so in
the future, especially in the case of highly leveraged issuers. The prices for
these securities may be affected by legislative and regulatory developments.
The market for these lower rated fixed income securities may be less liquid
than the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Sub-adviser's judgment may
at times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption
6
<PAGE>
requests or to respond to changes in the market. For a description of the
rating categories described above, see Appendix A.
While a Sub-adviser may refer to ratings issued by established credit rating
agencies, it is not the Portfolios' policy to rely exclusively on ratings
issued by these rating agencies, but rather to supplement such ratings with the
Sub-adviser's own independent and ongoing review of credit quality. To the
extent a Portfolio invests in these lower rated securities, the achievement of
its investment objective may be more dependent on the Sub-adviser's own credit
analysis than in the case of a fund investing in higher quality fixed income
securities. These lower rated securities may also include zero coupon bonds,
deferred interest bonds and PIK bonds which are described above.
Short Sales Against the Box-MFS Capital Opportunities, MFS Research Growth,
Scudder International Growth and T. Rowe Price Growth Equity Portfolios may
make short sales "against the box," i.e., when a security identical to one
owned by MFS Research Growth is borrowed and sold short. If MFS Research Growth
enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required to
hold such securities while the short sale is outstanding. MFS Research Growth
will incur transaction costs, including interest, in connection with opening,
maintaining, and closing short sales against the box.
Hybrid Instruments--T. Rowe Price Growth Equity may invest in hybrid
instruments. Hybrid instruments (a type of potentially high-risk derivative)
combine the elements of futures contracts or options with those of debt,
preferred equity or a depository instrument (hereinafter "Hybrid Instruments").
Generally, a Hybrid Instrument will be a debt security, preferred stock,
depository share, trust certificate, certificate of deposit or other evidence
of indebtedness on which a portion of or all interest payments, and/or the
principal or stated amount payable at maturity, redemption or retirement, is
determined by reference to prices, changes in prices, or differences between
prices, of securities, currencies, intangibles, goods, articles or commodities
(collectively "Underlying Assets") or by another objective index, economic
factor or other measure, such as interest rates, currency exchange rates,
commodity indices, and securities indices (collectively "Benchmarks"). Thus,
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates determined
by reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, the Portfolio may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transaction costs associated with buying and currency-hedging the foreign bond
positions. One solution would be to purchase a U.S. dollar-denominated Hybrid
Instrument whose redemption price is linked to the average three year interest
rate in a designated group of countries. The redemption price formula would
provide for payoffs of greater than par if the average interest rate was lower
than a specified level, and payoffs of less than par if rates were above the
specified level. Furthermore, the Portfolio could limit the downside risk of
the security by establishing a minimum redemption price so that the principal
paid at maturity could not be below a predetermined minimum level if interest
rates were to rise significantly. The purpose of this arrangement, known as a
structured security with an embedded put option, would be to give the Portfolio
the desired European bond exposure while avoiding currency risk, limiting
downside market risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy would be successful and the Portfolio could lose
money if, for example, interest rates do not move as anticipated or credit
problems develop with the issuer of the Hybrid Instrument.
The risks of investing in Hybrid Instruments reflect a combination of the risks
of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has
a fixed principal amount, is denominated in U.S. dollars or bears interest
either at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by
7
<PAGE>
the purchaser, such as economic and political events, the supply and demand for
the Underlying Assets and interest rate movements. In recent years, various
Benchmarks and prices for Underlying Assets have been highly volatile, and such
volatility may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for a discussion
of the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater market risks
than traditional debt instruments. Depending on the structure of the particular
Hybrid Instrument, changes in a Benchmark may be magnified by the terms of the
Hybrid Instrument and have an even more dramatic and substantial effect upon
the value of the Hybrid Instrument. Also, the prices of the Hybrid Instrument
and the Benchmark or Underlying Asset may not move in the same direction or at
the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below market
(or even relatively nominal) rates. Alternatively, Hybrid Instruments may bear
interest at above market rates but bear an increased risk of principal loss (or
gain). The latter scenario may result if "leverage" is used to structure the
Hybrid Instrument. Leverage risk occurs when the Hybrid Instrument is
structured so that a given change in a Benchmark or Underlying Asset is
multiplied to produce a greater value change in the Hybrid Instrument, thereby
magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
Portfolio and the issuer of the Hybrid Instrument, the creditworthiness of the
counterparty or issuer of the Hybrid Instrument would be an additional risk
factor which the Portfolio would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the Commodities Futures
Trading Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset value
of the Portfolio. Accordingly, each Portfolio will limit its investments in
Hybrid Instruments to 10% of total assets. However, because of their
volatility, it is possible that the Portfolio's investment in Hybrid
Instruments will account for more than 10% of its return (positive or
negative).
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
SWAPS, CAPS, FLOORS AND COLLARS--Among the transactions into which Scudder
International Growth may enter are interest rate, currency and index swaps and
the purchase or sale of related caps, floors and collars. The Portfolio expects
to enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio intends to use these transactions as hedges and not
as speculative investments and will not sell interest rate caps or floors where
it does not own securities or other instruments providing the income stream it
may be obligated to pay. Interest rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that
a specified index falls
8
<PAGE>
below a predetermined interest rate or amount. A collar is a combination of a
cap and a floor that preserves a certain return within a predetermined range of
interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Sub-adviser and the Portfolio believe such obligations do not
constitute senior securities under the 1940 Act, and, accordingly, will not
treat them as being subject to its borrowing restrictions. The Portfolio will
not enter into any swap, cap, floor or collar transaction unless, at the time
of entering into such transaction, the unsecured long-term debt of the
counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from a NRSRO or is determined to be of
equivalent credit quality by the Sub-adviser. If there is a default by the
counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
EURODOLLAR INSTRUMENTS-- MFS Capital Opportunities, MFS Emerging Equities and
Scudder International Growth may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. Scudder
International Growth might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
OPTIONS ON SECURITIES-- MFS Capital Opportunities, MFS Emerging Equities,
Scudder International Growth and T. Rowe Price Growth Equity may purchase and
write (sell) call and put options on securities. A Portfolio may sell options
on securities for the purpose of increasing its return on such securities
and/or to protect the value of its Portfolio. MFS Capital Opportunities, MFS
Emerging Equities and Scudder International Growth may only sell calls on
securities if such calls are "covered," as explained below. A Portfolio may
also write combinations of put and call options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk.
A Portfolio may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the
prices of securities that the Portfolio wants to purchase at a later date. A
Portfolio may sell call and put options only if it takes certain steps to cover
such options or segregates assets, in accordance with regulatory requirements,
as described below.
A call option sold by a Portfolio is "covered" if the Portfolio owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is considered
offset, and thus held in accordance with regulatory requirements, if a
Portfolio holds a call on the same security and in the same principal amount as
the call sold when the exercise price of the call held (a) is equal to or less
than the exercise price of the call sold or (b) is greater than the exercise
price of the call sold if the difference is maintained by the Portfolio in
liquid securities in a segregated account with its custodian. If a put option
is sold by a Portfolio, the Portfolio will maintain liquid securities with a
value equal to the exercise price in a segregated account with its custodian,
or else will hold a put on the same security and in the same principal amount
as the put sold where the exercise price of the put held is equal to or greater
than the exercise price of the put sold or where the exercise price of the put
held is less than the exercise price of the put sold if the Portfolio maintains
in a segregated account with the custodian, liquid securities with an aggregate
value equal to the difference.
Effecting a closing transaction in the case of a sold call option will permit a
Portfolio to sell another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a sold
put
9
<PAGE>
option will permit the Portfolio to sell another put option to the extent that
the exercise price thereof is secured by liquid securities in a segregated
account. Such transactions permit a Portfolio to generate additional premium
income, which will partially offset declines in the value of portfolio
securities or increases in the cost of securities to be acquired. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any subject to the option to be used for other investments
of a Portfolio, provided that another option on such security is not sold. If
the Portfolio desires to sell a particular security from its portfolio on which
it has sold a call option, it will effect a closing transaction in connection
with the option prior to or concurrent with the sale of the security.
A Portfolio will realize a profit from a closing transaction if the premium
paid in connection with the closing of an option sold by the Portfolio is less
than the premium received from selling the option, or if the premium received
in connection with the closing of an option by the Portfolio is more than the
premium paid for the original purchase. Conversely, a Portfolio will suffer a
loss if the premium paid or received in connection with a closing transaction
is more or less, respectively, than the premium received or paid in
establishing the option position. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option
previously sold by the Portfolio is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Portfolio.
A Portfolio may sell options in connection with buy-and-write transactions;
that is, the Portfolio may purchase a security and then sell a call option
against that security. The exercise price of the call a Portfolio determines to
sell will depend upon the expected price movement of the underlying security.
The exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is sold. Buy-and-write transactions
using in-the-money call options may be used when it is expected that the price
of the underlying security will decline moderately during the option period.
Buy-and-write transactions using out-of-the-money call options may be used when
it is expected that the premiums received from selling the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such transactions, a
Portfolio's maximum gain will be the premium received by it for selling the
option, adjusted upwards or downwards by the difference between the Portfolio's
purchase price of the security and the exercise price, less related transaction
costs. If the options are not exercised and the price of the underlying
security declines, the amount of such decline will be offset in part, or
entirely, by the premium received.
The selling of put options is similar in terms of risk/return characteristics
to buy-and-write transactions. If the market price of the underlying security
rises or otherwise is above the exercise price, the put option will expire
worthless and the Portfolio's gain will be limited to the premium received. If
the market price of the underlying security declines or otherwise is below the
exercise price, a Portfolio may elect to close the position or retain the
option until it is exercised, at which time the Portfolio will be required to
take delivery of the security at the exercise price; the Portfolio's return
will be the premium received from the put option minus the amount by which the
market price of the security is below the exercise price, which could result in
a loss. Out-of-the-money, at-the-money and in-the-money put options may be used
by a Portfolio in the same market environments that call options are used in
equivalent buy-and-write transactions.
A Portfolio may also sell combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By entering into a straddle, a Portfolio undertakes a simultaneous
obligation to sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Portfolio will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the
writing of the call options. Conversely, if the price of the security declines
by a sufficient amount, the put will likely be exercised. Straddles will likely
be effective, therefore, only where the price of the security remains stable
and neither the call nor the put is exercised. In those instances where one of
the options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
By selling a call option, a Portfolio limits its opportunity to profit from any
increase in the market value of the underlying security, above the exercise
price of the option. By selling a put option, a Portfolio assumes the risk that
it may be required to purchase the underlying security for an exercise price
above its then current market value,
10
<PAGE>
resulting in a capital loss unless the security subsequently appreciates in
value. The selling of options on securities will not be undertaken by a
Portfolio solely for hedging purposes, and could involve certain risks which
are not present in the case of hedging transactions. Moreover, even where
options are sold for hedging purposes, such transactions constitute only a
partial hedge against declines in the value of portfolio securities or against
increases in the value of securities to be acquired, up to the amount of the
premium.
A Portfolio may purchase options for hedging purposes or to increase its
return. Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit a
Portfolio to sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, the Portfolio will
reduce any profit it might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
A Portfolio may purchase call options to hedge against an increase in the price
of securities that the Portfolio anticipates purchasing in the future. If such
increase occurs, the call option will permit the Portfolio to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Portfolio upon exercise of the option, and,
unless the price of the underlying security rises sufficiently, the option may
expire worthless to the Portfolio.
In certain instances, a Portfolio may enter into options on U.S. Treasury
securities which provide for periodic adjustment of the strike price and may
also provide for the periodic adjustment of the premium during the term of each
such option. Like other types of options, these transactions, which may be
referred to as "reset" options or "adjustable strike" options, grant the
purchaser the right to purchase (in the case of a "call"), or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any time
up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of options, however, the price at which the underlying
security may be purchased or sold under a "reset" option is determined at
various intervals during the term of the option, and such price fluctuates from
interval to interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" option, at the time of
exercise, may be less advantageous to the Portfolio than if the strike price
had been fixed at the initiation of the option. In addition, the premium paid
for the purchase of the option may be determined at the termination, rather
than the initiation, of the option. If the premium is paid at termination, the
Portfolio assumes the risk that (i) the premium may be less than the premium
which would otherwise have been received at the initiation of the option
because of such factors as the volatility in yield of the underlying Treasury
security over the term of the option and adjustments made to the strike price
of the option, and (ii) the option purchaser may default on its obligation to
pay the premium at the termination of the option.
OPTIONS ON STOCK INDICES-- MFS Capital Opportunities, MFS Emerging Equities,
Scudder International Growth and T. Rowe Price Growth Equity may purchase and
sell call and put options on stock indices. A portfolio generally may sell
options on stock indices for the purpose of increasing gross income and to
protect the portfolio against declines in the value of securities they own or
increases in the value of securities to be acquired, although a Portfolio may
also purchase put or call options on stock indices in order, respectively, to
hedge its investments against a decline in value or to attempt to reduce the
risk of missing a market or industry segment advance. A Portfolio's possible
loss in either case will be limited to the premium paid for the option, plus
related transaction costs, although Scudder International Growth may sell
options on securities indices only to close out open positions.
In contrast to an option on a security, an option on a stock index provides the
holder with the right but not the obligation to make or receive a cash
settlement upon exercise of the option, rather than the right to purchase or
sell a security. The amount of this settlement is equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
call) or is below (in the case of a put) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
A Portfolio may sell call options on stock indices if it owns securities whose
price changes, in the opinion of the Sub-adviser, are expected to be similar to
those of the underlying index, or if it has an absolute and immediate right to
acquire such securities without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities in its Portfolio. When a
Portfolio covers a call option on a stock index it has sold by holding
securities, such securities may not match the composition of the index and, in
that event, the Portfolio will not be fully covered and could be subject to
risk of loss
11
<PAGE>
in the event of adverse changes in the value of the index. A Portfolio may also
sell call options on stock indices if it holds a call on the same index and in
the same principal amount as the call sold when the exercise price of the call
held (a) is equal to or less than the exercise price of the call sold or (b) is
greater than the exercise price of the call sold if the difference is
maintained by the Portfolio in liquid securities in a segregated account with
its custodian. A Portfolio may sell put options on stock indices if it
maintains liquid securities with a value equal to the exercise price in a
segregated account with its custodian, or by holding a put on the same stock
index and in the same principal amount as the put sold when the exercise price
of the put is equal to or greater than the exercise price of the put sold if
the difference is maintained by the Portfolio in liquid securities in a
segregated account with its custodian. Put and call options on stock indices
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which, or the counterparty with which, the option is traded
and applicable laws and regulations.
A Portfolio will receive a premium from selling a put or call option, which
increases the Portfolio's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which a
Portfolio has sold a call option falls or remains the same, the Portfolio will
realize a profit in the form of the premium received (less transaction costs)
that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Portfolio
will realize a loss in its call option position, which will reduce the benefit
of any unrealized appreciation in the Portfolio's stock investments. By selling
a put option, the Portfolio assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Portfolio correlate
with changes in the value of the index, selling covered put options on indices
will increase the Portfolio's losses in the event of a market decline, although
such losses will be offset in part by the premium received for selling the
option.
A Portfolio may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, the Portfolio will seek to offset a decline in the value of securities
it owns through appreciation of the put option. If the value of the Portfolio's
investments does not decline as anticipated, or if the value of the option does
not increase, the Portfolio's loss will be limited to the premium paid for the
option plus related transaction costs. The success of this strategy will
largely depend on the accuracy of the correlation between the changes in value
of the index and the changes in value of the Portfolio's security holdings.
The purchase of call options on stock indices may be used by a Portfolio to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment at a time when the Portfolio holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Portfolio will also bear the risk of losing all
or a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Portfolio is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Portfolio owns.
The index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index,
the changes in value of which ordinarily will reflect movements in the stock
market in general. In contrast, certain options may be based on narrower market
indices, such as the Standard & Poor's 100 Index, or on indices of securities
of particular industry groups, such as those of oil and gas or technology
companies. A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
so included. The composition of the index is changed periodically.
12
<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
MFS Capital Opportunities, MFS Emerging Equities, Scudder International Growth
and T. Rowe Price Growth Equity may engage in the following types of
transactions:
FUTURES CONTRACTS--The Portfolios may enter into stock index futures contracts,
including futures contracts related to stock indices and interest rates among
others. Such investment strategies will be used for hedging purposes and for
non-hedging purposes, subject to applicable law. Purchases or sales of stock
index futures contracts for hedging purposes may be used to attempt to protect
a Portfolio's current or intended stock investments from broad fluctuations in
stock prices, to act as a substitute for an underlying investment, or to
enhance yield ("speculation").
A futures contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument or for the making and
acceptance of a cash settlement, at a stated time in the future for a fixed
price. By its terms, a futures contract provides for a specified settlement
date on which, in the case of stock index futures contracts, the difference
between the price at which the contract was entered into and the contract's
closing value is settled between the purchaser and seller in cash. Futures
contracts differ from options in that they are bilateral agreements, with both
the purchaser and the seller equally obligated to complete the transaction.
Futures contracts call for settlement only on the date and cannot be
"exercised" at any other time during their term.
The purchase or sale of a futures contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with
the broker as "initial margin." Subsequent payments to and from the broker,
referred to as "variation margin," are made on a daily basis as the value of
the index or instrument underlying the futures contract fluctuates, making
positions in the futures contract more or less valuable--a process known as
"marking to the market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices. For example, a Portfolio may sell stock index
futures contracts in anticipation of, or during a market decline to attempt to
offset the decrease in market value of the Portfolio's portfolio securities
that might otherwise result if such decline occurs, because the loss in value
of portfolio securities may be offset, in whole or part, by gains on the
futures position. When a Portfolio is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock
index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the Portfolio
intends to purchase. As such purchases are made, the corresponding position in
stock index futures contracts will be closed out. In a substantial majority of
these transactions, the Portfolio will purchase such securities upon
termination of the futures position, but under usual market conditions, a long
futures position may be terminated without a related purchase of securities.
When a Portfolio buys or sells a futures contract, unless it already owns an
offsetting position, it will maintain, in a segregated account held by the
custodian, 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.
OPTIONS ON FUTURES CONTRACTS--The Portfolios may purchase and sell options to
buy or sell futures contracts in which they may invest ("options on futures
contracts"). Such investment strategies will be used for hedging purposes and
for non-hedging purposes, subject to applicable law, except that Scudder
International Growth may utilize such strategies only for hedging purposes. Put
and call options on futures contracts may be traded by a Portfolio in order to
protect against declines in the values of portfolio securities or against
increases in the cost of securities to be acquired, to act as a substitute for
an underlying investment, or to enhance yield.
An option on a futures contract provides the holder with the right to enter
into a "long" position in the underlying futures contract, in the case of a
call option, or a "short" position in the underlying futures contract, in the
case of a put option, at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Upon exercise of the option
by the holder, the contract market clearinghouse establishes a corresponding
short
13
<PAGE>
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of futures contracts. In addition, the seller of an option on
a futures contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's
profit or loss on the transaction.
Options on futures contracts that are sold or purchased by a Portfolio on U.S.
exchanges are traded on the same contract market as the underlying futures
contract, and, like futures contracts, are subject to regulation by the CFTC
and the performance guarantee of the exchange clearinghouse. In addition,
options on futures contracts may be traded on foreign exchanges.
A Portfolio may sell call options on futures contracts only if it also (a)
purchases the underlying futures contract, (b) owns the instrument, or
instruments included in the index, underlying the futures contract, or (c)
holds a call on the same futures contract and in the same principal amount as
the call sold when the exercise price of the call held (i) is equal to or less
than the exercise price of the call sold or (ii) is greater than the exercise
price of the call sold if the difference is maintained by the Portfolio in
liquid securities in a segregated account with its custodian. A Portfolio may
sell put options on futures contracts only if it also (A) sells the underlying
futures contract, (B) segregates liquid securities in an amount equal to the
value of the security or index underlying the futures contract, or (C) holds a
put on the same futures contract and in the same principal amount as the put
sold when the exercise price of the put held is equal to or greater than the
exercise price of the put written or when the exercise price of the put held is
less than the exercise price of the put sold if the difference is maintained by
the Portfolio in liquid securities in a segregated account with it its
custodian. Upon the exercise of a call option on a futures contract sold by a
Portfolio, the Portfolio will be required to sell the underlying futures
contract which, if the Portfolio has covered its obligation through the
purchase of such contract, will serve to liquidate its futures position.
Similarly, where a put option on a futures contract sold by the Portfolio is
exercised, the Portfolio will be required to purchase the underlying futures
contract which, if the Portfolio has covered its obligation through the sale of
such contract, will close out its futures position.
The selling of a call option on a futures contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the futures contract.
If the futures price at expiration of the option is below the exercise price,
the Portfolio will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any decline that may
have occurred in the Portfolio's holdings. The selling of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities or other instruments required to be delivered under the terms of the
futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Portfolio will retain the full amount of the
option premium, which provides a partial hedge against any increase in the
price of securities the Portfolio intends to purchase. If a put or call option
the Portfolio has sold is exercised, the Portfolio will incur a loss, which
will be reduced by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its portfolio securities
and the changes in the value of its futures positions, the Portfolio's losses
from existing options on futures contracts may to some extent be reduced or
increased by changes in the value of portfolio securities.
A Portfolio may purchase options on futures contracts for hedging purposes
instead of purchasing or selling the underlying futures contracts. For example,
where a decrease in the value of portfolio securities is anticipated as a
result of a projected market-wide decline or changes in interest or exchange
rates, the Portfolio could, in lieu of selling futures contracts, purchase put
options thereon. In the event that such decrease occurs, it may be offset, in
whole or in part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by the Portfolio will increase
prior to acquisition, due to a market advance or changes in interest or
exchange rates, the Portfolio could purchase call options on futures contracts,
rather than purchasing the underlying futures contracts.
14
<PAGE>
FORWARD CONTRACTS ON FOREIGN CURRENCY--The Portfolios may enter into forward
foreign currency exchange contracts for hedging and non-hedging purposes.
Forward contracts may be used for hedging to attempt to minimize the risk to a
Portfolio from adverse changes in the relationship between the U.S. dollar and
foreign currencies. Each Portfolio intends to enter into forward contracts for
hedging purposes. In particular, a forward contract to sell a currency may be
entered into where the Portfolio seeks to protect against an anticipated
increase in the rate for a specific currency which could reduce the dollar
value of portfolio securities denominated in such currency. Conversely, a
Portfolio may enter into a forward contract to purchase a given currency to
protect against a projected increase in the dollar value of securities
denominated in such currency which the Portfolio intends to acquire. The
Portfolio also may enter into a forward contract in order to assure itself of a
predetermined exchange rate in connection with a security denominated in a
foreign currency. In addition, the Portfolio may enter into forward contracts
for "cross hedging" purposes; e.g., the purchase or sale of a forward contract
on one type of currency as a hedge against adverse fluctuations in the value of
a second type of currency.
If a hedging transaction in forward contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets to be acquired may be offset, at least in part, by
profits on the forward contract. Nevertheless, by entering into such forward
contracts, a Portfolio may be required to forgo all or a portion of the
benefits which otherwise could have been obtained from favorable movements in
exchange rates. The Portfolio will usually seek to close out positions in such
contracts by entering into offsetting transactions, which will serve to fix the
Portfolio's profit or loss based upon the value of the contracts at the time
the offsetting transaction is executed.
A Portfolio will also enter into transactions in forward contracts for other
than hedging purposes, which present greater profit potential but also involve
increased risk. For example, a Portfolio may purchase a given foreign currency
through a forward contract if, in the judgment of the Sub-adviser, the value of
such currency is expected to rise relative to the U.S. dollar. Conversely, the
Portfolio may sell the currency through a forward contract if the Sub-adviser
believes that its value will decline relative to the dollar.
A Portfolio will profit if the anticipated movements in foreign currency
exchange rates occur which will increase its gross income. Where exchange rates
do not move in the direction or to the extent anticipated, however, the
Portfolio may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative and could involve
significant risk of loss.
Each Portfolio has established procedures consistent with statements by the SEC
and its staff regarding the use of forward contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Portfolio satisfies this requirement through segregation of assets, it will
maintain, in a segregated account cash, cash equivalents or other liquid
securities, which will be marked to market on a daily basis, in an amount equal
to the value of its commitments under forward contracts. While these contracts
are not presently regulated by the CFTC, the CFTC may in the future assert
authority to regulate forward contracts. In such event the Portfolio's ability
to utilize forward contracts in the manner set forth above may be restricted.
A Portfolio may hold foreign currency received in connection with investments
in foreign securities when, in the judgment of the Sub-adviser, it would be
beneficial to convert such currency into U.S. dollars at a later date, based on
anticipated changes in the relevant exchange rate. A Portfolio may also hold
foreign currency in anticipation of purchasing foreign securities.
OPTIONS ON FOREIGN CURRENCIES--The Portfolios (except MFS Research Growth) may
purchase and sell options on foreign currencies for hedging purposes in a
manner similar to that in which forward contracts will be utilized. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities,
even if their value in the foreign currency remains constant. In order to
protect against such diminution in the value of portfolio securities, the
Portfolio may purchase put options on the foreign currency. If the value of the
currency does decline, the Portfolio will have the right to sell such currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
15
<PAGE>
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of
such securities, the Portfolio may purchase call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Portfolio deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options which would require it to forgo a
portion or all of the benefits of advantageous changes in such rates.
A Portfolio may sell options on foreign currencies for the same types of
hedging purposes. For example, where the Portfolio anticipates a decline in the
dollar value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, sell a call option
on the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
As in the case of other types of options, however, the selling of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received, and the Portfolio could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Portfolio's position, it may forfeit the entire amount of the
premium plus related transaction costs. As in the case of forward contracts,
certain options on foreign currencies are traded over-the-counter and involve
risks which may not be present in the case of exchange-traded instruments.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Portfolio could
sell a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolio to hedge such
increased cost up to the amount of the premium. Foreign currency options sold
by the Portfolio will generally be covered in a manner similar to the covering
of other types of options. As in the case of other types of options, however,
the selling of a foreign currency option will constitute only a partial hedge
up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the
Portfolio would be required to purchase or sell the underlying currency at a
loss which may not be offset by the amount of the premium. Through the selling
of options on foreign currencies, the Portfolio also may be required to forgo
all or a portion of the benefits, which might otherwise have been obtained from
favorable movements in exchange rates.
RISKS ASSOCIATED WITH INVESTING IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH A PORTFOLIO'S
SECURITIES--A Portfolio's abilities effectively to hedge all or a portion of
its portfolio through transactions in options, futures contracts, options on
futures contracts, forward contracts and options on foreign currencies depend
on the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant portion of the Portfolio's
securities. In the case of futures and options based on an index, the Portfolio
will not duplicate the components of the index, and in the case of futures and
options on fixed income securities, the portfolio securities that are being
hedged may not be the same type of obligation underlying such contract. The use
of forward contracts for cross-hedging purposes may involve greater correlation
risks. As a result, the correlation probably will not be exact. Consequently,
the Portfolio bears the risk that the price of the portfolio securities being
hedged will not move in the same amount or direction as the underlying index or
obligation.
For example, if a Portfolio purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Portfolio would
experience a loss that is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or futures contract in which the Portfolio has
a position and the portfolio securities the Portfolio is attempting to hedge,
which could result in a loss on both the portfolio and the hedging instrument.
In addition, a Portfolio may enter into transactions in forward contracts or
options on foreign currencies in order to hedge against exposure arising from
the currencies underlying such forwards. In such instances, the Portfolio will
be subject to the additional risk of
16
<PAGE>
imperfect correlation between changes in the value of the currencies underlying
such forwards or options and changes in the value of the currencies being
hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index.
This is due to the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where a Portfolio enters into transactions in options
or futures on narrow-based indices for hedging purposes, movements in the value
of the index should, if the hedge is successful, correlate closely with the
portion of the Portfolio's portfolio or the intended acquisitions being hedged.
The trading of futures contracts, options and forward contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets, such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the options, futures and forward markets. In this regard,
trading by speculators in options, futures and forward contracts has in the
past occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of contracts.
The trading of options on futures contracts also entails the risk that changes
in the value of the underlying futures contract will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the futures contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies and options on futures contracts, the Portfolio is
subject to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. This could increase the
extent of any loss suffered by the Portfolio in connection with such
transactions.
In selling a covered call option on a security, index or futures contract, a
Portfolio also incurs the risk that changes in the value of the instruments
used to cover the position will not correlate closely with changes in the value
of the option or underlying index or instrument. For example, where the
Portfolio sells a call option on a stock index and segregates securities, such
securities may not match the composition of the index, and the Portfolio may
not be fully covered. As a result, the Portfolio could be subject to risk of
loss in the event of adverse market movements.
The selling of options on securities, options on stock indices or options on
futures contracts constitutes only a partial hedge against fluctuations in
value of a Portfolio's portfolio. When a Portfolio sells an option, it will
receive premium income in return for the holder's purchase of the right to
acquire or dispose of the underlying obligation. In the event that the price of
such obligation does not rise sufficiently above the exercise price of the
option, in the case of a call, or fall below the exercise price, in the case of
a put, the option will not be exercised and the Portfolio will retain the
amount of the premium, less related transaction costs, which will constitute a
partial hedge against any decline that may have occurred in the Portfolio's
portfolio holdings or any increase in the cost of the instruments to be
acquired.
When the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Portfolio will incur a loss which may only be partially offset by the
amount of the premium it received. Moreover, by selling an option, the
Portfolio may be required to forgo the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other assets
or a decline in the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events,
the Portfolio's overall return may be lower than if it had not engaged in the
hedging transactions.
It should also be noted that a Portfolio may enter into transactions in options
(except for options on foreign currencies), futures contracts, options on
futures contracts and forward contracts not only for hedging purposes, but also
for non-hedging purposes intended to increase portfolio returns. Non-hedging
transactions in such investments
17
<PAGE>
involve greater risks and may result in losses which may not be offset by
increases in the value of portfolio securities or declines in the cost of
securities to be acquired. A Portfolio will only sell covered options, such
that liquid securities with an aggregate value equal to an amount necessary to
satisfy an option exercise will be segregated at all times, unless the option
is covered in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations.
Nevertheless, the method of covering an option employed by the Portfolio may
not fully protect it against risk of loss and, in any event, the Portfolio
could suffer losses on the option position, which might not be offset by
corresponding portfolio gains.
A Portfolio also may enter into transactions in futures contracts, options on
futures contracts and forward contracts for other than hedging purposes, which
could expose the Portfolio to significant risk of loss if foreign currency
exchange rates do not move in the direction or to the extent anticipated. In
this regard, the foreign currency may be extremely volatile from time to time,
as discussed in the Prospectus and in this SAI, and the use of such
transactions for non-hedging purposes could therefore involve significant risk
of loss.
With respect to entering into straddles on securities, a Portfolio incurs the
risk that the price of the underlying security will not remain stable, that one
of the options sold will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing the Portfolio with two
simultaneous premiums on the same security, but involve additional risk, since
the Portfolio may have an option exercised against it regardless of whether the
price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET--Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While a Portfolio will enter into options or futures positions
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 contracts at any
specific time. In that event, it may not be possible to close out a position
held by the Portfolio, and the Portfolio could be required to purchase or sell
the instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if a Portfolio
has insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time when it
is disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Portfolio's ability
effectively to hedge its portfolio, and could result in trading losses.
The liquidity of a secondary market in the futures contract or option thereon
may be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of futures contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse 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.
MARGIN--Because of low initial margin deposits made upon the opening of a
futures or forward position and the selling of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where a Portfolio enters into such transactions for hedging purposes, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities or other assets held by the Portfolio or decreases in the prices of
securities or other assets the Portfolio intends to acquire. Where a Portfolio
enters into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Portfolio to
greater risk.
18
<PAGE>
TRADING AND POSITION LIMITS--The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Sub-advisers do not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolio
of the Portfolios.
RISKS OF OPTIONS ON FUTURES CONTRACTS--The amount of risk a Portfolio assumes
when it purchases an option on a futures contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying futures contract subject to the risks of the availability of a
liquid offset market described herein. The seller of an option on a futures
contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price underlying security, index, currency or futures contracts.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES--Transactions in forward contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on
the value of positions held by a Portfolio. Further, the value of such
positions could be adversely affected by a number of other complex political
and economic factors applicable to the countries issuing the underlying
currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Portfolio makes investment and trading decisions in
connection with other transactions. Moreover, because the foreign currency
market is a global, 24-hour market, events could occur in that market which
will not be reflected in the forward, futures or options markets until the
following day, thereby making it more difficult for the Portfolio to respond to
such events in a timely manner.
Settlements of exercises of over-the-counter forward contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or
other charges.
Unlike transactions entered into by a Portfolio in futures contracts and
exchange-traded options, options on foreign currencies, forward contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the option seller and a trader of forward contracts could lose
amounts substantially in excess of their initial investments, due to the margin
and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Portfolio.
Where no such counterparty is available, it will
19
<PAGE>
not be possible to enter into a desired transaction. There also may be no
liquid secondary market in the trading of over-the-counter contracts, and the
Portfolio could be required to retain options purchased or sold, or forward
contracts entered into, until exercise, expiration or maturity. This in turn
could limit the Portfolio's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Portfolio will therefore be subject to the risk
of default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Portfolio's ability to enter into desired hedging transactions.
The Portfolio will enter into an over-the-counter transaction only with parties
whose creditworthiness has been reviewed and found satisfactory by the
Sub-adviser.
Options on securities, options on stock indexes, futures contracts, options on
futures contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the
same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection with
such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For
example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on
exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS--In order to
assure that a Portfolio will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that a
Portfolio enter into transactions in futures contracts and options on futures
contracts only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes, provided that the aggregate
initial margin and premiums on such non-hedging positions does not exceed 5% of
the liquidation value of the Portfolio's assets.
The staff of the SEC has taken the position that over-the-counter options and
assets used to cover sold over-the-counter options are illiquid and, therefore,
together with other illiquid securities held by a Portfolio, cannot exceed 15%
of a Portfolio's assets (the "SEC illiquidity ceiling"). Although the
Sub-advisers may disagree with this position, each Sub-adviser intends to limit
the Portfolios' selling of over-the-counter options in accordance with the
following procedure. Except as provided below, MFS Capital Opportunities and
MFS Emerging Equities intend to sell over-the-counter options only with primary
U.S. Government securities dealers recognized as such by the Federal Reserve
Bank of New York. Also, the contracts a Portfolio has in place with such
primary dealers provide that the Portfolio has the absolute right to repurchase
an option it sells at a maximum price to be calculated by a pre-determined
formula. Each Portfolio will treat all or a portion of the formula as illiquid
for purposes of the SEC illiquidity ceiling
20
<PAGE>
test. Each Portfolio may also sell over-the-counter options with non-primary
dealers, including foreign dealers (where applicable), and will treat the
assets used to cover these options as illiquid for purposes of such SEC
illiquidity ceiling test.
The policies described above are not fundamental and may be changed without
shareholder approval, as may each Portfolio's investment objective.
TEMPORARY DEFENSIVE POSITIONS--During periods of unusual market conditions when
a Sub-adviser believes that investing for temporary defensive purposes is
appropriate, or in order to meet anticipated redemption requests, a Portfolio
may invest up to 100% of its assets in cash or cash equivalents including, but
not limited to, obligations of banks with assets of $1 billion or more
(including certificates of deposit, bankers' acceptances and repurchase
agreements), commercial paper, short-term notes, obligations issued or
guaranteed by the U.S. Government or any of its agencies, authorities or
instrumentalities and related repurchase agreements. Scudder International
Growth may, for temporary defensive purposes, invest all or a portion of its
assets in Canadian or U.S. Government obligations or currencies, or securities
of companies incorporated in and having their principal activities in Canada or
the U.S. In addition, Scudder International Growth may engage in strategic
transactions, which may include the use of derivatives.
21
<PAGE>
MANAGEMENT OF THE FUND
The investments and administration of the Fund are under the direction of the
Board of Directors. The Directors and executive officers of the Fund and their
principal occupations for the past five years are listed below.
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupation(s) During Past
Five Years (and Positions held with
Affiliated Persons or Principal
Name, Address and Birthdate Position(s) Held with Fund Underwriter of the Fund)
- --------------------------- -------------------------- ------------------------
Laurie M. LeBlanc, CFP* Director and President Vice President, Aetna Life Insurance and
151 Farmington Avenue Annuity Company, January 1998 to
Hartford, Connecticut present; Vice President, Aetna Retirement
05/12/52 Services, Fund Strategy and Management,
December 1995 to January 1998; Vice
President, Connecticut Mutual Financial
Services, Investment Products, July 1994
to December 1995.
John V. Boyer Director Executive Director, The Mark Twain
63 Penn Drive House Museum, 1989 to present.
West Hartford, Connecticut
07/19/53
Richard A. Johnson Director Retired for more than five years.
24 Sulgrave Road
West Hartford, Connecticut
03/22/36
Philip M. Markert Director Retired since March 1996; Division
164 Calhoun Street Executive, Citibank, Caribbean/Central
Washington, Connecticut America Region, February 1964 to March
06/22/38 1996.
Martin T. Conroy* Director, Vice President, Chief Assistant Treasurer, Aetna Retirement
151 Farmington Avenue Financial Officer and Treasurer Holdings, Inc., September 1997 to
Hartford, Connecticut present; Assistant Treasurer, Aetna Life
01/11/40 Insurance and Annuity Company, October 1991
to present.
Jeffrey J. Gaboury Assistant Treasurer Senior Manager, Reporting and
200 Clarendon Street Compliance, Investors Bank & Trust
Boston, Massachusetts Company, 1996 - present; Compliance
10/23/68 Manager, Scudder, 1995 - 1996.
Susan C. Mosher Secretary Director, Mutual Fund Administration -
200 Clarendon Street Legal Administration, Investors Bank &
Boston, Massachusetts Trust Company, 1995 - present; Associate
01/29/55 Counsel, 440 Financial Group of
Worcester, Inc., 1993 - 1995.
J. Neil McMurdie Assistant Secretary Counsel, Aetna Life Insurance and
151 Farmington Avenue Annuity Company, April 1998 to present;
Hartford, Connecticut Associate Counsel and Assistant Vice
10/29/57 President, GE Financial Assurance and
22
<PAGE>
subsidiaries, October 1993 to April 1998.
</TABLE>
*Interested person as defined by the 1940 Act.
Members of the Board of the Directors who are also directors, officers or
employees of Aetna Inc. or its affiliates are not entitled to any compensation
from the Fund. Members of the Board of Directors who are not affiliated with
Aetna or its subsidiaries are entitled to receive an annual retainer of $20,000
for service on the Board. In addition, each such member will receive a fee of
$2,500 per meeting for each regularly scheduled Board meeting; $2,500 for each
in-person Contract Committee meeting on any day on which a regular board
meeting is not scheduled; and $1,500 for each in-person committee meeting,
other than a Contract Committee meeting, on any day on which a regular Board
meeting is not scheduled. A Committee Chairperson fee of $1,500 each will be
paid to the Chairperson of the Valuation, Audit and Contract Committees. All of
the above fees are to be paid proportionately by each Portfolio based on the
net assets of the Portfolios as of the previous December 31.
The following table describes the compensation received by the Directors of the
Fund for the fiscal year ended December 31, 1999.
COMPENSATION TABLE
TOTAL COMPENSATION FROM FUND
AGGREGATE COMPENSATION AND FUND COMPLEX PAID TO
NAME OF PERSON, POSITION FROM FUND DIRECTORS
- ------------------------ --------- ---------
John V. Boyer, Director $39,833.34 $34,000
Richard A. Johnson, Director 39,833.34 34,000
Philip M. Markert, Director 39,833.34 34,000
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
Shares of the Portfolios will be owned by insurance companies as depositors of
separate accounts which are used to fund variable annuity contracts ("VA
Contracts") and variable life insurance contracts ("VLI Contracts"). Aetna and
its subsidiary, Aetna Insurance Company of America, Inc. may be deemed a
control person of the Fund in that certain of their separate accounts hold 100%
of the shares of each Portfolio of the Fund.
As of April 1, 2000, the following owned of record or, to the knowledge of
management, beneficially owned more than 5% of the outstanding shares of:
MFS Capital Opportunities Portfolio--Aetna Life Insurance & Annuity Company
(ALIAC), c/o Aetna Financial Services, Treasury Services, 151 Farmington
Avenue, Hartford, Connecticut 06156 (96.58%).
MFS Emerging Equities Portfolio--Aetna Life Insurance & Annuity Company
(ALIAC), c/o Aetna Financial Services, Treasury Services, 151 Farmington
Avenue, Hartford, Connecticut 06156 (93.42%).
MFS Research Growth Portfolio--Aetna Life Insurance & Annuity Company (ALIAC),
c/o Aetna Financial Plan Services, Treasury Services, 151 Farmington Avenue,
Hartford, Connecticut 06156 (93.45%).
Scudder International Growth Portfolio--Aetna Life Insurance & Annuity Company
(ALIAC), c/o Aetna Financial Services, Treasury Services, 151 Farmington
Avenue, Hartford, Connecticut 06156 (95.42%).
23
<PAGE>
T. Rowe Price Growth Equity Portfolio--Aetna Life Insurance & Annuity Company
(ALIAC), c/o Aetna Financial Services, Treasury Services, 151 Farmington
Avenue, Hartford, Connecticut 06156 (95.26%)
The Fund has no knowledge of any other owners of record of 5% or more than the
outstanding shares of a Portfolio. Shareholders owning more than 25% or more of
the outstanding shares of a Portfolio may take actions without the approval of
other investors in the Fund. See "Voting Rights" below.
Aetna is an indirect wholly-owned subsidiary of Aetna Financial Services, Inc.,
which is in turn an indirect wholly owned subsidiary of Aetna Inc. Aetna's
principal office and offices of its affiliated companies referred to herein are
located at 151 Farmington Avenue, Hartford, Connecticut 06156.
The Directors and Officers of the Fund as a group owned less than 1% of the
outstanding shares of any Portfolio of the Fund as of April 1, 2000.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT. Under the Investment Advisory Agreement and
subject to the direction of the Board of Directors of the Fund, Aetna has
responsibility, among other things, to (i) select the securities to be
purchased, sold or exchanged by each Portfolio, and place trades on behalf of
each Portfolio, or delegate such responsibility to one or more Sub-advisers;
(ii) supervise all aspects of the operations of the Portfolios; (iii) obtain
the services of, contract with, and provide instructions to custodians and/or
subcustodians of each Portfolio's securities, transfer agents, dividend paying
agents, pricing services and other service providers as are necessary to carry
out the terms of the Investment Advisory Agreement; (iv) monitor the investment
program maintained by each Sub-adviser for the Portfolios and the Sub-advisers'
compliance programs to ensure that the Portfolio's assets are invested in
compliance with the Sub-advisory Agreement and the Portfolio's investment
objectives and policies as adopted by the Board and described in the most
current effective amendment of the registration statement for the Portfolio, as
filed with the Commission under the 1933 Act and the 1940 Act ("Registration
Statement"); (v) review all data and financial reports prepared by each
Sub-adviser to assure that they are in compliance with applicable requirements
and meet the provisions of applicable laws and regulations; (vi) establish and
maintain regular communications with each Sub-adviser to share information it
obtains with each Sub-adviser concerning the effect of developments and data on
the investment program maintained by the Sub-adviser; (vii) oversee all matters
relating to the offer and sale of the Portfolios' shares, the Fund's corporate
governance, reports to the Board, contracts with all third parties on behalf of
the Portfolios for services to the Portfolios, reports to regulatory
authorities and compliance with all applicable rules and regulations affecting
the Portfolios' operations; and (viii) take other actions that appear to Aetna
and the Board to be necessary.
The Investment Advisory Agreement provides that Aetna shall pay (a) the
salaries, employment benefits and other related costs of those of its personnel
engaged in providing investment advice to the Portfolio, including, without
limitation, office space, office equipment, telephone and postage costs and (b)
any fees and expenses of all Directors, officers and employees, if any, of the
Fund who are employees of Aetna or an affiliated entity and any salaries and
employment benefits payable to those persons.
The Investment Advisory Agreement has an initial term of just under two years
and provides that it will remain in effect from year-to-year thereafter if
approved annually by a majority vote of the Directors, including a majority of
the Directors who are not "interested persons" as that term is defined in the
1940 Act, of the Fund or of Aetna, in person at a meeting called for that
purpose. The Investment Advisory Agreement may be terminated as to a particular
Portfolio without penalty at any time on sixty days' written notice by (i) the
Directors, (ii) a majority vote of the outstanding voting securities of that
Portfolio, or (iii) Aetna. The Investment Advisory Agreement terminates
automatically in the event of assignment.
The Prospectus contains a description of fees payable to Aetna. For the fiscal
year ended December 31, 1999, 1998, and for the period November 28, 1997
(commencement of operations) to December 31, 1997, the advisory fees for the
MFS Capital Opportunities, MFS Emerging Equities, MFS Research Growth, Scudder
International Growth and T. Rowe Price Growth Equity amounted to $734,991,
$1,073,994 and $79,213, $ 3,813,374, $6,073,693 and
24
<PAGE>
$482,568, $ 1,795,645, $3,075,409 and $257,457, $2,037,125, $3,330,261 and
$282,965 and $1,304,488, $2,643,704 and $202,630, respectively.
SUB-ADVISORY AGREEMENTS. The Fund's Board of Directors approved sub-advisory
agreements ("Sub-advisory Agreements") between Aetna and Massachusetts
Financial Services Company ("MFS") with respect to MFS Capital Opportunities,
MFS Emerging Equities and MFS Research Growth; with Scudder Kemper Investments,
Inc. ("Scudder Kemper"), with respect to Scudder International Portfolio; and
with T. Rowe Price Associates, Inc. ("T. Rowe Price"), with respect to T. Rowe
Price Growth Equity. Each Sub-advisory Agreement remains in effect from
year-to-year if approved annually by a majority vote of the Directors,
including a majority of the Directors who are not "interested persons" of the
Fund, Aetna or any Sub-adviser, in person, at a meeting called for that
purpose. Each Sub-advisory Agreement may be terminated without penalty at any
time on sixty days' written notice by (i) the Directors, (ii) a majority vote
of the outstanding voting securities of the respective Portfolio, (iii) Aetna,
or (iv) the relevant Sub-adviser. Each Sub-advisory Agreement terminates
automatically in the event of its assignment or in the event of the termination
of the Investment Advisory Agreement with Aetna.
Under each Sub-advisory Agreement, the Sub-adviser supervises the investment
and reinvestment of cash and securities comprising the assets of the
Portfolios. Each Sub-advisory Agreement also directs the Sub-adviser to (a)
determine the securities to be purchased or sold by the Portfolios, and (b)
take any actions necessary to carry out its investment sub-advisory
responsibilities.
Each Sub-adviser pays the salaries, employment benefits and other related costs
of personnel engaged in providing investment advice including office space,
facilities and equipment.
As compensation, Aetna pays each Sub-adviser a monthly fee as described below.
Aetna has certain obligations under the Sub-advisory Agreements and retains
overall responsibility for monitoring the investment program maintained by the
Sub-adviser for compliance with applicable laws and regulations and each
Portfolio's respective investment objectives. In addition, Aetna will consult
with and assist the Sub-adviser in maintaining appropriate policies, procedures
and records and oversee matters relating to promotion, marketing materials and
reports by the Sub-advisers to the Fund's Board of Directors.
MFS Capital Opportunities....... .40% on the first $300 million of aggregate
average daily net assets under management
MFS Emerging Equities .375% on the next $300 million of aggregate
MFS Research Growth average daily net assets under management
.35% on the next $300 million
.325% on the next $600 million
.25% on assets over $1.5 billion
Scudder International Growth .75% on the first $20 million of average
daily net assets
.65% on the next $15 million
.50% on the next $65 million
.40% on the next $200 million
.30% on assets over $300 million
T. Rowe Price Growth Equity .40% on the first $500 million of average
daily net assets
.375% on assets over $500 million
For the fiscal years ended December 31, 1999, 1998 and the period November 28,
1997 (commencement of operations) to December 31, 1997, Aetna paid MFS
$446,631, $6,282,714 and $5,423,591 on behalf of MFS Capital Opportunities,
Emerging Equities and MFS Research Growth. For the fiscal year ended December
31, 1999, 1998
25
<PAGE>
and the period November 28, 1997 (commencement of operations) to December 31,
1997, Aetna paid Scudder Kemper $1,978,275, $1,721,358 and $150,126 on behalf
of Scudder International Growth and T. Rowe Price $2,508,647, $1,762,470 and
$135,087 on behalf of T. Rowe Price Growth Equity.
THE ADMINISTRATIVE SERVICES AGREEMENT. Pursuant to an Administrative Services
Agreement, between the Fund and Aetna, Aetna has agreed to provide all
administrative services in support of the Portfolios and is responsible for the
supervision of the Fund's other service providers. Each Portfolio's costs and
fees are limited to its advisory fee and the administrative services charge.
The Administrative Services Agreement will remain in effect from year-to-year
if approved annually by a majority of the Directors. It may be terminated by
either party on sixty days' written notice. As compensation for its services,
Aetna receives a monthly fee from each Portfolio at an annual rate based on the
average daily net assets of each Portfolio as follows:
Portfolio Fee
- --------- ---
MFS Capital Opportunities............ 0.25%
MFS Emerging Equities................ 0.13%
MFS Research Growth.................. 0.15%
Scudder International Growth......... 0.20%
T. Rowe Price Growth Equity.......... 0.15%
For the fiscal year ended December 31, 1999, the MFS Capital Opportunities, MFS
Emerging Equities, MFS Research Growth, Scudder International Growth and T.
Rowe Price Growth Equity Portfolios paid Aetna $585,618, $1,477,831, $743,001,
$1,003,850 and $953,603, respectively, for such administrative services.
Each Portfolio's aggregate expenses are limited to the advisory and
administrative service fees disclosed above. Aetna has agreed to reimburse the
Portfolios for expenses and/or waive its fees, so that, through at least April
30, 2001, the aggregate of each Portfolio's expenses will not exceed the
combined investment advisory and administrative service fee rates shown above.
CUSTODIAN AND TRANSFER AGENT. Investors Bank & Trust Company ("Investors
Bank"), 200 Clarendon Street, Boston, Massachusetts, serves as custodian of the
assets of the Fund and transfer agent for the Fund. Investors Bank does not
participate in determining the investment policies of a Portfolio or in
deciding which securities are purchased or sold by a Portfolio.
INDEPENDENT AUDITORS. KPMG LLP, 99 High Street, Boston, Massachusetts 02110
serves as independent auditors to the Funds. KPMG LLP provides audit services,
assistance and consultation in connection with SEC filings.
PRINCIPAL UNDERWRITER
The Fund has entered into an Underwriting Agreement (the "Agreement") pursuant
to which Aetna, as agent, serves as principal underwriter for the continuous
offering of shares of the Portfolios. The Agreement may be continued from year
to year if approved annually by the Directors or by a vote of holders of a
majority of each Portfolio's shares, and by a vote of a majority of the
Directors who are not "interested persons" of Aetna, or the Fund, appearing in
person at a meeting called for the purpose of approving such Agreement. The
Agreement terminates automatically upon assignment, and may be terminated at
any time on sixty (60) days' written notice by the Directors or Aetna or by
vote of holders of a majority of a Portfolio's shares without the payment of
any penalty. The Underwriter has agreed to use its best efforts to solicit
orders for the purchase of shares of all the Portfolios, although it is not
obligated to sell any particular amount of shares. Aetna shall be responsible
for any costs of printing and distributing prospectuses and SAIs necessary to
offer and sell the shares, and such other sales literature, reports, forms and
advertisements as it elects to prepare. The Fund shall be responsible for the
costs of registering the shares with the SEC and for the costs of preparing
prospectuses and SAIs and such other documents as are required to maintain the
registration of the shares with the SEC. Aetna does not receive compensation
for providing services under the Agreement.
26
<PAGE>
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Directors, Aetna and the Sub-advisers have
responsibility for making the Portfolios' investment decisions, for effecting
the execution of trades for the Portfolios and for negotiating any brokerage
commissions thereof. It is the policy of Aetna and the Sub-advisers to obtain
the best quality of execution available, giving attention to net price
(including commissions where applicable), execution capability (including the
adequacy of a brokerage 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. In implementing their
trading policy, Aetna and the Sub-advisers may place a Portfolio's transactions
with such brokers or dealers and for execution in such markets as, in the
opinion of the Adviser or Sub-advisers, will lead to the best overall quality
of execution for the Portfolio.
Aetna and the Sub-advisers may receive a variety of brokerage and research
services from brokerage firms that execute trades on behalf of the Portfolios.
These services may benefit the Adviser and/or advisory clients other than the
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 Portfolio and other investment
companies and accounts, services related to the execution of trades in a
Portfolio's securities and advice as to the valuation of securities. Aetna and
the Sub-advisers may consider the quantity and quality of such brokerage and
research services provided by a brokerage firm along with the nature and
difficulty of the specific transaction in negotiating commissions for trades in
a Portfolio's securities and may pay higher commission rates than the lowest
available when it is reasonable to do so in light of the value of the brokerage
and research services received generally or in connection with a particular
transaction. Aetna's and the Sub-advisers' 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 that are reasonable in relation to the value
of the services provided by the broker, taking into consideration research and
other services provided. When either Aetna or the Sub-advisers believe that
more than one broker can provide best execution, preference may be given to
brokers who provide additional services to Aetna or the Sub-advisers.
Consistent with securities laws and regulations, Aetna and the Sub-advisers 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. Aetna's and the Sub-advisers' judgment as to whether and how they
will obtain the specific brokerage and research services will be based upon
their 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 Aetna's and the Sub-advisers' opinion as to which services and which
means of payment are in the long-term best interests of a Portfolio. The
Portfolios have no present intention to effect any brokerage transactions in
portfolio securities through Aetna, the Sub-advisers or any affiliate thereof.
If a Portfolio enters into a transaction with any such person in the future,
the transaction will comply with Rule 17e-1 under the 1940 Act. Certain
officers of Aetna and the Sub-advisers also manage the securities portfolios of
their own and their affiliates. Further, Aetna and the Sub-advisers also act as
investment adviser to other investment companies registered under the 1940 Act
and other client accounts.
To the extent Aetna or the Sub-advisers desire to buy or sell the same publicly
traded security at or about the same time for more than one client, the
purchases or sales will normally be aggregated, and allocated as nearly as
practicable on a pro rata basis in proportion to the amounts to be purchased or
sold by each, taking into consideration the respective investment objectives of
the clients, 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 those transactions.
In some cases, this procedure may adversely affect the size of the position
obtained for or disposed of by a Portfolio or the price paid or received by a
Portfolio.
The Board of Directors has adopted a policy allowing trades to be made between
a Portfolio and a registered investment company or series thereof that is an
affiliated person of the Portfolio (and certain noninvestment company
affiliated persons) provided the transactions meet the terms of Rule 17a-7
under the 1940 Act. Pursuant to this policy, a Portfolio may buy a security
from or sell another security to another registered investment company or
private advisory account advised by Aetna or by one of the Sub-advisers. The
Board of Directors, Aetna and each
27
<PAGE>
Sub-adviser have also adopted a Code of Ethics (in accordance with Rule 17j-1
under the 1940 Act) governing personal trading by persons who manage, or who
have access to trading activity by, a Portfolio. The Codes allow trades to be
made in securities that may be held by a Portfolio. However, they prohibit a
person from taking advantage of Portfolio trades or from acting on inside
information.
Information about these codes of ethics may be obtained by calling the
Commission's Public Reference Room at 1-202-942-8090. Copies of the codes of
ethics may also be obtained on the EDGAR Database on the Commission's Internet
site at http://www.sec.gov. Alternatively, this information may be obtained,
upon payment of a duplicating fee, by writing the Public Reference Section of
the Commission, Washington D.C. 20549-0102 or by electronic request at the
following e-mail address: [email protected].
During the fiscal year ended December 31, 1999, 1998, and the period November
28, 1997 (commencement of operations) to December 31, 1997, the aggregate
amount of brokerage commissions paid by the Portfolios was as follows: MFS
Capital Opportunities: $924,763, $642,245 and $214,636; MFS Emerging Equities:
$235,932, $332,149 and $453,702; MFS Research Growth: $1,039,086, $984,339 and
$433,626; Scudder International Growth: $1,665,184, $1,314,765 and $66,716; and
T. Rowe Price Growth Equity: $813,982, $567,634 and $380,629.
DESCRIPTION OF SHARES
The Articles of Incorporation authorize the Fund to issue one billion shares of
common stock with a par value of $.001 per share. The shares are
non-assessable, transferable, redeemable and do not have pre-emptive rights or
cumulative voting rights. The shares may be issued as whole or fractional
shares and are uncertificated.
The shares may be issued in series or portfolios having separate assets and
separate investment objectives and policies. Upon liquidation of a Portfolio,
its shareholders are entitled to share pro rata in the net assets of that
portfolio available for distribution to shareholders.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (and fractional
votes for fractional shares held) and will vote in the election of Directors
(to the extent hereinafter provided) and on other matters submitted to the vote
of the shareholders. The shareholders of the Portfolios are the insurance
companies for their separate accounts using the Portfolios to fund VA Contracts
and VLI Contracts. The insurance company depositors of the separate accounts
pass voting rights attributable to shares held for VA Contracts and VLI
Contracts through to Contract owners as described in the prospectus for the
applicable VA or VLI Contract.
The Directors of the Fund shall continue to hold office until the Annual
Meeting of Shareholders next held after his/her election, or until his/her
successor is duly elected and qualified. No meeting of the shareholders for the
purpose of electing Directors will be held. However, Shareholders holding a
majority of outstanding shares may request a special meeting for the purpose of
removing and replacing a Director. Vacancies on the Board occurring between any
such meetings shall be filled by the remaining Directors. Any Director may also
voluntarily resign from office. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Directors can,
if they choose to do so, elect all the Directors of the Fund, in which event
the holders of the remaining shares will be unable to elect any person as a
Director.
Special shareholder meetings may be called when requested in writing by the
holders of not less than 50% of the outstanding voting shares of a Portfolio.
Any request must state the purposes of the proposed meeting.
The Articles may be amended if duly advised by a majority of the Directors and
approved by the affirmative vote of a majority of votes entitled to be cast.
28
<PAGE>
NET ASSET VALUE
Securities of the Portfolios are generally valued by independent pricing
services. The values for equity securities traded on registered securities
exchanges are based on the last sale price or, if there has been no sale that
day, at the mean of the last bid and asked price on the exchange where the
security is principally traded. Securities traded over-the-counter are valued
at the last sale price or at the last bid price if there has been no sale that
day. Short-term debt securities that have a maturity date of more than sixty
days will be valued at the mean of the last bid and asked price obtained from
principal market makers. Long-term debt securities are valued at the mean of
the last bid and asked price of such securities obtained from a broker that is
a market-maker in the securities or a service providing quotations based upon
the assessment of market-makers in those securities.
Options are valued at the mean of the last bid and asked price on the exchange
where the option is primarily traded. Stock index futures contracts and
interest rate futures contracts are valued daily at a settlement price based on
rules of the exchange where the futures contract is primarily traded.
TAX STATUS
The following is only a summary of certain additional tax considerations
generally affecting each Portfolio that are not described in the Prospectus.
The discussions below and in the Prospectus are not intended as substitutes for
careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY--Each Portfolio has elected to
be taxed and intends to qualify as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, a Portfolio is not
subject to federal income tax on the portion of its net investment income
(i.e., taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains over
capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described in this
section. Distributions by a Portfolio made during the taxable year or, under
specified circumstances, within twelve months after the close of the taxable
year, will be considered distributions of income and gains of the taxable year
and will therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement").
In addition to satisfying the requirements described above, each Portfolio must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a
Portfolio's taxable year, at least 50% of the value of the Portfolio's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
each of which the Portfolio has not invested more than 5% of the value of the
Portfolio's total assets in securities of such issuer and does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or of two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses or
related trades or businesses. Generally, an option (call or put) with respect
to a security is treated as issued by the issuer of the security not the issuer
of the option. However, with regard to forward currency contracts, there does
not appear to be any formal or informal authority which identifies the issuer
of such instrument.
If for any taxable year a Portfolio does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
29
<PAGE>
QUALIFICATION OF SEGREGATED ASSET ACCOUNTS--Under Code Section 817(h), a
variable life insurance or annuity contract will not be treated as a life
insurance policy or annuity contract, respectively, under the Code, unless the
segregated asset account upon which such contract or policy is based is
"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 the
segregated asset account'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 each U.S. Government agency and instrumentality is considered a separate
issuer. As a safe harbor, a segregated asset 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. In addition, a segregated asset account with
respect to a variable life insurance contract is treated as adequately
diversified to the extent of its investment in securities issued by the United
States Treasury.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be entitled
to "look through" the regulated investment company to its pro rata portion of
the regulated investment company's assets, provided that the shares of such
regulated investment company are held only by insurance companies and certain
fund managers (a "Closed Fund").
If the segregated asset account upon which a variable contract is based is not
"adequately diversified" under the foregoing rules for each calendar quarter,
then (a) the variable contract is not treated as a life insurance contract or
annuity contract under the Code for all subsequent periods during which such
account is not "adequately diversified" and (b) the holders of such contract
must include as ordinary income the "income on the contract" for each taxable
year. Further, the income on a life insurance contract for all prior taxable
years is treated as received or accrued during the taxable year of the
policyholder in which the contract ceases to meet the definition of a "life
insurance contract" under the Code. The "income on the contract" is, generally,
the excess of (i) the sum of the increase in the net surrender value of the
contract during the taxable year and the cost of the life insurance protection
provided under the contract during the year, over (ii) the premiums paid under
the contract during the taxable year. In addition, if a Portfolio does not
constitute a Closed Fund, the holders of the contracts and annuities which
invest in the Portfolio through a segregated asset account may be treated as
owners of Portfolio shares and may be subject to tax on distributions made by
the Portfolio.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES--A 4% non-deductible excise tax is
imposed on 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 (a "taxable year election")). The balance of such income must
be distributed during the next calendar year. For the foregoing purposes, a
regulated investment company is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
For purposes of the excise tax, a regulated investment company shall (1) reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year, and (2) exclude foreign
currency gains and losses from Section 998 transactions incurred after October
31 of any year (or after the end of its taxable year if it has made a taxable
year election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).
Each Portfolio intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Portfolio may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid
excise tax liability.
30
<PAGE>
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS--The foregoing general
discussion of U.S. federal income tax consequences is based on the Code and the
Treasury Regulations issued thereunder as in effect on the date of this SAI.
Future legislative or administrative changes or court decisions may
significantly change the conclusions expressed herein, and any such changes or
decisions may have a retroactive effect with respect to the transactions
contemplated herein.
Rules of state and local taxation often differ from the rules for U.S. federal
income taxation described above. Shareholders are urged to consult their tax
advisers as to the consequences of state and local tax rules affecting
investment in a Portfolio.
PERFORMANCE INFORMATION
Total return of a Portfolio for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $1,000
investment in the Portfolio made at the beginning of each period, then
calculating the average annual compounded rate of return which would produce
the same investment return on the $1,000 investment over the same period. Total
return for a period of one year or less is equal to the actual investment
return on a $1,000 investment in the Portfolio during that period. Total return
calculations assume that all Portfolio distributions are reinvested at net
asset value on their respective reinvestment dates.
The performance of the Portfolios is commonly measured as total return. An
average annual compounded rate of return ("T") may be computed by using the
redeemable value at the end of a specified period ("ERV") of a hypothetical
initial investment of $1,000 ("P") over a period of time ("n") according to the
formula:
P (1 + T) (n) = ERV
Investors should not consider this performance data as an indication of the
future performance of any of the Portfolios.
The performance of a Portfolio may, from time to time, be compared to that of
other mutual funds tracked by mutual fund rating services, to broad groups of
comparable mutual funds, or to unmanaged indices which may assume investment of
dividends but generally do not reflect deductions for administrative and
management costs.
Each Portfolio commenced operations on November 28, 1997, and has a limited
performance record. However, each Portfolio has the same investment objective
and follows substantially the same investment strategies as a mutual fund or
funds whose shares are currently sold to the public or through variable
insurance products and is/are managed by MFS, Scudder Kemper or T. Rowe Price,
as applicable. The Prospectus contains historical performance information of
these similarly managed funds. Advertisements for Portfolio Partners, Inc. may
also include historical performance of these similarly managed Funds, subject
to regulatory approval.
A Portfolio's investment results will vary from time to time depending upon
market conditions, the composition of its investment portfolio and its
operating expenses. The total return for a Portfolio should be distinguished
from the rate of return of a corresponding division of the insurance company's
separate account, which rate will reflect the deduction of additional insurance
charges, including mortality and expense risk charges, and will therefore be
lower. Accordingly, performance figures for a Portfolio will only be included
in sales literature if comparable performance figures for the corresponding
division of the separate account accompany the sales literature. VA and VLI
Contract owners should consult their contract and policy prospectuses,
respectively, for further information. Each Portfolio's results also should be
considered relative to the risks associated with its investment objectives and
policies.
FINANCIAL STATEMENTS
The financial statements and independent auditors' report thereon for MFS
Emerging Equities, MFS Research Growth, MFS Capital Opportunities, Scudder
International Growth and T. Rowe Price Growth Equity are incorporated by
reference to the Fund's Annual Report as of and for the period ended December
31, 1999, and have been incorporated by reference into this SAI.
31
<PAGE>
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
The modifier 1 indicates that the bond ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates the issuer ranks in the lower end of its rating category.
STANDARD & POOR'S RATING GROUP
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
32
<PAGE>
BB -- Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, the bonds face major uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B -- Bonds rated B have a greater vulnerability to default but currently have
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
The ratings from "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
FITCH IBCA, INC.
AAA: Bonds considered to be investment grade and of the highest quality. The
obligor has an exceptionally strong ability to pay interest and repay principal
which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated
"F-1+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
33
<PAGE>
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be raised or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
34
<PAGE>
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Articles of Incorporation(1)
(b) By-laws(1)
(c) Instruments Defining Rights of Security Holders (set forth in the
Articles of Incorporation which are incorporated by reference)(1)
(d.1) Investment Advisory Agreement between Portfolio Partners, Inc.
and Aetna Life Insurance and Annuity Company ("Aetna")(2)
(d.2) Subadvisory Agreement between Aetna and Massachusetts Financial
Services Company(3)
(d.3) Subadvisory Agreement between Aetna and T. Rowe Price
Associates, Inc.(2)
(d.4) Subadvisory Agreement between Aetna and Scudder Kemper
Investments, Inc.(3)
(e) Underwriting Agreement between the Registrant and Aetna (2)
(f) Not Applicable
(g) Custodian Agreement(2)
(h.1) Administrative Services Agreement(2)
(h.2) Sub-Administration Agreement between Aetna and Investors Bank &
Trust Company(3)
(h.3) License Agreement between Aetna and T. Rowe Price Associates,
Inc.(1)
(i) Opinion of Counsel(4)
(j) Consent of Independent Auditors(4)
(k) Not Applicable
(l) Agreement re: Initial Contribution to Working Capital(1)
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
(p.1) Powers of Attorney(1)
(p.2) Power of Attorney(2)
(p.3) Authorization for Signatures(3)
(p.4) Code of Ethics(4)
(1) Incorporated herein by reference to the Registrant's initial Registration
Statement on Form N-1A ("Registration Statement") (File No. 333-32575) as
filed July 31, 1997.
(2) Incorporated herein by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-32575), as filed February
26, 1998.
<PAGE>
(3) Incorporated herein by reference to Post-Effective Amendment No. 3 to the
registration Statement on Form N-1A (File No. 333-32575), as filed February
26, 1999.
(4) Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Aetna is an indirect, wholly-owned subsidiary of Aetna Inc.
A list of all persons directly or indirectly under common control with the
Registrant which indicates principal business of each such company referenced
is incorporated herein by reference to Item 24 of the Post-Effective Amendment
No. 38 to the Registration Statement on Form N-1A (File No. 333-41694), as
filed with the Securities and Exchange Commission on February 23, 2000.
ITEM 25. INDEMNIFICATION
Article Ninth, Section (d) of the Registrant's Articles of Incorporation
provides for indemnification of directors and officers. In addition, the
Registrant's officers and directors will be covered under a directors and
officers errors and omissions liability insurance policy issued by ICI Mutual
Insurance Company.
Reference is also made to Section 2-418 of the Corporations and Associations
Article of the Annotated Code of Maryland which provides generally that (1) a
corporation may (but is not required to) indemnify its directors for judgments,
fines and expenses in proceedings in which the director is named a party solely
by reason of being a director, provided the director has not acted in bad
faith, dishonestly or unlawfully, and provided further that the director has
not received any "improper personal benefit"; and (2) that a corporation must
(unless otherwise provided in the corporation's charter or articles of
incorporation) indemnify a director if he or she is successful on the merits in
defending a suit against him or her by reason of being a director. The
statutory provisions are not exclusive; a corporation may provide greater
indemnification rights than those provided by statute.
Section XI.B of the Administrative Services Agreement, incorporated herein by
reference to Exhibit (h1) to the Registrant's Post-Effective Amendment No. 1 to
the Registration Statement on Form N-1A (File No. 333-32575), as filed on
February 26, 1998, provides for indemnification of the Administrator.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Aetna Life Insurance and Annuity Company ("Aetna") is an insurance company that
issues variable and fixed annuities and variable and universal life insurance
policies, and acts as principal underwriter and depositor for separate accounts
holding assets for variable contracts and policies. Aetna acts as the
investment adviser and principal underwriter for the Registrant (a management
investment company registered under the Investment Company Act of 1940, as
amended (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, Variable Life Account B of
Aetna and Variable Life Account C 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).
The following table summarizes the business connections of the directors and
principal officers of the Investment Adviser.
<PAGE>
Positions and Offices Other Principal Position(s) Held
Name with Investment Adviser Since Oct. 31, 1996/Addresses*
- ---- ----------------------- ------------------------------
Thomas J. McInerney Director and President Director and President (since
October 1998) - Aetna Investment
Adviser Holding Company, Inc.,
Aetna Retail Holding Company,
Inc., Aetna Services Holding
Company, Inc.; Director (since
February 1998) and President
(since April 1998) -- Aetna
Retirement Services, Inc.;
Director (since August 1997) and
President (since September 1997)
-- Aetna Life Insurance and
Annuity Company; Director and
President (since September 1997)
-- Aetna Retirement Holdings,
Inc.; Director and President
(since September 1997) -- Aetna
Insurance Company of America;
Executive Vice President (since
August 1997) -- Aetna Inc.; Vice
President, Strategic Planning
(March 1997 - August 1997) --
Aetna Inc.
Shaun Mathews Director and Senior Director and Senior Vice
Vice President President (since October 1998) -
Aetna Investment Adviser Holding
Company, Inc.; Aetna Retail
Holding Company, Inc., Aetna
Services Holding Company, Inc.;
Director (since December 1997) -
Aetna Retirement Holdings, Inc.;
Director (since December 1996) -
Aetna Insurance Agency Holding
Company, Inc.; Director (since
March 1991) and Senior Vice
President (since September 1997)
- Aetna Life Insurance and
Annuity Company; Director (since
July 1993), President (December
1998- February 1999) and Senior
Vice President (July 1993 -
December 1998) - Aetna
Investment Services, Inc.;
Director and Senior Vice
President (since September 1992)
- Aetna Insurance Company of
America.
Catherine H. Smith Director, Senior Vice Director and Senior Vice
President and Chief President (since October 1998) -
Financial Officer Aetna Investment Adviser Holding
Company, Inc.; Aetna Services
Holding Company, Inc.; Director
and Senior Vice President (since
October 1998) - Aetna Retail
Holding Company, Inc.; Director
(since March 1998) and Senior
Vice President (since February
1998) - Aetna Retirement
Holdings, Inc.; Director (since
March 1998) Aetna Insurance
Company of America; Director and
Senior Vice President, Business
Strategy and Finance and Chief
Financial Officer (since March
1998) - Aetna Life Insurance and
Annuity Company; Chief Financial
Officer (since February 1998) -
Aetna Retirement Services, Inc.;
Vice President, Strategy,
Finance and Administration,
Financial Relations (September
1996 - February 1998) - Aetna
Inc.
Kirk P. Wickman Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Corporate Secretary
Corporate Secretary (since June 1999) - Aetna
Retirement Holding Company,
Inc., Aetna Investment Adviser
Holding Company, Inc., Aetna
Services Holding Company, Inc.;
Senior Vice President, General
Counsel and Corporate Secretary
(since April 1999) Aetna
Retirement Services, Inc.; Vice
President, General Counsel and
Corporate Secretary (October
1998 - June 1999) - Aetna
Retirement Holdings, Inc.;
Senior Vice President (since
March 1999), General Counsel and
Corporate Secretary (since
November 1996), Vice President
(November 1996 - March 1999) -
Aetna Life Insurance and Annuity
Company.
Therese Squillacote Vice President and Vice President and Chief
Chief Compliance Compliance Officer (since
Officer December 1998) - Aetna Life
Insurance and Annuity Company;
Vice President and Chief
Compliance Officer (since
December 1998) - Aetna
Investment Services, Inc.; Chief
Compliance Officer (since
December 1998) - Systematized
Benefits Administrators, Inc.;
Vice President, Compliance
(since March 1998) - Aetna
Financial Services, Inc.;
Compliance Manager (May 1997 to
December 1998) - Aetna Life
Insurance and Annuity Company;
Registered Principal (since July
1997) - Aetna Investment
Services, Inc
<PAGE>
Deborah Koltenuk Vice President, Vice President, Corporate
Assistant Treasurer Controller and Assistant
Corporate Controller Treasurer (since July 1999)
Aetna Retirement Services, Inc.;
Vice President, Corporate
Controller, and Assistant
Treasurer (since June 1999)
Aetna Investment Adviser
Holding Company, Inc., Aetna
Retail Holding Company, Inc.,
Aetna Services Holding Company,
Inc., Aetna Life Insurance and
Annuity Company, Aetna
Insurance Company of America;
Vice President, Corporate
Controller and Assistant
Treasurer, (April 1999 - July
1999) Aetna Retirement Services,
Inc. Vice President, Treasurer
and Corporate Controller
(October 1998 - June 1999) Aetna
Investment Adviser Holding
Company, Inc., Aetna Retail
Holding Company, Inc., Aetna
Services Holding Company, Inc.;
Vice President and Controller
(April 1997 - April 1999) Aetna
Retirement Services, Inc.; Vice
President, Treasurer and
Corporate Controller (July 1996
- June 1999) Aetna Life
Insurance and Annuity Company;
Vice President, Treasurer and
Corporate Controller (September
1996 - June 1999) Aetna
Retirement Holdings, Inc.; Vice
President and Treasurer,
Corporate Controller (April
1997 - June 1999) Aetna
Insurance Company of America;
Vice President, Investment
Financial Reporting and
Securities Operations (April
1996 - July 1996) Aetna Life
Insurance Company.
*The principal business address of each
person named is 151 Farmington Avenue,
Hartford, Connecticut 06156.
The following information relates to the Sub-advisers of the Registrant.
Massachusetts Financial Services Company (MFS)
MFS serves as investment adviser to the following open-end Funds comprising the
MFS Family of Funds (except the Vertex Funds mentioned below): Massachusetts
Investors Trust, Massachusetts Investors Growth Stock Fund, MFS Growth
Opportunities Fund, MFS Government Securities Fund, MFS Government Limited
Maturity Fund, MFS Series Trust I (which has twelve series: MFS Managed Sectors
Fund, MFS Cash Reserve Fund, MFS Global Asset Allocation Fund, MFS Strategic
Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth Fund, MFS
Equity Income Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund, MFS
New Discovery Fund, MFS Science and Technology Fund and MFS Research
International Fund), MFS Series Trust II (which has four series: MFS Emerging
Growth Fund, MFS Large Cap Growth Fund, MFS Intermediate Income Fund and MFS
Charter Income Fund), MFS Series Trust III (which has three series: MFS High
Income Fund, MFS Municipal High Income Fund and MFS High Yield Opportunities
Fund), MFS Series Trust IV (which has four series: MFS Money Market Fund, MFS
Government Money Market Fund, MFS Municipal Bond Fund and MFS Mid Cap Growth
Fund), MFS Series Trust V (which has five series: MFS Total Return Fund, MFS
Research Fund, MFS International Opportunities Fund, MFS International
Strategic Growth Fund and MFS International Value Fund), MFS Series Trust VI
(which has three series: MFS Global Total Return Fund, MFS Utilities Fund and
MFS Global Equity Fund), MFS Series Trust VII (which has two series: MFS Global
Governments Fund and MFS Capital Opportunities Fund), MFS Series Trust VIII
(which has two series: MFS Strategic Income Fund and MFS Global Growth Fund),
MFS Series Trust IX (which has eight series: MFS Bond Fund, MFS Limited
Maturity Fund, MFS Municipal Limited Maturity Fund, MFS Research Bond Fund, MFS
Intermediate Investment Grade Bond Fund, MFS Mid Cap Value Fund, MFS Large Cap
Value Fund and MFS High Quality Bond Fund), MFS Series Trust X (which has
eleven series: MFS Government Mortgage Fund, MFS/Foreign & Colonial Emerging
Markets Equity Fund, MFS International Growth Fund, MFS International Growth
and Income Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund, MFS
Emerging Markets Debt Fund, MFS Income Fund, MFS European Equity Fund, MFS High
Yield Fund and MFS Concentrated Growth Fund), MFS Series Trust XI (which has
four series: MFS Union Standard Equity Fund, Vertex All Cap Fund, Vertex U.S.
All Cap Fund and Vertex Contrarian Fund), and MFS Municipal Series Trust (which
has 18 series: MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond
Fund, MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS
Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS
Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New
York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS
Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS
Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS West
Virginia Municipal Bond Fund, MFS Municipal Income Fund, MFS New York High
Income Tax Free Fund and MFS Massachusetts High Income Tax Free Fund) (the "MFS
Funds"). The principal business address of each of the MFS Funds is 500
Boylston Street, Boston, Massachusetts 02116.
<PAGE>
MFS also serves as investment adviser of the following open-end
Funds: MFS Institutional Trust ("MFSIT") (which has ten series) and MFS
Variable Insurance Trust ("MVI") (which has fifteen series). The principal
business address of each of the aforementioned funds is 500 Boylston Street,
Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL") (which has 26 series), Money Market Variable Account, High Yield
Variable Account, Capital Appreciation Variable Account, Government Securities
Variable Account, Global Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account (collectively, the "Accounts").
The principal business address of MFS/SL is 500 Boylston Street, Boston,
Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
VERTEX INVESTMENT MANAGEMENT, INC., a Delaware corporation and a
wholly owned subsidiary of MFS, whose principal business address is 500
Boylston Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment
adviser to Vertex All Cap Fund, Vertex U.S. All Cap Fund and Vertex Contrarian
Fund, each a series of MFS Series Trust XI. The principal business address of
the aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS INTERNATIONAL LTD. ("MIL"), a limited liability company organized
under the laws of Bermuda and a subsidiary of MFS, whose principal business
address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as
investment adviser to and distributor for MFS American Funds known as the MFS
Funds after January 1999 (which will have 11 portfolios as of January 1999):
U.S. Equity Fund, U.S. Emerging Growth Fund, U.S. High Yield Bond Fund, U.S.
Dollar Reserve Fund, Charter Income Fund, U.S. Research Fund, U.S. Strategic
Growth Fund, Global Equity Fund, European Equity Fund and European Corporate
Bond Fund) (the "MIL Funds"). The MIL Funds are organized in Luxembourg and
qualify as an undertaking for collective investments in transferable securities
(UCITS). The principal business address of the MIL Funds is 47, Boulevard
Royal, L-2449 Luxembourg. MIL also serves as investment adviser to and
distributor for MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter
Income Fund, MFS Meridian Global Governments Fund, MFS Meridian U.S. Emerging
Growth Fund, MFS Meridian Global Equity Fund, MFS Meridian Limited Maturity
Fund, MFS Meridian Global Growth Fund, MFS Meridian Money Market Fund, MFS
Meridian Global Balanced Fund, MFS Meridian U.S. Equity Fund, MFS Meridian
Research Fund, MFS Meridian U.S. High Yield Fund, MFS Meridian Emerging Markets
Debt Fund, MFS Meridian Strategic Growth Fund and MFS Meridian Global Asset
Allocation Fund and the MFS Meridian Research International Fund (collectively
the "MFS Meridian Funds"). Each of the MFS Meridian Funds is organized as an
exempt company under the laws of the Cayman Islands. The principal business
address of each of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman
Islands, British West Indies.
MFS INTERNATIONAL (U.K.) LTD. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is Eversheds, Senator House, 85 Queen Victoria Street, London, England
EC4V 4JL, is involved primarily in marketing and investment research activities
with respect to private clients and the MIL Funds and the MFS Meridian Funds.
MFS INSTITUTIONAL ADVISORS (AUSTRALIA) LTD. ("MFSI-AUSTRALIA"), a
private limited company organized under the Corporations Law of New South
Wales, Australia whose current address is Level 27, Australia Square, 264
George Street, Sydney, NSW2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts
as an investment adviser to institutional accounts.
MFS HOLDINGS AUSTRALIA PTY LTD. ("MFS HOLDINGS AUSTRALIA"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 27, Australia Square, 264 George
Street, Sydney, NSW2000 Australia, and whose function is to serve primarily as
a holding company.
MFS FUND DISTRIBUTORS, INC. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI and MFSIT.
MFS SERVICE CENTER, INC. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT and MVI.
MFS INSTITUTIONAL ADVISORS, INC. ("MFSI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS RETIREMENT SERVICES, INC. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
<PAGE>
MASSACHUSETTS INVESTMENT MANAGEMENT CO., LTD. ("MIMCO"), a wholly
owned subsidiary of MFS, is a corporation incorporated in Japan. MIMCO, whose
address is Kamiyacho-Mori Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo,
Japan, is involved in investment management activities.
MFS HERITAGE TRUST COMPANY ("MFS TRUST"), a New Hampshire-chartered
limited-purpose trust company whose current address is 650 Elm Street, Suite
404, Manchester, NH 03101, provides directed trustee services to retirement
plans.
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo, William
W. Scott, Donald A. Stewart, James Prieur and William W. Stinson. Mr. Shames is
the Chairman and Chief Executive Officer, Mr. Ballen is President and Chief
Investment Officer, Mr. Arnold Scott is a Senior Executive Vice President and
Secretary, Mr. William Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are
Executive Vice Presidents (Mr. Dello Russo is also Chief Financial Officer and
Chief Administrative Officer and Mr. Parke is also Chief Equity Officer),
Stephen E. Cavan is a Senior Vice President, General Counsel and an Assistant
Secretary, Robert T. Burns is a Senior Vice President, Associate General
Counsel and an Assistant Secretary of MFS, and Thomas B. Hastings is a Vice
President and Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
Jeffrey L. Shames is Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London, a Senior Vice President of MFS, is the Treasurer,
James O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS,
are the Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President
and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
Jeffrey L. Shames is Chairman and President, Leslie J. Nanberg,
Senior Vice President and Chief Economist of MFS, is a Vice President, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost,
Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and James
R. Bordewick, Jr. is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
Jeffrey L. Shames is Chairman and President, Leslie J. Nanberg,
Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr.
is the Assistant Secretary.
MFS SERIES TRUST III
Jeffrey L. Shames is Chairman and President, James T. Swanson, Robert
J. Manning and Joan S. Batchelder, Senior Vice Presidents of MFS (Mr. Manning
is also Director of Fixed Income Research and Chief of Fixed Income Strategy
and Ms. Batchelder is also Chief Fixed Income Officer), and Bernard Scozzafava,
Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers, and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
Jeffrey L. Shames is Chairman and President, Robert A. Dennis and
Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and
James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE>
MFS SERIES TRUST VII
Jeffrey L. Shames is Chairman and President, Leslie J. Nanberg and
Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost,
Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS SERIES TRUST VIII
Jeffrey L. Shames is Chairman and President, Leslie J. Nanberg, James
T. Swanson and John D. Laupheimer, Jr., a Senior Vice President of MFS, are
Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
Jeffrey L. Shames is Chairman and President, Robert A. Dennis is Vice
President, Geoffrey L. Schechter, Vice President of MFS, is Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS SERIES TRUST XI
MFS INSTITUTIONAL TRUST
Jeffrey L. Shames is the President and Chairman, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
Jeffrey L. Shames is Chairman and President, Robert J. Manning is
Vice President, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
Jeffrey L. Shames is Chairman and President, Leslie J. Nanberg and
James T. Swanson are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS SPECIAL VALUE TRUST
Jeffrey L. Shames is Chairman and President, Robert J. Manning is
Vice President, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
C. James Prieur, President and Director of Sun Life Assurance Company
of Canada, is the President, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers and James R. Bordewick, Jr., is the Assistant
Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
GLOBAL GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
C. James Prieur is the President, Stephen E. Cavan is the Secretary,
and James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE>
MIL FUNDS
Jeffrey L. Shames is Chairman, Richard B. Bailey, John A. Brindle,
Richard W. S. Baker, Arnold D. Scott and William F. Waters are Directors,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and
James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE>
MFS MERIDIAN FUNDS
Jeffrey L. Shames is Chairman, Richard B. Bailey, John A. Brindle,
Richard W. S. Baker, Arnold D. Scott and William F. Waters are Directors,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James R.
Bordewick, Jr. is the Assistant Secretary and James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers.
VERTEX
Jeffrey L. Shames is the Chairman and President, Arnold D. Scott is a
Director, Kevin R. Parke and John W. Ballen are Executive Vice Presidents, John
D. Laupheimer is a Senior Vice President, Brian E. Stack is a Vice President,
Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant
Treasurer, Stephen E. Cavan is the Secretary and Robert T. Burns is the
Assistant Secretary.
MIL
Peter D. Laird is President and a Director, Arnold D. Scott, Jeffrey
L. Shames and Thomas J. Cashman, Jr. are Directors, Stephen E. Cavan is a
Director, Senior Vice President and the Clerk, Robert T. Burns is an Assistant
Clerk, Joseph W. Dello Russo, Executive Vice President and Chief Financial
Officer of MFS, is the Treasurer and Thomas B. Hastings is the Assistant
Treasurer.
MIL-UK
Peter D. Laird is President and a Director, Thomas J. Cashman, Arnold
D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director
and the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - AUSTRALIA
Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer,
John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS HOLDINGS - AUSTRALIA
Jeffrey L. Shames is the President and a Director, Arnold D. Scott,
Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is
the Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W.
Scott, Jr., an Executive Vice President of MFS, is the President, Stephen E.
Cavan is the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W.
Dello Russo is the Treasurer, and Thomas B. Hastings is the Assistant
Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A.
Recomendes, a Senior Vice President and Chief Information Officer of MFS, is
Vice Chairman and a Director, Janet A. Clifford is the President, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant
Secretary.
MFSI
Thomas J. Cashman, Jr. is Chairman and a Director, Jeffrey L. Shames,
and Arnold D. Scott are Directors, Joseph J. Trainor is the President and a
Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director and
a Director, Kevin R. Parke is the Executive Vice President and a Managing
Director, George F. Bennett, Jr., John A. Gee, Brianne Grady, Joseph A.
Kosciuszek and
<PAGE>
Joseph J. Trainor are Senior Vice Presidents and Managing Directors, Joseph W.
Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer and
Robert T. Burns is the Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is
the President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan
is the Secretary and Robert T. Burns is the Assistant Secretary.
MIMCO
Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are Directors,
Shaun Moran is the Representative Director, Joseph W. Dello Russo is the
Statutory Auditor, Robert DiBella is the President and Thomas B. Hastings is
the Assistant Statutory Auditor.
MFS TRUST
The Directors of MFS Trust are Martin E. Beaulieu, Stephen E. Cavan,
Janet A. Clifford, Joseph W. Dello Russo and Joseph A. Kosciuszek. Mr. Cavan is
President, Mr. Dello Russo is Treasurer, and Robert T. Burns is Clerk of MFS
Trust.
In addition, the following persons, Directors or officers of MFS,
have the affiliations indicated:
Donald A. Stewart Chairman, Sun Life Assurance Company of Canada,
Sun Life Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also an officer
and/or Director of various subsidiaries and
affiliates of Sun Life)
C. James Prieur President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr.
Prieur is also an officer and/or Director of
various subsidiaries and affiliates of Sun
Life)
William W. Stinson Director, Sun Life Assurance Company of Canada,
Sun Life Centre, 150 King Street West, Toronto,
Ontario, Canada; Director, United Dominion
Industries Limited, Charlotte, N.C.; Director,
PanCanadian Petroleum Limited, Calgary,
Alberta; Director, LWT Services, Inc., Calgary
Alberta; Director, Western Star Trucks, Inc.,
Kelowna, British Columbia; Director, Westshore
Terminals Income Fund, Vancouver, British
Columbia; Director (until 4/99), Canadian
Pacific Ltd., Calgary, Alberta
SCUDDER KEMPER INVESTMENTS, INC.
- --------------------------------
Scudder Kemper Investments, Inc. has stockholders and employees
who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ---------------------------------------
Lynn S. Birdsong Director and Vice President, Scudder Kemper
Investments, Inc.**
Chairman of the Board, Scudder, Stevens & Clark
(Luxembourg) S.A.#
Director, Scudder Investments (UK) Ltd. Ooo
Chairman of the Board, Scudder Investments Asia, Ltd. @
Chairman of the Board, Scudder Investments Japan, Inc.&
Senior Vice President, Scudder Investor Services, Inc.**
Director, Scudder Trust (Cayman) Ltd. Xxx
Director, Scudder, Stevens & Clark Australia @@
Director, Korea Bond Fund Management Co., Ltd.+
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial
Services, Inc. ##
Chairman, Zurich-American Insurance Company o
<PAGE>
Nick Bratt Director and Vice President, Scudder Kemper
Investments, Inc.**
Vice President, Scudder MAXXUM Company***
Vice President, Scudder, Stevens & Clark Corporation**
Vice President, Scudder, Stevens & Clark Overseas
Corporation oo
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance
Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial
Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper
Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance
Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Compan
of America o
Director, ZKI Holding Corporation xx
Edmond D. Villani Director, President and Chief Executive Officer,
Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark
Overseas Corporation oo
President and Director, Scudder, Stevens & Clark
Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A.
Luxembourg, Grand-Duchy of Luxembourg
Director, Scudder Investments (UK) Ltd.Ooo
Director, Scudder Investments Japan, Inc.&
Director, Scudder Kemper Holdings (UK) Ltd. Ooo
President and Director, Zurich Investment Management,
Inc. Xx
* Two International Place, Boston, MA
X 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Socit Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
Xxx Grand Cayman, Cayman Islands, British West Indies
Oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
Xx 222 S. Riverside, Chicago, IL
O Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Ooo 1 South Place 5th floor, London EC2M 2ZS England
@ One Exchange Square 29th Floor, Hong Kong
& Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku,
Tokyo 105-0001
@@ Level 3, 5 Blue Street North Sydney, NSW 2060
T. ROWE PRICE ASSOCIATES, INC. (T. ROWE PRICE)
- ----------------------------------------------
Listed below are the Directors of T. Rowe Price who have other substantial
businesses, professions, vocations, or employment aside from that of Director
of T. Rowe Price:
James E. Halbkat, Jr., President of U.S. Monitor Corporation, a
provider of public response systems. Mr. Halbkat's address is
P.O. Box 23109, Hilton Head Island, South Carolina 29925.
Donald B. Hebb, Jr., Director of the Manager. Mr. Hebb is the
managing general partner of ABS Capital Partners. Mr. Hebb's
address is One South Street, 25th Floor, Baltimore, Maryland
21202.
<PAGE>
Richard L. Menschel, limited partner of the Goldman Sachs
Group, L.P. Mr. Menschel's address is 85 Broad Street, 2nd
Floor, New York, New York 10004.
Robert L. Strickland, Director, retired Chairman of Loew's
Companies, Inc., a retailer of specialty home supplies, and a
Director of Hannaford Bros., Co., a food retailer. Mr.
Strickland's address is 2000 W. First Street, Winston-Salem,
North Carolina 27104.
Phillip C. Walsh, retired Consultant to Cyprus Amax Minerals
Company, Englewood, Colorado. Mr. Walsh's address is Pleasant
Valley, Peapack, New Jersey 07977.
Ann Marie Whittemore, partner of the law firm of McGuire,
Woods, Battle and Boothe LLP and is a director of Owens &
Minor, Inc.; Fort James Corporation, and Albemarle Corporation.
Mrs. Whittemore's address is One James Center, Richmond,
Virginia 23219.
With the exception of Messrs. Halbkat, Menschel, Strickland, Walsh, and Mrs.
Whittemore (listed above), all Directors of T. Rowe Price are employees of T.
Rowe Price. Listed below are the additional Directors and the principal
executive officer of T. Rowe Price:
James S. Riepe, M. David Testa, Henry H. Hopkins, James A. C.
Kennedy II, John H. Laporte, Jr., William T. Reynolds, Brian C.
Rogers, and Edward C. Bernard
George A. Roche, Chairman of the Board and President of T. Rowe
Price.
The address of each of the above individuals is 100 East Pratt
Street, Baltimore, Maryland 21202.
ITEM 27. PRINCIPAL UNDERWRITER
(a) In addition to serving as the principal underwriter, investment
adviser and administrator for the Registrant, Aetna also acts as the
principal underwriter for Aetna Variable Fund, Aetna Income Shares,
Aetna Variable Encore Fund, Aetna Balanced VP, Inc. (formerly Aetna
Investment Advisers Fund, Inc.), Aetna Generation Portfolios, Inc.,
Aetna GET Fund and Aetna Variable Portfolios, Inc. (all management
investment companies registered under the 1940 Act). Additionally,
Aetna is 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 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:
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
- ----------------- -------------------------- ---------------
Thomas J. McInerney Director and President None
Shaun P. Mathews Director and Senior Vice None
President
Catherine H. Smith Director, Senior Vice None
President and Chief
Financial Officer
Deborah Koltenuk Vice President, Assistnt None
Treasurer and Corporate
Controller
Therese Squillacote Vice President and Chief None
Compliance Officer
Kirk P. Wickman Senior Vice President, None
General Counsel and
Corporate Secretary
The principal business address of all directors and officers listed is 151
Farmington Avenue, Hartford, Connecticut 06156.
(c) Not applicable.
<PAGE>
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, Aetna, maintain physical possession of
each account, book or other documents at its principal place of business
located at151 Farmington Avenue
Hartford, Connecticut 06156.
Shareholder records of direct shareholders are maintained by the transfer
agent, Investors Bank & Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this registration statement under rule 485(b)
under the Securities Act of 1933 and has duly caused this registration
statement to be signed on its behalf by the undersigned, duly authorized, in
the City of Hartford and State of Connecticut on the 25th day of April, 2000.
PORTFOLIO PARTNERS, INC.
By: *
-------------------------------------
Laurie M. LeBlanc
President
Pursuant to the requirements of the Securities Act of 1933 this Post-Effective
Amendment No. 4 to the Registration Statement has been signed below by the
following persons on April 25, 2000, in the capacities indicated.
SIGNATURE TITLE
* Director and President
-------------------------
Laurie M. LeBlanc (Principal Executive Officer)
* Director, Vice President,
-------------------------
Martin T. Conroy Chief Financial Officer and Treasurer
* Director
-------------------------
John V. Boyer
* Director
-------------------------
Richard A. Johnson
* Director
-------------------------
Philip M. Markert
*By: /s/ Susan C. Mosher
----------------------------------
Susan C. Mosher
Attorney-in-Fact
(Executed pursuant to Powers of Attorney dated January 8, 1998 and February 12,
1998 and filed with the Securities and Exchange Commission on February 26,
1998).
<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. TITLE OF EXHIBIT
- ----------- ----------------
(i) Opinion of Counsel
(j) Consent of Independent Auditors
(p.4) Code of Ethics
<PAGE>
DRINKER BIDDLE & REATH LLP
One Logan Square
18th & Cherry Streets
Philadelphia, PA 19103-6996
(215) 988-2700
April 11, 2000
Portfolio Partners, Inc.
151 Farmington Ave.
Hartford, Connecticut 06156-8962
RE: Portfolio Partners, Inc. - Shares of Common Stock
-------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Portfolio Partners, Inc., a Maryland
corporation (the "Fund"), in connection with the registration by the Fund of
its shares of common stock, par value $.001 per share, under the Securities Act
of 1933, as amended.
The Articles of Incorporation of the Fund authorize the issuance of
one billion (1,000,000,000) shares of common stock. The Board of Directors of
the Fund has the power to classify or reclassify any authorized shares of
common stock into one or more series of shares and to divide and classify
shares of any series into one or more classes of such series. Pursuant to such
authority, the Board of Directors has previously classified five hundred
million (500,000,000) of such authorized shares into five series, each series
representing interests in a separate portfolio of investments (the
"Portfolios"). The Board has previously authorized the issuance of Shares to
the public. Currently, the Fund is authorized to issue Shares of the following
Portfolios:
Portfolio Authorized Shares
--------- -----------------
MFS Emerging Equities............................ 100,000,000
MFS Research Growth.............................. 100,000,000
MFS Value Equity (to be renamed MFS
Capital Opportunities effective May 1, 2000).... 100,000,000
Scudder International Growth..................... 100,000,000
T. Rowe Price Growth Equity...................... 100,000,000
We have reviewed the Fund's Articles of Incorporation (the "Articles
of Incorporation"), ByLaws (the "ByLaws"), resolutions of its Board of
Directors and shareholders, and such other legal and factual matters as we have
deemed appropriate.
<PAGE>
Portfolio Partners, Inc.
April 11, 2000
Page 2
This opinion is based exclusively on the Maryland General Corporation
Law and the federal law of the United States of America.
We have also assumed the following for this opinion:
1. The Shares have been, and will continue to be, issued in
accordance with the Fund's Articles of Incorporation and ByLaws and resolutions
of the Fund's Board of Directors and shareholders relating to the creation,
authorization and issuance of the Shares.
2. The Shares have been, or will be, issued against consideration
therefor as described in the Fund's prospectus, and such consideration was, or
will have been, in each case at least equal to the applicable net asset value
and the applicable par value.
3. The number of outstanding Shares has not exceeded and will not
exceed the number of Shares authorized for the particular Portfolio.
On the basis of the foregoing, it is our opinion that (i) the Shares
outstanding on the date hereof have been validly and legally issued and are
fully paid and non-assessable by the Fund and (ii) any Shares issued and sold
after the date hereof will be validly and legally issued, fully paid and
non-assessable by the Fund.
We hereby consent to the filing of this opinion as an exhibit to
Post-Effective Amendment No. 4 to the Fund's Registration Statement on Form
N-1A.
Very truly yours,
/s/ DRINKER BIDDLE & REATH LLP
-------------------------------
DRINKER BIDDLE & REATH LLP
AT/MR
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Portfolio Partners, Inc.:
We consent to the use of our report dated February 4, 2000 incorporated by
reference herein on Form N-1A relating to MFS Emerging Equities Portfolio, MFS
Research Growth Portfolio, MFS Value Equity Portfolio, Scudder International
Growth Portfolio and T. Rowe Price Growth Equity Portfolio and to the
references to our firm under the headings "Financial Highlights" in the
prospectus and "Independent Auditors" in the statement of additional
information.
/s/ KPMG LLP
KPMG LLP
Hartford, Connecticut
April 25, 2000
CODE OF ETHICS
AETNA LIFE INSURANCE AND ANNUITY COMPANY
SEPTEMBER 3, 1997
<PAGE>
INTRODUCTION
- -------------------------------------------------------------------------------
This Code of Ethics (the "Code") is adopted on behalf of Aetna Life Insurance
and Annuity Company ("ALIAC"), in its capacity as investment adviser and
principal underwriter to registered investment companies ("Funds"), in
accordance with the requirements of Section 17(j) of the Investment Company Act
of 1940 ("1940 Act") and Rule 17j-1 thereunder, and the requirements of Section
204A of the Investment Advisers Act of 1940 (the "Advisers Act").
Rule 17j-1(a) makes it unlawful for any "Access Person" of ALIAC or a Fund
(defined below), in connection with the purchase or sale by such person of a
security "held or to be acquired" by any Fund:
1. To employ any device, scheme or artifice to defraud the Fund;
2. To make to the Fund any untrue statement of a material fact or to
omit to state to the Fund a material fact necessary in order to make the
statements made, in light of the circumstances under which they are made, not
misleading;
3. To engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon the Fund; or
4. To engage in any manipulative practice with respect to the Fund.
A security is "held or to be acquired" if within the most recent 15 days it (i)
is or has been held by a Fund, or (ii) is being or has been considered by a
Fund or the Fund's respective investment adviser or subadviser for purchase by
the Fund.
Both the Advisers Act and the Securities Exchange Act of 1934 prohibit Access
Persons from using for their personal benefit material non-public information
obtained in the course of their duties with respect to a Fund. Knowledge about
a Fund's impending securities transactions constitutes material non-public
information for these purposes. Further, Section 206 of the Advisers Act
imposes on ALIAC a fiduciary duty with respect to its relationship with its
advisory clients that prohibits ALIAC and its officers, directors and employees
from engaging in any business activity that would operate as a fraud or deceit
upon a client.
There are numerous ways that an Access Person could misuse material non-public
information about securities held or to be acquired by a Fund. The most common
example of this is "front running," which is generally defined as trading a
security ahead of a Fund in an attempt to take advantage of a move in the
market price of the security caused by the Fund's transaction. Access Persons
are also prohibited from using their relationship with a Fund to obtain
personal investment opportunities or other advantages that would otherwise be
unavailable. This Code is designed to prevent and to detect the misuse of
material non-public information about Fund portfolio transactions and to
prevent certain conflicts of interest between a Fund and ALIAC Access Persons
that could give rise to a breach of fiduciary duty.
2
<PAGE>
ADMINISTRATION AND ENFORCEMENT
- -------------------------------------------------------------------------------
Administration of the Code is the responsibility of the Chief Compliance
Officer of ALIAC, currently Fred Kelsven. Questions concerning the Code or any
transactions that may be subject to provisions of the Code may be directed to
him at (860) 273-1854 or via Fax at (860) 273-4898.
Enforcement of the Code is the responsibility of each Fund's Code of Ethics
Review Committee ("Committee"), which is comprised of ALIAC's Chief Compliance
Officer, the President of the Fund, and legal counsel to the Fund. The
Committee is responsible for investigating any reported or suspected violations
of the Code. If the investigation discloses that a violation has occurred, the
Committee has been given the authority by the Board of Directors of ALIAC, and
the Board of Directors or Board of Trustees of each Fund, as appropriate, to
determine the appropriate sanction and to direct the Chief Compliance Officer
to administer the sanction. The President of a Fund will report to the Board
any material violations of this Code affecting that Fund, the investigations
conducted and any resulting sanctions.
DEFINITIONS
- -------------------------------------------------------------------------------
Whenever used in the Code, the following terms have the following
meanings:
1. "Access Person" includes (i) each director, trustee or officer of a
Fund, and (ii) each director, officer or employee of ALIAC, who, in
connection with his regular duties, makes, participates in, or
obtains information about the purchase or sale of a security on
behalf of a Fund or whose functions relate to the making of any
recommendations with respect to such purchases or sales, and any
person in a control relationship to a Fund.
2. "Security" means ALL securities EXCEPT:
o shares of registered open-end investment companies (mutual funds);
o securities issued by the U.S. government, its agencies or
instrumentalities (e.g., Treasury Bills, FNMA or GNMA, etc.);
o bankers' acceptances;
o bank certificates of deposit;
o commercial paper.
"Security" includes options to purchase or sell such security.
3. "Fund" means any registered investment company or investment
portfolio thereof for which ALIAC serves as investment adviser and/or
principal underwriter.
3
<PAGE>
POLICY
- -------------------------------------------------------------------------------
Priority of Client Interests.
----------------------------
Each Access Person is required to give priority to the interests of the
Funds over his or her own interest in making or maintaining a personal
investment.
No Access Person shall purchase or sell a security for his/her own account
when the person knows, or has reason to know, that during the 15-day
period immediately preceding or after the date of his/her personal
transaction such security was purchased or sold by a Fund or was
considered for purchase or sale on behalf of a Fund.
Access persons also are prohibited from engaging in any personal
securities transaction on the basis of knowledge of a change, or possible
change, in a Fund's investment strategy.
Initial Public Offerings.
------------------------
Access Persons are prohibited from purchasing any security in an initial
public offering.
Receipt of Gifts.
----------------
No Access Person may receive any gift or other thing of more than de
minimus value from any person or entity that does business with a Fund,
ALIAC, or a subadviser for any Fund. An Access Person who receives a gift
or other thing of more than de minimus value from any such person or
entity should immediately contact ALIAC's Chief Compliance Officer to
determine the proper disposition of such gift.
Service as a Director or Officer.
--------------------------------
Absent prior approval of the Chief Compliance Officer, an Access Person
may not serve as a director or officer of a public or private company.
Aetna Inc. Code of Conduct.
--------------------------
All Access Persons are subject to the Aetna Inc. Code of Conduct and must
abide by all its requirements, including its requirements pertaining to
transactions in Aetna securities.
PROCEDURES
- -------------------------------------------------------------------------------
Post-Execution Reporting.
------------------------
At the close of each calendar quarter, the Chief Compliance Officer will
forward a copy of the Personal Securities Transactions Quarterly Report
(see Exhibit A) to every Access Person. Within ten calendar days of the
end of each calendar quarter, every Access Person must complete and return
to the Compliance Department the Quarterly Report, which describes all
personal Securities transactions executed during the preceding three
months.
4
<PAGE>
Full Disclosure of Personal Securities Investments.
--------------------------------------------------
Every Access Person, when requested by the Chief Compliance Officer or
his/her designee, will disclose all information about his or her personal
securities investments.
Confidentiality.
---------------
All information submitted to the Compliance Department pursuant to these
procedures will be treated as confidential information. It may, however,
be made available to governmental and securities industry self regulatory
agencies with regulatory authority over ALIAC or the Funds as well as to
ALIAC's or the Funds' auditors and legal advisors, if appropriate.
Exceptions to Policy and Procedures.
-----------------------------------
Because all fact situations cannot be contemplated, the Chief Compliance
Officer retains the authority to permit an exception to the above policies
and procedures requested by persons subject to this Code when to do so is
consistent with the interests of the Funds. Any exceptions and the reasons
therefor will be documented in writing. These written records will be
maintained in accordance with the recordkeeping requirements of the 1940
Act.
Distribution
------------
This Code will be distributed to all Access Persons.
SANCTIONS
- -------------------------------------------------------------------------------
An Access Person who breaches the above policies may be subject to certain
sanctions including, but not limited to, reprimand, disgorgement of
profits, suspension and termination.
5
<PAGE>
EXHIBIT A
QUARTERLY SECURITIES TRANSACTIONS REPORT
----------------------------------------
For Quarter Ending ____________, 199_
FILING OF REPORT IS REQUIRED WHETHER OR NOT TRANSACTIONS OCCURRED.
- ------------------------------------------------------------------
[ ] No Transactions To Report (Check if applicable)
Print Name
--------------------------------------
Trade * Quantity * Quantity Broker
Date Title of Security Purchased Sold Price or Bank
- ----- ----------------- ---------- ---------- ----- -------
* If you have acquired or disposed of a security in a transaction other than a
purchase or sale (e.g., by gift), please describe the nature of the
transaction.
IF YOU WISH, YOU MAY ATTACH A COPY OF YOUR ACCOUNT STATEMENTS AS PROVIDED TO
YOU BY YOUR BROKER, BANK, OR CUSTODIAN.
Date: Signature:
--------------------- -----------------------