As filed with the Securities and Exchange File No. 2-47232
Commission on March 1, 1996 File No. 811-2361
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 44
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 31
AETNA INCOME SHARES
(Exact Name of Registrant as Specified in Charter)
151 Farmington Avenue RE4C, Hartford, Connecticut 06156
(Address of Principal Executive Offices)
(860) 273-7834
(Registrant's Telephone Number, including Area Code)
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RE4C, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
Approximate date of proposed public offering - as soon after effectiveness as is
practicable.
It is proposed that this filing will become effective (check appropriate
space):
____ immediately upon filing pursuant to paragraph (b) of Rule 485
____ on pursuant to paragraph (b) of Rule 485
____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
X on May 1, 1996 pursuant to paragraph (a)(1) of Rule 485
- ----- ------------
____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
____ on pursuant to paragraph (a)(2) of Rule 485
Aetna Income Shares has registered an indefinite number of its securities under
the Securities Act of 1933 pursuant to Rule 24f-2 of the Investment Company Act
of 1940. Aetna Income Shares filed its Rule 24f-2 Notice for its fiscal year
ended December 31, 1995 on February 29, 1996.
<PAGE>
AETNA INCOME SHARES
Cross-Reference Sheet
<TABLE>
<CAPTION>
Form N-1A
Item No. Caption in Prospectus
<C> <S>
1. Cover Page Cover Page
2. Synopsis Aetna Income Shares Fee Table
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objective;
Investment Policies and Restrictions
5. Management of the Fund Management of the Fund
5A. Management's Discussion of Fund Financial Highlights
Performance
6. Capital Stock and Other Securities General Information;
Tax Matters
7. Purchase of Securities Being Offered Management of the Fund;
Net Asset Value
8. Redemption or Repurchase Sale and Redemption of Shares
9. Pending Legal Proceedings Not applicable
Caption in Statement of Additional Information
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information and History
13. Investment Objectives and Policies General Information and History;
Investment Objective and Policies of the Fund;
Description of Various Securities and Investment
Techniques
14. Management of the Fund Trustees and Officers of the Fund
15. Control Persons and Principal Control Persons and Principal Holders of the Fund
Holders of Securities
16. Investment Advisory and Other The Investment Advisory Contract
Services The Administrative Services Agreement
Custodian
Independent Auditors
17. Brokerage Allocation and Other Brokerage Allocation
Practices
18. Capital Stock and Other Securities Description of Shares
19. Purchase, Redemption and Pricing Sale and Redemption of Shares
of Securities Being Offered Net Asset Value
20. Tax Status Tax Matters
21. Underwriters Principal Underwriter
22. Calculation of Performance Data Not Applicable
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
AETNA INCOME SHARES
151 Farmington Avenue
Hartford, CT 06156
1-800-367-7732
Prospectus dated: May 1, 1996
The Fund Aetna Income Shares ("Income Shares" or "Fund") is a diversified,
open-end management investment company whose shares are currently available
to (i) variable annuity and variable life separate accounts to fund variable
annuity contracts and variable life insurance policies issued by Aetna Life
Insurance and Annuity Company (ALIAC) and its affiliates and subsidiaries and
(ii) other shareholders of the Fund only through dividend reinvestment.
Investment Objective Income Shares seeks to maximize total return,
consistent with reasonable risk, through investments in a diversified
portfolio consisting primarily of debt securities. The Fund defines
reasonable risk as the degree of risk of loss that an average investor would,
in light of the fund's investment policies, be willing to tolerate in seeking
to maximize total return. It is anticipated that capital appreciation and
investment income will both be major factors in achieving total return.
The Prospectus This Prospectus contains information about Income Shares that
you should know before investing. Additional information about the Fund is
contained in a Statement of Additional Information (SAI) dated May 1, 1996,
which has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference. You can request an SAI, without charge, by writing
to the Fund at the address listed above or by calling the Fund at
1-800-367-7732.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the securities of Income Shares in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Please read this Prospectus and retain for future reference.
<PAGE>
TABLE OF CONTENTS
AETNA INCOME SHARES FEE TABLE 3
FINANCIAL HIGHLIGHTS 4
INVESTMENT OBJECTIVE 5
INVESTMENT POLICIES AND RESTRICTIONS 5
Investment Policies 5
Industry Concentration 6
Asset-Backed Securities 6
Borrowing 6
Options, Futures and Other Derivatives 6
High Risk High-Yield Securities 6
International Securities 7
Mortgage-Backed Securities 7
Repurchase Agreements 7
Securities Lending 7
MANAGEMENT OF THE FUND 7
Trustees 7
Investment Adviser 7
Portfolio Management 8
Expenses and Fund Administration 8
GENERAL INFORMATION 8
Declaration of Trust 8
Capital Stock 8
Maintenance Fee 8
Shareholder Inquiries and Distribution Options 8
Shareholder Meetings 8
Voting Rights 8
TAX MATTERS 8
The Fund 9
Fund Distributions 9
Share Redemptions 9
Tax Withholding 9
SALE AND REDEMPTION OF SHARES 9
NET ASSET VALUE 9
APPENDIX--DESCRIPTION OF CORPORATE BOND RATINGS 10
2 Aetna Income Shares
<PAGE>
AETNA INCOME SHARES FEE TABLE
The Fee Table is provided to help the investor understand the various fees
and costs that an investor will bear directly or indirectly. It does not
include charges due under a Variable Annuity contract or a Variable Life
Insurance policy. Variable Annuity contract holders and participants, and
Variable Life Insurance policy holders should refer to the appropriate
contract or policy prospectus for a description of the contract or policy
charges or fees.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fee 0.25%
Other Expenses 0.10%
----
TOTAL FUND OPERATING
EXPENSES 0.35%
See "Management of the Fund" on page 7 of this Prospectus for additional
information regarding the Management Fee and Other Expenses.
Hypothetical Illustration (Example)
THE FOLLOWING EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE GREATER OR LESS THAN THOSE SHOWN BELOW.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------- -------- -------- -----------
<S> <C> <C> <C> <C>
You would pay the following
expenses* on a $1,000
investment, assuming (1) 5%
annual return and (2)
redemption at the end of each
time period: $ $ $ $
</TABLE>
*This includes an annual charge of $ per shareholder account. This
charge is not applicable to Variable Annuity contract or Variable Life
Insurance policy holders and/or participants who select Aetna Income Shares
as an investment funding option. Refer to the applicable Variable Annuity
contract or Variable Life Insurance policy prospectus for an explanation of
contract/ policy holder or participant charges.
For more information on the Shareholder Maintenance Fee, refer to
"Maintenance Fee" on page 8 of this Prospectus.
Aetna Income Shares 3
<PAGE>
FINANCIAL HIGHLIGHTS
The selected data presented below under the caption "Financial Highlights"
for, and as of the end of, each of the years in the ten-year period ended
December 31, 1995 are derived from the financial statements of Income Shares,
which statements have been audited by , independent auditors. The
financial statements as of December 31, 1995, and for each of the years in the
two-year period then ended, and the independent auditors' report thereon, are
included in the SAI.
Selected data for each share outstanding throughout each year:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
----- -------- -------- -------- -------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year $ $ 13.052 $ 12.759 $ 13.511 $ 12.307 $ 12.338 $ 12.060 $ 12.221 $ 14.108 $ 13.301
--- ------ ------ ------ ------ ------ ------ ------ ------ -------
Income from
Investment
Operations
Net investment
income .791 .854 .949 .919 .826 .982 1.084 1.345 1.002
Net realized and
unrealized gain
(loss) on
investments (1.294) .365 .039 1.465 .293 .775 (.151) (.741) .800
--- ------ ------ ------ ------ ------ ------ ------ ------ -------
Total from
investment
operations (.503) 1.219 .988 2.384 1.119 1.757 .933 .604 1.802
Less Distributions
Dividends from net
investment
income (.811) (.842) (1.070) (1.039) (1.110) (1.199) 1.094) (2.491) (.995)
Distribution in
excess of net
investment
income (.019) (.010) -- -- -- -- -- -- --
Distribution from
realized gains
on investments -- -- (.060) (.670) (.141) (.040) (.280) -- -- --
Distribution in
excess of
realized gains
on investments -- -- (.014) -- -- -- -- -- -- --
--- ------ ------ ------ ------ ------ ------ ------ ------ -------
Net asset value,
end of year $ $ 11.719 $ 13.052 $ 12.759 $ 13.511 $ 12.307 $ 12.338 $ 12.060 $ 12.221 $ 14.108
=== ====== ====== ====== ====== ====== ====== ====== ====== =======
Total return* % (3.80)% 9.68% 7.45% 19.43% 9.11% 14.57% 7.63% 4.52% 14.07%
Net assets, end of
year (000's) $ $561,704 $641,429 $530,880 $470,760 $359,660 $302,209 $260,912 $211,542 $239,203
Ratio of total
investment
expenses to
average net
assets % .33% .31% .31% .31% .34% .39% .48% .33% .34%
Ratio of net
investment
income to
average net
assets % 6.38% 6.47% 6.96% 6.98% 6.75% 7.46% 8.24% 9.29% 8.51%
Portfolio turnover
rate % 74.24% 56.37% 94.26% 97.82% 66.31% 91.64% 66.83%** 53.05%** 31.28%**
</TABLE>
Per share data calculated using weighted average number of shares outstanding
throughout the year.
* The total return percentage does not reflect the mortality and expense
charges, or other expenses, applicable to the separate accounts that
invest in the Fund. Inclusion of these expenses would reduce the total
return figures.
** Includes long-term U.S. Government securities.
Additional information about the performance of the Fund is contained in the
Fund's Annual Report dated December 31, 1995. The Report is incorporated
herein by reference and is available, without charge, by writing to the Fund
at the address listed on the cover of this Prospectus or by calling
1-800-367-7732.
4 Aetna Income Shares
<PAGE>
INVESTMENT OBJECTIVE
Income Shares' investment objective is to maximize total return, consistent
with reasonable risk, through investments in a diversified portfolio
consisting primarily of debt securities. The Fund defines reasonable risk as
the degree of risk of loss that an average investor would, in light of the
fund's investment policies, be willing to tolerate in seeking to maximize
total return. It is anticipated that capital appreciation and investment
income will both be major factors in achieving total return. Income Shares'
investment objective is fundamental and may not be changed without the vote
of a majority of the outstanding voting securities as defined by the
Investment Company Act of 1940 ("1940 Act"). There can be no assurance that
the Fund will meet its investment objective.
INVESTMENT POLICIES AND RESTRICTIONS
Investment Policies Income Shares will invest at least 65% of its total
assets in debt securities. It is anticipated that the portfolio's effective
average maturity will normally be between three and ten years. The Fund will
normally invest at least 70% of its assets in one or more of the following:
1) Debt securities or obligations (other than municipal securities) that are
rated at the time of purchase within the four highest categories assigned by
Moody's Investors Service, Inc. (Moody's), Standard & Poor's Corporation
(Standard & Poor's) or other rating agencies, or, if not rated, that are
considered by the Fund's investment adviser to be of comparable quality. For
purposes of this policy, "debt securities or obligations" may include
long-term obligations of, or guaranteed by, national or state banks, bank
holding companies.
2) Securities of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities.
3) Marketable securities or obligations of, or guaranteed by, foreign
governments (or any instrumentality thereof).
4) Commercial paper and other short-term investments having a maturity of
less than one year that are considered by the investment adviser to be
investment grade.
5) Cash or cash equivalents.
Additionally, the Fund may invest in debt securities which have equity
features, including convertible securities, which may be below investment
grade; below investment grade debt securities; and preferred and common
stocks. The Fund may also lend portfolio securities, write and repurchase
covered call options, buy and sell covered put options and buy and sell
interest rate futures contracts and options thereon for hedging purposes. The
Fund may enter into repurchase agreements with domestic banks and
broker-dealers. In addition, although the Fund's investment restrictions
allow it to invest up to 15% of its total assets in illiquid securities
(securities which cannot be sold in seven days without taking a materially
reduced price), the Fund does not intend to invest more than 5% of its total
assets in illiquid securities.
The relative size of the Fund's investments in any grade or type of
securities will vary from time to time depending on a number of factors,
including yields, market supply and economic outlook.
Based on Standard & Poor's bond ratings, the Fund had the following monthly
weighted average distribution, by quality rating, for 1995:
Rating %
------------- ------
AAA 51
AA 7
A 14
BBB 13
BB 9
B 4
Not Rated 2
----
100
The relative amount of the Fund's investments which will be made in any
particular grade or type of securities will vary from time to time depending
upon a number of factors, including yield, market supply and economic
outlook. The value of debt securities may be affected by changes in general
interest rates. If interest rates increase, such securities tend to decline
in value; if interest rates decline, the value of those securities will
normally rise. Also, there is generally a greater risk associated with
higher-yielding, lower-grade debt securities.
Aetna Income Shares 5
<PAGE>
Industry Concentration The Fund will not concentrate its investments in any
one industry, except that the Fund may invest up to 25% of its total assets
in securities of companies principally engaged in any one industry. This
limitation will not, however, apply to securities issued or guaranteed by the
U.S. Government, its agencies and instrumentalities. Also, the Fund will not
hold more than 5% of the value of its total assets in the securities of any
one issuer or hold more than 10% of the outstanding voting securities of any
one issuer. This restriction applies only to 75% of the value of the Fund's
total assets and does not include securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities.
Asset-Backed Securities The Fund may purchase securities collateralized by a
specified pool of assets, including automobile loans, computer leases, boat
loans, home equity loans, mobile home loans, recreational vehicles or credit
card receivables. These securities are subject to prepayment risk. In periods
of declining interest rates, reinvestment would thus be made at lower and
less attractive rates.
Borrowing The Fund may borrow up to 5% of the value of its total assets for
temporary or emergency purposes. The Fund does not intend to borrow for
leveraging purposes; but it has the authority to do so; provided, 300% of the
amount borrowed does not exceed the Fund's assets including the borrowings.
Leveraging can increase the volatility of the Fund since it exaggerates the
effects of changes in the value of the securities purchased with the borrowed
funds.
Options, Futures and Other Derivatives The Fund may write covered call
options and purchase covered put options, on securities and indexes. Put
options will be acquired only for temporary defensive purposes. The Fund may
purchase call options and sell put options to close out positions previously
opened by the Fund. At any one time, the Fund may not have outstanding call
options on more than 30% of its assets and it may not buy put options if more
than 3% of the assets of the Fund would be invested in put options.
The Fund may enter into futures contracts including stock index futures or
options on futures contracts only for hedging purposes. The Fund may not
enter into a futures contract if the current market prices of instruments
required to be delivered and purchased under open futures contracts would
exceed 30% of the Fund's assets. No more than 5% of the Fund's total assets
may be committed to margin deposits on futures contracts.
Income Shares may occasionally engage in hedging and other strategies using
other types of derivatives to manage its exposure to changing interest rates,
securities prices and currency exchange rates, or to increase its investment
return. A derivative is a financial instrument the value of which is
"derived" from the performance of an underlying asset (such as a security or
index of securities). In addition to futures and options, derivatives include
such instruments as forward contracts, swaps, structured notes, and
collateralized mortgage obligations (CMOs). A forward contract is a purchase
or sale of a specific quantity of a commodity, government security, foreign
currency, or other financial instrument at the current price, with delivery
and settlement at a specified future date. A swap is an exchange of one
security for another and may be executed to exchange the maturities of a bond
portfolio or the quality of the issues in a stock or bond portfolio.
Structured notes are privately placed fixed income securities whose coupon
and/or final payment depends on the return of a stock market index, portfolio
or security. Further information about CMOs is contained in the SAI. Except
for the purpose of hedging, the Fund may not invest more than 5% of its
assets in derivatives which management deems to involve high risk to the
Fund, such as inverse floaters, Interest Only and Principal Only Securities.
Options and futures contracts can be volatile investments and involve certain
risks. The Fund may be unable to limit losses by closing a position due to
lack of a liquid market or similar factors. Losses may also occur if there is
not a perfect correlation between the value of the contracts and the related
securities. The use of futures may involve a high degree of leverage because
of low margin requirements. As a result, small price movements in futures
contracts may result in immediate and potentially unlimited gains or losses
to the Fund. The amount of gains or losses on investments in futures
contracts depends on the portfolio manager's ability to predict correctly the
direction of stock prices, interest rates and other economic factors. Further
information about the use of futures, options and other derivative
instruments, and the associated risks, is contained in the SAI.
High Risk High-Yield Securities The Fund may invest up to 30% of its total
assets in high risk high-yield securities, often called junk bonds. These
securities are rated BB/Ba or below (securities with capacity to meet
interest and principal payments but greater vulnerability to default), or, if
unrated, considered by the Investment Adviser to be of comparable quality.
The Fund will not invest in any debt security rated lower than B. High risk
high-yield securities tend to offer higher yields than investment- grade
bonds because of the additional risks associated with them. These risks
include: a lack of liquidity; an unpredictable secondary market; a greater
likelihood of default; increased sensitivity to difficult economic and
corporate developments; call provisions which may adversely affect investment
returns; and loss of the entire principal and interest.
6 Aetna Income Shares
<PAGE>
International Securities The Fund may invest up to 25% of its total assets
in debt and/or equity international securities including depository receipts.
Investments in securities of foreign issuers or securities denominated in
foreign currencies involve risks not present in domestic markets. Such risks
include: currency fluctuations and related currency conversion costs; less
liquidity; price or income volatility; less government supervision and
regulation of foreign stock exchanges, brokers and listed companies; possible
difficulty in obtaining and enforcing judgments against foreign entities;
adverse foreign political and economic developments; different accounting
procedures and auditing standards; the possible imposition of withholding
taxes on interest income payable on securities; the possible seizure or
nationalization of foreign assets; the possible establishment of exchange
controls or other foreign laws or restrictions which might adversely affect
the payment and transferability of principal, interest and dividends on
securities; higher transaction costs; possible settlement delays and less
publicly available information about foreign issuers.
Income Shares can invest in both sponsored and unsponsored depository
receipts. Unsponsored depository receipts, which are typically traded in the
over-the-counter market, may be less liquid than sponsored depository
receipts and therefore may involve more risk. In addition, there may be less
information available about issuers of unsponsored depository receipts. The
Fund will generally acquire American Depository Receipts (ADRs) which are
dollar denominated, although their market price is subject to fluctuations of
the foreign currency in which the underlying securities are denominated. All
depository receipts will be considered international securities for purposes
of the Fund's investment limitation concerning investment in international
securities.
Mortgage-Backed Securities The Fund may invest in mortgage-backed and other
pass-through securities. Payments of interest and principal on these
securities may be guaranteed by an agency or instrumentality of the U.S.
Government such as the Government National Mortgage Association (GNMA), the
Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National
Mortgage Association (FNMA). These securities represent part ownership of a
pool of mortgage loans and principal is scheduled to be paid back by the
borrower over the length of the loan rather than returned in a lump sum at
maturity. The Fund may also invest in private pass-through securities backed
by pools of conventional fixed-rate or adjustable-rate mortgage loans. In
addition, the Fund may invest in collateralized mortgage obligations (CMOs)
and securities issued by real estate mortgage investment conduits (REMICs).
Mortgage-backed securities are also subject to the same prepayment risk as
asset-backed securities.
Repurchase Agreements Under a repurchase agreement, the Fund may acquire a
debt instrument for a relatively short period subject to an obligation by the
seller to repurchase and by the Fund to resell the instrument at a fixed
price and time. Assets may be invested in repurchase agreements with domestic
banks and broker-dealers. Such agreements, although fully collateralized,
involve the risk that the seller of the securities may fail to repurchase
them. In that event, the Fund may incur costs in liquidating the collateral
or a loss if the collateral declines in value. If the default on the part of
the seller is due to insolvency and the seller initiates bankruptcy
proceedings, the ability of the Fund to liquidate the collateral may be
delayed or limited.
The Fund's Board of Trustees has established credit standards for issuers of
repurchase agreements entered into by the Fund.
Securities Lending The Fund may lend its portfolio securities; however, the
value of the loaned securities (together with all other assets that are
loaned, including those subject to repurchase agreements) may not exceed
one-third of the Fund's total assets. The Fund will not lend portfolio
securities to affiliates. Though fully collateralized, lending portfolio
securities involves certain risks, including the possibility that the
borrower may become insolvent or default on the loan. In the event of a
disparity between the value of the loaned security and the collateral, there
is the additional risk that the borrower may fail to return the securities or
provide additional collateral. A loan may be terminated at any time by the
borrower or lender upon proper notice.
Income Shares is subject to further investment restrictions described in the
SAI.
MANAGEMENT OF THE FUND
Trustees The operations of Income Shares are managed under the direction of
the Board of Trustees (Trustees). The Trustees set broad policies for the
Fund. Information about the Trustees is found in the SAI.
Investment Adviser ALIAC, the investment adviser for the Fund, is a
Connecticut insurance corporation located at 151 Farmington Avenue, Hartford,
Connecticut 06156. It is a wholly owned subsidiary of Aetna Retirement
Services, Inc., which is in turn a wholly owned subsidiary of Aetna Life and
Casualty Company (Aetna). ALIAC is registered with the SEC as an investment
adviser and manages over $22 billion in assets including those held by Income
Shares.
Under an investment advisory agreement with the Fund effective January 1, 1996,
ALIAC is responsible for managing the assets of the Fund in accordance with
investment objectives and policies described above. ALIAC determines what
securities and other instruments are purchased and sold by the Fund, and is
responsible for obtaining and evaluating financial data relevant to the
Fund's portfolio. ALIAC receives a management fee from the Fund based on
average daily net assets of the Fund at an annual rate of 0.25%.
Aetna Income Shares 7
<PAGE>
Portfolio Management Jeanne Wong-Boehm, Managing Director, ALIAC, has been
the Portfolio Manager for Aetna Income Shares for the past three years. Ms.
Wong-Boehm has over ten years of investment management experience at ALIAC
and earned her BBA and MBA degrees from Pace University and an MFS degree
from Yale University.
Expenses and Fund Administration Under an Administrative Services Agreement with
the Fund, ALIAC provides all administrative services necessary for the
Fund's operations and is responsible for the supervision of the Fund's other
service providers. ALIAC also assumes all ordinary recurring direct costs of
the Fund. For the services provided under the Administrative Services
Agreement, ALIAC will receive an annual fee, payable monthly at a rate of 0.10%
of the average daily net assets of the Fund.
GENERAL INFORMATION
Declaration of Trust Income Shares was organized as a "Massachusetts
business trust" under the laws of Massachusetts on January 25, 1984. It began
operations on May 1, 1984 upon succeeding to the assets of Aetna Income
Shares, Inc. Massachusetts law provides that shareholders of the Fund can,
under certain circumstances, be held personally liable for the obligations of
the Fund. The Fund has been structured, and will be operated in such a way,
so as to ensure as much as possible, that shareholders will not be liable for
obligations of the Fund. The Declaration of Trust (Declaration) contains an
express disclaimer of shareholder liability for acts or obligations of the
Fund under Massachusetts law, and requires that notification of this
disclaimer be given in each agreement, obligation or instrument entered into
by the Fund or the Trustees. A more complete discussion of potential
liability of shareholders of the Fund under Massachusetts law is contained in
the SAI under "Description of Shares -- Shareholder and Trustee Liability."
Capital Stock The Declaration permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest in the Fund. All
shares are nonassessable, other than as disclosed above. There are no
preemptive rights.
As of March 31, 1996, there were shares of the Fund outstanding,
99% of which were owned by ALIAC and held in its separate accounts to fund
ALIAC's obligations under its variable annuity contracts and variable life
insurance policies. An additional .2% of the Fund's shares were owned by an
affiliate of ALIAC at that date.
Maintenance Fee Each shareholder account is charged an annual account
maintenance fee which is redeemed from each shareholder account. The fee for
1996 is $28.00 and the fee for 1997 will be $28.00. The 1996 annual account
maintenance fee was collected on January 31, 1996. The 1997 annual account
maintenance fee will be collected in January 1997. NOTE: This charge is not
applicable to Variable Annuity contract or Variable Life Insurance policy
holders and/or participants who select Aetna Income Shares as an investment
funding option.
Shareholder Inquiries and Distribution Options Any questions about the Fund
can be addressed to the Fund at the address listed on the cover of this
Prospectus or by calling 1-800-367-7732. Shareholders may elect to receive
dividends and capital gains distributions in cash or to reinvest in
additional shares in the Fund. See "Fund Distributions" below for further
information.
Shareholder Meetings The Fund is not required to hold annual shareholder
meetings. The Declaration provides for meetings of shareholders to elect
Trustees at such time as may be determined by the Trustees or as required by
the Investment Company Act of 1940. If requested by the holders of at least
10% of the Fund's outstanding shares, the Fund will hold a shareholder
meeting for the purpose of voting on the removal of one or more Trustees and
will assist with communications concerning that shareholder meeting.
Voting Rights Shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held on matters submitted to the
shareholders of the Fund. Voting rights are not cumulative. Participants who
select the Fund for investment through their variable annuity contract or
variable life insurance policy are not the shareholders of the Fund, but may
have the right to direct the voting of Fund shares at shareholder meetings if
required by law.
TAX MATTERS
The following discussion of federal income tax consequences is based on tax
laws and regulations in effect on the date of this prospectus, and is subject
to change by legislative or administrative action. The following discussion
is for general information only; a more detailed discussion of federal income
tax consideration is contained in the SAI. The term "shareholders", as used
below, refers to insurance company separate accounts who hold shares in
connection with variable annuity or variable life insurance contracts, or
other shareholders holding direct shares of the Fund. Holders of variable
annuity contracts or variable life insurance policies should consult the
prospectuses of their respective contracts or policies for information
concerning federal income tax consequences.
8 Aetna Income Shares
<PAGE>
The Fund The Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code") concerning: (1) the diversification of
assets; (2) the distribution of income; and (3) the source of income. It is
the policy of the Fund to distribute to shareholders all of its investment
income (net of expenses) and any capital gains (net of capital losses) in
accordance with the timing requirements imposed by the Code. In addition, the
Fund intends to comply with the variable asset diversification requirements
under Section 817(h) of the Code, which are described more fully in the SAI.
Fund Distributions Distributions by the Fund of net long-term capital gains
are taxable to shareholders as long-term capital gains regardless of the
length of time a shareholder has held his shares. Distributions by the Fund
of its net investment income and its net short-term capital gains are taxable
to shareholders as ordinary income. Distributions paid by the Fund to the
insurance company separate accounts and redemption of Fund shares held by the
separate accounts will not result in taxable income to holders of variable
annuity contracts and variable life insurance policies.
In general, shareholders include distributions in their taxable income in the
year in which they are received (whether paid in cash or reinvested).
However, distributions declared in December and paid in January are taxable
as if paid on December 31 of the year of declaration. A statement will be
sent to shareholders indicating the tax status of all distributions made
during the previous year.
Share Redemptions Any gain or loss recognized upon a taxable disposition of
a shareholder's shares will be treated as a taxable long-term or short-term
capital gain or loss (depending on whether the shareholder has held the
shares more than 12 months). Any loss realized upon a taxable disposition of
a Fund's shares may be subject to limitations that are described more fully
in the SAI.
Tax Withholding In order to avoid backup withholding, shareholders must
provide the Fund with a correct social security or taxpayer identification
number and certify that the shareholder is a corporation or otherwise exempt
from or not subject to backup withholding by the Internal Revenue Service
(IRS). If a shareholder is subject to backup withholding, the IRS can require
the Fund to withhold 31% of taxable dividends, capital gains distributions
and redemptions.
SALE AND REDEMPTION OF SHARES
ALIAC is the principal underwriter of the Fund pursuant to a Distribution
Agreement between it and the Fund. Shares may only be purchased by ALIAC as
the Depositor of Variable Annuity and Variable Life Separate Accounts as
directed by Participants.
Shares of the Fund are sold and redeemed at their net asset value next
determined after receipt of a purchase or redemption order in acceptable
form. Shareholders must provide a signature guarantee regardless of the
redemption amount. No sales charge or redemption charge is made.
Certain individuals own direct interests in the Fund. If those shareholders
have less than a $1,000 balance in their Account, their shares may be
liquidated upon six months' notice.
If such a shareholder holds Fund shares having a net asset value of $5,000 or
more, he or she may establish a Systematic Withdrawal Program. Further
information about this program may be obtained from the Fund.
NET ASSET VALUE
The net asset value per share (NAV) of the Fund is determined as of 4:15 p.m.
Eastern time on each day that the New York Stock Exchange is open for
trading. The NAV is computed by dividing the total value of the Fund's
securities, plus any cash or other assets less all liabilities (including
accrued expenses), by the number of shares outstanding.
Portfolio securities are valued at their market price, at the mean of the
last bid and asked price or amortized to maturity. All other assets,
including restricted securities and other 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 Trustees. The Trustees may authorize the use of
independent pricing services, where appropriate.
Aetna Income Shares 9
<PAGE>
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc.
"Aaa" Rating
Bonds which are rated Aaa are judged to be of the best quality and carry the
smallest degree of investment risk. 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" Rating
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they 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 greater than in Aaa securities.
"A" Rating
Bonds which are rated A possess many favorable investment attributes and are
considered upper-medium-grade obligations. Factors relating to security of
principal and interest are considered adequate but elements may be present
which suggest possible impairment sometime in the future.
"Baa" Rating
Bonds which are rated Baa are considered 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 have speculative characteristics.
"Ba" Rating
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 other good and bad times over the future. Uncertainty of position
characterizes this class of bond.
"B" Rating
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 that the issue ranks in the lower end of its rating
category.
Standard & Poor's Corporation
"AAA" Rating
Bonds which are rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
"AA" Rating
Bonds which are 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" Rating
Bonds which are 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 debt in higher rated
categories.
"BBB" Rating
Bonds which are rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
"BB" Rating
Bonds which are 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" Rating
Bonds which are 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.
10 Aetna Income Shares
<PAGE>
INVESTMENT ADVISER
Aetna Life Insurance
and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
CUSTODIAN
Mellon Bank N.A.
One Mellon Bank Center
Pittsburgh, Pennsylvania
TRANSFER, DIVIDEND DISBURSING
AND REDEMPTION AGENT
Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
AUDITORS
CityPlace II
Hartford, Connecticut 06103-4103
[Aetna Logo]
Aetna Life Insurance and Annuity Company
<PAGE>
Statement of Additional Information dated: May 1, 1996
AETNA INCOME SHARES
151 Farmington Avenue
Hartford, Connecticut 06156
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the current prospectus for Aetna Income Shares dated
May 1, 1996.
A free prospectus is available upon request from the local Aetna Life
Insurance and Annuity Company office or by writing:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-367-7732
Read the prospectus before you invest.
TABLE OF CONTENTS
General Information and History 2
Investment Objective and Policies of the Fund 2
Description of Various Securities and Investment Techniques 3
Trustees and Officers of the Fund 14
Control Persons and Principal Holders of The Fund 17
The Investment Advisory Contract 18
Administrative Services Agreement 19
Brokerage Allocation 19
Description of Shares 20
Sale and Redemption of Shares 21
Principal Underwriter 22
Tax Matters 22
Net Asset Value 26
Custodian 27
Independent Auditors 27
Financial Statements
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Income Shares ("Income Shares" or "Fund") is an open-end diversified
management investment company which sells its shares of beneficial interest
to (i) Aetna Life Insurance and Annuity Company ("Company") for allocation to
certain of its separate accounts, each of which has been established for the
purpose of funding either variable annuity contracts or variable life
insurance contracts issued by the Company, (ii) affiliates and subsidiaries
of the Company for allocation to their separate accounts in connection with
the purchase of annuity contracts and (iii) other shareholders of the Fund
only through reinvestment of dividends.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The investment objective of Income Shares is to maximize total return,
consistent with reasonable risk, through investments in a diversified
portfolio consisting primarily of debt securities. The Fund defines
reasonable risk as the degree of risk of loss that an average investor would,
in light of the fund's investment policies, be willing to tolerate in seeking
to maximize total return. It is anticipated that capital appreciation and
investment income will both be major factors in achieving such a return. The
Fund's investment adviser may, to a limited extent, cause the Fund to
purchase debt securities which have equity features; preferred or common
stock, (the latter principally for their income potential through dividends
and option writing); or may acquire securities having a mix of these
characteristics.
Income shares will operate under the following restrictions, which together
with its investment objective, are matters of fundamental policy and cannot
be changed without the approval of a majority of the outstanding voting
securities of the Fund. This means the lesser of: (i) 67% of the shares of
the Fund present or represented at a shareholders' meeting if the holders of
more than 50% of the shares then outstanding are present or represented; or
(ii) more than 50% of the outstanding voting securities of the Fund.
In pursuing its investment objective, Income Shares will not:
(1) issue any senior security, as defined in the Investment Company Act of
1940 (the "1940 Act"), except that (a) the Fund may enter into
commitments to purchase securities in accordance with the Fund's
investment program, including reverse repurchase agreements,
delayed-delivery and when-issued securities, which may be considered the
issuance of senior securities, (b) the Fund may engage in transactions
that may result in the issuance of a senior security to the extent
permitted under applicable regulations, interpretations of the 1940 Act
or an exemptive order; (c) the Fund may engage in short sales of
securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related
options shall not be considered to involve the issuance of senior
securities; and (e) subject to fundamental restrictions, the Fund may
borrow money as authorized by the 1940 Act;
(2) hold more than 5% of the value of its total assets in the securities of
any one issuer or hold more than 10% of the outstanding voting
securities of any one issuer. This restriction applies only to 75% of
the value of the Fund's total assets. Securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities are excluded
from this restriction;
(3) concentrate its investments in any one industry except that the Fund may
invest up to 25% of its total assets in securities issued by companies
principally engaged in any one industry. This limitation will not,
however, apply to securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities;
(4) make loans, except that, to the extent appropriate under its investment
program, the Fund may (a) purchase bonds, debentures or other debt
securities, including short-term obligations, (b) enter into repurchase
transactions and (c) lend portfolio securities provided that the value
of such loaned securities does not exceed one-third of the Fund's total
assets;
(5) invest in commodity contracts, except that the Fund may, to the extent
appropriate under its investment program, purchase securities of
companies engaged in such activities, may enter into trans-
2 Aetna Income Shares
<PAGE>
actions in financial and index futures contracts and related options,
may engage in transactions on a when-issued or forward commitment basis,
and may enter into forward currency contracts;
(6) borrow money, except that (a) the Fund may enter into certain futures
contracts and options related thereto; (b) the Fund may enter into
commitments to purchase securities in accordance with the Fund's
investment program, including delayed-delivery and when-issued
securities and reverse repurchase agreements; (c) for temporary
emergency purposes, the Fund may borrow money in amounts not exceeding
5% of the value of its total assets at the time the loan is made; and
(d) for purposes of leveraging, the Fund may borrow money from banks
(including its custodian bank) only if, immediately after such
borrowing, the value of the Fund's assets, including the amount
borrowed, less its liabilities, is equal to at least 300% of the amount
borrowed, plus all outstanding borrowings. If, at any time, the value of
the Fund's assets fails to meet the 300% asset coverage requirement
relative only to leveraging, the Fund will, within three days (not
including Sundays and holidays), reduce its borrowings to the extent
necessary to meet the 300% test;
(7) purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, the Fund may invest in securities secured by real
estate or interests therein or issued by companies, including real
estate investment trusts, which deal in real estate or interests
therein; or
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by the Fund, the
Fund may be deemed to be an underwriter under the provisions of the
Securities Act of 1933, as amended (the "1933 Act").
The Fund has also adopted certain other investment restrictions which may be
changed by the Fund's Trustees and without shareholder vote. Under such
restrictions, the Fund will not:
(1) invest more than 15% of its total assets in illiquid securities.
Illiquid securities are securities that are not readily marketable or
cannot be disposed of promptly within seven days and in the usual course
of business without taking a materially reduced price. Such securities
include, but are not limited to, time deposits and repurchase agreements
with maturities longer than seven days. Securities that may be resold
under Rule 144A or securities offered pursuant to Section 4(2) of the
1933 Act, as amended, shall not be deemed illiquid solely by reason of
being unregistered. The Investment Adviser shall determine whether a
particular security is deemed to be liquid based on the trading markets
for the specific security and other factors;
(2) invest in companies for the purpose of exercising control or management;
(3) purchase the securities of any other investment company, except as
permitted under the 1940 Act; or
(4) make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits
necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Fund.
Where the Fund's investment objective or policy restricts it to a specified
percentage of its total assets in any type of instrument, that percentage is
measured at the time of purchase. There will be no violation of any
investment policy or restriction if that restriction is complied with at the
time the relevant action is taken notwithstanding a later change in the
market value of an investment, in net or total assets, in the securities
rating of the investment or any other change.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
The following information supplements and should be read in conjunction with
the section of the prospectus entitled "Investment Policies and
Restrictions."
Aetna Income Shares 3
<PAGE>
U.S. Government Obligations
The types of U.S. Government obligations in which Income Shares may invest
include, but are not limited to: (1) direct obligations of the U.S. Treasury,
such as U.S. Treasury bonds, notes, bills and Treasury Certificates of
Indebtedness; (2) instruments issued or guaranteed by U.S. Government
agencies or instrumentalities which are backed by (a) the full faith and
credit of the United States, (b) the credit of the agency or instrumentality
issuing the obligations, or (c) the right of the issuer to borrow from the
U.S. Treasury, such as notes, bonds, and discount notes of U.S. Government
instrumentalities or agencies, including Federal Land Banks, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks,
Farmers Home Administration and Federal National Mortgage Association. (A
U.S. Government instrumentality is a government agency organized under
federal charter with government supervision.)
Repurchase Agreements
Income Shares may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards
established by the Fund's Board of Trustees. Under a repurchase agreement,
the Fund may acquire a debt instrument for a relatively short period (usually
not more than one week) subject to an obligation of the seller to repurchase
and the Fund to resell the instrument at a fixed price and time, thereby
determining the yield during the Fund's holding period. This results in a
fixed rate of return insulated from market fluctuations during such period.
Such underlying debt instruments serving as collateral will meet the quality
standards of the Fund. The market value of the underlying debt instruments
will, at all times, be equal to the dollar amount invested. Under the 1940
Act, repurchase agreements are considered loans by the Fund. Repurchase
agreements, although fully collateralized, involve the risk that the seller
of the securities may fail to repurchase them from the Fund. In that event,
the Fund may incur (a) disposition costs in connection with liquidating the
collateral, or (b) a loss if the collateral declines in value. Also, if the
default on the part of the seller is due to insolvency and the seller
initiates bankruptcy proceedings, the Fund's ability to liquidate the
collateral may be delayed or limited. Repurchase agreements maturing in more
than seven days will not exceed 15 percent of the total assets of the Fund.
The Fund does not intend to use reverse repurchase agreements.
Securities Lending
Income Shares may lend up to one-third of its total assets, although it is
anticipated that less than 10% of such assets will be on loan at any one
time. In the Company's opinion, lending portfolio securities to qualified
broker-dealers affords the Fund a means of increasing the yield on its
portfolio. All such loans will be fully collateralized with either cash or
direct obligations of the U.S. Government or agencies thereof. The Fund will
be entitled either to receive a fee from the borrower or to retain some or
all of the income derived from its investment of cash collateral. The Fund
will continue to receive the interest or dividends paid on any securities
loaned, or amounts equivalent thereto. Although voting rights will pass to
the borrower of securities, whenever a material event affecting the borrowed
securities is to be voted on, the Fund may terminate the loan to vote such
proxy.
The primary risk the Fund assumes in loaning securities is that the borrower
may become insolvent on a day on which the loaned security is rapidly
increasing in price. In such event, if the borrower fails to return the
loaned securities, the existing collateral might be insufficient to purchase
back the full amount of security loaned, and the borrower would be unable to
furnish additional collateral. The borrower would be liable for any shortage,
but the Fund would be an unsecured creditor as to such shortage and might not
be able to recover all or any part of it. A loan may be terminated at any
time by the borrower or lender upon proper notice.
Foreign Securities
The Fund may invest up to 25% of its total assets in foreign securities.
These securities will be marketable equity securities (including common and
preferred stock, depository receipts for stock and fixed income or equity
securities exchangeable for or convertible into stock) and debt securities of
foreign companies which generally are listed on recognized foreign securities
exchanges or are traded in a foreign over- the-counter market. The Fund also
invests in foreign securities listed on recognized U.S. securities
4 Aetna Income Shares
<PAGE>
exchanges or traded in the U.S. over-the-counter market. Such foreign
securities may be issued by foreign companies located in developing countries
in various regions of the world. A "developing country" is a country in the
initial stages of its industrial cycle. As compared to investment in the
securities markets of developed countries, investment in the securities
markets of developing countries involves exposure to markets that may have
substantially less trading volume and greater price volatility, economic
structures that are less diverse and mature, and political systems that may
be less stable.
Depository receipts are typically dollar denominated, although their market
price is subject to fluctuations of the foreign currency in which the
underlying securities are denominated. Depository receipts include: (1)
American Depository Receipts (ADRs), which are typically designed for U.S.
investors and held either in physical form or in book entry form; (2)
European Depository Receipts (EDRs), which are similar to ADRs but may be
listed and traded on a European exchange as well as in the U.S. Typically,
these securities are traded on the Luxembourg exchange in Europe; and (3)
Global Depository Receipts (GDRs), which are similar to EDRs although they
may be held through foreign clearing agents such as Euroclear and other
foreign depositories. All depository receipts will be considered foreign
securities for purposes of a Fund's investment limitation concerning
investment in foreign securities.
Investments in securities of foreign issuers involve certain risks not
associated with investments in securities of domestic issuers. These risks
include the following:
Currency Risk--The value of the Fund's foreign investments will be effected
by changes in currency exchange rates. The U.S. dollar value of a foreign
security decreases when the value of the U.S. dollar rises against the
foreign currency in which the security is denominated, and increases when the
value of the U.S. dollar falls against such currency.
Political and Economic Risk--The economies of many of the countries in which
the Fund may invest are not as developed as the U.S. economy and may be
subject to significantly different forces. Political or social instability,
expropriation or confiscatory taxation and limitation upon the removal of
funds or other assets could adversely affect the value of the Fund's
investments.
Regulatory Risk--Foreign companies are not registered with the Securities and
Exchange Commission (the "SEC") and are generally not subject to the
regulatory controls imposed on United States issuers and, as a consequence,
there is generally less publicly available information about foreign
securities than is available regarding domestic securities. Foreign companies
are not subject to uniform accounting, auditing and financial standards,
practices and requirements comparable to those applicable to U.S. companies.
Income from foreign securities owned by the Fund may be subject to
withholding taxes imposed at the source which would reduce dividend income
payable to the Fund's shareholders.
Market Risk--The securities markets in many of the countries in which the
Fund may invest have substantially less trading volume than the major U.S.
markets. Consequently, the securities of some foreign issuers may be less
liquid and experience more price volatility than comparable domestic
securities. Indeed, custodian costs, as well as administrative costs (such as
the need to use foreign custodians) may be associated with the maintenance of
assets in foreign jurisdictions. There is generally less government
regulation and supervision of foreign stock exchanges, brokers and issuers
which may make it difficult to enforce contractual obligations. In addition,
transaction costs in foreign commission rates in foreign jurisdictions are
likely to be higher than in the United States.
Interest Rate Futures Contracts and Options on Such Contracts
An interest rate futures contract provides for the future sale by one party
and purchase by another party of a specified amount of a specified financial
instrument (debt security) or index for a specified price at a designated
date, time and place. Income Shares may enter into interest rate futures
contracts as a hedge against changes in prevailing levels of interest rates,
or in order to establish more definitely the effective return on securities
held or intended to be acquired by the Fund. The Fund's hedging may include
sales of futures as an offset against the effect of expected increases in
interest rates.
Aetna Income Shares 5
<PAGE>
Although techniques other than sales and purchases of futures contracts could
be used to reduce the exposure of the Fund to market fluctuations, the Fund
may be able to hedge its exposure more effectively and perhaps at a lower
cost through using futures contracts. The Fund will not enter into a futures
contract if, as a result thereof, (i) the then current aggregate futures
market prices of financial instruments required to be delivered and purchased
under open futures contracts would exceed 30% of the Fund's total assets,
(taken at market value at the time of entering into the Contract), or (ii)
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the Contract), would be committed to margin deposits on such
futures contracts.
Although interest rate futures contracts typically require actual future
delivery of and payment for the underlying instruments, the contracts are
usually closed out before the delivery date. Closing out an open futures
contract sale or purchase is effected by entering into an offsetting futures
contract purchase or sale, respectively, for the same aggregate amount of the
identical type of underlying instrument and the same delivery date. There can
be no assurance, however, that the Fund will be able to enter into an
offsetting transaction with respect to a particular contract at a particular
time. If the Fund is not able to enter into an offsetting transaction, the
Fund will continue to be required to maintain the margin deposits on the
contract.
Persons who engage in futures contracts transactions may be broadly
classified as "hedgers" and "speculators." Hedgers, such as the Fund, whose
business activity involves investment in securities, use the futures markets
primarily to offset unfavorable changes in value that may occur because of
fluctuations in the value of the securities held or expected to be acquired
by them. Debtors and other obligors may also hedge the interest cost of their
obligations. The speculator, like the hedger, generally expects neither to
deliver nor to receive the financial instrument underlying the futures
contract, but, unlike the hedger, hopes to profit from fluctuations in
prevailing equities prices.
The Fund will not enter into financial futures contracts for speculation, and
will only enter into futures contracts that are traded on national futures
exchanges and are standardized as to maturity date and underlying financial
instrument. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC").
"Margin" is the amount of funds that must be deposited by Income Shares with
a commodities broker in a custodian account in order to initiate futures
trading and to maintain open positions in the Fund's futures contracts. A
margin deposit is intended to assure the Fund's performance of the futures
contract. The margin required for a particular futures contract is set by the
exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract. If the
price of an open futures contract changes (by increase in the case of a sale
or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of favorable price
changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will promptly pay the excess to the Fund. These
daily payments to and from the Fund are called variation margin. At times of
extreme price volatility such as occurred during the week of October 19,
1987, intra-day variation margin payments may be required. In computing daily
net asset values, Income Shares will mark to market the current value of its
open futures contracts. Income Shares expects to earn interest income on its
initial margin deposits.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, small price movements in
futures contracts may result in immediate and potentially unlimited loss or
gain to the Fund relative to the size of the margin commitment. For example,
if at the time of purchase 10% of the value of the futures contract is
deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit before any
deduction for the transaction costs, if the contract were then closed out. A
15% decrease in the value of the futures contract would result in a loss
equal to 150% of the original margin deposit, if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount initially
6 Aetna Income Shares
<PAGE>
invested in the futures contract. However, the Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract purchase, the Fund
deposits in a segregated account money market instruments sufficient to meet
all futures contract initial margin requirements.
Restrictions on the Use of Futures and Option Contracts
CFTC regulations require that all short futures positions be entered into for
the purpose of hedging the value of securities held in the Fund's portfolio,
and that all long futures positions either constitute bona fide hedging
transactions, as defined in such regulations, or have a total value not in
excess of an amount determined by reference to certain cash and securities
positions maintained for the Fund, and accrued profits on such positions.
The Fund's ability to engage in the hedging transactions described herein may
be limited by the current federal income tax requirement that a Fund derive
less than 30% of its gross income from the sale or other disposition of stock
or securities held for less than three months.
Covered Call and Put Options on Securities
The Fund may write (sell) covered call options ("call options") and purchase
covered put options ("put options") on securities and indexes, and purchase
call and sell put options to close out positions previously opened by the
Fund, provided, however, that it will not have call options outstanding at
any one time on more than 30% of its total assets nor will it buy put options
if more than 3% of the assets of the Fund immediately following such purchase
would consist of put options. The purpose of writing call options and
purchasing put options will be to reduce the effect of price fluctuations of
the securities owned by the Fund (and involved in the options) on the net
asset value per share of the Fund.
A call option gives the holder (buyer) the right to purchase a security at a
specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was settled, requiring him to deliver the underlying
security against payment of the exercise price. This obligation terminates
upon the expiration of the call option, the exercise of the call option, or
by entering into an offsetting transaction. To secure his obligation to
deliver the underlying security in the case of a call option, a writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the clearing corporations and of the exchanges.
A put option gives the holder (buyer) the right to sell a security at a
specified price (the exercise price) at any time until a certain date (the
expiration date). Income Shares will only write a call option or purchase a
put option on a security which it already owns and will not write call
options on when-issued securities. The Fund may purchase a put option on a
security that it already owns and on stock indexes.
The Fund will write call options and purchase put options in standard
contracts listed on national securities exchanges, or write call options with
and purchase put options directly from investment dealers meeting the
creditworthiness criteria of the Company.
When writing a call option, the Fund, in return for the premium, gives up the
opportunity to profit from a price increase in the underlying security above
the exercise price, but conversely retains the risk of loss should the price
of the security decline. If a call option which the Fund has written expires,
the Fund will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying security
during the option period. If the call option is exercised, the Fund will
realize a gain or loss from the sale of the underlying security. The Fund
will purchase put options involving portfolio securities only when the
Company believes that a temporary defensive position is desirable in light of
market conditions, but does not desire to sell the portfolio security.
Therefore, the purchase of put options will be used to protect the Fund's
holdings in an underlying security against a substantial decline in market
value. Such protection is, of course, only provided during the life of the
put option when the Fund, as the holder of the put option, is able to sell
the underlying security at the put exercise price regardless of any decline
in the underlying security's market price. By using put options in this
manner, the Fund
Aetna Income Shares 7
<PAGE>
will reduce any profit it might otherwise have realized in its underlying
security by the premium paid for the put option and by transaction costs. The
security covering the call or put option will be maintained in a segregated
account of the Fund's custodian.
The premium the Fund will receive from writing a call option, or the Fund
will pay when purchasing a put option, will reflect, among other things, the
current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, the length of the option period, and the general
interest rate environment. The premium received by the Fund for writing
covered call options will be recorded as a liability in the statement of
assets and liabilities of the Fund. This liability will be adjusted daily to
the option's current market value. The liability will be extinguished upon
expiration of the option, by the exercise of the option, or by entering into
an offsetting transaction. Similarly, the premium paid by the Fund when
purchasing a put option will be recorded as an asset in the statement of
assets and liabilities of the Fund. This asset will be adjusted daily to the
option's current market value. The asset will be extinguished upon expiration
of the option, by selling of an identical option in a closing transaction, or
exercising the option.
When writing put options on securities, to secure its obligation to pay for
the underlying security, the Fund will deposit in escrow liquid assets with a
value equal to or greater than the exercise price of the put option. The Fund
therefore foregoes the opportunity of investing the segregated assets or
writing calls against those assets. As long as the obligation of the Fund as
the put writer continues, it may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring the fund to take
delivery of the underlying security against payment of the exercise price.
The Fund has no control over when it may be required to purchase the
underlying security, since it may be assigned an exercise notice at any time
prior to the termination of its obligation as the writer of the put. This
obligation terminates upon expiration of the put, or such earlier time at
which the Fund effects a closing purchase transaction by purchasing a put of
the same series as that previously sold.
Closing transactions will be effected in order to realize a profit on an
outstanding call or put option, to prevent an underlying security from being
called or put, or to permit the exchange or tender of the underlying
security. Furthermore, effecting a closing transaction will permit the Fund
to write another call option, or purchase another put option, on the
underlying security with either a different exercise price or expiration date
or both. If the Fund desires to sell a particular security from its portfolio
on which it has written a call option, or purchased a put option, it will
seek to effect a closing transaction prior to, or concurrently with, the sale
of the security. There is, of course, no assurance that the Fund will be able
to effect such closing transactions at a favorable price. If the Fund cannot
enter into such a transaction, it may be required to hold a security that it
might otherwise have sold, in which case it would continue to be at market
risk on the security. The Fund will pay brokerage commissions in connection
with the sale or purchase of options to close out previously established
option positions. Such brokerage commissions are normally higher as a
percentage of underlying asset values than those applicable to purchases and
sales of portfolio securities.
The exercise price of the options may be below, equal to, or above the
current market values of the underlying securities at the time the options
are written. From time to time, the Fund may purchase an underlying security
for delivery in accordance with an exercise notice of a call option assigned
to it, rather than delivering such security from its portfolio. In such cases
additional brokerage commissions will be incurred. The Fund will realize a
profit or loss from a closing purchase transaction if the cost of the
transaction is less or more than the premium received from the writing of the
call option; however, any loss so incurred in a closing purchase transaction
may be partially or entirely offset by the premium received from a
simultaneous or subsequent sale of a different call or put option. Also,
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 is likely to be offset in whole or in
part by appreciation of the underlying security owned by the Fund.
Additional Risk Factors
In addition to any risk factors which may be described above, the following
sets forth certain information regarding the potential risks associated with
the Fund's futures and options transactions.
8 Aetna Income Shares
<PAGE>
Risk of Imperfect Correlation--The Fund's ability to hedge effectively all or
a portion of its portfolio through transactions in futures, options on
futures or options on securities and indexes depends on the degree to which
movements in the value of the securities or index underlying such hedging
instrument correlate with movements in the value of the relevant portion of
the Fund's portfolio. If the values of the portfolio securities being hedged
do not move in the same amount or direction as the underlying security or
index, the hedging strategy for the Fund might not be successful and the Fund
could sustain losses on its hedging transactions which would not be offset by
gains on its portfolio. It is also possible that there may be a negative
correlation between the security or index underlying a futures or option
contract and the portfolio securities being hedged, which could result in
losses both on the hedging transaction and the portfolio securities. In such
instances, the Fund's overall return could be less than if the hedging
transactions had not been undertaken. Stock index futures or options based on
a narrower index of securities may present greater risk than options or
futures based on a broad market index, as a narrower index is more
susceptible to rapid and extreme fluctuations resulting from changes in the
value of a small number of securities. The Fund would, however, effect
transactions in such futures or options only for hedging purposes (or to
close out open positions).
The trading of futures and options on indexes involves the additional risk of
imperfect correlation between movements in the futures or option price and
the value of the underlying index. The anticipated spread between the prices
may be distorted due to 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 futures and options market. The purchase
of an option on a futures contract also involves the risk that changes in the
value of underlying futures contract will not be fully reflected in the value
of the option purchased. The risk of imperfect correlation, however,
generally tends to diminish as the maturity date of the futures contract or
termination date of the option approaches. The risk incurred in purchasing an
option on a futures contract is limited to the amount of the premium plus
related transaction costs, although it may be necessary under certain
circumstances to exercise the option and enter into the underlying futures
contract in order to realize a profit. Under certain extreme market
conditions, it is possible that the Fund will not be able to establish
hedging positions, or that any hedging strategy adopted will be insufficient
to completely protect the Fund.
The Fund will purchase or sell futures contracts or options only if, in the
Company's judgment, there is expected to be a sufficient degree of
correlation between movements in the value of such instruments and changes in
the value of the relevant portion of the Fund's portfolio for the hedge to be
effective. There can be no assurance that the Company's judgment will be
accurate.
Potential Lack of a Liquid Secondary Market--The ordinary spreads between
prices in the cash and futures markets, due to differences in the natures of
those markets, are subject to distortions. First, all participants in the
futures market are subject to initial deposit and variation margin
requirements. This could require the Fund to post additional cash or cash
equivalents as the value of the position fluctuates. Further, rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of
the futures or options market may be lacking. Prior to exercise or
expiration, a futures or option position may be terminated only by entering
into a closing purchase or sale transaction, which requires a secondary
market on the exchange on which the position was originally established.
While the Fund will establish a futures or option position only if there
appears to be a liquid secondary market therefor, there can be no assurance
that such a market will exist for any particular futures or option contract
at any specific time. In such event, it may not be possible to close out a
position held by the Fund, which could require the Fund to purchase or sell
the instrument underlying the position, make or receive a cash settlement, or
meet ongoing variation margin requirements. The inability to close out
futures or option positions also could have an adverse impact on the Fund's
ability effectively to hedge its portfolio, or the relevant portion thereof.
The liquidity of a secondary market in a futures contract or an option on a
futures contract may be adversely affected by "daily price fluctuation
limits" established by the exchanges, which limit the amount
Aetna Income Shares 9
<PAGE>
of fluctuation in the price of a contract during a single trading day and
prohibit trading beyond such limits once they have been reached. The trading
of futures and options contracts also is subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of the brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Risk of Predicting Interest Rate Movements--Investments in futures contracts
on fixed income securities and related indexes involve the risk that if the
Company's investment judgment concerning the general direction of interest
rates is incorrect, the Fund's overall performance may be poorer than if it
had not entered into any such contract. For example, if the Fund has been
hedged against the possibility of an increase in interest rates which would
adversely affect the price of bonds held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the
increased value of its bonds which have been hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if the Fund has insufficient cash, it may have to sell bonds from its
portfolio to meet daily variation margin requirements, possibly at a time
when it may be disadvantageous to do so. Such sale of bonds may be, but will
not necessarily be, at increased prices which reflect the rising market.
Trading and Position Limits--Each contract market on which futures and option
contracts are traded has established a number of limitations governing the
maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Company does not believe that these
trading and position limits will have an adverse impact on the hedging
strategies regarding the Fund's portfolio.
Mortgage-Related Debt Securities
Federal mortgage-related securities include obligations issued or guaranteed
by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). GNMA is a wholly owned corporate instrumentality of
the United States whose securities and guarantees are backed by the full
faith and credit of the United States. FNMA, a federally chartered and
privately owned corporation, and FHLMC, a federal corporation, are
instrumentalities of the United States, with Presidentially-appointed board
members. The obligations of FNMA and FHLMC are not explicitly guaranteed by
the full faith and credit of the federal government.
Pass-through mortgage-related securities are characterized by monthly
payments to the holder, reflecting the monthly payments made by the borrowers
who received the underlying mortgage loans. The payments to the
security-holders like the payments on the underlying loans, represent both
principal and interest. Although the underlying mortgage loans are for
specified periods of time, often twenty or thirty years, the borrowers can,
and typically do, repay such loans sooner. Thus, the security holders
frequently receive repayments of principal, in addition to the principal
which is part of the regular monthly payment. A borrower is more likely to
repay a mortgage which bears a relatively high rate of interest. This means
that in times of declining interest rates, some higher yielding securities
held by the Fund might be converted to cash, and the Fund could be expected
to reinvest such cash at the then prevailing lower rates. The increased
likelihood of prepayment when interest rates decline also limits market price
appreciation of mortgage-related securities. If the Fund buys
mortgage-related securities at a premium, mortgage foreclosures or mortgage
prepayments may result in losses of up to the amount of the premium paid
since only timely payment of principal and interest is guaranteed.
As noted in the Prospectus, Income Shares may also invest in collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs"). CMOs and REMICs are securities which are collateralized by
mortgage pass-through securities. Cash flows from underlying mortgages are
allocated to various classes or tranches in a predetermined, specified order.
Each sequential tranche has a "stated maturity"--the latest date by which the
tranche can be completely repaid, assuming no repayments--and has an "average
life"--the average time to receipt of a principal payment weighted by
10 Aetna Income Shares
<PAGE>
the size of the principal payment. The average life is typically used as a
proxy for maturity because the debt is amortized, rather than being paid off
entirely at maturity, as would be the case in a straight debt instrument.
CMOs and REMICs are typically structured as "pass-through" securities. In
these arrangements, the underlying mortgages are held by the issuer, which
then issues debt collateralized by the underlying mortgage assets. The
security holder thus owns an obligation of the issuer and payment of interest
and principal on such obligations is made from payments generated by the
underlying mortgage assets. The underlying mortgages may be guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
Government such as GNMA or otherwise backed by FNMA or FHLMC. Alternatively,
such securities may be backed by mortgage insurance, letters of credit,
subordination or other credit enhancing features. Both CMOs and REMICs are
issued by private entities. They are not directly guaranteed by any
government agency and are secured by the collateral held by the issuer.
Asset-Backed Securities
Asset-backed securities are collateralized by short-term loans such as
automobile loans, computer leases, or credit card receivables. The payments
from the collateral are passed through to the security holder. As noted above
with respect to CMOs and REMICs, the average life for these securities is the
conventional proxy for maturity. Asset-backed securities may pay all interest
and principal to the holder, or they may pay a fixed rate of interest, with
any excess over that required to pay interest going either into a reserve
account or to a subordinate class of securities, which may be retained by the
originator. The originator may guarantee interest and principal payments.
These guarantees often do not extend to the whole amount of principal, but
rather to an amount equal to a multiple of the historical loss experience of
similar portfolios.
Other asset-backed securities are similar to CMOs and REMICs in structure and
operations. Two varieties of asset-backed securities are CARs and CARDs. CARs
are securities, representing either ownership interests in fixed pools of
automobile receivables, or debt instruments supported by the cash flows from
such a pool. CARDs are participations in fixed pools of credit accounts.
These securities have varying terms and degrees of liquidity.
CMOs, REMICs and other asset-backed securities are subject to the type of
prepayment risk discussed above due to the possibility that prepayments on
the underlying assets will alter the cash flow. The collateral behind
asset-backed securities tends to have prepayment rates that do not vary with
interest rates; the short-term nature of the loans may also tend to reduce
the impact of any change in prepayment level. However, faster prepayments
will shorten the average life and slower prepayments will lengthen it. Asset-
backed securities may be pass-through, representing actual equity ownership
of the underlying assets, or pay-through, representing debt instruments
supported by cash flows from the underlying assets.
The coupon rate of interest on mortgage-related and asset-backed securities
is lower than the interest rates paid on the mortgages included in the
underlying pool, by the amount of the fees paid to the mortgage pooler,
issuer, and/or guarantor. Actual yield may vary from the coupon rate,
however, if such securities are purchased at a premium or discount, traded in
the secondary market at a premium or discount, or to the extent that the
underlying assets are prepaid as noted above.
High Risk High-Yield Securities
The Fund may invest in high risk high-yield securities ("junk bonds") which
are fixed income securities that offer a current yield above that generally
available on debt securities rated in the four highest categories by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P")
or, if unrated, considered to be of comparable quality by the investment
adviser. These securities (junk bonds) include:
(a) fixed rate corporate debt obligations (including bonds, debentures and
notes) rated Ba or lower by Moody's or BB or lower by S&P;
(b) preferred stocks that have yields comparable to those of high-yielding
debt securities; and
(c) any securities convertible into any of the foregoing.
Aetna Income Shares 11
<PAGE>
Debt obligations rated BB/Ba or lower are regarded as speculative, and
generally involve more risk of loss of principal and income than higher-rated
securities. Also their yields and market values tend to fluctuate more.
Fluctuations in value do not affect the cash income from the securities but
are reflected in the Fund's net asset value. The greater risks and
fluctuations in yield and value occur, in part, because investors generally
perceive issuers of lower-rated and unrated securities to be less
creditworthy. Lower ratings, however, may not necessarily indicate higher
risks. In pursuing the Fund's objectives, the Company seeks to identify
situations in which the rating agencies have not fully perceived the value of
the security or in which the Company believes that future developments will
enhance the creditworthiness and the ratings of the issuer. The Fund will not
invest in any debt security rated lower than B.
The yields earned on high risk high-yield securities (junk bonds) generally
are related to the quality ratings assigned by recognized ratings agencies.
These securities tend to offer higher yields than those of other securities
with the same maturities because of the additional risks associated with
them. These risks include:
(1) Sensitivity to Interest Rate and Economic Changes. High risk high-yield
securities (junk bonds) are more sensitive to adverse economic changes or
individual corporate developments but less sensitive to interest rate
changes than are investment grade bonds. As a result, when interest rates
rise, causing bond prices to fall, the value of these securities may not
fall as much as investment grade corporate bonds. Conversely, when
interest rates fall, these securities may underperform investment grade
corporate bonds because the prices of these securities tend not to rise
as much as the prices of these other bonds.
Also, the financial stress resulting from an economic downturn or adverse
corporate developments could have a greater negative effect on the
ability of issuers of high risk high-yield securities (junk bonds) to
service their principal and interest payments, to meet projected business
goals and to obtain additional financing, than on more creditworthy
issuers. Holders of these securities could also be at greater risk
because these securities are generally unsecured and subordinated to
senior debt holders and secured creditors. If the issuer of a high risk
high-yield security (junk bond) owned by the Fund defaults, the Fund may
incur additional expenses to seek recovery. In addition, periods of
economic uncertainty and changes can be expected to result in increased
volatility of market prices of these securities and the Fund's net asset
value. Furthermore, in the case of high risk high- yield securities (junk
bonds) structured as zero coupon or pay-in-kind securities, their market
prices are affected to a greater extent by interest rate changes and
thereby tend to be more speculative and volatile than securities which
pay interest periodically and in cash.
(2) Payment Expectations. High risk high-yield securities (junk bonds),
present risks based on payment expectations. For example, these
securities may contain redemption or call provisions. If an issuer
exercises these provisions in a declining interest rate market, the Fund
may have to replace the securities with a lower yielding security,
resulting in a decreased return for investors. Also, the value of these
securities may decrease in a rising interest rate market. In addition,
there is a higher risk of non-payment of interest and/or principal by
issuers of these securities than in the case of investment grade bonds.
(3) Liquidity and Valuation Risks. High risk high-yield securities (junk
bonds) are often traded among a small number of broker-dealers rather
than in a broad secondary market. Purchasers of these securities tend to
be institutions rather than individuals, a factor that further limits the
secondary market. Many of these securities may not be as liquid as
investment grade bonds. The ability to value or sell these securities
will be adversely affected to the extent that such securities are thinly
traded or illiquid. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease or increase the values
and liquidity of high risk high-yield securities (junk bonds) more than
other securities, especially in a thinly-traded market.
(4) Limitations of Credit Ratings. The credit ratings assigned to high risk
high-yield securities (junk bonds) may not accurately reflect the true
risks of an investment. Credit ratings typically evaluate
12 Aetna Income Shares
<PAGE>
the safety of principal and interest payments rather than the market
value risk of such securities. In addition, credit agencies may fail to
adjust credit ratings to reflect rapid changes in economic or company
conditions that affect a security's market value. Although the ratings of
recognized rating services such as Moody's and S&P are considered, the
Company primarily relies on its own credit analysis which includes a
study of existing debt, capital structure, ability to service debts and
to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. Thus the achievement
of the Fund's investment objective may be more dependent on the Company's
own credit analysis than might be the case for a fund which does not
invest in high risk high-yield securities (junk bonds).
(5) Congressional Proposals. New laws and proposed new laws may have a
negative impact on the market for high risk high-yield securities (junk
bonds). As examples, recent legislation requires federally-insured
savings and loan associations to divest themselves of their investments
in such securities and other proposals are designed to limit the use of,
or tax and other advantages of, these securities. Any such proposals, if
enacted, could have a negative effect on the Fund's net asset value.
Zero Coupon and Pay-in-Kind Securities
Zero coupon, or deferred interest, securities are debt obligations that do
not entitle the holder to any periodic payment of interest prior to maturity
or a specified date when the securities begin paying current interest (the
"cash payment date") and therefore are issued and traded at a discount from
their face amounts or par value. The discount varies, depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, decreases
as the final maturity or cash payment date of the security approaches. The
market prices of zero coupon and delayed interest securities generally are
more volatile than the market prices of securities with similar maturities
that pay interest periodically and are likely to respond to changes in
interest rates to a greater degree than do non-zero coupon securities having
similar maturities and credit quality.
The risks associated with lower-rated debt securities may apply to zero
coupon and pay-in-kind securities. These securities are also subject to the
risk that in the event of a default, the Fund may realize no return on its
investment, because these securities do not pay cash interest.
When-Issued or Delayed-Delivery Securities
During any period that the Fund has outstanding a commitment to purchase
securities on a when-issued or delayed-delivery basis, the Fund will maintain
a segregated account consisting of cash, U.S. Government securities or other
high-quality debt obligations with its custodian bank. To the extent that the
market value of securities held in this segregated account falls below the
amount that the purchasing Fund will be required to pay on settlement,
additional assets may be required to be added to the segregated account. Such
segregated accounts could affect the purchasing Fund's liquidity and ability
to manage its portfolio. When the Fund engages in when-issued or
delayed-delivery transactions, it is effectively relying on the seller of
such securities to consummate the trade; failure of the seller to do so may
result in the Fund's incurring a loss or missing an opportunity to invest
funds held in the segregated account more advantageously.
The Fund will not pay for securities purchased on a when-issued or
delayed-delivery basis, or start earning interest on such securities, until
the securities are actually received. However, any security so purchased will
be recorded as an asset of the Fund at the time the commitment is made.
Because the market value of securities purchased on a when-issued or
delayed-delivery basis may increase or decrease prior to settlement as a
result of changes in interest rates or other factors, such securities will be
subject to changes in market value prior to settlement and a loss may be
incurred if the value of the security to be purchased declines prior to
settlement.
Convertibles
A convertible bond or convertible preferred stock gives the holder the option
of converting these securities into common stock. Convertible securities also
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
Aetna Income Shares 13
<PAGE>
Illiquid and Restricted Securities
The Fund may invest up to 15% of its total assets in illiquid securities. For
this purpose, "illiquid securities" are those which cannot be sold in seven
days in the ordinary course of business without taking a materially reduced
price. Because of the absence of a trading market for these investments, the
Fund may take longer to liquidate the position and may realize less than the
amount originally paid by the Fund. The Fund may purchase securities, which,
while privately placed, are eligible for purchase and sale pursuant to Rule
144A under the 1933 Act. This rule permits certain qualified institutional
buyers, such as the Fund, to trade in privately placed securities even though
such securities are not registered under the 1933 Act. The Company, under the
supervision of the Board of Trustees of the Fund, will consider whether
securities purchased under Rule 144A and other restricted securities are
illiquid and thus subject to the Fund's restriction of investing no more than
15% of the Fund's total assets in illiquid securities. In making this
determination, the Company will consider the trading markets for the specific
security taking into account the unregistered nature of the Rule 144A
security. In addition, the Company considers, among other things, the (i)
frequency of trades and quotes, (ii) number of dealers and potential
purchasers, (iii) dealer undertakings to make a market, and (iv) nature of
the security and market place trades. The liquidity of Rule 144A securities
will also be monitored by the Company and, if as a result of changed
conditions, it is determined that a Rule 144A security is no longer liquid,
the Fund's holdings of illiquid securities will be reviewed to assure that
the Fund does not invest more than 15% of its total assets in illiquid
securities. Investing in Rule 144A securities could have the effect of
increasing the amount of the Fund's investments in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities. At
the present time, it is not possible to predict with certainty how the market
for Rule 144A securities will develop.
Warrants
Warrants allow the holder to purchase new shares in the issuing company at a
predetermined price within either a specified length of time or perpetually.
Warrants may be sold individually or attached to preferred stock or bonds. If
the warrant is not exercised the Fund would lose the amount paid for the
warrant.
The purchaser of a warrant expects that the market price of a security will
exceed the purchase price of the warrant plus the exercise price of the
warrant, thus giving him a profit. Since the market price may never exceed
the exercise price before the expiration date of the warrant, the purchaser
of the warrant risks the loss of the entire purchase price of the warrant.
Borrowing
The Fund may borrow up to 5% of the value of its total assets for temporary
or emergency purposes. The Fund may also borrow up to one-third of the value
of its total assets from banks (including its custodian bank) to increase its
holdings of portfolio securities. Leveraging by means of borrowing may affect
the Fund's net asset value by exaggerating any increase or decrease in the
value of portfolio securities, and money borrowed is subject to interest and
other costs which may or may not exceed the income derived from the
securities purchased with borrowed funds. There is no present intention to
leverage the Fund.
Portfolio Turnover
Portfolio turnover refers to the frequency of portfolio transactions and the
percentage of portfolio assets being bought and sold in the aggregate during
the year. The Fund does not intend to make a general practice of short-term
trading, although it may occasionally realize short-term gains or losses.
Purchases and sales will be made whenever such action is deemed prudent and
consistent with investment objectives. It is anticipated that under normal
market conditions the average annual portfolio turnover rate will not exceed
125%. A high turnover rate involves greater expenses and may involve greater
risk to the Fund. The portfolio turnover rates for 1994 and 1995 were 74% and
__%, respectively.
TRUSTEES AND OFFICERS OF THE FUND
The investments and administration of the Fund are under the direction of the
Board of Trustees. The Trustees and executive officers of the Fund and their
principal occupations for the past five years are listed below. Those
trustees who are "interested persons," as defined in the 1940 Act, are
indicated by
14 Aetna Income Shares
<PAGE>
an asterisk (*), and hold similar positions with other investment companies
in the same fund complex managed by the Investment Adviser.
<TABLE>
<CAPTION>
Principal Occupation During Past Five Years
Position(s) Held (and Positions held with Affiliated Persons or
Name, Address and Age with Registrant Principal Underwriters of the Registrant)**
<S> <C> <C>
Shaun P. Mathews* Trustee and Chief Executive, Aetna Investment Services, Inc.,
151 Farmington Avenue President October 1995 to Present; President, Aetna Investment
Hartford, Connecticut Services, Inc., March 1994 to Present; Director and
Age 40 Chief Operations Officer, Aetna Investment Services,
Inc., July 1993 to Present; Director and Senior Vice
President, Aetna Insurance Company of America,
February 1993 to Present; Senior Vice President and
Director of ALIAC, March 1991 to Present; Vice
President of Aetna Life Insurance Company, 1991 to
Present.
James C. Hamilton Vice President Chief Financial Officer, Aetna Investment Services,
151 Farmington Avenue and Treasurer Inc., July 1993 to Present; Director, Vice President
Hartford, Connecticut and Treasurer, Aetna Insurance Company of America,
Age 55 February 1993 to Present; Director, Aetna Private
Capital, Inc., November 1990 to Present; Vice
President and Treasurer of ALIAC, October 1988 to
Present; Vice President and Actuary, Aetna Life
Insurance Company, 1988 to Present.
John Y. Kim* Trustee and President, Chief Executive Officer, and Chief
151 Farmington Avenue Vice President Investment Officer, Aeltus Investment Management,
Hartford, Connecticut Inc., December 1995 to Present; Senior Vice President
Age 35 and Director, ALIAC Investments and Chief Investment
Officer, Aetna Life and Casualty Company, May 1994 to
Present; Managing Director, Mitchell Hutchins
Institutional Investors, New York, NY, September 1993
to April 1994; Vice President of Investor Relations
and Senior Portfolio Manager, Aetna Life and Casualty
Company, October 1991 to August 1993.
Susan E. Bryant Secretary Counsel, Aetna Life and Casualty Company, March 1993
151 Farmington Avenue to Present; General Counsel and Corporate Secretary,
Hartford, Connecticut First Investors Corporation, April 1991 to March
Age 48 1993; Administrator, Oklahoma Department of
Securities, March 1986 to April 1991.
Aetna Income Shares 15
<PAGE>
Morton Ehrlich Trustee Chairman and Chief Executive Officer, Integrated
1000 Venetian Way Management Corp. (an entrepreneurial company) and
Miami, Florida Universal Research Technologies, 1992 to Present;
Age 61 Director and Chairman, Audit Committee, National
Bureau of Economic Research, 1985 to 1992; President,
LIFECO, Travel Services Corp., October 1988 to
December 1991.
Maria T. Fighetti Trustee Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation and
Closter, New Jersey Alcohol Services, 1973 to Present.
Age 52
David L. Grove Trustee Private Investor; Economic/Financial Consultant,
5 The Knoll December 1985 to Present.
Armonk, New York
Age 78
Daniel P. Kearney* Trustee Executive Vice President of Aetna Life and Casualty
151 Farmington Avenue Company, 1993 to Present; Group Executive, Aetna Life
Hartford, Connecticut and Casualty Company, 1991 to 1993.
Age 56
Sidney Koch Trustee Financial Adviser, self-employed, January 1993 to
455 East 86th Street Present; Senior Adviser, Daiwa Securities America,
New York, New York Inc., January 1992 to January 1993; Executive Vice
Age 61 President, Member of Executive Committee, Daiwa
Securities America, Inc., January 1986 to January
1992.
Corine T. Norgaard Trustee, Chair Professor, Accounting and Dean of the School of
School of Management Audit Committee Management, Binghamton University, (Binghamton, NY),
Binghamton University and Contract August 1993 to Present; Professor, Accounting,
Binghamton, New York Committee University of Connecticut, (Storrs, Connecticut),
Age 58 September 1969 to June 1993; Director, The Advest
Group (holding company for brokerage firm).
Richard G. Scheide Trustee Trust and Private Banking Consultant, David Ross
11 Lily Street Palmer Consultants, July 1991 to Present; Executive
Nantucket, Massachusetts Vice President and Manager, Bank of New England,
Age 66 N.A., June 1976 to July 1991.
</TABLE>
Members of the Board of Trustees who are also directors, officers or
employees of Aetna Life and Casualty Company or its affiliates are not
entitled to any fee. Members of the Board of Trustees who are not affiliated
as employees of Aetna or its subsidiaries receive an annual retainer of
$2,000 for service on the Board, and a fee of $400 per Fund for each meeting
of such Board (equal to an aggregate annual fee of $8,000). They may also
receive an annual fee of $400 or $500 for service on the Audit and Contract
Committees, respectively.
16 Aetna Income Shares
<PAGE>
As of December 31, 1995, the unaffiliated members of the Board of Trustees
were compensated as follows:
<TABLE>
<CAPTION>
Total Compensation from Registrant and
Name of Person, Aggregate Compensation Fund Complex* Paid to
Position from Registrant Directors
- ------------------------- ----------------------- --------------------------------------
<S> <C> <C>
Corine Norgaard
Director and Chairman,
Audit and Contract
Committees $ $
- ------------------------- ----------------------- --------------------------------------
Sidney Koch
Director and Member,
Audit and Contract
Committees $ $
- ------------------------- ----------------------- --------------------------------------
Maria T. Fighetti
Director and Member,
Audit and Contract
Committees $ $
- ------------------------- ----------------------- --------------------------------------
Morton Ehrlich
Director and Member,
Audit and Contract
Committees $ $
- ------------------------- ----------------------- --------------------------------------
Richard G. Scheide
Director and Member,
Audit and Contract
Committees $ $
- ------------------------- ----------------------- --------------------------------------
David L. Grove
Director and Member,
Audit and Contract
Committees $ $
</TABLE>
* Fund Complex presently consists of: Aetna Series Fund, Inc., Aetna
Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna
Investment Advisers Fund, Inc., Aetna GET Fund (Series B) and Aetna
Generation Portfolios, Inc.
** Mr. Grove elected to defer all such compensation.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF THE FUND
As of March 31, 1996, the Company and its affiliates owned ( %) shares of the
Fund which were allocated to variable annuity and variable life insurance
separate accounts to fund obligations under variable annuity contracts and
variable life insurance contracts. Contract holders in these separate accounts
are provided the right to direct the voting of Fund shares at shareholder
meetings. The Company and its affiliates vote the shares that they own in these
separate accounts in accordance with contract holders' directions. Undirected
shares of the Fund will be voted for each Account in the same proportion as
directed shares. The Company is a wholly owned subsidiary of Aetna Retirement
Services, Inc., which is in turn a wholly owned subsidiary of Aetna Life and
Casualty Company located at 151 Farmington Avenue, Hartford, Connecticut 06156.
Aetna Income Shares 17
<PAGE>
An additional shares (less than 1%) of the Fund were owned by an
affiliate of the Company at that date. All these shares are voted by the
affiliated companies at their sole discretion. Officers and Trustees own less
than 1% of the outstanding shares of Income Shares.
THE INVESTMENT ADVISORY CONTRACT
The Fund has entered into an Investment Advisory Agreement (the "Management
Agreement") with the Company, effective as of January 1, 1996. A prior
investment advisory agreement, with substantially identical terms, was
previously in effect. Under the Management Agreement and subject to the
direction of the Board of Trustees of the Fund, the Company has responsibility
for supervising all aspects of the operations of the Fund. For its services
under the Management Agreement, the Company receives an annual investment
advisory fee of 0.25% of the average daily net assets of the Fund. See
"Management of the Fund" in the Prospectus.
The Management Agreement provides that the Company shall pay (a) the
salaries, employment benefits and other related costs of those of its
personnel engaged in providing investment advice to the Fund, including,
without limitation, office space, office equipment, telephone and postage
costs and (b) any fees and expenses of all Trustees of the Fund who are
employees of the Company or an affiliated entity and any salaries and
employment benefits of officers of the Fund who are affiliated persons of the
Company for acting as officers of the Fund. The Management Agreement also
provides that the Fund will pay (i) investment advisory fees; (ii) broker's
commissions and certain other transaction fees including the portion of such
fees, if any, which is attributable to brokerage research services; (iii)
fees and expenses of the Fund's independent auditors and outside legal
counsel; (iv) expenses of printing and distributing proxies, proxy
statements, prospectuses and reports to shareholders of the Fund, except as
such expenses may be borne by the distributor; (v) interest and taxes; (vi)
fees and expenses of those of the Fund's Trustees who are not "interested
persons" (as defined by the 1940 Act) of the Fund or the Company; (vii)
shareholder's meeting expenses; (viii) Administrator, transfer agent,
custodian and dividend disbursing agent fees and expenses; (ix) fees of
dividend, accounting and pricing agents appointed by the Fund; (x) fees
payable to the SEC or in connection with the registration of shares of the
Fund under the laws of any state or territory of the United States or the
District of Columbia; (xi) fees and assessments of the Investment Company
Institute or any successor organization other association memberships
approved by the Board of Trustees; (xii) such nonrecurring or extraordinary
expenses as may arise; (xiii) all other ordinary business expenses incurred
in the operations of the Fund, unless specifically allocable otherwise by the
Management Agreement; (xiv) costs attributable to investor services,
administering shareholder accounts and handling shareholder relations; (xv)
all expenses incident to the payment of any dividend, distribution,
withdrawal of redemption; and (xvi) insurance premiums on property and
personnel (including officers and Trustees) of the Fund which inure to its
benefit.
The Management Agreement provides that if, for any fiscal year, the total of
all ordinary business expenses of the Fund, including all investment advisory
fees but excluding brokerage commissions, distribution fees, taxes, interest
and extraordinary expenses and certain other excludable expenses, would
exceed the most restrictive expense limits imposed by any statute or
regulatory authority of any jurisdiction in which shares of the Fund are
offered for sales (unless a waiver is obtained), the Company shall reduce its
advisory fee in order to reduce such excess expenses, but will not be
required to reimburse the Fund for any ordinary business expenses which
exceed the amount of its advisory fee for such fiscal year.
The Management Agreement provides that it will continue in effect from year
to year provided that it is specifically approved at least annually by the
Board of Trustees of the Fund and by a majority of the non- interested
Trustees by votes cast at a meeting called for such purpose. The Management
Agreement provides that it may be terminated at any time by vote of the
Fund's Trustees or by vote of a majority of the Fund's outstanding voting
securities, or the Company, on sixty (60) days' written notice to the other
party. The Management Agreement will terminate automatically in the event of
its assignment.
18 Aetna Income Shares
<PAGE>
Pursuant to the terms of the previous management agreement, the Company
received an annual investment advisory fee of 0.25% of the average daily net
assets of the Fund. For the years 1993, 1994 and 1995, the Fund paid the
Company an investment advisory fee of $1,476,853, $1,470,846 and $
respectively.
The service mark of Aetna Income Shares and the name "Aetna" have been
adopted by the Fund with the permission of Aetna Life and Casualty Company
and their continued use is subject to the right of Aetna Life and Casualty
Company to withdraw this permission in the event the Company or another
subsidiary or affiliated corporation of Aetna Life and Casualty Company
should not be the investment adviser of Income Shares.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund has entered into an Administrative Services Agreement with the Company
effective May 1, 1996 under which the Company has agreed to provide all
administrative services in support of the Fund. In addition, the Company has
agreed to assume all ordinary recurring direct costs of the Fund that it would
be required to pay under the terms of the Investment Advisory Agreement. As a
result, the Company will be covering all costs of the Fund other than the
investment advisory fee and brokerage costs and other transaction costs in
connection with the purchase and sale of securities for its portfolio. For the
services provided under the Administrative Services Agreement, the Company will
receive an annual fee, payable monthly at a rate of 0.10% of the average daily
net assets of the Fund. Prior to May 1, 1996, the Company had an Administrative
Services Agreement that provided for the reimbursement of a proportionate share
of the Company's overhead in administering the Fund. The Fund was obligated to
pay its own direct costs. The total of the direct costs and administrative costs
for the years ended December 31, 1993, 1994 and 1995 were $186,392, $207,233 and
$ , respectively.
The Administrative Services Agreement was approved by the Board of Trustees
on February 28, 1996 and will remain in effect until January, 1997. It will
then remain in effect from year-to-year if approved annually by a majority of
the Trustees. It may be terminated by either party on sixty days' written
notice.
BROKERAGE ALLOCATION
Subject to the direction of the Fund's Board of Trustees, the Company has
responsibility for making Income Shares' investment decisions, for effecting
the execution of trades for the Fund's portfolio and for negotiating any
brokerage commissions thereon. It is the policy of the Company to obtain the
best quality of execution available, giving attention to net price (including
commissions where applicable), execution capability (including the adequacy
of a firm's capital position), 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 its trading policy, the Company may place the Fund's
portfolio transactions with such brokers or dealers and for execution in such
markets as, in the opinion of the Company, will lead to best overall quality
of execution for the Fund's portfolio.
The Company currently receives a variety of brokerage and research services
from brokerage firms in return for the execution by such brokerage firms of
trades in securities held by the Fund. 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
Income Shares and other investment companies, services related to the
execution of trades in the Fund's securities and advice as to the valuation
of securities. The Company considers the quantity and quality of such
brokerage and research services provided by a brokerage firm along with the
nature and difficulty of the specific transaction in negotiating commissions
for trades in the Fund's securities.
Consistent with federal legislation, the Company 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-
Aetna Income Shares 19
<PAGE>
commission payments. The Company's judgment as to whether and how it will
obtain the specific brokerage and research services will be based upon its
analysis of the quality of such services and the cost (depending upon the
various methods of payment which may be offered by brokerage firms) and will
reflect the Company's opinion as to which services and which means of payment
are in the long-term best interests of the Fund. The Fund has no present
intention to effect any brokerage transactions in portfolio securities with
the Company or any affiliate of the Fund or the Company.
Certain executive officers of the Company also have supervisory
responsibility with respect to the securities portfolio of the Company's own
general account. Further, the Company also acts as investment adviser to
other investment companies registered under the 1940 Act. In placing orders
for the purchase and sale of securities for the Fund, the Company will
normally use its own facilities and there will not be allocations of such
orders between the Fund and the Company's general account. However, to the
extent the Company has other clients, the Fund and another advisory client of
the Company may desire to buy or sell the same publicly traded security at or
about the same time. In such a case, the purchases or sales will normally be
allocated as nearly as practicable on a pro rata basis in proportion to the
amounts to be purchased or sold by each. In some cases the smaller orders
will be filled first. In determining the amounts to be purchased and sold,
the main factors to be considered are the respective investment objectives of
the Fund and the other portfolios, the relative size of portfolio holdings of
the same or comparable securities, availability of cash for investment by the
Fund and the other portfolios, and the size of their respective investment
commitments. Trades may be executed between Funds and such trades are
executed at "current market price" in compliance with SEC Rule 17a-7.
Most purchases and sales of portfolio securities are made in principal
transactions and do not involve payment of brokerage commissions. For 1993,
1994 and 1995, Income Shares paid brokerage commissions of $35,562, $56,222
and $ respectively.
For the fiscal year ended December 31, 1995, portfolio transactions in the
amount of $____ were directed to certain brokers because of research services,
of which commissions in the amount of $____ were paid with respect to such
transactions. No brokerage business was placed with any brokers affiliated with
ALIAC during the last three fiscal years.
DESCRIPTION OF SHARES
Aetna Income Shares was established under the laws of Massachusetts by a
Declaration of Trust ("Declaration") dated January 25, 1984.
The Declaration permits the Trustees to issue an unlimited number of full and
fractional shares of beneficial interest of a single class, each of which
represents a proportionate interest in the Fund equal to each other share.
The Trustees have the power to divide or combine the shares into a greater or
lesser number of shares without thereby changing the proportional beneficial
interest in the Fund.
Upon liquidation of Income Shares, shareholders are entitled to share pro
rata in the net assets of the Fund available for distribution to
shareholders. Fund shares are fully paid and nonassessable, except as set
forth below.
Shareholder and Trustee Liability
Income Shares is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such business trust
may, under certain circumstances, be held personally liable as partners for
the obligations of the Fund, which is not true in the case of a corporation.
The Declaration provides that shareholders shall not be subject to any
personal liability for the acts or obligations of the Fund and that every
written agreement, obligation, instrument or undertaking made by the Fund
shall contain a provision to the effect that shareholders are not personally
liable thereunder. With respect to tort claims, contract claims where the
provision referred to is omitted from the undertaking, and claims for taxes
and certain statutory liabilities in other jurisdictions, a shareholder may
be held personally liable to the extent that claims are not satisfied by the
Fund. However, upon payment of any such liability the shareholder will be
entitled to reimbursement from the general assets of the Fund. The Trustees
intend to conduct the operations of the Fund, with the advice of counsel, in
such a way as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Fund.
20 Aetna Income Shares
<PAGE>
The Declaration further provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration
protects a Trustee against any liability to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her
office.
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
Trustees (to the extent hereinafter provided) and on other matters submitted
to the vote of shareholders. A meeting of the shareholder at which Trustees
were elected was most recently held on April 13, 1994. Thereafter, no further
meeting of shareholders for the purpose of electing Trustees will be held
unless and until such time as less than a majority of the Trustees holding
office have been elected by shareholders, at which time the Trustees then in
office will call a shareholders' meeting for election of Trustees. Vacancies
occurring between such meetings shall be filled in an otherwise legal manner
if, immediately after filling any such vacancy, at least two-thirds of the
Trustees holding office have been elected by shareholders. Except as set
forth above, the Trustees shall continue to hold office and may appoint
successor Trustees. Trustees may be removed from office (1) at any time by
two-thirds vote of the Trustees; (2) by a majority vote of Trustees where any
Trustee becomes mentally or physically incapacitated; (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares; (4)
by written declaration filed with Mellon Bank, N.A., the Fund's custodian,
signed by two-thirds of the Fund's shareholders. Any Trustee may also
voluntarily resign from office. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Trustees
can, if they choose to do so, elect all the Trustees of Income Shares, in
which event the holders of the remaining shares will be unable to elect any
person as a Trustee.
The Declaration may be amended by an affirmative vote of a majority of the
shares at any meeting of shareholders or by written instrument signed by a
majority of the Trustees and consented to by a majority of the shareholders.
The Trustees may also amend the Declaration without the vote or consent of
shareholders if they deem it necessary to conform the Declaration to the
requirements of applicable federal laws or regulations or the requirements of
the regulated investment company provisions of the Internal Revenue Code of
1986, as amended, but the Trustees shall not be liable for failing to do so.
Shares have no preemptive or conversion rights.
SALE AND REDEMPTION OF SHARES
Shares of Income Shares are sold and redeemed at the net asset value next
determined after receipt of a purchase or redemption order in acceptable form
by Firstar Trust Company ("Firstar"). No sales charge or redemption charge is
made. The value of shares redeemed may be more or less than the shareholder's
cost, depending upon the market value of the portfolio securities at the time
of redemption. Payment for shares redeemed will be made within seven days
after the redemption request is received in proper form by Firstar. Any
written request to redeem shares must bear the signatures of all the
registered holders of those shares. The signatures must be guaranteed by a
commercial bank, trust company or a member of a national securities exchange.
Firstar will, on request, explain any additional requirements for shares held
in the name of a corporation, partnership, trustee, guardian or in any other
representative capacity. However, the right to redeem Fund shares may be
suspended or payment therefore postponed for any period during which (a)
trading on the New York Stock Exchange is restricted as determined by the SEC
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the SEC, as a result of which (i) disposal
by the Fund of securities owned by it is not reasonably practicable, or (ii)
it is not reasonably practicable for the Fund to determine fairly the value
of its net assets; or (c) the SEC by order so permits for the protection of
shareholders of the Fund.
An open account is automatically set up and maintained for each shareholder
to facilitate the voluntary accumulation of Income Shares shares. The open
account system makes unnecessary the issuance and delivery of stock
certificates, thereby relieving shareholders of the responsibility of
safekeeping. Through
Aetna Income Shares 21
<PAGE>
the open account system, each shareholder is informed of his or her holdings
after any transaction affecting the number of shares he or she owns. Share
certificates will not be issued.
PRINCIPAL UNDERWRITER
The Company is the principal underwriter of Income Shares pursuant to a
contract ("Distribution Agreement") between it and the Fund effective
January 1, 1996. The Distribution Agreement may be continued annually if
approved annually by the Board of Trustees of the Fund or by a vote of
holders of a majority of the Fund's shares, and by a vote of a majority of
the Fund's Board of Trustees who are not "interested persons," as that term
is defined in the 1940 Act, of the Company, and who are not interested
persons of the Fund, appearing in person at a meeting called for the purpose
of approving such agreement. This agreement terminates automatically upon
assignment, and may be terminated at any time on sixty (60) days' written
notice by the Fund's Board of Trustees or by vote of holders of a majority of
the Fund's shares without the payment of any penalty.
TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Fund or its shareholders, and the discussions here and
in the Prospectus are not intended as substitutes for careful tax planning.
Holders of variable annuity contracts or variable life insurance policies
must consult the prospectuses of their respective contracts or policies for
information concerning the federal income tax consequences of owning such
variable annuity contracts or variable life insurance policies.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
As a regulated investment company, the Fund 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 below. Distributions by the
Fund 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 can therefore
satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) 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"); and (2) derive less than 30% of its gross income (exclusive of
certain gains on designated hedging transactions that are offset by realized
or unrealized losses on offsetting positions) from the sale or other
disposition of stock, securities or foreign currencies (or options, futures
or forward contracts thereon) held for less than three months (the
"Short-Short Gain Test"). However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options
or futures thereon). Because of the Short-Short Gain Test, the Fund may have
to limit the sale of appreciated securities that it has held for less than
three months. However, the Short-Short Gain Test will not prevent the Fund
from disposing of investments at a loss, since the recognition of a loss
before the expiration of the three-month holding period is disregarded for
22 Aetna Income Shares
<PAGE>
this purpose. Interest (including original issue discount) received by the
Fund at maturity or upon the disposition of a security held for less than
three months will not be treated as gross income derived from the sale or
other disposition of such security within the meaning of the Short-Short Gain
Test. However, income that is attributable to realized market appreciation
will be treated as gross income from the sale or other disposition of
securities for this purpose.
In general, gain or loss recognized by the Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Fund held the debt obligation. In
addition, under the rules of Code Section 988, gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an
option with respect thereto (but only to the extent attributable to changes
in foreign currency exchange rates), and gain or loss recognized on the
disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code Section
1256, will generally be treated as ordinary income or loss. For purposes of
determining whether capital gain or loss recognized by the Fund on the
disposition of an asset is long-term or short-term, the holding period of the
asset may be affected if (i) the asset is used to close a "short sale" (which
includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, (ii) the asset is otherwise
held by the Fund as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Fund grants a qualified covered
call option (which, among other things, must not be deep-in-the-money) with
respect thereto) or (iii) the asset is stock and the Fund grants an
in-the-money qualified covered call option with respect thereto. However, for
purposes of the Short-Short Gain Test, the holding period of the asset
disposed of may be reduced only in the case of clause (i) above. In addition,
the Fund may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the Fund on the lapse of, or any gain or loss
recognized by the Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option
written by the Fund will commence on the date it is written and end on the
date it lapses or the date a closing transaction is entered into.
Accordingly, the Fund may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.
Transactions that may be engaged in by the Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes
and futures contracts) will be subject to special tax treatment as "Section
1256 contracts." Section 1256 contracts are treated as if they are sold for
their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of
the year-end deemed disposition of Section 1256 contracts is taken into
account for the taxable year together with any other gain or loss that was
previously recognized upon the termination of Section 1256 contracts during
that taxable year. Any capital gain or loss for the taxable year with respect
to Section 1256 contracts (including any capital gain or loss arising as a
consequence of the year-end deemed sale of such contracts) is generally
treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. The Fund, however, may elect not to have this special tax treatment
apply to Section 1256 contracts that are part of a "mixed straddle" with
other investments of the Fund that are not Section 1256 contracts. The IRS
has held in several private rulings (and Treasury Regulations now provide)
that gains arising from Section 1256 contracts will be treated for purposes
of the Short- Short Gain Test as being derived from securities held for not
less than three months if the gains arise as a result of a constructive sale
under Code Section 1256.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess
of net long-term capital gain over net short-term capital loss) for any
taxable year, to elect (unless it has made a taxable year election for excise
tax purposes
Aetna Income Shares 23
<PAGE>
as discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
Finally, the Fund 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 the Fund's taxable year, at least 50% of the value of the
Fund'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 which the Fund has not invested more than
5% of the value of the Fund's total assets in securities of such issuer and
as to which the Fund 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 in two or more issuers which the Fund controls and which are
engaged in the same or similar 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. For purposes of
asset diversification testing, obligations issued by or guaranteed by
agencies and instrumentalities of the U.S. Government such as the Federal
Agricultural Mortgage Corporation, the Farm Credit System Financial
Assistance Corporation, the Federal Home Loan Bank, the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the
Government National Mortgage Corporation, and the Student Loan Marketing
Association are treated as U.S. Government securities.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be
eligible for the dividends-received deduction in the case of corporate
shareholders.
Qualification of Segregated Asset Accounts
Under Code section 817(h), a segregated asset account upon which a variable
annuity contract or variable life insurance policy is based must be
"adequately diversified." A segregated asset account will be adequately
diversified if it satisfies one of two alternative tests set forth in the
Treasury Regulations. Specifically, the Treasury Regulations provide, that
except as permitted by the "safe harbor" discussed below, as of the end of
each calendar quarter (or within 30 days thereafter) no more than 55% of a
fund's total assets may be represented by any one investment, no more than
70% by any two investments, no more than 80% by any three investments and no
more than 90% by any four investments. For this purpose, all securities of
the same issuer are considered a single investment, and while each U.S.
Government agency and instrumentality is considered a separate issuer, a
particular foreign government and its agencies, instrumentalities and
political subdivisions are considered the same issuer. As a safe harbor, a
separate account will be treated as being adequately diversified if the
diversification requirements under Subchapter M are satisfied and no more
than 55% of the value of the account's total assets are cash and cash items,
government securities and securities of other regulated investment companies.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be
entitled to "look-through" the regulated investment company to its pro rata
portion of the regulated investment company's assets, provided the regulated
investment company satisfies certain conditions relating to the ownership of
the shares.
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
24 Aetna Income Shares
<PAGE>
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 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).
The Fund 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 the Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid
excise tax liability.
Fund Distributions
The Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they may qualify for the 70% dividends-received deduction
for corporate shareholders.
The Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time a shareholder has held its shares or whether
such gain was recognized by the Fund prior to the date on which the
shareholder acquired his shares. All distributions paid to ALIAC or its
affiliates, whether characterized as ordinary income or capital gain, are not
taxable to variable annuity or variable life insurance contract holders.
If the Fund elects to retain its net capital gain, the Fund will be taxed
thereon (except to the extent of any available capital loss carryovers) at
the 35% corporate tax rate. Where the Fund elects to retain its net capital
gain, it is expected that the Fund also will elect to have shareholders of
record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit
for his pro rata share of tax paid by the Fund on the gain, and will increase
the tax basis for his shares by an amount equal to the deemed distribution
less the tax credit.
Investment income that may be received by the Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the Fund to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of the Fund's assets to be invested in various
countries is not known.
Distributions by the Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholder's tax basis in his shares; any
excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions paid to ALIAC or its affiliates will be reinvested in
additional shares. Distributions to other shareholders will be reinvested in
additional Fund shares unless Firstar Trust Company, the Fund's transfer
agent, is otherwise notified in writing prior to the record date for such
distributions.
Shareholders receiving a distribution in the form of either cash or
additional shares will be treated as receiving a distribution in an amount
equal to the fair market value of the shares received, determined as of the
reinvestment date. In addition, if the net asset value at the time a
shareholder purchases shares
Aetna Income Shares 25
<PAGE>
of the Fund reflects undistributed net investment income or recognized
capital gain net income, or unrealized appreciation in the value of the
assets of the Fund, distributions of such amounts will be taxable to the
shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31
of such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the
year.
Sale or Redemption of Shares
Shareholders will recognize gain or loss on the sale or redemption of shares
of the Fund in an amount equal to the difference between the proceeds of the
sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of the Fund within 30 days before or after
the sale or redemption. In general, any gain or loss arising from (or treated
as arising from) the sale or redemption of shares of the Fund will be
considered capital gain or loss and will be long-term capital gain or loss if
the shares were held for longer than one year. However, any capital loss
arising from the sale or redemption of shares held for six months or less
will be treated as a long-term capital loss to the extent of the amount of
capital gain dividends received on such shares. For this purpose, the special
holding period rules of Code Section 246(c)(3) and (4) generally will apply
in determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year
are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income. Although gain or loss
realized on shares redeemed through the direction of variable annuity or
variable life insurance contract holders is taxable to ALIAC or its
affiliates, such variable annuity or variable life insurance contract holders
will not be subject to tax.
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 Statement of Additional Information. 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 of ordinary income dividends and capital
gain dividends from regulated investment companies 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 these and other
state and local tax rules affecting investment in the Fund.
NET ASSET VALUE
Equity securities of the Fund which are traded on a registered securities
exchange are valued at the last sale price or, if there has been no sale that
day, at the mean of the last bid and asked price on the exchange where the
security is principally traded. Securities traded over the counter (including
long-term debt securities) are valued at the mean of the last bid and asked
price if current market quotations are not readily available. Short-term debt
securities which 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. Short-term debt securities maturing in sixty days or less at the date
of purchase will be valued using the "amortized cost" method of valuation.
This involves valuing an instrument at its cost and thereafter assuming a
constant amortization of premium or increase of discount. Long-term debt
securities traded on a national securities exchange are valued at the mean of
the last bid and asked price of such securities obtained from a broker
26 Aetna Income Shares
<PAGE>
who is a market-maker in the securities or a service providing quotations
based upon the assessment of market-makers in those securities.
Call options written by the Fund and put options are valued at the mean of
the last bid and asked price on the principal exchange where the option is
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. The Trustees may authorize the use of
independent pricing services, where appropriate.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258
serves as custodian for assets of the Fund. The custodian does not
participate in determining the investment policies of the Fund or in deciding
which securities are purchased or sold by the Fund. The Fund, however, may
invest in obligations of the custodian and may purchase or sell securities
from or to the custodian.
INDEPENDENT AUDITORS
________, CityPlace II, Hartford, Connecticut 06103-4103 serves as independent
auditors to the Fund. _____________ provides audit services, assistance and
consultation in connection with SEC filings.
Aetna Income Shares 27
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements*:
(1) Included in Part A:
Financial Highlights
(2) Included in Part B:
Statements of Assets and Liabilities as of December 31, 1995
Statements of Operations for the year ended December 31, 1995
Statements of Changes in Net Assets for the years ended
December 31, 1995 and 1994
Notes to Financial Statements
Portfolios of Investments
Independent Auditors' Report
(b) Exhibits:
(1) Charter (Declaration of Trust)(1)
(2) Amended Bylaws (adopted by Board of Trustees September 14, 1994)(2)
(3) Not Applicable
(4) Copies of Securities Issued and Registered by Registrant(1)
(5) Investment Advisory Agreement(3)
(6) Distribution Agreement(4)
(7) Not Applicable
(8) Custodian Agreements and Depository Contracts(4)
(9) Administrative Services Agreement *
(10.1) Opinion of Counsel(5)
(10.2) Consent of Counsel *
(11) Consent of Independent Auditors *
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Financial Data Schedule*
(18) Powers of Attorney(2)
* To be filed by subsequent Post-Effective Amendment.
1 Incorporated herein by reference to the Registration Statement on Form N-1A,
File No. 2-47232, as filed with the Securities and Exchange Commission on
May 1, 1984.
<PAGE>
2 Incorporated herein by reference to Post-Effective Amendment No. 43 to the
Registration Statement on Form N-1A, file No. 2-47232, as filed with the
Securities and Exchange Commission on April 24, 1995.
3 Incorporated herein by reference to Post-Effective Amendment No. 42 to the
Registration Statement on Form N-1A, File No. 2-47232, as filed with the
Securities and Exchange Commission on April 26, 1994.
4 Incorporated herein by reference to Post-Effective Amendment No. 26 to the
Registration Statement on Form N-1A, File No. 2-47232, as filed with the
Securities and Exchange Commission on April 18, 1985.
5 Incorporated herein by reference to Registrant's 24f-2 Notice for the fiscal
year ended December 31, 1995 as filed with the Securities and Exchange
Commission on February 29, 1996.
Item 25. Persons Controlled by or Under Common Control
Registrant is a Massachusetts business trust for which separate
financial statements are filed. On January 31, 1996, Aetna Life
Insurance and Annuity Company ("Company") owned 99% of the
Registrant's outstanding shares of beneficial interest. As of January
31, 1996, Aetna Life and Casualty Company ("Aetna") indirectly owns
100% of the Company's outstanding shares of common stock.
A diagram of all persons directly or indirectly under common control
with the Registrant is incorporated herein by reference to Item 26 of
Post-Effective Amendment No. 5 to the Registration Statement on Form
N-4, File No. 33-75982, as filed electronically with the Securities
and Exchange Commission on February 20, 1996.
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders
-------------- ------------------------
Shares of Beneficial Interest (to be updated by amendment)
$1.00 par value
Item 27. Indemnification
Article V of the Registrant's Declaration of Trust, incorporated
herein by reference to Exhibit 24(b)(1) to the Registrant's
Registration Statement on Form N-1A filed May 1, 1984 (File No.
2-47232), provides indemnification for Registrant's trustees and
officers.
In addition, the Registrant's trustees and officers are covered
under director and officer liability policies issued by National
Union Fire Insurance Company, which generally indemnify the
Registrant's trustees and officers for judgments and
<PAGE>
expenses in proceedings brought against them solely by reason of
their positions as trustees and officers (in the absence of gross
neglect or misfeasance). The policy expires on October 1, 1996.
Item 28. Business and Other Connections of Investment Adviser
The Investment Adviser is an insurance company that issues variable
and fixed annuities, variable and universal life insurance policies
and acts as depositor for separate accounts holding assets for
variable contracts and policies. The following table summarizes the
business connections of the directors and principal officers of the
Investment Adviser.
<TABLE>
<CAPTION>
------------------------- ---------------------------- --------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1993/Addresses*/**
------------------------- ---------------------------- --------------------------------------
<S> <C> <C>
Daniel P. Kearney Director, President and Executive Vice President (since
Chairman, Executive December 1993), and Group Executive,
Committee (Principal Financial Division (February 1993 -
Executive Officer) December 1993), Aetna Life and
Casualty Company; Director, Aetna
Insurance Company of America (since
February 1993).
Christopher J. Burns Director (1991); Senior Director, Aetna Financial Services,
Vice President Inc. (since January 1996); Director
(since July 1993) of Aetna Investment
Services, Inc.; Director (1992 - April
1995) and Senior Vice President, North
American Operations (1993 - April 1995)
of Aetna International, Inc.
Laura R. Estes Director and Senior Vice Director, Aetna Financial Services,
President Inc. (since January 1996); Director
and Senior Vice President, Aetna
Insurance Company of America (since
February 1993); Director, Aetna
Investment Services, Inc. (since
July 1993).
<PAGE>
Timothy A. Holt Director, Senior Vice Senior Vice President, Business
President and Chief Strategy & Finance, Aetna Retirement
Financial Officer (1996) Services (since February 1996); Vice
President, Aetna Portfolio Management/
Investment Group (August 1992 - February 1996).
Gail P. Johnson Director and Vice President Vice President, Service and Retain
Customers, Aetna Retirement Services
(since February 1996); Vice
President, Defined Benefit Services
(September 1994 - February 1996);
Vice President, Plan Services,
Pensions and Financial Services
(December 1992 - September 1994).
John Y. Kim Director and Senior Vice President, Aeltus Investment
President Management, Inc. (since December
1995); Chief Investment Officer, Aetna Life
and Casualty Company (since May 1994);
Managing Director, Mitchell Hutchins Institutional
Investors, New York, NY (September 1993 - April
1994).
Shaun P. Mathews Director and Vice President Senior Vice President, Strategic
Markets and Products (February 1993
- January 1996), of Aetna Life
Insurance and Annuity Company;
Director and Senior Vice President,
Aetna Insurance Company of America
(since February 1993); Vice
President of Aetna Life Insurance
Company (since 1991).
Glen Salow Director and Vice President Vice President, Information
Technology, Investments and
Financial Services (February 1995 -
February 1996); Vice President,
Investment Systems, AIT (1992 -
1995).
<PAGE>
Creed R. Terry Director and Vice President Vice President, Select and Manage
Markets, Aetna Retirement Services
(since February 1996); ALIAC Market
Strategist (August 1995 - February
1996); President, Chemical
Technology Corporation (a subsidiary
of Chemical Bank) (1991 - 1995).
Zoe Baird Senior Vice President and Senior Vice President and General
General Counsel Counsel of Aetna Life and Casualty
Company (since April 1992).
Susan E. Schechter Counsel and Corporate Counsel, Aetna Life and Casualty
Secretary Company (since November 1993).
Eugene M. Trovato Vice President and Vice President and Controller,
Treasurer, Corporate (February 1995 - Present), Assistant
Controller Vice President, Planning, Reporting,
and Analysis (October 1992 -
February 1995), Aetna Life Insurance
and Annuity Company.
Diane B. Horn Vice President and Chief Senior Compliance Officer (August
Compliance Officer 1993 - February 1996), Aetna Life
Insurance and Annuity Company and
Aetna Life Insurance Company.
</TABLE>
* The principal business address of each person named is 151 Farmington
Avenue, Hartford, Connecticut 06156.
** Certain officers and directors of the investment adviser currently hold
(or have held during the past two years) other positions with affiliates
of the Registrant which are not deemed to be principal positions.
Item 29. Principal Underwriters
a) In addition to serving as the principal underwriter for the
Registrant, Aetna Life Insurance and Annuity Company (ALIAC) also
acts as the principal underwriter for Aetna Variable Fund; Aetna
Series Fund, Inc.; Variable Life Account B and Variable Annuity
Accounts B, C and G (separate accounts of ALIAC registered as unit
investment trusts), and Variable Annuity Account I (a separate
account of Aetna Insurance Company of America registered as a unit
investment trust). Additionally, ALIAC is the investment adviser for
Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore
Fund, Aetna Investment Advisers Fund, Inc., Series B of Aetna GET
Fund, Aetna Series Fund, Inc. and Aetna Generation
<PAGE>
Portfolios, Inc. ALIAC is also the depositor of Variable Life
Account B and Variable Annuity Accounts B and C.
(b) The following are the directors and principal officers of the
Underwriter:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
<S> <C> <C>
Daniel P. Kearney Director and President Trustee
Timothy A. Holt Director, Senior Vice President and
Chief Financial Officer
Christopher J. Burns Director and Senior Vice President
Laura R. Estes Director and Senior Vice President
Gail P. Johnson Director and Vice President
John Y. Kim Director and Senior Vice President Trustee and Vice President
Shaun P. Mathews Director and Vice President Trustee and President
Glen Salow Director and Vice President
Creed R. Terry Director and Vice President
Zoe Baird Senior Vice President and General
Counsel
Susan E. Schechter Corporate Secretary and Counsel
Eugene M. Trovato Vice President and Treasurer,
Corporate Controller
Diane B. Horn Vice President and Chief Compliance
Officer
</TABLE>
* The principal business address of all directors and officers listed is
151 Farmington Avenue, Hartford, Connecticut 06156.
(c) Not applicable.
<PAGE>
Item 30. Location of Accounts and Records
As required by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder, the Registrant and its investment adviser,
ALIAC, maintain physical possession of each account, book or other
documents, except shareholder records, at its principal offices at
151 Farmington Avenue, Hartford, Connecticut 06156.
Shareholder records are maintained by the transfer agent, Firstar
Trust Company, 615 East Michigan Street, Milwaukee, Wisconsin 53261.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Fund's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
Aetna Income Shares (Registrant) has duly caused this Post-Effective Amendment
No. 44 to the Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Hartford, and State of
Connecticut, on the 1st day of March, 1996.
AETNA INCOME SHARES
(Registrant)
By Shaun P. Mathews *
Shaun P. Mathews
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons on March 1, 1996 in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
Shaun P. Mathews* President and Trustee
- ----------------------------- (Principal Executive Officer)
Shaun P. Mathews
Morton Ehrlich* Trustee
- -----------------------------
Morton Ehrlich
Maria T. Fighetti* Trustee
- -----------------------------
Maria T. Fighetti
David L. Grove* Trustee
- -----------------------------
David L. Grove
Daniel P. Kearney* Trustee
- -----------------------------
Daniel P. Kearney
John Y. Kim* Trustee and Vice President
- -----------------------------
John Y. Kim
Sidney Koch* Trustee
- -----------------------------
Sidney Koch
Corine T. Norgaard* Trustee
- -----------------------------
Corine T. Norgaard
<PAGE>
Richard G. Scheide* Trustee
- -----------------------------
Richard G. Scheide
James C. Hamilton* Vice President and Treasurer
- ----------------------------- (Principal Financial and
James C. Hamilton Accounting Officer)
</TABLE>
By: /s/ Susan E. Bryant
-------------------------
* Susan E. Bryant
Attorney-in-Fact
<PAGE>
AETNA INCOME SHARES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
<S> <C> <C>
99-(b)(1) Declaration of Trust *
99-(b)(2) Amended Bylaws *
99-(b)(4) Copies of Securities Issued and Registered by *
Registrant
99-(b)(5) Investment Advisory Agreement *
99-(b)(6) Distribution Agreement *
99-(b)(8) Custodian Agreements and Depository Contracts *
99-(b)(9) Administrative Services Agreement **
99-(b)(10.1) Opinion of Counsel *
99-(b)(10.2) Consent of Counsel **
99-(b)(11) Consent of Independent Auditors **
99-(b)(18) Powers of Attorney *
27 Financial Data Schedule **
</TABLE>
* Incorporated herein by reference.
** To be filed by subsequent Post-Effective Amendment.
