As filed with the Securities and Exchange File No. 2-47232
Commission on April 11, 1997 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. 47
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 34
AETNA INCOME SHARES
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
(860) 273-7834
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective:
X on May 1, 1997 pursuant to paragraph (b) 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 under the Investment Company
Act of 1940. The Registrant filed its Rule 24f-2 Notice for its fiscal year
ended December 31, 1996 on February 28, 1997.
<PAGE>
Aetna Income Shares
Cross-Reference Sheet
<TABLE>
<CAPTION>
Form N-1A
Item No. Part A Caption in Prospectus
- --------- ------ ---------------------
<S> <C> <C>
1. Cover Page........................................... Cover Page
2. Synopsis............................................. 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 Performance.......... Not Applicable
6. Capital Stock and Other Securities................... General Information;
Tax Matters
7. Purchase of Securities Being Offered................. Management of the Fund;
Purchase and Redemption of Shares;
Net Asset Value
8. Redemption or Repurchase............................. Purchase and Redemption of Shares;
Net Asset Value
9. Legal Proceedings.................................... Not applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Form N-1A Caption in Statement of
Item No. Part B Additional Information
- --------- ------ -----------------------
<S> <C> <C>
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 Holders of Securities.. Control Persons and Principal Shareholders
of the Fund
16. Investment Advisory and Other Services....... Investment Advisory Agreement;
Administrative Services Agreement;
Custodian; Independent Auditors
17. Brokerage Allocation................................. Brokerage Allocation and Trading Polices
18. Capital Stock and Other Securities................... Description of Shares
19. Purchase, Redemption and Pricing of Securities Being Purchase and Redemption of Shares;
Offered.............................................. Net Asset Value
20. Tax Status........................................... Tax Matters
21. Underwriters......................................... Principal Underwriter
22. Calculation of Performance Data...................... Performance Information
23. Financial Statements................................. Financial Statements
</TABLE>
<PAGE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
<PAGE>
AETNA INCOME SHARES
151 Farmington Avenue
Hartford, CT 06156-8972
1-800-238-6263
Prospectus dated: May 1, 1997
Aetna Income Shares (Fund) is a diversified open-end management investment
company whose shares are currently available to (i) variable annuity and
variable life insurance separate accounts to fund variable annuity contracts
(VA Contracts) and variable life insurance policies (VLI Policies) issued by
Aetna Life Insurance and Annuity Company (Aetna) and its affiliates and (ii)
other shareholders of the Fund only through dividend reinvestment.
The Fund 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. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government.
This Prospectus sets forth concisely the information about the Fund that you
should know before investing. Additional information about the Fund is
contained in a Statement of Additional Information (Statement) dated May 1,
1997, which has been filed with the Securities and Exchange Commission
(Commission) and is incorporated by reference. You can obtain a Statement,
without charge, by writing to the Fund at the address listed above or by
calling the Fund at 1-800-238-6263. Additional information filed with the
Commission can be obtained by contacting the Commission at its Web Site
(http://www.sec.gov).
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the securities of the Fund 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
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
Illiquid and Restricted Securities 7
Foreign Securities 7
Depositary Receipts 7
Mortgage-Backed Securities 7
Repurchase Agreements 7
Securities Lending 7
MANAGEMENT OF THE FUND 7
Trustees 7
Investment Adviser 7
Subadviser 8
Portfolio Management 8
Expenses and Fund Administration 8
GENERAL INFORMATION 8
Declaration of Trust 8
Capital Stock 8
Shareholder Inquiries and Distribution Options 8
Shareholder Meetings 8
Voting Rights 8
Mixed Funding 8
TAX MATTERS 9
The Fund 9
Fund Distributions 9
Share Redemptions 9
Tax Withholding 9
PURCHASE AND REDEMPTION OF SHARES 9
NET ASSET VALUE 10
APPENDIX--DESCRIPTION OF CORPORATE BOND RATINGS 11
2 Aetna Income Shares
<PAGE>
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 VA Contract or a VLI Policy. VA Contract holders
and participants in retirement plans holding such Contracts (Participants)
and VLI 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* 0.40%
Other Expenses** 0.08%
----
TOTAL FUND OPERATING EXPENSES 0.48%
*Effective August 1, 1996, the Investment Advisory Fee was increased for the
Fund. The Advisory Fee shown above is not based on the actual figure for the
fiscal year ended December 31, 1996 but reflects the fee payable under the
new Investment Advisory Agreement.
**Effective May 1, 1996, the Company began providing administrative services
to the Fund and assuming the Fund's ordinary recurring direct costs under an
Administrative Services Agreement. The "Other Expenses" shown are not based
on actual figures for the year ended December 31, 1996, but reflect the fee
payable under that Agreement.
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 a 5% annual return and
redemption at the end of each time
period: $5 $15 $27 $60
</TABLE>
Refer to the applicable VA Contract or VLI Policy prospectus for an
explanation of contract/policy charges and expenses.
Aetna Income Shares 3
<PAGE>
FINANCIAL HIGHLIGHTS
The selected data presented below for, and as of the end of, each of the years
in the ten-year period ended December 31, 1996 are derived from the financial
statements of the Fund, which statements have been audited by KPMG Peat Marwick
LLP, independent auditors. The financial statements and the independent
auditors' report thereon, are included in the Fund's Annual Report dated
December 31, 1996 which is incorporated by reference into the Statement.
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------
1996 1995+ 1994+ 1993+ 1992+
----------- ----------- ---------------------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning
of year $ 13.001 $ 11.719 $ 13.052 $ 12.759 $ 13.511
----------- ----------- ---------------------- -----------
Income from Investment
Operations
Net investment income .844 .885 .791 .854 .949
Net realized and unrealized gain
(loss) on investments (.387) 1.237 (1.294) .365 .039
----------- ----------- ---------------------- -----------
Total from investment operations .457 2.122 (.503) 1.219 .988
----------- ----------- ---------------------- -----------
Less Distributions
Dividends from net investment income (.835) (.840) (.830) (.852) (1.070)
Distribution from realized gains on
investments -- -- -- (.074) (.670)
----------- ----------- ---------------------- -----------
Net asset value per share, end of
year $ 12.623 $ 13.001 $ 11.719 $ 13.052 $ 12.759
=========== =========== ====================== ===========
Total return* 3.60% 18.24% (3.80)% 9.68% 7.45%
Net assets, end of year (000's) $643,729 $666,960 $561,704 $641,429 $530,880
Ratio of total expenses to average
net assets .39% .32% .33% .31% .31%
Ratio of net investment income to
average net assets 6.39% 6.97% 6.38% 6.47% 6.96%
Portfolio turnover rate 96.41% 113.72% 74.24% 56.37% 94.26%
</TABLE>
<TABLE>
<CAPTION>
1991+ 1990+ 1989+ 1988+ 1987+
----------- ----------- ---------------------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning
of year $ 12.307 $ 12.338 $ 12.060 $ 12.221 $ 14.108
----------- ----------- ---------------------- -----------
Income from Investment
Operations
Net investment income .919 .826 .982 1.084 1.345
Net realized and unrealized gain
(loss) on investments 1.465 .293 .775 (.151) (.741)
----------- ----------- ---------------------- -----------
Total from investment operations 2.384 1.119 1.757 .933 .604
----------- ----------- ---------------------- -----------
Less Distributions
Dividends from net investment income (1.039) (1.110) (1.199) (1.094) (2.491)
Distribution from realized gains on
investments (.141) (.040) (.280) -- --
----------- ----------- ---------------------- -----------
Net asset value per share, end of
year $ 13.511 $ 12.307 $ 12.338 $ 12.060 $ 12.221
=========== =========== ====================== ===========
Total return* 19.43% 9.11% 14.57% 7.63% 4.52%
Net assets, end of year (000's) $470,760 $359,660 $302,209 $260,912 $211,542
Ratio of total expenses to average
net assets .31% .34% .39% .48% .33%
Ratio of net investment income to
average net assets 6.98% 6.75% 7.46% 8.24% 9.29%
Portfolio turnover rate 97.82% 66.31% 91.64% 66.83%** 53.05%**
</TABLE>
+ Per share data calculated using weighted average number of shares
outstanding throughout the year.
* The performance data reflects deduction of an investment advisory fee at
an annual rate of 0.25% of the Fund's average daily net assets, prior to
August 1, 1996 and 0.40% of average daily net assets thereafter and
deductions for Fund administrative services and other expenses at cost
prior to May 1, 1996, and at an annual rate of 0.08% of average daily net
assets thereafter. Performance data above is for the Fund and not for the
separate accounts investing in the Fund. Therefore, the performance does
not reflect insurance charges for mortality and expense risks, contract
maintenance charges, deferred sales charges or other charges relating to
the separate account using the Fund for VA Contracts and VLI Policies.
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. The Annual Report may be obtained without charge, by
writing to the Fund at the address listed on the cover of this Prospectus or
by calling 1-800- 238-6263.
4 Aetna Income Shares
<PAGE>
INVESTMENT OBJECTIVE
The investment objective of the Fund 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. The Fund's
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 The Fund 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 and subadviser 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, or 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 or subdivision 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, and preferred and common stocks.
The Fund may also lend portfolio securities, purchase call options, write
(sell) covered call options, buy and sell 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.
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 1996:
Rating %
------ -----
AAA 59.5%
AA 7.6%
A 11.0%
BBB 6.1%
BB 3.8%
B 2.2%
Not Rated 9.8%
----
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, and therefore, the Fund will not invest 25% or more 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;
securities invested in, or repurchase agreements for, U.S. Government
securities; and certificates of deposit, banker's acceptances, or securities
of banks and bank holding companies. For purposes of this restriction,
finance companies will be classified as separate industries according to the
end users of their services, such as automobile finance, computer finance and
consumer finance. Also, the Fund will not hold securities constituting more
than 5% 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 latter
restriction applies only to 75% of the Fund's total assets and does not
include securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities. The Fund does not invest in the securities of
companies determined by the Adviser to be primarily involved in the
production or distribution of tobacco products.
Asset-Backed Securities The Fund may purchase securities collateralized by a
specified pool of assets, including automobile 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. It has the authority to do so, but only if, after the
borrowing, the value of the Fund's net assets, including proceeds from the
borrowings, is equal to at least 300% of all outstanding 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 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 market index, portfolio or security. Further information about
CMOs is contained in the Statement. 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. The Fund may write covered call
options and purchase put options, on securities and indices. 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 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.
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 Statement.
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 or below by Standard & Poor's Corporation (S&P) or Ba
or below by Moody's Investors Services, Inc. (Moody's) (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 by S&P or Moody's. 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>
Illiquid and Restricted Securities The Fund may invest up to 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 in
the ordinary course of business without taking a materially reduced price. In
addition, the Fund may invest in securities that are subject to legal or
contractual restrictions on resale, including securities purchased under Rule
144A and Section 4(2) of the Securities Act of 1933. The Board of Trustees of
the Fund (Trustees) has established a policy concerning investments in
restricted and illiquid securities.
Foreign Securities The Fund may invest up to 25% of its total assets in debt
and/or equity foreign securities including depositary 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
stock exchanges where securities may be traded, 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 income payable on securities or on capital gains; 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.
Depositary Receipts The Fund can invest in both sponsored and unsponsored
depositary receipts. Unsponsored depositary receipts, which are typically
traded in the over-the-counter market, may be less liquid than sponsored
depositary receipts and therefore may involve more risk. In addition, there
may be less information available about issuers of unsponsored depositary
receipts. The Fund may acquire American Depositary 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
depositary receipts will be considered foreign securities for purposes of the
Fund's investment limitation concerning investment in foreign 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 a pool 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 subject to the same prepayment risk as
asset-backed securities.
Repurchase Agreements The Fund may enter into repurchase agreements with
domestic banks and broker dealers. 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. 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 securities (or other collateral for the agreement) 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.
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.
The Fund is subject to additional investment restrictions described in the
Statement.
MANAGEMENT OF THE FUND
Trustees The operations of the Fund are managed under the direction of the
Trustees. The Trustees set broad policies for the Fund. Information about the
Trustees is found in the Statement.
Investment Adviser. Aetna serves as the investment adviser for the Fund and
Aeltus Investment Management, Inc. (Aeltus) serves as the subadviser. Aetna
is a Connecticut insurance corporation with its principal offices located at
151 Farmington Avenue, Hartford, Connecticut 06156. Aetna and Aeltus
(collectively, the "Adviser") are both indirect, wholly-owned subsidiaries of
Aetna Retirement Services, Inc., which is in turn an indirect wholly-owned
subsidiary of Aetna Inc. Aetna is registered with the Commission as an
investment adviser. Aetna receives a management fee at an annual rate of
0.40% of the average daily net assets of the Fund, payable monthly.
Aetna Income Shares 7
<PAGE>
Subadviser. The Fund and Aetna have engaged Aeltus as subadviser of the Fund.
Aeltus is a Connecticut corporation with its principal offices located at 242
Trumbull Street, Hartford, Connecticut 06156-1205. Aeltus is registered as an
investment adviser with the Commission.
Under the Subadvisory Agreement, Aeltus is responsible for managing the
assets of the Fund in accordance with the Fund's investment objective and
policies subject to the supervision of Aetna, the Fund and the Trustees.
Aeltus determines what securities and other instruments are purchased and
sold by the Fund and handles certain related accounting and administrative
functions, including determining the Fund's net asset value on a daily basis
and preparing and providing such reports, data and information as Aetna or
the Trustees request from time to time. Aeltus receives a fee at an annual
rate of up to 0.25% of the average daily net assets of the Fund, payable
monthly.
Aetna has overall responsibility for monitoring the investment program
maintained by the Subadviser for compliance with applicable laws and
regulations and the Fund's investment objective and policies.
Portfolio Management Jeanne Wong-Boehm, Managing Director, Aeltus, has been
the portfolio manager for the Fund for four years. Ms. Wong-Boehm joined the
Aetna organization in 1983 as a fixed income portfolio analyst. In 1989 she
was also assigned primary responsibility for the money market operations.
Expenses and Fund Administration Under an Administrative Services Agreement
with the Fund effective since May 1, 1996, Aetna provides all administrative
services necessary for the Fund's operations and is responsible for the
supervision of the Fund's other service providers. Aetna also assumed all
ordinary recurring direct costs of the Fund such as custodian fees, directors
fees, transfer agency costs and accounting expenses. For the services
provided under the Administrative Services Agreement, Aetna receives an
annual fee, payable monthly, at a rate of 0.08% of the average daily net
assets of the Fund.
GENERAL INFORMATION
Declaration of Trust The Fund 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 Statement 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, 1997, there were 49,699,338 shares of the Fund outstanding,
98.949% of which were owned by Aetna and held in its separate accounts to fund
Aetna's obligations under its VA Contracts and VLI Policies. An additional 0.21%
of the Fund's shares were owned by affiliates of Aetna at that date. The balance
of the shares were held directly by shareholders who acquired their interests
before the Fund was prohibited from selling shares both directly to investors
and to fund VA Contracts and VLI Policies. Direct shareholders may not purchase
additional shares except through dividend reinvestments.
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 1-800-238-6263. Shareholders may elect to receive
dividends and capital gains distributions in cash or to reinvest in
additional shares in the Fund. See "Tax Matters--Fund Distributions" below.
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 1940 Act. 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. Persons who
select the Fund for investment through their VA Contract or VLI 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. Participant voting
rights are discussed in the prospectus for the applicable VA Contract or VLI
Policy.
Mixed Funding Because the Fund is sold to fund variable annuity contracts and
variable life insurance policies issued by Aetna, certain conflicts of
interest could arise. If a conflict of interest were to occur, one of the
separate accounts invested
8 Aetna Income Shares
<PAGE>
in the Fund might withdraw its investment in the Fund, which might force the
Fund to sell its portfolio of securities at disadvantageous prices, causing
its per share value to decrease. The Trustees have agreed to monitor events
in order to identify any material irreconcilable conflicts which might arise
and to determine what action, if any, should be taken to address such
conflict.
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 Statement. 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 VA Contracts
or VLI Policies should consult the prospectuses of their respective contracts
or policies for information concerning federal income tax consequences to
them.
The Fund The Fund intends to continue 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 all of its investment
income (net of expenses) and any capital gains (net of capital losses),
distributions are made to the separate accounts for shares of the Fund held
under VA contracts and VLI policies and directly to other shareholders who
hold shares of the Fund directly, 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 Statement.
Fund Distributions Distributions by the Fund to shareholders other than
separate accounts of net long-term capital gains are taxable to those
shareholders as long-term capital gains regardless of the length of time a
shareholder has held the 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 are taxable, if at all, to the separate
accounts and not to the holders of VA Contracts and VLI Policies. Holders of
VA contracts and VLI policies should review the prospectus for their VA
Contract or VLI Policy for information regarding the tax treatment of their
contracts and policies and distributions from the Fund to the separate
accounts.
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
direct shareholder's shares generally 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 one year). Any loss realized upon a taxable
disposition of a Fund's shares may be subject to limitations that are
described more fully in the Statement.
Tax Withholding The Fund is be required to withhold taxes from any
distributions unless the shareholder provides the Fund with a correct social
security or taxpayer identification number or certifies that the shareholder
is a corporation or otherwise exempt from or not subject to 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.
PURCHASE AND REDEMPTION OF SHARES
Aetna is the principal underwriter of the Fund's shares. Except for the
reinvestment of dividends described under "General Information--Capital
Stock," shares may only be purchased by Aetna as the depositor of variable
annuity and variable life insurance separate accounts as directed by the
holders of the VA Contracts or VLI Policies. Refer to the prospectus for the
applicable VA Contract or VLI Policy for information on how to direct
investments in or redemptions from the Fund and any fees that may apply.
Shares of the Fund are purchased and redeemed at their net asset value next
determined after receipt of a purchase or redemption order in acceptable
form. Shareholders redeeming directly from the Fund and not through a VA
Contract or VLI Policy must provide a signature guarantee regardless of the
redemption amount. Orders for the purchase or redemption of shares of the
Fund that are received by the insurance company before the close of regular
trading on the New York Stock Exchange (normally 4 p.m. eastern time) are
effected at the net asset value per share determined that day, as described
below (see Net Asset Value). The insurance company shall be the designee of the
Fund for receipt of purchase and redemption orders. Therefore, receipt of an
order by the insurance company constitutes receipt by the Fund; provided
Aetna Income Shares 9
<PAGE>
that the Fund receives notice of the order by 9:30 a.m. the next day on which
the New York Stock Exchange is open for trading. No sales charge or
redemption charge is made.
If the value of shares held directly by a shareholder is less than $1,000,
the shares may be liquidated upon six months' notice. Shares will be redeemed
at the net asset value determined on the day the account is closed. The Fund
may suspend redemptions or postpone payments when the New York Stock Exchange
is closed or when trading is restricted for any reason (other than weekends
or holidays) or under emergency circumstances as determined by the
Commission.
If such a shareholder holds shares directly having a net asset value of
$5,000 or more, the shareholder 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 the
earlier of 15 minutes after the close of the New York Stock Exchange or 4:15
p.m. eastern time on each day that the New York Stock Exchange is open for
trading. The 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 primarily by independent pricing services,
based on market quotations. Short-term debt instruments maturing in less than
60 days are valued at amortized cost. Securities for which market quotations
are not readily available are valued at their fair value in such manner as
may be determined under the authority of the Trustees.
10 Aetna Income Shares
<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.
Aetna Income Shares 11
<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
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
CityPlace II
Hartford, Connecticut 06103-4103
Aetna Life Insurance and Annuity Company
AIS-3
12 Aetna Income Shares
<PAGE>
Statement of Additional Information dated: May 1, 1997
AETNA INCOME SHARES
151 Farmington Avenue
Hartford, Connecticut 06156
This Statement of Additional Information (Statement) is not a prospectus and
should be read in conjunction with the current prospectus for Aetna Income
Shares dated May 1, 1997.
A free prospectus is available from the local Aetna office, by writing to Aetna
Income Shares at the address listed above or by calling 1-800-238-6263.
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 Shareholders of the Fund ............ 17
Investment Advisory Agreement .................................... 18
Subadvisory Agreement ............................................. 18
Administrative Services Agreement ................................. 19
License Agreement ................................................ 19
Brokerage Allocation and Trading Policies ........................ 19
Description of Shares ............................................. 20
Purchase and Redemption of Shares ................................. 21
Principal Underwriter ............................................. 22
Tax Matters ...................................................... 22
Net Asset Value ................................................... 27
Performance Information .......................................... 27
Custodian ......................................................... 27
Independent Auditors ............................................. 27
Financial Statements ............................................. 28
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Income Shares (Fund) is an open-end diversified management investment
company which sells its shares of beneficial interest to (i) variable annuity
and variable life insurance separate accounts to fund variable annuity contracts
(VA Contracts) or variable life insurance policies (VLI Policies) issued by the
Aetna Life Insurance and Annuity Company (Aetna or the Company) and its
affiliates and (ii) other shareholders of the Fund only through reinvestment of
dividends.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The investment objective of the Fund 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.
The Fund 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 as defined by the Investment Company Act of 1940 (1940 Act). 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, the Fund will not:
(1) issue any senior security, as defined in 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 or related options shall not be
considered to involve the issuance of senior security; and (e) subject to
fundamental restrictions, the Fund may borrow money as authorized by the
1940 Act;
(2) with respect to 75% of the value of the Fund's total assets, 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.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities are excluded from these restrictions;
(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 or 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 (1933 Act).
The Fund has also adopted certain other investment restrictions that 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 by Order of the Securities and Exchange
Commission (Commission);
(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 policies restrict 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 of
purchase 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 the Fund 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
The Fund 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 (Trustees). A repurchase agreement allows the
Fund to determine 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
The Fund 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 securities or obligations
of foreign issuers including marketable securities of, or guaranteed by, foreign
governments (or any instrumentality or subdivision thereof) 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 will
invest in securities or obligations of foreign banks only if such banks have a
minimum of $5 billion in assets and a primary capital ratio of at least 4.25%.
The Fund also invests in foreign securities listed on recognized U.S. securities
exchanges or traded in the U.S. over-the-counter market. Such foreign securities
may be issued by
4 Aetna Income Shares
<PAGE>
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.
Depositary receipts are typically dollar denominated, although their market
price is subject to fluctuations of the foreign currency in which the underlying
securities are denominated. Depositary receipts include: (1) American Depositary
Receipts (ADRs), which are typically designed for U.S. investors and held either
in physical form or in book entry form; (2) European Depositary Receipts (EDRs),
which are similar to ADRs but may be listed and traded on a European exchange
(typically, Luxembourg) as well as in the United States; and (3) Global
Depositary Receipts (GDRs), which are similar to EDRs although they may be held
through foreign clearing agents such as Euroclear and other foreign
depositaries. All depositary 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 Commission 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. The Fund 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.
Although techniques other than sales and purchases of futures contracts could be
used to reduce the Fund's exposure to market fluctuations, the Fund may be able
to hedge its exposure more effectively and
Aetna Income Shares 5
<PAGE>
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 Commodities Futures Trading Commission (CFTC).
"Margin" is the amount of funds that must be deposited by the Fund 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, the Fund will mark to market the current value of its
open futures contracts. The Fund 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 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
6 Aetna Income Shares
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the decline. With regard to transactions involving futures contracts, the Fund
maintains a segregated account holding liquid assets in accordance with
applicable Commission staff positions.
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.
Call and Put Options on Securities
The Fund may purchase call options, write (sell) covered call options, and
purchase and sell put options, including options on securities, indices and
futures, as described in the prospectus and this Statement of Additional
Information; provided, the Fund 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). The Fund 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 indices.
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 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 segregated at the Fund's custodian.
Aetna Income Shares 7
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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.
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. Any profits from writing covered call options are considered short-term
gain for federal income tax purposes and, when distributed by the Fund, are
taxable as ordinary income.
Additional Risk Factors
In addition to any risk factors described above, the following sets forth
certain information regarding the potential risks associated with the Fund's
futures and options transactions.
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
8 Aetna Income Shares
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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 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.
Aetna Income Shares 9
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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 that
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 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, the Fund 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 prepayments-and has an "average life"--the average time to
receipt of a principal payment weighted by the size of the principal payment.
The average life is typically used as a proxy for maturity because the debt is
amortized, rather than being paid off entirely at maturity, as would be the
case in a straight debt instrument.
CMOs and REMICs are typically structured as "pass-through" securities. In these
arrangements, the underlying mortgages are held by the issuer, which then issues
debt collateralized by the underlying mortgage assets. The security holder thus
owns an obligation of the issuer and payment of interest and principal on such
obligations is made from payments generated by the underlying mortgage assets.
The underlying mortgages may be guaranteed as to payment of principal and
interest by an agency or instru-
10 Aetna Income Shares
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mentality 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, home equity loans, 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.
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.
Asset-backed securities may be subject to the type of prepayment risk discussed
above due to the possibility that prepayments on the underlying assets will
alter the cash flow. Faster prepayments will shorten the security's average life
and slower prepayments will lengthen it.
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 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.
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:
Aetna Income Shares 11
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(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), like
other debt instruments, 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 junk bonds 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 in the past
tended 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 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) Legislation. Legislation may have a negative impact on the market for
high-risk, high-yield securities (junk bonds), such as legislation
requiring federally-insured savings and loan associations to divest
themselves of their investments in these securities.
12 Aetna Income Shares
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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 (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 deferred interest securities generally are more volatile than the
market prices of securities with similar maturities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than do non-zero coupon securities having similar maturities and credit
quality.
The risks associated with lower-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.
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
Trustees, 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 may consider, among other things, the (i)
frequency
Aetna Income Shares 13
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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 continue
to operate.
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.
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 1995 and 1996 were 114% and 96%, respectively.
TRUSTEES AND OFFICERS OF THE FUND
The investments and administration of the Fund are under the direction of the
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 an asterisk
(*). All Trustees and officers hold similar positions with other investment
companies in the same Fund Complex managed by the Investment Adviser. 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 Series C), Aetna Generation Portfolios, Inc.,
and Aetna Variable Portfolios, Inc.
14 Aetna Income Shares
<PAGE>
<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 Vice President/Senior Vice President, Aetna Life
151 Farmington Avenue President Insurance and Annuity Company, March 1991 to present
Hartford, Connecticut and Vice President, Aetna Life Insurance Company, 1991
Age 41 to present. Director and President, Aetna Investment
Services, Inc.; and Director and Senior Vice President,
Aetna Insurance Company of America, March 1991 to
present.
------------------------------------------------------------------------------------------------------------
Wayne F. Baltzer Vice President Assistant Vice President, Aetna Life Insurance and
151 Farmington Avenue Annuity Company, May 1991 to present; Vice President,
Hartford, Connecticut Aetna Investment Services, Inc. July 1993 to present.
Age 53
------------------------------------------------------------------------------------------------------------
Martin T. Conroy Vice President Assistant Treasurer, Aetna Life Insurance and
151 Farmington Avenue Annuity Company, October 1991 to present;
Hartford, Connecticut
Age 57
------------------------------------------------------------------------------------------------------------
J. Scott Fox Vice President and Director and Senior Vice President, Aetna Life
151 Farmington Avenue Treasurer Insurance and Annuity Company, March 1997 to
Hartford, Connecticut present; Director, Managing Director, Chief
Age 42 Operating Officer, Chief Financial Officer and
Treasurer, Aeltus Investment Management, Inc.
(Aeltus), April 1994 to present; Managing Director
and Treasurer, Equitable Capital Management Corp.,
March 1987 to September 1993. Director and Chief
Financial Officer, Aeltus Capital, Inc. and Aeltus
Trust Company, Inc.; Director, President and Chief
Executive Officer, Aetna Investment Management,
(Bermuda) Holding, Ltd.
------------------------------------------------------------------------------------------------------------
Susan E. Bryant Secretary Counsel, Aetna Inc. (formerly Aetna Life and
151 Farmington Avenue Casualty Company) March 1993 to present; General
Hartford, Connecticut Counsel and Corporate Secretary, First Investors
Age 49 Corporation, April 1991 to March 1993. Secretary,
Aetna Investment Services, Inc. and Vice President
and Senior Counsel, Aetna Financial Services, Inc.
------------------------------------------------------------------------------------------------------------
Morton Ehrlich Trustee Chairman and Chief Executive Officer, Integrated
1000 Venetian Way Management Corp. (an entrepreneurial company)
Miami, Florida and Universal Research Technologies, 1992 to
Age 62 present; Director and Chairman, Audit Committee,
National Bureau of Economic Research, 1985 to
1992.
------------------------------------------------------------------------------------------------------------
Maria T. Fighetti Trustee Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation
Closter, New Jersey and Alcohol Services, 1973 to present.
Age 53
------------------------------------------------------------------------------------------------------------
David L. Grove Trustee Private Investor; Economic/Financial Consultant,
5 The Knoll December 1985 to present.
Armonk, New York
Age 78
------------------------------------------------------------------------------------------------------------
</TABLE>
Aetna Income Shares 15
<PAGE>
<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>
Timothy A. Holt* Trustee Director, Senior Vice President, and Chief Financial
151 Farmington Avenue Officer, Aetna Life Insurance and Annuity Company, February
Hartford, Connecticut 1996 to present; Vice President, Portfolio
Age 43 Management/Investment Group, Aetna Inc. (formerly Aetna
Life and Casualty Company), June 1991 to February 1996.
Director and Vice President Aetna Retirement Holdings, Inc.
------------------------------------------------------------------------------------------------------------
Daniel P. Kearney* Trustee Director, President, and Chief Executive Officer,
151 Farmington Avenue Aetna Life Insurance and Annuity Company, December 1993
Hartford, Connecticut to present; Executive Vice President, Aetna Inc. (formerly
Age 57 Aetna Life and Casualty Company), December 1993 to
present; Group Executive, Aetna Inc. (formerly Aetna
Life and Casualty Company), 1991 to 1993; Director,
Aetna Investment Services, Inc., November 1994 to
present; Director, Aetna Insurance Company of
America, May 1994 to present.
------------------------------------------------------------------------------------------------------------
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 Dean of the Barney School of Business, University
556 Wormwood Hill Audit Committee of Hartford, (West Hartford, CT), August 1996 to
Mansfield Center, and Contract present; Professor, Accounting and Dean of the
Connecticut Committee School of Management, Binghamton University,
Age 59 (Binghamton, NY), August 1993 to August 1996;
Professor, Accounting, University of Connecticut,
(Storrs, Connecticut), September 1969 to June
1993; Director, The Advest Group (holding
company for brokerage firm) through September
1996.
------------------------------------------------------------------------------------------------------------
Richard G. Scheide Trustee Trust and Private Banking Consultant, David Ross
11 Lily Street Palmer Consultants, July 1991 to present.
Nantucket, Massachusetts
Age 67
------------------------------------------------------------------------------------------------------------
</TABLE>
* Interested persons as defined in the Investment Company Act of 1940 (1940
Act).
During the year ended December 31, 1996, members of the Boards of the Funds
within the Aetna Mutual Fund Complex who are also directors, officers or
employees of Aetna Inc. and its affiliates were not entitled to any compensation
from the Funds. Effective November 1, 1995, members of the Boards who are not
affiliated as employees of Aetna or its subsidiaries are entitled to receive an
annual retainer of $30,000 for service on the Boards of the Funds within the
Aetna Mutual Fund Complex. In addition, each such member will receive a fee of
$5,000 per meeting for each regularly scheduled Board meeting; $5,000 for each
Contract Committee meeting which is held on any day on which a regular Board
meeting is not scheduled; and $3,000 for each committee meeting other than for a
Contract Committee meeting on any day on which a regular Board meeting is not
scheduled. A Committee Chairperson fee of $2,000 each will be paid to the
Chairperson of the Contract and Audit Committees. All of the above fees are to
be allo-
16 Aetna Income Shares
<PAGE>
cated proportionately to each Fund within the Aetna Mutual Fund Complex based on
the net assets of the Fund as of the date compensation is earned.
As of December 31, 1996, the unaffiliated members of the Trustees were
compensated as follows:
Total
Compensation
from Registrant
Aggregate and Fund
Name of Person, Compensation Complex Paid
Position from Registrant to Trustees
-------- --------------- -----------
Corine Norgaard $4,786.00 $72,950.00
Trustee and Chairman,
Audit and Contract Committees
Sidney Koch $4,786.00 $72,950.00
Trustee and Member,
Audit and Contract Committees
Maria T. Fighetti $4,195.00 $63,950.00
Trustee and Member,
Audit and Contract Committees
Morton Ehrlich $4,195.00 $63,950.00
Trustee and Member,
Audit and Contract Committees
Richard G. Scheide $4,523.00 $68,950.00
Trustee and Member,
Audit and Contract Committees
David L. Grove* $4,523.00 $68,950.00
Trustee and Member,
Audit and Contract Committees
* Mr. Grove elected to defer all such compensation under an existing deferred
compensation plan.
The Fund has applied for an Order by the Securities and Exchange Commission
to allow the Trustees who are not affiliated with Aetna Inc. or any of its
subsidiaries to defer all or a portion of their compensation in accordance with
the terms of a new Deferred Compensation Plan (Plan). Under the Plan,
compensation deferred by an unaffiliated Director is periodically adjusted as
though an equivalent amount had been invested and reinvested in shares of one or
more Series of Aetna Series Fund, Inc. designated by the Director. The amount
paid to the unaffiliated Director under the Plan will be based upon the
performance of such investments. Deferral of compensation in accordance with the
Plan will have a negligible effect on the assets, liabilities, and net income
per share, and will not obligate the Fund to retain the services of any Director
or to pay any particular level of compensation to the Director.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF THE FUND
As of March 31, 1997, the Company and its affiliates owned (99.15%) shares
of the Fund which were allocated to variable annuity and variable life insurance
separate accounts to fund obligations under VA Contracts and VLI Policies.
Contract holders in these separate accounts are provided the right to direct the
voting of Fund 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.
Aetna Income Shares 17
<PAGE>
INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an Investment Advisory Agreement (Advisory Agreement)
appointing Aetna as its Investment Adviser. The Advisory Agreement was adopted
by the Board of Trustees in February 1996, and approved by the shareholders in
June 1996. The Advisory Agreement has been effective since August 1, 1996. The
Advisory Agreement will remain in effect if approved at least annually by a
majority of the Trustees, including a majority of the Trustees who are not
"interested persons" of the Fund, at a meeting called for that purpose, and held
in person. The Advisory Agreement may be terminated without penalty at any time
by the Trustees or by a majority vote of the outstanding voting securities of
the Fund, or it may be terminated on sixty days' written notice by Aetna. The
Advisory Agreement terminates automatically in the event of assignment.
This Advisory Agreement replaces a prior agreement with Aetna that was approved
by shareholders in April 1994. Under both advisory agreements and subject to the
direction of the Board of Trustees, Aetna has responsibility for supervising all
aspects of the operations of the Fund including the selection, purchase and sale
of securities, the calculation of net asset values and the preparation of
financial and other reports as requested by the Board. Under both the old and
the new agreements, Aetna is given the right to delegate any or all of its
obligations to a subadviser.
The Advisory Agreement provides that Aetna is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
officers or trustees of the Fund. The Fund is responsible for payment of all of
its other costs; however, under the Administrative Services Agreement described
below, Aetna has agreed to pay all direct expenses for the Fund except for
broker's commissions and other costs incurred in effecting transactions on
behalf of the Fund.
For its services under the prior agreement, Aetna received a monthly fee at an
annual rate of 0.25% of the average daily net assets of the Fund. Under the new
Advisory Agreement, Aetna receives an advisory fee at an annual rate of 0.40% of
the average daily net assets of the Fund, payable monthly. For the years ended
December 31, 1994, 1995 and 1996, the Fund paid Aetna investment advisory fees
of $1,470,846, $1,534,803 and $2,033,785, respectively.
SUBADVISORY AGREEMENT
The Fund and Aetna have entered into a Subadvisory Agreement with Aeltus
Investment Management, Inc. (Aeltus) effective August 1, 1996. The Subadvisory
Agreement will remain in effect if approved at least annually by a majority of
the Trustees, including a majority of the Trustees who are not "interested
persons" of the Fund, at a meeting, called for that purpose, and held in person.
The Subadvisory Agreement may be terminated without penalty at any time by the
Trustees or by a majority of the outstanding voting securities of the Fund or
terminated on sixty days' written notice by the Adviser, the Fund or the
Subadviser. The Subadvisory Agreement terminates automatically in the event of
its assignment.
Under the Subadvisory Agreement, Aeltus is responsible for managing the assets
of the Fund in accordance with the Fund's investment objective and policies
subject to the supervision of Aetna and the Trustees and for preparing and
providing accounting and financial information as requested by the Adviser and
the Trustees. The Subadviser pays the salaries, employment benefits and other
related costs of its personnel. For its services, Aetna has agreed to pay the
Subadviser a fee at an annual rate of up to 0.25% of the average daily net
assets of the Fund, payable monthly. This fee is not charged to the Fund but is
paid by Aetna out of its investment advisory fees.
Aetna, as the Investment Adviser, retains overall responsibility for monitoring
the investment program maintained by Aeltus for compliance with applicable laws
and regulations and the Fund's investment objective and policies.
18 Aetna Income Shares
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
The Fund entered into an Administrative Services Agreement with Aetna effective
May 1, 1996 under which Aetna provides all administrative services for the Fund
and pays all ordinary recurring costs of the Fund (except brokerage costs and
other transaction costs). These are costs that the Fund would otherwise be
required to pay under the terms of the Investment Advisory Agreement. As a
result, the Fund's costs and fees are limited to the advisory fee, the
administrative services charge and brokerage and transaction costs. For its
services and as reimbursement for the costs it incurs under the Administrative
Services Agreement, Aetna receives an annual fee, payable monthly, at a rate of
0.08% of the average daily net assets of the Fund.
The Administrative Services Agreement will remain in effect if approved annually
by a majority of the Trustees. It may be terminated by either party on sixty
days' written notice.
Prior to May 1, 1996, Aetna provided administrative services under an agreement
that allowed for the reimbursement of a proportionate share of Aetna's overhead
in administering the Fund and the Fund reimbursed Aetna directly for all other
costs. The total of the direct costs and administrative costs reimbursed to
Aetna for the years ended December 31, 1994, 1995 and 1996 were $446,926,
$414,281 and $430,403, respectively.
LICENSE AGREEMENT
The Fund uses the service mark of Aetna Income Share and the name "Aetna" with
the permission of Aetna Inc. granted under a License Agreement. The continued
use is subject to the right of Aetna Inc. to withdraw this permission in the
event Aetna or another subsidiary or affiliated corporation of Aetna Inc. should
not be the investment adviser of the Fund.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Fund's Board of Trustees, Aetna and Aeltus have
responsibility for making the Fund's 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 Aetna and Aeltus to obtain the best
quality of execution available, giving attention to net price (including
commissions where applicable), execution capability (including the adequacy of a
brokerage firm's capital position), research and other services related to
execution; the relative priority given to these factors will depend on all of
the circumstances regarding a specific trade.
In implementing their trading policy, Aetna and Aeltus may place the Fund's
portfolio transactions with such brokers or dealers and for execution in such
markets as, in the opinion of Aetna and Aeltus, will lead to best overall
quality of execution.
Aetna and Aeltus currently receive 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 the Fund
and other investment companies, services related to the execution of trades in
the Fund's securities and advice as to the valuation of securities. Aetna and
Aeltus consider the quantity and quality of such brokerage and research services
provided by a brokerage firm along with the nature and difficulty of the
specific transaction in negotiating commissions for trades in the Fund's
securities and may pay higher commission rates than the lowest available when it
is reasonable to do so in light of the value of the brokerage and research
services received generally or in connection with a particular transaction.
Aetna and Aeltus' policy in selecting a broker to effect a particular
transaction is to seek to obtain "best execution," which means prompt and
efficient execution of the transaction at the best obtainable price with payment
of commissions which are reasonable in relation to the value of the services
provided
Aetna Income Shares 19
<PAGE>
by the broker, taking into consideration research and other services provided.
When either Aetna or Aeltus believes that more than one broker can provide best
execution, preference may be given to brokers who provide additional services to
Aetna or Aeltus.
Consistent with securities laws and regulations, Aetna and Aeltus may obtain
such brokerage and research services regardless of whether they are paid for (1)
by means of commissions; or(2) by means of separate, non-commission payments.
Aetna's and Aeltus' judgment as to whether and how they will obtain the specific
brokerage and research services will be based upon their analysis of the quality
of such services and the cost (depending upon the various methods of payment
which may be offered by brokerage firms) and will reflect Aetna's and Aeltus'
opinion as to which services and which means of payment are in the long-term
best interests of the Fund. Research services furnished by brokers through whom
the Fund effects securities transactions may be used by Aetna and Aeltus in
servicing all of their accounts; not all such services will be used to benefit
the Fund. The Fund has no present intention to effect any brokerage transactions
in Fund securities with Aetna or any affiliate of the Fund or Aetna except in
accordance with applicable Commission rules. All transactions will comply with
Rule 17e-1 under the 1940 Act.
Certain officers of Aetna and Aeltus also manage the securities portfolios of
Aetna's own accounts. Further, Aetna and Aeltus also act as investment adviser
to other investment companies registered under the 1940 Act and other client
accounts. Aetna and Aeltus have adopted policies designed to prevent
disadvantaging the Fund in placing orders for the purchase and sale of
securities for the Fund.
To the extent Aetna or Aeltus desires to buy or sell the same security at or
about the same time for more than one client, the purchases or sales will
normally be aggregated (or "bunched") and allocated as nearly as practicable on
a pro rata basis in proportion to the amounts to be purchased or sold by each,
taking into consideration the respective investment objectives of the clients,
the relative size of portfolio holdings of the same or comparable securities,
availability of cash for investment, and the size of their respective investment
commitments. Prices are averaged for those transactions. In some cases, this
procedure may adversely affect the size of the position obtained for or disposed
of by the Fund or the price paid or received by the Fund.
The Board of Trustees has adopted a policy allowing trades to be made between
registered investment companies provided they meet the terms of Rule 17a-7 under
the 1940 Act. Pursuant to this policy, the Fund may buy a security from or sell
another security to another registered investment company advised by Aetna.
The Trustees have adopted a Code of Ethics governing personal trading by persons
who manage or who have access to trading activity by a Fund. The Code of Ethics
allows trades to be made in securities that may be held by a Fund; however, it
prohibits a person from taking advantage of Fund trades or from acting on inside
information.
For 1994, 1995 and 1996, the Fund paid brokerage commissions of $56,222, $9,900
and $3,622, respectively.
For the fiscal year ended December 31, 1996, there were no portfolio
transactions directed to certain brokers because of research or other services.
No brokerage business was placed with any brokers affiliated with Aetna during
the last three fiscal years.
DESCRIPTION OF SHARES
Aetna Income Shares was originally established as a Maryland corporation in 1973
and was converted to a Massachusetts business trust on May 1, 1984. It currently
oeprates under 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 the Fund, 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.
20 Aetna Income Shares
<PAGE>
Shareholder and Trustee Liability
The Fund 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.
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. Participants who select the Fund for investment through their VA
Contract or VLI Policy are not the shareholders of the Fund. The insurance
companies who issue the separate accounts generally pass through voting to
Participants as described in the prospectus for the applicable VA Contract or
VLI Policy. A meeting of the shareholders 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.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are purchased 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,
Aetna Income Shares 21
<PAGE>
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 Commission or such Exchange is closed for other
than weekends and holidays; (b) an emergency exists, as determined by the
Commission, 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 Commission
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 Fund shares. The open account system
makes unnecessary the issuance and delivery of stock certificates, thereby
relieving shareholders of the responsibility of safekeeping. Through 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 the Fund pursuant to a contract
(Underwriting Agreement) between it and the Fund. The Underwriting Agreement
will remain in effect through December 1997 and may be continued annually
thereafter 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. This Underwriting Agreement
may be terminated at any time, by either party, without the payment of any
penalty, on sixty (60) days' written notice to the other party.
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
VA Contracts or VLI Policies must consult the prospectuses of their respective
contracts or policies for information concerning the federal income tax
consequences of owning such VA Contracts or VLI 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 (Code). As a
regulated investment company, the Fund generally 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 (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)
22 Aetna Income Shares
<PAGE>
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 (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 (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 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 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
Aetna Income Shares 23
<PAGE>
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 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, provided that the contract is actually held by the Fund
uninterrupted for a total of at least three months.
Because only a few regulations regarding the treatment of swap agreements and
other financial derivatives have been issued, the tax consequences of
transactions in these types of instruments are not always entirely clear. The
Fund intends to account for derivatives transactions in a manner deemed by it to
be appropriate, but the Internal Revenue Service might not necessarily accept
such treatment. If it did not, the status of a Fund as a regulated investment
company and/or its compliance with the diversification requirement under Code
section 817(h) might be affected. The Fund intends to monitor developments in
this area. Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
it will be able to engage in swap agreements.
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 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
24 Aetna Income Shares
<PAGE>
of each calendar quarter (or within 30 days thereafter) no more than 55% of a
fund's total assets may be represented by any one investment, no more than 70%
by any two investments, no more than 80% by any three investments and no more
than 90% by any four investments. For this purpose, all securities of the same
issuer are considered a single investment, and while each U.S. Government agency
and instrumentality is considered a separate issuer, a particular foreign
government and its agencies, instrumentalities and political subdivisions may be
considered the same issuer. As a safe harbor, a separate account will be treated
as being adequately diversified if the diversification requirements under
Subchapter M are satisfied and no more than 55% of the value of the account's
total assets are cash and cash items, U.S. government securities and securities
of other regulated investment companies.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be entitled
to "look-through" the regulated investment company to its pro rata portion of
the regulated investment company's assets, provided the regulated investment
company satisfies certain conditions relating to the ownership of the shares.
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 (taxable year election)). The balance of such
income must be distributed during the next calendar year. For the foregoing
purposes, a regulated investment company is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year.
For purposes of the excise tax, a regulated investment company shall: (1) reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year; and (2) exclude foreign currency
gains and losses from Section 988 transactions incurred after October 31 of any
year (or after the end of its taxable year if it has made a taxable year
election) in determining the amount of ordinary taxable income for the current
calendar year (and, instead, include such gains and losses in determining
ordinary taxable income for the succeeding calendar year).
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 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 Aetna or its affiliates, whether
characterized as ordinary income or capital gain, are not taxable to VA Contract
or VLI Policy 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
Aetna Income Shares 25
<PAGE>
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 Aetna 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 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, or deemed under Code rules to be 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. Although gain or loss realized on shares
redeemed through the direction of VA Contract or VLI Policy holders is taxable
to Aetna or its affiliates, such VA Contract or VLI Policy 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.
26 Aetna Income Shares
<PAGE>
NET ASSET VALUE
Securities of the Fund are generally valued by independent pricing services.
Equity securities of the Fund which are traded on a registered securities
exchange are based on the last sale price or, if there has been no sale that
day, at the mean of the last bid and asked price on the exchange where the
security is principally traded. Securities traded over the counter are valued at
the mean of the last bid and asked price if current market quotations are not
readily available. Short-term debt securities 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 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.
PERFORMANCE INFORMATION
Total return of a Fund for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $10,000
investment in the Fund made at the beginning of each period, then calculating
the average annual compounded rate of return which would produce the same
investment return on the $10,000 investment over the same period. Total return
for a period of one year or less is equal to the actual investment return on a
$10,000 investment in the Fund during that period. Total return calculations
assume that all Fund distributions are reinvested at net asset value on their
respective reinvestment dates.
The performance of the Fund may, from time to time, be compared to that of other
mutual funds tracked by mutual fund rating services, to broad groups of
comparable mutual funds, or to unmanaged indices which may assume investment of
dividends but generally do not reflect deductions for administrative and
management costs.
The performance of the Fund is commonly measured as total return. An average
annual compounded rate of return ("T") may be computed by using the redeemable
value at the end of a specified period ("ERV") of a hypothetical initial
investment of $10,000 ("P") over a period of time ("n") according to the
formula:
P(1 + T)(n) = ERV
The total return(s) of the Fund calculated based on the formula above for the
one, five and ten year periods ended December 31, 1996 are 3.60%, 6.77% and
8.83%, respectively.
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
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103 serves as
independent auditors to the Fund. KPMG Peat Marwick LLP, provides audit
services, assistance and consultation in connection with Commission filings.
Aetna Income Shares 27
<PAGE>
FINANCIAL STATEMENTS
Financial Statements for Aetna Income Shares are incorporated herein by
reference to the Annual Report dated December 31, 1996. The Annual Report is
available upon request and without charge by calling 1-800-238-6263 or by
writing to Aetna Income Shares at 151 Farmington Avenue, Hartford, CT 06156.
28 Aetna Income Shares
<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 by incorporation by reference to the
Fund's Annual Report dated December 31, 1996, as filed
electronically with the Securities and Exchange Commission
on March 7, 1997 (File No. 811-2361): Portfolio of
Investments
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the year ended December 31, 1996
Statements of Changes in Net Assets for the years ended
December 31, 1996 and 1995
Notes to Financial Statements
Independent Auditors' Report
(b) Exhibits:
(1) Charter (Declaration of Trust)(1)
(2) Amended and Restated Bylaws (adopted by Board of Trustees
September 14, 1994)(1)
(3) Not Applicable
(4) Instruments Defining Rights of Holders(2)
(5)(a) Investment Advisory Agreement between Aetna Life
Insurance and Annuity Company and Aetna Income Shares
(August 1, 1996)
(5)(b) Subadvisory Agreement between Aetna Life Insurance and
Annuity Company, Aetna Income Shares and Aeltus
Investment Management, Inc. (August 1, 1996)
(6) Underwriting Agreement between Aetna Life Insurance and
Annuity Company and Aetna Income Shares (April 30, 1996)
(7) Not Applicable
(8) Custodian Agreements and Depository Contracts(1)
(9)(a) Administrative Services Agreement between Aetna Life
Insurance and Annuity Company and Aetna Income Shares
(May 1, 1996)(1)
(9)(b) License Agreement (March 2, 1973)
(10)(a) Opinion of Counsel(3)
(10)(b) Consent of Counsel
(11) Consent of Independent Auditors
(12) Not Applicable
<PAGE>
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Schedule for Computation of Performance Data
(17) See Item 27 below
(18) Not Applicable
(19) Powers of Attorney(4)
(27) Financial Data Schedule
1. Incorporated herein by reference to Post-Effective Amendment No. 44 to
Registration Statement on Form N-1A (File No. 2-47232), as filed
electronically with the Securities and Exchange Commission on April 25,
1996.
2. Incorporated herein by reference to Post-Effective Amendment No. 46 to
Registration Statement on Form N-1A (File No. 2-47232), as filed
electronically with the Securities and Exchange Commission on June 7, 1996.
3. Incorporated herein by reference to Registrant's Rule 24f-2 Notice for the
fiscal year ended December 31, 1996, as filed with the Securities and
Exchange Commission on February 28, 1997.
4. Incorporated herein by reference to Post-Effective Amendment No. 52 to
Registration Statement on Form N-1A (File No. 2-51739), as filed
electronically with the Securities and Exchange Commission on April 11,
1997.
<PAGE>
Item 25. Persons Controlled by or Under Common Control
Registrant is a Massachusetts business trust for which separate
financial statements are filed. As of February 28, 1997, Aetna Life
Insurance and Annuity Company owned 98.96% of Registrant's outstanding
voting securities.
Aetna Life Insurance and Annuity Company is a wholly-owned subsidiary
of Aetna Retirement Holdings, Inc., which is in turn a wholly-owned
subsidiary of Aetna Retirement Services, Inc. and an indirect
wholly-owned subsidiary of Aetna Inc.
A list 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. 2 to the Registration Statement on
Form N-4 (File No. 33-61897), as filed electronically with the
Securities and Exchange Commission on April 11, 1997.
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders
-------------- ------------------------
Shares of Beneficial Interest 369 as of February 28, 1997
$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 Registrant's
Post-Effective Amendment No. 44 to Registration Statement on Form
N-1A (File No. 2-47232), as filed electronically on April 25, 1996,
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 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, 1997.
Item 28. Business and Other Connections of Investment Adviser
The Investment Adviser, Aetna Life Insurance and Annuity Company
(Aetna), is an insurance company that issues variable and fixed
annuities, and variable and universal life insurance policies and
acts as principal underwriter and depositor for separate accounts
holding assets for variable contracts and policies. It also acts as
the principal underwriter and investment adviser for the Registrant
and Aetna Series Fund, Inc., Aetna Variable Fund, Aetna Variable
Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund,
Aetna Generation Portfolios, Inc., and Aetna Variable
<PAGE>
Portfolios, Inc. (all management investment companies registered under
the Investment Company Act of 1940 (1940 Act)). Additionally, Aetna
acts as the principal underwriter and depositor for Variable Annuity
Account B of Aetna, Variable Annuity Account C of Aetna, Variable
Annuity Account G of Aetna, and Variable Life Account B of Aetna
(separate accounts of Aetna registered as unit investment trusts under
the 1940 Act). Aetna is also the principal underwriter for Variable
Annuity Account I of Aetna Insurance Company of America (AICA) (a
separate account of AICA registered as a unit investment trust under
the 1940 Act).
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, 1994/Addresses*/**
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Daniel P. Kearney Director, President and Director and President (since March 1996) --
Executive Officer Aetna Retirement Holdings, Inc.; President
(since December 1995) -- Aetna Retirement
Services, Inc.; President (since December
1993) -- Aetna Life Insurance and Annuity
Company; Executive Vice President (since
December 1993) -- Aetna Inc. (formerly
Aetna Life and Casualty Company); Director
(since 1992) -- MBIA, Inc.
Christopher J. Burns Director and Senior Vice Director, Aetna Financial Services, Inc.
President (since January 1996), and Aetna Investment
Services, Inc. (since July 1992) and
President, Chief Operations Officer (since
November 1996) -- Aetna Investment Services,
Inc.; Director (since March 1996) -- Aetna
Retirement Holdings, Inc.
Laura R. Estes Director and Senior Vice Director (since December 1996) -- Aetna
President Insurance Agency Holding Company, Inc.);
Director (since March 1996) -- Aetna
Retirement Holdings, Inc.; Senior Vice
President (since March 1991) -- Aetna Life
Insurance and Annuity Company.
<PAGE>
- ----------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
- ----------------------------------------------------------------------------------------------------------
J. Scott Fox Director and Senior Vice Director and Senior Vice President (since
President March 1997) -- Aetna Retirement Holdings,
Inc.; Senior Vice President (since March
1997) -- Aetna Life Insurance and Annuity
Company; Managing Director, Chief Operating
Officer, Chief Financial Officer, Treasurer
(April 1994 - March 1997) -- Aeltus
Investment Management, Inc.
Timothy A. Holt Director, Senior Vice President Senior Vice President and Chief Financial
and Chief Financial Officer Officer (since February 1996) -- Aetna Life
Insurance and Annuity Company; Vice President
(June 1991 - February 1996) -- Portfolio
Management/Investment Group, Aetna Inc.
(formerly known as Aetna Life and Casualty
Company); Director (since March 1996) --
Aetna Retirement Holdings, Inc.; Vice
President (since September 1996) -- Aetna
Retirement Holdings, Inc.
Gail P. Johnson Director and Vice President Vice President (since December 1992) --
Aetna Life Insurance and Annuity Company.
John Y. Kim Director and Senior Vice President (since December 1995) -- Aeltus
President Investment Management, Inc.; Chief
Investment Officer (since May 1994) -- Aetna
Life Insurance and Annuity Company.
<PAGE>
- ----------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
- ----------------------------------------------------------------------------------------------------------
Shaun P. Mathews Director and Vice President Director (since December 1996) -- Aetna
Insurance Agency Holding Company, Inc.; Vice
President (since February 1996), Senior Vice
President (March 1991 - Present) -- Aetna
Life Insurance and Annuity Company;
Director, Aetna Investment Services, Inc.
(since July 1993), and Aetna Insurance
Company of America (since February 1993).
Glen Salow Director and Vice President Vice President (since 1992) -- Aetna Life
Insurance and Annuity Company.
Creed R. Terry Director and Vice President Vice President (since February 1996), Market
Strategist (August 1995 - February 1996) --
Aetna Life Insurance and Annuity Company;
President, (1991 - 1995) Chemical Technology
Corporation (a subsidiary of Chemical Bank).
Kirk P. Wickman Vice President, General Vice President, General Counsel and
Counsel and Secretary Corporate Secretary (since March 1997) --
Aetna Retirement Holdings, Inc.; Vice
President, General Counsel and Secretary
(since November 1996) -- Aetna Life
Insurance and Annuity Company; Vice President
and Counsel (June 1992 - November 1996) --
Aetna Life Insurance Company.
<PAGE>
- ----------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
- ----------------------------------------------------------------------------------------------------------
Deborah Koltenuk Vice President and Treasurer, Vice President, Investment Planning and
Corporate Controller Financial Reporting (April 1996 to July
1996) -- Aetna Life Insurance Company;
Vice President, Investment Planning and
Financial Reporting (October 1994 to
April 1996) Aetna Life Insurance Company,
the Aetna Casualty and Surety Company and
The Standard Fire and Insurance Company;
Vice President and Treasurer, Corporate
Controller (since March 1996) -- Aetna
Retirement Holdings, Inc.
Frederick D. Kelsven Vice President and Chief Director of Compliance (January 1985 to
Compliance Officer September 1996) -- Nationwide 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 that are not deemed to be principal
positions.
For information regarding Aeltus Investment Management, Inc. (Aeltus), the
subadviser for the Fund, reference is hereby made to "Management of The Fund" in
the Prospectus. For information as to the business, profession, vocation or
employment of a substantial nature of each of the officers and directors of
Aeltus, reference is hereby made to the current Form ADV (File No. 801-9046) of
Aeltus filed under the Investment Advisers Act of 1940, incorporated herein by
reference.
Item 29. Principal Underwriters
(a) In addition to serving as the principal underwriter and investment
adviser for the Registrant, Aetna Life Insurance and Annuity
Company (Aetna) also acts as the principal underwriter and
investment adviser for Aetna Variable Fund, Aetna Series Fund,
Inc., Aetna Generation Portfolios, Inc., Aetna Variable Encore
Fund, Aetna Investment Advisers Fund, Inc., Aetna Variable
Portfolios, Inc., and Aetna GET Fund (all management investment
companies registered under the Investment Company Act of 1940
(1940 Act)). Additionally, Aetna acts as the principal
underwriter and depositor for Variable Annuity Account B of Aetna,
<PAGE>
Variable Annuity Account C of Aetna, Variable Annuity Account G
of Aetna and Variable Life Account B of Aetna (separate accounts
of Aetna registered as unit investment trusts under the 1940 Act).
Aetna is also the principal underwriter for Variable Annuity
Account I of Aetna Insurance Company of America (AICA) (a
separate account of AICA registered as a unit investment trust
under the 1940 Act).
(b) The following are the directors and principal officers of the
Underwriter:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices 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 Trustee
Financial Officer
Christopher J. Burns Director and Senior Vice President
Laura R. Estes Director and Senior Vice President
J. Scott Fox Director and Senior Vice President Vice President and Treasurer
Gail P. Johnson Director and Vice President
John Y. Kim Director and Senior 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
Kirk P. Wickman Vice President, General Counsel and Secretary
Deborah Koltenuk Vice President and Treasurer, Corporate
Controller
Frederick D. Kelsven Vice President and Chief Compliance Officer
</TABLE>
* The principal business address of all directors and officers listed is
151 Farmington Avenue, Hartford, Connecticut 06156.
<PAGE>
(c) Not applicable.
Item 30. Location of Accounts and Records
As required by Section 31(a) of the 1940 Act and the rules thereunder,
the Registrant and its investment adviser, Aetna, maintain physical
possession of each account, book and other documents at their principal
place of business located at:
151 Farmington Avenue
Hartford, Connecticut 06156
Shareholder records of direct shareholders 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 that if requested by the holders of at least
10% of the Registrant's outstanding shares, the Registrant will hold a
shareholder meeting for the purpose of voting on the removal of one or
more Trustees and will assist with communication concerning that
shareholder meeting as if Section 16(c) of the 1940 Act applied.
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of its latest annual report to
shareholders, upon request and without charge.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (1933 Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person
of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
Aetna Income Shares (Registrant) certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Post-Effective Amendment
No. 47 to Registration Statement on Form N-1A (File No. 2-47232) and has duly
caused this Post-Effective Amendment No. 47 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 11th day of April, 1997.
AETNA INCOME SHARES
Registrant
By Shaun P. Mathews *
-------------------
Shaun P. Mathews
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons on April 11, 1997 in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Shaun P. Mathews* President and Trustee )
- -------------------------------- (Principal Executive Officer) )
Shaun P. Mathews )
)
Morton Ehrlich* Trustee )
- -------------------------------- )
Morton Ehrlich )
) April
Maria T. Fighetti* Trustee ) 11, 1997
- -------------------------------- )
Maria T. Fighetti )
)
David L. Grove* Trustee )
- -------------------------------- )
David L. Grove )
)
Timothy A. Holt* Trustee )
- -------------------------------- )
Timothy A. Holt )
)
Daniel P. Kearney* Trustee )
- -------------------------------- )
Daniel P. Kearney )
<PAGE>
Sidney Koch* Trustee )
- -------------------------------- )
Sidney Koch )
)
Corine T. Norgaard* Trustee )
- -------------------------------- )
Corine T. Norgaard )
)
Richard G. Scheide* Trustee )
- -------------------------------- )
Richard G. Scheide )
)
J. Scott Fox* Vice President and Treasurer )
- -------------------------------- (Principal Financial and
J. Scott Fox 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 and Restated Bylaws *
99-(b)(4) Instruments Defining Rights of Holders *
99-(b)(5)(a) Investment Advisory Agreement between Aetna Life Insurance and
Annuity Company and Aetna Income Shares ---------
99-(b)(5)(b) Subadvisory Agreement between Aetna Life Insurance and Annuity
Company, Aetna Income Shares and Aeltus Investment Management, Inc. ---------
99-(b)(6) Underwriting Agreement between Aetna Life Insurance and Annuity
Company and Aetna Income Shares ---------
99-(b)(8) Custodian Agreements and Depository Contracts *
99-(b)(9)(a) Administrative Services Agreement between Aetna Life Insurance and *
Annuity Company and Aetna Income Shares
99-(b)(9)(b) License Agreement ---------
99-(b)(10)(a) Opinion of Counsel *
99-(b)(10)(b) Consent of Counsel ---------
99-(b)(11) Consent of Independent Auditors ---------
99-(b)(16) Schedule for Computation of Performance Data ---------
99-(b)(19) Powers of Attorney *
27 Financial Data Schedule ---------
</TABLE>
* Incorporated by reference
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between AETNA LIFE INSURANCE AND ANNUITY COMPANY,
a Connecticut corporation (the "Adviser") and AETNA INCOME SHARES, a
Massachusetts business trust (the "Fund"), as of the date set forth below.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser is registered with the Commission as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and
is in the business of acting as an investment adviser; and
WHEREAS, the Fund and the Adviser desire to enter into an agreement to provide
for investment advisory and management services for the Fund on the terms and
conditions hereinafter set forth;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement and the policies and
control of the Fund's Board of Trustees (the "Board"), the Fund hereby appoints
the Adviser to serve as the investment adviser to the Fund, to provide the
investment advisory services set forth below in Section II. The Adviser agrees
that, except as required to carry out its duties under this Agreement or
otherwise expressly authorized, it is acting as an independent contractor and
not as an agent of the Fund and has no authority to act for or represent the
Fund in any way.
II. DUTIES OF THE ADVISER
In carrying out the terms of this Agreement, the Adviser shall do the following:
1. supervise all aspects of the operations of the Fund;
2. select the securities to be purchased, sold or exchanged by the
Fund or otherwise represented in the Fund's investment portfolio,
place trades for all such securities and regularly report thereon
to the Board;
3. formulate and implement continuing programs for the purchase and
sale of securities and regularly report thereon to the Board;
<PAGE>
4. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally, the
Fund, securities held by or under consideration for the Fund, or
the issuers of those securities;
5. provide economic research and securities analyses as the Adviser
considers necessary or advisable in connection with the Adviser's
performance of its duties hereunder;
6. obtain the services of, contract with, and provide instructions to
custodians and/or subcustodians of the Fund's securities, transfer
agents, dividend paying agents, pricing services and other service
providers as are necessary to carry out the terms of this Agreement;
7. prepare financial and performance reports, calculate and report
daily net asset values, and prepare any other financial data or
reports, as the Adviser from time to time, deems necessary or as
are requested by the Board; and
8. take any other actions which appear to the Adviser and the Board
necessary to carry into effect the purposes of this Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Adviser
Adviser hereby represents and warrants to the Fund as follows:
1. Due Incorporation and Organization. The Adviser is duly
organized and is in good standing under the laws of the
State of Connecticut and is fully authorized to enter
into this Agreement and carry out its duties and
obligations hereunder.
2. Registration. The Adviser is registered as an investment
adviser with the Commission under the Advisers Act, and is
registered or licensed as an investment adviser under the
laws of all jurisdictions in which its activities require
it to be so registered or licensed. The Adviser shall
maintain such registration or license in effect at all
times during the term of this Agreement.
3. Best Efforts. The Adviser at all times shall provide its
best judgment and effort to the Fund in carrying out its
obligations hereunder.
-2-
<PAGE>
B. Representations and Warranties of the Fund
The Fund hereby represents and warrants to the Adviser as follows:
1. Due Incorporation and Organization. The Fund has been duly
formed as a business trust under the laws of the
Commonwealth of Massachusetts and it is authorized to
enter into this Agreement and carry out its obligations
hereunder.
2. Registration. The Fund is registered as an investment
company with the Commission under the 1940 Act and shares
of the Fund are registered for offer and sale to the
public under the Securities Act of 1933, as amended
(the "1933 Act") and all applicable state securities laws.
Such registrations will be kept in effect during the term
of this Agreement.
IV. DELEGATION OF RESPONSIBILITIES
A. Appointment of Subadviser
Subject to the approval of the Board and the shareholders of the Fund,
the Adviser may enter into a Subadvisory Agreement to engage a
subadviser (the "Subadviser") to the Adviser with respect to the Fund.
B. Duties of Subadviser
Under a Subadvisory Agreement, the Subadviser may be delegated some or
all of the following duties of the Adviser:
1. select the securities to be purchased, sold or exchanged by
the Fund or otherwise represented in the Fund's investment
portfolio, place trades for all such securities and
regularly report thereon to the Board;
2. formulate and implement continuing programs for the
purchase and sale of the securities of such issuers and
regularly report thereon to the Board;
3. obtain and evaluate pertinent information about
significant developments and economic, statistical and
financial data, domestic, foreign or otherwise, whether
affecting the economy generally, the Fund, securities held
by or under consideration for the Fund, or the issuers of
those securities;
4. provide economic research and securities analyses as the
Adviser considers necessary or advisable in connection
with the Adviser's performance of its duties hereunder;
-3-
<PAGE>
5. give instructions to the custodian and/or sub-custodian of
the Fund appointed by the Board, as to deliveries of
securities, transfers of currencies and payments of cash
for the Fund as required to carry out the investment
activities of the Fund, in relation to the matters
contemplated by this Agreement; and
6. provide such financial support, administrative services
and other duties as the Adviser deems necessary and
appropriate.
C. Duties of the Adviser
In the event the Adviser delegates certain responsibilities hereunder
to a Subadviser, the Adviser shall, among other things:
1. monitor the investment program maintained by the
Subadviser for the Fund and the Subadviser's compliance
program to ensure that the Fund's assets are invested in
compliance with the Subadvisory Agreement and the Fund's
investment objectives and policies as adopted by the Board
and described in the most current effective amendment of
the registration statement for the Fund, as filed with the
Commission under the 1933 Act and the 1940 Act
("Registration Statement");
2. review all data and financial reports prepared by the
Subadviser to assure that they are in compliance with
applicable requirements and meet the provisions of
applicable laws and regulations;
3. establish and maintain regular communications with the
Subadviser to share information it obtains with the
Subadviser concerning the effect of developments and data
on the investment program maintained by the Subadviser; and
4. oversee all matters relating to the offer and sale of the
Fund's shares, the Fund's corporate governance, reports to
the Board, contracts with all third parties on behalf of
the Fund for services to the Fund, reports to regulatory
authorities and compliance with all applicable rules and
regulations affecting the Fund's operations.
V. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Adviser, at its own expense, shall place all orders for the
purchase and sale of portfolio securities for the Fund with brokers or
dealers selected by the Adviser, which may include
-4-
<PAGE>
brokers or dealers affiliated with the Adviser. The Adviser shall use
its best efforts to seek to execute portfolio transactions at prices
that are advantageous to the Fund and at commission rates that are
reasonable in relation to the benefits received.
B. Selection of Broker-Dealers
In selecting broker-dealers qualified to execute a particular
transaction, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Fund and/or the
other accounts over which the Adviser or its affiliates exercise
investment discretion. The Adviser may also select brokers or dealers
to effect transactions for the Fund who provide payment for expenses of
the Fund. The Adviser is authorized to pay a broker or dealer who
provides such brokerage and research services or expenses, a commission
for executing a portfolio transaction for the Fund that is in excess of
the amount of commission another broker or dealer would have charged
for effecting that transaction if the Adviser determines in good faith
that such amount of commission is reasonable in relation to the value
of the brokerage and research services provided by such broker or
dealer and is paid in compliance with Section 28(e) or other rules and
regulations of the Commission. This determination may be viewed in
terms of either that particular transaction or the overall
responsibilities that the Adviser and its affiliates have with respect
to accounts over which they exercise investment discretion. The Board
shall periodically review the commissions paid by the Fund to determine
if the commissions paid over representative periods of time were
reasonable in relation to the benefits received.
VI. CONTROL BY THE BOARD OF TRUSTEES
Any investment program undertaken by the Adviser pursuant to this Agreement, as
well as any other activities undertaken by the Adviser on behalf of the Fund
pursuant thereto, shall at all times be subject to any directives of the Board.
VII. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Adviser shall at all
times conform to:
1. all applicable provisions of the 1940 Act, the Advisers Act and
any rules and regulations adopted thereunder;
2. all policies and procedures of the Fund as adopted by the Board
and as described in the Registration Statement;
3. the provisions of the Fund's Declaration of Trust, as amended;
-5-
<PAGE>
4. the provisions of the Bylaws of the Fund, as amended; and
5. any other applicable provisions of state and federal law.
VIII. COMPENSATION
For the services to be rendered, the facilities furnished and the expenses
assumed by the Adviser, the Fund shall pay to the Adviser an annual fee, payable
monthly, equal to .40% of the average daily net assets of the Fund. Except as
hereinafter set forth, compensation under this Agreement shall be calculated and
accrued daily at the rate of 1/365 of .40% of the daily net assets of the Fund.
If this Agreement becomes effective subsequent to the first day of a month or
terminates before the last day of a month, compensation for that part of the
month this Agreement is in effect shall be prorated in a manner consistent with
the calculation of the fees set forth above. Subject to the provisions of
Section X hereof, payment of the Adviser's compensation for the preceding month
shall be made as promptly as possible. For so long as a Subadvisory Agreement is
in effect, the Fund acknowledges that the Adviser will pay to the Subadviser, as
compensation for acting as Subadviser to the Fund, the fees specified in the
Subadvisory Agreement.
IX. EXPENSES
The expenses in connection with the management of the Fund shall be allocated
between the Fund and the Adviser as follows:
A. Expenses of the Adviser
The Adviser shall pay:
1. the salaries, employment benefits and other related costs
and expenses of those of its personnel engaged in providing
investment advice to the Fund, including without
limitation, office space, office equipment, telephone and
postage costs;
2. all fees and expenses of all Trustees, officers and
employees, if any, of the Fund who are employees of the
Adviser or an affiliated entity, including any salaries and
employment benefits payable to those persons;
B. Expenses of the Fund
The Fund shall pay:
1. investment advisory fees pursuant to this Agreement;
2. brokers' commissions, issue and transfer taxes or other
transaction fees payable in connection with any
transactions in the securities in the Fund's
-6-
<PAGE>
investment portfolio or other investment transactions
incurred in managing the Fund's assets, including portions
of commissions that may be paid to reflect brokerage
research services provided to the Adviser;
3. fees and expenses of the Fund's independent accountants and
legal counsel and the independent Trustees' legal counsel;
4. fees and expenses of any administrator, transfer agent,
custodian, dividend, accounting, pricing or disbursing
agent of the Fund;
5. interest and taxes;
6. fees and expenses of any membership in the Investment
Company Institute or any similar organization in which the
Board deems it advisable for the Fund to maintain
membership;
7. insurance premiums on property or personnel (including
officers and Trustees) of the Fund which benefit the Fund;
8. all fees and expenses of the Fund's Trustees, who are not
"interested persons" (as defined in the 1940 Act) of the
Fund or the Adviser;
9. expenses of preparing, printing and distributing proxies,
proxy statements, prospectuses and reports to shareholders
of the Fund, except for those expenses paid by third
parties in connection with the distribution of Fund shares
and all costs and expenses of shareholders' meetings;
10. all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in shares
of the Fund or in cash;
11. costs and expenses of promoting the sale of shares in the
Fund, including preparing prospectuses and reports to
shareholders of the Fund, provided, nothing in this
Agreement shall prevent the charging of such costs to third
parties involved in the distribution and sale of Fund
shares;
12. fees payable by the Fund to the Commission or to any state
securities regulator or other regulatory authority for the
registration of shares of the Fund in any state or
territory of the United States or in the District of
Columbia;
13. all costs attributable to investor services, administering
shareholder accounts and handling shareholder relations,
(including, without limitation, telephone and personnel
expenses), which costs may also be charged to third parties
by the Adviser; and
-7-
<PAGE>
14. any other ordinary, routine expenses incurred in the
management of the Fund's assets, and any nonrecurring or
extraordinary expenses, including organizational expenses,
litigation affecting the Fund and any indemnification by
the Fund of its officers, Trustees or agents.
X. EXPENSE LIMITATION
If, for any fiscal year, the total of all ordinary business expenses payable by
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 sale (unless a waiver is obtained), the
Adviser shall reduce its advisory fee to the extent necessary to meet such
expense limit, but the Adviser 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 amount of any such reduction is to be borne by the Adviser
and shall be deducted from the monthly advisory fee otherwise payable to the
Adviser during such fiscal year. For the purposes of this paragraph, the term
"fiscal year" shall exclude the portion of the current fiscal year which shall
have elapsed prior to the date hereof and shall include the portion of the then
current fiscal year which shall have elapsed at the date of termination of this
Agreement.
XI. ADDITIONAL SERVICES
Upon the request of the Board, the Adviser may perform certain accounting,
shareholder servicing or other administrative services on behalf of the Fund
that are not required by this Agreement. Such services will be performed on
behalf of the Fund and the Adviser may receive from the Fund such reimbursement
for costs or reasonable compensation for such services as may be agreed upon
between the Adviser and the Board on a finding by the Board that the provision
of such services by the Adviser is in the best interests of the Fund and its
shareholders. Payment or assumption by the Adviser of any Fund expense that the
Adviser is not otherwise required to pay or assume under this Agreement shall
not relieve the Adviser of any of its obligations to the Fund nor obligate the
Adviser to pay or assume any similar Fund expense on any subsequent occasions.
Such services may include, but are not limited to, (a) the services of a
principal financial officer of the Fund (including applicable office space,
facilities and equipment) whose normal duties consist of maintaining the
financial accounts and books and records of the Fund and the services (including
applicable office space, facilities and equipment) of any of the personnel
operating under the direction of such principal financial officer; (b) the
services of staff to respond to shareholder inquiries concerning the status of
their accounts, providing assistance to shareholders in exchanges among the
investment companies managed or advised by the Adviser, changing account
designations or changing addresses, assisting in the purchase or redemption of
shares; or otherwise providing services to shareholders of the Fund; and (c)
such other administrative services as may be furnished from time to time by the
Adviser to the Fund at the request of the Board.
-8-
<PAGE>
XII. NONEXCLUSIVITY
The services of the Adviser to the Fund are not to be deemed to be exclusive,
and the Adviser shall be free to render investment advisory or other services to
others (including other investment companies) and to engage in other activities,
so long as its services under this Agreement are not impaired thereby. It is
understood and agreed that officers and directors of the Adviser may serve as
officers or trustees of the Fund, and that officers or trustees of the Fund may
serve as officers or directors of the Adviser to the extent permitted by law;
and that the officers and directors of the Adviser are not prohibited from
engaging in any other business activity or from rendering services to any other
person, or from serving as partners, officers, directors or trustees of any
other firm or trust, including other investment companies.
XIII. TERM
This Agreement shall become effective at the close of business on July 31, 1996,
and shall remain in force and effect through December 31, 1997, unless earlier
terminated under the provisions of Article XV.
XIV. RENEWAL
Following the expiration of its initial term, the Agreement shall continue in
force and effect from year to year, provided that such continuance is
specifically approved at least annually:
1. a. by the Fund's trustees, or
b. by the vote of a majority of the Fund's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act), and
2. by the affirmative vote of a majority of the trustees who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a trustee of the Fund), by votes cast in
person at a meeting specifically called for such purpose.
XV. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Fund's trustees or by vote of a majority of the Fund's
outstanding voting securities (as defined in Section 2(a)(42) of the 1940 Act),
or by the Adviser, on sixty (60) days' written notice to the other party. The
notice provided for herein may be waived by the party required to be notified.
This
-9-
<PAGE>
Agreement shall automatically terminate in the event of its "assignment",
as that term is defined in Section 2(a)(4) of the 1940 Act.
XVI. LIABILITY
A. Liability of the Adviser
The Adviser shall be liable to the Fund and shall indemnify the Fund
for any losses incurred by the Fund, whether in the purchase, holding
or sale of any security or otherwise, to the extent that such losses
resulted from an act or omission on the part of the Adviser or its
officers, Trustees or employees, that is found to involve willful
misfeasance, bad faith or negligence, or reckless disregard by the
Adviser of its duties under this Agreement, in connection with the
services rendered by the Adviser hereunder.
B. Liability of the Fund, the Shareholders and the Trustees
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the trustees of the
Fund as trustees and not individually and that the obligations of this
instrument are not binding upon any of the trustees or shareholders
individually but are binding only upon the assets and property of the
Fund. No provision of this Agreement shall be construed to protect any
trustees or officer of the Fund or director or officer of the Adviser,
from liability in violation of Section 17(h) and (i) of the 1940 Act.
XVII. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such addresses shall be:
if to the Fund or the Adviser:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attention: Secretary
XVIII. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise
-10-
<PAGE>
derived from a term or provision of the 1940 Act shall be resolved by reference
to such term or provision of the 1940 Act and to interpretations thereof, if
any, by the United States Courts or, in the absence of any controlling decision
of any such court, by rules, regulations or orders of the Commission issued
pursuant to the 1940 Act. In addition, where the effect of a requirement of the
1940 Act reflected in the provisions of this Agreement is revised by rule,
regulation or order of the Commission, such provisions shall be deemed to
incorporate the effect of such rule, regulation or order.
-11-
<PAGE>
XIX. SERVICE MARK
The service mark of the Fund 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 Adviser or another subsidiary or affiliated
corporation of Aetna Life and Casualty Company should not be the investment
adviser of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 1st day of August, 1996.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Shaun P. Mathews
--------------------
Name: Shaun P. Mathews
Title: Vice President
Attest:
/s/ DeAnn S. Anastasio
----------------------
De Ann S. Anastasio
Assistant Corporate Secretary
AETNA INCOME SHARES
By: /s/ Shaun P. Mathews
--------------------
Name: Shaun P. Mathews
Attest: Title: President
/s/ Susan E. Bryant
-------------------
Susan E. Bryant
Secretary
- 12 -
SUBADVISORY AGREEMENT
THIS AGREEMENT is made by and among AETNA LIFE INSURANCE AND ANNUITY COMPANY, a
Connecticut insurance corporation (the "Adviser"), AETNA INCOME SHARES, a
Massachusetts Business Trust (the "Fund") and AELTUS INVESTMENT MANAGEMENT,
INC., a Connecticut corporation (the "Subadviser") as of the date set forth
below.
W I T N E S S E T H
-------------------
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company, under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, both the Adviser and the Subadviser are registered with the Commission
as investment advisers under the Investment Advisers Act of 1940, as amended
(the "Advisers Act") and both are in the business of acting as investment
advisers; and
WHEREAS, the Adviser has entered into an Investment Advisory Agreement with the
Fund (the "Investment Advisory Agreement") which appoints the Adviser as the
investment adviser for the Fund; and
WHEREAS, Article IV of the Investment Advisory Agreement authorizes the Adviser
to delegate all or a portion of its obligations under the Investment Advisory
Agreement to a subadviser;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement the Adviser and the Fund
hereby appoint the Subadviser to manage the assets of the Fund as set forth
below in Section II, under the supervision of the Adviser and subject to the
approval and direction of the Fund's Board of Trustees (the "Board"). The
Subadviser hereby accepts such appointment and agrees that it shall, for all
purposes herein, undertake such obligations as an independent contractor and not
as an agent of the Adviser. The Subadviser agrees, that except as required to
carry out its duties under this Agreement or otherwise expressly authorized, it
has no authority to act for or represent the Fund in any way.
II. DUTIES OF THE SUBADVISER AND THE ADVISER
A. Duties of the Subadviser
The Subadviser shall regularly provide investment advice with respect
to the assets held by the Fund and shall continuously supervise the
investment and reinvestment of cash, securities and instruments or
other property comprising the assets of the Fund. In carrying out these
duties, the Subadviser shall:
<PAGE>
1. select the securities to be purchased, sold or exchanged by
the Fund or otherwise represented in the Fund's investment
portfolio, place trades for all such securities and
regularly report thereon to the Adviser and, at the request
of the Adviser, to the Board;
2. formulate and implement continuing programs for the
purchase and sale of securities and regularly report
thereon to the Adviser and, at the request of the Adviser
or the Fund, to the Board;
3. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data,
domestic, foreign or otherwise, whether affecting the
economy generally, the Fund, securities held by or under
consideration for the Fund, or the issuers of those
securities;
4. provide economic research and securities analyses as
requested by the Adviser from time to time, or as the
Adviser considers necessary or advisable in connection with
the Subadviser's performance of its duties hereunder; and
5. give instructions to the custodian and/or sub-custodian of
the Fund appointed by the Board, concerning deliveries of
securities, transfers of currencies and payments of cash
for the Fund, as required to carry out the investment
activities of the Fund as contemplated by this Agreement;
and
6. provide such financial support, administrative and other
services, such as preparation of financial data,
determination of the Fund's net asset value, preparation of
financial and performance reports, as the Adviser from time
to time, deems necessary and appropriate and which the
Subadviser is willing and able to provide.
B. Duties of the Adviser
The Adviser shall retain responsibility for oversight of all activities
of the Subadviser and for monitoring its activities on behalf of the
Fund. In carrying out its obligations under this Agreement and the
Investment Advisory Agreement, the Adviser shall:
1. monitor the investment program maintained by the Subadviser
for the Fund and the Subadviser's compliance program to
ensure that the Fund's assets are invested in compliance
with the Subadvisory Agreement and the Fund's investment
objectives and policies as adopted by the Board and
described in the most current effective amendment of the
registration statement for the Fund, as filed with the
Commission under the Securities Act of 1933, as amended
(the "1933 Act"), and the 1940 Act ("Registration
Statement");
-2-
<PAGE>
2. review all data and financial reports prepared by the
Subadviser to assure that they are in compliance with
applicable requirements and meet the provisions of
applicable laws and regulations;
3. file all periodic reports required to be filed by the Fund
with the applicable regulatory authorities;
4. review and deliver to the Board all financial, performance
and other reports prepared by the Subadviser under the
provisions of this Agreement or as requested by the
Adviser;
5. establish and maintain regular communications with the
Subadviser to share information it obtains concerning the
effect of developments and data on the investment program
maintained by the Subadviser;
6. maintain contact with and enter into arrangements with the
custodian, transfer agent, auditors, outside counsel, and
other third parties providing services to the Fund;
7. oversee all matters relating to (i) the offer and sale of
shares of the Fund, including promotions, marketing
materials, preparation of prospectuses, filings with the
Commission and state securities regulators, and
negotiations with broker-dealers; (ii) shareholder
services, including, confirmations, correspondence and
reporting to shareholders; (iii) all corporate matters on
behalf of the Fund, including monitoring the corporate
records of the Fund, maintaining contact with the Board,
preparing for, organizing and attending meetings of the
Board and the Fund's shareholders; (iv) preparation of
proxies when required; and (v) any other matters not
expressly delegated to the Subadviser by this Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Subadviser
The Subadviser hereby represents and warrants to the Adviser as
follows:
1. Due Incorporation and Organization. The Subadviser is duly
organized and is in good standing under the laws of the
State of Connecticut and is fully authorized to enter into
this Agreement and carry out its duties and obligations
hereunder.
2. Registration. The Subadviser is registered as an investment
adviser with the Commission under the Advisers Act, and is
registered or licensed as an investment adviser under all
of the laws of all jurisdictions in which its activities
require it to be so registered or licensed. The Subadviser
shall maintain such registration or license in effect at
all times during the term of this Agreement.
-3-
<PAGE>
3. Regulatory Orders. The Subadviser is not subject to any
stop orders, injunctions or other orders of any regulatory
authority affecting its ability to carry out the terms of
this Agreement. The Subadviser will notify the Adviser and
the Fund immediately if any such order is issued or if any
proceeding is commenced that could result in such an order.
4. Compliance. The Subadviser has in place compliance systems
and procedures designed to meet the requirements of the
Advisers Act and the 1940 Act and it shall at all times
assure that its activities in connection with managing the
Fund follow these procedures.
5. Authority. The Subadviser is authorized to enter into this
Agreement and carry out the terms hereunder.
6. Best Efforts. The Subadviser at all times shall provide its
best judgment and effort to the Fund in carrying out its
obligations hereunder.
B. Representations and Warranties of the Adviser
The Adviser hereby represents and warrants to the Subadviser as
follows:
1. Due Incorporation and Organization. The Adviser is duly
organized and is in good standing under the laws of the
State of Connecticut and is fully authorized to enter into
this Agreement and carry out its duties and obligations
hereunder.
2. Registration. The Adviser is registered as an investment
adviser with the Commission under the Advisers Act, and is
registered or licensed as an investment adviser under all
of the laws of all jurisdictions in which its activities
require it to be so registered or licensed. The Adviser
shall maintain such registration or license in effect at
all times during the term of this Agreement.
3. Regulatory Orders. The Adviser is not subject to any stop
orders, injunctions or other orders of any regulatory
authority affecting its ability to carry out the terms of
this Agreement. The Adviser will notify the Subadviser and
the Fund immediately if any such order is issued or if any
proceeding is commenced that could result in such an order.
4. Authority. The Adviser is authorized to enter into this
Agreement and carry out the terms hereunder.
5. Best Efforts. The Adviser at all times shall provide its
best judgment and effort to the Fund in carrying out its
obligations hereunder.
-4-
<PAGE>
C. Representations and Warranties of the Fund
The Fund hereby represents and warrants to the Adviser as follows:
1. Due Incorporation and Organization. The Fund has been duly
formed as a business trust under the laws of the
Commonwealth of Massachusetts and it is authorized to enter
into this Agreement and carry out its obligations
hereunder.
2. Registration. The Fund is registered as an investment
company with the Commission under the 1940 Act and shares
of the Fund are registered for offer and sale to the public
under the 1933 Act and all applicable state securities
laws. Such registrations will be kept in effect during the
term of this Agreement.
IV. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Subadviser shall place all orders for the purchase and sale of
portfolio securities for the Fund with brokers or dealers selected by
the Subadviser, which may include brokers or dealers affiliated with
the Subadviser. The Subadviser shall use its best efforts to seek to
execute portfolio transactions at prices that are advantageous to the
Fund giving consideration to the services and research provided and at
commission rates that are reasonable in relation to the benefits
received.
B. Selection of Broker-Dealers
In selecting broker-dealers qualified to execute a particular
transaction, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Fund and/or the
other accounts over which the Subadviser or its affiliates exercise
investment discretion. The Subadviser may also select brokers or
dealers to effect transactions for the Fund who provide payment for
expenses of the Fund. The Subadviser is authorized to pay a broker or
dealer who provides such brokerage and research services or expenses, a
commission for executing a portfolio transaction for the Fund that is
in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction if the Subadviser
determines in good faith that such amount of commission is reasonable
in relation to the value of the brokerage, research and other services
provided by such broker or dealer and is paid in compliance with
Section 28(e) or other rules and regulations of the Commission. This
determination may be viewed in terms of either that particular
transaction or the overall responsibilities that the Subadviser and its
affiliates have with respect to accounts over which they exercise
investment discretion. The Board shall periodically review the
commissions paid by the Fund to determine if the commissions paid over
representative periods of time were reasonable in relation to the
benefits received.
-5-
<PAGE>
V. CONTROL BY THE BOARD OF TRUSTEES
Any investment program undertaken by the Subadviser pursuant to this Agreement,
as well as any other activities undertaken by the Subadviser at the direction of
the Adviser with respect to the Fund, shall at all times be subject to any
directives of the Board.
VI. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Subadviser shall at
all times conform to:
1. all applicable provisions of the 1940 Act, the Advisers Act
and any rules and regulations adopted thereunder;
2. all policies and procedures of the Fund as adopted by the
Board and as described in the Registration Statement;
3. the provisions of the Declaration of Trust of the Fund, as
amended from time to time;
4. the provisions of the Bylaws of the Fund, as amended from
time to time; and
5. any other applicable provisions of state or federal law.
VII. COMPENSATION
A. Payment Schedule
The Adviser shall pay the Subadviser, as compensation for services
rendered hereunder, from its own assets, an annual fee of up to .25% of
the average daily net assets in the Fund, payable monthly. Except as
hereinafter set forth, compensation under this Agreement shall be
calculated and accrued daily at the rate of 1/365 of the annual
Subadvisory fee of up to .25% applied to the daily net assets of the
Fund. If this Agreement becomes effective subsequent to the first day
of a month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in effect
shall be prorated in a manner consistent with the calculation of the
fees set forth above.
-6-
<PAGE>
B. Reduction
Payment of the Subadviser's compensation for the preceding month shall
be made as promptly as possible, except as provided below. The
Subadviser acknowledges that, pursuant to the Investment Advisory
Agreement, the Adviser has agreed to reduce its fee or reimburse the
Fund if the expenses borne by the Fund exceed the expense limitations
applicable to the Fund imposed by the securities laws or regulations of
any jurisdiction in which the Fund shares are qualified for sale.
Accordingly, the Subadviser agrees 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, 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 sale (unless a
waiver is obtained), the Subadviser shall reduce its advisory fee to
the extent necessary to meet such expense limit, but will not be
required to reimburse the Fund for any ordinary business expenses which
exceed the amount of its advisory fee for the fiscal year. The
Subadviser shall contribute to the amount of such reduction by
reimbursing the Adviser in proportion to the amounts which the Adviser
and Subadviser would have been entitled to receive for such year. For
the purposes of this paragraph, the term "fiscal year" shall exclude
the portion of the current fiscal year which elapsed prior to the
effective date of this Agreement, but shall include the portion of the
then current fiscal year has elapsed at the date of termination of this
Agreement.
VIII. ALLOCATION OF EXPENSES
The Subadviser shall pay the salaries, employment benefits and other related
costs of those of its personnel engaged in providing investment advice to the
Fund hereunder, including, but not limited to, office space, office equipment,
telephone and postage costs. In the event the Subadviser incurs any expense that
is the obligation of the Adviser as set out in this Agreement, the Adviser shall
reimburse the Subadviser for such expense on presentation of a statement
indicating the expenses incurred and the amount paid by the Subadviser.
IX. NONEXCLUSIVITY
The services of the Subadviser with respect to the Fund are not to be deemed to
be exclusive, and the Subadviser shall be free to render investment advisory and
administrative or other services to others (including other investment
companies) and to engage in other activities. It is understood and agreed that
officers or directors of the Subadviser may serve as officers or directors of
the Adviser or officers or trustees of the Fund; that officers or directors of
the Adviser or officers or trustees of the Fund may serve as officers or
directors of the Subadviser to the extent permitted by law; and that the
officers and directors of the Subadviser are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, officers, directors or trustees of any other firm or trust,
including other investment advisory companies.
-7-
<PAGE>
X. TERM
This Agreement shall become effective at the close of business on July 31, 1996,
and shall remain in force and effect through December 31, 1997, unless earlier
terminated under the provisions of Article XI. Following the expiration of its
initial term, the Agreement shall continue in force and effect for one year
periods, provided such continuance is specifically approved at least annually:
1 (a) by the Fund's trustees or (b) by the vote of a majority
of the Fund's outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act), and
2. by the affirmative vote of a majority of the trustees who
are not parties to this Agreement or interested persons of
a party to this Agreement (other than as a trustee of the
Fund), by votes cast in person at a meeting specifically
called for such purpose.
XI. TERMINATION
This Agreement may be terminated:
1. at any time, without the payment of any penalty, by vote of
the Fund's trustees or by vote of a majority of the
outstanding voting securities of the Fund; or
2. by the Adviser, the Fund or the Subadviser on sixty (60)
days' written notice to the other party, unless written
notice is waived by the party required to be notified; or
3. automatically in the event there is an "assignment" of this
Agreement, as defined in Section 2 (a) (4) of the 1940 Act.
XII. LIABILITY
A. Liability of the Subadviser
The Subadviser shall be liable to the Fund and the Adviser and shall
indemnify the Fund and the Adviser for any losses incurred by the Fund,
or the Adviser whether in the purchase, holding or sale of any security
or otherwise, to the extent that such losses resulted from an act or
omission on the part of the Subadviser or its officers, directors or
employees, that is found to involve willful misfeasance, bad faith or
negligence, or reckless disregard by the Subadviser of its duties under
this Agreement, in connection with the services rendered by the
Subadviser hereunder.
B. Liability of the Fund, the Shareholders and the Trustees
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the trustees of the
Fund as trustees and not individually and that the
-8-
<PAGE>
obligations of this instrument are not binding upon any of the
trustees or shareholders individually but are binding only upon the
assets and property of the Fund. No provision of this Agreement shall
be construed to protect any trustee or officer of the Fund or director
or officer of the Adviser, from liability in violation of Section 17(h)
and (i) of the 1940 Act.
XIII. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such address shall be:
if to the Fund or the Adviser:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attn: Secretary
if to the Subadviser:
242 Trumbull Street
Hartford, Connecticut 06103-1205
Fax number: 860/275-4440
Attention: President
XIV. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940 Act
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or, in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Commission issued pursuant to the 1940 Act. In addition, where the effect
of a requirement of the 1940 Act reflected in any provision of the Agreement is
revised by rule, regulation or order of the Commission, such provision shall be
deemed to incorporate the effect of such rule, regulation or order.
XV. SERVICE MARK
The service mark of the Fund and Adviser, 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 Subadviser or another subsidiary or
affiliated corporation of Aetna Life and Casualty Company should not be the
investment adviser of the Fund.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 1st day of August, 1996.
Aetna Life Insurance and Annuity Company
By: /s/ Shaun P. Mathews
--------------------------------
Attest: Name: Shaun P. Mathews
Title: Vice President
/s/ DeAnn S. Anastasio
- ----------------------------
DeAnn S. Anastasio
Assistant Corporate Secretary
Aeltus Investment Management, Inc.
Attest: By: /s/ John Y. Kim
--------------------------------
Name: John Y. Kim
Title: President
/s/ Melinda L. Dziavit
- ----------------------------
Melinda L. Dziavit
Assistant Secretary
Aetna Income Shares
By: /s/ Shaun P. Mathews
--------------------------------
Name: Shaun P. Mathews
Attest: Title: President
/s/ Susan E. Bryant
- ----------------------------
Susan E. Bryant
Secretary
-10-
AETNA INCOME SHARES
UNDERWRITING AGREEMENT
THIS AGREEMENT, is entered into this 30th day of April, 1996, by and between
Aetna Life Insurance and Annuity Company, Inc., a Connecticut corporation
(Aetna), and Aetna Income Shares, a Massachusetts Business Trust (Fund).
WHEREAS, the Fund is an open-end management investment company registered with
the Securities and Exchange Commission (Commission) under the Investment Company
Act of 1940, as amended (1940 Act); and
WHEREAS the Fund has registered the shares of its common stock (Shares) for
offer and sale to the public under the Securities Act of 1933, as amended; and
WHEREAS, the Fund wishes to retain Aetna, and Aetna is willing to act, as
principal underwriter in connection with the offer and sale of the Shares; and
NOW, THEREFORE, in consideration of the promises and mutual covenants herein
contained, the parties agree as follows:
1. Appointment of Underwriter. The Fund hereby appoints Aetna and Aetna hereby
accepts appointment as underwriter in connection with the distribution of the
Shares. The Fund authorizes Aetna to solicit orders for the purchase of the
Shares as set forth in the Registration Statement currently effective with the
Commission for the Shares. It is understood that the Shares are offered only
through variable annuity contracts and variable life policies issued by Aetna
and its affiliates.
2. Compensation. Aetna shall receive no separate compensation for providing
services under this Agreement. It is understood that the compensation Aetna
receives in connection with the issuance of the variable annuity contracts or
variable life policies shall be the only consideration it receives for serving
as underwriter hereunder.
3. Aetna Expenses. Aetna shall be responsible for any costs of printing and
distributing prospectuses and statements of additional information necessary to
offer and sell the Shares, and such other sales literature, reports, forms and
advertisements in connection as it elects to prepare, provided such materials
comply with the applicable provisions of federal and state law.
4. Fund Expenses. The Fund shall be responsible for the costs of registering the
Shares with the Commission and for the costs of preparing prospectuses,
statements of additional information and such other documents as are required to
maintain the registration of the Shares with the Commission.
5. Share Certificates. The Fund shall not issue certificates representing
Shares.
<PAGE>
6. Status of underwriter and Other Persons. Aetna is an independent contractor
and shall be agent for the Fund only in respect to the sale and redemption of
the Shares. Any person, even though also an officer, director, employee or agent
of Aetna, who may be or become an officer, director, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Aetna even though paid by Aetna.
7. Nonexclusivity. The services of Aetna to the Fund under this Agreement are
not to be deemed exclusive, and Aetna shall be free to render similar services
or other services to others and to engage in other activities related or
unrelated to those provided under this agreement.
8. Effectiveness and Termination of Agreement. This Agreement shall become
effective at the close of business on the date set forth in the first paragraph
of this Agreement and shall remain in force and effect, through December 31,
1997, unless earlier terminated under the provisions of Section 9. Following the
expiration of its initial term, the Agreement shall continue in force and effect
for one year periods, provided such continuance is specifically approved at
least annually by the Fund's trustees, or by the vote of a majority of the
Fund's outstanding voting securities (as defined in Section 2(a)(42) of the 1940
Act.
9. Termination. This Agreement may be terminated at any time, by either party,
without the payment of any penalty, on sixty (60) days' written notice to the
other party.
10. Liability of Aetna. Aetna shall be liable to the Fund and shall indemnify
the Fund for any losses incurred by the Fund, to the extent that such losses
resulted from an act or omission on the part of Aetna or its officers, directors
or employees in carrying out its duties hereunder, that is found to involve
willful misfeasance, bad faith or negligence, or reckless disregard by Aetna of
its duties under this Agreement.
11. Liability of Trustees. A copy of the Declaration of Trust of the Fund is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the trustees of the
Fund as trustees and not individually and that the obligations of this
instrument are not binding upon any of the trustees or shareholders individually
but are binding only upon the assets and property of the Fund. No provision of
this Agreement shall be construed to protect any trustee or officer of the Fund
or director or officer of the Aetna, from liability in violation of Section
17(h) and (i) of the 1940 Act.
12. Amendments. This Agreement may be amended or changed only by an instrument
in writing signed by both parties.
13. Applicable Law. This Agreement shall be construed in accordance with the
laws of the State of Connecticut and the 1940 Act. To the extent that the
applicable laws of the State of Connecticut conflict with the applicable
provisions of the 1940 Act, however, the latter shall control.
-2-
<PAGE>
14. Notices. Any notices under this Agreement shall be in writing, addressed and
delivered, mailed postage paid, or sent by other delivery service, or by
facsimile transmission to each party at such address as each party may designate
for the receipt of notice. Until further notice, such addresses shall be:
if to the Fund or Aetna:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
15. Questions of Interpretation. This Agreement shall be governed by the laws of
the State of Connecticut. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the 1940 Act shall be resolved by reference to such term or
provision of the 1940 Act and to interpretations thereof, if any, by the United
States Courts or, in the absence of any controlling decision of any such court,
by rules, regulations or orders of the Commission issued pursuant to the 1940
Act. In addition, where the effect of a requirement of the 1940 Act reflected in
the provisions of this Agreement is revised by rule, regulation or order of the
Commission, such provisions shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 30th day of April, 1996.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Attest: By: /s/ Shaun P. Mathews
--------------------
Name: Shaun P. Mathews
/s/ DeAnn S. Anastasio Title: Vice President
- ----------------------
Assistant Secretary
AETNA INCOME SHARES
By: /s/ Shaun P. Mathews
--------------------
Name: Shaun P. Mathews
Attest: Title: President
/s/ Susan E. Bryant
- ----------------------
Secretary
-3-
LICENSE AGREEMENT
This Agreement, made at Hartford, Connecticut, this 2nd day of March ,
1973, by and between Aetna Life Insurance Company, a Connecticut corporation
with a principal place of business at Hartford, Connecticut ("Aetna"), and Aetna
Income Shares, Inc. (the "Fund"), a Maryland corporation with a principal place
of business at Hartford, Connecticut, WITNESSETH:
WHEREAS, Aetna Life Insurance Company and its affiliates have for many
years been engaged in life insurance and other forms of the insurance business
and related financial services, and the name " Aetna " has become associated
with the high quality of insurance and financial services provided by Aetna and
its affiliates;
WHEREAS, Aetna is the owner of a service mark registered on the
Principal Register in the United States Patent Office and identifiable by United
States Patent Office Number 822,577, Serial Number 232,049, Class 102, which has
become a universal symbol of the high quality of services provided by Aetna and
its affiliated companies, herein referred to as the Aetna Logo;
WHEREAS, the Fund anticipates that it will enter into a contract with
Aetna Investment Management, Inc. (the "Management Company") whereby the
Management Company will manage the investment portfolio of the Fund;
WHEREAS, the Fund plans to enter into a sales contract with Aetna
Financial Services, Inc. (the "Sales Company") to sell Fund shares to the
general public;
WHEREAS, the Management Company and the Sales Company are, like Aetna,
wholly owned subsidiaries of Aetna Life and Casualty Company having principal
places of business at Hartford, Connecticut, and by reason of this relationship
Aetna is concerned with the growth and development of the Management Company and
the Sales Company, and therefore of the Fund; and
WHEREAS, the Fund desires a license to use the name "Aetna Income
Shares, Inc." and the Aetna Logo in connection with the promotion, advertisement
and sale of its shares to the public;
NOW, THEREFORE, in consideration of the corporate interrrelations and
the common interests and objectives of Aetna, the Management Company, and the
Sales Company which may be derived from the growth and development of the Fund,
and for other good and valuable consideration, the receipt whereof is hereby
acknowledged, Aetna hereby grants to the Fund a non-exclusive license to use the
name of "Aetna Income Shares, Inc." and the Aetna Logo throughout the world in
connection with the business of the Fund, provided, however, that Aetna reserves
the right to withdraw the license herein granted in the event that the Fund's
investment portfolio shall cease to be managed by the Management Company or some
other corporation controlling, controlled by, or under common control with
Aetna. The use by the Fund of its
<PAGE>
name and the Aetna Logo shall in no way prevent Aetna or any corporation
controlling, controlled by or under common control with it or its successors or
assigns from using, or permitting the use of, the name "Aetna" alone or in
conjunction with any other word or words and the Aetna Logo for, by or in
connection with any other entity or business whether or not the same directly or
indirectly competes with or conflicts with the Fund or its business in any
manner.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
at Hartford, Connecticut, this 2nd day of March , 1973.
AETNA LIFE INSURANCE COMPANY
By /s/ H. A. Moreen
-----------------------------------
Howard A. Moreen
Senior Vice President and Secretary
AETNA INCOME SHARES, INC.
By /s/ Donald G. Conrad
-----------------------------------
Donald G. Conrad
Vice President
151 Farmington Avenue
Hartford, CT 06156
Susan E. Bryant
Counsel
Law Division, RE4A
April 11, 1997 Investments & Financial Services
(860) 273-7834
Fax: (860) 273-0356
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir or Madam:
As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I hereby
consent to the use of my opinion dated February 28, 1997 (incorporated herein by
reference to the Rule 24f-2 Notice for the fiscal year ended December 31, 1996
filed on behalf of Aetna Income Shares) as an exhibit to this Post-Effective
Amendment No. 47 to the Registration Statement on Form N-1A (File No. 2-47232
and 811-2361).
Sincerely,
/s/ Susan E. Bryant
Susan E. Bryant
Counsel
Consent of Independent Auditors
The Board of Trustees
Aetna Income Shares:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "Financial Highlights" in the
Prospectus and "Independent Auditors" in the Statement of Additional
Information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Hartford, Connecticut
April 11, 1997
SCHEDULE FOR COMPUTATION OF PERFORMANCE DATA
AETNA INCOME SHARES
TOTAL RETURN CALCULATION
One Year Period Ended December 31, 1996
n
Formula P (1+T) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 10,359.34 = ERV
One Year Period Ended 12/31/96 1 = n
TOTAL RETURN FOR THE PERIOD 3.59% = T
TOTAL RETURN CALCULATION
Five Year Period Ended December 31, 1996
n
Formula P (1+T) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 13,872.35 = ERV
Five Year Period Ended 12/31/96 5 = n
TOTAL RETURN FOR THE PERIOD 6.77% = T
<PAGE>
TOTAL RETURN CALCULATION
Ten Year Period Ended December 31, 1996
n
Formula P (1+T) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 23,306.02 = ERV
Ten Year Period Ended 12/31/96 10 = n
TOTAL RETURN FOR THE PERIOD 8.83% = T
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000002646
<NAME> AETNA INCOME SHARES FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 669,068,997
<INVESTMENTS-AT-VALUE> 676,611,609
<RECEIVABLES> 9,233,509
<ASSETS-OTHER> 350
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 685,845,468
<PAYABLE-FOR-SECURITIES> 40,767,535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,348,504
<TOTAL-LIABILITIES> 42,116,039
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 643,211,785
<SHARES-COMMON-STOCK> 50,995,995
<SHARES-COMMON-PRIOR> 51,297,679
<ACCUMULATED-NII-CURRENT> 2,453,457
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (9,478,425)
<ACCUM-APPREC-OR-DEPREC> 7,542,612
<NET-ASSETS> 643,729,429
<DIVIDEND-INCOME> 27,167
<INTEREST-INCOME> 44,150,829
<OTHER-INCOME> 0
<EXPENSES-NET> (2,564,225)
<NET-INVESTMENT-INCOME> 41,568,771
<REALIZED-GAINS-CURRENT> 4,197,867
<APPREC-INCREASE-CURRENT> (23,388,378)
<NET-CHANGE-FROM-OPS> 22,378,260
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (41,091,489)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,561,711
<NUMBER-OF-SHARES-REDEEMED> (5,105,607)
<SHARES-REINVESTED> 3,242,212
<NET-CHANGE-IN-ASSETS> (23,231,060)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (116,781)
<OVERDIST-NET-GAINS-PRIOR> (13,676,296)
<GROSS-ADVISORY-FEES> 2,033,785
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,564,225
<AVERAGE-NET-ASSETS> 1,283,970,338
<PER-SHARE-NAV-BEGIN> 13.001
<PER-SHARE-NII> 0.844
<PER-SHARE-GAIN-APPREC> (0.387)
<PER-SHARE-DIVIDEND> (0.835)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.623
<EXPENSE-RATIO> 0.39
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
