PRESIDENT'S LETTER
Dear Valued Shareholder,
Thank you for investing in Aetna Variable Funds. Since you have many other
investment options from which to choose, we truly appreciate the confidence
you've placed in us to help you reach your investment goals. While the enclosed
annual report will give you a detailed review of the funds you have selected,
I'd like to share a few observations about the market in general and some
specific news about the funds and their adviser, Aeltus Investment Management,
Inc.
The past twelve months have been memorable both for the stock market and the
U.S. economy overall. It was a year of ups and downs in the market, with a
record high in July, followed by a severe correction during the third quarter.
Market volatility achieved and sustained levels not seen since the aftershocks
of the Crash of '87. Despite this volatility, there was plenty of good news.
The American economy was generally healthy, with low interest and inflation
rates, a reduced federal budget deficit and unemployment levels that registered
at lows not seen in many years. In addition, wages continued to grow and
consumer confidence held steady. All of these positive factors have allowed the
U.S. stock market to recoup the ground lost during the correction, despite
ongoing economic problems in Asia, Russia and Latin America.
Even with so much happening "on the street," the past year was equally exciting
and productive for Aeltus and the funds. Six new Aetna Variable Funds were
added, opening up new opportunities for investors like you to diversify your
portfolios across a broader range of asset classes and investment styles. The
names of certain funds were changed to more clearly reflect their investment
styles, as presented below,
<TABLE>
<CAPTION>
Former Name Current Name
----------- ------------
<S> <C>
Aetna Income Shares Aetna Bond VP
Aetna Investment Advisers Fund, Inc. Aetna Balanced VP, Inc.
Aetna Variable Encore Fund Aetna Money Market VP
Aetna Variable Fund Aetna Growth and Income VP
</TABLE>
In addition, we have been actively assessing and updating Aeltus' computer
systems with respect to "Year 2000" dating issues so they will be able to
adequately perform their intended functions after 1999. We look forward to
completing remediation and testing of all relevant systems by mid-1999.
Today, with over $49 billion in assets under management, Aeltus is one of the
country's largest investment management firms. That's important for investors,
because it represents the kind of size and strength that will allow us to
continue refining our existing investment management services and products,
adding new ones, and growing our staff to serve valued shareholders like you.
Thank you for your continued confidence in the Aetna Variable Funds and Aeltus
Investment Management, Inc. We look forward to a mutually prosperous new year.
Sincerely,
/s/ J. Scott Fox
J. Scott Fox
President
i
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
President's Letter..................................................... i
CAPITAL APPRECIATION PORTFOLIOS:
Investment Review...................................................... 1
Portfolios of Investments:
Aetna Growth VP.......................................................12
Aetna International VP................................................14
Aetna Small Company VP................................................16
Aetna Value Opportunity VP............................................18
Statements of Assets and Liabilities...................................20
Statements of Operations...............................................22
Statements of Changes in Net Assets....................................24
Notes to Financial Statements..........................................28
Additional Information.................................................34
Financial Highlights...................................................36
Independent Auditors' Report...........................................40
GROWTH AND INCOME PORTFOLIOS:
Investment Review......................................................41
Portfolios of Investments:
Aetna Balanced VP.....................................................53
Aetna Growth and Income VP............................................62
Aetna Real Estate Securities VP.......................................71
Statements of Assets and Liabilities...................................72
Statements of Operations...............................................73
Statements of Changes in Net Assets....................................74
Notes to Financial Statements..........................................77
Additional Information.................................................86
Financial Highlights...................................................87
Independent Auditors' Report...........................................90
INCOME PORTFOLIOS:
Investment Review......................................................91
Portfolios of Investments:
Aetna Bond VP.........................................................98
Aetna High Yield VP..................................................100
Aetna Money Market VP................................................102
Statements of Assets and Liabilities..................................104
Statements of Operations..............................................105
Statements of Changes in Net Assets...................................106
Notes to Financial Statements.........................................109
Additional Information................................................113
Financial Highlights..................................................114
Independent Auditors' Report..........................................117
<PAGE>
GET FUNDS:
Investment Review......................................................118
Portfolios of Investments:
Series B..............................................................125
Series C..............................................................127
Series D..............................................................133
Statements of Assets and Liabilities...................................134
Statements of Operations...............................................135
Statements of Changes in Net Assets....................................136
Notes to Financial Statements..........................................139
Additional Information.................................................143
Financial Highlights...................................................144
Independent Auditors' Report...........................................146
</TABLE>
<PAGE>
[Begin Line Chart]
Aetna Growth VP
Growth of $10,000
Aetna Growth VP S&P 500 Index
12/13/96 10,000 10,000
12/31/96 10,146 10,165
9,846 10,437
11,780 12,259
14,139 13,178
12/31/97 13,510 13,556
15,701 15,447
16,607 15,957
14,939 14,369
12/31/98 18,580 17,430
[End Line Chart]
<TABLE>
<CAPTION>
- ------------------------------------------
Average Annual Total Returns
for the period ended December 31, 1998*
<S> <C> <C>
- ------------------------------------------
Inception Date 1 Year Inception
- ------------------------------------------
12/13/96 37.68% 35.30%
- ------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA GROWTH VP
HOW DID THE PORTFOLIO PERFORM DURING THE PERIOD?
Aetna Growth VP (Growth) generated a total return of 37.68%, net of fund
expenses, for the year ended December 31, 1998. The benchmark, Standard & Poor's
(S&P) 500 Index(a), returned 28.57% for the same period. When compared against
the Morningstar, Inc. universe of variable annuity large blend funds, the
Portfolio ranked in the top 5% (out of 662 funds) for the year ended December
31, 1998.
WHAT ECONOMIC OR FINANCIAL MARKET CONDITIONS IMPACTED THE PORTFOLIO?
Robust domestic economic growth, coupled with interest rate cuts by the Federal
Reserve Board, helped stock prices end the year at record highs. Throughout the
year, large capitalization growth stocks outperformed their smaller brethren.
With the financial crisis in emerging markets threatening to disrupt the
earnings growth of U.S. companies, markets favored larger stocks with more
consistent and reliable earnings growth.
WHAT INVESTMENTS INFLUENCED THE PORTFOLIO'S PERFORMANCE OVER THE PAST TWELVE
MONTHS?
Technology was the best performing sector for the year, with the strongest
performance occurring in the fourth quarter. Results reflected an expansion in
technology exposure over the course of the year, with new positions in Cisco
Systems, Inc., Microsoft Corp., Tellabs, Inc. and Nokia Corp., ADR. Positions in
the energy and finance sectors were reduced over the year, adding to
performance. Energy stocks, suffering from low commodity prices, underperformed
the market, as estimated earnings growth rates declined. Finance stocks
underperformed in the latter half of the year, as concerns of economic
deceleration increased fears of increased loan default rates. Additionally, new
utility positions in MCI Worldcom, Inc. and SBC Communications, Inc. added to
returns. Throughout the year, the Portfolio maintained an overweight position in
See Definition of Terms. 1
<PAGE>
healthcare, a sector that outperformed the market. Warner Lambert Co., Schering
Plough and Pfizer, Inc. outperformed due to above average volume growth rates.
Consumer spending remained strong throughout 1998, assisting the growth rates
and the performance of our retail positions in TJX Companies, Inc., Costco
Companies, Inc. and Dayton Hudson Co.
WHAT IS YOUR OUTLOOK GOING FORWARD?
Looking forward, equity markets could remain volatile, as the uncertainty of
sustainable economic growth may once again become a concern. Factors that affect
stock prices, notably low interest and inflation rates remain favorable.
Current valuations are near historical levels and remain a concern.
PORTFOLIO SECTOR BREAKDOWN:
<TABLE>
<CAPTION>
% OF
COMMON % OF OVER/(UNDER)
SECTOR STOCKS S&P 500 WEIGHTING
<S> <C> <C> <C>
Basic Materials -- 3.1% (3.1)%
Commercial Services 4.5% 1.8% 2.7 %
Consumer Discretionary 17.5% 12.3% 5.2 %
Consumer Non-Discretionary 1.7% 9.4% (7.7)%
Energy 2.5% 6.9% (4.4)%
Finance 11.2% 15.7% (4.5)%
Healthcare 22.5% 12.3% 10.2 %
Manufacturing 9.5% 9.7% (0.2)%
Technology 19.5% 18.1% 1.4 %
Utilities 11.1% 10.7% 0.4 %
</TABLE>
<TABLE>
<CAPTION>
% OF NET
TOP TEN EQUITY HOLDINGS ASSETS
<S> <C>
MCI Worldcom, Inc. 3.3%
Microsoft Corp. 2.8%
Tyco International, Ltd. 2.8%
Associates First Capital Corp. 2.6%
Wal-Mart Stores, Inc. 2.6%
Compuware Corp. 2.5%
Schering Plough 2.5%
Tellabs, Inc. 2.4%
EMC/MASS Corp. 2.3%
Lexmark International Group, Inc. 2.3%
</TABLE>
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Portfolio are subject to change.
2 See Definition of Terms.
<PAGE>
[Begin Line Chart]
Aetna International VP
Growth of $10,000
Aetna International VP MSCI-EAFE Index
12/22/97 10,000 10,000
12/31/97 10,270 10,190
12,030 11,698
12,521 11,830
10,549 10,156
12/31/98 12,213 12,263
[End Line Chart]
<TABLE>
<CAPTION>
- ------------------------------------------
Average Annual Total Returns
for the period ended December 31, 1998*
<S> <C> <C>
- ------------------------------------------
Inception Date 1 Year Inception
- ------------------------------------------
12/22/97 18.92% 21.54%
- ------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA INTERNATIONAL VP
HOW DID THE PORTFOLIO PERFORM DURING THE PERIOD?
Aetna International VP (International) generated a 18.92% total return, net of
fund expenses, for the year ended December 31, 1998. The benchmark, Morgan
Stanley International-Europe, Australia, Far East (MSCI-EAFE) Index(b), returned
20.33% for the same period.
WHAT ECONOMIC OR FINANCIAL MARKET CONDITIONS IMPACTED THE PORTFOLIO?
For the last year, world equities markets have experienced some of the highest
volatility in the last 50 years. The Asian currency crisis, which began in the
summer of 1997, reached its low point in the summer of 1998. The Russian
currency devaluation and the default of Russian government debt in August
surprised the market during illiquid summer holiday trading. Brazil, under the
collapse of other emerging markets currencies, fended off devaluation concerns.
In Japan, equities sank to levels not seen in this decade as its economy slipped
into recession.
Even with these negatives, International still rose almost 19% as several
positives affected world equity markets. European equities markets performed
well, as the European Monetary Union (EMU) become a reality in 1999. EMU will
reduce boundaries and constraints in trading goods and services across 11
countries in continental Europe. Japan announced a serious banking reform bill
to cleanse its huge bad debt problems. In October, finance leaders from several
of the G7 countries lowered interest rates to fend off global equity concerns.
By year-end, over 60 countries had reduced interest rates and equity markets in
North America, Europe and Asia ended the year strongly.
See Definition of Terms. 3
<PAGE>
WHAT INVESTMENTS INFLUENCED THE PORTFOLIO'S PERFORMANCE OVER THE PAST TWELVE
MONTHS?
International's overweight position in European equities was the most
significant reason for the Portfolio's strong performance. Stock selection in
Japan, mainly exporter names like Fuji Photo Film and Nintendo Co. Ltd. also
contributed to strong performance. The Portfolio's underweighting in emerging
markets generally helped Portfolio performance.
The Portfolio's currency hedging policy hurt performance as both the German
Deutschemark and Japanese Yen were stronger against the U.S. Dollar. Investors
bid up the Deutschemark, as they perceived the EMU currency to begin on a strong
note. In Japan, investors are calling home their assets, even in a poor economic
environment. Economic factors still favor the U.S. economy and our hedging
policy remains long-term oriented based on economic fundamentals.
WHAT IS YOUR OUTLOOK GOING FORWARD?
The Portfolio maintains a slight overweight position in European countries, as
the forces of EMU, plus corporate restructuring and lower interest rates should
be a boost to equities. In Japan, economic stimulus packages and the Japanese
banking bill may ignite the economy. Once evidence is detected that the Japanese
economy has bottomed, the Portfolio's next large move would be to overweight
domestic Japanese equities. The Portfolio currently has an underweight position
in Japan when measured against its benchmark.
The Portfolio remains underweight in Asian equities as lower interest rates do
not provide enough incentive to overcome the real problem in Asia --
overcapacity. This structural problem may take years to solve. The Portfolio
also remains dramatically underweight in Latin America until economic strength
is seen in Brazil, which will eliminate devaluation fears.
<TABLE>
<CAPTION>
% OF TOTAL % OF OVER/(UNDER)
COUNTRY WEIGHTINGS INVESTMENTS MSCI EAFE WEIGHTING
<S> <C> <C> <C>
United Kingdom 19.6% 21.3% (1.7)%
Japan 13.1% 21.0% (7.9)%
France 12.0% 9.4% 2.6 %
Germany 8.7% 10.7% (2.0)%
Netherlands 8.6% 6.5% 2.1 %
Italy 5.7% 5.2% 0.5 %
Switzerland 5.3% 8.1% (2.8)%
Sweden 5.1% 2.6% 2.5 %
Ireland 4.0% 0.5% 3.5 %
Finland 3.1% 1.6% 1.5 %
Australia 2.7% 2.6% 0.1 %
Spain 2.4% 3.4% (1.0)%
Norway 2.0% 0.4% 1.6 %
Denmark 2.0% 0.9% 1.1 %
Other 5.7% 5.8% (0.1)%
</TABLE>
4 See Definition of Terms.
<PAGE>
<TABLE>
<CAPTION>
% OF NET
TOP TEN EQUITY HOLDINGS ASSETS
<S> <C>
Granada Group Plc 1.9%
Allied Irish Banks 1.8%
Nokia Corp., ADR 1.7%
Fuji Photo Film 1.6%
Novartis AG Registered Shares 1.6%
Vodafone Group Plc 1.6%
CRH Plc 1.5%
Securitas AB 1.5%
SoftBank Corp. 1.5%
Vivendi 1.5%
</TABLE>
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Portfolio are subject to change.
See Definition of Terms. 5
<PAGE>
[Begin Line Chart]
Aetna Small Company VP
Growth of $10,000
Aetna Small Company VP Russell 2000 Index
12/27/96 10,000 10,000
12/31/96 10,113 10,195
9,968 9,668
11,773 11,235
13,982 12,907
12/31/97 13,614 12,475
15,505 13,728
14,570 13,089
11,746 10,451
12/31/98 13,750 12,156
[End Line Chart]
<TABLE>
<CAPTION>
- ------------------------------------------
Average Annual Total Returns
for the period ended December 31, 1998*
- ------------------------------------------
<S> <C> <C>
Inception Date 1 Year Inception
- ------------------------------------------
12/27/96 1.10% 17.16%
- ------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA SMALL COMPANY VP
HOW DID THE PORTFOLIO PERFORM DURING THE PERIOD?
Aetna Small Company VP (Small Company) generated a 1.10% total return, net of
fund expenses, for the year ended December 31, 1998. The benchmark, Russell 2000
Index(c), returned -2.55% for the same period. Among variable annuity small
blend funds tracked by Morningstar, Inc., the Portfolio ranked in the top 35%
(out of 108 funds) for the year ended December 31, 1998.
WHAT ECONOMIC OR FINANCIAL CONDITIONS IMPACTED THE PORTFOLIO?
Three major events affected the investment arena and Small Company in 1998.
First, the large decline in energy prices hurt most energy stocks. While we
were underweight in this group throughout the year, most issues had negative
returns for the period. On the positive side, the decline in energy prices
helped most transportation stocks, an area where our overweight position helped
results significantly, particularly in the fourth quarter. Second, concerns
about the economy and slowing corporate profit growth depressed most financial
stocks. We have been underweighted in this area for the past three years.
Finally, periodic currency crises tended to dampen demand in many industries
(energy, manufacturing and raw materials) and contributed to increased
volatility in the financial markets. This volatility led us to hold somewhat
larger cash balances than in normal times.
WHAT INVESTMENTS INFLUENCED THE PORTFOLIO'S PERFORMANCE OVER THE LAST TWELVE
MONTHS?
The Portfolio received strong performance from investments in technology,
electric utilities, telephones and transportation. In addition, selected stocks
in consumer cyclicals (mostly cable and TV investments), healthcare and consumer
non-cyclicals contributed positively. In technology we had four holdings which
increased over 100% (Proxim, Inc., Cree Research, Inc.,
6 See Definition of Terms.
<PAGE>
Emulex Corp. and Inso Corp.). In electric utilities our largest holding,
Calpine Corp., returned over 55% while Cilcorp, Inc. received an offer to merge
at a substantial premium to its market price. Investment returns in telephones
were strong as the communication industry continues to both consolidate and
offer new services.
On the negative side, investments in energy (particularly oil service),
financials and raw materials were below expectations. Finally, selecting
holdings which did not meet earnings expectations were also weak.
WHAT IS YOUR OUTLOOK GOING FORWARD?
Looking forward, we continue to see a challenging investment environment.
Concerns about corporate profits, interest rates and currencies remain on most
investors' minds. In addition, the market continues to favor the large and more
liquid stocks. We cannot say how long this preference will continue, but we will
note that valuation spreads between large and small cap stocks are at
historically high levels. We believe these inefficiencies in today's market will
not last forever. Furthermore, we believe that our investment strategy of
focusing on those companies with the strongest business momentum and those
selling at reasonable prices, will continue to generate strong relative returns
over the long term.
PORTFOLIO SECTOR BREAKDOWN:
<TABLE>
<CAPTION>
% OF
COMMON % OF RUSSELL OVER/(UNDER)
SECTOR STOCKS 2000 WEIGHTING
<S> <C> <C> <C>
Basic Materials 5.7% 4.8% 0.9 %
Commercial Services 14.2% 9.8% 4.4 %
Consumer Discretionary 19.4% 17.1% 2.3 %
Consumer Non-Discretionary 4.2% 2.8% 1.4 %
Energy 2.7% 4.4% (1.7)%
Finance 10.7% 16.5% (5.8)%
Healthcare 10.8% 9.9% 0.9 %
Manufacturing 11.0% 10.8% 0.2 %
Technology 9.1% 18.9% (9.8)%
Utilities 12.2% 5.0% 7.2 %
</TABLE>
<TABLE>
<CAPTION>
% OF NET
TOP TEN EQUITY HOLDINGS ASSETS
<S> <C>
Calpine Corp. 2.1%
ICU Medical, Inc. 1.9%
Proxim, Inc. 1.9%
Emulex Corp. 1.8%
Skytel Communications, Inc. 1.8%
Avondale Industries, Inc. 1.7%
Nielson Media Research 1.7%
Superior TeleCom Inc. 1.7%
Dura Pharmaceuticals, Inc. 1.6%
Ruby Tuesday, Inc. 1.6%
</TABLE>
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Portfolio are subject to change.
See Definition of Terms. 7
<PAGE>
[Begin Line Chart]
Aetna Value Opportunity VP
Growth of $10,000
Aetna Value Opportunity VP S&P 500 Index
12/13/96 10,000 10,000
12/31/96 10,215 10,165
10,513 10,437
12,281 12,259
14,314 13,178
12/31/97 14,236 13,556
15,957 15,447
15,984 15,957
13,324 14,369
12/31/98 17,423 17,430
<TABLE>
<CAPTION>
- ------------------------------------------
Average Annual Total Returns
for the period ended December 31, 1998*
- ------------------------------------------
<S> <C> <C>
Inception Date 1 Year Inception
- ------------------------------------------
12/13/96 22.39% 31.12%
- ------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA VALUE OPPORTUNITY VP
HOW DID THE PORTFOLIO PERFORM DURING THE PERIOD?
Aetna Value Opportunity VP (Value Opportunity) generated a 22.39% total return,
net of fund expenses, for the year ended December 31, 1998. The benchmark,
Standard & Poor's (S&P) 500 Index(a), returned 28.57% for the same period. Among
variable annuity large blend funds tracked by Morningstar, Inc., the Portfolio
ranked in the top 68% (out of 662 funds) for the year ended December 31, 1998.
WHAT ECONOMIC OR FINANCIAL MARKET CONDITIONS IMPACTED THE PORTFOLIO?
The investment environment in 1998 was dominated by global financial market
turmoil. The stock market still produced solid returns, despite sharply
increased financial market volatility. What apparently started as a normal
equity market valuation correction in July, actually turned into a numbing
decline into October as investor confidence was rudely shaken by President
Clinton's legal ordeal, financial chaos in most emerging markets, Japan's
deepening recession and the near failure of a giant hedge fund, Long Term
Capital Management LP. Prompt action by the Federal Reserve to lower interest
rates helped calm the financial markets late in the year leading to a sharp year
end stock market rally.
WHAT INVESTMENTS INFLUENCED THE PORTFOLIO'S PERFORMANCE OVER THE PAST TWELVE
MONTHS?
Given 1998's uncertain economic environment, traditional value oriented issues
in the capital goods and manufacturing sectors performed poorly with the weakest
performance emanating from holdings in Boeing Co., Deere & Co. and Eaton Corp.
Furthermore, stock market leadership remained narrowly based throughout the year
with the largest growth issues, such as Dell Computer Corp. and Microsoft Corp.,
dominating performance. Their absence in the Portfolio explains a noticeable
performance drag relative to the S&P 500 Index.
8 See Definition of Terms.
<PAGE>
Fortunately, during the stock market's weakness in the fall, we were able to
opportunistically purchase issues of several quality companies at distressed
prices which significantly enhanced portfolio performance in the final months of
1998. New positions in General Electric Co., Computer Associates International,
Inc., Monsanto Co., Oracle Corp. and America Online, Inc. increased the
weighting in the technology and healthcare sectors in time for the year end
rally. These purchases were funded by weighting reductions in the energy and
basic materials sectors where current earnings fundamentals remain
disappointing.
WHAT IS YOUR OUTLOOK GOING FORWARD?
Despite the exaggerated market turmoil over the summer and fall of 1998, the
stock market now has a more balanced tone with much improved breadth. The market
is richly valued from a historic viewpoint, however, the speculation in internet
issues is definitely troublesome. While inflation remains low, liquidity and
interest rates generally lower around the world, these usually supportive
factors appear to be priced into the U.S. equity market at this time.
After a good start in early January, we expect that performance will be more
difficult to achieve in 1999 and that market volatility will continue to
increase. The investment philosophy of Value Opportunity is to focus on capital
appreciation by utilizing strict pricing disciplines in an effort to purchase
issues of dominant, high quality companies at attractive prices. A specific
event or broad market correction, like the one we witnessed in the fall of 1998,
can occur with some frequency thereby providing profitable entry points for
patient investors. Initially, we view these occurrences as opportunities to
analyze whether the event is a non-recurring incident, such as unexpected
write-off or one time earnings disappointment, or potentially the start of a
more serious problem. Quite often, industry-wide price corrections may also
provide a buying opportunity for a particular stock or group of stocks. We also
consider potential future events which may enhance or lower the outlook for a
particular stock or industry. The stock market can react quickly or harshly to
unforeseen events. With a value opportunity approach, we do our best to think
ahead and to take advantage of events to achieve superior long-term performance.
PORTFOLIO SECTOR BREAKDOWN:
<TABLE>
<CAPTION>
% OF
COMMON % OF S&P OVER/(UNDER)
SECTOR STOCKS 500 WEIGHTING
<S> <C> <C> <C>
Basic Materials 8.3% 3.1% 5.2 %
Commercial Services 3.3% 1.8% 1.5 %
Consumer Discretionary 5.4% 12.3% (6.9)%
Consumer Non-Discretionary 2.6% 9.4% (6.8)%
Energy 2.0% 6.9% (4.9)%
Finance 16.5% 15.7% 0.8 %
Healthcare 11.3% 12.3% (1.0)%
Manufacturing 11.9% 9.7% 2.2 %
Technology 31.0% 18.1% 12.9 %
Utilities 7.7% 10.7% (3.0)%
</TABLE>
See Definition of Terms. 9
<PAGE>
<TABLE>
<CAPTION>
% OF NET
TOP TEN EQUITY HOLDINGS ASSETS
<S> <C>
Compaq Computer Corp. 3.9%
America Online, Inc. 3.8%
Bristol-Myers Squibb Co. 3.5%
Sterling Commerce, Inc. 3.5%
American Express Co. 3.4%
International Business Machines Corp. 3.2%
Network Associates, Inc. 3.1%
Federal Home Loan Mortgage Corp. 3.0%
American Home Products Corp. 2.8%
Amgen, Inc. 2.8%
</TABLE>
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Portfolio are subject to change.
10 See Definition of Terms.
<PAGE>
DEFINITION OF TERMS
(a) The Standard & Poor's (S&P) 500 Index is a value-weighted, unmanaged index
of 500 widely held stocks that assumes the reinvestment of all dividends and is
considered to be representative of the U.S. stock market in general.
(b) The Morgan Stanley Capital International-Europe, Australia and Far East
(MSCI EAFE) Index is a market value-weighted average of the performance of more
than 900 securities listed on the stock exchanges of countries in Europe,
Australia and the Far East.
(c) The Russell 2000 Index consists of the smallest 2,000 companies in the
Russell 3000 Index and represents approximately 11% of the Russell 3000 total
market capitalization. The 3,000 largest U.S. companies by market
capitalization, representing nearly 98% of the U.S. equity market, comprise the
Russell 3000 Index. Both indices assume reinvestment of all dividends and are
unmanaged.
11
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
GROWTH
================================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET VALUE
SHARES
------------- -------------
<S> <C> <C>
COMMON STOCKS (77.1%)
AUTOMOTIVE (1.4%)
Federal-Mogul Corp. .................. 33,300 $ 1,981,350
-------------
BIOTECH AND MEDICAL PRODUCTS (6.0%)
Amgen, Inc. + ........................ 26,500 2,770,906
Biogen, Inc. + ....................... 18,900 1,568,700
Biomet, Inc. ......................... 48,500 1,952,125
Sofamor Danek Group, Inc. + .......... 2,200 267,850
Watson Pharmaceuticals, Inc. + ....... 31,200 1,961,700
-------------
8,521,281
-------------
COMMERCIAL SERVICES (2.4%)
Omnicom Group, Inc. .................. 18,600 1,078,800
Young And Rubicam, Inc. + ............ 70,800 2,292,150
-------------
3,370,950
-------------
COMPUTERS (1.3%)
Computer Sciences Corp. .............. 700 45,106
Dell Computer Corp. + ................ 24,700 1,807,732
-------------
1,852,838
-------------
CONGLOMERATE AND AEROSPACE (0.8%)
General Electric Co. ................. 10,800 1,102,275
-------------
CONSUMER FINANCE (5.2%)
Associates First Capital Corp. ....... 87,900 3,724,763
Federal National Mortgage Association 35,300 2,612,200
MBNA Corp. ........................... 43,500 1,084,781
-------------
7,421,744
-------------
CONSUMER PRODUCTS (1.3%)
Clorox Co. ........................... 16,000 1,869,000
-------------
CONSUMER SERVICES (0.5%)
Carnival Corp. ....................... 15,100 724,800
-------------
DATA AND IMAGING SERVICES (13.1%)
America Online, Inc. ................. 15,800 2,528,000
Cisco Systems, Inc. + ................ 20,250 1,879,453
Compuware Corp. + .................... 45,200 3,531,250
EMC/MASS Corp. + ..................... 39,100 3,323,500
Lexmark International Group, Inc. + .. 33,200 3,336,600
Microsoft Corp. + .................... 29,100 4,035,806
-------------
18,634,609
-------------
DISCRETIONARY RETAIL (6.1%)
Family Dollar Stores, Inc. ........... 129,200 2,842,400
Lowe's Co., Inc. ..................... 40,400 2,067,975
Wal-Mart Stores, Inc. ................ 45,400 3,697,262
-------------
8,607,637
-------------
DRUGS (7.1%)
Merck & Co., Inc. .................... 14,700 2,171,006
Pfizer, Inc. ......................... 11,700 1,467,619
Schering Plough ...................... 65,000 3,591,250
Warner Lambert Co. ................... 38,900 2,924,794
-------------
10,154,669
-------------
ELECTRONIC MEDIA (2.2%)
Capstar Broadcasting Corp. + ......... 28,200 645,075
NUMBER OF MARKET
SHARES VALUE
------------- -------------
ELECTRONIC MEDIA (CONTINUED)
CBS Corp. ............................ 77,900 $ 2,551,225
-------------
3,196,300
-------------
FOOD AND DRUG RETAIL (2.7%)
Kroger Co. (The) + ................... 13,300 804,650
Safeway, Inc. + ...................... 50,000 3,046,875
-------------
3,851,525
-------------
GAS UTILITIES (1.9%)
Enron Corp. .......................... 47,900 2,733,294
-------------
HEALTH SERVICES (4.2%)
Allegiance Corp. ..................... 45,500 2,121,438
HBO & Co. ............................ 100,600 2,885,962
Wellpoint Health Networks, Inc. + ... 11,800 1,026,600
-------------
6,034,000
-------------
HOUSING AND FURNISHINGS (2.1%)
Centex Corp. ......................... 27,500 1,239,219
Maytag Corp. ......................... 27,000 1,680,750
-------------
2,919,969
-------------
INDUSTRIAL SERVICES (1.1%)
Allied Waste Industries, Inc. + ...... 64,800 1,530,900
-------------
INSURANCE (1.7%)
SunAmerica, Inc. ..................... 29,100 2,360,738
-------------
INVESTMENT SERVICES (1.7%)
Firstar Corp. ........................ 26,468 2,468,141
-------------
MAJOR TELECOMMUNICATIONS (5.4%)
MCI Worldcom, Inc. + ................. 65,200 4,678,100
SBC Communications, Inc. ............. 54,700 2,933,287
-------------
7,611,387
-------------
OTHER TELECOMMUNICATIONS (4.2%)
Century Telephone Enterprises, Inc. .. 17,200 1,161,000
Nokia Corp., ADR ..................... 12,500 1,505,469
Tellabs, Inc. + ...................... 48,900 3,352,706
-------------
6,019,175
-------------
PRODUCER GOODS (2.8%)
Tyco International Ltd. .............. 53,000 3,998,187
-------------
SEMICONDUCTORS AND ELECTRONICS (1.9%)
Intel Corp. .......................... 23,200 2,750,650
-------------
TOTAL COMMON STOCKS (COST $87,758,220) 109,715,419
-------------
PRINCIPAL
AMOUNT
-------------
SHORT-TERM INVESTMENTS (9.3%)
Federal Home Loan Mortgage Corp.,
4.40%, 01/04/99 ..................... $12,536,000 12,536,000
U.S. Treasury Bill, 3.98%, 02/18/99 .. 200,000 198,912
U.S. Treasury Bill, 4.61%, 02/18/99 .. 100,000 99,456
U.S. Treasury Bill, 4.98%, 02/18/99 @. 400,000 397,824
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $13,231,941) 13,232,192
-------------
TOTAL INVESTMENTS (COST $100,990,161)(a) 122,947,611
OTHER ASSETS LESS LIABILITIES 19,415,628
-------------
TOTAL NET ASSETS $142,363,239
=============
</TABLE>
12 See Notes to Portfolio of Investments.
<PAGE>
===============================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes amounts to
$101,098,605. Unrealized gains and losses, based on identified tax cost at
December 31, 1998, are as follows:
<TABLE>
<S> <C>
Unrealized gains................................ $21,928,317
Unrealized losses............................... (79,311)
-----------
Net unrealized gain............................ $21,849,006
===========
</TABLE>
Information concerning open futures contracts at December 31, 1998 is shown
below:
<TABLE>
<CAPTION>
NO. OF INITIAL EXPIRATION UNREALIZED
CONTRACTS VALUE DATE GAIN/(LOSS)
----------- ------------ ------------ ---------------
LONG CONTRACTS
- ----------------------
<S> <C> <C> <C> <C>
S&P 500 Index Futures 18 $5,206,565 Mar 99 $ 398,023
========== ==========
</TABLE>
+ Non-income producing security.
@ Security pledged to cover initial margin requirements on open futures
contracts at December 31, 1998.
Category percentages are based on net assets.
See Notes to Financial Statements. 13
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
INTERNATIONAL
================================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ --------------
<S> <C> <C>
COMMON STOCKS (93.1%)
AUSTRALIA (2.6%)
Telstra Corp. Ltd. (Other
Telecommunications) +................... 38,700 $ 181,111
Westpac Banking Corp. Ltd. (Banks and
Thrifts)................................ 35,403 237,121
----------
TOTAL AUSTRALIA 418,232
----------
BELGIUM (1.3%)
Delhaize-le Lion SA (Food and Beverage) . 2,400 212,379
----------
CANADA (1.0%)
Canadian National Railway Co. (Surface
Transport).............................. 3,000 155,625
----------
DENMARK (1.9%)
Den Danske Bank (Investment Services) ... 900 120,905
Tele Danmark A/S (Major
Telecommunications)..................... 1,400 188,954
----------
TOTAL DENMARK 309,859
----------
FINLAND (3.0%)
Nokia Corp., ADR (Other
Telecommunications)..................... 2,300 277,006
Sonera Group Oyj (Other
Telecommunications)..................... 11,300 203,085
----------
TOTAL FINLAND 480,091
----------
FRANCE (11.4%)
Credit Commercial de France (Banks and
Thrifts) +.............................. 1,000 92,908
Elf Aquitaine SA (Oil) .................. 1,400 161,899
Etablissements Economiques du Casino
Guichard-Perrachon SA (Commercial
Services) +............................. 800 83,348
Gemini Sogeti SA (Insurance) ............ 1,100 176,632
Groupe Danone (Food and Beverage) ....... 750 214,815
Lafarge SA
(Forest Products and Building Materials) 2,000 190,111
Renault SA (Automotive) ................. 3,250 146,030
Sanofi SA (Drugs) ....................... 1,250 205,864
Scor (Insurance) ........................ 3,500 231,508
Societe Generale (Banks and Thrifts) .... 650 105,304
Vivendi (Utilities - Water) ............. 960 249,185
----------
TOTAL FRANCE 1,857,604
----------
GERMANY (6.2%)
Bayericshe Hypo-und Vereinsb
(Chemicals) + .......................... 1,412 110,631
BHF-Bank AG (Banks and Thrifts) ......... 2,800 112,632
DaimlerChrysler AG (Automotive) ......... 1,296 127,997
Deutsche Pfandbrief & Hypothekenbank AG
(Banks and Thrifts) .................... 2,100 184,078
Gehe AG (Health Services) ............... 3,000 207,133
Mannesmann AG (Producer Goods) .......... 1,200 137,608
MobileCom AG (Other Telecommunications) . 90 28,638
RWE AG (Oil) ............................ 1,800 98,613
----------
TOTAL GERMANY 1,007,330
----------
HONG KONG (1.9%)
HSBC Holdings Plc (Investment Services) . 5,400 134,525
VTech Holdings Ltd.
(Semiconductors and Electronics) ....... 39,000 170,151
----------
TOTAL HONG KONG 304,676
----------
IRELAND (3.8%)
Allied Irish Banks (Banks and Thrifts) .. 16,195 290,485
CRH Plc (Forest Products and Building
Materials).............................. 14,367 248,486
NUMBER OF MARKET
SHARES VALUE
------------ ----------
IRELAND (CONTINUED)
Waterford Wedgewood (Housing and
Furnishings)............................ 94,000 $ 79,888
----------
TOTAL IRELAND 618,859
----------
ITALY (5.4%)
Arnoldo Mondadori Editor (Print Media) .. 13,000 172,262
Banca Commerciale Italiana (Banks and
Thrifts)................................ 29,000 200,492
Banca del Nazionale Lavoro (Banks and
Thrifts) +.............................. 59,400 178,134
Istituto Nazionale delle Assicurazioni
(Insurance) +........................... 36,300 96,092
Telecom Italia SpA (Commercial Services) 17,900 153,062
Unione Immobiliare SpA
(Real Estate Investment Trusts) + ...... 155,200 81,132
----------
TOTAL ITALY 881,174
----------
JAPAN (12.5%)
Bank of Tokyo-Mitsubishi, Ltd. (The)
(Investment Services) .................. 8,500 88,165
Fuji Photo Film (Chemicals) ............. 7,000 260,638
Fujikura Ltd. (Semiconductors and
Electronics)............................ 22,000 118,192
Fujitec Co., Ltd.
(Forest Products and Building Materials) 6,000 38,723
Hitachi Ltd. (Semiconductors and
Electronics)............................ 30,000 186,170
Kao Corp. (Consumer Products) ........... 8,900 201,197
Mizuno Corp. (Consumer Products) ........ 39,000 118,590
Nintendo Co. Ltd.
(Semiconductors and Electronics) ....... 1,200 116,489
Nippon Telegraph & Telephone
(Major Telecommunications) ............. 5 38,652
NTT Mobile Communication Network, Inc.
(Other Telecommunications) + ........... 4 164,894
Orix Corp. (Investment Services) ........ 2,250 168,351
Seino Transportation Co. Ltd. (Surface
Transport).............................. 27,000 154,628
Shohkoh Fund & Co. (Banks and Thrifts) .. 400 129,078
SoftBank Corp. (Banks and Thrifts) ...... 4,000 241,135
----------
TOTAL JAPAN 2,024,902
----------
MEXICO (0.4%)
Grupo Financiero Banamex Accival, SA de
CV (Banacci) (Banks and Thrifts) + ..... 50,800 66,672
----------
NETHERLANDS (8.2%)
Akzo Nobel (Chemicals) .................. 2,400 109,341
Fortis Amev NV (Insurance) .............. 2,550 211,424
Hunter Douglas NV (Consumer Services) ... 6,653 220,502
ING Groep NV (Banks and Thrifts) ........ 3,670 223,912
Koninklijke Ahold NV (Commercial
Services)............................... 4,898 181,127
Philips Electronic Nv
(Semiconductors and Electronics) + ..... 1,700 115,069
TNT Post Group NV (Surface Transport) ... 4,600 148,292
VNU-Verenigde Nederlandes
Uitgeversbedrijven Verenigd Bezit (Print
Media).................................. 3,350 126,382
----------
TOTAL NETHERLANDS 1,336,049
----------
NEW ZEALAND (0.8%)
Fernz Corp. Ltd. (Chemicals) ............ 40,300 124,538
----------
NORWAY (1.9%)
Det Sondenfjelds-Norske Dampskibsselskab
(Oil) +................................. 6,300 49,613
Merkantildata ASA (Data and Imaging
Services)............................... 14,700 144,704
14 See Notes to Portfolio of Investments.
<PAGE>
===============================================================================
NUMBER OF MARKET
SHARES VALUE
------------ ----------
NORWAY (CONTINUED)
Ocean Rig ASA (Oil) + ................... 420,000 $ 114,661
----------
TOTAL NORWAY 308,978
----------
SPAIN (2.3%)
Iberdrola SA (Electric Utilities) + ..... 11,100 207,985
Telefonica de Espana (Major
Telecommunications)..................... 3,600 160,315
Telefonica SA Rights (Major
Telecommunications)..................... 3,600 3,201
----------
TOTAL SPAIN 371,501
----------
SWEDEN (4.8%)
Asticus AB (Investment Services) ........ 3,000 29,423
Ericsson ADR (Other Telecommunications) . 3,710 88,808
Hennes & Mauritz AB (Textiles and
Apparel)................................ 700 57,169
Industrial & Financial Systems
(Data and Imaging Services) + .......... 14,100 162,643
NetCom AB (Major Telecommunications) + .. 2,900 118,064
Securitas AB (Consumer Services) ........ 15,600 242,493
Volvo AB (Automotive) ................... 3,800 87,197
----------
TOTAL SWEDEN 785,797
----------
SWITZERLAND (5.1%)
Adecco SA (Commercial Services) ......... 410 187,164
Novartis AG Registered Shares (Health
Services) +............................. 130 255,552
Roche Holding AG (Biotech and Medical
Products)............................... 18 219,643
UBS AG (Banks and Thrifts) .............. 525 161,303
----------
TOTAL SWITZERLAND 823,662
----------
UNITED KINGDOM (18.6%)
Bank of Scotland (Banks and Thrifts) .... 15,700 188,070
Berisford Plc (Industrial Services) ..... 37,700 112,902
British Aerospace Plc
(Conglomerate and Aerospace) ........... 22,631 193,156
British Telecom Plc
(Major Telecommunications) ............. 12,497 187,959
Cable & Wireless Plc
(Other Telecommunications) + ........... 11,500 140,820
Dixons Group Plc (Discretionary Retail) . 11,000 154,829
Glaxo Wellcome Plc (Drugs) .............. 5,437 187,700
Granada Group Plc (Consumer Services) + . 17,400 305,415
Kingfisher Plc (Discretionary Retail) ... 17,850 193,631
National Westminster Bank Plc
(Banks and Thrifts) .................... 8,700 168,629
Pearson Plc (Print Media) ............... 12,100 240,944
Peninsular & Oriental Steam Navigation
Co. (Surface Transport) + .............. 16,402 194,296
Provident Financial Plc (Consumer
Finance)................................ 2,000 29,382
Railtrack Group (Surface Transport) ..... 3,974 103,804
SmithKline Beecham Plc (Drugs) .......... 9,000 124,910
Unilever Plc (Consumer Products) ........ 10,200 114,889
Vodafone Group Plc (Consumer Products) .. 16,212 263,793
WPP Group Plc (Commercial Services) ..... 20,100 122,061
----------
TOTAL UNITED KINGDOM 3,027,190
----------
TOTAL COMMON STOCKS (COST $13,061,499) 15,115,118
----------
NUMBER OF MARKET
SHARES VALUE
------------ ----------
PREFERRED STOCKS (2.1%)
GERMANY (2.1%)
Henkel KGAA (Chemicals) ................. 1,550 $ 138,659
Hugo Boss AG (Textiles and Apparel) + ... 60 115,274
SAP AG (Data and Imaging Services) + .... 180 85,936
----------
TOTAL PREFERRED STOCKS (COST $267,278) 339,869
----------
PRINCIPAL
AMOUNT
------------
SHORT-TERM INVESTMENTS (0.6%)
U.S. GOVERNMENT OBLIGATIONS
U.S. Treasury, Zero Coupon, 02/18/99 .... $100,000 99,458
TOTAL SHORT-TERM INVESTMENTS (COST $99,366) 99,458
-----------
TOTAL INVESTMENTS (COST $13,428,143)(a) 15,554,445
OTHER ASSETS LESS LIABILITIES 687,891
-----------
TOTAL NET ASSETS $16,242,336
===========
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes amounts to
$13,548,199. Unrealized gains and losses, based on identified tax cost at
December 31, 1998, are as follows:
<TABLE>
<S> <C>
Unrealized gains................................ $2,552,104
Unrealized losses............................... (545,857)
-----------
Net unrealized gain............................ $2,006,246
===========
</TABLE>
+ Non-income producing security.
Category percentages are based on net assets.
See Notes to Financial Statements. 15
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
SMALL COMPANY
===============================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------- --------------
<S> <C> <C>
COMMON STOCKS (78.2%)
AIR TRANSPORT (2.8%)
Airborne Freight Corp. .................. 38,500 $ 1,388,406
Eagle USA Airfreight, Inc. + ............ 59,100 1,447,950
-----------
2,836,356
-----------
AUTOMOTIVE (0.9%)
Arvin Industries, Inc. .................. 21,500 896,281
-----------
BANKS AND THRIFTS (4.7%)
Cullen/Frost Bankers, Inc. .............. 18,600 1,020,675
Greater Bay Bancorp ..................... 10,900 367,875
Harbor Florida Bancshares, Inc. ......... 116,600 1,304,462
Republic Security Financial Corp. ....... 94,100 1,140,962
Riggs National Corp. .................... 24,100 491,038
Timberland Bancorp, Inc. ................ 28,100 344,225
-----------
4,669,237
------------
BIOTECH AND MEDICAL PRODUCTS (4.0%)
CNS, Inc. + ............................. 152,800 525,250
CONMED Corp. + .......................... 25,900 854,700
i-STAT Corp. + .......................... 87,600 657,000
ICU Medical, Inc. + ..................... 88,400 1,944,800
-----------
3,981,750
-----------
CHEMICALS (0.9%)
Geon Co. (The) .......................... 39,900 917,700
-----------
COMMERCIAL SERVICES (3.3%)
Nielsen Media Research .................. 93,300 1,679,400
OroAmerica, Inc. + ...................... 70,900 700,138
Telespectrum Worldwide, Inc. + .......... 94,200 924,337
-----------
3,303,875
-----------
COMPUTERS (3.1%)
Alliance Semiconductor Corp. ............ 201,800 819,813
Saville Systems Plc + ................... 83,600 1,588,400
SCB Computer Technology, Inc. + ......... 67,600 667,550
-----------
3,075,763
-----------
CONSUMER FINANCE (1.4%)
Medallion Financial Corp. ............... 97,300 1,392,606
-----------
CONSUMER PRODUCTS (1.3%)
Church & Dwight, Inc. ................... 19,600 704,375
Suprema Specialties, Inc. + ............. 126,300 631,500
-----------
1,335,875
-----------
CONSUMER SERVICES (3.4%)
GP Strategies Corp. + ................... 90,500 1,357,500
Rental Service Corp. + .................. 28,600 448,662
Ruby Tuesday, Inc. ...................... 76,900 1,634,125
-----------
3,440,287
-----------
CONSUMER SPECIALTIES (0.4%)
Russ Berrie & Co., Inc. ................. 16,600 390,100
-----------
DATA AND IMAGING SERVICES (6.5%)
Activision, Inc. + ...................... 77,900 866,638
Emulex Corp. + .......................... 44,600 1,784,000
JDA Software Group, Inc. + .............. 152,200 1,474,437
Mapics, Inc. + .......................... 27,200 448,800
NUMBER OF MARKET
SHARES VALUE
------------- -------------
DATA AND IMAGING SERVICES (CONTINUED)
Proxim, Inc. + ......................... 71,300 $ 1,902,819
-----------
6,476,694
-----------
DRUGS (1.6%)
Dura Pharmaceuticals, Inc. + ............ 107,900 1,638,731
-----------
ELECTRIC UTILITIES (4.6%)
Calpine Corp. + ......................... 83,000 2,095,750
Cilcorp, Inc. ........................... 10,900 666,944
Montana Power Co. ....................... 9,900 559,969
Otter Tail Power Co. .................... 11,100 442,612
Philadelphia Suburban Corp. ............. 27,400 810,012
-----------
4,575,287
-----------
ELECTRONIC MEDIA (4.7%)
Ackerley Group, Inc. .................... 44,000 803,000
Jones Intercable, Inc. + ................ 29,900 1,065,188
Midway Games, Inc. + .................... 50,000 550,000
Scandinavian Broadcasting System SA + ... 27,700 747,900
Young Broadcasting Corp. + .............. 35,300 1,478,187
-----------
4,644,275
-----------
FOOD AND BEVERAGE (2.0%)
Hain Food Group, Inc. (The) + ........... 34,800 870,000
Hansen Natural Corp. + .................. 76,700 412,263
Smithfields Foods, Inc. + .............. 19,800 670,725
-----------
1,952,988
------------
FOOD AND DRUG RETAIL (1.5%)
Ruddick Corp. ........................... 67,200 1,545,600
-----------
FOREST PRODUCTS AND BUILDING MATERIALS (1.1%)
Centex Construction Products, Inc. ...... 27,300 1,109,063
-----------
GAS UTILITIES (0.8%)
Kaneb Services, Inc. + .................. 202,600 823,063
-----------
HEALTH SERVICES (2.8%)
Renex Corp. + ........................... 73,700 534,325
Shared Medical Systems Corp. ............ 23,500 1,172,063
Sierra Health Services, Inc. + .......... 53,700 1,131,056
-----------
2,837,444
-----------
HOUSING AND FURNISHINGS (1.1%)
Webb (Del E) Corp. ...................... 41,200 1,135,575
-----------
INDUSTRIAL SERVICES (0.8%)
Park-Ohio Holdings Corp. + .............. 54,000 816,750
-----------
INSURANCE (2.0%)
American Heritage Life Investment Corp. . 48,100 1,175,444
Automobile Protection Corp. + ........... 13,000 152,750
Scottish Annuity & Life Holdings, Ltd. + 45,900 631,125
-----------
1,959,319
-----------
MAJOR TELECOMMUNICATIONS (1.7%)
Superior TeleCom Inc. ................... 36,800 1,738,800
-----------
OIL (0.5%)
Union Pacific Resources Grp ............. 50,000 453,125
-----------
OIL SERVICES (2.0%)
McDermott International, Inc. ........... 46,600 1,150,437
Seitel, Inc. + .......................... 69,800 868,138
-----------
2,018,575
-----------
16 See Notes to Portfolio of Investments.
<PAGE>
===============================================================================
NUMBER OF MARKET
SHARES VALUE
------------- --------------
OTHER TELECOMMUNICATIONS (9.6%)
Associated Group, Inc. + ................ 24,100 $ 1,036,300
ICG Communications, Inc. + .............. 57,200 1,229,800
International Fibercom, Inc. + .......... 111,600 816,075
Kushner- Locke Co. (The) + .............. 164,700 1,224,956
Metromedia International Group, Inc. + .. 196,900 1,070,644
Price Communications Corp. + ............ 118,750 1,536,328
SkyTel Communications, Inc. + ........... 79,600 1,761,150
Telephone & Data Systems, Inc. ......... 20,500 921,219
-----------
9,596,472
-----------
PRODUCER GOODS (3.4%)
Alpine Group, Inc. (The) + .............. 78,200 1,173,000
Avondale Industries, Inc. + ............. 60,000 1,740,000
Dal-Tile International, Inc. + .......... 46,300 480,362
-----------
3,393,362
-----------
SEMICONDUCTORS AND ELECTRONICS (2.2%)
Boston Acoustics, Inc. .................. 43,650 1,156,725
Nam Tai Electronics, Inc. ............... 95,200 1,071,000
-----------
2,227,725
-----------
SPECIALTY CHEMICALS (1.9%)
Alcide Corp. + .......................... 53,800 813,725
Eco Soil Systems, Inc. + ................ 126,100 1,103,375
-----------
1,917,100
-----------
SURFACE TRANSPORT (1.0%)
Knightsbridge Tankers Ltd. .............. 46,000 957,375
-----------
TOTAL COMMON STOCKS (COST $72,236,301) 78,057,153
-----------
PRINCIPAL
AMOUNT
-------------
SHORT-TERM INVESTMENTS (18.0%)
Federal Home Loan Mortgage Corp.,
4.40%, 01/04/99 ........................ $17,393,000 17,393,000
U.S. Treasury Bill, 4.50%, 02/18/99 ..... 100,000 99,456
U.S. Treasury Bill, 4.77%, 02/18/99 ..... 100,000 99,456
U.S. Treasury Bill, 4.98%, 02/18/99 @.... 400,000 397,824
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $17,989,354) 17,989,736
-----------
TOTAL INVESTMENTS (COST $90,225,655)(a) 96,046,889
OTHER ASSETS LESS LIABILITIES 3,776,085
-----------
TOTAL NET ASSETS $99,822,974
===========
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes amounts to
$90,569,466. Unrealized gains and losses, based on identified tax cost at
December 31, 1998, are as follows:
<TABLE>
<S> <C>
Unrealized gains............................... $10,131,282
Unrealized losses.............................. (4,653,859)
-----------
Net unrealized gain........................... $ 5,477,423
===========
</TABLE>
Information concerning open futures contracts at December 31, 1998 is shown
below:
<TABLE>
<CAPTION>
NO. OF INITIAL EXPIRATION UNREALIZED
CONTRACTS VALUE DATE GAIN/(LOSS)
------------ -------------- ------------- ----------------
LONG CONTRACTS
- -----------------
<S> <C> <C> <C> <C>
Russell 2000
Index Futures
56 $11,254,221 Mar 99 $ 652,276
=========== ==========
</TABLE>
+ Non-income producing security.
@ Security pledged to cover initial margin requirements on open futures
contracts at December 31, 1998.
Category percentages are based on net assets.
See Notes to Financial Statements. 17
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
VALUE OPPORTUNITY
===============================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ --------------
<S> <C> <C>
COMMON STOCKS (83.0%)
AUTO PARTS AND HARDWARE (2.0%)
Dana Corp. ............................. 38,000 $ 1,553,250
-----------
BANKS AND THRIFTS (1.6%)
PNC Bank Corp. ......................... 22,000 1,190,750
-----------
BIOTECH AND MEDICAL PRODUCTS (5.7%)
Amgen, Inc. + .......................... 20,700 2,164,444
Monsanto Co. ........................... 45,000 2,137,500
-----------
4,301,944
-----------
COMPUTERS (9.5%)
Compaq Computer Corp. .................. 70,000 2,935,625
International Business Machines Corp. .. 13,300 2,457,175
Sun Microsystems, Inc. + ............... 21,500 1,840,937
-----------
7,233,737
-----------
CONGLOMERATE AND AEROSPACE (3.8%)
General Dynamics Corp. ................. 15,000 879,375
General Electric Co. ................... 20,000 2,041,250
-----------
2,920,625
-----------
CONSUMER FINANCE (3.0%)
Federal Home Loan Mortgage Corp. ....... 36,000 2,319,750
-----------
DATA AND IMAGING SERVICES (14.0%)
America Online, Inc. ................... 18,000 2,880,000
Computer Associates International, Inc. 31,000 1,321,375
Network Associates, Inc. + ............. 36,000 2,385,000
Oracle Corp. + ......................... 32,500 1,401,562
Sterling Commerce, Inc. + .............. 60,000 2,700,000
-----------
10,687,937
-----------
DISCRETIONARY RETAIL (0.9%)
Officemax, Inc. + ...................... 58,800 712,950
-----------
DIVERSIFIED FINANCIAL SERVICES (5.3%)
American Express Co. ................... 25,000 2,556,250
Citigroup Inc. ......................... 30,000 1,485,000
-----------
4,041,250
-----------
DRUGS (6.3%)
American Home Products Corp. ........... 38,000 2,139,875
Bristol-Myers Squibb Co. ............... 20,000 2,676,250
-----------
4,816,125
-----------
FOOD AND BEVERAGE (2.2%)
PepsiCo, Inc. .......................... 40,000 1,637,500
-----------
FOOD AND DRUG RETAIL (1.8%)
Albertson's, Inc. ...................... 21,700 1,382,019
----------
FOREST PRODUCTS AND BUILDING MATERIALS ( 4.0% )
Owens-Illinois, Inc. + ................. 40,000 1,225,000
Sealed Air Corp. + ..................... 35,000 1,787,188
-----------
3,012,188
-----------
GAS UTILITIES (1.7%)
Enron Corp. ............................ 22,000 1,255,375
-----------
HOUSING AND FURNISHINGS (1.7%)
Centex Corp. ........................... 28,900 1,302,306
-----------
INSURANCE (3.5%)
Exel Ltd. .............................. 19,800 1,485,000
NUMBER OF MARKET
SHARES VALUE
------------ --------------
<S> <C> <C>
INSURANCE (CONTINUED)
Orion Capital Corp. .................... 30,000 $ 1,194,375
-----------
2,679,375
------------
MAJOR TELECOMMUNICATIONS (6.6%)
AT&T Corp. ............................. 20,000 1,505,000
Bell Atlantic Corp. .................... 30,200 1,715,737
Loral Space & Commmunications Ltd. + ... 100,000 1,781,250
-----------
5,001,987
-----------
OIL SERVICES (1.5%)
McDermott International, Inc. .......... 45,000 1,110,938
-----------
OTHER TELECOMMUNICATIONS (2.0%)
Century Telephone Enterprises, Inc. .... 22,700 1,532,250
-----------
REAL ESTATE INVESTMENT TRUSTS (1.5%)
Duke Realty Investments, Inc. .......... 50,000 1,162,500
-----------
SEMICONDUCTORS AND ELECTRONICS (1.7%)
Intel Corp. ............................ 10,800 1,280,475
-----------
SURFACE TRANSPORT (2.7%)
Kansas City Southern Industries, Inc. .. 41,000 2,016,688
-----------
TOTAL COMMON STOCKS (COST $51,650,208) 63,151,919
-----------
PRINCIPAL
AMOUNT
------------
SHORT-TERM INVESTMENTS (5.8%)
Federal Home Loan Mortgage Corp.,
4.40%, 01/04/99 ....................... $4,083,000 4,083,000
U.S. Treasury Bill, 4.98%, 02/18/99 @... 300,000 298,368
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $4,381,134) 4,381,368
-----------
TOTAL INVESTMENTS (COST $56,031,342)(a) 67,533,287
OTHER ASSETS LESS LIABILITIES 8,575,419
-----------
TOTAL NET ASSETS $76,108,706
===========
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes amounts to
$56,031,342. Unrealized gains and losses, based on identified tax cost at
December 31, 1998, are as follows:
<TABLE>
<S> <C>
Unrealized gains.............................. $13,272,603
Unrealized losses............................. (1,770,658)
-----------
Net unrealized gain.......................... $11,501,945
===========
</TABLE>
18 See Notes to Portfolio of Investments.
<PAGE>
NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED)
Information concerning open futures contracts at December 31, 1998 is shown
below:
<TABLE>
<CAPTION>
NO. OF INITIAL EXPIRATION UNREALIZED
CONTRACTS VALUE DATE GAIN/(LOSS)
----------- ------------ ------------ ---------------
LONG CONTRACTS
- ----------------------
<S> <C> <C> <C> <C>
S&P 500 Index Futures 9 $2,603,283 Mar 99 $ 199,011
========== ==========
</TABLE>
+ Non-income producing security.
@ Security pledged to cover initial margin requirements on open futures
contracts at December 31, 1998.
Category percentages are based on net assets.
See Notes to Financial Statements. 19
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
===============================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at market value ..........................................
Cash ..................................................................
Cash denominated in foreign currencies ................................
Receivable for:
Dividends and interest ...............................................
Investments sold .....................................................
Fund shares sold .....................................................
Variation margin .....................................................
Recoverable foreign taxes ............................................
Reimbursment from Investment Adviser .................................
Prepaid expenses ......................................................
Gross unrealized gain on forward foreign currency exchange contracts ..
Total assets .....................................................
LIABILITIES:
Payable for:
Investments purchased ................................................
Fund shares redeemed .................................................
Accrued investment advisory fees ......................................
Accrued administrative service fees ...................................
Accrued custody fees ..................................................
Other liabilities .....................................................
Gross unrealized loss on forward foreign currency exchange contracts ..
Total liabilities ................................................
NET ASSETS ...........................................................
NET ASSETS REPRESENTED BY:
Paid-in capital .......................................................
Net unrealized gain on investments, open futures contracts and
foreign currency related transactions ................................
Undistributed net investment income ...................................
Accumulated net realized gain (loss) on investments ...................
NET ASSETS ...........................................................
CAPITAL SHARES:
Authorized ............................................................
Par value .............................................................
Outstanding ...........................................................
Net asset value, offering and redemption price per share (net assets
divided by shares outstanding) .......................................
Cost of investments ...................................................
Cost of cash denominated in foreign currencies ........................
</TABLE>
20 See Notes to Financial Statements.
<PAGE>
===============================================================================
<TABLE>
<CAPTION>
GROWTH INTERNATIONAL SMALL COMPANY VALUE OPPORTUNITY
--------------- -------------- --------------- -------------------
<S> <C> <C> <C>
$122,947,611 $ 15,554,445 $ 96,046,889 $ 67,533,287
638 160,321 5,006 10,274
-- 843,359 -- --
46,308 2,848 57,696 31,888
692,782 882,661 -- 249,492
21,460,568 12,224 8,170,576 8,297,332
15,300 -- 217,000 7,650
-- 19,259 -- --
-- 14,120 -- 34,693
38 92 46 40
-- 7,229 -- --
------------ ------------ ------------ ------------
145,163,245 17,496,558 104,497,213 76,164,656
------------ ------------ ------------ ------------
2,705,072 1,070,684 4,580,688 --
-- 38,579 4,571 2
63,762 11,618 61,821 36,559
7,970 1,025 6,182 4,570
11,495 57,989 8,474 4,362
11,707 7,248 12,503 10,457
-- 67,079 -- --
------------ ------------ ------------ ------------
2,800,006 1,254,222 4,674,239 55,950
------------ ------------ ------------ ------------
$142,363,239 $ 16,242,336 $ 99,822,974 $ 76,108,706
============ ============ ============ ============
$126,361,184 $ 13,892,819 $100,223,981 $ 66,911,800
22,355,473 2,069,277 6,473,510 11,700,956
-- 117,527 49,652 7,394
(6,353,418) 162,713 (6,924,169) (2,511,444)
------------ ------------ ------------ ------------
$142,363,239 $ 16,242,336 $ 99,822,974 $ 76,108,706
============ ============ ============ ============
Two Billion Two Billion Two Billion Two Billion
$ 0.001 $ 0.001 $ 0.001 $ 0.001
10,523,017 1,401,826 7,806,428 5,283,086
$ 13.53 $ 11.59 $ 12.79 $ 14.41
$100,990,161 $ 13,428,143 $ 90,225,655 $ 56,031,342
$ -- $ 841,615 $ -- $ --
</TABLE>
See Notes to Financial Statements. 21
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
STATEMENTS OF OPERATIONS
===============================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends .............................................................
Interest ..............................................................
Foreign taxes withheld on dividends ...................................
Total investment income ..........................................
INVESTMENT EXPENSES:
Investment advisory fees ..............................................
Administrative services fees ..........................................
Printing and postage ..................................................
Custody fees ..........................................................
Transfer agent fees ...................................................
Audit fees ............................................................
Directors' fees .......................................................
Registration fees .....................................................
Miscellaneous expenses ................................................
Expenses before reimbursement and waiver from Investment Adviser ......
Expense reimbursement and waiver from Investment Adviser ..............
Net expenses .....................................................
Net investment income .................................................
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ..........................................................
Futures and forward foreign currency exchange contracts ..............
Foreign currency related transactions.................................
Net realized gain (loss) on investments ..........................
Net change in unrealized gain or loss on:
Investments ..........................................................
Futures and forward foreign currency exchange contracts ..............
Foreign currency related transactions.................................
Net change in unrealized gain or loss on investments .............
Net realized and change in unrealized gain or loss on investments
Net increase (decrease) in net assets resulting from operations .......
</TABLE>
22 See Notes to Financial Statements.
<PAGE>
===============================================================================
<TABLE>
<CAPTION>
GROWTH INTERNATIONAL SMALL COMPANY VALUE OPPORTUNITY
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1998 1998
------------ ------------- ------------- -----------------
<S> <C> <C> <C>
$ 240,334 $ 305,791 $ 491,116 $ 456,116
405,964 21,677 646,793 329,780
----------- ---------- ----------- -----------
646,298 327,468 1,137,909 785,896
(275) (32,976) -- --
----------- ---------- ----------- -----------
646,023 294,492 1,137,909 785,896
----------- ---------- ----------- -----------
338,707 146,226 469,286 281,489
45,786 25,419 56,587 42,429
3,293 4,791 4,190 3,928
17,373 114,499 11,798 5,347
1,777 1,736 1,564 1,774
10,843 12,783 10,883 10,872
955 304 1,166 876
3,623 239 2,479 1,278
124 179 312 256
----------- ---------- ----------- -----------
422,481 306,176 558,265 348,249
-- (106,431) -- --
----------- ---------- ----------- -----------
422,481 199,745 558,265 348,249
----------- ---------- ----------- -----------
223,542 94,747 579,644 437,647
----------- ---------- ----------- -----------
(6,244,345) 1,272,181 (5,722,220) (3,275,264)
25,603 (319,355) (1,155,246) 776,059
-- 70,545 -- --
----------- ---------- ----------- -----------
(6,218,742) 1,023,371 (6,877,466) (2,499,205)
----------- ---------- ----------- -----------
21,675,399 1,724,909 4,963,030 11,092,471
398,023 (72,759) 606,976 199,011
-- (813) -- --
----------- ---------- ----------- -----------
22,073,422 1,651,337 5,570,006 11,291,482
----------- ---------- ----------- -----------
15,854,680 2,674,708 (1,307,460) 8,792,277
----------- ---------- ----------- -----------
$16,078,222 $2,769,455 $ (727,816) $ 9,229,924
=========== ========== =========== ===========
</TABLE>
See Notes to Financial Statements. 23
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS
===============================================================================
<TABLE>
<CAPTION>
GROWTH
------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ................. $ 223,542 $ 17,877
Net realized gain (loss) on investments (6,218,742) 1,465,898
Net change in unrealized gain or loss
on investments........................ 22,073,422 204,394
------------ -----------
Net increase in net assets resulting
from operations....................... 16,078,222 1,688,169
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............ (233,463) (15,218)
From net realized gains on investments -- (1,600,576)
------------ -----------
Decrease in net assets from
distributions to shareholders......... (233,463) (1,615,794)
------------ -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold............. 133,494,697 6,712,100
Net asset value of shares issued upon
reinvestment of distributions........ 233,463 1,436,186
Payments for shares redeemed.......... (13,173,524) (7,431,424)
------------ -----------
Net increase in net assets from fund
share transactions.................... 120,554,636 716,862
------------ -----------
Net change in net assets............... 136,399,395 789,237
NET ASSETS:
Beginning of period.................... 5,963,844 5,174,607
------------ -----------
End of period.......................... $142,363,239 $ 5,963,844
============ ===========
End of period net assets includes
distributions in excess of net
investment income..................... $ -- $ (393)
============ ===========
SHARE TRANSACTIONS:
Number of shares sold................. 11,095,048 500,364
Number of shares issued upon
reinvestment of distributions........ 17,449 147,415
Number of shares redeemed............. (1,195,162) (552,097)
------------ -----------
Net increase.......................... 9,917,335 95,682
============ ===========
</TABLE>
24 See Notes to Financial Statements.
<PAGE>
===============================================================================
<TABLE>
<CAPTION>
INTERNATIONAL
---------------------------------------
PERIOD FROM
DECEMBER 22, 1997
(COMMENCEMENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, 1998 TO DECEMBER 31, 1997
----------------- --------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income (loss)........ $ 94,747 $ (3,667)
Net realized gain (loss) on
investments........................ 1,023,371 (2,665)
Net change in unrealized gain or
loss on investments................ 1,651,337 417,940
------------ -----------
Net increase in net assets
resulting from operations.......... 2,769,455 411,608
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income......... (17,927) --
From net realized gains on
investments....................... (813,619) --
------------ -----------
Decrease in net assets from
distributions to shareholders...... (831,546) --
------------ -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold.......... 11,492,897 15,000,000
Net asset value of shares issued
upon reinvestment of distributions 814,794 --
Payments for shares redeemed....... (13,414,872) --
------------ -----------
Net increase (decrease) in net
assets from fund share transactions (1,107,181) 15,000,000
------------ -----------
Net change in net assets............ 830,728 15,411,608
NET ASSETS:
Beginning of period................. 15,411,608 --
------------ -----------
End of period....................... $ 16,242,336 $15,411,608
============ ===========
End of period net assets includes
undistributed net investment income $ 117,527 $ 8,604
============ ===========
SHARE TRANSACTIONS:
Number of shares sold.............. 971,299 1,500,000
Number of shares issued upon
reinvestment of distributions..... 70,485 --
Number of shares redeemed.......... (1,139,958) --
------------ -----------
Net increase (decrease)............ (98,174) 1,500,000
============ ===========
</TABLE>
See Notes to Financial Statements. 25
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
===============================================================================
<TABLE>
<CAPTION>
SMALL COMPANY
------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income.................. $ 579,644 $ 54,197
Net realized gain (loss) on investments (6,877,466) 1,204,297
Net change in unrealized gain or loss
on investments........................ 5,570,006 845,007
------------ -----------
Net increase (decrease) in net assets
resulting from operations............. (727,816) 2,103,501
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............ (544,565) (38,702)
From net realized gains on investments (230,169) (1,020,831)
------------ -----------
Decrease in net assets from
distributions to shareholders......... (774,734) (1,059,533)
------------ -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold............. 109,090,666 18,008,547
Net asset value of shares issued upon
reinvestment of distributions........ 774,734 1,059,533
Payments for shares redeemed.......... (26,641,691) (7,167,808)
------------ -----------
Net increase in net assets from fund
share transactions.................... 83,223,709 11,900,272
------------ -----------
Net change in net assets............... 81,721,159 12,944,240
NET ASSETS:
Beginning of period.................... 18,101,815 5,157,575
------------ -----------
End of period.......................... $ 99,822,974 $18,101,815
============ ===========
End of period net assets includes
undistributed net investment income... $ 49,652 $ 14,573
============ ===========
SHARE TRANSACTIONS:
Number of shares sold................. 8,539,090 1,353,068
Number of shares issued upon
reinvestment of distributions........ 60,652 83,662
Number of shares redeemed............. (2,210,865) (529,179)
------------ -----------
Net increase.......................... 6,388,877 907,551
============ ===========
</TABLE>
26 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
===============================================================================
VALUE OPPORTUNITY
------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ................. $ 437,647 $ 67,766
Net realized gain (loss) on investments (2,499,205) 1,683,762
Net change in unrealized gain or loss
on investments........................ 11,291,482 307,085
------------ -----------
Net increase in net assets resulting
from operations....................... 9,229,924 2,058,613
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............ (387,014) (65,555)
From net realized gains on investments (339,496) (1,379,694)
------------ -----------
Decrease in net assets from
distributions to shareholders......... (726,510) (1,445,249)
------------ -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold............. 67,879,273 9,237,674
Net asset value of shares issued upon
reinvestment of distributions........ 726,510 1,445,249
Payments for shares redeemed.......... (10,147,268) (7,351,123)
------------ -----------
Net increase in net assets from fund
share transactions.................... 58,458,515 3,331,800
------------ -----------
Net change in net assets............... 66,961,929 3,945,164
NET ASSETS:
Beginning of period.................... 9,146,777 5,201,613
------------ -----------
End of period.......................... $ 76,108,706 $ 9,146,777
============ ===========
End of period net assets includes
undistributed net investment income... $ 7,394 $ 1,435
============ ===========
SHARE TRANSACTIONS:
Number of shares sold................. 5,269,016 664,790
Number of shares issued upon
reinvestment of distributions........ 53,123 121,772
Number of shares redeemed............. (806,672) (528,943)
------------ -----------
Net increase.......................... 4,515,467 257,619
============ ===========
</TABLE>
See Notes to Financial Statements. 27
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
===============================================================================
1. ORGANIZATION
Aetna Variable Portfolios, Inc. (Fund) is registered under the Investment
Company Act of 1940 (the Act) as an open-end management investment company. It
was incorporated under the laws of Maryland on June 4, 1996. The Articles of
Incorporation permit the Company to offer separate portfolios, each of which has
its own investment objective, policies and restrictions.
The Fund currently offers eleven portfolios. This report covers four diversified
portfolios: Aetna Growth VP, Aetna International VP, Aetna Small Company VP and
Aetna Value Opportunity VP (Portfolios).
The following is each Portfolio's investment objective:
AETNA GROWTH VP (Growth) seeks growth of capital through investment in a
diversified portfolio of common stocks and securities convertible into common
stocks believed to offer growth potential.
AETNA INTERNATIONAL VP (International) seeks long-term capital growth
primarily through investment in a diversified portfolio of common stocks
principally traded in countries outside of the U.S. International will not
target any given level of current income.
AETNA SMALL COMPANY VP (Small Company) seeks growth of capital primarily
through investment in a diversified portfolio of common stocks and securities
convertible into common stocks of companies with smaller market
capitalizations.
AETNA VALUE OPPORTUNITY VP (Value Opportunity) seeks growth of capital
primarily through investment in a diversified portfolio of common stocks and
securities convertible into common stock.
Shares of each Portfolio are currently owned by insurance companies as
depositors of separate accounts which are used to fund variable annuity
contracts and variable life insurance policies. All shares are currently held by
separate accounts of Aetna Life Insurance and Annuity Company (ALIAC) and its
subsidiary, Aetna Insurance Company of America.
Effective May 1, 1998, Aeltus Investment Management, Inc. (Aeltus) became the
Investment Adviser to each Portfolio. Prior to May 1, 1998, ALIAC acted as
Investment Adviser and Aeltus served as Sub-Adviser to the Portfolios.
Effective October 1, 1998, Bradley, Foster & Sargent, Inc. (Bradley) was
appointed Sub-Advisor to Value Opportunity. ALIAC serves as the principal
underwriter to each Portfolio. Aeltus and ALIAC are both indirect wholly-owned
subsidiaries of Aetna Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of the Portfolios have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the
Portfolios.
A. VALUATION OF INVESMENTS
Investments are stated at market values based upon prices furnished by external
pricing sources as reported on national securities exchanges or, for
over-the-counter securities, at the mean of the bid and asked prices. Short-term
investments maturing in more than sixty days for which market quotations are
readily available are valued at current market value. Short-term investments
maturing in less than sixty days are valued at amortized cost, which when
combined with accrued interest, approximates market value. Securities and fixed
income investments for which market quotations are not considered to be readily
available are valued using methods approved by the Board of Directors.
28
<PAGE>
===============================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. VALUATION OF INVESMENTS (CONTINUED)
The accounting records of the Portfolios are maintained in U.S. dollars.
Investment securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the prevailing rates of exchanges
at the end of each day of each applicable foreign market. Purchases and sales of
securities, income receipts, and expense payments are translated into U.S.
dollars at the prevailing exchange rate on the respective dates of the
transactions. The Portfolios do not isolate the portion of the results of
operations resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in their market prices. Such fluctuations
are included in net realized and unrealized gain or loss on investments.
B. FUTURES AND FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security or financial instrument, including an
index of stocks, at a set price on a future date. The Portfolios invest in
financial futures contracts as a hedge against existing portfolio securities, to
manage the risk of changes in interest rates, equity prices, currency exchange
rates or in anticipation of future purchases and sales of portfolio securities.
Upon entering into a futures contract, the Portfolios are required to deposit
with a broker an amount (initial margin) equal to a percentage of the purchase
price indicated by the futures contract. Subsequent deposits (variation margin)
are received or paid each day by the Portfolios equal to the daily fluctuations
in the market value of the contract. These amounts are recorded by the
Portfolios as unrealized gains or losses. When a contract is closed, the
Portfolios record a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the time it was
closed. Generally, futures contracts held by the Portfolios are closed prior to
expiration.
A forward foreign currency exchange contract is an agreement to pay or receive
specific amounts of a currency at a future date in exchange for another currency
at an agreed upon exchange rate. The Portfolios, where authorized, may use
forward foreign currency exchange contracts to hedge against foreign currency
exchange rate risks on its non-U.S. dollar denominated portfolio securities.
Contracts are recorded at market value and marked-to-market daily.
The risks associated with financial futures and forward foreign currency
exchange contracts may arise from an imperfect correlation between the change in
market value of the securities held by the Portfolios and the price of the
contracts. Risks may also arise from an illiquid secondary market or from the
inability of counterparties to meet the terms of the contracts.
Realized and unrealized gains or losses on financial futures and forward foreign
currency exchange contracts are reflected in the accompanying financial
statements. The amounts at risk under such futures and forward foreign currency
exchange contracts may exceed the amounts reflected in the financial statements.
The notional amounts (economic exposure) of these contracts are disclosed in the
Portfolios of Investments and elsewhere in the Notes to Financial Statements.
For federal income tax purposes, any futures and forward foreign currency
exchange contracts which remain open at the end of the fiscal year are
marked-to-market and the resultant net gain or loss is reported to shareholders
as federal taxable income.
C. ILLIQUID AND RESTRICTED SECURITIES
Illiquid securities are securities that are not readily marketable. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Portfolios to sell them promptly
at an acceptable price. Restricted securities are those which can only be sold
under Rule 144A of the Securities Act of 1933 (1933 Act) or are securities
offered pursuant to Section 4(2) of the 1933 Act, and are subject to legal or
contractual restrictions on resale and may not be publicly sold without
registration under the 1933 Act. Illiquid and restricted securities are valued
using market quotations when readily available. In the absence of market
quotations, the securities are valued based upon their fair value determined
under procedures approved by the Board of Directors. Each Portfolio may invest
up to 15% of its total assets in illiquid securities. The Portfolios will not
pay the costs of disposition of restricted securities other than ordinary
brokerage fees, if any.
29
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
===============================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. FEDERAL INCOME TAXES
Each Portfolio intends to meet the requirements to be taxed as a regulated
investment company for the current year. As such, each Portfolio is relieved of
federal income taxes by distributing all of its net taxable investment income
and capital gains, if any, in compliance with the applicable provisions of the
Internal Revenue Code. Futhermore, by distributing substantially all of its net
taxable investment income and capital gains during the calendar year, each
Portfolio will avoid federal excise taxes in accordance with the applicable
provisions of the Internal Revenue Code. Thus, the financial statements contain
no provision for federal taxes.
E. DISTRIBUTIONS
Distributions are recorded on the ex-dividend date. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing treatments for foreign currency transactions, certain
futures contracts, certain investments in foreign equity securities and certain
losses deferred due to transactions characterized as "wash sales" by federal tax
regulations. In addition, distributions of realized gains from sales of
securities held one year or less are taxable to shareholders at ordinary income
tax rates rather than preferred capital gain tax rates in accordance with the
applicable provisions of the Internal Revenue Code.
F. OTHER
Investment transactions are accounted for on the day following trade date,
except same day settlements which are accounted for on the trade date. Interest
income is recorded on an accrual basis. Discounts and premiums on securities
purchased are accreted or amortized, respectively, using an effective yield
method over the life of the security. Dividend income and stock splits are
recorded on the ex-dividend date. Realized gains and losses from investment
transactions are determined on an identified cost basis.
3. INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES FEES
Each Portfolio pays Aeltus a monthly fee expressed as a percentage of its
average daily net assets. Below are the Portfolios' annual Investment Advisory
fees, as of December 31, 1998:
<TABLE>
<CAPTION>
ADVISORY FEE
------------
<S> <C>
Growth 0.60%
International 0.85%
Small Company 0.75%
Value Opportunity 0.60%
</TABLE>
Aeltus has served as the Investment Adviser for the Portfolios since May 1,
1998. Prior to May 1, 1998, ALIAC served as Investment Adviser and Aeltus served
as Sub-Adviser. As Sub-Adviser, Aeltus supervised the investment and
reinvestment of cash and securities and provided certain related administrative
services. For the period January 1, 1998 through April 30, 1998, ALIAC collected
$229,873 from the Portfolios, of which it paid $141,634 to Aeltus.
Effective October 1, 1998, Aeltus entered into a subadvisory agreement with
Bradley for Value Opportunity. As Sub-Adviser, Bradley supervises the investment
and reinvestment of equity securities. The Subadvisory Agreement provides that
Aeltus will pay Bradley a subadvisory fee at an annual rate of 0.15% of Value
Opportunity's average daily net assets on the first $250 million and 0.10% of
Value Opportunity's average daily net assets above $250 million. For the period
October 1, 1998 through December 31, 1998, Aeltus paid Bradley $21,668.
30
<PAGE>
===============================================================================
3. INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES FEES (CONTINUED)
Aeltus has entered into a consulting agreement with Bradley for Value
Opportunity and Aetna Value Opportunity Fund, a portfolio of Aetna Series Fund,
Inc., under which Bradley will provide assistance with shareholder
communications, contribute to marketing efforts and other non-investment
advisory services for the Value Opportunity Funds in exchange for payment from
the Investment Adviser. For the period October 1, 1998 through December 31,
1998, Aeltus paid Bradley $39,000.
Effective May 1, 1998, each Portfolio pays expenses incurred in exchange for
services provided by auditors, legal firms, transfer agents, custodian banks and
financial printers. Each Portfolio pays its proportionate share of compensation
to the Fund's Board of Directors and its proportionate share of insurance
premiums. Each Portfolio pays its direct costs incurred to mail shareholder
reports, register its shares with the Securities and Exchange Commission and any
other costs incurred by the Portfolio. In addition, each Portfolio pays Aeltus
an administrative services fee in exchange for receiving certain administrative
and shareholder services and to compensate Aeltus for supervising the
Portfolios' other service providers. Each Portfolio pays Aeltus an
administrative services fee at an annual rate based on its average daily net
assets. The rate is 0.075% on the first $5 billion in Portfolio assets and
0.050% on all Portfolio assets over $5 billion.
Prior to May 1, 1998, ALIAC acted as Administrator to the Portfolios. As
Administrator, ALIAC paid all the expenses of the Portfolios on their behalf,
supervised the Portfolios' other service providers and provided the Portfolios
with certain administrative and shareholder services. In exchange for these
services, ALIAC received an administrative services fee at an annual rate of up
to 0.30% of each Portfolio's average daily net assets. For the period January 1,
1998 through April 30, 1998, ALIAC collected $61,016 in administrative services
fees from the Portfolios.
Aeltus has entered into a Service Agreement with ALIAC under which ALIAC will
provide various administrative and shareholder services for each Portfolio, in
exchange for fees payable by Aeltus, of up to 0.425% of the Portfolios' average
daily net assets. For the period May 1, 1998 through December 31, 1998, Aeltus
paid ALIAC $494,721.
4. REIMBURSEMENT AND WAIVER FROM INVESTMENT ADVISER
Aeltus is contractually obligated through December 31, 1999 to reimburse a
Portfolio for some or all of its operating expenses or to waive fees in order to
maintain a certain expense ratio. Reimbursement and waiver arrangements will
increase a Portfolio's yield and total return.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES
Purchases and sales of investment securities, excluding short-term investments,
for the year ended December 31, 1998 were:
<TABLE>
<CAPTION>
COST OF PURCHASES PROCEEDS FROM SALES
----------------- -------------------
<S> <C> <C>
Growth $163,597,939 $74,367,925
International 26,362,696 28,875,731
Small Company 155,596,855 91,979,168
Value Opportunity 97,237,412 49,810,140
</TABLE>
31
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
===============================================================================
6. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
At December 31, 1998, International had the following open forward foreign
currency exchange contracts that obligate the Fund to deliver currencies at
specified future dates. The net unrealized loss of $59,850 on these contracts,
is included in the accompanying financial statements. The terms of the open
contracts are as follows:
<TABLE>
<CAPTION>
INTERNATIONAL
- ------------- U.S. $ VALUE U.S. $ VALUE
EXCHANGE CURRENCY TO DECEMBER 31, CURRENCY TO DECEMBER 31, UNREALIZED
DATE BE DELIVERED 1998 BE RECEIVED 1998 GAIN (LOSS)
- ------------- ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
CONTRACTS TO SELL
- -----------------
1/19/99 464,000 $83,149 82,221 $82,221 $(928)
French Franc U.S. Dollar
- -----------------------------------------------------------------------------------------
1/19/99 67,000 12,006 12,100 12,100 94
French Franc U.S. Dollar
- -----------------------------------------------------------------------------------------
1/19/99 72,000 12,902 12,965 12,965 63
French Franc U.S. Dollar
- -----------------------------------------------------------------------------------------
1/19/99 31,000 5,562 5,493 5,493 (69)
French Franc U.S. Dollar
- -----------------------------------------------------------------------------------------
1/19/99 360,000 64,813 63,792 63,792 (1,021)
French Franc U.S. Dollar
- -----------------------------------------------------------------------------------------
1/19/99 970,000 173,134 171,885 171,885 (1,249)
French Franc U.S. Dollar
- -----------------------------------------------------------------------------------------
2/22/99 33,000 5,892 5,930 5,930 38
French Franc U.S. Dollar
- -----------------------------------------------------------------------------------------
2/22/99 462,000 82,924 83,019 83,019 95
French Franc U.S. Dollar
- -----------------------------------------------------------------------------------------
1/21/99 191,000 114,804 117,611 117,611 2,807
German U.S. Dollar
Deutschemark
- -----------------------------------------------------------------------------------------
2/3/99 32,000 19,246 19,415 19,415 169
German U.S. Dollar
Deutschemark
- -----------------------------------------------------------------------------------------
2/3/99 1,000 601 598 598 (3)
German U.S. Dollar
Deutschemark
- -----------------------------------------------------------------------------------------
2/3/99 70,000 42,288 42,470 42,470 182
German U.S. Dollar
Deutschemark
- -----------------------------------------------------------------------------------------
2/3/99 22,000 13,156 13,348 13,348 192
German U.S. Dollar
Deutschemark
- -----------------------------------------------------------------------------------------
2/3/99 210,000 125,779 127,412 127,412 1,633
German U.S. Dollar
Deutschemark
- -----------------------------------------------------------------------------------------
2/3/99 17,000 10,191 10,167 10,167 (24)
German U.S. Dollar
Deutschemark
- -----------------------------------------------------------------------------------------
2/19/99 390,000 48,647 48,891 48,891 244
Hong Kong Dollar U.S. Dollar
- -----------------------------------------------------------------------------------------
2/19/99 110,000 13,890 13,790 13,790 (100)
Hong Kong Dollar U.S. Dollar
- -----------------------------------------------------------------------------------------
32
<PAGE>
========================================================================================
INTERNATIONAL (continued)
- ------------------------ U.S. $ VALUE U.S. $ VALUE
EXCHANGE CURRENCY TO DECEMBER 31, CURRENCY TO DECEMBER 31, UNREALIZED
DATE BE DELIVERED 1998 BE RECEIVED 1998 GAIN (LOSS)
- ------------- ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
CONTRACTS TO SELL (CONTINUED)
- -----------------------------
1/27/99 36,350,000 $323,384 311,750 $311,750 $(11,634)
Japanese Yen U.S. Dollar
- -----------------------------------------------------------------------------------------
1/27/99 3,440,000 30,604 29,164 29,164 (1,440)
Japanese Yen U.S. Dollar
- -----------------------------------------------------------------------------------------
1/27/99 5,360,000 44,257 45,969 45,969 1,712
Japanese Yen U.S. Dollar
- -----------------------------------------------------------------------------------------
2/26/99 49,040,000 437,981 411,203 411,203 (26,778)
Japanese Yen U.S. Dollar
- -----------------------------------------------------------------------------------------
2/26/99 5,840,000 50,642 48,969 48,969 (1,673)
Japanese Yen U.S. Dollar
- -----------------------------------------------------------------------------------------
3/17/69 69,878,000 625,694 606,580 606,580 (19,114)
Japanese Yen U.S. Dollar
- -----------------------------------------------------------------------------------------
3/17/69 42,410,000 368,542 368,142 368,142 (400)
Japanese Yen U.S. Dollar
- -----------------------------------------------------------------------------------------
1/19/99 1,000,000 131,125 128,493 128,493 (2,632)
Norwegian Kroner U.S. Dollar
- -----------------------------------------------------------------------------------------
1/25/99 4,000,000 2,134 2,120 2,120 (14)
Norwegian Kroner U.S. Dollar
- -----------------------------------------------------------------------------------------
$(59,850)
=============
</TABLE>
7. CAPITAL LOSS CARRYFORWARD
In accordance with applicable provisions of the Internal Revenue Code, the
following capital loss carryforwards have been incurred at December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL LOSS
CARRYFORWARD EXPIRATION DATE
------------ ---------------
<S> <C> <C>
Growth $5,846,950 2006
Small Company 5,927,829 2006
Value Opportunity 2,312,434 2006
</TABLE>
These capital loss carryforwards may be used to offset future capital gains
until their respective expiration dates. It is the policy of each of the Funds
to reduce future distributions of realized gains to shareholders to the extent
of unexpired capital loss carryforwards.
33
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
ADDITIONAL INFORMATION
OCTOBER 31, 1998
===============================================================================
FEDERAL TAX STATUS OF DIVIDENDS DECLARED DURING THE FISCAL YEAR (UNAUDITED)
In accordance with federal tax authorities, certain portions of the dividends
taxable as ordinary income qualify for the corporate dividends received
deduction. The following percentages reflect the portions of such dividends
paid:
<TABLE>
<S> <C>
Growth 100.00%
Small Company 55.90%
Value Opportunity 54.91%
</TABLE>
International intends to elect to pass through the credit for taxes paid in
foreign countries during the year. In accordance with current tax laws, the
foreign income and foreign tax per share (for a share outstanding on December
31, 1998) are as follows:
<TABLE>
<CAPTION>
COUNTRY DIVIDENDS FOREIGN TAX
- --------------------------------------------------
<S> <C> <C>
Australia 0.0147 0.0001
Belgium 0.0031 0.0005
Canada 0.0024 0.0004
Denmark 0.0040 0.0007
Finland 0.0070 0.0010
France 0.0233 0.0000
Germany 0.0216 0.0022
Hong Kong 0.0033 0.0000
Ireland 0.0050 0.0000
Italy 0.0084 0.0013
Japan 0.0137 0.0021
Netherlands 0.0105 0.0018
New Zealand 0.0027 0.0004
Norway 0.0059 0.0009
Spain 0.0076 0.0011
Sweden 0.0145 0.0022
Switzerland 0.0132 0.0020
United Kingdom 0.0458 0.0063
</TABLE>
The pass through of the foreign tax credit will affect only those shareholders
of the International who are holders on the dividend record date in December
1998. Accordingly, shareholders will receive more detailed information along
with their Form 1099-DIV in January 1999.
34
<PAGE>
================================================================================
SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED)
On September 4, 1998, a Special Shareholder Meeting was held for Value
Opportunity. Shareholders of record on June 30, 1998 were entitled to vote at
the meeting. The shareholders of Value Opportunity voted to approve a
Subadvisory Agreement with Bradley. See Note 3 of Notes to Financial Statements
for a description of the services provided and the compensation arrangement
defined by the terms of the agreement. Results of the vote were:
<TABLE>
<CAPTION>
VOTES CAST VOTES CAST
FOR AGAINST ABSTENTIONS
-------------------------------------
<S> <C> <C> <C>
Value Opportunity 1,429,046 34,772 79,746
</TABLE>
YEAR 2000 (UNAUDITED)
The Portfolios receive services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer systems and software to distinguish the
year 2000 from the year 1900. Aeltus is taking steps that it believes are
reasonably designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolios' other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolios from this problem.
35
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
FINANCIAL HIGHLIGHTS
GROWTH
===============================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 13, 1996
YEAR ENDED YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, DECEMBER 31, OPERATIONS)
1998 1997 TO DECEMBER 31, 1996
------------ ------------ --------------------
<S> <C> <C> <C>
Net asset value, beginning
of period ................ $ 9.85 $ 10.15 $10.00
-------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .... 0.03 0.04+ 0.01+
Net realized and change in
unrealized gain or loss on
investments............... 3.68 3.27 0.15
-------- ------- ------
Total from investment
operations............. 3.71 3.31 0.16
-------- ------- ------
LESS DISTRIBUTIONS:
From net investment income (0.03) (0.03) (0.01)
From net realized gains on
investments............... -- (3.58) --
-------- ------- ------
Total distributions .... (0.03) (3.61) (0.01)
-------- ------- ------
Net asset value, end of
period.................... $ 13.53 $ 9.85 $10.15
======== ======= ======
Total return* ............. 37.68% 33.01% 1.57%
Net assets, end of period
(000's)................... $142,363 $ 5,964 $5,175
Ratio of net expenses to
average net assets ....... 0.75% 0.75% 0.67%(1)
Ratio of net investment
income to average net
assets.................... 0.40% 0.29% 1.99%(1)
Portfolio turnover rate ... 152.99% 207.41% 1.97%
</TABLE>
(1) Annualized.
*The total return percentage does not reflect any separate account charges under
variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
36 See Notes to Financial Statements.
<PAGE>
INTERNATIONAL
===============================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 22, 1997
YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, OPERATIONS)
1998 TO DECEMBER 31, 1997
------------ --------------------
<S> <C> <C>
Net asset value, beginning of period .... $ 10.27 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................. 0.07 --
Net realized and change in unrealized
gain or loss on investments ............ 1.87 0.27
------- -------
Total from investment operations ..... 1.94 0.27
------- -------
LESS DISTRIBUTIONS:
From net investment income ............. (0.01) --
From net realized gains on investments . (0.61) --
------- -------
Total distributions .................. (0.62) --
------- -------
Net asset value, end of period .......... $ 11.59 $ 10.27
======= =======
Total return* ........................... 18.92% 2.74%
Net assets, end of period (000's) ....... $16,242 $15,412
Ratio of net expenses to average net
assets.................................. 1.15% 1.15%(1)
Ratio of net investment income to average
net assets ............................. 0.55% (0.98)%(1)
Ratio of expenses before reimbursement
and waiver to average net assets ....... 1.77% --
Portfolio turnover rate ................. 158.02% 0.71%
</TABLE>
(1) Annualized.
*The total return percentage does not reflect any separate account charges under
variable annuity contracts and life policies.
See Notes to Financial Statements. 37
<PAGE>
CAPITAL APPRECIATION PORTFOLIOS
FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL COMPANY
===============================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 27, 1996
YEAR ENDED YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, DECEMBER 31, OPERATIONS)
1998 1997 TO DECEMBER 31, 1996
------------ ------------ --------------------
<S> <C> <C> <C>
Net asset value, beginning
of period ................ $ 12.77 $ 10.11 $10.00
------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .... 0.07 0.04+ 0.01+
Net realized and change in
unrealized gain or loss on
investments.............. 0.07 3.44 0.11
------- ------- ------
Total from investment
operations............. 0.14 3.48 0.12
------- ------- ------
LESS DISTRIBUTIONS:
From net investment income (0.08) (0.03) (0.01)
From net realized gains on
investments.............. (0.04) (0.79) --
------- ------- ------
Total distributions .... (0.12) (0.82) (0.01)
------- ------- ------
Net asset value, end of
period.................... $ 12.79 $ 12.77 $10.11
======= ======= ======
Total return* ............. 1.10% 34.49% 1.23%
Net assets, end of period
(000's)................... $99,823 $18,102 $5,158
Ratio of net expenses to
average net assets ....... 0.89% 0.90% 0.55%(1)
Ratio of net investment
income to average net
assets.................... 0.93% 0.78% 5.96%(1)
Portfolio turnover rate ... 185.29% 180.25% --
</TABLE>
(1) Annualized.
*The total return percentage does not reflect any separate account charges under
variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
38 See Notes to Financial Statements.
<PAGE>
VALUE OPPORTUNITY
===============================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 13, 1996
YEAR ENDED YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, DECEMBER 31, OPERATIONS)
1998 1997 TO DECEMBER 31, 1996
------------ ------------ --------------------
<S> <C> <C> <C>
Net asset value, beginning
of period ................ $ 11.92 $ 10.20 $10.00
------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .... 0.09 0.11+ 0.02+
Net realized and change in
unrealized gain or loss on
investments............... 2.56 3.90 0.20
------- ------- ------
Total from investment
operations............. 2.65 4.01 0.22
------- ------- ------
LESS DISTRIBUTIONS:
From net investment income (0.08) (0.10) (0.02)
From net realized gains on
investments............... (0.08) (2.19) --
------- ------- ------
Total distributions .... (0.16) (2.29) (0.02)
------- ------- ------
Net asset value, end of
period.................... $ 14.41 $ 11.92 $10.20
======= ======= ======
Total return* ............. 22.39% 39.36% 2.15%
Net assets, end of period
(000's)................... $76,109 $ 9,147 $5,202
Ratio of net expenses to
average net assets ....... 0.74% 0.75% 0.67%(1)
Ratio of net investment
income to average net
assets.................... 0.93% 1.06% 2.73%(1)
Portfolio turnover rate ... 125.72% 187.84% --
</TABLE>
(1) Annualized.
*The total return percentage does not reflect any separate account charges under
variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
See Notes to Financial Statements. 39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Aetna Variable Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities of Aetna
Growth VP, Aetna International VP, Aetna Small Company VP, and Aetna Value
Opportunity VP, series of Aetna Variable Portfolios, Inc. (collectively the
Capital Appreciation Portfolios), including the portfolios of investments as of
December 31, 1998 and the related statements of operations for the year then
ended, the statements of changes in net assets for the each of the years or
periods in the two-year period then ended and financial highlights for each of
the years in the two-year period ended December 31, 1998 and the period from
December 13, 1996 (commencement of operations) to December 31, 1996 for Aetna
Growth VP and Aetna Value Opportunity VP, for the year ended December 31, 1998
and the period from December 22, 1997 (commencement of operations) to December
31, 1997 for Aetna International VP and for each of the years in the two-year
period ended December 31, 1998 and the period from December 27, 1996
(commencement of operations) to December 31, 1996 for Aetna Small Company VP.
These financial statements and financial highlights are the responsibility of
the Capital Appreciation Portfolios' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the custodians
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Aetna
Growth VP, Aetna International VP, Aetna Small Company VP, and Aetna Value
Opportunity VP as of December 31, 1998, results of their operations for the year
then ended, changes in their net assets for the years or periods in the two-year
period then ended and financial highlights for each of the years or periods
specified in the first paragraph above, in conformity with generally accepted
accounting principles.
KPMG LLP
Hartford, Connecticut
January 29, 1999
40
<PAGE>
[Begin Line Chart]
Aetna Balanced VP, Inc.
Growth of $10,000
Aetna Lehman Brothers
Balanced Aggregate 60% S&P 500/40% Lehman
VP, Inc. Bond Index S&P 500 Index Brothers Aggregate
04/89 10,000 10,000 10,000 10,000
12/89 10,730 11,325 12,297 11,913
12/90 11,339 12,340 11,915 12,129
12/91 13,429 14,314 15,545 15,133
12/92 14,289 15,373 16,729 16,281
12/93 15,699 16,872 18,416 17,908
12/94 15,627 16,380 18,659 17,849
12/95 19,882 19,405 25,671 23,143
12/96 22,898 20,109 31,562 26,607
12/97 28,046 22,051 42,092 32,940
12/98 32,798 23,965 54,120 40,065
[End Line Chart]
<TABLE>
<CAPTION>
- --------------------------------------------
Average Annual Total Returns
for the period ended December 31, 1998*
- --------------------------------------------
<S> <C> <C> <C>
Inception Date 1 Year 5 Years Inception
- --------------------------------------------
04/03/89 16.93% 15.87% 12.96%
- --------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA BALANCED VP, INC.
HOW DID THE FUND PERFORM DURING THE PERIOD?
Aetna Balanced VP, Inc. (Balanced) generated a 16.93% total return, net of fund
expenses, for the year ended December 31, 1998. The benchmark, 60% Standard &
Poor's (S&P) 500 Index(a)/40% Lehman Brothers Aggregate Bond Index(b), returned
20.98% for the same period. Among variable annuity domestic hybrid stock funds
tracked by Morningstar, Inc., the Fund ranked in the top 32% (out of 593 funds)
and 17% (out of 356 funds) for the past one and five year periods ended December
31, 1998, respectively.
WHAT ECONOMIC OR FINANCIAL MARKET CONDITIONS IMPACTED THE FUND?
While the first half of the year was one of low volatility with the Federal
Reserve on hold, the third quarter witnessed a series of shocks such as the
Russian crisis and Asian market instability which led to global equity market
declines and the Long Term Management Capital LP debacle. A resulting flight to
quality occurred throughout the equity and fixed income markets, causing large
cap stocks to outperform small cap stocks and U.S. Treasuries to be the asset of
choice within the fixed income market. With fears of a credit crunch and global
recession growing, the Federal Reserve cut rates three times from September
through November. These easings, plus the ability of the U.S. economy to
continue its above trend growth, caused these fears to subside in the fourth
quarter. Important trends in the U.S. equity markets in 1998 included the
above-mentioned size effect (large stocks did better than small stocks) and
growth stocks outperformed value stocks. Within the bond market, spreads on
corporate and mortgage issues recovered from very wide levels in the third
quarter, but still ended the year materially wider than their longer run
averages.
See Definition of Terms. 41
<PAGE>
WHAT INVESTMENTS INFLUENCED THE FUND'S PERFORMANCE OVER THE PAST TWELVE MONTHS?
The main driver of the Fund's underperformance versus the benchmark over the
past twelve months has been an underweight position in large cap stocks in favor
of small cap stocks. For the year, the S&P 500 returned 28.57%, an amazing
29.87% more than the S&P Smallcap 600(d) return of -1.30%. This spread between
large cap and small cap returns was one of the largest ever recorded. In
addition, being overweight in high yield bonds hurt relative performance as the
market's global economic concerns caused investors to favor issues of the
highest quality and liquidity. Although small cap stocks underperformed in 1998,
we believe that the attractive fundamental value of these issues will enhance
portfolio returns over the longer run.
WHAT IS YOUR OUTLOOK GOING FORWARD?
Given the continuing strength of the U.S. economy, the lack of inflationary
pressures and the Federal Reserve's relatively prompt response to the worldwide
deterioration in credit conditions, it is a reasonably favorable environment for
stocks going forward. However, risks remain, including further currency
devaluations in emerging economies, continued weakness in Japan, or a slowdown
in domestic spending due to declining personal savings rates. Thus, constant
monitoring of economic conditions and careful issue selection will continue to
be critical in the months ahead. In terms of asset allocation, we increased the
Fund's exposure to small cap stocks during the fourth quarter to take advantage
of their attractive valuations. In addition, we swapped from cash and U.S.
Treasuries into corporates and mortgage-backed securities within the bond
portion of the Fund during the third and fourth quarters to take advantage of
historically wide spreads. We will maintain this yield advantage in the bond
segment as long as the risk/return trade-off remains favorable. The Fund's asset
allocation targets as of December 31, 1998 are as follows: 45% large company
stocks, 14% small company stocks, 39% bonds and 2% cash.
LARGE CAP PORTFOLIO SECTOR BREAKDOWN:
<TABLE>
<CAPTION>
% OF EQUITY % OF S&P OVER/(UNDER)
SECTOR STOCKS 500 WEIGHTING
<S> <C> <C> <C>
Basic Materials 2.1% 3.1% (1.0)%
Commercial Services 4.0% 1.8% 2.2 %
Consumer Discretionary 15.8% 12.3% 3.5 %
Consumer Non-Discretionary 5.2% 9.4% (4.2)%
Energy 4.3% 6.9% (2.6)%
Finance 14.7% 15.7% (1.0)%
Healthcare 11.4% 12.3% (0.9)%
Manufacturing 12.7% 9.7% 3.0 %
Technology 17.7% 18.1% (0.4)%
Utilities 12.1% 10.7% 1.4 %
</TABLE>
<TABLE>
<CAPTION>
% OF NET
TOP TEN EQUITY HOLDINGS ASSETS
<S> <C>
Microsoft Corp. 2.2%
Intel Corp. 1.5%
General Electric Co. 1.4%
Wal-Mart Stores, Inc. 1.3%
International Business Machines Corp. 1.2%
Lucent Technologies, Inc. 1.0%
Merck & Co., Inc. 1.0%
Cisco Systems, Inc. 0.9%
Exxon Corp. 0.8%
Eli Lilly & Co. 0.7%
</TABLE>
42 See Definition of Terms.
<PAGE>
<TABLE>
<CAPTION>
% OF NET
TOP FIVE INCOME HOLDINGS ASSETS
<S> <C>
Government National Mortgage Association, 8.00%, 12/15/23 3.1%
Government National Mortgage Association, 7.50%, 12/15/23 2.9%
Federal National Mortgage Association, 6.50%, 11/01/28 1.8%
Government National Mortgage Association, 6.50%, 05/15/28 1.6%
Federal National Mortgage Association, 6.50%, 12/01/28 1.3%
</TABLE>
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Fund are subject to change.
See Definition of Terms. 43
<PAGE>
[Begin Line Chart]
Aetna Growth and Income VP
Growth of $10,000
Aetna Growth
and Income VP S&P 500 Index
01/88 10,000 10,000
12/88 11,464 11,661
12/89 14,797 15,356
12/90 15,286 14,879
12/91 19,322 19,412
12/92 20,617 20,892
12/93 22,006 22,997
12/94 21,784 23,301
12/95 28,809 32,058
12/96 35,856 39,415
12/97 46,573 52,564
12/98 53,322 67,585
[End Line Chart]
<TABLE>
<CAPTION>
- ------------------------------------------
Average Annual Total Returns
for the period ended December 31, 1998*
- ------------------------------------------
1 Year 5 Years 10 Years
- ------------------------------------------
<S> <C> <C>
14.49% 19.37% 16.61%
- ------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA GROWTH AND INCOME VP
HOW DID THE FUND PERFORM DURING THE PERIOD?
Aetna Growth and Income VP (Growth and Income) generated a 14.49% total return,
net of fund expenses, for the year ended December 31, 1998. The benchmark,
Standard & Poor's (S&P) 500 Index(a), returned 28.57% for the same period. Among
variable annuity large blend stock funds tracked by Morningstar, Inc., the Fund
ranked in the top 83% (out of 662 funds), 75% (out of 297 funds) and 69% (out of
156 funds) for the past one, five and ten year periods ended December 31, 1998,
respectively.
WHAT ECONOMIC OR FINANCIAL MARKET CONDITIONS IMPACTED THE FUND?
Tactical asset allocation decisions were the main reasons why the Fund's
performance trailed that of the S&P 500. We have used asset class
diversification as a means of 1) reducing the overall Fund risk, 2) enhancing
expected return by participating in asset classes with high historical returns
and 3) boosting the income of the Fund through ownership of high yielding asset
classes. There was an unusual degree of divergence in return between the S&P 500
and all other equity asset classes in 1998. Our asset allocation decisions are
driven by relative value comparisons. Our valuation disciplines indicated that
small cap stocks and equity real estate investment trusts (REITs) were
attractively priced relative to large cap stocks at the beginning of the year,
so we built up our holdings in those areas. Unfortunately, those two asset
classes became even cheaper as the year progressed.
44 See Definition of Terms.
<PAGE>
[Begin Bar Chart]
- ---------------------------------------------------------------------------
1 Year Asset Class Returns
As of 12/31/98
28.8% -2.6% 19.1% 20.3% -17.5% 8.7% 17.8% 5.2%
S&P Russell S&P MSCI NAREIT SB SB Non 91 Day
500 2000 Midcap EAFE Equity BIG US World T-bill
- ----------------------------------------------------------------------------
Lg cap Sm Cap Midcap Int'l REITs Bonds Int'l Cash
Stocks Stocksk Stocks Stocks Equity Bonds
- ---------------------------------------------------------------------------
[End Bar Chart]
<TABLE>
<CAPTION>
ASSET ALLOCATION: % OF NOTIONAL VALUE* ECONOMIC EXPOSURE*
ASSET CLASS INVESTMENT OF FUTURES OF OPTIONS 12/31/98 12/31/97
<S> <C> <C> <C> <C> <C>
Large Cap Stocks 73.3% 5.1% -- 78.4% 61.9%
Mid Cap Stocks 3.9% -- (1.2)% 2.7% 10.3%
Small Cap Stocks 7.2% -- (4.9)% 2.3% 8.9%
International Stocks 4.3% (0.1)% -- 4.2% 5.6%
International Bonds 0.1% -- -- 0.1% --
Real Estate Stocks 4.4% -- -- 4.4% 2.9%
U.S. Dollar Bonds -- -- -- -- --
Convertible Securities 1.0% -- -- 1.0% 1.2%
Special Situations** 2.1% 0.4% -- 2.5% 2.3%
Cash Equivalents 3.7% (5.4)% 6.1% 4.4% 6.9%
---------------------------------------------------------------
100.0% -- -- 100.0% 100.0%
================================================================
</TABLE>
* Notional value refers to the economic value at risk or the exposure to the
financial instruments underlying the options and futures positions. Economic
exposure reflects the Fund's exposure to both changes in the value of the
portfolio of investments as well as the financial instruments underlying the
options and futures positions.
** The special situations category was created to take advantage of investment
opportunities which are "special" in the sense that they do not fit well into
our normal valuation and modeling framework. The largest category within this
group is initial public offerings, but other categories include spin-offs, newly
created securities and stocks of companies which derive their value from
something other than current assets, earnings and dividends.
The exhibits above show the unusual divergence of returns between the S&P 500
and other equity asset classes, along with the progression of asset allocation
for Growth and Income. We still think small cap stocks and equity REITs are
attractive, but we are also sensitive to the risk we take when we allocate a
higher percentage to these asset classes than other funds against which we
compete. While we are willing to take a modest amount of "benchmark risk" by
having a somewhat different asset allocation strategy than the median
competitive fund, our primary goal is to consistently achieve higher returns
than those of our competitors. As the year unfolded and the performance
divergence became apparent, we increased our estimate of the expected benchmark
risk in the Fund due to our active asset allocation decisions. This caused us to
reduce our small cap and cash weightings and increase our large cap weightings,
in order to reduce our risk relative to both the overall market and our median
competitor.
See Definition of Terms. 45
<PAGE>
[Begin Line Chart]
- ------------------------------------------------------------------------
Small Cap Earnings/Price - S&P 500 Earnings/Price
As of 12/31/98
This graph shows the comparison between Small Cap Earnings/Price
to the S&P 500 Earnings/Price.
Source: I/B/E/S
- ------------------------------------------------------------------------
[End Line Chart]
[Begin Line Chart]
- ------------------------------------------------------------------------
REIT Earnings/Price - S&P 500 Earnings/Price
As of 12/31/98
This graph shows the comparison between REIT Earnings/Price
to the S&P 500 Earnings/Price.
Source: I/B/E/S & Nat'l Assoc. of REITS
- ------------------------------------------------------------------------
[End Line Chart]
We still believe firmly that diversification works over the long run and we
continue to hold modest amounts of different asset classes, such as small cap,
international and real estate stocks.
WHAT INVESTMENTS INFLUENCED THE FUND'S PERFORMANCE OVER THE PAST TWELVE MONTHS?
The basis of our stock and industry selection process is a quantitative
multi-factor model, which is primarily comprised of value and momentum factors.
Because both our industry and our stock selection techniques use value as a
very important factor, our Fund has a decided value tilt. Growth stocks have
outperformed value stocks by a wide margin in 1998, which shows up both in
higher returns for more growth-oriented industries and sectors and, also, in
higher returns for the higher growth stocks within the same industry or sector.
Our disciplines continue to indicate that low Price/Earnings (P/E), value-
46 See Definition of Terms.
<PAGE>
oriented stocks are unusually cheap relative to high P/E, growth-oriented
stocks. Value investing is a proven long-term strategy. We are not about to
abandon it because we have hit a rough patch in performance.
[Begin Bar Chart]
------------------------------------------------------------------------
S&P 500
Growth vs Value
1 Year Return as of 12/31/98
39.96%
------
14.31%
------
------ ------
Growth Value
- ------------------------------------------------------------------------
[End Bar Chart]
[Begin Line Chart]
- ------------------------------------------------------------------------
Contrarian Appeal:
S&P Value vs S&P Growth
Cumulative Returns
This graph shows the comparison between Value and Growth Stocks
within the S&P 500 Index.
Source: Ibbotson: as of 12/31/98
- ------------------------------------------------------------------------
[End Line Chart]
WHAT IS YOUR OUTLOOK GOING FORWARD?
The "one-two" punch that hurt us in 1998 was primarily our active positioning of
the Fund towards small cap stocks and value-oriented stocks (including equity
REITs). Currently, the market is at a historic extreme with respect to these two
characteristics (large-small and value-growth), which cut across all layers of
our structuring of the Fund: asset allocation, industry selection and stock
selection. We expect to benefit when the market returns to more normal pricing
with respect to these characteristics.
See Definition of Terms. 47
<PAGE>
The long-term story behind Growth and Income hasn't changed. Diversification
works well over the long-term. Value investing works well over the long-term.
Patience, discipline and sound analysis are now, and always will be, crucial to
investing success.
LARGE CAP PORTFOLIO SECTOR BREAKDOWN:
<TABLE>
<CAPTION>
% OF
COMMON % OF S&P OVER/(UNDER)
SECTOR STOCKS 500 WEIGHTING
<S> <C> <C> <C>
Basic Materials 1.9% 3.1% (1.2)%
Commercial Services 3.6% 1.8% 1.8 %
Consumer Discretionary 23.6% 12.3% 11.3 %
Consumer Non-Discretionary 2.9% 9.4% (6.5)%
Energy 3.8% 6.9% (3.1)%
Finance 10.4% 15.7% (5.3)%
Healthcare 9.6% 12.3% (2.7)%
Manufacturing 12.6% 9.7% 2.9 %
Technology 21.2% 18.1% 3.1 %
Utilities 10.4% 10.7% (0.3)%
</TABLE>
<TABLE>
<CAPTION>
% OF NET
TOP TEN EQUITY HOLDINGS ASSETS
<S> <C>
Intel Corp. 2.7%
Microsoft Corp. 2.5%
International Business Machines Corp. 2.4%
Procter & Gamble Co. 1.9%
TJX Companies, Inc. 1.9%
Sun Microsystems, Inc. 1.8%
Ford Motor Co. 1.7%
Oracle Corp. 1.7%
Sprint Corp. 1.6%
Lowe's Co., Inc. 1.5%
</TABLE>
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Fund are subject to change.
48 See Definition of Terms.
<PAGE>
[Begin Line Chart]
Aetna Real Estate Securities VP
Growth of $10,000
Aetna Real Estate
Securities VP NAREIT Index
12/15/97 10,000 10,000
12/31/97 10,363 10,236
10,343 10,188
9,960 9,720
9,217 8,698
12/31/98 9,031 8,444
[End Line Chart]
<TABLE>
<CAPTION>
- -------------------------------------------
Average Annual Total Returns
for the period ended December 31, 1998*
- -------------------------------------------
<S> <C> <C>
Inception Date 1 Year Inception
- -------------------------------------------
12/15/97 -12.85% -9.30%
- -------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA REAL ESTATE SECURITIES VP
HOW DID THE PORTFOLIO PERFORM DURING THE PERIOD?
Aetna Real Estate Securities VP (Real Estate) generated a -12.85% total return,
net of fund expenses, for the year ended December 31, 1998. The benchmark,
National Association of Real Estate Investment Trusts Equity (REIT) Index(c),
returned -17.51% for the same period.
WHAT ECONOMIC AND FINANCIAL MARKET CONDITIONS IMPACTED THE PORTFOLIO?
The Portfolio's underweight position in hotels has been a large and consistent
positive contributor to performance through the year, as growth investors exited
this sector, propelled partially by fears of economic slowdown. Strong stock
selection within the hotel sector, particularly underweighting of Patriot
American Hospitality contributed positively, but as hotel REIT valuations
appeared to offer an attractive risk/reward profile, the Portfolio increased its
exposure to the sector, but remains underweight. The increasingly overweighting
multi-family sector also helped, as this group provided stability and
inexpensive entry points in a turbulent environment. At the same time, exposure
to the commercial mortgage sector, especially Criimi Mae, Inc., produced a
substantial drag on performance. Unusually wide credit spreads in the commercial
mortgage-backed securities market triggered a drastic repricing of mortgage
inventories and a corresponding drop in value. Good stock selection within the
healthcare as well as retail sectors, with names such as Health Care REIT, Inc.
and Kimco Realty Corp., also provided some protection during a broadly negative
year.
See Definition of Terms. 49
<PAGE>
WHAT INVESTMENTS INFLUENCED THE PORTFOLIO'S PERFORMANCE OVER THE PAST TWELVE
MONTHS?
The environment for investing in REITs was difficult in 1998. A number of
related economic and financial market conditions impacted the Portfolio. There
was a slowdown in REIT earnings growth rates. Though REITs posted funds from
operations (FFO) per share growth rates higher than those achieved by the broad
market, the 13% FFO growth per share represents a slight decrease from previous
two years.
The maturation of the real estate recovery, equilibrium supply and demand
condition, and a decrease in acquisition activity, contributed to an erosion in
earnings growth rates throughout 1998. Another impact was the concerns
surrounding the level of construction. Real estate markets have improved
steadily since the bottom of the cycle in the early 1990s, with occupancy levels
and rents increasing in virtually every major property type and in most
geographic regions. Over the last two years, however, the healthy (and
increasingly tight) markets have gradually allowed development to be
economically justified. Investors accustomed to not seeing new construction
became alarmed that the excesses of prior real estate cycles would be repeated.
Though the data indicate that new supply is economically justified by strong
demand in most markets and that healthy market conditions are expected to
persist, the rate of growth in rents and occupancies will likely not occur at
the exceptional rates experienced in the early stage of the recovery.
Finally, there was significant dislocation in the real estate debt and equity
markets. Due to the conditions described above, some investors began to exit
REIT equities in the first half of 1998, causing weak stock prices and an
increase in the cost of equity capital to REITs. Later in the year, global
concerns in Asia and emerging markets caused fixed income investors to seek the
safety of U.S. Treasuries and real estate debt market spreads widened to levels
never seen. With virtually no debt or equity capital available to real estate
companies, FFO growth from property acquisitions (an important contributor to
total earnings growth) would not materialize. Although the medium term impact of
lower liquidity in real estate is favorable (that is, there is less money
available for development), the near term impact is to decrease earnings growth
from acquisitions.
WHAT IS YOUR OUTLOOK GOING FORWARD?
We continue to believe that equity real estate securities should provide
attractive total returns from current levels, as evidence of equilibrium
conditions in property markets, attractive absolute and relative REIT valuations
and more realistic earnings expectations restore investor confidence. We do not
necessarily believe a high-profile catalyst will emerge to spark interest in the
group from the broad market. Rather, we believe consistent earnings performance,
companies demonstrating their ability to successfully digest their recent
growth, evidence of healthy real estate market conditions and attractive stock
valuations will all bolster the group over time.
We believe a fundamental shift has occurred in the REIT sector away from
immediate earnings accretion through acquisitions toward long term creation of
value through operating efficiencies and alternative revenue streams (such as
providing telecommunications services to office tenants or establishing loyalty
shopping programs at regional malls). We view this as the natural evolution of
the real estate cycle and still expect the shift in the composition of FFO
growth towards internal growth to allow 6% to 8% FFO per share growth in 1999.
At some point, a broad based entry of value-oriented investors, or defensive
investors, could also provide price support.
We believe a recovery in REIT shares could stall if downward earnings estimate
revisions continue in 1999 or if the anecdotal evidence which indicates slowing
construction does not materialize. Furthermore, momentum investors, whom we
consider to be the marginal REIT investors who influence stock prices, may
believe the broader market could offer better investment alternatives than the
relatively predictable cash flow streams of REITs. Whereas REITs have often
performed well as defensive stocks, the group did not attract defensive
investors during 1998's turmoil.
Real estate securities involve certain risks, including dependency on a firm's
management skills, general and regional economic impact on the industry, changes
in the value of properties owned, refinancing and risks similar to those linked
to small company investing.
50 See Definition of Terms.
<PAGE>
<TABLE>
<CAPTION>
% OF NET
TOP TEN EQUITY HOLDINGS ASSETS
<S> <C>
PS Business Parks, Inc. 5.4%
Equity Office Properties Trust 5.0%
Kimco Realty Corp. 4.8%
Post Properties, Inc. 4.8%
General Growth Properties, Inc. 4.5%
Health Care REIT, Inc. 4.4%
Equity Residential Properties Trust 4.3%
Apartment Investment & Management Co. 4.2%
Camden Property Trust 4.2%
CBL & Associates Properties, Inc. 3.8%
</TABLE>
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Portfolio are subject to change.
See Definition of Terms. 51
<PAGE>
DEFINITION OF TERMS
(a) The Standard & Poor's (S&P) 500 Index is a value-weighted, unmanaged index
of 500 widely held stocks that assumes reinvestment of all dividends and is
considered to be representative of the U.S. stock market in general.
(b)The Lehman Brothers Aggregate Bond Index is an unmanaged index of U.S.
corporate, government and mortgage bonds.
(c) The National Association of Real Estate Investment Trusts (NAREIT) Equity
REIT Index is an unmanaged, market-weighted average of the performance for
tax-qualified real estate investment trusts listed on the New York Stock
Exchange, American Stock Exchange and the NASDAQ National Market System.
(d) The Standard & Poor's (S&P) Smallcap 600 Index is a value-weighted,
unmanaged index of 600 common stocks that assumes reinvestment of all dividends
and is considered to be representative of the U.S. stock market in general.
52
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
BALANCED
=========================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------- --------------
<S> <C> <C>
COMMON STOCKS (60.3%)
AIR TRANSPORT (0.5%)
Airborne Freight Corp. ........... 39,600 $ 1,428,075
Alaska Air Group, Inc. + ......... 12,100 535,425
AMR Corp. + ...................... 15,000 890,625
ASA Holdings, Inc. .............. 28,800 878,400
Atlas Air, Inc. + ................ 25,200 1,233,225
Delta Air Lines, Inc. ............ 11,600 603,200
Midwest Express Holdings, Inc. + . 26,950 709,122
SkyWest, Inc. ................... 35,900 1,173,481
Southwest Airlines Co. ........... 31,425 705,099
US Airways Group, Inc. + ......... 13,300 691,600
---------------
8,848,252
---------------
ALUMINUM (0.1%)
Aluminum Co. of America .......... 14,700 1,096,069
Reynolds Metals Co. .............. 7,600 400,425
---------------
1,496,494
---------------
AUTO PARTS AND HARDWARE (0.5%)
Black & Decker Corp. ............. 4,900 274,706
Carlisle Co., Inc. ............... 29,300 1,512,613
CLARCOR, Inc. .................... 41,650 833,000
Cooper Tire & Rubber Co. ......... 8,200 167,588
Dana Corp. ....................... 20,882 853,552
Genuine Parts Co. ................ 18,700 625,281
Goodyear Tire & Rubber Co. (The) . 15,200 766,650
Snap-On, Inc. .................... 8,500 295,906
Standard Motor Products, Inc. ... 29,600 717,800
Stanley Works (The) .............. 8,900 246,975
Tower Automotive, Inc. + ......... 71,800 1,790,512
Wynn's International, Inc. ....... 28,475 630,009
---------------
8,714,592
---------------
AUTOMOTIVE (1.1%)
Arvin Industries, Inc. ........... 29,500 1,229,781
Dura Automotive Systems, Inc. + .. 61,800 2,108,925
Eaton Corp. ...................... 6,700 473,606
Ford Motor Co. ................... 154,800 9,084,825
General Motors Corp. ............. 85,100 6,089,969
Gentex Corp. + ................... 28,500 570,000
Johnson Controls, Inc. .......... 8,700 513,300
TRW, Inc. ........................ 12,500 702,344
---------------
20,772,750
---------------
BANKS AND THRIFTS (3.0%)
Bank of New York Co., Inc. ...... 63,700 2,563,925
Bank One Corp. ................... 93,600 4,779,450
BankAmerica Corp. ................ 60,606 3,643,936
BankBoston Corp. ................. 31,600 1,230,425
BB&T Corp. ....................... 27,600 1,112,625
Chase Manhattan Corp. ............ 66,600 4,532,962
City National Corp. .............. 29,800 1,240,425
Comerica, Inc. ................... 13,250 903,484
Fifth Third Bancorp .............. 21,400 1,526,087
NUMBER OF MARKET
SHARES VALUE
------------- --------------
Banks and Thrifts (continued)
First Republic Bank + ............ 23,900 $ 598,994
First Union Corp. ................ 85,800 5,217,712
FirstFed Financial Corp. + ....... 49,600 886,600
Fleet Financial Group, Inc. ..... 46,200 2,064,562
Flushing Financial Corp. ......... 43,850 693,378
Golden State Bancorp, Inc. ....... 36,600 608,475
Golden West Financial Corp. ...... 5,500 504,281
Harbor Florida Bancshares, Inc. .. 76,900 860,319
HUBCO, Inc. ..................... 24,023 723,693
Huntington Bancshares ............ 20,570 618,386
J.P. Morgan & Co. ................ 5,700 598,856
KeyCorp .......................... 44,400 1,420,800
Mellon Bank Corp. ................ 21,700 1,491,875
Mercantile Bancorporation, Inc. . 12,800 590,400
Meta Group, Inc. + ............... 29,100 865,725
National City Corp. .............. 32,100 2,327,250
Northern Trust Corp. ............. 11,200 977,900
PNC Bank Corp. ................... 24,800 1,342,300
Regions Financial Corp. .......... 18,200 733,687
Republic New York Corp. .......... 3,600 164,025
Riggs National Corp. ............. 28,900 588,838
State Street Corp. ............... 14,400 1,001,700
Summit Bancorp. .................. 17,700 773,269
Suntrust Banks, Inc. ............. 17,000 1,300,500
Synovus Financial Corp. .......... 21,500 524,063
U.S. Bancorp ..................... 63,200 2,243,600
Union Planters Corp. ............. 11,000 498,438
Wachovia Corp. ................... 17,600 1,538,900
Washington Mutual, Inc. .......... 50,478 1,927,629
--------------
55,219,474
--------------
BIOTECH AND MEDICAL PRODUCTS (1.1%)
ADAC Laboratories + .............. 26,900 537,159
Alpharma, Inc. ++ ................ 30,400 1,073,500
Alza Corp. + ..................... 6,000 313,500
Amgen, Inc. + .................... 36,900 3,858,356
Becton, Dickinson & Co. .......... 20,100 858,019
Bindley Western Industries, Inc. 30,800 1,516,900
Biomet, Inc. ..................... 11,500 462,875
Boston Scientific Corp. + ........ 12,800 343,200
Cooper Companies, Inc. + ......... 20,500 424,094
Guidant Corp. .................... 12,100 1,334,025
Hanger Orthopedic Group, Inc. + .. 49,400 1,111,500
Maxxim Medical, Inc. + ........... 30,300 901,425
Medtronic, Inc. ................. 39,300 2,918,025
Monsanto Co. ..................... 19,600 931,000
Ocular Sciences Inc. + ........... 37,100 992,425
ResMed Inc. + .................... 23,600 1,070,850
VISX, Inc. + ..................... 14,400 1,259,100
Xomed Surgical Products, Inc. + .. 28,600 915,200
---------------
20,821,153
---------------
See Notes to Portfolio of Investments. 53
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
BALANCED (CONTINUED)
==========================================================================
NUMBER OF MARKET
SHARES VALUE
---------------- -----------------
CHEMICALS (0.4%)
Dow Chemical Co. ................. 17,400 $ 1,582,312
Du Pont (E.I.) de Nemours ........ 90,700 4,812,769
Eastman Chemical Co. ............. 3,200 143,200
Hercules, Inc. .................. 9,200 251,850
Rohm & Haas Co. .................. 19,200 578,400
Union Carbide Corp. .............. 4,500 191,250
---------------
7,559,781
---------------
COMMERCIAL SERVICES (1.2%)
ADVO, Inc. + ..................... 42,300 1,115,662
Aviation Sales Co. + ............. 26,300 1,068,438
Big Flower Holdings, Inc. + ...... 42,500 937,656
Century Business Services, Inc. + 44,800 644,000
Consolidated Graphics, Inc. + .... 12,000 810,750
Day Runner, Inc. + ............... 10,500 152,250
Deluxe Corp. ..................... 8,600 314,438
Dun & Bradstreet Corp. ........... 7,200 227,250
Dycom Industries, Inc. + ......... 19,400 1,108,225
Insight Enterprises, Inc. + ...... 33,050 1,681,419
Interim Services, Inc. + ......... 47,300 1,105,637
Interpublic Group of Co., Inc. ... 12,800 1,020,800
Kendle International, Inc. + ..... 9,600 224,400
Lason, Inc. + .................... 23,500 1,367,406
Mail-Well, Inc. + ................ 57,200 654,225
Matthews International Corp. ..... 33,100 1,042,650
Nielsen Media Research ........... 45,333 815,994
Omnicom Group, Inc. .............. 13,900 806,200
Paychex, Inc. ................... 14,200 730,413
RCM Technologies, Inc. + ........ 66,900 1,772,850
RR Donnelley & Sons Co. .......... 14,400 630,900
Staffmark, Inc. + ................ 27,400 613,075
TMP Worldwide Inc. + ............. 46,000 1,932,000
Valassis Communications, Inc. + .. 28,000 1,445,500
World Color Press, Inc. + ........ 24,900 757,894
---------------
22,980,032
---------------
COMPUTERS (3.3%)
Apple Computer, Inc. + ........... 19,400 794,188
Ceridian Corp. + ................. 7,300 509,631
Compaq Computer Corp. ............ 140,441 5,889,744
Computer Sciences Corp. .......... 12,700 818,356
Computer Task Group, Inc. ........ 31,800 862,575
Dell Computer Corp. + ............ 165,500 12,112,531
Electronic Data Systems Corp. .... 42,000 2,110,500
Gateway 2000, Inc. + ............. 12,900 660,319
Henry (Jack) & Associates, Inc. .. 18,700 930,325
Hewlett Packard Co. .............. 77,000 5,260,062
International Business Machines
Corp............................. 118,200 21,837,450
Micron Technology, Inc. + ........ 20,000 1,011,250
NeoMagic Corp. + ................. 48,300 1,068,638
Seagate Technology, Inc. + ...... 20,700 626,175
SPR, Inc. + ...................... 49,300 850,425
NUMBER OF MARKET
SHARES VALUE
---------------- ---------------
COMPUTERS (CONTINUED)
Sun Microsystems, Inc. + ......... 44,900 $ 3,844,562
Unisys Corp. + ................... 31,800 1,095,113
---------------
60,281,844
---------------
CONGLOMERATE AND AEROSPACE (2.3%)
AAR Corp. ........................ 28,550 681,631
Alliant Techsystems, Inc. + ...... 21,100 1,739,431
Aviall, Inc. + ................... 51,600 606,300
BE Aerospace, Inc. + ............. 14,000 294,000
Cordant Technologies, Inc. ....... 24,200 907,500
Crane Co. ........................ 9,000 271,688
General Dynamics Corp. ........... 13,200 773,850
General Electric Co. ............. 250,700 25,587,069
Kellstrom Industries, Inc. + ..... 43,000 1,236,250
Kroll O' Gara Co. (The) + ........ 43,300 1,707,644
Lockheed Martin Corp. ............ 19,100 1,618,725
Newport News Shipbuilding, Inc. .. 30,800 1,029,875
Northrop Grumman Corp. ........... 9,000 658,125
Raytheon Co. ..................... 23,800 1,267,350
Rockwell International Corp. ..... 16,200 786,712
Tenneco, Inc. .................... 5,500 187,344
Textron, Inc. .................... 13,600 1,032,750
United Technologies Corp. ........ 29,400 3,197,250
---------------
43,583,494
---------------
CONSUMER FINANCE (1.3%)
Associates First Capital Corp. ... 57,138 2,421,223
Capital One Financial Corp. ...... 10,200 1,173,000
Countrywide Credit Industries,
Inc.............................. 11,100 557,081
Electro Rent Corp. + ............. 66,500 1,072,312
Federal Home Loan Mortgage Corp. . 96,100 6,192,444
Federal National Mortgage
Association...................... 111,000 8,214,000
Household International, Inc. .... 33,600 1,331,400
MBNA Corp. ....................... 60,375 1,505,602
Resource America, Inc. .......... 67,900 615,344
SLM Holding Corp. ................ 15,000 720,000
---------------
23,802,406
---------------
CONSUMER PRODUCTS (1.5%)
American Greetings Corp. ......... 7,500 307,969
Avon Products, Inc. .............. 26,000 1,150,500
Bestfoods ........................ 27,600 1,469,700
Clorox Co. ....................... 10,100 1,179,806
Colgate-Palmolive Co. ............ 23,700 2,201,137
Eastman Kodak Co. ................ 26,600 1,915,200
Fossil, Inc. + ................... 60,250 1,732,188
Gillette Co. ..................... 37,900 1,831,044
International Flavors &
Fragrances, Inc. ................ 4,300 190,006
Kimberly-Clark Corp. ............. 48,100 2,621,450
Procter & Gamble Co. ............. 101,500 9,268,219
Unilever NV ...................... 54,700 4,536,681
---------------
28,403,900
---------------
CONSUMER SERVICES (1.1%)
Avis Rent A Car, Inc. + .......... 43,800 1,059,412
54 See Notes to Portfolio of Investments.
<PAGE>
==========================================================================
NUMBER OF MARKET
SHARES VALUE
---------------- -----------------
CONSUMER SERVICES (CONTINUED)
Bob Evans Farms, Inc. ............ 61,500 $ 1,602,844
Brinker International, Inc. + .... 23,000 664,125
Buffets, Inc. + .................. 66,500 793,844
CEC Entertainment, Inc. + ........ 29,800 826,950
Darden Restaurants, Inc. ......... 14,700 264,600
Dover Downs Entertainment, Inc. .. 92,000 1,109,750
Education Management Corp. + ..... 50,800 1,200,150
Foodmaker, Inc. + ................ 47,300 1,043,556
H & R Block, Inc. ................ 9,000 405,000
Hilton Hotels Corp. .............. 9,700 185,513
ITI Technologies, Inc. + ......... 26,200 812,200
Marriott International, Inc. ..... 12,400 359,600
McDonald's Corp. ................. 54,300 4,160,737
O'Charleys, Inc. + ............... 49,750 702,719
Rental Service Corp. + ........... 34,400 539,650
Ruby Tuesday, Inc. ............... 62,000 1,317,500
Ryan's Family Steak Houses,
Inc. +........................... 76,200 942,975
Service Corp. International ...... 26,500 1,008,656
Tricon Global Restaurants, Inc. + 15,680 785,960
Veterinary Centers of America,
Inc. + .......................... 43,800 873,26
---------------
20,659,004
---------------
CONSUMER SPECIALTIES (0.3%)
Action Performance Co., Inc. + ... 23,700 838,387
Allergan, Inc. .................. 7,700 498,575
Brunswick Corp. .................. 10,200 252,450
Hasbro, Inc. ..................... 13,300 480,463
International Speedway Corp. ..... 32,200 1,304,100
Mattel, Inc. .................... 30,600 698,063
Steinway Musical Instruments, Inc.
+................................ 27,600 717,600
---------------
4,789,638
---------------
DATA AND IMAGING SERVICES (4.8%)
American Management Systems, Inc.
+................................ 29,500 1,180,000
Autodesk, Inc. ................... 8,600 367,113
Automatic Data Processing, Inc. .. 24,900 1,996,669
Avant! Corp. + ................... 51,000 816,000
AVT Corp. + ...................... 48,000 1,392,000
Bell & Howell Co. + .............. 28,000 1,058,750
BMC Software, Inc. + ............. 30,900 1,376,981
Cisco Systems, Inc. + ............ 172,350 15,996,234
Computer Associates International,
Inc.............................. 44,300 1,888,287
Computer Horizons Corp. + ........ 24,200 644,325
EMC/MASS Corp. + ................. 67,900 5,771,500
Factset Research Systems, Inc. + . 15,400 950,950
First Data Corp. ................. 37,800 1,197,788
Mapics, Inc. + ................... 55,200 910,800
Mercury Interactive Corp. + ...... 18,800 1,189,100
Microsoft Corp. + ................ 292,600 40,579,962
Novell, Inc. + .................. 30,700 556,438
Oracle Corp. + ................... 106,700 4,601,437
Parametric Technology Co. + ...... 25,800 422,475
Peregrine Systems, Inc. + ........ 24,000 1,113,000
NUMBER OF MARKET
SHARES VALUE
---------------- ---------------
DATA AND IMAGING SERVICES (CONTINUED)
Pinnacle Systems, Inc. + ........ 24,300 $ 868,725
Progress Software Corp. + ........ 44,300 1,495,125
Reynolds And Reynolds ............ 34,900 800,519
Software AG Systems, Inc. + ...... 47,200 855,500
TSI International Software Ltd. + 29,700 1,421,888
---------------
89,451,566
---------------
DISCRETIONARY RETAIL (4.0%)
99 Cents Only Stores + ........... 39,700 1,950,262
American Eagle Outfitters, Inc. + 11,800 786,175
AutoZone, Inc. + ................. 15,900 523,706
Buckle, Inc. + ................... 41,250 990,000
Cato Corp. (The) ................. 70,200 691,031
Costco Companies, Inc. + ......... 18,500 1,335,469
CSK Auto Corp. + ................. 35,900 958,081
Dayton Hudson Co. ................ 37,500 2,034,375
Dillards, Inc. ................... 11,600 329,150
Dollar General Corp. ............. 18,400 434,700
Federated Department Stores,
Inc. +........................... 20,400 888,675
Fingerhut Companies, Inc. ........ 35,400 546,488
Gap, Inc. ........................ 74,250 4,176,562
Home Depot, Inc. ................ 203,200 12,433,300
J.C. Penney Co., Inc. ............ 20,300 951,563
Kenneth Cole Productions, Inc. + . 42,200 791,250
Kmart Corp. + .................... 51,000 780,938
Kohl's Corp. + ................... 13,500 829,406
Linens 'n Things, Inc. + ......... 45,300 1,795,012
Lowe's Co., Inc. ................. 40,600 2,078,212
May Department Stores Co. ........ 23,200 1,400,700
Men's Wearhouse, Inc. + .......... 42,900 1,362,075
Musicland Stores Corp. + ......... 70,100 1,047,119
Nordstrom, Inc. .................. 15,800 548,063
Regis Corp. ...................... 21,900 876,000
Renters Choice, Inc. + ........... 31,700 1,006,475
Sears, Roebuck & Co. ............. 33,400 1,419,500
Staples, Inc. + ................. 32,400 1,415,475
Tandy Corp. ...................... 12,100 498,369
The Limited, Inc. ................ 26,100 760,163
TJX Companies, Inc. .............. 46,000 1,334,000
Toys "R" Us, Inc. + .............. 11,200 189,000
Transport World Entertainment
Corp. + ......................... 47,750 910,234
Tweeter Home Entertainment Group + 40,300 1,158,625
Wal-Mart Stores, Inc. ............ 299,600 24,398,675
Zale Corp. + ..................... 37,600 1,212,600
---------------
74,841,428
---------------
DIVERSIFIED FINANCIAL SERVICES (1.1%)
American Express Co. ............. 38,000 3,885,500
American General Corp. ........... 20,200 1,575,600
Citigroup Inc. ................... 182,800 9,048,600
Morgan Stanley, Dean Witter,
Discover & Co. .................. 51,000 3,621,000
Trammell Crow Co. + .............. 38,600 1,080,800
See Notes to Portfolio of Investments. 55
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
BALANCED (CONTINUED)
==========================================================================
NUMBER OF MARKET
SHARES VALUE
---------------- -----------------
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
Transamerica Corp. ............... 6,600 $ 762,300
---------------
19,973,800
---------------
DRUGS (5.2%)
Abbott Laboratories .............. 166,700 8,168,300
American Home Products Corp. ..... 112,500 6,335,156
Baxter International, Inc. ....... 26,700 1,717,144
Bristol-Myers Squibb Co. ......... 79,500 10,638,094
Eli Lilly & Co. .................. 143,100 12,718,012
Johnson & Johnson ................ 102,900 8,630,737
Jones Medical Industries, Inc. .. 24,900 908,850
Medicis Pharmaceutical Corp. + ... 26,800 1,597,950
Merck & Co., Inc. ................ 129,100 19,066,456
Pfizer, Inc. ..................... 42,200 5,293,463
Pharmacia & Upjohn, Inc. ......... 45,100 2,553,788
Roberts Pharmaceutical Corp. + ... 35,900 780,825
Schering Plough .................. 157,300 8,690,825
Warner Lambert Co. ............... 113,400 8,526,262
---------------
95,625,862
---------------
ELECTRIC UTILITIES (1.9%)
AES Corp. + ...................... 14,900 705,888
Ameren Corp. ..................... 10,600 452,488
American Electric Power Co. ...... 12,800 602,400
Baltimore Gas & Electric Co. ..... 15,300 472,388
Black Hills Corp. ................ 29,100 767,512
Calpine Corp. + .................. 41,500 1,047,875
Carolina Power & Light Co. ....... 15,000 705,938
Central & South West Corp. ....... 18,500 507,594
Central Hudson Gas & Electric Co. 31,100 1,391,725
Cinergy Corp. .................... 16,900 580,938
Cleco Corp. ...................... 21,800 748,012
Consolidated Edison, Inc. ........ 24,300 1,284,862
Dominion Resources, Inc. ......... 19,400 906,950
DTE Energy Co. ................... 21,500 921,812
Duke Energy Corp. ................ 30,500 1,953,906
E West Blanch Holdings, Inc. .... 21,000 996,187
Edison International ............. 30,200 841,825
Entergy Corp. .................... 20,000 622,500
FirstEnergy Corp. ................ 15,000 488,438
FPL Group, Inc. .................. 14,500 893,562
GPU, Inc. ........................ 12,500 552,344
Houston Industries Finance Co. ... 26,300 844,887
Independent Energy Holdings + .... 76,400 687,600
Medical Assurance, Inc. + ........ 30,660 1,013,696
Minnesota Power, Inc. ............ 16,900 743,600
Mony Group Inc. + ................ 56,000 1,753,500
Nevada Power Co. ................. 36,600 951,600
Northern States Power Co. ........ 15,400 427,350
Peco Energy Co. .................. 25,600 1,065,600
PG&E Corp. ....................... 36,200 1,140,300
Philadelphia Suburban Corp. ...... 30,100 889,831
PP & L Resources, Inc. .......... 17,100 476,663
NUMBER OF MARKET
SHARES VALUE
---------------- ---------------
ELECTRIC UTILITIES (CONTINUED)
Public Service Enterprise Group,
Inc.............................. 23,100 $ 924,000
Sierra Pacific Resources ......... 24,000 912,000
SIGCORP, Inc. .................... 22,800 813,675
Southern Co. ..................... 59,600 1,732,125
Texas Utilities Co. .............. 24,000 1,120,500
Triumph Group, Inc. + ............ 28,500 912,000
Unicom Corp. ..................... 18,500 713,406
---------------
34,567,477
---------------
ELECTRICAL MACHINERY AND INSTRUMENTS (0.4%)
Harris Corp. ..................... 10,800 395,550
Knoll, Inc. + .................... 24,100 713,963
Mettler-Toledo International, Inc. + 43,000 1,206,687
Pitney Bowes, Inc. .............. 23,400 1,545,862
Virco Manufacturing Corp. ........ 31,770 583,774
Xerox Corp. ...................... 27,000 3,186,000
---------------
7,631,836
---------------
ELECTRONIC MEDIA (0.7%)
Citadel Communications Corp. + ... 66,200 1,712,925
Tele-Communications, Inc. + ..... 41,900 2,317,594
Time Warner, Inc. ................ 89,600 5,560,800
Viacom, Inc. + ................... 28,000 2,072,000
Walt Disney Co. (The) ............ 65,800 1,974,000
---------------
13,637,319
---------------
FOOD AND BEVERAGE (1.8%)
Anheuser-Busch Co., Inc. ......... 52,400 3,438,750
Archer-Daniels-Midland Co. ....... 18,115 311,352
Beringer Wine Estates Holdings,
Inc. + .......................... 18,800 840,125
Brown-Forman Corp. + ............. 7,000 529,813
Campbell Soup Co. ................ 36,000 1,980,000
Canandiagua Brands, Inc. + ....... 19,300 1,115,781
Coca-Cola Co. .................... 80,200 5,363,375
Coca-Cola Enterprises, Inc. ..... 31,400 1,122,550
Conagra, Inc. ................... 41,700 1,313,550
Coors (Adolph) Co. ............... 5,000 282,188
Earthgrains Co. (The) ............ 33,300 1,030,219
Fortune Brands, Inc. ............. 16,800 531,300
General Mills, Inc. .............. 16,000 1,244,000
Hain Food Group, Inc. (The) + .... 39,300 982,500
Heinz (H.J.) Co. ................. 40,400 2,287,650
Hershey Foods Corp. .............. 9,600 597,000
Michael Foods, Inc. .............. 29,600 888,000
PepsiCo, Inc. .................... 48,600 1,989,562
Pioneer Hi-Bred International,
Inc............................. 20,100 542,700
Quaker Oats Co. .................. 14,800 880,600
Ralcorp Holdings, Inc. + ......... 35,200 642,400
Ralston-Ralston Purina Group ..... 26,400 854,700
Robert Mondavi Corp. + ........... 24,900 1,017,787
Sara Lee Corp. ................... 79,800 2,249,362
Wrigley (Wm.) Jr. Co. ............ 9,300 832,931
---------------
32,868,195
---------------
56 See Notes to Portfolio of Investments.
<PAGE>
========================================================================
NUMBER OF MARKET
SHARES VALUE
---------------- ---------------
FOOD AND DRUG RETAIL (1.0%)
Albertson's, Inc. ................ 25,300 $ 1,611,294
American Stores Co. .............. 23,900 882,806
Casey's General Stores, Inc. ..... 30,300 394,847
CVS Corp. ........................ 35,800 1,969,000
Duane Reade, Inc. + .............. 27,400 1,054,900
Fred Meyer, Inc. + ............... 12,800 771,200
Kroger Co. (The) + ............... 36,900 2,232,450
Rite Aid Corp. ................... 24,400 1,209,325
Safeway, Inc. + .................. 52,000 3,168,750
SUPERVALU, Inc. .................. 16,400 459,200
Sysco Corp. ...................... 25,200 691,425
Walgreen Co. ..................... 54,600 3,197,512
Winn-Dixie Stores, Inc. .......... 5,100 228,863
---------------
17,871,572
---------------
FOREST PRODUCTS AND BUILDING MATERIALS (0.6%)
Armstrong World Industries, Inc. 4,200 253,313
Bemis Co., Inc. .................. 5,500 208,656
Centex Construction Products, Inc. 27,000 1,096,875
Crown Cork & Seal Co., Inc. ...... 12,200 375,912
Eagle Hardware & Garden, Inc. + .. 39,200 1,274,000
Elcor Corp. ...................... 31,700 1,024,306
Fort James Corp. ................. 18,700 748,000
Lone Star Industries, Inc. ....... 36,600 1,347,337
Masco Corp. ...................... 30,300 871,125
Mead Corp. ....................... 10,200 298,988
Owens-Illinois, Inc. + ........... 13,200 404,250
Shorewood Packaging Corp. + ...... 25,600 524,800
Simpson Manufacturing Co., Inc. + 21,700 812,394
Westvaco Corp. ................... 10,600 284,213
Weyerhaeuser Co. ................. 16,400 833,325
---------------
10,357,494
---------------
GAS UTILITIES (0.4%)
AGL Resources, Inc. .............. 40,500 934,031
Coastal Corp. (The) .............. 18,100 632,369
Columbia Energy Group ............ 8,700 502,425
Consolidated Natural Gas Co. ..... 9,300 502,200
Energen Corp. .................... 38,900 758,550
Enron Corp. ...................... 23,900 1,363,794
NICOR, Inc. ...................... 5,100 215,475
Piedmont Natural Gas, Inc. ....... 23,000 830,875
Sempra Energy .................... 20,400 517,650
Southwest Gas Corp. .............. 38,800 1,042,750
Williams Co., Inc. (The) ......... 14,200 442,862
---------------
7,742,981
---------------
HEALTH SERVICES (0.6%)
Cardinal Health, Inc. ............ 16,300 1,236,762
Carematrix Corp. + ............... 18,800 575,750
Cerner Corp. + ................... 41,900 1,120,825
HBO & Co. ........................ 60,500 1,735,594
HCR Manor Care, Inc. + ........... 6,700 196,813
HEALTHSOUTH Corp. + .............. 13,600 209,950
NUMBER OF MARKET
SHARES VALUE
---------------- ---------------
HEALTH SERVICES (CONTINUED)
Humana, Inc. + ................... 15,400 $ 274,313
IDX Systems Corp. + .............. 15,900 699,600
IMS Health, Inc. ................. 16,700 1,259,806
Medical Manager Corp. + .......... 29,500 925,562
Sunrise Assisted Living, Inc. + .. 30,600 1,587,375
Tenet Healthcare Corp. + ......... 31,000 813,750
United Healthcare Corp. .......... 17,000 732,062
---------------
11,368,162
---------------
HEAVY MACHINERY (0.4%)
Astec Industries, Inc. + ......... 30,400 1,691,000
Caterpillar, Inc. ................ 11,000 506,000
Cummins Engine Co., Inc. ........ 6,800 241,400
Gardner Denver Machinery, Inc. + . 57,500 848,125
Manitowoc Co., Inc. (The) ........ 34,200 1,517,625
Navistar International Corp. + ... 12,500 356,250
PACCAR, Inc. .................... 12,600 518,175
Terex Corp. + .................... 56,200 1,605,212
---------------
7,283,787
---------------
HOUSING AND FURNISHINGS (1.1%)
American Homestar Corp. + ........ 39,300 589,500
Centex Corp. ..................... 7,800 351,488
Champion Enterprises, Inc. + ..... 40,200 1,100,475
D.R. Horton, Inc. ................ 49,600 1,140,800
Department 56, Inc. + ............ 25,300 950,331
Ethan Allen Interiors, Inc. ..... 19,700 807,700
Furniture Brands International,
Inc. + ......................... 29,500 803,875
Helen of Troy Ltd. + ............. 56,800 834,250
Interface, Inc. .................. 45,600 423,225
Kaufman & Broad Home Corp. ....... 31,100 894,125
La-Z-Boy, Inc. ................... 50,600 901,313
Maytag Corp. ..................... 10,400 647,400
MDC Holdings, Inc. ............... 49,000 1,047,375
Newell Co. ....................... 15,800 651,750
NVR, Inc. + ...................... 26,800 1,278,025
Pillowtex Corp. .................. 20,700 553,725
Pulte Corp. ...................... 29,300 814,906
Rent-Way, Inc. + ................ 34,200 831,488
Rubbermaid, Inc. ................. 14,800 465,275
Ryland Group, Inc. ............... 42,400 1,224,300
Standard Pacific Corp. ........... 64,500 911,062
U.S. Home Corp. + ................ 20,100 668,325
Webb (Del E) Corp. ............... 43,000 1,185,187
Whirlpool Corp. .................. 7,400 409,775
---------------
19,485,675
---------------
INDUSTRIAL SERVICES (0.5%)
Browning-Ferris Industries, Inc. 21,300 605,719
Casella Waste Systems, Inc. + .... 20,500 761,063
Granite Construction, Inc. ....... 48,100 1,614,356
Jacobs Engineering Group, Inc. + . 28,700 1,169,525
Jersey Ray Mcdermott, S.A. + ..... 32,100 784,444
Laidlaw, Inc. .................... 32,700 329,044
See Notes to Portfolio of Investments. 57
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
BALANCED (CONTINUED)
================================================================================
NUMBER OF MARKET
SHARES VALUE
---------------- -----------------
INDUSTRIAL SERVICES (CONTINUED)
Smith (A.O.) Corp. ............... 27,750 $ 681,609
USA Waste Management, Inc. ....... 49,700 2,317,262
Watsco, Inc. ..................... 29,800 499,150
---------------
8,762,172
---------------
INSURANCE (2.4%)
Alfa Corp. ....................... 12,800 310,400
Allstate Corp. (The) ............. 65,000 2,510,625
American Annuity Group, Inc. ..... 42,400 975,200
American International Group, Inc. 84,000 8,116,500
Aon Corp. ........................ 16,800 930,300
Arm Financial Group, Inc. ....... 44,800 994,000
Chartwell Re Corp. ............... 18,900 448,875
Chicago Title Corp. .............. 15,300 718,144
Chubb Corp. ...................... 5,300 343,838
CIGNA Corp. ...................... 21,600 1,669,950
Cincinnati Financial Corp. ....... 16,800 615,300
CMAC Investment Corp. ............ 26,600 1,221,937
Conseco, Inc. .................... 30,000 916,875
Enhance Financial Services Group,
Inc............................. 29,600 888,000
ESG Re Ltd. ...................... 17,700 358,425
FBL Financial Group, Inc. ........ 54,700 1,326,475
Fidelity National Financial, Inc. 38,789 1,183,064
First American Financial Corp. ... 39,200 1,259,300
FPIC Insurance Group, Inc. + ..... 29,200 1,396,125
Gallagher (Arthur J.) & Co. ...... 21,600 953,100
Hartford Financial Services Group,
Inc.............................. 22,200 1,218,225
Hooper Holmes, Inc. ............. 51,000 1,479,000
Jefferson-Pilot Corp. ............ 11,100 832,500
LandAmerica Financial Group, Inc. 36,200 2,020,412
Lincoln National Corp. ........... 10,300 842,669
Marsh & Mclennan Co., Inc. ....... 21,100 1,233,031
MBIA, Inc. ....................... 11,100 727,744
MGIC Investment Corp. ............ 9,700 386,181
Mutual Risk Management Ltd. ...... 24,600 962,475
Progressive Corp. ................ 8,400 1,422,750
Provident Companies, Inc. ....... 11,500 477,250
Safeco Corp. ..................... 4,800 206,100
St. Paul Co., Inc. ............... 8,030 279,043
State Auto Financial Corp. ....... 24,300 300,713
SunAmerica, Inc. ................. 29,900 2,425,637
Torchmark Corp. .................. 13,200 466,125
Triad Guaranty, Inc. + ........... 34,800 767,775
UNUM Corp. ....................... 12,300 718,013
---------------
43,902,076
---------------
INVESTMENT SERVICES (0.8%)
Bear Stearns Co., Inc. (The) ..... 3,700 138,288
Charles Schwab Corp. ............. 30,675 1,723,552
Chemical Financial Corp. ......... 3,625 123,250
Conning Corp. .................... 22,100 458,575
Doral Financial Corp. ............ 73,700 1,630,612
Duff & Phelps Credit Rating Co. .. 18,800 1,030,475
NUMBER OF MARKET
SHARES VALUE
---------------- ---------------
INVESTMENT SERVICES (CONTINUED)
Franklin Resources, Inc. ......... 8,800 $ 281,600
Jefferies Group, Inc. ........... 28,700 1,424,237
Lehman Brothers Holdings, Inc. ... 3,700 163,031
Merrill Lynch & Co., Inc. ........ 27,600 1,842,300
Providian Financial Corp. ........ 14,550 1,091,250
Wells Fargo Co. .................. 128,400 5,127,975
---------------
15,035,145
---------------
MAJOR TELECOMMUNICATIONS (4.1%)
ALLTEL Corp. ..................... 19,700 1,178,306
Ameritech Corp. .................. 87,500 5,545,313
AT&T Corp. ....................... 134,200 10,098,550
Bell Atlantic Corp. .............. 168,200 9,555,862
BellSouth Corp. .................. 254,400 12,688,200
GTE Corp. ........................ 104,100 7,020,244
MCI Worldcom, Inc. + ............. 141,221 10,132,607
SBC Communications, Inc. ......... 209,300 11,223,712
Sprint Corp. ..................... 47,600 4,004,350
Sprint PCS + ..................... 15,700 363,063
Superior TeleCom Inc. ............ 25,900 1,223,775
U.S. WEST, Inc. .................. 57,175 3,694,934
---------------
76,728,916
---------------
MISCELLANEOUS METALS (0.1%)
Barrick Gold Corp. ............... 32,800 639,600
Johnstown America Industries, Inc. + 82,900 1,088,063
Placer Dome, Inc. ............... 21,100 242,650
---------------
1,970,313
---------------
OIL (2.0%)
Amoco Corp. ...................... 75,300 4,546,237
Ashland Oil, Inc. ................ 12,300 595,013
Chevron Corp. .................... 21,800 1,808,037
Exxon Corp. ...................... 195,200 14,274,000
Mobil Corp. ...................... 64,600 5,628,275
Royal Dutch Petroleum Co. ........ 169,100 8,095,662
Sunoco Inc. ...................... 12,700 457,994
Texaco, Inc. ..................... 17,100 904,163
USX-Marathon Group ............... 9,800 295,225
---------------
36,604,606
---------------
OIL SERVICES (0.1%)
Cal Dive International, Inc. + ... 45,600 946,200
Friede Goldman International, Inc. + 18,900 214,988
McDermott International, Inc. .... 5,400 133,313
SEACOR SMIT Holdings + ........... 16,200 800,887
Stolt Comex Seaway S.A. + ........ 56,900 384,075
---------------
2,479,463
---------------
OTHER TELECOMMUNICATIONS (2.1%)
AirTouch Communications, Inc. + .. 65,400 4,716,975
Ascend Communications, Inc. + .... 29,600 1,946,200
Comcast Corp. .................... 31,100 1,825,181
Empire District Electric Co. ..... 27,000 668,250
Frontier Corp. ................... 16,700 567,800
General Cable Corp. .............. 43,400 889,700
58 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
NUMBER OF MARKET
SHARES VALUE
---------------- ---------------
OTHER TELECOMMUNICATIONS (CONTINUED)
General Instrument Corp. + ....... 14,600 $ 495,488
L-3 Communications Holdings, Inc. + 20,500 954,531
Lucent Technologies, Inc. ........ 171,500 18,865,000
Mediaone Group, Inc. + ........... 54,100 2,542,700
Moog, Inc. + ..................... 25,100 982,037
Northern Telecom Ltd. ............ 47,000 2,355,875
RF Micro Devices, Inc. + ......... 11,900 551,863
Tekelec + ........................ 42,000 695,625
Tellabs, Inc. + .................. 21,600 1,480,950
---------------
39,538,175
---------------
PRINT MEDIA (0.3%)
Equifax, Inc. ................... 6,000 205,125
Gannett Co., Inc. ............... 25,700 1,701,019
Knight-Ridder, Inc. .............. 9,100 465,237
McGraw-Hill Co., Inc. ............ 8,900 906,687
New York Times Co. ............... 16,100 558,469
Scholastic Corp. + ............... 17,600 943,800
Times Mirror Co. ................. 9,800 548,800
Tribune Co. ...................... 10,400 686,400
---------------
6,015,537
---------------
PRODUCER GOODS (2.3%)
Aeroquip-Vickers, Inc. ........... 3,700 110,769
AFC Cable Systems, Inc. + ........ 28,300 951,587
Allegheny Teledyne, Inc. ......... 18,600 380,138
Allied Signal, Inc. .............. 48,000 2,127,000
Alpine Group, Inc. (The) + ....... 44,400 666,000
Applied Power, Inc. .............. 65,105 2,457,714
Avery Dennison Corp. ............. 12,100 545,256
Avondale Industries, Inc. + ...... 59,800 1,734,200
C & D Technologies, Inc. ......... 40,300 1,108,250
Cooper Industries, Inc. .......... 11,300 538,869
Corning, Inc. .................... 18,000 810,000
Danaher Corp. .................... 14,800 803,825
Dover Corp. ...................... 6,800 249,050
Ecolab, Inc. ..................... 13,400 484,913
Emerson Electric Co. ............. 37,800 2,364,862
FMC Corp. + ...................... 3,900 218,400
Graco, Inc. ...................... 37,800 1,115,100
Grainger (W.W.), Inc. ............ 10,200 424,575
Honeywell, Inc. .................. 12,900 971,531
Hughes Supply, Inc. .............. 34,750 1,016,437
Illinois Tool Works, Inc. ........ 24,400 1,415,200
Ingersoll-Rand Co. ............... 20,950 983,341
ITT Industries, Inc. ............. 12,100 480,975
Kuhlman Corp. .................... 11,300 427,988
Minnesota Mining and Manufacturing
Co............................... 33,100 2,354,237
Monaco Coach Corp. + ............. 64,950 1,721,175
Motivepower Industries, Inc. + ... 27,400 881,937
Mueller Industries, Inc. + ...... 43,400 881,562
Pall Corp. ....................... 10,100 255,656
Parker-Hannifin Corp. ............ 9,200 301,300
NUMBER OF MARKET
SHARES VALUE
---------------- ---------------
PRODUCER GOODS (CONTINUED)
PPG Industries, Inc. ............. 17,500 $ 1,019,375
Raychem Corp. .................... 9,000 290,813
Sherwin-Williams Co. ............. 18,800 552,250
Spartech Corp. ................... 41,300 908,600
Thomas & Betts Corp. ............. 5,500 238,219
Thomas Industries, Inc. .......... 29,500 578,938
Timken Co. ....................... 10,800 203,850
Tredegar Industries, Inc. ........ 48,300 1,086,750
Tyco International Ltd. .......... 87,600 6,608,325
United Stationers, Inc. + ........ 43,200 1,123,200
Varlen Corp. ..................... 40,100 924,806
Westinghouse Air Brake Co. ....... 29,400 718,463
---------------
43,035,436
---------------
REAL ESTATE INVESTMENT TRUSTS (0.6%)
Apartment Investment & Management
Co............................... 28,300 1,052,406
Brandywine Realty Trust .......... 37,300 666,738
CBL & Associates Properties, Inc. 34,900 900,856
Eastgroup Properties, Inc. ....... 45,500 838,906
Essex Property Trust, Inc. ....... 29,300 871,675
General Growth Properties, Inc. .. 27,700 1,049,137
Glenborough Realty Trust, Inc. ... 5,900 120,213
Health Care REIT, Inc. ........... 38,000 983,250
Healthcare Realty Trust, Inc. .... 22,700 506,494
Koger Equity, Inc. ............... 36,400 625,625
Lasalle Partners, Inc. + ......... 14,400 423,900
Parkway Properties, Inc. ......... 28,400 887,500
Prentiss Properties Trust ........ 35,900 801,019
U.S. Restaurant Properties, Inc. 34,000 826,625
---------------
10,554,344
---------------
SEMICONDUCTORS AND ELECTRONICS (2.4%)
3Com Corp. + ..................... 30,300 1,357,819
AMP, Inc. ........................ 17,500 911,094
Applied Materials, Inc. + ........ 29,000 1,237,938
CHS Electronics, Inc. + .......... 33,100 560,631
CTS Corp. ........................ 26,100 1,135,350
Esterline Technologies + ......... 58,900 1,281,075
Flextronics International Ltd. + . 21,800 1,866,625
Intel Corp. ...................... 230,400 27,316,800
Level One Communications, Inc. + . 29,650 1,052,575
Lincoln Electric Holdings ........ 38,000 845,500
Motorola, Inc. .................. 48,000 2,931,000
Plexus Corp. + ................... 30,600 1,036,575
Texas Instruments, Inc. .......... 42,600 3,644,962
---------------
45,177,944
---------------
SPECIALTY CHEMICALS (0.1%)
Air Products and Chemicals, Inc. . 25,000 1,000,000
Engelhard Corp. .................. 10,600 206,700
Grace (W.R.) & Co. ............... 7,200 112,950
Morton International, Inc. ....... 14,200 347,900
Praxair, Inc. .................... 5,900 207,975
See Notes to Portfolio of Investments. 59
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
BALANCED (CONTINUED)
================================================================================
NUMBER OF MARKET
SHARES VALUE
---------------- ---------------
SPECIALTY CHEMICALS (CONTINUED)
Sigma-Aldrich Corp. .............. 10,100 $ 296,688
---------------
2,172,213
---------------
STEEL (0.0%)
Nucor Corp. ...................... 9,100 393,575
Reliance Steel & Aluminum Co. ... 7,200 198,900
USX-US Steel Group, Inc. ......... 7,200 165,600
---------------
758,075
---------------
SURFACE TRANSPORT (0.5%)
Burlington Northern Santa Fe Corp. 39,100 1,319,625
FDX Corp. Holding Co. + .......... 14,320 1,274,480
Knightsbridge Tankers Ltd. ....... 27,700 576,506
Maximus, Inc. + .................. 25,700 950,900
Norfolk Southern Corp. ........... 40,200 1,273,837
Rollins Truck Leasing Corp. ...... 85,500 1,261,125
Ryder System, Inc. ............... 6,600 171,600
Swift Transportation Co., Inc. + . 44,550 1,248,792
Union Pacific Corp. .............. 8,600 387,538
---------------
8,464,403
---------------
TEXTILES AND APPAREL (0.3%)
Ann Taylor Stores Corp. + ........ 33,500 1,321,156
Gerber Childrenswear, Inc. + ..... 38,100 330,994
Liz Claiborne, Inc. .............. 12,100 381,906
Maxwell Shoe Co., Inc. + ......... 45,400 496,563
Nike, Inc. ...................... 14,600 592,212
Novel Denim Holdings Ltd. + ...... 36,600 777,750
Oshkosh B'Gosh, Inc. ............. 36,800 742,900
VF Corp. ......................... 13,000 609,375
---------------
5,252,856
---------------
TOTAL COMMON STOCKS (COST $906,772,377) 1,117,091,642
---------------
PREFERRED STOCKS (0.6%)
California Federal Preferred
Capital Corp. (Banks and Thrifts) 188,000 4,758,750
Global Crossing Holdings Ltd.
(Other Telecommunications) + ++ . 56,000 5,432,000
---------------
TOTAL PREFERRED STOCKS (COST $10,300,000) 10,190,750
---------------
PRINCIPAL
AMOUNT
----------------
LONG-TERM BONDS AND NOTES (38.3%)
CORPORATE BONDS (18.7%)
Abitibi-Consolidated Inc., 6.95%,
04/01/08......................... $ 9,350,000 9,040,515
Allied Waste North America,
7.38%, 01/01/04 ++ .............. 8,900,000 8,989,000
American General Finance Corp.,
8.45%, 10/15/09 ................. 7,000,000 8,406,090
Associates Corp. N.A., 6.25%,
11/01/08......................... 4,680,000 4,846,234
BankAmerica Corp., 7.88%, 12/01/02 1,500,000 1,619,490
BCH Cayman Islands Ltd.,
7.70%, 07/15/06 ................. 13,100,000 14,123,110
Celulosa Arauco Constitution,
6.95%, 09/15/05 ................. 7,500,000 6,660,000
PRINCIPAL MARKET
AMOUNT VALUE
---------- --------------
CORPORATE BONDS (CONTINUED)
Centennial Cellular Corp.,
10.13%, 05/15/05 ................ $ 5,550,000 $ 6,882,000
Chrysler Financial Corp., 5.25%,
10/19/00......................... 6,150,000 6,151,107
Citicorp, Inc., 6.69%, 08/01/00 .. 4,500,000 4,593,240
Comcast Cellular Holdings, Inc.,
9.50%, 05/01/07 ................. 10,000,000 10,625,000
Commercial Mortgage Acceptance
Corp., 5.80%, 03/15/06 .......... 6,452,097 6,455,122
CSX Corp., 7.45%, 05/01/07 ....... 10,835,000 11,807,008
Exide Corp., 10.00%, 04/15/05 ++ . 7,595,000 7,557,025
Federal Mogul Co., 7.50%, 07/01/04 12,150,000 12,267,247
First Empire Capital Trust II,
8.28%, 06/01/27 ................. 7,000,000 7,775,600
Ford Motor Credit Corp., 6.63%,
10/01/28......................... 13,020,000 13,370,629
Fred Meyer, Inc., 7.38%, 03/01/05 9,300,000 9,837,912
Globo Communicacoes,
10.63%, 12/05/08 ++ ............. 4,900,000 3,148,250
Household Finance Corp.,
5.88%, 09/25/04 ................. 12,150,000 12,163,000
HSBC America, 7.81%, 12/15/26 ++ . 12,250,000 11,735,623
IMC Global, Inc., 7.63%, 11/01/05 9,250,000 9,404,648
International Lease Finance Corp.,
5.56%, 09/18/01 ................. 15,000,000 14,964,600
Kaman Corp., 6.00%, 03/15/12 ..... 5,646,000 5,504,850
Korean Development Bank,
7.90%, 02/01/02 ................. 9,350,000 8,992,830
MBIA, Inc., 6.63%, 10/01/28 ...... 7,370,000 7,400,438
Merrill Lynch & Co., Inc.,
5.75%, 11/04/02 ................. 9,350,000 9,375,900
Norwest Financial, Inc., 5.38%,
09/30/03......................... 15,000,000 14,913,300
Panama (Republic of), 7.88%,
02/13/02 ++...................... 6,200,000 5,905,500
Pitney Bowes, Inc., 8.55%,
09/15/09......................... 13,100,000 16,176,011
Raytheon Co., 6.75%, 08/15/07 .... 10,000,000 10,587,100
Riggs Capital Trust, 8.63%,
12/31/26 ++...................... 3,700,000 3,760,754
Rite Aid Corp., 6.00%, 10/01/03 .. 12,150,000 12,138,457
Rogers Cantel, Inc., 9.38%,
06/01/08......................... 6,100,000 6,435,500
TCI Communications, Inc.,
6.38%, 09/15/99 ................. 18,000,000 18,143,820
Tenet Healthcare Corp., 7.88%,
01/15/03......................... 4,900,000 4,958,751
Tenet Healthcare Corp., 8.00%,
01/15/05......................... 2,800,000 2,842,000
USA Waste Management, Inc.,
6.13%, 07/15/01 ................. 12,750,000 12,829,050
WorldCom, Inc., 8.88%, 01/15/06 .. 3,431,000 3,749,980
---------------
TOTAL CORPORATE BONDS (COST $336,482,513) 346,136,691
---------------
FOREIGN AND SUPRANATIONALS (1.3%)
African Development Bank,
8.80%, 09/01/19 ................. 7,000,000 8,964,760
Argent-Global Bond (Republic of
Argentina), 11.38%, 01/30/17 .... 5,000,000 4,987,500
Banco de Galicia, 10.00%, 12/15/00
++ .............................. 4,650,000 4,673,250
United Mexican States Government,
11.38%, 09/15/16 ................ 4,600,000 4,876,000
---------------
TOTAL FOREIGN AND SUPRANATIONALS (COST $21,369,315) 23,501,510
---------------
60 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
PRINCIPAL MARKET
AMOUNT VALUE
---------- --------------
NON-AGENCY MORTGAGE-BACKED SECURITIES (1.7%)
American Southwest Financial
Securities Corp., 8.00%, 01/18/0 $ 7,723,998 $ 8,124,680
Chase Mortgage Finance Corp.,
6.75%, 11/25/09 ................. 428,256 424,643
CS First Boston Mortgage Corp.,
6.48%, 05/17/08 ................. 7,500,000 7,633,594
DLJ Mortgage Acceptance Corp.,
8.10%, 06/18/04 ................. 4,650,000 4,561,359
Kidder Peabody Acceptance Corp.,
8.80%, 04/01/07 ................. 5,000,000 5,478,125
Merrill Lynch Mortgage Investors,
Inc., 7.71%, 06/15/21 ........... 6,110,514 6,211,719
---------------
TOTAL NON-AGENCY MORTGAGE-BACKED SECURITIES (COST 32,434,120
$30,609,604) ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (16.0%)
Federal Home Loan Mortgage Corp.,
6.00%, 11/15/08 ................. 8,200,000 8,209,143
Federal National Mortgage
Association, 6.00%, 11/01/23 .... 22,708,609 22,417,666
Federal National Mortgage
Association, 6.00%, 11/01/28 .... 19,000,000 18,790,240
Federal National Mortgage
Association, 6.50%, 11/01/28 .... 32,672,231 32,917,273
Federal National Mortgage
Association, 6.50%, 12/01/28 .... 23,953,429 24,110,564
Federal National Mortgage
Association, 9.50%, 10/01/16 .... 10,515,425 11,235,079
GMAC Commercial Mortgage,
6.87%, 08/15/07 ................. 4,500,000 4,800,308
Government National Mortgage
Association, 6.50%, 05/15/28 .... 30,062,442 30,391,325
Government National Mortgage
Association, 6.50%, 10/20/28 .... 23,297,215 23,399,024
Government National Mortgage
Association, 7.50%, 12/15/23 .... 52,250,571 53,932,517
Government National Mortgage
Association, 8.00%, 12/15/23 .... 54,330,287 56,503,498
Tyco International Group, 6.38%,
06/15/05......................... 9,350,000 9,569,660
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES 296,276,297
(COST $295,755,292) ---------------
U.S. GOVERNMENT OBLIGATIONS (0.6%)
U.S. Treasury Bond, 6.75%,
08/15/26......................... 6,220,000 7,451,373
U.S. Treasury Bond, 7.25%,
05/15/16......................... 1,400,000 1,695,974
U.S. Treasury Note, 6.50%,
10/15/06......................... 2,500,000 2,773,050
TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $9,971,725) 11,920,397
---------------
TOTAL LONG-TERM BONDS AND NOTES 710,269,015
(COST $694,188,449) ---------------
PRINICIPAL MARKET
AMOUNT VALUE
---------- --------------
SHORT-TERM INVESTMENTS (1.2%)
Federal Home Loan Mortgage Corp.,
4.70%, 01/04/99 ................. $21,927,000 $ 21,927,000
TOTAL SHORT-TERM INVESTMENTS (COST $21,927,000) 21,927,000
---------------
TOTAL INVESTMENTS (COST $1,633,187,826)(a) 1,859,478,407
OTHER ASSETS LESS LIABILITIES (7,122,906)
---------------
TOTAL NET ASSETS $1,852,355,501
---------------
</TABLE>
<TABLE>
<CAPTION>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes amounts to
$1,640,792,642. Unrealized gains and losses, based on identified tax cost at
December 31, 1998, are as follows:
<S> <C>
Unrealized gains............................... $244,725,949
Unrealized losses.............................. (26,040,184)
------------
Net unrealized Gain............................ $218,685,765
============
</TABLE>
+ Non-income producing security.
++ Securities that may be resold to "qualified institutional buyers" under Rule
144A or securities offered pursuant to section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
Information concerning restricted securities at December 31, 1998 is shown
below:
<TABLE>
<CAPTION>
COST
---------
<S> <C>
Allied Waste North America .............................. $ 8,886,982
Banco de Galicia ........................................ 4,650,000
Exide Corp .............................................. 7,873,694
Globo Communicacoes ..................................... 4,913,970
HSBC America ............................................ 11,971,454
Panama (Republic of) .................................... 6,202,566
Riggs Capital Trust ..................................... 3,700,000
------------
$48,198,666
============
</TABLE>
The market value of the total restricted securities above represent 2.47% of the
total net assets.
Category percentages are based on net assets.
See Notes to Financial Statements. 61
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
GROWTH AND INCOME
================================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
<S> <C> <C>
COMMON STOCKS (95.2%)
UNITED STATES (91.0%)
AIR TRANSPORT (1.4%)
Airborne Freight Corp. ............ 55,000 $ 1,983,437
AMR Corp. + ....................... 1,275,300 75,720,938
Delta Air Lines, Inc. ............. 1,141,200 59,342,400
------------
137,046,775
------------
AUTO PARTS AND HARDWARE (1.2%)
Black & Decker Corp. .............. 2,144,800 120,242,850
------------
AUTOMOTIVE (3.8%)
Dura Automotive Systems, Inc. + ... 63,900 2,180,588
Ford Motor Co. .................... 2,862,400 167,987,100
General Motors Corp. .............. 1,886,700 135,016,968
Johnson Controls, Inc. ........... 1,104,200 65,147,800
------------
370,332,456
------------
BANKS AND THRIFTS (3.3%)
AmSouth Bancorporation ............ 196,400 8,960,750
Bank One Corp. .................... 73,548 3,755,545
Bank United Corp. ................. 46,500 1,825,125
Chase Manhattan Corp. ............. 574,800 39,122,325
Comerica, Inc. .................... 1,067,700 72,803,794
Commerce Bancshares, Inc. ......... 58,200 2,473,500
Dime Bancorp, Inc. ................ 359,000 9,491,063
Fifth Third Bancorp ............... 659,000 46,994,937
FirstFed Financial Corp. + ........ 336,600 6,016,725
Fleet Financial Group, Inc. ...... 252,400 11,279,125
Golden West Financial Corp. ....... 902,200 82,720,463
IMRglobal Corp. + ................. 141,300 4,159,518
Prime Bancshares, Inc. ............ 16,700 288,075
Suntrust Banks, Inc. .............. 391,800 29,972,700
------------
319,863,645
------------
BIOTECH AND MEDICAL PRODUCTS (2.8%)
ADAC Laboratories + ............... 231,800 4,628,756
Agouron Pharmaceuticals, Inc. + ... 35,000 2,056,250
Alpharma, Inc. Class B ++ ......... 383,017 13,525,288
Amgen, Inc. + ..................... 1,059,700 110,804,881
Barr Laboratories, Inc. + ......... 63,200 3,033,600
Bindley Western Industries, Inc. . 68,533 3,375,250
Bio-Rad Labs, Inc. + .............. 54,600 1,146,600
Biogen, Inc. + .................... 98,200 8,150,600
Datascope Corp. + ................. 397,400 9,140,200
Guidant Corp. ..................... 426,200 46,988,550
Hanger Orthopedic Group, Inc. + ... 241,900 5,442,750
Immunex Corp. + ................... 25,700 3,233,381
Maxxim Medical, Inc. + ............ 240,600 7,157,850
MedImmune, Inc. + ................. 26,900 2,674,869
Mylan Laboratories, Inc. .......... 55,700 1,754,550
Ocular Sciences Inc. + ............ 135,200 3,616,600
OEC Medical Systems, Inc. + ....... 147,100 4,624,456
Osteotech, Inc. + ................. 143,000 6,649,500
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
UNITED STATES (CONTINUED)
BIOTECH AND MEDICAL PRODUCTS (CONTINUED)
VISX, Inc. + ...................... 391,000 $ 34,188,063
------------
272,191,994
------------
COMMERCIAL SERVICES (1.0%)
Bowne & Co., Inc. ................. 621,400 11,107,525
Day Runner, Inc. + ................ 253,300 3,672,850
Deluxe Corp. ...................... 1,399,500 51,169,218
Engineering Animation, Inc. + ..... 135,150 7,298,100
Franklin Covey Co. + .............. 5,800 97,150
Galileo International, Inc. ....... 491,500 21,380,250
Modis Professional Services + ..... 227,000 3,291,500
------------
98,016,593
------------
COMPUTERS (6.7%)
Apple Computer, Inc. + ............ 3,371,900 138,037,156
Broadcom Corp. + .................. 35,000 4,226,250
Ceridian Corp. + .................. 487,100 34,005,668
Dell Computer Corp. + ............. 832,900 60,957,869
International Business Machines
Corp. @ .......................... 1,261,800 233,117,550
Jabil Circuit, Inc. + ............. 10,300 768,638
Micron Electronics, Inc. + ........ 100,000 1,731,250
NCR Corp. + ....................... 100,800 4,208,400
SPR, Inc. + ....................... 72,900 1,257,525
Sun Microsystems, Inc. + .......... 2,110,300 180,694,438
------------
659,004,744
------------
CONGLOMERATE AND AEROSPACE (3.8%)
Alliant Techsystems, Inc. + ....... 19,700 1,624,018
Cordant Technologies, Inc. ........ 180,900 6,783,750
Ducommun, Inc. + .................. 18,800 259,675
General Dynamics Corp. ............ 979,500 57,423,187
General Electric Co. .............. 27,736 2,830,806
Goodrich (B. F.) Co. .............. 1,253,880 44,982,945
Gulfstream Aerospace Corp. + ...... 195,000 10,383,750
Kellstrom Industries, Inc. + ...... 537,800 15,461,750
Loews Corp. ....................... 1,042,300 102,405,975
Northrop Grumman Corp. ............ 87,300 6,383,813
United Technologies Corp. ......... 1,110,500 120,766,875
------------
369,306,544
------------
CONSUMER FINANCE (0.7%)
Countrywide Credit Industries, Inc. 1,048,700 52,631,631
Crescent Operating, Inc. + ........ 46,200 219,450
Federal National Mortgage
Association....................... 176,300 13,046,200
------------
65,897,281
------------
CONSUMER PRODUCTS (2.5%)
American Greetings Corp. .......... 815,200 33,474,150
Blyth Industries, Inc. + .......... 293,800 9,181,250
Dial Corp. ........................ 124,800 3,603,600
M & F Worldwide Corp. + ........... 222,500 2,238,906
National R.V. Holdings, Inc. + .... 375,450 9,667,838
Procter & Gamble Co. .............. 2,065,900 188,642,494
------------
246,808,238
------------
62 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
UNITED STATES (CONTINUED)
CONSUMER SERVICES (1.5%)
Anchor Gaming + ................... 99,000 $ 5,581,125
Avis Rent A Car, Inc. + ........... 397,400 9,612,113
Brinker International, Inc. + ..... 283,400 8,183,175
Championship Auto Racing Teams,
Inc. + ........................... 83,400 2,470,725
Darden Restaurants, Inc. .......... 2,628,700 47,316,600
eBay Inc. + ....................... 36,200 8,733,250
Foodmaker, Inc. + ................. 396,100 8,738,956
Grand Casinos, Inc. + ............. 1,003,800 8,093,137
Harvey's Casino Resorts ........... 70,300 1,946,431
Promus Hotel Corp. + .............. 211,720 6,854,435
Sonic Corp. + ..................... 280,950 6,988,631
Tricon Global Restaurants, Inc. + . 618,900 31,022,363
------------
145,540,941
------------
CONSUMER SPECIALTIES (0.2%)
Hasbro, Inc. ...................... 92,000 3,323,500
International Speedway Corp. ...... 182,500 7,391,250
Russ Berrie & Co., Inc. ........... 214,200 5,033,700
Speedway Motorsports, Inc. + ...... 238,000 6,783,000
------------
22,531,450
------------
DATA AND IMAGING SERVICES (7.2%)
America Online, Inc. .............. 121,200 19,392,000
Avant! Corp. + .................... 65,000 1,040,000
Citrix Systems, Inc. + ............ 37,650 3,654,403
Computer Associates International,
Inc............................... 2,838,900 121,008,113
Computer Horizons Corp. + ......... 11,300 300,863
Compuware Corp. + ................. 163,000 12,734,374
Factset Research Systems, Inc. + .. 77,700 4,797,974
Geotel Communications Corp. + ..... 83,200 3,099,200
Intuit Inc. + ..................... 91,400 6,626,500
Keane, Inc. + ..................... 343,300 13,710,544
Microsoft Corp. + ................. 1,755,900 243,521,381
Oracle Corp. + .................... 3,820,400 164,754,750
Pinnacle Systems, Inc. + ......... 23,600 843,700
Pixar, Inc. + ..................... 190,600 6,671,000
Progress Software Corp. + ......... 328,950 11,102,063
Project Software & Development,
Inc. + .......................... 61,300 2,053,550
QLogic Corp. + .................... 438,400 57,375,600
Quantum Corp. + ................... 136,200 2,894,250
Siebel Systems, Inc. + ............ 532,300 18,064,931
Software AG Systems, Inc. + ....... 276,000 5,002,500
Symantec Corp. + .................. 70,100 1,524,675
THQ, Inc. + ....................... 40,900 1,145,200
VERITAS Software Corp. + .......... 14,200 851,113
Viasoft, Inc. + ................... 107,050 749,350
------------
702,918,034
------------
DISCRETIONARY RETAIL (7.4%)
American Eagle Outfitters, Inc. + . 491,400 32,739,525
Ames Department Stores, Inc. + .... 238,500 6,439,500
Barnes & Noble, Inc. + ............ 96,600 4,105,500
Best Buy Co., Inc. + .............. 343,000 21,051,625
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
UNITED STATES (CONTINUED)
DISCRETIONARY RETAIL (CONTINUED)
Cato Corp. (The) .................. 494,400 $ 4,866,750
CompUSA, Inc. + ................... 91,100 1,189,994
CSK Auto Corp. + .................. 79,800 2,129,663
Dress Barn, Inc. + ................ 216,300 3,285,055
Federated Department Stores, Inc. + 2,100,000 91,481,250
Gap, Inc. ......................... 1,745,850 98,204,063
Home Depot, Inc. ................. 831,400 50,871,287
Just For Feet, Inc. + ............. 80,000 1,390,000
Kmart Corp. + ..................... 196,100 3,002,781
Linens 'n Things, Inc. + .......... 74,400 2,948,100
Lowe's Co., Inc. .................. 2,933,600 150,163,650
Micro Warehouse, Inc. + ........... 416,900 14,096,431
Musicland Stores Corp. + .......... 904,800 13,515,450
Office Depot, Inc. + .............. 24,800 916,050
Renters Choice, Inc. + ............ 178,700 5,673,725
Tandy Corp. ....................... 731,000 30,108,063
TJX Companies, Inc. ............... 6,253,400 181,348,600
Transport World Entertainment Corp. + 59,550 1,135,172
Zale Corp. + ...................... 281,900 9,091,275
------------
729,753,509
------------
DIVERSIFIED FINANCIAL SERVICES (0.9%)
Morgan Stanley, Dean Witter,
Discover & Co. ................... 1,113,600 79,065,600
Transamerica Corp. ................ 59,400 6,860,700
------------
85,926,300
------------
DRUGS (4.9%)
Abbott Laboratories ............... 2,905,100 142,349,900
American Home Products Corp. ...... 820,400 46,198,775
Eli Lilly & Co. ................... 1,579,700 140,395,837
IDEC Pharmaceuticals Corp. + ...... 20,000 940,000
Johnson & Johnson @ ............... 150,000 12,581,250
Medicis Pharmaceutical Corp. + .... 96,600 5,759,775
Merck & Co., Inc. ................. 638,300 94,268,931
Roberts Pharmaceutical Corp. + .... 999,200 21,732,600
Theragenics Corp. + ............... 87,500 1,471,094
Warner Lambert Co. ................ 159,700 12,007,444
------------
477,705,606
------------
ELECTRIC UTILITIES (1.3%)
Allegheny Energy, Inc. ............ 224,000 7,728,000
Black Hills Corp. ................. 87,000 2,294,625
Citizens Utilities Co. + .......... 91,862 746,377
Cleco Corp. ....................... 68,700 2,357,268
Conectiv, Inc. .................... 64,000 1,568,000
Edison International .............. 157,700 4,395,887
Energy East Corp. ................. 228,400 12,904,600
Entergy Corp. ..................... 322,500 10,037,813
Florida Progress Corp. ............ 199,800 8,953,538
Minnesota Power, Inc. ............. 50,400 2,217,600
Niagara Mohawk Power Corp. + ...... 2,890,900 46,615,763
OGE Energy Corp. .................. 293,500 8,493,156
PG&E Corp. ........................ 400,000 12,600,000
See Notes to Portfolio of Investments. 63
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
GROWTH AND INCOME (CONTINUED)
================================================================================
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
UNITED STATES (CONTINUED)
ELECTRIC UTILITIES (CONTINUED)
Public Service Enterprise Group,
Inc............................... 15,000 $ 600,000
SIGCORP, Inc. ..................... 137,400 4,903,463
------------
126,416,090
------------
ELECTRICAL MACHINERY AND INSTRUMENTS (1.1%)
Waters Corp. + .................... 100,000 8,725,000
Xerox Corp. @ ..................... 799,100 94,293,800
------------
103,018,800
------------
ELECTRONIC MEDIA (0.9%)
Capstar Broadcasting Corp. + ...... 195,500 4,472,063
CBS Corp. ......................... 146,200 4,788,050
Infinity Broadcasting Corp. + ..... 100,000 2,737,500
USA Networks, Inc. + .............. 91,600 3,034,250
Viacom, Inc. + .................... 929,300 68,768,200
Young Broadcasting Corp. + ........ 68,800 2,881,000
------------
86,681,063
------------
FOOD AND BEVERAGE (0.2%)
Applebee's International, Inc. .... 405,400 8,361,375
Aurora Foods, Inc. + .............. 71,000 1,406,688
Canandiagua Brands, Inc. + ........ 19,900 1,150,468
Earthgrains Co. (The) ............. 21,200 655,875
IBP, Inc. ......................... 281,800 8,207,425
------------
19,781,831
------------
FOOD AND DRUG RETAIL (3.8%)
Casey's General Stores, Inc. ...... 163,600 2,131,913
CVS Corp. ......................... 1,825,800 100,419,000
Duane Reade, Inc. + ............... 27,300 1,051,050
Fleming Companies, Inc. ........... 987,500 10,245,313
Kroger Co. (The) + ................ 2,188,300 132,392,150
Longs Drug Stores, Inc. ........... 1,161,700 43,563,750
Rite Aid Corp. .................... 933,400 46,261,637
Safeway, Inc. + ................... 132,200 8,055,937
SUPERVALU, Inc. ................... 1,067,300 29,884,400
------------
374,005,150
------------
FOREST PRODUCTS AND BUILDING MATERIALS (1.4%)
Ball Corp. ........................ 491,100 22,467,825
Boise Cascade Corp. ............... 99,100 3,072,100
Centex Construction Products, Inc. 245,500 9,973,438
Delta & Pine Land Co. ............. 68,400 2,530,800
Georgia-Pacific Corp. ............. 626,800 14,925,675
Lafarge Corp. ..................... 344,300 13,944,150
Lone Star Industries, Inc. ........ 329,600 12,133,400
Masco Corp. ....................... 1,643,500 47,250,625
Owens Corning ..................... 230,600 8,171,887
USG Corp. ......................... 148,101 7,543,854
------------
142,013,754
------------
GAS UTILITIES (1.6%)
Coastal Corp. (The) ............... 917,100 32,041,181
Columbia Energy Group ............. 1,015,400 58,639,350
Eastern Enterprises ............... 68,400 2,992,500
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
UNITED STATES (CONTINUED)
GAS UTILITIES (CONTINUED)
Energen Corp. ..................... 159,200 $ 3,104,400
Enron Corp. ....................... 79,000 4,507,937
Sempra Energy ..................... 2,067,107 52,452,840
Southwest Gas Corp. ............... 109,900 2,953,563
Southwestern Energy Co. ........... 255,500 1,916,250
------------
158,608,021
------------
HEALTH SERVICES (0.6%)
Bergen Brunswig Corp. ............. 69,300 2,416,837
HBO & Co. ......................... 550,000 15,778,125
Lincare Holdings, Inc. + .......... 353,500 14,338,844
Pediatrix Medical Group, Inc. + ... 176,400 10,572,975
Trigon Healthcare, Inc. + ......... 298,500 11,137,781
United Healthcare Corp. ........... 93,100 4,009,119
------------
58,253,681
------------
HEAVY MACHINERY (0.2%)
Gardner Denver Machinery, Inc. + .. 71,900 1,060,525
NACCO Industries, Inc. ........... 91,200 8,390,400
Navistar International Corp. + .... 490,100 13,967,850
------------
23,418,775
------------
HOUSING AND FURNISHINGS (2.0%)
Centex Corp. ...................... 2,149,600 96,866,350
Fleetwood Enterprises, Inc. ....... 697,200 24,227,700
Herman Miller, Inc. ............... 56,000 1,505,000
Kaufman & Broad Home Corp. ........ 1,375,500 39,545,625
Lennar Corp. ...................... 64,400 1,626,100
Pulte Corp. ....................... 1,155,800 32,145,688
Ryland Group, Inc. ................ 137,400 3,967,425
Winsloew Furniture, Inc. + ........ 3,300 87,450
------------
199,971,338
------------
INDUSTRIAL SERVICES (0.4%)
American Buildings Co. + .......... 53,300 1,305,850
Fluor Corp. ....................... 595,300 25,337,457
Milacron, Inc. .................... 460,800 8,870,400
RTI International Metals + ........ 335,200 4,692,800
Safety-Kleen Corp. + .............. 62,675 885,284
------------
41,091,791
------------
INSURANCE (3.7%)
Allstate Corp. (The) .............. 3,180,200 122,835,225
CIGNA Corp. ....................... 994,500 76,887,281
Conseco, Inc. ..................... 1,758,487 53,743,759
ESG Re Ltd. ....................... 28,900 585,225
First American Financial Corp. .... 397,450 12,768,081
Hartford Life, Inc. ............... 130,600 7,607,450
LandAmerica Financial Group, Inc. @ 185,100 10,330,894
MGIC Investment Corp. ............. 1,294,100 51,521,356
Mutual Risk Management Ltd. ....... 210,932 8,252,715
Nationwide Financial Services, Inc. 67,200 3,473,400
PacifiCare Health Systems, Inc. + . 119,700 9,516,150
Stewart Information Services Corp. 35,600 2,064,800
------------
359,586,336
------------
<PAGE>
================================================================================
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
UNITED STATES (CONTINUED)
INVESTMENT SERVICES (0.6%)
Firstar Corp. ..................... 7,000 $ 652,750
Investors Financial Services Corp. 34,200 2,039,175
Providian Financial Corp. ......... 690,900 51,817,500
Telebanc Financial Corp. + ........ 73,100 2,485,400
Vermont Financial Services Corp. .. 45,600 1,516,200
------------
58,511,025
------------
MAJOR TELECOMMUNICATIONS (6.7%)
ALLTEL Corp. @ .................... 906,810 54,238,573
AT&T Corp. ........................ 1,881,400 141,575,350
Bell Atlantic Corp. ............... 1,763,400 100,183,163
BellSouth Corp. ................... 1,198,200 59,760,224
SBC Communications, Inc. .......... 38,113 2,043,810
Sprint Corp. ...................... 1,861,000 156,556,625
Sprint PCS + ...................... 837,200 19,360,250
U.S. WEST, Inc. ................... 1,852,200 119,698,425
------------
653,416,420
------------
OIL (1.5%)
Ashland Oil, Inc. ................. 1,219,200 58,978,800
Penn Virginia Corp. ............... 9,400 172,725
Sunoco Inc. ....................... 2,039,100 73,535,044
Tesoro Petroleum Corp. + .......... 1,084,600 13,150,775
------------
145,837,344
------------
OIL SERVICES (0.3%)
BJ Services Co. + ................. 156,500 2,445,313
Cal Dive International, Inc. + .... 68,500 1,421,375
McDermott International, Inc. ..... 80,000 1,975,000
Santa Fe International Corp. ...... 137,800 2,015,325
Seitel, Inc. + .................... 514,300 6,396,606
Tidewater, Inc. ................... 369,900 8,577,056
Tosco Corp. ....................... 267,400 6,918,975
Trico Marine Services, Inc. + ..... 516,300 2,516,963
-----------
32,266,613
-----------
OTHER TELECOMMUNICATIONS (1.0%)
Aerial Communications, Inc. + ..... 213,900 1,256,663
Century Telephone Enterprises, Inc. 358,950 24,229,125
Cincinnati Bell Inc. .............. 57,500 2,174,218
Comverse Technology, Inc. + ....... 45,500 3,230,500
Excel Switching Corp. + ........... 47,500 1,805,000
L-3 Communications Holdings, Inc. + 34,300 1,597,094
Lucent Technologies, Inc. ......... 194,200 21,362,000
Teligent, Inc. + .................. 91,400 2,627,750
Tellabs, Inc. + ................... 636,900 43,667,456
-----------
101,949,806
-----------
PRINT MEDIA (2.3%)
Central Newspapers, Inc. ......... 25,000 1,785,937
Knight-Ridder, Inc. ............... 1,386,400 70,879,700
McClatchy Newspapers, Inc. ....... 212,500 7,517,187
McGraw-Hill Co., Inc. ............. 437,500 44,570,313
Media General, Inc. + ............. 112,900 5,983,700
New York Times Co. ................ 2,609,800 90,527,438
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
UNITED STATES (CONTINUED)
PRINT MEDIA (CONTINUED)
Thomas Nelson, Inc. .............. 100,000 $ 1,350,000
-----------
222,614,275
-----------
PRODUCER GOODS (2.1%)
C & D Technologies, Inc. .......... 155,000 4,262,500
Gleason Corp. ..................... 83,500 1,513,437
Graco, Inc. ....................... 265,500 7,832,250
Honeywell, Inc. ................... 123,400 9,293,563
Ingersoll-Rand Co. ................ 2,342,200 109,937,013
Kaydon Corp. ...................... 214,500 8,593,406
Special Metals Corp. + ............ 76,700 685,506
Tecumseh Products Co. ............. 20,800 969,800
Tyco International Ltd. ........... 793,778 59,880,627
Varlen Corp. ...................... 174,937 4,034,485
------------
207,002,587
------------
REAL ESTATE INVESTMENT TRUSTS (4.4%)
AMB Property Corp. ................ 30,400 668,801
American Health Properties, Inc. .. 91,600 1,889,250
Apartment Investment & Management
Co................................ 237,900 8,846,906
Archstone Communities Trust ....... 250,000 5,062,500
Arden Realty Group, Inc. .......... 245,900 5,701,806
Avalon Bay Communities, Inc. ...... 242,892 8,319,051
Beacon Capital + [plus sign] ...... 267,600 4,281,600
Bedford Property Investors, Inc. @ 56,700 956,813
Boston Properties, Inc. ........... 44,800 1,366,400
Boykin Lodging Co. ................ 77,700 961,538
Brandywine Realty Trust ........... 263,200 4,704,700
Cabot Industrial Trust ............ 88,300 1,804,631
Camden Property Trust ............. 286,699 7,454,174
Captec Net Lease Realty, Inc. ..... 154,000 1,925,000
Carramerica Realty Corp. .......... 208,400 5,001,600
CBL & Associates Properties, Inc. . 464,600 11,992,488
CCA Prison Realty Trust ........... 183,700 3,765,850
Chateau Communities, Inc. ......... 90,900 2,664,506
Chelsea GCA Realty, Inc. ......... 61,400 2,187,375
Colonial Properties Trust ......... 606,100 16,137,413
Commercial Net Lease Realty ....... 162,600 2,154,450
Cornerstone Properties, Inc. ...... 251,800 3,934,375
Cousins Properties, Inc. .......... 149,400 4,818,150
Crescent Real Estate Equities,
Inc.............................. 512,700 11,792,100
Criimi Mae, Inc. .................. 222,600 779,100
Crown America Realty Trust ........ 228,300 1,769,325
Developers Diversified Realty Corp. 112,800 2,002,200
Duke Realty Investments, Inc. ..... 422,200 9,816,150
Eastgroup Properties, Inc. ........ 74,450 1,372,672
Equity Inns, Inc. ................. 66,700 641,988
Equity Office Properties Trust .... 1,149,066 27,577,584
Equity One, Inc. .................. 69,300 628,031
Equity Residential Properties Trust 637,817 25,791,725
Essex Property Trust, Inc. ........ 163,700 4,870,075
FelCor Lodging Trust Inc. ......... 76,200 1,757,363
</TABLE>
See Notes to Portfolio of Investments. 65
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
GROWTH AND INCOME (CONTINUED)
<TABLE>
================================================================================
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
<S> <C> <C>
UNITED STATES (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
First Industrial Realty Trust, Inc. 278,800 $ 7,475,325
Franchise Finance Corp. of America 172,100 4,130,400
Gables Residential Trust .......... 53,100 1,231,256
General Growth Properties, Inc. ... 190,500 7,215,187
Glenborough Realty Trust, Inc. .... 146,100 2,976,787
Glimcher Realty Trust ............. 81,400 1,276,963
Golf Trust of America, Inc. ....... 72,700 2,017,425
Health Care REIT, Inc. ............ 208,300 5,389,763
Healthcare Realty Trust, Inc. ..... 229,373 5,117,885
Highwood Properties, Inc. ......... 204,400 5,263,300
Home Properties of New York, Inc. . 22,800 587,100
Hospitality Properties Trust ...... 75,000 1,809,375
HRPT Properties Trust ............. 713,700 10,036,406
Imperial Credit Commercial Mortgage
Investment Corp. ................. 55,200 517,500
Innkeepers USA Trust .............. 135,900 1,605,318
Kilroy Realty Corp. ............... 153,600 3,532,800
Kimco Realty Corp. ................ 601,700 23,879,968
Koger Equity, Inc. ++ ............. 150,000 2,578,125
Lexington Corporate Properties
Trust............................. 67,200 844,200
Liberty Property Trust ............ 370,900 9,133,413
Mack-Cali Realty Corp. ............ 11,700 361,237
Manufactured Home Communities, Inc. 109,400 2,741,837
Meditrust Companies Corp. ......... 253,400 3,832,675
MeriStar Hospitality Corp. ........ 105,259 1,953,870
Merry Land Properties, Inc. + ..... 7,195 26,082
MGI Properties, Inc. .............. 70,500 1,969,594
Mid-America Apartment Communities,
Inc............................... 50,300 1,141,181
National Golf Properties, Inc. .... 205,100 5,935,081
National Health Investors, Inc. ... 44,500 1,098,594
OMEGA Healthcare Investors, Inc. .. 129,500 3,909,281
Parkway Properties, Inc. .......... 81,900 2,559,375
Post Properties, Inc. ............. 330,000 12,684,375
Prentiss Properties Trust ......... 237,600 5,301,450
Prime Retail, Inc. ................ 142,600 1,399,263
ProLogis Trust .................... 223,725 4,642,294
PS Business Parks, Inc. ........... 51,800 1,236,725
Public Storage, Inc. .............. 295,600 7,999,675
Ramco-Gerhenson Properties Trust .. 18,075 262,087
Reckson Associates Realty Corp. ... 163,300 3,623,218
Reckson Service Industries + ...... 25,680 105,930
Regency Realty Corp. .............. 118,600 2,638,850
RFS Hotel Investors, Inc. ......... 105,500 1,292,375
Shurgard Storage Centers, Inc. .... 90,800 2,343,775
Simon Property Group, Inc. ........ 578,244 16,479,954
SL Green Realty Corp. ............. 84,200 1,820,825
Sovran Self Storage, Inc. ......... 19,500 489,937
Spieker Properties, Inc. .......... 156,300 5,411,887
Starwood Financial Trust .......... 1,801 108,060
Starwood Lodging Trust ............ 638,200 14,479,163
Storage Trust Realty .............. 61,100 1,428,213
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
UNITED STATES (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
Sun Communities, Inc. ............. 121,150 $ 4,217,534
Sunstone Hotel Investors, Inc. .... 100,000 943,750
Tanger Factory Outlet Centers, Inc. 66,200 1,402,613
Tower Realty Trust, Inc. .......... 74,900 1,507,363
Trinet Corporate Realty Trust,
Inc.............................. 62,550 1,673,213
United Dominion Realty Trust, Inc. 265,508 2,738,051
Universal Health Realty Income
Trust............................. 80,700 1,583,737
Urban Shopping Centers, Inc. ...... 95,500 3,127,625
Vornado Operating Co. + ........... 15,070 121,502
Vornado Realty Trust .............. 301,400 10,172,250
Walden Residential Properties, Inc. 96,600 1,974,263
Weeks Corp. ....................... 52,300 1,474,206
Weingarten Realty Investors ....... 19,700 879,113
-------------
433,108,269
-------------
SEMICONDUCTORS AND ELECTRONICS (4.5%)
Alltrista Corp. + ................. 9,800 235,200
Altera Corp. + .................... 132,100 8,041,587
AMP, Inc. ......................... 2,326,800 121,139,025
Analog Devices, Inc. + ............ 125,000 3,921,875
C-Cube Microsystems, Inc. + ....... 146,600 3,976,525
Cirrus Logic, Inc. + .............. 48,100 471,981
Intel Corp. ....................... 2,206,100 261,560,731
Lattice Semiconductor Corp. + ..... 50,000 2,295,313
Linear Technology Corp. ........... 22,300 1,997,244
Sanmina Corp. + ................... 165,600 10,350,000
SLI, Inc. + ....................... 102,200 2,836,050
Solectron Corp. + ................. 18,500 1,719,344
Vitesse Semiconductor Corp. + ..... 290,300 13,244,937
Xilinx, Inc. + .................... 64,100 4,174,513
-------------
435,964,325
-------------
SPECIALTY CHEMICALS (0.1%)
Albemarle Corp. ................... 26,800 636,500
Engelhard Corp. ................... 64,600 1,259,700
International Specialty Products,
Inc. + ........................... 59,100 801,544
Millennium Chemicals, Inc. + ...... 190,600 3,788,174
Solutia, Inc. ..................... 100,700 2,253,163
-------------
8,739,081
-------------
STEEL (0.1%)
Texas Industries, Inc. ............ 358,100 9,646,319
-------------
SURFACE TRANSPORT (0.3%)
Burlington Northern Santa Fe Corp. 834,100 28,150,875
U.S. Freightways Corp. ............ 137,000 3,990,125
-------------
32,141,000
-------------
TEXTILES AND APPAREL (0.6%)
Abercrombie & Fitch Co. + ......... 672,300 47,565,226
Gerber Childrenswear, Inc. + ...... 38,000 330,125
Intimate Brands, Inc. ............. 470,200 14,047,225
61,942,576
-------------
TOTAL UNITED STATES (COST $7,528,393,643) 8,919,073,230
-------------
66 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
FOREIGN COMMON STOCKS (4.2%)
AUSTRALIA (0.1%)
Telstra Corp. Ltd
(Other Telecommunications) + ..... 734,900 $ 3,439,510
Westpac Banking Corp. Ltd.
(Banks and Thrifts) .............. 956,195 6,404,907
------------
TOTAL AUSTRALIA 9,844,417
------------
BELGIUM (0.0%)
Delhaize-le Lion SA
(Food and Beverage) .............. 44,600 3,946,696
------------
CANADA (0.0%)
BCE Inc. (Major Telecommunications) 500 18,936
Canadian National Railway Co.
(Surface Transport) .............. 66,600 3,454,875
Canadian National Railway Co.
(Surface Transport) .............. 5,000 259,603
------------
TOTAL CANADA 3,733,414
------------
DENMARK (0.1%)
Den Danske Bank (Investment
Services)......................... 12,600 1,692,670
Tele Danmark A/S
(Major Telecommunications) ....... 46,700 6,302,978
------------
TOTAL DENMARK 7,995,648
------------
FINLAND (0.1%)
Nokia Corp., ADR
(Other Telecommunications) ....... 62,700 7,551,432
Sampo Insurance Co. (Insurance) ... 14,600 557,945
Tieto Corp. (Data and Imaging
Services)......................... 4,200 188,292
Valmet Oyj (Consumer Services) .... 39,900 535,845
------------
TOTAL FINLAND 8,833,514
------------
FRANCE (0.5%)
Credit Commercial de France
(Banks and Thrifts) + ............ 55,000 5,109,914
Elf Aquitaine SA (Oil) ............ 35,000 4,047,474
Etablissements Economiques du
Casino Guichard-Perrachon SA
(Commercial Services) + .......... 53,300 5,553,078
Gemini Sogeti SA (Insurance) ...... 40,500 6,503,258
Groupe Danone (Food and Beverage) . 21,100 6,043,464
Lafarge SA
(Forest Products and Building
Materials)........................ 29,700 2,823,153
Renault SA (Automotive) ........... 97,800 4,394,365
Sanofi SA (Drugs) ................. 35,200 5,797,143
Scor (Insurance) .................. 59,300 3,922,407
Societe Generale (Banks and
Thrifts).......................... 9,270 1,501,799
Vivendi (Utilities - Water) ....... 23,250 6,034,961
------------
TOTAL FRANCE 51,731,016
------------
GERMANY (0.3%)
Bayericshe Hypo-und Vereinsb
(Chemicals) + .................... 40,287 3,156,493
BHF-Bank AG (Banks and Thrifts) ... 96,000 3,861,671
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
GERMANY (CONTINUED)
DaimlerChrysler AG (Automotive) ... 27,563 $ 2,722,210
Deutsche Pfandbrief &
Hypothekenbank AG (Banks and
Thrifts).......................... 62,300 5,460,975
Douglas Holding AG
(Discretionary Retail) ........... 11,700 691,913
Gehe AG (Health Services) ......... 76,700 5,295,688
Mannesmann AG (Producer Goods) .... 41,050 4,707,343
Metro AG (Discretionary Retail) ... 13,200 1,054,035
MobileCom AG
(Other Telecommunications) ....... 1,400 445,905
-------------
TOTAL GERMANY 27,396,233
-------------
HONG KONG (0.1%)
HSBC Holdings Plc
(Investment Services) ............ 112,600 2,805,081
VTech Holdings Ltd.
(Semiconductors and Electronics) . 497,500 2,170,498
-------------
TOTAL HONG KONG 4,975,579
-------------
IRELAND (0.2%)
Allied Irish Banks (Banks and
Thrifts).......................... 503,833 9,037,117
CRH Pl
(Forest Products and Building
Materials)........................ 389,929 6,744,056
Waterford Wedgewood
(Housing and Furnishings) ........ 4,097,999 3,482,766
-------------
TOTAL IRELAND 19,263,939
-------------
ITALY (0.3%)
Arnoldo Mondadori Editor (Print
Media)............................ 486,000 6,439,947
Banca Commerciale Italiana
(Banks and Thrifts) .............. 813,000 5,620,695
Banca del Nazionale Lavoro
(Banks and Thrifts) + ............ 1,214,000 3,640,656
Istituto Nazionale delle
Assicurazioni
(Insurance) + .................... 1,978,900 5,238,449
Telecom Italia SpA
(Commercial Services) ............ 690,000 5,900,147
Unione Immobiliare SpA
(Real Estate Investment Trusts) + 2,128,900 1,112,903
-------------
TOTAL ITALY 27,952,797
-------------
JAPAN (0.6%)
Bank of Tokyo-Mitsubishi, Ltd.
(The) (Investment Services) ...... 389,250 4,037,434
Exedy Corp. (Automotive) .......... 196,100 775,360
Fuji Photo Film (Chemicals) ....... 172,000 6,404,255
Fujikura Ltd.
(Semiconductors and Electronics) . 996,000 5,350,851
Hitachi Ltd.
(Semiconductors and Electronics) . 978,000 6,069,149
Kao Corp. (Consumer Products) ..... 234,300 5,296,676
Mizuno Corp. (Consumer Products) .. 674,000 2,049,486
Nintendo Co. Ltd.
(Semiconductors and Electronics) . 55,500 5,387,633
Nippon Telegraph & Telephone
(Major Telecommunications) ....... 10 7,731
See Notes to Portfolio of Investments. 67
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
GROWTH AND INCOME (CONTINUED)
================================================================================
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
JAPAN (CONTINUED)
NTT Mobile Communication Network,
Inc. (Other Telecommunications) + 1,450 $ 5,977,394
Orix Corp. (Investment Services) .. 13,550 1,013,847
Seino Transportation Co. Ltd.
(Surface Transport) .............. 900,000 5,154,254
Shohkoh Fund & Co.
(Banks and Thrifts) .............. 14,250 4,598,404
SoftBank Corp.
(Banks and Thrifts) .............. 137,200 8,270,922
Takefuji Corp.
(Banks and Thrifts) .............. 30 2,194
-------------
TOTAL JAPAN 60,395,590
-------------
MEXICO (0.0%)
Grupo Financiero Banamex Accival,
SA de CV (Banacci) (Banks and
Thrifts) +........................ 1,851,000 2,429,321
-------------
NETHERLANDS (0.3%)
Akzo Nobel (Chemicals) ............ 74,100 3,375,899
Hunter Douglas NV (Consumer
Services)......................... 104,673 3,469,208
ING Groep NV (Banks and Thrifts) .. 99,156 6,049,641
Koninklijke Ahold NV
(Commercial Services) ............ 132,604 4,903,670
Philips Electronic NV
(Semiconductors and Electronics) + 5,800 392,587
TNT Post Group NV (Surface
Transport)........................ 75,200 2,424,255
VNU-Verenigde Nederlandes
Uitgeversbedrijven Verenigd Bezit
(Print Media) .................... 122,400 4,617,637
-------------
TOTAL NETHERLANDS 25,232,897
-------------
NEW ZEALAND (0.0%)
Fernz Corp. Ltd. (Chemicals) ...... 824,500 2,548,163
-------------
NORWAY (0.2%)
Contextvision Ab (Electronic Media) + 340,700 1,386,232
Det Sondenfjelds-Norske
Dampskibsselskab (Oil) + ......... 466,750 3,675,679
Merkantildata ASA
(Data and Imaging Services) ...... 581,900 5,728,114
Ocean Rig ASA (Oil) + ............. 16,556,400 4,519,925
Tandberg Television ASA
(Electronic Media) + ............. 113,900 941,817
Tomra Systems ASA
(Forest Products and Building
Materials)........................ 60,000 1,968,762
-------------
TOTAL NORWAY 18,220,529
-------------
SPAIN (0.1%)
Iberdrola SA (Electric Utilities) + 273,900 5,132,160
Telefonica de Espana
(Major Telecommunications) ....... 115,400 5,139,002
Telefonica SA Rights
(Major Telecommunications) + ..... 115,400 102,617
-------------
TOTAL SPAIN 10,373,779
-------------
SWEDEN (0.2%)
Ericsson ADR
(Other Telecommunications) ....... 55,855 1,337,029
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
SWEDEN (CONTINUED)
Hennes & Mauritz AB
(Textiles and Apparel) ........... 6,300 $ 514,521
Industrial & Financial Systems
(Data and Imaging Services) + ++ . 453,750 5,233,984
NetCom AB
(Major Telecommunications) + ..... 34,200 1,392,336
Securitas AB (Consumer Services) .. 485,600 7,548,373
Swisscom AG
(Other Telecommunications) + ..... 82,400 3,507,150
Volvo AB (Automotive) ............. 36,500 837,548
-------------
TOTAL SWEDEN 20,370,941
-------------
SWITZERLAND (0.3%)
Adecco SA (Commercial Services) ... 13,210 6,030,339
Fischer (Georg) AG
(Auto Parts and Hardware) ........ 6,950 2,350,400
Novartis AG Registered Shares
(Health Services) + .............. 3,600 7,076,811
Roche Holding AG
(Biotech and Medical Products) ... 395 4,819,949
Swiss Re (Insurance) .............. 427 1,113,278
UBS AG (Banks and Thrifts) ........ 21,100 6,482,854
-------------
TOTAL SWITZERLAND 27,873,631
-------------
UNITED KINGDOM (0.8%)
Bank of Scotland (Banks and
Thrifts).......................... 502,367 5,992,960
Berisford Plc (Industrial Services) 757,700 2,269,190
British Aerospace Plc
(Conglomerate and Aerospace) ..... 537,706 4,567,113
British Telecom Plc
(Major Telecommunications) ....... 330,670 4,962,523
Cable & Wireless Plc
(Other Telecommunications) + ..... 316,600 3,895,383
Dixons Group Plc (Discretionary
Retail)........................... 359,800 5,061,461
Glaxo Wellcome Plc (Drugs) ........ 144,672 4,977,785
Granada Group Plc (Consumer
Services) +....................... 369,014 6,523,383
Kingfisher Plc (Discretionary
Retail)........................... 496,312 5,371,594
Kwik-Fit Holding Plc
(Auto Parts and Hardware) ........ 482,700 3,875,036
National Westminster Bank Plc
(Banks and Thrifts) .............. 203,702 3,928,043
Pearson Plc (Print Media) ......... 269,800 5,355,296
Peninsular & Oriental Steam
Navigation Co. (Surface Transport) + 375,548 4,436,341
Provident Financial Plc
(Consumer Finance) ............... 139,462 2,053,526
Railtrack Group (Surface Transport) 35,462 918,656
SmithKline Beecham Plc (Drugs) .... 253,675 3,560,114
Tomkins Plc (Consumer Services) ... 282,678 1,333,356
Unilever Plc (Consumer Products) .. 519,300 5,823,436
Vodafone Group Plc (Consumer
Products)......................... 386,654 6,278,754
WPP Group Plc (Commercial Services) 251,900 1,532,691
-------------
TOTAL UNITED KINGDOM 82,716,641
-------------
68 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
NUMBER OF MARKET
SHARES VALUE
--------------- -----------------
TOTAL FOREIGN COMMON STOCKS (COST $357,599,590) $ 415,834,745
--------------
TOTAL COMMON STOCKS (COST $7,885,993,233) 9,334,907,975
--------------
PREFERRED STOCKS (0.3%)
UNITED STATES (0.2%)
Archstone Communities Trust
(Real Estate Investment Trusts) .. 19,400 518,951
Case Corp. (Heavy Machinery) + ++ . 14,200 828,694
Chancellor Media Corp.
(Electronic Media) + ............. 18,600 2,511,744
Corning Delware L.P.
(Food and Beverage) + ............ 13,900 973,000
Equity Residential Properties
(Real Estate Investment Trusts) + 27,900 653,906
Ingersoll-Rand Co. (Producer Goods) + 55,800 1,325,250
International Paper Co.
(Forest Products and Building
Materials) + ++ .................. 9,300 451,050
Kaufman & Broad Home Corp.
(Industrial Services) + .......... 255,800 1,950,475
Lincoln National Corp.
(Electric Utilities) + ........... 74,400 1,753,050
Merrill "Dg" (Structured Yield
Product Exchangeable for Stock)
(Discretionary Retail) + ......... 69,700 2,483,063
Merrill CBR
(Data and Imaging Services) + .... 27,900 1,534,500
Owens-Illinois, Inc. (Forest
Products and Building Materials) + 18,600 790,500
Salomon, Inc. (Investment Services) + 69,800 4,624,250
Tanger Factory Outlet Centers, Inc.
(Real Estate Investment Trusts) + 55,800 1,063,688
Union Planters Co. (Food and
Beverage) +....................... 18,600 1,013,700
------------
TOTAL UNITED STATES 22,475,821
------------
FOREIGN PREFERRED STOCKS (0.1%)
GERMANY (0.1%)
Henkel KGAA (Chemicals) ........... 38,600 3,453,050
Hugo Boss AG (Textiles and Apparel) + 2,250 4,322,767
SAP AG (Data and Imaging Services) + 7,570 3,627,746
------------
TOTAL FOREIGN 11,403,563
-------------
TOTAL PREFERRED STOCKS (COST $32,154,896) 33,879,384
-------------
NUMBER OF
CONTRACTS
---------------
PUT OPTION PURCHASED (0.1%)
Russell 2000 Index, Strike $390,
March 99.......................... 1,067,600 10,676,000
Russell 2000 Index, Strike $400,
March 99.......................... 75,000 928,125
S&P Midcap 400 Index, Strike $350,
March 98.......................... 311,000 2,215,875
-------------
TOTAL PUT OPTIONS PURCHASED (COST $28,740,163) 13,820,000
-------------
PRINCIPAL MARKET
AMOUNT VALUE
--------------- -----------------
LONG-TERM BONDS AND NOTES (0.9%)
CORPORATE BONDS (0.9%)
Agnico-Eagle Mines Ltd.,
3.50%, 01/27/04 .................. $ 2,900,000 $1,819,750
Alza Corp., 5.00%, 05/01/06 ....... 930,000 1,329,900
American Express Credit Corp.,
1.13%, 02/19/03 .................. 2,820,000 2,745,975
Automatic Data Processing, Inc.,
Zero Coupon, 02/20/12 ............ 970,000 997,887
Baker Hughes, Inc., Zero Coupon,
05/05/08.......................... 3,325,000 2,161,250
Brightpoint Convertible,
Zero Coupon, 03/11/18 ............ 3,255,000 1,139,250
Checkpoint Systems, Inc.,
5.25%, 11/01/05 .................. 1,162,000 996,415
Comverse Technology, Inc.,
5.75%, 10/01/06 ++ ............... 4,600,000 7,377,250
Continental Airlines, Inc.,
6.75%, 04/15/06 ++ ............... 1,860,000 2,261,063
Credence Systems Corp.,
5.25%, 09/15/02 ++ ............... 3,700,000 2,571,500
Dovatron International, 6.00%,
10/15/02.......................... 930,000 1,147,388
Einstein/Noah Bagel Corp.,
7.25%, 06/01/04 .................. 4,630,000 2,319,285
EMC/MASS Corp., 3.25%, 03/15/02 ++ 3,660,000 11,968,200
Fremont General Corp.,
Zero Coupon, 10/12/13 ............ 930,000 902,100
Hewlett Packard Co.,
Zero Coupon, 10/14/17 ++ ......... 8,370,000 4,613,963
Home Depot, Inc., 3.25%, 10/01/01 1,860,000 4,912,725
Homebase, Inc., 5.25%, 11/01/04 ... 2,790,000 2,225,025
Integrated Health Services, Inc.,
5.75%, 01/01/01 .................. 1,395,000 1,211,906
Marriott International, Inc.,
Zero Coupon, 03/25/11 ++ ......... 2,730,000 1,794,975
NAC Re Corp., 5.25%, 12/15/02 ++ .. 930,000 992,775
National Semiconductor Corp.,
6.50%, 10/01/02 ++ ............... 4,650,000 4,004,813
Office Depot, Inc., Zero Coupon,
12/11/07.......................... 3,425,000 3,673,313
Ogden Corp., 5.75%, 10/20/02 ...... 930,000 885,825
Ogden Corp., 6.00%, 06/01/02 ...... 475,000 457,187
Pennzoil Co., 4.90%, 08/15/08 ..... 532,000 521,360
Pennzoil Co., 4.95%, 08/15/08 ..... 727,000 708,825
Phycor, Inc., 4.50%, 02/15/03 ..... 1,395,000 779,456
Phymatrix Corp., 6.75%, 06/15/03 .. 2,300,000 1,115,500
Pioneer Financial Services, 6.50%,
04/01/03.......................... 1,395,000 1,625,175
Potomac Electric Power, 7.00%,
01/15/18.......................... 750,000 765,468
Richey Electronics, Inc.,
7.00%, 03/01/06 ++ ............... 1,859,000 1,856,676
Roche Holdings, Zero Coupon,
05/06/12 ++....................... 11,625,000 6,219,375
SCI Systems, Inc., 5.00%, 05/01/06
++ ............................... 695,000 1,559,406
Tel-Save Holding, Inc., 5.00%,
12/15/04 ++....................... 1,400,000 1,303,750
Thermo Instrument System,
4.50%, 10/15/03 ++ ............... 930,000 837,000
See Notes to Portfolio of Investments. 69
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
GROWTH AND INCOME (CONTINUED)
================================================================================
PRINCIPAL MARKET
AMOUNT VALUE
---------- --------------
CORPORATE BONDS (CONTINUED)
U.S. Cellular Corp.,
Zero Coupon, 06/15/15 ............ $ 2,325,000 $ 941,625
Vantive Corp., 4.75%, 09/01/02 ++ . 930,000 660,300
Veterinary Centers of America,
5.25%, 05/01/06 ++ ............... 465,000 376,650
--------------
TOTAL CORPORATE BONDS 83,780,286
--------------
TOTAL LONG-TERM BONDS AND NOTES (COST $72,268,915) 83,780,286
--------------
SHORT-TERM INVESTMENTS (3.3%)
AT&T Capital Corp., 6.55%, 01/05/99 20,000,000 19,996,361
Federal Home Loan Mortgage Corp.,
4.70%, 01/04/99 .................. 107,612,000 107,612,000
Koch Industries Inc., 5.25%,
01/04/99.......................... 64,000,000 64,000,000
Textron Financial Corp.,
6.00%, 01/04/99 ++ ............... 25,000,000 25,000,000
TRW, Inc.,
5.05%, 01/04/99 ++ ............... 36,083,000 36,083,000
U.S. Treasury Bill, 4.34%, 02/18/99
@ ................................ 1,000,000 994,575
U.S. Treasury Bill, 4.40%, 02/18/99
@ ................................ 1,500,000 1,491,840
U.S. Treasury Bill, 4.46%, 02/18/99
@ ................................ 1,600,000 1,591,296
U.S. Treasury Bill, 4.96%, 02/18/99
@ ................................ 40,000,000 39,782,400
U.S. Treasury Bill, 4.98%, 02/18/99
@ ................................ 21,000,000 20,885,760
Wood Street Funding Corp.,
5.15%, 01/04/99 ++ ............... 5,527,000 5,527,000
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $322,917,172) 322,964,232
--------------
TOTAL INVESTMENTS (COST $8,342,074,379)(a) 9,789,351,877
OTHER ASSETS LESS LIABILITIES 11,700,493
--------------
TOTAL NET ASSETS $9,801,052,370
--------------
</TABLE>
<TABLE>
<CAPTION>
NOTES TO PORTFOLIO OF INVESTMENTS
<S> <C>
(a) The cost of investments for federal income tax purposes amounts to
$8,360,754,615. Unrealized gains and losses, based on identified tax cost at
December 31, 1998, are as follows:
Unrealized gains................................ $1,776,817,746
Unrealized losses............................... (348,220,484)
--------------
Net unrealized gain........................... $1,428,597,262
==============
</TABLE>
<TABLE>
Information concerning open futures contracts at December 31, 1998 is shown
below:
NO. OF INITIAL EXPIRATION UNREALIZED
CONTRACTS VALUE DATE GAIN/(LOSS)
---------- ------------- ----------- ----------------
LONG CONTRACTS
- ----------------------
<S> <C> <C> <C> <C>
S&P 500 Index Futures. 1,741 $510,891,480 Mar 99 $ 31,212,395
============ =============
</TABLE>
<TABLE>
<CAPTION>
SHORT CONTRACTS
- -------------------
<S> <C> <C> <C> <C>
United Kingdom FTSE
100 Index......... 77 $ (7,236,168) Mar 99 $ (336,296)
============ =============
</TABLE>
<TABLE>
Information concerning options written at December 31, 1998 is shown below:
NO. OF EXERCISE EXPIRATION MARKET
CONTRACTS PRICE DATE VALUE
---------- --------- ----------- ----------------
CALL OPTIONS
- ------------------------
<S> <C> <C> <C> <C>
Russell 2000 Index...... 10,676 $390.00 Mar 99 $(44,639,025)
Russell 2000 Index...... 750 400.00 Mar 99 (2,573,438)
S & P Mid Cap 400 Index. 3,110 350.00 Mar 99 (14,714,187)
Tyco International Ltd.. 600 55.00 Jan 99 (1,245,000)
------------
$(63,171,650)
============
</TABLE>
+ Non-income producing security.
++ Securities that may be resold to "qualified institutional buyers" under Rule
144A or securities offered pursuant to section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
@ Security pledged to cover initial margin requirements on open futures
contracts at December 31, 1998.
[plus sign] Restricted security. This security has been determined to be
illiquid under guidelines established by the Board of Trustees.
Information concerning restricted securities at December 31, 1998 is shown
below:
<TABLE>
<CAPTION>
COST COST
--------- ---------
<S> <C> <C>
National
Beacon Capital ............. $ 5,352,000 Semiconductor Corp...... $ 4,650,000
Case Corp. ................. 1,096,950 Richey Electronics, Inc. 1,937,411
Comverse Technology, Inc. .. 4,600,000 Roche Holdings ......... 5,033,109
Continental Airlines, Inc. . 1,971,033 SCI Systems, Inc. ...... 757,442
Credence Systems Corp. ..... 3,700,000 Tel-Save Holding, Inc... 1,400,000
EMC/MASS Corp. ............. 3,660,000 Textron Financial Corp.. 25,000,000
Thermo Instrument
Hewlett Packard Co. ........ 4,675,755 Systems ............... . 930,000
Industrial & Financial
Systems .................... 3,501,052 TRW, Inc. .............. 36,083,000
International Paper Co. .... 465,000 Vantive Corp. .......... 930,000
Veterinary Centers
Koch Industries Inc. ....... 64,000,000 of America ............. 456,077
Wood Street Funding
Marriott International, Inc. 1,616,429 Corp ................... 5,527,000
-----------
NAC Re Corp. ............... 926,344
GRAND TOTAL $178,268,602
============
</TABLE>
The market value of the total restricted securities above represent 1.94% of the
total net assets.
Category percentages are based on net assets.
70 See Notes to Financial Statements.
<PAGE>
GROWTH AND INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
REAL ESTATE
================================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ -------------
<S> <C> <C>
COMMON STOCKS (97.2%)
REAL ESTATE INVESTMENT TRUSTS (97.2%)
Apartment Investment & Management Co. 6,200 $ 230,562
Archstone Communities Trust .......... 2,600 52,650
Arden Realty Group, Inc. ............. 2,700 62,606
Avalon Bay Communities, Inc. ......... 2,500 85,625
Beacon Capital + [plus sign] ......... 6,800 108,800
Bedford Property Investors, Inc. ..... 3,200 54,000
Brandywine Realty Trust .............. 4,400 78,650
Camden Property Trust ................ 8,800 228,800
Captec Net Lease Realty, Inc. ........ 300 3,750
CBL & Associates Properties, Inc. .... 8,200 211,662
Colonial Properties Trust ............ 3,000 79,875
Cousins Properties, Inc. ............. 4,500 145,125
Crescent Real Estate Equities, Inc. .. 6,600 151,800
Criimi Mae, Inc. ..................... 8,600 30,100
Equity Office Properties Trust ....... 11,400 273,600
Equity One, Inc. ..................... 900 8,156
Equity Residential Properties Trust .. 5,900 238,581
Essex Property Trust, Inc. ........... 7,000 208,250
First Industrial Realty Trust, Inc. .. 3,200 85,800
Franchise Finance Corp. of America ... 1,100 26,400
General Growth Properties, Inc. ...... 6,600 249,975
Glenborough Realty Trust, Inc. ....... 6,300 128,363
Golf Trust of America, Inc. .......... 5,300 147,075
Health Care REIT, Inc. ............... 9,400 243,225
Healthcare Realty Trust, Inc. ........ 2,500 55,781
Home Properties of New York, Inc. .... 700 18,025
HRPT Properties Trust ................ 3,500 49,219
Imperial Credit Commercial Mortgage
Investment Corp. .................... 700 6,563
Kilroy Realty Corp. .................. 2,000 46,000
Kimco Realty Corp. ................... 6,700 265,906
Koger Equity, Inc. ................... 7,500 128,906
Kranzco Realty Trust ................. 6,200 92,613
Liberty Property Trust ............... 5,200 128,050
Parkway Properties, Inc. ............. 1,600 50,000
Post Properties, Inc. ................ 6,900 265,219
Prentiss Properties Trust ............ 4,700 104,869
Prime Retail, Inc. ................... 1,200 11,775
PS Business Parks, Inc. .............. 12,400 296,050
Public Storage, Inc. ................. 1,400 37,888
Reckson Associates Realty Corp. ...... 2,400 53,250
Simon Property Group, Inc. ........... 5,800 165,300
Sovran Self Storage, Inc. ............ 500 12,563
Starwood Lodging Trust ............... 7,400 167,887
Storage Trust Realty ................. 800 18,700
Sun Communities, Inc. ................ 3,100 107,919
Tower Realty Trust, Inc. ............. 800 16,100
Weeks Corp. .......................... 4,000 112,750
-----------
TOTAL COMMON STOCKS (COST $6,093,724) 5,344,763
-----------
PRINCIPAL MARKET
AMOUNT VALUE
------------ -------------
SHORT-TERM INVESTMENTS (4.2%)
Federal Home Loan Mortgage Corp.,
4.40%, 01/04/99 ..................... $230,000 $ 230,000
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $230,000) 230,000
-----------
TOTAL INVESTMENTS (COST $6,323,724)(a) 5,574,763
OTHER ASSETS LESS LIABILITIES (75,145)
-----------
TOTAL NET ASSETS $5,499,618
===========
</TABLE>
<TABLE>
<CAPTION>
NOTES TO PORTFOLIO OF INVESTMENTS
<S> <C>
(a) The cost of investments for federal income tax purposes amounts to
$6,346,039. Unrealized gains and losses, based on identified tax cost at
December 31, 1998, are as follows:
Unrealized gains............................... $ 73,930
Unrealized losses.............................. (845,206)
-----------
Net unrealized loss........................... $(771,276)
===========
</TABLE>
+ Non-income producing security.
[plus sign] Restricted security. This security has been determined to be
illiquid under guidelines established by the Board of Directors.
<TABLE>
<CAPTION>
Information concerning restricted securities at December 31, 1998 is shown
below:
COST
-----------
<S> <C>
Beacon Capital ................................... $ 136,000
===========
</TABLE>
The market value of the total restricted securities above represent 1.98% of the
total net assets.
Category percentages are based on net assets.
See Notes to Financial Statements. 71
<PAGE>
GROWTH AND INCOME PORTFOLIOS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
================================================================================
<TABLE>
<CAPTION>
BALANCED GROWTH AND INCOME REAL ESTATE
--------------- ------------------ ----------------
<S> <C> <C> <C>
ASSETS:
Investments, at market
value................ $1,859,478,407 $9,789,351,877 $ 5,574,763
Cash ................. 328,143 959,333 8,347
Cash denominated in
foreign currencies .. -- 19,880,295 --
Receivable for:
Dividends and
interest............ 10,251,212 10,232,346 47,843
Investments sold .... 19,625,879 124,950,837 8,816
Fund shares sold .... 2,426 4,411,279 14,070
Variation Margin..... -- 1,481,265 --
Recoverable foreign
taxes............... -- 529,930 --
Prepaid expenses ..... 3,140 24,782 30
Gross unrealized gain
on forward foreign
currency exchange
contracts............ -- 1,157,832 --
--------------- --------------- -------------
Total assets .... 1,889,689,207 9,952,979,776 5,653,869
--------------- --------------- -------------
LIABILITIES:
Payable for:
Dividends to
shareholders........ -- 593,651 139,376
Investments purchased 29,640,766 66,543,549 --
Fund shares redeemed 6,542,588 12,455,409 --
Call options written,
at market value
(Premiums received,
Growth and Income,
$35,346,583)........ -- 63,171,650 --
Accrued investment
advisory fees ....... 877,487 4,484,074 3,963
Accrued administrative
service fees ........ 131,623 568,271 396
Accrued custody fees . 28,388 246,214 4,462
Other liabilities .... 112,854 497,837 6,054
Gross unrealized loss
on forward foreign
currency exchange
contracts............ -- 3,366,751 --
--------------- --------------- -------------
Total liabilities 37,333,706 151,927,406 154,251
--------------- --------------- -------------
NET ASSETS .......... $1,852,355,501 $9,801,052,370 $ 5,499,618
=============== =============== =============
NET ASSETS REPRESENTED
BY:
Paid-in capital ...... $ 1,490,221,671 $ 8,123,117,539 $ 6,433,336
Net unrealized gain
(loss) on investments
and open futures
contracts............ 226,290,581 1,448,293,520 (748,961)
Undistributed
(distributions in
excess of) net
investment income ... 8,051,568 (942,800) 1,335
Accumulated net
realized gain (loss)
on investments ...... 127,791,681 230,584,111 (186,092)
--------------- --------------- -------------
NET ASSETS .......... $1,852,355,501 $9,801,052,370 $ 5,499,618
=============== =============== =============
CAPITAL SHARES:
Authorized ........... Two Billion Unlimited Two Billion
Par value .... ........ $ 0.001 $ 1.000 $ 0.001
Outstanding .......... 117,766,149 307,531,473 645,065
Net asset value,
offering and
redemption price per
share (net assets
divided by shares
outstanding)......... $ 15.73 $ 31.87 $ 8.53
Cost of investments .. $1,633,187,826 $8,342,074,379 $ 6,323,724
Cost of cash
denominated in
foreign currencies .. $ -- $ 19,747,560 $ --
</TABLE>
72 See Notes to Financial Statements.
<PAGE>
GROWTH AND INCOME PORTFOLIOS
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
BALANCED GROWTH AND INCOME REAL ESTATE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1998
------------- ----------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................... $ 13,380,659 $ 125,902,953 $ 330,137
Interest .................... 50,074,996 28,578,746 7,499
------------ -------------- -----------
63,455,655 154,481,699 337,636
Foreign taxes withheld on
dividends................... (48,152) (1,025,399) --
------------ -------------- -----------
Total investment income 63,407,503 153,456,300 337,636
------------ -------------- -----------
INVESTMENT EXPENSES:
Investment advisory fees .... 8,810,398 47,851,987 40,863
Administrative services fees 1,349,637 5,950,715 6,153
Printing and postage ........ 35,871 182,461 3,010
Custody fees ................ 43,007 458,965 5,188
Transfer agent fees ......... 1,991 10,475 1,755
Audit fees .................. 22,729 37,624 14,601
Directors'/Trustees' fees ... 31,015 168,117 96
Registration fees ........... 21,763 38,093 72
Miscellaneous expenses ...... 34,179 181,270 56
------------ -------------- -----------
Expenses before reimbursement
and waiver from
Investment Adviser ......... 10,350,590 54,879,707 71,794
Expense reimbursement and
waiver from Investment
Adviser..................... -- -- (19,932)
------------ -------------- -----------
Net expenses ........... 10,350,590 54,879,707 51,862
------------ -------------- -----------
Net investment income ....... 53,056,913 98,576,593 285,774
------------ -------------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ................ 130,305,824 1,669,033,012 (187,051)
Closed and expired options . -- 48,911,346 --
Futures and forward foreign
currency exchange contracts (694,626) 4,038,351 --
Foreign currency related
transactions............... -- (1,609,341) --
------------ -------------- -----------
Net realized gain (loss)
on investments ........ 129,611,198 1,720,373,368 (187,051)
------------ -------------- -----------
Net change in unrealized gain or loss on:
Investments ................ 90,945,617 (542,571,486) (903,215)
Written options ............ -- (28,684,326) --
Futures and forward foreign
currency exchange contracts (87,669) 24,371,744 --
Foreign currency related
transactions............... -- 387,371 --
------------ -------------- -----------
Net change in unrealized
gain or loss on
investments............. 90,857,948 (546,496,697) (903,215)
------------ -------------- -----------
Net realized and change in
unrealized gain or loss on
investments ................ 220,469,146 1,173,876,671 (1,090,266)
------------ -------------- -----------
Net increase (decrease) in
net assets resulting from
operations.................. $273,526,059 $1,272,453,264 $ (804,492)
============ ============== ===========
</TABLE>
See Notes to Financial Statements. 73
<PAGE>
GROWTH AND INCOME PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
BALANCED
------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income.................. $ 53,056,913 $ 45,458,448
Net realized gain on investments....... 129,611,198 301,769,042
Net change in unrealized gain or loss
on investments........................ 90,857,948 (42,021,326)
-------------- --------------
Net increase in net assets resulting
from operations...................... 273,526,059 305,206,164
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income........... (45,005,345) (105,283,441)
From net realized gains.............. (255,329,194) (109,284,309)
-------------- --------------
Decrease in net assets from
distributions to shareholders........ (300,334,539) (214,567,750)
-------------- --------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold............ 63,609,192 43,252,366
Net asset value of shares issued upon
reinvestment of distributions....... 300,334,539 214,567,750
Payments for shares redeemed......... (126,833,307) (70,446,645)
-------------- --------------
Net increase in net assets from fund
share transactions................... 237,110,424 187,373,471
-------------- --------------
Net change in net assets............... 210,301,944 278,011,885
NET ASSETS:
Beginning of period.................... 1,642,053,557 1,364,041,672
-------------- --------------
End of period.......................... $1,852,355,501 $1,642,053,557
============== ==============
End of period net assets includes
undistributed net investment income... $ 8,051,568 $ --
============== ==============
SHARE TRANSACTIONS:
Number of shares sold................ 3,888,368 2,713,055
Number of shares issued upon
reinvestment of distributions....... 19,665,398 13,885,971
Number of shares redeemed............ (8,207,096) (4,406,176)
-------------- --------------
Net increase.......................... 15,346,670 12,192,850
============== ==============
</TABLE>
74 See Notes to Financial Statements.
<PAGE>
================================================================================
<TABLE>
<CAPTION>
GROWTH AND INCOME
------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income.................. $ 98,576,593 $ 120,665,565
Net realized gain on investments....... 1,720,373,368 1,597,118,852
Net change in unrealized gain or loss
on investments........................ (546,496,697) 383,260,565
--------------- ---------------
Net increase in net assets resulting
from operations...................... 1,272,453,264 2,101,044,982
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income........... (106,400,592) (130,095,758)
From net realized gains.............. (1,621,614,754) (1,737,875,271)
--------------- ---------------
Decrease in net assets from
distributions to shareholders........ (1,728,015,346) (1,867,971,029)
--------------- ---------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold............ 173,705,279 322,401,783
Net asset value of shares issued upon
reinvestment of distributions....... 1,727,349,858 1,867,325,252
Payments for shares redeemed......... (832,700,179) (188,771,990)
--------------- ---------------
Net increase in net assets from fund
share transactions................... 1,068,354,958 2,000,955,045
--------------- ---------------
Net change in net assets............... 612,792,876 2,234,028,998
NET ASSETS:
Beginning of period.................... 9,188,259,494 6,954,230,496
--------------- ---------------
End of period.......................... $ 9,801,052,370 $ 9,188,259,494
=============== ===============
End of period net assets includes
distributions in excess of
net investment income................. $ (942,800) $ (4,047,705)
=============== ===============
SHARE TRANSACTIONS:
Number of shares sold................ 4,918,286 8,739,687
Number of shares issued upon
reinvestment of distributions....... 53,542,755 54,916,035
Number of shares redeemed............ (24,104,473) (5,175,087)
--------------- ---------------
Net increase.......................... 34,356,568 58,480,635
=============== ===============
</TABLE>
See Notes to Financial Statements. 75
<PAGE>
GROWTH AND INCOME PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
REAL ESTATE
---------------------------------------
PERIOD FROM
DECEMBER 15, 1997
(COMMENCEMENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, 1998 TO DECEMBER 31, 1997
----------------- --------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income............... $ 285,774 $ 24,907
Net realized loss on investments.... (187,051) --
Net change in unrealized gain or
loss on investments................. (903,215) 154,254
----------- ----------
Net increase (decrease) in net
assets resulting from operations... (804,492) 179,161
----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income......... (282,137) (26,250)
----------- ----------
Decrease in net assets from
distributions to shareholders...... (282,137) (26,250)
----------- ----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold.......... 3,471,174 5,000,000
Net asset value of shares issued
upon reinvestment of distributions 142,761 --
Payments for shares redeemed....... (2,180,599) --
----------- ----------
Net increase in net assets from
fund share transactions............ 1,433,336 5,000,000
----------- ----------
Net change in net assets............. 346,707 5,152,911
NET ASSETS:
Beginning of period.................. 5,152,911 --
----------- ----------
End of period........................ $ 5,499,618 $5,152,911
=========== ==========
End of period net assets includes
undistributed (distributions in
excess of) net investment income.... $ 1,335 $ (2,302)
=========== ==========
SHARE TRANSACTIONS:
Number of shares sold.............. 371,334 500,000
Number of shares issued upon
reinvestment of distributions..... 16,996 --
Number of shares redeemed.......... (243,265) --
----------- ----------
Net increase........................ 145,065 500,000
=========== ==========
</TABLE>
76 See Notes to Financial Statements.
<PAGE>
GROWTH AND INCOME PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
1. ORGANIZATION
The Statements contained herein refer to Aetna Balanced VP, Inc. (Balanced),
Aetna Variable Fund d/b/a Aetna Growth and Income VP (Growth and Income) and
Aetna Real Estate Securities VP (Real Estate), a portfolio of Aetna Variable
Portfolios, Inc. (Variable Portfolios, collectively the Funds).
Growth and Income was organized under the laws of Massachusetts on January 25,
1984. Balanced was incorporated under the laws of Maryland on December 14, 1988.
Variable Portfolios was incorporated under the laws of Maryland on June 4, 1996.
The Articles of Incorporation of Variable Portfolios permit it to offer separate
portfolios, each of which has its own investment objective, policies and
restrictions. Variable Portfolios currently offers eleven separate portfolios,
including Real Estate. Balanced, Growth and Income, and Variable Portfolios are
each registered under the Investment Company Act of 1940 (the Act) as open-end
management investment companies.
The following is each Fund's investment objective:
BALANCED seeks to maximize investment return, consistent with reasonable
safety of principal, by investing in a diversified portfolio of one or more
of the following asset classes: stocks, bonds and cash equivalents, based on
the investment adviser's judgment of which of those sectors or mix thereof
offers the best investment prospects.
GROWTH AND INCOME seeks to maximize total return through investments in a
diversified portfolio of common stocks and securities convertible into common
stock. It is anticipated that capital appreciation and investment income will
both be major factors in achieving total return.
REAL ESTATE seeks maximum total return primarily through investment in a
diversified portfolio of equity securities issued by real estate companies,
the majority of which are real estate investment trusts (REITs).
Shares in the Funds are currently sold to Aetna Life Insurance and Annuity
Company (ALIAC), an Aetna Life Insurance Separate Account, and in the case of
Growth and Income, to existing shareholders through reinvestment of
distributions. ALIAC's shares are allocated to certain of its variable
life/annuity accounts. At December 31, 1998, ALIAC's separate accounts and
affiliates held all of Balanced's and Real Estate's shares outstanding and 99.6%
of Growth and Income's shares outstanding.
Effective May 1, 1998, Aeltus Investment Management, Inc. (Aeltus) became the
investment adviser to the Funds. Prior to May 1, 1998, ALIAC acted as investment
adviser and Aeltus served as sub-adviser to the Funds. ALIAC serves as the
principal underwriter to each Fund. Aeltus and ALIAC are both indirect
wholly-owned subsidiaries of Aetna Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of each Fund have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of each Fund.
A. VALUATION OF INVESTMENTS
Investments are stated at market values based upon prices furnished by external
pricing sources as reported on national securities exchanges or, for
over-the-counter securities, at the mean of the bid and asked prices. Short-term
investments maturing in more than sixty days for which market quotations are
readily available are valued at current market value. Short-term investments
maturing in less than sixty days are valued at amortized cost, which when
combined with accrued interest, approximates market value. Securities and fixed
income investments for which market quotations are not considered to be readily
available are valued using methods approved by the Board of Directors/Trustees.
77
<PAGE>
GROWTH AND INCOME PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. VALUATION OF INVESTMENTS (CONTINUED)
The accounting records of each Fund are maintained in U.S. dollars. Investment
securities and other assets and liabilities denominated in foreign currencies
are translated into U.S. dollars at the prevailing rates of exchanges at the end
of each day of each applicable foreign market. The Funds do not isolate the
portion of the results of operations resulting from changes in foreign exchange
rates on investments from the fluctuations arising from changes in their market
prices. Such fluctuations are included in net realized and unrealized gain or
loss on investments.
Purchases and sales of securities, income receipts, and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the respective
dates of the transactions.
B. OPTIONS CONTRACTS
The Funds may purchase and write (sell) call options and put options and write
(sell) covered call options as a hedge against adverse movements in the value of
portfolio holdings or to increase market exposure.
Option contracts are valued daily and unrealized gains or losses are recorded
based upon the last sales price on the principal exchange on which the options
are traded. The Funds will realize a gain or loss upon the expiration or closing
of the option contract. When an option is exercised, the proceeds on sales of
the underlying security for a written call option, the purchase cost of the
security for a written put option, or the cost of the security for a purchased
put or call option is adjusted by the amount of premium received or paid.
Realized and unrealized gains or losses on option contracts are reflected in the
accompanying financial statements.
The risk in writing a call option is that the Funds give up the opportunity for
profit if the market price of the security increases and the option is
exercised. The risk in writing a put option is that the Funds may incur a loss
if the market price of the security decreases and the option is exercised. The
risk in buying an option is that the Funds pay a premium whether or not the
option is exercised. Risks may also arise from an illiquid secondary market or
from the inability of counterparties to meet the terms of the contract.
C. FUTURES AND FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security or financial instrument, including an
index of stocks, at a set price on a future date. The Funds invest in financial
futures contracts as a hedge against existing portfolio securities, to manage
the risk of changes in interest rates, equity prices, currency exchange rates or
in anticipation of future purchases and sales of portfolio securities.
Upon entering into a futures contract, the Funds are required to deposit with a
broker an amount (initial margin) equal to a percentage of the purchase price
indicated by the futures contract. Subsequent deposits (variation margin) are
received or paid each day by the Funds equal to the daily fluctuations in the
market value of the contract. These amounts are recorded by the Funds as
unrealized gains or losses. When a contract is closed, the Funds record a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed. Generally,
futures contracts held by the Funds are closed prior to expiration.
A forward foreign currency exchange contract is an agreement to pay or receive
specific amounts of a currency at a future date in exchange for another currency
at an agreed upon exchange rate. The Funds, where authorized, may use forward
foreign currency exchange contracts to hedge against foreign currency exchange
rate risks on their non-U.S. dollar denominated portfolio securities. Contracts
are recorded at market value and marked-to-market daily.
78
<PAGE>
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FUTURES AND FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (CONTINUED)
The risks associated with futures and forward foreign currency exchange
contracts may arise from an imperfect correlation between the change in market
value of the securities held by the Funds and the price of the contracts. Risks
may also arise from an illiquid secondary market or from the inability of
counterparties to meet the terms of the contracts.
Realized and unrealized gains or losses on financial futures and forward foreign
currency exchange contracts are reflected in the accompanying financial
statements. The amounts at risk under such futures and forward foreign currency
exchange contracts may exceed the amounts reflected in the financial statements.
The notional amounts (economic exposure) of these contracts are disclosed in the
Portfolios of Investments and elsewhere in the Notes to Financial Statements.
For federal income tax purposes, any futures and forward foreign currency
exchange contracts which remain open at the end of the fiscal year are
marked-to-market and the resultant net gain or loss is reported to shareholders
as federal taxable income.
D. ILLIQUID AND RESTRICTED SECURITIES
Illiquid securities are securities that are not readily marketable. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Funds to sell them promptly at an
acceptable price. Restricted securities are those which can only be sold under
Rule 144A of the Securities Act of 1933 (1933 Act) or are securities offered
pursuant to Section 4(2) of the 1933 Act, and are subject to legal or
contractual restrictions on resale and may not be publicly sold without
registration under the 1933 Act. Each Fund may invest up to 15% of its total
assets in illiquid securities. Illiquid and restricted securities are valued
using market quotations when readily available. In the absence of market
quotations, the securities are valued based upon their fair value determined
under procedures approved by the Board of Directors/Trustees. The Funds will not
pay the costs of disposition of restricted securities other than ordinary
brokerage fees, if any. Below is a summary of securities held which are both
illiquid and restricted as of December 31, 1998:
<TABLE>
<CAPTION>
COST MARKET VALUE % OF NET ASSETS
---- ------------ ---------------
<S> <C> <C> <C>
Growth and Income $5,352,000 $ 4,281,600 0.04%
Real Estate 136,000 108,800 1.98%
</TABLE>
E. DELAYED DELIVERY TRANSACTIONS
The Funds may purchase or sell securities on a when-issued or forward commitment
basis. The price of the underlying securities and date when the securities will
be delivered and paid for are fixed at the time the transaction is negotiated.
The market value of such securities are identified in the Portfolios of
Investments. Losses may arise due to changes in the market value of the
securities or from the inability of counterparties to meet the terms of the
contract. In connection with such purchases, the Funds are required to hold
liquid assets as collateral with their custodian sufficient to cover the
purchase price.
F. FEDERAL INCOME TAXES
Each Fund intends to meet the requirements to be taxed as a regulated investment
company for the current year. As such, each Fund is relieved of federal income
taxes by distributing all of its net taxable investment income and capital
gains, if any, in compliance with the applicable provisions of the Internal
Revenue Code. Furthermore, by distributing substantially all of its net taxable
investment income and capital gains during the calendar year, each Fund will
avoid federal excise taxes in accordance with the applicable provisions of the
Internal Revenue Code. Thus, the financial statements contain no provision for
federal taxes.
79
<PAGE>
GROWTH AND INCOME PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. DISTRIBUTIONS
Distributions are recorded on the ex-dividend date. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing treatments for foreign currency transactions, certain
futures contracts, certain investments in foreign equity securities and certain
losses deferred due to transactions characterized as "wash sales" by federal tax
regulations. In addition, distributions of realized gains from sales of
securities held one year or less are taxable to shareholders at ordinary income
tax rates rather than preferred capital gain tax rates in accordance with the
applicable provisions of the Internal Revenue Code.
H. OTHER
Investment transactions are accounted for on the day following trade date,
except same day settlements which are accounted for on the trade date. Interest
income is recorded on an accrual basis. Discounts and premiums on securities
purchased are accreted or amortized, respectively, using an effective yield
method over the life of the security. Dividend income and stock splits are
recorded on the ex-dividend date. Realized gains and losses from investment
transactions are determined on an identified cost basis.
3. INVESTMENT ADVISORY AND ADMINISTRATIVE FEES
Each Fund pays Aeltus a monthly fee expressed as a percentage of its average
daily net assets. Below are the Funds' annual Investment Advisory fees as of
December 31, 1998:
<TABLE>
<CAPTION>
ADVISORY FEE
------------
<S> <C>
Balanced 0.50%
Growth and Income 0.50%
Real Estate 0.75%
</TABLE>
Aeltus has served as the investment adviser for the Funds since May 1, 1998.
Prior to May 1, 1998, ALIAC served as investment adviser and Aeltus served as
sub-adviser. As sub-adviser, Aeltus supervised the investment and reinvestment
of cash and securities and provided certain related administrative services. For
the period January 1, 1998 through April 30, 1998, ALIAC collected $18,785,089
from the Funds, of which it paid $10,478,415 to Aeltus.
Effective May 1, 1998, each Fund pays expenses incurred in exchange for services
provided by auditors, legal firms, transfer agents, custodian banks and
financial printers. Each Fund pays its proportionate share of compensation to
the Fund's Board of Directors/Trustees and its proportionate share of insurance
premiums. Each Fund pays its direct costs incurred to mail shareholder reports,
register its shares with the Securities and Exchange Commission and any other
costs incurred by the Fund. In addition, each Fund pays Aeltus an administrative
services fee in exchange for receiving certain administrative and shareholder
services and to compensate Aeltus for supervising the Funds' other service
providers. Each Fund pays Aeltus an administrative services fee at an annual
rate based on its average daily net assets. The rate is 0.075% on the first $5
billion in Fund assets and 0.050% on all Fund assets over $5 billion.
80
<PAGE>
================================================================================
3. INVESTMENT ADVISORY, SHAREHOLDER SERVICES AND DISTRIBUTION FEES (CONTINUED)
Prior to May 1, 1998, ALIAC acted as Administrator to the Funds. As
Administrator, ALIAC paid all the expenses of the Funds on their behalf,
supervised the Funds' other service providers and provided the Funds with
certain administrative and shareholder services. In exchange for these services,
ALIAC received an administrative services fee at an annual rate of up to 0.20%
of each Fund's average daily net assets. For the period January 1, 1998 through
April 30, 1998, ALIAC collected $2,369,275 in administrative services fees from
the Funds.
Aeltus has entered into a Service Agreement with ALIAC under which ALIAC will
provide various administrative and shareholder services for each Fund, in
exchange for fees payable by Aeltus, of up to 0.375% of the Funds' average daily
net assets. For the period May 1, 1998 through December 31, 1998, Aeltus paid
ALIAC $18,836,724.
4. REIMBURSEMENT AND WAIVER FROM INVESTMENT ADVISER
Aeltus is contractually obligated through December 31, 1999 to reimburse Real
Estate for some or all of its operating expenses or to waive fees in order to
maintain a certain expense ratio. Reimbursement and waiver arrangements will
increase a Fund's yield and total return.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES
Purchases and sales of investment securities, excluding short-term investments,
for the year ended December 31, 1998 were:
<TABLE>
<CAPTION>
COST OF PURCHASES PROCEEDS FROM SALES
----------------- -------------------
<S> <C> <C>
Balanced $ 1,545,736,813 $ 1,286,779,165
Growth and Income 13,158,342,850 13,292,995,656
Real Estate 4,372,699 2,965,652
</TABLE>
6. OPTIONS
All Funds may use options. For the year ended December 31, 1998, the following
reflects the written option activity:
<TABLE>
<CAPTION>
CALL OPTIONS WRITTEN
---------------------------------------------------
NUMBER OF PREMIUM REALIZED
GROWTH AND INCOME CONTRACTS RECEIVED GAIN (LOSS)
---------------------------------------------------
<S> <C> <C> <C>
Outstanding December 31, 1997 1,000 $ 234,492 $ --
Written 45,728 90,528,828 --
Closed (30,128) (55,003,147) 6,558,241
Exercised (1,464) (413,590) --
Expired -- -- --
---------------------------------------------------
Outstanding December 31, 1998 15,136 $ 35,346,583 $ 6,558,241
===================================================
</TABLE>
81
<PAGE>
GROWTH AND INCOME PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
6. OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
CALL OPTIONS WRITTEN
---------------------------------------------------
NUMBER OF PREMIUM REALIZED
GROWTH AND INCOME CONTRACTS RECEIVED GAIN (LOSS)
---------------------------------------------------
<S> <S> <C> <C>
Outstanding December 31, 1997 1,220 $ 2,060,767 $ --
Written 2,820 4,379,394 --
Closed (3,240) (4,802,616) (6,181,414)
Exercised (800) (1,637,545) 1,637,545
Expired -- -- --
---------------------------------------------------
Outstanding December 31, 1998 -- $ -- $(4,543,869)
===================================================
</TABLE>
7. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
As of December 31, 1998, Growth and Income had open forward foreign currency
exchange contracts that obligate the Fund to deliver currencies at specified
future dates. The net unrealized loss of $2,208,919 on these contracts are
included in the accompanying financial statements. The terms of the open
contracts are as follows:
GROWTH AND INCOME
- -----------------
<TABLE>
<CAPTION>
U.S. $ VALUE U.S. $ VALUE
EXCHANGE CURRENCY TO BE DECEMBER 31, CURRENCY TO BE DECEMBER 31, UNREALIZED
DATE DELIVERED 1998 RECEIVED 1998 GAIN (LOSS)
---- --------- ---- -------- ---- -----------
CONTRACTS TO BUY
- ----------------
<S> <C> <C> <C> <C> <C>
1/4/99 1,911,666 $1,911,666 1,140,000 $1,903,390 $(8,276)
U.S. Dollar British Pound
- ------------------------------------------------------------------------------------------------------
1/4/99 1,951,259 1,951,259 1,165,000 1,945,131 (6,128)
U.S. Dollar British Pound
- ------------------------------------------------------------------------------------------------------
1/7/99 66,814 66,814 40,000 66,751 (63)
U.S. Dollar British Pound
- ------------------------------------------------------------------------------------------------------
1/5/99 650,938 650,938 1,225,000 650,742 (196)
U.S. Dollar Dutch Guilder
- ------------------------------------------------------------------------------------------------------
1/19/99 2,511,730 2,511,730 13,999,000 2,505,430 (6,300)
U.S. Dollar French Franc
- ------------------------------------------------------------------------------------------------------
1/19/99 2,108,239 2,108,239 11,710,000 2,095,764 (12,475)
U.S. Dollar French Franc
- ------------------------------------------------------------------------------------------------------
1/19/99 908,507 908,507 5,090,000 910,968 2,461
U.S. Dollar French Franc
- ------------------------------------------------------------------------------------------------------
1/19/99 3,844,439 3,844,439 21,560,000 3,858,638 14,199
U.S. Dollar French Franc
- ------------------------------------------------------------------------------------------------------
2/22/99 399,236 399,236 2,236,000 401,320 2,084
U.S. Dollar French Franc
- ------------------------------------------------------------------------------------------------------
1/21/99 4,408,960 4,408,960 7,375,000 4,427,557 18,597
U.S. Dollar German Deutschemark
- ------------------------------------------------------------------------------------------------------
1/21/99 2,277,448 2,277,448 3,805,000 2,284,320 6,872
U.S. Dollar German Deutschemark
- ------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
================================================================================
GROWTH AND INC0ME (CONTINUED)
<TABLE>
<CAPTION>
U.S. $ VALUE U.S. $ VALUE
EXCHANGE CURRENCY TO BE DECEMBER 31, CURRENCY TO BE DECEMBER 31, UNREALIZED
DATE DELIVERED 1998 RECEIVED 1998 GAIN (LOSS)
---- --------- ---- -------- ---- -----------
CONTRACTS TO BUY (CONTINUED)
- ----------------------------
<S> <C> <C> <C> <C> <C>
2/3/99 5,090,832 $5,090,832 8,435,000 $5,073,175 $(17,657)
U.S. Dollar German Deutschemark
- --------------------------------------------------------------------------------------------------------
2/3/99 5,101,609 5,101,609 8,435,000 5,073,176 (28,433)
U.S. Dollar German Deutschemark
- --------------------------------------------------------------------------------------------------------
2/3/99 2,248,599 2,248,599 3,751,000 2,256,015 7,416
U.S. Dollar German Deutschemark
- --------------------------------------------------------------------------------------------------------
2/3/99 5,606,235 5,606,235 9,280,000 5,581,396 (24,839)
U.S. Dollar German Deutschemark
- --------------------------------------------------------------------------------------------------------
2/3/99 1,510,495 1,510,495 2,526,000 1,519,247 8,752
U.S. Dollar German Deutschemark
- --------------------------------------------------------------------------------------------------------
1/5/99 690,933 690,933 5,353,000 690,904 (29)
U.S. Dollar Hong Kong Dollar
- --------------------------------------------------------------------------------------------------------
2/19/99 238,738 238,738 1,900,000 245,145 6,407
U.S. Dollar Hong Kong Dollar
- --------------------------------------------------------------------------------------------------------
2/19/99 1,386,451 1,386,451 10,980,000 1,416,683 30,232
U.S. Dollar Hong Kong Dollar
- --------------------------------------------------------------------------------------------------------
2/19/99 1,523,014 1,523,014 12,210,000 1,575,383 52,369
U.S. Dollar Hong Kong Dollar
- --------------------------------------------------------------------------------------------------------
1/27/99 685,905 685,905 83,070,000 737,921 52,016
U.S. Dollar Japanese Yen
- --------------------------------------------------------------------------------------------------------
2/26/99 4,150,191 4,150,191 478,600,000 4,275,028 124,837
U.S. Dollar Japanese Yen
- --------------------------------------------------------------------------------------------------------
3/17/99 2,262,177 2,262,177 260,320,000 2,331,377 69,200
U.S. Dollar Japanese Yen
- --------------------------------------------------------------------------------------------------------
1/5/99 269,511 269,511 2,035,000 267,887 (1,624)
U.S. Dollar Norwegian Krone
- --------------------------------------------------------------------------------------------------------
1/5/99 839,966 839,966 6,786,000 836,808 (3,158)
U.S. Dollar Swedish Krona
- --------------------------------------------------------------------------------------------------------
CONTRACTS TO SELL
- -----------------
1/25/99 15,188,600 8,098,283 8,049,712 8,049,712 (48,571)
Dutch Guilder U.S. Dollar
- --------------------------------------------------------------------------------------------------------
1/5/99 8,784,000 1,568,566 1,561,322 1,561,322 (7,244)
French Franc U.S. Dollar
- --------------------------------------------------------------------------------------------------------
1/7/99 3,727,000 665,747 663,876 663,876 (1,871)
French Franc U.S. Dollar
- --------------------------------------------------------------------------------------------------------
1/19/99 81,913,300 14,660,194 14,515,142 14,515,142 (145,052)
French Franc U.S. Dollar
- --------------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
GROWTH AND INCOME PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
GROWTH AND INC0ME (CONTINUED)
<TABLE>
<CAPTION>
U.S. $ VALUE U.S. $ VALUE
EXCHANGE CURRENCY TO BE DECEMBER 31, CURRENCY TO BE DECEMBER 31, UNREALIZED
DATE DELIVERED 1998 RECEIVED 1998 GAIN (LOSS)
---- --------- ---- -------- ---- -----------
CONTRACTS TO SELL (CONTINUED)
- -----------------------------
<S> <C> <C> <C> <C> <C>
1/19/99 310,000 $55,481 55,334 $55,334 $(147)
French Franc U.S. Dollar
- ------------------------------------------------------------------------------------------------------
1/19/99 898,000 160,717 160,975 160,975 258
French Franc U.S. Dollar
- ------------------------------------------------------------------------------------------------------
1/19/99 73,000 13,065 13,086 13,086 21
French Franc U.S. Dollar
- ------------------------------------------------------------------------------------------------------
1/19/99 7,313,000 1,038,823 1,316,869 1,316,869 8,046
French Franc U.S. Dollar
- ------------------------------------------------------------------------------------------------------
2/22/99 106,061,600 19,036,043 19,058,688 19,058,688 22,645
French Franc U.S. Dollar
- ------------------------------------------------------------------------------------------------------
1/5/99 4,210,000 2,520,188 2,513,433 2,513,433 (6,755)
German Deutschemark U.S. Dollar
- ------------------------------------------------------------------------------------------------------
1/21/99 38,824,000 23,307,864 23,906,404 23,906,404 598,540
German Deutschemark U.S. Dollar
- ------------------------------------------------------------------------------------------------------
2/3/99 25,108,600 15,101,403 15,233,952 15,233,952 132,549
German Deutschemark U.S. Dollar
- ------------------------------------------------------------------------------------------------------
2/3/99 4,792,000 2,882,117 2,865,994 2,865,994 (16,123)
German Deutschemark U.S. Dollar
- ------------------------------------------------------------------------------------------------------
2/3/99 580,000 348,837 349,168 349,168 331
German Deutschemark U.S. Dollar
- ------------------------------------------------------------------------------------------------------
2/19/99 25,090,000 3,237,211 3,145,293 3,145,293 (91,918)
Hong Kong Dollar U.S. Dollar
- ------------------------------------------------------------------------------------------------------
1/4/99 531,780,000 4,648,520 4,577,208 4,577,208 (71,312)
Japanese Yen U.S. Dollar
- ------------------------------------------------------------------------------------------------------
1/27/99 2,508,315,000 22,281,675 21,512,136 21,512,136 (769,539)
Japanese Yen U.S. Dollar
- ------------------------------------------------------------------------------------------------------
2/26/99 2,599,660,000 23,221,098 21,798,256 21,798,256 (1,422,842)
Japanese Yen U.S. Dollar
- ------------------------------------------------------------------------------------------------------
3/17/99 1,484,921,000 13,298,673 12,889,939 12,889,939 (408,734)
Japanese Yen U.S. Dollar
- ------------------------------------------------------------------------------------------------------
1/19/99 23,530,000 3,087,289 3,023,450 3,023,450 (63,839)
Norwegian Krone U.S. Dollar
- ------------------------------------------------------------------------------------------------------
2/2/99 23,747,000 17,352,322 17,148,696 17,148,696 (203,626)
Swiss Franc U.S. Dollar
- ------------------------------------------------------------------------------------------------------
$(2,208,919)
==================
</TABLE>
84
<PAGE>
================================================================================
8. CAPITAL LOSS CARRYFORWARD
In accordance with applicable provisions of the Internal Revenue Code, the
following capital loss carryforwards have been incurred at December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL LOSS
CARRYFORWARD EXPIRATION DATE
------------ ---------------
<S> <C> <C>
Real Estate $ 80,901 2006
583,835 2007
</TABLE>
These capital loss carryforwards may be used to offset future capital gains
until their respective expiration dates. It is the policy of each of the Funds
to reduce future distributions of realized gains to shareholders to the extent
of unexpired capital loss carryforwards.
85
<PAGE>
GROWTH AND INCOME PORTFOLIOS
ADDITIONAL INFORMATION
DECEMBER 31, 1998
================================================================================
FEDERAL TAX STATUS OF DIVIDENDS DECLARED DURING THE FISCAL YEAR (UNAUDITED)
In accordance with federal tax authorities, certain portions of the dividends
taxable as ordinary income qualify for the corporate dividends received
deduction. The following percentages reflect the portions of such dividends
paid:
<TABLE>
<CAPTION>
<S> <C>
Balanced 10.42%
Growth and Income 41.10%
</TABLE>
In accordance with federal tax authorities, the Funds paid the following amounts
of dividends which qualify to be taxed at long-term capital gain rates:
<TABLE>
<CAPTION>
AGGREGATE PER SHARE
--------- ---------
<S> <C> <C>
Balanced $ 202,440,607 $1.96
Growth and Income 1,621,263,743 6.21
</TABLE>
YEAR 2000 (UNAUDITED)
The Funds receive services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer systems and software to distinguish the
year 2000 from the year 1900. Aeltus is taking steps that it believes are
reasonably designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Funds' other major service providers. There can be no assurance, however, that
these steps will be sufficient to avoid any adverse impact on the Funds from
this problem.
86
<PAGE>
GROWTH AND INCOME PORTFOLIOS
FINANCIAL HIGHLIGHTS
BALANCED
================================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995+ 1994+
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .. $16.03 $ 15.12 $ 14.50 $ 12.23 $ 12.80
------ ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.46 0.50+ 0.47+ 0.54 0.48
Net realized and
change in unrealized
gain or loss on
investments.......... 2.11 2.73 1.59 2.73 (0.53)
------ ------- ------- ------- -------
Total from
investment
operations........ 2.57 3.23 2.06 3.27 (0.05)
------ ------- ------- ------- -------
LESS DISTRIBUTIONS:
From net investment
income............... (0.39) (1.10) (0.35) (0.67) (0.45)
From net realized
gains on investments (2.48) (1.22) (1.09) (0.33) (0.07)
------ ------- ------- ------- -------
Total distributions (2.87) (2.32) (1.44) (1.00) (0.52)
------ ------- ------- ------- -------
Net asset value, end
of period ............ $15.73 $ 16.03 $ 15.12 $ 14.50 $ 12.23
====== ======= ======= ======= =======
Total return* ......... 16.93% 22.49% 15.17% 27.23% (0.35)%
Net assets, end of
period (millions) .... $1,852 $ 1,642 $ 1,364 $ 1,196 $ 958
Ratio of net expenses
to average net assets 0.59% 0.58% 0.45% 0.31% 0.32%
Ratio of net
investment income to
average net assets ... 3.01% 3.01% 3.21% 3.96% 3.83%
Portfolio turnover
rate.................. 85.83% 112.03% 107.80% 141.21% 112.05%
</TABLE>
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
See Notes to Financial Statements. 87
<PAGE>
GROWTH AND INCOME PORTFOLIOS
FINANCIAL HIGHLIGHTS (CONTINUED)
GROWTH AND INCOME
================================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995+ 1994+
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .. $ 33.63 $ 32.39 $29.05 $26.23 $31.25
------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.38 0.54+ 0.65+ 0.72 0.76
Net realized and
change in unrealized
gain or loss
on investments ...... 4.47 8.94 6.45 7.62 (1.07)
------- ------- ------ ------ ------
Total from
investment
operations........ 4.85 9.48 7.10 8.34 (0.31)
------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
From net investment
income............... (0.40) (0.58) (0.73) (0.72) (0.81)
From net realized
gains on investments (6.21) (7.66) (3.03) (4.80) (3.90)
------ ------- ------ ------ ------
Total distributions (6.61) (8.24) (3.76) (5.52) (4.71)
------- ------- ------ ------ ------
Net asset value, end
of period ............ $ 31.87 $ 33.63 $32.39 $29.05 $26.23
======= ======= ====== ====== ======
Total return* ......... 14.49% 29.89% 24.46% 32.25% (0.96)%
Net assets, end of
period (millions) .... $ 9,801 $ 9,188 $6,954 $5,662 $4,424
Ratio of net expenses
to average net assets 0.57% 0.56% 0.43% 0.29% 0.30%
Ratio of net
investment income to
average net assets ... 1.03% 1.46% 2.02% 2.42% 2.52%
Portfolio turnover
rate.................. 145.64% 107.01% 85.03% 96.63% 84.27%
</TABLE>
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
88 See Notes to Financial Statements.
<PAGE>
REAL ESTATE
================================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 15, 1997
YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, OPERATIONS)
1998 TO DECEMBER 31, 1997
------------ --------------------
<S> <C> <C>
Net asset value, beginning of period .... $ 10.31 $10.00
------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................. 0.45 0.05+
Net realized and change in unrealized
gain or loss on investments ........... (1.78) 0.31
------- ------
Total from investment operations .... (1.33) 0.36
------- ------
LESS DISTRIBUTIONS:
From net investment income ............. (0.45) (0.05)
------- ------
Total distributions ................. (0.45) (0.05)
------- ------
Net asset value, end of period .......... $ 8.53 $10.31
======= ======
Total return* ........................... (12.85)% 3.59%
Net assets, end of period (000's) ....... $ 5,500 $5,153
Ratio of net expenses to average net
assets.................................. 0.95% 0.95%(1)
Ratio of net investment income to average
net assets ............................. 5.24% 9.99%(1)
Ratio of expenses before reimbursement
and waiver to average net assets ....... 1.32% --
Portfolio turnover rate ................. 55.79% --
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
See Notes to Financial Statements. 89
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees/Directors and Shareholders of Aetna Balanced VP, Inc.,
Aetna Growth and Income VP, and Aetna Variable Portfolios, Inc.:
We have audited the accompanying statements of assets and liabilities of Aetna
Growth and Income VP, Aetna Balanced VP, Inc. and Aetna Real Estate Securities
VP (collectively the Growth and Income Portfolios), including the portfolios of
investments as of December 31, 1998 and the related statements of operations for
the year then ended, the statements of changes in net assets for each of the
years or periods in the two-year period then ended and financial highlights for
each of the years in the five-year period ended December 31, 1998 for Aetna
Growth and Income VP and Aetna Balanced VP, Inc. and for the year ended December
31, 1998 and the period from December 15, 1997 (commencement of operations) to
December 31, 1997 for Aetna Real Estate Securities VP. These financial
statements and financial highlights are the responsibility of the Growth and
Income Portfolios' management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Aetna
Balanced VP, Inc., Aetna Growth and Income VP and Aetna Real Estate Securities
VP as of December 31, 1998, results of their operations for the year then ended,
changes in their net assets for each of the years or periods in the two-year
period then ended and financial highlights for each of the years or periods
specified in the first paragraph above, in conformity with generally accepted
accounting principles.
KPMG LLP
Hartford, Connecticut
January 29, 1999
90
<PAGE>
[Begin Line Chart]
Aetna Bond VP
Growth of $10,000
Aetna Bond VP Lehman Brothers Aggregate Bond Index
------------- ------------------------------------
01/88 10,000 10,000
12/88 10,763 10,789
12/89 12,331 12,357
12/90 13,458 13,464
12/91 16,075 15,618
12/92 17,272 16,774
12/93 18,944 18,409
12/94 18,205 17,872
12/95 21,526 21,173
12/96 22,299 21,941
12/97 24,149 24,059
12/98 26,115 26,148
[End Line Chart]
Average Annual Total Returns
for the period ended December 31, 1998*
- ------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1 Year 5 Years 10 Years
- ------------------------------------------
8.14% 6.64% 9.27%
- ------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA BOND VP
HOW DID THE FUND PERFORM DURING THE PERIOD?
Aetna Bond VP (Bond) generated an 8.14% total return, net of fund expenses, for
the year ended December 31, 1998. The benchmark, Lehman Brothers Aggregate Bond
Index(a), returned 8.69% for the same period. Among variable annuity
intermediate-term bond funds tracked by Morningstar, Inc., the Fund ranked in
the top 44% (out of 268 funds), 61% (out of 192 funds) and 26% (out of 128
funds) for the past one, five and ten year periods ended December 31, 1998,
respectively.
WHAT ECONOMIC OR FINANCIAL MARKET CONDITIONS IMPACTED THE FUND?
While the first half of the year was one of low volatility with the Federal
Reserve on hold, the third quarter brought upward spikes in volatilities across
all market sectors as emerging market turmoil spilled over into domestic
markets. Stock market declines and hedge fund unwinding activity led to widening
risk premiums on virtually all non-Treasury securities. Fears of inflation were
replaced with fears of deflation and commodity prices plummeted leading the
Federal Reserve to ease monetary policy to relieve some of the strain in the
markets. The 10-year Treasury rallied by over 100 basis points in the August/
September time period, while emerging markets, high yield, investment grade
corporates and mortgage-backed securities all underperformed U.S Treasuries by
significant margins in the third quarter. Only after the Federal Reserve began
easing did the spreads begin to recover; however, spreads still ended the year
significantly wider than mid-year levels, reflecting continued fear and
uncertainty surrounding the future path of the domestic and global economies.
WHAT INVESTMENTS INFLUENCED THE FUND'S PERFORMANCE OVER THE PAST TWELVE MONTHS?
Fund performance in the third quarter was negatively impacted by the global
instability as holdings in Asian securities, European banks and callable bonds
lagged the market. A strategy shift toward the end of the third quarter,
coinciding with a
See Definition of Terms. 91
<PAGE>
change in portfolio managers, resulted in a restructuring of the Fund to reduce
exposure to foreign sectors, then reinvesting the proceeds in domestic corporate
bonds and commercial mortgage-backed securities. As a result of this shift in
strategy, performance for the fourth quarter of 1.24% significantly exceeded the
0.34% return of the Lehman Brothers Aggregate Bond Index, recouping much of the
third quarter underperformance.
WHAT IS YOUR OUTLOOK GOING FORWARD?
At year end, spreads on corporate bonds were near recessionary levels and
spreads on mortgage-backed securities were pricing in sustained levels of high
prepayments. The economic environment, both globally and domestically, remains
uncertain and risk factors remain. Despite these risk factors, we believe that
the risk/return tradeoff still favors an overweight position in spread products
and an underweight position in U.S. Treasuries. We will be closely monitoring
risk factors, affecting both domestic factors -- consumer spending, stock market
levels, tight labor markets, trade deficits and the value of the dollar and
global factors -- further currency devaluations in emerging economies, continued
weakness in Japan and commodity prices. We expect to reduce our risk posture
should the markets begin to trade at lofty levels that understate the
aforementioned risks.
<TABLE>
<CAPTION>
- -------------------------------------------
QUALITY RATINGS
- -------------------------------------------
<S> <C>
AAA 35.2%
AA 9.6%
A 21.0%
BBB 16.4%
BB 4.6%
B 9.0%
CCC 0.7%
N/R 3.5%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
WEIGHTED AVERAGE LIFE TO MATURITY
- -------------------------------------------
<S> <C>
0 - 1 years 8.1%
1 - 5 years 47.0%
5 - 10 years 33.4%
10 - 20 years 6.9%
20 + years 4.6%
</TABLE>
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Fund are subject to change.
92 See Definition of Terms.
<PAGE>
[Begin Line Chart]
Aetna High Yield VP
Growth of $10,000
Merrill Lynch
Aetna High Yield VP High Yield Master Trust Index
------------------- -----------------------------
12/10/97 10,000 10,000
12/31/97 10,150 10,058
10,813 10,337
10,873 10,511
9,982 10,135
12/31/98 10,122 10,425
[End Line Chart]
- ------------------------------------------
Average Annual Total Returns
for the period ended December 31, 1998*
- ------------------------------------------
<TABLE>
<CAPTION>
Inception Date 1 Year Inception
- ------------------------------------------
<S> <C> <C>
12/10/97 -0.27% 1.16%
- ------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA HIGH YIELD VP
HOW DID THE PORTFOLIO PERFORM DURING THE PERIOD?
Aetna High Yield VP (High Yield) generated a -0.27% total return, net of fund
expenses, for the year ended December 31, 1998. The benchmark, Merrill Lynch
High Yield Master Trust Index(b), returned 3.66% for the same period.
WHAT ECONOMIC OR FINANCIAL MARKET CONDITIONS IMPACTED THE PORTFOLIO?
The high yield market underperformed both the treasury and equity markets in
1998, as volatility associated with riskier asset classes escalated.
Outperformance earlier in the year evaporated with a deluge of new issuance and
the flight to quality brought about by the Russian crisis and hedge fund
problems which surfaced late in the summer. Spreads widened to levels not seen
since the recessionary environment of the early 1990's, when default rates
reached 10%. Single B issues reversed a three-year trend of outperforming BB
issues on the heels of the global credit crunch. By year end, spreads had
recovered to some extent, but remained 200 basis points wide to their earlier
narrow levels. Defaults ticked up slightly in 1998 and we would expect a further
increase in 1999, but expect them to remain in the 3.0 to 3.5% range below
long-term historical averages.
WHAT INVESTMENTS INFLUENCED THE PORTFOLIO'S PERFORMANCE OVER THE PAST TWELVE
MONTHS?
Underperformance versus the benchmark index for the year was attributable to the
significant price decline of a security which unexpectedly announced liquidity
problems in December and subsequently defaulted on its coupon payment, as well
as underperformance in the more volatile deferred coupon portion of the
telecommunications sector which is not included in the benchmark index. Volatile
sectors of the high yield market, such as deferred coupon securities, were
severely punished in the
See Definition of Terms. 93
<PAGE>
latter half of 1998 and underperformed the market. Our holdings in this sector
remain strong long-term credit stories. Overweighting in the gaming and media
sectors, strong performers in 1998, partially offset the above underperformance.
WHAT IS YOUR OUTLOOK GOING FORWARD?
We believe that the high yield market is poised to outperform other fixed income
classes in 1999, as new investors are attracted to the markets' yields, which
are double those of U.S. Treasuries in an environment of relative economic
stability and below average long-term default rates. We view this as a good
environment in which to utilize strong credit research skills. We will continue
our overweighting in the fast-growth telecommunications sector as well as in the
strong cash-generating gaming sector and continue our underweighting in
cyclicals.
<TABLE>
<CAPTION>
- ------------------------------------------
QUALITY RATINGS
- ------------------------------------------
<S> <C>
BB 4.5%
B 79.9%
CCC 9.3%
N/R 6.3%
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------
MATURITY DISTRIBUTION
- ------------------------------------------
<S> <C>
0 - 1 years 4.6%
1 - 5 years 15.3%
5 - 10 years 78.5%
10 - 20 years 1.6%
</TABLE>
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Portfolio are subject to change.
94 See Definition of Terms.
<PAGE>
[Begin Line Chart]
Aetna Money Market VP
Growth of $10,000
Aetna Money Market VP IBC
--------------------- ---
01/88 10,000 10,000
12/88 10,753 10,685
12/89 11,762 11,596
12/90 12,755 12,473
12/91 13,588 13,167
12/92 14,086 13,606
12/93 14,535 13,970
12/94 15,127 14,485
12/95 16,042 15,260
12/96 16,903 15,997
12/97 17,828 16,792
12/98 18,801 17,622
[End Line Chart]
Average Annual Total Returns
for the period ended December 31, 1998*
- ------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1 Year 5 Years 10 Years
- ------------------------------------------
5.46% 5.27% 5.75%
- ------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA MONEY MARKET VP
HOW DID THE FUND PERFORM DURING THE PERIOD?
Aetna Money Market VP (Money Market) generated a 5.46% total return, net of fund
expenses, for the year ended December 31, 1998. The benchmark, IBC's Money Funds
Report Average/All Taxable Index(c), returned 4.92% for the same period. As of
December 31, 1998, the Fund reported a 7-day yield of 5.03% with an average
weighted maturity of 62 days. Among variable annuity money market funds tracked
by Morningstar, Inc., the Fund ranked in the top 17% (out of 312 funds), 14%
(out of 243 funds) and 12% (out of 178 funds) for the past one, five and ten
year periods ended December 31, 1998, respectively.
WHAT ECONOMIC OR FINANCIAL MARKET CONDITIONS IMPACTED THE FUND?
The year was largely dominated by events and developments overseas. The U.S.
markets are still feeling the effects of the global crisis that began over a
year ago in southeast Asia and spread to Russia and Latin America. Reduced
demand and slower export growth have already impacted the manufacturing sector.
Lower earnings expectations, capital flight and decreasing availability of
credit reinforced concerns of negative pressures on the U.S. economy. On
September 29, the Federal Reserve moved to counter these negative pressures on
domestic growth with a cut in short-term interest rates. The absence of
inflationary pressures afforded monetary authorities some leeway to change
policy. Since then, slower domestic growth and increased threat of a global
credit crunch have resulted in two additional rate cuts to lower the Federal
Funds rate to 4.75%.
Concerns of a weakening U.S. economy were reflected in the dramatic widening of
corporate credit spreads in the second half of the year. Liquidity and credit
risk premiums rose as investors turned to U.S. Treasuries and other large, high
quality issuers. Deposit flows into money funds reached record levels as
investors began to reassess their risks and sought safer havens. This strong
demand provided some support to spread levels for top tier money market issuers,
while spread
See Definition of Terms. 95
<PAGE>
differential widened for less liquid or lower quality issuers.
WHAT INVESTMENTS INFLUENCED THE FUND'S PERFORMANCE OVER THE PAST TWELVE MONTHS?
Strategic positioning of maturities contributed positively to performance as the
money market curve flattened over the period. In the first half of the year, the
Fund implemented a barbell strategy to take advantage of higher yields provided
in very short maturities. Later, the allocation to longer maturities was raised
to extend the average portfolio maturity in anticipation of further interest
rates cuts. The Fund reduced its emphasis on adjustable rate securities except
for those securities with coupons that reset off higher yielding London
Interbank Bank Offered Rate indices. High quality asset-backed securities that
provided attractive yields were targeted throughout the year.
Heightened stock market volatility and liquidity concerns widened credit
spreads in the fourth quarter. A modest allocation to lower rated issuers was
added to the portfolio mix to enhance the overall yield.
WHAT IS YOUR OUTLOOK GOING FORWARD?
Monetary authorities have eased interest rates three times since the end of
September out of concern for financial market conditions and the potential
negative impact on the economy. The moves appear to have been prudent and well
justified. More importantly, the actions signal that policy makers are committed
to reducing the risks of a U.S. recession.
However, given the remarkable resiliency of the U.S. economy, we now expect the
monetary policy to remain unchanged for the near term. The impact from the Asian
crisis on domestic growth has not been as severe as originally expected while
availability of credit has improved. Further improvement to inflation will also
be difficult. At current levels, commodity prices are probably near or at
bottom. On the other hand, we anticipate that domestic growth will moderate in
1999 as consumer spending slows and the drag from the trade sector persists.
These countervailing forces should keep the Federal Reserve on hold.
<TABLE>
<CAPTION>
- ------------------------------------------
QUALITY RATINGS
- ------------------------------------------
<S> <C>
Tier 1 98.2%
Tier 2 1.8%
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------
MATURITY DISTRIBUTION
- ------------------------------------------
<S> <C>
1 - 30 days 12.0%
31 - 60 days 8.6%
61 - 90 days 9.8%
91 - 120 days 6.4%
121 - 180 days 6.5%
181 - 397 days 56.7%
</TABLE>
*Tier 1 securities are securities which are rated in the highest short-term
rating category by at least two nationally recognized statistical rating
organizations (NRSROs) or by the only NRSRO that has rated the security or
comparable unrated securities. Tier 2 securities are securities that are not
rated Tier 1.
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Fund are subject to change.
96 See Definition of Terms.
<PAGE>
DEFINITION OF TERMS
(a) The Lehman Brothers Aggregate Bond Index is an unmanaged index of U. S.
corporate, government and mortgage bonds.
(b) The Merrill Lynch High Yield Master Trust Index is an unmanaged, broad gauge
of the high yield bond market and does not take into account any fees and
expenses of the individual securities that they track.
(c) IBC's Money Funds Report Average/All Taxable Index (IBC) is an average of
the returns of over 250 money market mutual funds surveyed each month by IBC.
97
<PAGE>
INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
BOND
================================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ ------------
<S> <C> <C>
PREFERRED STOCKS (0.7%)
Global Crossing Holdings Ltd. + ++ 60,000 $ 5,820,000
------------
TOTAL PREFERRED STOCKS (COST $6,000,000) 5,820,000
------------
PRINCIPAL
AMOUNT
------------
LONG-TERM BONDS AND NOTES (93.6%)
CORPORATE BONDS (67.4%)
ELECTRIC AND TELEPHONE BONDS (15.1%)
Alabama Power Co., 5.49%, 11/01/05 $ 15,000,000 14,967,900
Comcast Cellular Holdings, Inc.,
9.50%, 05/01/07 .................. 6,500,000 6,906,250
GTE North, Inc., 5.65%, 11/15/08 .. 12,500,000 12,593,250
ITC Deltacom, Inc., 9.75%, 11/15/08
++ ............................... 3,000,000 3,067,500
Level 3 Communications, 9.13%,
05/01/08.......................... 5,600,000 5,551,000
McLeodUSA, Inc., 8.38%, 03/15/08 .. 4,800,000 4,800,000
Metromedia International Group,
Inc., 10.00%, 11/15/08 ........... 2,000,000 2,060,000
Nextlink Communications,
10.75%, 11/15/08 ++ .............. 6,000,000 6,150,000
PSINET, Inc., 10.00%, 02/15/05 .... 5,050,000 4,949,000
Qwest Communications International,
7.50%, 11/01/08 .................. 5,500,000 5,720,000
Sprint Capital Corp., 5.70%,
11/15/03.......................... 9,000,000 9,032,130
Sprint Capital Corp., 6.13%,
11/15/28.......................... 11,900,000 12,159,777
Verio, Inc., 11.25%, 12/01/08 ++ .. 2,250,000 2,272,500
WorldCom, Inc., 6.25%, 08/15/03 ... 25,000,000 25,667,250
WorldCom, Inc., 8.88%, 01/15/06 ... 3,689,000 4,031,966
------------
119,928,523
------------
FINANCIAL BONDS (24.6%)
American General Finance Corp.,
5.75%, 11/01/03 .................. 9,000,000 9,054,900
American General Finance Corp.,
8.13%, 08/15/09 .................. 10,000,000 11,743,200
Associates Corp. N.A., 5.75%,
11/01/03 *........................ 17,400,000 17,556,078
Associates Corp. N.A., 7.95%,
02/15/10.......................... 15,000,000 17,579,100
Chase Manhattan Corp., 9.38%,
07/01/01.......................... 11,790,000 12,836,952
Commercial Mortgage Acceptance
Corp., 5.80%, 03/15/06 ........... 19,701,060 19,710,296
EOP Operating L.P., 6.38%, 02/15/03 4,200,000 4,146,408
First Empire Capital Trust II,
8.28%, 06/01/27 .................. 7,150,000 7,942,220
Ford Motor Credit Co., 5.13%,
10/15/01.......................... 4,000,000 3,981,880
Ford Motor Credit Co., 5.49%,
02/15/28.......................... 5,500,000 5,650,150
Ford Motor Credit Co., 5.94%,
02/22/99.......................... 15,000,000 15,013,550
Ford Motor Credit Co., 6.63%,
10/01/28.......................... 5,000,000 5,134,650
General Electric, 8.63%, 06/15/08 . 10,000,000 12,332,800
General Motors Acceptance Corp.,
5.33%, 10/20/00 .................. 15,000,000 14,997,000
General Motors Acceptance Corp.,
6.42%, 05/15/35 .................. 25,000,000 25,843,750
Mellon Financial Co., 5.75%,
11/15/03.......................... 5,000,000 5,034,650
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
Simon De Bartolo Group, Inc.,
6.63%, 06/15/03 .................. $ 7,000,000 $ 6,905,290
------------
195,462,874
------------
FOREIGN AND SUPRANATIONALS (1.5%)
Inter-American Development Bank,
12.25%, 12/15/08 ................. 7,775,000 11,928,716
------------
FOREIGN BONDS (4.1%)
Bayerische Landesbank, 6.25%,
03/15/00.......................... 12,000,000 12,120,960
Globo Communicacoes,
10.63%, 12/05/08 ++ .............. 3,750,000 2,409,375
Orange Plc, 8.00%, 08/01/08 ....... 3,000,000 3,030,000
Rogers Cablesystem, 10.00%,
03/15/05.......................... 8,500,000 9,520,000
Telewest Plc, 11.00%, 10/01/07 .... 6,850,000 5,719,750
-----------
32,800,085
-----------
OTHER PUBLIC CORPORATE BONDS (22.1%)
Allied Waste North America,
7.38%, 01/01/04 ++ ............... 5,100,000 5,151,000
Chancellor Media Corp., 8.00%,
11/01/08 ++....................... 7,000,000 7,140,000
Continental Airlines, Inc.,
8.00%, 12/15/05 .................. 3,250,000 3,225,625
Echostar Satellite Broadcast,
Zero Coupon, 03/15/04 ............ 4,950,000 4,937,625
Enron Oil & Gas Corp.,
6.50%, 12/01/07 .................. 8,000,000 8,042,480
Fisher Scientific International,
9.00%, 02/01/08 ++ ............... 1,250,000 1,243,750
Gulf Canada Resources Corp.,
8.38%, 11/15/05 .................. 1,500,000 1,485,000
International Home Foods,
10.38%, 11/01/06 ................. 3,500,000 3,780,000
Jersey Seagram & Sons,
6.25%, 12/15/01 .................. 15,000,000 14,906,250
Monsanto Co., 5.38%, 12/01/01 ..... 15,000,000 14,989,500
Motorola, Inc., 5.80%, 10/15/08 ... 15,000,000 15,344,100
Procter & Gamble Co., 5.25%,
09/15/03.......................... 8,800,000 8,808,272
Rite Aid Corp., 5.50%, 12/15/00 ... 20,000,000 19,956,000
Rite Aid Corp., 6.00%, 10/01/03 ... 10,000,000 9,990,500
Safeway, Inc., 5.75%, 11/15/00 .... 9,800,000 9,819,600
Station Casinos Corp., 10.13%,
03/15/06.......................... 6,000,000 6,285,000
Sun International Hotels, 9.00%,
03/15/07.......................... 5,000,000 5,200,000
Time Warner, Inc., 7.95%, 02/01/00 7,000,000 7,181,580
Time Warner, Inc., 9.13%, 01/15/13 10,000,000 12,659,600
Xerox Corp., 5.25%, 12/15/03 ...... 15,000,000 14,892,750
------------
175,038,632
------------
TOTAL CORPORATE BONDS (COST $522,622,451) 535,158,830
------------
NON-AGENCY MORTGAGE-BACKED SECURITIES (0.3%)
MORTGAGE-BACKED SECURITIES (0.3%)
Chase Mortgage Finance Corp.,
6.75%, 11/25/09 .................. 926,978 919,156
</TABLE>
98 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
<S> <C> <C>
NON-AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
Security Pacific National Bank,
8.50%, 04/25/17 [plus sign]....... $ 1,342,158 $ 1,339,222
------------
TOTAL NON-AGENCY MORTGAGE-BACKED SECURITIES
(COST $2,253,410) 2,258,378
------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (15.8%)
AGENCY MORTGAGE-BACKED SECURITIES (15.8%)
Federal National Mortgage
Association,
6.50%, 02/11/29 # ................ 35,000,000 35,191,450
Federal National Mortgage
Association, 7.00%, 08/01/25 -
03/01/26.......................... 10,542,911 10,760,360
Federal National Mortgage
Association,
7.50%, 10/01/28 - 11/01/28........ 47,106,749 48,416,929
Government National Mortgage
Association, 7.00%, 04/15/26 ..... 7,944,619 8,135,767
Government National Mortgage
Association, 7.50%, 12/15/22 ..... 10,445,800 10,778,708
Government National Mortgage
Association, 10.00%, 10/15/09 -
01/15/21.......................... 5,378,104 5,877,259
Government National Mortgage
Association, 10.50%, 02/15/13 -
01/15/21.......................... 5,699,423 6,246,214
Government National Mortgage
Association, 11.00%, 02/15/10 .... 21,414 23,455
------------
125,430,142
------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES (COST $123,786,108) 125,430,142
------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (10.1%)
ASSET-BACKED SECURITIES (0.6%)
First Security Auto Grantor Trust,
6.10%, 04/15/03 .................. 5,158,888 5,181,861
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (3.3%)
Fannie Mae, 6.00%, 05/15/08 # ..... 5,000,000 5,285,335
Federal National Mortgage Corp.,
5.75%, 04/15/03 .................. 13,000,000 13,365,586
Small Business Administration
92-20K, 7.55%, 11/01/12 .......... 7,286,272 7,759,880
------------
26,410,801
------------
U.S. TREASURY OBLIGATIONS (6.2%)
U.S. Treasury Bond, 6.13%,
11/15/27* ........................ 15,000,000 16,790,550
U.S. Treasury Bond, 6.63%, 02/15/27 7,000,000 8,279,670
U.S. Treasury Note, 4.50%, 09/30/00 15,000,000 14,967,150
U.S. Treasury Note, 4.63%, 11/30/00 5,000,000 5,003,100
U.S. Treasury Note, 6.88%, 07/31/99 4,000,000 4,049,360
------------
49,089,830
------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $77,614,222) 80,682,492
------------
TOTAL LONG-TERM BONDS AND NOTES (COST $726,276,191) 743,529,842
------------
SHORT-TERM INVESTMENTS (9.3%)
AT&T Capital Corp., 6.55%, 01/04/99 15,000,000 15,000,000
Enron Oil & Gas Corp.,
5.55%, 02/11/99 * ++ ............. 21,500,000 21,374,046
Federal Home Loan Mortgage Corp.,
4.70%, 01/04/99 .................. 20,218,000 20,218,000
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
------------ ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (CONTINUED)
Koch Industries Inc., 5.25%,
01/04/99 ++....................... $ 17,000,000 $ 17,000,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $73,592,046) 73,592,046
------------
TOTAL INVESTMENTS (COST $805,868,237)(a) 822,941,888
OTHER ASSETS LESS LIABILITIES (28,381,655)
------------
TOTAL NET ASSETS $794,560,233
============
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes is identical.
Unrealized gains and losses, based on identified tax cost at December 31, 1998,
are as follows:
<TABLE>
<S> <C>
Unrealized gains.............................................. $ 19,407,632
Unrealized losses............................................. (2,333,981)
-------------
Net unrealized loss.......................................... $ 17,073,651
=============
</TABLE>
+ Non-income producing security.
++ Securities that may be resold to "qualified institutional buyers" under Rule
144A or securities offered pursuant to section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
* Segregated securities for purchases of delayed delivery or when-issued
securities held at December 31, 1998.
# When-issued or delayed delivery security.
[plus sign] Restricted security. This security has been determined to be
illiquid under guidelines established by the Board of Trustees.
Information concerning restricted securities at December 31, 1998 is shown
below:
<TABLE>
<CAPTION>
COST
-----------
<S> <C>
Allied Waste North America............................ $ 5,092,540
Chancellor Media Corp. ............................... 6,941,081
Enron Oil & Gas Corp. ................................ 21,374,046
Fisher Scientific International....................... 1,206,611
Globo Communicacoes .................................. 3,760,691
ITC Deltacom, Inc. ................................... 3,000,000
Koch Industries, Inc. ................................ 17,000,000
Nextlink Communications............................... 6,000,000
Security Pacific National Bank........................ 1,331,955
Verio, Inc............................................ 2,250,000
-----------
$67,956,924
===========
</TABLE>
The market value of the total restricted securities above represent 8.45% of the
total net assets.
Category percentages are based on net assets.
See Notes to Financial Statements. 99
<PAGE>
INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
HIGH YIELD
================================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
--------- ----------
<S> <C> <C>
COMMON STOCKS (0.1%)
American Banknote Corp. Warrants .......... 175 $ 219
KMC Telcom Holdings, Inc. Warrants ........ 300 3,000
Park N' View, Inc. Warrants ............... 50 3,100
----------
TOTAL COMMON STOCKS (COST $0) 6,319
----------
PREFERRED STOCKS (4.2%)
Cumulus Media, Inc. + ..................... 77 82,775
Global Crossing Holdings Ltd. + ++ ........ 150 145,500
Rural Cellular Corp. ++ ................... 158 145,360
----------
TOTAL PREFERRED STOCKS (COST $382,441) 373,635
----------
PRINCIPAL
AMOUNT
---------
LONG-TERM BONDS AND NOTES (98.4%)
CORPORATE BONDS (98.4%)
Adelphia Communications, 8.13%, 07/15/03 .. $ 100,000 102,250
America Lawyer Holding Corp.,
Zero Coupon, 12/15/08 .................... 250,000 155,000
America Skiing Co., 12.00%, 07/15/06 ...... 100,000 104,000
ATC Group Services, 12.00%, 01/15/08 + @@ . 200,000 16,000
Aztar Corp., 11.00%, 10/01/02 ............. 125,000 126,250
Bell Sports, Inc., 11.00%, 08/15/08 ++ .... 200,000 204,000
Casino Magic, 13.00%, 08/15/03 ............ 250,000 282,500
Cencall Communications, Zero Coupon,
01/15/04.................................. 500,000 490,000
Comcast Cable Corp., Zero Coupon, 11/15/07 250,000 208,750
Cumulus Media, Inc., 10.38%, 07/01/08 ..... 50,000 53,000
Dialogic Corp. Plc, 11.00%, 11/15/07 ...... 100,000 99,500
Dimac Corp., 12.50%, 10/01/08 ++ .......... 150,000 150,000
ESAT Telecom Group Plc, 11.88%, 12/01/08 ++ 200,000 200,000
Esprit Telecom Group Plc, 11.50%, 12/15/07 250,000 255,000
Fisher Scientific International,
9.00%, 02/01/08 ++ ....................... 50,000 49,750
Galaxy Telecom LP, 12.38%, 10/01/05 ....... 250,000 278,125
Gulf Canada Resources Corp., 8.38%,
11/15/05.................................. 100,000 99,000
Harvey's Casino Resorts, 10.63%, 06/01/06 . 200,000 228,000
Hermes Euro Rail Corp., 11.50%, 08/15/07 .. 125,000 133,438
Hollywood Casino Corp., 12.75%, 11/01/03 .. 250,000 265,000
Hollywood Park, Inc., 9.50%, 08/01/07 ..... 125,000 125,000
Hyperion Telecom Corp., 12.25%, 09/01/04 .. 100,000 101,500
IMAX Corp., 7.88%, 12/01/05 ............... 50,000 50,250
Iridium LLC/Capital Corp., 11.25%, 07/15/05 150,000 128,250
ITC Deltacom, Inc., 9.75%, 11/15/08 ++ .... 150,000 153,375
Jordan Telecom Products, 9.88%, 08/01/07 .. 250,000 250,000
KMC Telcom Holdings, Inc.,
Zero Coupon, 02/15/08 .................... 300,000 144,000
Majestic Star Casino LLC, 12.75%, 05/15/03 500,000 520,000
McLeodUSA, Inc., 9.50%, 11/01/08 ++ ....... 100,000 106,000
Metromedia International Group, Inc.,
10.00%, 11/15/08 ......................... 200,000 206,000
Metronet Communications,
Zero Coupon, 11/01/07 .................... 500,000 330,000
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------- ----------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
Microcell Telecommunications,
Zero Coupon, 06/01/06 .................... $ 200,000 $ 149,500
Neenah Corp., 11.13%, 05/01/07 ............ 100,000 102,750
Nextlink Communications, 10.75%,
11/15/08 ++ .............................. 150,000 153,750
NTLI, Inc., Zero Coupon, 10/01/08 ++ ...... 125,000 78,125
NTLI, Inc., 11.50%, 10/01/08 ++ ........... 200,000 215,000
Optel, Inc., 11.50%, 07/01/08 ............. 150,000 147,000
Orion Network Corp., Zero Coupon, 01/15/07 250,000 157,500
Park N' View, Inc., 13.00%, 05/15/08
[plus sign] .............................. 50,000 39,400
Penhall Acquisition Corp., 12.00%, 08/01/06
++ ....................................... 125,000 118,750
PSINET, Inc., 11.50%, 11/01/08 ++ ......... 175,000 182,437
Qwest Communications International,
7.25%, 11/01/08 ++ ....................... 200,000 204,500
Radio Unica Corp., Zero Coupon, 08/01/06
[plus sign] .............................. 300,000 162,000
Rogers Cantel, Inc., 9.38%, 06/01/08 ...... 45,000 47,475
Sun International Hotels, 9.00%, 03/15/07 . 100,000 104,000
TBS Shipping International Ltd.,
10.00%, 05/01/05 ......................... 200,000 110,000
Telecomm Techniques Co., 9.75%, 05/15/08 .. 100,000 97,000
Telewest Plc, 11.00%, 10/01/07 ............ 100,000 83,500
Trench Inc., 10.25%, 12/15/07 ............. 250,000 232,500
Verio, Inc., 10.38%, 04/01/05 ............. 250,000 245,000
Verio, Inc., 11.25%, 12/01/08 ++ .......... 150,000 151,500
Waterford Gaming, 12.75%, 11/15/03 ........ 125,000 136,875
Winstar Communications, Inc.,
10.00%, 03/15/08 ......................... 75,000 60,750
Worldwide Fiber Corp., 12.50%, 12/15/05 ... 30,000 30,000
----------
TOTAL LONG-TERM BONDS AND NOTES (COST $9,000,198) 8,623,250
----------
SHORT-TERM INVESTMENTS (4.0%)
Federal Home Loan Mortgage Corp.,
4.40%, 01/04/99 .......................... 352,000 352,000
----------
TOTAL SHORT-TERM INVESTMENTS (COST $352,000) 352,000
----------
TOTAL INVESTMENTS (COST $9,734,639)(a) 9,355,204
OTHER ASSETS LESS LIABILITIES (588,444)
----------
TOTAL NET ASSETS $8,766,760
==========
</TABLE>
100 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes amounts to
$9,735,280. Unrealized gains and losses, based on identified tax cost at
December 31, 1998, are as follows:
<TABLE>
<S> <C>
Unrealized gains............................................... $ 186,610
Unrealized losses.............................................. (566,686)
---------
Net unrealized loss........................................... $(380,076)
=========
</TABLE>
+ Non-income producing security.
++ Securities that may be resold to "qualified institutional buyers" under Rule
144A or securities offered pursuant to section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Directors.
@@ Security has defaulted on its most current interest payment.
[plus sign] Restricted security. This security has been determined to be
illiquid under guidelines established by the Board of Directors.
Information concerning restricted securities at December 31, 1998 is shown
below:
<TABLE>
<CAPTION>
COST
-----------
<S> <C> <C>
ATC Group Services.......................................... $ 200,000
Bell Sports, Inc............................................ 200,000
Dimac Corp.................................................. 145,892
ESAT Telecom Group Plc...................................... 200,000
Fisher Scientific International............................. 48,264
ITC Deltacom, Inc........................................... 150,000
McLeodUSA, Inc.............................................. 100,000
Nextlink Communications..................................... 150,000
NTLI, Inc................................................... 270,838
Park N' View, Inc........................................... 50,000
Penhall Acquisition Corp.................................... 125,000
PSINET, Inc................................................. 178,470
Qwest Communications International.......................... 200,000
Radio Unica Corp............................................ 199,348
Rural Cellular Corp......................................... 158,000
Verio, Inc.................................................. 150,000
-----------
$ 2,525,812
===========
</TABLE>
The market value of the total restricted securities above represent 26.58% of
the total net assets.
Category percentages are based on net assets.
See Notes to Financial Statements. 101
<PAGE>
INCOME PORTFOLIOS
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
MONEY MARKET
================================================================================
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------ ------------
<S> <C> <C>
ASSET-BACKED SECURITIES (32.8%)
ABS Investor Trust Series 1997-E,
5.54%, 08/15/99 .................... $ 19,000,000 $ 19,000,000
Amercredit Auto Recreation Trust,
5.63%, 06/12/99 .................... 2,886,831 2,888,860
Bishops Gate Residential Mortgage
Trust, 5.76%, 11/22/99 ............. 9,000,000 9,000,000
Case Equipment Receivables Trust
1998-B, 5.61%, 09/15/99 ............ 13,604,583 13,612,024
Caterpillar Financial Asset Trust,
5.64%, 07/26/99 .................... 10,567,668 10,575,097
Chase Manhattan Auto Owner Trust,
5.59%, 07/09/99 .................... 2,207,316 2,208,351
Compass Auto Recreation Trust,
5.66%, 07/15/99 .................... 3,254,202 3,255,474
ContiMortgage Home Equity Loan Trust,
5.51%, 09/15/99 .................... 18,201,869 18,226,041
DVI Business Trust 1998, 5.24%,
12/13/99............................ 19,882,000 19,882,000
First Security Auto Owner Trust,
5.25%, 11/15/99 .................... 24,485,598 24,488,945
Green Tree Financial Corp., 5.68%,
06/01/99............................ 150,052 150,052
Green Tree Financial Corp., 5.69%,
05/01/99............................ 1,148 1,148
Green Tree Receivable Equipment &
Construction Trust, 5.55%, 08/15/99 12,290,801 12,301,364
Green Tree Receivable Equipment &
Construction Trust, 5.67%, 07/15/99 2,189,333 2,190,018
Long Lane Master Trust Lll Series,
5.23%, 04/30/99 .................... 14,300,000 14,300,000
MMCA Auto Owner Trust 1997-1,
5.62%, 08/16/99 .................... 20,660,329 20,647,014
Newcourt Equipment Trust Securities,
5.01%, 11/20/99 .................... 35,881,385 35,889,796
Onyx Acceptance Owner Trust,
5.26%, 12/15/99 .................... 10,641,683 10,643,346
PNC Bank N.A., 5.25%, 08/03/99 ...... 36,000,000 35,975,879
Provident Equipment Lease Trust,
5.28%, 10/25/99 .................... 18,399,813 18,384,725
Racers Series 1998, 5.33%, 01/20/99 . 13,200,000 13,198,416
------------
TOTAL ASSET-BACKED SECURITIES 286,818,550
------------
CERTIFICATES OF DEPOSIT (8.0%)
Abbey National Treasury, 5.54%,
08/17/99............................ 30,000,000 29,982,000
Abbey National Treasury, 5.58%,
08/19/99............................ 9,400,000 9,435,250
Deutsche Bank AG (NY), 5.70%,
03/30/99............................ 15,500,000 15,517,825
Svenska Handelsbanken, Inc.,
5.72%, 03/31/99 .................... 15,300,000 15,318,513
------------
TOTAL CERTIFICATES OF DEPOSIT 70,253,588
------------
COMMERCIAL PAPER - DOMESTIC (21.9%)
Cooper Industries, Inc., 5.45%,
01/04/99 ++......................... 9,298,000 9,298,000
Cooperative Associates of Tractor
Dealers, Inc., 5.54%, 01/08/99 ..... 5,800,000 5,796,430
EG&G, Inc., 5.35%, 02/11/99 +
[plus sign]........................ 12,000,000 11,932,233
Finova Capital Corp., 5.30%, 02/19/99 3,000,000 2,979,683
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------ ------------
<S> <C> <C>
COMMERCIAL PAPER - DOMESTIC (CONTINUED)
Frontier Corp., 5.30%, 02/19/99 ++ .. $ 20,000,000 $ 19,864,557
Frontier Corp., 5.60%,
01/13/99 - 01/14/99 ++ ............. 16,097,000 16,072,908
GTE Corp., 5.40%,
01/04/99 - 02/19/99................. 22,000,000 21,951,700
GTE Corp., 6.00%, 01/12/99 .......... 11,680,000 11,664,427
Household International, Inc.,
4.98%, 03/09/99 [plus sign] ........ 8,000,000 7,929,840
Household International, Inc.,
5.20%, 02/23/99 [plus sign] ........ 10,000,000 9,931,300
Jefferson Smurfit Finance Corp.,
5.30%, 01/04/99 .................... 2,500,000 2,500,000
Jefferson Smurfit Finance Corp.,
5.35%, 01/05/99 - 01/12/99.......... 10,000,000 9,991,752
Jefferson Smurfit Finance Corp.,
5.45%, 01/15/99 - 01/20/99.......... 6,500,000 6,486,905
Jefferson Smurfit Finance Corp.,
5.52%, 01/26/99 .................... 3,500,000 3,488,193
Republic Industries, Inc.,
5.30%, 01/04/99 .................... 11,248,000 11,248,000
Sheffield Receivables Corp.,
5.17%, 03/05/99 ++ ................. 10,000,000 9,919,300
Torchmark Corp., 5.27%, 03/08/99 .... 6,000,000 5,948,220
Torchmark Corp., 5.35%, 02/16/99 .... 15,000,000 14,904,146
Torchmark Corp., 6.50%, 01/05/99 .... 10,000,000 9,998,194
------------
TOTAL COMMERCIAL PAPER - DOMESTIC 191,905,788
------------
COMMERCIAL PAPER - FOREIGN (1.4%)
UBS Finance, Inc., 4.80%, 03/22/99 .. 12,000,000 11,875,920
------------
TOTAL COMMERCIAL PAPER - FOREIGN 11,875,920
------------
CORPORATE NOTES (10.7%)
BankBoston N.A., 5.14%, 09/08/99 .... 15,000,000 15,037,500
FCC National Bank, 4.80%, 06/01/99 .. 32,000,000 31,977,920
First Allamerica Financial Corp.,
5.59%, 09/17/99 .................... 25,000,000 25,000,000
First USA Bank, 5.75%, 01/15/99 ..... 3,000,000 2,999,859
International Lease Finance Corp.,
7.50%, 03/01/99 .................... 2,100,000 2,107,308
Textron Financial Corp., 5.68%,
11/15/99............................ 8,000,000 7,999,200
Transamerica Corp., 6.80%, 03/15/99 . 8,760,000 8,787,594
------------
TOTAL CORPORATE NOTES 93,909,381
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (0.5%)
U.S. Treasury Note, 5.88%, 02/28/99 . 4,000,000 4,008,080
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 4,008,080
------------
MEDIUM-TERM NOTES (24.2%)
American Honda Finance Corp.,
5.63%, 04/08/99 .................... 25,500,000 25,499,490
American Honda Finance Corp.,
5.67%, 05/07/99 .................... 10,000,000 9,998,000
Associates Corp. N.A., 6.13%,
11/12/99............................ 23,000,000 23,193,660
</TABLE>
102 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------ ------------
<S> <C> <C>
MEDIUM-TERM NOTES (CONTINUED)
Chrysler Financial Corp., 7.89%,
10/12/99............................ $ 7,000,000 $ 7,144,690
CIT Group Holdings, Inc.,
5.54%, 01/14/00 .................... 10,000,000 9,991,100
Countrywide Home Loans, Inc.,
5.46%, 10/27/99 .................... 10,000,000 10,000,000
Countrywide Home Loans, Inc.,
5.70%, 08/13/99 .................... 33,000,000 32,958,090
Finova Capital Corp., 6.19%, 10/20/99 10,575,000 10,639,190
Finova Capital Corp., 6.37%, 04/15/99 3,500,000 3,510,080
Finova Capital Corp., 6.38%, 04/15/99 5,500,000 5,516,005
Ford Motor Credit Corp., 7.45%,
07/12/99............................ 4,500,000 4,556,610
General Motors Acceptance Corp.,
7.50%, 05/24/99 .................... 6,500,000 6,554,275
General Motors Acceptance Corp.,
7.50%, 08/05/99 .................... 5,100,000 5,165,025
Greyhound Financial Corp.,
8.50%, 02/15/99 .................... 2,500,000 2,507,059
Heller Financial, Inc., 5.36%,
07/06/99............................ 37,000,000 36,981,500
PHH Corp., 5.59%, 02/10/99 .......... 10,000,000 9,999,507
Sundstrand Corp., 5.77%, 10/15/99 ... 8,000,000 8,000,000
------------
TOTAL MEDIUM-TERM NOTES 212,214,281
------------
TOTAL INVESTMENTS (COST $870,980,177)(a) 870,985,588
OTHER ASSETS LESS LIABILITIES 4,183,079
------------
TOTAL NET ASSETS $875,168,667
============
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes is identical.
Unrealized gains and losses, based on identified tax cost at December 31,
1998, are as follows:
Unrealized gains............................................... $ 195,522
Unrealized losses.............................................. (190,111)
---------
Net unrealized gain........................................... $ 5,411
=========
</TABLE>
++ Securities that may be resold to "qualified institutional buyers" under Rule
144A or securities offered pursuant to section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
[plus sign] Restricted security. This security has been determined to be
illiquid under guidelines established by the Board of Trustees.
Information concerning restricted securities at December 31, 1998 is shown
below:
<TABLE>
<CAPTION>
COST
------------
<S> <C>
Abbey National Treasury........................................ $ 39,416,253
ABS Investor Trust Series 1997-E............................... 19,000,000
Cooper Industries, Inc......................................... 9,298,000
EG&G, Inc...................................................... 11,932,233
First Allamerica Financial Corp................................ 25,000,000
Frontier Corp.................................................. 35,937,464
Household International, Inc................................... 17,856,951
Long Lane Master Trust LII Series.............................. 14,300,000
Racers Series 1998............................................. 13,199,724
Sheffield Receivables Corp..................................... 9,913,833
Sundstrand Corp................................................ 8,000,000
Textron Financial Corp......................................... 8,000,000
------------
$211,854,458
============
</TABLE>
The market value of the total restricted securities above represent 24.21% of
the total net assets.
Category percentages are based on net assets.
See Notes to Financial Statements. 103
<PAGE>
INCOME PORTFOLIOS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
================================================================================
<TABLE>
<CAPTION>
BOND HIGH YIELD MONEY MARKET
------------ ---------- ------------
<S> <C> <C> <C>
ASSETS:
Investments, at market
value.................. $822,941,888 $9,355,204 $870,985,588
Cash ................... 580 240 --
Receivable for:
Dividends and interest 8,984,268 144,523 5,907,761
Investments sold ...... 15,089,289 3,852 --
Fund shares sold ...... 15,320 -- 37,001
Prepaid expenses ....... 1,203 61 1,503
------------- ---------- -------------
Total assets ...... 847,032,548 9,503,880 876,931,853
------------- ---------- -------------
LIABILITIES:
Payable for:
Dividends to
shareholders.......... 39,181 718,868 --
Investments purchased . 50,337,444 -- --
Fund shares redeemed .. 1,668,639 3,085 1,435,457
Accrued investment
advisory fees ......... 302,706 5,759 199,485
Accrued administrative
service fees .......... 56,758 665 59,845
Accrued custody fees ... 11,987 2,781 7,592
Other liabilities ...... 55,600 5,962 60,807
------------- ---------- -------------
Total liabilities . 52,472,315 737,120 1,763,186
------------- ---------- -------------
NET ASSETS ............ $794,560,233 $8,766,760 $875,168,667
============= ========== =============
NET ASSETS REPRESENTED
BY:
Paid-in capital ........ $774,913,537 $9,703,382 $834,445,331
Net unrealized gain
(loss) on investments
and open futures
contracts.............. 17,073,651 (379,435) 5,411
Undistributed
(distributions in
excess of) net
investment income ..... 12,386 (1,719) 40,780,802
Accumulated net realized
gain (loss) on
investments............ 2,560,659 (555,468) (62,877)
------------- ---------- -------------
NET ASSETS ............ $794,560,233 $8,766,760 $875,168,667
============= ========== =============
CAPITAL SHARES:
Authorized ............. Unlimited Two Billion Unlimited
Par value .............. $ 1.000 $ 0.001 $ 1.000
Outstanding ............ 60,823,084 969,508 65,372,658
Net asset value,
offering and redemption
price per share (net
assets divided by
shares outstanding) ... $ 13.06 $ 9.04 $ 13.39
Cost of investments .... $805,868,237 $9,734,639 $870,980,177
</TABLE>
104 See Notes to Financial Statements.
<PAGE>
INCOME PORTFOLIOS
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
BOND HIGH YIELD MONEY MARKET
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest .......................... $46,370,038 $ 1,049,592 $43,437,738
----------- ----------- -----------
Total investment income ...... 46,370,038 1,049,592 43,437,738
----------- ----------- -----------
INVESTMENT EXPENSES:
Investment advisory fees .......... 2,935,908 68,620 1,930,191
Administrative services fees ...... 561,856 10,505 636,338
Printing and postage .............. 21,073 3,161 18,310
Custody fees ...................... 18,494 3,490 11,169
Transfer agent fees ............... 7,852 1,756 1,954
Audit fees ........................ 20,240 14,023 17,393
Directors'/Trustees' fees ......... 12,876 193 13,397
Registration fees ................. 10,997 145 13,535
Miscellaneous expenses ............ 14,796 114 14,302
----------- ----------- -----------
Expenses before reimbursement and
waiver from Adviser .............. 3,604,092 102,007 2,656,589
Expense reimbursement and waiver
from Adviser ..................... -- (17,237) --
----------- ----------- -----------
Net expenses ................. 3,604,092 84,770 2,656,589
----------- ----------- -----------
Net investment income ............. 42,765,946 964,822 40,781,149
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized gain (loss) on:
Investments ...................... 12,113,406 (555,468) --
----------- ----------- -----------
Net realized gain (loss) on
investments.................. 12,113,406 (555,468) --
----------- ----------- -----------
Net change in unrealized gain
or loss on:
Investments ...................... 2,511,151 (456,966) (20,848)
----------- ----------- -----------
Net change in unrealized gain
or loss on investments ...... 2,511,151 (456,966) (20,848)
----------- ----------- -----------
Net realized and change in
unrealized gain or loss on
investments....................... 14,624,557 (1,012,434) (20,848)
----------- ----------- -----------
Net increase (decrease) in net
assets resulting from operations . $57,390,503 $ (47,612) $40,760,301
=========== =========== ===========
</TABLE>
See Notes to Financial Statements. 105
<PAGE>
INCOME PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
BOND
------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income.................. $ 42,765,946 $ 40,558,298
Net realized gain on investments....... 12,113,406 3,644,569
Net change in unrealized gain or loss
on investments........................ 2,511,151 7,019,888
------------ ------------
Net increase in net assets resulting
from operations...................... 57,390,503 51,222,755
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income........... (43,159,245) (40,513,113)
From net realized gains.............. (3,718,891) --
------------ ------------
Decrease in net assets from
distributions to shareholders........ (46,878,136) (40,513,113)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold............ 129,876,548 54,764,238
Net asset value of shares issued upon
reinvestment of distributions....... 46,816,347 40,445,062
Payments for shares redeemed......... (77,605,522) (64,687,878)
------------ ------------
Net increase in net assets from fund
share transactions................... 99,087,373 30,521,422
------------ ------------
Net change in net assets............... 109,599,740 41,231,064
NET ASSETS:
Beginning of period.................... 684,960,493 643,729,429
------------ ------------
End of period.......................... $794,560,233 $684,960,493
============ ============
End of period net assets includes
undistributed net investment income... $ 12,386 $ 2,498,642
============ ============
SHARE TRANSACTIONS:
Number of shares sold................ 9,811,337 4,174,206
Number of shares issued upon
reinvestment of distributions....... 3,589,303 3,169,762
Number of shares redeemed............ (5,880,354) (5,037,165)
------------ ------------
Net increase.......................... 7,520,286 2,306,803
============ ============
</TABLE>
106 See Notes to Financial Statements.
<PAGE>
================================================================================
<TABLE>
<CAPTION>
HIGH YIELD
---------------------------------------
PERIOD FROM
DECEMBER 10, 1997
(COMMENCEMENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, 1998 TO DECEMBER 31, 1997
----------------- --------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income............... $ 964,822 $ 49,665
Net realized gain (loss) on
investments........................ (555,468) 21,216
Net change in unrealized gain or
loss on investments................ (456,966) 77,531
----------- -----------
Net increase (decrease) in net
assets resulting from operations.. (47,612) 148,412
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income........ (916,480) (50,000)
From net realized gains........... (70,942) --
----------- -----------
Decrease in net assets from
distributions to shareholders..... (987,422) (50,000)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold......... 3,590,850 10,000,000
Net asset value of shares issued
upon reinvestment of distributions 199,555 --
Payments for shares redeemed...... (4,087,023) --
----------- -----------
Net increase (decrease) in net
assets from fund share
transactions (296,618) 10,000,000
----------- -----------
Net change in net assets............ (1,331,652) 10,098,412
NET ASSETS:
Beginning of period................. 10,098,412 --
----------- -----------
End of period....................... $ 8,766,760 $10,098,412
=========== ===========
End of period net assets includes
distributions in excess of
net investment income.............. $ (1,719) $ --
=========== ===========
SHARE TRANSACTIONS:
Number of shares sold............. 349,877 1,000,000
Number of shares issued upon
reinvestment of distributions.... 22,065 --
Number of shares redeemed......... (402,434) --
----------- -----------
Net increase (decrease)............ (30,492) 1,000,000
=========== ===========
</TABLE>
See Notes to Financial Statements. 107
<PAGE>
INCOME PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
MONEY MARKET
------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income.................. $ 40,781,149 $ 34,576,768
Net change in unrealized gain or loss
on investments........................ (20,848) (58,463)
------------- -------------
Net increase in net assets resulting
from operations...................... 40,760,301 34,518,305
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income........... (34,446,801) (24,537,119)
------------- -------------
Decrease in net assets from
distributions to shareholders........ (34,446,801) (24,537,119)
------------- -------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold............ 929,993,353 469,580,959
Net asset value of shares issued upon
reinvestment of distributions....... 34,446,801 24,537,119
Payments for shares redeemed......... (784,340,735) (428,848,854)
------------- -------------
Net increase in net assets from fund
share transactions................... 180,099,419 65,269,224
------------- -------------
Net change in net assets............... 186,412,919 75,250,410
NET ASSETS:
Beginning of period.................... 688,755,748 613,505,338
------------- -------------
End of period.......................... $ 875,168,667 $ 688,755,748
============= =============
End of period net assets includes
undistributed net investment income... $ 40,780,802 $ 34,446,455
============= =============
SHARE TRANSACTIONS:
Number of shares sold................ 70,927,540 35,877,859
Number of shares issued upon
reinvestment of distributions....... 2,701,802 1,929,274
Number of shares redeemed............ (59,793,888) (32,769,382)
------------- -------------
Net increase.......................... 13,835,454 5,037,751
============= =============
</TABLE>
108 See Notes to Financial Statements.
<PAGE>
INCOME PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
1. ORGANIZATION
The Statements contained herein refer to Aetna Income Shares d/b/a Aetna Bond VP
(Bond), Aetna High Yield VP (High Yield), a portfolio of Aetna Variable
Portfolios, Inc. (Variable Portfolios, collectively the Funds) and Aetna
Variable Encore Fund d/b/a Aetna Money Market VP (Money Market).
Bond and Money Market were organized under the laws of Massachusetts on January
25, 1984. Variable Portfolios was incorporated under the laws of Maryland on
June 4, 1996. The Articles of Incorporation of Variable Portfolios permit it to
offer separate portfolios, each of which has its own investment objective,
policies and restrictions. Variable Portfolios currently offers eleven separate
portfolios, including High Yield. Bond, Money Market and Variable Portfolios are
each registered under the Investment Company Act of 1940 (the Act) as open-end
management investment companies.
The following is each Fund's investment objective:
BOND seeks to maximize total return, consistent with reasonable risk, through
investments in a diversified portfolio consisting primarily of debt
securities. It is anticipated that capital appreciation and investment income
will both be major factors in achieving total return.
HIGH YIELD seeks high current income and growth of capital primarily through
investment in a diversified portfolio of fixed income securities rated lower
than BBB- by Standard and Poor's Corporation or lower than Baa3 by Moody's
Investors Service, Inc.
MONEY MARKET seeks to provide high current return, consistent with
preservation of capital and liquidity, through investment in high-quality
money market instruments.
Shares in the Funds are currently sold to Aetna Life Insurance and Annuity
Company (ALIAC), an Aetna Life Insurance Separate Account, and in the case of
Bond, to existing shareholders through reinvestment of distributions. ALIAC's
shares are allocated to certain of its variable life/annuity accounts. At
December 31, 1998, ALIAC's separate accounts and affiliates held all of Money
Market's and Variable Portfolios' shares outstanding and 99.4% of Bond's shares
outstanding.
Effective May 1, 1998, Aeltus Investment Management, Inc. (Aeltus) became the
investment adviser to the Funds. Prior to May 1, 1998, ALIAC acted as investment
adviser and Aeltus served as sub-adviser to the Funds. ALIAC serves as the
principal underwriter to each Fund. Aeltus and ALIAC are both indirect wholly
owned subsidiaries of Aetna Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of each Fund have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of each Fund.
A. VALUATION OF INVESTMENTS
Except in Money Market, investments are stated at market values based upon
prices furnished by external pricing sources as reported on national securities
exchanges or, for over-the-counter securities, at the mean of the bid and asked
prices. Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value.
Short-term investments maturing in less than sixty days are valued at amortized
cost, which when combined with accrued interest, approximates market value.
Short-term investments maturing in more than sixty days for which market
quotations are readily available are valued at current market value. Securities
and fixed income investments for which market quotations are not considered to
be readily available are valued using methods approved by the Board of
Directors/Trustees.
109
<PAGE>
INCOME PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. ILLIQUID AND RESTRICTED SECURITIES
Illiquid securities are securities that are not readily marketable. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Funds to sell them promptly at an
acceptable price. Restricted securities are those which can only be sold under
Rule 144A of the Securities Act of 1933 (1933 Act) or are securities offered
pursuant to Section 4(2) of the 1933 Act, and are subject to legal or
contractual restrictions on resale and may not be publicly sold without
registration under the 1933 Act. Each Fund may invest up to 15% of its total
assets in illiquid securities (except Money Market which may invest up to 10%).
Illiquid and restricted securities are valued using market quotations when
readily available. In the absence of market quotations, the securities are
valued based upon their fair value determined under procedures approved by the
Board of Directors/Trustees. The Funds will not pay the costs of disposition of
restricted securities other than ordinary brokerage fees, if any. Below is a
summary of securities held which are both illiquid and restricted as of December
31, 1998:
<TABLE>
<CAPTION>
COST MARKET VALUE % OF NET ASSETS
---- ------------ ---------------
<S> <C> <C> <C>
Bond $ 1,331,955 $ 1,339,222 0.17%
High Yield 449,348 217,400 2.48%
Money Market 82,288,908 82,291,789 9.40%
</TABLE>
C. DELAYED DELIVERY TRANSACTIONS
The Funds may purchase or sell securities on a when-issued or forward commitment
basis. The price of the underlying securities and date when the securities will
be delivered and paid for are fixed at the time the transaction is negotiated.
The market value of such securities are identified in the Portfolios of
Investments. Losses may arise due to changes in the market value of the
securities or from the inability of counterparties to meet the terms of the
contract. In connection with such purchases, the Funds are required to hold
liquid assets as collateral with their custodian sufficient to cover the
purchase price.
D. DOLLAR ROLL TRANSACTIONS
Each of the Funds may engage in dollar roll transactions with respect to
mortgage-backed securities issued by Government National Mortgage Association,
Federal National Mortgage Association and Federal Home Loan Mortgage Corp. In a
dollar roll transaction, a Fund sells a mortgage-backed security to a financial
institution, such as a bank or broker/dealer, and simultaneously agrees to
repurchase a substantially similar (i.e., same type, coupon, and maturity)
security from the institution at a later date at an agreed upon price. The
mortgage-backed securities that are repurchased will bear the same interest rate
as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories.
E. FEDERAL INCOME TAXES
Each Fund intends to meet the requirements to be taxed as a regulated investment
company for the current year. As such, each Fund is relieved of federal income
taxes by distributing all of its net taxable investment income and capital
gains, if any, in compliance with the applicable provisions of the Internal
Revenue Code. Furthermore, by distributing substantially all of its net taxable
investment income and capital gains during the calendar year, each Fund will
avoid federal excise taxes in accordance with the applicable provisions of the
Internal Revenue Code. Thus, the financial statements contain no provision for
federal taxes.
110
<PAGE>
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. DISTRIBUTIONS
Distributions are recorded on the ex-dividend date. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. In addition, distributions
of realized gains from sales of securities held one year or less are taxable to
shareholders at ordinary income tax rates rather than preferred capital gain tax
rates in accordance with the applicable provisions of the Internal Revenue Code.
G. OTHER
Investment transactions are accounted for on the day following trade date,
except same day settlements which are accounted for on the trade date. Interest
income is recorded on an accrual basis. Discounts and premiums on securities
purchased are accreted or amortized, respectively, using an effective yield
method over the life of the security. Dividend income and stock splits are
recorded on the ex-dividend date. Realized gains and losses from investment
transactions are determined on an identified cost basis.
3. INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICE FEES
Each Fund pays Aeltus a monthly fee expressed as a percentage of its average
daily net assets. Below are the Funds' annual Investment Advisory fee, as of
December 31, 1998:
<TABLE>
<CAPTION>
ADVISORY FEE
------------
<S> <C>
Bond 0.40%
High Yield 0.65%
Money Market 0.25%
</TABLE>
Aeltus has served as the investment adviser for the Funds since May 1, 1998.
Prior to May 1, 1998, ALIAC served as investment adviser and Aeltus served as
sub-adviser. As sub-adviser, Aeltus supervised the investment and reinvestment
of cash and securities and provided certain related administrative services. For
the period January 1, 1998 through April 30, 1998, ALIAC collected $1,511,493
from the Funds, and paid $902,338 to Aeltus.
Effective May 1, 1998, each Fund pays expenses incurred in exchange for services
provided by auditors, legal firms, transfer agents, custodian banks and
financial printers. Each Fund pays its proportionate share of compensation to
the Fund's Board of Directors/Trustees and its proportionate share of insurance
premiums. Each Fund pays its direct costs incurred to mail shareholder reports,
register its shares with the Securities and Exchange Commission and any other
costs incurred by the Fund. In addition, each Fund pays Aeltus an administrative
services fee in exchange for receiving certain administrative and shareholder
services and to compensate Aeltus for supervising the Funds' other service
providers. Each Fund pays Aeltus an administrative services fee at an annual
rate based on its average daily net assets. The rate is 0.075% on the first $5
billion in Fund assets and 0.050% on all Fund assets over $5 billion.
Prior to May 1, 1998, ALIAC acted as administrator to the Funds. As
administrator, ALIAC paid all the expenses of each Fund, supervised each Fund's
other service providers and provided each Fund with certain administrative and
shareholder services. In exchange for these services, ALIAC received an
administrative services fee at an annual rate of up to 0.15% of each Fund's
average daily net assets. For the period January 1, 1998 through April 30, 1998,
ALIAC collected $417,637 in administrative services fees from the Funds.
111
<PAGE>
INCOME PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
3. INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICE FEES (CONTINUED)
Aeltus has entered into a Service Agreement with ALIAC under which ALIAC will
provide various administrative and shareholder services for each Fund, in
exchange for fees payable by Aeltus, of up to 0.325% of the Funds' average daily
net assets. For the period May 1, 1998 through December 31, 1998, Aeltus paid
ALIAC $1,692,076.
4. REIMBURSEMENT AND WAIVER FROM INVESTMENT ADVISER
Aeltus is contractually obligated through December 31, 1999 to reimburse a Fund
for some or all of its operating expenses or to waive fees in order to maintain
a certain expense ratio. Reimbursement and waiver arrangements will increase a
Fund's yield and total return.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES
Purchases and sales of investment securities, excluding short-term investments,
for the year ended December 31, 1998 were:
<TABLE>
<CAPTION>
COST OF PURCHASES PROCEEDS FROM SALES
----------------- -------------------
<S> <C> <C>
Bond $714,963,113 $560,878,644
High Yield 17,891,796 17,927,256
</TABLE>
6. CAPITAL LOSS CARRYFORWARD
In accordance with applicable provisions of the Internal Revenue Code, the
following capital loss carryforwards have been incurred at December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL LOSS YEAR OF
CARRYFORWARD EXPIRATION
------------ ----------
<S> <C> <C>
High Yield $ 218,483 2006
336,345 2007
-------------------------------------------------
Money Market 62,877 2003
</TABLE>
These capital loss carryforwards may be used to offset future capital gains
until their respective expiration dates. It is the policy of each of the Funds
to reduce future distributions of realized gains to shareholders to the extent
of unexpired capital loss carryforwards.
112
<PAGE>
INCOME PORTFOLIOS
ADDITIONAL INFORMATION
DECEMBER 31, 1998
================================================================================
FEDERAL TAX STATUS OF DIVIDENDS DECLARED DURING THE FISCAL YEAR (UNAUDITED)
In accordance with federal tax authorities, the Fund paid the following amounts
of dividends which qualify to be taxed at long-term capital gain rates:
<TABLE>
<CAPTION>
AGGREGATE PER SHARE
--------- ---------
<S> <C> <C>
Bond $3,718,891 0.06
</TABLE>
YEAR 2000 (UNAUDITED)
The Funds receive services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer systems and software to distinguish the
year 2000 from the year 1900. Aeltus is taking steps that it believes are
reasonably designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Funds' other major service providers. There can be no assurance, however, that
these steps will be sufficient to avoid any adverse impact on the Funds from
this problem.
113
<PAGE>
INCOME PORTFOLIOS
FINANCIAL HIGHLIGHTS
BOND
================================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995+ 1994+
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .. $ 12.85 $ 12.62 $ 13.00 $ 11.72 $ 13.05
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.75 0.80+ 0.85+ 0.88 0.79
Net realized and
change in unrealized
gain or loss on
investments.......... 0.28 0.23 (0.39) 1.24 (1.29)
-------- -------- -------- -------- --------
Total from
investment
operations........ 1.03 1.03 0.46 2.12 (0.50)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
From net investment
income............... (0.76) (0.80) (0.84) (0.84) (0.83)
From net realized
gains on investments (0.06) -- -- -- --
-------- -------- -------- -------- --------
Total distributions (0.82) (0.80) (0.84) (0.84) (0.83)
-------- -------- -------- -------- --------
Net asset value, end
of period ............ $ 13.06 $ 12.85 $ 12.62 $ 13.00 $ 11.72
======== ======== ======== ======== ========
Total return* ......... 8.14% 8.30% 3.60% 18.24% (3.80)%
Net assets, end of
period (000's) ....... $794,560 $684,960 $643,729 $666,960 $561,704
Ratio of net expenses
to average net assets 0.49% 0.48% 0.39% 0.32% 0.33%
Ratio of net
investment income to
average net assets ... 5.82% 6.31% 6.39% 6.97% 6.38%
Portfolio turnover
rate.................. 88.98% 134.92% 96.41% 113.72% 74.24%
</TABLE>
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
114 See Notes to Financial Statements.
<PAGE>
HIGH YIELD
================================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 10, 1997
YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, OPERATIONS)
1998 TO DECEMBER 31, 1997
------------ --------------------
<S> <C> <C>
Net asset value, beginning of period .... $ 10.10 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................. 1.07 0.05+
Net realized and change in unrealized
gain or loss on investments ........... (1.09) 0.10
------- -------
Total from investment operations .... (0.02) 0.15
------- -------
LESS DISTRIBUTIONS:
From net investment income ............. (1.02) (0.05)
From net realized gains on investments . (0.02) --
------- -------
Total distributions ................. (1.04) (0.05)
------- -------
Net asset value, end of period .......... $ 9.04 $ 10.10
======= =======
Total return*............................ (0.27)% 1.48%
Net assets, end of period (000's) ....... $ 8,767 $10,098
Ratio of net expenses to average net
assets.................................. 0.80% 0.80%(1)
Ratio of net investment income to average
net assets ............................. 9.14% 7.81%(1)
Ratio of expenses before reimbursement
and waiver to average net assets ....... 0.97% --
Portfolio turnover rate ................. 178.39% 69.39%
</TABLE>
(1) Annualized.
*The total return percentage does not reflect any separate account charges under
variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
See Notes to Financial Statements. 115
<PAGE>
INCOME PORTFOLIOS
FINANCIAL HIGHLIGHTS (CONTINUED)
MONEY MARKET
================================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996+ 1995+ 1994+
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .. $ 13.36 $ 13.19 $ 13.29 $ 12.54 $ 12.54
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.63 0.67+ 0.70 0.75 0.52
Net realized and
change in unrealized
gain or loss
on investments ...... 0.07 0.03 -- 0.01 (0.02)
-------- -------- -------- -------- --------
Total from
investment
operations........ 0.70 0.70 0.70 0.76 0.50
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
From net investment
income............... (0.67) (0.53) (0.80) (0.01) (0.50)
-------- -------- -------- -------- --------
Total distributions (0.67) (0.53) (0.80) (0.01) (0.50)
-------- -------- -------- -------- --------
Net asset value, end
of period ............ $ 13.39 $ 13.36 $ 13.19 $ 13.29 $ 12.54
======== ======== ======== ======== ========
Total return* ......... 5.46% 5.47% 5.37% 6.05% 4.09%
Net assets, end of
period (000's) ....... $875,169 $688,756 $613,505 $514,037 $483,039
Ratio of net expenses
to average
net assets ........... 0.34% 0.35% 0.34% 0.30% 0.32%
Ratio of net
investment income to
average net assets ... 5.28% 5.34% 5.24% 5.82% 4.16%
</TABLE>
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
116 See Notes to Financial Statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees/Directors and Shareholders of Aetna Bond VP, Aetna High
Yield VP and Aetna Money Market VP:
We have audited the accompanying statements of assets and liabilities of Aetna
Bond VP, Aetna High Yield VP and Aetna Money Market VP (collectively the Income
Portfolios), including the portfolios of investments as of December 31, 1998 and
the related statements of operations for the year then ended, the statements of
changes in net assets for each of the years or periods in the two-year period
then ended and financial highlights for each of the years in the five-year
period ended December 31, 1998 for Aetna Bond VP and Aetna Money Market VP and
for the year ended December 31, 1998 and the period from December 10, 1997
(commencement of operations) to December 31, 1997 for Aetna High Yield VP. These
financial statements and financial highlights are the responsibility of the
Income Portfolios' management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position Aetna
Bond VP, Aetna High Yield VP and Aetna Money Market VP as of December 31, 1998,
results of their operations for the year then ended, changes in their net assets
for each of the years or periods in the two-year period then ended and financial
highlights for each of the years or periods specified in the first paragraph
above, in conformity with generally accepted accounting principles.
KPMG LLP
Hartford, Connecticut
January 29, 1999
117
<PAGE>
[Begin Line Chart]
Aetna GET Fund, Series B
Growth of $10,000
Aetna GET Fund, Series B S&P 500 Index
------------------------ -------------
07/94 10,000 10,000
10,229 10,489
12/94 10,186 10,487
10,748 11,508
11,664 12,607
12,506 13,610
12/95 13,078 14,429
13,868 15,204
14,443 15,885
14,824 16,376
12/96 16,153 17,742
16,439 18,217
19,286 21,398
22,130 23,000
12/97 21,722 23,660
24,533 26,961
24,891 27,851
21,205 25,080
12/98 25,941 30,422
[End Line Chart]
- -------------------------------------------
Average Annual Total Returns
for the period ended December 31, 1998*
- -------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Inception Date 1 Year Inception
- -------------------------------------------
07/01/94 19.42% 23.59%
- -------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA GET FUND, SERIES B
HOW DID THE SERIES PERFORM DURING THE PERIOD?
Aetna GET Fund, Series B (GET B) generated a return of 19.42%, net of fund
expenses, for the year ended December 31, 1998. The benchmark, the Standard &
Poor's (S&P) 500 Index(a), returned 28.57% for the same period.
Currently closed to new deposits, GET B invests primarily in common stocks and
bonds in varying proportions in response to market fluctuations. GET B
guarantees that the market value of an investor's assets will not be less than
their market value on the first day of the Guaranteed Period (less any
applicable maintenance fees) if the assets are held to the Series' maturity on
June 30, 1999.
WHAT ECONOMIC OR FINANCIAL MARKET CONDITIONS IMPACTED THE SERIES?
The large company stocks that make up the S&P 500 continued to lead all other
asset classes and achieved returns that were well above long-term historical
averages during this past year. This continued progress in stock market levels
has continued to raise the Series' cumulative return cushion and stimulate an
increase in the Series' allocation to equities to its current level of 100%.
WHAT INVESTMENTS INFLUENCED THE SERIES' PERFORMANCE OVER THE PAST TWELVE MONTHS?
GET B is managed in a style similar to that used for the portion of the Aetna
Growth and Income VP which invests in large company stocks. The basis of our
stock and industry selection process is a quantitative multi-factor model, which
is primarily comprised of value and momentum factors. Because both our industry
and our stock selection techniques use value as a very important factor, GET B
has a decided value tilt. Growth stocks outperformed value stocks by a wide
margin in 1998, which is demonstrated both in higher returns for more
growth-oriented industries and sectors and also in higher returns for the higher
growth stocks within the same industry or sector. Our disciplines currently
indicate that low Price/Earnings (P/E) value-
118 See Definition of Terms.
<PAGE>
oriented stocks are unusually cheap relative to high P/E, growth-oriented
stocks. Value investing is a proven long-term strategy. We are not about to
abandon it because we have hit a rough patch in performance.
WHAT IS YOUR OUTLOOK GOING FORWARD?
According to our disciplines, U.S. stocks are about fairly valued. We use the
forward earnings yield (earnings per share divided by price) of the S&P 500 as
our barometer of equity valuation and compare it to the yield on the 10-year
government bond. The spread between these two expected return measures is what
drives our asset allocation decision and is currently at a neutral level.
LARGE CAP PORTFOLIO SECTOR BREAKDOWN:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
% OF EQUITY % OF S&P OVER/(UNDER)
SECTOR STOCKS 500 WEIGHTING
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Materials 0.7% 3.1% (2.4)%
Commercial Services 4.0% 1.8% 2.2 %
Consumer Discretionary 24.7% 12.3% 12.4 %
Consumer Non-Discretionary 3.3% 9.4% (6.1)%
Energy 3.8% 6.9% (3.1)%
Finance 10.1% 15.7% (5.6)%
Healthcare 8.7% 12.3% (3.6)%
Manufacturing 10.9% 9.7% 1.2 %
Technology 23.0% 18.1% 4.9 %
Utilities 10.8% 10.7% 0.1 %
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------
% OF NET
TOP TEN EQUITY HOLDINGS ASSETS
- ---------------------------------------------------
<S> <C>
Microsoft Corp. 4.4%
Intel Corp. 4.1%
Eli Lilly & Co. 3.6%
AT&T Corp. 3.2%
International Business Machines Corp. 3.2%
Ford Motor Co. 2.8%
Sun Microsystems, Inc. 2.8%
Procter & Gamble Co. 2.7%
Abbott Laboratories 2.5%
Sprint Corp. 2.2%
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
ASSET ALLOCATION:
% OF NOTIONAL VALUE* ECONOMIC EXPOSURE*
ASSET CLASS INVESTMENT OF FUTURES 12/31/98 12/31/97
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Stocks 99.4% -- 99.4% 95.5%
Mid Cap Stocks 1.1% -- 1.1% --
Small Cap Stocks -- -- -- 0.3%
U.S Government Obligations -- -- -- 2.2%
Cash Equivalents (0.5)% -- (0.5)% 2.0%
--------------------------------------------------------------
100.0% -- 100.0% 100.0%
==============================================================
</TABLE>
* Notional value refers to the economic value at risk or the exposure to the
financial instruments underlying the options and futures positions. Economic
exposure reflects the Series' exposure to both changes in the value of the
portfolio of investments as well as the financial instruments underlying the
options and futures positions.
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Series are subject to change.
See Definition of Terms. 119
<PAGE>
[Begin Line Chart]
Aetna GET Fund, Series C
Growth of $10,000
Aetna GET Fund, Series C S&P 500 Index
------------------------ -------------
12/17/96 10,000 10,000
12/31/96 10,153 10,174
10,251 10,446
11,620 12,270
12,442 13,189
12/31/97 12,715 13,568
14,432 15,461
15,002 15,971
13,496 14,382
12/31/98 16,248 17,445
[End Line Chart]
- -------------------------------------------
Average Annual Total Returns
for the period ended December 31, 1998*
- -------------------------------------------
<TABLE>
<CAPTION>
Inception Date 1 Year Inception
- -------------------------------------------
<S> <C> <C>
12/17/96 27.76% 26.88%
- -------------------------------------------
</TABLE>
*Total Return is calculated including reinvestment of income and capital gain
distributions. Past performance is no guarantee of future results. Performance
does not take into account any separate account charges imposed by Aetna.
AETNA GET FUND, SERIES C
HOW DID THE SERIES PERFORM DURING THE PERIOD?
Aetna GET Fund, Series C (GET C) generated a return of 27.76%, net of fund
expenses, for the year ended December 31, 1998. The benchmark, Standard & Poor's
(S&P) 500 Index(a), returned 28.57% for the same period.
Currently closed to new deposits, GET C invests primarily in common stocks and
bonds in varying proportions in response to market fluctuations. This strategy
is complemented by a guarantee that the market value of an investor's assets
will not be less than their market value on the first day of GET C's 5-year
Guaranteed Period if the assets are held to GET C's maturity on December 16,
2001.
WHAT ECONOMIC OR FINANCIAL MARKET CONDITIONS IMPACTED THE SERIES?
GET C outperformed most balanced funds for the year, as well as many equity
indexes, primarily due to a high percentage of total assets held in stocks and
good stock selection.
The size effect we wrote about in the last semi-annual report persisted for the
remainder of the year in 1998. The Series once again benefited from this effect
because our model continued to rate larger issues more favorably and,
consequently, over weighted them in the Series. It should be noted that these
issues were not favored because they were large per se, but because they
generally scored well on attributes such as low price to earnings, relative
performance and earnings momentum, all of which are important determinants in
predicting which stocks are likely to do well.
Another trend that affected the performance of the Series in 1998 was the
enormous disparity between the returns of so-called
120 See Definition of Terms.
<PAGE>
growth stocks relative to value stocks. The stocks in the S&P 500 with the
lowest price relative to their book value (the criterion used to create the
S&P/Barra style indexes) underperformed the alternative by over 7%. The Series
benefited from this large dispersion because our model rated growth issues more
favorably and, consequently, we overweighted them.
WHAT INVESTMENTS INFLUENCED THE SERIES' PERFORMANCE OVER THE PAST TWELVE MONTHS?
GET C was underweight in the energy sector for the entire period, as oil prices
plummeted to an all-time low (adjusted for inflation) during the period. This
worked to the Series' advantage, as energy stocks substantially underperformed
other issues in the S&P 500. Conversely, performance was adversely affected by a
relatively low weight in the finance sector, which outperformed during the
period.
WHAT IS YOUR OUTLOOK GOING FORWARD?
In 1998, as fears of disinflation took root, the market favored long duration
assets such as long-term bonds or other long dated assets in order to lock in
the current economic rent for money (usually in the form of a high coupon). The
longest duration asset class that exists is a true growth company - a company
that can grow its earnings regardless of the environment is an extremely
valuable asset. The multiple you would pay for such an asset in a deflationary
environment is huge. In 1998, people paid dearly for growth due to a pervasive
fear of deflation and global economic malaise. If in 1999, the world economy is
stronger and there is a shift in perception about the world economy, this trend
may reverse. However, the evidence of a turn right now is tenuous at best.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
% OF EQUITY % OF S&P OVER/(UNDER)
SECTOR STOCKS 500 WEIGHTING
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Materials 2.3% 3.1% (0.8)%
Commercial Services 1.8% 1.8% --
Consumer Discretionary 13.1% 12.3% 0.8 %
Consumer Non-Discretionary 5.7% 9.4% (3.7)%
Energy 4.9% 6.9% (2.0)%
Finance 14.7% 15.7% (1.0)%
Healthcare 12.5% 12.3% 0.2%
Manufacturing 9.9% 9.7% 0.2 %
Technology 20.4% 18.1% 2.3 %
Utilities 14.7% 10.7% 4.0 %
</TABLE>
LARGE CAP PORTFOLIO SECTOR BREAKDOWN:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
% OF NET
TOP TEN EQUITY HOLDINGS ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Microsoft Corp. 4.9%
General Electric Co. 2.9%
Intel Corp. 2.9%
Wal-Mart Stores, Inc. 2.6%
International Business Machines Corp. 2.5%
Merck & Co., Inc. 2.2%
Lucent Technologies, Inc. 2.1%
Cisco Systems, Inc. 1.7%
Exxon Corp. 1.6%
Eli Lilly & Co. 1.4%
</TABLE>
See Definition of Terms. 121
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ASSET ALLOCATION: % OF NOTIONAL VALUE* ECONOMIC EXPOSURE*
ASSET CLASS INVESTMENT OF FUTURES 12/31/98 06/30/98
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Stocks 91.0% -- 91.0% 92.9%
Mid Cap Stocks 1.9% -- 1.9% 0.8%
International Stocks 1.9% -- 1.9% 2.1%
Fixed Income 2.7% -- 2.7% --
U.S Government Obligations -- -- -- 4.0%
Cash Equivalents 2.5% -- 2.5% 0.2%
-------------------------------------------------------------------------
100.0% -- 100.0% 100.0%
=========================================================================
</TABLE>
* Notional value refers to the economic value at risk or the exposure to the
financial instruments underlying the options and futures positions. Economic
exposure reflects the Series' exposure to both changes in the value of the
portfolio of investments as well as the financial instruments underlying the
options and futures positions.
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Series are subject to change.
122 See Definition of Terms.
<PAGE>
AETNA GET FUND, SERIES D
ACCUMULATION PERIOD
Aetna GET Fund, Series D (GET D) will be offered from October 15, 1998 through
January 15, 1999 as a funding option under certain variable annuity contracts
issued by Aetna Life Insurance and Annuity Company. GET D assets will be
invested entirely in money market instruments prior to January 16, 1999. After
that date, GET D will allocate its investments between equities and fixed income
securities in proportions that are intended to help GET D attain its investment
objective.
WHAT IS YOUR OUTLOOK GOING FORWARD?
In 1998, as fears of disinflation took root, the market favored long duration
assets such as long-term bonds or other long dated assets in order to lock in
the current economic rent for money (usually in the form of a high coupon). The
longest duration asset class that exists is a true growth company - a company
that can grow its earnings regardless of the environment is an extremely
valuable asset. The multiple you would pay for such an asset in a deflationary
environment is huge. In 1998, people paid dearly for growth due to a pervasive
fear of deflation and global economic malaise. If in 1999, the world economy is
stronger and there is a shift in perception about the world economy, this trend
may reverse. However, the evidence of a turn right now is tenuous at best.
The opinions expressed reflect those of the portfolio manager only through
December 31, 1998. The manager's opinions are subject to change at any time
based on market and other conditions. The composition, industries and holdings
of the Series are subject to change.
See Definition of Terms. 123
<PAGE>
DEFINITION OF TERMS
(a) The Standard & Poor's (S&P) 500 Index is a value-weighted, unmanaged index
of 500 widely held stocks that assumes reinvestment of all dividends and is
considered to be representative of the U.S. stock market in general.
124
<PAGE>
AETNA GET FUND
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
SERIES B
================================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ -------------
<S> <C> <C>
COMMON STOCKS (100.7%)
AIR TRANSPORT (0.9%)
Delta Air Lines, Inc. .................. 14,800 $ 769,600
-----------
AUTO PARTS AND HARDWARE (1.1%)
Black & Decker Corp. ................... 17,500 981,094
-----------
AUTOMOTIVE (2.9%)
Ford Motor Co. ......................... 43,600 2,558,775
-----------
BANKS AND THRIFTS (4.4%)
Chase Manhattan Corp. .................. 25,500 1,735,594
Comerica, Inc. ......................... 5,500 375,031
Fifth Third Bancorp .................... 10,200 727,387
Golden West Financial Corp. ............ 11,700 1,072,744
-----------
3,910,756
-----------
BIOTECH AND MEDICAL PRODUCTS (1.6%)
Amgen, Inc. + .......................... 6,700 700,569
Guidant Corp. .......................... 6,700 738,675
-----------
1,439,244
-----------
COMMERCIAL SERVICES (1.6%)
Deluxe Corp. ........................... 38,700 1,414,969
-----------
COMPUTERS (8.0%)
Apple Computer, Inc. + ................. 41,100 1,682,531
International Business Machines Corp. .. 15,800 2,919,050
Sun Microsystems, Inc. + ............... 29,800 2,551,625
-----------
7,153,206
-----------
CONGLOMERATE AND AEROSPACE (4.0%)
Goodrich (B. F.) Co. ................... 40,600 1,456,525
Loews Corp. ............................ 14,600 1,434,450
United Technologies Corp. .............. 6,400 696,000
-----------
3,586,975
-----------
CONSUMER FINANCE (0.5%)
Countrywide Credit Industries, Inc. .... 9,500 476,781
-----------
CONSUMER PRODUCTS (3.3%)
American Greetings Corp. ............... 13,100 537,919
Procter & Gamble Co. ................... 27,000 2,465,437
-----------
3,003,356
-----------
CONSUMER SERVICES (0.2%)
Darden Restaurants, Inc. ............... 82,700 1,488,600
-----------
DATA AND IMAGING SERVICES (9.9%)
Adobe Systems, Inc. .................... 29,300 1,369,775
Computer Associates International, Inc. 37,800 1,611,225
Microsoft Corp. + ...................... 28,800 3,994,200
Oracle Corp. + ......................... 43,500 1,875,937
-----------
8,851,137
-----------
DISCRETIONARY RETAIL (7.8%)
Federated Department Stores, Inc. + .... 32,900 1,433,206
Gap, Inc. .............................. 22,350 1,257,188
Lowe's Co., Inc. ....................... 38,300 1,960,481
Tandy Corp. ............................ 11,600 477,775
NUMBER OF MARKET
SHARES VALUE
------------ -------------
DISCRETIONARY RETAIL (CONTINUED)
TJX Companies, Inc. .................... 64,600 $ 1,873,400
-----------
7,002,050
-----------
DIVERSIFIED FINANCIAL SERVICES (1.0%)
Transamerica Corp. ..................... 7,400 854,700
-----------
DRUGS (7.2%)
Abbott Laboratories .................... 45,100 2,209,900
Eli Lilly & Co. ........................ 36,300 3,226,162
Johnson & Johnson ...................... 1,700 142,588
Merck & Co., Inc. ...................... 6,000 886,125
-----------
6,464,775
-----------
ELECTRIC UTILITIES (0.6%)
Niagara Mohawk Power Corp. + ........... 32,100 517,613
-----------
ELECTRICAL MACHINERY AND INSTRUMENTS (1 4%)
Xerox Corp. ............................ 10,900 1,286,200
-----------
FOOD AND DRUG RETAIL (7.0%)
CVS Corp. .............................. 22,000 1,210,000
Kroger Co. (The) + ..................... 17,500 1,058,750
Rite Aid Corp. ......................... 31,000 1,536,438
Safeway, Inc. + ........................ 16,700 1,017,656
SUPERVALU, Inc. ........................ 52,800 1,478,400
-----------
6,301,244
-----------
FOREST PRODUCTS AND BUILDING MATERIALS (0.6%)
Ball Corp. ............................. 7,800 356,850
Boise Cascade Corp. .................... 3,800 117,800
Owens Corning .......................... 2,800 99,225
-----------
573,875
-----------
GAS UTILITIES (1.6%)
Eastern Enterprises .................... 800 35,000
ONEOK, Inc. ............................ 8,600 310,675
Sempra Energy .......................... 42,858 1,087,522
-----------
1,433,197
-----------
HOUSING AND FURNISHINGS (5.3%)
Centex Corp. ........................... 40,800 1,838,550
Fleetwood Enterprises, Inc. ............ 27,400 952,150
Kaufman & Broad Home Corp. ............. 23,100 664,125
Pulte Corp. ............................ 46,400 1,290,500
-----------
4,745,325
-----------
INDUSTRIAL SERVICES (1.3%)
Fluor Corp. ............................ 7,500 319,219
Foster Wheeler Corp. ................... 52,700 694,981
Milacron, Inc. ......................... 7,000 134,750
-----------
1,148,950
-----------
INSURANCE (2.7%)
Allstate Corp. (The) ................... 43,800 1,691,775
MGIC Investment Corp. .................. 19,000 756,437
-----------
2,448,212
-----------
INVESTMENT SERVICES (1.6%)
Providian Financial Corp. .............. 19,550 1,466,250
-----------
MAJOR TELECOMMUNICATIONS (8.5%)
AT&T Corp. ............................. 38,600 2,904,650
Bell Atlantic Corp. .................... 35,100 1,994,119
See Notes to Portfolio of Investments. 125
<PAGE>
AETNA GET FUND
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
SERIES B (CONTINUED)
================================================================================
NUMBER OF MARKET
SHARES VALUE
------------ -------------
MAJOR TELECOMMUNICATIONS (CONTINUED)
BellSouth Corp. ........................ 9,200 $ 458,850
Sprint Corp. ........................... 24,000 2,019,000
Sprint PCS + ........................... 12,000 277,500
-----------
7,654,119
-----------
OIL (2.2%)
Ashland Oil, Inc. ...................... 20,600 996,525
Sunoco Inc. ............................ 27,600 995,325
-----------
1,991,850
-----------
OTHER TELECOMMUNICATIONS (1.8%)
Lucent Technologies, Inc. .............. 2,200 242,000
Tellabs, Inc. + ........................ 20,300 1,391,819
-----------
1,633,819
-----------
PRINT MEDIA (2.1%)
Knight-Ridder, Inc. .................... 27,100 1,385,488
McGraw-Hill Co., Inc. .................. 4,800 489,000
-----------
1,874,488
-----------
PRODUCER GOODS (2.5%)
Ingersoll-Rand Co. ..................... 36,700 1,722,606
Tyco International Ltd. ................ 7,200 543,150
-----------
2,265,756
-----------
SEMICONDUCTORS AND ELECTRONICS (5.3%)
AMP, Inc. .............................. 4,200 218,662
Intel Corp. ............................ 31,200 3,699,150
National Semiconductor Corp. + ......... 65,100 878,850
-----------
4,796,662
-----------
SPECIALTY CHEMICALS (0.0%)
Engelhard Corp. ........................ 800 15,600
-----------
SURFACE TRANSPORT (0.5%)
Burlington Northern Santa Fe Corp. ..... 12,300 415,125
-----------
TOTAL COMMON STOCKS (COST $76,033,302) . 90,524,303
-----------
PRINCIPAL
AMOUNT
------------
SHORT-TERM INVESTMENTS (0.4%)
U.S. Treasury Bill, 4.98%, 02/18/99 .... $300,000 298,368
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $298,134) 298,368
-----------
TOTAL INVESTMENTS (COST $76,331,436)(a) 90,822,671
OTHER ASSETS LESS LIABILITIES (956,564)
-----------
TOTAL NET ASSETS $89,866,107
===========
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes amounts to
$76,416,222. Unrealized gains and losses, based on identified tax cost at
December 31, 1998, are as follows:
Unrealized gains ........................................... $ 16,362,850
Unrealized losses .......................................... (1,956,401)
------------
Net unrealized gain ...................................... $ 14,406,449
============
</TABLE>
+ Non-income producing security.
Category percentages are based on net assets.
126 See Notes to Portfolio of Investments.
<PAGE>
AETNA GET FUND
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
SERIES C
================================================================================
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
------------ -------------
<S> <C> <C>
COMMON STOCKS (94.9%)
AIR TRANSPORT (0.3%)
AMR Corp. + ............................ 3,800 $ 225,625
Delta Air Lines, Inc. .................. 2,800 145,600
Southwest Airlines Co. ................. 7,000 157,063
US Airways Group, Inc. + ............... 1,800 93,600
-------------
621,888
-------------
ALUMINUM (0.2%)
Alcan Aluminum Ltd. .................... 2,300 62,244
Aluminum Co. of America ................ 4,600 342,987
Reynolds Metals Co. .................... 2,400 126,450
-------------
531,681
-------------
AUTO PARTS AND HARDWARE (0.4%)
Black & Decker Corp. ................... 1,700 95,306
Briggs & Stratton Corp. ................ 300 14,962
Cooper Tire & Rubber Co. ............... 900 18,394
Dana Corp. ............................. 4,657 190,355
Genuine Parts Co. ...................... 4,450 148,797
Goodyear Tire & Rubber Co. (The) ....... 4,300 216,881
Snap-On, Inc. .......................... 2,300 80,069
Stanley Works (The) .................... 2,700 74,925
-------------
839,689
-------------
AUTOMOTIVE (1.8%)
Eaton Corp. ............................ 700 49,481
Ford Motor Co. ......................... 37,700 2,212,519
General Motors Corp. ................... 21,700 1,552,906
Johnson Controls, Inc. ................. 2,400 141,600
TRW, Inc. .............................. 3,500 196,656
-------------
4,153,162
-------------
BANKS AND THRIFTS (5.4%)
Bank of New York Co., Inc. ............. 16,500 664,125
Bank One Corp. ......................... 25,798 1,317,310
BankAmerica Corp. ...................... 14,363 863,575
BankBoston Corp. ....................... 7,600 295,925
BB&T Corp. ............................. 5,700 229,781
Chase Manhattan Corp. .................. 17,600 1,197,900
Comerica, Inc. ......................... 3,400 231,838
Fifth Third Bancorp .................... 5,525 394,002
First Union Corp. ...................... 20,606 1,253,102
Fleet Financial Group, Inc. ............ 12,500 558,594
Golden West Financial Corp. ............ 1,900 174,206
Huntington Bancshares .................. 4,930 148,208
KeyCorp ................................ 11,500 368,000
Mellon Bank Corp. ...................... 6,500 446,875
Mercantile Bancorporation, Inc. ........ 3,600 166,050
National City Corp. .................... 7,500 543,750
Northern Trust Corp. ................... 2,300 200,819
PNC Bank Corp. ......................... 6,600 357,225
Regions Financial Corp. ................ 5,200 209,625
Republic New York Corp. ................ 1,100 50,119
State Street Corp. ..................... 3,700 257,381
NUMBER OF MARKET
SHARES VALUE
------------ -------------
BANKS AND THRIFTS (CONTINUED)
Summit Bancorp ......................... 4,100 $ 179,119
Suntrust Banks, Inc. ................... 4,600 351,900
Synovus Financial Corp. ................ 6,800 165,750
U.S. Bancorp ........................... 16,550 587,525
Union Planters Corp. ................... 3,100 140,469
Wachovia Corp. ......................... 4,800 419,700
Washington Mutual, Inc. ................ 13,221 504,877
-------------
12,277,750
-------------
BIOTECH AND MEDICAL PRODUCTS (1.3%)
Alza Corp. + ........................... 1,900 99,275
Amgen, Inc. + .......................... 9,000 941,062
Bausch & Lomb, Inc. .................... 1,800 108,000
Becton, Dickinson & Co. ................ 5,400 230,513
Biomet, Inc. ........................... 2,000 80,500
Boston Scientific Corp. + .............. 3,600 96,525
Guidant Corp. .......................... 3,300 363,825
Medtronic, Inc. ........................ 10,000 742,500
Monsanto Co. ........................... 5,300 251,750
-------------
2,913,950
-------------
CHEMICALS (0.9%)
Dow Chemical Co. ....................... 4,300 391,031
Du Pont (E.I.) de Nemours .............. 22,700 1,204,519
Eastman Chemical Co. ................... 2,300 102,925
Hercules, Inc. ......................... 3,100 84,862
Rohm & Haas Co. ........................ 4,000 120,500
Union Carbide Corp. .................... 1,300 55,250
-------------
1,959,087
-------------
COMMERCIAL SERVICES (0.5%)
Deluxe Corp. ........................... 1,501 56,019
Dun & Bradstreet Corp. ................. 4,800 151,500
Interpublic Group of Co., Inc. ......... 3,100 247,225
Omnicom Group, Inc. .................... 3,700 214,600
Paychex, Inc. .......................... 3,300 169,744
RR Donnelley & Sons Co. ................ 4,000 175,250
-------------
1,014,338
-------------
COMPUTERS (6.3%)
Apple Computer, Inc. + ................. 6,100 249,719
Ceridian Corp. + ....................... 2,100 146,606
Compaq Computer Corp. .................. 33,432 1,402,054
Computer Sciences Corp. ................ 3,300 212,644
Dell Computer Corp. + .................. 42,600 3,117,787
Electronic Data Systems Corp. .......... 10,900 547,725
Gateway 2000, Inc. + ................... 4,600 235,463
Hewlett Packard Co. .................... 19,600 1,338,925
International Business Machines Corp. .. 30,600 5,653,350
Micron Technology, Inc. + .............. 2,000 101,125
Sun Microsystems, Inc. + ............... 13,500 1,155,938
Unisys Corp. + ......................... 7,600 261,725
-------------
14,423,061
-------------
See Notes to Portfolio of Investments. 127
<PAGE>
AETNA GET FUND
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
SERIES C (CONTINUED)
================================================================================
NUMBER OF MARKET
SHARES VALUE
------------ -------------
CONGLOMERATE AND AEROSPACE (4.0%)
Crane Co. .............................. 1,200 $ 36,225
General Dynamics Corp. ................. 4,100 240,362
General Electric Co. ................... 64,500 6,583,031
Goodrich (B. F.) Co. ................... 1,000 35,875
Lockheed Martin Corp. .................. 4,400 372,900
National Service Industries, Inc. ...... 800 30,400
Northrop Grumman Corp. ................. 1,700 124,313
Raytheon Co. ........................... 6,400 340,800
Rockwell International Corp. ........... 4,500 218,531
Tenneco, Inc. .......................... 1,500 51,094
Textron, Inc. .......................... 4,100 311,344
United Technologies Corp. .............. 7,500 815,625
-------------
9,160,500
-------------
CONSUMER FINANCE (2.5%)
Associates First Capital Corp. ......... 15,198 644,015
Capital One Financial Corp. ............ 2,800 322,000
Countrywide Credit Industries, Inc. .... 3,000 150,563
Federal Home Loan Mortgage Corp. ....... 24,000 1,546,500
Federal National Mortgage Association .. 28,700 2,123,800
Household International, Inc. .......... 9,800 388,325
MBNA Corp. ............................. 15,675 390,895
SLM Holding Corp. ...................... 4,300 206,400
-------------
5,772,498
-------------
CONSUMER PRODUCTS (2.9%)
Alberto-Culver Co. ..................... 1,000 26,688
American Greetings Corp. ............... 1,200 49,275
Avon Products, Inc. .................... 6,500 287,625
Bestfoods .............................. 6,300 335,475
Clorox Co. ............................. 2,600 303,713
Colgate-Palmolive Co. .................. 5,700 529,387
Eastman Kodak Co. ...................... 6,700 482,400
Gillette Co. ........................... 8,600 415,487
International Flavors & Fragrances,
Inc ................................... 1,000 44,188
Kimberly-Clark Corp. ................... 11,300 615,850
Procter & Gamble Co. ................... 25,900 2,364,994
Unilever NV ............................ 12,600 1,045,012
-------------
6,500,094
-------------
CONSUMER SERVICES (0.8%)
Darden Restaurants, Inc. ............... 5,800 104,400
H & R Block, Inc. ...................... 2,500 112,500
Harrah's Entertainment, Inc. + ......... 1,200 18,825
Hilton Hotels Corp. .................... 2,500 47,813
Marriott International, Inc. ........... 3,900 113,100
McDonald's Corp. ....................... 14,100 1,080,412
Service Corp. International ............ 6,000 228,375
Tricon Global Restaurants, Inc. + ...... 2,470 123,809
-------------
1,829,234
-------------
CONSUMER SPECIALTIES (0.1%)
Brunswick Corp. ........................ 4,300 106,425
Hasbro, Inc. ........................... 2,500 90,313
NUMBER OF MARKET
SHARES VALUE
------------ -------------
CONSUMER SPECIALTIES (CONTINUED)
Mattel, Inc. ........................... 6,800 $ 155,125
-------------
351,863
-------------
DATA AND IMAGING SERVICES (8.6%)
Autodesk, Inc. ......................... 2,300 98,181
Automatic Data Processing, Inc. ........ 6,700 537,256
BMC Software, Inc. + ................... 8,800 392,150
Cisco Systems, Inc. + .................. 41,550 3,856,359
Computer Associates International, Inc. 11,150 475,269
EMC/MASS Corp. + ....................... 17,700 1,504,500
First Data Corp. ....................... 8,400 266,175
Microsoft Corp. + ...................... 80,300 11,136,606
Novell, Inc. + ......................... 10,000 181,250
Oracle Corp. + ......................... 23,400 1,009,125
Parametric Technology Co. + ............ 6,700 109,713
-------------
19,566,584
-------------
DISCRETIONARY RETAIL (6.4%)
AutoZone, Inc. + ....................... 1,300 42,819
Circuit City Stores, Inc. .............. 3,000 149,812
Costco Companies, Inc. + ............... 4,800 346,500
Dayton Hudson Co. ...................... 8,600 466,550
Dillards, Inc. ......................... 3,500 99,312
Federated Department Stores, Inc. + .... 5,100 222,169
Gap, Inc. .............................. 19,375 1,089,844
Home Depot, Inc. ....................... 52,000 3,181,750
J.C. Penney Co., Inc. .................. 2,200 103,125
Kmart Corp. + .......................... 11,900 182,219
Kohl's Corp. + ......................... 3,500 215,031
Lowe's Co., Inc. ....................... 10,500 537,469
May Department Stores Co. .............. 5,000 301,875
Nordstrom, Inc. ........................ 4,300 149,156
Sears, Roebuck & Co. ................... 8,500 361,250
Staples, Inc. + ........................ 9,300 406,294
Tandy Corp. ............................ 2,200 90,612
The Limited, Inc. ...................... 6,400 186,400
TJX Companies, Inc. .................... 10,700 310,300
Toys "R" Us, Inc. + .................... 2,700 45,563
Wal-Mart Stores, Inc. .................. 73,700 6,001,944
-------------
14,489,994
-------------
DIVERSIFIED FINANCIAL SERVICES (2.0%)
American Express Co. ................... 8,900 910,025
American General Corp. ................. 5,264 410,592
Citigroup Inc. ......................... 43,400 2,148,300
Morgan Stanley, Dean Witter, Discover &
Co .................................... 11,375 807,625
Transamerica Corp. ..................... 1,800 207,900
-------------
4,484,442
-------------
DRUGS (10.2%)
Abbott Laboratories .................... 42,600 2,087,400
American Home Products Corp. * ......... 25,700 1,447,231
Baxter International, Inc. ............. 7,000 450,188
Bristol-Myers Squibb Co. ............... 19,400 2,595,962
Eli Lilly & Co. ........................ 36,400 3,235,050
128 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
NUMBER OF MARKET
SHARES VALUE
------------ -------------
DRUGS (CONTINUED)
Johnson & Johnson ...................... 26,200 $ 2,197,525
Merck & Co., Inc. ...................... 33,400 4,932,762
Pfizer, Inc. ........................... 10,100 1,266,919
Pharmacia & Upjohn, Inc. ............... 10,600 600,225
Schering Plough ........................ 38,700 2,138,175
Warner Lambert Co. ..................... 29,000 2,180,438
-------------
23,131,875
-------------
ELECTRIC UTILITIES (2.5%)
AES Corp. + ............................ 4,200 198,975
Ameren Corp. ........................... 3,800 162,213
American Electric Power Co. ............ 4,700 221,194
Baltimore Gas & Electric Co. ........... 3,800 117,325
Carolina Power & Light Co. ............. 3,900 183,544
Central & South West Corp. ............. 6,400 175,600
Cinergy Corp. .......................... 4,000 137,500
Consolidated Edison, Inc. .............. 7,300 385,987
Dominion Resources, Inc. ............... 5,600 261,800
DTE Energy Co. ......................... 4,500 192,937
Duke Energy Corp. ...................... 7,930 508,016
Edison International ................... 7,300 203,487
Entergy Corp. .......................... 6,000 186,750
FirstEnergy Corp. ...................... 5,000 162,812
FPL Group, Inc. ........................ 3,800 234,175
GPU, Inc. .............................. 3,300 145,819
Houston Industries Finance Co. ......... 8,915 286,394
Northern States Power Co. .............. 2,000 55,500
Peco Energy Co. ........................ 6,600 274,725
PG&E Corp. ............................. 8,400 264,600
PP & L Resources, Inc. ................. 4,100 114,288
Public Service Enterprise Group, Inc. .. 5,900 236,000
Southern Co. ........................... 15,700 456,281
Texas Utilities Co. .................... 6,457 301,461
Unicom Corp. ........................... 5,500 212,094
-------------
5,679,477
-------------
ELECTRICAL MACHINERY AND INSTRUMENTS (0 6%)
Harris Corp. ........................... 2,700 98,888
Pitney Bowes, Inc. ..................... 6,100 402,981
Xerox Corp. ............................ 6,800 802,400
-------------
1,304,269
-------------
ELECTRONIC MEDIA (1.3%)
King World Production, Inc. + .......... 1,200 35,325
Tele-Communications, Inc. + ............ 9,800 542,063
Time Warner, Inc. ...................... 21,700 1,346,756
Viacom, Inc. + ......................... 6,500 481,000
Walt Disney Co. (The) .................. 17,000 510,000
-------------
2,915,144
-------------
FOOD AND BEVERAGE (2.8%)
Anheuser-Busch Co., Inc. ............... 13,400 879,375
Archer-Daniels-Midland Co. ............. 5,449 93,655
Brown-Forman Corp. + ................... 800 60,550
Campbell Soup Co. ...................... 11,000 605,000
NUMBER OF MARKET
SHARES VALUE
------------ -------------
FOOD AND BEVERAGE (CONTINUED)
Coca-Cola Co. .......................... 19,200 $ 1,284,000
Coca-Cola Enterprises, Inc. ............ 9,400 336,050
Conagra, Inc. .......................... 9,500 299,250
Coors (Adolph) Co. ..................... 1,000 56,438
Fortune Brands, Inc. ................... 5,300 167,613
General Mills, Inc. .................... 3,000 233,250
Heinz (H.J.) Co. ....................... 7,500 424,687
Hershey Foods Corp. .................... 2,200 136,813
PepsiCo, Inc. .......................... 12,200 499,437
Pioneer Hi-Bred International, Inc. ... 5,300 143,100
Quaker Oats Co. ........................ 3,000 178,500
Ralston-Ralston Purina Group ........... 7,800 252,525
Sara Lee Corp. ......................... 17,800 501,737
Wrigley (Wm.) Jr. Co. .................. 2,000 179,125
-------------
6,331,105
-------------
FOOD AND DRUG RETAIL (1.8%)
Albertson's, Inc. ...................... 5,400 343,912
American Stores Co. .................... 6,800 251,175
CVS Corp. .............................. 8,600 473,000
Fred Meyer, Inc. + ..................... 3,700 222,925
Kroger Co. (The) + ..................... 8,600 520,300
Longs Drug Stores, Inc. ................ 800 30,000
Rite Aid Corp. ......................... 5,900 292,419
Safeway, Inc. + ........................ 12,800 780,000
SUPERVALU, Inc. ........................ 3,800 106,400
Sysco Corp. ............................ 9,700 266,144
Walgreen Co. ........................... 13,100 767,169
Winn-Dixie Stores, Inc. ................ 1,400 62,825
-------------
4,116,269
-------------
FOREST PRODUCTS AND BUILDING MATERIALS (0.5%)
Armstrong World Industries, Inc. ....... 800 48,250
Bemis Co., Inc. ........................ 1,700 64,494
Crown Cork & Seal Co., Inc. ............ 2,500 77,031
Fort James Corp. ....................... 5,300 212,000
Masco Corp. ............................ 8,200 235,750
Mead Corp. ............................. 3,000 87,937
Owens-Illinois, Inc. + ................. 3,100 94,937
Temple-Inland, Inc. .................... 1,600 94,900
Westvaco Corp. ......................... 1,000 26,813
Weyerhaeuser Co. ....................... 5,100 259,144
-------------
1,201,256
-------------
GAS UTILITIES (0.5%)
Coastal Corp. (The) .................... 4,900 171,194
Columbia Energy Group .................. 1,500 86,625
Consolidated Natural Gas Co. ........... 1,800 97,200
Eastern Enterprises .................... 500 21,875
Enron Corp. ............................ 6,400 365,200
NICOR, Inc. ............................ 900 38,025
ONEOK, Inc. ............................ 700 25,287
People's Energy Corp. .................. 600 23,925
Sempra Energy .......................... 4,311 109,392
See Notes to Portfolio of Investments. 129
<PAGE>
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PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
SERIES C (CONTINUED)
================================================================================
NUMBER OF MARKET
SHARES VALUE
------------ -------------
GAS UTILITIES (CONTINUED)
Williams Co., Inc. (The) ............... 4,200 $ 130,987
-------------
1,069,710
-------------
HEALTH SERVICES (0.6%)
Cardinal Health, Inc. .................. 4,400 333,850
HBO & Co. .............................. 13,200 378,675
HCR Manor Care, Inc. + ................. 1,100 32,312
Humana, Inc. + ......................... 2,000 35,625
IMS Health, Inc. ....................... 3,300 248,944
Tenet Healthcare Corp. + ............... 8,200 215,250
United Healthcare Corp. ................ 2,000 86,125
-------------
1,330,781
-------------
HEAVY MACHINERY (0.1%)
Caterpillar, Inc. ...................... 2,800 128,800
NACCO Industries, Inc. ................. 200 18,400
Navistar International Corp. + ......... 2,300 65,550
PACCAR, Inc. ........................... 2,300 94,588
-------------
307,338
-------------
HOUSING AND FURNISHINGS (0.3%)
Centex Corp. ........................... 3,000 135,187
Fleetwood Enterprises, Inc. ............ 700 24,325
Kaufman & Broad Home Corp. ............. 900 25,875
Maytag Corp. ........................... 3,700 230,325
Newell Co. ............................. 3,900 160,875
Pulte Corp. ............................ 1,000 27,812
Rubbermaid, Inc. ....................... 1,800 56,588
Whirlpool Corp. ........................ 2,100 116,287
-------------
777,274
-------------
INDUSTRIAL SERVICES (0.4%)
Browning-Ferris Industries, Inc. ....... 5,900 167,781
Fluor Corp. ............................ 2,400 102,150
Foster Wheeler Corp. ................... 600 7,913
Laidlaw, Inc. .......................... 8,800 88,550
Milacron, Inc. ......................... 900 17,325
USA Waste Management, Inc. ............. 12,600 587,475
-------------
971,194
-------------
INSURANCE (2.9%)
Allstate Corp. (The) ................... 16,000 618,000
American International Group, Inc. ..... 21,800 2,106,425
Aon Corp. .............................. 4,650 257,494
Chubb Corp. ............................ 1,400 90,825
CIGNA Corp. ............................ 5,000 386,562
Cincinnati Financial Corp. ............. 4,500 164,813
Conseco, Inc. .......................... 7,100 216,994
Hartford Financial Services Group, Inc. 5,100 279,863
Jefferson-Pilot Corp. .................. 2,500 187,500
Lincoln National Corp. ................. 2,100 171,806
Marsh & Mclennan Co., Inc. ............. 5,900 344,781
MBIA, Inc. ............................. 2,400 157,350
MGIC Investment Corp. .................. 2,500 99,531
Progressive Corp. ...................... 2,300 389,562
Safeco Corp. ........................... 1,400 60,113
NUMBER OF MARKET
SHARES VALUE
------------ -------------
INSURANCE (CONTINUED)
St. Paul Co., Inc. ..................... 2,296 $ 79,786
SunAmerica, Inc. ....................... 6,850 555,706
Torchmark Corp. ........................ 4,000 141,250
UNUM Corp. ............................. 3,800 221,825
-------------
6,530,186
-------------
INVESTMENT SERVICES (1.1%)
Charles Schwab Corp. ................... 7,850 441,072
Franklin Resources, Inc. ............... 2,400 76,800
Lehman Brothers Holdings, Inc. ......... 1,100 48,469
Merrill Lynch & Co., Inc. .............. 7,200 480,600
Providian Financial Corp. .............. 4,050 303,750
Wells Fargo Co. ........................ 31,500 1,258,031
-------------
2,608,722
-------------
MAJOR TELECOMMUNICATIONS (8.4%)
ALLTEL Corp. ........................... 6,000 358,875
Ameritech Corp. * ...................... 21,500 1,362,563
AT&T Corp. ............................. 34,200 2,573,550
Bell Atlantic Corp. .................... 41,236 2,342,720
BellSouth Corp. ........................ 64,800 3,231,900
GTE Corp. .............................. 27,100 1,827,556
MCI Worldcom, Inc. + ................... 36,046 2,586,300
SBC Communications, Inc. ............... 51,444 2,758,684
Sprint Corp. ........................... 11,500 967,438
Sprint PCS + ........................... 4,200 97,125
U.S. WEST, Inc. ........................ 14,113 912,053
-------------
19,018,764
-------------
MISCELLANEOUS METALS (0.0%)
Barrick Gold Corp. ..................... 4,500 87,750
-------------
OIL (4.2%)
Amoco Corp. ............................ 21,100 1,273,913
Ashland Oil, Inc. ...................... 2,900 140,288
Chevron Corp. .......................... 5,400 447,863
Exxon Corp. ............................ 50,500 3,692,812
Mobil Corp. ............................ 16,200 1,411,425
Royal Dutch Petroleum Co. .............. 45,900 2,197,462
Sunoco Inc. ............................ 2,900 104,581
Texaco, Inc. ........................... 5,200 274,950
-------------
9,543,294
-------------
OIL SERVICES (0.0%)
McDermott International, Inc. .......... 2,900 71,594
-------------
OTHER TELECOMMUNICATIONS (3.8%)
AirTouch Communications, Inc. + ........ 15,200 1,096,300
Ascend Communications, Inc. + .......... 4,900 322,175
Comcast Corp. .......................... 7,500 440,156
Frontier Corp. ......................... 4,700 159,800
General Instrument Corp. + ............. 4,300 145,931
Lucent Technologies, Inc. .............. 44,000 4,840,000
Mediaone Group, Inc. + ................. 12,600 592,200
Northern Telecom Ltd. .................. 13,600 681,700
Tellabs, Inc. + ........................ 5,200 356,525
-------------
8,634,787
-------------
130 See Notes to Portfolio of Investments.
<PAGE>
================================================================================
NUMBER OF MARKET
SHARES VALUE
------------ -------------
PRINT MEDIA (0.7%)
Dow Jones & Co., Inc. .................. 2,200 $ 105,875
Equifax, Inc. .......................... 4,100 140,169
Gannett Co., Inc. ...................... 6,400 423,600
Knight-Ridder, Inc. .................... 1,900 97,137
McGraw-Hill Co., Inc. .................. 2,600 264,875
Meredith Corp. ......................... 1,500 56,813
New York Times Co. ..................... 5,400 187,312
Times Mirror Co. ....................... 1,000 56,000
Tribune Co. ............................ 3,200 211,200
-------------
1,542,981
-------------
PRODUCER GOODS (2.6%)
Aeroquip-Vickers, Inc. ................. 500 14,969
Allegheny Teledyne, Inc. ............... 5,200 106,275
Allied Signal, Inc. .................... 12,600 558,337
Avery Dennison Corp. ................... 2,600 117,163
Cooper Industries, Inc. ................ 2,800 133,525
Corning, Inc. .......................... 5,300 238,500
Dover Corp. ............................ 1,700 62,263
Ecolab, Inc. ........................... 3,400 123,037
Emerson Electric Co. ................... 9,900 619,369
FMC Corp. + ............................ 600 33,600
Grainger (W.W.), Inc. .................. 700 29,138
Honeywell, Inc. ........................ 3,600 271,125
Illinois Tool Works, Inc. .............. 6,000 348,000
Ingersoll-Rand Co. ..................... 5,800 272,237
ITT Industries, Inc. ................... 2,600 103,350
Minnesota Mining and Manufacturing Co. . 7,600 540,550
Parker-Hannifin Corp. .................. 2,600 85,150
PPG Industries, Inc. ................... 4,800 279,600
Raychem Corp. .......................... 3,000 96,938
Sherwin-Williams Co. ................... 4,300 126,312
Thomas & Betts Corp. ................... 1,700 73,631
Timken Co. ............................. 1,700 32,088
Tyco International Ltd. ................ 21,400 1,614,362
-------------
5,879,519
-------------
SEMICONDUCTORS AND ELECTRONICS (4.2%)
3Com Corp. + ........................... 8,600 385,388
AMP, Inc. .............................. 5,200 270,725
Applied Materials, Inc. + .............. 7,900 337,231
Intel Corp. ............................ 55,200 6,544,650
Motorola, Inc. ......................... 13,200 806,025
Texas Instruments, Inc. ................ 12,900 1,103,756
-------------
9,447,775
-------------
SPECIALTY CHEMICALS (0.3%)
Air Products and Chemicals, Inc. ....... 6,400 256,000
Engelhard Corp. ........................ 4,100 79,950
Grace (W.R.) & Co. ..................... 1,800 28,238
Great Lakes Chemical Corp. ............. 700 28,000
Morton International, Inc. ............. 1,100 26,950
Nalco Chemical Co. ..................... 1,100 34,100
Praxair, Inc. .......................... 4,400 155,100
NUMBER OF MARKET
SHARES VALUE
------------ -------------
SPECIALTY CHEMICALS (CONTINUED)
Sigma-Aldrich Corp. .................... 1,900 $ 55,812
-------------
664,150
-------------
STEEL (0.1%)
Nucor Corp. ............................ 1,900 82,175
USX-US Steel Group, Inc. ............... 4,400 101,200
-------------
183,375
-------------
SURFACE TRANSPORT (0.5%)
Burlington Northern Santa Fe Corp. ..... 10,400 351,000
FDX Corp. Holding Co. + ................ 2,980 265,220
Norfolk Southern Corp. ................. 9,900 313,706
Ryder System, Inc. ..................... 1,600 41,600
Union Pacific Corp. .................... 2,300 103,644
-------------
1,075,170
-------------
TEXTILES AND APPAREL (0.1%)
Liz Claiborne, Inc. .................... 1,900 59,969
VF Corp. ............................... 4,100 192,187
-------------
252,156
-------------
TOTAL COMMON STOCKS (COST $173,521,138) 215,565,730
-------------
PRINCIPAL
AMOUNT
-------------
LONG-TERM BONDS AND NOTES (2.7%)
U.S. TREASURIES (2.7%)
U.S. Treasury Strip, Zero Coupon,
11/15/01 #............................ $4,558,000 3,990,574
U.S. Treasury Strip, Zero Coupon,
02/15/02 #............................ 2,497,000 2,161,004
-----------
TOTAL LONG-TERM BONDS AND NOTES (COST $6,224,766) 6,151,578
------------
SHORT-TERM INVESTMENTS (1.8%)
Federal Home Loan Mortgage Corp.,
4.40%, 01/04/99 ...................... 4,029,000 4,029,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $4,029,000) 4,029,000
------------
TOTAL INVESTMENTS (COST $183,774,904)(a) 225,746,308
OTHER ASSETS LESS LIABILITIES ......... 1,460,674
------------
TOTAL NET ASSETS $227,206,982
============
</TABLE>
See Notes to Portfolio of Investments. 131
<PAGE>
AETNA GET FUND
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
SERIES C (CONTINUED)
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes amounts to
$186,430,914. Unrealized gains and losses, based on identified tax cost at
December 31, 1998, are as follows:
<TABLE>
<S> <C>
Unrealized gains................................ $42,576,808
Unrealized losses............................... (3,261,414)
--------------
Net unrealized gain............................ $39,315,394
==============
</TABLE>
+ Non-income producing security.
* Segregated securities for purchases of delayed delivery or when-issued
securities held at December 31, 1998.
# When-issued or delayed delivery security.
Category percentages are based on net assets.
132 See Notes to Financial Statements.
<PAGE>
AETNA GET FUND
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1998
SERIES D
================================================================================
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------------- -----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (97.6%)
COMMERCIAL PAPER - DOMESTIC (35.5%)
American Express Credit Corp.,
4.90%, 01/06/99 ....................... $10,000,000 $ 9,997,278
Ciesco Inc., 5.40%, 01/14/99 ++ ........ 9,000,000 8,986,500
Cooperative Associates of Tractor
Dealers, Inc., 5.75%, 01/12/99 ........ 1,700,000 1,697,828
Cooperative Associates of Tractor
Dealers, Inc., 6.12%, 01/05/99 ........ 1,500,000 1,499,745
CSW Credit, Inc., 5.35%, 01/19/99 ++ ... 10,000,000 9,977,708
Dakota Certificates - Standard Credit
Card Master Trust 1, 5.50%,
01/07/99 ++ .......................... 8,000,000 7,996,333
Dealers Capital Acceptance Trust,
Inc.,
5.35%, 01/04/99 ....................... 10,000,000 10,000,000
Ford Motor Credit Corp., 5.95%,
01/05/99 .............................. 10,000,000 9,998,347
Goldman Sachs Group L.P., 5.35%,
01/04/99 .............................. 8,000,000 8,000,000
Jefferson Smurfit Finance Corp.,
6.10%, 01/05/99 ....................... 1,370,000 1,369,768
Koch Industries Inc., 5.25%,
01/04/99 ++ ........................... 10,000,000 10,000,000
McDonald's Corp., 5.80%, 01/05/99 ...... 10,000,000 9,998,389
Pitney Bowes, Inc., 4.95%, 01/14/99 .... 10,000,000 9,986,250
Prudential Funding Corp., 4.25%,
01/04/99 .............................. 10,000,000 10,000,000
Republic Industries, Inc., 5.50%,
01/13/99 .............................. 8,000,000 7,989,000
TRW, Inc., 5.05%, 01/04/99 ++ .......... 10,000,000 10,000,000
Wood Street Funding Corp.,
5.45%, 01/11/99 ++ .................... 7,000,000 6,992,582
Wood Street Funding Corp.,
5.97%, 01/08/99 ++ .................... 2,350,000 2,348,441
------------
TOTAL COMMERCIAL PAPER - DOMESTIC ...... 136,838,169
------------
COMMERCIAL PAPER - FOREIGN (5.2%)
Eureka Securitization, Inc., 5.30%,
01/04/99 ++ ........................... 10,000,000 10,000,000
Xerox Capital (Europe) Plc,
5.00%, 01/04/99 ++ .................... 10,000,000 10,000,000
------------
TOTAL COMMERCIAL PAPER - FOREIGN ....... 20,000,000
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (44.7%)
Federal Farm Credit Bank, 5.07%,
01/13/99 .............................. 30,000,000 29,961,975
Federal Home Loan Mortgage Corp.,
4.55%, 01/05/99 ....................... 9,000,000 8,998,863
Federal Home Loan Mortgage Corp.,
5.08%, 01/15/99 ....................... 25,000,000 24,961,194
Federal Home Loan Mortgage Corp.,
5.10%, 01/11/99 ....................... 25,000,000 24,975,208
Federal Home Loan Mortgage Corp.,
5.10%, 01/14/99 ....................... 11,000,000 10,984,417
Federal National Mortgage Association,
5.09%, 01/07/99 ....................... 22,261,000 22,251,558
Federal National Mortgage Association,
5.11%, 01/14/99 ....................... 25,000,000 24,964,514
Federal National Mortgage Association,
5.12%, 01/05/99 ....................... 25,000,000 24,996,444
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 172,094,173
------------
PRINCIPAL
AMOUNT VALUE
-------------- ------------
U.S. GOVERNMENT OBLIGATIONS (12.2%)
U.S. Treasury Bill, 3.60%, 01/14/99 .. $47,140,000 $47,092,860
------------
TOTAL SHORT-TERM INVESTMENTS .......... 376,025,202
------------
TOTAL INVESTMENTS (COST $376,025,202)(a) 376,025,202
OTHER ASSETS LESS LIABILITIES ......... 9,268,385
------------
TOTAL NET ASSETS $385,293,587
============
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes is identical. There
were no unrealized gains and losses as of December 31, 1998.
++Securities that may be resold to "qualified institutional buyers" under Rule
144A or securities offered pursuant to section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
Information concerning restricted securities at December 31, 1998 is shown
below:
<TABLE>
<CAPTION>
COST
-----------
<S> <C>
Ciesco Inc............................................ $ 8,986,500
CSW Credit, Inc....................................... 9,977,708
Dakota Certificates - Standard Credit Card Master 7,996,333
Trust 1...............................................
Eureka Securitization, Inc............................ 10,000,000
Koch Industries, Inc.................................. 10,000,000
TRW, Inc.............................................. 10,000,000
Wood Street Funding Corp.............................. 9,341,023
Xerox Capital (Europe) Plc............................ 10,000,000
-----------
$76,301,564
===========
</TABLE>
The market value of the total restricted securities above represent 19.80% of
the total net assets.
Category percentages are based on net assets.
See Notes to Financial Statements. 133
<PAGE>
AETNA GET FUND
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
================================================================================
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D
----------- ------------ ------------
<S> <C> <C> <C>
ASSETS:
Investments, at market
value.................. $90,822,671 $225,746,308 $376,025,202
Cash ................... -- 14,099 57
Receivable for:
Dividends and interest 90,312 199,626 --
Investments sold ...... 521,702 2,924,127 --
Fund shares sold ...... -- -- 9,375,081
Prepaid expenses ...... 508 1,423 --
----------- ------------ ------------
Total assets ...... 91,435,193 228,885,583 385,400,340
----------- ------------ ------------
LIABILITIES:
Payable for:
Investments purchased . 875,933 1,142,631 --
Fund shares redeemed .. 159,045 355,383 --
Accrued investment
advisory fees ......... 66,769 134,811 65,315
Accrued administrative
service fees .......... 6,677 16,851 19,600
Accrued custody fees ... 5,868 8,974 5,600
Other liabilities ...... 454,794 19,951 16,238
----------- ------------ ------------
Total liabilities . 1,569,086 1,678,601 106,753
----------- ------------ ------------
NET ASSETS ............ $89,866,107 $227,206,982 $385,293,587
=========== ============ ============
NET ASSETS REPRESENTED
BY:
Paid-in capital ........ $57,170,696 $143,933,391 $385,279,011
Net unrealized gain on
investments............ 14,491,234 41,971,404 --
Undistributed net
investment income ..... 97,631 718,532 16,872
Accumulated net realized
gain (loss) on
investments............ 18,106,546 40,583,655 (2,296)
----------- ------------ ------------
NET ASSETS ............ $89,866,107 $227,206,982 $385,293,587
=========== ============ ============
CAPITAL SHARES:
Par value .............. $ 0.001 $ 0.001 $ 0.001
Outstanding ............ 6,155,294 15,717,958 38,334,233
Net asset value,
offering and redemption
price per share (net
assets divided by
shares outstanding) ... $ 14.60 $ 14.46 $ 10.05
Cost of investments .... $76,331,436 $183,774,904 $376,025,202
</TABLE>
134 See Notes to Financial Statements.
<PAGE>
AETNA GET FUND
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D
YEAR ENDED YEAR ENDED PERIOD FROM OCTOBER 15, 1998
DECEMBER 31, DECEMBER 31, (COMMENCEMENT OF OPERATIONS)
1998 1998 TO DECEMBER 31, 1998
------------ ------------ ----------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends .................... $ 1,258,787 $ 3,306,353 $ --
Interest ..................... 418,947 879,077 1,779,574
------------ ------------ ------------
1,677,734 4,185,430 1,779,574
Foreign taxes withheld
on dividends ................ (2,030) (13,941) --
------------ ------------ ------------
Total investment income . 1,675,704 4,171,489 1,779,574
------------ ------------ ------------
INVESTMENT EXPENSES:
Investment advisory fees ..... 779,171 1,557,938 88,845
Administrative
services fees ............... 104,042 258,756 26,654
Printing and postage ......... 5,187 8,528 4,084
Custody fees ................. 9,696 11,187 5,600
Transfer agent fees .......... 1,614 1,572 722
Audit fees ................... 11,217 12,288 5,653
Directors' fees .............. 1,845 4,644 1,106
Registration fees ............ 1,249 2,211 4,097
Miscellaneous expenses ....... 1,434 2,869 576
------------ ------------ ------------
Expenses before reimbursement
and waiver from Investment
Adviser ..................... 915,455 1,859,993 137,337
Expense reimbursement
and waiver from
Investment Adviser .......... -- -- (6,829)
------------ ------------ ------------
Net expenses ............ 915,455 1,859,993 130,508
------------ ------------ ------------
Net investment income ........ 760,249 2,311,496 1,649,066
------------ ------------ ------------
NET REALIZED AND UNREALIZED
GAIN (LOSS):
Net realized gain (loss) on:
Investments ................. 17,501,921 41,727,606 (2,296)
Futures contracts ........... 726,485 (1,446) --
------------ ------------ ------------
Net realized gain (loss)
on investments ......... 18,228,406 41,726,160 (2,296)
------------ ------------ ------------
Net change in unrealized
gain or loss on:
Investments ................. (2,034,916) 16,257,595 --
Futures contracts ........... 26,100 -- --
------------ ------------ ------------
Net change in unrealized
gain or loss on
investments ............ (2,008,816) 16,257,595 --
------------ ------------ ------------
Net realized and change in
unrealized gain or loss on
investments ................. 16,219,590 57,983,755 (2,296)
------------ ------------ ------------
Net increase in net
assets resulting from
operations .................. $ 16,979,839 $ 60,295,251 $ 1,646,770
============ ============ ============
</TABLE>
See Notes to Financial Statements. 135
<PAGE>
AETNA GET FUND
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
SERIES B
------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income .................. $ 760,249 $ 1,238,060
Net realized gain on investments ....... 18,228,406 23,778,113
Net change in unrealized gain or loss
on investments ........................ (2,008,816) 2,699,879
------------- -------------
Net increase in net assets resulting
from operations ....................... 16,979,839 27,716,052
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ........... (899,725) (1,316,653)
From net realized gains .............. (23,849,952) (15,789,390)
------------- -------------
Decrease in net assets from
distributions to shareholders ......... (24,749,677) (17,106,043)
------------- -------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold ............ 3,367,874 515,787
Net asset value of shares issued upon
reinvestment of distributions ....... 24,749,677 17,106,043
Payments for shares redeemed ......... (32,418,789) (9,311,023)
------------- -------------
Net increase (decrease) in net assets
from fund share transactions ......... (4,301,238) 8,310,807
------------- -------------
Net change in net assets ............... (12,071,076) 18,920,816
NET ASSETS:
Beginning of period .................... 101,937,183 83,016,367
------------- -------------
End of period .......................... $ 89,866,107 $ 101,937,183
============= =============
End of period net assets includes
undistributed net investment income ... $ 97,631 $ 237,107
============= =============
SHARE TRANSACTIONS:
Number of shares exchanged* .......... 193,414 32,017
Number of shares issued upon
reinvestment of distributions ....... 1,759,731 1,209,626
Number of shares redeemed ............ (2,279,118) (598,460)
------------- -------------
Net increase (decrease) ............... (325,973) 643,183
============= =============
</TABLE>
* Exchanges into the Series are from initial shareholders who have exchange
privileges.
136 See Notes to Financial Statements.
<PAGE>
================================================================================
<TABLE>
<CAPTION>
SERIES C
------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income .................. $ 2,311,496 $ 3,674,973
Net realized gain on investments ....... 41,726,160 25,237,905
Net change in unrealized gain or loss
on investments ........................ 16,257,595 22,900,180
------------- -------------
Net increase in net assets resulting
from operations ....................... 60,295,251 51,813,058
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ........... (1,999,433) (3,554,172)
From net realized gains .............. (26,131,436) (292,861)
------------- -------------
Decrease in net assets from
distributions to shareholders ........ (28,130,869) (3,847,033)
------------- -------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold ............ 1,331,190 2,280,242
Net asset value of shares issued upon
reinvestment of distributions ....... 28,130,869 3,847,033
Payments for shares redeemed ......... (82,171,253) (14,783,238)
------------- -------------
Net decrease in net assets from fund
share transactions .................... (52,709,194) (8,655,963)
------------- -------------
Net change in net assets ............... (20,544,812) 39,310,062
NET ASSETS:
Beginning of period .................... 247,751,794 208,441,732
------------- -------------
End of period .......................... $ 227,206,982 $ 247,751,794
============= =============
End of period net assets includes
undistributed net investment income ... $ 718,532 $ 406,469
============= =============
SHARE TRANSACTIONS:
Number of shares exchanged* .......... 97,439 208,233
Number of shares issued upon
reinvestment of distributions ....... 2,094,000 317,546
Number of shares redeemed ............ (6,120,999) (1,254,289)
------------- -------------
Net decrease .......................... (3,929,560) (728,510)
============= =============
</TABLE>
* Exchanges into the Series are from initial shareholders who have exchange
privileges.
See Notes to Financial Statements. 137
<PAGE>
AETNA GET FUND
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
SERIES D
--------------------
PERIOD FROM
OCTOBER 15, 1998
(COMMENCEMENT OF
OPERATIONS)
TO DECEMBER 31, 1998
--------------------
<S> <C>
FROM OPERATIONS:
Net investment income ........................................... $ 1,649,066
Net realized loss on investments ................................ (2,296)
-------------
Net increase in net assets resulting from operations ........... 1,646,770
-------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income .................................... (1,632,194)
-------------
Decrease in net assets from distributions to
shareholders .................................................. (1,632,194)
-------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold ..................................... 383,646,817
Net asset value of shares issued upon reinvestment of
distributions ................................................ 1,632,194
-------------
Net increase in net assets from fund share
transactions .................................................. 385,279,011
-------------
Net change in net assets ........................................ 385,293,587
NET ASSETS:
Beginning of period ............................................. --
-------------
End of period ................................................... $ 385,293,587
=============
End of period net assets includes undistributed net
investment income .............................................. $ 16,872
=============
SHARE TRANSACTIONS:
Number of shares sold ......................................... 38,171,760
Number of shares issued upon reinvestment of
distributions ................................................ 162,473
-------------
Net increase ................................................... 38,334,233
=============
</TABLE>
138 See Notes to Financial Statements.
<PAGE>
AETNA GET FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
1. ORGANIZATION
Aetna GET Fund (Fund) is registered under the Investment Company Act of 1940 as
an open-end management investment company. It was organized under the laws of
Massachusetts as a business trust on March 9, 1987. The Declaration of Trust
permits the Fund to offer separate series (Series), each of which has its own
investment objective, policies and restrictions.
Currently there are three diversified Series of the Fund, Aetna GET Fund, Series
B (GET B), Aetna GET Fund, Series C (GET C), and Aetna GET Fund, Series D (GET
D). Each Series seek to achieve maximum total return by participating in
favorable equity market performance without compromising a minimum targeted rate
of return during a specified five year period (Guaranteed Period). The minimum
targeted return for each Series during its Guaranteed Period is 2.50% per year,
before asset based contract charges and each Series' cost of operations.
GET B accumulated deposits from March 15, 1994 to June 30, 1994. The Guaranteed
Period for GET B is from July 1, 1994 to June 30, 1999, its maturity date. GET C
accumulated deposits from September 16, 1996 to December 16, 1996. The
Guaranteed Period for GET C is from December 17, 1996 to December 16, 2001, its
maturity date. GET D will accumulate deposits from October 15, 1998 to January
15, 1999. The Guaranteed Period for GET D is from January 16, 1999 to January
15, 2004, its maturity date.
Shares of each Series are currently owned by insurance companies as depositors
of separate accounts which are used to fund variable annuity contracts and
variable life insurance policies. All shares are currently held by separate
accounts of Aetna Life Insurance and Annuity Company (ALIAC) and its subsidiary,
Aetna Insurance Company of America.
Effective May 1, 1998, Aeltus Investment Management, Inc. (Aeltus) became the
investment adviser to the Fund. Prior to May 1, 1998, ALIAC acted as investment
adviser and Aeltus served as sub-adviser to the Fund. ALIAC serves as the
principal underwriter to the Fund. Aeltus and ALIAC are both indirect
wholly-owned subsidiaries of Aetna Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of each Series have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect amounts
reported therein. Although actual results may differ from these estimates, any
such differences are expected to be immaterial to the net assets of each Series.
A. VALUATION OF INVESTMENTS
Investments are stated at market values based upon prices furnished by external
pricing sources as reported on national securities exchanges or, for
over-the-counter securities, at the mean of the bid and asked prices. Short-term
investments maturing in more than sixty days for which market quotations are
readily available are valued at current market value. Short-term investments
maturing in less than sixty days are valued at amortized cost, which when
combined with accrued interest, approximates market value. Securities and fixed
income investments for which market quotations are not considered to be readily
available are valued using methods approved by the Board of Trustees.
B. FUTURES CONTRACTS
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security or financial instrument, including an
index of stocks, at a set price on a future date. Each Series invests in
financial futures contracts as a hedge against its existing portfolio
securities, to manage the risk of changes in interest rates, equity prices,
currency exchange rates or in anticipation of future purchases and sales of
portfolio securities.
139
<PAGE>
AETNA GET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FUTURES CONTRACTS (CONTINUED)
Upon entering into a futures contract, each Series is required to deposit with a
broker an amount (initial margin) equal to a percentage of the purchase price
indicated by the futures contract. Subsequent deposits (variation margin) are
received or paid each day by a Series equal to the daily fluctuations in the
market value of the contract. These amounts are recorded by a Series as
unrealized gains or losses. When a contract is closed, a Series records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed. Generally,
futures contracts held by a Series are closed prior to expiration.
The risks associated with financial futures may arise from an imperfect
correlation between the change in market value of the securities held by the
Funds and the price of the contracts. Risks may also arise from an illiquid
secondary market or from the inability of counterparties to meet the terms of
the contracts.
Realized and unrealized gains or losses on financial futures are reflected in
the accompanying financial statements. The amounts at risk under such futures
may exceed the amounts reflected in the financial statements. For federal income
tax purposes, any futures contracts which remain open at year end are
marked-to-market and the resultant net gain or loss is reported to shareholders
as federal taxable income.
C. ILLIQUID AND RESTRICTED SECURITIES
Illiquid securities are securities that are not readily marketable. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for a Series to sell them promptly at an
acceptable price. Restricted securities are those which can only be sold under
Rule 144A of the Securities Act of 1933 (1933 Act) or are securities offered
pursuant to Section 4(2) of the 1933 Act, and are subject to legal or
contractual restrictions on resale and may not be publicly sold without
registration under the 1933 Act. Each Series may invest up to 15% of its total
assets in illiquid securities. In the absence of market quotations, the
securities are valued based upon their fair value determined under procedures
approved by the Board of Trustees. The Series will not pay the costs of
disposition of restricted securities other than ordinary brokerage fees, if any.
Illiquid and restricted securities are valued using market quotations when
readily available.
D. FEDERAL INCOME TAXES
Each Series intends to meet the requirements to be taxed as a regulated
investment company for the current year. As such, each Series is relieved of
federal income taxes by distributing all of its net taxable investment income
and capital gains, if any, in compliance with the applicable provisions of the
Internal Revenue Code. Furthermore, by distributing substantially all of its net
taxable investment income and capital gains during the calendar year, each
Series will avoid federal excise taxes in accordance with the applicable
provisions of the Internal Revenue Code. Thus, the financial statements contain
no provision for federal taxes.
E. DISTRIBUTIONS
Distributions are recorded on the ex-dividend date. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing treatments for futures contracts and certain losses
deferred due to transactions characterized as "wash sales" by federal tax
regulations. In addition, distributions of realized gains from sales of
securities held one year or less are taxable to shareholders at ordinary income
tax rates rather than preferred capital gain tax rates in accordance with the
applicable provisions of the Internal Revenue Code.
140
<PAGE>
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. OTHER
Investment transactions are accounted for on the day following trade date,
except same day settlements which are accounted for on the trade date. Interest
income is recorded on an accrual basis. Discounts and premiums on securities
purchased are accreted or amortized, respectively, using an effective yield
method over the life of the security. Dividend income and stock splits are
recorded on the ex-dividend date. Realized gains and losses from investment
transactions are determined on an identified cost basis.
3. INVESTMENT ADVISORY, SHAREHOLDER SERVICES AND DISTRIBUTION FEES
Each Series pays Aeltus a monthly fee expressed as a percentage of its average
daily net assets. Below are the Series' annual Investment Advisory fees, as of
December 31, 1998:
<TABLE>
<CAPTION>
ADVISORY FEE
------------
<S> <C>
GET B 0.75%
GET C 0.60%
GET D 0.25%
</TABLE>
Aeltus has served as the investment adviser for GET B and GET C since May 1,
1998 and since inception for GET D. Prior to May 1, 1998, ALIAC served as
investment adviser and Aeltus served as sub-adviser. As the sub-adviser, Aeltus
supervised the investment and reinvestment of cash and securities and provided
certain related administrative services for each Series. For the period January
1, 1998 through April 30, 1998, ALIAC collected $779,781 from the Series, of
which it paid $441,411 to Aeltus.
Effective May 1, 1998 (for GET D, October 15, 1998), each Series pays expenses
incurred in exchange for services provided by auditors, legal firms, transfer
agents, custodian banks and financial printers. Each Series pays its
proportionate share of compensation to the Fund's Board of Trustees and its
proportionate share of insurance premiums. Each Series pays its direct costs
incurred to mail shareholder reports, register its shares with the Securities
and Exchange Commission and any other costs incurred by the Series. In addition,
each Series pays Aeltus an administrative services fee in exchange for receiving
certain administrative and shareholder services and to compensate Aeltus for
supervising the Funds' other service providers. Each Series pays Aeltus an
administrative services fee at an annual rate based on its average daily net
assets of the Series. The rate is 0.075% on the first $5 billion in Series
assets and 0.050% on all Series assets over $5 billion.
Prior to May 1, 1998, ALIAC acted as Administrator to the Fund. As
Administrator, ALIAC paid all the expenses of the Fund on its behalf, supervised
the Fund's other service providers and provided the Fund with certain
administrative and shareholder services. In exchange for these services, ALIAC
received an administrative services fee at an annual rate of up to 0.15% of each
Series' average daily net assets. For the period January 1, 1998 through April
30, 1998, ALIAC collected $181,768 in administrative services fees from the
Series'.
Aeltus has entered into a Service Agreement with ALIAC under which ALIAC will
provide various administrative and shareholder services for each Series, in
exchange for fees payable by Aeltus, of up to 0.375% of the Series' average
daily net assets. For the period May 1, 1998 through December 31, 1998, Aeltus
paid ALIAC $813,954.
141
<PAGE>
AETNA GET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
================================================================================
4. REIMBURSEMENT AND WAIVER FROM INVESTMENT ADVISER
Aeltus may, from time to time, make reimbursements to GET B for some or all of
its operating expenses or it may waive fees in order to maintain a certain
expense ratio. Aeltus is contractually obligated for GET C and GET D through
December 31, 1999 and December 31, 2000, respectively, to reimburse GET C and
GET D for some or all of their operating expenses or to waive fees in order to
maintain a certain expense ratio. Reimbursement and waiver arrangements, which
may be terminated at any time without notice for GET B, will increase a Series'
yield and total return.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES
Purchases and sales of investment securities, excluding short-term investments,
for the year ended December 31, 1998 were:
<TABLE>
<CAPTION>
COST OF PURCHASES PROCEEDS FROM SALES
----------------- -------------------
<S> <C> <C>
GET B $141,196,630 $164,241,981
GET C 272,406,156 355,410,671
</TABLE>
142
<PAGE>
AETNA GET FUND
ADDITIONAL INFORMATION
DECEMBER 31, 1998
================================================================================
FEDERAL TAX STATUS OF DIVIDENDS DECLARED DURING THE FISCAL YEAR (UNAUDITED)
In accordance with federal tax authorities, certain portions of the dividends
taxable as ordinary income qualify for the corporate dividends received
deduction. The following percentages reflect the portions of such dividends
paid:
<TABLE>
<CAPTION>
<S> <C>
GET B 12.16%
GET C 10.95%
</TABLE>
In accordance with federal tax authorities, the following amount of dividends
which qualify to be taxed at long-term capital gain rates were paid during the
year ended December 31, 1998:
<TABLE>
<CAPTION>
AGGREGATE PER SHARE
--------- ---------
<S> <C> <C>
GET B $12,190,195 $1.97
GET C 355,796 0.02
</TABLE>
YEAR 2000 (UNAUDITED)
The Series receive services from a number of providers which rely on the
effective functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not be able to perform their intended functions adequately after 1999
because of the inability of computer systems and software to distinguish the
year 2000 from the year 1900. Aeltus is taking steps that it believes are
reasonably designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Series' other major service providers. There can be no assurance, however, that
these steps will be sufficient to avoid any adverse impact on the Series from
this problem.
143
<PAGE>
AETNA GET FUND
FINANCIAL HIGHLIGHTS
GET SERIES B
================================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1994
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OPERATIONS)
1998 1997 1996 1995+ TO DECEMBER 31,1994+
------------ ------------ ------------ ------------ --------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $ 15.73 $ 14.22 $ 12.40 $ 9.92 $ 10.09
------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................... 0.12 0.21+ 0.28+ 0.31 0.25
Net realized and change in unrealized
gain or loss on investments ............. 2.75 4.34 2.49 2.49 (0.06)
------- -------- ------- ------- -------
Total from investment operations ....... 2.87 4.55 2.77 2.80 0.19
------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
From net investment income ............... (0.14) (0.22) (0.23) (0.32) (0.32)
From net realized gains on investments ... (3.86) (2.82) (0.72) -- (0.04)
------- -------- ------- ------- -------
Total distributions .................... (4.00) (3.04) (0.95) (0.32) (0.36)
------- -------- ------- ------- -------
Net asset value, end of period ............ $ 14.60 $ 15.73 $ 14.22 $ 12.40 $ 9.92
======= ======== ======= ======= =======
Total return* ............................. 19.42% 34.52% 23.52% 28.38% 1.83%
Net assets, end of period (000's) ......... $89,866 $101,937 $83,016 $88,570 $74,145
Ratio of net expenses to average
net assets ............................... 0.88% 0.90% 0.85% 1.03% 0.53%(1)
Ratio of net investment income to
average net assets ....................... 0.73% 1.30% 1.96% 2.74% 4.52%(1)
Portfolio turnover rate ................... 145.66% 214.10% 122.27% 90.25% 36.12%
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
144 See Notes to Financial Statements.
<PAGE>
GET SERIES C
================================================================================
Selected data for a fund share outstanding throughout each period:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17, 1996
YEAR ENDED YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, DECEMBER 31, OPERATIONS)
1998 1997 TO DECEMBER 31, 1996
------------ ------------ --------------------
<S> <C> <C> <C>
Net asset value, beginning of period ...... $ 12.61 $ 10.23 $ 10.13
-------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .................... 0.14 0.19+ 0.01+
Net realized and change in unrealized gain
or loss on investments .................. 3.23 2.39 0.14
-------- -------- --------
Total from investment operations ....... 3.37 2.58 0.15
-------- -------- --------
LESS DISTRIBUTIONS:
From net investment income ............... (0.12) (0.18) (0.05)
From net realized gains on investments ... (1.40) (0.02) --
-------- -------- --------
Total distributions .................... (1.52) (0.20) (0.05)
-------- -------- --------
Net asset value, end of period ............ $ 14.46 $ 12.61 $ 10.23
======== ======== ========
Total return* ............................. 27.76% 25.25% 1.52%
Net assets, end of period (000's) ......... $227,207 $247,752 $208,442
Ratio of net expenses to average net assets 0.72% 0.75% 0.75%
Ratio of net investment income to average
net assets ............................... 0.89% 1.58% 3.04%
Portfolio turnover rate ................... 108.16% 126.43% 6.25%
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
See Notes to Financial Statements. 145
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of Aetna GET Fund:
We have audited the accompanying statements of assets and liabilities of Aetna
GET Fund, Series B, Series C and Series D (collectively the Funds), including
the portfolios of investments as of December 31, 1998 and the related statements
of operations for the year or period then ended, the statements of changes in
net assets for each of the years or period in the two-year period then ended and
financial highlights for each of the years in the four-year period ended
December 31, 1998 and the period from July 1, 1994 (commencement of operations)
to December 31, 1994 for Series B and for each of the years in the two-year
period ended December 31, 1998 and the period from December 17, 1996
(commencement of operations) to December 31, 1996 for Series C. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Aetna
GET Fund, Series B, Series C and Series D as of December 31, 1998, results of
their operations for the year or period then ended, changes in their net assets
for each of the years or periods in the two-year period then ended and financial
highlights for each of the years or periods specified in the first paragraph
above, in conformity with generally accepted accounting principles.
KPMG LLP
Hartford, Connecticut
January 29, 1999
146
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
[back cover]
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Hartford, CT 06156-8972 PAID
BOSTON, MA
PERMIT NO. 57842
ANN.AETNA-98 (3/99)
