As filed with the Securities and Exchange File No. 2-51739
Commission on April 27, 1998 File No. 811-2514
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 53
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 38
AETNA VARIABLE FUND
-------------------
(d/b/a Aetna Growth and Income VP)
----------------------------------
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
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(860) 273-1409
Amy R. Doberman, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
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(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
[X] on May 1, 1998 pursuant to paragraph (b) of Rule 485
<PAGE>
Aetna Variable Fund
Cross-Reference Sheet
<TABLE>
<CAPTION>
Form N-1A
Item No. Part A Caption in Prospectus
- -------- ------ ---------------------
<S> <C> <C>
1. Cover Page.................................... Cover Page
2. Synopsis...................................... Fee Table
3. Condensed Financial Information............... Financial Highlights
4. General Description of Registrant............. Investment Objective
Investment Policies and Restrictions
Risk Factors and Other Considerations
General Information
5. Management of the Fund........................ Management of the Fund
5A. Management's Discussion of Fund Performance... Not applicable
6. Capital Stock and Other Securities............ General Information
Tax Matters
7. Purchase of Securities Being Offered.......... General Information
Purchase and Redemption of Shares
Net Asset Value
8. Redemption or Repurchase...................... Purchase and Redemption of Shares
Net Asset Value
9. Legal Proceedings............................. Not applicable
<PAGE>
Form N-1A Caption in Statement of
-----------------------
Item No. Part B Additional Information
- -------- ------ ---------------------
10. Cover Page.................................... Cover Page
11. Table of Contents............................. Table of Contents
12. General Information and History............... General Information and History
13. Investment Objectives and Policies............ General Information and History
Investment Policies of the Fund
Description of Various Securities and
Investment Techniques
14. Management of the Fund........................ Trustees and Officers of the Fund
Control Persons and Principal
15. Holders of Securities......................... Control Persons and Principal
Shareholders of the Fund
16. Investment Advisory and Other Services........ Investment Advisory Agreements Administrative
Services Agreements Custodian
Independent Auditors
17. Brokerage Allocation.......................... Brokerage Allocation and Trading
Policies
18. Capital Stock and Other Securities............ Description of Shares
Purchase, Redemption and Pricing of
19. Securities Being Offered...................... Purchase and Redemption of Shares
Net Asset Value
20. Tax Status.................................... Tax Matters
21. Underwriters.................................. Principal Underwriter
22. Calculation of Performance Data............... Performance Information
23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
<PAGE>
Aetna Variable Fund d/b/a
AETNA GROWTH AND INCOME VP
151 Farmington Avenue
Hartford, Connecticut 06156-8962
1-800-238-6263
Prospectus dated: May 1, 1998
Aetna Growth and Income VP (Fund) is a diversified, open-end management
investment company whose shares are currently available to (i) variable annuity
or variable life insurance separate accounts to fund variable annuity contracts
(VA Contracts) and variable life insurance policies (VLI Policies) issued by
Aetna Life Insurance and Annuity Company (Aetna) and its affiliates and (ii)
other shareholders of the Fund only through dividend reinvestment.
The Fund seeks to maximize total return 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. An investment in the Fund is neither insured
nor guaranteed by the U.S. Government.
This Prospectus sets forth concisely the information about the Fund that you
should know before investing. Additional information about the Fund is contained
in a Statement of Additional Information (Statement) dated May 1, 1998, which
has been filed with the Securities and Exchange Commission (Commission) and is
incorporated by reference. You can obtain a Statement, without charge, by
writing to the Fund at the address listed above or by calling the Fund at
1-800-238-6263. Additional information filed with the Commission can be obtained
by contacting the Commission at its Web Site (http://www.sec.gov).
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the securities of the Fund in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Please read this Prospectus and retain for future reference.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
FEE TABLE ................................................................ 3
FINANCIAL HIGHLIGHTS ..................................................... 4
INVESTMENT OBJECTIVE ..................................................... 5
INVESTMENT POLICIES AND RESTRICTIONS ..................................... 5
Investment Policies ..................................................... 5
Industry Concentration .................................................. 5
Illiquid and Restricted Securities ...................................... 5
Foreign Securities ...................................................... 5
Repurchase Agreements ................................................... 5
Borrowing ............................................................... 5
High-Yield Bonds ........................................................ 5
Zero Coupon and Pay-in-Kind Bonds ....................................... 5
Bank Obligations ........................................................ 6
Options, Futures and Other Derivative Instruments ....................... 6
Cash or Cash Equivalents ................................................ 6
RISK FACTORS AND OTHER CONSIDERATIONS .................................... 7
General Considerations .................................................. 7
High-Yield Bonds ........................................................ 7
Foreign Securities ...................................................... 7
Options and Futures ..................................................... 7
Variable-Rate Instruments, When-Issued and Delayed-Delivery Transactions 7
Real Estate Securities .................................................. 7
MANAGEMENT OF THE FUND ................................................... 8
Trustees ................................................................ 8
Investment Adviser ...................................................... 8
Portfolio Transactions and Commissions .................................. 8
Portfolio Management .................................................... 8
Administrator ........................................................... 8
GENERAL INFORMATION ...................................................... 8
Declaration of Trust .................................................... 8
Capital Stock ........................................................... 8
Shareholder Inquiries and Distribution Options .......................... 8
Shareholder Meetings .................................................... 9
Voting Rights ........................................................... 9
Principal Underwriter ................................................... 9
Custodian ............................................................... 9
Mixed Funding ........................................................... 9
TAX MATTERS .............................................................. 9
The Fund ................................................................ 9
Fund Distributions ...................................................... 9
Share Redemptions ....................................................... 9
Tax Withholding ......................................................... 9
PURCHASE AND REDEMPTION OF SHARES ........................................ 9
NET ASSET VALUE .......................................................... 10
YEAR 2000 ................................................................ 10
</TABLE>
2 Aetna Growth and Income VP
<PAGE>
FEE TABLE
The Fee Table is provided to help the investor understand the various fees and
costs that an investor will bear directly or indirectly. It does not include
charges due under a VA Contract or a VLI Policy. VA Contract holders and
participants in retirement plans holding such contracts (Participants), and VLI
Policy holders should refer to the appropriate contract or policy prospectus for
a description of the contract or policy charges or fees.
Annual Fund Operating Expenses
(as a percentage of average net assets)
<TABLE>
<S> <C>
Management Fee 0.500%
Administrative Fee(1) 0.066%
Other Expenses(2) 0.021%
-----
TOTAL FUND OPERATING EXPENSES 0.587%
=====
</TABLE>
(1)Prior to May 1, 1998, the investment adviser provided administrative services
to the Fund and assumed the Fund's ordinary recurring direct costs under an
Administrative Services Agreement. Effective May 1, 1998, the investment
adviser will continue to provide administrative services to the Fund, but
will no longer assume all of the Fund's ordinary recurring direct costs under
the Administrative Services Agreement. The Administrative Fee is 0.075% on
the first $5 billion in assets and 0.050% on all assets over $5 billion.
(2)The "Other Expenses" shown are not based on actual for the year ended
December 31, 1997, but reflect estimates of the Fund's ordinary recurring
direct costs.
Hypothetical Illustration (Example)
THE FOLLOWING EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE GREATER OR LESS THAN THOSE SHOWN BELOW.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and redemption at
the end of each time period: $6 $19 $33 $73
</TABLE>
Refer to the applicable VA Contract or VLI Policy prospectus for an explanation
of contract/policy charges and expenses.
Aetna Growth and Income VP 3
<PAGE>
FINANCIAL HIGHLIGHTS
The selected data presented below for, and as of the end of, each of the years
in the ten-year period ended December 31, 1997 are derived from the financial
statements of the Fund, which statements have been audited by KPMG Peat Marwick
LLP, independent auditors. The financial statements and the independent
auditors' report thereon are included in the Fund's annual report dated December
31, 1997, which is incorporated by reference into the Statement.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1997 1996 1995+ 1994+
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ..... $32.391 $29.055 $26.229 $31.245
------- ------- ------- -------
Income From Investment
Operations
Net investment income ................. 0.544 0.651 0.724 0.765
Net realized and unrealized gain
(loss) on investments ................ 8.939 6.446 7.620 (1.071)
------- ------- ------- -------
Total from investment
operations .......................... 9.483 7.097 8.344 (0.306)
------- ------- ------- -------
Less Distributions
From net investment
income ............................... (0.578) (0.733) (0.723) (0.811)
From net realized
gains on investments ................. (7.661) (3.028) (4.795) (3.899)
------- ------- ------- -------
Total Distributions .................. (8.239) (3.761) (5.518) (4.710)
------- ------- ------- -------
Net asset value, end of year ........... $33.635 $32.391 $29.055 $26.229
======= ======= ======= =======
Total Return* .......................... 29.89% 24.46% 32.25% (0.96)%
Net assets, end of year (millions) ..... $ 9,188 $ 6,954 $ 5,662 $ 4,424
Ratio of total expenses to average
net assets ............................ 0.56% 0.43% 0.29% 0.30%
Ratio of net investment income to
average net assets .................... 1.46% 2.02% 2.42% 2.52%
Portfolio turnover rate ................ 107.01% 85.03% 96.63% 84.27%
Average commission rate paid per
share on equity securities traded ..... $0.0397 $0.0418 -- --
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------
1993+ 1992+ 1991+ 1990+ 1989+ 1988+
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ..... $31.602 $30.954 $25.498 $25.977 $22.461 $20.961
------- ------- ------- ------- ------- -------
Income From Investment
Operations
Net investment income ................. 0.822 0.810 0.922 0.935 1.041 0.874
Net realized and unrealized gain
(loss) on investments ................ 1.287 1.229 5.780 (0.084) 5.402 2.187
------- ------- ------- ------- ------- -------
Total from investment
operations .......................... 2.109 2.039 6.702 0.851 6.443 3.061
------- ------- ------- ------- ------- -------
Less Distributions
From net investment
income ............................... (0.814) (0.866) (0.942) (0.960) (1.056) (0.892)
From net realized
gains on investments ........... ..... (1.652) (0.525) (0.304) (0.370) (1.871) (0.669)
------- ------- ------- ------- ------- -------
Total Distributions .................. (2.466) (1.391) (1.246) (1.330) (2.927) (1.561)
------- ------- ------- ------- ------- -------
Net asset value, end of year ........... $31.245 $31.602 $30.954 $25.498 $25.977 $22.461
======= ======= ======= ======= ======= =======
Total Return* .......................... 6.74% 6.70% 26.41% 3.31% 29.06% 14.63%
Net assets, end of year (millions) ..... $ 4,988 $ 4,552 $ 3,818 $ 2,768 $ 2,592 $ 2,042
Ratio of total expenses to average
net assets ............................ 0.29% 0.30% 0.30% 0.30% 0.29% 0.38%
Ratio of net investment income to
average net assets .................... 2.57% 2.86% 3.22% 3.70% 4.01% 3.81%
Portfolio turnover rate ................ 25.22% 16.26% 12.08% 19.40% 28.79% 24.96%
Average commission rate paid per
share on equity securities traded ..... -- -- -- -- -- --
</TABLE>
+ Per share data calculated using weighted average number of shares outstanding
throughout the year.
* The performance data reflects deduction of an investment advisory fee at an
annual rate of 0.25% of the Fund's average daily net assets, prior to August
1, 1996 and 0.50% of average daily net assets thereafter and deductions for
Fund administrative services and other expenses at cost prior to May 1, 1996,
and at an annual rate of 0.06% of average daily net assets thereafter.
Performance data above is for the Fund and not for the separate accounts
investing in the Fund. Therefore, the performance does not reflect insurance
charges for mortality and expense risks, contract maintenance charges,
deferred sales charges or other charges relating to the separate account using
the Fund for VA Contracts or VLI Policies. Inclusion of these expenses would
reduce the total return figures.
Additional information about the performance of the Fund is contained in the
Fund's Annual Report dated December 31, 1997. The Annual Report may be obtained,
without charge, by writing to the Fund at the address listed on the cover of
this Prospectus or by calling 1-800-238-6263.
4 Aetna Growth and Income VP
<PAGE>
INVESTMENT OBJECTIVE
The investment objective of the Fund is 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. The
Fund's investment objective is fundamental and may not be changed without the
vote of a majority of its outstanding voting securities as defined by the
Investment Company Act of 1940 (1940 Act). There can be no assurance that the
Fund will meet its investment objective.
INVESTMENT POLICIES AND RESTRICTIONS
Investment Policies The Fund generally will seek to achieve its investment
objective by investing principally in common stocks and securities convertible
into common stock that are believed to have significant potential for capital
appreciation and/or investment income. In addition, the Fund may invest in
nonconvertible preferred stocks, debt securities, rights and warrants; the Fund
may maintain a reserve of cash and high-grade, short-term debt securities; and
the Fund may purchase securities on a when-issued or delayed-delivery basis.
Industry Concentration The Fund will not concentrate its investments in any one
industry, and therefore the Fund will not invest 25% or more of its total assets
in securities issued by companies principally engaged in any one industry. This
limitation will not, however, apply to securities issued or guaranteed by the
U.S. government, its agencies and instrumentalities; securities invested in, or
repurchase agreements for, U.S. Government securities; and certificates of
deposit, bankers' acceptances, or securities of banks and bank holding
companies. For purposes of this restriction, finance companies will be
classified as separate industries according to the end users of their services,
such as automobile finance, computer finance and consumer finance. Also, the
Fund will not invest more than 5% of its total assets in the securities of any
one issuer or purchase more than 10% of the outstanding voting securities of any
one issuer. The 5% and 10% restrictions apply only to 75% of the Fund's total
assets. Those restrictions do not apply to securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities. The Fund does not
invest in the securities of companies determined by its investment adviser,
Aeltus Investment Management, Inc. (Aeltus), to be primarily involved in the
production or distribution of tobacco products.
Illiquid and Restricted Securities The Fund may invest up to 15% of its total
assets in illiquid securities. Illiquid securities are securities that are not
readily marketable or cannot be disposed of promptly within seven days in the
ordinary course of business without taking a materially reduced price. In
addition, the Fund may invest in securities that are subject to legal or
contractual restrictions on resale, including securities purchased under Rule
144A and Section 4(2) of the Securities Act of 1933. The Board of Trustees of
the Fund (Trustees) has established a policy concerning investments in
restricted and illiquid securities.
Foreign Securities The Fund may invest up to 25% of its total assets in equity
and debt securities of foreign issuers, including depositary receipts. The Fund
can invest in both sponsored and unsponsored depositary receipts. Unsponsored
depositary receipts, which are typically traded in the over-the-counter market,
may be less liquid than sponsored depositary receipts and therefore may involve
more risk. In addition, there may be less information available about issuers of
unsponsored depositary receipts. The Fund may acquire American Depositary
Receipts, which are dollar denominated, although their market price is subject
to fluctuations of the foreign currency in which the underlying securities are
denominated.
Repurchase Agreements The Fund may enter into repurchase agreements with
domestic banks and broker-dealers. Under a repurchase agreement, a Fund may
acquire a debt instrument for a relatively short period subject to an obligation
by the seller to repurchase and by the Fund to resell the instrument at a fixed
price and time. Such agreements, although fully collateralized, involve the risk
that the seller of the securities may fail to repurchase them. In that event, a
Fund may incur costs in liquidating the securities (or other collateral for the
agreement) or a loss if the securities (or collateral) decline in value. If the
default on the part of the seller is due to insolvency and the seller initiates
bankruptcy proceedings, the ability of a Fund to liquidate the collateral may be
delayed or limited. The Trustees have established credit standards for issuers
of repurchase agreements entered into by the Fund.
Borrowing The Fund may borrow up to 5% of the value of its total assets for
temporary or emergency purposes. The Fund does not intend to borrow for
leveraging purposes. It has the authority to do so, but only if, after the
borrowing, the value of the Fund's net assets, including proceeds from the
borrowings, is equal to at least 300% of all outstanding borrowings. Leveraging
can increase the volatility of the Fund since it exaggerates the effects of
changes in the value of the securities purchased with the borrowed funds.
High-Yield Bonds The Fund may invest up to 10% of its total assets in securities
rated BB or below by Standard and Poor's Corporation or Ba or below by Moody's
Investors Services, Inc., or other ratings agencies, or, if not rated,
considered by Aeltus to be of comparable quality. The Fund does not intend to
invest more than 5% of its assets in such securities.
Aetna Growth and Income VP 5
<PAGE>
Zero Coupon and Pay-in-Kind Bonds The Fund may invest in zero coupon securities
and pay-in-kind bonds. Zero coupon securities are debt securities that pay no
cash income but are sold at substantial discounts to their value at maturity.
Some zero coupon securities call for the commencement of regular interest
payments at a deferred date. Pay-in-kind bonds pay all or a portion of their
interest in the form of additional debt or equity securities. Zero coupon
securities and pay-in-kind bonds are subject to greater price fluctuations in
response to changes in interest rates than are ordinary interest-paying
instruments with similar maturities; the value of zero coupon securities and
pay-in-kind bonds appreciates more during periods of declining interest rates
and depreciates more during periods of rising interest rates.
Bank Obligations The Fund may invest in obligations (including banker's
acceptances, commercial paper, bank notes, time deposits and certificates of
deposit) issued by domestic or foreign banks, provided the issuing bank has a
minimum of $5 billion in assets and a primary capital ratio of at least 4.25%.
Options, Futures and Other Derivative Instruments In order to manage exposure to
changing interest rates, securities prices and currency exchange rates, or to
increase investment return, the Fund may engage in hedging and other strategies
using derivatives. A derivative is a financial instrument the value of which
depends on (or derives from) the value of an underlying asset, such as a
security, interest rate, currency exchange rate or index. Derivatives that may
be used by the Fund include forward contracts, swaps, structured notes, futures
(see "Futures Contracts" below), options (see "Options" below), and U.S.
Government derivatives (see "U.S. Government Derivatives" below). See the
Statement for additional information on the use of and risks associated with
derivatives.
Some of these strategies, such as selling futures contracts, buying puts and
writing (selling) calls, are designed to hedge against price fluctuations. Other
strategies, such as writing puts, and buying futures contracts, calls, and
interest rate swaps, tend to increase market exposure. In some cases, the Fund
may buy a futures contract for the purpose of increasing its exposure in a
particular market segment, which may be considered speculative, rather than for
hedging.
For purposes other than hedging, the Fund will invest no more than 5% of its
assets in derivatives which at the time of purchase are considered by management
to involve high risk to the Fund, such as inverse floaters, interest-only and
principal-only debt instruments. The Fund may invest up to 30% of its assets in
lower risk derivatives for hedging or to gain additional exposure to certain
markets for investment purposes while maintaining liquidity to meet shareholder
redemptions and minimizing trading costs.
Futures Contracts - Futures contracts are agreements that obligate the buyer to
buy and the seller to sell a specific quantity of securities at a specific price
on a specific date. Investments in futures contracts or options on futures may
be made subject to the limits discussed in the Statement.
Options - The Fund may purchase and write (sell) call options and put options,
including options on securities, indices and futures. Call options on securities
may be written only if covered. Options are agreements that for a fee or
premium, give the holder the right, but not the obligation, to pay or settle for
cash a certain amount of securities during a specified period or on a specified
date. Options are used to minimize principal fluctuation or to generate
additional premium income.
Asset-Backed Securities - The Fund may purchase securities collateralized by a
specified pool of assets, including automobile loans, home equity loans, mobile
home loans, recreational vehicles or credit card receivables. These securities
are subject to prepayment risk. In periods of declining interest rates,
reinvestment would thus be made at lower and less attractive rates.
U.S. Government Derivatives - The Fund may purchase separately traded principal
and interest components of certain U.S. Government securities. In addition, the
Fund may acquire custodial receipts that represent ownership in a U.S.
Government security's future interest or principal payments. These securities
are known by such exotic names as TIGRS and CATS and may be issued at a discount
to face value. They are generally more volatile than normal fixed income
securities because interest payments are accrued rather than paid out in regular
installments.
Forward-Exchange Contracts - The Fund may engage in forward-exchange contracts.
The use of forward-exchange contracts may reduce the gain that would otherwise
result from a change in the relationship between the U.S. dollar and a foreign
currency. In an attempt to limit their risk in forward-exchange contracts, the
Fund limits its exposure to the amount of its assets denominated in the foreign
currency being cross-hedged. Cross-hedging entails a risk of loss on both the
value of the security that is the basis of the hedge and the currency contract
that was used in the hedge. These risks are described in greater detail in the
Statement.
Cash or Cash Equivalents The Fund reserves the right to depart from its
investment objective temporarily by investing up to 100% of its assets in cash
or cash equivalents for defense against potential market declines and to
accommodate cash flows from the purchase and sale of Fund shares.
The Fund is subject to additional investment restrictions described in the
Statement.
6 Aetna Growth and Income VP
<PAGE>
RISK FACTORS AND OTHER CONSIDERATIONS
General Considerations The different types of securities purchased and
investment techniques used by the Fund involve varying amounts of risk. For
example, equity securities are subject to a decline in the stock market or in
the value of the issuer, and preferred stocks have price risk and some interest
rate and credit risk. The value of debt securities may be affected by changes in
general interest rates and in the creditworthiness of the issuer. Debt
securities with longer maturities (for example, over ten years) are generally
more affected by changes in interest rates and provide less price stability than
securities with short-term maturities (for example, one to ten years). Also, on
each debt security, the risk of principal and interest default is greater with
higher-yield bonds. High-yield bonds may provide a higher return but with added
risk. In addition, foreign securities have currency risk. Some of the risks
involved in the securities acquired by the Fund are discussed in this section.
Additional discussion is contained above under "Investment Policies and
Restrictions" and in the Statement.
High-Yield Bonds The Fund may invest in high-yield bonds. These securities tend
to offer higher yields than investment-grade bonds because of the additional
risks associated with them. These risks include: a lack of liquidity; an
unpredictable secondary market; a greater likelihood of default; increased
sensitivity to difficult economic and corporate developments; call provisions
which may adversely affect investment returns; and loss of the entire principal
and interest.
Although high-yield bonds are high risk investments, they may be purchased if
Aeltus believes they offer good value. This may happen if, for example, the
rating agencies have, in Aeltus' opinion, misclassified the bonds or overlooked
the potential for the issuer's enhanced creditworthiness.
Foreign Securities Investments in securities of foreign issuers or securities
denominated in foreign currencies involve risks not present in domestic markets.
Such risks include: currency fluctuations and related currency conversion costs;
less liquidity; price or income volatility; less government supervision and
regulation of stock exchanges where securities may be traded, brokers and listed
companies; possible difficulty in obtaining and enforcing judgments against
foreign entities; adverse foreign political and economic developments; different
accounting procedures and auditing standards; the possible imposition of
withholding taxes on income payable on securities or on capital gains; the
possible seizure or nationalization of foreign assets; the possible
establishment of exchange controls or other foreign laws or restrictions which
might adversely affect the payment and transferability of principal, interest
and dividends on securities; higher transaction costs; possible settlement
delays; and less publicly available information about foreign issuers.
Options and Futures Generally, the risks involved in using options and futures
include the risk that the instrument may experience greater price swings than
other securities and may be less liquid than other securities. Certain risks are
associated with investing in futures contracts including but not limited to:
transactions to close out futures contracts may not be able to be effected at
favorable prices; possible reduction in the Fund's total return and yield;
possible reduction in value of the futures instrument; the inability of the Fund
to limit losses by closing its position due to lack of a liquid secondary market
or due to daily limits of price fluctuation; imperfect correlation between the
value of the futures contracts and the related securities; and potential losses
in excess of the amount invested in the futures contracts themselves.
The use of futures involves a high degree of leverage because of the low margin
requirements. As a result, small price movements in futures contracts may result
in immediate and potentially unlimited losses or gains to the Fund. The amount
of gains or losses on investments in futures contracts depends on the portfolio
manager's ability to predict correctly the direction of stock prices, interest
rates and other economic factors.
In writing puts, there is the risk that the Fund may be required to buy the
underlying security (or other instrument) at a disadvantageous price. Writing
call options involves the risk of not being able to effect closing transactions
at favorable prices or to participate in the appreciation of the underlying
securities. Purchasing put and call options involve the risk of losing the
entire purchase price of the option.
Variable-Rate Instruments, When-Issued and Delayed-Delivery Transactions
When-issued, delayed-delivery and variable-rate instruments may be subject to
liquidity risks and risks of loss of principal due to market fluctuations.
Liquid assets in an amount at least equal to the Fund's commitments to purchase
securities on a when-issued or delayed-delivery basis will be segregated. For
more information about these securities, see the Statement.
Real Estate Securities Real estate securities include interests in real estate
investment trusts (REITs), real estate development, real estate operating
companies, and companies engaged in other real estate related businesses.
Mortgage REITS are pools of mortgages that sell shares in the pool to investors.
Equity REITs are trusts that sell shares to investors and use the proceeds to
invest in real estate or interests in real estate. A REIT may focus on a
particular project, such as apartment complexes, or geographic region, such as
the Northeastern United States, or both.
Equity REITs may be affected by any changes in the value of the underlying
property owned by such REITs, while mortgage REITs may be affected by the
quality of any credit extended. Equity and mortgage REITs are dependent on the
REITs' management skill and may not be diversified. The Fund could conceivably
own real estate directly as a result of a default on debt obligations it owns.
Changes in prevailing interest rates also may inversely affect the value of the
debt obligations in which the Fund may invest.
Aetna Growth and Income VP 7
<PAGE>
MANAGEMENT OF THE FUND
Trustees The Fund is managed under the supervision of the Trustees. The Trustees
set broad policies for the Fund. Information about the Trustees is found in the
Statement.
Investment Adviser Aeltus has entered into an investment advisory agreement with
the Fund which provides that Aeltus is responsible for managing the Fund's
assets in accordance with its investment objective and policies. Aeltus is a
Connecticut corporation with its principal offices located at 242 Trumbull
Street, Hartford, Connecticut 06103-1205. Aeltus is an indirect wholly-owned
subsidiary of Aetna Retirement Services, Inc., which is, in turn, an indirect
wholly-owned subsidiary of Aetna Inc. Aeltus is registered as an investment
adviser with the Commission. Aeltus is entitled to receive a monthly fee from
the Fund at an annual rate of 0.50% of the average daily net assets of the Fund.
Portfolio Transactions and Commissions Subject to the supervision of the
Trustees, Aeltus has responsibility for making investment decisions, for
effecting the execution of trades and for negotiating any brokerage commissions
thereon. It is Aeltus' policy to obtain the best quality of execution available,
giving attention to net price (including commissions where applicable),
execution capability (including the adequacy of a firm's capital position),
research and other services related to execution; the relative priority given to
these factors will depend on all of the circumstances regarding a specific
trade. Aeltus may also consider the sale of shares of registered investment
companies advised by Aeltus as a factor in the selection of brokerage firms to
execute the Fund's portfolio transactions, subject to its duty to obtain best
execution. See the Statement for more information.
Portfolio Management Kevin Means, Managing Director, Aeltus, has been the lead
portfolio manager for the Fund since joining the Aetna organization in July,
1994. He was previously Chief Investment Officer at INVESCO Management and
Research. He also served for six years as the Director of Quantitative Research
and Equity Portfolio Manager at INVESCO Capital Management. Mr. Means is
assisted by a team of portfolio managers who specialize in various asset
classes.
Administrator The Fund has appointed Aeltus as its administrator. Aeltus has
responsibility for certain administrative and internal accounting and reporting
services, maintenance of relationships with third party service providers,
calculation of the net asset value (NAV) and other financial reports prepared
for the Fund (collectively referred to as "Administrative Services").
For providing Administrative Services, Aeltus receives a fee at the following
annual rate based on average daily net assets of the Fund:
<TABLE>
<CAPTION>
Administrative Fee Fund Assets
- -------------------- ------------------------------
<S> <C>
0.075% On the first $5 billion
0.050% On all assets over $5 billion
</TABLE>
As administrator, Aeltus may contract with other entities to perform certain
Administrative Services.
GENERAL INFORMATION
Declaration of Trust The Fund was organized as a Massachusetts business trust
under the laws of Massachusetts on January 25, 1984. It began operations on May
1, 1984 upon succeeding to the assets of Aetna Variable Fund, Inc., a
corporation that was formed in 1974. Massachusetts law provides that
shareholders of the Fund can, under certain circumstances, be held personally
liable for the obligations of the Fund. The Fund has been structured, and will
be operated in such a way, so as to ensure as much as possible, that
shareholders will not be liable for obligations of the Fund. The Declaration of
Trust (Declaration) contains an express disclaimer of shareholder liability for
acts or obligations of the Fund under Massachusetts law, and requires that
notification of this disclaimer be given in each agreement, obligation or
instrument entered into by the Fund or the Trustees. A more complete discussion
of potential liability of shareholders of the Fund under Massachusetts law is
contained in the Statement under "Description of Shares--Shareholder and Trustee
Liability."
Capital Stock The Declaration permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest in the Fund. All shares are
nonassessable, other than as disclosed above. There are no preemptive rights.
As of March 31, 1998, there were 270,866,804 shares of the Fund outstanding,
99.60% of which were owned by Aetna and held in its separate accounts to fund
Aetna's obligations under its VA Contracts and VLI Policies. An additional % of
the Fund's shares were owned by affiliates of Aetna at that date. The balance of
the shares were held directly by shareholders who acquired their interests
before the Fund was prohibited from selling shares both directly to investors
and to fund VA contracts and VLI Policies. Direct shareholders may not purchase
additional shares except through dividend reinvestments.
Shareholder Inquiries and Distribution Options Any questions about the Fund can
be addressed to the Fund at the address listed on the cover of this Prospectus
or by calling 1-800-238-6263. Direct shareholders may elect to receive dividends
and capital gains distributions in cash or to reinvest in additional shares in
the Fund. See "Tax Matters--Fund Distributions" below.
8 Aetna Growth and Income VP
<PAGE>
Shareholder Meetings The Fund is not required to hold annual shareholder
meetings. The Declaration provides for meetings of shareholders to elect
Trustees at such time as may be determined by the Trustees or as required by the
1940 Act. If requested by the holders of at least 10% of the Fund's outstanding
shares, the Fund will hold a shareholder meeting for the purpose of voting on
the removal of one or more Trustees and will assist with communications
concerning that shareholder meeting.
Voting Rights Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held on matters submitted to the
shareholders of the Fund. Voting rights are not cumulative. Persons who select
the Fund for investment through their VA Contract or VLI Policy are not the
shareholders of the Fund, but may have the right to direct the voting of Fund
shares at shareholder meetings if required by law. Participant voting rights are
discussed in the prospectus for the applicable VA Contract or VLI Policy.
Principal Underwriter Aetna is the principal underwriter for the Fund. Aetna is
a Connecticut corporation, and is a wholly-owned subsidiary of Aetna Retirement
Holdings, Inc. and an indirect wholly-owned subsidiary of Aetna Inc.
Custodian Mellon Bank, N.A., is the Fund's custodian.
Mixed Funding Because the Fund is sold to fund variable annuity contracts and
variable life insurance policies issued by Aetna, certain conflicts of interest
could arise. If a conflict of interest were to occur, one of the separate
accounts invested in the Fund might withdraw its investment in the Fund, which
might force the Fund to sell its portfolio securities at disadvantageous prices,
causing its per share value to decrease. The Trustees have agreed to monitor
events in order to identify any material irreconcilable conflicts which might
arise and to determine what action, if any, should be taken to address such
conflict.
TAX MATTERS
The following discussion of federal income tax consequences is based on tax laws
and regulations in effect on the date of this prospectus, and is subject to
change by legislative or administrative action. The following discussion is for
general information only; a more detailed discussion of federal income tax
considerations is contained in the Statement.
The Fund The Fund intends to continue to qualify as a regulated investment
company by satisfying the requirements under Subchapter M of the Internal
Revenue Code of 1986, as amended (Code) concerning: (1) the diversification of
assets; (2) the distribution of income; and (3) the source of income. It is the
policy of the Fund to distribute all of its investment income (net of expenses)
and any capital gains (net of capital losses). Distributions are made to the
separate accounts for shares of the Fund held under VA Contracts and VLI
Policies, and directly to shareholders who hold shares of the Fund directly, in
accordance with the timing requirements imposed by the Code. In addition, the
Fund intends to comply with the variable asset diversification requirements
under Section 817(h) of the Code, which are described more fully in the
Statement.
Fund Distributions Distributions by the Fund to shareholders other than separate
accounts of net long-term capital gains are taxable to those shareholders as
long-term capital gains regardless of the length of time a shareholder has held
the shares. Distributions by the Fund of its net investment income and its net
short-term capital gains are taxable to shareholders as ordinary income.
Distributions paid by the Fund to the insurance company separate accounts are
taxable, if at all, to the separate accounts and not to the holders of VA
Contracts and VLI Policies. Holders of VA Contracts and VLI Policies should
review the prospectus for their VA Contract or VLI Policy for information
regarding the tax treatment of their contracts and policies and distributions
from the Fund to the separate accounts.
Direct shareholders include distributions in their taxable income in the year in
which they are received (whether paid in cash or reinvested). However,
distributions declared in December and paid in January are taxable as if paid on
December 31 of the year of declaration. A statement will be sent to direct
shareholders indicating the tax status of all distributions made during the
previous year.
Share Redemptions Any gain or loss recognized upon a taxable disposition of a
direct shareholder's shares generally will be treated as a taxable long-term or
short-term capital gain or loss (depending on whether the shareholder has held
the shares more than one year). Any loss realized upon a taxable disposition of
a Fund's shares may be subject to limitations that are described more fully in
the Statement.
Tax Withholding The Fund is required to withhold taxes from any distributions
unless the shareholder provides the Fund with a correct social security or
taxpayer identification number or certifies that the shareholder is a
corporation or otherwise exempt from or not subject to withholding by the
Internal Revenue Service (IRS). If a shareholder is subject to backup
withholding, the IRS can require the Fund to withhold 31% of taxable dividends,
capital gains distributions and redemptions.
PURCHASE AND REDEMPTION OF SHARES
Aetna is the principal underwriter of the Fund's shares. Except for the
reinvestment of dividends described under "General Information--Capital Stock,"
shares may only be purchased by Aetna or its affiliated insurance companies as
the depositor of variable annuity and variable life insurance separate accounts
as directed by the holders of the VA Contracts or VLI Policies.
Aetna Growth and Income VP 9
<PAGE>
Refer to the documents pertaining to the applicable VA Contract or VLI Policy
for information on how to direct investments in or redemptions from the Fund and
any fees that may apply.
Shares of the Fund are purchased and redeemed at their NAV next determined after
receipt of a purchase or redemption order in acceptable form. Shareholders
redeeming directly from the Fund and not through a VA Contract or VLI Policy
must provide a signature guarantee regardless of the redemption amount. Orders
for the purchase or redemption of shares of the Fund that are received before
the close of regular trading on the New York Stock Exchange (NYSE) (normally 4
p.m. eastern time) are effected at the NAV per share determined that day, as
described below (see "Net Asset Value"). Orders for the redemption of shares of
the Fund that are received from shareholders redeeming directly from the Fund
(and not through a VA Contract or VLI Policy) that are received by the Fund's
transfer agent before the close of regular trading on the NYSE (normally 4 p.m.
eastern time) are effected at the NAV per share determined that day, as
described below (see "Net Assets Value").
For shares held in connection with VA Contracts or VLI Policies, the insurance
company shall be the designee of the Fund for receipt of purchase and redemption
orders. Therefore, receipt of an order by the insurance company constitutes
receipt by the Fund, provided the Fund receives notice of the order by 9:30 a.m.
the next day on which the NYSE is open for trading.
If the value of shares held directly by a shareholder is less than $1,000, the
shares may be liquidated at the Fund's initiative upon six months' notice.
Shares will be redeemed at the NAV determined on the day the account is closed.
The Fund may suspend redemptions or postpone payments when the NYSE is closed or
when trading is restricted for any reason or under emergency circumstances as
determined by the Commission.
If such a shareholder holds shares directly having an aggregate value of $5,000
or more, the shareholder may establish a systematic withdrawal program. Further
information about this program may be obtained from the Fund.
NET ASSET VALUE
The NAV is determined as of the earlier of 15 minutes after the close of the
NYSE or 4:15 p.m. eastern time on each day that the NYSE is open for trading.
The NAV is computed by dividing the total value of the Fund's securities, plus
any cash and other assets (including dividends and interest accrued but not
collected) less all liabilities (including accrued expenses), by the number of
shares outstanding.
Portfolio securities are valued primarily by independent pricing services, based
on market quotations. Short-term debt instruments maturing in less than 60 days
are valued at amortized cost. Securities for which market quotations are not
readily available are valued at their fair value in such manner as may be
determined under the authority of the Trustees.
YEAR 2000
Aetna Inc. (referred to collectively with its subsidiaries and affiliates as
"Aetna Inc.") has developed and is currently executing a plan to make its
computer systems and applications accommodate date-sensitive information
relating to the Year 2000. The plan covers four stages including (i) inventory,
(ii) assessment, (iii) remediation and (iv) testing and certification. Aetna
Inc. is currently in the assessment or remediation stages of its plan for the
systems and applications related to the Fund, including those relating to
Aeltus. Testing and certification of these systems is targeted for completion by
mid-1999. The costs of these efforts will not affect the Fund.
Aeltus and the Fund also have relationships with broker dealers, transfer
agents, custodians and other securities industry participants and service
providers that are not affiliated with Aetna Inc. Aetna Inc. is currently
examining its relationships with third parties as part of its Year 2000 plan.
While Aeltus believes that United States securities industry participants
generally are preparing their computer systems and applications to accommodate
Year 2000 date-sensitive information, preparation by third parties is outside
Aetna Inc., Aeltus' and the Fund's control. There can be no assurance that
failure of third parties to complete adequate preparations in a timely manner,
and any resulting systems interruptions or other consequences, would not have an
adverse effect, directly or indirectly, on the Fund, including, without
limitation, its operation or the valuation of its assets.
10 Aetna Growth and Income VP
<PAGE>
INVESTMENT ADVISER
Aeltus Investment Management, Inc.
242 Trumbull Street
Hartford, Connecticut 06103-1205
CUSTODIAN
Mellon Bank N.A.
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
TRANSFER, DIVIDEND DISBURSING
AND REDEMPTION AGENT
Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
CityPlace II
Hartford, Connecticut 06103-4103
[Aetna Logo]
Aetna Life Insurance and Annuity Company
Aetna Growth and Income VP 11
<PAGE>
Statement of Additional Information dated: May 1, 1998
AETNA BALANCED VP, INC.
Aetna Income Shares d/b/a
AETNA BOND VP
Aetna Variable Fund d/b/a
AETNA GROWTH AND INCOME VP
151 Farmington Avenue
Hartford, Connecticut 06156
This Statement of Additional Information (Statement) is not a prospectus and
should be read in conjunction with the current prospectuses for Aetna Balanced
VP, Inc. (Balanced VP), Aetna Bond VP (Bond VP), and Aetna Growth and Income VP
(Growth and Income VP) (each a "Fund" and collectively "Funds"), each dated May
1, 1998.
You may obtain a free copy of a prospectus for any Fund from the local Aetna
office, by writing to the respective Fund at the address listed above or by
calling 1-800-238-6263.
Read the prospectus for a Fund before you invest in that Fund.
TABLE OF CONTENTS
General Information and History ..................................... 2
Investment Policies of the Funds .................................... 2
Description of Various Securities and Investment Techniques ......... 3
Trustees and Officers of the Funds .................................. 18
Control Persons and Principal Shareholders of the Funds ............. 21
Investment Advisory Agreements ...................................... 22
Administrative Services Agreements .................................. 22
Brokerage Allocation and Trading Policies ........................... 23
Description of Shares ............................................... 24
Purchase and Redemption of Shares ................................... 25
Principal Underwriter ............................................... 25
Tax Matters ......................................................... 26
Net Asset Value ..................................................... 30
Performance Information ............................................. 31
Custodian ........................................................... 32
Independent Auditors ................................................ 32
Financial Statements ................................................ 32
<PAGE>
GENERAL INFORMATION AND HISTORY
The Funds are open-end diversified management investment companies which sell
their shares (i) to variable annuity and variable life insurance separate
accounts to fund variable annuity contracts (VA Contracts) or variable life
insurance policies (VLI Policies) issued by the Aetna Life Insurance and
Annuity Company (Aetna) and its affiliates and (ii) in the case of Bond VP and
Growth and Income VP, to other shareholders of the Funds only through
reinvestment of dividends. Capitalized terms not defined herein are used as
defined in the Funds' prospectuses.
INVESTMENT POLICIES OF THE FUNDS
Each Fund will operate under the following restrictions, which together with
the Fund's investment objective (as set forth in the Fund's prospectus), are
matters of fundamental policy and cannot be changed without the approval of a
majority of the outstanding voting securities of that Fund as defined by the
Investment Company Act of 1940 (1940 Act). This means the lesser of: (i) 67% of
the shares of a Fund present or represented at a shareholders' meeting if the
holders of more than 50% of the shares then outstanding are present or
represented; or (ii) more than 50% of the outstanding voting securities of a
Fund.
As a matter of fundamental policy, none of the Funds will:
(1) issue any senior security, as defined in the 1940 Act, except that (a) a
Fund may enter into commitments to purchase securities in accordance with
that Fund's investment program, including reverse repurchase agreements,
delayed-delivery and when-issued securities, which may be considered the
issuance of senior securities; (b) a Fund may engage in transactions that
may result in the issuance of a senior security to the extent permitted
under applicable regulations, interpretations of the 1940 Act or an
exemptive order; (c) a Fund may engage in short sales of securities to the
extent permitted in its investment program and other restrictions; (d) the
purchase or sale of futures contracts or related options shall not be
considered to involve the issuance of a senior security; and (e) subject
to fundamental restrictions, a Fund may borrow money as authorized by the
1940 Act;
(2) with respect to 75% of the value of a Fund's total assets, hold more than
5% of the value of its total assets in the securities of any one issuer or
hold more than 10% of the outstanding voting securities of any one issuer.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities are excluded from these restrictions;
(3) concentrate its investments in any one industry except that a Fund may
invest up to 25% of its total assets in securities issued by companies
principally engaged in any one industry. This limitation will not,
however, apply to securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities;
(4) make loans, except that, to the extent appropriate under its investment
program, a Fund may (a) purchase bonds, debentures or other debt
securities, including short-term obligations, (b) enter into repurchase
transactions and (c) lend portfolio securities provided that the value of
such loaned securities does not exceed one-third of a Fund's total assets;
(5) invest in commodity contracts, except that a Fund may, to the extent
appropriate under its investment program, purchase securities of companies
engaged in such activities, may enter into transactions in financial and
index futures contracts and related options, may engage in transactions on
a when-issued or forward commitment basis, and may enter into forward
currency contracts;
(6) borrow money, except that (a) a Fund may enter into certain futures
contracts or options related thereto; (b) a Fund may enter into
commitments to purchase securities in accordance with that Fund's
investment program, including delayed-delivery and when-issued securities
and reverse repurchase agreements; (c) for temporary emergency purposes, a
Fund may borrow money in amounts not exceeding 5% of the value of its
total assets at the time the loan is made; and (d)
2
<PAGE>
for purposes of leveraging, a Fund may borrow money from banks (including
its custodian bank) only if, immediately after such borrowing, the value
of the Fund's assets, including the amount borrowed, less its liabilities,
is equal to at least 300% of the amount borrowed, plus all outstanding
borrowings. If, at any time, the value of a Fund's assets fails to meet
the 300% asset coverage requirement relative only to leveraging, the Fund
will, within three days (not including Sundays and holidays), reduce its
borrowings to the extent necessary to meet the 300% test;
(7) purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, a Fund may invest in securities secured by real estate
or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein; or
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by a Fund, that
Fund may be deemed to be an underwriter under the provisions of the
Securities Act of 1933, as amended (1933 Act).
Each Fund has also adopted certain other investment restrictions that may be
changed by that Fund's Directors/Trustees (Trustees) and without shareholder
vote. Under such restrictions, none of the Funds will:
(1) invest more than 15% of its total assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be
disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Such securities include, but
are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under
Rule 144A or securities offered pursuant to Section 4(2) of the 1933 Act,
shall not be deemed illiquid solely by reason of being unregistered.
Aeltus Investment Management, Inc. (Aeltus) shall determine whether a
particular security is deemed to be liquid based on the trading markets
for the specific security and other factors;
(2) invest in companies for the purpose of exercising control or management;
and
(3) make short sales of securities, other than short sales "against the box,"
or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction
will not be applied to limit the use of options, futures contracts and
related options, in the manner otherwise permitted by the investment
restrictions, policies and investment program of each Fund.
In addition, Balanced VP will not:
(4) invest more than 25% of its total assets in securities or obligations of
foreign issuers, including marketable securities of, or guaranteed by,
foreign governments (or any instrumentality or subdivision thereof). The
Fund will invest in securities or obligations of foreign banks only if
such banks have a minimum of $5 billion in assets and a primary capital
ratio of at least 4.25%;
(5) invest more than 25% of the total value of its assets in fixed income
securities, including convertible securities, rated below BBB or Baa by
Standard & Poor's (S&P) or Moody's Investors Service, Inc. (Moody's) or
other comparable nationally recognized statistical rating organizations
(sometimes referred to as high-yield bonds) or, if not rated, considered
by Aeltus to be of comparable quality;
Where a Fund's investment objective or policies restrict it to a specified
percentage of its total assets in any type of instrument, that percentage is
measured at the time of purchase. There will be no violation of any investment
policy or restriction if that restriction is complied with at the time of
purchase notwithstanding a later change in the market value of an investment,
in net or total assets, in the securities rating of the investment or any other
change.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
The following information supplements and should be read in conjunction with
the section of each Fund's prospectus entitled "Investment Policies and
Restrictions."
3
<PAGE>
U.S. Government Obligations
The types of U.S. Government obligations in which a Fund may invest include,
but are not limited to: (1) direct obligations of the U.S. Treasury, such as
U.S. Treasury bonds, notes, bills and Treasury Certificates of Indebtedness;
(2) instruments issued or guaranteed by U.S. Government agencies or
instrumentalities which are backed by (a) the full faith and credit of the
United States, (b) the credit of the agency or instrumentality issuing the
obligations, or (c) the right of the issuer to borrow from the U.S. Treasury,
such as notes, bonds, and discount notes of U.S. Government instrumentalities
or agencies, including Federal Land Banks, Central Bank for Cooperatives,
Federal Intermediate Credit Banks, Federal Home Loan Banks, Farmers Home
Administration and Federal National Mortgage Association. (A U.S. Government
instrumentality is a government agency organized under federal charter with
government supervision.)
Repurchase Agreements
Each Fund may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards established
by the Fund's Trustees. A repurchase agreement allows a Fund to determine the
yield during the Fund's holding period. This results in a fixed rate of return
insulated from market fluctuations during such period. Such underlying debt
instruments serving as collateral will meet the quality standards of the Fund.
The market value of the underlying debt instruments will, at all times, be
equal to the dollar amount invested. Under the 1940 Act, repurchase agreements
are considered loans by a Fund. Repurchase agreements, although fully
collateralized, involve the risk that the seller of the securities may fail to
repurchase them from a Fund. In that event, a Fund may incur (a) disposition
costs in connection with liquidating the collateral, or (b) a loss if the
collateral declines in value. Also, if the default on the part of the seller is
due to insolvency and the seller initiates bankruptcy proceedings, a Fund's
ability to liquidate the collateral may be delayed or limited. Repurchase
agreements maturing in more than seven days will not exceed 10 percent (15
percent in the case of Bond VP) of the total assets of a Fund. The Funds do not
intend to use reverse repurchase agreements.
Foreign Securities
Each Fund may invest up to 25% of its total assets in securities or obligations
of foreign issuers including marketable securities of, or guaranteed by,
foreign governments (or any instrumentality or subdivision thereof) and debt
securities of foreign companies which generally are listed on recognized
foreign securities exchanges or are traded in a foreign over-the-counter
market. Each Fund will invest in securities or obligations of foreign banks
only if such banks have a minimum of $5 billion in assets and a primary capital
ratio of at least 4.25%. Each Fund also invests in foreign securities listed on
recognized U.S. securities exchanges or traded in the U.S. over-the-counter
market. Such foreign securities may be issued by foreign companies located in
developing countries in various regions of the world. A "developing country" is
a country in the initial stages of its industrial cycle. As compared to
investment in the securities markets of developed countries, investment in the
securities markets of developing countries involves exposure to markets that
may have substantially less trading volume and greater price volatility,
economic structures that are less diverse and mature, and political systems
that may be less stable.
Depositary receipts are typically dollar denominated, although their market
price is subject to fluctuations of the foreign currency in which the
underlying securities are denominated. Depositary receipts include: (1)
American Depositary Receipts (ADRs), which are typically designed for U.S.
investors and held either in physical form or in book entry form; (2) European
Depositary Receipts (EDRs), which are similar to ADRs but may be listed and
traded on a European exchange (typically, Luxembourg) as well as in the United
States; and (3) Global Depositary Receipts, which are similar to EDRs although
they may be held through foreign clearing agents such as Euroclear and other
foreign depositaries. All depositary receipts will be considered foreign
securities for purposes of a Fund's investment limitation concerning investment
in foreign securities.
Investments in securities of foreign issuers involve certain risks not
associated with investments in securities of domestic issuers. These risks
include the following:
4
<PAGE>
Currency Risk--The value of a Fund's foreign investments will be effected by
changes in currency exchange rates. The U.S. dollar value of a foreign security
decreases when the value of the U.S. dollar rises against the foreign currency
in which the security is denominated, and increases when the value of the U.S.
dollar falls against such currency.
Political and Economic Risk--The economies of many of the countries in which
each Fund may invest are not as developed as the U.S. economy and may be
subject to significantly different forces. Political or social instability,
expropriation or confiscatory taxation and limitation upon the removal of funds
or other assets could adversely affect the value of a Fund's investments.
Regulatory Risk--Foreign companies are not registered with the Commission and
are generally not subject to the regulatory controls imposed on United States
issuers and, as a consequence, there is generally less publicly available
information about foreign securities than is available regarding domestic
securities. Foreign companies are not subject to uniform accounting, auditing
and financial standards, practices and requirements comparable to those
applicable to U.S. companies. Income from foreign securities owned by a Fund
may be subject to withholding taxes imposed at the source which would reduce
dividend income payable to the Fund's shareholders.
Market Risk--The securities markets in many of the countries in which each Fund
may invest have substantially less trading volume than the major U.S. markets.
Consequently, the securities of some foreign issuers may be less liquid and
experience more price volatility than comparable domestic securities. Indeed,
custodian costs, as well as administrative costs (such as the need to use
foreign custodians) may be associated with the maintenance of assets in foreign
jurisdictions. There is generally less government regulation and supervision of
foreign stock exchanges, brokers and issuers which may make it difficult to
enforce contractual obligations. In addition, transaction costs in foreign
commission rates in foreign jurisdictions are likely to be higher than in the
United States.
Options, Futures and Other Derivative Instruments
Each Fund may use derivative instruments as described below and in its
prospectus under "Investment Policies and Restrictions." The following provides
additional information about these instruments.
Futures Contracts--Each Fund may enter into futures contracts as described in
its prospectus but subject to restrictions described below under "Restrictions
on the Use of Futures and Option Contracts." A Fund may enter into futures
contracts or options thereon, which are traded on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The futures exchanges and trading in the United States are regulated under the
Commodity Exchange Act by the Commodities Futures Trading Commission (CFTC).
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific commodity, financial
instrument(s) or a specific stock market index for a specified price at a
designated date, time, and place. Brokerage fees are incurred when a futures
contract is bought or sold and at expiration, and margin deposits must be
maintained.
Although interest rate futures contracts typically require actual future
delivery of and payment for the underlying instruments or commodities, those
contracts are usually closed out before the delivery date. Stock index futures
contracts do not contemplate actual future delivery and will be settled in cash
at expiration or closed out prior to expiration. Closing out an open futures
contract sale or purchase is effected by entering into an offsetting futures
contract purchase or sale, respectively, for the same aggregate amount of the
identical type of underlying instrument and the same delivery date. There can
be no assurance, however, that a Fund will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If a
Fund is not able to enter into an offsetting transaction, it will continue to
be required to maintain the margin deposits on the contract.
The prices of futures contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates and equities
prices, which in turn are affected by fiscal and monetary policies and national
and international political and economic events.
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When using futures contracts as a hedging technique, at best, the correlation
between changes in prices of futures contracts and of the securities being
hedged can be only approximate. The degree of imperfection of correlation
depends upon circumstances such as: variations in speculative market demand for
futures and for securities, including technical influences in futures trading,
and differences between the financial instruments being hedged and the
instruments underlying the standard futures contracts available for trading.
Even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or stock market or interest rate trends.
Most United States futures exchanges limit the amount of fluctuation permitted
in interest rate futures contract prices during a single trading day, and, as
noted, temporary regulations limiting price fluctuations for stock index
futures contracts are also now in effect. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
persons engaging in futures transactions to substantial losses.
Sales of futures contracts which are intended to hedge against a change in the
value of securities held by a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
"Margin" is the amount of funds that must be deposited by a Fund with a
commodities broker in a custodian account in order to initiate futures trading
and to maintain open positions in a Fund's futures contracts. A margin deposit
is intended to assure a Fund's performance of the futures contract. The margin
required for a particular futures contract is set by the exchange on which the
contract is traded and may be significantly modified from time to time by the
exchange during the term of the contract.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if
the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will promptly pay the excess to a Fund. These daily payments to and from
a Fund are called variation margin. At times of extreme price volatility,
intra-day variation margin payments may be required. In computing daily net
asset values (NAV), each Fund will mark-to-market the current value of its open
futures contracts. Each Fund expects to earn interest income on its initial
margin deposits.
When a Fund buys or sells a futures contract, unless it already owns an
offsetting position, it will maintain in a segregated account, cash and/or
liquid securities having an aggregate value at least equal to the full
"notional" value of the futures contract, thereby insuring that the leveraging
effect of such futures contract is minimized, in accordance with regulatory
requirements.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, small price movements in
futures contracts may result in immediate and potentially unlimited loss or
gain to a Fund relative to the size of the margin commitment. For example, if
at the time of purchase 10% of the value of the futures contract is deposited
as margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit before any deduction for the
transaction costs, if the contract were then closed out. A 15% decrease in the
value of the futures contract would result in a loss equal to 150% of the
original margin deposit, if the contract were closed out. Thus, a purchase or
sale of a futures contract may result in losses in excess of the amount
initially invested in the futures contract.
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A Fund can buy and write (sell) options on futures contracts. See "Call and Put
Options" below. The risk involved in writing options on futures contracts or
market indices is that the Fund would not benefit from any increase in value
above the exercise price. Usually, this risk can be eliminated by entering into
an offsetting transaction. However, the cost to do an offsetting transaction
and terminate a Fund's obligation might be more or less than the premium
received when it originally wrote the option. Further, a Fund might
occasionally not be able to close the option because of insufficient activity
in the options market.
Call and Put Options--Each Fund may purchase and write (sell) call options and
put options on securities, indices and futures as discussed in its prospectus,
subject to the restrictions described in this section and under "Restrictions
on the Use of Futures and Option Contracts." A call option gives the holder
(buyer) the right to buy and to obligate the writer (seller) to sell a security
or financial instrument at a stated price (strike price) at any time until a
designated future date when the option expires (expiration date). A put option
gives the holder (buyer) the right to sell and to obligate the writer (seller)
to purchase a security or financial instrument at a stated price at any time
until the expiration date. A Fund may write or purchase put or call options
listed on national securities exchanges in standard contracts or may write or
purchase put or call options with or directly from investment dealers meeting
the creditworthiness criteria determined by Aeltus.
No Fund may buy put options if more than 3% of its assets immediately following
such purchase would consist of put options. The Funds may purchase call and
sell put options on equity securities only to close out positions previously
opened. No Fund will write a call option on a security unless the call is
"covered," i.e., it already owns the underlying security. Securities it
"already owns" include any stock which it has the right to acquire without any
additional payment, at its discretion for as long as the put or call remains
outstanding. This restriction does not apply to the writing of calls on
securities indices or futures contracts (see below). The Funds will not write
call options on when-issued securities. No Fund may have call options
outstanding at any one time on more than 30% of its total assets. The Funds
purchase calls primarily as a temporary substitute for taking positions in
certain securities or in the securities that comprise a relevant index,
particularly if Aeltus considers these instruments to be undervalued relative
to the prices of particular securities or of the securities that comprise that
index. The Funds also may purchase call options on an index to protect against
increases in the price of securities underlying that index that the Fund(s)
intends to purchase pending its ability to invest in such securities in an
orderly manner.
So long as the obligation of the writer of a call option continues, the writer
may be assigned an exercise notice by the broker-dealer through which such
option was settled, requiring the writer to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, by the exercise of the call option, or by
entering into an offsetting transaction. To secure the writer's obligation to
deliver the underlying security, a writer of a call option is required to
deposit in escrow the underlying security or other assets in accordance with
the rules of the clearing corporations and of the exchanges.
When writing a call option, in return for the premium, the writer gives up the
opportunity to profit from the price increase in the underlying security above
the exercise price, but conversely retains the risk of loss should the price of
the security decline. If a call option expires unexercised, the writer will
realize a gain in the amount of the premium; however, such gain may be offset
by a decline in the market value of the underlying security during the option
period. If the call option is exercised, the writer would realize a gain or
loss from the transaction depending on what it received from the call and what
it paid for the underlying security.
An option on an index is a contract that gives the purchaser of the option, in
return for the premium paid, the right to receive from the writer of the option
cash equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified multiple
(the "multiplier").
Each Fund may write calls on securities indices and futures contracts provided
that the Fund enters into an appropriate offsetting position or that liquid
assets in an amount sufficient to cover the underlying obli-
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gation are segregated, in accordance with regulatory requirements. A call
option is considered offset, and thus held in accordance with regulatory
requirements, if a Fund holds a call on the same security and in the same
principal amount as the call sold when the exercise price of the call held (a)
is equal to or less than the exercise price of the call sold or (b) is greater
than the exercise price of the call sold if the difference is maintained by the
Fund in liquid securities in a segregated account. The Funds also may write a
call on an index if the Fund holds in its portfolio equity securities that
perform with a high degree of correlation to the performance of the index.
In the case of a put option, as long as the obligation of the put writer
continues, it may be assigned an exercise notice by the broker-dealer through
which such option was sold, requiring the writer to take delivery of the
underlying security against payment of the exercise price. A writer has no
control over when it may be required to purchase the underlying security, since
it may be assigned an exercise notice at any time prior to the expiration date.
This obligation terminates earlier if the writer effects a closing purchase
transaction by purchasing a put of the same series as that previously sold.
If a put option is sold by a Fund, the Fund will maintain cash and/or liquid
securities with a value equal to the exercise price in a segregated account, or
else will hold a put on the same security and in the same principal amount as
the put sold where the exercise price of the put held is less than the exercise
price of the put sold if the Fund maintains in a segregated account, liquid
securities with an aggregate value equal to the difference. The writer of a put
therefore foregoes the opportunity of investing the segregated assets or
writing calls against those assets. A Fund may write put options on debt
securities or futures, only if such puts are covered by segregated liquid
assets. A Fund will not write a put if it will require more than 50% of the
Fund's net assets to be segregated to cover the put obligation.
In writing puts, there is the risk that a writer may be required to buy the
underlying security at a disadvantageous price. The premium the writer receives
from writing a put option represents a profit, as long as the price of the
underlying instrument remains above the exercise price; however, if the put is
exercised, the writer is obligated during the option period to buy the
underlying instrument from the buyer of the put at the exercise price, even
though the value of the investment may have fallen below the exercise price. If
the put lapses unexercised, the writer realizes a gain in the amount of the
premium. If the put is exercised, the writer may incur a loss, equal to the
difference between the exercise price and the current market value of the
underlying instrument.
A Fund may purchase put options when Aeltus believes that a temporary defensive
position is desirable in light of market conditions, but does not desire to
sell a portfolio security. The purchase of put options may be used to protect a
Fund's holdings in an underlying security against a substantial decline in
market value. Such protection is, of course, only provided during the life of
the put option when a Fund, as the holder of the put option, is able to sell
the underlying security at the put exercise price regardless of any decline in
the underlying security's market price. By using put options in this manner, a
Fund will reduce any profit it might otherwise have realized in its underlying
security by the premium paid for the put option and by transaction costs.
The premium received from writing a call or put option, or paid for purchasing
a call or put option will reflect, among other things, the current market price
of the underlying security, the relationship of the exercise price to such
market price, the historical price volatility of the underlying security, the
length of the option period, and the general interest rate environment. The
premium received by a Fund for writing call options will be recorded as a
liability in the statement of assets and liabilities of that Fund. This
liability will be adjusted daily to the option's current market value. The
liability will be extinguished upon expiration of the option, by the exercise
of the option, or by entering into an offsetting transaction. Similarly, the
premium paid by a Fund when purchasing a put option will be recorded as an
asset in the statement of assets and liabilities of that Fund. This asset will
be adjusted daily to the option's current market value. The asset will be
extinguished upon expiration of the option, by selling an identical option in a
closing transaction, or by exercising the option.
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Closing transactions will be effected in order to realize a profit on an
outstanding call or put option, to prevent an underlying security from being
called or put, or to permit the exchange or tender of the underlying security.
Furthermore, effecting a closing transaction will permit a Fund to write
another call option, or purchase another put option, on the underlying security
with either a different exercise price or expiration date or both. If a Fund
desires to sell a particular security from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security.
There is, of course, no assurance that a Fund will be able to effect a closing
transaction at a favorable price. If a Fund cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk on the security. A
Fund will pay brokerage commissions in connection with the sale or purchase of
options to close out previously established option positions. Such brokerage
commissions are normally higher as a percentage of underlying asset values than
those applicable to purchases and sales of portfolio securities.
The exercise price of an option may be below, equal to, or above the current
market value of the underlying security at the time the option is written. From
time to time, a Fund may purchase an underlying security for delivery in
accordance with an exercise notice of a call option assignment, rather than
delivering such security. In such cases additional brokerage commissions will
be incurred.
A Fund will realize a profit or loss from a closing purchase transaction if the
cost of the transaction is less or more than the premium received from the
writing of the call option; however, any loss so incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
simultaneous or subsequent sale of a different option. Also, because increases
in the market price of a call option will generally reflect increases in the
market price of the underlying security, any loss resulting from the repurchase
of a call option is likely to be offset in whole or in part by appreciation of
the underlying security owned by a Fund. Any profits from writing covered call
options are considered short-term gain for federal income tax purposes and,
when distributed by a Fund, are taxable as ordinary income.
Foreign Futures Contracts and Foreign Options--The Funds may engage in
transactions in foreign futures contracts and foreign options. Participation in
foreign futures contracts and foreign options transactions involves the
execution and clearing of trades on or subject to the rules of a foreign board
of trade. Neither the CFTC, the National Futures Association (NFA) nor any
domestic exchange regulates activities of any foreign boards of trade including
the execution, delivery and clearing of transactions, or has the power to
compel enforcement of the rules of a foreign board of trade or any applicable
foreign laws. Generally, the foreign transaction will be governed by applicable
foreign law. This is true even if the exchange is formally linked to a domestic
market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures contracts or
foreign options transaction occurs. Investors which trade foreign futures
contracts or foreign options contracts may not be afforded certain of the
protective measures provided by domestic exchanges, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided by
the NFA. In particular, funds received from customers for foreign futures
contracts or foreign options transactions may not be provided the same
protections as funds received for transactions on United States futures
exchanges. The price of any foreign futures contracts or foreign options
contract and, therefore, the potential profit and loss thereon, may be affected
by any variance in the foreign exchange rate between the time an order is
placed and the time it is liquidated, offset or exercised.
Options on Foreign Currencies--Each Fund may write and purchase calls on
foreign currencies. A Fund may purchase and write puts and calls on foreign
currencies that are traded on a securities or commodities exchange or quoted by
major recognized dealers in such options for the purpose of protecting against
declines in the dollar value of foreign securities and against increases in the
dollar cost of foreign securities to be acquired. If a rise is anticipated in
the dollar value of a foreign currency in which securities to be acquired are
denominated, the increased cost of such securities may be partially offset by
purchasing calls or writing puts on that foreign currency. If a decline in the
dollar value of a foreign currency is
9
<PAGE>
anticipated, the decline in value of portfolio securities denominated in that
currency may be partially offset by writing calls or purchasing puts on that
foreign currency. In the event of rate fluctuations adverse to a Fund's
position, it would lose the premium it paid and transactions costs. A call
written on a foreign currency by a Fund is covered if the Fund owns the
underlying foreign currency subject to the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated
account) upon conversion or exchange of other foreign currency held in its
portfolio. A call may be written by a Fund on a foreign currency to provide a
hedge against a decline due to an expected adverse change in the exchange rate
in the U.S. dollar value of a security which the Fund owns or has the right to
acquire and which is denominated in the currency underlying the option. This is
a "cross-hedging" strategy. In such circumstances, the Fund collateralizes the
position by maintaining in a segregated account, cash and/or liquid securities
in an amount not less than the value of the underlying foreign currency in U.S.
dollars marked-to-market daily.
Forward Exchange Contracts--Each Fund may enter into forward contracts for
foreign currency (forward exchange contracts), which obligate the seller to
deliver and the purchaser to take a specific amount of a specified foreign
currency at a future date at a price set at the time of the contract. These
contracts are generally traded in the interbank market conducted directly
between currency traders and their customers. A Fund may enter into a forward
exchange contract in order to "lock in" the U.S. dollar price of a security
denominated in a foreign currency which it has purchased or sold but which has
not yet settled (a "transaction hedge"); or to lock in the value of an existing
portfolio security (a "position hedge"); or to protect against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar
and a foreign currency. There is a risk that use of forward exchange contracts
may reduce the gain that would otherwise result from a change in the
relationship between the U.S. dollar and a foreign currency. Forward exchange
contracts include standardized foreign currency futures contracts which are
traded on exchanges and are subject to procedures and regulations applicable to
futures. Each Fund may also enter into a forward exchange contract to sell a
foreign currency which differs from the currency in which the underlying
security is denominated. This is done in the expectation that there is a
greater correlation between the foreign currency of the forward exchange
contract and the foreign currency of the underlying investment than between the
U.S. dollar and the foreign currency of the underlying investment. This
technique is referred to as "cross hedging." The success of cross hedging is
dependent on many factors, including the ability of Aeltus to correctly
identify and monitor the correlation between foreign currencies and the U.S.
dollar. To the extent that the correlation is not identical, a Fund may
experience losses or gains on both the underlying security and the cross
currency hedge.
Each Fund may use forward exchange contracts to protect against uncertainty in
the level of future exchange rates. The use of forward exchange contracts does
not eliminate fluctuations in the prices of the underlying securities the Fund
owns or intends to acquire, but it does fix a rate of exchange in advance. In
addition, although forward exchange contracts limit the risk of loss due to a
decline in the value of the hedged currencies, at the same time they limit any
potential gain that might result should the value of the currencies increase.
There is no limitation as to the percentage of a Fund's assets that may be
committed to forward exchange contracts. The Funds will not enter into a "cross
hedge," unless it is denominated in a currency or currencies that Aeltus
believes will have price movements that tend to correlate closely with the
currency in which the investment being hedged is denominated.
Each Fund's custodian will segregate cash and/or liquid securities having a
value equal to the aggregate amount of that Fund's commitments under forward
contracts entered into with respect to position hedges and cross hedges. If the
value of the securities segregated declines, additional cash or securities will
be placed in the account on a daily basis so that the value of the account will
equal the amount of the Fund's commitments with respect to such contracts. As
an alternative to maintaining all or part of the separate account, a Fund may
purchase a call option permitting the Funds to purchase the amount of foreign
currency being hedged by a forward sale contract at a price no higher than the
forward contract price, or a Fund may purchase a put option permitting the Fund
to sell the amount of foreign currency subject to
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<PAGE>
a forward purchase contract at a price as high or higher than the forward
contract price. Unanticipated changes in currency prices may result in poorer
overall performance for a Fund than if it had not entered into such contracts.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the forward
contract is entered into and the date it is sold. Accordingly, it may be
necessary for a Fund to purchase additional foreign currency on the spot (i.e.,
cash) market (and bear the expense of such purchase), if the market value of
the security is less than the amount of foreign currency the Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot
market some of the foreign currency received upon the sale of the portfolio
security if its market value exceeds the amount of foreign currency the Fund is
obligated to deliver. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Fund to sustain losses on these contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring a Fund to
sell a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, a Fund may
close out a forward contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. The Fund would
realize a gain or loss as a result of entering into such an offsetting forward
contract under either circumstance to the extent the exchange rate(s) between
the currencies involved moved between the execution dates of the first contract
and the offsetting contract.
The cost to a Fund of engaging in forward exchange contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such contracts are not traded on an exchange, a Fund must evaluate the credit
and performance risk of each particular counterparty under a forward contract.
Although the Funds value their assets daily in terms of U.S. dollars, they do
not intend to convert their holdings of foreign currencies into U.S. dollars on
a daily basis. The Funds may convert foreign currency from time to time.
Foreign exchange dealers do not charge a fee for conversion, but they do seek
to realize a profit based on the difference between the prices at which they
buy and sell various currencies. Thus, a dealer may offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell that currency to the dealer.
Restrictions on the Use of Futures and Related Option Contracts--A Fund may
purchase and sell futures contracts and related options under the following
conditions: (a) the then-current aggregate futures market prices of financial
instruments required to be delivered and purchased under open futures contracts
shall not exceed 30% of a Fund's total assets at market value; and (b) no more
than 5% of the assets, at market value at the time of entering into a contract,
shall be committed to margin deposits in relation to futures contracts. CFTC
regulations require that to prevent a Fund from being a commodity pool the
Funds enter into all short futures for the purpose of hedging the value of
securities held, and that all long futures positions either constitute bona
fide hedging transactions, as defined in such regulations, or have a total
value not in excess of an amount determined by reference to certain cash and
securities positions maintained, and accrued profits on such positions. With
respect to futures contracts or related options that are entered into for
purposes that may be considered speculative, the aggregate initial margin for
future contracts and premiums for options will not exceed 5% of a Funds' net
assets, after taking into account realized profits and unrealized losses on
such futures contracts.
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Interest Rate Swap Transactions--Swap agreements entail both interest rate risk
and credit risk. There is a risk that, based on movements of interest rates in
the future, the payments made by a Fund under a swap agreement will have been
greater than those received by it. Credit risk arises from the possibility that
the counterparty will default. If the counterparty to an interest rate swap
defaults, a Fund's loss will consist of the net amount of contractual interest
payments that a Fund has not yet received. Aeltus will monitor the
creditworthiness of counterparties to a Fund's interest rate swap transactions
on an ongoing basis. A Fund will enter into swap transactions with appropriate
counterparties pursuant to master netting agreements. A master netting
agreement provides that all swaps done between a Fund and that counterparty
under that master agreement shall be regarded as parts of an integral
agreement. If on any date amounts are payable in the same currency in respect
of one or more swap transactions, the net amount payable on that date in that
currency shall be paid. In addition, the master netting agreement may provide
that if one party defaults generally or on one swap, the counterparty may
terminate the swaps with that party. Under such agreements, if there is a
default resulting in a loss to one party, the measure of that party's damages
is calculated by reference to the average cost of a replacement swap with
respect to each swap (i.e., the mark-to-market value at the time of the
termination of each swap). The gains and losses on all swaps are then netted,
and the result is the counterparty's gain or loss on termination. The
termination of all swaps and the netting of gains and losses on termination is
generally referred to as "aggregation."
Additional Risk Factors
In addition to any risk factors which may be described elsewhere in this
section, or in a Fund's prospectus, the following sets forth certain
information regarding the potential risks associated with a Fund's transactions
in derivatives.
Risk of Imperfect Correlation--A Fund's ability to hedge effectively all or a
portion of its portfolio through transactions in futures, options on futures or
options on securities and indices depends on the degree to which movements in
the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the relevant portion of the Fund's
portfolio. If the values of the portfolio securities being hedged do not move
in the same amount or direction as the underlying security or index, the
hedging strategy for a Fund might not be successful and the Fund could sustain
losses on its hedging transactions which would not be offset by gains on its
portfolio. It is also possible that there may be a negative correlation between
the security or index underlying a futures or option contract and the portfolio
securities being hedged, which could result in losses both on the hedging
transaction and the portfolio securities. In such instances, the Fund's overall
return could be less than if the hedging transactions had not been undertaken.
Stock index futures or options based on a narrower index of securities may
present greater risk than options or futures based on a broad market index, as
a narrower index is more susceptible to rapid and extreme fluctuations
resulting from changes in the value of a small number of securities. The Fund
would, however, effect transactions in such futures or options only for hedging
purposes (or to close out open positions).
The trading of futures and options on indices involves the additional risk of
imperfect correlation between movements in the futures or option price and the
value of the underlying index. The anticipated spread between the prices may be
distorted due to differences in the nature of the markets, such as differences
in margin requirements, the liquidity of such markets and the participation of
speculators in the futures and options market. The purchase of an option on a
futures contract also involves the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased. The risk of imperfect correlation, however, generally tends
to diminish as the maturity date of the futures contract or termination date of
the option approaches. The risk incurred in purchasing an option on a futures
contract is limited to the amount of the premium plus related transaction
costs, although it may be necessary under certain circumstances to exercise the
option and enter into the underlying futures contract in order to realize a
profit. Under certain extreme market conditions, it is possible that a Fund
will not be able to establish hedging positions, or that any hedging strategy
adopted will be insufficient to completely protect the Fund.
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<PAGE>
Each Fund will purchase or sell futures contracts or options only if, in
Aeltus' judgment, there is expected to be a sufficient degree of correlation
between movements in the value of such instruments and changes in the value of
the relevant portion of the Fund's portfolio for the hedge to be effective.
There can be no assurance that Aeltus' judgment will be accurate.
Potential Lack of a Liquid Secondary Market--The ordinary spreads between
prices in the cash and futures markets, due to differences in the natures of
those markets, are subject to distortions. First, all participants in the
futures market are subject to initial deposit and variation margin
requirements. This could require a Fund to post additional cash or cash
equivalents as the value of the position fluctuates. Further, rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures or options market may be lacking. Prior to exercise or expiration, a
futures or option position may be terminated only by entering into a closing
purchase or sale transaction, which requires a secondary market on the exchange
on which the position was originally established. While a Fund will establish a
futures or option position only if there appears to be a liquid secondary
market therefor, there can be no assurance that such a market will exist for
any particular futures or option contract at any specific time. In such event,
it may not be possible to close out a position held by the Fund, which could
require the Fund to purchase or sell the instrument underlying the position,
make or receive a cash settlement, or meet ongoing variation margin
requirements. The inability to close out futures or option positions also could
have an adverse impact on the Fund's ability effectively to hedge its
portfolio, or the relevant portion thereof.
The liquidity of a secondary market in a futures contract or an option on a
futures contract may be adversely affected by "daily price fluctuation limits"
established by the exchanges, which limit the amount of fluctuation in the
price of a contract during a single trading day and prohibit trading beyond
such limits once they have been reached. The trading of futures and options
contracts also is subject to the risk of trading halts, suspensions, exchange
or clearing house equipment failures, government intervention, insolvency of
the brokerage firm or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to liquidate
existing positions or to recover excess variation margin payments.
Risk of Predicting Interest Rate Movements--Investments in futures contracts on
fixed income securities and related indices involve the risk that if Aeltus'
investment judgment concerning the general direction of interest rates is
incorrect, a Fund's overall performance may be poorer than if it had not
entered into any such contract. For example, if a Fund has been hedged against
the possibility of an increase in interest rates which would adversely affect
the price of bonds held in its portfolio and interest rates decrease instead,
the Fund will lose part or all of the benefit of the increased value of its
bonds which have been hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements, possibly at a time when it may be
disadvantageous to do so. Such sale of bonds may be, but will not necessarily
be, at increased prices that reflect the rising market.
Trading and Position Limits--Each contract market on which futures and option
contracts are traded has established a number of limitations governing the
maximum number of positions which may be held by a trader, whether acting alone
or in concert with others. Aeltus does not believe that these trading and
position limits will have an adverse impact on the hedging strategies regarding
the Funds' portfolios.
Mortgage-Related Debt Securities
Federal mortgage-related securities include obligations issued or guaranteed by
the Government National Mortgage Association (GNMA), the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC). GNMA is a wholly owned corporate instrumentality of the United States
whose securities and guarantees are backed by the full faith and credit of the
United States. FNMA, a federally chartered and privately owned corporation, and
FHLMC, a federal corporation,
13
<PAGE>
are instrumentalities of the United States, with Presidentially-appointed board
members. The obligations of FNMA and FHLMC are not explicitly guaranteed by the
full faith and credit of the federal government.
Pass-through mortgage-related securities are characterized by monthly payments
to the holder, reflecting the monthly payments made by the borrowers who
received the underlying mortgage loans. The payments to the security-holders
like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, often twenty or thirty years, the borrowers can repay such loans sooner.
Thus, the security holders frequently receive repayments of principal, in
addition to the principal which is part of the regular monthly payment. A
borrower is more likely to repay a mortgage which bears a relatively high rate
of interest. This means that in times of declining interest rates, some higher
yielding securities held by a Fund might be converted to cash, and the Fund
could be expected to reinvest such cash at the then prevailing lower rates. The
increased likelihood of prepayment when interest rates decline also limits
market price appreciation of mortgage-related securities. If a Fund buys
mortgage-related securities at a premium, mortgage foreclosures or mortgage
prepayments may result in losses of up to the amount of the premium paid since
only timely payment of principal and interest is guaranteed.
Collateralized mortgage obligations (CMOs) and real estate mortgage investment
conduits (REMICs) are securities which are collateralized by mortgage
pass-through securities. Cash flows from underlying mortgages are allocated to
various classes or tranches in a predetermined, specified order. Each
sequential tranche has a "stated maturity"--the latest date by which the
tranche can be completely repaid, assuming no prepayments--and has an "average
life"--the average time to receipt of a principal payment weighted by the size
of the principal payment. The average life is typically used as a proxy for
maturity because the debt is amortized, rather than being paid off entirely at
maturity, as would be the case in a straight debt instrument.
CMOs and REMICs are typically structured as "pass-through" securities. In these
arrangements, the underlying mortgages are held by the issuer, which then
issues debt collateralized by the underlying mortgage assets. The security
holder thus owns an obligation of the issuer and payment of interest and
principal on such obligations is made from payments generated by the underlying
mortgage assets. The underlying mortgages may be guaranteed as to payment of
principal and interest by an agency or instrumentality of the U.S. Government
such as GNMA or otherwise backed by FNMA or FHLMC. Alternatively, such
securities may be backed by mortgage insurance, letters of credit,
subordination or other credit enhancing features. Both CMOs and REMICs are
issued by private entities. They are not directly guaranteed by any government
agency and are secured by the collateral held by the issuer.
Asset-Backed Securities
Asset-backed securities are collateralized by short-term loans such as
automobile loans, home equity loans, or credit card receivables. The payments
from the collateral are passed through to the security holder. As noted above
with respect to CMOs and REMICs, the average life for these securities is the
conventional proxy for maturity. Asset-backed securities may pay all interest
and principal to the holder, or they may pay a fixed rate of interest, with any
excess over that required to pay interest going either into a reserve account
or to a subordinate class of securities, which may be retained by the
originator. The originator may guarantee interest and principal payments. These
guarantees often do not extend to the whole amount of principal, but rather to
an amount equal to a multiple of the historical loss experience of similar
portfolios.
Two varieties of asset-backed securities are CARs and CARDs. CARs are
securities, representing either ownership interests in fixed pools of
automobile receivables, or debt instruments supported by the cash flows from
such a pool. CARDs are participations in fixed pools of credit accounts. These
securities have varying terms and degrees of liquidity.
14
<PAGE>
Asset-backed securities may be subject to the type of prepayment risk discussed
above due to the possibility that prepayments on the underlying assets will
alter the cash flow. Faster prepayments will shorten the security's average
life and slower prepayments will lengthen it.
The coupon rate of interest on mortgage-related and asset-backed securities is
lower than the interest rates paid on the mortgages included in the underlying
pool, by the amount of the fees paid to the mortgage pooler, issuer, and/or
guarantor. Actual yield may vary from the coupon rate, however, if such
securities are purchased at a premium or discount, traded in the secondary
market at a premium or discount, or to the extent that the underlying assets
are prepaid as noted above.
High-Yield Bonds
Each Fund may invest in high-yield bonds which are fixed income securities that
offer a current yield above that generally available on debt securities rated
in the four highest categories by Moody's and S&P or, if unrated, considered to
be of comparable quality by Aeltus. These securities include:
(a) fixed rate corporate debt obligations (including bonds, debentures and
notes) rated Ba or lower by Moody's or BB or lower by S&P;
(b) preferred stocks that have yields comparable to those of high-yielding
debt securities; and
(c) any securities convertible into any of the foregoing.
Debt obligations rated BB/Ba or lower are regarded as speculative, and
generally involve more risk of loss of principal and income than higher-rated
securities. Also their yields and market values tend to fluctuate more.
Fluctuations in value do not affect the cash income from the securities but are
reflected in a Fund's NAV. The greater risks and fluctuations in yield and
value occur, in part, because investors generally perceive issuers of
lower-rated and unrated securities to be less creditworthy. Lower ratings,
however, may not necessarily indicate higher risks. In pursuing a Fund's
objectives, Aeltus seeks to identify situations in which the rating agencies
have not fully perceived the value of the security or in which Aeltus believes
that future developments will enhance the creditworthiness and the ratings of
the issuer. None of the Funds will invest in any debt security rated lower than
B.
The yields earned on high-yield bonds generally are related to the quality
ratings assigned by recognized ratings agencies. These securities tend to offer
higher yields than those of other securities with the same maturities because
of the additional risks associated with them. These risks include:
(1) Sensitivity to Interest Rate and Economic Changes. High-yield bonds are
more sensitive to adverse economic changes or individual corporate
developments but less sensitive to interest rate changes than are
investment grade bonds. As a result, when interest rates rise, causing
bond prices to fall, the value of these securities may not fall as much as
investment grade corporate bonds. Conversely, when interest rates fall,
these securities may underperform investment grade corporate bonds because
the prices of these securities tend not to rise as much as the prices of
these other bonds.
Also, the financial stress resulting from an economic downturn or adverse
corporate developments could have a greater negative effect on the ability
of issuers of high-yield bonds to service their principal and interest
payments, to meet projected business goals and to obtain additional
financing, than on more creditworthy issuers. Holders of these securities
could also be at greater risk because these securities are generally
unsecured and subordinated to senior debt holders and secured creditors.
If the issuer of a high-yield bond owned by a Fund defaults, the Fund may
incur additional expenses to seek recovery. In addition, periods of
economic uncertainty and changes can be expected to result in increased
volatility of market prices of these securities and a Fund's NAV.
Furthermore, in the case of high-yield bonds structured as zero coupon or
pay-in-kind securities, their market prices are affected to a greater
extent by interest rate changes and thereby tend to be more speculative
and volatile than securities which pay interest periodically and in cash.
15
<PAGE>
(2) Payment Expectations. High-yield bonds, like other debt instruments,
present risks based on payment expectations. For example, these securities
may contain redemption or call provisions. If an issuer exercises these
provisions in a declining interest rate market, a Fund may have to replace
the securities with a lower yielding security, resulting in a decreased
return for investors. Also, the value of these securities may decrease in
a rising interest rate market. In addition, there is a higher risk of
non-payment of interest and/or principal by issuers of high-yield bonds
than in the case of investment-grade bonds.
(3) Liquidity and Valuation Risks. High-yield bonds are often traded among a
small number of broker-dealers rather than in a broad secondary market.
Purchasers of these securities in the past tended to be institutions
rather than individuals, a factor that further limits the secondary
market. Many of these securities may not be as liquid as investment grade
bonds. The ability to value or sell these securities will be adversely
affected to the extent that such securities are thinly traded or illiquid.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease or increase the values and liquidity of
high-yield bonds more than other securities, especially in a thinly-traded
market.
(4) Limitations of Credit Ratings. The credit ratings assigned to high-yield
bonds may not accurately reflect the true risks of an investment. Credit
ratings typically evaluate the safety of principal and interest payments
rather than the market value risk of such securities. In addition, credit
agencies may fail to adjust credit ratings to reflect rapid changes in
economic or company conditions that affect a security's market value.
Although the ratings of recognized rating services such as Moody's and S&P
are considered, Aeltus primarily relies on its own credit analysis which
includes a study of existing debt, capital structure, ability to service
debts and to pay dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend of earnings. Thus
the achievement of a Fund's investment objective may be more dependent on
Aeltus' own credit analysis than might be the case for a fund which does
not invest in these securities.
(5) Legislation. Legislation may have a negative impact on the market for
high-yield bonds, such as legislation requiring federally-insured savings
and loan associations to divest themselves of their investments in these
securities.
Small-Capitalization Companies
Balanced VP and Growth and Income VP may invest in small-capitalization equity
securities. These securities are issued by smaller, less well-known U.S.
companies with equity market capitalization generally less than $1 billion.
These companies may be in an early developmental stage or may be older
companies entering a new stage of growth due to management changes, new
technology, products or markets. The securities of small-capitalization
companies may also be undervalued due to poor economic conditions, market
decline or actual or unanticipated unfavorable developments affecting the
companies.
Securities of small-capitalization companies tend to offer greater potential
for growth than securities of larger, more established issuers but there are
additional risks associated with them. These risks include: limited
marketability; more abrupt or erratic market movements than securities of
larger capitalization companies; and less publicly available information about
the company and its securities. In addition, these companies may be dependent
on relatively few products or services, have limited financial resources and
lack of management depth, and may have less of a track record or historical
pattern of performance.
Zero Coupon and Pay-in-Kind Securities
Zero coupon, or deferred interest, securities are debt obligations that do not
entitle the holder to any periodic payment of interest prior to maturity or a
specified date when the securities begin paying current interest (cash payment
date) and therefore are issued and traded at a discount from their face amounts
or par value. The discount varies, depending on the time remaining until
maturity or cash payment date, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, decreases as the final
maturity or cash payment date of the security approaches. The market prices of
zero coupon and deferred interest securities generally
16
<PAGE>
are more volatile than the market prices of securities with similar maturities
that pay interest periodically and are likely to respond to changes in interest
rates to a greater degree than do non-zero coupon securities having similar
maturities and credit quality.
The risks associated with lower-rated debt securities may apply to zero coupon
and pay-in-kind securities. These securities are also subject to the risk that
in the event of a default, a Fund may realize no return on its investment,
because these securities do not pay cash interest.
When-Issued or Delayed-Delivery Securities
During any period that a Fund has outstanding a commitment to purchase
securities on a when-issued or delayed-delivery basis, the Fund will maintain a
segregated account consisting of cash, U.S. Government securities or other
high-quality debt obligations. To the extent that the market value of
securities held in this segregated account falls below the amount that the
purchasing Fund will be required to pay on settlement, additional assets may be
required to be added to the segregated account. Such segregated accounts could
affect the purchasing Fund's liquidity and ability to manage its portfolio.
When a Fund engages in when-issued or delayed-delivery transactions, it is
effectively relying on the seller of such securities to consummate the trade;
failure of the seller to do so may result in the Fund's incurring a loss or
missing an opportunity to invest funds held in the segregated account more
advantageously.
A Fund will not pay for securities purchased on a when-issued or
delayed-delivery basis, or start earning interest on such securities, until the
securities are actually received. However, any security so purchased will be
recorded as an asset of the Fund at the time the commitment is made. Because
the market value of securities purchased on a when-issued or delayed-delivery
basis may increase or decrease prior to settlement as a result of changes in
interest rates or other factors, such securities will be subject to changes in
market value prior to settlement and a loss may be incurred if the value of the
security to be purchased declines prior to settlement.
Convertibles
A convertible bond or convertible preferred stock gives the holder the option
of converting these securities into common stock. Convertible securities also
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
Illiquid and Restricted Securities
Each Fund may invest up to 15% of its total assets in illiquid securities. For
this purpose, "illiquid securities" are those which cannot be sold in seven
days in the ordinary course of business without taking a materially reduced
price. Because of the absence of a trading market for these investments, a Fund
may take longer to liquidate the position and may realize less than the amount
originally paid by the Fund. Each Fund may purchase securities, which, while
privately placed, are eligible for purchase and sale pursuant to Rule 144A
under the 1933 Act. This rule permits certain qualified institutional buyers,
such as the Funds, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. Aeltus, under the supervision
of the Trustees, will consider whether securities purchased under Rule 144A and
other restricted securities are illiquid and thus subject to each Fund's
restriction of investing no more than 15% of the Fund's total assets in
illiquid securities. In making this determination, Aeltus will consider the
trading markets for the specific security taking into account the unregistered
nature of the Rule 144A security. In addition, Aeltus may consider, among other
things, the (i) frequency of trades and quotes, (ii) number of dealers and
potential purchasers, (iii) dealer undertakings to make a market, and (iv)
nature of the security and market place trades. The liquidity of Rule 144A
securities will also be monitored by Aeltus and, if as a result of changed
conditions, it is determined that a Rule 144A security is no longer liquid, a
Fund's holdings of illiquid securities will be reviewed to assure that the Fund
does not invest more than 15% of its total assets in illiquid securities.
Investing in Rule 144A securities could have the effect of increasing the
amount of a Fund's investments in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities. At the present
time, it is not possible to predict with certainty how the market for Rule 144A
securities will continue to operate.
17
<PAGE>
Warrants
Warrants allow the holder to purchase new shares in the issuing company at a
predetermined price within either a specified length of time or perpetually.
Warrants may be sold individually or attached to preferred stock or bonds.
The purchaser of a warrant expects that the market price of a security will
exceed the purchase price of the warrant plus the exercise price of the
warrant, thus giving him a profit. Since the market price may never exceed the
exercise price before the expiration date of the warrant, the purchaser of the
warrant risks the loss of the entire purchase price of the warrant.
Borrowing
Each Fund may borrow up to 5% of the value of its total assets for temporary or
emergency purposes. Each Fund may also borrow up to one-third of the value of
its total assets from banks (including its custodian bank) to increase its
holdings of portfolio securities. Leveraging by means of borrowing may affect a
Fund's NAV by exaggerating any increase or decrease in the value of portfolio
securities, and money borrowed is subject to interest and other costs which may
or may not exceed the income derived from the securities purchased with
borrowed funds. There is no present intention to leverage the Funds.
Portfolio Turnover
Portfolio turnover refers to the frequency of portfolio transactions and the
percentage of portfolio assets being bought and sold in the aggregate during
the year. The Funds do not intend to make a general practice of short-term
trading, although they may occasionally realize short-term gains or losses.
Purchases and sales will be made whenever such action is deemed prudent and
consistent with investment objectives. It is anticipated that under normal
market conditions the average annual portfolio turnover rate for each Fund will
not exceed 125%. A high turnover rate involves greater expenses and may involve
greater risk to the Fund. For the years ended December 31, 1997 and December
31, 1996, the portfolio turnover rates were as follows:
December 31, 1997 December 31, 1996
----------------- -----------------
Balanced VP 112.03% 107.80%
Bond VP 134.92% 96.41%
Growth and Income VP 107.01% 85.03%
TRUSTEES AND OFFICERS OF THE FUNDS
The investments and administration of a Fund are under the supervision of its
Trustees. The Trustees and executive officers of a Fund and their principal
occupations for the past five years are listed below. Those Trustees who are
"interested persons," as defined in the 1940 Act, are indicated by an asterisk
(*). All Trustees and officers hold similar positions with certain other
investment companies in the same Complex. The Fund Complex presently consists
of Aetna Series Fund, Inc., Aetna Growth and Income VP, Aetna Bond VP, Aetna
Variable Encore Fund, Aetna Balanced VP, Inc., Aetna GET Fund (Series B and
Series C), Aetna Generation Portfolios, Inc., Aetna Variable Portfolios, Inc.
and Portfolio Partners, Inc.
18
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Principal Occupation During Past Five Years
Position(s) Held with (and Positions held with Affiliated Persons or
Name, Address and Age each Fund Principal Underwriter of each Fund)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
J. Scott Fox* Trustee and President Director, Managing Director, Chief Operating Officer,
242 Trumbull Street Chief Financial Officer, Aeltus Investment
Hartford, Connecticut Management, Inc. (Aeltus), October 1997 to present;
Age 42 Vice President, Aetna Retirement Services, Inc., April
1997 to present; Director and Senior Vice President,
Aetna Retirement Holdings, Inc., April 1997 to
February 1998; Director and President, Aetna Life
Assignment Company, September 1997 to present;
Director and Senior Vice President, Aetna Life
Insurance and Annuity Company, March 1997 to
February 1998; Director, Managing Director, Chief
Operating Officer, Chief Financial Officer and
Treasurer, Aeltus, April 1994 to March 1997;
Managing Director and Treasurer, Equitable Capital
Management Corp., March 1987 to September 1993;
Director, Aeltus Capital, Inc., March 1996 to July
1997; Managing Director, Chief Financial Officer,
Aeltus Capital, Inc., March 1996 to April 1997;
Director, Aeltus Trust Company, Inc., May 1996 to July
1997; Managing Director, Chief Operating Officer,
Chief Financial Officer and Treasurer, Aeltus Trust
Company, Inc., May 1996 to April 1997; Director and
President, Aetna Investment Management (Bermuda)
Holding, Ltd., May 1996 to October 1997.
- ----------------------------------------------------------------------------------------------------------
Wayne F. Baltzer Vice President Assistant Vice President, Aetna Life Insurance and
242 Trumbull Street Annuity Company, May 1991 to present; Vice
Hartford, Connecticut President, Aetna Investment Services, Inc., July 1993
Age 54 to present.
- ----------------------------------------------------------------------------------------------------------
Amy R. Doberman Secretary Counsel, Aetna Life Insurance and Annuity Company,
151 Farmington Avenue December 1996 to present; Attorney, Securities and
Hartford, Connecticut Exchange Commission, March 1990 to November
Age 36 1996.
- ----------------------------------------------------------------------------------------------------------
Maria T. Fighetti Trustee Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation and
Closter, New Jersey Alcohol Services, 1973 to present.
Age 54
- ----------------------------------------------------------------------------------------------------------
David L. Grove Trustee, Chairperson Private Investor; Economic/Financial Consultant,
5 The Knoll Contract Committee December 1985 to present.
Armonk, New York
Age 79
- ----------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Principal Occupation During Past Five Years
Position(s) Held with (and Positions held with Affiliated Persons or
Name, Address and Age each Fund Principal Underwriter of each Fund)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
John Y. Kim* Trustee Director, President, Chief Executive Officer, Chief
242 Trumbull Street Investment Officer, Aeltus Investment Management,
Hartford, Connecticut Inc., December 1995 to present; Director, Aetna Life
Age 37 Insurance and Annuity Company, February 1995 to
present; Senior Vice President, Aetna Life Insurance
and Annuity Company, September 1994 to present.
- ----------------------------------------------------------------------------------------------------------
Sidney Koch Trustee Financial Adviser, self-employed, January 1993 to
455 East 86th Street present.
New York, New York
Age 62
- ----------------------------------------------------------------------------------------------------------
Frank Litwin Vice President Managing Director, Aeltus Investment Management,
242 Trumbull Street Inc., August 1997 to present; Vice President, Fidelity
Hartford, Connecticut Investments Institutional Services Company, April
Age 48 1992 to August 1997.
- ----------------------------------------------------------------------------------------------------------
Shaun P. Mathews* Trustee Vice President/Senior Vice President, Aetna Life
151 Farmington Avenue Insurance and Annuity Company, March 1991 to
Hartford, Connecticut present; Vice President, Aetna Life Insurance
Age 42 Company, 1991 to present; Director and Senior Vice
President, Aetna Investment Services, Inc., July 1993
to present; Director and Senior Vice President, Aetna
Insurance Company of America, September 1992 to
present.
- ----------------------------------------------------------------------------------------------------------
Corine T. Norgaard Trustee Dean of the Barney School of Business, University of
556 Wormwood Hill Hartford (West Hartford, CT), August 1996 to present;
Mansfield Center, Professor, Accounting and Dean of the School of
Connecticut Management, Binghamton University (Binghamton,
Age 60 NY), August 1993 to August 1996; Professor,
Accounting, University of Connecticut (Storrs, CT),
September 1969 to June 1993; Director, The Advest
Group (holding company for brokerage firm) through
September 1996.
- ----------------------------------------------------------------------------------------------------------
Richard G. Scheide Trustee, Chairperson Trust and Private Banking Consultant, David Ross
11 Lily Street Audit Committee Palmer Consultants, July 1991 to present.
Nantucket,
Massachusetts
Age 68
- ----------------------------------------------------------------------------------------------------------
Stephanie A. Taylor Vice President, Vice President Mutual Fund Accounting, Aeltus
242 Trumbull Street Treasurer and Chief Investment Management, Inc., November 1995 to
Hartford, Connecticut Financial Officer present; Director Mutual Fund Accounting, Aetna Life
Age 44 Insurance and Annuity Company, August 1994 to
November 1995; Assistant Vice President, Investors
Bank & Trust, January 1993 to August 1994.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Trustees who are also directors, officers or employees of Aetna Inc. and its
affiliates are not entitled to any compensation from the Funds. As of December
31, 1997, the unaffiliated Trustees received compensation in the amounts
included in the following table. None of these Trustees were entitled to
receive pension or retirement benefits.
<TABLE>
<CAPTION>
Aggregate
Aggregate Aggregate Compensation Total Compensation
Compensation Compensation from from
Name of Person, from from Growth and the Funds and Fund
Position Balanced VP Bond VP Income VP Complex Paid to Trustees
- --------------------- ------------ ------------ ------------ ------------------------
<S> <C> <C> <C> <C>
Corine Norgaard $6,284 $2,622 $35,100 $55,500
Trustee
Sidney Koch 6,340 2,646 35,416 56,000
Trustee
Maria T. Fighetti 6,284 2,622 35,100 55,500
Trustee
Richard G. Scheide 6,906 2,882 38,578 61,000
Trustee, Chairperson
Audit Committee
David L. Grove* 6,510 2,717 36,365 57,500
Trustee, Chairperson
Contract Committee
</TABLE>
*Mr. Grove elected to defer all such compensation under an existing deferred
compensation plan.
The Funds have obtained an order from the Commission which allows the Trustees
who are not affiliated with Aetna Inc. or any of its subsidiaries to defer all
or a portion of their compensation in accordance with the terms of a Deferred
Compensation Plan (the "Plan"). Under the Plan, compensation deferred by an
unaffiliated Trustee is periodically adjusted as though an equivalent amount
had been invested and reinvested in shares of one or more series of Aetna
Series Fund, Inc. designated by the Trustee. The amount paid to the
unaffiliated Trustee under the Plan will be based upon the performance of such
investments. Deferral of compensation in accordance with the Plan will have a
negligible effect on the assets, liabilities and net income per share of any
Fund and will not obligate a Fund to retain the services of any Trustee or to
pay any particular level of compensation to any Trustee.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS OF THE FUNDS
As of March 31, 1998, Aetna and its affiliates owned (100%) shares of Balanced
VP, (99.25%) shares of Bond VP and (99.60%) shares of Growth and Income VP
which were allocated to variable annuity and variable life insurance separate
accounts to fund obligations under VA Contracts and VLI Policies. Contract
holders in these separate accounts are provided the right to direct the voting
of Fund shares at shareholder meetings. Aetna and its affiliates vote the
shares that they own in these separate accounts in accordance with contract
holders' directions. Undirected shares of a Fund will be voted for each Account
in the same proportion as directed shares.
21
<PAGE>
INVESTMENT ADVISORY AGREEMENTS
Effective May 1, 1998, each Fund entered into an investment advisory agreement
appointing Aeltus as its Investment Adviser. These agreements replace
investment advisory agreements with Aetna, and will be effective through
December 31, 1998. The Advisory Agreements will remain in effect thereafter if
approved at least annually by a majority of the Trustees, including a majority
of the Trustees who are not "interested persons" of a Fund, as defined by the
1940 Act (Independent Trustees), at a meeting called for that purpose, and held
in person. Each Advisory Agreement may be terminated without penalty upon sixty
(60) days' written notice by the Trustees or by a majority vote of the
outstanding voting securities of that Fund, or by Aeltus. The Advisory
Agreements terminate automatically in the event of assignment. Under the
Advisory Agreements and subject to the supervision of the Trustees of each
Fund, Aeltus has responsibility for supervising all aspects of the operations
of each Fund including the selection, purchase and sale of securities on behalf
of each Fund. Under the Advisory Agreements, Aeltus is given the right to
delegate any or all of its obligations to a subadviser.
The Advisory Agreements provide that Aeltus is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
officers or Trustees of the Fund and each Fund is responsible for payment of
all other of its costs.
For the services under the Advisory Agreements, Aeltus will receive an annual
fee, payable monthly, as described in each Fund's prospectus.
Prior to the date of this Statement, Aetna served as investment adviser to the
Funds. For the years ended December 31, 1997, 1996 and 1995, Aetna received the
following amounts in advisory fees from each Fund:
1997 1996 1995
---- ---- ----
Balanced VP $7,561,696 $4,616,886 $2,674,612
Bond VP 2,576,345 2,033,785 1,534,803
Growth and Income VP 41,563,182 22,537,554 12,573,737
ADMINISTRATIVE SERVICES AGREEMENTS
Pursuant to an Administrative Services Agreement with respect to each Fund,
Aeltus acts as administrator and provides certain administrative and
shareholder services necessary for Fund operations and is responsible for the
supervision of other service providers. The services provided by Aeltus
include: (1) internal accounting services; (2) monitoring regulatory
compliance, such as reports and filings with the Commission and state
securities commissions; (3) preparing financial information for proxy
statements; (4) preparing semiannual and annual reports to shareholders; (5)
calculating NAV; (6) the preparation of certain shareholder communications; (7)
supervision of the custodians and transfer agent; and (8) reporting to the
Trustees.
For its services, each Fund pays Aeltus an annual fee, payable monthly, as
described in each Fund's prospectus.
Each Administrative Services Agreement will remain in effect until December 31,
1998, and from year-to-year thereafter if approved annually by a majority of
the Trustees. Each may be terminated by either party on sixty (60) days'
written notice.
Prior to the date of this Statement, Aetna acted as Administrator. For the years
ended December 31, 1997, 1996 and 1995, Aetna received the following
administrative fees from each Fund:
1997 1996 1995
---- ---- ----
Balanced VP $1,209,871 $ 851,380 $ 583,165
Bond VP 515,269 430,403 414,281
Growth and Income VP 4,987,583 3,258,759 2,202,904
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BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the supervision of each Fund's Trustees, Aeltus has responsibility
for making investment decisions, for effecting the execution of trades and for
negotiating any brokerage commissions thereon. It is Aeltus' policy to obtain
the best quality of execution available, giving attention to net price
(including commissions where applicable), execution capability (including the
adequacy of a firm's capital position), research and other services related to
execution. The relative priority given to these factors will depend on all of
the circumstances regarding a specific trade. Aeltus may also consider the sale
of shares of registered investment companies advised by Aeltus as a factor in
the selection of brokerage firms to executive the Funds' portfolio
transactions, subject to Aeltus' duty to obtain best execution.
Aeltus receives a variety of brokerage and research services from brokerage
firms in return for the execution by such brokerage firms of trades on behalf
of each Fund. These brokerage and research services include, but are not
limited to, quantitative and qualitative research information and purchase and
sale recommendations regarding securities and industries, analyses and reports
covering a broad range of economic factors and trends, statistical data
relating to the strategy and performance of the Funds and other investment
companies, services related to the execution of trades in a Fund's securities
and advice as to the valuation of securities, the providing of equipment used
to communicate research information and specialized consultations with Fund
personnel with respect to computerized systems and data furnished to the Funds
as a component of other research services. Aeltus considers the quantity and
quality of such brokerage and research services provided by a brokerage firm
along with the nature and difficulty of the specific transaction in negotiating
commissions for trades in a Fund's securities and may pay higher commission
rates than the lowest available when it is reasonable to do so in light of the
value of the brokerage and research services received generally or in
connection with a particular transaction. Aeltus' policy in selecting a broker
to effect a particular transaction is to seek to obtain "best execution," which
means prompt and efficient execution of the transaction at the best obtainable
price with payment of commissions which are reasonable in relation to the value
of the services provided by the broker, taking into consideration research and
brokerage services provided. When the trader believes that more than one broker
can provide best execution, preference may be given to brokers who provide
additional services to Aeltus.
Research services furnished by brokers through whom a Fund effects securities
transactions may be used by Aeltus in servicing all of its accounts; not all
such services will be used by Aeltus to benefit the Fund.
Consistent with Federal law, Aeltus may obtain such brokerage and research
services regardless of whether they are paid for (1) by means of commissions,
or (2) by means of separate, non-commission payments. Aeltus' judgment as to
whether and how it will obtain the specific brokerage and research services
will be based upon its analysis of the quality of such services and the cost
(depending upon the various methods of payment which may be offered by
brokerage firms) and will reflect Aeltus' opinion as to which services and
which means of payment are in the long-term best interests of the Funds.
The Funds have not effected and have no present intention of effecting any
brokerage transactions in portfolio securities with Aeltus or any other
affiliated person of the Funds. If Aeltus effects brokerage transactions
through any affiliated person of the Fund or with any affiliated person of such
person in the future, all such transactions will comply with Rule 17e-1 under
the 1940 Act.
Aeltus acts as investment adviser to other investment companies registered
under the 1940 Act. Aeltus has adopted policies designed to prevent
disadvantaging the Funds in placing orders for the purchase and sale of
securities.
A Fund and another advisory client of Aeltus or Aeltus itself, may desire to
buy or sell the same security at or about the same time. In such a case, the
purchases or sales will normally be aggregated, and then allocated as nearly as
practicable on a pro rata basis in proportion to the amounts to be purchased or
sold by each. In some cases the smaller orders will be filled first. In
determining the amounts to be purchased and sold, the main factors to be
considered are the respective investment objectives of a Fund,
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the relative size of Fund holdings of the same or comparable securities,
availability of cash for investment, and the size of their respective
investment commitments. Prices are averaged for aggregated trades.
For the years ended December 31, 1997, 1996 and 1995, each Fund paid brokerage
commissions as follows:
1997 1996 1995
---- ---- ----
Balanced VP $2,113,501 $2,131,638 $3,963,689
Bond VP 0 3,622 9,900
Growth and Income VP 19,942,448 12,769,947 17,298,663
For the fiscal year ended December 31, 1997, commissions in the amounts listed
below were paid with respect to portfolio transactions directed to certain
brokers because of research services provided:
Balanced VP $ 764,261
Bond VP 0
Growth and Income VP 3,371,710
Each Fund is subject to a Code of Ethics, approved by the Trustees, governing
personal trading by persons who manage, or who have access to trading activity
by, a Fund. The Code allows personal trades to be made in securities that may
be held by a Fund; however, it prohibits a person from taking advantage of Fund
trades or from acting on inside information. Aeltus also has adopted a Code of
Ethics which the Trustees review annually.
DESCRIPTION OF SHARES
Bond VP was originally established as a Maryland corporation in 1973 and was
converted to a Massachusetts business trust on May 1, 1984. It currently
operates under a Declaration of Trust (Declaration) dated January 25, 1984.
Growth and Income VP was originally established as a Maryland corporation in
1974 and was converted to a Massachusetts business trust on May 1, 1984. It
operates under a Declaration dated January 25, 1984. The Declaration of each
Fund permits the Trustees to issue an unlimited number of full and fractional
shares of beneficial interest of a single class, each of which represents a
proportionate interest in that Fund equal to each other share. The Trustees
have the power to divide or combine the shares into a greater or lesser number
of shares without thereby changing the proportional beneficial interest in the
Fund.
Balanced VP was established under the laws of Maryland through Articles of
Incorporation ("Articles") dated December 14, 1988. Balanced VP's name was
changed from Aetna Investment Advisers Fund, Inc. on May 1, 1998. Balanced VP's
Articles permit the Trustees to issue two billion transferable full and
fractional shares of common stock with a par value of $.001 per share.
Upon liquidation of a Fund, shareholders are entitled to share pro rata in the
net assets of the Fund available for distribution to shareholders. Fund shares
are fully paid and nonassessable, except as set forth below.
Shareholder and Trustee Liability
Bond VP and Growth and Income VP are entities of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
business trust may, under certain circumstances, be held personally liable as
partners for the obligations of a Fund, which is not true in the case of a
corporation. The Declaration of each Fund provides that shareholders shall not
be subject to any personal liability for the acts or obligations of that Fund
and that every written agreement, obligation, instrument or undertaking made by
that Fund shall contain a provision to the effect that shareholders are not
personally liable thereunder. With respect to tort claims, contract claims
where the provision referred to is omitted from the undertaking, and claims for
taxes and certain statutory liabilities in other jurisdictions, a shareholder
may be held personally liable to the extent that claims are not satisfied by a
Fund. However, upon payment of any such liability the shareholder will be
entitled to reimbursement from the general
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<PAGE>
assets of the Fund. The Trustees intend to conduct the operations of each Fund,
with the advice of counsel, in such a way as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Fund.
Each Fund's Declaration further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declarations protects a Trustee against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
Voting Rights
Shareholders are entitled to one vote for each full share held (and fractional
votes for fractional shares held) and will vote in the election of Trustees (to
the extent hereinafter provided) and on other matters submitted to the vote of
shareholders. Participants who select a Fund for investment through their VA
Contract or VLI Policy are not the shareholders of the Fund. The insurance
companies who issue the separate accounts generally pass through voting to
Participants as described in the prospectus for the applicable VA Contract or
VLI Policy. Once the initial Board of Trustees is elected, no meeting of the
shareholders for the purpose of electing Trustees will be held unless and until
such time as less than a majority of the Trustees holding office have been
elected by the shareholders, or shareholders holding 10% or more of the
outstanding shares request such a vote. The Trustees then in office will call a
shareholder meeting for election of Trustees. Vacancies occurring between any
such meeting shall be filled as allowed by law, provided that immediately after
filling any such vacancy, at least two-thirds of the Trustees holding office
have been elected by the shareholders. Except as set forth above, the Trustees
shall continue to hold office and may appoint successor Trustees. Trustees of
Bond VP and Growth and Income VP may be removed from office (1) at any time by
two-thirds vote of the Trustees; (2) by a majority vote of Trustees where any
Trustee becomes mentally or physically incapacitated; (3) at a special meeting
of shareholders by a two-thirds vote of the outstanding shares; or (4) by
written declaration filed with Mellon Bank, N.A., the Fund's custodian, signed
by two-thirds of the Fund's shareholders. Trustees of Balanced VP may be
removed at any meeting of shareholders by the vote of a majority of all shares
entitled to vote. Any Trustee may also voluntarily resign from office. Voting
rights are not cumulative, so that the holders of more than 50% of the shares
voting in the election of Trustees can, if they choose to do so, elect all the
Trustees of a Fund, in which event the holders of the remaining shares will be
unable to elect any person as a Trustee.
Each Share has equal dividend rights with every other Share. Shares have no
preemptive or conversion rights.
PURCHASE AND REDEMPTION OF SHARES
Shares of a Fund are purchased and redeemed at the NAV next determined after
receipt of a purchase or redemption order in acceptable form as described in
each Fund's prospectus under "Purchase and Redemption of Shares" and "Net Asset
Value."
The value of shares redeemed may be more or less than the shareholder's costs,
depending upon the market value of the portfolio securities at the time of
redemption. Payment for shares redeemed will be made by a Fund within seven
days or the maximum period allowed by law, if shorter, after the redemption
request is received by Aetna.
PRINCIPAL UNDERWRITER
Aetna is the principal underwriter of each Fund pursuant to a contract
(Underwriting Agreement) between it and the Fund. Each Underwriting Agreement
will remain in effect through December 1998 and may be continued annually
thereafter if approved annually by the Trustees of the Fund or by a vote of
holders of a majority of the Fund's shares. Each Underwriting Agreement may be
terminated at any time, by either party, without the payment of any penalty, on
sixty (60) days' written notice to the other party.
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TAX MATTERS
The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the Funds' prospectuses. No attempt is made to present a detailed explanation
of the tax treatment of the Funds or their shareholders, and the discussions
here and in the Funds' prospectuses are not intended as substitutes for careful
tax planning. Holders of VA Contracts or VLI Policies must consult the
prospectuses of their respective contracts or policies for information
concerning the federal income tax consequences of owning such VA Contracts or
VLI Policies.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (Code). As a
regulated investment company, a Fund generally is not subject to federal income
tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess
of net short-term capital gain over net long-term capital loss) for the taxable
year (Distribution Requirement), and satisfies certain other requirements of
the Code that are described below. Distributions by a Fund made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (Income Requirement). For purposes of these calculations, gross
income includes tax-exempt income.
In general, gain or loss recognized by a Fund on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of
a debt obligation purchased by a Fund at a market discount (generally, at a
price less than its principal amount) will be treated as ordinary income to the
extent of the portion of the market discount which accrued during the period of
time the Fund held the debt obligation. In addition, under the rules of Code
Section 988, gain or loss recognized on the disposition of a debt obligation
denominated in a foreign currency or an option with respect thereto (but only
to the extent attributable to changes in foreign currency exchange rates), and
gain or loss recognized on the disposition of a foreign currency forward
contract, futures contract, option or similar financial instrument, or of
foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256, will generally be treated as ordinary
income or loss.
For purposes of determining whether capital gain or loss recognized by a Fund
on the disposition of an asset is long-term or short-term, the holding period
of the asset may be affected if (i) the asset is used to close a "short sale"
(which includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, (ii) the asset is otherwise
held by the Fund as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Fund grants a qualified covered call
option (which, among other things, must not be deep-in-the-money) with respect
thereto) or (iii) the asset is stock and the Fund grants an in-the-money
qualified covered call option with respect thereto. In addition, a Fund may be
required to defer the recognition of a loss on the disposition of an asset held
as part of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by a Fund on the lapse of, or any gain or loss recognized
by a Fund from a closing transaction with respect to, an option written by the
Fund will be treated as a short-term capital gain or loss.
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Transactions that may be engaged in by a Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
contracts." Section 1256 contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such contracts have not terminated (by
delivery, exercise, entering into a closing transaction or otherwise) as of
such date. Any gain or loss recognized as a consequence of the year-end deemed
disposition of Section 1256 contracts is taken into account for the taxable
year together with any other gain or loss that was previously recognized upon
the termination of Section 1256 contracts during that taxable year. Any capital
gain or loss for the taxable year with respect to Section 1256 contracts
(including any capital gain or loss arising as a consequence of the year-end
deemed sale of such contracts) is generally treated as 60% long-term capital
gain or loss and 40% short-term capital gain or loss. A Fund, however, may
elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a "mixed straddle" with other investments of the Fund that are
not Section 1256 contracts.
Because only a few regulations regarding the treatment of swap agreements and
other financial derivatives have been issued, the tax consequences of
transactions in these types of instruments are not always entirely clear. Each
Fund intends to account for derivatives transactions in a manner deemed by it
to be appropriate, but the Internal Revenue Service might not necessarily
accept such treatment. If it did not, the status of a Fund as a regulated
investment company and/or its compliance with the diversification requirement
under Code section 817(h) might be affected. The Funds intend to monitor
developments in this area. Certain requirements that must be met under the Code
in order for a Fund to qualify as a regulated investment company may limit the
extent to which it will be able to engage in swap agreements.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it has made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss incurred after October
31 as if it had been incurred in the succeeding year.
Finally, each Fund must satisfy an asset diversification test in order to
qualify as a regulated investment company. Under this test, at the close of
each quarter of a Fund's taxable year, at least 50% of the value of the Fund's
assets must consist of cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of such issuer and as to which the Fund does
not hold more than 10% of the outstanding voting securities of such issuer),
and no more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses. Generally, an option (call or put) with respect to a security is
treated as issued by the issuer of the security not the issuer of the option.
However, with regard to forward currency contracts, there does not appear to be
any formal or informal authority which identifies the issuer of such
instrument. For purposes of asset diversification testing, obligations issued
by or guaranteed by agencies and instrumentalities of the U.S. Government such
as the Federal Agricultural Mortgage Corporation, the Farm Credit System
Financial Assistance Corporation, the Federal Home Loan Bank, the Federal Home
Loan Mortgage Corporation, the Federal National Mortgage Association, the
Government National Mortgage Corporation, and the Student Loan Marketing
Association are treated as U.S. Government securities.
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If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Qualification of Segregated Asset Accounts
Under Code section 817(h), a segregated asset account upon which a variable
annuity contract or variable life insurance policy is based must be "adequately
diversified." A segregated asset account will be adequately diversified if it
satisfies one of two alternative tests set forth in the Treasury Regulations.
Specifically, the Treasury Regulations provide, that except as permitted by the
"safe harbor" discussed below, as of the end of each calendar quarter (or
within 30 days thereafter) no more than 55% of a fund's total assets may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are considered
a single investment, and while each U.S. Government agency and instrumentality
is considered a separate issuer, a particular foreign government and its
agencies, instrumentalities and political subdivisions may be considered the
same issuer. As a safe harbor, a separate account will be treated as being
adequately diversified if the diversification requirements under Subchapter M
are satisfied and no more than 55% of the value of the account's total assets
are cash and cash items, U.S. government securities and securities of other
regulated investment companies.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be entitled
to "look-through" the regulated investment company to its pro rata portion of
the regulated investment company's assets, provided the regulated investment
company satisfies certain conditions relating to the ownership of the shares.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or,
at the election of a regulated investment company having a taxable year ending
November 30 or December 31, for its taxable year (taxable year election)). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable
year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year; and (2) exclude foreign
currency gains and losses from Section 988 transactions incurred after October
31 of any year (or after the end of its taxable year if it has made a taxable
year election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Fund Distributions
Each Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but they may qualify for the dividends-received deduction for
corporate shareholders.
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Each Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time a shareholder has held shares or whether such
gain was recognized by the Fund prior to the date on which the shareholder
acquired the shares. All distributions paid to Aetna or its affiliates, whether
characterized as ordinary income or capital gain, are not taxable to VA
Contract or VLI Policy holders.
If a Fund elects to retain its net capital gain, the Fund will be taxed thereon
(except to the extent of any available capital loss carryovers) at the 35%
corporate tax rate. Where a Fund elects to retain its net capital gain, it is
expected that the Fund also will elect to have shareholders of record on the
last day of its taxable year treated as if each received a distribution of his
pro rata share of such gain, with the result that each shareholder will be
required to report his pro rata share of such gain on his tax return as long-
term capital gain, will receive a refundable tax credit for his pro rata share
of tax paid by the Fund on the gain, and will increase the tax basis for his
shares by an amount equal to the deemed distribution less the tax credit.
Investment income that may be received by a Fund from sources within foreign
countries may be subject to foreign taxes withheld at the source. The United
States has entered into tax treaties with many foreign countries which entitle
a Fund to a reduced rate of, or exemption from, taxes on such income. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of a Fund's assets to be invested in various countries is not known.
Distributions by a Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed below.
Shareholders receiving a distribution in the form of either cash or additional
shares will be treated as receiving a distribution in an amount equal to the
fair market value of the shares received, determined as of the reinvestment
date. In addition, if the NAV at the time a shareholder purchases shares of a
Fund reflects undistributed net investment income or recognized capital gain
net income, or unrealized appreciation in the value of the assets of the Fund,
distributions of such amounts will be taxable to the shareholder in the manner
described above, although such distributions economically constitute a return
of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Sale or Redemption of Shares
Shareholders with direct investments in Growth and Income VP and Bond VP will
recognize gain or loss on the sale or redemption of shares of a Fund in an
amount equal to the difference between the proceeds of the sale or redemption
and the shareholder's adjusted tax basis in the shares. All or a portion of any
loss so recognized may be disallowed if the shareholder purchases other shares
of the Fund within 30 days before or after the sale or redemption. In general,
any gain or loss arising from (or treated as arising from) the sale or
redemption of shares of a Fund will be considered capital gain or loss and will
be long-term capital gain or loss if the shares were held for longer than one
year. However, any capital loss arising from the sale or redemption of shares
held, or deemed under Code rules to be held, for six months or less will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. Although gain or loss realized on shares
redeemed through the direction of VA Contract or VLI Policy holders is taxable
to Aetna or its affiliates, such VA Contract or VLI Policy holders will not be
subject to tax.
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Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and capital gain
dividends from regulated investment companies often differ from the rules for
U.S. federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local
tax rules affecting investment in a Fund.
NET ASSET VALUE
Securities of each Fund are generally valued by independent pricing services.
Equity securities of a Fund which are traded on a registered securities
exchange are based on the last sale price or, if there has been no sale that
day, at the mean of the last bid and asked price on the exchange where the
security is principally traded. Securities traded over the counter are valued
at the mean of the last bid and asked price if current market quotations are
not readily available. Short-term debt securities which have a maturity date of
more than sixty days will be valued at the mean of the last bid and asked price
obtained from principal market makers. Short-term debt securities maturing in
sixty days or less at the date of purchase will be valued using the "amortized
cost" method of valuation. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization of premium or increase of discount.
Long-term debt securities (other than high-yield bonds) traded on a national
securities exchange are valued at the mean of the last bid and asked price of
such securities obtained from a broker who is a market-maker in the securities
or a service providing quotations based upon the assessment of market-makers in
those securities. High-yield bonds are valued at the last bid price of such
securities obtained from a broker.
Call options and put options are valued at the mean of the last bid and asked
price on the principal exchange where the option is traded. Stock index futures
contracts and interest rate futures contracts are valued daily at a settlement
price based on rules of the exchange where the futures contract is primarily
traded.
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PERFORMANCE INFORMATION
Performance information for each Fund may appear in reports or promotional
literature to current or prospective shareholders.
Average Annual Total Return
Total return of a Fund for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $1,000
investment in the Fund made at the beginning of each period, then calculating
the average annual compounded rate of return which would produce the same
investment return on the $1,000 investment over the same period. Total return
for a period of one year or less is equal to the actual investment return on a
$1,000 investment in the Fund during that period. Total return calculations
assume that all Fund distributions are reinvested at net asset value on their
respective reinvestment dates.
From time to time, Aeltus may reduce its compensation or assume expenses in
respect of the operations of a Fund in order to reduce each Fund's expenses.
Any such waiver or assumption would increase a Fund's yield and total return
during the period of the waiver or assumption.
The performance of the Funds may, from time to time, be compared to that of
other mutual funds tracked by mutual fund rating services, to broad groups of
comparable mutual funds, or to unmanaged indices which may assume investment of
dividends but generally do not reflect deductions for administrative and
management costs.
The performance of the Funds are commonly measured as total return. An average
annual compounded rate of return ("T") may be computed by using the redeemable
value at the end of a specified period ("ERV") of a hypothetical initial
investment of $1,000 ("P") over a period of time ["n"] according to the
formula:
P(1 + T)n = ERV
The total return(s) of each Fund calculated based on the formula above for the
one, five and ten year periods ended December 31, 1997 are set forth in the
table below.
1 Year 5 Years 10 Years
------ ------- --------
Balanced VP 22.49% 14.44% 12.52%
Bond VP 8.30% 6.93% 9.22%
Growth and Income VP 29.89% 17.70% 16.63%
Investors should not consider this performance data as an indication of the
future performance of any of the Funds.
A Fund's investment results will vary from time to time depending upon market
conditions, the composition of its investment Fund and its operating expenses.
Performance information of any Fund will not be compared in advertisements with
such information for funds that offer their shares directly to the public,
because Fund performance data does not reflect charges imposed by the insurance
company on the VA Contracts and VLI Policies. The total return for a Fund
should be distinguished from the rate of return of a corresponding division of
the insurance company's separate account, which rate will reflect the deduction
of additional insurance charges, including mortality and expense risk charges,
and will therefore be lower. Accordingly, performance figures for a Fund will
only be advertised if comparable performance figures for the corresponding
division of the separate account are included in the advertisements. VA
Contract owners and VLI Policy owners should consult their contract and policy
prospectuses, respectively, for further information. Each Fund's results also
should be considered relative to the risks associated with its investment
objectives and policies.
31
<PAGE>
30-Day Yield
Quotations of yield for Bond VP will be based on all investment income per
share earned during a particular 30-day period, less expenses accrued during
the period (net investment income), and will be computed by dividing net
investment income by the value of a share on the last day of the period,
according to the following formula:
YIELD = 2[(a-b + 1)6-1]
cd
Where:
a = dividends and interest earned during the period
b = the expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
The yield for Bond VP for the 30-day period ended March 31, 1998 was 6.14%.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258
serves as custodian for assets of each Fund. The custodian does not participate
in determining the investment policies of a Fund or in deciding which
securities are purchased or sold by the Fund. A Fund, however, may invest in
obligations of the custodian and may purchase or sell securities from or to the
custodian.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103 serves as
independent auditors for each Fund. KPMG Peat Marwick LLP, provides audit
services, assistance and consultation in connection with Commission filings.
FINANCIAL STATEMENTS
The Financial Statements for each Fund, and Independent Auditors Report
thereon, are incorporated herein by reference to each Fund's Annual Report
dated December 31, 1997. Each Annual Report is available upon request and
without charge by calling 1-800-238-6263 or by writing to the Funds at 151
Farmington Avenue, Hartford, CT 06156.
32
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A:
Financial Highlights
(2) Incorporated by reference in Part B to the Fund's Annual
Report dated December 31, 1997, as filed electronically with
the Securities and Exchange Commission on March 5, 1998
(File No.811-2514) (Accession No. 0000950146-98-000359):
Audited Financial Statements for Aetna Variable Fund
which include the following:
Portfolio of Investments as of December 31, 1997
Statement of Assets and Liabilities as of December 31,
1997
Statement of Operations for the year ended December
31, 1997
Statements of Changes in Net Assets for the years
ended December 31, 1997 and 1996
Notes to Financial Statements
Financial Highlights for each of the years in the five
year period ended December 31, 1997
Independent Auditors' Report
(b) Exhibits:
(1)(a) Charter (Declaration of Trust)(1)
(1)(b) Amendment to Declaration of Trust of Aetna
Variable Fund
(2) Amended and Restated Bylaws (adopted by Board of
Trustees September 13, 1994)(1)
(3) Not Applicable
(4) Instruments Defining Rights of Holders(2)
(5) Investment Advisory Agreement between Aeltus
Investment Management, Inc. ("Aeltus") and Aetna
Variable Fund
(6) Underwriting Agreement between Aetna Life
Insurance and Annuity Company and Aetna Variable
Fund(3)
(7) Directors' Deferred Compensation Plan
(8) Custodian Agreement between Aetna Variable Fund
and Mellon Bank, N. A.(1)
(9)(a) Administrative Services Agreement between Aeltus
and Aetna Variable Fund
(9)(b) License Agreement(4)
(10) Opinion and Consent of Counsel
(11) Consent of Independent Auditors
<PAGE>
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Schedule for Computation of Performance Data(4)
(17) See exhibit 27 below
(18) Not Applicable
(19)(a) Power of Attorney
(19)(b) Authorization for Signatures(5)
(27) Financial Data Schedule
1. Incorporated by reference to Post-Effective Amendment No. 48 to Registration
Statement on Form N-1A (File No. 2-51739), as filed electronically on April
25, 1996 (Accession No. 0000950146-96-000583).
2. Incorporated by reference to Post-Effective Amendment No. 50 to Registration
Statement on Form N-1A (File No. 2-51739), as filed electronically on June 7,
1996 (Accession No. 0000950146-96-000943).
3. Incorporated by reference to Post-Effective Amendment No. 51 to Registration
Statement on Form N-1A (File No. 2-51739), as filed electronically on
February 18, 1997 (Accession No. 0000950146-97-002130).
4. Incorporated by reference to Post-Effective Amendment No. 52 to Registration
Statement on Form N-1A (File No. 2-51739), as filed electronically on April
11, 1997 (Accession No. 0000950146-97-000576).
5. Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement on Form N-1A (File No. 333-05173), as filed electronically on
September 26, 1997 (Accession No. 0000950146-97-001480).
<PAGE>
Item 25. Persons Controlled by or Under Common Control
Registrant is a Massachusetts business trust for which separate
financial statements are filed. As of March 31, 1998, Aetna Life
Insurance and Annuity Company ("Aetna") owned 99.60% of
Registrant's outstanding voting securities.
Aetna is an indirect wholly-owned subsidiary of Aetna Inc.
A list of all persons directly or indirectly under common control
with the Registrant and a list which indicates the principal
business of each such company referenced in the diagram are
incorporated herein by reference to Item 26 of Post-Effective
Amendment No. 9 to the Registration Statement on Form N-4 (File
No. 333-01107), as filed electronically with the Securities and
Exchange Commission on April 7, 1998 (Accession No.
0000950146-98-000564).
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders
-------------- ------------------------
Shares of Beneficial Interest
$1.00 par value 735 as of March 31, 1998
Item 27. Indemnification
Article 5.3 of the Registrant's Amendment to Declaration of Trust,
incorporated herein by reference to Exhibit 24(b)(1)(b) of this
Post-Effective Amendment, provides indemnification for the Registrant's
trustees and officers. In addition, the Registrant's trustees and
officers are covered under a directors and officers errors and
omissions liability insurance policy issued by Gulf Insurance Company
which expires on October 1, 1999.
Section XI.B of the Administrative Services Agreement (filed herewith
as Exhibit 24(b)(9)(a)) provides for indemnification of the
Administrator.
Item 28. Business and Other Connections of Investment Adviser
The investment adviser, Aeltus Investment Management, Inc. ("Aeltus"),
is registered as an investment adviser with the Securities and Exchange
Commission. In addition to serving as the investment adviser and
administrator for the Registrant, Aeltus acts as investment adviser and
administrator for Aetna Income Shares, Aetna Variable Encore Fund,
Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund,
Inc.), Aetna Generation Portfolios, Inc., Aetna GET Fund, Aetna
Variable Portfolios, Inc., and Aetna Series Fund, Inc. (all management
investment companies registered under
<PAGE>
the Investment Company Act of 1940 (the "1940 Act")). It also acts as
investment adviser to certain private accounts.
The following table summarizes the business connections of the
directors and principal officers of the investment adviser.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Positions and Offices Other Principal Position(s) Held
Name with Investment Adviser Since Oct. 31, 1995/Addresses*/**
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
J. Scott Fox Director, Managing Director and President (since September 1997) -- Aetna Life
Director, Chief Operating Assignment Company; Vice President (since April 1997) -- Aetna
Officer, Chief Financial Retirement Services, Inc.; Director and Senior Vice President
Officer (April 1997 - February 1998) -- Aetna Retirement Holdings,
Inc.; Director and Senior Vice President (March 1997 - February
1998) -- Aetna Life Insurance and Annuity Company; Managing
Director, Chief Operating Officer, Chief Financial Officer,
Treasurer (April 1994 - March 1997) -- Aeltus Investment
Management, Inc.; Director (March 1996 - July 1997) -- Aeltus
Capital, Inc.; Managing Director, Chief Financial Officer
(March 1996 - April 1997) -- Aeltus Capital, Inc.; Director
(May 1996 - July 1997) -- Aeltus Trust Company, Inc.; Managing
Director, Chief Operating Officer, Chief Financial Officer and
Treasurer (May 1996 - April 1997) -- Aeltus Trust Company,
Inc.; Director and President (May 1996 - October 1997) -- Aetna
Investment Management (Bermuda) Holding, Ltd.
<PAGE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Positions and Offices Other Principal Position(s) Held
Name with Investment Adviser Since Oct. 31, 1995/Addresses*/**
------------------------------------------------------------------------------------------------------------------
Timothy A. Holt Director Senior Vice President (September 1997 - February 1998) -- Aetna
Retirement Holdings, Inc.; Director (since September 1997)
--Aetna Investment Services, Inc.; Senior Vice President and
Chief Financial Officer (February 1996 - February 1998) --Aetna
Life Insurance and Annuity Company; Director (March 1996 -
February 1998) -- Aetna Retirement Holdings, Inc.; Vice
President (September 1996 - September 1997) -- Aetna Retirement
Holdings, Inc.; Vice President, Portfolio Management/Investment
Group (June 1991 - February 1996) -- Aetna Inc. (formerly known
as Aetna Life and Casualty Company).
John Y. Kim Director, President, Chief Director (since February 1995) -- Aetna Life Insurance and
Executive Officer, Chief Annuity Company; Senior Vice President (since September 1994)
Investment Officer -- Aetna Life Insurance and Annuity Company.
Thomas J. McInerney Director President (since August 1997) -- Aetna Retirement Services,
Inc.; Director and President (since September 1997) -- Aetna
Life Insurance and Annuity Company; Director and President
(since September 1997) -- Aetna Retirement Holdings, Inc.;
Director and President (since September 1997) -- Aetna
Insurance Company of America; Executive Vice President (since
August 1997) -- Aetna Inc.; Vice President, Strategy (March
1997 - August 1997) -- Aetna Inc.; Vice President, Marketing
and Sales (December 1996 - March 1997) -- Aetna U.S.
Healthcare; Vice President, National Accounts (April 1996
-December 1996) -- Aetna U.S. Healthcare; Vice President,
Strategy, Finance, & Administration (July 1995 - April 1996) --
Aetna Inc.
<PAGE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Positions and Offices Other Principal Position(s) Held
Name with Investment Adviser Since Oct. 31, 1995/Addresses*/**
------------------------------------------------------------------------------------------------------------------
Peter B. Canoni Managing Director, Equity Managing Director (since January 1996) -- Aeltus Trust Company;
Investments Registered Representative (since March 1994) -- Aeltus Capital,
Inc.
Lennart A. Carlson Managing Director, Fixed Managing Director (since January 1996) -- Aeltus Trust Company;
Income Investments Registered Representative (since February 1993) -- Aeltus
Capital, Inc.
Steven C. Huber Managing Director, Fixed Portfolio Manager (August 1991 - August 1996) -- Aetna Life
Income Investments Insurance and Annuity Company; Managing Director (since August
1996) -- Aeltus Trust Company.
Brian K. Kawakami Vice President, Chief Chief Compliance Officer & Director (since January 1996) --
Compliance Officer Aeltus Trust Company; Chief Compliance Officer (since August
1993) -- Aeltus Capital, Inc.
Neil Kochen Managing Director, Product Managing Director (since April 1996) -- Aeltus Investment
Development Management, Inc.; Managing Director (since April 1996) --Aeltus
Trust Company; Managing Director (since August 1996) -- Aeltus
Capital, Inc.; Managing Director (July 1994- August 1996) --
Aetna Life Insurance and Annuity Company.
Frank Litwin Managing Director, Retail Vice President, Strategic Marketing (April 1992 - August
Marketing and Sales 1997) -- Fidelity Investments Institutional Services Company.
Kevin M. Means Managing Director, Equity Managing Director (July 1994 - August 1996) -- Aetna Life
Investments Insurance and Annuity Company; Managing Director (since August
1996) -- Aeltus Trust Company.
<PAGE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Positions and Offices Other Principal Position(s) Held
Name with Investment Adviser Since Oct. 31, 1995/Addresses*/**
------------------------------------------------------------------------------------------------------------------
L. Charles Managing Director, Managing Director (since April 1997) -- Aeltus Investment
Meythaler Institutional Marketing and Management, Inc.; Director (since July 1997) -- Aeltus Trust
Sales Company; Managing Director (since June 1997) -- Aeltus Trust
Company; President (June 1993 - April 1997) -- New England
Investment Association.
Jeanne Wong-Boehm Managing Director, Fixed Portfolio Manager (March 1982 - August 1996) -- Aetna Life
Income Investments Insurance and Annuity Company; Portfolio Manager (March 1982 -
August 1996) -- Aetna Inc.; Managing Director (since August
1996) -- Aeltus Trust Company; Registered Representative (since
August 1996) -- Aeltus Capital, Inc.
</TABLE>
* Except with respect to Messrs. Holt and McInerney, the principal business
address of each person named is 242 Trumbull Street, Hartford, Connecticut
06103-1205. The address of Messrs. Holt and McInerney is 151 Farmington
Avenue, Hartford, Connecticut 06156.
** Certain officers and directors of the investment adviser currently hold (or
have held during the past two years) other positions with affiliates of the
Registrant that are not deemed to be principal positions.
Item 29. Principal Underwriters
(a) In addition to serving as the principal underwriter for the Registrant,
Aetna also acts as the principal underwriter for Aetna Income Shares,
Aetna Variable Encore Fund, Aetna Balanced VP, Inc. (formerly Aetna
Investment Advisers Fund, Inc.), Aetna GET Fund, Aetna Variable
Portfolios, Inc. and Aetna Generation Portfolios, Inc. and as
investment adviser, principal underwriter and administrator for
Portfolio Partners, Inc. (all management investment companies
registered under the 1940 Act). Additionally, Aetna acts as the
principal underwriter and depositor for Aetna Variable Annuity Account
B of Aetna, Variable Annuity Account C of Aetna, Variable Annuity
Account G of Aetna, and Aetna Variable Life Account B of Aetna
(separate accounts of Aetna registered as unit investment trusts under
the 1940 Act). Aetna is also the principal underwriter for Variable
Annuity Account I of Aetna Insurance Company of America ("AICA") (a
separate account of AICA registered as a unit investment trust under
the 1940 Act).
(b) The following are the directors and principal officers of the Underwriter:
<PAGE>
Positions
and Offices
Name and Principal Positions and Offices with
Business Address* with Principal Underwriter Registrant
- ----------------- -------------------------- -----------
Thomas J. McInerney Director and President None
Robert D. Friedhoff Senior Vice President None
John Y. Kim Senior Vice President Trustee
Shaun P. Mathews Director and Senior Vice President Trustee
Catherine H. Smith Director, Senior Vice President and Chief None
Financial Officer
Kirk P. Wickman Vice President, General Counsel and None
Corporate Secretary
Deborah Koltenuk Vice President and Treasurer, Corporate None
Controller
Frederick D. Kelsven Vice President and Chief Compliance Officer None
* Except with respect to Mr. Kim, the principal business address of all
directors and officers listed is 151 Farmington Avenue, Hartford, Connecticut
06156. Mr. Kim's address is 242 Trumbull Street, Hartford, Connecticut
06103-1205.
(c) Not applicable
<PAGE>
Item 30. Location of Accounts and Records
As required by Section 31(a) of the 1940 Act and the rules thereunder,
the Registrant and its investment adviser, Aeltus, maintain physical
possession of each account, book or other document, at 151 Farmington
Avenue, Hartford, Connecticut 06156 or 242 Trumbull Street, Hartford,
Connecticut 06103-1205.
Shareholder records of direct shareholders are maintained by the
transfer agent, Firstar Trust Company, 615 East Michigan Street,
Milwaukee, Wisconsin 53261.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
The Registrant undertakes that if requested by the holders of at least
10% of the Registrant's outstanding shares, the Registrant will hold a
shareholder meeting for the purpose of voting on the removal of one or
more Trustees and will assist with communication concerning that
shareholder meeting as if Section 16(c) of the 1940 Act applied.
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of its latest annual report to
shareholders, upon request and without charge.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "1933 Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person
of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
Aetna Variable Fund certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Post-Effective Amendment to the
Registration Statement on Form N-1A (File No. 2-51739) and has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Hartford, and State of Connecticut, on the 27th
day of April, 1998.
AETNA VARIABLE FUND
Registrant
By J. Scott Fox*
-----------------
J. Scott Fox
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons on April 27, 1998 in the capacities indicated.
Signature Title Date
- --------- ----- ----
J. Scott Fox* President and Trustee )
- ------------------------ (Principal Executive Officer) )
J. Scott Fox )
)
)
Maria T. Fighetti* Trustee )
- ------------------------ )
Maria T. Fighetti )
) April
)
David L. Grove* Trustee ) 27, 1998
- ------------------------ )
David L. Grove )
)
)
John Y. Kim* Trustee )
- ------------------------ )
John Y. Kim )
)
)
Sidney Koch* Trustee )
- ------------------------ )
Sidney Koch )
)
)
Shaun P. Mathews* Trustee )
- ------------------------ )
Shaun P. Mathews )
<PAGE>
)
Corine T. Norgaard* Trustee )
- ------------------------ )
Corine T. Norgaard )
)
)
Richard G. Scheide* Trustee )
- ------------------------ )
Richard G. Scheide )
)
)
Stephanie A. Taylor* Treasurer and )
- ------------------------ Chief Financial Officer )
Stephanie A. Taylor (Principal Financial and )
Accounting Officer) )
By: /s/ Amy R. Doberman
-------------------------
*Amy R. Doberman
Attorney-in-Fact
(Executed pursuant to Power of Attorney dated December 10, 1997 which is being
filed with this Post-Effective Amendment No. 53 as exhibit 24(b)(19)).
<PAGE>
Aetna Variable Fund
EXHIBIT INDEX
Exhibit No. Exhibit Page
- ----------- ------- ----
99-(b)(1)(a) Charter (Declaration of Trust) *
99-(b)(1)(b) Amendment to Declaration of Trust of Aetna Variable ______
Fund
99-(b)(2) Amended and Restated Bylaws *
99-(b)(4) Instruments Defining Rights of Holders *
99-(b)(5) Investment Advisory Agreement between Aeltus Investment ______
Management, Inc. ("Aeltus") and Aetna Variable Fund
99-(b)(6) Underwriting Agreement between Aetna Life Insurance and *
Annuity Company and Aetna Variable Fund
99-(b)(7) Directors' Deferred Compensation Plan ______
99-(b)(8) Custodian Agreement between Aetna Variable Fund and *
Mellon Bank, N.A.
99-(b)(9)(a) Administrative Services Agreement between Aeltus and ______
Aetna Variable Fund
99-(b)(9)(b) License Agreement *
99-(b)(10) Opinion and Consent of Counsel ______
99-(b)(11) Consent of Independent Auditors ______
99-(b)(16) Schedule for Computation of Performance Data *
99-(b)(19)(a) Power of Attorney ______
99-(b)(19)(b) Authorization for Signatures *
(27) Financial Data Schedule ______
* Incorporated by reference
AMENDMENT TO
DECLARATION OF TRUST
OF
AETNA VARIABLE FUND
Amending and Restating Articles 5.2 and 5.3 of the Declaration of Trust
The undersigned, being a duly elected and qualified Trustee of Aetna Variable
Fund (the "Trust"), a Massachusetts business trust, acting pursuant to Section
11.3 of the Declaration of Trust (the "Declaration of Trust") dated January 25,
1984, hereby states that the shareholders of the Trust, upon approval and
recommendation of the Board of Trustees, on June 17, 1996, approved the
amendment and restatement Articles 5.2 and 5.3 of the Declaration of the Trust
as follows:
5.2 Nonliability of Trustees and Others
The exercise by the Trustees of their powers and discretion hereunder
shall be binding upon everyone interested. A Trustee shall be liable to the
Trust and the Shareholders for such Trustee's own willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and for nothing else, and shall not be liable
for errors of judgment or mistakes of fact and law. Subject to the foregoing,
the Trustees shall not be responsible or liable in any event for any neglect or
wrongdoing of any officer, agent, employee, consultant, adviser, administrator,
distributor or principal underwriter, custodian or transfer, dividend
disbursing, shareholder servicing or accounting agent of the Trust, nor shall
any Trustee by responsible for the act or omission of any other Trustee.
Furthermore, no officer, employee, or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee, officer, employee or
agent for any action or failure to act (including the failure to compel in any
way any former or acting Trustee to redress any breach of trust), except upon a
showing of bad faith, willful misfeasance, gross negligence or reckless
disregard of duties.
5.3 Indemnification
The Trust shall indemnify its Trustees and officers and any person who
serves at the request of the Trust as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise as
follows:
(a) Every person who is or has been a Trustee or officer of the Trust
and persons who serve at the Trust's request as director or
officer of another corporation, partnership, joint venture, trust
or other enterprise shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all
expenses reasonably incurred or paid in connection with any debt,
claim, action, demand, suit, proceeding, judgment, decree,
liability or obligation of any kind in which he or she becomes
involved as a party or otherwise by virtue of being or having
been a Trustee or officer of the Trust or of another
corporation, partnership, joint venture, trust or other
enterprise at the request of the Trust and against amounts paid
or incurred in the settlement thereof.
(b) The words "claim," "action," "suit" or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal,
administrative, legislative, investigative or other, including
appeals), actual or threatened, and the words "liability" and
"expenses" shall include, without limitation, attorney's fees,
costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
<PAGE>
(c) No indemnification shall be provided hereunder to a Trustee,
officer, employee or agent against any liability to the Trust or
its shareholders by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of office.
(d) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable,
shall not affect any other rights to which any Trustee, officer,
employee or agent may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee,
officer, employee or agent and shall inure to the benefits of the
heirs, executors and administrators of such a person.
(e) In the absence of a final decision on the merits by a court or
other body before which such proceeding was brought, an
indemnification payment will not be made, except as provided in
paragraph (f) of this Article, unless in the absence of such a
decision, a reasonable determination based upon a factual review
has been made (1) by a majority vote of a quorum of non-party
Trustees who are not interested persons of the Trust, or (2) by
independent legal counsel in a written opinion that the
indemnitee was not liable for an act of willful misfeasance, bad
faith, gross negligence, or reckless disregard of duties.
(f) The Trust further undertakes that advancement or expenses
incurred in the defense of a proceeding (upon undertaking for
repayment unless it is ultimately determined that indemnification
is appropriate) against a Trustee or officer of the Trust will
not be made absent the fulfillment of at least one of the
following conditions: (i) the indemnitee provides security for
his undertaking, (ii) the Trust is insured against losses arising
by reason of any unlawful advances or (iii) a majority of a
quorum of disinterested non-party Trustees or independent legal
counsel in a written opinion shall have determined, based on a
review of readily available facts (as opposed to a full
trial-type inquiry) that there is reason to believe the
indemnitee ultimately will be entitled to indemnification.
(g) No amendment of this Declaration or repeal of any of its
provisions shall limit or eliminate the rights of indemnification
provided hereunder with respect to acts or omission occurring
prior to such amendment or repeal.
The foregoing shall be effective as of June 17, 1996.
/s/ Shaun P. Mathews
- ---------------------------------------
Shaun P. Mathews, Trustee and President
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between AELTUS INVESTMENT MANAGEMENT,
INC., a Connecticut corporation (the "Adviser") and AETNA VARIABLE
FUND, a Massachusetts business trust (the "Fund"), with respect to the
following recital of facts:
R E C I T A L
-------------
WHEREAS, the Fund is registered with the Securities and Exchange
Commission (the "Commission") as an open-end, diversified, management
investment company under the Investment Company Act of 1940 (the "1940
Act"); and
WHEREAS, the Adviser is registered with the Commission as an
investment adviser under the Investment Advisers Act of 1940 (the
"Advisers Act"), and is in the business of acting as an investment
adviser; and
WHEREAS, the Fund and the Adviser desire to enter into an agreement to
provide for investment advisory and management services for the Fund
on the terms and conditions hereinafter set forth;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement and the policies
and control of the Fund's Board of Trustees (the "Board"), the Fund
hereby appoints the Adviser to serve as the investment adviser to the
Fund, to provide the investment advisory services set forth below in
Section II. The Adviser agrees that, except as required to carry out
its duties under this Agreement or otherwise expressly authorized, it
is acting as an independent contractor and not as an agent of the Fund
and has no authority to act for or represent the Fund in any way.
II. DUTIES OF THE ADVISER
In carrying out the terms of this Agreement, the Adviser shall do the
following:
1. supervise all aspects of the operations of the Fund;
2. select the securities to be purchased, sold or exchanged
by the Fund or otherwise represented in the Fund's
investment portfolio, place trades for all such
securities and regularly report thereon to the Board;
<PAGE>
3. formulate and implement continuing programs for the
purchase and sale of securities and regularly report
thereon to the Board;
4. obtain and evaluate pertinent information about
significant developments and economic, statistical and
financial data, domestic, foreign or otherwise, whether
affecting the economy generally, the Fund, securities
held by or under consideration for the Fund, or the
issuers of those securities;
5. provide economic research and securities analyses as the
Adviser considers necessary or advisable in connection
with the Adviser's performance of its duties hereunder;
6. obtain the services of, contract with, and provide
instructions to custodians and/or subcustodians of the
Fund's securities, transfer agents, dividend paying
agents, pricing services and other service providers as
are necessary to carry out the terms of this Agreement;
and
7. take any other actions which appear to the Adviser and
the Board necessary to carry into effect the purposes of
this Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Adviser
Adviser hereby represents and warrants to the Fund as follows:
1. Due Incorporation and Organization. The Adviser is
duly organized and is in good standing under the
laws of the State of Connecticut and is fully
authorized to enter into this Agreement and carry
out its duties and obligations hereunder.
<PAGE>
2. Registration. The Adviser is registered as an
investment adviser with the Commission under the
Advisers Act. The Adviser shall maintain such
registration in effect at all times during the
term of this Agreement.
3. Best Efforts. The Adviser at all times shall
provide its best judgment and effort to the Fund
in carrying out its obligations hereunder.
B. Representations and Warranties of the Fund
The Fund hereby represents and warrants to the Adviser as
follows:
1. Due Incorporation and Organization. The Fund has
been duly incorporated under the laws of the
Commonwealth of Massachusetts and it is authorized
to enter into this Agreement and carry out its
obligations hereunder.
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2. Registration. The Fund is registered as an
investment company with the Commission under the
1940 Act and shares of the Fund are registered or
qualified for offer and sale to the public under
the Securities Act of 1933 and all applicable
state securities laws. Such registrations or
qualifications will be kept in effect during the
term of this Agreement.
IV. DELEGATION OF RESPONSIBILITIES
Subject to the approval of the Board and the shareholders of the Fund,
the Adviser may enter into a Subadvisory Agreement to engage a
subadviser to the Adviser with respect to the Fund.
V. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Adviser shall place all orders for the purchase and sale of
portfolio securities for the Fund with brokers or dealers
selected by the Adviser, which may include brokers or dealers
affiliated with the Adviser. The Adviser shall use its best
efforts to seek to execute portfolio transactions at prices
that are advantageous to the Fund and at commission rates that
are reasonable in relation to the benefits received.
B. Selection of Broker-Dealers
In selecting broker-dealers qualified to execute a particular
transaction, brokers or dealers may be selected who also
provide brokerage or research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of
1934) to the Adviser and/or the other accounts over which the
Adviser or its affiliates exercise investment discretion. The
Adviser may also select brokers or dealers to effect
transactions for the Fund that provide payment for expenses of
the Fund. The Adviser is authorized to pay a broker or dealer
who provides such brokerage or research services or expenses,
and that has provided assistance in the distribution of shares
of the Fund to the extent permitted by law, a commission for
executing a portfolio transaction for the Fund that is in
excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if the
Adviser determines in good faith that such amount of commission
is reasonable in relation to the value of the brokerage or
research services provided by such broker or dealer and is paid
in compliance with Section 28(e). This determination may be
viewed in terms of either that particular transaction or the
overall responsibilities that the Adviser and its affiliates
have with respect to accounts over which they exercise
investment discretion. The Board shall periodically review the
commissions paid by the Fund to determine if the commissions
paid over representative periods of time were reasonable in
relation to the benefits received.
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VI. CONTROL BY THE BOARD
Any investment program undertaken by the Adviser pursuant to this
Agreement, as well as any other activities undertaken by the Adviser
on behalf of the Fund pursuant thereto, shall at all times be subject
to any directives of the Board.
VII. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Adviser
shall at all times conform to:
1. all applicable provisions of the 1940 Act;
2. the provisions of the current Registration Statement of the Fund;
3. the provisions of the Fund's Articles of Incorporation, as amended;
4. the provisions of the Bylaws of the Fund, as amended; and
5. any other applicable provisions of state and federal law.
VIII. COMPENSATION
For the services to be rendered, the facilities furnished and the
expenses assumed by the Adviser, the Fund shall pay to the Adviser an
annual fee, payable monthly, equal to .50% of the average daily net
assets of the Fund. Except as hereinafter set forth, compensation
under this Agreement shall be calculated and accrued daily at the rate
of 1/365 of .50% of the daily net assets of the Fund. If this
Agreement becomes effective subsequent to the first day of a month or
terminates before the last day of a month, compensation for that part
of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fees set forth above. Subject
to the provisions of Section X hereof, payment of the Adviser's
compensation for the preceding month shall be made as promptly as
possible.
IX. EXPENSES
The expenses in connection with the management of the Fund shall be
allocated between the Fund and the Adviser as follows:
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A. Expenses of the Adviser
The Adviser shall pay:
1. the salaries, employment benefits and other
related costs and expenses of those of its
personnel engaged in providing investment advice
to the Fund, including without limitation, office
space, office equipment, telephone and postage
costs; and
2. all fees and expenses of all trustees, officers
and employees, if any, of the Fund who are
employees of the Adviser, including any salaries
and employment benefits payable to those persons.
B. Expenses of the Fund
The Fund shall pay:
1. investment advisory fees pursuant to this Agreement;
2. brokers' commissions, issue and transfer taxes or
other transaction fees payable in connection with
any transactions in the securities in the Fund's
investment portfolio or other investment
transactions incurred in managing the Fund's
assets, including portions of commissions that may
be paid to reflect brokerage research services
provided to the Adviser;
3. fees and expenses of the Fund's independent
accountants and legal counsel and the independent
Trustees' legal counsel;
4. fees and expenses of any administrator, transfer
agent, custodian, dividend, accounting, pricing or
disbursing agent of the Fund;
5. interest and taxes;
6. fees and expenses of any membership in the
Investment Company Institute or any similar
organization in which the Board deems it advisable
for the Fund to maintain membership;
7. insurance premiums on property or personnel
(including officers and trustees) of the Fund;
8. all fees and expenses of the Company's trustees,
who are not "interested persons" (as defined in
the 1940 Act) of the Fund or the Adviser;
9. expenses of preparing, printing and distributing
proxies, proxy statements, prospectuses and
reports to shareholders of the Fund, except for
those expenses
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paid by third parties in connection with the distribution
of Fund shares and all costs and expenses of shareholders'
meetings;
10. all expenses incident to the payment of any
dividend, distribution, withdrawal or redemption,
whether in shares of the Fund or in cash;
11. costs and expenses (other than those detailed in
paragraph 9 above) of promoting the sale of shares
in the Fund, including preparing prospectuses and
reports to shareholders of the Fund, provided,
nothing in this Agreement shall prevent the
charging of such costs to third parties involved
in the distribution and sale of Fund shares;
12. fees payable by the Fund to the Commission or to
any state securities regulator or other regulatory
authority for the registration of shares of the
Fund in any state or territory of the United
States or of the District of Columbia;
13. all costs attributable to investor services,
administering shareholder accounts and handling
shareholder relations, (including, without
limitation, telephone and personnel expenses),
which costs may also be charged to third parties
by the Adviser; and
14. any other ordinary, routine expenses incurred in
the management of the Fund's assets, and any
nonrecurring or extraordinary expenses, including
organizational expenses, litigation affecting the
Fund and any indemnification by the Fund of its
officers, trustees or agents.
X. ADDITIONAL SERVICES
Upon the request of the Board, the Adviser may perform certain
accounting, shareholder servicing or other administrative services on
behalf of the Fund that are not required by this Agreement. Such
services will be performed on behalf of the Fund and the Adviser may
receive from the Fund such reimbursement for costs or reasonable
compensation for such services as may be agreed upon between the
Adviser and the Board on a finding by the Board that the provision of
such services by the Adviser is in the best interests of the Fund and
its shareholders. Payment or assumption by the Adviser of any Fund
expense that the Adviser is not otherwise required to pay or assume
under this Agreement shall not relieve the Adviser of any of its
obligations to the Fund nor obligate the Adviser to pay or assume any
similar Fund expense on any subsequent occasions. Such services may
include, but are not limited to, (a) the services of a principal
financial officer of the Fund (including applicable office space,
facilities and equipment) whose normal duties consist of maintaining
the financial accounts and books and records of the Fund and the
services (including applicable office space, facilities and equipment)
of any of the personnel operating under the direction of such
principal financial officer; (b) the services of staff to respond to
shareholder inquiries concerning the status of their accounts,
providing assistance to shareholders in exchanges among the investment
companies managed or
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<PAGE>
advised by the Adviser, changing account designations or changing
addresses, assisting in the purchase or redemption of shares; or
otherwise providing services to shareholders of the Fund; and (c) such
other administrative services as may be furnished from time to time by
the Adviser to the Fund at the request of the Board.
XII. NONEXCLUSIVITY
The services of the Adviser to the Fund are not to be deemed to be
exclusive, and the Adviser shall be free to render investment advisory
or other services to others (including other investment companies) and
to engage in other activities, so long as its services under this
Agreement are not impaired thereby. It is understood and agreed that
officers and directors of the Adviser may serve as officers or
trustees of the Fund, and that officers or trustees of the Fund may
serve as officers or directors of the Adviser to the extent permitted
by law; and that the officers and directors of the Adviser are not
prohibited from engaging in any other business activity or from
rendering services to any other person, or from serving as partners,
officers, directors or trustees of any other firm or trust, including
other investment companies.
XIII. TERM
This Agreement shall become effective on May 1, 1998, and shall remain
in force and effect through December 31, 1998, unless earlier
terminated under the provisions of Article XV.
XIV. RENEWAL
Following the expiration of its initial term, the Agreement shall
continue in force and effect from year to year, provided that such
continuance is specifically approved at least annually:
1. a. by the Board, or
b. by the vote of a majority of the Fund's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940
Act), and
2. by the affirmative vote of a majority of the
trustees who are not parties to this Agreement or
interested persons of a party to this Agreement
(other than as a trustee of the Fund), by votes cast
in person at a meeting specifically called for such
purpose.
XV. TERMINATION
This Agreement may be terminated at any time, without the payment of
any penalty, by vote of the Board or by vote of a majority of the
Fund's outstanding voting securities (as defined in
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<PAGE>
Section 2(a)(42) of the 1940 Act), or by the Adviser, on sixty (60)
days' written notice to the other party. The notice provided for
herein may be waived by the party required to be notified. This
Agreement shall automatically terminate in the event of its
"assignment."
XVI. LIABILITY
The Adviser shall be liable to the Fund and shall indemnify the Fund
for any losses incurred by the Fund, whether in the purchase, holding
or sale of any security or otherwise, to the extent that such losses
resulted from an act or omission on the part of the Adviser or its
officers, directors or employees, that is found to involve willful
misfeasance, bad faith or negligence, or reckless disregard by the
Adviser of its duties under this Agreement, in connection with the
services rendered by the Adviser hereunder.
XVII. NOTICES
Any notices under this Agreement shall be in writing, addressed and
delivered, mailed postage paid, or sent by other delivery service, or
by facsimile transmission to each party at such address as each party
may designate for the receipt of notice. Until further notice, such
addresses shall be:
if to the Fund:
151 Farmington Avenue
Hartford, Connecticut 06156
Fax number 860/273-8340
if to the Adviser:
242 Trumbull Street
Hartford, Connecticut 06103-1205
Fax number 860/275-4440
XVIII. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of
Connecticut. Any question of interpretation of any term or provision
of this Agreement having a counterpart in or otherwise derived from a
term or provision of the 1940 Act shall be resolved by reference to
such term or provision of the 1940 Act and to interpretations thereof,
if any, by the United States courts or, in the absence of any
controlling decision of any such court, by rules or orders of the
Commission issued pursuant to the 1940 Act, or contained in no-action
and interpretive positions taken by the Commission staff. In addition,
where the effect of a requirement of the 1940 Act reflected in the
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<PAGE>
provisions of this Agreement is revised by rule or order of the
Commission, such provisions shall be deemed to incorporate the effect
of such rule or order.
XIX. SERVICE MARK
The service mark of the Fund and the name "Aetna" have been adopted by
the Fund with the permission of Aetna Services, Inc. (formerly known
as Aetna Life and Casualty Company) and their continued use is subject
to the right of Aetna Services, Inc. to withdraw this permission in
the event the Adviser or another affiliated corporation of Aetna
Services, Inc. should not be the investment adviser of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their respective officers on the 25th day
of March, 1998.
Aeltus Investment Management, Inc.
Attest: /s/ Susan Harinstein By: /s/ John Y. Kim
-------------------------- --------------------------
Name: Susan Harinstein Name: John Y. Kim
-------------------------- --------------------------
Title: Assistant Secretary Title: President
-------------------------- --------------------------
Aetna Variable Fund
Attest: /s/ DeAnn S. Anastasio By: /s/ J. Scott Fox
-------------------------- --------------------------
Name: DeAnn S. Anastasio Name: J. Scott Fox
-------------------------- --------------------------
Title: Assistant Secretary Title: President
-------------------------- --------------------------
AETNA VARIABLE FUND
DIRECTORS' DEFERRED COMPENSATION PLAN
I. INTRODUCTION
1.01 This Deferred Compensation Plan (the "Plan") has
been established by resolution of the Boards of
Trustees/Directors (the "Board") of Aetna Variable
Fund (the "Fund") using the format that has been
established for use by all open-end management
investment companies, whether now existing or to be
created, that are advised by Aetna Life Insurance
and Annuity Company ("ALIAC") or its successor. The
purpose of the Plan is to provide retirement
benefits for those directors or trustees, as the
case may be, of the Fund who are not employees of
the Fund, its distributor or administrator, or
ALIAC, or any affiliate of ALIAC.
1.02 The Plan shall be administered by the Board or by
such person or persons as the Board may designate to
carry out administrative functions hereunder (the
"Plan Administrator"). The Plan Administrator shall
have complete discretion to interpret and administer
the Plan in accordance with its terms, and its
determinations shall be binding on all persons
except for the provisions of ARTICLE VIII,
whereunder action by the full Board shall be
required.
II. DEFINITIONS
2.01 Beneficiary or Beneficiaries: The person, persons,
or legal entities designated by the Participant in
the Participant's Deferral Agreement who are
entitled to receive payments under this Plan that
become payable to such person, persons, or legal
entities in the event of the Participant's death. If
more than one designated beneficiary survives the
Participant, payments shall be made equally, unless
otherwise provided in the beneficiary designation.
Nothing herein shall prevent the Participant from
designating primary and secondary beneficiaries.
Secondary beneficiaries are considered designated
beneficiaries and are entitled to payments under the
Plan only in the event that there are no primary
beneficiaries surviving the Participant.
2.02 Compensation. The annual retainer fees earned by a
Participant for service as a director of the Fund;
the annual retainer fee earned by a Participant for
membership to a Committee of the Board; and any fees
earned by a Participant for attendance at meetings
of the Board and any of its Committees, all or a
portion of which may be deferred.
<PAGE>
2.03 Deferral Agreement: The agreement between the Fund and the
Participant to defer Compensation under the Plan.
2.04 Deferred Compensation: The amount, as mutually
agreed to by the Participant and the Fund, by which
any Compensation not yet earned shall be reduced in
return for the benefits provided under this Plan.
2.05 Lump Sum: A single payment of the entire balance credited to
the Participant's bookkeeping account under ARTICLE IV.
2.06 Notional Fund: Any open-end management investment
company registered under the Investment Company Act
of 1940 with respect to which ALIAC serves as
investment adviser, shares of which are sold to the
public, and which the Plan Administrator designates
as a Notional Fund under the Plan.
2.07 Participant: Any Eligible Director of the Fund who
fulfills the eligibility and enrollment requirements
of ARTICLE III.
2.08 Retirement: The time at which the Participant ceases
to serve as an Eligible Director of the Fund in
conformity with the Retirement Policy of the Board
in effect at the time of such cessation of service.
2.09 Termination of Services: The time at which the
Participant ceases to serve as an Eligible Director
of the Fund for any reason other than Retirement or
death.
2.10 Unforeseeable Emergency: An unanticipated emergency
that is caused by an event beyond the control of the
Participant and that would result in severe
financial hardship to the individual if early
withdrawal were not permitted in accordance with
ARTICLE VII hereof.
III. PARTICIPATION IN THE PLAN
3.01 Eligibility: Any director or trustee of the Fund who
is not an employee of the Fund or of the Fund's
distributor or administrator, or who is not an
employee of ALIAC or any affiliate of ALIAC, and who
is not eligible to participate in the Retirement
Plan for Employees of Aetna Inc. ("Eligible
Director"), is eligible to participate in the Plan.
3.02 Enrollment in the Plan:
(a) An Eligible Director may become a
Participant by executing a Deferral
Agreement whereunder that Eligible Director
agrees to defer all or a portion of
Compensation not yet earned and agrees to
the provisions of the Plan.
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(b) An election by the Eligible Director to
defer Compensation under the Plan for any
calendar year shall not be effective unless
such election is made on or before December
31 of the preceding year, except that
(1) in the year in which the Plan is
first implemented, the Eligible
Director may elect to participate
in the Plan within thirty days of
the date on which the Plan is
implemented, with deferral of
Compensation to begin on the first
day of the month subsequent to the
month in which the election is
made, or
(2) an Eligible Director may elect to
participate in the Plan within
thirty days of the date upon which
such Director first meets the
eligibility requirements of
Section 3.01, with deferral of
Compensation to begin on the first
day of the month subsequent to the
month in which the election is
made.
(c) An Eligible Director who defers
Compensation may not modify the Eligible
Director's Deferral Agreement to change the
amount deferred except with respect to
Compensation earned in a subsequent
calendar year where the Participant
notifies the Plan Administrator in writing
or except as provided in ARTICLE VII hereof
with respect to WITHDRAWALS.
(d) A Participant may elect the manner in which
benefits will be distributed under the
Deferral Agreement. The distribution
election may be subsequently changed by the
Participant by notifying the Plan
Administrator in writing of the
Participant's election, but such amendment
will only be effective with respect to the
distribution of Compensation earned and
amounts credited on such Compensation in
the Participant's bookkeeping account in
calendar years following the year in which
the amendment is requested.
IV. ACCUMULATION OF DEFERRED COMPENSATION
4.01 The Plan Administrator shall establish a bookkeeping account
on behalf of the Participant, the value of which at any given
time shall determine the benefits payable to the Participant
under ARTICLES V and VI and the Withdrawal values under
ARTICLE VII. Beginning on the date the Participant first
enrolls in the Plan, the account shall be credited with an
amount equal to the Participant's Deferred Compensation at
such times as the Compensation subject to deferral would
otherwise have been paid.
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<PAGE>
Until the account is removed from the books of the Fund, the
account shall be further adjusted for notional investment
experience as described in Section 4.02.
4.02 Amounts credited to the Participant's bookkeeping
account shall be periodically adjusted for notional
investment experience. In each case such notional
investment experience shall be determined by
treating such account as though an equivalent dollar
amount had been invested and reinvested in one or
more of the Notional Funds. The Notional Funds used
as a basis for determining notional investment
experience with respect to the Participant's account
shall be designated by the Participant in writing by
instrument of election and may be changed
prospectively by similar written election no later
than thirty days before the end of a calendar
quarter effective as of the first day of the
subsequent calendar quarter. The Plan Administrator
may from time to time limit the Notional Funds
available for purposes of such election. If at any
time any Notional Fund that has previously been
designated by the Participant as a notional
investment shall cease to exist or shall be
unavailable for any reason, or if the Participant
fails to designate one or more Notional Funds
pursuant to this Section 4.02, the Plan
Administrator may, at its discretion and upon notice
to the Participant, treat any amounts previously
notionally invested or to be notionally invested in
such Notional Fund as being invested in Aetna Money
Market Fund or if such Notional Fund ceases to exist
or is unavailable for any reason, such other
short-term high-quality fixed-income Notional Fund
as the Plan Administrator may from time to time
designate, in all cases only until such time as the
Participant shall have made another investment
election in accordance with the foregoing
procedures. The Participant's bookkeeping account
shall continue to be adjusted for notional
investment experience until distributed in full in
accordance with the distribution methods set forth
in this Plan.
4.03 It is specifically provided that neither the Plan
Administrator nor the Fund shall be obligated to
make actual cash deposits in the account, but only
to make bookkeeping entries as if deposits had been
made. If for its own convenience the Fund should
make deposits, it is further provided that any sums
thus deposited shall remain a general unrestricted
asset of the Fund and shall not be deemed as being
held in trust, escrow, or in any other fiduciary
manner for the benefit of the Participant. The
Participant understands that the value of the
Participant's bookkeeping account will fluctuate due
to the investment experience of the Notional Funds
and that at the time at which benefits become
payable under the Plan, the value of the
Participant's bookkeeping account may be less than
the total amount of Compensation deferred under the
Plan. The Fund is not responsible or liable for any
amount by which the total amount of Compensation
deferred
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exceeds the value of the bookkeeping account and the Fund
shall have no obligation to restore any such difference.
V. BENEFITS ON RETIREMENT
5.01 If the Participant continues in the service of the
Fund until Retirement, the Fund shall pay to such
Participant the amount then and thereafter standing
credited to the bookkeeping account described in
ARTICLE IV at the time and in the manner as elected
by the Participant in the Participant's Deferral
Agreement. If monthly or annual installments are
elected by the Participant, the estimated payments
must be at least $1,000 per month or $10,000 per
year; if the applicable minimum is not met, the
payout duration will be adjusted to meet the
minimums. Installment payments shall be
substantially equal over the period elected. Any
excess amounts remaining in the account shall be
paid out in the final installment. With respect to
benefits payable in a Lump Sum, the Lump Sum shall
be an amount equal to the current value of the
Participant's bookkeeping account on the date of the
Participant's Retirement. The Lump Sum shall be paid
to the Participant no later than the fifteenth day
of the month following the date of the Participant's
Retirement.
5.02 Should the Participant die at any time after
Retirement, whether prior to or after the
Participant has begun to receive the retirement
payments provided for in Section 5.01, the
Participant's designated Beneficiary or
Beneficiaries shall be entitled to receive the
balance of such payments as they fall due, or, in
the sole discretion of the Plan Administrator, in a
Lump Sum equal to the current value of the deceased
Participant's bookkeeping account on the date of the
Participant's death. If no Beneficiary or
Beneficiaries are designated as provided in Section
2.01 of this Plan at the time the Participant dies,
then the Participant's estate shall be paid by the
Plan as promptly as possible after due proof of
death a Lump Sum amount equal to the value of the
Participant's bookkeeping account on the date of the
Participant's death. If a designated Beneficiary or
Beneficiaries survive the death of the Participant,
and said designated Beneficiary or Beneficiaries do
not survive the period during which payments are to
be made under this Plan, then:
(a) If there is only one designated
Beneficiary, then the designated
Beneficiary's estate shall be paid by the
Plan as promptly as possible after due
proof of death a Lump Sum amount equal to
the value of the Participant's bookkeeping
account on the date of the designated
Beneficiary's death, or
(b) If there is more than one designated
Beneficiary, then the death of any
designated Beneficiary who is not the last
to die shall cause all
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<PAGE>
prospective payments under this Plan previously
designated to the deceased Beneficiary to be
redistributed proportionately among the surviving
designated Beneficiaries.
Upon the death of the last designated Beneficiary,
such designated Beneficiary's estate shall be paid
by the Plan as promptly as possible after due proof
of death a Lump Sum amount equal to the value of the
Participant's bookkeeping account on the date of the
designated Beneficiary's death.
VI. BENEFITS ON TERMINATION OF SERVICES OR DEATH PRIOR TO RETIREMENT
6.01 In the event there is a Termination of Services, the
Fund shall pay to the Participant the amount then
and thereafter standing credited to the bookkeeping
account described in ARTICLE IV at the time and in
the manner as elected by the Participant in the
Participant's Deferral Agreement. If monthly or
annual installments are elected by a Participant,
the estimated payments must be at least $1,000 per
month or $10,000 per year; if the applicable minimum
is not met, the payout duration will be adjusted to
meet the minimums. Installment payments shall be
substantially equal over the period elected. Any
excess amounts remaining in the account shall be
paid out in the final installment. With respect to
benefits payable in a Lump Sum, the Lump Sum shall
be an amount equal to the current value of the
Participant's bookkeeping account on the date of
Termination of Services. The Lump Sum shall be paid
to the Participant no later than the fifteenth day
of the month following the date of Termination of
Services.
6.02 In the event the Participant dies before the
Participant's Retirement or the Participant dies
prior to receiving all of the payments under Section
6.01, the Participant's designated Beneficiary or
Beneficiaries shall be entitled to receive the
balance remaining of such payments as they fall due,
or, in the sole discretion of the Plan
Administrator, in a Lump Sum equal to the current
value of the deceased Participant's bookkeeping
account on the date of the Participant's death. If
no Beneficiary or Beneficiaries are designated as
provided in Section 2.01 of this Plan at the time
the Participant dies, then the Participant's estate
shall be paid by the Plan as promptly as possible
after due proof of death a Lump Sum amount equal to
the value of the Participant's bookkeeping account
on the date of the Participant's death. If a
designated Beneficiary or Beneficiaries survive the
death of the Participant, and said designated
Beneficiary or Beneficiaries do not survive the
period during which payments are to be made under
this Plan, then:
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(a) If there is only one designated
Beneficiary, then the designated
Beneficiary's estate shall be paid by the
Plan as promptly as possible after due
proof of death a Lump Sum amount equal to
the value of the Participant's bookkeeping
account on the date of the designated
Beneficiary's death, or
(b) If there is more than one designated
Beneficiary, then the death of any
designated Beneficiary who is not the last
to die shall cause all prospective payments
under this Plan previously designated to
the deceased Beneficiary to be
redistributed proportionately among the
surviving designated Beneficiaries.
Upon the death of the last designated
Beneficiary, such designated Beneficiary's
estate shall be paid by the Plan as
promptly as possible after due proof of
death a Lump Sum amount equal to the value
of the Participant's bookkeeping account on
the date of the designated Beneficiary's
death.
VII. WITHDRAWALS
In the event of an Unforeseeable Emergency, the
Participant may apply to the Plan Administrator for
early withdrawal from the Plan of an amount limited
to that which is necessary to meet the emergency. If
such application for withdrawal is approved by the
Plan Administrator, the withdrawal will be effective
at the latter of the date specified in the
Participant's application or the date of approval by
the Plan Administrator. Whenever an application for
withdrawal is honored, the Plan Administrator shall
pay the Participant from the Participant's
bookkeeping account described in ARTICLE IV only
those amounts necessary to meet the emergency. The
Participant's bookkeeping account shall be
appropriately adjusted to reflect the amounts
withdrawn. An Unforeseeable Emergency shall include
the following: bankruptcy or impending bankruptcy,
unexpected and nonreimbursable major expenses
resulting from illness to person or accident to
person or property and other types of unexpected and
nonreimbursable expenses of a major or emergency
nature where withdrawal of funds would be necessary
to prevent serious financial hardship to the
Participant. Withdrawals for foreseeable
expenditures such as the down payment on a home,
vacation expenses, purchase of an automobile, or
education expenses will not be permitted. As
provided in Section 1.02, the Plan Administrator
shall make the required findings under this
provision and such findings shall be binding upon
all persons.
VIII. AMENDMENT OR TERMINATION OF PLAN
7
<PAGE>
8.01 The Board may at any time terminate this Plan. Upon
such termination, the Participant will be deemed to
have revoked the election to defer Compensation as
of the date of such termination. Upon termination,
no part of the Participant's Compensation will be
deferred and the Participant shall be treated as if
there had been a Termination of Services under
Section 6.01 on the date of the termination for
purposes of payment of benefits under the Plan.
8.02 The Board may amend the provisions of this Plan at
any time provided, however, that no amendment shall
adversely affect the rights of the Participant or
the designated Beneficiary or Beneficiaries, if any,
as to the receipt of payments under the Plan to the
extent of any Compensation deferred before the time
of the amendment.
IX. PARTICIPANT STATUS
The Participant in the Plan shall have only the
status of general unsecured creditor of the Fund.
The Plan constitutes a mere promise by the Fund to
make payments in the future.
X. NON-ASSIGNABILITY CLAUSE
It is expressly provided that neither the
Participant nor the Participant's Beneficiary or
Beneficiaries, nor any other designee, shall have
any right to commute, sell, assign, transfer or
otherwise convey the right to receive any payments
hereunder which payments and rights thereto are
expressly declared to be non-assignable and
non-transferable and, in the event of any attempted
assignment or transfer, the Fund shall have no
further liability hereunder. Moreover, no unpaid
benefits shall be subject to attachment, garnishment
or execution, or be transferable by operation of law
in the event of bankruptcy or insolvency, except to
the extent otherwise required by law. The right of
the Participant or the Participant's Beneficiary or
Beneficiaries to payments under the Plan are not
subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors of the
Participant or the Participant's Beneficiary or
Beneficiaries.
XI. APPLICABLE LAW
This Plan shall be construed under the law of the
State of Connecticut.
8
<PAGE>
II. EFFECTIVE DATE
This Plan shall be effective on the date of its
adoption by the Fund's Board of Directors or on such
later date as may be provided in the vote,
resolution or consent in which such adoption takes
place.
Adopted by the Board, by resolution, on September 24, 1997.
9
ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT is made by and between AETNA VARIABLE FUND, a
Massachusetts business trust (the "Fund"), and AELTUS INVESTMENT MANAGEMENT,
INC., a Connecticut corporation (the "Administrator"), with respect to the
following recital of facts:
R E C I T A L
-------------
WHEREAS, the Fund is registered as an open-end diversified management
investment company under the Investment Company Act of 1940 (the "1940 Act");
and
WHEREAS, the Administrator is registered as an investment adviser under
the Investment Advisers Act of 1940, and engages in the business of acting as an
investment adviser and an administrator of investment companies; and
WHEREAS, the Fund and the Administrator desire to enter into an
agreement to provide for administrative services for the Fund on the terms and
conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable considerations, the receipt of which is
hereby acknowledged, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADMINISTRATOR
The Administrator is hereby appointed to serve as the Administrator to
the Fund, to provide the administrative services described herein and assume the
obligations set forth in Section II, subject to the terms of this Agreement and
the control of the Fund's Board of Trustees (the "Board"). The Administrator
shall, for all purposes herein, be deemed an independent contractor and shall
have, unless otherwise expressly provided or authorized, no authority to act for
or represent the Fund in any way or otherwise be deemed an agent of the Fund.
II. DUTIES OF THE ADMINISTRATOR
In carrying out the terms of this Agreement, the Administrator shall:
A. provide office space, equipment and facilities (which may be the
Administrator's or its affiliates') for maintaining the Fund's organization, for
meetings of the Fund's Board and shareholders, and for performing administrative
services hereunder;
B. supervise and manage all aspects of the Fund's operations (other
than investment advisory activities), supervise relations with, and monitor the
performance of, custodians, depositories,
<PAGE>
transfer and pricing agents, accountants, attorneys, underwriters, brokers and
dealers, insurers and other persons in any capacity deemed to be necessary and
desirable by the Board;
C. provide internal clerical and legal services, and stationery and
office supplies;
D. provide accounting services, including:
1. determining and arranging for the publication of the net
asset value of the Fund;
2. preparing financial information for presentation to the
Fund's Board and management;
3. preparing and monitoring the Fund's annual expense budget,
and establishing daily accruals;
4. coordinating payment of fund expenses;
5. calculating periodic dividend rates to be declared in
accordance with management guidelines;
6. calculating total return information as defined in the
current prospectus and statement of additional information;
7. coordinating audit packages for use by independent public
accountants;
8. responding to regulatory audits;
E. provide non-investment related statistical and research data and
such other reports, evaluations and information as the Fund may request from
time to time;
F. monitor the Fund's compliance with the current prospectus and
statement of additional information, the 1940 Act, the Internal Revenue Code and
other applicable laws and regulations;
G. prepare, to the extent requested by the Fund, registration
statements, proxy statements and annual and semi-annual reports to shareholders;
H. arrange for the printing and mailing (at the Fund's expense) of
proxy statements and other reports or other materials provided to the Fund's
shareholders;
I. support outside auditors in preparing and filing all the Fund's
federal and state tax returns and required tax filings other than those required
to be made by the Fund's custodian and transfer agent;
J. prepare periodic reports to and filings with the Securities and
Exchange Commission (the "SEC") and state Blue Sky authorities with the advice
of the Fund's counsel;
2
<PAGE>
K. maintain the Fund's existence, and during such times as the shares
of the Fund are publicly offered, maintain the registration and qualification of
the Fund's shares under federal and state law;
L. keep and maintain the financial accounts and records of the Fund;
M. provide the Board on a regular basis with reports and analyses of
the Fund's operations and the operations of comparable investment companies; and
N. take any other actions which appear to the Administrator and the
Board necessary to carry into effect the purposes of this Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. REPRESENTATIONS AND WARRANTIES OF THE ADMINISTRATOR
The Administrator hereby represents and warrants to the Fund as
follows:
1. Due Incorporation and Organization. The Administrator is
duly organized and is in good standing under the laws of the
State of Connecticut and is fully authorized to enter into
this Agreement and carry out its duties and obligations
hereunder.
2. Best Efforts. The Administrator at all times shall provide
its best judgment and effort to the Fund in carrying out its
obligations hereunder.
B. REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund hereby represents and warrants to the Administrator as
follows:
1. Due Incorporation and Organization. The Fund has been duly
incorporated under the laws of the Commonwealth of
Massachusetts and it is authorized to enter into this
Agreement and carry out its terms.
2. Registration. The Fund is registered as an investment
company with the SEC under the 1940 Act and shares of the
Fund are registered or qualified for offer and sale to the
public under the Securities Act of 1933 (the "1933 Act"),
and all applicable state securities laws. Such registrations
or qualifications will be kept in effect during the term of
this Agreement.
IV. CONTROL BY THE BOARD OF TRUSTEES
3
<PAGE>
Any activities undertaken by the Administrator pursuant to this
Agreement on behalf of the Fund shall at all times be subject to any directives
of the Board.
V. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Administrator
shall at all times conform to:
A. all applicable provisions of the 1940 Act;
B. the provisions of the registration statement of the Fund under
the 1933 Act and the 1940 Act;
C. the provisions of the Fund's Articles of Incorporation, as
amended;
D. the provisions of the By-Laws of the Fund, as amended; and
E. any other applicable provisions of state and federal law.
VI. DELEGATION OF RESPONSIBILITIES
All services to be provided by the Administrator under this Agreement
may be furnished by any directors, officers or employees of the Administrator or
by any affiliates of the Administrator under the Administrator's supervision.
VII. COMPENSATION
For the services to be rendered, the facilities furnished and the
expenses assumed by the Administrator, the Fund shall pay to the Administrator
an annual fee, payable monthly (in arrears), based upon the following average
daily net assets of the Fund:
Rate Net Assets
---- ----------
.075% on the 1st $5 billion
.05% over $5 billion
Except as hereinafter set forth, compensation under this Agreement shall be
calculated and accrued daily at the rate of 1/365 of the annual administration
fee applied to the daily net assets of the Fund. If this Agreement becomes
effective subsequent to the first day of a month or shall terminate before the
last day of a month, compensation for that part of the month this Agreement is
in effect shall be prorated in a manner consistent with the calculation of the
fees as set forth above.
4
<PAGE>
5
<PAGE>
VIII. NON-EXCLUSIVITY
The services of the Administrator to the Fund are not to be deemed to
be exclusive, and the Administrator shall be free to render administrative or
other services to others (including other investment companies) and to engage in
other activities, so long as its services under this Agreement are not impaired
thereby. It is understood and agreed that officers and directors of the
Administrator may serve as officers or trustees of the Fund, and that officers
or trustees of the Fund may serve as officers or directors of the Administrator
to the extent permitted by law; and that the officers and directors of the
Administrator are not prohibited from engaging in any other business activity or
from rendering services to any other person, or from serving as partners,
officers, directors or trustees of any other firm or trust, including other
investment companies.
IX. TERM
This Agreement shall become effective on May 1, 1998, and shall
continue through December 31, 1998. Thereafter it shall continue for successive
annual periods, provided such continuance is specifically approved at least
annually:
1. a. by the Board, or
b. by the vote of a majority of the Fund's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act),
and
2. by the affirmative vote of a majority of the trustees who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a trustee of the Fund), by votes cast in
person at a meeting specifically called for such purpose.
X. TERMINATION
This Agreement may be terminated at any time, without the payment of
any penalty, by vote of the Fund's trustees or by vote of a majority of the
Fund's outstanding voting securities, as defined in Section 2(a)(42) of the 1940
Act, or by the Administrator, on sixty (60) days' written notice to the other
party.
XI. LIABILITY OF ADMINISTRATOR AND INDEMNIFICATION
A. LIABILITY
The Administrator shall be liable to the Fund and shall indemnify the
Fund for any losses incurred by the Fund, whether in the purchase, holding or
sale of any security or otherwise, to the extent that such losses resulted from
an act or omission on the part of the Administrator or its officers, directors
or employees, that is found to involve willful misfeasance, bad faith or
negligence,
6
<PAGE>
or reckless disregard by the Administrator of its duties under this Agreement,
in connection with the services rendered by the Administrator hereunder.
B. INDEMNIFICATION
In the absence of willful misfeasance, bad faith, negligence or
reckless disregard of obligations or duties hereunder on the part of the
Administrator or any officer, director or employee of the Administrator, to the
extent permitted by applicable law, the Fund hereby agrees to indemnify and hold
the Administrator harmless from and against all claims, actions, suits and
proceedings at law or in equity, whether brought or asserted by a private party
or a governmental agency, instrumentality or entity of any kind, relating to the
sale, purchase, pledge of, advertisement of, or solicitation of sales or
purchases of any security by the Fund, its officers, trustees, employees or
agents in alleged violation of applicable federal, state or foreign laws, rules
or regulations.
XII. NOTICES
Any notices under this Agreement shall be in writing, addressed and
delivered or mailed postage paid to the other party at such address as such
other party may designate for the receipt of such notice. Until further notice
to the other party, it is agreed that the address of the Administrator for this
purpose shall be 242 Trumbull Street, Hartford, Connecticut 06103-1205, and the
address of the Fund for this purpose shall be 151 Farmington Avenue, Hartford,
Connecticut 06156.
XIII. QUESTIONS OF INTERPRETATIONS
This Agreement shall be governed by the laws of the State of
Connecticut. Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the 1940 Act shall be resolved by reference to such term or provision of the
1940 Act and to interpretations thereof, if any, by the United States courts or,
in the absence of any controlling decision of any such court, by rules or orders
of the SEC issued pursuant to the 1940 Act, or contained in no-action and
interpretive positions taken by the SEC staff. In addition, where the effect of
a requirement of the 1940 Act reflected in the provisions of this Agreement is
revised by rule or order of the SEC, such provisions shall be deemed to
incorporate the effect of such rule or order.
XIV. SERVICE MARK
The service mark of the Fund and the name "Aetna" have been adopted by
the Fund with the permission of Aetna Services, Inc. (formerly known as Aetna
Life and Casualty Company) and their continued use is subject to the right of
Aetna Services, Inc. to withdraw this permission in the event
7
<PAGE>
the Administrator or another subsidiary or affiliated corporation of Aetna
Services, Inc. should not be the Administrator of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers as of the 25th day of March,
1998.
AELTUS INVESTMENT
MANAGEMENT, INC.
Attest: /s/ Susan Harinstein By: /s/ John Y. Kim
-------------------------- --------------------------
Name: Susan Harinstein Name: John Y. Kim
-------------------------- --------------------------
Title: Assistant Secretary Title: President
-------------------------- --------------------------
AETNA VARIABLE FUND
Attest: /s/ DeAnn S. Anastasio By: /s/ J. Scott Fox
-------------------------- --------------------------
Name: DeAnn S. Anastasio Name: J. Scott Fox
-------------------------- --------------------------
Title: Assistant Secretary Title: President
-------------------------- --------------------------
Aetna Inc.
151 Farmington Avenue
Hartford, CT 06156-3124
Amy R. Doberman
Counsel
Law Division, RE4A
April 27, 1998 Investments & Financial Services
(860) 273-1409
Fax: (860) 273-0356
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Filing Desk
Re: Aetna Variable Fund
Post-Effective Amendment No. 53 to
Registration Statement on Form N-1A
(File No. 2-51739 and 811-2514)
Dear Sir or Madam:
The undersigned serves as counsel to Aeltus Investment Management, Inc., the
investment adviser, effective May 1, 1998, to Aetna Variable Fund, a
Massachusetts business trust (the "Fund"). It is my understanding that the Fund
has registered an indefinite number of shares of beneficial interest under the
Securities Act of 1933 (the "1933 Act") pursuant to Rule 24f-2 under the
Investment Company Act of 1940 (the "1940 Act").
Insofar as it relates or pertains to the Fund, I have reviewed the prospectus
and the Fund's Registration Statement on Form N-1A, as amended to the date
hereof, filed with the Securities and Exchange Commission under the 1933 Act and
the 1940 Act, pursuant to which the Shares will be sold (the "Registration
Statement"). I have also examined originals or copies, certified or otherwise
identified to my satisfaction, of such documents and other instruments I have
deemed necessary or appropriate for the purpose of this opinion. For purposes of
such examination, I have assumed the genuineness of all signatures on original
documents and the conformity to the original of all copies.
I am admitted to practice law in Maryland and the District of Columbia, and do
not purport to be an expert on the laws of any other state.
<PAGE>
Based upon the foregoing, and assuming the securities are issued and sold in
accordance with the provisions of the Fund's Declaration of Trust and the
Registration Statement, I am of the opinion that the securities will when sold
be legally issued, fully paid and nonassessable.
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Amy R. Doberman
Amy R. Doberman
Counsel
Consent of Independent Auditors
The Board of Directors and Shareholders of
Aetna Variable Fund:
We consent to the use of our report dated February 13, 1998 incorporated by
reference herein this Post-Effective Amendment No. 53 to Registration Statement
(No. 2-51739) and to the references to our firm under the headings, "Financial
Highlights" in the prospectus and "Independent Auditors" in the statement of
additional information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Hartford, Connecticut
April 27, 1998
POWER OF ATTORNEY
We, the undersigned trustees and officers of Aetna GET Fund, Aetna Income
Shares, Aetna Variable Fund and Aetna Variable Encore Fund, hereby severally
constitute and appoint Amy R. Doberman, Julie E. Rockmore and Daniel E. Burton,
and each of them individually, our true and lawful attorneys, with full power to
them and each of them to sign for us, and in our names and in the capacities
indicated below, any and all amendments to the Registration Statements listed
below filed with the Securities and Exchange Commission under the Securities Act
of 1933 and under the Investment Company Act of 1940:
Registration Statements filed under the Securities Act of 1933:
Aetna GET Fund 33-12723
Aetna Income Shares 2-47232
Aetna Variable Fund 2-51739
Aetna Variable Encore Fund 2-53038
Registration Statements filed under the Investment Company Act of 1940:
Aetna GET Fund 811-5062
Aetna Income Shares 811-2361
Aetna Variable Fund 811-2514
Aetna Variable Encore Fund 811-2565
hereby ratifying and confirming on this 10th day of December, 1997, our
signatures as they may be signed by our said attorneys to any and all amendments
to such Registration Statements.
Signature/Title Signature/Title
--------------- ---------------
/s/ J. Scott Fox /s/ Stephanie A. Taylor
- ------------------------------- --------------------------------------------
J. Scott Fox Stephanie A. Taylor
President and Trustee Treasurer and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
/s/ Maria T. Fighetti /s/ Shaun P. Mathews
- ------------------------------- --------------------------------------------
Maria T. Fighetti, Trustee Shaun P. Mathews, Trustee
/s/ David L. Grove /s/ Corine T. Norgaard
- ------------------------------- --------------------------------------------
David L. Grove, Trustee Corine T. Norgaard, Trustee
/s/ John Y. Kim /s/ Richard G. Scheide
- ------------------------------- --------------------------------------------
John Y. Kim, Trustee Richard G. Scheide, Trustee
/s/ Sidney Koch
- -------------------------------
Sidney Koch, Trustee
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000002664
<NAME> Aetna Variable Fund
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 7,143,613,092
<INVESTMENTS-AT-VALUE> 9,133,462,076
<RECEIVABLES> 121,319,390
<ASSETS-OTHER> 18,812,657
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,273,594,123
<PAYABLE-FOR-SECURITIES> 60,355,460
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24,979,169
<TOTAL-LIABILITIES> 85,334,629
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,054,762,581
<SHARES-COMMON-STOCK> 273,174,905
<SHARES-COMMON-PRIOR> 214,694,270
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (4,047,705)
<ACCUMULATED-NET-GAINS> 142,754,401
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,994,790,217
<NET-ASSETS> 9,188,259,494
<DIVIDEND-INCOME> 122,630,514
<INTEREST-INCOME> 44,585,816
<OTHER-INCOME> 0
<EXPENSES-NET> (46,550,765)
<NET-INVESTMENT-INCOME> 120,665,565
<REALIZED-GAINS-CURRENT> 1,597,118,852
<APPREC-INCREASE-CURRENT> 383,260,565
<NET-CHANGE-FROM-OPS> 2,101,044,982
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (130,095,758)
<DISTRIBUTIONS-OF-GAINS> (1,737,875,271)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,739,687
<NUMBER-OF-SHARES-REDEEMED> (5,175,087)
<SHARES-REINVESTED> 54,916,035
<NET-CHANGE-IN-ASSETS> 2,234,028,998
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 292,973,005
<OVERDISTRIB-NII-PRIOR> (116,078)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 41,563,182
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 46,550,765
<AVERAGE-NET-ASSETS> 8,292,579,196
<PER-SHARE-NAV-BEGIN> 32.391
<PER-SHARE-NII> 0.544
<PER-SHARE-GAIN-APPREC> 8.939
<PER-SHARE-DIVIDEND> (0.578)
<PER-SHARE-DISTRIBUTIONS> (7.661)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 33.635
<EXPENSE-RATIO> 0.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
