AETNA GET FUND
SERIES C
151 Farmington Avenue
Hartford, Connecticut 06156-8962
STATEMENT OF ADDITIONAL INFORMATION dated:
September 3, 1996
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for Aetna GET Fund, Series C Shares,
dated September 3, 1996.
A free prospectus is available upon request from the local Aetna Life Insurance
and Annuity Company office or by writing:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156-8962
Telephone: 1-800-525-4225
READ THE PROSPECTUS BEFORE YOU INVEST.
TABLE OF CONTENTS
Page
GENERAL INFORMATION AND HISTORY
INVESTMENT OBJECTIVE AND RESTRICTIONS
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
THE ASSET ALLOCATION PROCESS
TRUSTEES AND OFFICERS OF THE TRUST
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
THE INVESTMENT ADVISORY AGREEMENT
THE SUB-ADVISORY AGREEMENT
THE ADMINISTRATIVE SERVICES AGREEMENT
CUSTODIAN
INDEPENDENT AUDITORS
PRINCIPAL UNDERWRITER
BROKERAGE ALLOCATION AND TRADING POLICIES
DESCRIPTION OF SHARES
SALE AND REDEMPTION OF SHARES
NET ASSET VALUE
TAX STATUS
VOTING RIGHTS
GENERAL INFORMATION AND HISTORY
Aetna GET Fund (Fund or Trust) is an open-end, diversified management investment
company which sells its shares of beneficial interest to Aetna Life Insurance
and Annuity Company (ALIAC) for allocation to certain of its separate accounts
established to fund variable annuity contracts issued by ALIAC. The Board of
Trustees of the Trust (Trustees) may authorize the division of shares of the
Trust into two or more series, each series relating to a separate portfolio
of investments, with different rights as determined by the Trustees. "Series C"
as used herein shall refer to the third series offered by the Trust.
INVESTMENT OBJECTIVE AND RESTRICTIONS
The investment objective for Series C is to achieve maximum total return by
participating in favorable equity market performance without compromising a
minimum targeted rate of return during a specified five year period, the
"Guaranteed Period," from December 17, 1996 through December 16, 2001, the
maturity date. The Series C investment objective and policies are described in
detail in the prospectus under the caption "Description of Series C." In seeking
to achieve this investment objective, Series C has adopted the following
restrictions which are matters of fundamental policy and cannot be changed
without approval by the holders of the lesser of: (i) 67% of the shares of
Series C present or represented at a shareholders' meeting at which the holders
of more than 50% of such shares are present or represented; or (ii) more than
50% of the outstanding shares of Series C.
As a matter of fundamental policy, Series C will not:
(1)Issue any senior security as defined in the Investment Company Act of
1940, as amended (the Act), except that (a) the Series may enter into
commitments to purchase securities in accordance with the Series' investment
program, including reverse repurchase agreements, delayed delivery and when-
issued securities, which may be considered the issuance of senior securities;
(b) the Series may engage in transactions that may result in the issuance of a
senior security to the extent permitted under applicable regulations,
interpretations of the Act or an exemptive order; (c) the Series may engage in
short sales of securities to the extent permitted in its investment program and
other restrictions; (d) the purchase or sale of futures contracts and related
options shall not be considered to involve the issuance of senior securities;
and (e) subject to the restrictions set forth below, the Series may borrow money
as authorized by the Act.
(2) Borrow money, except that (a) the Series may enter into certain futures
contracts and options related thereto; (b) the Series may enter into commitments
to purchase securities in accordance with the Series' investment program,
including delayed delivery and when-issued securities and reverse repurchase
agreements; (c) the Series may borrow money for temporary or emergency purposes
in amounts not exceeding 15% of the value of its total assets at the time when
the loan is made; and (d) for purposes of leveraging the Series may borrow money
from banks (including its custodian bank), only if, immediately after such
borrowing, the value of the Series' assets, including the amount borrowed, less
its liabilities, is equal to at least 300% of the amount borrowed, plus all
outstanding borrowings. If at any time the value of the Series' assets fails to
meet the 300% coverage requirement relative only to leveraging, the Series
shall, within three days (not including Sundays and holidays), reduce its
borrowings to the extent necessary to meet the 300% test.
(3) Invest more than 15% of the 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 in excess of
seven days. Securities that may be resold under Rule 144A under the Securities
Act of 1933, as amended (the 1933 Act) or securities offered pursuant to Section
4(2) of the 1933 Act shall not be deemed illiquid solely by reason of being
unregistered. The investment adviser shall determine whether a particular
security is deemed to be illiquid based on the trading markets for the specific
security and other factors.
(4) Act as an underwriter of securities except to the extent that, in
connection with the disposition of securities by Series C for its portfolio,
Series C or the Trust may be deemed to be an underwriter under the provisions of
the 1933 Act.
(5) Purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, Series C 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;
(6) Make loans, except that, to the extent appropriate under its investment
program, Series C may (a) purchase bonds, debentures or other debt securities,
including short-term obligations; (b) enter into repurchase transactions and (c)
lend portfolio securities provided that the value of such loaned securities does
not exceed one-third of the Series' total assets.
(7)Invest in commodity contracts, except that the Series may, to the extent
appropriate under its investment program, purchase securities of companies
engaged in such activities; may enter into futures contracts and related
options, may engage in transactions on a when-issued or forward commitment
basis, and may enter into forward currency contracts in accordance with its
overall investment program.
Provided, however, that whenever any of the foregoing provisions states a
maximum percentage of the assets of Series C which may be invested in any
securities or other property, any excess of the actual percentage limitation
shall be considered a violation of such restriction only if such excess exists
immediately after the acquisition of such security or property and resulted in
whole or in part from such acquisition.
Series C also has adopted certain other investment policies and restrictions
reflecting the current investment practices of Series C, which may be changed by
the Trustees and without shareholder vote. Under such policies and restrictions,
Series C will not:
(1)Invest more than 5% of its total assets in the securities of an issuer
excluding securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities, or purchase more than 10% of the outstanding voting
securities of any issuer.
(2) 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). Series C
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%.
(3) Mortgage, pledge or hypothecate its assets except in connection with
loans of securities permitted by Fundamental Restriction 6, borrowings permitted
under Fundamental Restriction 2, and permitted transactions involving options,
futures contracts and options on such contracts.
(4)Invest in companies for the purpose of exercising control or
management.
(5) Purchase the securities of any other investment company, except as
permitted under the Act.
(6) Purchase interests in oil, gas or other mineral exploration programs;
however, this limitation will not prohibit the acquisition of securities of
companies engaged in the production or transmission of oil, gas, or other
minerals.
(7) Incur aggregate borrowings which exceed 15% of the market value of
Series C's assets (including such borrowings) less liabilities (excluding such
borrowings). There will be no new purchases if borrowing exceeds 5% of Series
C's total assets.
(8) 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 programs of the Series.
(9) Concentrate its investments in any one industry except Series C may
invest up to 25% of its total assets in securities issued by companies
principally engaged in any one industry. 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. This limitation will not apply to securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
Options, Futures and Other Derivative Instruments
Series C may use derivative instruments as described in the prospectus under
"Investment Techniques." The following provides additional information about
these instruments.
Futures Contracts - Series C may enter into futures contracts as described in
the prospectus. Series C may enter into futures contracts 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 Commodity Futures
Trading Commission (the "CFTC").
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument(s) or a
specific stock market index for a specified price at a designated date and
time. Brokerage fees are incurred when a futures contract is bought or sold and
at expiration, and margin deposits must be maintained.
Although certain futures contracts require actual future delivery of and
payment for the underlying instruments, 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 Series C will be able to enter into an offsetting transaction with
respect to a particular contract at a particular time. If Series C 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.
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
rates futures contract prices during a single trading day, and 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 Series C 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 Series C with a
commodities broker in a custodian account in order to initiate futures trading
and to maintain open positions in Series C's futures contracts. A margin deposit
is intended to assure Series C'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 Series C. These daily payments to and from Series C
are called variation margin. At times of extreme price volatility such as
occurred during the week of October 19, 1987, intra-day variation margin
payments may be required. In computing daily net asset values, Series C will
mark-to-market the current value of its open futures contracts. Series C expects
to earn interest income on its initial margin deposits. Furthermore, in the case
of a futures contract purchase, Series C has deposited in a segregated account
money market instruments sufficient to meet all futures contract initial margin
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
Series C relative to the size of the margin commitment. For example, if at the
time of purchase 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit before any deduction for the
transaction costs, if the contract were then closed out. A 15% decrease in the
value of the futures contract would result in a loss equal to 150% of the
original margin deposit, if the contract were closed out. Thus, a purchase or
sale of a futures contract may result in losses in excess of the amount
initially invested in the futures contract. However, Series C would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Series C can enter into options on futures contacts. See "Covered Call and Put
Options" below. The risk involved in writing options on futures contracts or
market indices is that there could be an increase in the market value of such
contracts or indices. If that occurred, the option would be exercised and Series
C 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 the Series C's
obligation might be more or less than the premium received when it originally
wrote the option. Further, Series C might occasionally not be able to close the
option because of insufficient activity in the options market.
Covered Call and Put Options -Series C may write (sell) covered call options and
purchase put options and may purchase call and sell put options including
options on securities, indices and futures as discussed in the prospectus and in
this Section. A call option gives the holder (buyer) the right to buy and
obligates 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 obligates the writer (seller) to purchase a security or
financial instrument at a stated price at any time until the expiration date.
Series C 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
of ALIAC.
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. Series C will only
write a call option on a security which it already owns and will not write call
options on when-issued securities.
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.
Series C may purchase and write call options on stock indices, including the S&P
500, as well as on any individual stock, as described below. Series C will use
these techniques primarily as a temporary substitute for taking positions in
certain securities or in the securities that comprise the index, particularly if
ALIAC considers these instruments to be undervalued relative to the prices of
particular securities or of the securities that comprise the index.
An option on an index (or a particular security) 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 (or security) and the exercise price of the option, expressed
in dollars, times a specified multiple (the "multiplier"). Series C may, in
particular, purchase call options on an index (or a particular security) to
protect against increases in the price of securities underlying that index (or
individual securities) that Series C intends to purchase pending its ability to
invest in such securities in an orderly manner.
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.
To secure its obligation to pay for the underlying security, the writer of a put
generally must deposit in escrow liquid assets with a value equal to or greater
than the exercise price of the put option. The writer therefore foregoes the
opportunity of investing the segregated assets or writing calls against those
assets. Series C may write put options on debt securities or futures, only if
such puts are covered by segregated liquid assets.
In writing puts, there is the risk that a writer may be required to buy the
underlying security at a disadvantageous price. Writing a put covered by
segregated liquid assets equal to the exercise of the put has the same economic
effect as writing a covered call option. 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.
Series C may purchase put options when ALIAC 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 for these purposes may
be used to protect Series C'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 Series C, as the holder of the
put option, is able to sell the underlying security at the put exercise
price regardless of any decline in the underlying security's market price.
By using put options in this manner, the Series will reduce any profit it might
otherwise have realized in its underlying security by the premium paid for
the put option and by transaction costs. The security covering the call or put
option will be segregated at Series C's custodian.
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 Series C for writing call options will be recorded as a liability in
the statement of assets and liabilities of Series C. 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 Series C
when purchasing a put option will be recorded as an asset in the statement of
assets and liabilities of Series C. 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.
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 Series C 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 Series C
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 Series C will be able to effect a closing
transaction at a favorable price. If Series C 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.
Series C 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, Series C may purchase an underlying security for delivery in
accordance with an exercise notice of a call option assignment, rather than
delivering such security from its portfolio. In such cases additional brokerage
commissions will be incurred.
Series C 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 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 Series C. Any profits from writing covered call
options are considered short-term gain for federal income tax purposes and, when
distributed by Series C, are taxable as ordinary income.
Foreign Futures Contracts and Foreign Options - Series C 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 contract 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 - Series C may write and purchase calls on foreign
currencies. Series C 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 purposes 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 required 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 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 Series C's position, it would lose the premium it
paid and transaction costs. A call written on a foreign currency by Series C is
covered if Series C owns the underlying foreign currency covered by 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 by its custodian) upon conversion or
exchange of other foreign currency held in its portfolio. A call may be written
by Series C 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 Series C 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, Series C collateralizes the position by
maintaining in a segregated account with Series C's custodian cash or U.S.
Government 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 -Series C 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. Series C 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.
Series C 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 ALIAC to correctly identify and monitor the
correlation between foreign currencies and the U.S. dollar. To the extent
that the correlation is not identical, Series C may experience losses or
gains on both the underlying security and the cross currency hedge.
Series C 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 Series C
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 Series C's assets that may be
committed to forward exchange contracts. Series C will not enter into a
"cross-hedge," unless it is denominated in a currency or currencies that
ALIAC believes will have price movements that tend to correlate
closely with the currency in which the investment being hedged is denominated.
Series C's custodian will place cash or U.S. Government securities or other
liquid high-quality debt securities in a separate account of Series C having a
value equal to the aggregate amount of Series C's commitments under forward
contracts entered into with respect to position hedges and cross-hedges. If the
value of the securities placed in the separate account 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 Series C's commitments with respect to
such contracts. As an alternative to maintaining all or part of the separate
account, Series C may purchase a call option permitting Series C 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 Series C may purchase a put option
permitting Series C to sell the amount of foreign currency subject to 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 Series C 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
Series C 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 Series C 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 Series C 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 Series C to sustain losses
on these contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring Series C to
sell a currency, Series C 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 Series C will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, Series C 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. Series C 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 Series C 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, Series C must evaluate the credit
and performance risk of each particular counterparty under a forward contract.
Although Series C values its assets daily in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. Series C may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. 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 Series C at
one rate, while offering a lesser rate of exchange should Series C desire to
resell that currency to the dealer.
Restrictions on the Use of Futures and Option Contracts - CFTC regulations
require that all short futures positions be entered into for the purpose of
hedging the value of securities held, 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 the Equity
Component of Series C's net assets, after taking into account realized profits
and unrealized losses on such futures contracts.
Series C's ability to engage in the hedging transactions described herein may be
limited by the current federal income tax requirement that Series C derive less
than 30% of its gross income from the sale or other disposition of stock or
securities held for less than three months.
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 Series C 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, Series C's loss will consist of the net amount of contractual interest
payments that Series C has not yet received. ALIAC will monitor the
creditworthiness of counterparties to Series C's interest rate swap
transactions on an ongoing basis. Series C will enter into swap transactions
with appropriate counterparties pursuant to master netting agreements. A master
netting agreement provides that all swaps done between Series C 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 Using Derivatives - In addition to any risk factors
which may be described elsewhere in this section, or in the prospectus under
"Investment Techniques" and "Risk Factors and Other Considerations," the
following sets forth certain information regarding the potential risks
associated with Series C's transactions in derivatives.
Risk of Imperfect Correlation - Series C's ability to hedge effectively all
or a portion of its portfolio through transactions in futures, options on
futures or options on securities and indexes depends on the degree to which
movements in the value of the securities or index underlying such hedging
instrument correlate with movements in the value of the assets being hedged. If
the values of the assets being hedged do not move in the same amount or
direction as the underlying security or index, the hedging strategy for Series C
might not be successful and Series C 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, Series C'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. Series C 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 Series C will not
be able to establish hedging positions, or that any hedging strategy adopted
will be insufficient to completely protect Series C.
Series C will purchase or sell futures contracts or options for hedging
purposes, only if, in ALIAC's judgment, there is expected to be a sufficient
degree of correlation between movements in the value of such instruments
and changes in the value of the assets being hedged for the hedge to be
effective. There can be no assurance that ALIAC's judgment will be accurate.
Potential Lack of a Liquid Secondary Market - The ordinary spreads between
prices in the cash and futures markets, due to differences in the natures of
those markets, are subject to distortions. First, all participants in the
futures markets are subject to initial deposit and variation margin
requirements. This could require Series C to post additional cash or cash
equivalents as the value of the position fluctuates. 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 Series C 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 Series C, which could require Series C
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
Series C'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 ALIAC's judgment concerning the general direction of interest rates is
incorrect, Series C's overall performance may be poorer than if it had not
entered into any such contract. For example, if Series C 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, Series C 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 Series C has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements, possibly at a time when it may be disadvantageous
to do so. Such sale of bonds may be, but will not necessarily be, at increased
prices which reflect the rising market.
Trading and Position Limits - Each contract market on which futures and
option contracts are traded has established a number of limitations governing
the maximum number of positions which may be held by a trader, whether acting
alone or in concert with others. The Company does not believe that these trading
and position limits will have an adverse impact on the hedging strategies
regarding Series C.
Repurchase Agreements
Series C may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards established
by the Trust's Board of Directors. A repurchase agreement allows Series C to
determine the yield during Series C'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 Series C. The market value of the underlying debt instruments will,
at all times, be equal to the dollar amount invested. Repurchase Agreements,
although fully collateralized, involve the risk that the seller of the
securities may fail to repurchase them from Series C. In that event, Series C
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, Series C's ability to liquidate the collateral may be delayed or
limited. Under the 1940 Act, repurchase agreements are considered loans by
Series C. Repurchase agreements maturing in more than seven days will not exceed
15 percent of the total assets of Series C.
Variable Rate Demand Instruments
Variable rate demand instruments (including floating rate instruments) held by
Series C may have maturities of more than one year, provided: (i) Series C is
entitled to the payment of principal at any time, or during specified intervals
not exceeding one year, upon giving the prescribed notice (which may not exceed
30 days), and (ii) the rate of interest on such instruments is adjusted at
periodic intervals not to exceed one year. In determining whether a variable
rate demand instrument has a remaining maturity of one year or less, each
instrument will be deemed to have a maturity equal to the longer of the period
remaining until its next interest rate adjustment or the period remaining until
the principal amount can be recovered through demand. Series C will be able (at
any time or during specified periods not exceeding one year, depending upon the
note involved) to demand payment of the principal of a note. If an issuer of a
variable rate demand note defaulted on its payment obligation, Series C might be
unable to dispose of the note and a loss would be incurred to the extent of the
default. Series C may invest in variable rate demand notes only when the
investment is deemed to involve minimal credit risk. The continuing
creditworthiness of issuers of variable rate demand notes held by Series C will
also be monitored to determine whether such notes should continue to be held.
Variable and floating rate instruments with demand periods in excess of seven
days and which cannot be disposed of promptly within seven business days and in
the usual course of business without taking a reduced price will be treated as
illiquid securities that are subject to the Portfolio's policies and
restrictions on illiquid securities.
Securities Lending
Series C can lend securities in its portfolio subject to the following
conditions: (a) the borrower will provide collateral equal to an amount of at
least 100% of the then current market value of the loaned securities throughout
the life of the loan; (b) loans will be made subject to the rules of the New
York Stock Exchange; (c) the loan collateral will be either cash, direct
obligations of the U.S. government or agencies thereof or irrevocable letters of
credit; (d) cash collateral will be invested only in highly liquid short-term
investments; (e) during the existence of a loan, Series C will continue to
receive any distributions paid on the borrowed securities or amounts equivalent
thereto; and (f) no more than one-third of the net assets of Series C will be on
loan at any one time. A loan may be terminated at any time by the borrower or
lender upon proper notice.
In ALIAC's opinion, lending portfolio securities to qualified broker-dealers
affords Series C a means of increasing the yield on its portfolio.
Series C will be entitled either to receive a fee from the borrower or to retain
some or all of the income derived from its investment of cash collateral.
Series C will continue to receive the interest or dividends paid on any
securities loaned, or amounts equivalent thereto. Although voting rights
will pass to the borrower of the securities, whenever a material event affecting
the borrowed securities is to be voted on, the Investment Adviser will regain or
direct the vote with respect to loaned securities.
The primary risk Series C assumes in loaning securities is that the borrower may
become insolvent on a day on which the loaned security is rapidly increasing in
price. In such event, if the borrower fails to return the loaned securities, the
existing collateral might be insufficient to purchase back the full amount of
the security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage, but Series C would be
an unsecured creditor as to such shortage and might not be able to recover all
or any of it.
Foreign Securities
Investments in foreign securities, including futures and options contracts,
offer potential benefits not available solely through investment in securities
of domestic issuers. Foreign securities offer the opportunity to invest in
foreign issuers that appear to offer growth potential, or in foreign countries
with economic policies or business cycles different from those of the United
States, or to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in exchange rates, adverse foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since Series C may invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability, or diplomatic developments that could
adversely affect investments in those countries.
There may be less publicly available information about a foreign issuer than
about a U.S. issuer, and foreign issuers may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or as
uniform as those of U.S. issuers. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than U.S. markets.
Securities of many foreign issuers are less liquid and their prices more
volatile than securities of comparable U.S. issuers. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the U.S. The Trust might have
greater difficulty taking appropriate legal action with respect to foreign
investments in non-U.S. courts than with respect to domestic issuers in U.S.
courts. In addition, transactions in foreign securities may involve greater time
from the trade date until settlement than domestic securities transactions and
involve the risk of possible losses through the holding of securities by
custodians and securities depositories in foreign countries. Currently, direct
investment in equity securities in China and Taiwan is restricted, and
investments may be made only through a limited number of approved vehicles. At
present this includes investment in listed and unlisted investment companies,
subject to limitations under the 1940 Act. Investment in these closed-end funds
may involve the payment of additional premiums to acquire shares in the open-
market and the yield of these securities will be reduced by the operating
expenses of such companies. In addition, an investor should recognize that
he or she will bear not only his proportionate share of the expenses of
Series C, but also indirectly bear similar expenses of the underlying
closed-end fund. Also, as a result of Series C's policy of investing in
closed-end mutual funds, investors in the portfolio may receive taxable
capital gains distributions to a greater extent than if he or she had invested
directly in the underlying closed-end fund.
Dividend and interest income from foreign securities may generally be subject to
withholding taxes by the country in which the issuer is located and may not be
recoverable by Series C or its investors.
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: (a) American Depositary
Receipts (ADRs), which are typically designed for U.S. investors and held either
in physical form or in book entry form; (b) European Depositary Receipts (EDRs),
which are similar to ADRs but may be listed and traded on a European exchange as
well as in the United States. Typically, these securities are traded on the
Luxembourg exchange in Europe; and (c) Global Depositary Receipts (GDRS), which
are similar to EDRS although they may be held through foreign clearing agents
such as Euroclear and other foreign depositories. Depositary receipts are not
considered foreign securities for purposes of Series C's investment limitation
concerning investment in foreign securities.
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,
the securities and guarantees of which are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately owned
corporation, and FHLMC, a federal corporation, are instrumentalities of the
United States with Presidentially-appointed board members. The obligations of
FNMA and FHLMC are not explicitly guaranteed by the full faith and credit of the
federal government.
Pass-through, mortgage-related securities are characterized by monthly payments
to the holder, reflecting the monthly payments made by the borrowers who
received the underlying mortgage loans. The payments to the security holders,
like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, often twenty or thirty years, the borrowers can repay such loans sooner.
Thus, the security holders frequently receive repayments of principal, in
addition to the principal which is part of the regular monthly payment. A
borrower is more likely to repay a mortgage which bears a relatively high rate
of interest. This means that in times of declining interest rates, some higher
yielding securities held by Series C might be converted to cash, and Series C
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 Series C buys
mortgage-related securities at a premium, mortgage foreclosures or mortgage
prepayments may result in losses of up to the amount of the premium paid since
only timely payment of principal and interest is guaranteed.
As noted in the Prospectus, Series C may also invest in collateralized mortgage
obligations (CMOs) and real estate mortgage investment conduits (REMICs). CMOs
and REMICs are securities which are collateralized by mortgage pass-through
securities. Cash flows from underlying mortgages are allocated to various
classes or tranches in a predetermined, specified order. Each sequential tranche
has a "stated maturity" - the latest date by which the tranche can be completely
repaid, assuming no repayments - and has an "average life" - the average time to
receipt of a principal payment weighted by 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 or other credit enhancing features.
Both CMOs and REMICs are issued by private entities. They are not directly
guaranteed by any government agency and are secured by the collateral held by
the issuer.
Asset-Backed Securities
Asset-backed securities are collateralized by short-term loans such as
automobile loans, home equity loans, or credit card receivables. The payments
from the collateral are passed through to the security holder. As noted above
with respect to CMOs and REMICs, the average life for these securities is the
conventional proxy for maturity. Asset-backed securities may pay all interest
and principal to the holder, or they may pay a fixed rate of interest, with any
excess over that required to pay interest going either into a reserve account or
to a subordinate class of securities, which may be retained by the originator.
The originator may guarantee interest and principal payments. These guarantees
often do not extend to the whole amount of principal, but rather to an amount
equal to a multiple of the historical loss experience of similar portfolios.
Two varieties of asset-backed securities are CARs and CARDs. CARs are
securities, representing either ownership interests in fixed pools of automobile
receivables, or debt instruments supported by the cash flows from such a pool.
CARDs are participations in fixed pools of credit accounts. These securities
have varying terms and degrees of liquidity.
Asset-backed securities may be subject to the type of prepayment risk discussed
above due to the possibility that prepayments on the underlying assets will
alter the cash flow. Faster prepayments will shorten the 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, trade in the secondary market
at a premium or discount, or to the extent that the underlying assets are
prepaid as noted above.
High Risk, High-Yield Securities
Series C may invest in high risk, high-yield securities ("junk bonds"), which
are fixed income securities that offer a current yield above that generally
available on higher quality debt securities. These securities 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 Series C's net asset value. The greater risks and
fluctuations in yield and value occur, in part, because investors generally
perceive issuers of lower-rated and unrated securities to be less creditworthy.
Lower ratings, however, may not necessarily indicate higher risks. In pursuing
Series C's objectives, ALIAC seeks to identify situations in which the rating
agencies have not fully perceived the value of the security or in which ALIAC
believes that future developments will enhance the creditworthiness and the
ratings of the issuer.
The yields earned on high risk, high-yield securities (junk bonds) generally are
higher than those of higher quality securities with the same maturities because
of the additional risks associated with them. These risks include:
(1) Sensitivity to Interest Rate and Economic Changes. High risk,
high-yield securities (junk bonds) are more sensitive to adverse economic
changes or individual corporate developments but less sensitive to interest rate
changes than are investment grade bonds. As a result, when interest rates rise,
causing bond prices to fall, the value of these securities may not fall as much
as investment grade corporate bonds. Conversely, when interest rates fall, these
securities may underperform investment grade corporate bonds because the prices
of high risk, high-yield securities (junk bonds) tend not to rise as much as the
prices of those 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 these securities to service their principal and interest payments, to
meet projected business goals and to obtain additional financing, than on more
creditworthy issuers. Holders of these securities could also be at greater risk
because these securities are generally unsecured and subordinated to senior debt
holders and secured creditors. If the issuer of a high risk, high-yield security
(junk bonds) owned by Series C defaults, Series C 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 Series C's net asset value. Furthermore, in the case of high
risk, high-yield securities (junk bonds) structured as zero coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes and thereby tend to be more speculative and volatile than
securities which pay interest periodically and in cash.
(2) Payment Expectations. High risk, high-yield securities (junk bonds),
like other debt instruments, present risks based on payment expectations. For
example, these securities may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, Series C
may have to replace the securities with a lower yielding security, resulting in
a decreased return for investors. Also, the value of these securities may
decrease in a rising interest rate market. In addition, there is a higher risk
of non-payment of interest and/or principal by issuers of these securities
than in the case of investment grade bonds.
(3) Liquidity and Valuation Risks. Some high risk, high-yield securities
(junk bonds) are traded among a small number of broker-dealers rather than in a
broad 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 value and liquidity of these
securities more than other securities, especially in a thinly-traded market.
(4) Limitations of Credit Ratings. The credit ratings assigned to high
risk, high-yield securities (junk bonds) may not accurately reflect the true
risks of an investment. Credit ratings typically evaluate the safety of
principal and interest payments rather than the market value risk of such
securities. In addition, credit agencies may fail to adjust credit ratings to
reflect rapid changes in economic or company conditions that affect a security's
market value. Although the ratings of recognized rating services such as Moody's
Investors Service, Inc. and Standard & Poor's Corporation are considered,
ALIAC 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 Series C's
investment objective may be more dependent on ALIAC's 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 risk, high-yield securities (junk bonds), such as legislation requiring
federally-insured savings and loan associations to divest themselves of their
investments in these securities.
Zero Coupon and Pay-in-Kind Securities
Series C may invest in zero coupon securities and pay-in-kind securities. In
addition, Series C may invest in STRIPS (Separate Trading of Registered Interest
and Principal of Securities). Zero coupon or deferred interest securities are
debt obligations that do not entitle the holder to any periodic payment of
interest prior to maturity or a specified date when the securities begin paying
current interest (the "cash payment date") and therefore are issued and traded
at a discount from their face amounts or par value. The discount varies,
depending on the time remaining until maturity or cash payment date, prevailing
interest rates, liquidity of the security and the perceived credit quality of
the issuer. The discount, in the absence of financial difficulties of the
issuer, decreases as the final maturity or cash payment date of the security
approaches. STRIPS are created by the Federal Reserve Bank by separating the
interest and principal components of an outstanding U.S. Treasury bond and
selling them as individual securities. The market prices of zero coupon, STRIPS
and deferred interest securities generally are more volatile than the market
prices of securities with similar maturities that pay interest periodically and
are likely to respond to changes in interest rates to a greater degree than do
non-zero coupon securities having similar maturities and credit quality.
The risks associated with lower-rated debt securities apply to these securities.
Zero coupon and pay-in-kind securities are also subject to the risk that in the
event of a default, Series C may realize no return on its investment, because
these securities do not pay cash interest.
Convertibles
A convertible bond or convertible preferred stock gives the holder the option of
converting these securities into common stock. Some convertible securities
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
Warrants
Warrants allow the holder to subscribe for new shares in the issuing company
within a specified time period, according to a predetermined formula governing
the number of shares per warrant and the price to be paid for those shares.
Warrants may be issued separately or in association with a new issue of bonds,
preferred stock, common stock or other securities.
Covered warrants allow the holder to purchase existing shares in the issuing
company, or in a company associated with the issuer, or in a company in which
the issuer has or may have a share stake which covers all or part of the
warrants' subscription rights.
When-Issued or Delayed-Delivery Securities
During any period that Series C has outstanding a commitment to purchase
securities on a when-issued or delayed-delivery basis, Series C will maintain a
segregated account consisting of cash, U.S. Government securities or other
high-quality debt obligations with its custodian bank. To the extent that the
market value of securities held in this segregated account falls below the
amount that Series C will be required to pay on settlement, additional assets
may be required to be added to the segregated account. Such segregated accounts
could affect Series C's liquidity and ability to manage its portfolio. When
Series C 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 Series C's incurring a loss or
missing an opportunity to invest securities held in the segregated account more
advantageously. Series C 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 Series C 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.
Portfolio Turnover
Series C's policies on portfolio turnover are discussed in the prospectus.
THE ASSET ALLOCATION PROCESS
The initial allocation of the Series C Assets between the Equity Component and
the Fixed Component will be determined principally by the prevailing level of
interest rates, and the volatility of the stock market, at the beginning of the
Guaranteed Period. In periods of high interest rates, fewer Assets have to be
allocated to the Fixed Component to provide the necessary assurances for meeting
the minimum targeted rate of return.
ALIAC, with the assistance of the proprietary software program, reallocates
assets as needed between the Equity Component and the Fixed Component so that if
the value of the Equity Component were to decline by 30% in a single day, a
complete reallocation to the Fixed Component might occur to ensure that the
minimum targeted rate of return would be achieved at the end of the Guaranteed
Period. While the performance of the Equity Component may be better or worse
than the performance of major stock market indices such as the Dow Jones
Industrial Average and the Standard and Poor's 500 Stock Index, neither of those
indices has declined as much as 30% in a single day since 1929. There can be no
assurance that a decline of 30% or more will not occur during the Guaranteed
Period.
The asset allocation process will also be affected by ALIAC's ability to manage
the Fixed Component. If the Fixed Component provides a return better than that
assumed by the proprietary software model, less Assets will have to be allocated
to the Fixed Component. On the other hand, if the Fixed Component performance is
poorer than expected (as might happen if there were a default on one or more
securities held in the Fixed Component), more Assets would have to be allocated
to the Fixed Component, and the ability of Series C to participate in any
subsequent upward movement in the equities market would be more limited. The
process of asset reallocation results in additional transaction costs such as
brokerage commissions. To moderate such costs, ALIAC has built into the
proprietary software program a factor which will require reallocations only when
Equity Component and Fixed Component values have deviated by more than certain
minimal amounts since the last reallocation.
TRUSTEES AND OFFICERS OF THE TRUST
The investments and administration of the Trust are under the direction of the
Board of Trustees. The Trustees and executive officers of the Trust and their
principal occupations for the past five years are listed below. Those Trustees
who are "interested persons," as defined in the 1940 Act, are indicated by an
asterisk (*). All Trustees and officers hold similar positions with other
investment companies in the same Fund Complex managed by ALIAC as the investment
adviser. The Fund Complex presently consists of Aetna Series Fund, Inc., Aetna
Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment
Advisers Fund, Inc., Aetna GET Fund (Series B), Aetna Generation Portfolios,
Inc. and Aetna Variable Portfolios, Inc.
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupation During Past Five Years
Position(s) (and Positions held with Affiliated Persons
Held with or Principal Underwriters of the
Name, Address and Age Registrant Registrant)
Shaun P. Mathews* Trustee and Chief Executive, Aetna Investment Services,
151 Farmington Avenue President Inc., October, 1995 to Present; President,
Hartford, Connecticut Aetna Investment Services, Inc., March, 1994
Age 40 to Present; Director and Chief Operating
Officer, Aetna Investment Services, Inc.,
July 1993 to Present; Director and
Senior Vice President, Aetna Insurance
Company of America, February 1993
to Present; Senior Vice President and
Director of Aetna Life Insurance and
Annuity Company ("ALIAC"), March 1991 to
Present; Vice President of Aetna Life
Insurance Company, 1991 to Present.
J. Scott Fox Vice President Director, Managing Director, Chief Operating
242 Trumbull Street and Treasurer Officer, Chief Financial Officer and
Hartford, Connecticut Treasurer, Aeltus Investment Management, Inc.
Age 41 (Aeltus), April 1994 to present; Managing
Director and Treasurer, Equitable Capital
Management Corp., March 1987 to September
1993; Director and Chief Financial Officer,
Aeltus Capital, Inc. and Aeltus Trust
Company Inc.; Director, President and Chief
Executive Officer, Aetna Investment
Management, (Bermuda) Holding, Ltd.
Susan E. Bryant Secretary Counsel, ALIAC and Aetna Inc., March 1993
151 Farmington Avenue to Present; General Counsel and Corporate
Hartford, Connecticut Secretary, First Investors Corporation,
Age 48 April 1991 to March 1993.
Morton Ehrlich Trustee Chairman and Chief Executive Officer,
1000 Venetian Way Integrated Management Corp. (an entrepre-
Miami, Florida neurial company) and Universal Research
Age 61 Technologies, January 1992 to Present;
Director and Chairman, Audit Committee,
National Bureau of Economic Research,
1985 to 1992; President, LIFECO Travel
Services Corp., October 1988 to December
1991.
Maria T. Fighetti Trustee Attorney, New York City Department of
325 Piermont Road Mental Health, 1973 to Present.
Closter, New Jersey
Age 53
David L. Grove Trustee Private Investor; Economic/Financial Con-
5 The Knoll sultant, December 1988 to Present.
Armonk, New York
Age 77
Timothy A. Holt* Trustee Director, Aeltus, April, 1996 to Present.
151 Farmington Avenue Director, Senior Vice President and Chief
Hartford, Connecticut Financial Officer, ALIAC, February 1996 to
Age 43 Present; Senior Vice President, Business
Strategy & Finance, Aetna Retirement
Services, Inc., February 1996 to Present;
Vice President, Portfolio Management/
Investment Group, Aetna Inc., August 1992
to February 1996.
Daniel P. Kearney* Trustee Chairman (since February 1996), Director
151 Farmington Avenue (since March 1991) and President (since
Hartford, Connecticut March 1994), ALIAC; Executive Vice President
Age 57 (since December 1993), and Group Executive,
Investment Division (from February 1991 to
December 1993), Aetna Inc. Director, Aeltus,
April, 1996 to Present.
Sidney Koch Trustee Senior Adviser, Hambro America, Inc.,
455 East 86th Street January, 1993 to Present; Senior Adviser,
New York, New York Daiwa Securities America, Inc. January 1991
Age 60 to January 1993.
Corine T. Norgaard** Trustee, Chair Dean of the School of Management, State
School of Management Audit Committee University of New York (Binghamton), August
Binghamton University and Contract 1993 to Present; Professor, Accounting,
Binghamton, New York Committee University of Connecticut (Storrs,
Age 59 Connecticut), September 1969 to June 1993;
Director, The Advest Group, Inc. (holding
company for brokerage firm) from August,
1983 to Present.
Richard G. Scheide Trustee Private Banking Consultant, July 1992 to
11 Lily Street Present; Consultant, Fleet Bank, from July
Nantucket, Massachusetts 1991 to July 1992.
Age 67
<FN>
** Dr. Norgaard is a director of a holding company that has as a
subsidiary a broker-dealer that sells Contracts for ALIAC. Series C is offered
as an investment option under the Contracts. Her position as a Trustee of the
holding company may cause her to be an "interested person" for purposes of the
1940 Act.
</TABLE>
During the year ended December 31, 1995, members of the Boards of the Funds
within the Aetna Fund Complex who are also directors, officers or employees of
Aetna Inc. and its affiliates were not entitled to any compensation from the
Funds. Effective November 1, 1995, members of the Boards who are not affiliated
as employees of Aetna or its subsidiaries are entitled to receive an annual
retainer of $30,000 for service on the Boards of the Funds within the Aetna
Fund Complex. In addition, each such member will receive a fee of $5,000 per
meeting for each regularly scheduled Board meeting; $5,000 for each
Contract Committee meeting which is held on any day on which a regular Board
meeting is not scheduled; and $3,000 for each committee meeting other than
for a Contract Committee meeting on any day on which a regular Board meeting is
not scheduled. A Committee Chairperson fee of $2,000 each will be paid to the
Chairperson of the Contract and Audit Committees. All of the above fees are to
be allocated proportionately to each Fund within the Aetna Fund Complex based on
the net assets of the Fund as of the date compensation is earned.
<TABLE>
<CAPTION>
<S> <C> <C>
Total Compensation from
Aggregate Compensa- Registrant and Fund
Name of Person, Position tion from Registrant Complex Paid to Trustees
Corine Norgaard $-0- $51,000
Trustee and Chairman,
Audit and Contract Committees
Sidney Koch $-0- $47,000
Trustee and Member,
Audit and Contract Committees
Maria T. Fighetti $-0- $46,000
Trustee and Member,
Audit and Contract Committees
Morton Ehrlich $-0- $46,000
Trustee and Member,
Audit and Contract Committees
Richard G. Scheide $-0- $46,500
Trustee and Member,
Audit and Contract Committees
David L. Grove $-0- $46,500*
Trustee and Member,
Audit and Contract Committees
<FN>
* Mr. Grove elected to defer all such compensation.
</TABLE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
Shares of Series C will be owned by ALIAC as the depositor of separate accounts
which are used to fund variable annuity contracts ("VA Contracts") and variable
life insurance policies ("VLI Policies"). It is currently expected that all
shares will be held by separate accounts of ALIAC. See "Voting Rights" below.
ALIAC is an indirect wholly-owned subsidiary of Aetna Retirement Services,
Inc., which is in turn an indirect wholly-owned subsidiary of Aetna Inc.
ALIAC's principal office is located at 151 Farmington Avenue, Hartford,
Connecticut 06156. ALIAC is registered with the SEC as an investment adviser and
manages over $22 billion in assets.
THE INVESTMENT ADVISORY AGREEMENT
On June 18, 1996, the Trust's Board of Trustees approved an investment advisory
agreement (Investment Advisory Agreement) between the Trust and ALIAC for
Series C.
Under the Investment Advisory Agreement and subject to the direction of the
Board of Trustees of the Trust, ALIAC has responsibility for (i)
supervising all aspects of the operations of Series C; (ii) selecting the
securities to be purchased, sold or exchanged by Series C or otherwise
represented in its investment portfolio, placing trades for all such securities
and regulatory reporting thereon to the Board of Trustees; (iii) formulating and
implementing continuing programs for the purchase and sale of securities; (iv)
obtaining and evaluating pertinent information about significant developments
and economic, statistical and financial data, domestic foreign or otherwise,
whether affecting the economy generally, Series C, securities held by or under
consideration for Series C, or the issuers of those securities; (v) providing
economic research and securities analyses as ALIAC considers necessary or
advisable in connection with ALIAC's performance of its duties thereunder;
(vi) obtaining the services of, contracting with, and providing instructions
to custodians and/or sub-custodians of Series C's securities, transfer
agents, dividend paying agents, pricing services and other service providers
as are necessary to carry out the terms of the Agreement; (vii) preparing
financial and performance reports, calculating and reporting daily net asset
values, and preparing any other financial data or reports, as ALIAC from
time to time, deems necessary or as is requested by the Trustees; and (viii)
taking any other actions which appear to ALIAC and the Trustees to be necessary.
The Investment Advisory Agreement provides that ALIAC shall pay (a) the
salaries, employment benefits and other related costs of those of its personnel
engaged in providing investment advice to the Trust, including, without
limitation, office space, office equipment, telephone and postage costs
and (b) any fees and expenses of all Trustees, officers and employees, if any,
of the Trust who are employees of ALIAC or an affiliated entity and any
salaries and employment benefits payable to those persons. The Investment
Advisory Agreement provides that Series C will pay (i) investment advisory fees;
(ii) brokers' commissions and certain other transaction fees including the
portion of such fees, if any, which is attributable to brokerage research
services; (iii) fees and expenses of the Trust's independent auditors and
outside legal counsel; (iv) expenses of printing and distributing proxies,
proxy statements, prospectuses and reports to shareholders of the Trust,
except as such expenses may be borne by the distributor; (v) interest
and taxes; (vi) fees and expenses of those of the Trust's Trustees who are
not "interested persons" (as defined by the 1940 Act) of the Trust or ALIAC;
(vii) costs and expenses of promoting the sale of shares in Series C,
including preparing prospectuses and reports to shareholders of the Trust;
(viii) administrator, transfer agent, custodian and dividend disbursing
agent fees and expenses; (ix) fees of dividend, accounting and pricing agents
appointed by Series C; (x) fees payable to the SEC or in connection with the
registration of shares of Series C under the laws of any state or territory of
the United States or the District of Columbia; (xi) fees and assessments of the
Investment Company Institute or other association memberships approved by the
Board of Trustees; (xii) such nonrecurring or extraordinary expenses as may
arise; (xiii) all other ordinary business expenses incurred in the operations of
Series C, unless specifically allocable otherwise by the Investment Advisory
Agreement; (xiv) costs attributable to investor services, administering
shareholder accounts and handling shareholder relations; (xv) all expenses
incident to the payment of any dividend, distribution, withdrawal or
redemption; and (xvi) insurance premiums on property or personnel (including
officers and Trustees) of the Trust which benefit the Trust. Some of the
costs payable by Series C under the Investment Advisory Agreement are being
assumed by ALIAC under the terms of the Administrative Services Agreement
(see "Administrative Services Agreement").
The Investment Advisory Agreement provides that it will remain in effect from
year-to-year if approved annually by a majority vote of the Trustees, including
a majority of the Trustees who are not "interested persons," in person at a
meeting called for that purpose. The Investment Advisory Agreement may be
terminated as to Series C without penalty at any time on sixty days' written
notice by (i) the Trustees, (ii) a majority vote of the outstanding voting
securities of Series C, or (iii) ALIAC. The Investment Advisory Agreement
terminates automatically in the event of assignment.
The service mark of Series C and the name "Aetna" have been adopted by the Trust
with the permission of Aetna Inc. and their continued use is subject to the
right of Aetna Inc. to withdraw this permission in the event ALIAC or
another subsidiary or affiliated corporation of Aetna Inc. should not be the
investment adviser of Series C.
THE SUBADVISORY AGREEMENT
On June 18, 1996, the Trust's Board of Trustees approved a sub-advisory
agreement (Sub-Advisory Agreement) between ALIAC and Aeltus Investment
Management, Inc. (Aeltus) with respect to Series C. The Subadvisory Agreement
remains in effect from year-to-year if approved annually by a majority vote of
the Trustees, including a majority of the Trustees who are not "interested
persons," in person, at a meeting called for that purpose. The Subadvisory
Agreement may be terminated without penalty at any time on sixty days' written
notice by (i) the Trustees, (ii) a majority vote of the outstanding
voting securities of Series C, (iii) ALIAC, or (iv) Aeltus. The Subadvisory
Agreement terminates automatically in the event of its assignment or in the
event of the termination of the Investment Advisory Agreement with ALIAC.
Under the Subadvisory Agreement, Aeltus supervises the investment and
reinvestment of cash and securities comprising the assets of Series C. The
Subadvisory Agreement also directs Aeltus to (a) determine the securities to be
purchased or sold by Series C, and (b) take any actions necessary to carry out
its investment subadvisory responsibilities.
Aeltus pays the salaries, employment benefits and other related costs of
personnel engaged in providing investment advice including office space,
facilities and equipment.
As compensation, ALIAC pays the subadviser a monthly fee as described in the
prospectus.
ALIAC has certain obligations under the Subadvisory Agreement and retains
overall responsibility for monitoring the investment program maintained
by Aeltus for compliance with applicable laws and regulations and
Series C's respective investment objectives. ALIAC will also obtain and
evaluate data regarding economic trends in the United States and
industries in which Series C invests and consult with the subadviser on such
data and trends. In addition, ALIAC will consult with and assist the
subadviser in maintaining appropriate policies, procedures and
records and oversee matters relating to promotion, marketing materials and
reports by the subadviser to the Trust's Board of Trustees.
THE ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to an Administrative Services Agreement, between the Trust and ALIAC,
ALIAC has agreed to provide all administrative services in support of Series C.
In addition, ALIAC has agreed to pay on behalf of Series C, all ordinary
recurring direct costs of the Portfolio that it would otherwise be required to
pay under the terms of the Investment Advisory Agreement except brokerage costs
and other transaction costs in connection with the purchase and sale of
securities for its portfolios (Transaction Costs). As a result, Series C's costs
and fees are limited to its advisory fee, the administrative services charge and
Transaction Costs. For the services under the Administrative Services Agreement,
ALIAC will receive an annual fee, payable monthly, at a rate of 0.15% of the
average daily net assets of Series C.
The Administrative Services Agreement will remain in effect until December 31,
1997. It will then remain in effect from year-to-year if approved annually by a
majority of the Trustees. It may be terminated by either party on sixty days'
written notice.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, PA, 15258 serves as
custodian for the assets of Series C. The custodian does not participate in
determining the investment policies of Series C or in deciding which securities
are purchased or sold by Series C. Series C, 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, Hartford, Connecticut 06103 will serve as independent
auditors to Series C. KPMG Peat Marwick LLP provides audit services, assistance
and consultation in connection with SEC filings.
PRINCIPAL UNDERWRITER
ALIAC has agreed to use its best efforts to distribute the shares as the
principal underwriter of Series C pursuant to an Underwriting Agreement between
it and the Trust. The Agreement was approved on June 18, 1996 to continue
through December 31, 1997. The Underwriting Agreement may be continued
from year to year if approved annually by the Trustees or by a vote of
holders of a majority of Series C's shares, and by a vote of a majority
of the Trustees who are not "interested persons," as that term is defined in
the 1940 Act, of ALIAC, and who are not interested persons of the Trust,
appearing in person at a meeting called for the purpose of approving such
Agreement. This Agreement terminates automatically upon assignment, and may
be terminated at any time on sixty (60) days' written notice by the Trustees
or ALIAC or by vote of holders of a majority of Series C's shares without the
payment of any penalty.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Trustees, ALIAC and Aeltus have responsibility
for making Series C's investment decisions, for effecting the execution of
trades for Series C and for negotiating any brokerage commissions thereof. It is
the policy of ALIAC and Aeltus to obtain the best quality of execution
available, giving attention to net price (including commissions where
applicable), execution capability (including the adequacy of a brokerage
firm's capital position), research and other services related to execution; the
relative priority given to these factors will depend on all of the circumstances
regarding a specific trade.
In implementing their trading policy, ALIAC and Aeltus may place Series C's
transactions with such brokers or dealers and for execution in such markets as,
in the opinion of the Trust, will lead to the best overall quality of execution
for Series C.
ALIAC and Aeltus currently receive a variety of brokerage and research services
from brokerage firms in return for the execution by such brokerage firms of
trades in securities held by Series C. 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 Series C
and other investment companies and accounts, services related to the execution
of trades in Series C's securities and advice as to the valuation of securities.
ALIAC and Aeltus consider the quantity and quality of such brokerage and
research services provided by a brokerage firm along with the nature and
difficulty of the specific transaction in negotiating commissions for trades in
Series C'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. ALIAC's and Aeltus' policy in selecting a broker to effect a
particular transaction is to seek to obtain "best execution," which means prompt
and efficient execution of the transaction at the best obtainable price with
payment of commissions which are reasonable in relation to the value of the
services provided by the broker, taking into consideration research and other
services provided. When either ALIAC or Aeltus believes that more than one
broker can provide best execution, preference may be given to brokers
who provide additional services to ALIAC or Aeltus.
Consistent with securities laws and regulations, ALIAC and Aeltus may obtain
such brokerage and research services regardless of whether they are paid for (1)
by means of commissions; or (2) by means of separate, non-commission payments.
ALIAC's and Aeltus' judgment as to whether and how they will obtain the specific
brokerage and research services will be based upon their analysis of the quality
of such services and the cost (depending upon the various methods of payment
which may be offered by brokerage firms) and will reflect ALIAC's and Aeltus'
opinion as to which services and which means of payment are in the long-term
best interests of Series C. Series C has no present intention to effect any
brokerage transactions in portfolio securities with ALIAC or any affiliate of
Series C or ALIAC except in accordance with applicable SEC rules. All
transactions will comply with Rule 17e-1 under the 1940 Act.
Certain officers of ALIAC and Aeltus also manage the securities portfolios of
ALIAC's own accounts. Further, ALIAC and Aeltus also act as investment adviser
to other investment companies registered under the 1940 Act and other client
accounts. ALIAC and Aeltus have adopted policies designed to prevent
disadvantaging Series C in placing orders for the purchase and sale of
securities for Series C.
To the extent ALIAC or Aeltus desires to buy or sell the same publicly traded
security at or about the same time for more than one client, the purchases or
sales will normally be allocated as nearly as practicable on a pro rata basis
in proportion to the amounts to be purchased or sold by each, taking into
consideration the respective investment objectives of the clients, the relative
size of portfolio holdings of the same or comparable securities, availability of
cash for investment, and the size of their respective investment commitments.
Orders for different clients received at approximately the same time may be
bunched for purposes of placing trades, as authorized by regulatory directives.
Prices are averaged for those transactions. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by Series
C or the price paid or received by Series C.
The Board of Trustees has adopted a policy allowing trades to be made between
registered investment companies provided they meet the terms of Rule 17a-7 under
the 1940 Act. Pursuant to this policy, Series C may buy a security from or sell
another security to another registered investment company advised by ALIAC.
Most purchases and sales of securities for the Fixed Component are made in
principal transactions and do not include payment of brokerage commissions.
Purchases and sales of securities for the Equity Component do involve the
payment of brokerage commissions.
The Board of Trustees has also adopted a Code of Ethics governing personal
trading by persons who manage, or who have access to trading activity by, Series
C. The Code allows trades to be made in securities that may be held by Series C,
however, it prohibits a person from taking advantage of Series C trades or from
acting on inside information. ALIAC and Aeltus have adopted Codes of Ethics
which the Board of Trustees of the Trust reviews annually.
DESCRIPTION OF SHARES
Aetna GET Fund was established under the laws of Massachusetts on March 9, 1987.
The Trust's Declaration of Trust (Declaration) permits the Trustees to issue an
unlimited number of transferable full and fractional shares of beneficial
interest without par value of a single class, each of which represents a
proportionate interest in Series C equal to each other share (see discussion in
the Prospectus under "Capital Stock"). The Trustees have the power to divide or
combine the shares of a particular series into a greater or lesser number of
shares without thereby changing the proportional beneficial interest in Series
C.
Upon liquidation of Series C, shareholders of Series C are entitled to share pro
rata in the net assets of Series C available for distribution to shareholders.
Series C shares are fully paid and nonassessable when issued.
Nothing in the Declaration protects a Trustee against any liability to which he
or she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his or her office.
SALE AND REDEMPTION OF SHARES
Shares of Series C are sold and redeemed at the net asset value next determined
after receipt of a purchase or redemption order in acceptable form as described
in the Prospectus under "Sale and Redemption of Shares" and "Net Asset Value."
NET ASSET VALUE
Securities of Series C are generally valued by independent pricing services. The
values for equity securities traded on registered securities exchanges are based
on the last sale price or, if there has been no sale that day, at the mean of
the last bid and asked price on the exchange where the security is principally
traded. Securities traded over the counter are valued at the 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. Long-term debt securities 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.
Options are valued at the mean of the last bid and asked price on the exchange
where the option is primarily traded. Stock index futures contracts and interest
rate futures contracts are valued daily at a settlement price based on rules of
the exchange where the futures contract is primarily traded.
TAX STATUS
The following is only a summary of certain additional tax considerations
generally affecting Series C and its shareholders which are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of Series C or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
Series C has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, Series C 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) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described in this section. Distributions by Series C made during
the taxable year or, under specified circumstances, within twelve months after
the close of the taxable year, will be considered distributions of income and
gains of the taxable year and can therefore satisfy the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement"); and (2) derive less than 30% of its gross
income (exclusive of certain gains on designated hedging transactions that are
offset by realized or unrealized losses on offsetting positions) from the
sale or other disposition of stock, securities or foreign currencies (or
options, futures or forward contracts thereon) held for less than three months
(the "Short-Short Gain Test"). For purposes of these calculations, gross income
includes tax-exempt income. However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, Series C may have to
limit the sale of appreciated securities that it has held for less than three
months. However, the Short-Short Gain Test will not prevent Series C from
disposing of investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this purpose.
Interest (including original issue discount) received by Series C at maturity or
upon the disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income that
is attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by Series C on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of a
debt obligation (including municipal obligations) purchased by Series C 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 Series C 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 (unless Series C
elects otherwise), will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss recognized
by Series C on the disposition of an asset is long-term or short-term, the
holding period of the asset may be affected if (1) 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, (2) the asset
is otherwise held by Series C as part of a "straddle" (which term generally
excludes a situation where the asset is stock and Series C grants a qualified
covered call option (which, among other things, must not be deep-in- the-money)
with respect thereto) or (3) the asset is stock and Series C grants an
in-the-money qualified covered call option with respect thereto. However, for
purposes of the Short-Short Gain Test, the holding period of the asset disposed
of may be reduced only in the case of clause (1) above. In addition, Series C
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 Series C on the lapse of, or any gain or loss recognized
by Series C from a closing transaction with respect to, an option written by
Series C will be treated as a short-term capital gain or loss. For purposes of
the Short-Short Gain Test, the holding period of an option written by Series C
will commence on the date it is written and end on the date it lapses or the
date a closing transaction is entered into. Accordingly, Series C may be
limited in its ability to write options which expire within three months and to
enter into closing transactions at a gain within three months of the
writing of options.
Transactions that may be engaged in by Series C (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
contracts." Section 1256 contracts are treated as if they are sold for their
fair market value on the last day of the taxable year, even though a taxpayer's
obligations (or rights) under such contracts have not terminated (by delivery,
exercise, entering into a closing transaction or otherwise) as of such date. Any
gain or loss recognized as a consequence of the year-end deemed disposition of
Section 1256 contracts is taken into account for the taxable year together with
any other gain or loss that was previously recognized 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. Series C, 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 Series C that are not Section 1256
contracts. The IRS has held in several private rulings that gains arising from
Section 1256 contracts will be treated for purposes of the Short-Short Gain Test
as being derived from securities held for not less than three months if the
gains arise as a result of a constructive sale under Code Section 1256, provided
that the contract is actually held by the Portfolio uninterrupted for a total of
at least three months.
Because only a few regulations regarding the treatment of swap agreements and
other financial derivatives have been issued, the tax consequences of
transactions in these types of instruments are not always entirely clear. The
Trust 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 Series C as a regulated investment
company and/or its compliance with the diversification requirement under Code
Section 817(h) might be affected. The Trust intends to monitor developments in
this area. Certain requirements that must be met under the Code in order for
Series C to qualify as a regulated investment company may limit the extent to
which it will be able to engage in swap agreements.
Series C may purchase securities of certain foreign investment funds or trusts
which constitute passive foreign investment companies ("PFICS") for federal
income tax purposes. If Series C invests in a PFIC, it may elect to treat the
PFIC as a qualifying electing portfolio (a "QEP") in which event Series C will
each year have ordinary income equal to its pro rata share of the PFIC's
ordinary earnings for the year and long-term capital gain equal to its pro rata
share of the PFIC's net capital gain for the year, regardless of whether Series
C receives distributions of any such ordinary earnings or capital gain from the
PFIC. If Series C does not (because it is unable to, chooses not to or
otherwise) elect to treat the PFIC as a QEP, then in general (1) any gain
recognized by Series C upon sale or other disposition of its interest in the
PFIC or any excess distribution received by Series C from the PFIC will be
allocated ratably over Series C's holding period of its interest in the PFIC,
(2) the portion of such gain or excess distribution so allocated to the year in
which the gain is recognized or the excess distribution is received shall be
included in Series C's gross income for such year as ordinary income (and
the distribution of such portion by Series C to shareholders will be taxable as
an ordinary income dividend, but such portion will not be subject to tax at the
Series C level), (3) Series C shall be liable for tax on the portions of such
gain or excess distribution so allocated to prior years in an amount equal to,
for each such prior year, (i) the amount of gain or excess distribution
allocated to such prior year multiplied by the highest tax rate (individual or
corporate) in effect for such prior year plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received at the rates and
methods applicable to underpayments of tax for such period, and (4) the
distribution by the portfolio to shareholders of the portions of such gain or
excess distribution so allocated to prior years (net of the tax payable by
Series C thereon) will again be taxable to the shareholders as an ordinary
income dividend.
Under recently proposed Treasury Regulations Series C can elect to recognize as
gain the excess, as of the last day of its taxable year, of the fair market
value of each share of PFIC stock over Series C's adjusted tax basis in that
share ("mark to market gain"). Such mark to market gain will be included by
Series C as ordinary income, such gain will not be subject to the Short-Short
Gain Test, and Series C's holding period with respect to such PFIC stock
commences on the first day of the next taxable year. If Series C makes such
election in the first taxable year it holds PFIC stock, Series C will include
ordinary income from any mark to market gain, if any, and will not incur the tax
described in the previous paragraph.
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.
In addition to satisfying the requirements described above, Series C 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 Series C's
taxable year, at least 50% of the value of Series C'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 Series C has
not invested more than 5% of the value of Series C's total assets in securities
of such issuer and as to which Series C does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or of two or more issuers which Series C controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses. Generally, an option (call or put) with respect to a security is
treated as issued by the issuer of the security not the issuer of the option.
However, with regard to forward currency contracts, there does not appear to be
any formal or informal authority which identifies the issuer of such instrument.
For purposes of asset diversification testing, obligations issued or guaranteed
by agencies or instrumentalities of the U.S. Government such as the Federal
Agricultural Mortgage Corporation, the Farm Credit System Financial Assistance
Corporation, a Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, the Government National
Mortgage Corporation, and the Student Loan Marketing Association are treated as
U.S. Government securities.
If for any taxable year Series C 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 Series C'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 Series' 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 (a "taxable year election")). Tax-exempt
interest on municipal obligations is not subject to the excise tax. The balance
of such income must be distributed during the next calendar year. For the
foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall (1) reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year; and (2) exclude foreign currency
gains and losses from Section 998 transactions incurred after October 31 of any
year (or after the end of its taxable year if it has made a taxable year
election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).
Series C 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 Series C may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Series C Distributions
Series C anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to the
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 to the extent discussed below.
Series C may either retain or distribute to the shareholders its net capital
gain for each taxable year. Series C 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 the shareholders as long-term capital gain,
regardless of the length of time the shareholders have held shares or whether
such gain was recognized by Series C prior to the date on which the shareholder
acquired the shares.
If Series C elects to retain its net capital gain, Series C will be taxed
thereon (except to the extent of any available capital loss carryovers) at the
35% corporate tax rate. Where Series C elects to retain its net capital gain, it
is expected that Series C also will elect to have shareholders of record on the
last day of its taxable year treated as if each received a distribution of its
pro rata share of such gain, with the result that each shareholder will be
required to report its pro rata share of such gain on its tax return as
long-term capital gain, will receive a refundable tax credit for its pro rata
share of tax paid by Series C on the gain, and will increase the tax basis for
its shares by an amount equal to the deemed distribution less the tax credit.
All distributions paid to ALIAC, whether characterized as ordinary income or
capital gain, are not taxable to Contract owners.
Ordinary income dividends paid by Series C with respect to a taxable year may
qualify for the dividends-received deduction generally available to corporations
(other than corporations, such as S corporations, which are not eligible for the
deduction because of their special characteristics and other than for purposes
of special taxes such as the accumulated earnings tax and the personal holding
company tax) to the extent of the amount of qualifying dividends received by
Series C from domestic corporations for the taxable year and if the shareholder
meets eligibility requirements in the Code. A dividend received by Series C will
not be treated as a qualifying dividend (1) if it has been received with respect
to any share of stock that Series C has held for less than 46 days (91 days in
the case of certain preferred stock), excluding for this purpose under the rules
of Code Section 246(c)(3) and (4): (i) any day more than 45 days (or 90 days in
the case of certain preferred stock) after the date on which the stock becomes
ex-dividend and (ii) any period during which Series C has an option to sell, is
under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of a deep-in-the-money or otherwise nonqualified option to buy,
or has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that
Series C is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property; or (3) to the extent the stock on which the dividend is paid is
treated as debt-financed under the rules of Code Section 246(a). Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed
or reduced (i) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of Series C or (ii) by application
of Code Section 246(b) which in general limits the dividends-received
deduction.
Alternative Minimum Tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate of
28% for noncorporate taxpayers and 20% for corporate taxpayers on the excess of
the taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. In addition, under the Superfund Amendments and Reauthorization Act of
1986, a tax is imposed for taxable years beginning after 1986 and before 1996 at
the rate of 0.12% on the excess of a corporate taxpayer's AMTI (determined
without regard to the deduction for this tax and the AMT net operating loss
deduction) over $2 million. For purposes of the corporate AMT and the
environmental super-fund tax (which are discussed above), the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, corporate shareholders will generally be required
to take the full amount of any dividend received from Series C into account
(without a dividends-received deduction) in determining its adjusted current
earnings, which are used in computing an additional corporate preference item
(i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings
over its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Investment income that may be received by Series C 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
Series C 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 Portfolio's assets to be invested in various countries is not known.
Distributions by Series C that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in his shares; any excess will
be treated as gain from the sale of his shares, as discussed below.
Distributions paid to shareholders are generally reinvested in additional
shares. Shareholders receiving a distribution in the form of additional shares
will be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment date. In
addition, if the net asset value at the time a shareholder purchases shares of
Series C reflects undistributed net investment income or recognized capital gain
net income, or unrealized appreciation in the value of the assets of Series C,
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 Series C 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 Series C) 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 generally will recognize gain or loss on the sale or redemption of
shares of Series C 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 Series C 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 Series C 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.
Tax Effect on Contract Owners
Owners of Contracts are taxed through prior ownership of such Contracts, as
described in ALIAC's prospectus for the applicable Contract.
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, exempt- interest
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 Series C.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (and fractional
votes for fractional shares held) and will vote in the election of Directors (to
the extent hereinafter provided) and on other matters submitted to the vote of
the shareholders. The shareholder of Series C is ALIAC for its separate accounts
using Series C to fund Contracts. ALIAC passes voting rights attributable to
shares held for the Contracts through to Contract owners as described in the
prospectus for the applicable Contract. 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, in which event
the holders of the remaining shares will be unable to elect any person as a
Trustee.
The Declaration may be amended by an affirmative vote of a majority of the
shares at any meeting of shareholders or by written instrument signed by a
majority of the Trustees and consented to by a majority of the shareholders. The
Trustees may also amend the Declaration without the vote or consent of
shareholders, if they deem it necessary to conform the Declaration to the
requirements of applicable federal laws or regulations or the requirements of
the regulated investment company provisions of the Internal Revenue Code of
1986, as amended, or to establish a new series of shares, but the Trustees shall
not be liable for failing to do so.
