As filed with the Securities and Exchange File No. 33-41694
Commission on August 2, 1999 File No. 811-6352
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
________________________________________________________________________________
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 33
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 43
AETNA SERIES FUND, INC.
________________________
10 State House Square SH11, Hartford, Connecticut 06103-3602
____________________________________________________________
(860) 275-2032
Amy R. Doberman, Counsel
Aeltus Investment Management, Inc.
10 State House Square SH11, Hartford, Connecticut 06103-3602
____________________________________________________________
(Name and Address of Agent for Service)
________________________________________________________________________________
It is proposed that this filing will become effective:
<PAGE>
Part A
The Class A, B and C Prospectus and the Class I Prospectus of Aetna Series Fund,
Inc. are incorporated into Part A of this Post-Effective Amendment No. 33 by
reference to the Fund's filing under Rule 497(j) under the Securities Act of
1933, as filed on March 1, 1999.
The Class A, B, C and I Prospectus Supplement and the Aetna Principal Protection
Fund I and Brokerage Cash Reserves Prospectuses of Aetna Series Fund, Inc. are
incorporated into Part A of this Post-Effective Amendment No. 33 by reference to
the Fund's filing under Rule 497(j) under the Securities Act of 1933, as filed
on August 2, 1999.
The Class A, B, C and I Statement of Additional Information (SAI), Aetna
Principal Protection Fund I SAI and Brokerage Cash Reserves SAI of Aetna Series
Fund, Inc. are incorporated into Part A of this Post-Effective Amendment No. 33
by reference to the Fund's filing under Rule 497(j) under the Securities Act of
1933, as filed on August 2, 1999.
<PAGE>
AETNA SERIES FUND, INC.
AETNA PRINCIPAL PROTECTION FUND II
PROSPECTUS
___________, 1999
Aetna Series Fund, Inc. is an open-end investment company authorized to issue
multiple series of shares. This prospectus offers shares of Aetna Principal
Protection Fund II (Fund). The Offering Period will run from October 7, 1999
through December 20, 1999. All monies must be received no later than December
17, 1999.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is truthful or complete. Anyone
who represents to the contrary has committed a criminal offense.
SUBJECT TO COMPLETION OR AMENDMENT
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
TABLE OF CONTENTS
PAGE
THE FUND'S INVESTMENTS....................................................1
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISKS.........1
FUND EXPENSES.............................................................3
OTHER CONSIDERATIONS......................................................4
THE GUARANTEE.............................................................4
MANAGEMENT OF THE FUND....................................................6
INVESTING IN THE FUND.....................................................7
Opening an Account and Selecting a Share Class..........................7
How to Buy Shares.......................................................9
How to Sell Shares......................................................9
Timing of Purchase and Redemption Requests.............................11
Other Information About Shareholder Accounts and Services..............11
Dividends and Distributions............................................13
Tax Information........................................................13
ADDITIONAL INFORMATION...................................................14
<PAGE>
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES
AND RISKS
Aetna Principal Protection Fund II (Fund) has both an Offering Period and a
Guarantee Period. The OFFERING PERIOD is the only time investors can invest in
the Fund. The Offering Period will run from October 7, 1999 through December 20,
1999. All applications must be received by the transfer agent no later than
December 17, 1999 (November 8, 1999 in the case of IRA rollovers). All monies
must be received no later than December 17, 1999. During the Offering Period,
Fund assets will be invested exclusively in money market securities. Once the
Offering Period terminates, the Guarantee Period begins. The GUARANTEE PERIOD
will run from December 21, 1999 through December 20, 2004 (Maturity Date).
During the Guarantee Period, all assets will be invested in accordance with the
investment objective and strategies described below. On the Maturity Date, the
Fund will distribute to each shareholder the net asset value (NAV) of his or her
shares. The Fund guarantees that the amount distributed to each shareholder will
be no less than the value of that shareholder's investment as of the inception
of the Guarantee Period (Guarantee) provided that all distributions received
from the Fund have been reinvested and no shares have been redeemed. If a
shareholder takes any distributions or dividends in cash instead of reinvesting
them, or if any shares are redeemed before the Maturity Date, the shareholder's
guaranteed amount will be reduced as more fully described below. The Fund's
Guarantee is backed by an unconditional, irrevocable guarantee pursuant to an
insurance policy issued to the Fund by MBIA Insurance Corporation (MBIA), an
AAA/Aaa rated monoline financial guarantor.
The Fund is a series of Aetna Series Fund, Inc. (Company). Investors who wish to
purchase another series of the Company (Series) may request a separate
prospectus by calling 1-800-367-7732.
INVESTMENT OBJECTIVE During the Guarantee Period, the Fund seeks to achieve
maximum total return by participating in favorable equity market performance
while preserving the principal amount of the Fund as of the inception of the
Guarantee Period.
PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, during the
Guarantee Period the Fund's assets are allocated between the following asset
classes:
[bullet] EQUITY COMPONENT, consisting primarily of common stocks and
[bullet] FIXED COMPONENT, consisting primarily of short- to
intermediate-duration U.S. Government securities.
EQUITY COMPONENT Aeltus Investment Management, Inc. (Aeltus), the investment
adviser to the Fund, invests at least 80% of the Equity Component's net assets
in stocks included in the Standard and Poor's 500 Index (S&P 500), other than
Aetna Inc. The Equity Component may also include S&P 500 futures contracts. The
S&P 500 is a stock market index comprised of common stocks of 500 of the largest
publicly traded companies in the U.S. selected by Standard and Poor's
Corporation (S&P).
Aeltus manages the Equity Component by overweighting those stocks in the S&P 500
that it believes will outperform the S&P 500 and underweighting (or avoiding
altogether) those stocks that Aeltus believes will underperform the S&P 500.
Stocks that Aeltus believes are likely to match the performance of the S&P 500
are invested in proportion to their representation in the
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<PAGE>
index. To determine which stocks to weight more or less heavily, Aeltus uses
internally developed quantitative computer models to evaluate various criteria,
such as the financial strength of each company and its potential for strong,
sustained earnings growth. At any one time, the Fund generally holds between 400
and 450 stocks included in the S&P 500. Although the Equity Component will not
hold all of the stocks in the S&P 500, Aeltus expects that there will be a close
correlation between the performance of the Equity Component and that of the S&P
500 in both rising and falling markets.
FIXED COMPONENT Aeltus looks to select investments for the Fixed Component with
financial characteristics that will, at any point in time, closely resemble
those of a portfolio of zero coupon bonds which mature within one month of the
Maturity Date. The Fixed Component will consist primarily of securities issued
or guaranteed by the U.S. Government and its agencies or instrumentalities,
including STRIPS (Separate Trading of Registered Interest and Principal of
Securities). STRIPS are created by the Federal Reserve Bank by separating the
interest and principal components of an outstanding U.S. Treasury or agency bond
and selling them as individual securities. The Fixed Component may also include
corporate bonds rated AA- or higher by S&P and/or Aa3 or higher by Moody's
Investors Services, Inc., futures on U.S. Treasury securities and money market
instruments.
ASSET ALLOCATION Aeltus uses a proprietary computer model to determine, on an
ongoing basis, the percentage of assets allocated to the Equity Component and to
the Fixed Component in an attempt to meet the investment objective. The model
evaluates a number of factors, including, but not limited to:
[bullet] the market value of the Fund's assets;
[bullet] the prevailing level of interest rates;
[bullet] equity market volatility; and
[bullet] the length of time remaining until the Maturity Date.
The model will determine the initial allocation between the Equity Component and
the Fixed Component on December 21, 1999 and will evaluate the allocations on a
daily basis thereafter. Generally, as the market value of the Equity Component
rises, more assets are allocated to the Equity Component, and as the market
value of the Equity Component declines, more assets are allocated to the Fixed
Component.
PRINCIPAL RISKS The principal risks of investing in the Fund are those
generally attributable to stock and bond investing. The success of the Fund's
strategy depends on Aeltus' skill in allocating assets between the Equity
Component and the Fixed Component and in selecting investments within each
component. BECAUSE THE FUND INVESTS IN BOTH STOCKS AND BONDS, THE FUND MAY
UNDERPERFORM STOCK FUNDS WHEN STOCKS ARE IN FAVOR AND UNDERPERFORM BOND FUNDS
WHEN BONDS ARE IN FAVOR.
The risks associated with investing in STOCKS include sudden and unpredictable
drops in the value of the market as a whole and periods of lackluster or
negative performance. The performance of the Equity Component also depends
significantly on Aeltus' skill in determining which securities to overweight,
underweight or avoid altogether.
The principal risk associated with investing in BONDS is that interest rates may
rise, which generally causes bond prices to fall. The market value of a zero
coupon bond portfolio generally is more
3
<PAGE>
volatile than the market value of a portfolio of fixed income securities with
similar maturities that pay interest periodically. With corporate bonds, there
is a risk that the issuer will default on the payment of principal or interest.
If interest rates are low (particularly at the inception of the Guarantee
Period), Fund assets may be largely invested in the Fixed Component in order to
increase the likelihood of preserving the value of the Fund as of the inception
of the Guarantee Period. In addition, if during the Guarantee Period the equity
markets experienced a major decline, the Fund's assets may become largely or
entirely invested in the Fixed Component. In fact, if the value of the Equity
Component were to decline by 30% in a single day, a complete and irreversible
reallocation to the Fixed Component would occur. In this circumstance, the Fund
would not participate in any subsequent recovery in the equity markets. USE OF
THE FIXED COMPONENT REDUCES THE FUND'S ABILITY TO PARTICIPATE AS FULLY IN UPWARD
EQUITY MARKET MOVEMENTS, AND THEREFORE REPRESENTS SOME LOSS OF OPPORTUNITY, OR
OPPORTUNITY COST, COMPARED TO A PORTFOLIO THAT IS MORE HEAVILY INVESTED IN
EQUITIES.
If Fund assets do not reach $75 million by the end of the Offering Period, or in
the event of severe market volatility or adverse market conditions during the
Offering Period, the Company's Board of Directors (Board) reserves the right not
to operate the Fund in accordance with its investment objective. In that event,
the Fund will continue to be invested in money market instruments and all Fund
shareholders will be entitled to receive the greater of: (a) their initial
investment (including the amount of their Class A front-end sales load, if
applicable) or (b) the then current NAV of their shares.
If you may need access to your money at any point prior to the Maturity Date or
if you prefer to receive your dividends and distributions in cash, you should
consider the appropriateness of investing in the Fund. Redemptions made for any
reason prior to the Maturity Date will be made at NAV and are not eligible for
the Guarantee. Any distributions that you receive in the form of cash will
reduce your Guarantee proportionally.
SHARES OF THE FUND WILL RISE AND FALL IN VALUE AND YOU COULD LOSE MONEY BY
INVESTING IN THE FUND IF YOU REDEEM YOUR SHARES PRIOR TO THE MATURITY DATE.
THERE IS NO GUARANTY THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AN
INVESTMENT IN THE FUND IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY
THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
Because the Fund is new, it does not have performance information an investor
may find useful in evaluating the risks of investing in the Fund.
4
<PAGE>
FUND EXPENSES
The following tables describe the Fund's expenses. Shareholder Fees are paid
directly by shareholders. Annual Fund Operating Expenses are expressed as a
percentage of the Fund's average daily net assets, and are thus paid indirectly
by all Fund shareholders.
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum Sales Maximum Deferred Sales
Charge (Load) on Purchases Charge (Load) (as a % of
(as a % of purchase price) gross redemption proceeds)
Class A 4.75% None
Class B None 5.00%
<TABLE>
ANNUAL FUND OPERATING EXPENSES(1)
(expenses that are deducted from Fund assets)
<CAPTION>
Distribution Total Fee Waiver/
Management (12b-1) and Other Operating Expense Net
Fee Service Fees Expenses Expenses Reimbursement Expenses
<S> <C> <C> <C> <C> <C> <C>
Class A 0.65% 0.25% 0.61% 1.51% 0.01% 1.50%
Class B 0.65% 1.00% 0.61% 2.26% 0.01% 2.25%
</TABLE>
(1) Because the Fund is new, Other Expenses, shown above, are estimated. Aeltus
is contractually obligated, through the Maturity Date, to waive all or a
portion of its management fee and/or administrative services fee and/or
reimburse a portion of the Fund's other expenses in order to ensure that the
Fund's total operating expenses do not exceed the percentage of the Fund's
average daily net assets reflected in the table under Net Expenses. An
administrative services fee of 0.10% and a guarantee fee of 0.33% are
included in Other Expenses.
EXAMPLE
The following example is designed to help you compare the costs of investing in
the Fund with the costs of investing in other mutual funds. Using the annual
fund operating expenses percentages above, you would pay the following expenses
on a $10,000 investment, assuming a 5% annual return and redemption at the end
of each of the periods shown:
1 Year* 3 Years* 5 Years*
Class A $___ $___ $____
Class B $___ $___ $____
* Aeltus is contractually obligated to waive fees and/or reimburse expenses
through the Maturity Date. Therefore, all figures reflect this
waiver/reimbursement.
THIS EXAMPLE SHOULD NOT BE CONSIDERED AN INDICATION OF PRIOR OR FUTURE EXPENSES.
ACTUAL EXPENSES FOR THE CURRENT YEAR MAY BE GREATER OR LESS THAN THOSE SHOWN.
5
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OTHER CONSIDERATIONS
In addition to the principal investment strategies and risks described above,
the Fund may also invest in other securities, engage in other practices, and be
subject to additional risks, as discussed below and in the Statement of
Additional Information (SAI).
FUTURES CONTRACTS The Fund may invest in futures contracts, which provide for
the future sale by one party and purchase by another party of a specified amount
of a financial instrument or a specific stock market index for a specified price
on a designated date. The Fund uses futures to increase exposure or hedge
existing exposure to a particular asset class. The Fund may only invest in
futures contracts on the S&P 500 and U.S. Treasury securities.
The main risk with futures contracts is that they can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the futures contract.
YEAR 2000 The date-related computer issue known as the "Year 2000 problem"
could have an adverse impact on the quality of services provided to the Fund and
its shareholders. However, Aeltus understands that the Fund's key service
providers, including the transfer agent, MBIA, the custodian, and the
broker-dealers through which the Fund's trades are executed, are taking steps to
address the issue. The costs of these efforts will not affect the Fund. The Year
2000 problem also may adversely affect the issuers in which the Fund invests.
For example, issuers may incur substantial costs to address the problem. They
may also suffer losses caused by corporate and governmental data processing
errors. Aeltus will continue to monitor developments relating to this issue.
PORTFOLIO TURNOVER Portfolio turnover refers to the frequency of portfolio
transactions and the percentage of portfolio assets being bought and sold during
the year. It is expected that the Fund may have a portfolio turnover rate in
excess of 125%. A high portfolio turnover rate increases the Fund's transaction
costs and may increase your tax liability.
THE GUARANTEE
The Fund guarantees that on the Maturity Date, each shareholder will receive no
less than the Guarantee per Share amount for each share held (Guaranteed
Amount). The Guarantee per Share will equal the NAV on the last day of the
Offering Period, and thereafter will be adjusted to reflect any dividends and
distributions made by the Fund. A shareholder who automatically reinvests all
such distributions and does not redeem any shares during the Guarantee Period
will receive, on the Maturity Date, no less than his or her account value at the
inception of the Guarantee Period. The Fund's Guarantee is backed by an
unconditional and irrevocable guarantee from MBIA pursuant to an insurance
policy issueed by MBIA to the Fund. If, on the Maturity Date, the actual NAV is
less than the Guarantee per Share, MBIA will pay to the Fund for disbursement to
Fund shareholders an amount equal to this difference for every share
outstanding. See the SAI or call 1-800-367-7732 for additional details regarding
the Guarantee.
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In summary, a shareholder who maintains his or her Fund investment through the
Maturity Date, makes no redemptions, and reinvests all distributions will be
entitled to receive no less than:
[bullet] the amount initially allocated to the Fund, less
[bullet] the amount of the Class A front-end sales load paid, if any, plus
[bullet] any accrued interest earned during the Offering Period.
EXAMPLE. Assume you invested $20,000 in Class A shares when the NAV was $10.00
per share. After deducting your sales load of 4.75%, $19,050 will be invested in
Class A shares and you will have 1,905 shares in your account.
Assume further that at the end of the day preceding the inception of the
Guarantee Period (December 20, 1999), the NAV for Class A shares has increased
to $10.02. Your Guaranteed Amount is based on the NAV determined on the evening
of December 20, 1999. To calculate your full guarantee, multiply the shares you
own on December 20, 1999 by the NAV for your class of shares on December 20,
1999. Using our example:
Shares you own on December 20, 1999 1,905.000
NAV of Class A shares on December 20, 1999 X $10.02
---------
YOUR GUARANTEED AMOUNT $19,088.10
==========
YOUR GUARANTEED AMOUNT WILL NOT CHANGE DURING THE LIFE OF THE PRODUCT AS LONG AS
YOU REINVEST ALL YOUR DIVIDENDS AND DISTRIBUTIONS AND MAKE NO WITHDRAWALS PRIOR
TO THE MATURITY DATE.
REDEMPTIONS OF SHARES DURING THE GUARANTEE PERIOD WILL DECREASE THE GUARANTEED
AMOUNT TO WHICH A SHAREHOLDER IS ENTITLED. If a shareholder redeems shares in
the Fund, he or she will then hold fewer shares at the then current Guarantee
per Share, thereby reducing the Guarantee Amount for the shareholder.
Redemptions made from the Fund prior to the Maturity Date will be made at NAV,
which may be higher or lower than the NAV at the inception of the Guarantee
Period. For certain shareholders, redemptions made prior to the Maturity Date
may also be subject to a contingent deferred sales charge (CDSC).
THE GUARANTEE PER SHARE WILL DECLINE AS DIVIDENDS AND DISTRIBUTIONS ARE MADE TO
SHAREHOLDERS. If a shareholder automatically reinvests dividends and
distributions in the Fund, he or she will then hold a greater number of shares
at the reduced Guarantee per Share. The result would be to preserve the
Guaranteed Amount he or she was entitled to before the dividend or distribution
was made. If a shareholder instead elects to receive any dividends or
distributions in cash, he or she will then hold the same number of shares at the
reduced Guarantee per Share. This will reduce the Guaranteed Amount that such
shareholder was entitled to before the dividend or distribution was made.
EXAMPLE. Assume you reinvest your dividends and distributions. The number of
shares you own in the Fund will increase at each declaration date. Although the
number of shares in your account increases, and the Guarantee per Share
decreases, your Guaranteed Amount does not change.
7
<PAGE>
Using our example, assume it is now February 11, 2000 and the Fund declares a
dividend of $0.15 per share. Also, assume that the Class A NAV is $11.25 per
share at the end of the day on February 11, 2000.
To recalculate your Guarantee per Share:
1. Determine the value of your dividend. Your total dividend will equal the per
share dividend multiplied by the number of shares you own the day before the
dividend is declared. In our example, we will multiply 1,905 shares by $0.15
per share to arrive at $285.75.
2. Determine the number of shares that will get added to your account when your
dividend is reinvested. Your additional shares equal the value of your
dividend divided by the ending NAV on the day the dividend was declared. In
our case, $285.75 divided by $11.25 or 25.400 shares.
3. Adjust your account for your additional shares. Add 1,905.000 and 25.400 to
arrive at your new share balance of 1,930.400.
4. Determine your new Guarantee per Share. Take your original Guaranteed Amount
and divide by your new share balance. Using our example, divide $19,088.10 by
1,930.400 shares to arrive at the new Guarantee per Share of $9.8882.
5. YOUR GUARANTEED AMOUNT STILL EQUALS $19,088.10.
This calculation is repeated every time the Fund declares a dividend. Although
shareholders can perform this calculation themselves, the Fund will recalculate
the Guarantee per Share for each of the class of shares whenever the Fund
declares a dividend. Shareholders can obtain this information at any time by
calling 1-800-367-7732.
The Fund's Guarantee is backed by a guarantee from MBIA. The Fund will pay to
MBIA a fee equal to 0.33% of the average daily net assets of the Fund during the
Guarantee Period for providing the Guarantee.
The terms of the Guarantee Agreement prescribe the manner in which the Fund must
be managed. Accordingly, the Guarantee Agreement could limit Aeltus' ability to
alter the management of the Fund in response to changing market conditions.
See Tax Information - Taxes in Relation to the Guarantee for additional details
regarding the Guarantee.
8
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MANAGEMENT OF THE FUND
Aeltus, 10 State House Square, Hartford, Connecticut 06103-3602, serves as
investment adviser to the Fund. Aeltus is responsible for managing the assets of
the Fund in accordance with its investment objective and policies, subject to
oversight by the Board. Aeltus has acted as adviser or subadviser to mutual
funds since 1994 and has managed institutional accounts since 1972.
ADVISORY FEES For its services, Aeltus is entitled to receive an advisory fee
as set forth below. The advisory fee is expressed as an annual rate based on the
average daily net assets of the Fund.
Offering Period 0.25%
Guarantee Period 0.65%
PORTFOLIO MANAGEMENT
ASSET ALLOCATION Neil Kochen, Managing Director, Aeltus, is responsible for
overseeing the overall Fund strategy and the allocation of Fund assets between
the Equity and Fixed Components. Mr. Kochen joined the Aetna organization in
1985 and has served as head of fixed income quantitative research, head of
investment strategy and policy, and as a senior portfolio manager.
EQUITY COMPONENT Geoffrey A. Brod, Portfolio Manager, Aeltus, manages the
Equity Component. He has over 30 years of experience in quantitative
applications and has 12 years of experience in equity investments. Mr. Brod has
been with the Aetna organization since 1966.
FIXED COMPONENT The Fixed Component is managed by a team of Aeltus fixed-income
specialists.
INVESTING IN THE FUND
OPENING AN ACCOUNT AND SELECTING A SHARE CLASS
HOW TO OPEN AN ACCOUNT You may open an account either through your investment
professional or through the sponsor of your employer-sponsored retirement plan.
If you are opening an account through your investment professional, he or she
will guide you through the process of investing in the Fund. If you are
investing through a retirement plan, please refer to your plan materials.
SELECTING A CLASS
CLASS A SHARES
- --------------
[bullet] Front-end sales charge applies (at the time of purchase), which will
vary depending on the size of your purchase.
[bullet] No CDSC applies, except in certain instances when the front-end sales
charge has been waived because the aggregate investment in the Company
was at least $1 million or the purchase was through certain
participant-directed employee benefit plans.
[bullet] Distribution (12b-1) fee of 0.25% applies.
SALES CHARGES: CLASS A SHARES The table below shows the front-end sales
charges you will pay if you purchase Class A shares of the Company in any amount
up to $1 million.
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<TABLE>
<CAPTION>
THIS % IS DEDUCTED WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT FOR SALES CHARGES OF YOUR INVESTMENT
--------------------------- ----------------- ------------------
<S> <C> <C> <C>
Under $50,000 4.75% 4.99%
$50,000 or more but under $100,000 4.50% 4.71%
$100,000 or more but under $250,000 3.50% 3.63%
$250,000 or more but under $500,000 2.50% 2.56%
$500,000 or more but under $1,000,000 2.00% 2.04%
</TABLE>
CLASS A SHARES SALES CHARGE WAIVERS The Fund waives the Class A front-end sales
charge for purchases made by certain types of shareholders. See the SAI or call
1-800-367-7732 for additional details.
CDSC ON CLASS A SHARES A CDSC is not imposed on Class A shares purchased with
an aggregate investment in the Company of less than $1 million. A CDSC may be
imposed on Class A shares purchased (i) with an aggregate investment in the
Company in excess of $1 million or (ii) by certain participant-directed employee
benefit plans. The CDSC on Class A shares will apply only to shares for which a
finder's fee is paid to investment professionals pursuant to a distribution
agreement with Aeltus Capital, Inc. (ACI), the Company's principal underwriter.
The CDSC imposed (based on the lesser of the current market value or the
original cost of the shares being redeemed) is as follows:
<TABLE>
<CAPTION>
WHEN YOU INVEST THIS AMOUNT THIS % IS DEDUCTED FROM YOUR PROCEEDS
--------------------------- -------------------------------------
<S> <C> <C>
$1 million or more but under $3 million Year 1 - 1.00%
Year 2 - 0.50%
$3 million or more but under $20 million Year 1 - 0.50%
Year 2 - 0.50%
$20 million or greater Year 1 - 0.25%
Year 2 - 0.25%
</TABLE>
CLASS B SHARES
- --------------
[bullet] No front-end sales charge applies.
[bullet] CDSC applies (if you sell your shares within 5 years of purchase).
[bullet] Distribution (12b-1) fee of 0.75% applies.
[bullet] Service fee of 0.25% applies.
Investors looking to invest $250,000 or more into the Fund should be aware that
they will generally be better served by investing in Class A Shares of the Fund,
due to Class A's lower level of annual fund operating expenses. However, if an
investor looking to invest $250,000 or more into the Fund is concerned that the
NAV will be lower than the Guarantee per Share on the Maturity Date, that
investor may be better served by investing in Class B Shares.
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<PAGE>
SALES CHARGES: CLASS B SHARES The Fund imposes a CDSC on redemptions made
within the first 5 years of purchase. The table below shows the applicable CDSC
based on the time invested.
REDEMPTION DURING CDSC
----------------- ----
1st year since purchase 5%
2nd year since purchase 4%
3rd year since purchase 3%
4th year since purchase 3%
5th year since purchase 2%
OTHER POLICIES RELATING TO CHARGES AND FEES
APPLICATION OF A CDSC To determine whether a CDSC is payable on any redemption,
the Fund will FIRST redeem shares not subject to any charge, and THEN shares
held longest during the CDSC period. The CDSC is assessed on an amount equal to
the lesser of the current market value or the original cost of the shares being
redeemed.
Unless otherwise specified, when you request to sell a stated dollar amount, the
Fund will redeem additional shares to cover any CDSC. For requests to sell a
stated number of shares, the Fund will deduct the amount of the CDSC, if any,
from the sale proceeds.
WHEN THE CDSC DOES NOT APPLY The CDSC does not apply in certain situations,
including certain retirement distributions and certain redemptions made because
of disability or death. See the SAI or call 1-800-367-7732 for additional
details.
DISTRIBUTION (12B-1) Fees With respect to both its Class A and Class B shares,
the Company has adopted a Distribution Plan in accordance with Rule 12b-1 under
the Investment Company Act of 1940 that allows the Fund to pay fees for the sale
and distribution of each class of shares. The 12b-1 fees are paid out of the
Fund's assets on an ongoing basis, and as a result, over time, these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges. Some or all of the distribution (12b-1) fees may be used
to compensate your investment professional.
Service Fee The Company, with respect to its Class B shares, has adopted a
Shareholder Services Plan that allows the payment of servicing fees. The service
fee is used primarily to pay selling dealers and their agents for servicing and
maintaining shareholder accounts.
HOW TO BUY SHARES
MINIMUM INVESTMENT
All accounts, including retirement accounts, require a minimum initial
investment of $10,000.
INSTRUCTIONS FOR BUYING FUND SHARES
Please contact your investment professional or consult your plan materials
regarding the purchase
11
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of Fund shares. ALL APPLICATIONS MUST BE RECEIVED BY THE TRANSFER AGENT NO LATER
THAN DECEMBER 17, 1999 (NOVEMBER 8, 1999 IN THE CASE OF IRA ROLLOVERS). MONIES
RECEIVED AFTER DECEMBER 17, 1999 WILL NOT BE INVESTED IN THE FUND, EXCEPT UNDER
SPECIAL CIRCUMSTANCES AS DETERMINED BY THE BOARD. If you are purchasing Fund
shares through your investment professional, he or she will guide you through
the process of opening an account, as follows.
TO OPEN AN ACCOUNT
- --------------------------------------------------------------------------------
BY MAIL Complete and sign your application, make your
check payable to Aetna Series Fund, Inc. and
mail to:
Aetna Series Fund, Inc.
c/o First Data Investor Services Group, Inc.
P.O. Box 9681
Providence, RI 02940
Your check must be drawn on a bank located within
the United States, payable in U.S. dollars, and
received by the transfer agent NO LATER THAN
DECEMBER 17, 1999. Cash, credit cards and third
party checks cannot be used to open an account.
- --------------------------------------------------------------------------------
BY OVERNIGHT Follow the instructions above for "By Mail" but
COURIER send your completed application and check to:
Aetna Series Fund, Inc.
c/o First Data Investor Services Group, Inc.
4400 Computer Drive
Westborough, MA 01581
- --------------------------------------------------------------------------------
BY WIRE Not Available.
- --------------------------------------------------------------------------------
BY ELECTRONIC Not Available.
FUNDS TRANSFER
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
To redeem all or a portion of the shares in your account, you should submit a
redemption request through your investment professional, plan sponsor or as
described below. Your investment professional may charge you a fee for selling
your shares.
Redemption requests in amounts up to $25,000 may be made in writing or by
telephone. The Company requires a signature guarantee if the amount of the
redemption request is over $25,000. You may obtain a signature guarantee at most
banks and securities dealers. Please note that a notary public cannot provide a
signature guarantee.
Once your redemption request is received in good order, the Company normally
will send the proceeds of the redemption within one or two business days.
However, if making immediate payment could adversely affect the Fund, it may
defer distribution for up to seven days or a longer period if permitted. If you
redeem shares of the Fund shortly after purchasing them, the Fund will
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<PAGE>
hold payment of redemption proceeds until a purchase check clears, which may
take up to 12 calendar days. A redemption request made within 15 calendar days
after submission of a change of address is permitted only if the request is in
writing and is accompanied by a signature guarantee.
FUND SHARES MAY BE REDEEMED BY SHAREHOLDERS PRIOR TO THE MATURITY DATE. HOWEVER,
REDEMPTIONS MADE FOR ANY REASON PRIOR TO THE MATURITY DATE WILL BE MADE AT NAV
AND ARE NOT ELIGIBLE FOR THE GUARANTEE. MOREOVER, REDEMPTIONS MAY BE SUBJECT TO
A CDSC.
- --------------------------------------------------------------------------------
REDEMPTIONS BY MAIL You may redeem shares you own by sending
written instructions to:
Aetna Series Fund, Inc.
c/o First Data Investor Services Group, Inc.
P.O. Box 9681
Providence, RI 02940
Your instructions should identify:
[bullet] The number of shares or dollar amount
to be redeemed.
[bullet] Your name and account number.
Your instructions must be signed by all person(s)
required to sign for the account, exactly as the
shares are registered, and, if necessary,
accompanied by a signature guarantee(s).
- --------------------------------------------------------------------------------
REDEMPTIONS BY WIRE A minimum redemption of $1,000 is required for
wire transfers. Redemption proceeds will be
transferred by wire to your previously designated
bank account or to another destination if the
federal funds wire instructions provided with
your redemption are accompanied by a signature
guarantee. A $12 fee will be charged for this
service.
- --------------------------------------------------------------------------------
REDEMPTIONS BY Call 1-800-367-7732. Please be prepared to
TELEPHONE provide your account number, account name and the
amount of the redemption, which generally must be
no less than $500 and no more than $25,000.
- --------------------------------------------------------------------------------
TIMING OF PURCHASE AND REDEMPTION REQUESTS
Orders that are received before the close of regular trading on the New York
Stock Exchange (usually 4:00 p.m. eastern time) will be processed at the NAV
calculated that business day (adjusted for the front-end sales charge or CDSC,
if applicable). Orders received after the close of regular trading on the New
York Stock Exchange will be processed at the NAV calculated on the following
business day (adjusted for the front-end sales charge or CDSC, if applicable).
APPLICATIONS AND/OR FUNDS RECEIVED BY THE TRANSFER AGENT AFTER THE CLOSE OF
REGULAR TRADING ON THE NEW YORK STOCK EXCHANGE ON DECEMBER 17, 1999 WILL NOT BE
PROCESSED, EXCEPT UNDER SPECIAL CIRCUMSTANCES DETERMINED BY THE BOARD.
Certain institutions and financial intermediaries (Institutions) may be
designated by the Fund to accept purchase and redemption orders. If you purchase
or redeem shares through these
13
<PAGE>
Institutions, and the Institution receives your order before the close of
regular trading on the New York Stock Exchange, your shares will be purchased or
redeemed at the NAV determined that business day, subject to the applicable
front-end sales charge or CDSC.
Institutions may be authorized to designate other intermediaries to accept
purchase and redemption orders on the Fund's behalf. In those instances, the
Fund will be deemed to have received a purchase or redemption order when the
Institution's authorized designee, accepts the order.
Institutions may charge fees or assess other charges for the services they
provide to their customers. These fees or charges are retained by the
Institution and are not remitted to the Fund.
Shareholders purchasing through an Institution should refer to the Institution's
materials for a discussion of any specific instructions on the timing of or
restrictions relating to the purchase or redemption of shares.
OTHER INFORMATION ABOUT SHAREHOLDER ACCOUNTS AND SERVICES
BUSINESS HOURS The Fund is open on the same days as the New York Stock Exchange
(generally, Monday through Friday). Fund representatives are available from 8:00
a.m. to 8:00 p.m. eastern time on those days.
NET ASSET VALUE The NAV of the Fund is determined as of the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. eastern time).
In calculating the NAV, securities are valued primarily by independent pricing
services using market quotations. Short-term debt securities maturing in less
than 60 days are valued using amortized cost. Securities for which market
quotations are not readily available are valued at their fair value, subject to
procedures adopted by the Board.
EXCHANGE PRIVILEGES There is no fee to exchange shares from the Fund to another
Series of the Company. When you exchange shares, your new shares will be in the
equivalent class of your current shares. When you exchange Class B shares of the
Fund prior to the Maturity Date for Class B shares in another Series of the
Company, you will be subject to the CDSC schedule of that series, but the CDSC
will be calculated from the date of your original purchase.
There are no limits on the number of exchanges you can make. However, the Fund
may suspend or terminate your exchange privilege if you make more than five
exchanges out of the Fund in any calendar year, and the Fund may refuse to
accept any exchange request, especially if as a result of the exchange, in
Aeltus' judgment, it would be too difficult to invest effectively in accordance
with the Fund's investment objective.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund reserves the right to
reject any specific purchase or exchange request, including a request made by a
market timer.
TELEPHONE REDEMPTION PRIVILEGES You automatically receive a telephone
redemption privilege when you establish your account. If you do not want this
privilege, you may call 1-800-367-7732 to have it removed. All telephone
transactions may be recorded, and you will be asked for certain identifying
information.
14
<PAGE>
Telephone redemption requests will be accepted if the request is for a minimum
of $500 or a maximum of $25,000. Telephone redemption requests will not be
accepted if you:
[bullet] Have submitted a change of address within the preceding 15 calendar
days.
[bullet] Are selling shares in a retirement plan account held in trust.
The Fund reserves the right to amend telephone redemption privileges at any time
upon notice to shareholders and may refuse a telephone redemption if it believes
it is advisable to do so.
MINIMUM ACCOUNT BALANCE You must maintain a minimum balance of $10,000 in the
Fund. If you do not, the Fund may redeem all of your remaining shares and mail
the proceeds to you at the address of record. The Fund will not redeem shares
for failing to maintain an adequate account balance if the account balance falls
below the minimum balance only because the value of Fund shares has decreased.
ADDITIONAL SERVICES The Fund offers additional shareholder services. The Fund
reserves the right to terminate or amend these services at any time. For all of
the services, certain terms and conditions apply. See the SAI or call
1-800-367-7732 for additional information on any of these services.
[bullet] LETTER OF INTENT If, in addition to purchasing Class A shares of the
Fund, you agree to purchase a specific amount of Class A shares of one
or more Series of the Company (other than Aetna Money Market Fund) over
a period of up to 13 months, the front-end sales charge will be
calculated at the rate that would have been charged had you purchased
the entire amount all at once. You may qualify for a reduced front-end
sales charge by notifying us of your intent by completing and returning
to us the relevant portion of your application. After the Letter of
Intent is filed, each additional investment in a Series will be
entitled to the front-end sales charge applicable to the level of
investment indicated in the Letter of Intent.
[bullet] RIGHT OF ACCUMULATION/CUMULATIVE QUANTITY DISCOUNTS To determine if
you may pay a reduced front-end sales charge on Class A purchases, you
may add the amount of your current purchase to the cost or current
value, whichever is higher, of other Class A shares of other Series
(other than Aetna Money Market Fund) owned by you, your family and your
company (if you are the sole owner).
[bullet] TDD SERVICE Telecommunication Device for the Deaf (TDD) services are
offered for hearing impaired shareholders. The dedicated number for
this service is 1-800-684-4889.
[bullet] TAX-DEFERRED RETIREMENT PLANS The Fund may be used for investment by a
variety of tax-deferred retirement plans, such as individual retirement
accounts (IRAs, including Roth IRAs) and 401(k) and 403(b)(7) programs
sponsored by employers. Purchases made in connection with IRAs and
403(b)(7) accounts may be subject to an annual custodial fee of $10 for
each account registered under the same taxpayer identification number.
This fee will be deducted directly from your account(s). The custodial
fee will be waived for IRAs and 403(b)(7) accounts registered under the
same taxpayer identification number having an aggregate balance over
$30,000 at the time such fee is scheduled to be deducted. All purchase
orders in connection with IRA rollovers must be received by the
transfer agent no
15
<PAGE>
later than November 8, 1999.
DIVIDENDS AND DISTRIBUTIONS
Dividends are declared and paid annually. Capital gains distributions, if any,
are paid on an annual basis around the end of the year, December 31. To comply
with federal tax regulations, the Fund may also pay an additional capital gains
distribution, usually in June. Both income dividends and capital gains
distributions are paid by the Fund on a per share basis. As a result, at the
time of a payment, the share price (or NAV) and the Guarantee per Share of the
Fund will be reduced by the amount of the payment.
Distribution Options When completing your application, you must select one of
the following options for dividends and capital gains distributions:
[bullet] FULL REINVESTMENT Both dividends and capital gains distributions from
the Fund will be reinvested in additional shares of the same class of
shares of the Fund. This option will be selected automatically unless
the other option is specified.
[bullet] ALL CASH Dividends and capital gains distributions will be paid in
cash. If you select a cash distribution option, you can elect to have
distributions automatically invested in shares of another Series,
provided you have a minimum of $1,000 in that Series at the time of the
exchange.
AN ELECTION TO TAKE DISTRIBUTIONS IN CASH WILL REDUCE THE GUARANTEE
PROPORTIONALLY.
Distributions will be paid in additional shares based on the NAV at the close of
business on the date the distribution is declared, unless the shareholder elects
to receive such distributions in cash.
TAX INFORMATION
[bullet] In general, dividends and short-term capital gains distributions you
receive from the Fund are taxable as ordinary income.
[bullet] Distributions of capital gains you receive generally are taxable as
capital gains.
[bullet] Ordinary income and capital gains are taxed at different rates.
[bullet] The rates that you will pay on capital gains distributions will depend
on how long the Fund holds its portfolio securities. This is true no
matter how long you have owned your shares in the Fund or whether you
reinvest your distributions or take them in cash.
[bullet] The sale of shares in your account may produce a gain or loss, and
typically is a taxable event. For tax purposes, an exchange is the same
as a sale.
Every year, the Fund will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year. You should
consult your tax professional for assistance in evaluating the tax implications
of investing in the Fund.
TAXES IN RELATION TO THE GUARANTEE Any withholding of taxes on distributions by
the Fund will result in a reduction of the benefit under the Guarantee. If an
amount is paid to shareholders pursuant to the Guarantee, these amounts probably
will be taxable to shareholders. However, it is possible that such amounts could
be regarded as a tax-free return of capital.
16
<PAGE>
The Fund does not undertake to suggest to shareholders the manner in which any
payments that may be made under the Guarantee are to be treated for tax
purposes. Shareholders are specifically advised to consult their tax advisers
about the tax treatment of any payments that may be made under the Guarantee.
The Guarantee is a relatively new feature that has not previously been offered
by many other mutual funds. As a result, certain tax consequences arising from
the Guarantee are not entirely clear.
17
<PAGE>
ADDITIONAL INFORMATION
The SAI, which is incorporated by reference into this Prospectus, contains
additional information about the Fund.
You may request free of charge the current SAI, or other information about the
Fund, by calling 1-800-367-7732 or writing to:
Aetna Series Fund, Inc.
10 State House Square
Hartford, Connecticut 06103-3602
The SEC also makes available to the public reports and information about the
Fund. Certain reports and information, including the SAI, are available on the
SEC's web site (http://www.sec.gov) or at the SEC's Public Reference Room in
Washington, D.C. You may call 1-800-SEC-0330 to get information on the
operations of the Public Reference Room or you may write to Public Reference
Section, Washington, D.C. 20549-6009 to get information from the Public
Reference Section. The Public Reference Section will charge a duplicating fee
for copying and sending any information you request.
Investment Company Act File No. 811-6352.
18
<PAGE>
AETNA SERIES FUND, INC.
AETNA PRINCIPAL PROTECTION FUND II
STATEMENT OF ADDITIONAL INFORMATION DATED _________, 1999
This Statement of Additional Information (Statement) is not a Prospectus and
should be read in conjunction with the current Prospectus for the Aetna
Principal Protection Fund II, a series of the Aetna Series Fund, Inc. (Company).
Capitalized terms not defined herein are used as defined in the Prospectus. The
Company is authorized to issue multiple series of shares, each representing a
diversified portfolio of investments with different investment objectives,
policies and restrictions. This Statement applies only to the Aetna Principal
Protection Fund II (Fund).
A free copy of the Fund's Prospectus is available upon request by writing to the
Fund at: 10 State House Square, Hartford, Connecticut 06103-3602, or by calling:
(800) 367-7732.
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION..........................................................1
INVESTMENT OBJECTIVE AND RESTRICTIONS........................................2
INVESTMENT TECHNIQUES AND RISK FACTORS.......................................3
OTHER CONSIDERATIONS.........................................................9
THE ASSET ALLOCATION PROCESS.................................................9
DIRECTORS AND OFFICERS OF THE FUND..........................................10
INVESTMENT ADVISORY AGREEMENT...............................................13
THE GUARANTY AGREEMENT......................................................13
ADMINISTRATIVE SERVICES AGREEMENT...........................................14
CUSTODIAN...................................................................14
THE GUARANTOR...............................................................14
TRANSFER AGENT..............................................................14
INDEPENDENT AUDITORS........................................................15
PRINCIPAL UNDERWRITER.......................................................15
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS.........................15
PURCHASE AND REDEMPTION OF SHARES...........................................17
BROKERAGE ALLOCATION AND TRADING POLICIES...................................19
SHAREHOLDER ACCOUNTS AND SERVICES...........................................20
NET ASSET VALUE.............................................................21
TAX STATUS..................................................................21
PERFORMANCE INFORMATION.....................................................22
<PAGE>
GENERAL INFORMATION
Organization The Company was incorporated under the laws of Maryland on June 17,
1991.
Series and Classes Although the Company currently offers multiple series, this
Statement applies only to the Aetna Principal Protection Fund II (Fund). The
Board of Directors (Board) has the authority to subdivide each series into
classes of shares having different attributes so long as each share of each
class represents a proportionate interest in the series equal to each other
share in that series. Shares of the Fund are classified into two classes: Class
A and Class B. Each class of shares has the same rights, privileges and
preferences, except with respect to: (a) the effect of sales charges for each
class; (b) the distribution fees borne by each class; (c) the expenses allocable
exclusively to each class; and (d) voting rights on matters exclusively
affecting a single class.
Capital Stock Fund shares are fully paid and nonassessable when issued. Fund
shares have no preemptive or conversion rights. Each share of the Fund has the
same rights to share in dividends declared by the Fund. Upon liquidation of the
Fund, shareholders are entitled to share pro rata in the net assets of the Fund
available for distribution to shareholders.
Voting Rights Shareholders of each class are entitled to one vote for each full
share held (and fractional votes for fractional shares of each class held) and
will vote on the election of Directors and on other matters submitted to the
vote of shareholders. Generally, all shareholders have voting rights on all
matters except matters affecting only interests of one class of shares. Voting
rights are not cumulative, so that the holders of more than 50% of the shares
voting in the election of Directors can, if they choose to do so, elect all the
Directors, in which event the holders of the remaining shares will be unable to
elect any person as a Director.
The Articles 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 Board and consented to by a majority of the shareholders.
Shareholder Meetings The Company is not required, and does not intend, to hold
annual shareholder meetings. The Articles provide for meetings of shareholders
to elect Directors at such times as may be determined by the Board or as
required by the Investment Company Act of 1940, as amended (1940 Act). If
requested by the holders of at least 10% of the Company's outstanding shares,
the Company will hold a shareholder meeting for the purpose of voting on the
removal of one or more Directors and will assist with communication concerning
that shareholder meeting.
1
<PAGE>
INVESTMENT OBJECTIVE AND RESTRICTIONS
The investment objective and certain investment policies of the Fund are matters
of fundamental policy for purposes of the 1940 Act and therefore cannot be
changed without approval by the holders of the lesser of: (a) 67% of the shares
of the Fund present at a shareholders' meeting if the holders of more than 50%
of the shares then outstanding are present in person or by proxy; or (b) more
than 50% of the outstanding voting securities of the Fund.
As a matter of fundamental policy, the Fund will not:
(1) Borrow money, except that (a) the Fund may enter into certain futures
contracts; (b) the Fund may enter into commitments to purchase securities in
accordance with the Fund's investment program, including delayed delivery and
when-issued securities and reverse repurchase agreements; (c) the Fund 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 Fund may borrow money from banks (including its
custodian bank) only if, immediately after such borrowing, the value of the
Fund's assets, including the amount borrowed, less its liabilities, is equal to
at least 300% of the amount borrowed, plus all outstanding borrowings. If at any
time the value of the Fund's assets fails to meet the 300% coverage requirement
relative only to leveraging, the Fund shall, within three days (not including
Sundays and holidays), reduce its borrowings to the extent necessary to meet the
300% test.
(2) Act as an underwriter of securities except to the extent that, in
connection with the disposition of securities by the Fund for its portfolio, the
Fund may be deemed to be an underwriter under the provisions of the 1933 Act.
(3) Purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, the Fund may invest in securities secured by real estate or
interests therein or issued by companies, including real estate investment
trusts (REITs), which deal in real estate or interests therein.
(4) Make loans, except that, to the extent appropriate under its investment
program, the Fund may purchase bonds, debentures or other debt securities,
including short-term obligations and enter into repurchase transactions.
(5) Invest in commodity contracts, except that the Fund may, to the extent
appropriate under its investment program, purchase securities of companies
engaged in such activities; may enter into futures contracts and related
options, may engage in transactions on a when-issued or forward commitment
basis.
(6) With respect to 75% of its total assets, invest more than 5% of its
total assets in the securities of any one 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.
(7) Concentrate its investments in any one industry except that the Fund
may invest up to 25% of its total assets in securities issued by companies
principally engaged in any one industry. 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 as to principal and/or interest by the U.S. Government, its agencies
or instrumentalities.
Where the Fund's investment objective or policy restricts it to holding or
investing a specified percentage of its assets in any type of instrument, that
percentage is measured at the time of purchase. There will be no violation of
any investment policy or restriction if that restriction is complied with at the
time the relevant action is taken, notwithstanding a later change in the market
value of an investment, in net or total assets, in the securities rating of the
investment or any other change.
2
<PAGE>
The Fund also has adopted certain other investment policies and restrictions
reflecting the current investment practices of the Fund, which may be changed by
the Board and without shareholder vote. Under such policies and restrictions,
the Fund will not:
(1) Mortgage, pledge or hypothecate its assets except in connection with
loans of securities as described in (4) above, borrowings as described in (1)
above, and permitted transactions involving options, futures contracts and
options on such contracts.
(2) Invest in companies for the purpose of exercising control or
management.
(3) Make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction will not
be applied to limit the use of futures contracts in the manner otherwise
permitted by the investment restrictions, policies and investment programs of
the Fund.
INVESTMENT TECHNIQUES AND RISK FACTORS
Futures and Other Derivative Instruments
The Fund may use certain derivative instruments, described below and in the
Prospectus, as a means of achieving its investment objective. The Fund may
invest up to 30% of its assets in lower risk derivatives for hedging or to gain
additional exposure to certain markets for investment purposes while maintaining
liquidity to meet shareholder redemptions and minimizing trading costs.
The following provides additional information about those derivative instruments
the Fund may use.
FUTURES CONTRACTS The Fund may enter into futures contracts subject to the
restrictions described below under "Additional Restrictions on the Use of
Futures Contracts." The Fund will only enter into futures contracts on the S&P
500 Index and U.S. Treasury securities. The futures exchanges and trading in the
U.S. are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC).
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a financial instrument or a specific
stock market index for a specified price on a designated date, time, and place.
Brokerage fees are incurred when a futures contract is bought or sold and at
expiration, and margin deposits must be maintained.
Although interest rate futures contracts typically require actual future
delivery of and payment for the underlying instruments, 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 the Fund will be able to enter into an
offsetting transaction with respect to a particular contract at a particular
time. If the Fund is not able to enter into an offsetting transaction, it will
continue to be required to maintain the margin deposits on the contract.
The prices of futures contracts are volatile and are influenced by, among other
things, actual and anticipated changes in interest rates and equity prices,
which in turn are affected by fiscal and monetary policies and national and
international political and economic events. Small price movements in futures
contracts may result in immediate and
3
<PAGE>
potentially unlimited loss or gain to the Fund relative to the size of the
margin commitment. A purchase or sale of a futures contract may result in losses
in excess of the amount initially invested in the futures contract.
When using futures contracts as a hedging technique, at best, the correlation
between changes in prices of futures contracts and of the instruments or
securities being hedged can be only approximate. The degree of imperfection of
correlation depends upon circumstances such as: variations in 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 U.S. futures exchanges limit the amount of fluctuation permitted in
interest rate 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 future contracts which are intended to hedge against a change in the
value of securities held by a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
"Margin" is the amount of funds that must be deposited by the Fund with a
commodities broker in a custodian account in order to initiate futures trading
and to maintain open positions in the Fund's futures contracts. A margin deposit
is intended to assure the Fund's performance of the futures contract. The margin
required for a particular futures contract is set by the exchange on which the
contract is traded and may be significantly modified from time to time by the
exchange during the term of the contract.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy the
margin requirement, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will promptly pay the excess to the Fund. These daily payments to and
from the Fund are called variation margin. At times of extreme price volatility,
intra-day variation margin payments may be required. In computing daily net
asset values, the Fund will mark-to-market the current value of its open futures
contracts. The Fund expects to earn interest income on its initial margin
deposits.
When the Fund buys or sells a futures contract, unless it already owns an
offsetting position, it will designate cash and/or liquid securities having an
aggregate value at least equal to the full "notional" value of the futures
contract, thereby insuring that the leveraging effect of such futures contract
is minimized, in accordance with regulatory requirements.
The Fund may purchase and sell futures contracts under the following conditions:
(a) the then-current aggregate futures market prices of financial instruments
required to be delivered and purchased under open futures contracts shall not
exceed 30% of the Fund's total assets at market value at the time of entering
into a contract, (b) no more than 5%
4
<PAGE>
of the assets, at market value at the time of entering into a contract, shall be
committed to margin deposits in relation to futures contracts, and (c) the
notional value of all U.S. Treasury futures shall not exceed 50% of the market
value of all corporate bonds.
ADDITIONAL RESTRICTIONS ON THE USE OF FUTURES CONTRACTS CFTC regulations
require that to prevent the Fund from being a commodity pool, the Fund enter
into all short futures for the purpose of hedging the value of securities held,
and that all long futures positions either constitute bona fide hedging
transactions, as defined in such regulations, or have a total value not in
excess of an amount determined by reference to certain cash and securities
positions maintained, and accrued profits on such positions. As evidence of its
hedging intent, the Fund expects that at least 75% of futures contract purchases
will be "completed"; that is, upon the sale of these long contracts, equivalent
amounts of related securities will have been or are then being purchased by it
in the cash market.
Zero Coupon Securities
The Fund may invest in U.S. Treasury, agency or corporate zero coupon securities
maturing on or within 90 days preceding the Maturity Date. U.S. Treasury or
agency zero coupon securities shall be limited to non-callable, non-interest
bearing obligations and shall include STRIPS (Separate Trading of Registered
Interest and Principal of Securities); CATS (Certificates of Accrual on Treasury
Securities); TIGRs (Treasury Investment Growth Receipts) and TRs (Generic
Treasury Receipts). Zero coupon or deferred interest securities are debt
obligations that do not entitle the holder to any periodic payment of interest
prior to maturity or a specified date when the securities begin paying current
interest (the "cash payment date") and therefore are issued and traded at a
discount from their face amounts or par value. The discount varies, depending on
the time remaining until maturity or cash payment date, prevailing interest
rates, liquidity of the security and the perceived credit quality of the issuer.
The discount, in the absence of financial difficulties of the issuer, decreases
as the final maturity or cash payment date of the security approaches. The
market prices of zero coupon 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.
5
<PAGE>
Zero coupon securities issued by corporations are also subject to the risk that
in the event of a default, the Fund may realize no return on its investment.
Additional Risk Factors in Using Derivatives
In addition to any risk factors which may be described elsewhere in this
section, or in the Prospectus, the following sets forth certain information
regarding the potential risks associated with the Fund's transactions in
derivatives.
RISK OF IMPERFECT CORRELATION The Fund's ability to hedge effectively all or a
portion of its portfolio through transactions in futures on securities and
indices depends on the degree to which movements in the value of the securities
or index underlying such hedging instrument correlates with movements in the
value of the assets being hedged. If the value of the assets being hedged does
not move in the same amount or direction as the underlying security or index,
the hedging strategy for the Fund might not be successful and it 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 contract and the portfolio securities
being hedged, which could result in losses both on the hedging transaction and
the portfolio securities. In such instances, the Fund's overall return could be
less than if the hedging transactions had not been undertaken.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET Prior to exercise or expiration, a
futures position may be terminated only by entering into a closing sale
transaction, which requires a secondary market on the exchange on which the
position was originally established. While the Fund will establish a futures
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
contract at any specific time. In such event, it may not be possible to close
out a position held by the Fund which could require it 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
positions also could have an adverse impact on the Fund's ability effectively to
hedge its portfolio, or the relevant portion thereof.
The trading of futures 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 involve the risk that if Aeltus' judgment concerning the
general direction of interest rates is incorrect, the overall performance of the
Fund may be poorer than if it had not entered into any such contract. For
example, if the Fund has been hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which have been hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell bonds from
its portfolio to meet daily variation margin requirements, possibly at a time
when it may be disadvantageous to do so. Such sale of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market.
TRADING AND POSITION LIMITS Each contract market on which futures contracts are
traded has established a number of limitations governing the maximum number of
positions which may be held by a trader, whether acting alone or in concert with
others. The Company does not believe that these trading and position limits will
have an adverse impact on the hedging strategies regarding the Fund.
COUNTERPARTY RISK With some derivatives there is also the risk that the
counterparty may fail to honor its contract terms, causing a loss for the Fund.
6
<PAGE>
Foreign Securities
The Fund may invest in depositary receipts of foreign companies included in the
S&P 500. 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 are typically
American Depositary Receipts (ADRs), which are designed for U.S. investors and
held either in physical form or in book entry form. 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.
Real Estate Securities
The Fund may invest in real estate securities through interests in REITs,
provided the REIT is included in the S&P 500. REITs are trusts that sell
securities to investors and use the proceeds to invest in real estate or
interests in real estate. A REIT may focus on a particular project, such as
apartment complexes, or geographic region, or both. Investing in stocks of real
estate-related companies presents certain risks that are more closely associated
with investing in real estate directly than with investing in the stock market
generally, including: periodic declines in the value of real estate, generally,
or in the rents and other income generated by real estate; periodic
over-building, which creates gluts in the market, as well as changes in laws
(e.g. zoning laws) that impair the rights of real estate owners; and adverse
developments in the real estate industry.
Bank Obligations
The Fund may invest in obligations issued by domestic banks (including banker's
acceptances, commercial paper, bank notes, time deposits and certificates of
deposit).
Illiquid Securities
The Fund may invest 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. Securities that may be resold under Rule 144A under the Securities Act of
1933, as amended (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. Aeltus shall determine whether a particular security is deemed to
be illiquid based on the trading markets for the specific security and other
factors. Illiquid securities will not exceed 15% of net assets of the Fund.
Corporate Bonds
The Fixed Component may consist of non-callable corporate bonds, provided that
no less than 40% of the Fund's assets are allocated to the Equity Component.
Each such bond must mature within three (3) years of the Maturity Date. In
addition, each such bond must be rated AA- or higher by S&P or Aa3 or higher by
Moody's, provided that if both S&P and Moody's have issued a rating on the
security, such rating shall be no less than AA-/Aa3. If a corporate bond is
downgraded below this level, Aeltus shall divest the security within 15 business
days following the public announcement of such downgrade. No more than 2% of the
Fund's assets shall be invested in corporate debt securities of any issuer or
its affiliates at the time of investment therein.
7
<PAGE>
OTHER CONSIDERATIONS
Year 2000
As a healthcare and financial services enterprise, Aetna Inc. (referred to
collectively with its affiliates and subsidiaries as "Aetna Inc."), is dependent
on computer systems and applications to conduct its business. Aetna Inc. has
developed and is currently executing a comprehensive risk-based plan designed to
make its mission-critical information technology (IT) systems and embedded
systems Year 2000 ready. The plan for IT systems covers five stages including
(i) assessment, (ii) remediation, (iii) testing, (iv) implementation and (v)
Year 2000 approval. The remediation and testing of domestic mission-critical IT
systems has been completed. Remediation and/or testing activities remain to be
completed on approximately 1% of the systems portfolio. Final Year 2000 approval
testing for all systems is on target to complete mid-1999. The costs of these
efforts will not affect the Fund.
Aeltus and the Fund also have relationships with broker-dealers, transfer
agents, custodians or other securities industry participants or other service
providers that are not affiliated with Aetna Inc. Aetna Inc., including Aeltus,
has initiated communication with its critical external relationships, including
MBIA, to determine the extent to which Aetna Inc. may be vulnerable to such
parties' failure to resolve their own Year 2000 issues. Aetna Inc. and Aeltus
have assessed and are prioritizing responses in an attempt to mitigate risks
with respect to the failure of these parties to be Year 2000 ready. There can be
no assurance that failure of third parties to complete adequate preparations in
a timely manner, and any resulting systems interruptions or other consequences,
would not have an adverse effect, directly or indirectly, on the Fund,
including, without limitation, its operation or the valuation of its assets.
In addition, the Year 2000 problem may adversely affect issuers in which the
Fund invests. For example, issuers may incur substantial costs to address the
problem. Aeltus and the Fund will continue to monitor developments relating to
this issue.
Acceptance of Deposits During Guarantee Period
The Fund reserves the right to accept additional deposits after December 17,
1999 and to discontinue this practice at its discretion at any time.
THE ASSET ALLOCATION PROCESS
In pursuing the Fund's investment objective, Aeltus looks to allocate assets
among the Equity Component and the Fixed Component. The allocation of assets
depends on a variety of factors, including, but not limited to, the then
prevailing level of interest rates, equity market volatility, the market value
of Fund assets, and the Maturity Date. If interest rates are low (particularly
at the inception of the Guarantee Period), Fund assets may be largely invested
in the Fixed Component in order to increase the likelihood of meeting the
investment objective. In addition, if during the Guarantee Period the equity
markets experienced a major decline, the Fund's assets may become largely or
entirely invested in the Fixed Component in order to increase the likelihood of
meeting the investment objective.
The initial allocation of Fund 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 Guarantee
Period. If at the inception of the Guarantee Period interest rates are low, more
assets may have to be allocated to the Fixed Component. Aeltus will monitor the
allocation of the Fund's assets on a daily basis.
The asset allocation process will also be affected by Aeltus' ability to manage
the Fixed Component. If the Fixed Component provides a return better than that
assumed by Aeltus' proprietary model, fewer assets would have to be allocated to
the Fixed Component. On the other hand, if the performance of the Fixed
Component is poorer than
8
<PAGE>
expected, more assets would have to be allocated to the Fixed Component, and
the ability of the Fund to participate in any subsequent upward movement in
the equity market would be limited.
The process of asset reallocation results in additional transaction costs such
as brokerage commissions. To moderate such costs, Aeltus has built into its
proprietary model a factor that will require reallocations only when Equity
Component and Fixed Component values have deviated by more than certain minimal
amounts since the last reallocation.
DIRECTORS AND OFFICERS OF THE FUND
The investments and administration of the Fund are under the supervision of the
Board. The Directors and executive officers of the Fund and their principal
occupations for the past five years are listed below. Those Directors who are
"interested persons," as defined in the 1940 Act, are indicated by an asterisk
(*). Directors and officers hold the same positions with other investment
companies in the same Fund Complex: Aetna GET Fund, Aetna Variable Fund, Aetna
Income Shares, Aetna Variable Encore Fund, Aetna Balanced VP, Inc., Aetna
Generation Portfolios, Inc., and Aetna Variable Portfolios, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST FIVE YEARS (AND
NAME, POSITION(S) HELD POSITIONS HELD WITH AFFILIATED PERSONS OR
ADDRESS AND AGE WITH EACH FUND PRINCIPAL UNDERWRITERS OF THE FUND)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
J. Scott Fox* Director and President Director, Managing Director, Chief Operating
10 State House Square Officer, Chief Financial Officer, Aeltus
Hartford, Connecticut Investment Management, Inc., October 1997 to
Age 44 present; Director and Senior Vice President,
Aetna Life Insurance and Annuity Company, March
1997 to February 1998; Director, Managing Director,
Chief Operating Officer, Chief Financial Officer
and Treasurer, Aeltus, April 1994 to March 1997.
- --------------------------------------------------------------------------------------------------------------------
Wayne F. Baltzer Vice President Vice President, Aeltus Capital, Inc., May 1998 to
10 State House Square present; Vice President, Aetna Investment
Hartford, Connecticut Services, Inc., July 1993 to May 1998.
Age 56
- --------------------------------------------------------------------------------------------------------------------
Albert E. DePrince, Jr. Director Professor, Middle Tennessee State University,
3029 St. Johns Drive 1991 to present.
Murfreesboro, Tennessee
Age 58
- --------------------------------------------------------------------------------------------------------------------
Stephanie A. DeSisto Vice President, Vice President, Mutual Fund Accounting, Aeltus
10 State House Square Treasurer and Chief Investment Management, Inc., November 1995 to
Hartford, Connecticut Financial Officer present; Director, Mutual Fund Accounting, Aetna
Age 45 Life Insurance and Annuity Company, August 1994
to November 1995.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amy R. Doberman Secretary General Counsel, Aeltus Investment Management,
10 State House Square Inc., February 1999 to present; Counsel, Aetna
Hartford, Connecticut Life Insurance and Annuity Company, December 1996
Age 37 to present; Attorney, Securities and Exchange
Commission, March 1990 to November 1996.
- --------------------------------------------------------------------------------------------------------------------
Maria T. Fighetti Director Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation
Closter, New Jersey and Alcohol Services, 1973 to present.
Age 55
- --------------------------------------------------------------------------------------------------------------------
David L. Grove Director Private Investor; Economic/Financial Consultant,
5 The Knoll December 1985 to present.
Armonk, New York
Age 81
- --------------------------------------------------------------------------------------------------------------------
John Y. Kim* Director Director, President, Chief Executive Officer,
10 State House Square Chief Investment Officer, Aeltus Investment
Hartford, Connecticut Management, Inc., December 1995 to present;
Age 38 Director, Aetna Life Insurance and Annuity
Company, February 1995 to March 1998; Senior Vice
President, Aetna Life Insurance and Annuity
Company, September 1994 to present.
- --------------------------------------------------------------------------------------------------------------------
Sidney Koch Director Financial Adviser, self-employed, January 1993 to
455 East 86th Street present.
New York, New York
Age 64
- --------------------------------------------------------------------------------------------------------------------
Frank Litwin Vice President Managing Director, Aeltus Investment Management,
10 State House Square Inc., August 1997 to present; Managing Director,
Hartford, Connecticut Aeltus Capital, Inc., May 1998 to present; Vice
Age 49 President, Fidelity Investments Institutional
Services Company, April 1992 to August 1997.
- --------------------------------------------------------------------------------------------------------------------
Shaun P. Mathews* Director Director, Vice President/Senior Vice President,
151 Farmington Avenue Aetna Life Insurance and Annuity Company, March
Hartford, Connecticut 1991 to present; Director, Aetna Investment
Age 44 Services, Inc., July 1993 to present; Senior Vice
President, Aetna Investment Services, Inc., July
1993 to February, 1999.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corine T. Norgaard Director Dean of the Barney School of Business, University
556 Wormwood Hill of Hartford (West Hartford, CT), August 1996 to
Mansfield Center, Connecticut present; Professor, Accounting and Dean of the
Age 62 School of Management, SUNY Binghamton
(Binghamton, NY), August 1993 to August 1996
- --------------------------------------------------------------------------------------------------------------------
Richard G. Scheide Director Trust and Private Banking Consultant, David Ross
11 Lily Street Palmer Consultants, July 1991 to present.
Nantucket, Massachusetts
Age 70
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
During the fiscal year ended October 31, 1998, members of the Board who are also
directors, officers or employees of Aetna Inc. and its affiliates were not
entitled to any compensation from the Fund. As of October 31, 1998, the
unaffiliated members of the Board received compensation in the amounts included
in the following table. None of these Directors was entitled to receive pension
or retirement benefits.
- ------------------------------------------------------------------------------
AGGREGATE
NAME OF PERSON COMPENSATION FROM TOTAL COMPENSATION FROM THE
POSITION COMPANY COMPANY AND FUND COMPLEX
- ------------------------------------------------------------------------------
Corine Norgaard
Director $6,600 $66,000
- ------------------------------------------------------------------------------
Sidney Koch
Director $6,650 $66,500
- ------------------------------------------------------------------------------
Maria T. Fighetti*
Director $6,550 $65,500
- ------------------------------------------------------------------------------
Richard G. Scheide
Director, Chairperson
Audit Committee $7,075 $70,750
- ------------------------------------------------------------------------------
David L. Grove*
Director, Chairperson
Contract Committee $6,925 $69,250
- ------------------------------------------------------------------------------
Albert E. DePrince, Jr.
Director $3,077 $30,778
- ------------------------------------------------------------------------------
*During the fiscal year ended October 31, 1998, Ms. Fighetti and Dr. Grove
elected to defer compensation in the amount of $15,000 and $69,250,
respectively.
11
<PAGE>
INVESTMENT ADVISORY AGREEMENT
The Fund entered into an investment advisory agreement (Advisory Agreement)
appointing Aeltus as the investment adviser of the Fund. Under the Advisory
Agreement, and subject to the supervision of the Board, Aeltus has
responsibility for supervising all aspects of the operations of the Fund
including the selection, purchase and sale of securities. Under the Advisory
Agreement, Aeltus is given the right to delegate any or all of its obligations
to a subadviser. Aeltus is an indirect wholly-owned subsidiary of Aetna Life
Insurance and Annuity Company and an indirect wholly-owned subsidiary of Aetna
Inc., a publicly-owned holding company whose principal operating subsidiaries
engage in the health benefits, insurance and financial services businesses in
the U.S. and internationally.
The Advisory Agreement provides that Aeltus is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
officers or members of the Board, and that the Fund is responsible for payment
of all other of its costs.
For the services under the Advisory Agreement, Aeltus will receive an annual
fee, payable monthly, as described in the Prospectus.
The service mark of the Fund and the name "Aetna" have been adopted by the Fund
with the permission of Aetna Services, Inc. (ASI). Their continued use is
subject to the right of ASI to withdraw this permission in the event Aeltus or
another subsidiary or affiliate of Aetna Inc. should not be the investment
adviser of the Fund.
THE GUARANTY AGREEMENT
The Fund guarantees that on the Maturity Date (December 20, 2004), each
shareholder will receive no less than the Guarantee per Share for each share
held. The Guarantee per Share will equal the Net Asset Value (NAV) per share on
the last day of the Offering Period, and thereafter will be adjusted to reflect
any dividends and distributions made by the Fund. A shareholder who
automatically reinvests all dividends and distributions and does not redeem any
shares during the Guarantee Period will receive, in the aggregate, no less than
his or her account value at the inception of the Guarantee Period. The Fund's
Guarantee is backed by an unconditional and irrevocable guarantee from MBIA
Insurance Corporation (MBIA) pursuant to an insurance policy issued by MBIA
to the Fund.
MBIA, Aeltus and the Company have entered into a Financial Guaranty Agreement
specifying the rights and obligations of Aeltus and MBIA with respect to the
Fund. The Financial Guaranty Agreement is unconditional and irrevocable and will
remain in place through the Maturity Date. The Financial Guaranty Agreement
provides that, if Aeltus fails to comply with specific investment parameters as
more fully described below, MBIA may direct Aeltus to cure the breach within a
prescribed period of time. If Aeltus fails to do so, MBIA may direct trades on
behalf of the Fund in order to bring the Fund back into compliance with these
investment parameters, and consistent with the Fund's investment objective and
strategies.
Aeltus, in managing the Fund, allocates assets to the Equity and Fixed
Components. The types of securities which may be held in the Equity Component or
the Fixed Component are set forth in the Prospectus and in this Statement
(Eligible Security). In the event that Aeltus acquires a security that is not an
Eligible Security, MBIA has the right under the Financial Guaranty Agreement to
direct Aeltus to sell that security and replace it with an Eligible Security
within three business days. In the event Aeltus does not sell the security, MBIA
reserves the right to direct the Custodian to sell that security and replace it
with an Eligible Security.
The specific formula for the Fund's allocation of assets between the Fixed and
Equity Components is set forth in the Financial Guaranty Agreement. In the event
that MBIA determines that the allocation of assets is inconsistent with the
Financial Guaranty Agreement, MBIA can direct Aeltus to sell securities from the
Equity Component and replace them
12
<PAGE>
with securities for the Fixed Component. If Aeltus fails to make such trade(s)
by the next business day, MBIA reserves the right to direct the Custodian to
sell securities from the Equity Component and replace them with securities for
the Fixed Component. In the event MBIA directs the custodian to sell securities
from the Equity Component, MBIA will use reasonable efforts to first sell those
securities which caused the breach and to reinvest the proceeds therefrom into
other equity securities.
Finally, if Aeltus breaches any other terms of the Financial Guaranty Agreement,
Aeltus has 15 business days to cure the breach. If there is written notification
from MBIA of a breach and the breach remains uncured after 15 business days,
MBIA will have the right to direct the custodian to buy and sell Eligible
Securities.
After any default has been cured (whether by Aeltus or by changes in market
prices or as a result of actions taken by MBIA), MBIA has no further right to
direct the custodian with respect to that default.
ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to an Administrative Services Agreement, Aeltus acts as administrator
and provides certain administrative and shareholder services necessary for the
Fund's operations and is responsible for the supervision of other service
providers. The services provided by Aeltus include: (a) internal accounting
services; (b) monitoring regulatory compliance, such as reports and filings with
the Commission and state securities commissions; (c) preparing financial
information for proxy statements; (d) preparing semi-annual and annual reports
to shareholders; (e) calculating the NAV; (f) preparation of certain shareholder
communications; (g) supervising the custodian and transfer agent; and (h)
reporting to the Board. For its services, Aeltus is entitled to receive from the
Fund a fee at an annual rate of 0.10% of its average daily net assets.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258,
serves as custodian for the assets of the Fund. The custodian does not
participate in determining the investment policies of the Fund nor in deciding
which securities are purchased or sold by the Fund. The Fund may, however,
invest in obligations of the custodian and may purchase or sell securities from
or to the custodian.
In addition to serving as the custodian of the Fund's assets, the custodian will
monitor both the allocation of assets and the securities held within the Equity
Component and the Fixed Component and report on the same to both Aeltus and
MBIA. The custodian is authorized to accept orders from MBIA made pursuant to
the Financial Guaranty Agreement.
THE GUARANTOR
MBIA, 113 King Street, Armonk, New York 10504 serves as the Guarantor to the
Fund pursuant to a written agreement with Aeltus and the Company. The Financial
Guaranty Agreement is unconditional and irrevocable and will remain in place
through the Maturity Date. Pursuant to the terms of the Financial Guaranty
Agreement, MBIA will issue to the Fund an insurance policy to support the Fund's
Guarantee. MBIA is one of the world's premier financial guarantee companies and
a leading provider of investment management products and services. MBIA and its
subsidiaries provide financial guarantees to municipalities and other bond
issuers. MBIA also guarantees structured asset-backed and mortgage-backed
transactions, selected corporate bonds and obligations of high-quality financial
institutions.
TRANSFER AGENT
First Data Investor Services Group, Inc. 4400 Computer Drive, Westborough,
Massachusetts 01581 serves as the transfer agent and dividend-paying agent to
the Fund.
13
<PAGE>
INDEPENDENT AUDITORS
________, CityPlace II, Hartford, Connecticut 06103 serves as independent
auditors to the Fund. ________ provides audit services, assistance and
consultation in connection with the Commission filings.
PRINCIPAL UNDERWRITER
Aeltus Capital, Inc. (ACI) has agreed to use its best efforts to distribute the
shares as the principal underwriter of the Fund pursuant to an Underwriting
Agreement between it and the Fund. The Agreement was approved on ________, 1999
to continue through December 31, 1999. The Underwriting Agreement may be
continued from year to year thereafter if approved annually by the Directors and
by a vote of a majority of the Directors who are not "interested persons," as
that term is defined in the 1940 Act, of the Fund, appearing in person at a
meeting called for the purpose of approving such Agreement, or by a vote of
holders of a majority of the Fund's shares. This Agreement terminates
automatically upon assignment, and may be terminated at any time on sixty (60)
days' written notice by the Directors or by vote of holders of a majority of the
Fund's shares without the payment of any penalty.
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS
Fund shares are distributed by ACI. With respect to Class A shares of the Fund,
ACI is paid an annual distribution fee at the rate of 0.25% of the value of
average daily net assets attributable to those shares under a Distribution Plan
adopted by the Company pursuant to Rule 12b-1 under the 1940 Act ("Distribution
Plan"). With respect to Class B shares of the Fund, ACI is paid an annual
distribution fee at the rate of 0.75% of the value of average daily net assets
attributable to those shares under a Distribution Plan. The distribution fee for
a specific class may be used to cover expenses incurred in promoting the sale of
that class of shares, including (a) the costs of printing and distributing to
prospective investors Prospectuses, statements of additional information and
sales literature; (b) payments to investment professionals and other persons who
provide support services in connection with the distribution of shares; (c)
overhead and other distribution related expenses; and (d) accruals for interest
on the amount of the foregoing expenses that exceed distribution fees and
contingent deferred sales charges. The distribution fee for Class B shares may
also be used to pay the financing costs of accruing certain unreimbursed
expenses. ACI may reallow all or a portion of these fees to broker-dealers
entering into selling agreements with it, including its affiliates.
Class B shares are also subject to a Shareholder Services Plan adopted pursuant
to Rule 12b-1. Under the Shareholder Services Plan, ACI is paid a servicing fee
at an annual rate of 0.25% of the average daily net assets of the Class B shares
of the Fund. The Service Fee will be used by ACI primarily to pay selling
dealers and their agents for servicing and maintaining shareholder accounts.
ACI is required to report in writing to the Board at least quarterly on the
amounts and purpose of any payment made under the Distribution or Shareholder
Services Plan and any related agreements, as well as to furnish the Board with
such other information as may reasonably be requested in order to enable the
Board to make an informed determination whether each Plan should be continued.
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with the requirements of Rule 12b-1.
The Distribution Plans and Shareholder Services Plan continue from year to year,
provided such continuance is approved annually by vote of the Board, including a
majority of Independent Directors. The Distribution Plans may not be amended to
increase the amount to be spent for the services provided by ACI without
shareholder approval. All amendments to the Distribution Plans must be approved
by the Board in the manner described above. The Distribution Plans may be
terminated at any time, without penalty, by vote of a majority of the
Independent Directors upon not more than thirty (30) days' written notice to any
other party to the Distribution Plans. All persons who are under
14
<PAGE>
common control with the Fund could be deemed to have a financial interest in the
Plans. No other interested person of the Fund has a financial interest in the
Plans.
Other Payments to Securities Dealers
Typically, the portion of the front-end sales charge on Class A shares shown in
the following tables is paid to your securities dealer. Your securities dealer
may, however, receive up to the entire amount of the front-end sales charge.
<TABLE>
<CAPTION>
When you invest this amount Amount of sales charge typically reallowed to dealers as a percentage
of offering price
<S> <C>
Under $50,000 4.00%
$50,000 or more, but under $100,000 3.75
$100,000 or more, but under $250,000 2.75
$250,000 or more, but under $500,000 1.75
$500,000 or more, but under $1,000,000 1.25
</TABLE>
Securities dealers that sell Class A shares in amounts of $1 million or more or
that sell load-waived Class A shares to certain retirement plans will be
entitled to receive the following commissions:
Commission
----------
[bullet] on sales of $1 million to $3 million; 1.00%
[bullet] on sales over $3 million to $20 million; and 0.50%
[bullet] on sales over $20 million. 0.25%
For sales of Class B shares, your securities dealer is paid an up-front
commission equal to 4% of the amount sold. Beginning in the thirteenth month
after the sale is made, ACI uses the 0.25% servicing fee to compensate
securities dealers for providing personal services to accounts that hold Class B
shares, on a monthly basis.
These breakpoints are reset every 12 months for purposes of additional
purchases. ACI may make these payments in the form of contingent advance
payments, which may be recovered from the securities dealer or set off against
other payments due to the dealer if shares are sold within 12 months of the
calendar month of purchase. Other conditions may apply.
ACI or its affiliates may make payments in addition to those described above to
certain broker-dealers that enter into agreements providing ACI with
preferential access to representatives of the broker-dealer. These payments may
be in an amount not exceeding 0.13% of the total fund assets held in omnibus
accounts or in customer accounts that designate such firm(s) as the selling
broker-dealer.
15
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Class A shares of the Company are purchased at the NAV of the Fund next
determined after a purchase order is received less any applicable front-end
sales charge. Class B shares of the Company are purchased at the NAV of the Fund
next determined after a purchase order is received. All purchase orders must be
received by the transfer agent by no later than December 17, 1999 (November 8,
1999 in the case of IRA rollovers).
Class A shares are redeemed at the NAV of the Fund next determined adjusted for
any applicable CDSC after a redemption request is received. Class B shares are
redeemed at the NAV of the Fund next determined less any applicable contingent
deferred sales charge (CDSC) after a redemption request is received. ANY
REDEMPTIONS MADE FROM THE FUND PRIOR TO THE MATURITY DATE WILL BE MADE AT NAV,
WHICH MAY BE HIGHER OR LOWER THAN THE NAV AT THE INCEPTION OF THE GUARANTEE
PERIOD. MOREOVER, AMOUNTS REDEEMED PRIOR TO THE MATURITY DATE ARE NOT ELIGIBLE
FOR THE GUARANTEE.
Payment for shares redeemed will be made within seven days (or the maximum
period allowed by law, if shorter) after the redemption request is received in
proper form by the transfer agent. The right to redeem shares may be suspended
or payment therefore postponed for any period during which (a) trading on the
NYSE is restricted as determined by the Commission or the NYSE is closed for
other than weekends and holidays; (b) an emergency exists, as determined by the
Commission, as a result of which (i) disposal by the Fund of securities owned by
it is not reasonably practicable, or (ii) it is not reasonably practicable for
the Fund to determine fairly the value of its net assets; or (c) the Commission
by order so permits for the protection of shareholders of the Fund.
Any written request to redeem shares in amounts in excess of $25,000 must bear
the signatures of all the registered holders of those shares. The signatures
must be guaranteed by a national or state bank, trust company or a member of a
national securities exchange. Information about any additional requirements for
shares held in the name of a corporation, partnership, trustee, guardian or in
any other representative capacity can be obtained from the transfer agent.
The Fund has the right to satisfy redemption requests by delivering securities
from its investment portfolio rather than cash when it decides that distributing
cash would not be in the best interests of shareholders. However, the Fund is
obligated to redeem its shares solely in cash up to an amount equal to the
lesser of $250,000 or 1% of its net assets for any one shareholder in any 90-day
period. To the extent possible, the Fund will distribute readily marketable
securities, in conformity with applicable rules of the Commission. In the event
such redemption is requested by institutional investors, the Fund will weigh the
effects on nonredeeming shareholders in applying this policy. Securities
distributed to shareholders may be difficult to sell and may result in
additional costs to the shareholders.
Purchases should be made for investment purposes only. The Fund reserves the
right to reject any specific purchase request.
Front-end Sales Charge Waivers
The front-end sales charge will not apply if you are:
1. an employee or retired employee of Aetna Inc. (including members of the
board and members of employees', retired employees' and directors'
immediate families); or
2. a member of the Board (including members of Directors' immediate families).
16
<PAGE>
The Fund's front-end sales charge will also not apply to Class A purchases by:
3. Investors who purchase Fund shares with redemption proceeds received in
connection with a distribution from a retirement plan investing either (1)
directly in any Aeltus-advised fund or (2) in a separate account sponsored
by Aetna Life Insurance and Annuity Company (ALIAC) or any affiliate
thereof, but only if no deferred sales charge is paid in connection with
such distribution and the investor receives the distribution in connection
with a separation from service, retirement, death or disability.
4. Certain trust companies and bank trust departments agreeing to invest in
the Fund over a 13-month period at least $1 million of assets over which
the trust companies and bank trust departments have full or shared
investment discretion, provided the account(s) are not part of an omnibus
account arrangement.
5. Certain retirement plans that are sponsored by an employer with at least 25
employees and either (a) have plan assets of $1 million or more or (b)
agree to invest at least $500,000 in the Fund over a 13-month period.
6. Broker-dealers, registered investment advisers and financial planners that
have entered into a selling agreement with ACI (or otherwise having an
arrangement with a broker-dealer or financial institution with respect to
sales of Fund shares) on behalf of clients participating in advisory fee
programs.
7. Current employees of broker-dealers and financial institutions that have
entered into a selling agreement with ACI (or otherwise having an
arrangement with a broker-dealer or financial institution with respect to
sales of Fund shares) and their immediate family members, as allowed by the
internal policies of their employer.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer.
9. Shareholders of the Adviser Class of other Series at the time such shares
were redesignated as Class A shares.
Contingent Deferred Sales Charge
Certain Class A shares and all Class B shares are subject to a CDSC, as
described in the Prospectus. There is no CDSC imposed on shares purchased more
than two years (in the case of Class A shares) or five years (in the case of
Class B shares) prior to the redemption.
CDSC Waivers
The CDSC will be waived for:
[bullet] Redemptions following the death or disability of the shareholder
or beneficial owner;
[bullet] Redemptions related to distributions from retirement plans or
accounts under Internal Revenue Section 403(b) after you attain
age 70 1/2;
[bullet] Tax-free returns of excess contributions from employee benefit
plans; and
[bullet] Distributions from employee benefit plans, including those due
to plan termination or plan transfer.
Letter of Intent
You may qualify for a reduced sales charge when you buy Class A shares, as
described in the Prospectus. At any time, you may file with the Company a signed
shareholder application with the Letter of Intent section completed. After the
Letter of Intent is filed, each additional investment in the Fund (or in certain
other series of the Company) will be entitled to the sales charge applicable to
the level of investment indicated on the Letter of Intent. Sales charge
17
<PAGE>
reductions are based on purchases in the Fund (and in certain other series of
the Company) and will be effective only after notification to ACI that the
investment qualifies for a discount. Your holdings in the Fund (and in certain
other Series of the Company) acquired within 90 days of the day the Letter of
Intent is filed will be counted towards completion of the Letter of Intent and
will be entitled to a retroactive downward adjustment in the sales charge. Such
adjustment will be made by the purchase of additional shares in certain other
Series of the Company in an equivalent amount.
Five percent (5%) of the amount of the total intended purchase will be held by
the transfer agent in escrow until you fulfill the Letter of Intent. If, at the
end of the 13-month period, you have not met the terms of the Letter of Intent
an amount of shares equal to the difference owed will be deducted from your
account. Such an adjustment will be made at NAV and will not be eligible for the
Guarantee. In the event of a total redemption of the account before fulfillment
of the Letter of Intent, the additional sales charge due will be deducted from
the proceeds of the redemption, and the balance will be forwarded to you.
If the Letter of Intent is not completed within the 13-month period, there will
be an upward adjustment of the sales charge, depending on the amount actually
purchased during the period. The upward adjustment will be paid with shares
redeemed from your account.
Right of Accumulation/Cumulative Quantity Discount
A purchaser of Class A shares may qualify for a cumulative quantity discount by
combining a current purchase (or combined purchases as described above) with
certain other Class A shares of the Series already owned. To determine if you
may pay a reduced front-end sales charge, the amount of your current purchase is
added to the cost or current value, whichever is higher, of certain other Class
A shares you own, as well as certain Class A shares of your spouse and children
under the age of 21. If you are the sole owner of the Fund, you may also add any
other accounts, including retirement plan accounts invested in certain Class A
shares of the Company. Companies with one or more retirement plans may add
together the total plan assets invested in certain Class A shares of the Series
to determine the front-end sales charge that applies.
To qualify for the cumulative quantity discount on a purchase through an
investment dealer, when each purchase is made the investor or dealer must
provide the Company with sufficient information to verify that the purchase
qualifies for the privilege or discount. The shareholder must furnish this
information to the Company when making direct cash investments.
Additional Rights The Fund retains certain rights, including the rights to:
refuse orders to purchase shares; vary its requirements for initial or
additional investments, reinvestments, retirement and employee benefit plans,
sponsored arrangements and similar programs; and change or discontinue its sales
charge waivers and orders acceptance practices.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the supervision of the Board, Aeltus has responsibility for making
investment decisions, for effecting the execution of trades and for negotiating
any brokerage commissions thereon. It is Aeltus' policy to obtain the best
quality of execution available, giving attention to net price (including
commissions where applicable), execution capability (including the adequacy of a
firm's capital position), research and other services related to execution. The
relative priority given to these factors will depend on all of the circumstances
regarding a specific trade. Aeltus may also consider the sale of shares of
registered investment companies advised by Aeltus as a factor in the selection
of brokerage firms to execute the Fund's portfolio transactions, subject to
Aeltus' duty to obtain best execution.
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<PAGE>
Aeltus receives a variety of brokerage and research services from brokerage
firms in return for the execution by such brokerage firms of trades on behalf of
the Fund. These brokerage and research services include, but are not limited to,
quantitative and qualitative research information and purchase and sale
recommendations regarding securities and industries, analyses and reports
covering a broad range of economic factors and trends, statistical data relating
to the strategy and performance of the Fund and other investment companies,
services related to the execution of trades on behalf of the Fund and advice as
to the valuation of securities, the providing of equipment used to communicate
research information and specialized consultations with Fund personnel with
respect to computerized systems and data furnished to the Fund as a component of
other research services. Aeltus considers the quantity and quality of such
brokerage and research services provided by a brokerage firm along with the
nature and difficulty of the specific transaction in negotiating commissions for
trades in the Fund's securities and may pay higher commission rates than the
lowest available when it is reasonable to do so in light of the value of the
brokerage and research services received generally or in connection with a
particular transaction. Aeltus' policy in selecting a broker to effect a
particular transaction is to seek to obtain "best execution," which means prompt
and efficient execution of the transaction at the best obtainable price with
payment of commissions which are reasonable in relation to the value of the
services provided by the broker, taking into consideration research and
brokerage services provided. When the trader believes that more than one broker
can provide best execution, preference may be given to brokers that provide
additional services to Aeltus.
Research services furnished by brokers through whom the Fund effects securities
transactions may be used by Aeltus in servicing all of its accounts; not all
such services will be used by Aeltus to benefit the Fund.
Consistent with federal law, Aeltus may obtain such brokerage and research
services regardless of whether they are paid for (1) by means of commissions, or
(2) by means of separate, non-commission payments. Aeltus' judgment as to
whether and how it will obtain the specific brokerage and research services will
be based upon its analysis of the quality of such services and the cost
(depending upon the various methods of payment which may be offered by brokerage
firms) and will reflect Aeltus' opinion as to which services and which means of
payment are in the long-term best interests of the Fund.
The Fund has no present intention of effecting any brokerage transactions in
portfolio securities with Aeltus or any other affiliated person.
The Fund, another series of the Company, another advisory client of Aeltus or
Aeltus itself, may desire to buy or sell the same security at or about the same
time. In such a case, the purchases or sales will normally be aggregated, and
then allocated as nearly as practicable on a pro rata basis in proportion to the
amounts to be purchased or sold by each. In some cases the smaller orders will
be filled first. In determining the amounts to be purchased and sold, the main
factors to be considered are the respective investment objectives of the funds
and/or accounts, the relative size of portfolio holdings of the same or
comparable securities, availability of cash for investment, and the size of
their respective investment commitments. Prices are averaged for aggregated
trades.
The Board has adopted a policy allowing trades to be made between affiliated
registered investment companies or series thereof provided they meet the terms
of Rule 17a-7 under the 1940 Act.
The Board has also adopted a Code of Ethics governing personal trading by
persons who manage, or who have access to trading activity by, the Fund. The
Code of Ethics allows trades to be made in securities that may be held by the
Fund. However, it prohibits a person from taking advantage of the Fund trades or
from acting on inside information. Aeltus also has adopted a Code of Ethics,
which the Board reviews annually.
19
<PAGE>
SHAREHOLDER ACCOUNTS AND SERVICES
Shareholder Information
The Fund's transfer agent will maintain your account information. Account
statements will be sent at least quarterly. A Form 1099 generally will also be
sent each year by January 31. Annual and semiannual reports will also be sent to
shareholders. The transfer agent may charge you a fee for special requests such
as historical transcripts of your account and copies of canceled checks.
Consolidated statements reflecting current values, share balances and
year-to-date transactions generally will be sent to you each quarter. All
accounts identified by the same social security number and address will be
consolidated. For example, you could receive a consolidated statement showing
your individual and IRA accounts. With the prior permission of the other
shareholders involved, you have the option of requesting that accounts
controlled by other shareholders be shown on one consolidated statement. For
example, information on your individual account, your IRA, your spouse's
individual account and your spouse's IRA may be shown on one consolidated
statement.
Signature Guarantee
A signature guarantee is verification of the authenticity of the signature given
by certain authorized institutions. The Company requires a signature guarantee
for redemption requests in amounts in excess of $25,000. In addition, if you
wish to have your redemption proceeds transferred by wire to your designated
bank account, paid to someone other than the shareholder of record, or sent
somewhere other than the shareholder address of record, you must provide a
signature guarantee with your written redemption instructions regardless of the
amount of redemption.
The Company reserves the right to amend or discontinue this policy at any time
and establish other criteria for verifying the authenticity of any redemption
request. You can obtain a signature guarantee from any one of the following
institutions: a national or state bank (or savings bank in New York or
Massachusetts only); a trust company; a federal savings and loan association; or
a member firm of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges. Please note that signature guarantees are not provided by notaries
public.
NET ASSET VALUE
Securities of the Fund are generally valued by independent pricing services
which have been approved by the Board. 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 last sale price or, if there has been no sale that
day, at the mean of the last bid and asked price if current market quotations
are not readily available. Debt securities maturing in more than sixty days at
the date of valuation are valued at the mean of the last bid and asked price of
such securities obtained from a broker-dealer or a service providing quotations
based upon the assessment of market-makers in those securities. Debt securities
maturing in sixty days or less at the date of valuation will be valued using the
"amortized cost" method of valuation. This involves valuing an instrument at its
cost and thereafter assuming a constant amortization of premium or increase of
discount. Futures contracts are valued daily at a settlement price based on
rules of the exchange where the futures contract is primarily traded. Securities
for which market quotations are not readily available are valued at their fair
value in such manner as may be determined, from time to time, in good faith, by
or under the authority of, the Board.
20
<PAGE>
TAX STATUS
The following is only a limited discussion of certain additional tax
considerations generally affecting the Fund. No attempt is made to present a
detailed explanation of the tax treatment of the Fund and no explanation is
provided with respect to the tax treatment of any shareholder. The discussions
here and in the Prospectus are not intended as substitutes for careful tax
planning.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. If for any taxable year the Fund does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions generally will
be eligible for the dividends-received deduction in the case of corporate
shareholders.
Foreign Investments
Investment income from foreign securities may be subject to foreign taxes
withheld at the source. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets to be invested in
various countries is not known.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on the undistributed income of a
regulated investment company that fails to distribute in each calendar year an
amount equal to 98% of ordinary taxable income for the calendar year and 98% of
capital gain net income for the one-year period ended on October 31 of such
calendar year (or, at the election of a regulated investment company having a
taxable year ending November 30 or December 31, for its taxable year (taxable
year election)). 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.
The Fund intends to make sufficient distributions or deemed distributions of its
ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that the Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Taxes in Relation to the Guarantee
Any withholding of taxes on distributions by the Fund will result in a reduction
of the benefit under the Guarantee. If an amount is paid to shareholders
pursuant to the Guarantee, these amounts probably will be taxable to
shareholders. However, it is possible that such amounts could be regarded as a
tax-free return of capital.
The Fund does not undertake to suggest to shareholders the manner in which any
payments that may be made under the Guarantee are to be treated for tax
purposes. Shareholders are specifically advised to consult their tax advisers
about the tax treatment of any payments that may be made under the Guarantee.
21
<PAGE>
PERFORMANCE INFORMATION
Performance information for each class of shares, including the total return of
the Fund, may appear in reports or promotional literature to current or
prospective shareholders.
Average Annual Total Return
Quotations of average annual total return for the Fund will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Fund over a period of one and five years (or, if less, up to
the life of the Fund), calculated pursuant to the formula:
P(1 + T)(n) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = an average annual total return
n = the number of years
ERV = the ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1 or 5 year period at the end of the 1 or 5 year
period (or fractional portion thereof).
The Fund may also from time to time include in such advertising a total return
figure for Class A and/or Class B that is not calculated according to the
formula set forth above. Specifically, the Fund may include performance for
Class A that does not take into account payment of the applicable front-end
sales load, or the Company may include performance for Class B that does not
take into account the imposition of the applicable CDSC.
Performance information for the Fund may be compared, in reports and promotional
literature, to: (a) the Standard & Poor's 500 Index, the Lehman Brothers
Aggregate Bond Index, or other indices (including, where appropriate, a blending
of indices) that measure performance of a pertinent group of securities widely
regarded by investors as representative of the securities markets in general;
(b) other groups of investment companies tracked by Morningstar or Lipper
Analytical Services, widely used independent research firms that rank mutual
funds and other investment companies by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications,
or persons who rank such investment companies on overall performance or other
criteria; and (c) the Consumer Price Index (measure for inflation) to assess the
real rate of return from an investment in the Fund.
From time to time sales materials and advertisements may include comparisons of
the cost of borrowing a specific amount of money at a given loan rate over a set
period of time to the cost of a monthly investment program, over the same time
period, which earns the same rate of return. The comparison may involve
historical rates of return on a given index, or may involve performance of the
Fund.
Statement of Additional Information
22
<PAGE>
PART C
OTHER INFORMATION
-----------------
Item 23. Exhibits
- -----------------
(a.1) Articles of Amendment and Restatement (September 2,
1997)(1)
(a.2) Articles of Amendment (October 29, 1997)(2)
(a.3) Articles Supplementary (October 29, 1997)(2)
(a.4) Articles of Amendment (January 26, 1998)(3)
(a.5) Articles Supplementary (June 25, 1998)(4)
(a.6) Articles Supplementary (December 22, 1998)(5)
(a.7) Articles Supplementary (July 12, 1999)(6)
(a.8) Articles Supplementary (______________, 1999)*
(b) By-laws (as amended September 13, 1994)(7)
(c) Instruments Defining Rights of Holders (set forth in the
Articles of Amendment and Restatement)(1)
(d.1) Investment Advisory Agreement between Aeltus Investment
Management, Inc. and Aetna Series Fund, Inc., on
behalf of Aetna Balanced Fund, Aetna Bond Fund, Aetna
Growth Fund, Aetna Growth and Income Fund, Aetna
Government Fund, Aetna Index Plus Large Cap Fund, Aetna
International Fund, Aetna Money Market Fund, Aetna Small
Company Fund, Aetna Ascent Fund, Aetna Crossroads Fund,
Aetna Legacy Fund, Aetna High Yield Fund, Aetna Index Plus
Bond Fund, Aetna Index Plus Mid Cap Fund, Aetna Index Plus
Small Cap Fund, Aetna Mid Cap Fund, Aetna Real Estate
Securities Fund, and Aetna Value Opportunity Fund(5)
(d.2) Investment Advisory Agreement between Aeltus Investment
Management, Inc. and Aetna Series Fund, Inc., on behalf of
Aetna Principal Protection Fund I(6)
(d.3) Investment Advisory Agreement between Aeltus Investment
Management, Inc. and Aetna Series Fund, Inc., on behalf of
Aetna Principal Protection Fund II*
(d.4) Investment Advisory Agreement between Aeltus Investment
Management, Inc. and Aetna Series Fund, Inc., on behalf of
Brokerage Cash Reserves(6)
(d.5) Subadvisory Agreement between Aeltus Investment
Management, Inc., Aetna Series Fund, Inc., on behalf of
Aetna Value Opportunity Fund, and Bradley, Foster &
Sargent, Inc.(8)
(e.1) Underwriting Agreement between Aeltus Capital, Inc. and
Aetna Series Fund, Inc.(3)
(e.2) Master Selling Dealer Agreement(3)
(f) Directors' Deferred Compensation Plan (1)
(g.1) Custodian Agreement - Mellon Bank, N.A. (September 1,
1992)(5)
(g.2) Amendment to Custodian Agreement - Mellon Bank, N.A.
(May 11, 1994)(2)
(g.3) Amendment to Custodian Agreement - Mellon Bank, N.A.
(September 14, 1994)(7)
<PAGE>
(g.4) Amendment to Custodian Agreement - Mellon
Bank, N.A. (October 11, 1996)(9)
(g.5) Amendment to Custodian Agreement - Mellon Bank, N.A.
(January 29, 1998)(3)
(g.6) Amendment to Custodian Agreement - Mellon Bank, N.A.
(July 26, 1999)(6)
(g.7) Amendment to Custodian Agreement - Mellon Bank, N.A.
(July 26, 1999)(6)
(g.8) Amendment to Custodian Agreement - Mellon Bank, N.A.
(_______, 1999)*
(g.9) Custodian Agreement - Brown Brothers Harriman & Company
(Aetna International Fund) (December 12, 1991)(10)
(h.1) Administrative Services Agreement between Aeltus
Investment Management, Inc. and Aetna Series Fund, Inc. on
behalf of Aetna Balanced Fund, Aetna Bond Fund, Aetna
Growth Fund, Aetna Growth and Income Fund, Aetna
Government Fund, Aetna Index Plus Large Cap Fund, Aetna
International Fund, Aetna Money Market Fund, Aetna Small
Company Fund, Aetna Ascent Fund, Aetna Crossroads Fund,
Aetna Legacy Fund, Aetna High Yield Fund, Aetna Index Plus
Bond Fund, Aetna Index Plus Mid Cap Fund, Aetna Index Plus
Small Cap Fund, Aetna Mid Cap Fund, Aetna Real Estate
Securities Fund, and Aetna Value Opportunity Fund(5)
(h.2) Amendment to Administrative Services Agreement between
Aeltus Investment Management, Inc. and Aetna Series Fund,
Inc. on behalf of Aetna Principal Protection Fund I(6)
(h.3) Amendment to Administrative Services Agreement between
Aeltus Investment Management, Inc. and Aetna Series Fund,
Inc. on behalf of Aetna Principal Protection Fund II*
(h.4) Amendment to Administrative Services Agreement between
Aeltus Investment Management, Inc. and Aetna Series Fund,
Inc. on behalf of Brokerage Cash Reserves(6)
(h.5) License Agreement(7)
(h.6) Transfer Agent Agreement(4)
(h.7) Amendment No. 1 to the Transfer Agency and Services
Agreement(11)
(h.8) Amendment No. 2 to the Transfer Agency and Services
Agreement(11)
(h.9) Amendment No. 3 to the Transfer Agency and Services
Agreement(5)
(h.10) Form of Amendment No. 4 to the Transfer Agency and
Services Agreement
(h.11) Amendment No. 5 to the Transfer Agency and Services
Agreement*
(h.12) Form of Financial Guaranty Agreement between Aetna Series
Fund, Inc., on behalf of Aetna Principal Protection Fund
I, and MBIA
(h.13) Form of Service Agreement between Aetna Series Fund, Inc.,
Mellon Bank and MBIA
(i) Opinion and Consent of Counsel
(j) Consent of Independent Auditors
(k) Not applicable
(l) Initial Capital Agreement(11)
(m.1) Distribution Plan (Class A)*
(m.2) Distribution Plan (Class C)(5)
(m.3) Distribution Plan (Class B)*
<PAGE>
(m.4) Distribution Plan (Brokerage Cash Reserves)(6)
(m.5) Shareholder Service Plan (Class C)(5)
(m.6) Shareholder Service Plan (Class B)*
(m.7) Shareholder Service Plan (Brokerage Cash Reserves)(6)
(n) Not applicable
(o) Multiple Class Plan*
(p.1) Power of Attorney (November 6, 1998)(11)
(p.2) Authorization for Signatures(12)
* To be filed by Amendment.
1. Incorporated herein by reference to Post-Effective Amendment No. 24 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on January 16, 1998.
2. Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A, (File No. 33-41694), as filed with the
Securities and Exchange Commission on November 3, 1997.
3. Incorporated herein by reference to Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A, (File No. 33-41694), as filed with the
Securities and Exchange Commission on April 24, 1998.
4. Incorporated herein by reference to Post-Effective Amendment No. 26 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on June 29, 1998.
5. Incorporated herein by reference to Post-Effective Amendment No. 30 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on February 25, 1999.
6. Incorporated herein by reference to Post-Effective Amendment No. 32 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on July 29, 1999.
7. Incorporated herein by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A, (File No. 33-85620), as filed with the
Securities and Exchange Commission on June 28, 1995.
8. Incorporated herein by reference to Post-Effective Amendment No. 28 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on September 30, 1998.
9. Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on December 10, 1996.
10. Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on September 20, 1996.
11. Incorporated herein by reference to Post-Effective Amendment No. 29 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on December 17, 1998.
<PAGE>
12. Incorporated herein by reference to Post-Effective Amendment No. 2 to
Registration Statement on Form N-1A (File No. 333-05173), as filed with the
Securities and Exchange Commission on September 26, 1997.
<PAGE>
Item 24. Persons Controlled by or Under Common Control
- ------------------------------------------------------
Registrant is a Maryland corporation for which separate financial
statements are filed. As of June 30, 1999, Aetna Life Insurance and
Annuity Company (Aetna), and its affiliates, had the following interest
in the series of the Registrant, through direct ownership or through one
of Aetna's separate accounts:
<TABLE>
<CAPTION>
% Aetna
----------------------------------------------------------------------------
Class I Class A Class B Class C
------- ------- ------- -------
<S> <C> <C> <C> <C>
Aetna Balanced Fund 18.62%
Aetna Bond Fund 55.79% 71.19%
Aetna Government Fund 81.23% 86.84% 45.72%
Aetna Growth Fund 15.77%
Aetna Growth and Income Fund 13.90%
Aetna High Yield Fund 98.39% 25.73% 69.11%
Aetna Index Plus Bond Fund 99.75% 14.07% 36.84% 33.70%
Aetna Index Plus Large Cap Fund 40.05%
Aetna Index Plus Mid Cap Fund 98.29% 4.95% 36.38%
Aetna Index Plus Small Cap Fund 98.03% 6.24% 47.35%
Aetna International Fund 21.03% 53.54%
Aetna Mid Cap Fund 97.94% 21.11% 95.67% 73.78%
Aetna Money Market Fund 50.27% 41.76%
Aetna Real Estate Securities Fund 95.71% 11.99% 71.72% 48.01%
Aetna Small Company Fund 54.59% 72.66%
Aetna Value Opportunity Fund 96.72% 13.98% 89.39% 48.77%
Aetna Ascent Fund 85.31% 94.81%
Aetna Crossroads Fund 90.82% 100.00%
Aetna Legacy Fund 82.97% 92.52%
</TABLE>
Aetna is an indirect wholly owned subsidiary of Aetna Inc.
A list of all persons directly or indirectly under common control with
the Registrant and a list which indicates the principal business of each
such company referenced in the diagram are incorporated herein by
reference to Item 24 of Post-Effective Amendment No. 31 to the
Registration Statement on Form N-1A (File No. 33-41694), as filed with
the Securities and Exchange Commission on May 17, 1999.
Item 25. Indemnification
- ------------------------
Article 12, Section (d) of the Registrant's Articles of Amendment and
Restatement, incorporated herein by reference to Exhibit (a.1) to
Registrant's Registration Statement on Form N-1A (File No. 33-41694), as
filed on November 3, 1997, provides for indemnification of directors and
officers. In addition, the Registrant's
<PAGE>
officers and directors are covered under a directors and officers/errors
and omissions liability insurance policy issued by Gulf Insurance Company
which expires October 1, 1999.
Section XI.B of the Administrative Services Agreement, incorporated
herein by reference to Exhibit (h.1) to Registrant's Registration
Statement on Form N-1A (File No. 33-41694), as filed on February 25,
1999, provides for indemnification of the Administrator.
Section 8 of the Underwriting Agreement, incorporated herein by reference
to Exhibit (e.1) to Registrant's Registration Statement on Form N-1A
(File No. 33-41694), as filed electronically on April 24, 1998, provides
for indemnification of the Underwriter, its several officers and
directors, and any person who controls the Underwriter within the meaning
of Section 15 of the Securities Act of 1933.
Reference is also made to Section 2-418 of the Corporations and
Associations Article of the Annotated Code of Maryland which provides
generally that (1) a corporation may (but is not required to) indemnify
its directors for judgments, fines and expenses in proceedings in which
the director is named a party solely by reason of being a director,
provided the director has not acted in bad faith, dishonestly or
unlawfully, and provided further that the director has not received any
"improper personal benefit"; and (2) that a corporation must (unless
otherwise provided in the corporation's charter or articles of
incorporation) indemnify a director who is successful on the merits in
defending a suit against him by reason of being a director for
"reasonable expenses." The statutory provisions are not exclusive; i.e.,
a corporation may provide greater indemnification rights than those
provided by statute.
Item 26. Business and Other Connections of Investment Adviser
- --------------------------------------------------------------
The investment adviser, Aeltus Investment Management, Inc. (Aeltus), is
registered as an investment adviser with the Securities and Exchange
Commission. In addition to serving as investment adviser and
administrator for Aetna Series Fund, Inc., Aeltus acts as investment
adviser and administrator for Aetna Variable Fund, Aetna Income Shares,
Aetna Variable Encore Fund, Aetna Balanced VP, Inc., Aetna GET Fund,
Aetna Generation Portfolios, Inc., and Aetna Variable Portfolios, Inc.
(all management investment companies registered under the Investment
Company Act of 1940 (1940 Act)). It also acts as investment adviser to
certain private accounts.
<PAGE>
The following table summarizes the business connections of the directors and
principal officers of the Investment Adviser.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1996/Addresses*
----------------------- ------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John Y. Kim Director, President, Chief Director (February 1995 - March 1998) -- Aetna Life
Executive Officer, Chief Insurance and Annuity Company; Senior Vice President
Investment Officer (since September 1994) -- Aetna Life Insurance and
Annuity Company.
J. Scott Fox Director, Managing Director, Vice President (since April 1997) -- Aetna
Chief Operating Officer, Chief Retirement Services, Inc.; Director and Senior Vice
Financial Officer President (March 1997 - February 1998) -- Aetna Life
Insurance and Annuity Company; Managing Director,
Chief Operating Officer, Chief Financial Officer,
Treasurer (April 1994 - March 1997) -- Aeltus Investment
Management, Inc.
Thomas J. McInerney Director President (since August 1997) -- Aetna Retirement
Services, Inc.; Director and President (since
September 1997) -- Aetna Life Insurance and Annuity
Company; Executive Vice President (since August
1997) -- Aetna Inc.; Vice President, Strategy (March
1997 - August 1997) -- Aetna Inc.; Vice President,
Marketing and Sales (December 1996 - March 1997) --
Aetna U.S. Healthcare; Vice President, National
Accounts (April 1996 - December 1996) -- Aetna U.S.
Healthcare.
Catherine H. Smith Director Chief Financial Officer (since February 1998) --
Aetna Retirement Services, Inc.; Director, Senior
Vice President and Chief Financial Officer (since
February 1998) -- Aetna Life Insurance and Annuity
Company; Vice President, Strategy, Finance and
Administration, Financial Relations (September 1996
- February 1998) -- Aetna Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1996/Addresses*
----------------------- ------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stephanie A. DeSisto Vice President
Amy R. Doberman Vice President, General Counsel Counsel (since December 1996) -- Aetna Life
and Secretary Insurance and Annuity Company; Attorney (March 1990
- November 1996) -- U.S. Securities and Exchange
Commission.
Brian K. Kawakami Vice President, Chief Compliance Chief Compliance Officer & Director (since January
Officer 1996) -- Aeltus Trust Company; Chief Compliance
Officer (since August 1993) -- Aeltus Capital, Inc.
Neil Kochen Managing Director, Product Managing Director (since April 1996) -- Aeltus Trust
Development Company; Managing Director (since August 1996) --
Aeltus Capital, Inc.
Frank Litwin Managing Director, Retail Vice President, Strategic Marketing (April 1992 -
Marketing and Sales August 1997) -- Fidelity Investments Institutional
Services Company.
Kevin M. Means Managing Director, Equity Managing Director (since August 1996) -- Aeltus
Investments Trust Company.
L. Charles Meythaler Managing Director, Institutional Director (since July 1997) -- Aeltus Trust Company;
Marketing Managing Director (since June 1997) -- Aeltus Trust
and Sales Company; President (June 1993 - April 1997) -- New
England Investment Association.
James Sweeney Managing Director, Fixed Income
Investments
</TABLE>
* Except with respect to Mr. McInerney and Ms. Smith, the principal
business address of each person named is 10 State House Square,
Hartford, Connecticut 06103-3602. The address of Mr. McInerney and
Ms. Smith is 151 Farmington Avenue, Hartford, Connecticut 06156.
For information regarding Bradley, Foster & Sargent, Inc. (Bradley), the
subadviser for Aetna Value Opportunity Fund, reference is made to the section
entitled "Subadviser" in the Class A and C Prospectus, the Class I Prospectus
and the Statement of Additional Information each dated March 1, 1999. For
information as to the business, profession, vocation or employment of a
substantial nature of each of the officers of Bradley, reference is made to
Bradley's current Form
<PAGE>
ADV (File No. 801-46616) filed under the Investment Advisers Act of 1940,
incorporated herein by reference.
Item 27. Principal Underwriters
- -------------------------------
(a) None
(b) The following are the directors and principal officers of Aeltus
Capital, Inc., the principal underwriter of the Registrant:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
- ----------------- -------------------------- ---------------
<S> <C> <C>
John Y. Kim Director and President Director
J. Scott Fox Director, Managing Director, Chief Operating Director and President
Officer, Chief Financial Officer
Brian K. Kawakami Director, Vice President, Chief Compliance None
Officer
Frank Litwin Director, Managing Director Vice President
Daniel F. Wilcox Vice President, Finance and Treasurer None
</TABLE>
*The principal business address of all directors and officers listed is 10
State House Square, Hartford, Connecticut 06103-3602.
(c) Not applicable.
Item 28. Location of Accounts and Records
- -----------------------------------------
As required by Section 31(a) of the 1940 Act and the rules thereunder,
the Registrant and its investment adviser, Aeltus, maintain physical
possession of each account, book or other document, at 10 State House
Square, Hartford, Connecticut 06103-3602.
Shareholder records are maintained by the transfer agent, First Data
Investor Services Group, Inc., 4400 Computer Drive, Westboro,
Massachusetts 01581.
Item 29. Management Services
- --------------------------------
Not applicable.
<PAGE>
Item 30. Undertakings
- -------------------------
Insofar as indemnification for liability arising under the Securities Act
of 1933 (1933 Act) may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other that the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the 1933 Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, Aetna Series Fund, Inc. has duly caused this registration
statement to be signed on its behalf by the undersigned, duly authorized, in the
City of Hartford and State of Connecticut on the 2nd day of August, 1999.
AETNA SERIES FUND, INC.
-----------------------
Registrant
By J. Scott Fox*
-------------
J. Scott Fox
President
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C> <C>
J. Scott Fox* President and Director )
- ------------------------------------------- )
J. Scott Fox (Principal Executive Officer) )
)
Albert E. DePrince, Jr.* Director )
- ------------------------------------------- )
Albert E. DePrince, Jr. )
)
Maria T. Fighetti* Director ) August
- ------------------------------------------- ) 2, 1999
Maria T. Fighetti )
)
David L. Grove* Director )
- ------------------------------------------- )
David L. Grove )
)
John Y. Kim* Director )
- ------------------------------------------- )
John Y. Kim )
)
Sidney Koch* Director )
- ------------------------------------------- )
Sidney Koch )
)
Shaun P. Mathews* Director )
- ------------------------------------------- )
Shaun P. Mathews )
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Corine T. Norgaard* Director )
- ------------------------------------------- )
Corine T. Norgaard )
)
Richard G. Scheide* Director )
- ------------------------------------------- )
Richard G. Scheide )
)
Stephanie A. DeSisto* Treasurer and Chief Financial Officer )
- ------------------------------------------- )
Stephanie A. DeSisto (Principal Financial and Accounting )
Officer) )
</TABLE>
By: /s/Amy R. Doberman
---------------------------------------------------
*Amy R. Doberman
Attorney-in-Fact
*Executed pursuant to Power of Attorney dated November 6, 1998 and
filed with the Securities and Exchange Commission on December
17, 1998.
<PAGE>
<TABLE>
<CAPTION>
Aetna Series Fund, Inc.
EXHIBIT INDEX
Exhibit No. Exhibit Page
----------- ------- ----
<S> <C> <C> <C>
99-(h.10) Form of Amendment No. 4 to the Transfer Agency and Services Agreement -----------------
99-(h.12) Form of Financial Guaranty Agreement between Aetna Series Fund, Inc.
and MBIA -----------------
99-(h.13) Form of Service Agreement between Aetna Series Fund, Inc., Mellon Bank
and MBIA -----------------
99-(i) Opinion and Consent of Counsel -----------------
99-(j) Consent of Independent Auditors -----------------
</TABLE>
EXHIBIT h.10
FORM OF AMENDMENT NO. 4 TO THE
TRANSFER AGENCY AND SERVICES AGREEMENT
<PAGE>
FORM OF AMENDMENT NO. 4 TO THE
TRANSFER AGENCY AND SERVICES AGREEMENT
THIS AMENDMENT, dated as of the lst day of March, 1999 is made to the Transfer
Agency and services Agreement dated July 3, 1998, as amended (the "Agreement")
between AETNA SERIES FUND, INC. (the "Fund") and FIRST DATA INVESTOR SERVICES
GROUP, INC. (the "Investor Services Group").
WITNESSETH
WHEREAS, the Fund and Investor Services Group desire to amend the
Agreement, as previously amended, to reflect certain changes thereto.
NOW THEREFORE, in consideration of the mutual covenants contained herein,
the parties agree that as of the date first referenced above, the Agreement
shall be amended as follows:
1. Schedule A - Duties of Investor Services Group is hereby amended by
adding the following new Section 9:
"9. Cash Management Services.
(a) Investor Services Group shall establish demand deposit accounts
(DDA's) with a cash management provider to facilitate the receipt of purchase
payments and the processing of other Shareholder-related transactions. Investor
Services Group shall retain any excess balance credits earned with respect to
the amounts in such DDA's ("Balance Credits") after such Balance Credits are
first used to offset any banking service fees charged in connection with banking
services provided on behalf of the Fund. Balance Credits will be calculated and
applied toward the Fund's banking service charges regardless of the withdrawal
of DDA balances described in Section (b) below.
(b) DDA balances which cannot be forwarded on the day of receipt may be
withdrawn on a daily basis and invested in U.S. Treasury and Federal Agency
obligations, money market mutual funds, repurchase agreements, money market
preferred securities (rated A or better), commercial paper (rated A1 or P1),
corporate notes/bonds (rated A or better) and/or Eurodollar time deposits
(issued by banks rated A or better). Investor Services Group bears the risk of
loss on any such investment and shall retain any earnings generated thereby.
Other similarly rated investment vehicles may be used, provided however,
Investor Services Group shall first notify the Fund of any such change."
2. Schedule B - FEE SCHEDULE is hereby deleted in its entirety and replaced
with the revised Schedule B attached hereto.
3. Schedule C - OUT-OF-POCKET EXPENSES is hereby deleted in its entirety and
replaced with the revised Schedule B attached hereto.
<PAGE>
The Agreement, as previously amended and as amended by this Amendment,
("Modified Agreement"), constitutes the entire agreement between the parties
with respect to the subject matter hereof. The Modified Agreement supersedes all
prior and contemporaneous agreements between the parties in connection with the
subject matter hereof. No officer, employee, servant or other agent of either
party is authorized to make any representation, warranty, or other promises not
expressly contained herein with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers, as of the day and year first above
written.
AETNA SERIES FUND, INC.
By: ____________________________
Title: ____________________________
FIRST DATA INVESTOR SERVICES GROUP, INC.
By: ____________________________
Title: ____________________________
<PAGE>
SCHEDULE B
FEE SCHEDULE
------------
1. Standard Fees:
(a) Per Account Fees: $25,000 annual minimum per Portfolio
(includes up to 4 classes of shares
per Portfolio* - excludes Brokerage
Cash Reserves) $20 per open account
per annum (money market) $16 per open
account per annum (equity, bond) $2.50
per closed account per annum
*The annual minimum per Portfolio fee shall increase on a
Portfolio by Portfolio basis in the event the Fund
establishes more than four classes of shares in a Portfolio.
Such increase shall be mutually agreed upon by the parties.
The Per Account Fees set forth in this Section 1(a) shall remain in
effect for the duration of the Initial Term.
(b) Brokerage Cash Reserves: $2,600 annual flat fee
(c) Cost Basis Accounting: $0.15 per month per eligible account
(d) VRU: $0.23 per minute
$0.10 per call
Program development costs not to
exceed $20,000.
2. Programming Costs
(a) Dedicated Team:
Programmer $100,000 per annum
BSA $ 85,000 per annum
Tester $ 65,000 per annum
(b) System Enhancements (Non Dedicated Team):
Programmer $150.00 per hour
3. Print/Mail Fees
Program development costs not to exceed $5000.00
<PAGE>
Monthly Processing Charge per $1650.00 per month
complex:
Daily/periodic confirms/statements:
Print: $.065 per image (includes plain paper)
Fold/Insert 1/seal/meter: $.02 each
Each additional insert: $0.15 each
Checks:
Print/fold/insert/seal/meter: $.25 each
Presort Charge: $0.277 postage rate
$0.035 per piece
Inventory Storage: $20.00 for each inventory location as
of the 15th of the month
Special Pulls: $2.50 per account pull at Aetna's
request.
Forms Development/Programming Fee: $135/hr
Postage, printed stock and envelopes will be billed in addition to the
above mentioned at actual cost.
4. Miscellaneous
[bullet] Ad hoc reports/SQL computer time (Prior Fund Approval Required -
Fee shall be based on system enhancement/non-dedicated team
charge set forth above)
[bullet] Banking Services
<PAGE>
SCHEDULE C
OUT-OF-POCKET-EXPENSES
----------------------
The Fund shall reimburse Investor Services Group monthly for the
following applicable out-of-pocket expenses:
Standard (No Prior Fund Approval Required):
[bullet] Postage (bulk, pre-sort, ZIP+4, barcoding, first class)
direct pass through to the Fund
[bullet] Telephone and telecommunication costs, including all lease,
maintenance and line costs
[bullet] Shipping, Certified and Overnight mail and insurance
[bullet] Record retention, retrieval and destruction costs, including,
but not limited to exit fees charged by third party record
keeping vendors
[bullet] Third party audit reviews
[bullet] NSCC/FundServe Transaction charges
[bullet] NSCC same day confirm charges
Non-Standard (Prior Fund Approval Required):
[bullet] Proxy solicitations, mailings and tabulations, upon prior Fund
approval
[bullet] Terminals, communication lines, printers and other equipment
and any expenses incurred in connection with such terminals
and lines, upon prior Fund approval
[bullet] Courier services
[bullet] Overtime
[bullet] Temporary staff
[bullet] Travel and entertainment
[bullet] Magnetic media tapes and freight
[bullet] Such other miscellaneous expenses reasonably incurred by
Investor Services Group in response to specific requests by
the Fund in performing its duties and responsibilities under
this Agreement.
The Fund will promptly reimburse Investor Services Group for any other
unscheduled expenses incurred by Investor Services Group whenever the Fund and
Investor Services Group mutually agree that such expenses are not otherwise
properly borne by Investor Services Group as part of its duties and obligations
under the Agreement.
<PAGE>
Exhibit 1
LIST OF PORTFOLIOS
Revised as of August 1, 1999
Aetna Money Market Fund
Aetna Government Fund
Aetna Bond Fund
Aetna High Yield Fund
Aetna Balanced Fund
Aetna Growth and Income Fund
Aetna Real Estate Securities Fund
Aetna Value Opportunity Fund
Aetna Growth Fund
Aetna Mid Cap Fund
Aetna Small Company Fund
Aetna International Fund
Aetna Index Plus Large Cap Fund
Aetna Index Plus Mid Cap Fund
Aetna Index Plus Small Cap Fund
Aetna Index Plus Bond Fund
Aetna Ascent Fund
Aetna Crossroads Fund
Aetna Legacy Fund
Aetna Principal Protection Fund I
Brokerage Cash Reserves
<TABLE>
<CAPTION>
<S> <C>
Aetna Series Fund, Inc. First Data Investor Services Group, Inc.
By: _______________________________________________ By: _______________________________________________
Title: _______________________________________________ Title: _______________________________________________
</TABLE>
EXHIBIT h.12
FORM OF
FINANCIAL GUARANTY AGREEMENT
<PAGE>
1
FORM OF
FINANCIAL GUARANTY AGREEMENT
FINANCIAL GUARANTY AGREEMENT, dated as of , 1999
(the "Agreement"), among MBIA Insurance Corporation, a New York monoline stock
insurance company (the "Insurer"), AELTUS INVESTMENT MANAGEMENT, INC., a
Connecticut company ("Aeltus"), and AETNA SERIES FUND, INC., an open-end
management investment company (the "Fund").
W I T N E S S E T H:
--------------------
WHEREAS, the Fund is a series fund and intends to create one
or more additional series, each called Aetna Principal Protection Fund (each a
"PPF") and each advised by Aeltus, which will include a promise by the Fund on
behalf of each PPF (each a "Repayment Obligation") to repay to each shareholder
thereof (a "PPF Shareholder") at maturity his or her Guarantee Amount (as
defined herein); and
WHEREAS, the Insurer is authorized to transact a financial
guaranty insurance business in the State of Connecticut and the Fund has
requested the Insurer, and the Insurer has agreed, to issue a financial guaranty
in connection with each PPF substantially in the form of Exhibit A hereto (each
a "Policy"), in the aggregate amount of $250,000,000, to assure the timely
payment by the Fund of the Repayment Obligations with respect to such PPFs; and
WHEREAS, the parties hereto, among other things, desire to
specify the conditions precedent to the issuance by the Insurer of the Policies,
the payment of the premium and other amounts in respect thereof, the
reimbursement obligations of Aeltus, the investment adviser to the Fund, to the
Insurer, and to provide for certain other matters related thereto;
NOW, THEREFORE, in consideration of the promises and of the
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 General Definitions. The terms defined in this
Article I shall have the meanings provided herein for all purposes of this
Agreement, unless the context clearly requires otherwise, in both singular and
plural form, as appropriate.
"Adjusted Total Asset Value" shall have the meaning set forth
in Section 3.5.
"Aggregate Guarantee Amount" shall mean, with respect to any
PPF, on any date of determination, the aggregate Guarantee Amounts with
respect to all PPF Shareholders in such PPF on such date of
determination.
"Application" shall have the meaning set forth in Section 2.2.
"Asset Allocation Test" shall have the meaning set forth in
Section 3.5.
<PAGE>
2
"Asset Allocation Threshold" shall mean, with respect to any
PPF, on any Valuation Date, an amount equal to 99% of the sum of (i)
the Present Value of the Aggregate Guarantee Amount and (ii) the
Present Value of Covered Expenses.
"Business Day" shall mean a day that is a Trading Day and is
not a Saturday or Sunday, and is not a legal holiday or a day on which
banking institutions generally are authorized or obligated by law or
regulation to close in New York, New York or in Hartford, Connecticut.
"Cash Associated with Futures" shall mean, with respect to any
Index Future, on any Valuation Date, an amount of cash or Cash
Equivalents equal to the Market Value thereof on such Valuation Date.
"Cash Equivalents" shall mean the Eligible PPF Investments
described in Section 3.1(b)(i).
"Cash Margin" shall mean, with respect to any U.S. Treasury
Future, on any Valuation Date, the mark to Market Value of the Cash
Equivalents held as margin for such security on such Valuation Date.
"Class B Percentage" shall mean, with respect to any PPF, on
any Valuation Date, the percentage equivalent of a fraction, the
numerator of which is the product of the NAV of the Class B shares of
such PPF multiplied by the number of Class B shares of such PPF
outstanding, and the denominator of which is the sum of (i) the product
of the NAV of the Class A shares of such PPF multiplied by the number
of Class A shares of such PPF outstanding and (ii) the product of the
NAV of the Class B shares of such PPF multiplied by the number of the
Class B shares of such PPF outstanding.
"Contractual Obligation" shall mean, as to any Person, any
provision of any security issued by such Person or any agreement,
instrument or other undertaking to which such Person is a party or by
which it or any of its property is bound.
"Corporate Bond" shall mean, on any Valuation Date, the
debentures of any corporation as described in Section 3.1(b)(iii).
"Covered Expenses" shall mean, for any class of shares of any
PPF, the annual fund operating expenses enumerated in the final
prospectus for such PPF.
"Covered Expense Ratio" shall mean, with respect to any PPF,
on any Valuation Date, the higher of (a) the expense ratio utilized by
Aeltus in its asset allocation model and (b) the Lower Covered Expense
Ratio, provided, however, that if the percentage of the Total Asset
Value of such PPF on such date allocable to equities according to the
Asset Allocation Test is less than 30% using the Lower Covered Expense
Ratio, the Covered Expense Ratio will equal the Higher Covered Expense
Ratio.
"Custodian" shall mean Mellon Bank, N.A. or any successor or
assigns under the Custodian Agreement.
"Custodian Agreement" shall mean the Custodial Services
Agreement by and between the Fund and the Custodian with respect to the
custody of the assets of certain series of the Fund including the PPFs,
as the same may be amended, supplemented or modified from time to time.
<PAGE>
3
"Custodian Service Agreement" shall mean the Service
Agreement, dated , 1999, among the Fund, the Insurer and the
Custodian, substantially in the form of Exhibit B hereto, as the same
may be amended, supplemented or otherwise modified from time to time,
and any other agreement substantially in the form of Exhibit B hereto
with a successor Custodian.
"Default" shall mean any of the events specified in Section
4.1, whether or not any requirement for the giving of notice, the lapse
of time, or both, or any other condition, has been satisfied.
"Default Period" shall have the meaning set forth in Section
4.2(a).
"Discount Rate" shall mean, with respect to any PPF, on any
Valuation Date, the quotient of (a) the sum of (i) the aggregate Market
Value of the Fixed Income Portfolio multiplied by the Fixed Income
Portfolio Yield with respect to such PPF plus (ii) the U.S. Treasury
Futures Spread for such PPF, divided by (b) the aggregate Market Value
of the Fixed Income Portfolio; provided, however if such PPF does not
hold any securities in its Fixed Income Portfolio on such Valuation
Date, the Discount Rate shall equal the interest rate derived by
calculating the internal rate of return for a proxy U.S. Treasury Zero
maturing on the date closest to the Maturity Date with respect to such
PPF, but in no event later than such Maturity Date. The internal rate
of return for such proxy U.S. Treasury Zero shall be calculated based
on the actual days to maturity, compounded on an annual basis, and
shall be based on the Market Value for such U.S. Treasury Zero as of
such Valuation Date compared with the par value for such U.S. Treasury
Zero at maturity.
"Distribution" shall mean any payment by a PPF that is not a
Covered Expense or a transaction related brokerage expense, and shall
include without limitation, any distribution of income, dividends,
capital gains or principal to its shareholders and any payment of
income taxes or excise taxes.
"Effective Date" shall mean the date on which the conditions
set forth in Section 2.3 are satisfied.
"Eligible PPF Investments" shall have the meaning set forth in
Section 3.1(b).
"Equity Portfolio" shall mean, with respect to any PPF, all
holdings which are Eligible PPF Investments defined in Sections
3.1(b)(v) and (vi).
"Event of Default" shall have the meaning set forth in Section
4.1.
"Fee Payment Date" shall have the meaning set forth in Section
2.4.
"Fixed Income Portfolio" shall mean, with respect to any PPF,
all holdings which are Eligible PPF Investments defined in Sections
3.1(b)(ii), (iii) and (iv).
"Fixed Income Portfolio Yield" shall mean, with respect to any
PPF on any Valuation Date, the sum of (a) the weighted average spread
over the U.S. Treasury zero maturing on the date closest to the Maturity
Date with respect to such PPF, but in no event later than such Maturity
Date, of such PPF's Fixed Income Portfolio (excluding U.S. Treasury
Futures) and Cash Margin,
<PAGE>
4
as calculated using Lehman Brothers analytics or another widely
recognized, reputable source, as of the close of business on the
Business Day prior to such Valuation Date based on the Market Value for
each Fixed Income Portfolio security on such Business Day plus (b) the
yield to maturity of the U.S. Treasury zero maturing on the date
closest to the Maturity Date with respect to such PPF, but in no event
later than such Maturity Date, calculated based on the actual days to
maturity compounded on a semi-annual basis based on the Market Value
for such U.S. Treasury zero as of such Valuation Date compared with the
par value for such U.S. Treasury zero at maturity.
"Fund Sector Weight" shall mean, with respect to any PPF, for
any Sector, on any Valuation Date, the percentage equivalent of a
fraction, the numerator of which is the aggregate Market Value of all
Index Equities belonging to such Sector held by such PPF on such
Valuation Date and the denominator of which is the aggregate Market
Value of all Index Equities held by such PPF on such Valuation Date.
"Fund Weight" shall mean, with respect to any PPF and an Index
Equity, on any Valuation Date, the percentage equivalent of a fraction,
the numerator of which is the Market Value of such Index Equity held by
such PPF on such Valuation Date and the denominator of which is the
aggregate Market Value of all Index Equities held by such PPF on such
Valuation Date.
"Government Authority" shall mean any nation or government,
any state or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Guarantee Amount" shall mean, with respect to any PPF
Shareholder, on any date of determination, an amount equal to the
product of (i) the Guarantee per Share for the class of shares of such
PPF held by such PPF Shareholder on such date and (ii) the total number
of such shares held by such PPF Shareholder on such date.
"Guarantee per Share" shall mean, with respect to any class of
shares of any PPF, on any Valuation Date, (i) on the Inception Date,
the NAV for such class at the close of business on the last day of the
Offering Period for such PPF; and (ii) thereafter, the Guarantee per
Share for such class of shares of any PPF on the immediately preceding
Valuation Date divided by one plus the quotient of (i) the amount of
any Distribution made by such PPF calculated on a per share basis for
such class of shares effective since the immediately preceding
Valuation Date divided by (ii) the NAV per share for such class of
shares prior to any such Distribution minus the amount of such
Distribution calculated on a per share basis for such class of shares.
"Guarantee Period" shall mean, with respect to any PPF, the
period commencing on and including the Inception Date to and including
the Maturity Date.
"High Ranked Equities" shall mean, on any date of
determination, the Index Equities listed by Aeltus as "High Ranked
Stocks" in the report most recently delivered by Aeltus to the Insurer
pursuant to Section 3.4.
"Higher Covered Expense Ratio" shall mean, with respect to any
PPF, on any Valuation Date, the sum of (a) 1.50% times the excess, if
any, of (i) one over (ii) the Class B Percentage with respect to such
PPF plus (b) 2.25% times the Class B Percentage with respect to such
PPF.
<PAGE>
5
"Hypothetical Total Asset Value" shall mean, with respect to
any PPF, an amount equal to the Total Asset Value on the date on which
a Permanent Deficit Event shall have occurred with respect to such PPF,
recalculated as follows: (a) the value of the Equity Portfolio of such
PPF on the Valuation Date immediately preceding such Permanent Deficit
Event shall (i) first, be reduced to an amount such that the Adjusted
Total Asset Value would have equaled the sum of the Present Value of
the Aggregate Guarantee Amount plus the Present Value of Covered
Expenses calculated using the Higher Covered Expense Ratio for such PPF
on such Valuation Date and (ii) second, be reduced to reflect the
change in the value of the Equity Portfolio from such Valuation Date to
the date on which the Permanent Deficit Event shall have occurred and
(b) the value of the Fixed Income Portfolio of such PPF on such
Valuation Date shall (i) first, be increased in an amount equal to the
dollar decrease in the amount of the Equity Portfolio determined in
clause (a)(i) above and (ii) second, be increased or reduced to reflect
the change in the value of the Fixed Income Portfolio from such
Valuation Date to the date on which the Permanent Deficit Event shall
have occurred. A sample calculation is set forth in Annex C.
"Inception Date" shall mean, with respect to a PPF, the
Business Day immediately following the last day of the Offering Period.
"Indemnitee" shall have the meaning set forth in Section 2.6.
"Indemnified Liabilities" shall have the meaning set forth in
Section 2.6.
"Index Equity" shall mean, on any Valuation Date, the equity
securities of any company included in the S&P 500 Index on such
Valuation Date, as published by FactSet Data Systems, Inc. ("FactSet").
"Index Equity Capitalization" shall mean, for any Index
Equity, on any Valuation Date, the product of the number of shares
outstanding of such Index Equity, as published by FactSet multiplied by
the price per share of such Index Equity, as published by Bridge Data
Company ("Bridge").
"Index Future" shall mean a forward contract on the S&P 500
Index, as traded on the Chicago Mercantile Exchange.
"Index Weight" shall mean, for any Index Equity, on any
Valuation Date, the percentage equivalent of a fraction, the numerator
of which is the Index Equity Capitalization of such Index Equity on
such Valuation Date and the denominator of which is the Total Index
Capitalization on such Valuation Date.
"Lien" shall mean any mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or
other), other charge or security interest, or any preference, priority
or other agreement or preferential arrangement of any kind or nature
whatsoever.
"Low Ranked Equities" shall mean, on any date of
determination, the Index Equities listed by Aeltus as "Low Ranked
Stocks" in the report most recently delivered by Aeltus to the Insurer
pursuant to Section 3.4.
"Lower Covered Expense Ratio" shall mean, with respect to any
PPF, on any Valuation Date, 1.50% minus, for such PPF, the lesser of
(i) 0.5% and (ii) the percentage equivalent of an
<PAGE>
6
amount equal to the excess, if any, of 1.015 over the product of (x)
0.96109 times (y) one plus the Discount Rate with respect to such PPF
on the last day of the Offering Period for such PPF.
"Market Value" shall mean, with respect to any PPF, securities
which are generally valued by independent pricing services which have
been approved by the Fund's Board of Directors. The values for each
Index Equity 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. Index Equities traded over the counter are valued
at the mean of the last bid and asked price or, if there has been no
sale that day, at the mean of the last bid and asked price. Short-term
debt securities that have a maturity date of more than sixty days and
long-term debt securities are valued at the mean of the last bid and
asked price of such securities obtained from a broker-dealer that is a
market-maker in the securities or a service providing quotations based
upon the assessment of market-makers in those securities. Short-term
debt securities maturing in sixty days or less as of the date of
purchase will be valued using the "amortized cost" method of valuation.
This involves valuing an instrument at its cost and thereafter assuming
a constant amortization of premium or increase of discount. Futures
contracts are valued daily at a settlement price based on rules of the
exchange where the futures contract is primarily traded. Securities for
which market quotations are not readily available are valued at their
fair value in such manner as may be determined, from time to time, in
good faith, by or under the authority of, the Fund's Board of
Directors. The NAV of each PPF is determined as of the close of regular
trading on The New York Stock Exchange (normally 4:00 p.m. eastern
time).
"Maturity Date" shall have the meaning set forth in Section
2.1.
"Modified Duration" shall mean, with respect to any fixed
income security, the quotient of (a) the weighted average term to
maturity of such security's cash flows divided by (b) the sum of (i)
one plus (ii) one half of the security's current bond equivalent yield
to maturity.
"Moody's" shall mean Moody's Investors Service, Inc. and its
successors and assigns.
"NAV" shall mean the net asset value of the PPF, which is
equal to the Market Value of all assets held in the PPF less any
accrued and unpaid expenses of such PPF.
"Notional Value" shall mean the pre-determined dollar
principal amount on which the contract is based.
"NYSE" shall mean The New York Stock Exchange.
"Offering Period" shall have the meaning set forth in each
PPF's prospectus. Generally, this will be the period preceding the
Inception Date during which a PPF permits sales of shares to investors.
"Permanent Deficit Event" shall have the meaning set forth in
Section 2.5(a).
"Permanent Deficit Reimbursement Ratio" shall be calculated
and fixed on the date on which a Permanent Deficit Event shall have
occurred with respect to any PPF and shall mean, with respect to such
PPF, (A) if the Covered Expense Ratio for such PPF on the Business Day
preceding the date of such Permanent Deficit Event was greater than or
equal to 1.50%, 100%; (B)
<PAGE>
7
if the Covered Expense Ratio for such PPF on the Business Day preceding
the date of such Permanent Deficit Event was less than 1.50% and
greater than or equal to 1.17%, the quotient of (i) 0.75% divided by
(ii) the sum of (a) 0.75% plus (b) 1.50% minus the Covered Expense
Ratio on the Business Day preceding the date of such Permanent Deficit
Event; or (C) if the Covered Expense Ratio for such PPF on the Business
Day preceding the date of such Permanent Deficit Event was less than
1.17%, the quotient of (i) the sum of (a) 0.75% plus (b)1.17% minus the
Covered Expense Ratio on the Business Day preceding the date of such
Permanent Deficit Event divided by (ii) the sum of (a) 1.08% plus (b)
1.17% minus the Covered Expense Ratio on the Business Day preceding the
date of such Permanent Deficit Event.
"Permanent Fee Deficit Amount" shall mean, with respect to any
PPF, on any Valuation Date, the product of (A) the quotient of (i) the
Permanent Total Deficit Amount with respect to such PPF on the date on
which a Permanent Deficit Event shall have occurred minus the Permanent
Principal Deficit Amount with respect to such PPF divided by (ii) the
Permanent Total Deficit Amount with respect to such PPF on the date on
which a Permanent Deficit Event shall have occurred times (B) the
Permanent Total Deficit Amount with respect to such PPF on such
Valuation Date.
"Permanent Principal Deficit Amount" shall mean, with respect
to any PPF, the excess, if any, of (a) the sum of the Present Value of
the Aggregate Guarantee Amount plus the Present Value of Covered
Expenses calculated using the Higher Covered Expense Ratio as the
Covered Expense Ratio with respect to such PPF on the date on which a
Permanent Deficit Event shall have occurred with respect to such PPF
over (b) the Hypothetical Total Asset Value with respect to such PPF.
"Permanent Total Deficit Amount" shall mean, with respect to
any PPF, on any Valuation Date, the excess, if any, of (a) the sum of
the Present Value of the Aggregate Guarantee Amount plus the Present
Value of Covered Expenses calculated using the Higher Covered Expense
Ratio as the Covered Expense Ratio with respect to such PPF over (b)
the Total Asset Value with respect to such PPF on such Valuation Date.
"Person" shall mean an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association,
joint venture, Government Authority or other entity of whatever nature.
"Policy" shall have the meaning set forth in the recitals.
"Policy Fee" shall have the meaning set forth in Section 2.4.
"Portfolio Duration" shall mean, with respect to any group of
securities, the Market Value weighted average Modified Duration of such
securities as calculated using Lehman Brothers analytics or another
widely recognized, reputable source as of the close of business on the
Business Day preceding the relevant Valuation Date, based on the Market
Value for each such security on such Business Day.
"Present Value of the Aggregate Guarantee Amount" shall mean,
with respect to any PPF, on any Valuation Date, the quotient of (a) the
Aggregate Guarantee Amount with respect to such PPF divided by (b)(i)
the sum of one plus one half the Discount Rate with respect to such PPF
on
<PAGE>
8
such Valuation Date (ii) compounded over twice the time remaining to
the Maturity Date of such PPF.
"Present Value of Covered Expenses" shall mean, with respect
to any PPF, on any Valuation Date, the product of (a) the Present Value
of the Aggregate Guarantee Amount with respect to such PPF on such date
times (b) the excess of (i) the sum of one plus the Covered Expense
Ratio with respect to such PPF on such date, compounded over the time
remaining to the Maturity Date of such PPF, over (ii) one.
"Rebalancing" shall have the meaning set forth in Section 3.5.
"Reimbursement Amount" shall mean, with respect to any PPF, on
any Valuation Date, the excess, if any, of (a) the aggregate amount of
reimbursement payments received as of such date by the Insurer from
Aeltus with respect to such PPF pursuant to Section 2.5(a), plus
interest on each such payment from the date such payment was received
by the Insurer to, but excluding, such Valuation Date at the Discount
Rate prevailing with respect to such PPF on the date such payment was
received by the Insurer, over (b) the sum of the aggregate amount of
any refunds made by the Insurer to Aeltus pursuant to Section 2.5(a)
plus interest on each such refund from the date of such refund to, but
excluding, such Valuation Date at the Discount Rate prevailing with
respect to such PPF on the date of such refund.
"Repayment Obligation" shall have the meaning set forth in the
recitals.
"Requirements of Law" shall mean, as to any Person, the
certificate of incorporation and by-laws or other organizational or
governing documents of such Person, and any law, treaty, rule, or
regulation or determination of an arbitrator or a court or other
Government Authority, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its
property is subject.
"Sector" shall mean one of the Sectors set forth in Annex B
hereto, as amended from time to time in accordance with Section 6.1
(g).
"Sector Index Weight" shall mean, on any Valuation Date, for
each Sector, the percentage equivalent of a fraction, the numerator of
which is the sum of the Index Equity Capitalizations for all Index
Equities belonging to such Sector on such Valuation Date and the
denominator of which is the Total Index Capitalization on such
Valuation Date.
"Selection Guidelines" shall mean the investment guidelines
described in Annex A.
"S&P" shall mean Standard and Poor's Ratings Service, a
division of McGraw Hill Companies, Inc.
"S&P 500 Index" shall mean the index of 500 equity securities
known as the Standard and Poor's 500 Composite Index of 500 Stocks and
as compiled by S&P and published by FactSet Data Systems, Inc. or
another widely recognized, reputable source.
"Theoretical Zero Modified Duration" shall mean, with respect
to any PPF on any Valuation Date, the Modified Duration of the U.S.
Treasury zero coupon bond whose maturity date exactly matches the
Maturity Date of such PPF or, if no such U.S. Treasury zero coupon
<PAGE>
9
bond exists, the Modified Duration of a proxy U.S. Treasury zero coupon
bond whose maturity date exactly matches the Maturity Date of such PPF
and whose current yield to maturity is based on the interpolated yield
to maturity of the two U.S. Treasury zero coupon bonds which mature
immediately preceding and immediately following the Maturity Date of
such PPF.
"Total Asset Value" shall mean, with respect to any PPF, on
any Valuation Date, an amount equal to the excess of (a) the sum of:
(i) the aggregate Market Value of all Index Equities
held by such PPF on such Valuation Date;
(ii) the aggregate Market Value of all Cash Equivalents
held by such PPF (less Cash Associated with Futures and Cash
Margin with respect to such PPF) on such Valuation Date;
(iii) the aggregate Market Value of all U.S. Treasury
and Agency Zeroes held by such PPF on such Valuation Date;
(iv) the aggregate Market Value of all Corporate Bonds
held by such PPF on such Valuation Date;
(v) the aggregate Market Value of all Cash Margin held
by such PPF; and
(vi) the aggregate Market Value of all Index Futures
held by such PPF on such Valuation Date,
over (b) an amount equal to the aggregate amount of accrued and unpaid
expenses and other liabilities of such PPF.
"Total Index Capitalization" shall mean, on any Valuation
Date, the sum of the Index Equity Capitalizations on such Valuation
Date for all Index Equities (other than Aetna Inc.).
"Trading Day" shall mean each day on which the NYSE is open
for regular trading for at least two hours.
"Transaction Documents" shall mean, with respect to a PPF,
this Agreement, the PPF's prospectus and statement of additional
information, the investment advisory agreement between Aeltus and the
Fund, on behalf of the PPF and the Custodian Service Agreement, as each
may be amended, supplemented or otherwise modified from time to time.
"U.S. Treasury Futures" shall mean futures contracts on U.S.
Treasury securities.
"U.S. Treasury Futures Spread" shall mean, for any PPF, on any
Valuation Date, the sum of the product for each U.S. Treasury Future
held by such PPF of (a) the Notional Value of such U.S. Treasury Future
times (b) the excess of (i) the yield on such U.S. Treasury Future's
cheapest-to-deliver bond as published by Bloomberg, L.P. over (ii) the
Federal Reserve's targeted Fed Funds rate on such date as published by
Bloomberg, L.P. (this rate may be found on Bloomberg by typing in FDTR
[less than symbol]Index[greater than symbol] [less than
symbol]Go[greater than symbol]).
<PAGE>
10
"U.S. Treasury or Agency Zeroes" shall mean non-callable
non-interest bearing obligations of (A) the United States of America
and (B) the following U.S. Government Agencies: Fannie Mae, Freddie
Mac, Federal Home Loan Bank, Resolution Funding Corporation, Financing
Corporation and Tennessee Valley Authority; these obligations may
include, without limitation: Certificates of Accrual on Treasury
Securities (CATS); Treasury Investment Growth Receipts (TIGRs); Generic
Treasury Receipts (TRs); and Separate Trading of Registered Interest
and Principal of Securities (STRIPS).
"Valuation Date" shall mean, for any Trading Day, as of the
close of trading on the immediately preceding Trading Day.
Section 1.2 Generic Terms. All words used herein shall be
construed to be of such gender or number as the circumstances require. The words
"herein," "hereby," "hereof," "hereto," "hereinbefore" and "hereinafter," and
words of similar import, refer to this Agreement in its entirety and not to any
particular paragraph, clause or other subdivision, unless otherwise specified,
and Section, subsection, Schedule and Exhibit references are to this Agreement
unless otherwise specified.
Section 1.3 Valuation Calculations. All calculations to be
made herein shall be made on a basis that assumes that all acquisitions and
dispositions of assets are settled as of the related trade date, not the
settlement date.
ARTICLE II
THE POLICIES
Section 2.1 Policies. The Insurer agrees, subject to the
conditions hereinafter set forth, to issue up to six Policies to the Fund during
the period commencing on the Effective Date and ending on December 31, 2000 in
an aggregate amount up to $250,000,000. Each Policy shall (i) be issued on an
Inception Date with respect to a PPF, (ii) guarantee the Aggregate Guarantee
Amount with respect to such PPF on the date which is five years from the
issuance date of such Policy (the "Maturity Date"), (iii) be in an amount equal
to the Aggregate Guarantee Amount on the Inception Date with respect to such
PPF, (iv) be in an amount not less than $25,000,000 and (v) terminate by its
terms on the earlier of (A) the second Business Day immediately succeeding the
Maturity Date with respect to such PPF or (B) any date on which the Aggregate
Guarantee Amount with respect to such PPF equals zero.
Section 2.2 Procedure for Issuance of Policies. The Fund may
from time to time request that the Insurer issue a Policy by delivering to the
Insurer at its address for notices specified herein an application therefor
substantially in the form of Exhibit C (each an "Application"), completed to the
satisfaction of the Insurer, and such other information with respect to the
related PPF as the Insurer may reasonably request. Upon receipt of any
Application and satisfaction of the conditions precedent therefor set forth in
Section 2.3(b), the Insurer shall promptly issue and deliver to the Fund at its
address for notices specified herein the Policy requested thereby duly
authorized and executed by the Insurer (but in no event shall the Insurer send
any Policy to the Fund later than five Business Days after its receipt of the
Application therefor or be required to send any Policy to the Fund earlier than
two Business Days after its receipt of the Application therefor).
Section 2.3 Conditions Precedent to Effectiveness. (a) The
effectiveness of this Agreement is subject to the satisfaction of the following
conditions:
<PAGE>
11
(i) The Transaction Documents and the Custodian Agreement
shall be in full force and effect and the Transaction Documents shall
be in form and substance satisfactory to the Insurer and each
Transaction Document shall have been delivered to the Insurer;
(ii) The Insurer and the Fund shall have received a
certificate of the Secretary or Assistant Secretary of Aeltus, as to
the incumbency and signature of the officers or other employees of
Aeltus authorized to sign this Agreement and the other Transaction
Document to which it is a party on behalf of Aeltus, together with
evidence of the incumbency of such Secretary or Assistant Secretary,
certified by the Secretary or Assistant Secretary of Aeltus;
(iii) The Insurer and Aeltus shall have received a certificate
of the Secretary or Assistant Secretary of the Fund as to the
incumbency and signature of the officers or other employees of the Fund
authorized to sign this Agreement and the Transaction Documents to
which it is a party on behalf of the Fund, together with evidence of
the incumbency of such Secretary or Assistant Secretary, certified by
the Secretary or Assistant Secretary of the Fund;
(iv) Aeltus and the Fund shall have received a certificate of
the Secretary or Assistant Secretary of the Insurer as to the
incumbency and signature of the officers or other employees of the
Insurer authorized to sign this Agreement on behalf of the Insurer,
together with evidence of the incumbency of such Secretary or Assistant
Secretary, certified by the Secretary or Assistant Secretary of the
Insurer;
(v) The Insurer shall have received certificates of the
Secretary or Assistant Secretary of Aeltus certifying that attached
thereto are true, complete and correct copies of the resolutions duly
adopted by the Board of Directors of Aeltus authorizing the execution
of this Agreement and all Transaction Documents to which Aeltus is a
party;
(vi) The Insurer shall have received certificates of the
Secretary or Assistant Secretary of the Fund certifying that attached
thereto are true, complete and correct copies of resolutions duly
adopted by the Board of Directors of the Fund authorizing the execution
of this Agreement and all Transaction Documents to which it is a party;
(vii) Each party to this Agreement shall have received the
following executed legal opinions, in form and substance satisfactory
to each of the parties hereto:
(A) the opinion of Amy R. Doberman, Esq., counsel to
Aeltus, substantially to the effect set forth in
Exhibit D.
(B) the opinion of ____________________,
__________________ of the Custodian, substantially
to the effect set forth in Exhibit E.
(C) the opinion of _____________________, Associate
General Counsel and Vice President of the Insurer,
substantially to the effect set forth in Exhibit
F.
(D) the opinion of Amy R. Doberman, Esq., Counsel to
the Fund, substantially to the effect set forth in
Exhibit G.
<PAGE>
12
(viii) All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the transactions
contemplated by this Agreement and the other Transaction Documents
shall be satisfactory in form and substance to the Insurer, and the
Insurer shall have received such other documents and legal opinions in
respect of any aspect or consequence of the transactions contemplated
hereby or thereby as it shall reasonably request.
(b) The obligation of the Insurer to issue each Policy is
subject to the satisfaction of the following conditions on the
Inception Date with respect to the related PPF:
(i) The registration statement with respect to such PPF shall
have been filed with and declared effective by the U.S. Securities and
Exchange Commission, and a copy of each prospectus and statement of
additional information shall have been delivered to the Insurer;
(ii) The Insurer shall have received a certificate of the
Secretary or Assistant Secretary of the Fund dated as of such Inception
Date certifying that attached thereto are true, complete and correct
copies of the resolutions duly adopted by the Board of Directors
authorizing the creation of such PPF;
(iii) Each of the representations and warranties made by
Aeltus and the Fund in or pursuant to the Transaction Documents shall
be true and correct in all material respects on and as of such date;
(iv) No Default or Event of Default shall have occurred and be
continuing on such date;
(v) No statute, rule, regulation or order shall have been
enacted, entered or deemed applicable by any Government Authority which
would make the transactions contemplated by any of the Transaction
Documents illegal or otherwise prevent the consummation thereof; and
(vi) All proceedings, and all documents, instruments and other
legal matters in connection with the creation of such PPF shall be
satisfactory in form and substance to the Insurer.
Section 2.4 Premiums. In consideration of the issuance by the
Insurer of each Policy with respect to a PPF, the Fund shall pay to the Insurer
a fee in an amount equal to 0.33% per annum of the average daily NAV of such PPF
during the Guarantee Period (the "Policy Fee") payable monthly in arrears (each
a "Fee Payment Date"). Policy Fees payable on each Fee Payment Date shall be
calculated based on a 365- or 366-day year and the actual number of days
elapsed.
Section 2.5 Reimbursement Obligations. If, after any
Rebalancing on any Trading Day pursuant to Section 3.5 with respect to any PPF,
(x) all of the assets of such PPF are, or are required to be, invested solely in
U.S. Treasury and Agency Zeroes and Cash Equivalents, and (y) the Covered
Expense Ratio was less than the Higher Covered Expense Ratio on the Valuation
Date for such Trading Day, a "Permanent Deficit Event" shall be deemed to have
occurred. After the occurrence of a Permanent Deficit Event with respect to any
PPF, Aeltus hereby agrees to pay to the Insurer from time to time an amount
equal to each payment of any amount made for any reason by such PPF to Aeltus,
within two Business Days of the date of Aeltus' receipt of such payment, until
the first Valuation Date on which the Reimbursement Amount with respect to such
PPF equals or exceeds the product of the Permanent Deficit Reimbursement Ratio
and the Permanent Fee Deficit Amount for such PPF on such Valuation Date.
Thereafter, the Insurer hereby agrees to pay to Aeltus, on a quarterly basis, on
the last Business Day of
<PAGE>
13
each calendar quarter and on the Maturity Date of such PPF, the excess, if any,
of the Reimbursement Amount with respect to such PPF over the product of the
Permanent Deficit Reimbursement Ratio for such PPF times the Permanent Fee
Deficit Amount for such PPF as of the last Valuation Date of such calendar
quarter or such Maturity Date, as the case may be.
Section 2.6 Indemnification. (a) In addition to any and all
rights of reimbursement or any other rights pursuant hereto or under law or
equity, Aeltus agrees (i) to pay, or reimburse, the Insurer for all of its
reasonable out-of-pocket costs and expenses (including, without limitation as
provided in Section 7.4, the reasonable fees and disbursements of its counsel)
incurred in connection with the negotiation, preparation, execution and delivery
of this Agreement, the other Transaction Documents and any amendment, supplement
or modification thereof, or waiver or consent thereunder, (ii) to pay, or
reimburse, the Insurer for all of its reasonable out-of-pocket costs and
expenses (including, without limitation, the reasonable fees and disbursements
of its counsel) incurred in connection with the enforcement or preservation of
any rights under the Transaction Documents, (iii) to pay, indemnify, and hold
the Insurer harmless from any and all recording and filing fees and any and all
liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other taxes (excluding income taxes), if any, that may be payable or
determined to be payable in connection with the execution and delivery of, or
consummation or administration of any of the transactions contemplated by, or
any amendment, supplement or modification of, or any waiver or consent under or
in respect of the Transaction Documents and (iv) to pay, indemnify and hold the
Insurer and its officers, directors and employees (each an "Indemnitee")
harmless from and against any and all out-of-pocket liabilities (including
penalties), obligations, losses, damages, actions, suits, demands, claims,
judgments, costs, expenses or disbursements of any kind or nature whatsoever
that arise out of, or in any way relate to or result from or out of (A) the
transactions contemplated by the Transaction Documents or (B) any investigation
or defense of, or participation in, any legal proceeding relating to the
execution, delivery, enforcement, performance or administration of the
Transaction Documents (whether or not such Indemnitee is a party thereto) (all
the foregoing in clauses (i) through (iv) above, collectively, the "Indemnified
Liabilities"); provided that Aeltus shall have no obligation hereunder to any
Indemnitee with respect to Indemnified Liabilities arising from the gross
negligence, bad faith or willful misconduct of any Indemnitee. Any payments
required to be made by Aeltus under this Section 2.6 shall be due and payable by
Aeltus on the 30th day after demand therefor.
(b) The indemnity provisions of this Section 2.6, as well as
the reimbursement provisions set forth in Section 2.5, shall survive the
termination of this Agreement.
ARTICLE III
MANAGEMENT OF PPFs
Section 3.1 Eligible Investments. (a) Aeltus shall segregate
the assets of each such PPF from all other series of the Fund and ensure that
the investment of the assets of each independently satisfies the requirements of
this Article III.
(b) Aeltus shall, subject to the restrictions of Sections 3.2,
3.3, 3.4 and 3.5, invest the assets of each PPF only in the following types of
investments ("Eligible PPF Investments"):
(i) cash and the following short-term securities with
remaining maturities of 180 days or less: (1) direct obligations of,
and obligations fully guaranteed as to full and timely payment by the
full faith and credit of, the United States of America, excluding U.S.
Treasury and Agency Zeroes; (2) demand deposits, time deposits or
certificates of deposit of any depository institution or trust company
incorporated under the laws of the United States of America or any
state thereof;
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14
provided that at the time of investment therein the commercial paper or
other short-term unsecured debt obligations thereof shall be rated at
least A-1 by S&P or P-1 by Moody's; (3) bankers acceptances issued by
any depository institution or trust company referred to in clause (2)
above; and (4) commercial paper having at the time of the investment
therein a rating of at least A-1 by S&P or P-1 by Moody's;
(ii) U.S. Treasury or Agency Zeroes maturing on, or within the
90 days preceding, the Maturity Date with respect to such PPF;
(iii) Non-callable corporate debt securities maturing within
the three years preceding or the three years following the Maturity
Date with respect to such PPF and having a rating of at least AA- by
S&P or Aa3 by Moody's; provided that if both Moody's and S&P have
issued a rating thereon, such rating shall be no less than Aa3/AA-;
(iv) U.S. Treasury Futures;
(v) Index Equities; and
(vi) Index Futures.
Section 3.2 Investment Limitations. Aeltus shall invest the
assets of each PPF subject to the following limitations:
(a) all Cash Associated with Futures shall be invested in Cash
Equivalents;
(b) each PPF shall hold Cash Equivalents having Market Value
at all times at least equal to Cash Associated with Futures with respect to such
PPF;
(c) the Market Value of all Cash Equivalents held by such PPF
(less Cash Associated with Futures and Cash Margin with respect to such PPF) on
any Valuation Date shall not exceed 4% of the Total Asset Value with respect to
such PPF on such Valuation Date;
(d) no Cash Equivalent or U.S. Treasury or Agency Zero held by
any PPF shall mature after the Maturity Date with respect to such PPF;
(e) at the time of any investment in Corporate Bonds by a PPF,
no more than 2% of the Total Asset Value of such PPF shall be invested in
Corporate Bonds issued by a particular issuer or its affiliates;
(f) the Notional Value of all U.S. Treasury Futures held by a
PPF shall not exceed 50% of the Market Value of all Corporate Bonds held by such
PPF on any Valuation Date;
(g) on any Valuation Date, the Portfolio Duration of the
Corporate Bonds and U.S. Treasury Futures held by a PPF shall not be greater
than the Theoretical Zero Modified Duration of such PPF nor less than the
Theoretical Zero Modified Duration of such PPF minus 0.25;
(h) the aggregate Market Value of all Index Futures held by a
PPF on any Valuation Date shall not exceed 20% of the sum of (i) the aggregate
Market Value of all such Index Futures and (ii) the aggregate Market Value of
all Index Equities held by such PPF on such Valuation Date;
<PAGE>
15
(i) any Corporate Bond held by a PPF rated less than AA- by
S&P or less than Aa3 by Moody's shall be sold by such PPF with 15 Business Days
following the public announcement of such rating, and
(j) no investment shall be made in securities issued by Aetna
Inc.
Section 3.3 Index Equity Selection Guidelines. Aeltus shall
make each investment in Index Equities in any PPF in accordance with the
Selection Guidelines. Aeltus shall not make any material change in the Selection
Guidelines, including without limitation, the investment selection methodology
described therein, without the prior written consent of the Insurer.
Section 3.4 Index Equity Diversification and Capitalization
Requirements. Aeltus shall invest the assets of each PPF, to the extent such PPF
holds any Index Equities, such that the following requirements are satisfied as
of each Valuation Date:
(a) each PPF shall be invested in at least 400 of the 500
Index Equities; provided that no investment in an Index Equity will be included
for the purposes of satisfying the requirements set forth in this paragraph (a)
unless the Fund Weight with respect to such PPF and such Index Equity equals or
exceeds 40% of the Index Weight for such Index Equity;
(b) the aggregate of the Index Weights with respect to each of
the Index Equities which are held by such PPF and which satisfy the requirements
of paragraph (a) above shall not be less than 85%;
(c) the Fund Weight with respect to such PPF and each Index
Equity held by such PPF shall not exceed 200% of the Index Weight for such Index
Equity; and
(d) the Fund Sector Weight with respect to such PPF for each
Sector shall not: (i) exceed 135% of the Sector Index Weight for such Sector or
(ii) be less than 65% of the Sector Index Weight for such Sector.
Aeltus shall demonstrate its compliance with the requirements
and limitations set forth in this Section 3.4 by providing to the Insurer,
within 10 calendar days of the end of each month, a report for each PPF as of
such month end, substantially in the form attached hereto as Exhibit H.
Section 3.5 Asset Allocation and Rebalancing. (a) If, with
respect to any PPF, prior to the open of trading on the NYSE on any Trading Day,
the excess of (1) the sum of:
(i) 70% of the aggregate Market Value of all Index Equities
held by such PPF on the Valuation Date for such Trading Day,
(ii) the aggregate Market Value of all Cash Equivalents held
in such PPF (less Cash Associated with Futures and Cash Margin with
respect to such PPF) on the Valuation Date for such Trading Day,
(iii) the aggregate Market Value of all U.S. Treasury and
Agency Zeroes held by such PPF on the Valuation Date for such Trading
Day,
<PAGE>
16
(iv) the aggregate Market Value of all Corporate Bonds held by
such PPF on the Valuation Date for such Trading Day,
(v) the aggregate Market Value of all Cash Margin held by such
PPF on the Valuation Date for such Trading Day, and
(vi) 70% of the aggregate Market Value of all Index Futures
held by such PPF on such Trading Day,
over (2) an amount equal to the aggregate amount of accrued and unpaid expenses
and other liabilities of such PPF (the "Adjusted Total Asset Value") is less
than the Asset Allocation Threshold, Aeltus shall sell a portion of the Index
Equities held by such PPF and reinvest the proceeds of such sale in U.S.
Treasury or Agency Zeroes, Corporate Bonds and/or Cash Equivalents such that,
after giving effect to such sale and reinvestment of proceeds, the Adjusted
Total Asset Value would equal or exceed the sum of the Present Value of the
Aggregate Guarantee Amount plus the Present Value of Covered Expenses with
respect to such PPF (each such divestiture and reinvestment, a "Rebalancing").
The foregoing determination (an "Asset Allocation Test") shall be performed by
Aeltus with respect to each PPF prior to the open of trading on the NYSE on each
Trading Day. If, on any Trading Day, Aeltus fails to effect a Rebalancing
required by this Section 3.5, Aeltus shall provide the Insurer and the Custodian
with written notice of such failure prior to the next succeeding Trading Day.
(b) If, on any Trading Day, with respect to any PPF, the
aggregate Market Value of all Index Equities permitted to be held by such PPF in
accordance with the Asset Allocation Test is less than 40% of the Total Asset
Value of such PPF, Aeltus shall seek to sell all Corporate Bonds held by such
PPF on such Trading Day and reinvest the proceeds thereof in U.S. Treasury or
Agency Zeroes or Cash Equivalents.
(c) Aeltus shall report the results of each Asset Allocation
Test with respect to each PPF for each Trading Day in a report substantially in
the form attached hereto as Exhibit I, and shall deliver each such report to the
Insurer prior to the opening of business on the next succeeding Trading Day.
ARTICLE IV
EVENTS OF DEFAULT
Section 4.1 Default. If any of the following events (each, an
"Event of Default") shall occur and be continuing:
(a) Aeltus shall default in its observance or performance of
any agreement or obligation contained in Section 3.1 or 3.5(b) and such default
shall continue unremedied for a period of three Trading Days;
(b) Aeltus shall default in its observance or performance of
any agreement or obligation contained in Section 3.2, 3.3 or 3.4 and such
default shall continue unremedied for a period of three Trading Days;
provided, however that Aeltus shall not be in default of its obligations
contained in Section 3.2(c) on any Trading Day on which the market for
Treasury obligations of the U.S. Government is closed;
<PAGE>
17
(c) Aeltus shall default in its observance or performance of
any agreement or obligation contained in Section 3.5(a) or 3.5(c) and such
default shall continue unremedied for a period of one Trading Day;
(d) Aeltus or the Fund shall default in the observance or
performance of any agreement or obligation contained in this Agreement (other
than any obligation or agreement referred to in paragraphs (a) through (c)
above) and such default remains unremedied for a period of 15 Trading Days after
the date on which written notice thereof shall have been given by the Insurer to
Aeltus; or
(e) Any representation or warranty made or deemed made by
Aeltus or the Fund in this Agreement or which is contained in any certificate,
document or financial or other statement furnished at any time under or in
connection with this Agreement shall prove to have been incorrect in any
material respect on or as of the date made or deemed made and such breach
remains unremedied for a period of 15 Trading Days after the date on which
written notice thereof shall have been given by the Insurer to Aeltus or the
Fund;
then and only then the Insurer shall have the right to direct the investment of
funds in the particular PPF or PPFs pursuant to Section 3 of the Custodian
Service Agreement in the manner and to the extent provided in Section 4.2.
Section 4.2 Remedies. (a) After the occurrence and during the
continuance of an Event of Default with respect to a PPF or an Event of Default
not relating to a particular PPF, the Insurer shall have the right to deliver to
Aeltus and the Custodian an Event of Default Notice (as defined in the Custodian
Service Agreement). During the period (the "Default Period") from and including
the date on which the Custodian receives an Event of Default Notice from the
Insurer to and excluding the Business Day following the date on which the
Insurer gives the Custodian a Cure Notice (as defined in the Custodian Service
Agreement), the Insurer shall have the right to direct the investment of the PPF
as to which such Event of Default shall have occurred or all PPF's, as the case
may be, by delivering to the Custodian, pursuant to Section 3 of the Custodian
Service Agreement, as described below. In the event that during the Default
Period the Insurer receives written investment instructions from Aeltus, the
Insurer shall promptly forward such instructions to the Custodian unless the
Insurer determines that the execution of such instructions would result in the
occurrence of another Default or, after the occurrence and during the
continuance of an Event of Default specified in Section 4.1 (a), (b) or (c),
that the execution of such instructions would not result in the cure of the
breach causing such Event of Default.
(b) In the event that during a Default Period and after the
occurrence and during the continuance of an Event of Default with respect to a
PPF specified in Section 4.1 (a), (b) or (c) herein, the Insurer shall not have
received written investment instructions from Aeltus with respect to such PPF in
the format set forth in the Custodian Service Agreement, the execution of which
would result in the cure of the breach causing such Event of Default, without
resulting in the occurrence of another Default, by 10:00 a.m., New York City
time, on the later of the first day of such Default Period and the Trading Day
after the occurrence of such Event of Default, the Insurer shall have the right
to provide the Custodian with its own investment instructions pursuant to
Section 3 of the Custodian Service Agreement, subject to the following
conditions:
(i) after giving effect to any changes to the investments of
such PPF at the direction of the Insurer, the investments of such PPF
shall be consistent with Article III;
<PAGE>
18
(ii) any changes made to the investments of such PPF at the
direction of the Insurer shall be limited to those that are reasonably
necessary to cure the breach causing such Event of Default;
(iii) if such Event of Default is specified in Section 4.1(a)
or (b), the Insurer shall direct the sale of the specific securities
necessary to cure the breach causing such Event of Default; further, if
the securities which the Insurer directs to be sold are equity
securities, then the Insurer shall reinvest the proceeds therefrom in
Index Equities by directing the purchase, to the extent practicable, of
a pro rata portion of the Index Equities held by the PPF as to which
such Event of Default shall have occurred, unless doing so would result
in another Event of Default pursuant to Section 4.1(c), in which case
the Insurer shall reinvest the proceeds in U.S. Treasury or Agency
Zeroes; if the securities which the Insurer must cause to be sold are
fixed income securities, then the Insurer shall reinvest the proceeds
therefrom in eligible U.S. Treasury or Agency Zeroes; and
(iv) if such Event of Default is specified in Section 4.1(c),
the minimum amount of Index Equities or Index Futures as is reasonably
necessary, after giving effect to the reinvestment of the proceeds
thereof in U.S. Treasury or Agency Zeroes or Cash Equivalents, to cause
the Adjusted Total Asset Value with respect to the PPF as to which such
Event of Default shall have occurred to equal the sum of the Present
Value of the Aggregate Guarantee Amount plus the Present Value of
Covered Expenses with respect to such PPF, shall be sold; further, to
the extent practicable, a pro rata portion of the Index Equities and
the Index Futures held by the PPF as to which such Event of Default
shall have occurred shall be sold.
(c) In the event that, after the occurrence and during the
continuance of an Event of Default specified in Section 4.1(d) or (e), the
Insurer shall not have received written instructions from Aeltus or the written
instructions received from Aeltus would result in the occurrence of a Default,
then the Insurer shall have no right to direct the investment of the PPF as to
which such Event of Default shall have occurred pursuant to Section 3 of the
Custodian Service Agreement or otherwise, provided no Event of Default specified
in Section 4.1(a), (b) or (c) shall have occurred and be continuing. If an Event
of Default specified in Section 4.1(d) or (e) shall occur and be continuing, it
shall be deemed to have occurred with respect to all PPFs.
(d) After the occurrence and during the continuance of an
Event of Default, Aeltus shall deliver trade instructions only through the
Insurer in accordance with this Section 4.2 with respect to the PPF as to which
the Event of Default has occurred.
(e) Upon the cure of an Event of Default, the Insurer shall
give prompt written notice of such cure to Aeltus and, unless another Event of
Default shall have occurred and be continuing, shall promptly give a Cure Notice
to the Custodian pursuant to the Custodian Service Agreement. Other than after
the occurrence and during the continuance of an Event of Default, the Insurer
shall have no right to direct the investment of funds in the PPFs.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.1 Representations and Warranties of Aeltus. To
induce the Insurer to enter into this Agreement and to issue the Policies,
Aeltus hereby represents and warrants to the Insurer that:
<PAGE>
19
(a) Aeltus (i) is a Connecticut corporation duly organized,
validly existing and in good standing under the laws of the State of
Connecticut, (ii) has the corporate power and authority, and the legal right, to
own its assets and to transact the business in which it is engaged, (iii) is
duly qualified to do business and is in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification except where the failure to so qualify
would not have a material adverse effect on Aeltus' ability to perform its
obligations under the Transaction Documents and (iv) is in compliance with all
Requirements of Law except where non-compliance would not have a material
adverse effect on Aeltus' ability to perform its obligations under the
Transaction Documents or the validity or enforceability of the Transaction
Documents.
(b) Aeltus has the corporate power and authority, and the
legal right, to execute, deliver and perform the Transaction Documents to which
it is a party and has taken all necessary action required by applicable
Requirements of Law to authorize the execution, delivery and performance of the
Transaction Documents to which it is a party. Except as has been obtained, no
consent or authorization of, filing with, or other act by or in respect of, any
Government Authority or any other Person is required in connection with the
execution, delivery, performance, validity or enforceability by or against
Aeltus of the Transaction Documents to which it is a party. This Agreement has
been, and each other Transaction Document to which Aeltus is a party will be,
duly executed and delivered on behalf of Aeltus. This Agreement constitutes, and
each other Transaction Document to which Aeltus is a party, when executed and
delivered, will constitute, a legal, valid and binding obligation of Aeltus
enforceable against Aeltus in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
(c) The execution, delivery and performance of the Transaction
Documents to which Aeltus is a party will not violate any Requirement of Law or
Contractual Obligation of Aeltus and will not result in, or require, the
creation or imposition of any Lien on any of its property, assets or revenues
pursuant to any such Requirement of Law or Contractual Obligation except where
such violation would not have a material adverse effect on Aeltus' ability to
perform its obligations under the Transaction Documents or the validity or
enforceability of the Transaction Documents.
(d) No litigation, proceeding or investigation of or before
any arbitrator or Governmental Authority is pending or threatened by or against
Aeltus or against any of its properties or revenues (i) asserting the invalidity
or unenforceability of any of the Transaction Documents, (ii) seeking to prevent
the consummation of any of the transactions contemplated by the Transaction
Documents or (iii) seeking any determination or ruling that might materially and
adversely affect (A) Aeltus' ability to perform its obligations under the
Transaction Documents, (B) the validity or enforceability of the Transaction
Documents or (C) the Insurer.
Section 5.2 Representations and Warranties of the Fund. The
Fund hereby represents and warrants to the Insurer that:
(a) The Fund (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland; (ii) has
the corporate power and authority, and the legal right, to own its assets and to
transact the business in which it is engaged; (iii) is duly qualified to do
business and is in good standing under the laws of each jurisdiction where its
ownership or lease of property or the conduct of its business requires such
qualification except where the failure to so qualify would not have a material
adverse effect on the Fund's ability to perform its obligations under the
Transaction Documents; and (iv) is in compliance with all Requirements of Law
except where non-compliance would not have a material
<PAGE>
20
adverse effect on the Fund's ability to perform its obligations under the
Transaction Documents or the validity or enforceability of the Transaction
Documents.
(b) The Fund has the corporate power and authority, and the
legal right, to execute, deliver and perform this Agreement and has taken all
necessary action required by applicable Requirements of Law to authorize the
execution, delivery and performance of this Agreement. No consent or
authorization of, filing with, or other act by or in respect of, any Government
Authority or any other Person is required in connection with the execution,
delivery, performance, validity or enforceability by or against the Fund of the
Transaction Documents to which it is a party, other than a filing made under the
Securities Act of 1933 and the Investment Company Act of 1940. This Agreement
has been duly executed and delivered on behalf of the Fund and constitutes a
legal, valid and binding obligation of the Fund enforceable against the Fund in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles
(whether enforcement is sought by proceedings in equity or at law).
(c) The execution, delivery and performance of the Transaction
Documents to which it is a party will not violate any Requirement of Law or
Contractual Obligation of the Fund and will not result in, or require, the
creation or imposition of any Lien on any of its property, assets or revenues
pursuant to any such Requirement of Law or Contractual Obligation except where
such violation would not have a material adverse effect on the Fund's ability to
perform its obligations under the Transaction Documents to which it is a party
or the validity or enforceability of the Transaction Documents to which it is a
party.
(d) No litigation, proceeding or investigation of or before
any arbitrator or Governmental Authority is pending or threatened by or against
the Fund or against any of its properties or revenues (i) asserting the
invalidity or unenforceability of this Agreement, (ii) seeking to prevent the
consummation of any of the transactions contemplated by the Transaction
Documents to which it is a party or (iii) seeking any determination or ruling
that might materially and adversely affect (A) the Fund's ability to perform its
obligations under this Agreement, (B) the validity or enforceability of this
Agreement or (C) the Insurer.
ARTICLE VI
COVENANTS
Section 6.1 Covenants of Aeltus. Aeltus hereby covenants and
agrees that during the term of this Agreement:
(a) it shall comply in all material respects with the terms
and conditions of the Transaction Documents to which it is a party and shall
provide the Insurer with written notice immediately upon becoming aware of any
material breach by it of the provisions of any such agreements;
(b) it shall not amend, supplement or otherwise modify, or
agree to any waiver with respect to any provision of the Custodian Service
Agreement without the prior written consent of the Insurer;
(c) it shall promptly notify the Insurer of any information or
event, to the knowledge of Aeltus, that would be reasonably likely to result,
through passage of time or otherwise, in the occurrence of an Event of Default;
<PAGE>
21
(d) it shall provide to the Insurer copies of the prospectus
provided to potential PPF Shareholders and such additional information with
respect to the PPFs as the Insurer may from time to time reasonably request;
(e) it shall not amend or otherwise modify the Sectors as set
forth on Annex B, without the prior written consent of the Insurer; and
(f) it shall not terminate any PPF during the Guarantee Period
prior to the Maturity Date.
Section 6.2 Covenants of the Fund.
(a) in the event that either it or the Custodian shall
terminate the Custodian Agreement or the Custodial Services Agreement, it shall
enter into a custodian agreement and a Custodian Service Agreement with a
successor Custodian prior to the effective date of such termination;
(b) within 90 days of the end of each PPF's fiscal year, it
shall provide to the Insurer the financial statements for each PPF with respect
to such fiscal year, audited by independent public accountants;
(c) other than in connection with a Distribution to PPF
Shareholders, it shall not divide the shares of any PPF into a greater number of
shares of lesser value or combine them into a lesser number of shares of greater
value; and
(d) it shall not replace Aeltus as investment adviser to any
PPF unless the successor adviser is subject to terms and conditions
substantially similar to those contained in this Agreement.
ARTICLE VII
FURTHER AGREEMENTS
Section 7.1 Obligations Absolute. The obligations of Aeltus
and the Fund pursuant to this Agreement are absolute and unconditional and will
be paid or performed strictly in accordance with the respective terms thereof,
irrespective of:
(a) any lack of validity or enforceability of, or any
amendment or other modification of, or waiver with respect to, the Transaction
Documents;
(b) any amendment or waiver of, or consent to departure from,
the Policies or any Transaction Document;
(c) the existence of any claim, set-off, defense or other
rights either may have at any time against the other, any beneficiary or any
transferee of the Policies (or any persons or entities for whom any such
beneficiary or any such transferee may be acting), the Insurer or any other
person or entity whether in connection with the Policies, this Agreement or any
unrelated transactions;
(d) any statement or any other document presented under the
Policies (including any Notice for Payment (as defined in the Policies)) proving
to be forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect whatsoever;
<PAGE>
22
(e) the inaccuracy or alleged inaccuracy of any Notice for
Payment upon which any drawing under a Policy is based;
(f) payment by the Insurer under a Policy against presentation
of a draft of certificate which does not comply with the terms of such Policy,
provided that such payment shall not have constituted gross negligence or
willful misconduct or bad faith of the Insurer;
(g) any default or alleged default of the Insurer under a
Policy other than a default with respect to payment thereunder; or
(h) any other circumstance or happening whatsoever, provided
that the same shall not have constituted gross negligence, willful misconduct or
bad faith of the Insurer and to the extent that such do not result in a default
with respect to payments under the Policies.
Section 7.2 Reinsurance and Assignments. The Insurer shall
have the right to give participation in its rights under this Agreement and to
enter into contracts of reinsurance with respect to the Policies, provided that
the Insurer agrees that any such disposition will not alter or affect in any way
whatsoever the Insurer's direct obligations hereunder and under the Policies.
Neither Aeltus nor the Fund may assign its obligations under this Agreement
without the prior written consent of the Insurer.
Section 7.3 Fund Liability. Any other provision to the
contrary notwithstanding, any liability of the Fund under this Agreement with
respect to a PPF, or in connection with the transactions contemplated herein
with respect to a PPF, shall be discharged only out of the assets of that PPF,
and no other portfolio of the Fund shall be liable with respect thereto.
Section 7.4 Liability of the Insurer. Aeltus and the Fund
agree that neither the Insurer, nor any of its officers, directors or employees
shall be liable or responsible for (except to the extent of its own or their
gross negligence, willful misconduct or bad faith) (a) the use which may be made
of any Policy by any Person or for any acts or omissions of another Person in
connection therewith or (b) the validity, sufficiency, accuracy or genuineness
of any documents delivered to the Insurer, or of any endorsement(s) thereon,
even if such documents should in fact prove to be in any or all respects
invalid, insufficient, fraudulent or forged. In furtherance and not in
limitation of the foregoing, the Insurer may accept documents that appear on
their face to be in order, without responsibility for further investigation
(except to the extent that the Insurer acted with gross negligence, willful
misconduct or bad faith).
Section 7.5 Fees and Expenses. Aeltus agrees to pay all
reasonable costs and expenses in connection with the preparation, execution and
delivery of the Transaction Documents and all other documents delivered with
respect thereto, including, without limitation, the fees of Moody's and S&P
incurred by the Insurer in connection with this Agreement and the transactions
contemplated hereby and by the other Transaction Documents and the fees of
Simpson Thacher & Bartlett, counsel to the Insurer. All such fees, costs and
expenses shall be payable on or prior to the date which is 30 days from the date
on which an invoice for any such fees, costs and expenses shall have been
presented to Aeltus.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Amendments and Waivers. No amendment or waiver of
any provision of this Agreement nor consent to any departure therefrom, shall in
any event be effective unless in writing and
<PAGE>
23
signed by all of the parties hereto; provided that any waiver so granted shall
extend only to the specific event or occurrence so waived and not to any other
similar event or occurrence which occurs subsequent to the date of such waiver.
Aeltus shall provide Moody's with written notice of any amendment or waiver of
the provisions of this Agreement.
Section 8.2 Notices. Except to the extent otherwise expressly
provided herein, all notices, requests and demands to or upon the respective
parties hereto and Moody's to be effective shall be in writing (and if, sent by
mail, certified or registered, return receipt requested) or confirmed facsimile
transmission and, unless otherwise expressly provided herein, shall be deemed to
have been duly given or made when delivered by hand, or three Business Days
after being deposited in the mail, postage prepaid, or, in the case of facsimile
transmission, when sent, addressed as follows:
If to Aeltus:
-------------
Aeltus Investment Management, Inc.
10 State House Square, SH11
Hartford, Connecticut 06103-3602
Attention: Vice President & General Counsel
Telephone: (860) 275-2032
Facsimile: (860) 275-2158
If to the Fund:
---------------
10 State House Square, SH14
Hartford, Connecticut 06103-3602
Attn: President
Telephone: (860) 275-3055
Facsimile: (860) 275-3394
If to the Insurer:
------------------
MBIA Insurance Corporation
113 King Street
Armonk, New York 10504
Attention: Mr. Kevin Loescher
Telephone: 914/765-3933
Facsimile: 914/765-3161
If to Moody's:
--------------
Moody's Investors Service
99 Church Street
New York, New York
Attention:
Telephone: (212)
Facsimile: (212)
Section 8.3 No Waiver, Remedies and Severability. No failure on the
part of the Insurer to exercise, and no delay in exercising, any right
hereunder shall operate as a waiver thereof, nor shall any
<PAGE>
24
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law. The
parties further agree that the holding by any court of competent jurisdiction
that any remedy pursued by the Insurer hereunder is unavailable or unenforceable
shall not affect in any way the ability of the Insurer to pursue any other
remedy available to it. In the event any provision of this Agreement shall be
held invalid or unenforceable by any court of competent jurisdiction, the
parties hereto agree that such holding shall not invalidate or render
unenforceable any other provision hereof.
Section 8.4 Payments. All payments to the Insurer hereunder shall be
made in lawful currency of the United States in immediately available funds and
shall be made prior to 2:00 p.m. (New York City time) on the date such payment
is due by wire transfer to The Chase Manhattan Bank, ABA #021-000021, MBIA
Insurance Corporation Account Number 910-2-721-728 or to such other office or
account as the Insurer may direct. All payments to Aeltus hereunder shall be
made in lawful currency of the United States and in immediately available funds
on the date such payment is due by wire transfer to , or to
such other office or account as the Fund may direct.
Whenever any payment under this Agreement shall be stated to
be due on a day which is not a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in such cases be
included in computing interest or fees, if any, in connection with such payment.
Section 8.5 Governing Law. This Agreement shall be construed,
and the obligations, rights and remedies of the parties hereunder shall be
determined, in accordance with the laws of the State of New York.
Section 8.6 Counterparts. This Agreement may be executed in
counterparts of the parties hereto, and each such counterpart shall be
considered an original and all such counterparts shall constitute one and the
same instrument.
Section 8.7 Paragraph Headings, Etc. The headings of
paragraphs contained in this Agreement are provided for convenience only. They
form no part of this Agreement and shall not affect its construction or
interpretation.
Section 8.8 Termination. This Agreement shall terminate on the
earlier of: (a) the first date as of which the final outstanding Policy has
terminated in accordance with the provisions thereof and the Insurer has
recovered all amounts owing to it hereunder or (b) the date on which the
Aggregate Guarantee Amount with respect to each PPF equals zero. Any termination
of this Agreement will be effective only upon the delivery to the Insurer of all
Policies, whereupon the Policies will be cancelled and the Insurer's liabilities
thereunder will cease.
<PAGE>
25
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, all as of the day and year first above mentioned.
MBIA INSURANCE CORPORATION,
as Insurer
By: ___________________________________________
Name:
Title:
AELTUS INVESTMENT MANAGEMENT, INC.
By: ___________________________________________
Name:
Title:
AETNA SERIES FUND, INC.
By: ___________________________________________
Name:
Title:
<PAGE>
ANNEX A
THE EQUITY PORTFOLIO ("INDEX PLUS LARGE CAP")
Investment The investment philosophy of the equity
philosophy portfolio, a quantitative "Index Plus Large Cap"
strategy, is based on the following principles:
[bullet] Rigorous quantitative analysis can identify
those securities having the greatest
likelihood of underperformance.
[bullet] A portfolio that avoids the underperforming
securities in the S&P 500 will outperform
the Index.
Quantitative The process begins with output from an internally
ranking developed quantitative model that ranks every issue
in the S&P 500 using factors which Aeltus has
identified as being predictors of relative
performance. The model produces a weighted aggregate
score, and ranks the universe.
Portfolio Screening and Weighting
construction
After the quantitative evaluation, well ranked stocks
are overweighted and poorly ranked stocks are
underweighted. Bottom decile stocks and Aetna Inc.
are not owned at all. If the data needed for such
quantitative evaluation is not available for a
particular company, the company will be held in the
equity portfolio at its index weight.
Final Construction
Finally, the screened and weighted portfolio is
tested to assure appropriate representation in each
of the 12 S&P 500 industry sectors (as set forth in
Annex B). If any sector of the Portfolio is less than
65% of the S&P 500 weight, Aeltus will increase its
investment in that sector sufficiently to meet this
criterion. Similarly, if any sector is greater than
135% of the S&P weight, Aeltus will decrease its
investment in that sector sufficiently to meet this
criterion. The portfolio is generally rebalanced
monthly to reflect changes in rank and/or weighting
components.
Use of Futures Transaction efficiency is improved by using S&P 500
futures. They will represent no more than 20% of the
equity portfolio, and will not be leveraged or used
for speculative purposes.
<PAGE>
ANNEX B
SECTOR LIST
Sector Abbreviation Sector Name
------------------- -----------
CAPG CAPITAL GOODS
TECH TECHNOLOGY
CONC CONSUMER CYCLICALS
CONN CONSUMER NON-CYCLICALS
HELT HEALTH CARE
RETL RETAILERS
RAWM RAW MATERIALS
TRAN TRANSPORTATION
ENGY ENERGY
FINN FINANCIAL
TELF TELEPHONE UTILITIES
ELUT ELECTRIC UTILITIES
<PAGE>
<TABLE>
ANNEX C
SAMPLE CALCULATION OF HYPOTHETICAL TOTAL ASSET VALUE
<CAPTION>
If Actual Data Based Then Hypothetical
on Actual Expense Data if Higher
Ratio in Asset Covered Expense
Allocation Model Ratio had been used
were: would be:
---------------------- ----------------------
<S> <C> <C>
Business Day Preceding Permanent Deficit Event:
- Equity Percentage 30.0% 19.7% (a)
- Discount Rate 5.50% 5.50%
- Remaining Time to Maturity (in Years) 4.00 4.00
- Actual Expense Ratio in Asset Allocation Model 1.40% 1.40%
- Higher Covered Expense Ratio 2.25% 2.25%
- Gross Principal Guarantee $ 100,000,000 $ 100,000,000
- Present Value of Aggregate Guarantee Amount plus $ 85,093,654 $ 85,093,654
Present Value of Covered Expenses using Actual Expense
Ratio
- Present Value of Aggregate Guarantee Amount plus $ 87,982,971 $ 87,982,971
Present Value of Covered Expenses using Higher Covered
Expense Ratio
- Cash Equivalent Value $ 0 $ 0
- Equity Portfolio Value $ 28,052,853 $ 18,421,799 (b)
- Fixed Income Portfolio Value $ 65,456,657 $ 75,087,712 (c)
- Total Asset Value $ 93,509,510 $ 93,509,510 (d)
- Adjusted Total Asset Value $ 85,093,654 $ 87,982,971
Date on Which Permanent Deficit Event Occurs
- Change in Equity Portfolio Value -40.00% -40.00% (e)
- Change in Disc. Rate -0.50% -0.50%
- Change in Fixed Income Portfolio Value 2.00% 2.00% (f)
- Cash Equivalent Value $ 0 $ 0
- Equity Portfolio Value $ 16,831,712 $ 11,053,079 (g)
- Fixed Income Portfolio Value $ 66,765,790 $ 76,589,466 (h)
------------------
- Total Asset Value $ 83,597,502 $ 87,642,544 (i)
------------------
</TABLE>
(a) Amount of equity allowed in order for the Present Value of the Aggregate
Guarantee Amount plus the Present Value of Covered Expenses using the
Higher Covered Expense Ratio to exactly equal the Adjusted Total Asset
Value.
(b) The Total Asset Value times the equity percentage, or (a) times (d).
(c) The Total Asset Value minus the Equity Portfolio Value, or (d) minus (b).
(d) Equals the actual Total Asset Value as of this date.
(e) Equals the actual change in the value of the actual Equity Portfolio.
(f) Equals the actual change in the value of the actual Fixed Income Portfolio.
(g) Equals the adjusted hypothetical Equity Portfolio Value, or (b) times one
plus (e).
(h) Equals the adjusted hypothetical Fixed Income Portfolio Value, or (c) times
one plus (f).
(i) Equals the sum of the adjusted hypothetical Equity and Fixed Income
Portfolio Values, or (g) plus (h).
EXHIBIT h.13
FORM OF
SERVICE AGREEMENT
<PAGE>
FORM OF
SERVICE AGREEMENT
THIS AGREEMENT made as of the __ day of ________, 1999 by and
among AETNA SERIES FUND, INC. ("Fund"), MBIA INSURANCE CORPORATION ("MBIA") and
MELLON BANK, N.A. ("Mellon").
WHEREAS, the Fund intends to establish a separate series of the
Fund, Aetna Principal Protection Fund I ("Series"), with an obligation by the
Series to repay the amount initially invested by each shareholder in the Series
on a date certain ("Repayment Obligation"); and
WHEREAS, the Fund, on behalf of the Series, has entered into a
Financial Guaranty Agreement with MBIA (the "Financial Guaranty Agreement")
whereby MBIA will issue a policy to support the Series' Repayment Obligations
("Policy"); and
WHEREAS, in connection therewith, the Fund intends to open custody
accounts with Mellon under the terms of the Custodian Agreement (the "Custodial
Services Agreement") between the Fund and Mellon dated as of September 1, 1992,
as amended, on behalf of the Series, to hold the Series' portfolio investments;
and
WHEREAS, under the terms of the Financial Guaranty Agreement, in
consideration of MBIA's issuing the Policy, the Series has agreed to a
particular investment strategy and to provide an arrangement whereby trades
executed for the Series will be monitored for conformity with certain
guidelines; and
WHEREAS, the Fund and MBIA wish for Mellon to provide investment
monitoring and trade execution services in respect of the Series, and Mellon is
willing to perform such services upon the following terms and conditions.
<PAGE>
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration the parties hereto agree to the following:
1. Construction.
-------------
Unless the context of this Agreement otherwise clearly requires,
references to the plural include the singular, the singular the plural and the
part the whole and "or" has the inclusive meaning sometimes represented by the
phrase "and/or". The words "hereof," "herein," "hereunder" and similar terms in
this Agreement refer to this Agreement as a whole and not to any particular
provision of this Agreement. The section and other headings contained in this
Agreement are for reference purposes only and shall not control or affect the
construction of this Agreement or the interpretation thereof in any respect.
Section, subsection, schedule, exhibit and attachment references are to this
Agreement unless otherwise specified.
2. Monitoring Services.
--------------------
The Fund, on behalf of the Series, will open with Mellon a custody
account designated "Series" (such designated custody account hereinafter
referred to as "Series Account"). The Series Account will contain the
appropriate designation in its title and will be operated subject to the terms
of the Custodial Services Agreement between Mellon and the Fund. Mellon will
monitor the assets delivered to the Series Account for conformity with the
guidelines set forth in Schedule A attached hereto entitled Conforming Assets
Guidelines (the "Guidelines"). For purposes of this Agreement, Mellon will only
be responsible for performing conforming assets tests on assets that are settled
through the Series Account. In order to carry out the conforming assets tests,
Mellon will rely on the trade information received from the Series and from
broker confirmations tendered by brokers to Mellon through The Depository Trust
Company's Institutional Delivery Confirmation System ("DTC ID"). Such trade
information must be
2
<PAGE>
complete, properly formatted and provided to Mellon in a timely manner. No
broker confirmation provided through DTC ID shall be deemed valid by Mellon
unless it includes the properly formatted account number for the Series Account,
enabling Mellon to process the DTC ID confirmation in the normal course of
business through its custody systems platform. Mellon shall perform the
conforming asset test with respect to each asset added to the Series Account
promptly after receipt of the related trade information and in any event within
one business day of such receipt. If by applying the conforming assets test to
the Series Account an instance of noncompliance with the Guidelines is noted,
Mellon will notify MBIA and the Series promptly of such noncompliance in writing
via facsimile transmission. Once Mellon has notified the Series and MBIA as to
the existence of noncompliance, Mellon shall have no further obligation or duty
to the Series and MBIA to monitor the trade, or to report its cure.
3. Notification of Event of Default/Trade Execution/Cure
Notice/Obligation to Reject Trades.
- -------------------------------------------------------------------
If MBIA notifies Mellon, by giving a written notice to Mellon,
with a copy to the Series, substantially in the format of Exhibit 1 hereto, that
an Event of Default under the Financial Guaranty Agreement has occurred and
remains uncured ("Event of Default Notice"), Mellon will promptly confirm
receipt of such notice via phone contact and facsimile to the Series.
After or concurrently with Mellon's receipt of an Event of Default
Notice and until the end of the related DK Period (as defined below), MBIA shall
be entitled to deliver to Mellon (with a copy to the Series) trade instructions
in the format of Attachment 1 to Exhibit 1 (for manual trade instructions) or in
the format of Attachment 2 to Exhibit 1 (for electronic instructions) with
respect to the Series Account. Each and every set of trade instructions
delivered by MBIA to Mellon shall be accompanied by a newly executed Event of
Default Notice.
3
<PAGE>
MBIA shall deliver to Mellon, with a copy to the Fund, a written notice of the
cure of such default, substantially in the format of Exhibit 2 hereto, promptly
upon the occurrence of such cure (the "Cure Notice").
From 12:01 a.m. eastern time on the Business Day (defined as a day
upon which the New York Stock Exchange is open for trading and is not a Saturday
or Sunday, and is neither a legal holiday nor a day on which banking
institutions are generally authorized or obligated by law or regulation to
close) immediately following the day upon which Mellon receives an Event of
Default Notice from MBIA until 12:01 a.m. eastern time on the Business Day
immediately following the day upon which Mellon receives a Cure Notice from MBIA
(a "DK Period"), Mellon shall reject and not act upon any trade instructions
(for settlement of securities) issued directly by the Series (or its investment
adviser) for the Series Account when the account number is specified in the
Event of Default Notice. With respect to the Series Account, Mellon shall, upon
the termination of a DK Period, revert to its normal method of accepting trade
instructions from the Fund (or its investment adviser) as governed by the
Custodial Services Agreement.
From the time Mellon receives an Event of Default Notice through
the end of the related DK Period, Mellon is irrevocably authorized and
instructed (i) to act upon any and all trade instructions delivered by MBIA
provided such trade instructions are accompanied by a newly executed Event of
Default Notice and (ii) to execute the transactions set forth in such
instructions through a broker or dealer selected by Mellon for the Series
Account. Mellon will promptly notify the Series, with a copy to MBIA, of trades
executed as a result of instructions received from MBIA. Such notification will
be made via transmission of a trade execution file, to the extent possible
(substantially in the format of Exhibit 5), by close of business on the date
such trades are executed.
4
<PAGE>
4. Delivery of Documents.
----------------------
The Series and MBIA will promptly furnish to Mellon such copies,
properly certified or authenticated, of documents and other related information
that Mellon may reasonably request or require to properly discharge its duties
herein.
5. Fees and Expenses.
------------------
(a) As compensation for the services rendered to the Fund and MBIA
pursuant to this Agreement, the Series shall pay Mellon monthly fees determined
as set forth in Schedule B hereto. Such fees are to be billed monthly and shall
be due and payable upon receipt of the invoice. The Fund and Mellon may agree,
from time to time, to a change to the fees set forth in Schedule B. Upon any
termination of the provision of services under this Agreement before the end of
any month, the fee for the part of the month before such termination shall be
prorated according to the proportion which such part bears to the full monthly
period and shall be payable upon the date of such termination.
(b) The Fund may request additional services, additional
processing, or special reports, with such specifications and requirements
documentation as may be reasonably required by the Fund or by Mellon. If Mellon
elects to provide such services or arrange for their provision, it shall be
entitled to additional fees and expenses at its customary rates and charges.
(c) All fees, out-of-pocket expenses, or additional charges of
Mellon shall be billed on a monthly basis and shall be due and payable by the
Series upon receipt of the invoice.
(d) Mellon will render, after the close of each month in which
services have been furnished, a statement reflecting all of the charges for such
month. Charges remaining unpaid thirty (30) days after receipt of such statement
shall bear interest in finance charges equivalent to Mellon's Prime Rate as
announced from time to time plus two (2) percent per annum and all costs
5
<PAGE>
and expenses of effecting collection of any such sums, including reasonable
attorney's fees, shall be paid by the Series to Mellon.
(e) In the event that the Series is more than sixty (60) days
delinquent in its payments of monthly billings in connection with this Agreement
(with the exception of specific amounts which may be contested in good faith by
the Series), this Agreement may be terminated upon sixty (60) days' written
notice to the Fund and MBIA by Mellon with a copy to MBIA. The Series must
notify Mellon in writing of any contested amounts, with a copy to MBIA, within
thirty (30) days of receipt of a billing for such amounts. Disputed amounts are
not due and payable while they are being investigated. MBIA reserves the right
to pay the delinquent amounts thereby eliminating Mellon's right to terminate
the Agreement under this subsection.
6. Limitation of Liability and Indemnification.
--------------------------------------------
(a) In undertaking the performance of its obligations hereunder,
Mellon shall not be liable for any loss, damage or expense suffered by the Fund,
the Series or MBIA in connection with the matters to which this Agreement
relates except for general damages solely caused by or resulting from willful
misfeasance, bad faith or negligence on the part of Mellon, its officers,
employees or agents, in the performance of its or their duties under this
Agreement. "General damages" means only those damages as directly and
necessarily result from such act or omission without reference to any special
conditions or circumstances of the Fund, the Series or MBIA. In no event shall
Mellon be liable for any indirect, special or consequential losses or damages of
any kind whatsoever (including but not limited to lost profits), even if Mellon
has been advised of the likelihood of such losses or damages and regardless of
the form of action through which any such losses or damages may be claimed.
6
<PAGE>
(b) Mellon shall not be responsible for, and the Series shall
indemnify and hold Mellon, its officers, employees and agents (collectively
"Mellon and its agents") harmless from and against any and all losses, damages,
costs, reasonable attorneys' fees and expenses, incurred by Mellon or its
agents, in the performance of its/their duties hereunder, including but not
limited to those arising out of or attributable to:
(i) any and all actions of Mellon and its agents required to
be taken pursuant to this Agreement;
(ii) the reliance on or use by Mellon and/or its agents of
information, records, or documents which are received by Mellon
and/or its agents and furnished to it or them by or on behalf of
the Fund, the Series or MBIA in accordance with this Agreement,
and which have been prepared or maintained by the Fund, the Series
or MBIA or any third party on behalf of either the Fund, the
Series or MBIA;
(iii) The Fund's or MBIA's refusal or failure to comply with
the terms of this Agreement or any agreement between the Series
Fund and MBIA relating to the matters herein, or the Fund's or
MBIA's lack of good faith, or its actions, or lack thereof,
involving negligence or willful misfeasance;
(iv) any delays, inaccuracies, errors in or omissions from
information or data provided to Mellon or its agents by MBIA or
the Series Fund or provided to Mellon or its agents by data or
corporate action services or vendors;
(v) the offer or sale of shares by the Series or MBIA in
violation of any requirement under the Federal securities laws or
regulations or the securities laws or regulations of any state, or
in violation of any stop order or other determination or ruling by
any Federal agency or any state agency with respect to the offer
or sale of
7
<PAGE>
such shares in such state (1) resulting from activities, actions,
or omissions by the Series or MBIA, or (2) existing or arising out
of activities, actions or omissions by or on behalf of the Series
or MBIA prior to the effective date of this Agreement;
(vi) all actions, omissions, or errors caused by third
parties to whom Mellon, its agents, the Fund on behalf of the
Series, or MBIA has assigned any rights and/or delegated any
duties under this Agreement at the request of or as required by
the Fund or MBIA; and
(vii) Mellon and its agents acting upon electronic or
written trade instructions given by MBIA pursuant to Section 3;
provided that, in no event shall Mellon or its agents be
indemnified for its or their negligence, bad faith or willful
misfeasance in carrying out its or their duties hereunder.
(c) MBIA shall indemnify and hold Mellon, and its agents harmless
from and against any and all losses, damages, costs, reasonable attorneys' fees
and expenses, incurred by Mellon and its agents insofar as such losses, damages
or costs arise out of, or are based upon, wrongful exercise by MBIA of its
rights under the Financial Guaranty Agreement to give instructions to Mellon
pursuant to Section 3 hereof; provided that, in no event shall Mellon or its
agents be indemnified for its or their negligence, bad faith or willful
misfeasance in carrying out its duties hereunder.
(d) In performing its services hereunder, Mellon and its agents
shall be entitled to rely only on written instructions (oral instructions are
not permitted), notices or other communications, including electronic
transmissions, bearing or purporting to bear the manual or facsimile signature
of any person from the Fund or MBIA (an "Authorized Person") named, and in the
capacity identified, in lists (naming those persons who may authorize the
transactions in
8
<PAGE>
Sections 2 and 3) which are attached hereto as Exhibit 3 (for the Fund) and
Exhibit 4 (for MBIA). Any changes to such lists will be furnished to Mellon from
time to time in writing and given in the manner set forth in Section 13 hereof
and will be signed by an officer of either the Fund or MBIA, as appropriate, who
shall provide Mellon with evidence of his or her authority to make such changes.
Each of the Fund, in Exhibit 3, and MBIA, in Exhibit 4, will provide Mellon with
authenticated specimen signatures of each Authorized Person, and each of the
Fund and MBIA shall indemnify Mellon and its agents for any loss or expense
caused by reliance upon such authenticated specimen signatures which Mellon and
its agents acting in good faith believe to be genuine, valid and authorized, and
shall be indemnified by each of the Fund, the Series Fund and MBIA as
appropriate for any loss or expense caused by such reliance. In addition, in
performing its services hereunder, Mellon and its agents also shall be entitled
to consult with and rely on the advice and opinions of legal counsel retained by
Mellon or the Fund or MBIA, as necessary or appropriate, including Mellon's
in-house counsel, and Mellon shall not be liable for any action taken, suffered
or omitted by it in accordance with the advice of such counsel.
(e) In the event that Mellon or its agents shall receive
instructions, claims or demands from the Fund or MBIA which, in Mellon's
opinion, conflict with any of the provisions of this Agreement, Mellon shall
notify the Fund or MBIA, as the case may be, of such conflict and shall be
entitled to refrain from taking any action and its sole obligation shall be to
keep safely all assets in the Series Account until it shall receive
instructions, claims or demands from such party which, in Mellon's opinion,
conform to the provisions of this Agreement.
(f) The duties and responsibilities of Mellon hereunder shall be
determined solely by the express provisions of this Agreement, except that the
settlement and safekeeping of assets in the Series Account shall be governed by
the terms of the Custodial Services Agreement between
9
<PAGE>
Mellon and the Fund. Should there be any conflict between the terms of the
Custodial Services Agreement and the terms of this Agreement regarding the
services set forth in Sections 2 and 3 of this Agreement, the terms of this
Agreement shall govern.
(g) Mellon shall have no responsibility to make recommendations
with respect to the purchase, retention or sale of assets relating to the Series
Account or to maintain any insurance on assets in the Series Account for the
benefit of MBIA or the Series.
(h) Mellon shall be entitled to perform the monitoring service set
forth in Section 2 hereof with affiliates of Mellon. If the monitoring service
set forth in Section 2 hereof cannot be performed by a Mellon affiliate for any
reason, then the monitoring services may be performed by an agent selected by
Mellon.
(i) Mellon shall have no responsibility for any act or omission,
or for the solvency or insolvency, or notice to Mellon or any of its affiliates
or agents of the solvency or insolvency, of any broker (other than a Mellon
affiliate selected by Mellon pursuant to Section 3 hereof to execute the trade
instructions provided by MBIA).
7. Term.
-----
This Agreement shall become effective on the date first herein
above written and may be modified or amended from time to time by mutual
agreement among the parties hereto. This Agreement shall continue in effect
unless terminated by any party hereto on 90 days' prior written notice to the
other parties. Upon termination of this Agreement, the Series shall pay to
Mellon such compensation and any out-of-pocket or other reimbursable expenses
which may become due or payable under the terms hereof as of the date of
termination or after the date that the provision of services ceases, whichever
is later.
10
<PAGE>
8. Representations.
----------------
(a) The Fund, on behalf of the Series, represents and warrants
that the Fund has directed the Series' investment adviser to comply with the
Guidelines and purchase for such accounts only assets conforming to the
Guidelines.
(b) Each of the parties hereto represents and warrants that: (i)
it has the legal right, power and authority to execute, deliver and perform this
Agreement and to carry out all of the transactions contemplated hereby; (ii) it
has obtained all necessary authorizations; (iii) the execution, delivery and
performance of this Agreement and the carrying out of any of the transactions
contemplated hereby will not be in conflict with, result in a breach of or
constitute a default under any agreement or other instrument to which it is a
party or which is otherwise known to it; (iv) it does not require the consent or
approval of any governmental agency or instrumentality, except any such consents
and approvals which it has obtained; and (v) the execution and delivery of this
Agreement by it will not violate any law, regulation, charter, by-law, order of
any court or governmental agency or judgment applicable to it.
9. Notices.
--------
Any notice required or permitted hereunder shall be in writing and
shall be deemed effective on the date of personal delivery (by private
messenger, courier service or otherwise) or upon confirmed receipt of telex or
facsimile or other electronic system acceptable to Mellon, whichever occurs
first, or upon receipt if by mail to the parties at the following address (or
such other address as a party may specify by notice to the others):
11
<PAGE>
If to the Fund or the Series:
Aetna Series Fund, Inc./Series
10 State House Square
Hartford, CT 06103-3602
Attention: Counsel
Phone: (860) 275-2032
Fax: (860) 275-2158
If to MBIA:
Attention:
Phone:
Fax:
If to Mellon:
Attention:
Phone:
Fax:
10. Waiver.
-------
The failure of a party to insist upon strict adherence to any term
of this Agreement on any occasion shall not be considered a waiver nor shall it
deprive such party of the right thereafter to insist upon strict adherence to
that term or any term of this Agreement. Any waiver must be in writing signed by
the waiving party.
12
<PAGE>
11. Amendments.
-----------
This Agreement may be modified or amended from time to time by
mutual written agreement of the parties hereto. No provision of this Agreement
may be changed, discharged, or terminated orally, but only by an instrument in
writing signed by the parties.
12. Severability.
-------------
If any provision of this Agreement is invalid or unenforceable,
the balance of the Agreement shall remain in effect, and if any provision is
inapplicable to any person or circumstance it shall nevertheless remain
applicable to all other persons and circumstances.
13. Governing Law.
--------------
This Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without regard to laws as to conflicts
of laws, and shall be binding on all the parties hereto and their respective
successors and assigns. The Fund, MBIA and Mellon hereby irrevocably submit to
the exclusive jurisdiction of the state and federal courts in the State and
County of New York for the purposes of any suit, action or other proceedings
arising out of this Agreement. The Fund, MBIA and Mellon hereby irrevocably
waive any objection on the ground of venue, forum non conveniens, or any similar
grounds, and irrevocably consent to service of process by mail or in any manner
permitted by New York law, and irrevocably waive their respective rights to any
jury trial. The headings of the sections hereof are included for convenience of
reference only and do not form a part of this Agreement.
14. Benefit of the Parties.
-----------------------
This Agreement is for the exclusive benefit of the parties hereto
and shall not be relied upon by or create any beneficial interest in any person
not a party hereto including any shareholders of the Fund.
13
<PAGE>
15. Counterparts.
-------------
This Agreement may be executed by the parties in a number of
counterparts each of which shall be an original and together shall constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date first written above.
AETNA SERIES FUND, INC.
By:_________________________________________
Name:_______________________________________
Title:______________________________________
MBIA INSURANCE CORPORATION
By:_________________________________________
Name:_______________________________________
Title:______________________________________
MELLON BANK, N.A.
By:_________________________________________
Name:_______________________________________
Title:______________________________________
14
<PAGE>
SCHEDULE A
CONFORMING ASSETS GUIDELINES
----------------------------
Equity Asset Test
- -----------------
[bullet] Equity securities of any company included in the S&P 500 Index, as
published by FactSet Data Systems, Inc.
[bullet] Forward contracts on the S&P 500 Index, as traded on the Chicago
Mercantile Exchange
Fixed Income Assets Test
- ------------------------
[bullet] U.S. Treasury or Agency Zeroes maturing on, or within 90 days
preceding, the Maturity Date
[bullet] Non-callable corporate debt securities maturing within 3 years
(preceding or following) of the Maturity Date and having a rating of at
least AA- by S&P or Aa3 by Moody's
[bullet] If both Moody's and S&P have issued a rating thereon, such rating shall
be no less than Aa3/AA-
[bullet] U.S. Treasury Futures
Cash and Cash Equivalents
- -------------------------
[bullet] Cash and
[bullet] the following short-term securities with remaining maturities of 180
days or less:
[bullet] (1) direct obligations of, and obligations fully guaranteed as
to full and timely payment by the full faith and credit of,
the United States of America, excluding U.S. Treasury and
Agency Zeroes
[bullet] (2) demand deposits, time deposits or certificates of deposit
of any depository institution or trust company incorporated
under the laws of the United States of America or any state
thereof; provided that at the time of investment therein the
commercial paper or other short-term unsecured debt
obligations thereof shall be rated at least A-1 by S&P or P-1
by Moody's
[bullet] (3) bankers acceptances issued by any depository institution
or trust company referred to in clause (2) above and
[bullet] (4) commercial paper having at the time of the investment
therein a rating of at least A-1 by S&P or P-1 by Moody's
<PAGE>
SCHEDULE B
FEES AND EXPENSES
-----------------
For the services rendered under this Agreement, the Fund shall pay to Mellon:
ASSUMPTIONS:
[bullet] Fund will consist of the following fund types:
[bullet] Combined Account Structure - Per Fund
- Equity Component = 450 Securities in the S&P 500
- Fixed Income Component = 15 Securities
[bullet] Fund of Funds Structure
- Equity Account = 450 Securities in the S&P 500
- Multiple Fixed Income Accounts = 15 Securities Per Account
[bullet] Equity transactions per fund type will not exceed 2,000 per year.
Should transactions exceed 2,000 transactions in a given fund, Mellon
may re-negotiate the fees for this service.
[bullet] Fixed income transactions per fund will not exceed 20 per year per
account. Should transactions exceed 20 per account, Mellon may
re-negotiate the fees for this service.
ACCOUNT FEE STRUCTURE PER ANNUM:
Combined Account Structure $30,000
Fund of Funds Structure
- Equity Component & First Three Fixed Income Components $30,000
- Fixed Income Component (after first three funds) $2,000
OTHER:
Fees will be computed, billed and payable on a monthly basis in advance.
The Fund shall pay any broker/dealer fees and expenses and any fees of Mellon
associated with the execution of any trade instruction.
Out-of-pocket expenses will be billed and payable monthly.
These fees will be effective for three years commencing with the date of the
Agreement. Mellon reserves the right to re-negotiate its compensation if the
nature of the account(s) change significantly. If non-standard or special
services are requested, Mellon may negotiate additional compensation
accordingly.
<PAGE>
EXHIBIT 1
EVENT OF DEFAULT NOTICE
[Date]
[Addressee - Mellon]
Re: Event of Default
----------------
Pursuant to Section 3 of the Service Agreement (the "Agreement") dated
______________ among Aetna Series Fund, Inc. ("Fund"), Mellon Bank, N.A.
("Mellon") and MBIA Insurance Corporation ("MBIA"), please be advised that an
Event of Default, as defined in Section 4.1 (__) relating to a default under
[Section 3.___ of](1) the Financial Guaranty Agreement dated _________ among the
Fund and MBIA, has occurred and [remains uncured. Please reject and do not act
upon any trade instructions for the settlement of securities issued directly by
the Series Fund (or its investment adviser) for the Aetna Principal Protection
Fund I Account # _______.] or [was cured on the date hereof, as indicated in a
Cure Notice dated the date hereof](2) Please have the following trades listed on
the attached trade instructions executed in respect of Aetna Principal
Protection Fund I.
MBIA Insurance Corporation
- -----------------------------------------------
By:
Title:
copy: Aetna Series Fund, Inc.
10 State House Square
Hartford, CT 06103-3602
Attn: Counsel
Fax: (860) 275-2158
_____________________
(1) Strike language in brackets and initial if Section 4.1(d) or (d) Event of
Default has occurred.
(2) Strike inappropriate language in brackets and initial.
<PAGE>
<TABLE>
EXHIBIT 1 - ATTACHMENT 1
MANUAL TRADE INSTRUCTIONS
From: Capital Markets Assurance Corporation
<CAPTION>
PORTFOLIO ACCOUNT BUY OR SELL SECURITY NAME TICKET/CUSIP QUANTITY
<S> <C> <C> <C> <C> <C>
1. _________________ ____________________ ____________________ ____________________ ____________________
2. _________________ ____________________ ____________________ ____________________ ____________________
3. _________________ ____________________ ____________________ ____________________ ____________________
4. _________________ ____________________ ____________________ ____________________ ____________________
5. _________________ ____________________ ____________________ ____________________ ____________________
6. _________________ ____________________ ____________________ ____________________ ____________________
7. _________________ ____________________ ____________________ ____________________ ____________________
8. _________________ ____________________ ____________________ ____________________ ____________________
</TABLE>
Note: CUSIP Number is only required for U.S. Treasury Strip securities.
copy: Aetna Series Fund, Inc.
10 State House Square
Hartford, CT 06103-3602
Attn: Counsel
Fax: 860-275-2158
<PAGE>
EXHIBIT 2
CURE NOTICE
[Date]
Aetna Series Fund, Inc.
10 State House Square
Hartford, CT 06103-3602
Attn: Counsel
FAX: (860) 275-2158
Re: Event of Default
----------------
Pursuant to Section 3 of the Service Agreement (the "Agreement") dated
___________ among Aetna Series Fund, Inc. ("Fund"), Mellon Bank, N.A. ("Mellon")
and MBIA Insurance Corporation ("MBIA"), please be advised that an Event of
Default identified in our written notice to Mellon dated
_______________________, as defined in Section 4.1 (_) relating to a default
under [Section 3.__ of](1) the Financial Guaranty Agreement dated ______________
among the Fund and MBIA has been cured. Please revert to your normal method of
accepting trade instructions from the Aetna Principal Protection Fund I (or its
investment adviser) for Aetna Principal Protection Fund I (as defined in the
Agreement).
MBIA Insurance Corporation
- -------------------------------------------------
By:
Title:
copy: Mellon Bank, N.A.
_____________________
(1) Strike language in brackets and initial if Section 4.1(d) or (e) Event of
Default has occurred.
<PAGE>
<TABLE>
EXHIBIT 3
AUTHORIZED PERSONS - AETNA SERIES FUND, INC.
The following Aetna Series Fund, Inc. personnel are authorized to instruct Mellon as it relates to Aetna
Principal Protection Fund I:
<S> <C> <C>
- --------------------------------------------------- ------------------------------------- ------------------------------
John Kim, Director* Phone: 860-275-4759 Fax: 860-275-3608
- --------------------------------------------------- ------------------------------------- ------------------------------
Michael J. Sheridan, Vice President Phone: 860-275-3896 Fax: 860-275-4796
Securities Operations &
Assistant Treasurer**
- --------------------------------------------------- ------------------------------------- ------------------------------
Anne G. Ozimek, Manager Phone: 860-275-2107 Fax: 860-275-2791
Treasury Operations**
- --------------------------------------------------- ------------------------------------- ------------------------------
Margaret Karasinski, Manager Phone: 860-275-2225 Fax: 860-275-2446
Equity Security Operations**
- --------------------------------------------------- ------------------------------------- ------------------------------
Stephanie A. DeSisto, Vice President, Treasurer Phone: 860-275-3413 Fax: 860-275-2084
and Chief Financial Officer (Principal Financial
and Accounting Officer)*
- --------------------------------------------------- ------------------------------------- ------------------------------
J. Scott Fox, President Phone: 860-275-3055 Fax: 860-275-3394
(Principal Executive Officer)*
- --------------------------------------------------- ------------------------------------- ------------------------------
Allan R. Shaer, Jr., Assistant Treasurer* Phone: 860-275-4166 Fax: 860-275-4184
</TABLE>
* Reflects position with the Fund.
** Reflects position with the Fund's investment adviser, Aeltus Investment
Management, Inc.
<PAGE>
<TABLE>
EXHIBIT 4
AUTHORIZED PERSONS AND SIGNATURE SAMPLES - MBIA INSURANCE CORPORATION
The following MBIA Insurance Corporation personnel are authorized to instruct Mellon as it relates to Aetna Principal
Protection Fund I:
<S> <C> <C>
- ---------------------------------------- --------------------------------------- -------------------------------------
TELEPHONE: FACSIMILE:
- ---------------------------------------- --------------------------------------- -------------------------------------
TELEPHONE: FACSIMILE:
- ---------------------------------------- --------------------------------------- -------------------------------------
TELEPHONE: FACSIMILE:
- ---------------------------------------- --------------------------------------- -------------------------------------
TELEPHONE: FACSIMILE:
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 5
TRADE EXECUTION NOTIFICATION FILE
Aetna Principal Protection Fund I must have a header (Record Type 1), the trade execution detail for purchases and
sales (Record Type 2), hash totals (Record Type 3) one each for purchase and sales.
FLAT FILE FORMAT FOR TRADE PARSE
<CAPTION>
HEADER (RECORD TYPE 1)
FIELD POSITION LENGTH COMMENTS
- ------------------------------- ----------------------- --------------------- ----------------------------------------
<S> <C> <C> <C>
Record Type 1 1 "1"
Filler 2 1 space
Account 3 30 Aeltus Portfolio
Trade Date 33 8 mm/dd/yy
Filler 41 1 space
Settlement Date 42 8 mm/dd/yy
Filler 50 1 space
Broker Number 51 6 Assigned by Aeltus Operations
DETAIL (RECORD TYPE 2)
FIELD POSITION LENGTH COMMENTS
- ------------------------------- ----------------------- --------------------- ----------------------------------------
Record Type 1 1 "2"
Filler 2 1 space
CUSIP 3 9
Filler 12 1 space
Ticker 13 6
Filler 19 1 space
Buy/Sell 20 1 "B" or "S"
Filler 21 1 space
Shares 22 7 no commas, no decimals
Filler 29 1 space
Price 30 11 six decimals, no commas
Filler 41 1 space
Commission 42 7 four decimals
Filler 49 1 space
Security Name 50 30
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 5 (CONT'D.)
<CAPTION>
TOTALS (RECORD TYPE 3)
FIELD POSITION LENGTH COMMENTS
- ------------------------------- -------------------------- ----------------------- -----------------------------------
<S> <C> <C> <C>
Record Type 1 1 "3"
filler 2 1 space
Buy/Sell 3 1 "B" or "S"
filler 4 1 space
# of trades 5 4 no comma
filler 9 1 space
# of shares 13 8 no commas, no decimals
filler 21 1 space
Gross cost/proceeds 22 13 no commas, two decimals
filler 35 1 space
Commission 36 13 no commas, three decimals
filler 49 1 space
SEC Fee 50 9 no commas, two decimals
filler 59 1 space
Net cost/proceeds 60 13 no commas, two decimals
</TABLE>
7
EXHIBIT i
OPINION AND CONSENT OF COUNSEL
<PAGE>
10 State House Square, SH11
Hartford, Ct 06103-3602
AMY R. DOBERMAN
Counsel
Aetna Series Fund, Inc.
August 2, 1999 (860) 275-2032
Fax: (860) 275-2158
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: AETNA SERIES FUND, INC.
POST-EFFECTIVE AMENDMENT NO. 33 TO
REGISTRATION STATEMENT ON FORM N-1A
(FILE NO. 33-41694 AND 811-6352)
Dear Sir or Madam:
The undersigned serves as counsel to Aetna Series Fund, Inc., a Maryland
corporation (the "Company"). It is my understanding that the Company has
registered an indefinite number of shares of beneficial interest under the
Securities Act of 1933 (the "1933 Act") pursuant to Rule 24f-2 under the
Investment Company Act of 1940 (the "1940 Act").
Insofar as it relates or pertains to the Company, I have reviewed the prospectus
and the Company's Registration Statement on Form N-1A, as amended to the date
hereof, filed with the Securities and Exchange Commission under the 1933 Act and
the 1940 Act, pursuant to which the Shares will be sold (the "Registration
Statement"). I have also examined originals or copies, certified or otherwise
identified to my satisfaction, of such documents and other instruments I have
deemed necessary or appropriate for the purpose of this opinion. For purposes of
such examination, I have assumed the genuineness of all signatures on original
documents and the conformity to the original of all copies.
I am admitted to practice law in Connecticut, Maryland and the District of
Columbia. My opinion herein as to Maryland law is based upon a limited inquiry
thereof that I have deemed appropriate under the circumstances.
Based upon the foregoing, and assuming the securities are issued and sold in
accordance with the provisions of the Company's Articles of Incorporation and
the Registration Statement, I am of the opinion that the securities will when
sold be legally issued, fully paid and nonassessable.
<PAGE>
Page 2
August 2, 1999
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/Amy R. Doberman
Amy R. Doberman
Counsel
EXHIBIT j
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
Consent of Independent Auditors
The Board of Directors and Shareholders
Aetna Series Fund, Inc.:
We consent to the use of our reports dated December 11, 1998 and to the
references to our firm under the captions "Financial Highlights" in the
prospectuses and "Independent Auditors" in the statements of additional
information, incorporated herein by reference.
/s/KPMG LLP
KPMG LLP
Hartford, Connecticut
August 2, 1999
