As filed with the Securities and Exchange File No. 33-41694
Commission on December 16, 1999 File No. 811-6352
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 37
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 47
AETNA SERIES FUND, INC.
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10 State House Square SH11, Hartford, Connecticut 06103-3602
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(860) 275-2032
Amy R. Doberman, Counsel
Aetna Series Fund, Inc.
10 State House Square SH11, Hartford, Connecticut 06103-3602
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(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
X March 1, 2000 pursuant to paragraph (a)(1)
---
<PAGE>
AETNA SERIES FUND, INC.
PROSPECTUS
CLASS A, CLASS B AND CLASS C SHARES
March ___ , 2000
CAPITAL APPRECIATION FUNDS
Aetna Growth Fund (Growth)
Aetna International Fund (International)
Aetna Mid Cap Fund (Mid Cap)
Aetna Small Company Fund (Small Company)
Aetna Value Opportunity Fund (Value Opportunity)
Aetna Technology Fund (Technology)
GROWTH & INCOME FUNDS
Aetna Balanced Fund (Balanced)
Aetna Growth and Income Fund (Growth and Income)
Aetna Real Estate Securities Fund (Real Estate)
INCOME FUNDS
Aetna Bond Fund (Bond Fund)
Aetna Government Fund
Aetna High Yield Fund (High Yield)
Aetna Money Market Fund (Money Market)
INDEX PLUS FUNDS
Aetna Index Plus Bond Fund (Index Plus Bond)
Aetna Index Plus Large Cap Fund (Index Plus Large Cap)
Aetna Index Plus Mid Cap Fund (Index Plus Mid Cap)
Aetna Index Plus Small Cap Fund (Index Plus Small Cap)
GENERATION FUNDS
Aetna Ascent Fund (Ascent)
Aetna Crossroads Fund (Crossroads)
Aetna Legacy Fund (Legacy)
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.
This Prospectus is for investors purchasing or considering purchase of Class A,
Class B or Class C shares of one or more of the Funds.
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
THE FUNDS' INVESTMENTS 3
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RISKS,
INVESTMENT PERFORMANCE 3
FUND EXPENSES 37
OTHER CONSIDERATIONS 44
MANAGEMENT OF THE FUNDS 45
INVESTING IN THE FUNDS 47
OPENING AN ACCOUNT AND SELECTING A SHARE CLASS 47
HOW TO BUY SHARES 50
HOW TO SELL SHARES 53
TIMING OF REQUESTS 54
OTHER INFORMATION ABOUT SHAREHOLDER ACCOUNTS AND SERVICES 54
DIVIDENDS AND DISTRIBUTIONS 56
TAX INFORMATION 56
PERFORMANCE OF SIMILARLY MANAGED FUNDS 57
FINANCIAL HIGHLIGHTS 60
ADDITIONAL INFORMATION 80
2
<PAGE>
THE FUNDS' INVESTMENTS
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RISKS, INVESTMENT
PERFORMANCE
Below is a description of each Fund's INVESTMENT OBJECTIVE, the PRINCIPAL
INVESTMENT STRATEGIES employed on behalf of each Fund and the PRINCIPAL RISKS
associated with investing in each Fund.
- --------------------------------------------------------------------------------
A performance BAR CHART is provided for each Fund that has been in existence for
at least one full calendar year. If a Fund has been in existence for at least
two full calendar years, the bar chart shows changes in the Fund's performance
from year to year. The fluctuation in returns illustrates each Fund's
performance volatility. Sales charges are not reflected in the bar chart
performance. If sales charges were reflected, returns would be lower.
The chart is accompanied by the Fund's best and worst quarterly returns
throughout the years noted in the bar chart.
- --------------------------------------------------------------------------------
A TABLE for each Fund that has been in existence for at least one full calendar
year shows its average annual total return. These returns do reflect all
applicable sales charges. The table also compares the Fund's performance to the
performance of one or more broad-based securities market indices. Each index is
a widely recognized, unmanaged index of securities. A Fund's past performance is
not necessarily an indication of how it will perform in the future.
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Additional information about the Funds' investment strategies and risks is
included on page 44.
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Aeltus Investment Management, Inc. (Aeltus) serves as investment adviser of the
Funds.
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Elijah Asset Management, LLC (EAM) serves as subadviser of Technology.
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SHARES OF THE FUNDS WILL RISE AND FALL IN VALUE AND YOU COULD LOSE MONEY BY
INVESTING IN THEM. THERE IS NO GUARANTY THE FUNDS WILL ACHIEVE THEIR RESPECTIVE
INVESTMENT OBJECTIVES. SHARES OF THE FUNDS ARE NOT BANK DEPOSITS AND ARE NOT
GUARANTEED, ENDORSED OR INSURED BY ANY FINANCIAL INSTITUTION, THE FDIC OR ANY
OTHER GOVERNMENT AGENCY.
3
<PAGE>
CAPITAL APPRECIATION FUNDS
AETNA GROWTH FUND (GROWTH)
INVESTMENT OBJECTIVE Seeks GROWTH OF CAPITAL through investment in a diversified
portfolio consisting primarily of common stocks and securities convertible into
common stocks believed to offer growth potential.
PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, Growth invests
at least 65% of its total assets in common stocks and securities convertible
into common stock.
In managing Growth, Aeltus:
[bullet] Emphasizes stocks of larger companies, although Growth may invest in
companies of any size.
[bullet] Uses internally developed quantitative computer models to evaluate the
financial characteristics (for example, earnings growth consistency,
earnings momentum, and price/earnings ratio) of approximately 1,000
companies. Aeltus analyzes these characteristics in an attempt to
identify companies it believes have strong growth characteristics or
demonstrate a positive trend in earnings estimates, but whose perceived
value is not reflected in the stock price.
[bullet] Focuses on companies that it believes have strong, sustainable and
improving earnings growth, and established market positions in a
particular industry.
PRINCIPAL RISKS The principal risks of investing in Growth are those generally
attributable to stock investing. They include sudden and unpredictable drops in
the value of the market as a whole and periods of lackluster or negative
performance.
Growth-oriented stocks typically sell at relatively high valuations as compared
to other types of stocks. If a growth stock does not exhibit the consistent
level of growth expected, its price may drop sharply. Historically,
growth-oriented stocks have been more volatile than value-oriented stocks.
4
<PAGE>
AETNA GROWTH FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C>
Class A* % % % 01/04/94
Class B* % % % 01/04/94
Class C* % % % 01/04/94
S&P 500 Index** % % N/A
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
shares. The Fund introduced Class B and Class C shares on March 1, 1999 and June
30, 1998, respectively. For periods prior to the Class A inception date, Class A
performance is calculated using the performance of Class I shares, and deducting
the Class A front-end sales charge and the internal fees and expenses of the
Adviser Class shares. For periods prior to the Class B and Class C inception
dates, Class B and Class C performance is calculated using the performance of
Class I shares, and deducting the internal fees and expenses of the Class B and
Class C shares, respectively. All Class B share returns, and Class C share
1-year returns, reflect the deduction of the applicable contingent deferred
sales charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Standard & Poor's 500 Index is a value-weighted, unmanaged index
of 500 widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
5
<PAGE>
AETNA INTERNATIONAL FUND (INTERNATIONAL)
INVESTMENT OBJECTIVE Seeks LONG-TERM CAPITAL GROWTH primarily through investment
in a diversified portfolio of common stocks principally traded in countries
outside of North America. International will not target any given level of
current income.
PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, International
invests at least 65% of its total assets in securities principally traded in
three or more countries outside of North America. These securities may include
common stocks as well as securities convertible into common stocks.
In managing International, Aeltus:
[bullet] Diversifies the Fund's portfolio by investing in a mix of stocks that
it believes have the potential for long-term growth, as well as stocks
that appear to be trading below their perceived value.
[bullet] Allocates assets among several geographic regions and individual
countries, investing primarily in those areas that it believes have the
greatest potential for growth as well as stable exchange rates.
[bullet] Invests primarily in established foreign securities markets, although
it may invest in emerging markets as well.
[bullet] Typically invests in approximately 80 to 110 different securities at
any one time, and looks to allocate no more than 3% of the Fund's total
assets to a single security.
[bullet] Uses internally developed quantitative computer models to evaluate the
financial characteristics of over 2,000 companies. Aeltus analyzes cash
flows, earnings and dividends of each company, in an attempt to select
companies with long-term sustainable growth characteristics.
[bullet] Employs currency hedging strategies to protect the portfolio from
adverse effects on the U.S. dollar.
PRINCIPAL RISKS The principal risks of investing in International are those
generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Other risks of foreign investing include:
[bullet] Stocks of foreign companies tend to be less liquid and more volatile
than their U.S. counterparts.
[bullet] Accounting standards and market regulations tend to be less
standardized in certain foreign countries, and economic and political
climates tend to be less stable.
[bullet] Stocks of foreign companies may be denominated in foreign currency.
Exchange rate fluctuations may reduce or eliminate gains or create
losses. Hedging strategies intended to reduce this risk may not perform
as expected.
[bullet] Investments in emerging markets are subject to the same risks
applicable to foreign investments generally, although those risks may
be increased due to conditions in such countries.
6
<PAGE>
AETNA INTERNATIONAL FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C>
Class A* % % % 01/03/92
Class B* % % % 01/03/92
Class C* % % % 01/03/92
MSCI EAFE Index** % % N/A
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
shares. The Fund introduced Class B and Class C shares on March 1, 1999 and June
30, 1998, respectively. For periods prior to the Class A inception date, Class A
performance is calculated using the performance of Class I shares, and deducting
the Class A front-end sales charge and the internal fees and expenses of the
Adviser Class shares. For periods prior to the Class B and Class C inception
dates, Class B and Class C performance is calculated using the performance of
Class I shares, and deducting the internal fees and expenses of the Class B and
Class C shares, respectively. All Class B share returns, and Class C share
1-year returns, reflect the deduction of the applicable contingent deferred
sales charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Morgan Stanley Capital International-Europe, Australia and Far East Index
is a market value-weighted average of the performance of more than 900
securities listed on the stock market exchanges of countries in Europe,
Australia and the Far East.
7
<PAGE>
AETNA MID CAP FUND (MID CAP)
INVESTMENT OBJECTIVE Seeks GROWTH OF CAPITAL primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stocks of companies having medium market capitalizations.
PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, Mid Cap invests
at least 65% of its total assets in common stocks and securities convertible
into common stock of mid-capitalization companies, defined as:
[bullet] The 1,000 largest U.S. companies (as measured by market
capitalization), excluding companies in the Standard & Poor's 500
Composite Index.
[bullet] All companies not included above that are included in the Standard &
Poor's 400 Index.
[bullet] Currently, companies falling into these categories have market
capitalizations of between $800 million and $20 billion.
In managing Mid Cap, Aeltus invests in stocks that it believes have the
potential for long-term growth, as well as those that appear to be trading below
their perceived value. Aeltus uses internally developed quantitative computer
models to evaluate the financial characteristics of companies such as a
company's potential for strong, sustainable earnings and for long-term
profitability. Aeltus analyzes these characteristics in an attempt to identify
companies whose full value is not reflected in the stock price.
PRINCIPAL RISKS The principal risks of investing in Mid Cap are those generally
attributable to stock investing. These risks include sudden and unpredictable
drops in the value of the market as a whole and periods of lackluster or
negative performance. Stocks of medium-sized companies tend to be more volatile
and less liquid than stocks of larger companies.
8
<PAGE>
AETNA MID CAP FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A % % 02/04/98
Class B* % % 02/04/98
Class C* % % 02/04/98
S&P MidCap 400 Index** % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* The Fund introduced Class B and Class C shares on March 1, 1999 and
June 30, 1998, respectively. For periods prior to the Class B and Class C
inception dates, the performance is calculated using the performance of Class I
shares, and deducting the internal fees and expenses of the Class B shares and
Class C shares, respectively. All Class B share returns, and Class C share
1-year returns, reflect the deduction of the applicable contingent deferred
sales charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Standard & Poor's MidCap 400 Index consists of 400 domestic stocks chosen
for market size, liquidity and industry group representation. It is a
market-weighted index, with each stock affecting the index in proportion to its
market value.
9
<PAGE>
AETNA SMALL COMPANY FUND (SMALL COMPANY)
INVESTMENT OBJECTIVE Seeks GROWTH OF CAPITAL primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stocks of companies with smaller market capitalizations.
PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, Small Company
invests at least 65% of its total assets in common stocks and securities
convertible into common stock of small-capitalization companies, defined as:
[bullet] The 2,000 smallest of the 3,000 largest U.S. companies (as measured by
market capitalization).
[bullet] All companies not included above that are included in the Standard &
Poor's SmallCap 600 Index or the Russell 2000 index.
[bullet] Companies with market capitalizations lower than any companies included
in the first two categories.
For purposes of the 65% policy, the largest company in which Small Company
intends to invest currently has a market capitalization of approximately $1.5
billion.
In managing Small Company, Aeltus:
[bullet] Invests in stocks that it believes have the potential for long-term
growth, as well as those that appear to be trading below their
perceived value.
[bullet] Uses internally developed quantitative computer models to evaluate
financial characteristics (for example, changes in earnings, earnings
estimates and price momentum) of over 2,000 companies. Aeltus analyzes
these characteristics in an attempt to identify companies whose
perceived value is not reflected in the stock price.
[bullet] Considers the potential of each company to create or take advantage of
unique product opportunities, its potential to achieve long-term
sustainable growth and the quality of its management.
PRINCIPAL RISKS The principal risks of investing in Small Company are those
generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Other risks include:
[bullet] Stocks of smaller companies carry higher risks than stocks of larger
companies. This is because smaller companies may lack the management
experience, financial resources, product diversification, and
competitive strengths of larger companies.
[bullet] In many instances, the frequency and volume of trading in small cap
stocks are substantially less than stocks of larger companies. As a
result, the stocks of smaller companies may be subject to wider price
fluctuations and/or may be less liquid.
[bullet] When selling a large quantity of a particular stock, the Fund may have
to sell at a discount from quoted prices or may have to make a series
of small sales over an extended period of time due to the more limited
trading volume of smaller company stocks.
[bullet] Stocks of smaller companies can be particularly sensitive to expected
changes in interest rates, borrowing costs and earnings.
10
<PAGE>
AETNA SMALL COMPANY FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C>
Class A* % % % 01/04/94
Class B* % % % 01/04/94
Class C* % % % 01/04/94
Russell 2000 Index** % % N/A
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
shares. The Fund introduced Class B and Class C shares on March 1, 1999 and June
30, 1998, respectively. For periods prior to the Class A inception date, Class A
performance is calculated using the performance of Class I shares, and deducting
the Class A front-end sales charge and the internal fees and expenses of the
Adviser Class shares. For periods prior to the Class B and Class C inception
dates, Class B and Class C performance is calculated using the performance of
Class I shares, and deducting the internal fees and expenses of the Class B and
Class C shares, respectively. All Class B share returns, and Class C share
1-year returns, reflect the deduction of the applicable contingent deferred
sales charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Russell 2000 Index consists of the smallest 2,000 companies in the
Russell 3000 Index and represents approximately 10% of the Russell 3000 total
market capitalization. The Russell 2000 Index assumes reinvestment of all
dividends and is unmanaged.
11
<PAGE>
AETNA VALUE OPPORTUNITY FUND
(VALUE OPPORTUNITY)
INVESTMENT OBJECTIVE Seeks GROWTH OF CAPITAL primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stock.
PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, Value
Opportunity invests at least 65% of its total assets in common stocks and
securities convertible into common stock. In managing Value Opportunity, Aeltus
tends to invest in larger companies it believes are trading below their
perceived value, although it may invest in companies of any size. Aeltus
believes that Value Opportunity's investment objective can best be achieved by
investing in companies whose stock price has been excessively discounted due to
perceived problems or for other reasons. In searching for investments, Aeltus
evaluates financial and other characteristics of companies, attempting to find
those companies that appear to possess a catalyst for positive change, such as
strong management, solid assets, or market position, rather than those companies
whose stocks are simply inexpensive. Aeltus looks to sell a security when
company business fundamentals deteriorate or when price objectives are reached.
PRINCIPAL RISKS The principal risks of investing in Value Opportunity are those
generally attributable to stock investing. They include sudden and unpredictable
drops in the value of the market as a whole and periods of lackluster or
negative performance.
Stocks that appear to be undervalued may never appreciate to the extent
expected. Further, because the prices of value-oriented stocks tend to correlate
more closely with economic cycles than growth-oriented stocks, they generally
are more sensitive to changing economic conditions, such as changes in interest
rates, corporate earnings and industrial production.
AETNA VALUE OPPORTUNITY FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A % % 02/02/98
Class B* % % 02/02/98
Class C* % % 02/02/98
S&P 500 Index** % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* The Fund introduced Class B and Class C shares on March 1, 1999 and June 30,
1998, respectively. For periods prior to the Class B and Class C inception
dates, the performance is calculated using the performance of Class I shares,
and deducting the internal fees and expenses of the Class B shares and Class C
shares, respectively. All Class B share returns, and Class C share 1-year
returns, reflect the deduction of the applicable contingent deferred sales
charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
12
<PAGE>
AETNA TECHNOLOGY FUND
(TECHNOLOGY)
INVESTMENT OBJECTIVE Seeks LONG-TERM CAPITAL APPRECIATION.
PRINCIPAL INVESTMENT STRATEGIES Technology primarily invests in common stocks
and securities convertible into common stock of companies in the information
technology industry sector.
Companies in the information technology industries include companies that EAM
considers to be principally engaged in the development, production, or
distribution of products or services related to the processing, storage,
transmission, or presentation of information or data. The following examples
illustrate the wide range of products and services provided by these industries:
[bullet] Computer hardware and software of any kind, including, for example,
semiconductors, minicomputers, and peripheral equipment.
[bullet] Telecommunications products and services.
[bullet] Multimedia products and services, including, for example, goods and
services used in the broadcast and media industries.
[bullet] Data processing products and services.
[bullet] Financial services companies that collect or disseminate market,
economic, and financial information.
[bullet] Internet companies and other companies engaged in, or providing
products or services for, e-commerce.
A particular company will be considered to be principally engaged in the
information technology industries if at the time of investment EAM determines
that at least 50% of the company's assets, gross income, or net profits are
committed to, or derived from, those industries. A company will also be
considered to be principally engaged in the information technology industries if
EAM considers that the company has the potential for capital appreciation
primarily as a result of particular products, technology, patents, or other
market advantages in those industries.
In selecting stocks for Technology, EAM looks at a company's valuation relative
to its potential long-term growth rate. EAM may look to see whether a company
offers a new or improved product, service, or business operation; whether it has
experienced a positive change in its financial or business condition; whether
the market for its goods or services has expanded or experienced a positive
change; and whether there is a potential catalyst for positive change in the
company's business or stock price. Technology may sell a security if EAM
determines that the company has become overvalued due to price appreciation or
has experienced a change in its business fundamentals, if the company's growth
rate slows substantially, or if EAM believes that another investment offers a
better opportunity.
PRINCIPAL RISKS The principal risks of investing in Technology are those
generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. Stocks of smaller companies tend to be less
liquid and more volatile than stocks of larger companies. Further, stocks of
smaller companies also can be particularly sensitive to expected changes in
interest rates, borrowing costs and earnings.
Because Technology's investments are concentrated in the information technology
industries, the value of its shares will be especially affected by factors
peculiar to those industries and may fluctuate more widely than the value of
shares of a portfolio which invests in a broader range of industries.
Investments in information technology companies may be highly volatile. Changes
in their prices may reflect changes in investor evaluation of a particular
product or group of products, of the prospects of a company to develop and
market a particular technology successfully, or of information technology
investments generally.
Technology may experience difficulty in establishing or closing out positions in
these securities at prevailing market prices. Also, there may be less publicly
available information about small companies or less market interest in their
securities as compared to larger companies, and it may take longer for the
prices of the securities to reflect the full value of their issuers' earnings
potential or assets.
13
<PAGE>
GROWTH & INCOME FUNDS
AETNA BALANCED FUND (BALANCED)
INVESTMENT OBJECTIVE Seeks to MAXIMIZE TOTAL RETURN with reasonable safety of
principal by investing in a diversified portfolio of stocks, bonds and money
market instruments.
Principal Investment Strategies Under normal market conditions, Balanced
allocates its assets between the following asset classes:
[bullet] Equities, such as common and preferred stocks.
[bullet] Debt, such as bonds, mortgage-related and other asset-backed
securities, U.S. Government securities and money market instruments.
Aeltus typically maintains approximately 60% of Balanced's total assets in
equities and approximately 40% of its total assets in debt (including money
market instruments), although those percentages may vary from time to time
depending on Aeltus' view of the relative attractiveness of each asset class. In
making asset allocation decisions, Aeltus uses current market statistics and
economic indicators to attempt to forecast returns for the equity and debt
sectors of the securities market. Within each asset class, Aeltus uses
quantitative computer models to evaluate financial criteria in an attempt to
identify those issuers whose perceived value is not reflected in their equity or
debt securities. Aeltus generally does not attempt to respond to short-term
swings in the market by quickly changing the characteristics of the Fund's
portfolio.
In managing the EQUITY COMPONENT of Balanced, Aeltus typically emphasizes
investment in stocks of larger companies, although it may invest in stocks of
smaller companies to a significant extent.
In managing the DEBT COMPONENT of Balanced, Aeltus looks to select investments
with the opportunity to enhance the portfolio's yield and total return, focusing
on performance over the long term. The Fund may invest up to 15% of its total
assets in high-yield, high-risk bonds (high-yield bonds). High-yield bonds are
fixed income securities rated below BBB- by Standard & Poor's Corporation (S&P)
or Baa3 by Moody's Investors Services, Inc. (Moody's) or, if unrated, considered
by Aeltus to be of comparable quality.
PRINCIPAL RISKS The principal risks of investing in Balanced are those generally
attributable to stock and bond investing. The success of the Fund's strategy
depends on Aeltus' skill in allocating Fund assets between equities and debt and
in choosing investments within those categories. Because the Fund's assets are
allocated between equities and fixed income securities, Balanced may
underperform stock funds when stocks are in favor and underperform bond funds
when bonds are in favor.
Risks attributable to STOCK investing include sudden and unpredictable drops in
the value of the market as a whole and periods of lackluster or negative
performance. Stocks of smaller companies tend to be less liquid and more
volatile than stocks of larger companies. Further, stocks of smaller companies
also can be particularly sensitive to expected changes in interest rates,
borrowing costs and earnings.
The Fund's FIXED-INCOME investments are subject to the risk that interest rates
will rise, which generally causes bond prices to fall. Also, economic and market
conditions may cause issuers to default or go bankrupt. In either case, the
price of Fund shares may fall. High-yield bonds are even more sensitive to
economic and market conditions than other bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
14
<PAGE>
AETNA BALANCED FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C>
Class A* % % % 01/03/92
Class B* % % % 01/03/92
Class C* % % % 01/03/92
S&P 500 Index** % % N/A
LBAB*** % % N/A
60% S&P 500 Index/
40% LBAB % % N/A
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
shares. The Fund introduced Class B and Class C shares on March 1, 1999 and June
30, 1998, respectively. For periods prior to the Class A inception date, Class A
performance is calculated using the performance of Class I shares, and deducting
the Class A front-end sales charge and the internal fees and expenses of the
Adviser Class shares. For periods prior to the Class B and Class C inception
dates, Class B and Class C performance is calculated using the performance of
Class I shares, and deducting the internal fees and expenses of the Class B and
Class C shares, respectively. All Class B share returns, and Class C share
1-year returns, reflect the deduction of the applicable contingent deferred
sales charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
*** The Lehman Brothers Aggregate Bond Index (LBAB) is an unmanaged index of
corporate, government and mortgage bonds.
15
<PAGE>
AETNA GROWTH AND INCOME FUND
(GROWTH AND INCOME)
INVESTMENT OBJECTIVE Seeks LONG-TERM GROWTH OF CAPITAL AND INCOME through
investment in a diversified portfolio consisting primarily of common stocks and
securities convertible into common stock believed to offer above-average growth
potential.
PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, Growth and
Income invests at least 65% of its total assets in common stocks and securities
convertible into common stock that Aeltus believes have significant potential
for capital or income growth.
In managing Growth and Income, Aeltus:
[bullet] Emphasizes stocks of larger companies.
[bullet] May also invest the Fund's assets across other asset classes (including
stocks of small and medium-sized companies, international stocks and
fixed income securities), depending upon market conditions.
[bullet] Uses internally developed quantitative computer models to determine the
relative attractiveness of each asset class and to evaluate company
financial characteristics (for example, price to earnings ratios,
growth rates and earnings estimates) to select securities within each
class. In analyzing these characteristics, Aeltus attempts to identify
positive earnings momentum and valuation characteristics in selecting
securities whose perceived value is not reflected in their price.
PRINCIPAL RISKS The principal risks of investing in Growth and Income are those
generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Although Aeltus emphasizes large cap stocks, to the extent the Fund is
diversified across asset classes, it may not perform as well as less diversified
funds when large cap stocks are in favor.
16
<PAGE>
AETNA GROWTH AND INCOME FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C>
Class A* % % % 01/03/92
Class B* % % % 01/03/92
Class C* % % % 01/03/92
S&P 500 Index** % % N/A
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
shares. The Fund introduced Class B and Class C shares on March 1, 1999 and June
30, 1998, respectively. For periods prior to the Class A inception date, Class A
performance is calculated using the performance of Class I shares, and deducting
the Class A front-end sales charge and the internal fees and expenses of the
Adviser Class shares. For periods prior to the Class B and Class C inception
dates, Class B and Class C performance is calculated using the performance of
Class I shares, and deducting the internal fees and expenses of the Class B and
Class C shares, respectively. All Class B share returns, and Class C share
1-year returns, reflect the deduction of the applicable contingent deferred
sales charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
17
<PAGE>
AETNA REAL ESTATE SECURITIES FUND (REAL ESTATE)
INVESTMENT OBJECTIVE Seeks MAXIMUM TOTAL RETURN primarily through investment in
a diversified portfolio of equity securities of real estate companies, the
majority of which are real estate investment trusts (REITs).
PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, Real Estate
invests at least 65% of its total assets in stocks, convertible securities and
preferred stocks of companies principally engaged in the real estate industry.
These companies may invest in, among other things, shopping malls, healthcare
facilities, office parks and apartment communities, or may provide real estate
management and development services.
In selecting investments from a universe of equity securities of REITs and real
estate operating companies, Aeltus uses internally developed quantitative models
to forecast the returns of each security. Aeltus evaluates real estate companies
based on their earnings history and long-term growth prospects, analyst
estimates of future earnings, safety and growth in dividends, balance sheet
strength and quality of management. Aeltus also considers whether the securities
appear to be trading below their perceived value. Aeltus allocates assets among
property types and economic and geographic regions. Aeltus attempts to construct
Real Estate's portfolio so that the overall level of risk is not in excess of
its benchmark index, the National Association of Real Estate Investment Trusts
Equity Index.
PRINCIPAL RISKS Concentrating 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. Those risks
include:
[bullet] Periodic declines in the value of real estate, generally, or in the
rents and other income generated by real estate.
[bullet] Periodic over-building, which creates gluts in the market, as well as
changes in laws (such as zoning laws) that impair the property rights
of real estate owners.
[bullet] Adverse developments in the real estate industry, which may have a
greater impact on this Fund than a fund that is more broadly
diversified.
The performance of the Fund also may be adversely affected by sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative market performance. Although Real Estate is subject to
the risks generally attributable to stock investing, because the Fund has
concentrated its assets in one industry it may be subject to more abrupt swings
in value than would a fund that does not concentrate its assets in one industry.
18
<PAGE>
AETNA REAL ESTATE SECURITIES FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A % % 02/02/98
Class B* % % 02/02/98
Class C* % % 02/02/98
NAREIT Index** % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* The Fund introduced Class B and Class C shares on March 1, 1999 and June 30,
1998, respectively. For periods prior to the Class B and Class C inception
dates, the performance is calculated using the performance of Class I shares,
and deducting the internal fees and expenses of the Class B shares and Class C
shares, respectively. All Class B share returns, and Class C share 1-year
returns, reflect the deduction of the applicable contingent deferred sales
charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The National Association of Real Estate Investment Trusts Equity (NAREIT)
Index is a market weighted total return of all tax-qualified REITs listed on the
New York Stock Exchange and the NASDAQ National Market System.
19
<PAGE>
INCOME FUNDS
AETNA BOND FUND (BOND FUND)
Investment Objective Seeks to provide AS HIGH A LEVEL OF TOTAL RETURN AS IS
CONSISTENT WITH REASONABLE RISK, primarily through investment in a diversified
portfolio of investment-grade corporate bonds, and debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
Principal Investment Strategies Under normal market conditions, Bond Fund
invests at least 65% of its total assets in:
[bullet] High-grade corporate bonds,
[bullet] Mortgage-related and other asset-backed securities, and
[bullet] Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
High-grade securities are rated at least A by S&P or Moody's, or if unrated,
considered by Aeltus to be of comparable quality. The Fund may also invest up to
15% of its total assets in high-yield bonds, and up to 25% of its total assets
in foreign debt securities.
In managing Bond Fund, Aeltus:
[bullet] Looks to construct an intermediate-term (generally consisting of
securities with an average maturity of between 5-10 years), high
quality portfolio by selecting investments with the opportunity to
enhance the portfolio's overall total return and yield, while managing
volatility.
[bullet] Uses quantitative computer models to identify issuers whose perceived
value is not reflected in their security prices.
Principal Risks The principal risks of investing in Bond Fund are those
generally attributable to debt investing, including increases in interest rates
and loss of principal. Generally, when interest rates rise, bond prices fall.
Bonds with longer maturities tend to be more sensitive to changes in interest
rates.
For all bonds there is a risk that the issuer will default. High-yield bonds
generally are more susceptible to the risk of default than higher rated bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
Foreign securities present additional risks. Some foreign securities tend to be
less liquid and more volatile than their U.S. counterparts. In addition,
accounting standards and market regulations tend to be less standardized in
certain foreign countries. These risks are usually higher for securities of
companies in emerging markets. Finally, securities of foreign companies may be
denominated in foreign currency. Exchange rate fluctuations may reduce or
eliminate gains or create losses.
20
<PAGE>
AETNA BOND FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C>
Class A* % % % 01/03/92
Class B* % % % 01/03/92
Class C* % % % 01/03/92
LBAB** % % N/A
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
shares. The Fund introduced Class B and Class C shares on March 1, 1999 and June
30, 1998, respectively. For periods prior to the Class A inception date, Class A
performance is calculated using the performance of Class I shares, and deducting
the Class A front-end sales charge and the internal fees and expenses of the
Adviser Class shares. For periods prior to the Class B and Class C inception
dates, Class B and Class C performance is calculated using the performance of
Class I shares, and deducting the internal fees and expenses of the Class B and
Class C shares, respectively. All Class B share returns, and Class C share
1-year returns, reflect the deduction of the applicable contingent deferred
sales charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Lehman Brothers Aggregate Bond Index (LBAB) is an unmanaged index of
corporate, government and mortgage bonds.
21
<PAGE>
AETNA GOVERNMENT FUND
INVESTMENT OBJECTIVE Seeks to provide INCOME CONSISTENT WITH THE PRESERVATION OF
CAPITAL through investment in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Principal Investment Strategies Under normal market conditions, Aetna Government
Fund invests at least 65% of its total assets in U.S. Government securities.
U.S. Government securities include securities issued by the U.S. Treasury,
individual government agencies and certain organizations created through federal
legislation. Securities issued by the U.S. Treasury are backed by the full faith
and credit of the federal government, the strongest form of credit backing in
the U.S. Securities issued by individual agencies and organizations may be
backed by the full faith and credit of the federal government as to principal or
interest but are not direct obligations of the U.S. Treasury. Government
securities also include certain mortgage-related securities that are sponsored
by a U.S. Government agency or organization and are not direct obligations of
the U.S. Government.
In managing Aetna Government Fund, Aeltus:
[bullet] Looks to construct an intermediate-term, high-quality portfolio by
selecting investments with the potential to enhance the portfolio's
overall yield and total return.
[bullet] Uses quantitative computer models to identify attractive investments
within the U.S. Government securities markets. As a result, Aetna
Government Fund may, at times, emphasize one type of U.S. Government
security rather than another.
Principal Risks The principal risks of investing in Aetna Government Fund are
those generally attributable to bond investing, including increases in interest
rates. Generally, when interest rates rise, bond prices fall. Bonds with longer
maturities tend to be more sensitive to changes in interest rates.
In addition to being sensitive to changes in interest rates, the prices of
mortgage-related securities also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
AETNA GOVERNMENT FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C>
Class A* % % % 01/04/94
Class B* % % % 01/04/94
Class C* % % % 01/04/94
Lehman Brothers Intermediate
Government Index** % % N/A
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
shares. The Fund introduced Class B and Class C shares on March 1, 1999 and June
30, 1998, respectively. For periods prior to the Class A inception date, Class A
performance is calculated using the performance of Class I shares, and deducting
the Class A front-end sales charge and the internal fees and expenses of the
Adviser Class shares. For periods prior to the Class B and Class C inception
dates, Class B and Class C performance is calculated using the performance of
Class I shares, and deducting the internal fees and expenses of the Class B and
Class C shares, respectively. All Class B share returns, and Class C share
1-year returns, reflect the deduction of the applicable contingent deferred
sales charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Lehman Brothers Intermediate Government Bond Index, an unmanaged index,
includes those bonds found in the Lehman Brothers Government Bond Index that
have a maturity of one to 9.99 years.
22
<PAGE>
AETNA HIGH YIELD FUND (HIGH YIELD)
INVESTMENT OBJECTIVE Seeks HIGH CURRENT INCOME AND GROWTH OF CAPITAL primarily
through investment in a diversified portfolio of fixed-income securities rated
lower than BBB- by S&P or lower than Baa3 by Moody's.
PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, High Yield
invests at least 65% of its total assets in high-yield bonds. High-yield bonds
are bonds rated below investment grade in terms of quality, and may include
bonds of companies in default or bankruptcy.
In managing High Yield, Aeltus:
[bullet] Looks to meet the Fund's objective and reduce volatility by
constructing a diversified portfolio consisting of securities with
varying maturities and credit ratings. Aeltus, however, attempts to
look beyond credit ratings to select investments that it believes offer
opportunities for high income, growth and credit improvement.
[bullet] Uses a quantitative process for evaluating the financial criteria of
issuers, such as cash flow and profitability.
[bullet] Evaluates other, less quantitative factors, such as market share,
strength of management and management's equity stake in the company.
The Fund may also invest up to 35% of its total assets in foreign securities.
PRINCIPAL RISKS When the economy weakens, cash flows weaken, making it more
difficult for issuers to pay principal and interest. For all bonds, there is a
risk that an issuer will default. This risk is even greater with high-yield
bonds. Moreover, high-yield bonds, as a group, often decline in value when the
market anticipates or experiences a large number of issuers defaulting or
declaring bankruptcy.
Additional risks include:
[bullet] The performance of High Yield may be adversely affected by weak equity
markets, when issuers of high-yield bonds generally find it difficult
to reduce debt by replacing debt with equity.
[bullet] Generally, when interest rates rise, bond prices fall, which may cause
the value of the Fund's portfolio securities to fall as well.
Foreign securities present additional risks. Some foreign securities tend to be
less liquid and more volatile than their U.S. counterparts. In addition,
accounting standards and market regulations tend to be less standardized in
certain foreign countries.
AETNA HIGH YIELD FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A % % 02/02/98
Class B* % % 02/02/98
Class C* % % 02/02/98
Merrill Lynch High Yield
Master Trust Index** % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* The Fund introduced Class B and Class C shares on March 1, 1999 and June 30,
1998, respectively. For periods prior to the Class B and Class C inception
dates, the performance is calculated using the performance of Class I shares,
and deducting the internal fees and expenses of the Class B shares and Class C
shares, respectively. All Class B share returns, and Class C share 1-year
returns, reflect the deduction of the applicable contingent deferred sales
charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Merrill Lynch High Yield Master Trust Index is an unmanaged index of
secured and subordinated debt securities rated by Standard & Poor's or by
Moody's Investors Service as less than investment grade (i.e. BBB or Baa) but
not in default.
23
<PAGE>
AETNA MONEY MARKET FUND
(MONEY MARKET)
INVESTMENT OBJECTIVE Seeks to provide HIGH CURRENT RETURN, CONSISTENT WITH
PRESERVATION OF CAPITAL AND LIQUIDITY, through investment in high-quality money
market instruments.
Principal Investment Strategies Money Market invests in a diversified portfolio
of high-quality fixed income securities denominated in U.S. dollars, with short
remaining maturities. These securities include U.S. Government securities (such
as U.S. Treasury bills and securities issued or sponsored by U.S. Government
agencies), corporate debt securities, commercial paper, asset-backed securities
and certain obligations of U.S. and foreign banks, each of which must be highly
rated by independent rating agencies or, if unrated, considered by Aeltus to be
of comparable quality. Money Market maintains a dollar-weighted average
portfolio maturity of 90 days or less.
Principal Risks Although Money Market seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
Money Market. An investment in Money Market is not insured or guaranteed by the
FDIC or any other government agency. A weak economy, strong equity markets and
changes by the Federal Reserve in its monetary policies all could affect
short-term interest rates and therefore the value and yield of Money Market's
shares. Risks also include adverse changes in the actual or perceived
creditworthiness of issuers and adverse changes in the economic or political
environment.
24
<PAGE>
AETNA MONEY MARKET FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C>
Class A* % % % 01/03/92
Class B* % % % 01/03/92
Class C* % % % 01/03/92
IBC Index** % % N/A
</TABLE>
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
Shares. The Fund introduced Class B and Class C shares on March 1, 1999 and June
30, 1998, respectively. For periods prior to the Class A inception date, Class A
performance is calculated using the performance of Class I shares, and deducting
the internal fees and expenses of the Adviser Class shares. For periods prior to
the Class B inception date, Class B performance is calculated using the
performance of Class I shares, and deducting the internal fees and expenses of
the Class B shares. All Class B share returns reflect the deduction of the
applicable contingent deferred sales charge (CDSC) as described under "Opening
an Account and Selecting a Share Class." For periods prior to the Class C
inception date, Class C performance is calculated using the performance of Class
I shares.
** IBC's Money Funds Report Average/All Taxable Index is an average of
the returns of over 250 money market mutual funds surveyed each month by IBC.
To obtain current yield information, please contact 1-800-367-7732.
25
<PAGE>
INDEX PLUS FUNDS
AETNA INDEX PLUS BOND FUND
(INDEX PLUS BOND)
Investment Objective Seeks MAXIMUM TOTAL RETURN, CONSISTENT WITH PRESERVATION OF
CAPITAL, primarily through investment in a diversified portfolio of fixed-income
securities, which will be chosen to substantially replicate the characteristics
of the Lehman Brothers Aggregate Bond Index (LBAB), an unmanaged index comprised
of approximately 6,900 securities.
Principal Investment Strategies Index Plus Bond invests at least 90% of its
total assets in bonds, including U.S. Treasuries, corporate bonds and
mortgage-related securities.
In managing Index Plus Bond, Aeltus:
[bullet] Attempts to achieve a total return which, before deducting Fund
expenses, exceeds that of the LBAB.
[bullet] Allocates assets among various sectors, as well as among individual
securities, that it believes will outperform the LBAB, while
underweighting (or avoiding) those sectors and securities it believes
will underperform.
[bullet] In determining which bonds to purchase, evaluates various criteria,
such as the financial strength of the issuer and the issuer's potential
for strong, sustained earnings growth as well as the potential for
interest rates to rise or fall.
Although the Fund will not hold all of the securities in the LBAB, Aeltus
expects that there will be a close correlation between the performance of Index
Plus Bond and that of the LBAB in both rising and falling markets.
PRINCIPAL RISKS The principal risks of investing in Index Plus Bond are those
generally attributable to bond investing. Generally, when interest rates rise,
bond prices fall. Bonds with longer maturities tend to be more sensitive to
changes in interest rates. For all bonds there is a risk that an issuer will
default.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
The success of the Fund's strategy depends significantly on Aeltus' skill in
choosing investments, and in determining which sectors or securities to
overweight, underweight or avoid altogether.
26
<PAGE>
AETNA INDEX PLUS BOND FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A % % 02/04/98
Class B* % % 02/04/98
Class C* % % 02/04/98
LBAB** % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* The Fund introduced Class B and Class C shares on March 1, 1999 and June 30,
1998, respectively. For periods prior to the Class B and Class C inception
dates, the performance is calculated using the performance of Class I shares,
and deducting the internal fees and expenses of the Class B shares and Class C
shares, respectively. All Class B share returns, and Class C share 1-year
returns, reflect the deduction of the applicable contingent deferred sales
charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
**The Lehman Brothers Aggregate Bond Index (LBAB) is an unmanaged index of
corporate, government and mortgage bonds.
27
<PAGE>
AETNA INDEX PLUS LARGE CAP FUND
(INDEX PLUS LARGE CAP)
Investment Objective Seeks to OUTPERFORM THE TOTAL RETURN PERFORMANCE of the
STANDARD & POOR'S 500 COMPOSITE INDEX (S&P 500), while maintaining a market
level of risk.
Principal Investment Strategies Index Plus Large Cap invests at least 80% of its
net assets in stocks included in the S&P 500 (other than Aetna Inc. common
stock). The S&P 500 is a stock market index comprised of common stocks of 500 of
the largest companies in the U.S. selected by Standard & Poor's Corporation.
In managing Index Plus Large Cap, Aeltus attempts to achieve the Fund's
objective by overweighting those stocks in the S&P 500 that Aeltus believes will
outperform the index, and underweighting (or avoiding altogether) those stocks
that Aeltus believes will underperform the index. In determining stock
weightings, 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, Aeltus
generally includes in Index Plus Large Cap approximately 400 of the stocks
included in the S&P 500. Although the Fund will not hold all the stocks in the
S&P 500, Aeltus expects that there will be a close correlation between the
performance of Index Plus Large Cap and that of the S&P 500 in both rising and
falling markets, as the Fund is designed to have risk characteristics (e.g.,
price-to-earnings ratio, divided yield, volatility) which approximate those of
the S&P 500.
Principal Risks The principal risks of investing in Index Plus Large Cap are
those generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. The success of the Fund's strategy depends
significantly on Aeltus' skill in determining which securities to overweight,
underweight or avoid altogether.
AETNA INDEX PLUS LARGE CAP FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A* % % 12/10/96
Class B* % % 12/10/96
Class C* % % 12/10/96
S&P 500 Index**
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
shares. The Fund introduced Class B and Class C shares on March 1, 1999 and June
30, 1998, respectively. For periods prior to the Class A inception date, Class A
performance is calculated using the performance of Class I shares, and deducting
the Class A front-end sales charge and the internal fees and expenses of the
Adviser Class shares. For periods prior to the Class B and Class C inception
dates, Class B and Class C performance is calculated using the performance of
Class I shares, and deducting the internal fees and expenses of the Class B and
Class C shares, respectively. All Class B share returns, and Class C share
1-year returns, reflect the deduction of the applicable contingent deferred
sales charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
28
<PAGE>
AETNA INDEX PLUS MID CAP FUND
(INDEX PLUS MID CAP)
Investment Objective Seeks to OUTPERFORM THE TOTAL RETURN PERFORMANCE of the
STANDARD & POOR'S MIDCAP 400 INDEX (S&P 400), while maintaining a market level
of risk.
Principal Investment Strategies Index Plus Mid Cap invests at least 80% of its
net assets in stocks included in the S&P 400. The S&P 400 is a stock market
index comprised of common stocks of 400 mid-capitalization companies in the U.S.
selected by Standard & Poor's Corporation.
In managing Index Plus Mid Cap, Aeltus attempts to achieve the Fund's objective
by overweighting those stocks in the S&P 400 that Aeltus believes will
outperform the index, and underweighting (or avoiding altogether) those stocks
that Aeltus believes will underperform the index. In determining stock
weightings, Aeltus uses internally developed quantitative computer models to
evaluate various criteria, such as the financial strength of each issuer and its
potential for strong, sustained earnings growth. Although the Fund will not hold
all of the stocks in the S&P 400, Aeltus expects that there will be a close
correlation between the performance of Index Plus Mid Cap and that of the S&P
400 in both rising and falling markets, as the Fund is designed to have risk
characteristics (e.g., price-to-earnings ratio, dividend yield, volatility)
which approximate those of the S&P 400.
Principal Risks The principal risks of investing in Index Plus Mid Cap are those
generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. In addition, stocks of medium sized
companies tend to be more volatile and less liquid than stocks of larger
companies.
The success of the Fund's strategy depends significantly on Aeltus' skill in
determining which securities to overweight, underweight or avoid altogether.
AETNA INDEX PLUS MID CAP FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A % % 02/03/98
Class B* % % 02/03/98
Class C* % % 02/03/98
S&P MidCap 400 Index** % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* The Fund introduced Class B and Class C shares on March 1, 1999 and June 30,
1998, respectively. For periods prior to the Class B and Class C inception
dates, the performance is calculated using the performance of Class I shares,
and deducting the internal fees and expenses of the Class B shares and Class C
shares, respectively. All Class B share returns, and Class C share 1-year
returns, reflect the deduction of the applicable contingent deferred sales
charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Standard & Poor's MidCap 400 Index consists of 400 domestic stocks chosen
for market size, liquidity and industry group representation. It is a market-
weighted index, with each stock affecting the index in proportion to its market
value.
29
<PAGE>
AETNA INDEX PLUS SMALL CAP FUND
(INDEX PLUS SMALL CAP)
Investment Objective Seeks to OUTPERFORM THE TOTAL RETURN PERFORMANCE of the
STANDARD & POOR'S SMALLCAP 600 (S&P 600), while maintaining a market level of
risk.
Principal Investment Strategies Index Plus Small Cap invests at least 80% of its
net assets in stocks included in the S&P 600. The S&P 600 is a stock market
index comprised of common stocks of 600 small-capitalization companies in the
U.S. selected by Standard & Poor's Corporation.
In managing Index Plus Small Cap, Aeltus attempts to achieve the Fund's
objective by overweighting those stocks in the S&P 600 that Aeltus believes will
outperform the index, and underweighting (or avoiding altogether) those stocks
that Aeltus believes will underperform the index. In determining stock
weightings, Aeltus uses internally developed quantitative computer models to
evaluate various criteria, such as the financial strength of each issuer and its
potential for strong, sustained earnings growth. Although the Fund will not hold
all of the stocks in the S&P 600, Aeltus expects that there will be a close
correlation between the performance of Index Plus Small Cap and that of the S&P
600 in both rising and falling markets, as the Fund is designed to have risk
characteristics (e.g., price-to-earnings ratio, dividend yield, volatility)
which approximate those of the S&P 600.
Principal Risks The principal risks of investing in Index Plus Small Cap are
those generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Other risks include:
[bullet] Stocks of smaller companies carry higher risks than stocks of larger
companies because smaller companies may lack the management experience,
financial resources, product diversification and competitive strengths
of larger companies.
[bullet] In many instances, the frequency and volume of trading in small cap
stocks are substantially less than stocks of larger companies. As a
result, the stocks of smaller companies may be subject to wider price
fluctuations.
[bullet] When selling a large quantity of a particular stock, the Fund may have
to sell at a discount from quoted prices or may have to make a series
of small sales over an extended period of time due to the more limited
trading volume of smaller company stocks.
[bullet] Stocks of smaller companies tend to be more volatile than stocks of
larger companies and can be particularly sensitive to expected changes
in interest rates, borrowing costs and earnings.
Finally, the success of the Fund's strategy depends significantly on Aeltus'
skill in determining which securities to overweight, underweight or avoid
altogether.
30
<PAGE>
AETNA INDEX PLUS SMALL CAP FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] Worst Quarter:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A % % 02/03/98
Class B* % % 02/03/98
Class C* % % 02/03/98
S&P SmallCap 600 Index** % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* The Fund introduced Class B and Class C shares on March 1, 1999 and June 30,
1998, respectively. For periods prior to the Class B and Class C inception
dates, the performance is calculated using the performance of Class I shares,
and deducting the internal fees and expenses of the Class B shares and Class C
shares, respectively. All Class B share returns, and Class C share 1-year
returns, reflect the deduction of the applicable contingent deferred sales
charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Standard & Poor's SmallCap 600 consists of 600 domestic stocks chosen for
market size, liquidity and industry group representation. It is a market-
weighted index, with each stock affecting the index in proportion to its market
value.
31
<PAGE>
GENERATION FUNDS
AETNA ASCENT FUND
(ASCENT)
AETNA CROSSROADS FUND
(CROSSROADS)
AETNA LEGACY FUND
(LEGACY)
Investment Objectives ASCENT seeks to provide CAPITAL APPRECIATION.
CROSSROADS seeks to provide TOTAL RETURN (i.e., income and capital appreciation,
both realized and unrealized).
LEGACY seeks to provide TOTAL RETURN CONSISTENT WITH PRESERVATION OF CAPITAL.
Principal Investment Strategies Ascent, Crossroads and Legacy are asset
allocation funds that have been designed for investors with different investment
goals:
[bullet] Ascent is managed for investors seeking capital appreciation who
generally have an INVESTMENT HORIZON EXCEEDING 15 YEARS AND WHO HAVE A
HIGH LEVEL OF RISK TOLERANCE.
[bullet] Crossroads is managed for investors seeking a balance between income
and capital appreciation who generally have an INVESTMENT HORIZON
EXCEEDING 10 YEARS AND WHO HAVE A MODERATE LEVEL OF RISK TOLERANCE.
[bullet] Legacy is managed for investors primarily seeking total return
consistent with capital preservation who generally have an INVESTMENT
HORIZON EXCEEDING 5 YEARS AND WHO HAVE A LOW LEVEL OF RISK TOLERANCE.
Under normal market conditions, Aeltus allocates the assets of each Generation
Fund, in varying degrees, among several classes of equities, fixed-income
securities (including up to 15% of the total value of each Fund's assets in
high-yield bonds) and money market instruments. To remain consistent with each
Generation Fund's investment objective and intended level of risk tolerance,
Aeltus has instituted both a BENCHMARK PERCENTAGE ALLOCATION and a FUND LEVEL
RANGE ALLOCATION for each asset class. The benchmark percentage for each asset
class assumes neutral market and economic conditions. The Fund level range
allows Aeltus to vary the securities in each Fund and take advantage of
opportunities as market and economic conditions change.
The Generation Funds' benchmarks and ranges are described on the following page.
The asset allocation limits apply at the time of purchase of a particular
security.
Each Generation Fund's asset allocation may vary from the benchmark allocation
(within the permissible range) based on Aeltus' ongoing evaluation of the
expected returns and risks of each asset class relative to other classes. Aeltus
may vary each Generation Fund's asset allocation within a given asset class to
the full extent of the permissible range. Among the criteria Aeltus evaluates to
determine allocations are economic and market conditions, including changes in
circumstances with respect to particular asset classes, geographic regions,
industries or issuers, and interest rate movements. In selecting individual
portfolio securities, Aeltus considers such factors as:
[bullet] Expected dividend yields and growth rates.
[bullet] Bond yields.
[bullet] Current relative value compared to historic averages.
Principal Risks THE SUCCESS OF EACH GENERATION FUND'S STRATEGY DEPENDS
SIGNIFICANTLY ON AELTUS' SKILL IN CHOOSING INVESTMENTS AND IN ALLOCATING ASSETS
AMONG THE DIFFERENT INVESTMENT CLASSES.
In addition, each asset type has risks that are somewhat unique, as described
below. The performance of each Generation Fund will be affected by these risks
to a greater or lesser extent depending on the size of the allocation. The
principal risks of investing in each Generation Fund are those generally
attributable to stock and bond investing.
For stock investments, those risks include sudden and unpredictable drops in the
value of the market as a whole and periods of lackluster or negative
performance. Stocks of smaller companies tend to be less liquid and more
volatile than stocks of larger companies, and can be particularly sensitive to
expected changes in interest rates, borrowing costs and earnings.
The risks associated with real estate securities include periodic declines in
the value of real estate generally, and declines in the rents and other income
generated by real estate caused by such factors as periodic over-building.
For bonds, generally, when interest rates rise, bond prices fall. Also, economic
and market conditions may cause issuers to default or go bankrupt. The value of
high-yield bonds are even more sensitive to economic and market conditions than
other bonds.
32
<PAGE>
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
Foreign securities present additional risks. Some foreign securities tend to be
less liquid and more volatile than their U.S. counterparts. In addition,
accounting standards and market regulations tend to be less standardized in
certain foreign countries. These risks are usually higher for securities of
companies in emerging markets. Finally, securities of foreign companies may be
denominated in foreign currency. Exchange rate fluctuations may reduce or
eliminate gains or create losses. Hedging strategies intended to reduce this
risk may not perform as expected.
<TABLE>
ASSET CLASS
<CAPTION>
ASCENT CROSSROADS(1) LEGACY(2) COMPARATIVE INDEX
<S> <C> <C> <C> <C>
EQUITIES
LARGE CAPITALIZATION STOCKS
Range 0-70% 0-50% 0-30% S&P 500 Index
Benchmark 35% 25% 15%
SMALL-/MID-CAPITALIZATION STOCKS
Range 0-40% 0-30% 0-20% Russell 2500 Index
Benchmark 20% 15% 10%
INTERNATIONAL STOCKS Morgan Stanley Capital
Range 0-40% 0-30% 0-20% International Europe,
Benchmark 20% 15% 10% Australia and Far East Index
REAL ESTATE STOCKS National Association of
Range 0-10% 0-10% 0-10% Real Estate Investment Trusts
Benchmark 5% 5% 5% Equity Index
FIXED INCOME
U.S. DOLLAR BONDS
Range 0-30% 0-60% 0-90% Salomon Brothers Broad
Benchmark 15% 30% 45% Investment Grade Index
INTERNATIONAL BONDS
Range 0-10% 0-10% 0-10% Salomon Brothers Non-U.S.
Benchmark 5% 5% 5% World Government Bond Index
MONEY MARKET INSTRUMENTS
Range 0-30% 0-30% 0-30% 91-Day U.S. Treasury Bill Rate
Benchmark 0% 5% 10%
</TABLE>
- ----------
(1) Crossroads will invest no more than 60% of its assets in any combination of
the following asset classes: small-/mid-capitalization stocks, high-yield bonds,
international stocks and international fixed-income securities.
(2) Legacy will invest no more than 35% of its assets in any combination of the
following asset classes: small-/mid-capitalization stocks, high-yield bonds,
international stocks and international fixed-income securities.
33
<PAGE>
AETNA ASCENT FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A* % % 01/04/95
Class B* % % 01/04/95
Class C* % % 01/04/95
Russell 3000 Index** % N/A
Ascent Composite**** % N/A
AETNA CROSSROADS FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A* % % 01/04/95
Class B* % % 01/04/95
Class C* % % 01/04/95
Russell 3000 Index** % N/A
Saly BIG Index*** % N/A
Crossroads Composite****
34
<PAGE>
AETNA LEGACY FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class A* % % 01/04/95
Class B* % % 01/04/95
Class C* % % 01/04/95
Saly BIG Index*** % N/A
Legacy Composite**** % N/A
Each performance table and bar chart provide an indication of the historical
risk of an investment in the respective Generation Fund.
The Crossroads Fund has changed its benchmark from the Salomon Brothers Broad
Investment-Grade Bond Index (Saly BIG Index) to the Russell 3000 Index due to
the increase in the Fund's benchmark percentage allocation for large
capitalization stocks.
- ----------
* On February 2, 1998, the Fund redesignated Adviser Class shares as Class A
shares. The Fund introduced Class B and Class C shares on March 1, 1999 and June
30, 1998, respectively. For periods prior to the Class A inception date, Class A
performance is calculated using the performance of Class I shares, and deducting
the Class A front-end sales charge and the internal fees and expenses of the
Adviser Class shares. For periods prior to the Class B and Class C inception
dates, Class B and Class C performance is calculated using the performance of
Class I shares, and deducting the internal fees and expenses of the Class B and
Class C shares, respectively. All Class B share returns, and Class C share
1-year returns, reflect the deduction of the applicable contingent deferred
sales charge (CDSC) as described under "Opening an Account and Selecting a Share
Class."
** The Russell 3000 Index measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
*** The Salomon Brothers Broad Investment-Grade Bond Index (Saly BIG Index) is a
market-weighted index that contains approximately 4,700 individually priced
investment-grade bonds. The index includes U.S. Treasury/agency issues, mortgage
passthrough securities, and corporate issues.
**** The Ascent Composite, Crossroads Composite and Legacy Composite are each
comprised of the seven stock and bond indices listed below in weights that
correspond to the particular benchmark weights for each Fund. However, the
Composite performance information (for each Generation Fund) prior to March 1,
2000 is based on benchmark weights that were in effect at that time. Only the
following asset class benchmarks were changed as of March 1, 2000. For Ascent,
benchmarks for large capitalization stocks, real estate stocks, U.S. Dollar
bonds and international bonds were 20%, 20%, 10% and 10%, respectively. For
Crossroads, benchmarks for large capitalization stocks, real estate stocks, U.S.
Dollar bonds and international bonds were 15%, 15%, 25% and 10%, respectively.
For Legacy, benchmarks for large capitalization stocks, real estate stocks, U.S.
Dollar bonds and international bonds were 10%, 10%, 40% and 10%, respectively.
35
<PAGE>
Asset Class Benchmark Index
- --------------------------------------------------------------------------------
Large Cap Stocks The Standard & Poor's 500 Index is a value-weighted,
unmanaged index of 500 widely held stocks that assumes
the reinvestment of all dividends, and is considered to
be representative of the stock market in general.
Small-/Mid-Cap Stocks The Russell 2500 Index consists of the smallest 500
securities in the Russell 1000 Index and all 2,000
securities in the Russell 2000 Index. Each of these
indices assumes reinvestment of all dividends and is
unmanaged.
International Stocks The Morgan Stanley Capital International-Europe,
Australia, Far East Index is an unmanaged, market
value-weighted average of the performance of more than
900 securities listed on the stock exchange of
countries in Europe, Australia and the Far East.
Real Estate Stocks The National Association of Real Estate Investment
Trusts Equity Index is an unmanaged, market-weighted
average of the performance of tax-qualified real estate
investment trusts listed on the New York Stock
Exchange, American Stock Exchange and the NASDAQ
National Market System.
U.S. Dollar Bonds Salomon Brothers Broad Investment-Grade Bond Index is
an unmanaged, market-weighted index that contains
approximately 4,700 individually priced
investment-grade bonds rated BBB or better. The index
includes U.S. Treasury/Agency issues, mortgage
pass-through securities and corporate issues.
International Bonds The Salomon Brothers Non-U.S. World Government Bond
Index serves as an unmanaged benchmark to evaluate the
performance of government bonds with a maturity of one
year or greater in the following 12 countries: Japan,
United Kingdom, Germany, France, Canada, the
Netherlands, Australia, Denmark, Italy, Belgium, Spain
and Sweden.
Cash Equivalents Three-month Treasury bills are government-backed
short-term investments considered to be risk-free, and
equivalent to cash because their maturity is only three
months.
36
<PAGE>
FUND EXPENSES
The following tables describe Fund expenses. Shareholder fees are paid directly
by shareholders. Annual Fund Operating Expenses are deducted from Fund assets
every year, and are thus paid indirectly by all shareholders.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
SHAREHOLDER FEES (1) SHAREHOLDER FEES (1) SHAREHOLDER FEES (1)
Maximum Maximum Maximum Maximum Maximum Maximum
Sales Deferred Sales Sales Charge Deferred Sales Sales Charge Deferred Sales
Charge (Load) Charge (Load) (Load) on Charge (Load) (Load) on Charge (Load)
on Purchases (as a percentage Purchases (as (as a percentage Purchases (as (as a percentage
(as a percentage of gross a percentage of gross a percentage of gross
of purchase redemption of purchase redemption of purchase redemption
price) proceeds)(2) price) proceeds)(3) price) proceeds)(4)
<S> <C> <C> <C> <C> <C> <C>
Growth 5.75% None None 5.00% None 1.00%
International 5.75% None None 5.00% None 1.00%
Mid Cap 5.75% None None 5.00% None 1.00%
Small Company 5.75% None None 5.00% None 1.00%
Value Opportunity 5.75% None None 5.00% None 1.00%
Technology 5.75% None None 5.00% None 1.00%
- -------------------------------------------------------------------------------------------------------------------------
Balanced 5.75% None None 5.00% None 1.00%
Growth and Income 5.75% None None 5.00% None 1.00%
Real Estate 5.75% None None 5.00% None 1.00%
- -------------------------------------------------------------------------------------------------------------------------
Bond Fund 4.75% None None 5.00% None 1.00%
Aetna Government Fund 4.75% None None 5.00% None 1.00%
High Yield 4.75% None None 5.00% None 1.00%
Money Market None None None 5.00% None None
- -------------------------------------------------------------------------------------------------------------------------
Index Plus Bond 3.00% None None 5.00% None 0.75%
Index Plus Large Cap 3.00% None None 5.00% None 0.75%
Index Plus Mid Cap 3.00% None None 5.00% None 0.75%
Index Plus Small Cap 3.00% None None 5.00% None 0.75%
- -------------------------------------------------------------------------------------------------------------------------
Ascent 5.75% None None 5.00% None 1.00%
Crossroads 5.75% None None 5.00% None 1.00%
Legacy 5.75% None None 5.00% None 1.00%
</TABLE>
(1) The Funds do not impose any sales charge (load) on reinvested dividends or
exchanges.
(2) A CDSC of up to 1.00% is assessed only on certain redemptions of Class A
shares that were purchased without a front-end sales charge.
(3) The Funds charge a CDSC of 5.00% on shares redeemed in the first year,
declining to 1.00% on shares redeemed in the sixth year. No CDSC is charged
thereafter.
(4) The Funds charge a CDSC of 1.00% (0.75% for the Index Plus Funds) on shares
redeemed in the first 18 months. No CDSC is charged thereafter.
37
<PAGE>
CLASS A SHARES
ANNUAL FUND OPERATING EXPENSES
<TABLE>
CLASS A SHARES
ANNUAL FUND OPERATING EXPENSES(1)
(as a percentage of average daily net assets)
<CAPTION>
Distribution Total Fee Waiver/
Management (12b-1) Operating Expense Net
Fee Fees Other Expenses Expenses Reimbursement Expenses
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth % % % % % %
International % % % % % %
Mid Cap % % % % % %
Small Company % % % % % %
Value Opportunity % % % % % %
Technology(2) % % % % % %
- ----------------------------------------------------------------------------------------------------------------------
Balanced % % % % % %
Growth and Income % % % % % %
Real Estate % % % % % %
- ----------------------------------------------------------------------------------------------------------------------
Bond Fund % % % % % %
Aetna Government Fund % % % % % %
High Yield % % % % % %
Money Market % % % % % %
- ----------------------------------------------------------------------------------------------------------------------
Index Plus Bond % % % % % %
Index Plus Large Cap % % % % % %
Index Plus Mid Cap % % % % % %
Index Plus Small Cap % % % % % %
- ----------------------------------------------------------------------------------------------------------------------
Ascent % % % % % %
Crossroads % % % % % %
Legacy % % % % % %
</TABLE>
(1) Aeltus is contractually obligated through December 31, 2000 to waive all or
a portion of its investment advisory fee and/or its administrative services fee
for certain Funds and/or to reimburse a portion of those Funds' 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. Fee waiver/expense reimbursement obligations apply to each Fund
except Growth, Balanced, Growth and Income, and Money Market. An administrative
services fee of 0.10% is included in Other Expenses.
The expenses shown above are based on the year ended October 31, 1999, except
that expense information for Money Market, Ascent, Crossroads and Legacy has
been restated to reflect current fee waiver/expense reimbursement obligations.
(2)Technology commenced operations on March 1, 2000. Amounts reflected in "Other
Expenses" and "Total Operating Expenses" are estimated amounts for the current
fiscal year based on expenses for comparable funds. Actual expenses may be
greater or less than estimated.
38
<PAGE>
CLASS A SHARES EXAMPLE
The following example is designed to help you compare the costs of investing in
the Funds 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* 10 YEARS*
Growth $ $ $ $
International
Mid Cap
Small Company
Value Opportunity
Technology
- --------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- --------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- --------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- --------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
* Aeltus is contractually obligated to waive fees and/or reimburse expenses
through December 31, 2000 for all Funds except Growth, Balanced, Growth and
Income, and Money Market. Therefore, figures for all Funds, except those noted,
reflect a waiver/reimbursement only for the first year of the period.
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.
Long-term shareholders (except for Money Market shareholders) may pay more than
the economic equivalent of the maximum sales charge permitted by the National
Association of Securities Dealers, Inc. (NASD), because of the combination of
front-end sales charges and distribution (12b-1) fees. Registered
representatives may receive different levels of compensation depending on the
class sold. Additional information regarding the classes may be obtained by
calling your investment professional.
39
<PAGE>
CLASS B SHARES
ANNUAL FUND OPERATING EXPENSES
<TABLE>
CLASS B SHARES
ANNUAL FUND OPERATING EXPENSES(1)
(as a percentage of average daily net assets)
<CAPTION>
Distribution and Total Fee Waiver/
Management Service (12b-1) Operating Expense Net
Fee Fees Other Expenses Expenses Reimbursement Expenses
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth % % % % % %
International
Mid Cap
Small Company
Value Opportunity
Technology(2)
- ---------------------------------------------------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- ---------------------------------------------------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- ---------------------------------------------------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- ---------------------------------------------------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
</TABLE>
(1) Aeltus is contractually obligated through December 31, 2000 to waive all or
a portion of its investment advisory fee and/or its administrative services fee
for certain Funds and/or to reimburse a portion of those Funds' 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. Fee waiver/expense reimbursement obligations apply to each Fund
except Growth, Balanced, Growth and Income, and Money Market. An administrative
services fee of 0.10% is included in Other Expenses.
The expenses shown above are based on the period from March 1, 1999 (Class B
inception date) to October 31, 1999, and have been annualized. Expense
information for Money Market, Ascent, Crossroads and Legacy has been restated to
reflect current fee waiver/reimbursement obligations.
(2)Technology commenced operations on March 1, 2000. Amounts reflected in "Other
Expenses" and "Total Operating Expenses" are estimated amounts for the current
fiscal year based on expenses for comparable funds. Actual expenses may be
greater or less than estimated.
40
<PAGE>
CLASS B SHARES EXAMPLE
The following example is designed to help compare the costs of investing in the
Funds 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:
<TABLE>
<CAPTION>
1 YEAR* 3 YEARS* 5 YEARS* 10 YEARS*[dagger]
<S> <C> <C> <C> <C>
Growth $ $ $ $
International
Mid Cap
Small Company
Value Opportunity
Technology
- --------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- --------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- --------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- --------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
</TABLE>
* Aeltus is contractually obligated to waive fees and/or reimburse expenses
through December 31, 2000 for all Funds except Growth, Balanced, Growth and
Income, and Money Market. Therefore, figures for all Funds, except those noted,
reflect a waiver/reimbursement only for the first year of the period.
[dagger] Reflects the conversion of Class B shares to Class A shares, which pay
lower 12b-1 fees. Conversion occurs eight years after purchase.
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.
Long-term shareholders may pay more than the economic equivalent of the maximum
sales charge permitted by the NASD, because of the distribution and shareholder
service (12b-1) fees. Registered representatives may receive different levels of
compensation depending on the class sold. Additional information regarding the
classes may be obtained by calling your investment professional.
41
<PAGE>
CLASS C SHARES
ANNUAL FUND OPERATING EXPENSES
<TABLE>
CLASS C SHARES
ANNUAL FUND OPERATING EXPENSES(1)
(as a percentage of average daily net assets)
<CAPTION>
Distribution and Total Fee Waiver/
Management Service (12b-1) Operating Expense Net
Fee Fees Other Expenses Expenses Reimbursement Expenses
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth % % % % % %
Mid Cap
Small Company
Value Opportunity
Technology(2)
- ---------------------------------------------------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- ---------------------------------------------------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- ---------------------------------------------------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- ---------------------------------------------------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
</TABLE>
(1) Aeltus is contractually obligated through December 31, 2000 to waive all or
a portion of its investment advisory fee and/or its administrative services fee
for certain Funds and/or to reimburse a portion of those Funds' 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. Fee waiver/expense reimbursement obligations apply to each Fund
except Growth, Balanced, Growth and Income, and Money Market. An administrative
services fee of 0.10% is included in Other Expenses.
The expenses shown above are based on the year ended October 31, 1999, except
that expense information for Money Market, Ascent, Crossroads and Legacy has
been restated to reflect current fee waiver/expense reimbursement obligations.
(2)Technology commenced operations on March 1, 2000. Amounts reflected in "Other
Expenses" and "Total Operating Expenses" are estimated amounts for the current
fiscal year based on expenses for comparable funds. Actual expenses may be
greater or less than estimated.
42
<PAGE>
CLASS C SHARES EXAMPLE
The following example is designed to help compare the costs of investing in the
Funds 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* 10 YEARS*
Growth $ $ $ $
International
Mid Cap
Small Company
Value Opportunity
Technology
- --------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- --------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- --------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- --------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
* Aeltus is contractually obligated to waive fees and/or reimburse expenses
through December 31, 2000 for all Funds except Growth, Balanced, Growth and
Income, and Money Market. Therefore, figures for all Funds, except those noted,
reflect a waiver/reimbursement only for the first year of the period.
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.
Long-term shareholders (except Money Market shareholders) may pay more than the
economic equivalent of the maximum sales charge permitted by the NASD, because
of the distribution and shareholder service (12b-1) fees. Registered
representatives may receive different levels of compensation depending on the
class sold. Additional information regarding the classes may be obtained by
calling your investment professional.
43
<PAGE>
OTHER CONSIDERATIONS
In addition to the principal investments and strategies described on the
previous pages, the Funds 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 and Options Each Fund (except Money Market) may enter into
futures contracts and use options. The Funds primarily use futures contracts and
options to hedge against price fluctuations or increase exposure to a particular
asset class. To a limited extent, the Funds also may use these instruments for
speculation (investing for potential income or capital gain).
[bullet] Futures contracts are agreements that obligate the buyer to buy and the
seller to sell a certain quantity of securities at a specific price on
a specific date.
[bullet] Options are agreements that give the holder the right, but not the
obligation, to purchase or sell a certain amount of securities or
futures contracts during a specified period or on a specified date.
The main risk of investing in futures contracts and options is that these
instruments can amplify a gain or loss, potentially earning or losing
substantially more money than the actual cost of the instrument. In addition,
while a hedging strategy can guard against potential risks for the Fund as a
whole, it adds to the Fund's expenses and may reduce or eliminate potential
gains. There is also a risk that a futures contract or option intended as a
hedge may not perform as expected.
Swaps Bond, Balanced, Ascent, Crossroads and Legacy may enter into interest rate
swaps, currency swaps and other types of swap agreements, including swaps on
securities and indices. A swap is an agreement between two parties pursuant to
which each party agrees to make one or more payments to the other on regularly
scheduled dates over a stated term, based on different interest rates, currency
exchange rates, security prices, the prices or rates of other types of financial
instruments or assets or the levels of specified indices.
Swap agreements can take many different forms and are known by a variety of
names. The Funds are not limited to any particular form or variety of swap
agreement if Aeltus determines it is consistent with a Fund's investment
objective and policies.
The most significant factor in the performance of swaps is the change in the
underlying price, rate or index level that determines the amount of payments to
be made under the arrangement. If Aeltus incorrectly forecasts such change, a
Fund's performance would be less than if the Fund had not entered into the swap.
In addition, if the counterparty's creditworthiness declines, the value of the
swap agreement also would be likely to decline, potentially resulting in losses.
If the counterparty to a swap defaults, a Fund's loss will consist of the net
amount of contractual payments that a Fund has not yet received. Aeltus will
monitor the creditworthiness of counterparties to a Fund's swap transactions on
an ongoing basis.
Defensive Investing In response to unfavorable market conditions, each Fund
(except Index Plus Bond, Index Plus Large Cap, Index Plus Mid Cap and Index Plus
Small Cap) may make temporary investments that are not consistent with its
principal investment objective and policies.
Portfolio Turnover Portfolio turnover refers to the frequency of portfolio
transactions and the percentage of portfolio assets being bought and sold during
the year. For the fiscal year ended October 31, 1999, International, Mid Cap,
Small Company and Bond each had a portfolio turnover rate in excess of 150%. A
high portfolio turnover rate increases a Fund's transaction costs and may
increase your tax liability.
44
<PAGE>
MANAGEMENT OF THE FUNDS
Aeltus Investment Management, Inc., 10 State House Square, Hartford, Connecticut
06103-3602 serves as investment adviser to the Funds. Aeltus is responsible for
managing the assets of each Fund in accordance with its investment objective and
policies, subject to oversight by the Aetna Series Fund, Inc. (Company) Board of
Directors (Board). Aeltus has acted as adviser or subadviser to mutual funds
since 1994 and has managed institutional accounts since 1972.
Advisory Fees
[bullet] Listed below for all Funds (except Technology) are the aggregate
advisory fees paid by each Fund for its most recent fiscal year. These
numbers reflect the advisory fees after fee waiver and expense
reimbursement. See the Fund Operating Expense table for the advisory
fee (Management Fee) Aeltus was entitled to receive.
[bullet] Listed below for Technology, which has operated for less than one full
fiscal year, are the advisory fees that Aeltus is entitled to receive,
expressed as an annual rate based on the average daily net assets of
Technology.
<TABLE>
<CAPTION>
AGGREGATE ADVISORY FEES PAID AS A AGGREGATE ADVISORY FEES PAID AS A
PERCENTAGE OF AVERAGE NET ASSETS PERCENTAGE OF AVERAGE NET ASSETS
FUND NAME FOR YEAR ENDED OCTOBER 31, 1999 FUND NAME FOR YEAR ENDED OCTOBER 31, 1999
<S> <C>
Growth Aetna Government Fund
International High Yield
MidCap Money Market
Small Company Index Plus Bond
Value Opportunity Index Plus Large Cap
Balanced Index Plus Mid Cap
Growth and Income Index Plus Small Cap
Real Estate Ascent
Bond Fund Crossroads
Legacy
FUND NAME RATE AVERAGE DAILY NET ASSETS
Technology 1.05% On first $500 million
1.025% On next $500 million
1.00% Over $1 billion
</TABLE>
45
<PAGE>
Eijah Asset Management, LLC, 100 Pine St., Suite 420, San Francisco, California
94111, a Delaware limited liability company, serves as subadviser to
Technology. Subject to such policies as the Board or Aeltus may determine, EAM
manages Technology's assets in accordance with Technology's investment
objective, policies, and limitations. EAM makes investment decisions for
Technology as to those assets and places orders to purchase and sell securities
and other investments for Technology.
Aeltus pays EAM a subadvisory fee at an annual rate of 0.50% of Technology's
average daily net assets.
Portfolio Management The following discusses who are primarily responsible for
the day-to-day management of the Funds.
CAPITAL APPRECIATION FUNDS
Growth Kenneth H. Bragdon, Portfolio Manager, Aeltus, has been managing Growth
since May 1998. Previously, Mr. Bragdon co-managed the Fund. Mr. Bragdon has
been with the Aetna organization since 1978 and has 28 years of experience in
the investment business.
International Vince Fioramonti, Portfolio Manager, Aeltus, has been managing
International since December 1995. Mr. Fioramonti manages international stocks
and non-U.S. dollar government bonds for several Aetna investment funds. Mr.
Fioramonti joined Aetna in 1994 after serving as Vice President of The Travelers
Investment Management Company. He began his investment career with Travelers in
1988.
Mid Cap Donald Townswick, Portfolio Manager, Aeltus, has been managing Mid Cap
since its inception in February 1998. He also manages small- and mid-cap stocks
for several other mutual funds managed by Aeltus. Mr. Townswick joined the Aetna
organization in July 1994 after serving for 2 years with Invesco Inc.
Small Company Thomas DiBella, Portfolio Manager, Aeltus, has been managing Small
Company since its inception in January 1994. Mr. DiBella joined Aeltus in 1991
and is currently responsible for the management of several small-capitalization
portfolios.
Value Opportunity Value Opportunity is managed by a team of Aeltus equity
investment specialists.
Technology Ronald E. Elijah managing member of EAM, has been managing Technology
since its inception. Prior to founding EAM in March, 1999, Mr. Elijah was a
portfolio manager with Robertson Stephens Investment Management.
Roderick R. Berry, a member of EAM, serves as a co-portfolio manager of
Technology. Prior to joining EAM in March, 1999, Mr. Berry was a member of the
Robertson Stephens Investment Management research team. He has served on the
management team of Technology since its inception. Prior to joining Robertson
Stephens Investment Management, Mr. Berry worked for USL Capital for six years
as both an investment officer and a financial manager.
GROWTH & INCOME FUNDS
Balanced Balanced is managed by a team of Aeltus fixed-income and equity
investment specialists.
Growth and Income Kenneth Bragdon, Portfolio Manager, Aeltus, manages Growth and
Income. Mr. Bragdon is the lead portfolio manager of Growth and Income and heads
a team of investment professionals, each of whom specializes in a particular
asset class.
Real Estate Real Estate is managed by a team of Aeltus equity investment
specialists.
46
<PAGE>
INCOME FUNDS
Bond Fund, Aetna Government Fund, Money Market Bond Fund, Aetna Government Fund
and Money Market are managed by a team of Aeltus fixed-income specialists.
High Yield Gail Bruhn, Portfolio Manager, Aeltus, has been managing High Yield
since its inception in February 1998. Ms. Bruhn joined Aeltus in 1995 after
spending 12 years with CIGNA Investments. She currently manages high-yield
securities for several institutional accounts.
INDEX PLUS FUNDS
Index Plus Bond Index Plus Bond, is managed by a team of Aeltus fixed-income
specialists.
Index Plus Large Cap Geoffrey A. Brod, Portfolio Manager, Aeltus, has been
managing Index Plus Large Cap since its inception in December 1996.
Index Plus Mid Cap, Index Plus Small Cap Michael F. Farrell, Portfolio Manager,
Aeltus, served as co-manager of Index Plus Mid Cap and Index Plus Small Cap
since March 1, 1999 and has served as sole manager of Index Plus Mid Cap and
Index Plus Small Cap since March 1, 2000. Mr. Farrell has been with the Aetna
organization since 1991 and has been responsible for quantitative research and
development of equity models.
GENERATION FUNDS
Ascent, Crossroads, Legacy Neil Kochen, Managing Director, Aeltus, is the lead
portfolio manager and asset allocation strategist for each Generation Fund. Mr.
Kochen heads a team of investment professionals, each of whom specializes in a
particular asset class. Mr. Kochen joined the Aetna organization in 1985 and
previously served as head of fixed income quantitative research, head of
investment strategy and policy, and as a senior portfolio manager.
INVESTING IN THE FUNDS
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 a Fund. If you are investing
through a retirement plan, please refer to your plan materials.
Selecting a Class
CLASS A SHARES (EXCEPT MONEY MARKET)
[bullet] Front-end sales charge applies (at the time of purchase), which will
vary depending on the Fund and the size of your purchase.
[bullet] No CDSC applies, except in certain limited instances (see below).
[bullet] Distribution (12b-1) Fee of 0.25% applies.
47
<PAGE>
Sales Charges: Class A Shares The tables below show the front-end sales charges
you will pay if you purchase Class A shares of the Funds in any amount up to $1
million.
<TABLE>
<CAPTION>
GROWTH BALANCED ASCENT
INTERNATIONAL GROWTH AND INCOME CROSSROADS
MID CAP REAL ESTATE LEGACY
SMALL COMPANY
VALUE OPPORTUNITY
TECHNOLOGY
WHEN YOU INVEST THIS AMOUNT THIS % IS WHICH EQUALS THIS
DEDUCTED % OF YOUR INVESTMENT
FOR SALES CHARGES
<S> <C> <C> <C>
under $50,000 5.75% 6.10%
$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
BOND FUND
AETNA GOVERNMENT FUND
HIGH YIELD
WHEN YOU INVEST THIS AMOUNT THIS % IS WHICH EQUALS THIS
DEDUCTED % OF YOUR INVESTMENT
FOR SALES CHARGES
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
INDEX PLUS BOND
INDEX PLUS LARGE CAP
INDEX PLUS MID CAP
INDEX PLUS SMALL CAP
WHEN YOU INVEST THIS AMOUNT THIS % IS WHICH EQUALS THIS
DEDUCTED % OF YOUR INVESTMENT
FOR SALES CHARGES
under $50,000 3.00% 3.09%
$50,000 or more but under $100,000 2.50 2.56
$100,000 or more but under $250,000 2.00 2.04
$250,000 or more but under $500,000 1.50 1.52
$500,000 or more but under $1,000,000 1.00 1.01
</TABLE>
48
<PAGE>
Class A Shares Sales Charge Waivers Generally, no front-end sales charge applies
if you are buying Class A shares with money you received within the past 60 days
by redeeming class A shares of another Aeltus-advised Fund on which a front-end
sales charge was paid or with money you received within the past 30 days by
redeeming shares of another mutual fund on which you paid a front-end sales
charge. The Funds also waive the Class A front-end sales charge for purchases
made by certain types of investors. (See the SAI or call 1-800-367-7732 for
additional details.)
CDSC on Class A Shares The Funds do not impose a CDSC on Class A shares
purchased with an aggregate investment in the Funds of less than $1 million. All
Funds other than Money Market may impose a CDSC on Class A shares purchased (i)
with an aggregate investment in the Funds 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 the Funds. The CDSC
imposed for all Funds' Class A shares except the Index Plus Funds is as follows:
THIS % IS DEDUCTED FROM
WHEN YOU INVEST THIS AMOUNT YOUR PROCEEDS
$1 million but under $3 million Year 1- 1.00%
Year 2- 0.50%
$3 million but under $20 million Year 1- 0.50%
Year 2- 0.50%
$20 million or greater Year 1- 0.25%
Year 2- 0.25%
The CDSC imposed for the Index Plus Funds is as follows:
THIS % IS DEDUCTED FROM
WHEN YOU INVEST THIS AMOUNT YOUR PROCEEDS
$1 million but under $3 million Year 1- 0.50%
Year 2- 0.50%
$3 million but under $20 million Year 1- 0.25%
Year 2- 0.25%
$20 million or greater Year 1- 0.25%
Year 2- 0.25%
CLASS B SHARES
[bullet] No front-end sales charge applies.
[bullet] CDSC applies (if you sell your shares within six years of purchase).
[bullet] Distribution (12b-1) Fee of 0.75% applies.
[bullet] Service Fee of 0.25% applies.
[bullet] Automatic conversion to Class A shares after eight years.
You can purchase Class B shares of Money Market only by (i) opening a Dollar
Cost Averaging account by which all of the amount invested will be reinvested in
another Fund within 24 months of the initial purchase or (ii) exchanging Class B
shares of another Fund. ORDERS FOR CLASS B SHARES FOR $250,000 OR MORE WILL BE
TREATED AS ORDERS FOR CLASS A SHARES.
SALES CHARGES: CLASS B SHARES All Funds impose a CDSC on redemptions, but not
exchanges, made within six 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%
6th year since purchase 1%
7th year since purchase None
CLASS C SHARES (EXCEPT MONEY MARKET)
[bullet] No front-end sales charge applies.
[bullet] CDSC applies (if you sell your shares within 18 months of purchase).
[bullet] Distribution (12b-1) Fee of 0.75% (for all Funds except the Index Plus
Funds) or 0.50% (for the Index Plus Funds) applies.
[bullet] Service Fee of 0.25% applies.
SALES CHARGES: CLASS C SHARES All Funds other than Money Market impose a CDSC on
redemptions made within 18 months of purchase. The CDSC imposed on redemptions
is 1.00%, except for the Index Plus Funds which impose a CDSC of 0.75%.
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
49
<PAGE>
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 exchanges, 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 its Class A and Class C shares, each
Fund, other than Money Market, has adopted a plan that allows the Fund to pay
fees for the sale and distribution of Fund shares (Rule 12b-1 plan). With
respect to its Class B shares, each Fund, including Money Market, has adopted a
Rule 12b-1 plan. The 12b-1 fees are paid out of Fund 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 of the
distribution (12b-1) fees are used to compensate financial professionals who
sell Fund shares.
Service Fee Each Fund, with respect to its Class B shares, and each Fund (except
Money Market), with respect to its Class C shares, has adopted a Shareholder
Services Plan that allows the payment of a service fee. The service fee is used
primarily to pay selling dealers and their agents for servicing and maintaining
shareholder accounts.
HOW TO BUY SHARES
<TABLE>
<CAPTION>
Minimum Investments
Initial Investment Additional Investments
<S> <C> <C>
Individual Retirement Accounts $500 [bullet] $100 except by wire or Systematic
(including Roth IRAs) Investment
[bullet] $500 by wire
[bullet] $50 by Systematic Investment
All other investments $1,000 [bullet] $100 except by wire or Systematic
Investment
[bullet] $500 by wire
[bullet] $50 by Systematic Investment
</TABLE>
INSTRUCTIONS FOR BUYING FUND SHARES
Please contact your investment professional or consult your plan materials
regarding the purchase of Fund shares. If you are purchasing Fund shares through
your investment professional, he or she will guide you through the process of
opening an account and purchasing additional shares, as follows.
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO PURCHASE ADDITIONAL SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BY MAIL Complete and sign your Fill out the investment stub from your
application, make confirmation statement or send a letter
your check payable to Aetna indicating your name, account
Series Fund, Inc. and mail to: number(s), the Fund(s) in which you
wish to invest and the amount you want
Aetna Series Fund, Inc. to invest in each Fund.
c/o PFPC Inc.
P.O. Box 9681 Make your check payable to Aetna
Providence, RI 02940 Series Fund, Inc. and mail to:
Your check must be drawn on a Aetna Series Fund, Inc.
bank located within the United c/o PFPC Inc.
States and payable in U.S. dollars. P.O. Box 9663
Cash, credit cards and third party Providence, RI 02940
checks cannot be used to open
an account.
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO PURCHASE ADDITIONAL SHARES
<S> <C> <C>
Your check must be drawn on a bank
located within the United States and
payable in U.S. dollars. The Funds will
accept checks which are made payable
to you and endorsed to Aetna Series
Fund, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
BY OVERNIGHT COURIER Follow the instructions above Follow the instructions above for
for "By Mail" but send your "By Mail" but send your check and
completed application and investment stub or letter to:
check to:
Aetna Series Fund, Inc.
Aetna Series Fund, Inc. c/o PFPC Inc.
c/o PFPC Inc. 4400 Computer Drive
4400 Computer Drive Westborough, MA 01581
Westborough, MA 01581
- ------------------------------------------------------------------------------------------------------------------------------------
BY WIRE Not Available. Call 1-800-367-7732 prior to sending
the wire in order to obtain a
confirmation number.
Instruct your bank to wire funds to:
Boston Safe Deposit & Trust Company
ABA # 011001234
Credit to:
Boston Safe Deposit & Trust Company
Account # 176656
Further Credit to:
Name of Fund
Shareholder Account Number
Shareholder Registration
Federal funds wire purchase orders will
be accepted only when the Fund's
transfer agent and custodian bank are
open for business.
Neither the Funds nor their agents are
responsible for the consequences of
delays resulting from the banking or
Federal Reserve wire system or from
incomplete instructions.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO PURCHASE ADDITIONAL SHARES
<S> <C> <C>
BY ELECTRONIC Not Available. Use the Systematic Investment Option.
FUNDS TRANSFER Sign up for this service when opening
your account or by requesting the
appropriate information.
- ------------------------------------------------------------------------------------------------------------------------------------
BY EXCHANGE Submit a written request to the Submit a written request to the address
address listed above under listed above under "By Mail." Include:
"By Mail." Include: [bullet] Your name and account number.
[bullet] Your name and account number. [bullet] The name of the Fund into and out of
[bullet] The name of the Fund into and which you wish to exchange.
out of which you wish to [bullet] The amount to be exchanged and the
exchange. signatures of all shareholders.
[bullet] The amount to be exchanged
and the signatures of all You may also exchange your shares by
shareholders. calling 1-800-367-7732. Please be
prepared to provide:
You may also exchange your [bullet] The Funds' names.
shares by calling 1-800-367-7732. [bullet] Your account number(s).
Please be prepared to provide: [bullet] Your Social Security number or
[bullet] The Funds' names. taxpayer identification number.
[bullet] Your account number(s). [bullet] Your address.
[bullet] Your Social Security number or [bullet] The amount to be exchanged.
taxpayer identification number.
[bullet] Your address.
[bullet] The amount to be exchanged.
</TABLE>
52
<PAGE>
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 may be made in writing or, in amounts up to $50,000, by
telephone. The Company requires a signature guarantee if the amount of the
redemption request is over $50,000. You may obtain a signature guarantee at most
banks and securities dealers. Please note that notaries public cannot provide
signature guarantees.
Once your redemption request is received in good order as described below, the
Fund normally will send the proceeds of such redemption within one or two
business days. However, if making immediate payment could adversely affect a
Fund, the Fund may defer distribution for up to seven days or a longer period if
permitted. If you redeem shares of a Fund shortly after purchasing them, the
Fund will hold payment of redemption proceeds until a purchase check or
systematic investment 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.
<TABLE>
<S> <C>
REDEMPTIONS BY MAIL You may redeem shares you own in any Fund
by sending written instructions to:
Aetna Series Fund, Inc.
c/o PFPC Inc.
P.O. Box 9681
Providence, RI 02940
Your instructions should identify:
[bullet] The Fund.
[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 Fund
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 request are accompanied by a
signature guarantee. A $12 fee will be
charged for this service.
- ----------------------------------------------------------------------------------------------------
REDEMPTIONS BY TELEPHONE Call 1-800-367-7732. Please be prepared to
provide your account number, account name
and the amount of the redemption, which
generally must be no less than $500 and
no more than $50,000.
</TABLE>
53
<PAGE>
TIMING OF REQUESTS
Orders that are received by the Funds' transfer agent, or as otherwise provided
below, before the close of regular trading on the New York Stock Exchange
(usually 4:00 p.m. eastern time) will be processed at the Net Asset Value (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).
The Company may appoint certain financial intermediaries and institutions
(Institutions) as parties that may accept purchase and redemption orders on
behalf of the Company. If you purchase or redeem shares in connection with
programs offered by these 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 Company's behalf, subject to the Company's
approval. In that case, the Company will be deemed to have received a purchase
or redemption order when the Institution's authorized designee accepts the
order.
Institutions may charge you 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 Company.
Investors 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 Each 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 Monday through Friday.
Net Asset Value The NAV of each 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, the securities held by Money Market are valued using
amortized cost. For all other Funds, 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. With respect to any Fund that
invests in foreign securities, because those securities may be traded on markets
that are open on days when the Fund does not price its shares, the Fund's NAV
may change even though Fund shareholders may not be permitted to sell or redeem
Fund shares.
Exchange Privileges There is no fee to exchange shares from one Fund to another.
However, a sales charge may apply upon an exchange of Class A shares of Money
Market for Class A shares of another Fund. When you exchange shares, your new
Fund shares will be in the equivalent class of your current shares. For Class B
and Class C shares, any CDSC that applies to your current shares will apply to
the new shares. 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 Funds
may suspend or terminate your exchange privilege if you make more than five
exchanges out of a single Fund in any calendar year, and the Funds 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 Funds are not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Funds reserve the right to
reject any specific purchase or exchange request, including a request made by a
market timer.
Cross Investing
[bullet] DIVIDEND INVESTING You may elect to have dividend and/or capital gains
distributions automatically invested in the same class of one other
Fund.
[bullet] SYSTEMATIC EXCHANGE You may establish an automatic exchange of shares
from one Fund to another.
Telephone Exchange and Redemption Privileges You automatically receive telephone
exchange and redemption privileges when you establish your account. If you do
not want these telephone privileges, you may call 1-800-367-7732 to have them
removed. All telephone transactions may be recorded, and you will be asked for
certain identifying information.
54
<PAGE>
Telephone redemption requests will be accepted if the request is for a minimum
of $500 or a maximum of $50,000. 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 Funds reserve the right to amend telephone exchange and redemption purchases
at any time upon notice to shareholders and may refuse a telephone exchange or
redemption if the Funds believe it is advisable to do so.
Minimum Account Balance You must maintain a minimum balance of $500 in each Fund
account. If you do not, the Fund may give you 60 days' notice to increase the
account balance to the $500 minimum. If you fail to increase your account
balance to the minimum, 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 Funds offer these additional investor services. Each
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 details.
[bullet] SYSTEMATIC INVESTMENT You can make automatic monthly investments in
any Fund.
[bullet] LETTER OF INTENT If you agree to purchase a specific amount of Class A
shares of one or more Funds (other than Money Market) 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 Fund will be entitled to the
front-end sales charge applicable to the level of investment indicated
on 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 the Funds (other
than Money Market) owned by you, your family and your company (if you
are the sole owner).
[bullet] AUTOMATIC CASH WITHDRAWAL PLAN The Automatic Cash Withdrawal Plan
provides a convenient way for you to receive a systematic distribution
while maintaining an investment in a Fund.
[bullet] CHECKWRITING SERVICE Checkwriting is available with Class A and Class
C shares of Money Market. There currently is no transaction charge for
this service, and the initial checkbook you receive is free. However,
you will be charged a $3.00 fee for each checkbook reorder. Checks must
be for a minimum of $250 and the checkwriting service may not be used
for a complete redemption of your shares. This service is not available
for IRA or other retirement accounts. You will be charged a $25 fee for
stop payment requests and for Money Market checks that are returned due
to insufficient funds.
[bullet] TDD SERVICE Telecommunication Device for the Deaf (TDD) services are
offered for hearing impaired investors. The dedicated number for this
service is 1-800-688-4889.
[bullet] TAX-DEFERRED RETIREMENT PLANS Each Fund may be used for investment by
a variety of tax-deferred retirement plans, such as individual
retirement accounts (IRAs, including Roth IRAs) and certain programs
sponsored by employers (such as 401(k) and 403(b)(7) plans). There is
no minimum investment or minimum account balance applicable to
investments in 403(b)(7) accounts except that a rollover from a
403(b)(7) account must be for at least $500. Purchases made in
connection with IRAs and 403(b)(7) accounts may be subject to an annual
custodial fee of $10.00 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.
Payments to Securities Dealers and Selection of Executing Brokers From time to
time, Aeltus Capital, Inc., the Company's principal underwriter, or its
affiliates may make payments to other dealers and/or their registered
representatives who may or may not be affiliates of Aetna, who sell shares or
who provide shareholder services. The value of a shareholder's investment will
be unaffected by these payments.
Aeltus may consider the sale of shares of the Funds and of other investment
companies advised by Aeltus as a factor in the selection of brokerage firms to
execute each Fund's portfolio transactions, subject to Aeltus' (or EAM's, in the
case of Technology) duty to obtain best execution.
55
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Dividends Dividends are declared and paid as follows:
[bullet] declared daily and paid monthly Money Market
[bullet] declared and paid monthly Aetna Government Fund
Bond Fund
High Yield
Index Plus Bond
[bullet] declared and paid semiannually Balanced
Growth and Income
[bullet] declared and paid annually All other Funds
Capital gains distributions, if any, are paid on an annual basis in December. To
comply with federal tax regulations, each Fund may also pay an additional
capital gains distribution, usually in June.
Money Market shares begin to accrue dividends the business day after they are
purchased. A redemption of Money Market shares will include dividends declared
through the redemption date.
Both income dividends and capital gains distributions are paid by each Fund on a
per share basis. As a result, at the time of this payment, the share price of a
Fund (except Money Market) will be reduced by the amount of the payment.
Distribution Options When completing your application, you must select one of
the following three options for dividends and capital gains distributions:
[bullet] FULL REINVESTMENT Both dividends and capital gains distributions from
a Fund will be reinvested in additional shares of the same class of
shares of that Fund. This option will be selected automatically unless
one of the other options is specified.
[bullet] CAPITAL GAINS REINVESTMENT Capital gains distributions from a Fund
will be reinvested in additional shares of the same class of shares of
that Fund and all net income from dividends will be distributed in
cash.
[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 Fund.
Distributions paid in shares will be credited to your account at the next
determined NAV per share.
TAX INFORMATION
[bullet] In general, dividends and short-term capital gains distributions you
receive from any Fund are taxable as ordinary income.
[bullet] Distributions of other capital gains 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 as 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 Funds 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 Funds.
Backup Withholding By law, the Funds must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
56
<PAGE>
PERFORMANCE OF SIMILARLY MANAGED FUNDS
PUBLIC FUND PERFORMANCE
Technology is recently organized and does not yet have a long-term performance
record. However, Technology has an investment objective, policies and strategies
substantially similar to a series of an investment company registered under the
Investment Company Act of 1940 (1940 Act) whose shares are currently sold to the
public (Public Fund) and are subadvised by EAM. Therefore, the performance of
the Public Fund is provided below. The performance of Technology will vary over
time and its investments will not be identical to the past portfolio investments
of the Public Fund.
The Public Fund has been managed since its inception by Mr. Elijah and Mr.
Berry, the portfolio managers for Technology. Both Mr. Elijah and Mr. Berry are
currently members of EAM, the subadviser to Technology.
The results shown below for the Public Fund reflect the reinvestment of
dividends and distributions, and were calculated in the same manner which will
be used by Technology to calculate its own performance. All Public Fund
performance data:
[bullet] Was calculated on a total return basis and includes all dividends and
interest, accrued income and realized and unrealized gains and losses.
[bullet] Reflects the deduction of the historical fees and expenses paid by
the Public Fund, and not those paid by Technology.
[bullet] Includes cash and cash equivalents.
The following table shows average annual total returns for the period ended
December 31, 1999 for the Public Fund and its benchmark index. Investors should
not consider the historical performance of the Public Fund to be an indication
of the future performance of Technology.
TECHNOLOGY
1 YEAR SINCE INCEPTION
The Information Age Fund (11/15/95)
Pacific Stock Exchange
Technology Index (_______________)
PRIVATE ACCOUNT PERFORMANCE
Index Plus Large Cap, Index Plus Bond and High Yield do not yet have long-term
performance records. However, these Funds have investment objectives, policies
and strategies substantially similar to those employed by Aeltus in managing
accounts for certain institutional investors (Private Accounts). Therefore, the
performance of these Private Accounts is provided below. Note that the Private
Accounts, unlike the Funds, are not subject to certain investment limitations,
diversification requirements and other restrictions imposed by the Investment
Company Act of 1940 and the Internal Revenue Code of 1986, as amended, which, if
applicable, could have adversely affected the Private Accounts' performance.
The Private Account Performance data, shown below, was calculated in accordance
with the standards established by the Association for Investment Management and
Research (AIMR). AIMR is a nonprofit membership and educational organization
that, among other things, has formulated a set of performance presentation
standards for investment advisers. AIMR has not been involved with the
preparation or review of the performance shown.
All Private Account Performance data:
[bullet] Was calculated on a time-weighted total return basis and includes all
dividends and interest, accrued income and realized and unrealized
gains and losses.
[bullet] Reflects the reinvestment of dividends and distributions.
[bullet] Reflects the deduction of investment advisory fees and brokerage
commissions paid by the Private Accounts, but does not reflect the
deduction of custodial fees.
[bullet] Includes cash and cash equivalents.
The historical fees and expenses paid by the Private Accounts are significantly
lower than those paid by the corresponding Fund. Had Fund level expenses been
charged to the Private Accounts, performance would have been lower.
The following table shows average annual total returns for the periods ended
December 31, 1999 for the Funds, the comparable Private Accounts and their
respective benchmark indices. Investors should not consider the historical
performance of the Private Accounts as an indication of the future performance
of a comparably managed Fund.
57
<PAGE>
PRIVATE ACCOUNT COMPOSITE AND FUND PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INDEX PLUS LARGE CAP 1 YEAR 3 YEARS 5 YEARS INCEPTION
<S> <C> <C> <C> <C>
Index Plus Large Cap, Class A (assuming payment
of maximum front-end sales charge)(1) % % N/A %(12/10/96)
Index Plus Large Cap, Class A (without payment of
front-end sales charge)(1) % % N/A %(12/10/96)
Index Plus Large Cap Private Account Composite % % % N/A
S&P 500 Stock Index % % % N/A
- ------------------------------------------------------------------------------------------------------------
SINCE
INDEX PLUS BOND 1 YEAR 5 YEARS 10 YEARS INCEPTION
Index Plus Bond, Class A (assuming payment
of maximum front-end sales charge) % N/A N/A %(2/4/98)
Index Plus Bond, Class A (without payment of
front-end sales charge) % N/A N/A %(2/4/98)
Index Plus Bond Private Account Composite % % % N/A
Lehman Brothers Aggregate Bond Index % % % N/A
- ------------------------------------------------------------------------------------------------------------
SINCE
HIGH YIELD 1 YEAR 3 YEARS INCEPTION
High Yield, Class A (assuming payment of
maximum front-end sales charge) % N/A %(2/2/98)
High Yield, Class A (without payment of
front-end sales charge) % N/A %(2/2/98)
High Yield Private Account Composite % % N/A
Merrill Lynch High Yield Master Index % % N/A
</TABLE>
(1) The Fund redesignated its Adviser Class shares as Class A shares on February
2, 1998. For periods prior to the Class A inception date, Class A performance is
calculated by using the performance of Class I shares and deducting the maximum
Class A front-end sales load and internal fees and expenses of the Adviser
Class.
58
<PAGE>
This page is intentionally blank.
59
<PAGE>
FINANCIAL HIGHLIGHTS
These highlights are intended to help you understand the Funds' performance for
the past 5 years (or since commencement of operations, if shorter). Certain
information reflects financial results for a single Fund share. The total
returns in the tables represent the rate an investor would have earned (or lost)
on an investment in each Fund (assuming reinvestment of all dividends and
distributions). The information in these tables has been audited by ___________,
independent auditors, whose reports, along with the Funds' Financial Statements,
are included in the Company's Annual Reports, which are available upon request.
Financial statement information is not available for Technology which commenced
operations on ________, 2000.
<TABLE>
<CAPTION>
GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- --------------------------------------------------------------------------------------------------------------- ------------------
Period From
March 1, 1999
(Date of Initial
Year Ended Year Ended Year Ended Year Ended Year Ended Public Offering)
October 31, October 31, October 31, October 31, October 31, to October 31,
1999 1998 1997 1996 1995 1999
- --------------------------------------------------------------------------------------------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $ $
- --------------------------------------------------------------------------------------------------------------- ------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- --------------------------------------------------------------------------------------------------------------- ------------------
Total from investment operations
- --------------------------------------------------------------------------------------------------------------- ------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- --------------------------------------------------------------------------------------------------------------- ------------------
Total distributions
- --------------------------------------------------------------------------------------------------------------- ------------------
Net asset value, end of period
=============================================================================================================== ==================
Total Return
Net assets, end of period (000's)
Ratio of net expenses to
average net assets
Ratio of net investment income to
average net assets
Ratio of expenses before
reimbursement and waiver to
average net assets
Portfolio turnover rate
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
GROWTH INTERNATIONAL
- ------------------------------ ------------------------------------------------------------------- ----------------
Class C Class A Class B
- ------------------------------ ------------------------------------------------------------------- ----------------
Period From Period From
June 30, 1998 March 1, 1999
(Date of Initial (Date of Initial
Year Ended Public Offering) Year Ended Year Ended Year Ended Year Ended Year Ended Public Offering)
October 31, to October 31, October 31, October 31, October 31, October 31, October 31, to October 31,
1999 1998 1999 1998 1997 1996 1995 1999
- ------------------------------ ------------------------------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $ $
- ------------------------------ ------------------------------------------------------------------- ----------------
- ------------------------------ ------------------------------------------------------------------- ----------------
- ------------------------------ ------------------------------------------------------------------- ----------------
- ------------------------------ ------------------------------------------------------------------- ----------------
- ------------------------------ ------------------------------------------------------------------- ----------------
============================== =================================================================== ================
</TABLE>
61
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
INTERNATIONAL MID CAP
- -------------------------------------------------------------------------- -------------------------------------------------
Class C Class A Class B
- -------------------------------------------------------------------------- ------------------------------ ----------------
Period From Period From Period From
June 30, 1998 February 4, 1998 March 1, 1999
(Date of Initial (Commencement (Date of Initial
Year Ended Public Offering) Year Ended of Operations) Public Offering)
October 31, to October 31, October 31, to October 31, to October 31,
1999 1998 1999 1998 1999
- -------------------------------------------------------------------------- ------------------------------ ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- -------------------------------------------------------------------------- ------------------------------ ----------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- -------------------------------------------------------------------------- ------------------------------ ----------------
Total from investment operations
- -------------------------------------------------------------------------- ------------------------------ ----------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- -------------------------------------------------------------------------- ------------------------------ ----------------
Total distributions
- -------------------------------------------------------------------------- ------------------------------ ----------------
Net asset value, end of period
========================================================================== ============================== ================
Total Return
Net assets, end of period (000's)
Ratio of net expenses to
average net assets
Ratio of net investment income to
average net assets
Ratio of expenses before
reimbursement and waiver to
average net assets
Portfolio turnover rate
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
MID CAP SMALL COMPANY
- ------------------------------ --------------------------------------------------------------------------------------
Class C Class A Class B
- ------------------------------ ------------------------------------------------------------------- ----------------
Period From Period From
June 30, 1998 March 1, 1999
(Date of Initial (Date of Initial
Year Ended Public Offering) Year Ended Year Ended Year Ended Year Ended Year Ended Public Offering)
October 31, to October 31, October 31, October 31, October 31, October 31, October 31, to October 31,
1999 1998 1999 1998 1997 1996 1995 1999
- ------------------------------ ------------------------------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $ $
- ------------------------------ ------------------------------------------------------------------- ----------------
- ------------------------------ ------------------------------------------------------------------- ----------------
- ------------------------------ ------------------------------------------------------------------- ----------------
- ------------------------------ ------------------------------------------------------------------- ----------------
- ------------------------------ ------------------------------------------------------------------- ----------------
============================== =================================================================== ================
</TABLE>
63
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
SMALL COMPANY VALUE OPPORTUNITY
- ---------------------------------------------------------------------------- -----------------------------------------------------
Class C Class A Class B
- ---------------------------------------------------------------------------- -------------------------------- ------------------
Period From Period From Period From
June 30, 1998 February 2, 1998 March 1, 1999
(Date of Initial (Commencement (Date of Initial
Year Ended Public Offering) Year Ended of Operations) Public Offering)
October 31, to October 31, October 31, to October 31, to October 31,
1999 1998 1999 1998 1999
- ---------------------------------------------------------------------------- -------------------------------- ------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- ---------------------------------------------------------------------------- -------------------------------- ------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- ---------------------------------------------------------------------------- -------------------------------- ------------------
Total from investment operations
- ---------------------------------------------------------------------------- -------------------------------- ------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ---------------------------------------------------------------------------- -------------------------------- ------------------
Total distributions
- ---------------------------------------------------------------------------- -------------------------------- ------------------
Net asset value, end of period
============================================================================ ================================ ==================
Total Return
Net assets, end of period (000's)
Ratio of net expenses to average
net assets
Ratio of net investment income to
average net assets
Ratio of expenses before
reimbursement and waiver to
average net assets
Portfolio turnover rate
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
VALUE OPPORTUNITY BALANCED
- -------------------------------------------- -------------------------------------------------------------------------------------
Class C Class A
- -------------------------------------------- -------------------------------------------------------------------------------------
Period From
June 30, 1998
(Date of Initial
Year Ended Public Offering) Year Ended Year Ended Year Ended Year Ended Year Ended
October 31, to October 31, October 31, October 31, October 31, October 31, October 31,
1999 1998 1999 1998 1997 1996 1995
- -------------------------------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
- -------------------------------------------- -------------------------------------------------------------------------------------
- -------------------------------------------- -------------------------------------------------------------------------------------
- -------------------------------------------- -------------------------------------------------------------------------------------
- -------------------------------------------- -------------------------------------------------------------------------------------
- -------------------------------------------- -------------------------------------------------------------------------------------
============================================ =====================================================================================
</TABLE>
65
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
BALANCED
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Class C
- ---------------------------------------------------------------------------- -----------------------------------------------------
Period From Period From
March 1, 1999 June 30, 1998
(Date of Initial (Date of Initial
Public Offering) Year Ended Public Offering)
to October 31, October 31, to October 31,
1999 1999 1998
- ---------------------------------------------------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ $ $
- ---------------------------------------------------------------------------- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- ---------------------------------------------------------------------------- -----------------------------------------------------
Total from investment operations
- ---------------------------------------------------------------------------- -----------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ---------------------------------------------------------------------------- -----------------------------------------------------
Total distributions
- ---------------------------------------------------------------------------- -----------------------------------------------------
Net asset value, end of period
============================================================================ =====================================================
Total Return
Net assets, end of period (000's)
Ratio of net expenses to average
net assets
Ratio of net investment income to
average net assets
Ratio of expenses before
reimbursement and waiver to
average net assets
Portfolio turnover rate
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
GROWTH AND INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- ---------------------------------------------------------------------------- ---------------- ----------------------------------
Period From Period From
March 1, 1999 June 30, 1998
(Date of Initial (Date of Initial
Year Ended Year Ended Year Ended Year Ended Year Ended Public Offering) Year Ended Public Offering)
October 31, October 31, October 31, October 31, October 31, to October 31, October 31, to October 31,
1999 1998 1997 1996 1995 1999 1999 1998
- ---------------------------------------------------------------------------- ----------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $ $
- ---------------------------------------------------------------------------- ----------------- ---------------------------------
- ---------------------------------------------------------------------------- ----------------- ---------------------------------
- --------------------------------------------------------------------------- ----------------- ---------------------------------
- ---------------------------------------------------------------------------- ----------------- ---------------------------------
- --------------------------------------------------------------------------- ----------------- ---------------------------------
=========================================================================== ================= =================================
</TABLE>
67
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
REAL ESTATE
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- ---------------------------------------------------------------------------- ------------------ --------------------------------
Period From Period From Period From
February 2, 1998 March 1, 1999 June 30, 1998
(Commencement (Date of Initial (Date of Initial
Year Ended of Operations) Public Offering) Year Ended Public Offering)
October 31, to October 31, to October 31, October 31, to October 31,
1999 1998 1999 1999 1998
- ---------------------------------------------------------------------------- ------------------ --------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- ---------------------------------------------------------------------------- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- ---------------------------------------------------------------------------- -----------------------------------------------------
Total from investment operations
- ---------------------------------------------------------------------------- -----------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ---------------------------------------------------------------------------- -----------------------------------------------------
Total distributions
- ---------------------------------------------------------------------------- -----------------------------------------------------
Net asset value, end of period
============================================================================ =====================================================
Total Return
Net assets, end of period (000's)
Ratio of net expenses to average
net assets
Ratio of net investment income to
average net assets
Ratio of expenses before
reimbursement and waiver to
average net assets
Portfolio turnover rate
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
BOND
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- ----------------------------------------------------------------------- ------------------- ------------------------------------
Period From Period From
March 1, 1999 June 30, 1998
(Date of Initial (Date of Initial
Year Ended Year Ended Year Ended Year Ended Year Ended Public Offering) Year Ended Public Offering)
October 31, October 31, October 31, October 31, October 31, to October 31, October 31, to October 31,
1999 1998 1997 1996 1995 1999 1999 1998
- ----------------------------------------------------------------------- ------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $ $
- ----------------------------------------------------------------------- ------------------- ------------------------------------
- ----------------------------------------------------------------------- ------------------- ------------------------------------
- ----------------------------------------------------------------------- ------------------- ------------------------------------
- ----------------------------------------------------------------------- ------------------- ------------------------------------
- ----------------------------------------------------------------------- ------------------- ------------------------------------
======================================================================= =================== ====================================
</TABLE>
69
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
AETNA GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- --------------------------------------------------------------------------------------------------------------- ------------------
Period From
March 1, 1999
(Date of Initial
Year Ended Year Ended Year Ended Year Ended Year Ended Public Offering)
October 31, October 31, October 31, October 31, October 31, to October 31,
1999 1998 1997 1996 1995 1999
- --------------------------------------------------------------------------------------------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $ $
- --------------------------------------------------------------------------------------------------------------- ------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- --------------------------------------------------------------------------------------------------------------- ------------------
Total from investment operations
- --------------------------------------------------------------------------------------------------------------- ------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- --------------------------------------------------------------------------------------------------------------- ------------------
Total distributions
- --------------------------------------------------------------------------------------------------------------- ------------------
Net asset value, end of period
=============================================================================================================== ==================
Total Return
Net assets, end of period (000's)
Ratio of net expenses to average
net assets
Ratio of net investment income to
average net assets
Ratio of expenses before
reimbursement and waiver to
average net assets
Portfolio turnover rate
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
AETNA GOVERNMENT FUND HIGH YIELD
- ----------------------------------- ----------------------------------------------------------------------------------------------
Class C Class A Class B Class C
- ----------------------------------- --------------------------------- ------------------- ------------------------------------
Period From Period From Period From Period From
June 30, 1998 February 2, 1998 March 1, 1999 June 30, 1998
(Date of Initial (Commencement (Date of Initial (Date of Initial
Year Ended Public Offering) Year Ended of Operations Public Offering) Year Ended Public Offering)
October 31, to October 31, October 31, to October 31, to October 31, October 31, to October 31,
1999 1998 1999 1998 1999 1999 1998
- ----------------------------------- --------------------------------- ------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
- ----------------------------------- --------------------------------- ------------------- ------------------------------------
- ----------------------------------- --------------------------------- ------------------- ------------------------------------
- ----------------------------------- --------------------------------- ------------------- ------------------------------------
- ----------------------------------- --------------------------------- ------------------- ------------------------------------
- ----------------------------------- --------------------------------- ------------------- ------------------------------------
=================================== ================================= =================== ====================================
</TABLE>
71
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
MONEY MARKET
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- --------------------------------------------------------------------------------------------------------------- ------------------
Period From
March 1, 1999
(Date of Initial
Year Ended Year Ended Year Ended Year Ended Year Ended Public Offering)
October 31, October 31, October 31, October 31, October 31, to October 31,
1999 1998 1997 1996 1995 1999
- --------------------------------------------------------------------------------------------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $ $
- --------------------------------------------------------------------------------------------------------------- ------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- --------------------------------------------------------------------------------------------------------------- ------------------
Total from investment operations
- --------------------------------------------------------------------------------------------------------------- ------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- --------------------------------------------------------------------------------------------------------------- ------------------
Total distributions
- --------------------------------------------------------------------------------------------------------------- ------------------
Net asset value, end of period
=============================================================================================================== ==================
Total Return
Net assets, end of period (000's)
Ratio of net expenses to average
net assets
Ratio of net investment income to
average net assets
Ratio of expenses before
reimbursement and waiver to
average net assets
Portfolio turnover rate
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
MONEY MARKET INDEX PLUS BOND
- --------------------------------- ------------------------------------------------------------------------------------------------
Class C Class A Class B Class C
- --------------------------------- ------------------------------- ------------------- ----------------------------------------
Period From Period From Period From Period From
June 30, 1998 February 4, 1998 March 1, 1999 June 30, 1998
(Date of Initial (Commencement (Date of Initial (Date of Initial
Year Ended Public Offering) Year Ended of Operations) Public Offering) Year Ended Public Offering)
October 31, to October 31, October 31, to October 31, to October 31, October 31, to October 31,
1999 1998 1999 1998 1999 1999 1998
- --------------------------------- ------------------------------- ------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
- --------------------------------- ------------------------------- ------------------- ----------------------------------------
- --------------------------------- ------------------------------- ------------------- ----------------------------------------
- --------------------------------- ------------------------------- ------------------- ----------------------------------------
- --------------------------------- ------------------------------- ------------------- ----------------------------------------
- --------------------------------- ------------------------------- ------------------- ----------------------------------------
================================= =============================== ================== ========================================
</TABLE>
73
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
INDEX PLUS LARGE CAP
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- ---------------------------------------------------------------------------------- ---------------- ----------------------------
Period From Period From Period From
February 3, 1997 March 1, 1999 June 30, 1998
(Date of Initial (Date of Initial (Date of Initial
Year Ended Year Ended Public Offering) Public Offering) Year Ended Public Offering)
October 31, October 31, to October 31, to October 31, October 31, to October 31,
1999 1998 1997 1999 1999 1998
- ---------------------------------------------------------------------------------- ---------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $ $
- ---------------------------------------------------------------------------------- ---------------- ---------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- ---------------------------------------------------------------------------------- ---------------- ---------------------------
Total from investment operations
- ---------------------------------------------------------------------------------- ---------------- ---------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ---------------------------------------------------------------------------------- ---------------- ----------------------------
Total distributions
- ---------------------------------------------------------------------------------- ---------------- ---------------------------
Net asset value, end of period
================================================================================== ================ ============================
Total Return
Net assets, end of period (000's)
Ratio of net expenses to
average net assets
Ratio of net investment income to
average net assets
Ratio of expenses before
reimbursement and waiver to
average net assets
Portfolio turnover rate
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
INDEX PLUS MID CAP INDEX PLUS SMALL CAP
- -------------------------------------------------------------------------------- --------------------------------------------------
Class A Class B Class C Class A Class B
- ----------------------------- ---------------- ------------------------------- ------------------------------- -----------------
Period From Period From Period From Period From Period From
February 3, 1998 March 1, 1999 June 30, 1998 February 3, 1998 March 1, 1999
(Commencement (Date of Initial (Date of Initial (Commencement (Date of Initial
Year Ended of Operations) Public Offering) Year Ended Public Offering) Year Ended of Operations) Public Offering)
October 31, to October 31, to October 31, October 31, to October 31, October 31, to October 31, to October 31,
1999 1998 1999 1999 1998 1999 1998 1999
- ----------------------------- ---------------- ------------------------------- ------------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
- ----------------------------- ---------------- ------------------------------- ------------------------------- -----------------
- ----------------------------- ---------------- ------------------------------- ------------------------------- -----------------
- ----------------------------- ---------------- ------------------------------- ------------------------------- -----------------
- ----------------------------- ---------------- ------------------------------- ------------------------------- -----------------
- ----------------------------- ---------------- ------------------------------- ------------------------------- -----------------
============================= ================ =============================== =============================== =================
</TABLE>
75
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
INDEX PLUS SMALL CAP ASCENT
- ----------------------------------------------------------------------------- ----------------------------------------------------
Class C Class A
- ----------------------------------------------------------------------------- ----------------------------------------------------
Period From Period From
June 30, 1998 January 20, 1997
(Date of Initial (Date of Initial
Year Ended Public Offering) Year Ended Year Ended Public Offering)
October 31, to October 31, October 31, October 31, to October 31,
1999 1998 1999 1998 1997
- ----------------------------------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- ----------------------------------------------------------------------------- ----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- ----------------------------------------------------------------------------- ----------------------------------------------------
Total from investment operations
- ----------------------------------------------------------------------------- ----------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ----------------------------------------------------------------------------- ----------------------------------------------------
Total distributions
- ----------------------------------------------------------------------------- ----------------------------------------------------
Net asset value, end of period
============================================================================= ====================================================
Total Return
Net assets, end of period (000's)
Ratio of net expenses to average
net assets
Ratio of net investment income to
average net assets
Ratio of expenses before
reimbursement and waiver to
average net assets
Portfolio turnover rate
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
ASCENT CROSSROADS
- ------------------------------------------------------ ---------------------------------------------------------------------------
Class B Class C Class A Class B
- ------------------- -------------------------------- ----------------------------------------------------- -------------------
Period From Period From Period From Period From
March 1, 1999 June 30, 1998 January 20, 1997 March 1, 1999
(Date of Initial (Date of Initial (Date of Initial (Date of Initial
Public Offering) Year Ended Public Offering) Year Ended Year Ended Public Offering) Public Offering)
to October 31, October 31, to October 31, October 31, October 31, to October 31, to October 31,
1999 1999 1998 1999 1998 1997 1999
- ------------------- -------------------------------- ----------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
- ------------------- -------------------------------- ----------------------------------------------------- -------------------
- ------------------- -------------------------------- ----------------------------------------------------- -------------------
- ------------------- -------------------------------- ----------------------------------------------------- -------------------
- ------------------- -------------------------------- ----------------------------------------------------- -------------------
- ------------------- -------------------------------- ----------------------------------------------------- -------------------
=================== ================================ ===================================================== ===================
</TABLE>
77
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
CROSSROADS LEGACY
- ----------------------------------------------------------------------------- ----------------------------------------------------
Class C Class A
- ----------------------------------------------------------------------------- ----------------------------------------------------
Period From Period From
June 30, 1998 January 20, 1997
(Date of Initial (Date of Initial
Year Ended Public Offering) Year Ended Year Ended Public Offering)
October 31, to October 31, October 31, October 31, to October 31,
1999 1998 1999 1998 1997
- ----------------------------------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- ----------------------------------------------------------------------------- ----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- ----------------------------------------------------------------------------- ----------------------------------------------------
Total from investment operations
- ----------------------------------------------------------------------------- ----------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ----------------------------------------------------------------------------- ----------------------------------------------------
Total distributions
- ----------------------------------------------------------------------------- ----------------------------------------------------
Net asset value, end of period
============================================================================= ====================================================
Total Return
Net assets, end of period (000's)
Ratio of net expenses to average
net assets
Ratio of net investment income to
average net assets
Ratio of expenses before
reimbursement and waiver to
average net assets
Portfolio turnover rate
</TABLE>
78
<PAGE>
LEGACY
- ------------------------------------------------------------------
Class B Class C
- -------------------------- -------------------------------------
Period From Period From
March 1, 1999 June 30, 1998
(Date of Initial (Date of Initial
Public Offering) Year Ended Public Offering)
to October 31, October 31, to October 31,
1999 1999 1998
- -------------------------- -------------------------------------
$ $ $
- -------------------------- -------------------------------------
- -------------------------- -------------------------------------
- -------------------------- -------------------------------------
- -------------------------- -------------------------------------
- -------------------------- -------------------------------------
========================== =====================================
79
<PAGE>
ADDITIONAL INFORMATION
The SAI, which is incorporated by reference into this Prospectus, contains
additional information about the Funds. The Funds' most recent annual and
semiannual reports also contain information about the Funds' investments, as
well as a discussion of the market conditions and investment strategies that
significantly affected their performance during the past fiscal year.
You may request free of charge the current SAI or the most recent annual and
semiannual reports, or other information about the Funds, 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
Funds. Certain reports and information, including the SAI, are available on the
EDGAR Database 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 1-202-942-8090 to get
information about the operations of the public reference room. You may obtain
copies of reports and other information about the Funds, after paying a
duplicating fee, by sending an E-mail request to: [email protected], or by
writing to the SEC's Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act File No. 811-6352.
80
<PAGE>
This page is intentionally blank.
<PAGE>
AETNA SERIES FUND, INC.
PROSPECTUS
CLASS I SHARES
March __, 2000
<TABLE>
<S> <C>
CAPITAL APPRECIATION FUNDS INDEX PLUS FUNDS
Aetna Growth Fund (Growth) Aetna Index Plus Bond Fund (Index Plus Bond)
Aetna International Fund (International) Aetna Index Plus Large Cap Fund (Index Plus Large Cap)
Aetna Mid Cap Fund (Mid Cap) Aetna Index Plus Mid Cap Fund (Index Plus Mid Cap)
Aetna Small Company Fund (Small Company) Aetna Index Plus Small Cap Fund (Index Plus Small Cap)
Aetna Value Opportunity Fund (Value Opportunity)
Aetna Technology Fund (Technology)
GENERATION FUNDS
Aetna Ascent Fund (Ascent)
GROWTH & INCOME FUNDS Aetna Crossroads Fund (Crossroads)
Aetna Balanced Fund (Balanced) Aetna Legacy Fund (Legacy)
Aetna Growth and Income Fund (Growth and Income)
Aetna Real Estate Securities Fund (Real Estate)
INCOME FUNDS
Aetna Bond Fund (Bond Fund)
Aetna Government Fund
Aetna High Yield Fund (High Yield)
Aetna Money Market Fund (Money Market)
</TABLE>
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.
This Prospectus is for investors purchasing or considering purchase of Class I
shares of one or more of the Funds. Only certain investors are eligible to
purchase Class I shares. All other investors may purchase Class A, Class B and
Class C shares. Investors who wish to purchase Class A, Class B or Class C
shares of the Funds may request a separate prospectus by calling 1-800-367-7732.
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
THE FUNDS' INVESTMENTS 3
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RISKS,
INVESTMENT PERFORMANCE 3
FUND EXPENSES 37
OTHER CONSIDERATIONS 39
MANAGEMENT OF THE FUNDS 40
INVESTING IN THE FUNDS 43
OPENING AN ACCOUNT AND ELIGIBILITY FOR CLASS I SHARES 43
HOW TO BUY SHARES 43
HOW TO SELL SHARES 46
TIMING OF REQUESTS 47
OTHER INFORMATION ABOUT SHAREHOLDER ACCOUNTS AND SERVICES 47
DIVIDENDS AND DISTRIBUTIONS 48
TAX INFORMATION 49
PERFORMANCE OF SIMILARLY MANAGED FUNDS 49
FINANCIAL HIGHLIGHTS 52
ADDITIONAL INFORMATION 65
2
<PAGE>
THE FUNDS' INVESTMENTS
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RISKS, INVESTMENT
PERFORMANCE
Below is a description of each Fund's INVESTMENT OBJECTIVE, the PRINCIPAL
INVESTMENT STRATEGIES employed on behalf of each Fund, and the PRINCIPAL RISKS
associated with investing in each Fund.
- --------------------------------------------------------------------------------
A performance BAR CHART is provided for each Fund that has been in existence for
at least one full calendar year. If a Fund has been in existence for at least
two full calendar years, the bar chart shows changes in the Fund's performance
from year to year. The fluctuation in returns illustrates each Fund's
performance volatility. The chart is accompanied by the Fund's best and worst
quarterly returns throughout the years noted in the bar chart.
- --------------------------------------------------------------------------------
A TABLE for each Fund that has been in existence for at least one full calendar
year shows its average annual total return. The table also compares the Fund's
performance to the performance of one or more broad-based securities market
indices. Each index is a widely recognized, unmanaged index of securities. A
Fund's past performance is not necessarily an indication of how it will perform
in the future.
- --------------------------------------------------------------------------------
Additional information on the Funds' investment strategies and risks is
included, beginning on page 39.
- --------------------------------------------------------------------------------
Aeltus Investment Management, Inc. (Aeltus) serves as investment adviser of the
Funds.
- --------------------------------------------------------------------------------
Elijah Asset Management, LLC (EAM) serves as subadviser of Technology.
- --------------------------------------------------------------------------------
SHARES OF THE FUNDS WILL RISE AND FALL IN VALUE AND YOU COULD LOSE MONEY BY
INVESTING IN THEM. THERE IS NO GUARANTY THE FUNDS WILL ACHIEVE THEIR RESPECTIVE
INVESTMENT OBJECTIVES. SHARES OF THE FUNDS ARE NOT BANK DEPOSITS AND ARE NOT
GUARANTEED, ENDORSED OR INSURED BY ANY FINANCIAL INSTITUTION, THE FDIC OR ANY
OTHER GOVERNMENT AGENCY.
3
<PAGE>
CAPITAL APPRECIATION FUNDS
AETNA GROWTH FUND (GROWTH)
Investment Objective Seeks GROWTH OF CAPITAL through investment in a diversified
portfolio consisting primarily of common stocks and securities convertible into
common stocks believed to offer growth potential.
Principal Investment Strategies Under normal market conditions, Growth invests
at least 65% of its total assets in common stocks and securities convertible
into common stock.
In managing Growth, Aeltus:
[bullet] Emphasizes stocks of larger companies, although Growth may invest in
companies of any size.
[bullet] Uses internally developed quantitative computer models to evaluate the
financial characteristics (for example, earnings growth consistency,
earnings momentum, and price/earnings ratio) of approximately 1,000
companies. Aeltus analyzes these characteristics in an attempt to
identify companies it believes have strong growth characteristics or
demonstrate a positive trend in earnings estimates, but whose perceived
value is not reflected in the stock price.
[bullet] Focuses on companies that it believes have strong, sustainable and
improving earnings growth, and established market positions in a
particular industry.
Principal Risks The principal risks of investing in Growth are those generally
attributable to stock investing. They include sudden and unpredictable drops in
the value of the market as a whole and periods of lackluster or negative
performance.
Growth-oriented stocks typically sell at relatively high valuations as compared
to other types of stocks. If a growth stock does not exhibit the consistent
level of growth expected, its price may drop sharply. Historically,
growth-oriented stocks have been more volatile than value-oriented stocks.
4
<PAGE>
AETNA GROWTH FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1994 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
Class I % % % 01/04/94
S&P 500 Index* % % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
* The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
5
<PAGE>
AETNA INTERNATIONAL FUND (INTERNATIONAL)
Investment Objective Seeks LONG-TERM CAPITAL GROWTH primarily through investment
in a diversified portfolio of common stocks principally traded in countries
outside of North America. International will not target any given level of
current income.
Principal Investment Strategies Under normal market conditions, International
invests at least 65% of its total assets in securities principally traded in
three or more countries outside of North America. These securities may include
common stocks as well as securities convertible into common stocks.
In managing International, Aeltus:
[bullet] Diversifies the Fund's portfolio by investing in a mix of stocks that
it believes have the potential for long-term growth, as well as stocks
that appear to be trading below their perceived value.
[bullet] Allocates assets among several geographic regions and individual
countries, investing primarily in those areas that it believes have the
greatest potential for growth as well as stable exchange rates.
[bullet] Invests primarily in established foreign securities markets, although
it may invest in emerging markets as well.
[bullet] Typically invests in approximately 80 to 110 different securities at
any one time, and looks to allocate no more than 3% of the Fund's total
assets to a single security.
[bullet] Uses internally developed quantitative computer models to evaluate the
financial characteristics of over 2,000 companies. Aeltus analyzes cash
flows, earnings and dividends of each company, in an attempt to select
companies with long-term sustainable growth characteristics.
[bullet] Employs currency hedging strategies to protect the portfolio from
adverse effects on the U.S. dollar.
Principal Risks The principal risks of investing in International are those
generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Other risks of foreign investing include:
[bullet] Stocks of foreign companies tend to be less liquid and more volatile
than their U.S. counterparts.
[bullet] Accounting standards and market regulations tend to be less
standardized in certain foreign countries, and economic and political
climates tend to be less stable.
[bullet] Stocks of foreign companies may be denominated in foreign currency.
Exchange rate fluctuations may reduce or eliminate gains or create
losses. Hedging strategies intended to reduce this risk may not perform
as expected.
[bullet] Investments in emerging markets are subject to the same risks
applicable to foreign investments generally, although those risks may
be increased due to conditions in such countries.
6
<PAGE>
AETNA INTERNATIONAL FUND INVESTMENT PERFORMANCE
[graphic omitted]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR-BY-YEAR TOTAL RETURN 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
Class I % % % 01/03/92
MSCI EAFE Index* % % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Morgan Stanley Capital International-Europe, Australia and Far East Index
is a market value-weighted average of the performance of more than 900
securities listed on the stock market exchanges of countries in Europe,
Australia and the Far East.
7
<PAGE>
AETNA MID CAP FUND
(MID CAP)
Investment Objective Seeks GROWTH OF CAPITAL primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stocks of companies having medium market capitalizations.
Principal Investment Strategies Under normal market conditions, Mid Cap invests
at least 65% of its total assets in common stocks and securities convertible
into common stock of medium capitalization companies, defined as:
[bullet] The 1,000 largest U.S. companies (as measured by market
capitalization), excluding companies in the Standard & Poor's 500
Composite Index.
[bullet] All companies not included above that are included in the Standard &
Poor's MidCap 400 Index.
[bullet] Currently, companies falling into these categories have market
capitalizations of between $800 million and $20 billion.
In managing Mid Cap, Aeltus invests in stocks that it believes have the
potential for long-term growth, as well as those that appear to be trading below
their perceived value. Aeltus uses internally developed quantitative computer
models to evaluate the financial characteristics of companies such as a
company's potential for strong, sustainable earnings and for long-term
profitability. Aeltus analyzes these characteristics in an attempt to identify
companies whose full value is not reflected in the stock price.
Principal Risks The principal risks of investing in Mid Cap are those generally
attributable to stock investing. These risks include sudden and unpredictable
drops in the value of the market as a whole and periods of lackluster or
negative performance. Stocks of medium-sized companies tend to be more volatile
and less liquid than stocks of larger companies.
8
<PAGE>
AETNA MID CAP FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 02/04/98
S&P MidCap 400 Index * % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Standard & Poor's MidCap 400 Index is an unmanaged index used to measure
stock market performance composed of companies with a weighted average market
value of $3.6 billion. Performance is calculated on a total return basis and
dividends are reinvested, as reported by Frank Russell Company.
9
<PAGE>
AETNA SMALL COMPANY FUND
(SMALL COMPANY)
Investment Objective Seeks GROWTH OF CAPITAL primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stocks of companies with smaller market capitalizations.
Principal Investment Strategies Under normal market conditions, Small Company
invests at least 65% of its total assets in common stocks and securities
convertible into common stock of small-capitalization companies, defined as:
[bullet] The 2,000 smallest of the 3,000 largest U.S. companies (as measured by
market capitalization).
[bullet] All companies not included above that are included in the Standard &
Poor's SmallCap 600 Index or the Russell 2000 Index.
[bullet] Companies with market capitalizations lower than companies included in
the first two categories.
For purposes of the 65% policy, the largest company in which Small Company
intends to invest currently has a market capitalization of approximately $1.5
billion.
In managing Small Company, Aeltus:
[bullet] Invests in stocks that it believes have the potential for long-term
growth, as well as those that appear to be trading below their
perceived value.
[bullet] Uses internally developed quantitative computer models to evaluate
financial characteristics (for example, changes in earnings, earnings
estimates and price momentum) of over 2,000 companies. Aeltus analyzes
these characteristics in an attempt to identify companies whose
perceived value is not reflected in the stock price.
[bullet] Considers the potential of each company to create or take advantage of
unique product opportunities, its potential to achieve long-term
sustainable growth and the quality of its management.
Principal Risks The principal risks of investing in Small Company are those
generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Other risks include:
[bullet] Stocks of smaller companies carry higher risks than stocks of larger
companies. This is because smaller companies may lack the management
experience, financial resources, product diversification, and
competitive strengths of larger companies.
[bullet] In many instances, the frequency and volume of trading in small cap
stocks are substantially less than stocks of larger companies. As a
result, the stocks of smaller companies may be subject to wider price
fluctuations and/or may be less liquid.
[bullet] When selling a large quantity of a particular stock, the Fund may have
to sell at a discount from quoted prices or may have to make a series
of small sales over an extended period of time due to the more limited
trading volume of smaller company stocks.
[bullet] Stocks of smaller companies can be particularly sensitive to expected
changes in interest rates, borrowing costs and earnings.
10
<PAGE>
AETNA SMALL COMPANY FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1994 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 01/04/94
Russell 2000 Index* % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Russell 2000 Index consists of the smallest 2,000 companies in the Russell
3000 Index and represents approximately 10% of the Russell 3000 total market
capitalization. The Russell 2000 Index assumes reinvestment of all dividends
and is unmanaged.
11
<PAGE>
AETNA VALUE OPPORTUNITY FUND
(VALUE OPPORTUNITY)
Investment Objective Seeks GROWTH OF CAPITAL primarily through investment in a
diversified portfolio of common stocks and securities convertible into common
stock.
Principal Investment Strategies Under normal market conditions, Value
Opportunity invests at least 65% of its total assets in common stocks and
securities convertible into common stock. In managing Value Opportunity, Aeltus
tends to invest in larger companies it believes are trading below their
perceived value, although it may invest in companies of any size. Aeltus
believes that Value Opportunity's investment objective can best be achieved by
investing in companies whose stock price has been excessively discounted due
to perceived problems or for other reasons. In searching for investments,
Aeltus evaluates financial and other characteristics of companies, attempting to
find those companies that appear to possess a catalyst for positive change,
such as strong management, solid assets, or market position, rather than those
companies whose stocks are simply inexpensive. Aeltus looks to sell a security
when price objectives are reached.
Principal Risks The principal risks of investing in Value Opportunity are those
generally attributable to stock investing. They include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Stocks that appear to be undervalued may never appreciate to the extent
expected. Further, because the prices of value-oriented stocks tend to
correlate more closely with economic cycles than growth-oriented stocks, they
generally are more sensitive to changing economic conditions, such as changes
in interest rates, corporate earnings and industrial production.
AETNA VALUE OPPORTUNITY FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 02/02/98
S&P 500 Index * % N/A
The performance table and bar chart provide an indication of the historical
risk of an investment in the Fund.
- ----------
*The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
12
<PAGE>
AETNA TECHNOLOGY FUND
(TECHNOLOGY)
Investment Objective Seeks LONG-TERM CAPITAL APPRECIATION.
Principal Investment Strategies Technology primarily invests in common stocks
and securities convertible into common stock of companies in the information
technology industry sector.
Companies in the information technology industries include companies that EAM
considers to be principally engaged in the development, production, or
distribution of products or services related to the processing, storage,
transmission, or presentation of information or data. The following examples
illustrate the wide range of products and services provided by these
industries:
[bullet] Computer hardware and software of any kind, including, for example,
semiconductors, minicomputers, and peripheral equipment.
[bullet] Telecommunications products and services.
[bullet] Multimedia products and services, including, for example, goods and
services used in the broadcast and media industries.
[bullet] Data processing products and services.
[bullet] Financial services companies that collect or disseminate market,
economic, and financial information.
[bullet] Internet companies and other companies engaged in, or providing
products or services for, e-commerce.
A particular company will be considered to be principally engaged in the
information technology industries if at the time of investment EAM determines
that at least 50% of the company's assets, gross income, or net profits are
committed to, or derived from, those industries. A company will also be
considered to be principally engaged in the information technology industries
if EAM considers that the company has the potential for capital appreciation
primarily as a result of particular products, technology, patents, or other
market advantages in those industries.
In selecting stocks for Technology, EAM looks at a company's valuation relative
to its potential long-term growth rate. EAM may look to see whether a company
offers a new or improved product, service, or business operation; whether it
has experienced a positive change in its financial or business condition;
whether the market for its goods or services has expanded or experienced a
positive change; and whether there is a potential catalyst for positive change
in the company's business or stock price. Technology may sell a security if EAM
determines that the company has become overvalued due to price appreciation or
has experienced a change in its business fundamentals, if the company's growth
rate slows substantially, or if EAM believes that another investment offers a
better opportunity.
Principal Risks The principal risks of investing in Technology are those
generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. Stocks of smaller companies tend to be less
liquid and more volatile than stocks of larger companies. Further, stocks of
smaller companies also can be particularly sensitive to expected changes in
interest rates, borrowing costs and earnings.
Because Technology's investments are concentrated in the information technology
industries, the value of its shares will be especially affected by factors
peculiar to those industries and may fluctuate more widely than the value of
shares of a portfolio which invests in a broader range of industries.
Investments in information technology companies may be highly volatile. Changes
in their prices may reflect changes in investor evaluation of a particular
product or group of products, of the prospects of a company to develop and
market a particular technology successfully, or of information technology
investments generally.
Technology may experience difficulty in establishing or closing out positions in
these securities at prevailing market prices. Also, there may be less publicly
available information about small companies or less market interest in their
securities as compared to larger companies, and it may take longer for the
prices of the securities to reflect the full value of their issuers' earnings
potential or assets.
13
<PAGE>
GROWTH & INCOME FUNDS
AETNA BALANCED FUND
(BALANCED)
Investment Objective Seeks to MAXIMIZE TOTAL RETURN with reasonable safety of
principal by investing in a diversified portfolio of stocks, bonds and money
market instruments.
Principal Investment Strategies Under normal market conditions, Balanced
allocates its assets between the following asset classes:
[bullet] Equities, such as common and preferred stocks.
[bullet] Debt, such as bonds, mortgage-related and other asset-backed
securities, U.S. Government securities and money market instruments.
Aeltus typically maintains approximately 60% of Balanced's total assets in
equities and approximately 40% of its total assets in debt (including money
market instruments), although those percentages may vary from time to time
depending on Aeltus' view of the relative attractiveness of each asset class. In
making asset allocation decisions, Aeltus uses current market statistics and
economic indicators to attempt to forecast returns for the equity and debt
sectors of the securities market. Within each asset class, Aeltus uses
quantitative computer models to evaluate financial criteria in an attempt to
identify those issuers whose perceived value is not reflected in their equity or
debt securities. Aeltus generally does not attempt to respond to short-term
swings in the market by quickly changing the characteristics of the Fund's
portfolio.
In managing the EQUITY COMPONENT of Balanced, Aeltus typically emphasizes
investment in stocks of larger companies, although it may invest in stocks of
smaller companies to a significant extent.
In managing the DEBT COMPONENT of Balanced, Aeltus looks to select investments
with the opportunity to enhance the portfolio's yield and total return, focusing
on performance over the long term. The Fund may invest up to 15% of its total
assets in high-yield, high-risk bonds (high-yield bonds). High-yield bonds are
fixed income securities rated below BBB- by Standard & Poor's Corporation (S&P)
or Baa3 by Moody's Investors Services, Inc. (Moody's) or, if unrated, considered
by Aeltus to be of comparable quality.
Principal Risks The principal risks of investing in Balanced are those generally
attributable to stock and bond investing. The success of the Fund's strategy
depends on Aeltus' skill in allocating Fund assets between equities and debt and
in choosing investments within those categories. Because the Fund's assets are
allocated between equities and fixed income securities, Balanced may
underperform stock funds when stocks are in favor and underperform bond funds
when bonds are in favor.
Risks attributable to STOCK investing include sudden and unpredictable drops in
the value of the market as a whole and periods of lackluster or negative
performance. Further, stocks of smaller companies tend to be less liquid and
more volatile than stocks of larger companies. Stocks of smaller companies also
can be particularly sensitive to expected changes in interest rates, borrowing
costs and earnings.
The Fund's FIXED-INCOME investments are subject to the risk that interest rates
will rise, which generally causes bond prices to fall. Also, economic and market
conditions may cause issuers to default or go bankrupt. In either case, the
price of Fund shares may fall. High-yield bonds are even more sensitive to
economic and market conditions than other bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
14
<PAGE>
AETNA BALANCED FUND INVESTMENT PERFORMANCE
[graphic omitted]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR-BY-YEAR TOTAL RETURN 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
Class I % % % 01/03/92
S&P 500 Index* % % N/A
LBAB** % % N/A
60% S&P 500 Index/40% LBAB % % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends and is
considered to be representative of the stock market in general.
** The Lehman Brothers Aggregate Bond Index (LBAB) is an unmanaged index of
corporate, government and mortgage bonds.
15
<PAGE>
AETNA GROWTH AND INCOME FUND
(GROWTH AND INCOME)
Investment Objective Seeks LONG-TERM GROWTH OF CAPITAL AND INCOME through
investment in a diversified portfolio consisting primarily of common stocks and
securities convertible into common stock believed to offer above-average growth
potential.
Principal Investment Strategies Under normal market conditions, Growth and
Income invests at least 65% of its total assets in common stocks and securities
convertible into common stock that Aeltus believes have significant potential
for capital or income growth.
In managing Growth and Income, Aeltus:
[bullet] Emphasizes stocks of larger companies.
[bullet] May also invest the Fund's assets across other asset classes (including
stocks of small and medium-sized companies, international stocks and
fixed income securities), depending upon market conditions.
[bullet] Uses internally developed quantitative computer models to determine the
relative attractiveness of each asset class and to evaluate company
financial characteristics (for example, price to earnings ratios,
growth rates and earnings estimates) to select securities within each
class. In analyzing these characteristics, Aeltus attempts to identify
positive earnings momentum and valuation characteristics in selecting
securities whose perceived value is not reflected in their price.
Principal Risks The principal risks of investing in Growth and Income are those
generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Although Aeltus emphasizes large cap stocks, to the extent the Fund is
diversified across asset classes, it may not perform as well as less diversified
funds when large cap stocks are in favor.
16
<PAGE>
AETNA GROWTH AND INCOME FUND INVESTMENT PERFORMANCE
[graphic omitted]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR-BY-YEAR TOTAL RETURN 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
Class I % % % 01/03/92
S&P 500 Index* % % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends and is
considered to be representative of the stock market in general.
17
<PAGE>
AETNA REAL ESTATE SECURITIES FUND
(REAL ESTATE)
Investment Objective Seeks MAXIMUM TOTAL RETURN primarily through investment in
a diversified portfolio of equity securities of real estate companies, the
majority of which are real estate investment trusts (REITs).
Principal Investment Strategies Under normal market conditions, Real Estate
invests at least 65% of its total assets in stocks, convertible securities and
preferred stocks of companies principally engaged in the real estate industry.
These companies may invest in, among other things, shopping malls, healthcare
facilities, office parks and apartment communities, or may provide real estate
management and development services.
In selecting investments from a universe of equity securities of REITs and real
estate operating companies, Aeltus uses internally developed quantitative models
to forecast the returns of each security. Aeltus evaluates real estate companies
based on their earnings history and long-term growth prospects, analyst
estimates of future earnings, safety and growth in dividends, balance sheet
strength and quality of management. Aeltus also considers whether the securities
appear to be trading below their perceived value. Aeltus allocates assets among
property types and economic and geographic regions. Aeltus attempts to construct
Real Estate's portfolio so that the overall level of risk is not in excess of
its benchmark index, the National Association of Real Estate Investment Trusts
Equity Index.
Principal Risks Concentrating 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. Those risks
include:
[bullet] Periodic declines in the value of real estate, generally, or in the
rents and other income generated by real estate.
[bullet] Periodic over-building, which creates gluts in the market, as well as
changes in laws (such as zoning laws) that impair the property rights
of real estate owners.
[bullet] Adverse developments in the real estate industry, which may have a
greater impact on this Fund than a fund that is more broadly
diversified.
The performance of the Fund also may be adversely affected by sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative market performance. Although Real Estate is subject to
the risks generally attributable to stock investing, because the Fund has
concentrated its assets in one industry it may be subject to more abrupt swings
in value than would a fund that does not concentrate its assets in one industry.
18
<PAGE>
AETNA REAL ESTATE SECURITIES FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 02/02/98
NAREIT Index * % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The National Association of Real Estate Investment Trusts Equity (NAREIT) Index
is a market weighted total return of all tax-qualified REITs listed on the New
York Stock Exchange, American Stock Exchange and the NASDAQ National Market
System.
19
<PAGE>
INCOME FUNDS
AETNA BOND FUND (BOND FUND)
Investment Objective Seeks to provide AS HIGH A LEVEL OF TOTAL RETURN AS IS
CONSISTENT WITH REASONABLE RISK, primarily through investment in a diversified
portfolio of investment-grade corporate bonds, and debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
Principal Investment Strategies Under normal market conditions, Bond Fund
invests at least 65% of its total assets in:
[bullet] High-grade corporate bonds,
[bullet] Mortgage-related and other asset-backed securities, and
[bullet] Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
High-grade securities are rated at least A by S&P or Moody's, or if unrated,
considered by Aeltus to be of comparable quality. The Fund may also invest up to
15% of its total assets in high-yield bonds, and up to 25% of its total assets
in foreign debt securities.
In managing Bond Fund, Aeltus:
[bullet] Looks to construct an intermediate-term (generally consisting of
securities with an average maturity of between 5-10 years),
high-quality portfolio by selecting investments with the opportunity to
enhance the portfolio's overall total return and yield, while managing
volatility.
[bullet] Uses quantitative computer models to identify issuers whose perceived
value is not reflected in their security prices.
Principal Risks The principal risks of investing in Bond Fund are those
generally attributable to debt investing, including increases in interest rates
and loss of principal. Generally, when interest rates rise, bond prices fall.
Bonds with longer maturities tend to be more sensitive to changes in interest
rates.
For all bonds there is a risk that the issuer will default. High-yield bonds
generally are more susceptible to the risk of default than higher rated bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
Foreign securities present additional risks. Some foreign securities tend to be
less liquid and more volatile than their U.S. counterparts. In addition,
accounting standards and market regulations tend to be less standardized in
certain foreign countries. These risks are usually higher for securities of
companies in emerging markets. Finally, securities of foreign companies may be
denominated in foreign currency. Exchange rate fluctuations may reduce or
eliminate gains or create losses.
20
<PAGE>
AETNA BOND FUND INVESTMENT PERFORMANCE
[graphic omitted]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR-BY-YEAR TOTAL RETURN 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
Class I % % % 01/03/92
LBAB* % % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Lehman Brothers Aggregate Bond Index (LBAB) is an unmanaged index of
corporate, government and mortgage bonds.
21
<PAGE>
AETNA GOVERNMENT FUND
Investment Objective Seeks to provide INCOME CONSISTENT WITH THE PRESERVATION OF
CAPITAL through investment in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
Principal Investment Strategies Under normal market conditions, Aetna Government
Fund invests at least 65% of its total assets in U.S. Government securities.
U.S. Government securities include securities issued by the U.S. Treasury,
individual government agencies and certain organizations created through federal
legislation. Securities issued by the U.S. Treasury are backed by the full faith
and credit of the federal government, the strongest form of credit backing in
the U.S. Securities issued by individual agencies and organizations may be
backed by the full faith and credit of the federal government as to principal or
interest but are not direct obligations of the U.S. Treasury. Government
securities also include certain mortgage-related securities that are sponsored
by a U.S. Government agency or organization and are not direct obligations of
the U.S. Government.
In managing Aetna Government Fund, Aeltus:
[bullet] Looks to construct an intermediate-term, high-quality portfolio by
selecting investments with the potential to enhance the portfolio's
overall yield and total return.
[bullet] Uses quantitative computer models to identify attractive investments
within the U.S. Government securities markets. As a result, Aetna
Government Fund may, at times, emphasize one type of U.S. Government
security rather than another.
Principal Risks The principal risks of investing in Aetna Government Fund are
those generally attributable to bond investing, including increases in interest
rates. Generally, when interest rates rise, bond prices fall. Bonds with longer
maturities tend to be more sensitive to changes in interest rates.
In addition to being sensitive to changes in interest rates, the prices of
mortgage-related securities also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
22
<PAGE>
AETNA GOVERNMENT FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1994 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 01/04/94
Lehman Brothers Intermediate
Government Index* % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Lehman Brothers Intermediate Government Bond Index, an unmanaged index,
includes those bonds found in the Lehman Brothers Government Bond Index that
have a maturity of one to 9.99 years.
23
<PAGE>
AETNA HIGH YIELD FUND
(HIGH YIELD)
Investment Objective Seeks HIGH CURRENT INCOME AND GROWTH OF CAPITAL primarily
through investment in a diversified portfolio of fixed-income securities rated
lower than BBB- by S&P or lower than Baa3 by Moody's.
Principal Investment Strategies Under normal market conditions, High Yield
invests at least 65% of its total assets in high-yield bonds. High-yield bonds
are bonds rated below investment grade in terms of quality, and may include
bonds of companies in default or bankruptcy.
In managing High Yield, Aeltus:
[bullet] Looks to meet the Fund's objective and reduce volatility by
constructing a diversified portfolio consisting of securities with
varying maturities and credit ratings. Aeltus, however, attempts to
look beyond credit ratings to select investments that it believes offer
opportunities for high income, growth and credit improvement.
[bullet] Uses a quantitative process for evaluating the financial criteria of
issuers, such as cash flow and profitability.
[bullet] Evaluates other, less quantitative factors, such as market share,
strength of management and management's equity stake in the company.
The Fund may also invest up to 35% of its total assets in foreign securities.
Principal Risks When the economy weakens, cash flows weaken, making it more
difficult for issuers to pay principal and interest. For all bonds, there is a
risk that an issuer will default. This risk is even greater with high-yield
bonds. Moreover, high-yield bonds, as a group, often decline in value when the
market anticipates or experiences a large number of issuers defaulting or
declaring bankruptcy.
Additional risks include:
[bullet] The performance of High Yield may be adversely affected by weak equity
markets, when issuers of high-yield bonds generally find it difficult
to reduce debt by replacing debt with equity.
[bullet] Generally, when interest rates rise, bond prices fall, which may cause
the value of the Fund's portfolio securities to fall as well.
Foreign securities present additional risks. Some foreign securities tend to be
less liquid and more volatile than their U.S. counterparts. In addition,
accounting standards and market regulations tend to be less standardized in
certain foreign countries.
AETNA HIGH YIELD FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 02/02/98
Merrill Lynch High Yield
Master Trust Index* % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Merrill Lynch High Yield Master Trust Index is an unmanaged index of
secured and subordinated debt securities rated by Standard & Poor's or by
Moody's Investors Service as less than investment grade (i.e., BBB or Baa)
but not in default.
24
<PAGE>
AETNA MONEY MARKET FUND
(MONEY MARKET)
Investment Objective Seeks to provide HIGH CURRENT RETURN, CONSISTENT WITH
PRESERVATION OF CAPITAL AND LIQUIDITY, through investment in high-quality money
market instruments.
Principal Investment Strategies Money Market invests in a diversified portfolio
of high-quality fixed income securities denominated in U.S. dollars, with short
remaining maturities. These securities include U.S. Government securities (such
as U.S. Treasury bills and securities issued or sponsored by U.S. Government
agencies), corporate debt securities, commercial paper, asset-backed securities,
and certain obligations of U.S. and foreign banks, each of which must be highly
rated by independent rating agencies or, if unrated, considered by Aeltus to be
of comparable quality. Money Market maintains a dollar-weighted average
portfolio maturity of 90 days or less.
Principal Risks Although Money Market seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
Money Market. An investment in Money Market is not insured or guaranteed by the
FDIC or any other government agency. A weak economy, strong equity markets and
changes by the Federal Reserve in its monetary policies all could affect
short-term interest rates and, therefore, the value and yield of Money Market's
shares. Risks also include adverse changes in the actual or perceived
creditworthiness of issuers and adverse changes in the economic or political
environment.
AETNA MONEY MARKET FUND INVESTMENT PERFORMANCE
[graphic omitted]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR-BY-YEAR TOTAL RETURN 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE
Class I % % % 01/03/92
IBC Index* % % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*IBC's Money Funds Report Average/All Taxable Index is an average of the returns
of over 250 money market mutual funds surveyed each month by IBC.
To obtain current yield information, please contact 1-800-367-7732.
25
<PAGE>
INDEX PLUS FUNDS
AETNA INDEX PLUS BOND FUND
(INDEX PLUS BOND)
Investment Objective Seeks MAXIMUM TOTAL RETURN, CONSISTENT WITH PRESERVATION OF
CAPITAL, primarily through investment in a diversified portfolio of fixed-income
securities, which will be chosen to substantially replicate the characteristics
of the Lehman Brothers Aggregate Bond Index (LBAB), an unmanaged index comprised
of approximately 6,900 securities.
Principal Investment Strategies Index Plus Bond invests at least 90% of its
total assets in bonds, including U.S. Treasuries, corporate bonds and
mortgage-related securities.
In managing Index Plus Bond, Aeltus:
[bullet] Attempts to achieve a total return which, before deducting Fund
expenses, exceeds that of the LBAB.
[bullet] Allocates assets among various sectors, as well as among individual
securities, that it believes will outperform the LBAB, while
underweighting (or avoiding) those sectors and securities it believes
will underperform.
[bullet] In determining which bonds to purchase, evaluates various criteria,
such as the financial strength of the issuer and the issuer's potential
for strong, sustained earnings growth as well as the potential for
interest rates to rise or fall.
Although the Fund will not hold all of the securities in the LBAB, Aeltus
expects that there will be a close correlation between the performance of Index
Plus Bond and that of the LBAB in both rising and falling markets.
Principal Risks The principal risks of investing in Index Plus Bond are those
generally attributable to bond investing. Generally, when interest rates rise,
bond prices fall. Bonds with longer maturities tend to be more sensitive to
changes in interest rates. For all bonds there is a risk that an issuer will
default.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
The success of the Fund's strategy depends significantly on Aeltus' skill in
choosing investments, and in determining which sectors or securities to
overweight, underweight or avoid altogether.
26
<PAGE>
AETNA INDEX PLUS BOND FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 02/04/98
LBAB* % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Lehman Brothers Aggregate Bond Index (LBAB) is an unmanaged index and is
composed of securities from Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index and the Asset-Backed Securities Index.
27
<PAGE>
AETNA INDEX PLUS LARGE CAP FUND (INDEX PLUS LARGE CAP)
Investment Objective Seeks to OUTPERFORM THE TOTAL RETURN PERFORMANCE of the
STANDARD & POOR'S 500 COMPOSITE INDEX (S&P 500), while maintaining a market
level of risk.
Principal Investment Strategies Index Plus Large Cap invests at least 80% of its
net assets in stocks included in the S&P 500 (other than Aetna Inc. common
stock). The S&P 500 is a stock market index comprised of common stocks of 500 of
the largest companies in the U.S. selected by Standard & Poor's Corporation.
In managing Index Plus Large Cap, Aeltus attempts to achieve the Fund's
objective by overweighting those stocks in the S&P 500 that Aeltus believes will
outperform the index, and underweighting (or avoiding altogether) those stocks
that Aeltus believes will underperform the index. In determining stock
weightings, 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, Aeltus
generally includes in Index Plus Large Cap portfolio approximately 400 of the
stocks included in the S&P 500. Although the Fund will not hold all the stocks
in the S&P 500, Aeltus expects that there will be a close correlation between
the performance of Index Plus Large Cap and that of the S&P 500 in both rising
and falling markets, as the Fund is designed to have risk characteristics (e.g.,
price-to-earnings ratio, dividend yield, volatility) which approximate those of
the S&P 500.
Principal Risks The principal risks of investing in Index Plus Large Cap are
those generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. The success of the Fund's strategy depends
significantly on Aeltus' skill in determining which securities to overweight,
underweight or avoid altogether.
AETNA INDEX PLUS LARGE CAP FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 12/10/96
S&P 500 Index* % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500
widely held stocks that assumes the reinvestment of all dividends, and is
considered to be representative of the stock market in general.
28
<PAGE>
AETNA INDEX PLUS MID CAP FUND
(INDEX PLUS MID CAP)
Investment Objective Seeks to OUTPERFORM THE TOTAL RETURN PERFORMANCE of the
STANDARD & POOR'S MIDCAP 400 INDEX (S&P 400), while maintaining a market level
of risk.
Principal Investment Strategies Index Plus Mid Cap invests at least 80% of its
net assets in stocks included in the S&P 400. The S&P 400 is a stock market
index comprised of common stocks of 400 mid-capitalization companies in the U.S.
selected by Standard & Poor's Corporation.
In managing Index Plus Mid Cap, Aeltus attempts to achieve the Fund's objective
by overweighting those stocks in the S&P 400 that Aeltus believes will
outperform the index, and underweighting (or avoiding altogether) those stocks
that Aeltus believes will underperform the index. In determining stock
weightings, Aeltus uses internally developed quantitative computer models to
evaluate various criteria, such as the financial strength of each issuer and its
potential for strong, sustained earnings growth. Although the Fund will not hold
all of the stocks in the S&P 400, Aeltus expects that there will be a close
correlation between the performance of Index Plus Mid Cap and that of the S&P
400 in both rising and falling markets, as the Fund is designed to have risk
characteristics (e.g., price-to-earnings ratio, dividend yield, volatility)
which approximate those of the S&P 400.
Principal Risks The principal risks of investing in Index Plus Mid Cap are those
generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. In addition, stocks of medium sized
companies tend to be more volatile and less liquid than stocks of larger
companies.
The success of the Fund's strategy depends significantly on Aeltus' skill in
determining which securities to overweight, underweight or avoid altogether.
AETNA INDEX PLUS MID CAP FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 02/03/98
S&P MidCap 400 Index* % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Standard & Poor's MidCap 400 Index is an unmanaged index used to measure
stock market performance composed of companies with a weighted average market
value of $3.6 billion. Performance is calculated on a total return basis and
dividends are reinvested, as reported by Frank Russell Company.
29
<PAGE>
AETNA INDEX PLUS SMALL CAP FUND
(INDEX PLUS SMALL CAP)
Investment Objective Seeks to OUTPERFORM THE TOTAL RETURN PERFORMANCE of the
STANDARD & POOR'S SMALLCAP 600 INDEX (S&P 600), while maintaining a market level
of risk.
Principal Investment Strategies Index Plus Small Cap invests at least 80% of its
net assets in stocks included in the S&P 600. The S&P 600 is a stock market
index comprised of common stocks of 600 small-capitalization companies in the
U.S. selected by Standard & Poor's Corporation.
In managing Index Plus Small Cap, Aeltus attempts to achieve the Fund's
objective by overweighting those stocks in the S&P 600 that Aeltus believes will
outperform the index, and underweighting (or avoiding altogether) those stocks
that Aeltus believes will underperform the index. In determining stock
weightings, Aeltus uses internally developed quantitative computer models to
evaluate various criteria, such as the financial strength of each issuer and its
potential for strong, sustained earnings growth. Although the Fund will not hold
all of the stocks in the S&P 600, Aeltus expects that there will be a close
correlation between the performance of Index Plus Small Cap and that of the S&P
600 in both rising and falling markets, as the Fund is designed to have risk
characteristics (e.g., price-to-earnings ratio, dividend yield, volatility)
which approximate those of the S&P 600.
Principal Risks The principal risks of investing in Index Plus Small Cap are
those generally attributable to stock investing. These risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance.
Other risks include:
[bullet] Stocks of smaller companies carry higher risks than stocks of larger
companies because smaller companies may lack the management experience,
financial resources, product diversification and competitive strengths
of larger companies.
[bullet] In many instances, the frequency and volume of trading in small cap
stocks are substantially less than stocks of larger companies. As a
result, the stocks of smaller companies may be subject to wider price
fluctuations.
[bullet] When selling of a large quantity of a particular stock, the Fund may
have to sell at a discount from quoted prices or may have to make a
series of small sales over an extended period of time due to the more
limited trading volume of smaller company stocks.
[bullet] Stocks of smaller companies tend to be more volatile than stocks of
larger companies and can be particularly sensitive to expected changes
in interest rates, borrowing costs and earnings.
Finally, the success of the Fund's strategy depends significantly on Aeltus'
skill in determining which securities to overweight, underweight or avoid
altogether.
30
<PAGE>
AETNA INDEX PLUS SMALL CAP FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEAR ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 02/03/98
S&P SmallCap 600 Index* % N/A
The performance table and bar chart provide an indication of the historical risk
of an investment in the Fund.
- ----------
*The Standard & Poor's SmallCap 600 Index consists of 600 domestic stocks chosen
for market size, liquidity and industry group representation. It is a
market-weighted index, with each stock affecting the index in proportion to its
market value.
31
<PAGE>
GENERATION FUNDS
AETNA ASCENT FUND
(ASCENT)
AETNA CROSSROADS FUND
(CROSSROADS)
AETNA LEGACY FUND
(LEGACY)
Investment Objectives ASCENT seeks to provide CAPITAL APPRECIATION.
CROSSROADS seeks to provide TOTAL RETURN (i.e., income and capital appreciation,
both realized and unrealized).
LEGACY seeks to provide TOTAL RETURN CONSISTENT WITH PRESERVATION OF CAPITAL.
Principal Investment Strategies Ascent, Crossroads and Legacy are asset
allocation funds that have been designed for investors with different investment
goals:
[bullet] Ascent is managed for investors seeking capital appreciation who
generally have an INVESTMENT HORIZON EXCEEDING 15 YEARS AND WHO HAVE A
HIGH LEVEL OF RISK TOLERANCE.
[bullet] Crossroads is managed for investors seeking a balance between income
and capital appreciation who generally have an INVESTMENT HORIZON
EXCEEDING 10 YEARS AND WHO HAVE A MODERATE LEVEL OF RISK TOLERANCE.
[bullet] Legacy is managed for investors primarily seeking total return
consistent with capital preservation who generally have an INVESTMENT
HORIZON EXCEEDING 5 YEARS AND WHO HAVE A LOW LEVEL OF RISK TOLERANCE.
Under normal market conditions, Aeltus allocates the assets of each Generation
Fund, in varying degrees, among several classes of equities, fixed-income
securities (including up to 15% of the total value of each Fund's assets in
high-yield bonds) and money market instruments. To remain consistent with each
Generation Fund's investment objective and intended level of risk tolerance,
Aeltus has instituted both a BENCHMARK PERCENTAGE ALLOCATION and a FUND LEVEL
RANGE ALLOCATION for each asset class. The benchmark percentage for each asset
class assumes neutral market and economic conditions. The Fund level range
allows Aeltus to vary the securities in each Fund and take advantage of
opportunities as market and economic conditions change.
The Generation Funds' benchmarks and ranges are described on the following page.
The asset allocation limits apply at the time of purchase of a particular
security.
Each Generation Fund's asset allocation may vary from the benchmark allocation
(within the permissible range) based on Aeltus' ongoing evaluation of the
expected returns and risks of each asset class relative to other classes. Aeltus
may vary each Generation Fund's asset allocation within a given asset class to
the full extent of the permissible range. Among the criteria Aeltus evaluates to
determine allocations are economic and market conditions, including changes in
circumstances with respect to particular asset classes, geographic regions,
industries or issuers and interest rate movements. In selecting individual
portfolio securities, Aeltus considers such factors as:
[bullet] Expected dividend yields and growth rates.
[bullet] Bond yields.
[bullet] Current relative value compared to historic averages.
Principal Risks THE SUCCESS OF EACH GENERATION FUND'S STRATEGY DEPENDS
SIGNIFICANTLY ON AELTUS' SKILL IN CHOOSING INVESTMENTS AND IN ALLOCATING ASSETS
AMONG THE DIFFERENT INVESTMENT CLASSES.
In addition, each asset type has risks that are somewhat unique, as described
below. The performance of each Generation Fund will be affected by these risks
to a greater or lesser extent depending on the size of the allocation. The
principal risks of investing in each Generation Fund are those generally
attributable to stock and bond investing.
For stock investments, those risks include sudden and unpredictable drops in the
value of the market as a whole and periods of lackluster or negative
performance. Stocks of smaller companies tend to be less liquid and more
volatile than stocks of larger companies, and can be particularly sensitive to
expected changes in interest rates, borrowing costs and earnings.
The risks associated with real estate securities include periodic declines in
the value of real estate generally, and declines in the rents and other income
generated by real estate caused by such factors as periodic over-building.
For bonds, generally, when interest rates rise, bond prices fall. Also, economic
and market conditions may cause issuers to default or go bankrupt. The value of
high-yield
32
<PAGE>
bonds are even more sensitive to economic and market conditions than other
bonds.
The prices of mortgage-related securities, in addition to being sensitive to
changes in interest rates, also are sensitive to changes in the prepayment
patterns on the underlying instruments. If the principal on the underlying
mortgage notes is repaid faster than anticipated, which typically occurs in
times of low or declining interest rates, the price of the mortgage-related
security may fall.
Foreign securities present additional risks. Some foreign securities tend to be
less liquid and more volatile than their U.S. counterparts. In addition,
accounting standards and market regulations tend to be less standardized in
certain foreign countries. These risks are usually higher for securities of
companies in emerging markets. Finally, securities of foreign companies may be
denominated in foreign currency. Exchange rate fluctuations may reduce or
eliminate gains or create losses. Hedging strategies intended to reduce this
risk may not perform as expected.
ASSET CLASS
<TABLE>
<CAPTION>
ASCENT CROSSROADS(1) LEGACY(2) COMPARATIVE INDEX
EQUITIES
LARGE CAPITALIZATION STOCKS
<S> <C> <C> <C> <C>
Range 0-70% 0-50% 0-30% S&P 500 Index
Benchmark 35% 25% 15%
SMALL-/MID-CAPITALIZATION STOCKS
Range 0-40% 0-30% 0-20% Russell 2500 Index
Benchmark 20% 15% 10%
INTERNATIONAL STOCKS Morgan Stanley Capital
Range 0-40% 0-30% 0-20% International Europe,
Benchmark 20% 15% 10% Australia and Far East Index
REAL ESTATE STOCKS National Association of
Range 0-10% 0-10% 0-10% Real Estate Investment Trusts
Benchmark 5% 5% 5% Equity Index
FIXED INCOME
U.S. DOLLAR BONDS
Range 0-30% 0-60% 0-90% Salomon Brothers Broad
Benchmark 15% 30% 45% Investment Grade Index
INTERNATIONAL BONDS
Range 0-10% 0-10% 0-10% Salomon Brothers Non-U.S.
Benchmark 5% 5% 5% World Government Bond Index
MONEY MARKET INSTRUMENTS
Range 0-30% 0-30% 0-30% 91-Day U.S. Treasury Bill Rate
Benchmark 0% 5% 10%
</TABLE>
- ------------------------------
(1)Crossroads will invest no more than 60% of its assets in any combination of
the following asset classes: small-/mid-capitalization stocks, high-yield bonds,
international stocks and international fixed-income securities.
(2)Legacy will invest no more than 35% of its assets in any combination of the
following asset classes: small-/mid-capitalization stocks, high-yield bonds,
international stocks and international fixed-income securities.
33
<PAGE>
AETNA ASCENT FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 01/04/95
Russell 3000 Index* % N/A
Ascent Composite*** % N/A
AETNA CROSSROADS FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 01/04/95
Russell 3000 Index* % N/A
Saly BIG Index** % N/A
Crossroads Composite*** % N/A
34
<PAGE>
AETNA LEGACY FUND INVESTMENT PERFORMANCE
[graphic omitted]
YEARS ENDED DECEMBER 31,
YEAR-BY-YEAR TOTAL RETURN 1995 1996 1997 1998 1999
[arrow up] BEST QUARTER:
quarter 19__, up %
[arrow down] WORST QUARTER:
quarter 19__, down %
AS OF DECEMBER 31, 1999
AVERAGE ANNUAL TOTAL RETURN 1 YEAR SINCE INCEPTION INCEPTION DATE
Class I % % 01/04/95
Saly BIG Index** % N/A
Legacy Composite*** % N/A
Each performance table and bar chart provide an indication of the historical
risk of an investment in the respective Generation Fund.
The Crossroads Fund has changed its benchmark from the Salomon Brothers Broad
Investment-Grade Bond Index (Saly BIG Index) to the Russell 3000 Index due to
the increase in the Fund's benchmark percentage allocation for large
capitalization stocks.
- ----------
*The Russell 3000 Index measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
**The Salomon Brothers Broad Investment-Grade Bond Index (Saly BIG Index) is a
market-weighted index that contains approximately 4,700 individually priced
investment-grade bonds. The index includes U.S. Treasury/agency issues, mortgage
passthrough securities, and corporate issues.
***The Ascent Composite, Crossroads Composite and Legacy Composite are each
comprised of the seven stock and bond indices listed below in weights that
correspond to the particular benchmark weights for each Fund. However, the
Composite performance information (for each Generation Fund) prior to March 1,
2000 is based on benchmark weights that were in effect at that time. Only the
following asset class benchmarks were changed as of March 1, 2000. For Ascent,
benchmarks for large capitalization stocks, real estate stocks, U.S. Dollar
bonds and international bonds were 20%, 20%, 10% and 10% respectively. For
Crossroads, benchmarks for large capitalization stocks, real estate stocks,
U.S. Dollar bonds and international bonds were 15%, 15% 25% and 10%,
respectively. For Legacy, benchmarks for large capitalization stocks, real
estate stocks, U.S. Dollar bonds and international bonds were 10%, 10%, 40% and
10%, respectively.
35
<PAGE>
<TABLE>
<CAPTION>
Asset Class Benchmark Index
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Large Cap Stocks The Standard & Poor's 500 Index is a value-weighted, unmanaged index of 500 widely held stocks
that assumes the reinvestment of all dividends, and is considered to be representative of the stock market
in general.
Small-/Mid-Cap Stocks The Russell 2500 Index consists of the smallest 500 securities in the Russell 1000 Index and all
2,000 securities in the Russell 2000 Index. Each of these indices assumes reinvestment of all dividends and
is unmanaged.
International Stocks The Morgan Stanley Capital International-Europe, Australia, Far East Index is an unmanaged, market
value-weighted average of the performance of more than 900 securities listed on the stock exchange of
countries in Europe, Australia and the Far East.
Real Estate Stocks The National Association of Real Estate Investment Trusts Equity Index is an unmanaged, market-weighted
average of the performance of tax-qualified real estate investment trusts listed on the New York Stock
Exchange, American Stock Exchange and the NASDAQ National Market System.
U.S. Dollar Bonds Salomon Brothers Broad Investment-Grade Bond Index is an unmanaged, market-weighted index that contains
approximately 4,700 individually priced investment-grade bonds rated BBB or better. The index includes U.S.
Treasury/Agency issues, mortgage pass-through securities and corporate issues.
International Bonds The Salomon Brothers Non-U.S. World Government Bond Index serves as an unmanaged benchmark to evaluate the
performance of government bonds with a maturity of one year or greater in the following 12 countries:
Japan, United Kingdom, Germany, France, Canada, the Netherlands, Australia, Denmark, Italy, Belgium, Spain
and Sweden.
Cash Equivalents Three-month Treasury bills are government-backed short-term investments considered to be risk-free, and
equivalent to cash because their maturity is only three months.
</TABLE>
36
<PAGE>
FUND EXPENSES
The following tables describe Fund expenses. Annual Fund Operating Expenses are
deducted from Fund assets every year, and are thus paid indirectly by all
shareholders.
CLASS I SHAREHOLDER FEES
There are no sales charges deducted on initial purchases of Class I shares, no
deferred sales charges applied on redemptions, no sales charges applied to
dividend reinvestments, and no exchange fees.
<TABLE>
<CAPTION>
CLASS I SHARES
ANNUAL FUND OPERATING EXPENSES(1)
(as a percentage of average daily net assets)
Distribution Total Fee Waiver/
Management (12b-1) Operating Expense Net
Fee Fees Other Expenses Expenses Reimbursement Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth % % % % % %
International
Mid Cap
Small Company
Value Opportunity
Technology(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- ------------------------------------------------------------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- ------------------------------------------------------------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- ------------------------------------------------------------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
</TABLE>
(1) Aeltus is contractually obligated through December 31, 2000 to waive all or
a portion of its investment advisory fee and/or its administrative services fee
for certain Funds and/or to reimburse a portion of those Funds' 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. Fee waiver/expense reimbursement obligations apply to each Fund
except Growth, Balanced, Growth and Income, and Money Market. An administrative
services fee of 0.10% is included in Other Expenses.
The expenses shown above are based on the year ended October 31, 1999, except
that expense information for Money Market, Ascent, Crossroads and Legacy has
been restated to reflect current fee waiver/expense reimbursement obligations.
(2)Technology commenced operations on March 1, 2000. Amounts reflected in "Other
Expenses" and "Total Operating Expenses" are estimated amounts for the current
fiscal year based on expenses for comparable funds. Actual expenses may be
greater or less than estimated.
37
<PAGE>
CLASS I SHARES EXAMPLE
The following example is designed to help you compare the costs of investing in
the Funds 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* 10 YEARS*
Growth $ $ $ $
International
Mid Cap
Small Company
Value Opportunity
Technology
- --------------------------------------------------------------------------------
Balanced
Growth and Income
Real Estate
- --------------------------------------------------------------------------------
Bond Fund
Aetna Government Fund
High Yield
Money Market
- --------------------------------------------------------------------------------
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
- --------------------------------------------------------------------------------
Ascent
Crossroads
Legacy
* Aeltus is contractually obligated to waive fees and/or reimburse expenses
through December 31, 2000 for all Funds except Growth, Balanced, Growth and
Income, and Money Market. Therefore, figures for all Funds, except those noted,
reflect a waiver/reimbursement only for the first year of the period.
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.
38
<PAGE>
OTHER CONSIDERATIONS
In addition to the principal investments and strategies described above, the
Funds 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 and Options Each Fund (except Money Market) may enter into
futures contracts and use options. The Funds primarily use future contracts and
use options to hedge against price fluctuations or increase exposure to a
particular asset class. To a limited extent, the Funds also may use these
instruments for speculation (investing for potential income or capital gain).
[bullet] Futures contracts are agreements that obligate the buyer to buy and the
seller to sell a certain quantity of securities at a specific price on
a specific date.
[bullet] Options are agreements that give the holder the right, but not the
obligation, to purchase or sell a certain amount of securities or
futures contracts during a specified period or on a specified date.
The main risk of investing in futures contracts and options is that these
instruments can amplify a gain or loss, potentially earning or losing
substantially more money than the actual cost of the instrument. In addition,
while a hedging strategy can guard against potential risks for the Fund as a
whole, it adds to the Fund's expenses and may reduce or eliminate potential
gains. There is also a risk that a futures contract or option intended as a
hedge may not perform as expected.
Swaps Bond, Balanced, Ascent, Crossroads and Legacy may enter into interest rate
swaps, currency swaps and other types of swap agreements, including swaps on
securities and indices. A swap is an agreement between two parties pursuant to
which each party agrees to make one or more payments to the other on regularly
scheduled dates over a stated term, based on different interest rates, currency
exchange rates, security prices, the prices or rates of other types of financial
instruments or assets or the levels of specified indices.
Swap agreements can take many different forms and are known by a variety of
names. The Funds are not limited to any particular form or variety of swap
agreement if Aeltus determines it is consistent with a Fund's investment
objective and policies.
The most significant factor in the performance of swaps is the change in the
underlying price, rate or index level that determines the amount of payments to
be made under the arrangement. If Aeltus incorrectly forecasts such change, a
Fund's performance would be less than if the Fund had not entered into the swap.
In addition, if the counterparty's creditworthiness declines, the value of the
swap agreement also would be likely to decline, potentially resulting in losses.
If the counterparty to a swap defaults, a Fund's loss will consist of the net
amount of contractual payments that a Fund has not yet received. Aeltus will
monitor the creditworthiness of counterparties to a Fund's swap transactions on
an ongoing basis.
Defensive Investing In response to unfavorable market conditions, each Fund
(except Index Plus Bond, Index Plus Large Cap, Index Plus Mid Cap and Index Plus
Small Cap) may make temporary investments that are not consistent with its
principal investment objective and policies.
Portfolio Turnover Portfolio turnover refers to the frequency of portfolio
transactions and the percentage of portfolio assets being bought and sold during
the year. For the fiscal year ended October 31, 1999, International, Mid Cap,
Small Company and Bond each had a portfolio turnover rate in excess of 150%. A
high portfolio turnover rate increases a Fund's transaction costs and may
increase your tax liability.
39
<PAGE>
MANAGEMENT OF THE FUNDS
Aeltus Investment Management, Inc., 10 State House Square, Hartford, Connecticut
06103-3602 serves as investment adviser to the Funds. Aeltus is responsible for
managing the assets of each Fund in accordance with its investment objective and
policies, subject to oversight by the Aetna Series Fund, Inc. (Company) Board of
Directors (Board). Aeltus has acted as adviser or subadviser to mutual funds
since 1994 and has managed institutional accounts since 1972.
Advisory Fees
[bullet] Listed below for all Funds (except Technology) are the aggregate
advisory fees paid by each Fund for its most recent fiscal year. These
numbers reflect the advisory fees after fee waiver and expense
reimbursement. See the Fund Operating Expense table for the advisory
fee (Management Fee) Aeltus was entitled to receive.
[bullet] Listed below for Technology, which has operated for less than one full
fiscal year, are the advisory fees that Aeltus is entitled to receive,
expressed as an annual rate based on the average daily net assets of
Technology.
<TABLE>
<CAPTION>
AGGREGATE ADVISORY FEES PAID AS A AGGREGATE ADVISORY FEES PAID AS A
PERCENTAGE OF AVERAGE NET ASSETS PERCENTAGE OF AVERAGE NET ASSETS
FUND NAME FOR YEAR ENDED OCTOBER 31, 1999 FUND NAME FOR YEAR ENDED OCTOBER 31, 1999
<S> <C> <C>
Growth Aetna Government Fund
International High Yield
Mid Cap Money Market
Small Company Index Plus Bond
Value Opportunity Index Plus Large Cap
Balanced Index Plus Mid Cap
Growth and Income Index Plus Small Cap
Real Estate Ascent
Bond Fund Crossroads
Legacy
FUND NAME RATE AVERAGE DAILY NET ASSETS
Technology 1.05% On first $500 million
1.025% On next $500 million
1.00% Over $1 billion
</TABLE>
40
<PAGE>
Elijah Asset Management, LLC, 100 Pine St., Suite 420, San Francisco, California
94111, a Delaware limited liability company, serves as subadviser to
Technology. Subject to such policies as the Board or Aeltus may determine, EAM
manages Technology's assets in accordance with Technology's investment
objective, policies, and limitations. EAM makes investment decisions for
Technology as to those assets and places orders to purchase and sell securities
and other investments for Technology.
Aeltus pays EAM a subadvisory fee at an annual rate of 0.50% of Technology's
average daily net assets.
Portfolio Management The following discusses who are primarily responsible for
the day-to-day management of the Funds.
CAPITAL APPRECIATION FUNDS
Growth Kenneth H. Bragdon, Portfolio Manager, Aeltus, has been managing Growth
since May 1998. Previously, Mr. Bragdon co-managed the Fund. Mr. Bragdon has
been with the Aetna organization since 1978 and has 28 years of experience in
the investment business.
International Vince Fioramonti, Portfolio Manager, Aeltus, has been managing
International since December 1995. Mr. Fioramonti manages international stocks
and non-U.S. dollar government bonds for several Aetna investment funds. Mr.
Fioramonti joined Aetna in 1994 after serving as Vice President of The Travelers
Investment Management Company. He began his investment career with Travelers in
1988.
Mid Cap Donald Townswick, Portfolio Manager, Aeltus, has been managing Mid Cap
since its inception in February 1998. He also manages small- and mid-cap stocks
for other mutual funds managed by Aeltus. Mr. Townswick joined the Aetna
organization in July 1994 after serving 2 years with Invesco Inc.
Small Company Thomas DiBella, Portfolio Manager, Aeltus, has been managing Small
Company since its inception in January 1994. Mr. DiBella joined Aeltus in 1991
and is currently responsible for the management of several small-capitalization
portfolios.
Value Opportunity Value Opportunity is managed by a team of Aeltus equity
investment specialists.
Technology Ronald E. Elijah, managing member of EAM, has been managing
Technology since its inception. Prior to founding EAM in March, 1999, Mr. Elijah
was a portfolio manager with Robertson Stephens Investment Management.
Roderick R. Berry, a member of EAM, serves as a co-portfolio manager of
Technology. Prior to joining EAM in March, 1999, Mr. Berry was a member of the
Robertson Stephens Investment Management research team. He has served on the
management team of Technology since its inception. Prior to joining Robertson
Stephens Investment Management, Mr. Berry worked for USL Capital for six years
as both an investment officer and a financial manager.
GROWTH & INCOME FUNDS
Balanced Balanced is managed by a team of Aeltus fixed-income and equity
investment specialists.
Growth and Income Kenneth Bragdon, Portfolio Manager, Aeltus, manages Growth and
Income. Mr. Bragdon is the lead portfolio manager of Growth and Income and heads
a team of investment professionals, each of whom specializes in a particular
asset class.
Real Estate Real Estate is managed by a team of Aeltus equity investment
specialists.
41
<PAGE>
INCOME FUNDS
Bond Fund, Aetna Government Fund, Money Market Bond Fund, Aetna Government Fund
and Money Market are managed by a team of Aeltus fixed-income specialists.
High Yield Gail Bruhn, Portfolio Manager, Aeltus, has been managing High Yield
since its inception in February 1998. Ms. Bruhn joined Aeltus in 1995 after
spending 12 years with CIGNA Investments. She currently manages high-yield
securities for several institutional accounts.
INDEX PLUS FUNDS
Index Plus Bond Index Plus Bond is managed by a team of Aeltus fixed-income
specialists.
Index Plus Large Cap Geoffrey A. Brod, Portfolio Manager, Aeltus, has been
managing Index Plus Large Cap since its inception in December 1996.
Index Plus Mid Cap, Index Plus Small Cap Michael F. Farrell, Portfolio Manager,
Aeltus, served as co-manager of Index Plus Mid Cap and Index Plus Small Cap
since March 1, 1999 and has served as sole manager of Index Plus Mid Cap and
Index Plus Small Cap since March 1, 2000. Mr. Farrell has been with the Aetna
organization since 1991 and has been responsible for quantitative research and
development of equity models.
GENERATION FUNDS
Ascent, Crossroads, Legacy Neil Kochen, Managing Director, Aeltus, is the lead
portfolio manager and asset allocation strategist for each Generation Fund. Mr.
Kochen heads a team of investment professionals, each of whom specializes in a
particular asset class. Mr. Kochen joined the Aetna organization in 1985 and
previously served as head of fixed income quantitative research, head of
investment strategy and policy, and as a senior portfolio manager.
42
<PAGE>
INVESTING IN THE FUNDS
OPENING AN ACCOUNT AND ELIGIBILITY FOR CLASS I SHARES
How to Open an Account You may open an account either through the sponsor of
your employer-sponsored retirement plan or by yourself. If you are investing
through a retirement plan, please refer to your plan materials. If you wish to
open an account on your own, you must submit a completed application to the
Fund. You may submit a completed and signed application along with your check
to:
Aetna Series Fund, Inc.
c/o PFPC Inc.
P.O. Box 9681
Providence, RI 02940
Your check must be drawn on a bank located within the United States and payable
in U.S. dollars.
CLASS I ELIGIBILITY
Class I shares are offered to:
[bullet] Certain retirement plans.
[bullet] Certain registered investment advisers having an agreement with the
Funds to invest a minimum of $1 million within one year of initial
purchase (excludes Technology).
[bullet] Employees and retired employees of Aetna Inc. and its affiliates
(including members of employees' and retired persons' immediate
families, board members and trustees, and their immediate families).
[bullet] Insurance companies (including separate accounts (excludes
Technology)).
[bullet] Registered investment companies (excludes Technology).
[bullet] Shareholders holding Select Class shares at the time such shares were
redesignated as Class I shares, and their immediate family members, as
long as they maintain a shareholder account.
[bullet] Certain bank and independent trust companies investing on behalf of
their clients for which they charge trust or investment management
fees.
[bullet] Members of the Board.
[bullet] NASD-registered representatives of Aeltus Capital, Inc. (ACI) or any
affiliated broker-dealer (including members of their immediate
families).
[bullet] Other groups as may be approved by the Board from time to time.
HOW TO BUY SHARES
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS
INITIAL INVESTMENT ADDITIONAL INVESTMENTS
<S> <C> <C>
Individual Retirement Accounts $500 [bullet] $100 except by wire or Systematic
(including Roth IRAs) Investment
[bullet] $500 by wire
[bullet] $50 by Systematic Investment
All other investments $1,000 [bullet] $100 except by wire or Systematic
Investment
[bullet] $500 by wire
[bullet] $50 by Systematic Investment
</TABLE>
43
<PAGE>
INSTRUCTIONS FOR BUYING FUND SHARES
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO PURCHASE ADDITIONAL SHARES
<S> <C> <C>
Through Your Consult your plan materials. Consult your plan materials.
Retirement Plan
- ------------------------------------------------------------------------------------------------------------------------------------
BY MAIL Complete and sign your Fill out the investment stub from your
application, make confirmation statement or send a letter
your check payable to Aetna indicating your name, account
Series Fund, Inc. and mail to: number(s), the Fund(s) in which you
wish to invest and the amount you want
Aetna Series Fund, Inc. to invest in each Fund.
c/o PFPC Inc.
P.O. Box 9681 Make your check payable to Aetna
Providence, RI 02940 Series Fund, Inc. and mail to:
Cash, credit cards and third party Aetna Series Fund, Inc.
checks cannot be used to open an c/o PFPC Inc.
account. P.O. Box 9663
Providence, RI 02940
The Funds will accept checks which are
made payable to you and endorsed to
Aetna Series Fund, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
BY OVERNIGHT COURIER Follow the instructions above Follow the instructions above for
for "By Mail" but send your "By Mail" but send your check and
completed application and check investment stub or letter to:
to:
Aetna Series Fund, Inc.
Aetna Series Fund, Inc. c/o PFPC Inc.
c/o PFPC Inc. 4400 Computer Drive
4400 Computer Drive Westborough, MA 01581
Westborough, MA 01581
- ------------------------------------------------------------------------------------------------------------------------------------
BY WIRE Not Available. Call 1-800-367-7732 prior to sending
the wire in order to obtain a
confirmation number.
Instruct your bank to wire funds to:
Boston Safe Deposit & Trust Company
ABA # 011001234
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO PURCHASE ADDITIONAL SHARES
<S> <C> <C>
Credit to:
Boston Safe Deposit & Trust Company
Account # 176656
Further Credit to:
Name of Fund
Shareholder Account Number
Shareholder Registration
Federal funds wire purchase orders will
be accepted only when the Fund's
transfer agent and custodian bank are
open for business.
Neither the Funds nor their agents are
responsible for the consequences of
delays resulting from the banking or
Federal Reserve wire system or from
incomplete instructions.
- ------------------------------------------------------------------------------------------------------------------------------------
BY ELECTRONIC Not Available. Use the Systematic Investment Option.
FUNDS TRANSFER Sign up for this service when opening
your account or by requesting the
appropriate information.
- ------------------------------------------------------------------------------------------------------------------------------------
BY EXCHANGE Submit a written request to the Submit a written request to the address
address listed above under listed above under "By Mail." Include:
"By Mail." Include: [bullet] Your name and account number
[bullet] Your name and account number. [bullet] The name of the Fund into and out of
[bullet] The name of the Fund into and which you wish to exchange.
out of which you wish to [bullet] The amount to be exchanged and the
exchange. signatures of all shareholders.
[bullet] The amount to be exchanged
and the signatures of all You may also exchange your shares by
shareholders. calling 1-800-367-7732. Please be
prepared to provide:
You may also exchange your [bullet] The Funds' names.
shares by calling 1-800-367-7732. [bullet] Your account number(s).
Please be prepared to provide: [bullet] Your Social Security number or
[bullet] The Funds' names. taxpayer identification number.
[bullet] Your account number(s). [bullet] Your address.
[bullet] Your Social Security number or [bullet] The amount to be exchanged.
taxpayer identification number.
[bullet] Your address.
[bullet] The amount to be exchanged.
</TABLE>
45
<PAGE>
HOW TO SELL SHARES
To redeem all or a portion of the shares in your account, you should submit a
redemption request through your plan sponsor or as described below.
Redemption requests may be made in writing or, in amounts up to $50,000, by
telephone. The Company requires a signature guarantee if the amount of the
redemption request is over $50,000. You may obtain a signature guarantee at most
banks and securities dealers. Please note that notaries public cannot provide
signature guarantees.
Once your redemption request is received in good order as described below, the
Fund normally will send the proceeds of such redemption within one or two
business days. However, if making immediate payment could adversely affect a
Fund, the Fund may defer distribution for up to seven days or a longer period if
permitted. If you redeem shares of a Fund shortly after purchasing them, the
Fund will hold payment of redemption proceeds until a purchase check or
systematic investment 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.
<TABLE>
<S> <C>
REDEMPTIONS BY MAIL You may redeem shares you own in any Fund by sending written
instructions to:
Aetna Series Fund, Inc.
c/o PFPC Inc.
P.O. Box 9681
Providence, RI 02940
Your instructions should identify:
[bullet] The Fund.
[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
Fund 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 request are accompanied by a
signature guarantee. A $12 fee will be charged for this service.
- ------------------------------------------------------------------------------------------------------------------------------------
Redemptions by Telephone Call 1-800-367-7732. Please be prepared to provide your account number,
account name and the amount of the redemption, which generally
must be no less than $500 and no more than $50,000.
</TABLE>
46
<PAGE>
TIMING OF REQUESTS
Orders that are received by the Funds' transfer agent, or as otherwise provided
below, before the close of regular trading on the New York Stock Exchange
(usually 4:00 p.m. eastern time) will be processed at the Net Asset Value (NAV)
calculated that business day. 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.
The Company may appoint certain financial intermediaries and institutions
(Institutions) as parties that may accept purchase and redemption orders on
behalf of the Company. If you purchase or redeem shares in connection with
programs offered by these 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.
Institutions may be authorized to designate other intermediaries to accept
purchase and redemption orders on the Company's behalf, subject to the Company's
approval. In that case, the Company will be deemed to have received a purchase
or redemption order when the Institution's authorized designee accepts the
order.
Institutions may charge you 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 Company.
Investors 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 Each 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 Monday through Friday.
Net Asset Value The NAV of each 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, the securities held by Money Market are valued using
amortized cost. For all other Funds, 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. With respect to any Fund that
invests in foreign securities, because those securities may be traded on markets
that are open on days when the Fund does not price its shares, the Fund's NAV
may change even though Fund shareholders may not be permitted to sell or redeem
Fund shares.
Exchange Privileges There is no fee to exchange shares from one Fund to another.
When you exchange shares, your new Fund shares will be in the equivalent class
of your current shares.
There are no limits on the number of exchanges you can make. However, the Funds
may suspend or terminate your exchange privilege if you make more than five
exchanges out of a single Fund in any calendar year, and the Funds 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 Funds are not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Funds reserve the right to
reject any specific purchase or exchange request, including a request made by a
market timer.
Cross Investing
[bullet] DIVIDEND INVESTING You may elect to have dividend and/or capital gains
distributions automatically invested in the same class of one other
Fund.
[bullet] SYSTEMATIC EXCHANGE You may establish an automatic exchange of share
from one Fund to another.
Telephone Exchange and Redemption Privileges You automatically receive telephone
exchange and redemption privileges when you establish your account. If you do
not want these telephone privileges, you may call 1-800-367-7732 to have them
removed. All telephone transactions may be recorded, and you will be asked for
certain identifying information.
Telephone redemption requests will be accepted if the request is for a minimum
of $500 or a maximum of $50,000. 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.
47
<PAGE>
The Funds reserve the right to amend telephone exchange and redemption purchases
at any time upon notice to shareholders and may refuse a telephone exchange or
redemption if the Funds believe it is advisable to do so.
Minimum Account Balance You must maintain a minimum balance of $500 in each Fund
account. If you do not, the Fund may give you 60 days' notice to increase the
account balance to the $500 minimum. If you fail to increase your account
balance to the minimum, 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 Funds offer these additional investor services. Each
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 details.
[bullet] SYSTEMATIC INVESTMENT You can make automatic monthly investments in any
Fund.
[bullet] AUTOMATIC CASH WITHDRAWAL PLAN The Automatic Cash Withdrawal Plan
provides a convenient way for you to receive a systematic distribution
while maintaining an investment in a Fund.
[bullet] CHECKWRITING SERVICE Checkwriting is available with Money Market. There
currently is no transaction charge for this service, and the initial
checkbook you receive is free. However, you will be charged a $3.00 fee
for each checkbook reorder. Checks must be for a minimum of $250 and
the checkwriting service may not be used for a complete redemption of
your shares. This service is not available for IRA or other retirement
accounts. You will be charged a $25 fee for stop payment requests and
for Money Market checks that are returned due to insufficient funds.
[bullet] TDD SERVICE Telecommunication Device for the Deaf (TDD) services are
offered for hearing impaired investors. The dedicated number for this
service is 1-800-688-4889.
[bullet] TAX-DEFERRED RETIREMENT PLANS Each Fund may be used for investment by a
variety of tax-deferred retirement plans, such as individual retirement
accounts (IRAs, including Roth IRAs) and certain programs sponsored by
employers (such as 401(k) and 403(b)(7) plans). There is no minimum
investment or minimum account balance applicable to investments in
403(b)(7) accounts except that a rollover from a 403(b)(7) account must
be for at least $500. Purchases made in connection with IRAs and
403(b)(7) accounts may be subject to an annual custodial fee of $10.00
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 individual retirement accounts and
403(b) 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.
Payments to Securities Dealers and Selection of Executing Brokers From time to
time, Aeltus Capital, Inc., the Company's principal underwriter, or its
affiliates may make payments to other dealers and/or their registered
representatives, who may or may not be affiliates of Aetna, who sell shares or
who provide shareholder services. The value of a shareholder's investment will
be unaffected by these payments.
Aeltus may consider the sale of shares of the Funds and of other investment
companies advised by Aeltus as a factor in the selection of brokerage firms to
execute each Fund's portfolio transactions, subject to Aeltus' (or EAM's, in the
case of Technology) duty to obtain best execution.
DIVIDENDS AND DISTRIBUTIONS
Dividends Dividends are declared and paid as follows:
[bullet] declared daily and paid monthly Money Market
[bullet] declared and paid monthly Aetna Government Fund
Bond Fund
High Yield
Index Plus Bond
[bullet] declared and paid semiannually Balanced
Growth and Income
[bullet] declared and paid annually All other Funds
Capital gains distributions, if any, are paid on an annual basis in December. To
comply with federal tax regulations, each Fund may also pay an additional
capital gains distribution, usually in June.
Money Market shares begin to accrue dividends the business day after they are
purchased. A redemption of Money Market shares will include dividends declared
through the redemption date.
Both income dividends and capital gains distributions are paid by each Fund on a
per share basis. As a result, at the time of this payment, the share price of a
Fund (except Money Market) will be reduced by the amount of the payment.
48
<PAGE>
Distribution Options When completing your application, you must select one of
the following three options for dividends and capital gains distributions:
[bullet] FULL REINVESTMENT Both dividends and capital gains distributions from a
Fund will be reinvested in additional shares of the same class of
shares of that Fund. This option will be selected automatically unless
one of the other options is specified.
[bullet] CAPITAL GAINS REINVESTMENT Capital gains distributions from a Fund will
be reinvested in additional shares of the same class of shares of that
Fund and all net income from dividends will be distributed in cash.
[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 Fund.
Distributions paid in shares will be credited to your account at the next
determined NAV per share.
TAX INFORMATION
[bullet] In general, dividends and short-term capital gains distributions you
receive from any Fund are taxable as ordinary income.
[bullet] Distributions of other capital gains 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 as 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 Funds 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 Funds.
Backup Withholding By law, the Funds must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
PERFORMANCE OF SIMILARLY MANAGED FUNDS
PUBLIC FUND PERFORMANCE
Technology is recently organized and does not yet have a long-term performance
record. However, Technology has an investment objective, policies and strategies
substantially similar to a series of an investment company registered under the
Investment Company Act of 1940 (1940 Act) whose shares are currently sold to the
public (Public Fund) and are subadvised by EAM. Therefore, the performance of
the Public Fund is provided below. The performance of Technology will vary over
time and its investments will vary over time and its investments will not be
identical to the past portfolio investments of the Public Fund.
The Public Fund has been managed since its inception by Mr. Elijah and Mr.
Berry, the portfolio managers for Technology. Both Mr. Elijah and Mr. Berry are
currently members of EAM, the subadviser to Technology.
The results shown below for the Public Fund reflect the reinvestment of
dividends and distributions, and were calculated in the same manner which will
be used by Technology to calculate its own performance. All Public Fund
performance data:
[bullet] Was calculated on a total return basis and includes all dividends and
interest, accrued income and realized and unrealized gains and losses.
[bullet] Reflects the deduction of the historical fees and expenses paid by the
Public Fund, and not those paid by Technology.
[bullet] Includes cash and cash equivalents.
The following table shows average annual total returns for the period ended
December 31, 1999 for the Public Fund and its benchmark index. Investors should
not consider the historical performance of the Public Fund to be an indication
of the future performance of Technology.
TECHNOLOGY
1 YEAR SINCE INCEPTION
The Information Age Fund (11/15/95)
Pacific Stock Exchange
Technology Index (_________)
49
<PAGE>
PRIVATE ACCOUNT PERFORMANCE
Index Plus Large Cap, Index Plus Bond and High Yield do not yet have long-term
performance records. However, these Funds have investment objectives, policies
and strategies substantially similar to those employed by Aeltus in managing
accounts for certain institutional investors (Private Accounts). Therefore, the
performance of these Private Accounts is provided below. Note that the Private
Accounts, unlike the Fund, are not subject to certain investment limitations,
diversification requirements and other restrictions imposed by the Investment
Company Act of 1940 and the Internal Revenue Code of 1986, as amended, which, if
applicable, could have adversely affected the Private Accounts' performance.
The Private Account Performance data, shown below, was calculated in accordance
with the standards established by the Association for Investment Management and
Research (AIMR). AIMR is a nonprofit membership and education organization that,
among other things, has formulated a set of performance presentation standards
for investment advisers. AIMR has not been involved with the preparation or
review of the performance shown.
All Private Account Performance data:
[bullet] Was calculated on a total return basis and includes all
dividends and interest, accrued income, and realized and unrealized
gains and losses.
[bullet] Reflects the reinvestment of dividends and distributions.
[bullet] Reflects the deduction of investment advisory fees and brokerage
commissions paid by the Private Accounts, but does not reflect the
deduction of custodial fees.
[bullet] Includes cash and cash equivalents.
The historical fees and expenses paid by the Private Accounts are significantly
lower than those paid by the corresponding Fund. Had higher expenses been
charged to the Private Accounts performance would have been lower.
The following table shows average annual total returns for the periods ended
December 31, 1999 for the Funds, the comparable Private Accounts and their
respective benchmark indices. Investors should not consider the historical
performance of the Private Accounts as an indication of the future performance
of a comparably managed Fund.
PRIVATE ACCOUNT COMPOSITE AND FUND PERFORMANCE
SINCE
INDEX PLUS LARGE CAP 1 YEAR 3 YEARS 5 YEARS INCEPTION
Index Plus Large Cap (Class I) % % N/A % (12/10/96)
Index Plus Large Cap Private Account
Composite % % % N/A
S&P 500 Stock Index % % % N/A
- --------------------------------------------------------------------------------
SINCE
INDEX PLUS BOND 1 YEAR 5 YEARS 10 YEARS INCEPTION
Index Plus Bond (Class I) % N/A N/A % (2/4/98)
Index Plus Bond Private Account
Composite % % % N/A
Lehman Brothers Aggregate Bond Index % % % N/A
- --------------------------------------------------------------------------------
SINCE
HIGH YIELD 1 YEAR 3 YEARS INCEPTION
High Yield (Class I) % N/A % (2/2/98)
High Yield Private Account Composite % % N/A
Merrill Lynch High Yield Master Index % % N/A
50
<PAGE>
This page is intentionally blank.
51
<PAGE>
FINANCIAL HIGHLIGHTS
(for one outstanding share throughout each period)
These highlights are intended to help you understand the Funds' performance for
the past 5 years (or since commencement of operations, if shorter). Certain
information reflects financial results for a single Fund share. The total
returns in the tables represent the rate an investor would have earned (or lost)
on an investment in each Fund (assuming reinvestment of all dividends and
distributions). The information in these tables has been audited by _________,
independent auditors, whose reports, along with the Funds' Financial Statements,
are included in the Company's Annual Reports, which are available upon request.
Financial statement information is not available for Technology which commenced
operations on March 1, 2000.
<TABLE>
<CAPTION>
CLASS I SHARES GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized gain or
loss on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
====================================================================================================================================
Total return
Net assets, end of period (000's)
Ratio of net expenses to average net assets
Ratio of net investment income to average
net assets
Ratio of expenses before reimbursement
and waiver to average net assets
Portfolio turnover rate
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL MID CAP
- ---------------------------------------------------------------------------- ------------------------------------
Period From
February 4, 1998
(Commencement
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended of Operations) to
October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996 1995 1999 1998
- ---------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
- ---------------------------------------------------------------------------- ------------------------------------
- ---------------------------------------------------------------------------- ------------------------------------
- ---------------------------------------------------------------------------- ------------------------------------
- ---------------------------------------------------------------------------- ------------------------------------
- ---------------------------------------------------------------------------- ------------------------------------
=========================================================================== ====================================
</TABLE>
53
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
CLASS I SHARES
SMALL COMPANY
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized gain or
loss on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
====================================================================================================================================
Total return
Net assets, end of period (000's)
Ratio of net expenses to average net assets
Ratio of net investment income to average
net assets
Ratio of expenses before reimbursement and
waiver to average net assets
Portfolio turnover rate
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
VALUE
OPPORTUNITY BALANCED
- --------------------------------------- ----------------------------------------------------------------------------------------
Period From
February 2, 1998
(Commencement
Year Ended of Operations) to Year Ended Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999 1998 1999 1998 1997 1996 1995
- --------------------------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
======================================= ========================================================================================
</TABLE>
55
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
CLASS I SHARES
GROWTH AND INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized gain or
loss on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
====================================================================================================================================
Total return
Net assets, end of period (000's)
Ratio of net expenses to average net assets
Ratio of net investment income to average
net assets
Ratio of expenses before reimbursement and
waiver to average net assets
Portfolio turnover rate
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
REAL ESTATE BOND
- --------------------------------------- ----------------------------------------------------------------------------------------
Period From
February 2, 1998
(Commencement
Year Ended of Operations) to Year Ended Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999 1998 1999 1998 1997 1996 1995
- --------------------------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
======================================= ========================================================================================
</TABLE>
57
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
CLASS I SHARES
AETNA GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized gain or
loss on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
====================================================================================================================================
Total return
Net assets, end of period (000's)
Ratio of net expenses to average net assets
Ratio of net investment income to average
net assets
Ratio of expenses before reimbursement and
waiver to average net assets
Portfolio turnover rate
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
HIGH YIELD MONEY MARKET
- --------------------------------------- ----------------------------------------------------------------------------------------
Period From
February 2, 1998
(Commencement
Year Ended of Operations) to Year Ended Year Ended Year Ended Year Ended Year Ended
October 31, October 31, October 31, October 31, October 31, October 31, October 31,
1999 1998 1999 1998 1997 1996 1995
- --------------------------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
- --------------------------------------- ----------------------------------------------------------------------------------------
======================================= ========================================================================================
</TABLE>
59
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
CLASS I SHARES
<TABLE>
<CAPTION>
INDEX PLUS INDEX PLUS
BOND LARGE CAP
- --------------------------------------------------------------------------- -------------------------------------------------------
Period From Period From
February 4, 1998 December 10, 1996
(Commencement (Commencement
Year Ended of Operations) to Year Ended Year Ended of Operations) to
October 31, October 31, October 31, October 31, October 31,
1999 1998 1999 1998 1997
- --------------------------------------------------------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- --------------------------------------------------------------------------- -------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized
gain or loss on investments
- --------------------------------------------------------------------------- -------------------------------------------------------
Total from investment operations
- --------------------------------------------------------------------------- -------------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- --------------------------------------------------------------------------- -------------------------------------------------------
Total distributions
- --------------------------------------------------------------------------- -------------------------------------------------------
Net asset value, end of period
=========================================================================== =======================================================
Total return
Net assets, end of period (000's)
Ratio of net expenses to average net assets
Ratio of net investment income to average
net assets
Ratio of expenses before reimbursement and
waiver to average net assets
Portfolio turnover rate
</TABLE>
60
<PAGE>
INDEX PLUS INDEX PLUS
MID CAP SMALL CAP
- ------------------------------------ -----------------------------------
Period From Period From
February 3, 1998 February 3, 1998
(Commencement (Commencement
Year Ended of Operations) to Year Ended of Operations) to
October 31, October 31, October 31, October 31,
1999 1998 1999 1998
- ------------------------------------ -----------------------------------
$ $ $ $
- ------------------------------------ -----------------------------------
- ------------------------------------ -----------------------------------
- ------------------------------------ -----------------------------------
- ------------------------------------ -----------------------------------
- ------------------------------------ -----------------------------------
==================================== ===================================
61
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
CLASS I SHARES
ASCENT
- ------------------------------------------------------------------------------------------------------------------------------------
Period From
January 4, 1995
(Commencement
Year Ended Year Ended Year Ended Year Ended of Operations) to
October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized gain
or loss on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
====================================================================================================================================
Total return
Net assets, end of period (000's)
Ratio of net expenses to average net assets
Ratio of net investment income to average
net assets
Ratio of expenses before reimbursement and
waiver to average net assets
Portfolio turnover rate
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
CROSSROADS
- ---------------------------------------------------------------------------------------------------
Period From
January 4, 1995
(Commencement
Year Ended Year Ended Year Ended Year Ended of Operations) to
October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ $ $ $ $
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
===================================================================================================
</TABLE>
63
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
CLASS I SHARES
LEGACY
- ------------------------------------------------------------------------------------------------------------------------------------
Period From
January 4, 1995
(Commencement
Year Ended Year Ended Year Ended Year Ended of Operations) to
October 31, October 31, October 31, October 31, October 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income
Net realized and change in unrealized gain
or loss on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income
From net realized gains on investments
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
====================================================================================================================================
Total return
Net assets, end of period (000's)
Ratio of net expenses to average net assets
Ratio of net investment income to average
net assets
Ratio of expenses before reimbursement and
waiver to average net assets
Portfolio turnover rate
</TABLE>
64
<PAGE>
ADDITIONAL INFORMATION
The SAI, which is incorporated by reference into this Prospectus, contains
additional information about the Funds. The Funds' most recent annual and
semiannual reports also contain information about the Funds' investments, as
well as a discussion of the market conditions and investment strategies that
significantly affected their performance during the past fiscal year.
You may request free of charge the current SAI or the most recent annual and
semiannual reports, or other information about the Funds, 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
Funds. Certain reports and information, including the SAI, are available on the
EDGAR Database 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 1-202-942-8090 to get
information about the operations of the public reference room. You may obtain
copies of reports and other information about the Funds, after paying a
duplicating fee, by sending an E-mail request to: [email protected], or by
writing to the SEC's Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act File No. 811-6352.
65
<PAGE>
This page is intentionally blank.
<PAGE>
CLASS A, CLASS B, CLASS C AND CLASS I SHARES
AETNA SERIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION DATED MARCH __, 2000
This Statement of Additional Information (Statement) is not a Prospectus and
should be read in conjunction with the current Prospectus for Class A, Class B
and Class C shares of Aetna Series Fund, Inc. (Company) and the current
Prospectus for Class I shares of the Company, each dated March __, 2000, for the
following funds (Funds). Capitalized terms not defined herein are used as
defined in the Prospectuses.
CAPITAL APPRECIATION FUNDS
Aetna Growth Fund (Growth)
Aetna International Fund (International)
Aetna Mid Cap Fund (Mid Cap)
Aetna Small Company Fund (Small Company)
Aetna Value Opportunity Fund (Value Opportunity)
Aetna Technology Fund (Technology)
GROWTH & INCOME FUNDS
Aetna Balanced Fund (Balanced)
Aetna Growth and Income Fund (Growth and Income)
Aetna Real Estate Securities Fund (Real Estate)
INCOME FUNDS
Aetna Bond Fund (Bond Fund)
Aetna Government Fund
Aetna High Yield Fund (High Yield)
Aetna Money Market Fund (Money Market)
INDEX PLUS FUNDS
Aetna Index Plus Bond Fund (Index Plus Bond)
Aetna Index Plus Large Cap Fund (Index Plus Large Cap)
Aetna Index Plus Mid Cap Fund (Index Plus Mid Cap)
Aetna Index Plus Small Cap Fund (Index Plus Small Cap)
GENERATION FUNDS
Aetna Ascent Fund (Ascent)
Aetna Crossroads Fund (Crossroads)
Aetna Legacy Fund (Legacy)
The Funds' Financial Statements and the independent auditors' reports thereon,
included in the Company's Annual Reports, are incorporated herein by reference
in this Statement. A free copy of the Company's Annual Reports and each
Prospectus is available upon request by writing to: Aetna Series Fund, Inc., 10
State House Square, Hartford, Connecticut 06103-3602, or by calling: (800)
367-7732.
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 STATEMENT OF ADDITIONAL INFORMATION 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. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS.
1
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION............................................................3
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES................................4
INVESTMENT TECHNIQUES AND RISK FACTORS.........................................6
DIRECTORS AND OFFICERS........................................................20
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS....................................22
THE INVESTMENT ADVISORY AGREEMENTS............................................23
THE SUBADVISORY AGREEMENT.....................................................27
THE ADMINISTRATIVE SERVICES AGREEMENT.........................................27
CUSTODIAN.....................................................................29
TRANSFER AGENT................................................................29
INDEPENDENT AUDITORS..........................................................29
PRINCIPAL UNDERWRITER.........................................................29
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS...........................29
PURCHASE AND REDEMPTION OF SHARES.............................................33
BROKERAGE ALLOCATION AND TRADING POLICIES.....................................36
SHAREHOLDER ACCOUNTS AND SERVICES.............................................38
NET ASSET VALUE...............................................................39
TAX STATUS....................................................................40
PERFORMANCE INFORMATION.......................................................41
FINANCIAL STATEMENTS..........................................................47
2
<PAGE>
GENERAL INFORMATION
Incorporation The Company was incorporated under the laws of Maryland on June
17, 1991.
Series and Classes The Company currently offers multiple series, not all of
which are offered through this Statement of Additional Information and the
corresponding Prospectuses. 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 each Fund currently are
classified into four classes: Class A, Class B, Class C and Class I. Class I
shares are shares that are offered to certain retirement plans; certain
registered investment advisers having an agreement with the Funds to invest a
minimum of $1 million within one year of initial purchase (excludes Technology);
employees and retired employees of Aetna Inc. and its affiliates (including
members of employees' and retired persons' immediate families, board members and
trustees, and their immediate families); insurance companies (including separate
accounts )(excludes Technology); registered investment companies (excludes
Technology); shareholders holding Select Class shares at the time such shares
were redesignated as Class I shares, and their immediate family members, as long
as they maintain a shareholder account; certain bank and independent trust
companies investing on behalf of their clients for which they charge trust and
investment management fees; members of the Board; NASD-registered
representatives of Aeltus Capital, Inc. (ACI) or any affiliated broker-dealer
(including members of their immediate families); and of such other groups as may
be approved by the Board from time to time. Class A, Class B and Class C shares
are shares that are offered to accounts not eligible to buy Class I shares. Each
class of shares has the same rights, privileges and preferences, except with
respect to: (a) the effect of sales charges, if any, for each class; (b) the
distribution fees borne by each class; (c) the expenses allocable exclusively to
each class; (d) voting rights on matters exclusively affecting a single class;
and (e) the exchange privilege of each class.
Capital Stock Fund shares are fully paid and nonassessable when issued. Fund
shares have no preemptive or conversion rights, except that each Fund's Class B
shares automatically convert to Class A shares after 8 years. Each share of a
Fund has the same rights to share in dividends declared by a Fund. Upon
liquidation of any Fund, shareholders in that Fund 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 the interests of one Fund or 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 Company's Articles of Incorporation 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 Directors 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 Directors 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.
1940 Act Classification The Company is an open-end management investment
company, as that term is defined under the 1940 Act. Each Fund is a diversified
company, as that term is defined under the 1940 Act. The 1940 Act generally
requires that with respect to 75% of its total assets, a diversified company may
not invest more than 5% of its total assets in the securities of any one issuer.
3
<PAGE>
As a matter of operating policy, Money Market may invest no more than 5% of its
total assets in the securities of any one issuer (as determined pursuant to Rule
2a-7 under the 1940 Act), except that Money Market may invest up to 25% of its
total assets in the first tier securities (as defined in Rule 2a-7) of a single
issuer for a period of up to three business days. Fundamental policy number (1),
as set forth below, would give Money Market the ability to invest, with respect
to 25% of its assets, more than 5% of its assets in any one issuer only in the
event Rule 2a-7 is amended in the future.
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES
The investment objectives and certain investment policies of each Fund are
matters of fundamental policy for purposes of the 1940 Act and therefore cannot
be changed without the approval of a majority of the outstanding voting
securities of that Fund. This means the lesser of (a) 67% of the shares of a
Fund present at a shareholders' meeting if the holders of more than 50% of the
shares of that Fund 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, a Fund will not:
(1) hold more than 5% of the value of its total assets in the securities of
any one issuer or hold more than 10% of the outstanding voting
securities of any one issuer. This restriction applies only to 75% of
the value of a Fund's total assets. Securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities are excluded
from this restriction;
(2) except for Real Estate and Technology, concentrate its investments in
any one industry, although a 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 user of their
services, such as automobile finance, computer finance and consumer
finance. In addition, for purposes of this restriction, for Ascent,
Crossroads and Legacy (collectively referred to as the "Generation
Funds"), real estate stocks will be classified as separate industries
according to property type, such as apartment, retail, office and
industrial. This limitation will not apply to any Fund's investment in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
Additionally for Money Market, investments in the following shall not
be subject to the 25% limitation: securities invested in, or repurchase
agreements for, U.S. Government securities, certificates of deposit,
bankers' acceptances, and securities of banks;
(3) make loans, except that, to the extent appropriate under its investment
program, a Fund may (i) purchase bonds, debentures or other debt
instruments, including short-term obligations; (ii) enter into
repurchase transactions; and (iii) lend portfolio securities provided
that the value of such loaned securities does not exceed one-third of
the Fund's total assets;
(4) issue any senior security (as defined in the 1940 Act), except that (i)
a Fund may enter into commitments to purchase securities in accordance
with that Fund's investment program, including reverse repurchase
agreements, delayed delivery and when-issued securities, which may be
considered the issuance of senior securities; (ii) a Fund may engage in
transactions that may result in the issuance of a senior security to
the extent permitted under applicable regulations, interpretations of
the 1940 Act or an exemptive order; (iii) a Fund (other than Money
Market) may engage in short sales of securities to the extent permitted
in its investment program and other restrictions; (iv) the purchase or
sale of futures contracts and related options shall not be considered
to involve the issuance of senior securities; and (v) subject to
certain fundamental restrictions set forth below, a Fund may borrow
money as authorized by the 1940 Act;
(5) except for Real Estate, purchase real estate, interests in real estate
or real estate limited partnership interests except that: (i) to the
extent appropriate under its investment program, a Fund may invest in
securities secured by real estate or interests therein or issued by
companies, including real estate investment trusts, which deal in real
estate or interests therein; or (ii) a Fund may acquire real estate as
a result of ownership of securities or other interests (this could
occur for example if a Fund holds a security that is collateralized by
an interest in real estate and the security defaults);
4
<PAGE>
(6) invest in commodity contracts, except that a Fund may, to the extent
appropriate under its investment program, purchase securities of
companies engaged in such activities; may (other than Money Market)
enter into transactions in financial and index futures contracts and
related options; and may enter into forward currency contracts;
(7) borrow money, except that (i) a Fund (other than Money Market) may
enter into certain futures contracts and options related thereto; (ii)
a Fund may enter into commitments to purchase securities in accordance
with that Fund's investment program, including delayed delivery and
when-issued securities and reverse repurchase agreements; (iii) for
temporary emergency purposes, a Fund may borrow money in amounts not
exceeding 5% of the value of its total assets at the time the loan is
made; and (iv) for purposes of leveraging, a Fund (other than Money
Market) may borrow money from banks (including its custodian bank) only
if, immediately after such borrowing, the value of that 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 that Fund's assets fails to meet the 300%
asset coverage requirement relative only to leveraging, that Fund will,
within three days (not including Sundays and holidays), reduce its
borrowings to the extent necessary to meet the 300% test;
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by a Fund, that
Fund may be deemed to be an underwriter under the provisions of the
Securities Act of 1933 (1933 Act).
The Board has adopted the following other investment restrictions which may be
changed by the Board and without shareholder vote. A Fund will not:
(1) except for Technology, make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment
programs of each Fund, as described in this Statement and in the
Prospectuses;
(2) except for International and the Generation Funds, invest more than 25%
(35% for High Yield) of its total assets in securities or obligations
of foreign issuers, including marketable securities of, or guaranteed
by, foreign governments (or any instrumentality or subdivision
thereof). Money Market may only purchase foreign securities or
obligations that are U.S.-dollar denominated;
(3) invest in companies for the purpose of exercising control or
management;
(4) purchase interests in oil, gas or other mineral exploration programs;
however, this limitation will not prohibit the acquisition of
securities of companies engaged in the production or transmission of
oil, gas, or other minerals;
(5) invest more than 15% (10% for Money Market, Index Plus Bond, Index Plus
Large Cap, Index Plus Mid Cap and Index Plus Small Cap) of its net
assets in illiquid securities. Illiquid securities are securities that
are not readily marketable or cannot be disposed of promptly within
seven days and in the usual course of business without taking a
materially reduced price. Such securities include, but are not limited
to, time deposits and repurchase agreements with maturities longer than
seven days. Securities that may be resold under Rule 144A under, or
securities offered pursuant to Section 4(2) of the 1933 Act, shall not
be deemed illiquid solely by reason of being unregistered. Aeltus
Investment Management, Inc. (Aeltus), the investment adviser, or Elijah
Asset Management, LLC (EAM), the sub-adviser to Technology, shall
determine whether a particular security is deemed to be liquid based on
the trading markets for the specific security and other factors;
(6) except for High Yield, invest more than 15% (10% for Index Plus Large
Cap, Index Plus Mid Cap and Index Plus Small Cap) of the total value of
its assets in high-yield bonds (securities rated below BBB- by
5
<PAGE>
Standard & Poor's Corporation (S&P) or Baa3 by Moody's Investors
Service, Inc. (Moody's), or, if unrated, considered by Aeltus to be of
comparable quality).
Where a 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.
Money Market will invest at least 95% of its total assets in high-quality
securities. High-quality securities are those receiving the highest short-term
credit rating by any two nationally recognized statistical rating organizations
(or one, if only one rating organization has rated the security) and meet
certain other conditions of Rule 2a-7 under the 1940 Act. High-quality
securities may also include unrated securities if Aeltus determines the security
to be of comparable quality.
The remainder of Money Market's assets will be invested in securities rated
within the two highest short term rating categories by any two nationally
recognized statistical rating organizations (or one, if only one rating
organization has rated the security) and unrated securities if Aeltus determines
the security to be of comparable quality. With respect to this group of
securities, Money Market generally may not, however, invest more than 1% of the
market value of its total assets or $1 million, whichever is greater, in the
securities or obligations of a single issuer.
INVESTMENT TECHNIQUES AND RISK FACTORS
Options, Futures and Other Derivative Instruments
Each Fund may use certain derivative instruments as a means of achieving its
investment objective. For purposes other than hedging, a Fund will invest no
more than 5% of its assets in derivatives, which at the time of purchase are
considered by management to involve high risk to the Fund, such as inverse
floaters and interest-only and principal-only debt instruments.
Each Fund (except Money Market) may use the derivative instruments described
below and in the Prospectuses. Derivatives that may be used by a Fund (other
than Money Market) include forward contracts, swaps, structured notes, futures
and options. Each 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. Forward exchange contracts are not subject to this
30% limitation.
The following provides additional information about those derivative instruments
each Fund (except Money Market) may use.
Futures Contracts Each Fund may enter into futures contracts and options thereon
subject to the restrictions described below under "Additional Restrictions on
the Use of Futures and Option Contracts." A Fund may enter into futures
contracts or options thereon that are traded on national futures exchanges and
are standardized as to maturity date and underlying financial instrument. 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 at a designated date, time, and place.
Brokerage fees are incurred when a futures contract is bought or sold and at
expiration, and margin deposits must be maintained.
Although interest rate futures contracts typically require actual future
delivery of and payment for the underlying instruments, 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
6
<PAGE>
delivery date. There can be no assurance, however, that a Fund will be able to
enter into an offsetting transaction with respect to a particular contract at a
particular time. If a Fund is not able to enter into an offsetting transaction,
it will continue to be required to maintain the margin deposits on the contract.
The prices of futures contracts are volatile and are influenced 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 potentially unlimited loss or gain to a
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 securities being
hedged can be only approximate. The degree of imperfection of correlation
depends upon circumstances such as: variations in speculative market demand for
futures and for securities, including technical influences in futures trading,
and differences between the financial instruments being hedged and the
instruments underlying the standard futures contracts available for trading.
Even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or stock market or interest rate trends.
Most 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 futures contracts which are intended to hedge against a change in the
value of securities held by a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
"Margin" is the amount of funds that must be deposited by a Fund with a
commodities broker in a custodian account in order to initiate futures trading
and to maintain open positions in a Fund's futures contracts. A margin deposit
is intended to assure 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 a Fund. These daily payments to and from
a Fund are called variation margin. At times of extreme price volatility,
intra-day variation margin payments may be required. In computing daily net
asset values, each Fund will mark-to-market the current value of its open
futures contracts. Each Fund expects to earn interest income on its initial
margin deposits.
When a Fund buys or sells a futures contract, unless it already owns an
offsetting position, it will 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.
A Fund can buy and write (sell) options on futures contracts. A Fund may
purchase and sell futures contracts and related options under the following
conditions: (a) the then-current aggregate futures market prices of financial
instruments required to be delivered and purchased under open futures contracts
shall not exceed 30% of a Fund's total assets (100% in the case of Ascent and
60% in the case of Crossroads) at market value at the time of entering
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into a contract and (b) no more than 5% of the assets, at market value at the
time of entering into a contract, shall be committed to margin deposits in
relation to futures contracts. See "Call and Put Options" below for additional
restrictions.
Call and Put Options Each Fund may purchase and write (sell) call options and
put options on securities, indices and futures as discussed in the Prospectuses,
subject to the restrictions described in this section and under "Additional
Restrictions on the Use of Futures and Option Contracts." A call option gives
the holder (buyer) the right to buy and to obligate the writer (seller) to sell
a security or financial instrument at a stated price (strike price) at any time
until a designated future date when the option expires (expiration date). A put
option gives the holder (buyer) the right to sell and to obligate the writer
(seller) to purchase a security or financial instrument at a stated price at any
time until the expiration date. A Fund may write or purchase put or call options
listed on national securities exchanges in standard contracts or may write or
purchase put or call options with or directly from investment dealers meeting
the creditworthiness criteria of Aeltus (or EAM, in the case of Technology).
Each Fund, except the Generation Funds, is prohibited from having written call
options outstanding at any one time on more than 30% of its total assets. A Fund
will not write a put if it will require more than 50% of the Fund's net assets
to be designated to cover all put obligations. No Fund may buy put options if
more than 3% of its assets immediately following such purchase would consist of
put options. The Funds may purchase call and sell put options on equity
securities only to close out positions previously opened; the Generation Funds
are not subject to this restriction. No Fund will write a call option on a
security unless the call is "covered" (i.e., it already owns the underlying
security). Securities it "already owns" include any stock which it has the right
to acquire without any additional payment, at its discretion for as long as the
call remains outstanding. This restriction does not apply to the writing of
calls on securities indices or futures contracts. The Funds will not write call
options on when-issued securities. The Funds purchase call options on indices
primarily as a temporary substitute for taking positions in certain securities
or in the securities that comprise a relevant index. A Fund may also purchase
call options on an index to protect against increases in the price of securities
underlying that index that the Fund intends to purchase pending its ability to
invest in such securities in an orderly manner.
So long as the obligation of the writer of a call option continues, the writer
may be assigned an exercise notice by the broker-dealer through which such
option was settled, requiring the writer to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, by the exercise of the call option, or by
entering into an offsetting transaction.
When writing a call option, in return for the premium, the writer gives up the
opportunity to profit from the price increase in the underlying security above
the exercise price, but conversely retains the risk of loss should the price of
the security decline. If a call option expires unexercised, the writer will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security during the option
period. If the call option is exercised, the writer would realize a gain or loss
from the transaction depending on what it received from the call and what it
paid for the underlying security.
An option on an index (or a particular security) is a contract that gives the
purchaser of the option, in return for the premium paid, the right to receive
from the writer of the option cash equal to the difference between the closing
price of the index (or security) and the exercise price of the option, expressed
in dollars, times a specified multiple (the multiplier).
A Fund may write calls on securities indices and futures contracts provided that
it enters into an appropriate offsetting position or that it designates liquid
assets in an amount sufficient to cover the underlying obligation in accordance
with regulatory requirements. The risk involved in writing call options on
futures contracts or market indices is that a Fund would not benefit from any
increase in value above the exercise price. Usually, this risk can be eliminated
by entering into an offsetting transaction. However, the cost to do an
offsetting transaction and terminate the Fund's obligation might be more or less
than the premium received when it originally wrote the option. Further, a Fund
might occasionally not be able to close the option because of insufficient
activity in the options market.
In the case of a put option, as long as the obligation of the put writer
continues, it may be assigned an exercise notice by the broker-dealer through
which such option was sold, requiring the writer to take delivery of the
underlying
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security against payment of the exercise price. A writer has no control over
when it may be required to purchase the underlying security, since it may be
assigned an exercise notice at any time prior to the expiration date. This
obligation terminates earlier if the writer effects a closing purchase
transaction by purchasing a put of the same series as that previously sold.
If a put option is sold by a Fund, the Fund will designate liquid securities
with a value equal to the exercise price, or else will hold an offsetting
position in accordance with regulatory requirements. In writing puts, there is
the risk that a writer may be required to buy the underlying security at a
disadvantageous price. The premium the writer receives from writing a put option
represents a profit, as long as the price of the underlying instrument remains
above the exercise price. If the put is exercised, however, the writer is
obligated during the option period to buy the underlying instrument from the
buyer of the put at the exercise price, even though the value of the investment
may have fallen below the exercise price. If the put lapses unexercised, the
writer realizes a gain in the amount of the premium. If the put is exercised,
the writer may incur a loss, equal to the difference between the exercise price
and the current market value of the underlying instrument.
A Fund may purchase put options when Aeltus (or EAM, in the case of Technology)
believes that a temporary defensive position is desirable in light of market
conditions, but does not desire to sell a portfolio security. The purchase of
put options may be used to protect a Fund's holdings in an underlying security
against a substantial decline in market value. Such protection is, of course,
only provided during the life of the put option when a Fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price regardless of any decline in the underlying security's market price. By
using put options in this manner, a Fund will reduce any profit it might
otherwise have realized in its underlying security by the premium paid for the
put option and by transaction costs.
The premium received from writing a call or put option, or paid for purchasing a
call or put option will reflect, among other things, the current market price of
the underlying security, the relationship of the exercise price to such market
price, the historical price volatility of the underlying security, the length of
the option period, and the general interest rate environment. The premium
received by a Fund for writing call options will be recorded as a liability in
the statement of assets and liabilities of that Fund. This liability will be
adjusted daily to the option's current market value. The liability will be
extinguished upon expiration of the option, by the exercise of the option, or by
entering into an offsetting transaction. Similarly, the premium paid by a Fund
when purchasing a put option will be recorded as an asset in the statement of
assets and liabilities of that Fund. This asset will be adjusted daily to the
option's current market value. The asset will be extinguished upon expiration of
the option, by selling an identical option in a closing transaction, or by
exercising the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call or put option, to prevent an underlying security from being
called or put, or to permit the exchange or tender of the underlying security.
Furthermore, effecting a closing transaction will permit a Fund to write another
call option, or purchase another put option, on the underlying security with
either a different exercise price or expiration date or both. If a Fund desires
to sell a particular security from its portfolio on which it has written a call
option, or purchased a put option, it will seek to effect a closing transaction
prior to, or concurrently with, the sale of the security. There is, of course,
no assurance that a Fund will be able to effect a closing transaction at a
favorable price. If a Fund cannot enter into such a transaction, it may be
required to hold a security that it might otherwise have sold, in which case it
would continue to be at market risk on the security. A Fund will pay brokerage
commissions in connection with the sale or purchase of options to close out
previously established option positions. These brokerage commissions are
normally higher as a percentage of underlying asset values than those applicable
to purchases and sales of portfolio securities.
Foreign Futures Contracts and Foreign Options The Funds may engage in
transactions in foreign futures contracts and foreign options. Participation in
foreign futures contracts and foreign options transactions involves the
execution and clearing of trades on or subject to the rules of a foreign board
of trade. Neither the CFTC, the National Futures Association (NFA) nor any
domestic exchange regulates activities of any foreign boards of trade including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
laws. Generally, the foreign transaction will be governed by applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will
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vary depending on the foreign country in which the foreign futures contracts or
foreign options transaction occurs. Investors that trade foreign futures
contracts or foreign options contracts may not be afforded certain of the
protective measures provided by domestic exchanges, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided by
the NFA. In particular, funds received from customers for foreign futures
contracts or foreign options transactions may not be provided the same
protections as funds received for transactions on U.S. futures exchange. The
price of any foreign futures contracts or foreign options contract and,
therefore, the potential profit and loss thereon, may be affected by any
variance in the foreign exchange rate between the time an order is placed and
the time it is liquidated, offset or exercised.
Options on Foreign Currencies Each Fund may write and purchase calls on foreign
currencies. A Fund may purchase and write puts and calls on foreign currencies
that are traded on a securities or commodities exchange or quoted by major
recognized dealers in such options for the purpose of protecting against
declines in the dollar value of foreign securities and against increases in the
dollar cost of foreign securities to be acquired. If a rise is anticipated in
the dollar value of a foreign currency in which securities to be acquired are
denominated, the increased cost of such securities may be partially offset by
purchasing calls or writing puts on that foreign currency. If a decline in the
dollar value of a foreign currency is anticipated, the decline in value of
portfolio securities denominated in that currency may be partially offset by
writing calls or purchasing puts on that foreign currency. In such
circumstances, the Fund collateralizes the position by designating cash and/or
liquid securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily. In the event of rate
fluctuations adverse to a Fund's position, it would lose the premium it paid and
transactions costs. A call written on a foreign currency by a Fund is covered if
the Fund owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration specially designated)
upon conversion or exchange of other foreign currency held in its portfolio.
Additional Restrictions on the Use of Futures and Option Contracts CFTC
regulations require that to prevent a Fund from being a commodity pool the Funds
enter into all short futures for the purpose of hedging the value of securities
held, and that all long futures positions either constitute bona fide hedging
transactions, as defined in such regulations, or have a total value not in
excess of an amount determined by reference to certain cash and securities
positions maintained, and accrued profits on such positions. As evidence of its
hedging intent, each 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 that Fund in the cash market. With respect to futures contracts or
related options that are entered into for purposes that may be considered
speculative, the aggregate initial margin for future contracts and premiums for
options will not exceed 5% of a Fund's net assets, after taking into account
realized profits and unrealized losses on such futures contracts.
Forward Exchange Contracts Each Fund may enter into forward contracts for
foreign currency (forward exchange contracts), which obligate the seller to
deliver and the purchaser to take a specific amount of a specified foreign
currency at a future date at a price set at the time of the contract. These
contracts are generally traded in the interbank market conducted directly
between currency traders and their customers. A Fund may enter into a forward
exchange contract in order to "lock in" the U.S. dollar price of a security
denominated in a foreign currency which it has purchased or sold but which has
not yet settled (a transaction hedge); or to lock in the value of an existing
portfolio security (a position hedge); or to protect against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
a foreign currency. Forward exchange contracts include standardized foreign
currency futures contracts which are traded on exchanges and are subject to
procedures and regulations applicable to futures. Each Fund may also enter into
a forward exchange contract to sell a foreign currency that differs from the
currency in which the underlying security is denominated. This is done in the
expectation that there is a greater correlation between the foreign currency of
the forward exchange contract and the foreign currency of the underlying
investment than between the U.S. dollar and the foreign currency of the
underlying investment. This technique is referred to as "cross hedging." The
success of cross hedging is dependent on many factors, including the ability of
Aeltus (or EAM, in the case of Technology) to correctly identify and monitor the
correlation between foreign currencies and the U.S. dollar. To the extent that
the correlation is not identical, a Fund may experience losses or gains on both
the underlying security and the cross currency hedge.
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Each Fund may use forward exchange contracts to protect against uncertainty in
the level of future exchange rates. The use of forward exchange contracts does
not eliminate fluctuations in the prices of the underlying securities the Fund
owns or intends to acquire, but it does fix a rate of exchange in advance. In
addition, although forward exchange contracts limit the risk of loss due to a
decline in the value of the hedged currencies, at the same time they limit any
potential gain that might result should the value of the currencies increase.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the forward contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase), if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring a Fund to
sell a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, a Fund may
close out a forward contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the same
currency on the maturity date of the first contract. The Fund would realize a
gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate(s) between the
currencies involved moved between the execution dates of the first contract and
the offsetting contract.
The cost to a Fund of engaging in forward exchange contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because forward contracts are usually entered
into on a principal basis, no fees or commissions are involved. Because such
contracts are not traded on an exchange, Aeltus must evaluate the credit and
performance risk of each particular counterparty under a forward contract.
Although the Funds value their assets daily in terms of U.S. dollars, they do
not intend to convert their holdings of foreign currencies into U.S. dollars on
a daily basis. The Funds may convert foreign currency from time to time. Foreign
exchange dealers do not charge a fee for conversion, but they do seek to realize
a profit based on the difference between the prices at which they buy and sell
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Funds at one rate, while offering a lesser rate of exchange should the Funds
desire to resell that currency to the dealer.
Swap Transactions Each Fund may enter into interest rate swaps, currency swaps
and other types of swap agreements, including swaps on securities and indices.
Swap transactions are described in the Prospectuses. A Fund will enter into swap
transactions with appropriate counterparties pursuant to master netting
agreements. A master netting agreement provides that all swaps done between a
Fund and that counterparty under that master agreement shall be regarded as
parts of an integral agreement. If on any date amounts are payable in the same
currency in respect of one or more swap transactions, the net amount payable on
that date in that currency shall be paid. In addition, the master netting
agreement may provide that if one party defaults generally or on one swap, the
counterparty may terminate the swaps with that party. Under such agreements, if
there is a default resulting in a loss to one party, the measure of that party's
damages is calculated by reference to the average cost of a replacement swap
with respect to each swap (i.e., the mark-to-market value at the time of the
termination of each swap). The gains and losses on all swaps are then netted,
and the result is the counterparty's gain or loss on termination. The
termination of all swaps and the netting of gains and losses on termination is
generally referred to as "aggregation."
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Mortgage-Related Debt Securities
Money Market, Aetna Government Fund, Bond Fund, Growth and Income, High Yield,
Balanced, Real Estate, Index Plus Bond and the Generation Funds may invest in
mortgage-related debt securities, collateralized mortgage obligations (CMOs) and
real estate mortgage investment conduits (REMICs). Federal mortgage-related
securities include obligations issued or guaranteed by the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA)
and the Federal Home Loan Mortgage Corporation (FHLMC). GNMA is a wholly owned
corporate instrumentality of the U.S., the securities and guarantees of which
are backed by the full faith and credit of the U.S. FNMA, a federally chartered
and privately owned corporation, and FHLMC, a federal corporation, are
instrumentalities of the U.S. with Presidentially appointed board members. The
obligations of FNMA and FHLMC are not explicitly guaranteed by the full faith
and credit of the federal government.
Pass-through mortgage-related securities are characterized by monthly payments
to the holder, reflecting the monthly payments made by the borrowers who
received the underlying mortgage loans. The payments to the security holders,
like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, often twenty or thirty years, the borrowers can, and typically do, repay
such loans sooner. Thus, the security holders frequently receive repayments of
principal, in addition to the principal that is part of the regular monthly
payment. A borrower is more likely to repay a mortgage bearing a relatively high
rate of interest. This means that in times of declining interest rates, some
higher yielding securities held by a Fund might be converted to cash, and the
Fund could be expected to reinvest such cash at the then prevailing lower rates.
The increased likelihood of prepayment when interest rates decline also limits
market price appreciation of mortgage-related securities. If a Fund buys
mortgage-related securities at a premium, mortgage foreclosures or mortgage
prepayments may result in losses of up to the amount of the premium paid since
only timely payment of principal and interest is guaranteed.
CMOs and REMICs are securities which are collateralized by mortgage pass-through
securities. Cash flows from underlying mortgages are allocated to various
classes or tranches in a predetermined, specified order. Each sequential tranche
has a "stated maturity"--the latest date by which the tranche can be completely
repaid, assuming no repayments--and has an "average life"--the average time to
receipt of a principal payment weighted by the size of the principal payment.
The average life is typically used as a proxy for maturity because the debt is
amortized, rather than being paid off entirely at maturity, as would be the case
in a straight debt instrument.
CMOs and REMICs are typically structured as "pass-through" securities. In these
arrangements, the underlying mortgages are held by the issuer, which then issues
debt collateralized by the underlying mortgage assets. The security holder thus
owns an obligation of the issuer and payment of interest and principal on such
obligations is made from payments generated by the underlying mortgage assets.
The underlying mortgages may or may not be guaranteed as to payment of principal
and interest by an agency or instrumentality of the U.S. Government such as GNMA
or otherwise backed by FNMA or FHLMC. Alternatively, such securities may be
backed by mortgage insurance, letters of credit or other credit enhancing
features. Both CMOs and REMICs are issued by private entities. They are not
directly guaranteed by any government agency and are secured by the collateral
held by the issuer. CMOs and REMICs are subject to the type of prepayment risk
described above due to the possibility that prepayments on the underlying assets
will alter the cash flow.
Asset-Backed Securities
Each Fund may invest in asset-backed securities. Asset-backed securities are
collateralized by short-term loans such as automobile loans, home equity loans,
equipment leases or credit card receivables. The payments from the collateral
are generally passed through to the security holder. As noted above with respect
to CMOs and REMICs, the average life for these securities is the conventional
proxy for maturity. Asset-backed securities may pay all interest and principal
to the holder, or they may pay a fixed rate of interest, with any excess over
that required to pay interest going either into a reserve account or to a
subordinate class of securities, which may be retained by the originator. The
originator or other party may guarantee interest and principal payments. These
guarantees often do not extend to the whole amount of principal, but rather to
an amount equal to a multiple of the historical loss experience of similar
portfolios.
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Two varieties of asset-backed securities are CARs and CARDs. CARs are
securities, representing either ownership interests in fixed pools of automobile
receivables, or debt instruments supported by the cash flows from such a pool.
CARDs are participations in fixed pools of credit accounts. These securities
have varying terms and degrees of liquidity.
The collateral behind certain asset-backed securities (such as CARs and CARDs)
tends to have prepayment rates that do not vary with interest rates; the
short-term nature of the loans may also tend to reduce the impact of any change
in prepayment level. Other asset-backed securities, such as home equity
asset-backed securities, have prepayment rates that are sensitive to interest
rates. Faster prepayments will shorten the average life and slower prepayments
will lengthen it. Asset-backed securities may be pass-through, representing
actual equity ownership of the underlying assets, or pay-through, representing
debt instruments supported by cash flows from the underlying assets.
The coupon rate of interest on mortgage-related and asset-backed securities is
lower than the interest rates paid on the mortgages included in the underlying
pool, by the amount of the fees paid to the mortgage pooler, issuer, and/or
guarantor. Actual yield may vary from the coupon rate, however, if such
securities are purchased at a premium or discount, traded in the secondary
market at a premium or discount, or to the extent that the underlying assets are
prepaid as noted above.
Zero Coupon and Pay-in-Kind Securities
Each Fund may invest in zero coupon securities and all Funds (except Money
Market) may invest in pay-in-kind securities. In addition, each Fund may invest
in STRIPS (Separate Trading of Registered Interest and Principal of Securities).
Zero coupon or deferred interest securities are debt obligations that do not
entitle the holder to any periodic payment of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their face
amounts or par value. The discount varies, depending on the time remaining until
maturity or cash payment date, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, decreases as the final maturity
or cash payment date of the security approaches. STRIPS are created by the
Federal Reserve Bank by separating the interest and principal components of an
outstanding U.S. Treasury or agency bond and selling them as individual
securities. The market prices of zero coupon, STRIPS and deferred interest
securities generally are more volatile than the market prices of securities with
similar maturities that pay interest periodically and are likely to respond to
changes in interest rates to a greater degree than do non-zero coupon securities
having similar maturities and credit quality.
The risks associated with lower-rated debt securities apply to these securities.
Zero coupon and pay-in-kind securities are also subject to the risk that in the
event of a default, a Fund may realize no return on its investment, because
these securities do not pay cash interest.
Additional Risk Factors in Using Derivatives
In addition to any risk factors which may be described elsewhere in this
section, or in the Prospectuses, the following sets forth certain information
regarding the potential risks associated with a Fund's transactions in
derivatives.
Risk of Imperfect Correlation A Fund's ability to hedge effectively all or a
portion of its portfolio through transactions in futures, options on futures or
options on securities and indexes depends on the degree to which movements in
the value of the securities or index underlying such hedging instrument
correlate with movements in the value of the assets being hedged. If the values
of the assets being hedged do not move in the same amount or direction as the
underlying security or index, the hedging strategy for a Fund might not be
successful and the Fund could sustain losses on its hedging transactions which
would not be offset by gains on its portfolio. It is also possible that there
may be a negative correlation between the security or index underlying a futures
or option contract and the portfolio securities being hedged, which could result
in losses both on the hedging transaction and the portfolio securities. In such
instances, the Fund's overall return could be less than if the hedging
transactions had not been undertaken.
Potential Lack of a Liquid Secondary Market Prior to exercise or expiration, a
futures or option position may be
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terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the exchange on which the position was originally
established. While a Fund will establish a futures or option position only if
there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures or option
contract at any specific time. In such event, it may not be possible to close
out a position held by the Fund, which could require the Fund to purchase or
sell the instrument underlying the position, make or receive a cash settlement,
or meet ongoing variation margin requirements. The inability to close out
futures or option positions also could have an adverse impact on the Fund's
ability effectively to hedge its portfolio, or the relevant portion thereof.
The trading of futures and options contracts also is subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of the brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Risk of Predicting Interest Rate Movements Investments in futures contracts on
fixed income securities and related indices involve the risk that if Aeltus' (or
EAM's, in the case of Technology) judgment concerning the general direction of
interest rates is incorrect, a Fund's overall performance may be poorer than if
it had not entered into any such contract. For example, if a Fund has been
hedged against the possibility of an increase in interest rates which would
adversely affect the price of bonds held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the increased
value of its bonds which have been hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements, possibly at a time when it may be disadvantageous
to do so. Such sale of bonds may be, but will not necessarily be, at increased
prices which reflect the rising market.
Trading and Position Limits Each contract market on which futures and option
contracts are traded has established a number of limitations governing the
maximum number of positions which may be held by a trader, whether acting alone
or in concert with others. The Company does not believe that these trading and
position limits will have an adverse impact on the hedging strategies regarding
the Funds.
Counterparty Risk With some derivatives, whether used for hedging or
speculation, there is also the risk that the counterparty may fail to honor its
contract terms, causing a loss for the Fund.
Funds' Investment in Equity and Debt Securities
Each Fund may invest in equity and debt securities (except that Aetna Government
Fund and Money Market may not invest in equity securities). Equity securities
are subject to a decline in the stock market or in the value of the issuing
company and preferred stocks have price risk and some interest rate and credit
risk. The value of fixed income or debt securities may be affected by changes in
general interest rates and in the creditworthiness of the issuer. Debt
securities with longer maturities (for example, over ten years) are more
affected by changes in interest rates and provide less price stability than
securities with short-term maturities (for example, one to ten years). Also, for
each debt security, there is a risk of principal and interest default which will
be greater with higher-yielding, lower-grade securities. International may hold
up to 10% of its total assets in long-term debt securities with an S&P or
Moody's rating of AA/Aa or above, or, if unrated, are considered by Aeltus to be
of comparable quality. Technology may only invest in investment grade debt
securities, which are debt securities with an S&P or Moody's rating of BBB/Baa
or above or, if unrated, are considered by EAM to be of comparable quality.
Balanced generally maintains at least 25% of its total assets in debt
securities.
Repurchase Agreements
Each Fund may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards approved by
the Board. Under a repurchase agreement, a Fund may acquire a debt instrument
for a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase and the Fund to resell the instrument at
a fixed price and time, thereby determining the yield during the Fund's holding
period. This results in a fixed rate of return insulated from market
fluctuations during such period.
14
<PAGE>
Such underlying debt instruments serving as collateral will meet the quality
standards of a Fund. The market value of the underlying debt instruments will,
at all times, be equal to the dollar amount invested. Repurchase agreements,
although fully collateralized, involve the risk that the seller of the
securities may fail to repurchase them from a Fund. In that event, the Fund may
incur (a) disposition costs in connection with liquidating the collateral, or
(b) a loss if the collateral declines in value. Also, if the default on the part
of the seller is due to insolvency and the seller initiates bankruptcy
proceedings, a Fund's ability to liquidate the collateral may be delayed or
limited. Repurchase agreements maturing in more than seven days will not exceed
10% of the total assets of a Fund.
Variable Rate Demand Instruments
Each Fund may invest in variable rate demand instruments. Variable rate demand
instruments held by a Fund may have maturities of more than one year, provided:
(i) the Fund is entitled to the payment of principal at any time, or during
specified intervals not exceeding one year, upon giving the prescribed notice
(which may not exceed 30 days), and (ii) the rate of interest on such
instruments is adjusted at periodic intervals not to exceed one year. In
determining whether a variable rate demand instrument has a remaining maturity
of one year or less, each instrument will be deemed to have a maturity equal to
the longer of the period remaining until its next interest rate adjustment or
the period remaining until the principal amount can be recovered through demand.
A Fund will be able (at any time or during specified periods not exceeding one
year, depending upon the note involved) to demand payment of the principal of a
note. If an issuer of a variable rate demand note defaulted on its payment
obligation, a Fund might be unable to dispose of the note and a loss would be
incurred to the extent of the default. A Fund may invest in variable rate demand
notes only when the investment is deemed to involve minimal credit risk. The
continuing creditworthiness of issuers of variable rate demand notes held by a
Fund will also be monitored to determine whether such notes should continue to
be held. Variable and floating rate instruments with demand periods in excess of
seven days and which cannot be disposed of promptly within seven business days
and in the usual course of business without taking a reduced price will be
treated as illiquid securities.
Foreign Securities
All Funds may invest in foreign securities. 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. Because the Funds (other than Money Market) may invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
so far as U.S. investors are concerned. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability, or diplomatic developments that could
adversely affect investments in those countries.
There may be less publicly available information about a foreign issuer than
about a U.S. company, and foreign issuers may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or as
uniform as those of U.S. issuers. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than U.S. markets.
Securities of many foreign issuers are less liquid and their prices more
volatile than securities of comparable U.S. issuers. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the U.S. The Company might have
greater difficulty taking appropriate legal action with respect to foreign
investments in non-U.S. courts than with respect to domestic issuers in U.S.
courts. In addition, transactions in foreign securities may involve greater time
from the trade date until settlement than domestic securities transactions and
involve the risk of possible losses through the holding of securities by
custodians and securities depositories in foreign countries.
All these risks usually are higher in emerging markets, such as most countries
in Africa, Asia, Latin America and the Middle East, than in more established
markets, such as Western Europe.
Depositary receipts are typically dollar denominated, although their market
price is subject to fluctuations of the foreign currency in which the underlying
securities are denominated. Depositary receipts include: (a) American Depositary
Receipts (ADRs), which are typically designed for U.S. investors and held either
in physical form or in
15
<PAGE>
book entry form; (b) European Depositary Receipts (EDRs), which are similar to
ADRs but may be listed and traded on a European exchange as well as in the U.S.
(typically, these securities are traded on the Luxembourg exchange in Europe);
and (c) Global Depositary Receipts (GDRs), which are similar to EDRs although
they may be held through foreign clearing agents such as Euroclear and other
foreign depositories. Depositary receipts denominated in U.S. dollars will not
be considered foreign securities for purposes of the investment limitation
concerning investment in foreign securities.
High-Yield Bonds
All Funds, except International, Technology, Aetna Government Fund and Money
Market, may invest in high-yield bonds, subject to the limits described above
and in the Prospectuses. High-yield bonds are fixed income securities that offer
a current yield above that generally available on debt securities rated in the
four highest categories by Moody's and S&P or other rating agencies, or, if
unrated, are considered to be of comparable quality by Aeltus. These securities
include:
(a) fixed rate corporate debt obligations (including bonds, debentures and
notes) rated below Baa3 by Moody's or BBB- by S&P;
(b) preferred stocks that have yields comparable to those of high-yielding debt
securities; and
(c) any securities convertible into any of the foregoing.
Debt obligations rated below Baa3/BBB- generally involve more risk of loss of
principal and income than higher-rated securities. Their yields and market
values tend to fluctuate more. Fluctuations in value do not affect the cash
income from the securities but are reflected in a Fund's net asset values. The
greater risks and fluctuations in yield and value occur, in part, because
investors generally perceive issuers of lower-rated and unrated securities to be
less creditworthy. Lower ratings, however, may not necessarily indicate higher
risks. In pursuing a Fund's objectives, Aeltus seeks to identify situations in
which Aeltus believes that future developments will enhance the creditworthiness
and the ratings of the issuer.
Some of the risks associated with high-yield bonds include:
Sensitivity to Interest Rate and Economic Changes High-yield bonds are more
sensitive to adverse economic changes or individual corporate developments but
generally less sensitive to interest rate changes than are investment grade
bonds. As a result, when interest rates rise, causing bond prices to fall, the
value of these securities may not fall as much as investment grade corporate
bonds. Conversely, when interest rates fall, these securities may underperform
investment grade corporate bonds.
Also, the financial stress resulting from an economic downturn or adverse
corporate developments could have a greater negative effect on the ability of
issuers of these securities to service their principal and interest payments, to
meet projected business goals and to obtain additional financing, than on more
creditworthy issuers. In addition, periods of economic uncertainty and changes
can be expected to result in increased volatility of market prices of these
securities and a Fund's net asset values. Furthermore, in the case of high-yield
bonds structured as zero coupon or pay-in-kind securities, their market prices
are affected to a greater extent by interest rate changes and thereby tend to be
more speculative and volatile than securities which pay interest periodically
and in cash.
Payment Expectations High-yield bonds present risks based on payment
expectations. For example, these securities may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest rate
market, the Funds may have to replace the securities with a lower yielding
security, resulting in a decreased return for investors. In addition, there is a
higher risk of non-payment of interest and/or principal by issuers of these
securities than in the case of investment-grade bonds.
Liquidity and Valuation Risks Some issuers of high-yield bonds may be traded
among a limited number of broker-dealers rather than in a broad secondary
market. Many of these securities may not be as liquid as investment grade bonds.
The ability to value or sell these securities will be adversely affected to the
extent that such securities are
16
<PAGE>
thinly traded or illiquid. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease or increase the value and
liquidity of these securities more than other securities, especially in a
thinly-traded market.
Limitations of Credit Ratings The credit ratings assigned to high-yield bonds
may not accurately reflect the true risks of an investment. Credit ratings
typically evaluate the safety of principal and interest payments rather than the
market value risk of such securities. In addition, credit agencies may fail to
adjust credit ratings to reflect rapid changes in economic or company conditions
that affect a security's market value. Although the ratings of recognized rating
services such as Moody's and S&P are considered, Aeltus primarily relies on its
own credit analysis which includes a study of existing debt, capital structure,
ability to service debts and to pay dividends, the issuer's sensitivity to
economic conditions, its operating history and the current trend of earnings.
Thus the achievement of a Fund's investment objective may be more dependent on
Aeltus' own credit analysis than might be the case for a fund which does not
invest in these securities.
Convertibles
All Funds except Aetna Government Fund may invest in convertible securities. A
convertible bond or convertible preferred stock gives the holder the option of
converting these securities into common stock. Some convertible securities
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
Real Estate Securities
All Funds except Aetna Government Fund may invest in real estate securities,
including interests in real estate investment trusts (REITs), real estate
development, real estate operating companies, and companies engaged in other
real estate related businesses. 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, such as the Northeastern U.S., or both.
Risks of real estate securities include those risks that are more closely
associated with investing in real estate directly than with investing in the
stock market generally. Those risks include: 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 (such as zoning laws) that impair the property rights of real
estate owners; and adverse developments in the real estate industry.
Equity Securities of Smaller Companies
All Funds other than Bond Fund, Aetna Government Fund, Money Market and Index
Plus Bond may invest in equity securities issued by U.S. companies with smaller
market capitalizations. These companies may be in an early developmental stage
or may be older companies entering a new stage of growth due to management
changes, new technology, products or markets. The securities of
small-capitalization companies may also be undervalued due to poor economic
conditions, market decline or actual or unanticipated unfavorable developments
affecting the companies. Securities of small-capitalization companies tend to
offer greater potential for growth than securities of larger, more established
issuers but there are additional risks associated with them. These risks
include: limited marketability; more abrupt or erratic market movements than
securities of larger capitalization companies; and less publicly available
information about the company and its securities. In addition, these companies
may be dependent on relatively few products or services, have limited financial
resources and lack of management depth, and may have less of a track record or
historical pattern of performance.
Supranational Agencies
Each Fund may invest up to 10% of its net assets in securities of supranational
agencies. These securities are not considered government securities and are not
supported directly or indirectly by the U.S. Government. Examples of
supranational agencies include, but are not limited to, the International Bank
for Reconstruction and Development
17
<PAGE>
(commonly referred to as the World Bank), which was chartered to finance
development projects in developing member countries; the European Community,
which is a twelve-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union of
various European nations' steel and coal industries; and the Asian Development
Bank, which is an international development bank established to lend funds,
promote investment and provide technical assistance to member nations in the
Asian and Pacific regions.
Borrowing
Each Fund may borrow up to 5% of the value of its total assets from a bank for
temporary or emergency purposes. The Funds may borrow for leveraging purposes
only if after the borrowing, the value of the Funds' net assets including
proceeds from the borrowings, is equal to at least 300% of all outstanding
borrowings. Leveraging can increase the volatility of a Fund since it
exaggerates the effects of changes in the value of the securities purchased with
the borrowed funds. The Funds do not intend to borrow for leveraging purposes,
except that they may invest in leveraged derivatives which have certain risks as
outlined above.
Bank Obligations
Each Fund may invest in obligations issued by domestic or foreign banks
(including banker's acceptances, commercial paper, bank notes, time deposits and
certificates of deposit).
Short Sales
Technology may seek to hedge investments or realize additional gains through
short sales. Short sales are transactions in which an unowned security is sold,
in anticipation of a decline in the market value of that security. To complete
such a transaction, the security must be borrowed to make delivery to the buyer.
The borrower (or short seller) then is obligated to replace the security
borrowed by purchasing it at the market price at or prior to the time of
replacement. The price at such time may be more or less than the price at which
the security was sold. Until the security is replaced, the borrower is required
to repay the lender any dividends or interest that accrue during the period of
the loan. The borrower may also be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale will
be retained by the broker (or by the custodian in a special custody account), to
the extent necessary to meet margin requirements, until the short position is
closed out. There are also transaction costs incurred in effecting short sales.
A loss may be incurred as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
borrowed security is replaced. A gain will be realized if the security declines
in price between those dates. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of the premium, dividends, interest
or expenses required to be paid in connection with a short sale. An increase in
the value of a security sold short over the price at which it was sold short
will result in a loss, and there can be no assurance that the position may be
closed out at any particular time or at an acceptable price.
Maturity Policies
The average dollar-weighted maturity of securities in Money Market's portfolio
will not exceed ninety days. In addition, all investments in the Money Market's
portfolio will have a maturity at the time of purchase, as defined under the
federal securities laws, of 397 calendar days or less.
Portfolio Turnover
The portfolio turnover rate for Mid Cap was significantly higher in 1999 than in
1998 because of increased volatility in the market for mid cap stocks. The
portfolio turnover rate for Balanced was significantly higher in 1999 than in
1998 because of a change in portfolio managers for the small cap component,
which led to a reallocation of Fund assets. The portfolio turnover rate for
Index Plus Bond was significantly higher in 1999 than in 1998 because of a
change in portfolio managers and a shift toward a more active
18
<PAGE>
investment management process. The portfolio turnover rate for Bond Fund was
significantly higher in 1999 than in 1998 because of a shift toward a more
active investment management process. The portfolio turnover rate for Ascent was
significantly higher in 1999 than in 1998 because of increased volatility in the
market for small and mid-cap stocks, increased volatility in the quantitative
rankings used in managing the Fund, and a shift toward a more active investment
management process with respect to fixed-income investments.
19
<PAGE>
DIRECTORS AND OFFICERS
The investments and administration of the Company are under the supervision of
the Board. The Directors and executive officers of the Company 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 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.
<TABLE>
<CAPTION>
- --------------------------------- ------------------------------ ---------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST FIVE YEARS (AND
NAME, POSITION(S) HELD POSITIONS HELD WITH AFFILIATED PERSONS OR
ADDRESS AND AGE WITH THE COMPANY PRINCIPAL UNDERWRITERS OF THE COMPANY)
- --------------------------------- ------------------------------ ---------------------------------------------------
<S> <C> <C>
J. Scott Fox* Director and President Director, Managing Director, Chief Operating
10 State House Square (Principal Executive Officer) Officer, Chief Financial Officer, Aeltus
Hartford, Connecticut Investment Management, Inc., October 1997 to
Age 45 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 (Principal present; Director, Mutual Fund Accounting, Aetna
Age 46 Financial and Accounting Life Insurance and Annuity Company, August 1994
Officer) to November 1995.
- --------------------------------- ------------------------------ ---------------------------------------------------
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 56
- --------------------------------- ------------------------------ ---------------------------------------------------
David L. Grove Director Private Investor; Economic/Financial Consultant,
5 The Knoll December 1985 to present.
Armonk, New York
Age 81
- --------------------------------- ------------------------------ ---------------------------------------------------
20
<PAGE>
- --------------------------------- ------------------------------ ---------------------------------------------------
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 39 Director, Aetna Life Insurance and Annuity
Company, February 1995 to present; 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 50 President, Fidelity Investments Institutional
Services Company, April 1992 to August 1997.
- --------------------------------- ------------------------------ ---------------------------------------------------
Shaun P. Mathews* Director Vice President/Senior Vice President, Aetna Life
151 Farmington Avenue Insurance and Annuity Company, March 1991 to
Hartford, Connecticut present; Director, Aetna Investment Services,
Age 44 Inc., July 1993 to February 1999; Senior Vice
President, Aetna Investment Services, Inc., July
1993 to February 1999.
- --------------------------------- ------------------------------ ---------------------------------------------------
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 year ended October 31, 1999, 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 Company. For the year ended October 31,
1999, 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.
<TABLE>
<CAPTION>
- ---------------------------------------- ------------------------------------- -------------------------------------
NAME OF PERSON AGGREGATE COMPENSATION FROM THE TOTAL COMPENSATION FROM THE COMPANY
POSITION COMPANY AND FUND COMPLEX PAID TO DIRECTORS
- ---------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
Corine Norgaard $ $
Director
- ---------------------------------------- ------------------------------------- -------------------------------------
Sidney Koch
Director
- ---------------------------------------- ------------------------------------- -------------------------------------
21
<PAGE>
- ---------------------------------------- ------------------------------------- -------------------------------------
Maria T. Fighetti*
Director
- ---------------------------------------- ------------------------------------- -------------------------------------
Richard G. Scheide
Director, Chairperson
Audit Committee
- ---------------------------------------- ------------------------------------- -------------------------------------
David L. Grove*
Director, Chairperson
Contract Committee
- ---------------------------------------- ------------------------------------- -------------------------------------
Albert E. DePrince, Jr.
Director
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
*During the year ended October 31, 1999, Ms. Fighetti and Dr. Grove deferred
$______ and $______, respectively, of their compensation from the Fund
Complex.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of November 30, 1999, Aetna Life Insurance and Annuity Company (Aetna), a
Connecticut corporation, and its affiliates, had the following interest in the
Funds, through direct ownership or through one of Aetna's separate accounts:
<TABLE>
<CAPTION>
% AETNA AND ITS AFFILIATES
-----------------------------------------------------------------------------
Class I Class A Class B Class C
------- ------- ------- -------
<S> <C> <C> <C> <C>
Aetna Bond Fund 55.06% 49.63%
Aetna Government Fund 82.71% 63.93%
Aetna High Yield Fund 97.67% 15.28% 32.72%
Aetna Index Plus Bond Fund 99.74% 6.32% 29.44% 28.93%
Aetna Index Plus Large Cap Fund 46.34%
Aetna Index Plus Mid Cap Fund 97.67% 3.56% 24.19%
Aetna Index Plus Small Cap Fund 97.51% 3.70% 41.92%
Aetna International Fund 24.82% 46.39%
Aetna Mid Cap Fund 97.88% 16.61% 90.12% 70.12%
Aetna Money Market Fund 50.12%
Aetna Real Estate Securities Fund 95.87% 10.09% 70.99% 46.98%
Aetna Small Company Fund 51.07% 80.52%
Aetna Value Opportunity Fund 96.23% 12.89% 61.95% 35.65%
Aetna Ascent Fund 84.13% 93.05%
Aetna Crossroads Fund 91.02% 100.00%
Aetna Legacy Fund 79.38% 84.94%
Aetna Growth Fund 15.60%
Aetna Growth and Income Fund 15.79%
Aetna Balanced Fund 25.91%
</TABLE>
Shares of the Funds held beneficially by Aetna and its affiliates are voted in
the same proportion as shares held by non-Aetna shareholders of that Fund.
As of November 30, 1999, officers and Directors owned less than 1% of the
outstanding shares of any of the Funds.
Aetna is an indirect parent company of Aeltus. Aetna is also an indirect
wholly-owned subsidiary of Aetna Retirement Services, Inc., which is in turn an
indirect wholly-owned subsidiary of Aetna Inc. Aetna's principal office is
located at 151 Farmington Avenue, Hartford, Connecticut 06156. Aetna is
registered with the Commission as an investment adviser.
22
<PAGE>
THE INVESTMENT ADVISORY AGREEMENTS
The Company, on behalf of each Fund, has entered into investment advisory
agreements (Advisory Agreements) appointing Aeltus as the Investment Adviser of
each Fund. Under the Advisory Agreements and subject to the supervision of the
Board, Aeltus has responsibility for supervising all aspects of the operations
of each Fund including the selection, purchase and sale of securities. Under the
Advisory Agreements, 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 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 Agreements provide that Aeltus is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
Directors and officers of the Company and that each Fund is responsible for
payment of all other of its costs.
Advisory Fees for each Fund are allocated to a particular class on the basis of
the net assets of that class in relation to the net assets of the Fund. Listed
below are the Advisory Fees that Aeltus is entitled to receive from each Fund at
an annual rate based on average daily net assets of each Fund:
<TABLE>
<CAPTION>
ADVISORY FEE ASSETS
CAPITAL APPRECIATION FUNDS
<S> <C> <C>
Growth 0.700% On first $250 million
0.650% On next $250 million
0.625% On next $250 million
0.600% On next $1.25 billion
0.550% Over $2 billion
International 0.850% On first $250 million
0.800% On next $250 million
0.775% On next $250 million
0.750% On next $1.25 billion
0.700% Over $2 billion
Mid Cap 0.750% On first $250 million
0.700% On next $250 million
0.675% On next $250 million
0.650% On next $1.25 billion
0.600% Over $2 billion
Small Company 0.850% On first $250 million
0.800% On next $250 million
0.775% On next $250 million
0.750% On next $1.25 billion
0.725% Over $2 billion
Value Opportunity 0.700% On first $250 million
0.650% On next $250 million
0.625% On next $250 million
0.600% On next $1.25 billion
0.550% Over $2 billion
23
<PAGE>
Technology 1.050% On first $500 million
1.025% On next $500 million
1.000% Over $1 billion
GROWTH & INCOME FUNDS
Balanced 0.800% On first $500 million
0.750% On next $500 million
0.700% On next $1 billion
0.650% Over $2 billion
Growth and Income 0.700% On first $250 million
0.650% On next $250 million
0.625% On next $250 million
0.600% On next $1.25 billion
0.550% Over $2 billion
Real Estate 0.800% On first $250 million
0.750% On next $250 million
0.725% On next $250 million
0.700% On next $1.25 billion
0.650% Over $2 billion
INCOME FUNDS
Bond Fund 0.500% On first $250 million
0.475% On next $250 million
0.450% On next $250 million
0.425% On next $1.25 billion
0.400% Over $2 billion
Aetna Government Fund 0.500% On first $250 million
0.475% On next $250 million
0.450% On next $250 million
0.425% On next $1.25 billion
0.400% Over $2 billion
High Yield 0.650% On first $250 million
0.600% On next $250 million
0.575% On next $250 million
0.550% On next $1.25 billion
0.500% Over $2 billion
Money Market 0.400% On first $500 million
0.350% On next $500 million
0.340% On next $1 billion
0.330% On next $1 billion
0.300% Over $3 billion
INDEX PLUS FUNDS
Index Plus Bond 0.350% On first $250 million
0.350% On next $250 million
0.325% On next $250 million
0.300% On next $1.25 billion
0.275% Over $2 billion
24
<PAGE>
Index Plus Large Cap 0.450% On first $250 million
0.450% On next $250 million
0.425% On next $250 million
0.400% On next $250 million
0.400% On next $1 billion
0.375% Over $2 billion
Index Plus Mid Cap 0.450% On first $250 million
0.450% On next $250 million
0.425% On next $250 million
0.400% On next $1.25 billion
0.375% Over $2 billion
Index Plus Small Cap 0.450% On first $250 million
0.450% On next $250 million
0.425% On next $250 million
0.400% On next $1.25 billion
0.375% Over $2 billion
GENERATION FUNDS
Ascent Fund 0.800% On first $500 million
0.775% On next $500 million
0.750% On next $500 million
0.725% On next $500 million
0.700% Over $2 billion
Crossroads Fund 0.800% On first $500 million
0.775% On next $500 million
0.750% On next $500 million
0.725% On next $500 million
0.700% Over $2 billion
Legacy Fund 0.800% On first $500 million
0.775% On next $500 million
0.750% On next $500 million
0.725% On next $500 million
0.700% Over $2 billion
</TABLE>
For the years ended October 31, 1999, October 31, 1998 and October 31, 1997,
investment advisory fees were paid to Aetna (investment adviser to the Funds
prior to February 2, 1998) and Aeltus (for the period after February 2, 1998) as
follows:
Year Ended October 31, 1999
- ---------------------------
<TABLE>
<CAPTION>
Total Investment Net Advisory
<S> <C> <C> <C>
Company Name Advisory Fees Waiver Fees Paid
- ------------ ------------- ------ ---------
Growth
International
Mid Cap
Small Company
Value Opportunity
Balanced
Growth and Income
25
<PAGE>
Real Estate
Bond Fund
Aetna Government Fund
High Yield
Money Market
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
Ascent
Crossroads
Legacy
</TABLE>
Year Ended October 31, 1998
- ---------------------------
<TABLE>
<CAPTION>
Total Investment Net Advisory
Company Name Advisory Fees Waiver Fees Paid
- ------------ ------------- ------ ---------
<S> <C> <C> <C>
Growth
International
Mid Cap*
Small Company
Value Opportunity**
Balanced
Growth and Income
Real Estate**
Bond Fund
Aetna Government Fund
High Yield**
Money Market
Index Plus Bond*
Index Plus Large Cap
Index Plus Mid Cap***
Index Plus Small Cap***
Ascent
Crossroads
Legacy
</TABLE>
Year Ended October 31, 1997
- ---------------------------
<TABLE>
<CAPTION>
Total Investment Net Advisory
Company Name Advisory Fees Waiver Fees Paid
- ------------ ------------- ------ ---------
<S> <C> <C> <C>
Growth
International
Small Company
Balanced
Growth and Income
Bond Fund
Aetna Government Fund
Money Market
Index Plus Large Cap****
Ascent
Crossroads
Legacy
</TABLE>
26
<PAGE>
*Mid Cap and Index Plus Bond commenced operations on February 4, 1998.
Investment Advisory Fees shown are for the period from February 4, 1998 to
October 31, 1998.
**Value Opportunity, Real Estate and High Yield commenced operations on
February 2, 1998. Investment Advisory Fees shown are for the period from
February 2, 1998 to October 31, 1998.
***Index Plus Mid Cap and Index Plus Small Cap commenced operations on
February 3, 1998. Investment Advisory Fees shown are for the period from
February 3, 1998 to October 31, 1998.
****Index Plus Large Cap commenced operations on December 10, 1996. Investment
Advisory Fees shown are for the period from December 10, 1996 to October
31, 1997.
Bradley, Foster & Sargent, Inc. ("Bradley") served as subadviser of Value
Opportunity from October 1, 1998 through December 31, 1999. For the years ended
October 31, 1999 and October 31, 1998, Aeltus paid Bradley subadvisory fees of
___________ and ___________, respectively. The subadvisory agreement was
terminated as of December 31, 1999.
THE SUBADVISORY AGREEMENT
Aeltus and the Company, on behalf of Technology, have entered into an agreement
(Subadvisory Agreement) with EAM effective March 1, 2000 appointing EAM as
subadviser of Technology.
The Subadvisory Agreement gives EAM broad latitude to select securities for
Technology consistent with the investment objective and policies of the Fund,
subject to Aeltus' oversight. The Agreement contemplates that EAM will be
responsible for all aspects of managing Technology, including trade execution.
However, the Agreement contemplates that Aeltus will be primarily responsible
for cash management.
For the services under the Subadvisory Agreement, EAM will receive an annual fee
payable monthly as described in the Prospectuses. Subadvisory Fees are allocated
to a particular class on the basis of the net assets of that class in relation
to the net assets of Technology.
THE ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Administrative Services Agreement, Aeltus acts as administrator
and provides certain administrative and shareholder services necessary for Fund
operations and is responsible for the supervision of other service providers.
The services provided by Aeltus include: (a) internal accounting services; (b)
monitoring regulatory compliance, such as reports and filings with the
Commission and state securities regulatory authorities; (c) preparing financial
information for proxy statements; (d) preparing semiannual and annual reports to
shareholders; (e) calculating net asset values; (f) preparation of certain
shareholder communications; (g) supervision of the custodians and transfer
agent; and (h) reporting to the Board.
For its services, Aeltus is entitled to receive from each Fund a fee at an
annual rate of 0.10% of its average daily net assets.
For the years ended October 31, 1999, October 31, 1998 and October 31, 1997,
administrative services fees were paid to Aetna (administrator to the Funds
prior to February 2, 1998) and Aeltus (for the period after February 2, 1998) as
follows:
Year Ended October 31, 1999
- ---------------------------
<TABLE>
<CAPTION>
Total Administrative Administrator Net Administrative
Company Name Services Fees Waiver Services Fees Paid
- ------------ ------------- ------ ------------------
<S> <C> <C> <C>
Growth
International
Mid Cap
Small Company
27
<PAGE>
Value Opportunity
Balanced
Growth and Income
Real Estate
Bond Fund
Aetna Government Fund
High Yield
Money Market
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
Ascent
Crossroads
Legacy
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31, 1998
- ---------------------------
<S> <C> <C> <C>
Total Administrative Administrator Net Administrative
Company Name Services Fees Waiver Services Fees Paid
- ------------ ------------- ------ ------------------
Growth
International
Mid Cap*
Small Company
Value Opportunity**
Balanced
Growth and Income
Real Estate**
Bond Fund
Aetna Government Fund
High Yield**
Money Market
Index Plus Bond*
Index Plus Large Cap****
Index Plus Mid Cap***
Index Plus Small Cap***
Ascent
Crossroads
Legacy
</TABLE>
Year Ended October 31, 1997
- ---------------------------
<TABLE>
<CAPTION>
Total Administrative Administrator Net Administrative
Company Name Services Fees Waiver Services Fees Paid
- ------------ ------------- ------ ------------------
<S> <C> <C> <C>
Growth
International
Small Company
Balanced
Growth and Income
Bond Fund
Aetna Government Fund
28
<PAGE>
Money Market
Index Plus Large Cap****
Ascent
Crossroads
Legacy
</TABLE>
*Mid Cap and Index Plus Bond commenced operations on February 4, 1998.
Administrative Services Fees shown are for the period from February 4, 1998
to October 31, 1998.
**Value Opportunity, Real Estate and High Yield commenced operations on
February 2, 1998. Administrative Services Fees shown are for the period
from February 2, 1998 to October 31, 1998.
***Index Plus Mid Cap and Index Plus Small Cap commenced operations on
February 3, 1998. Administrative Services Fees shown are for the period
from February 3, 1998 to October 31, 1998.
****Index Plus Large Cap commenced operations on December 10, 1996.
Administrative Services Fees shown are for the period from December 10,
1996 to October 31, 1997.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258,
serves as custodian for the assets of all Funds except International. Brown
Brothers Harriman & Company, 40 Water Street, Boston, Massachusetts, 02109,
serves as custodian for the assets of International. Neither custodian
participates in determining the investment policies of a Fund nor in deciding
which securities are purchased or sold by a Fund. A Fund may, however, invest in
obligations of the custodian and may purchase or sell securities from or to the
custodian.
For portfolio securities which are purchased and held outside the U.S., Mellon
Bank, N.A. and Brown Brothers Harriman & Company have entered into sub-custodian
arrangements (which are designed to comply with Rule 17f-5 under the 1940 Act)
with certain foreign banks and clearing agencies.
TRANSFER AGENT
PFPC Inc., 4400 Computer Drive, Westborough, Massachusetts 01581, serves as the
transfer agent and dividend-paying agent to the Funds.
INDEPENDENT AUDITORS
_________, CityPlace II, Hartford, Connecticut 06103 serves as independent
auditors to the Company. _________ provides audit services, assistance and
consultation in connection with Commission filings.
PRINCIPAL UNDERWRITER
Shares of each Fund are offered on a continuous basis. Effective May 1, 1998,
the Company's Board approved a change in the Company's principal underwriter
from Aetna Investment Services, Inc. (AISI), 151 Farmington Avenue, Hartford,
Connecticut 06156, to ACI, 10 State House Square, Hartford, Connecticut
06103-3602. ACI is a Connecticut corporation, and is a wholly-owned subsidiary
of Aeltus and an indirect wholly-owned subsidiary of Aetna Inc. ACI has agreed
to use its best efforts to distribute the shares as the principal underwriter of
the Funds pursuant to an Underwriting Agreement between it and the Company.
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS
Fund shares are distributed by ACI. With respect to Class A shares of the Funds
(other than Money Market), 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 Funds,
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.
With respect to Class C shares of the Funds (other than Money Market), ACI is
paid an annual distribution fee at the rate of 0.75% (0.50% for the
29
<PAGE>
Index Plus Funds) 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 cost 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 and Class C shares each are also subject to a Shareholder Services Plan
adopted pursuant to Rule 12b-1. Under the Class B 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 each Fund. Under the Class C 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 C shares of each Fund except Money Market.
The Service Fee may be used by ACI 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 each 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.
Prior to February 2, 1998, with respect to Adviser Class (redesignated Class A)
shares, AISI received a Rule 12b-1 fee at the rate of 0.50% and a Shareholder
Service fee at the rate of 0.25% (0.10% for Money Market) of the value of
average daily net assets.
For the years ended October 31, 1999, 1998 and 1997, Shareholder Services and
Distribution fees were paid to Aetna (principal underwriter of the Company prior
to August 1, 1997), AISI (for the period August 1, 1997 through April 30, 1998)
and ACI (for the period after May 1, 1998) as follows:
Year Ended October 31, 1999
- ---------------------------
Company Name Total Underwriting Fees
- ------------ -----------------------
Growth $
International
Mid Cap
Small Company
Value Opportunity
Balanced
Growth and Income
Real Estate
Bond Fund
Aetna Government Fund
High Yield
Money Market
Index Plus Bond
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
Ascent
Crossroads
Legacy
30
<PAGE>
Year Ended October 31, 1998
- ---------------------------
Company Name Total Underwriting Fees
- ------------ -----------------------
Growth $
International
Mid Cap*
Small Company
Value Opportunity**
Balanced
Growth and Income
Real Estate**
Bond Fund
Aetna Government Fund
High Yield**
Money Market
Index Plus Bond*
Index Plus Large Cap
Index Plus Mid Cap***
Index Plus Small Cap***
Ascent
Crossroads
Legacy
Year Ended October 31, 1997
- ---------------------------
Company Name Total Underwriting Fees
- ------------ -----------------------
Growth $
International
Small Company
Balanced
Growth and Income
Bond Fund
Aetna Government Fund
Money Market
Index Plus Large Cap****
Ascent*****
Crossroads*****
Legacy*****
*Mid Cap and Index Plus Bond commenced operations on February 4, 1998.
**Value Opportunity, Real Estate and High Yield commenced operations on
February 2, 1998.
***Index Plus Mid Cap and Index Plus Small Cap commenced operations on
February 3, 1998.
****Index Plus Large Cap commenced operations on December 10, 1996.
*****Ascent, Crossroads and Legacy Class A Shares commenced operations on
January 20, 1997.
Fees in the amount of $___, $____ and $____, for the years ended October 31,
1999, 1998, and 1997, respectively, were waived for Money Market.
31
<PAGE>
The Distribution Plans and Shareholder Services Plans 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 common control
with the Funds could be deemed to have a financial interest in the Plans. No
other interested person of the Funds has a financial interest in the Plans.
For the year ended October 31, 1999, approximately $____, $____, $____, $____,
$____ and $____ of the Company's total distribution expenses were expended in
connection with advertising, printing and mailing of prospectuses to other than
current shareholders, compensation to underwriters, compensation to
broker-dealers and compensation to sales personnel, respectively.
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.
The following table applies to Growth, International, Mid Cap, Small Company,
Value Opportunity, Technology, Balanced, Growth and Income, Real Estate, and the
Generation Funds:
<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 5.00%
$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 2.00
$500,000 or more but under $1,000,000 1.75
</TABLE>
The following table applies to Bond Fund, Aetna Government Fund and High Yield:
<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>
The following table applies to Index Plus Bond, Index Plus Large Cap, Index Plus
Mid Cap and Index Plus Small Cap (collectively referred to as the Index Plus
Funds):
<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 2.50%
$50,000 or more but under $100,000 2.00
$100,000 or more but under $250,000 1.50
$250,000 or more but under $500,000 1.00
$500,000 or more but under $1,000,000 0.50
</TABLE>
32
<PAGE>
Securities dealers that sell Class A shares (other than shares of the Index Plus
Funds) 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 0.50%
[bullet] on sales over $20 million 0.25%
Securities dealers that sell Class A shares of the Index Plus Funds 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 0.50%
[bullet] on sales over $3 million to $20 million 0.25%
[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 four percent (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.
For sales of Class C shares (other than Money Market), your securities dealer is
paid an up-front commission based on the amount sold. The up-front commission is
equal to one percent (1%) of the sales price, except that in the case of the
Index Plus Funds, the up-front commission is equal to 0.75%. This up-front
commission is an advance of the 0.25% servicing fee plus the 0.75% (0.50% in the
case of the Index Plus Funds) distribution fee for the first year. Beginning in
the thirteenth month after the sale is made, ACI uses the servicing fee and the
distribution fee to compensate securities dealers, on a monthly basis.
ACI or its affiliates may make payments in addition to those described above to
broker-dealers that enter into agreements providing ACI with preferential access
to representatives of the broker-dealer. These payments may be in an amount up
to 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.
In addition, ACI or its affiliates may, from time to time, make payments to
clearing firms that offer networking services which make the Funds available to
their customers. Such payments will not exceed 0.10% of a Fund's average daily
net assets.
The value of a shareholder's investment will be unaffected by these payments.
PURCHASE AND REDEMPTION OF SHARES
Class I shares of the Company are purchased and redeemed at the applicable net
asset value (NAV) next determined after a purchase or redemption order is
received, as described in the Prospectus. Class B and Class C shares of the
Company are purchased at the applicable NAV next determined after a purchase
order is received. Class B and Class C shares are redeemed at the applicable NAV
next determined less any applicable contingent deferred sales charge (CDSC)
after a redemption request is received, as described in the Prospectus. Class A
shares of the Company are purchased at the applicable NAV next determined after
a purchase order is received less any applicable front-end sales charge and
redeemed at the applicable NAV next determined adjusted for any applicable CDSC
after a redemption request is received, as described in the Prospectus.
Except as provided below, 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;
33
<PAGE>
(b) an emergency exists, as determined by the Commission, as a result of which
(i) disposal by a Fund of securities owned by it is not reasonably practicable,
or (ii) it is not reasonably practicable for a Fund to determine fairly the
value of its net assets; or (c) the Commission by order so permits for the
protection of shareholders of a Fund.
Any written request to redeem shares in amounts in excess of $50,000 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.
A 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, a 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 of a Fund 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 and exchanges should be made for investment purposes only. The Funds
reserve the right to reject any specific purchase or exchange request. In the
event a Fund rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed until the Fund receives further
redemption instructions.
The Funds are not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Funds define a "market
timer" as an individual, or entity acting on behalf of one or more individuals,
if (i) the individual or entity makes three or more exchange requests out of any
Fund per calendar year and (ii) any one of such exchange requests represents
shares equal in value to 1/2 of 1% or more of the Fund's net assets at the time
of the request. Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
Front-end Sales Charge Waivers
Front-end sales charges will not apply if you are buying Class A shares with
proceeds from the following sources:
1. Redemptions from any Aeltus-advised Fund if you:
[bullet] Originally paid a front-end sales charge on the shares;
[bullet] Reinvest the money within 60 days of the redemption date; and
[bullet] Reinvest the money in the same class of shares.
2. Redemptions from other mutual funds if you:
[bullet] Originally paid a front-end sales charge on the shares;
[bullet] Reinvest the money within 30 days of the redemption date; and
[bullet] Reinvest the money in the same class of shares.
The Fund's front-end sales charges 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 through an unregistered separate
account sponsored by Aetna or any affiliate thereof or (2) in a separate
account sponsored by Aetna 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.
34
<PAGE>
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 who are charged an asset based
fee for services.
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 at the time such shares were redesignated
as Class A shares.
Contingent Deferred Sales Charge
Certain Class A shares, all Class B shares and all Class C shares (except for
Money Market) are subject to a CDSC, as described in the Prospectus. There is no
CDSC imposed on:
[bullet] redemptions of shares purchased through reinvestment of dividends or
capital gains distributions;
[bullet] shares purchased more than two years (in the case of Class A shares),
six years (in the case of Class B shares) or eighteen months (in the
case of Class C shares) prior to the redemption; and
[bullet] redemptions of Money Market Class A and Class C shares unless:
[bullet] those shares were purchased through an exchange from another
Fund within two years (in the case of Class A shares) or
eighteen months (in the case of Class C shares) prior to the
redemption; and
[bullet] the original purchase of the shares exchanged was subject to a
CDSC.
CDSC Waivers
The CDSC will be waived for:
[bullet] Exchanges to other Funds of the same class;
[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;
[bullet] Distributions from employee benefit plans, including those due to plan
termination or plan transfer; and o Redemptions made in connection with
the Automatic Cash Withdrawal Plan (see Shareholder Services and Other
Features), provided that such redemptions:
[bullet] are limited annually to no more than 12% of the original
account value;
[bullet] are made in equal monthly amounts, not to exceed 1% per month;
and
[bullet] the minimum account value at the time the Automatic Cash
Withdrawal Plan was initiated was no less than $10,000.
Letter of Intent
You may qualify for a reduced sales charge when you buy Class A shares (other
than Money Market), 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 will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent. Sales charge reductions are based
on purchases in more than one Fund and will be effective only after notification
to ACI that the investment qualifies for a discount. Your holdings in certain
Funds (other than Money Market shares) 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 an
equivalent amount.
35
<PAGE>
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. 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 (excluding Money Market) of the Funds 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 your other Class A shares (excluding Money Market), as well as those
Class A shares (excluding Money Market) of your spouse and children under the
age of 21. If you are the sole owner of a company, you may also add any company
accounts, including retirement plan accounts invested in Class A shares
(excluding Money Market) of the Funds. Companies with one or more retirement
plans may add together the total plan assets invested in Class A shares
(excluding Money Market) of the Funds 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.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the supervision of the Board, Aeltus (or EAM, in the case of
Technology) has responsibility for making investment decisions, for effecting
the execution of trades and for negotiating any brokerage commissions thereon.
It is Aeltus' and EAM's 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 (or EAM, in the case of Technology) may also
consider the sale of shares of the Funds and of other investment companies
advised by Aeltus as a factor in the selection of brokerage firms to execute the
Funds' portfolio transactions, subject to Aeltus' and EAM's duty to obtain best
execution.
Aeltus (or EAM, in the case of Technology) 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 Funds. These brokerage and research
services include, but are not limited to, quantitative and qualitative research
information and purchase and sale recommendations regarding securities and
industries, analyses and reports covering a broad range of economic factors and
trends, statistical data relating to the strategy and performance of the Funds
and other investment companies, services related to the execution of trades on
behalf of a Fund and advice as to the valuation of securities, the providing of
equipment used to communicate research information and specialized consultations
with Company personnel with respect to computerized systems and data furnished
to the Funds as a component of other research services. Aeltus and EAM consider
the quantity and quality of such brokerage and research services provided by a
brokerage firm along with the nature and difficulty of the specific transaction
in negotiating commissions for trades in a Fund's securities and may pay higher
commission rates than the lowest available when it is reasonable to do so in
light of the value of the brokerage and research services received generally or
in connection with a particular transaction. It is the policy of Aeltus and EAM,
in selecting a broker to effect a particular transaction, 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.
36
<PAGE>
Research services furnished by brokers through whom the Funds effect securities
transactions may be used by Aeltus in servicing all of its accounts; not all
such services will be used by Aeltus or EAM to benefit the Funds.
Consistent with federal law, Aeltus or EAM 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. The judgment
of Aeltus and EAM, as to whether and how it will obtain the specific brokerage
and research services, will be based upon an 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' or EAM's opinion as to
which services and which means of payment are in the long-term best interests of
the Funds.
The Funds have not effected, and have no present intention of effecting, any
brokerage transactions in portfolio securities with Aeltus, EAM or any other
affiliated person of the Company.
A Fund and another advisory client of Aeltus, EAM, or Aeltus or themselves, 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 determining the amounts to be purchased and sold,
the main factors to be considered are the respective investment objectives of a
Fund and the other 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.
Brokerage commissions were paid as follows:
<TABLE>
<CAPTION>
For Year Ended For Year Ended For Year Ended
Fund Name Oct. 31, 1999 Oct. 31, 1998 Oct. 31, 1997
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Growth $ $ $
International
Mid Cap*
Small Company
Value Opportunity**
Balanced
Growth and Income
Real Estate**
Bond Fund
Aetna Government Fund
High Yield**
Money Market
Index Plus Bond*
Index Plus Large Cap***
Index Plus Mid Cap****
Index Plus Small Cap****
Ascent
Crossroads
Legacy
</TABLE>
*Mid Cap and Index Plus Bond commenced operations on February 4, 1998.
**Value Opportunity, Real Estate and High Yield commenced operations on
February 2, 1998.
***Index Plus Large Cap commenced operations December 10, 1996.
****Index Plus Mid Cap and Index Plus Small Cap commenced operations on
February 3, 1998.
37
<PAGE>
For the year ended October 31, 1999, commissions in the amounts listed below
were paid with respect to portfolio transactions directed to certain brokers
because of research services:
Company Name Commissions Paid on Total Transactions
- ------------ --------------------------------------
Growth $
International
Mid Cap
Small Company
Value Opportunity
Balanced
Growth and Income
Real Estate
Index Plus Large Cap
Index Plus Mid Cap
Index Plus Small Cap
Ascent
Crossroads
Legacy
The Board has adopted a policy allowing trades to be made between affiliated
registered investment companies or series thereof provided such trades meet the
terms of Rule 17a-7 under the 1940 Act.
The Company, Aeltus, EAM, and ACI each have adopted a Code of Ethics (in
accordance with Rule 17j-1 under the 1940 Act). The Codes of Ethics allow
personnel subject to the Codes to invest in securities, including securities
that may be purchased or held by a Fund. However, it prohibits a person from
taking advantage of Fund trades or from acting on inside information.
SHAREHOLDER ACCOUNTS AND SERVICES
Systematic Investment
The Systematic Investment feature, using the EFT capability, allows you to make
automatic monthly investments in any Fund. On the application, you may select
the amount of money to be moved and the Fund in which it will be invested. In
order to elect EFT, you must first have established an account, subject to the
minimum amount specified in the Prospectuses. Thereafter, the minimum monthly
Systematic Investment is currently $50 per Fund, and we reserve the right to
increase that amount. EFT transactions will be effective 15 days following the
receipt by the Transfer Agent of your application. The Systematic Investment
feature and EFT capability will be terminated upon total redemption of your
shares. Payment of redemption proceeds will be held until a Systematic
Investment has cleared, which may take up to 12 calendar days.
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.
38
<PAGE>
Automatic Cash Withdrawal Plan
A CDSC may be applied to withdrawals made under this plan. The Automatic Cash
Withdrawal Plan permits you to have payments of $100 or more automatically
transferred from a Fund to your designated bank account on a monthly basis. To
enroll in this plan, you must have a minimum balance of $10,000 in a Fund. Your
automatic cash withdrawals will be processed on a regular basis beginning on or
about the first day of the month. There may be tax consequences associated with
these transactions. Please consult your tax adviser.
Checkwriting Service
Checkwriting is available with Class A, Class C and Class I shares of Money
Market. If the amount of the check is greater than the value of your shares, the
check will be returned unpaid. In addition, checks written against shares
purchased by check or Systematic Investment during the preceding 12 calendar
days will be returned unpaid due to uncollected funds. You may select the
checkwriting service by indicating your election on the application or by
calling (800) 367-7732. All notices with respect to checks must be given to the
transfer agent.
Cross Investing
Dividend Investing You may elect to have dividend and/or capital gains
distributions automatically invested in the same class of one other Fund.
Systematic Exchange You may establish an automatic exchange of shares from
one Fund to another. The exchange will occur on or about the 15th day of
each month and must be for a minimum of $50 per month. Because this
transaction is treated as an exchange, the policies related to the exchange
privilege apply. There may be tax consequences associated with these
exchanges. Please consult your tax adviser.
Cross investing may only be made in a Fund that has been previously established
with the minimum investment. To request information or to initiate a transaction
under either or both of these features, please call (800)367-7732.
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 $50,000. 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
The NAV per share of each class is computed by dividing each class' pro-rata
share of a Fund's net assets less any liabilities specifically attributable to
that class by the total number of shares outstanding for that class. The Fund's
net assets include, among other things, the market value of any securities held
by the Fund, any dividends or interest accrued but not collected, other assets
adjusted by certain liabilities incurred for the benefit of the Fund, such as
payables for securities purchased and certain accrued expenses.
Securities of the Funds are generally valued by independent pricing services
which have been approved by the Board. The values for equity securities traded
on registered securities exchanges (except as otherwise noted below) 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
39
<PAGE>
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. Readily marketable securities
listed on a foreign securities exchange whose operations are similar to those of
the United States over-the-counter market are valued at the mean of the current
bid and asked prices as reported by independent pricing sources. Fixed-income
securities may be valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market value of such
securities. The prices provided by a pricing service take into account many
factors, including institutional size trading in similar groups of securities
and any developments related to specific securities. Securities for which prices
are not obtained from a pricing service are valued based upon the assessment of
market-makers in those securities. Debt securities maturing in sixty days or
less at the date of valuation, and all securities in Money Market, 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. Options are valued at the mean of the last bid
and asked price on the exchange where the option is primarily traded. 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.
Generally, trading in foreign securities markets is substantially completed each
day at various times prior to the close of the New York Stock Exchange (NYSE).
The values of foreign securities used in computing the NAV of the shares of a
Fund are determined as of the earlier of such market close or the closing time
of the NYSE. Occasionally, events affecting the value of such securities may
occur between the times at which they are determined and the close of the NYSE,
or when the foreign market on which such securities trade is closed but the NYSE
is open, which will not be reflected in the computation of NAV. If during such
periods, events occur which materially affect the value of such securities, the
securities may be 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.
TAX STATUS
The following is only a limited discussion of certain additional tax
considerations generally affecting each Fund. No attempt is made to present a
detailed explanation of the tax treatment of each Fund and no explanation is
provided with respect to the tax treatment of any Fund shareholder. The
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If for any
taxable year a Fund does not qualify as a regulated investment company, all of
its taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to shareholders,
and such distributions will be taxable to the shareholders as ordinary dividends
to the extent of the Fund's current and accumulated earnings and profits.
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.
Each Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. However, investors should
note that a Fund may in certain circumstances be required to liquidate portfolio
investments to make sufficient distributions to avoid excise tax liability.
40
<PAGE>
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 a Fund's assets to be invested in
various countries is not known.
If more than 50% of International's total assets at the close of its fiscal year
consist of securities of foreign corporations, that Fund will be eligible to,
and may, file an election with the Internal Revenue Service (IRS) pursuant to
which shareholders will be required to include their pro rata portions of
foreign taxes paid by the Fund as income received by them. Shareholders may then
either deduct such pro rata portion in computing their taxable income or use
them as foreign tax credits against their U.S. income taxes. If International
makes such an election, it will report annually to each shareholder the amount
of foreign taxes to be included in income and then either deducted or credited.
Alternatively, if the amount of foreign taxes paid by International is not large
enough to warrant its making such an election, the Fund may claim the amount of
foreign taxes paid as a deduction against its own gross income. In that case
shareholders would not be required to include any amount of foreign taxes paid
by International in their income and would not be permitted either to deduct any
portion of foreign taxes from their own income or to claim any amount tax credit
for taxes paid by the Fund.
PERFORMANCE INFORMATION
Performance information for each class of shares including the yield and
effective yield of Money Market, the yield or dividend yield of Bond Fund, Aetna
Government Fund, High Yield and Index Plus Bond and the total return of all
Funds, may appear in reports or promotional literature to current or prospective
shareholders.
Money Market Yield
Current yield for Money Market will be based on a recently ended seven-day
period, computed by determining the net change, exclusive of capital changes and
income other than investment income, in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from that shareholder
account, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return. This base period
return is then multiplied by 365/7 with the resulting yield figure carried to at
least the nearest hundredth of one percent. Calculation of "effective yield"
begins with the same "base period return" used in the calculation of yield,
which is then annualized to reflect weekly compounding pursuant to the following
formula:
Effective Yield = [(Base Period Return + 1)(365/7)] - 1
The yield and effective yield for Money Market for the seven days ended October
31, 1999 were ___% and ___%, respectively.
30-Day Yield for Certain Non-Money Market Funds
Quotations of yield at the public offering price (POP) for Bond Fund, Aetna
Government Fund, High Yield and Index Plus Bond will be based on all investment
income per share earned during a particular 30-day period, less expenses accrued
during the period (net investment income), and will be computed by dividing net
investment income by the value of a share on the last day of the period,
according to the following formula:
YIELD = 2[(a - b + 1)(6) - 1]
-----
cd
Where:
a = dividends and interest earned during the period
b = the expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum POP per share on the last day of the period
41
<PAGE>
For purposes of determining net investment income during the period (variable
"a" in the formula), interest earned on debt obligations held by the fund is
calculated each day during the period according to the formulas below, and then
added together for each day in the period:
[bullet] Certain mortgage-backed, asset-backed and CMO securities: Generally,
interest is computed by taking daily interest income (coupon rate times
face value divided by 360 or 365, as the case may be) adjusted by that
day's pro-rata share of the most recent paydown gain or loss from the
security;
[bullet] Other debt obligations: Generally, interest is calculated by computing
the yield to maturity of each debt obligation held based on the market
value of the obligation (including current interest accrued) at the
close of each day, dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including current
accrued interest).
For purposes of this calculation, it is assumed that each month contains 30
days.
Undeclared earned income will be subtracted from the NAV per share (variable "d"
in the formula). Undeclared earned income is the net investment income which, at
the end of the base period, has not been declared as a dividend, but is
reasonably expected to be and is declared as a dividend shortly thereafter.
For the 30-day period ended October 31, 1999:
<TABLE>
<CAPTION>
Yield (at POP)
------------------------------------------------------------
Name of Fund Class A Class B Class C Class I
- ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Bond Fund % % % %
Aetna Government Fund % % % %
High Yield % % % %
Index Plus Bond % % % %
</TABLE>
The Company may also from time to time include quotations of yield for Class A
that are not calculated according to the formula set forth above. Specifically,
the Company may include yield for Class A at the NAV per share on the last day
of the period, and not the maximum POP per share on the last day of the period.
In which case, variable "d" in the formula will be:
d = the NAV per share on the last day of the period.
For the 30-day period ended October 31, 1999:
Yield (at NAV)
Name of Fund Class A
--------------------- -------------------
Bond Fund %
Aetna Government Fund %
High Yield %
Index Plus Bond %
Dividend Yield
Bond Fund, Aetna Government Fund, High Yield and Index Plus Bond may quote a
"dividend yield" for each class of its shares. Dividend yield is based on the
dividends paid on shares of a class from net investment income.
To calculate dividend yield, the most recent dividend of a class declared is
multiplied by 12 (to annualize the yield) and divided by the current NAV. The
formula is shown below:
42
<PAGE>
Dividend Yield = (Dividends paid x 12) / Net Asset Value
The Class A dividend yield may also be quoted with the public offering price
(POP) for Class A shares. The POP includes the maximum front-end sales charge.
The dividend yield for Class B shares and Class C shares is calculated without
considering the effect of contingent deferred sales charges.
The dividend yields for the 30-day dividend period ended October 31, 1999 were
as follows:
<TABLE>
<CAPTION>
FUND CLASS A (NAV) CLASS A (POP) CLASS B CLASS C
---- ------------- ------------- ------- -------
<S> <C> <C> <C> <C>
Aetna Government Fund % % % %
Bond Fund % % % %
High Yield % % % %
Index Plus Bond % % % %
</TABLE>
Average Annual Total Return
Quotations of average annual total return for any Fund will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in a Fund over a period of one, five and ten 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, 5, or 10 year period at the end of the 1, 5, or 10 year
period (or fractional portion thereof).
The Company may also from time to time include in such advertising a total
return figure for Class A, Class B and/or Class C that is not calculated
according to the formula set forth above.
Specifically, the Company 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 or Class C that does not take into account the
imposition of the applicable CDSC.
All the following figures are based on actual investment performance.
In February 1998, the Funds redesignated Adviser Class shares as Class A shares.
For periods prior to the Class A inception date, Class A performance is
calculated by using the performance of Class I (formerly Select Class) shares
and deducting the Class A front-end sales load and internal fees and expenses of
the Adviser Class. In March 1999, the Funds introduced Class B shares. For
periods prior to the Class B inception date, Class B performance is calculated
using the performance of Class I (formerly Select Class) shares, and deducting
the internal fees and expenses applicable to the Class B shares. CDSC of 5.00%
applies for all Class B shares redeemed in the first year, declining to 1.00% on
Class B shares redeemed in the sixth year. No CDSC is charged thereafter. The
Class B returns without CDSC are net of fund expenses only, and do not deduct a
CDSC. In June 1998, the Funds introduced Class C shares. For periods prior to
the Class C inception date, Class C performance is calculated using the
performance of Class I (formerly Select Class) shares, and deducting the
internal fees and expenses applicable to the Class C shares. CDSC applies for
all Class C shares (except Money Market) redeemed prior to the end of the first
eighteen months of ownership. The 1-year Class C returns without CDSC are net of
fund expenses only, and do not deduct a CDSC. Neither a front-end sales load nor
a CDSC applies to Class A or Class C shares of Money Market.
Total Return Quotations as of October 31, 1999:
- -----------------------------------------------
43
<PAGE>
CLASS I
<TABLE>
<CAPTION>
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
<S> <C> <C> <C> <C>
Money Market % % % 1/3/92
Aetna Government Fund % % 1/4/94
Bond Fund % % % 1/3/92
Balanced % % % 1/3/92
Growth and Income % % % 1/3/92
Growth % % 1/4/94
Index Plus Large Cap % % 12/10/96
Small Company % % 1/4/94
International % % % 1/3/92
Ascent Fund % % 1/4/95
Crossroads Fund % % 1/4/95
Legacy Fund % % 1/4/95
High Yield % 2/2/98
Index Plus Bond % 2/4/98
Index Plus Mid Cap % 2/3/98
Index Plus Small Cap % 2/3/98
Mid Cap % 2/4/98
Real Estate % 2/2/98
Value Opportunity % 2/2/98
</TABLE>
CLASS A (assuming payment of the front-end sales load)
<TABLE>
<CAPTION>
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
<S> <C> <C> <C> <C>
Aetna Government Fund % % 1/4/94
Bond Fund % % % 1/3/92
Balanced % % % 1/3/92
Growth and Income % % % 1/3/92
Growth % % 1/4/94
Index Plus Large Cap % % 12/10/96
Small Company % % 1/4/94
International % % % 1/3/92
Ascent Fund % % 1/4/95
Crossroads Fund % % 1/4/95
Legacy Fund % % 1/4/95
High Yield % 2/2/98
Index Plus Bond % 2/4/98
Index Plus Mid Cap % 2/3/98
Index Plus Small Cap % 2/3/98
Mid Cap % 2/4/98
Real Estate % 2/2/98
Value Opportunity % 2/2/98
</TABLE>
CLASS A (without payment of the front-end sales load)
<TABLE>
<CAPTION>
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
<S> <C> <C> <C>
Money Market % % % 1/3/92
Aetna Government Fund % % 1/4/94
Bond Fund % % % 1/3/92
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balanced % % % 1/3/92
Growth and Income % % % 1/3/92
Growth % % 1/4/94
Index Plus Large Cap % % 12/10/96
Small Company % % 1/4/94
International % % % 1/3/92
Ascent Fund % % 1/4/95
Crossroads Fund % % 1/4/95
Legacy Fund % % 1/4/95
High Yield % 2/2/98
Index Plus Bond % 2/4/98
Index Plus Mid Cap % 2/3/98
Index Plus Small Cap % 2/3/98
Mid Cap % 2/4/98
Real Estate % 2/2/98
Value Opportunity % 2/2/98
</TABLE>
CLASS B (assuming payment of the CDSC)
<TABLE>
<CAPTION>
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
<S> <C> <C> <C> <C>
Money Market % % % 1/3/92
Aetna Government Fund % % % 1/4/94
Bond Fund % % % 1/3/92
Balanced % % % 1/3/92
Growth and Income % % % 1/3/92
Growth % % 1/4/94
Index Plus Large Cap % % 12/10/96
Small Company % % 1/4/94
International % % % 1/3/92
Ascent Fund % % 1/4/95
Crossroads Fund % % 1/4/95
Legacy Fund % % 1/4/95
High Yield % 2/2/98
Index Plus Bond % 2/4/98
Index Plus Mid Cap % 2/3/98
Index Plus Small Cap % 2/3/98
Mid Cap % 2/4/98
Real Estate % 2/2/98
Value Opportunity % 2/2/98
</TABLE>
<TABLE>
<CAPTION>
CLASS B (without payment of the CDSC)
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
<S> <C> <C> <C> <C>
Money Market % % % 1/3/92
Aetna Government Fund % % 1/4/94
Bond Fund % % % 1/3/92
Balanced % % % 1/3/92
Growth and Income % % % 1/3/92
Growth % % 1/4/94
Index Plus Large Cap % % 12/10/96
Small Company % % 1/4/94
International % % % 1/3/92
Ascent Fund % % 1/4/95
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Crossroads Fund % % 1/4/95
Legacy Fund % % 1/4/95
High Yield % 2/2/98
Index Plus Bond % 2/4/98
Index Plus Mid Cap % 2/3/98
Index Plus Small Cap % 2/3/98
Mid Cap % 2/4/98
Real Estate % 2/2/98
Value Opportunity % 2/2/98
</TABLE>
CLASS C (assuming payment of the CDSC)
<TABLE>
<CAPTION>
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
<S> <C> <C> <C> <C>
Aetna Government Fund % % 1/4/94
Bond Fund % % % 1/3/92
Balanced % % % 1/3/92
Growth and Income % % % 1/3/92
Growth % % 1/4/94
Index Plus Large Cap % % 12/10/96
Small Company % % 1/4/94
International % % % 1/3/92
Ascent Fund % % 1/4/95
Crossroads Fund % % 1/4/95
Legacy Fund % % 1/4/95
High Yield % 2/2/98
Index Plus Bond % 2/4/98
Index Plus Mid Cap % 2/3/98
Index Plus Small Cap % 2/3/98
Mid Cap % 2/4/98
Real Estate % 2/2/98
Value Opportunity % 2/2/98
</TABLE>
CLASS C (without payment of the CDSC)
<TABLE>
<CAPTION>
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
<S> <C> <C> <C> <C>
Money Market % % % 1/3/92
Aetna Government Fund % % 1/4/94
Bond Fund % % % 1/3/92
Balanced % % % 1/3/92
Growth and Income % % % 1/3/92
Growth % % 1/4/94
Index Plus Large Cap % % 12/10/96
Small Company % % 1/4/94
International % % % 1/3/92
Ascent Fund % % 1/4/95
Crossroads Fund % % 1/4/95
Legacy Fund % % 1/4/95
High Yield % 2/2/98
Index Plus Bond % 2/4/98
Index Plus Mid Cap % 2/3/98
Index Plus Small Cap % 2/3/98
Mid Cap % 2/4/98
Real Estate % 2/2/98
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Value Opportunity % 2/2/98
</TABLE>
- ---------------
* The inception dates above represent the commencement of investment operations,
which may not coincide with the effective date of the post-effective amendment
to the registration statement through which the Funds were added.
Performance information for a Fund may be compared, in reports and promotional
literature, to: (a) the Standard & Poor's 500 Stock Index, the Russell 2000
Index, the Russell 3000 Index, Lehman Brothers Aggregate Bond Index, Lehman
Brothers Intermediate Government Bond Index, Merrill Lynch High Yield Index,
Salmon Brothers Broad Investment Grade Bond Index, Dow Jones Industrial Average,
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 a Fund.
From time to time, in reports or promotional literature, the Funds may discuss,
or provide quotes or commentary of their current portfolio managers,
strategists, and other investment personnel, with respect to: the economy;
securities markets; portfolio securities and their issuers; investment
philosophies; strategies; techniques and criteria used in the selection of
securities to be purchased or sold for the Funds; the Funds' portfolio holdings,
including the description or graphical representation of portfolio risk and
other fundamental data; the investment research and analysis process; the
formulation of investment recommendations; and the assessment and evaluation of
credit, interest rate, market and economic risks, and similar or related
matters. The Funds may also quote or reprint all or a portion of evaluations or
descriptions of fund performance and operations appearing in various independent
publications.
From time to time, the Funds may also advertise their performance showing the
cumulative value of an initial or periodic investment in the Funds in various
amounts over specified periods, with capital gain and dividend distributions
invested in additional shares or taken in cash, and with no adjustment for any
income taxes (if applicable) payable by shareholders.
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 any
of the Funds.
The Funds may also include in their advertising examples to illustrate basic
investment concepts, including but not limited to systematic investment, the
effects of compounding, and various tax related concepts, including tax deferred
growth and tax equivalent yield.
FINANCIAL STATEMENTS
The Financial Statements and the independent auditors' reports, thereon,
appearing in the Company's Annual Reports for the year ended October 31, 1999
are incorporated by reference in this Statement. The Company's Annual Reports
are available upon request and without charge by calling (800) 367-7732.
Statement of Additional Information
47
<PAGE>
BROKERAGE CASH RESERVES
PROSPECTUS
March __, 2000
Brokerage Cash Reserves (Fund) is a series of Aetna Series Fund, Inc. (Company),
an open-end investment company.
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.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
THE FUND'S INVESTMENTS 1
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISKS 1
FUND EXPENSES 2
MANAGEMENT OF THE FUND 3
INVESTMENTS IN AND REDEMPTIONS FROM THE FUND 4
DIVIDENDS AND DISTRIBUTIONS 5
TAX INFORMATION 5
FINANCIAL HIGHLIGHTS 6
OTHER CONSIDERATIONS 7
ADDITIONAL INFORMATION 7
<PAGE>
- --------------------------------------------------------------------------------
THE FUND'S INVESTMENTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Investment Objective Seeks to provide HIGH CURRENT RETURN, CONSISTENT WITH
PRESERVATION OF CAPITAL AND LIQUIDITY, through investment in high-quality money
market instruments.
Principal Investment Strategies The Fund invests in a diversified portfolio of
high-quality fixed income securities denominated in U.S. dollars, with short
remaining maturities. These securities include U.S. Government securities (such
as U.S. Treasury bills and securities issued or sponsored by U.S. Government
agencies), corporate debt securities, commercial paper, asset-backed securities
and certain obligations of U.S. and foreign banks, each of which must be highly
rated by independent rating agencies or, if unrated, considered by the Fund's
investment adviser, Aeltus Investment Management, Inc. (Aeltus), to be of
comparable quality. The Fund maintains a dollar-weighted average portfolio
maturity of 90 days or less.
Principal Risks ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT
AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. AN
INVESTMENT IN THE FUND IS NOT A BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY
ANY FINANCIAL INSTITUTION, THE FDIC OR ANY OTHER GOVERNMENT AGENCY. Also, a weak
economy, strong equity markets and changes by the Federal Reserve in its
monetary policies all could affect short-term interest rates and therefore the
value and yield of the Fund's shares. Risks also include adverse changes in the
actual or perceived creditworthiness of issuers and adverse changes in the
economic or political environment.
1
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
The following table describes Fund expenses. Shareholder Fees are paid directly
by shareholders. Annual Fund Operating Expenses are deducted from Fund assets
every year, and are thus paid indirectly by all Fund shareholders.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) on Purchases None
Maximum Deferred Sales Charge (Load) None
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(1)
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and Service (12b-1) Fees %
Other Expenses %
Total Operating Expenses %
Fee Waiver and/or Expense Reimbursement %
Net Expenses %
- --------------------------------------------------------------------------------
(1)Because the Fund was recently organized, the amounts shown for Management Fee
and Distribution and Service (12b-1) Fees are based on anticipated payments.
Other Expenses are estimated amounts for the current fiscal year. The estimates
are based on other funds that have similar investment objectives. The Fund's
actual expenses may not equal the estimate and may be more or less than the
amounts shown. An administrative services fee of 0.10% is included in Other
Expenses.
Aeltus is contractually obligated to waive all or a portion of its investment
advisory fee and/or its administrative services fee and/or to reimburse a
portion of the Fund's other expenses in order to ensure that the Fund's total
operating expenses do not exceed 0.95% of the Fund's average daily net assets.
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*
$ $
* Aeltus is contractually obligated to waive fees and/or reimburse expenses as
stated above. The figures in the example 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.
Long-term shareholders may pay more than the economic equivalent of the maximum
sales charge permitted by the NASD, because of the distribution and shareholder
service (12b-1) fees.
2
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
Aeltus Investment Management, Inc., 10 State House Square, Hartford, Connecticut
06103-3602, serves as the Fund's investment adviser. Aeltus is responsible for
managing the assets of the Fund in accordance with its investment objective and
policies, subject to oversight by the Company's Board of Directors. Aeltus has
acted as adviser or subadviser to mutual funds since 1994 and has managed
institutional accounts since 1972.
Advisory Fees Listed below are the advisory fees that Aeltus is entitled to
receive from the Fund at an annual rate based on the average daily net assets of
the Fund:
Rate Average Daily Net Assets
0.20% On first $1 billion
0.19% On next $2 billion
0.18% Over $3 billion
3
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENTS IN AND REDEMPTIONS FROM THE FUND
- --------------------------------------------------------------------------------
The Fund is utilized as a sweep account for various brokerage firms.
Purchase of Shares By Sweep Your brokerage account will be coded to sweep cash
balances into shares of the Fund. There is a $1,000 minimum initial investment.
Free credit balances arising in your brokerage account from check deposits,
dividend payments, interest payments and other credits will be invested in the
Fund on the business day after posting. Free credit balances arising from the
sale of securities will be invested into the Fund on the business day following
settlement. Your broker will, however, hold back and not invest in the Fund
sufficient monies to pay for security purchases that have not yet settled.
Redemptions
BY CHECKWRITING - Your brokerage firm will provide a checkbook from which you
may write checks made payable to any payee in any amount of $100 or more. The
maximum amount that a check may be written for will depend upon the value of
your Fund shares, other available cash in your brokerage account, and the
available margin loan value of securities in your brokerage account if your
brokerage account is established as a margin account. In order to establish
checkwriting you must complete a signature card which you can obtain from your
Account Executive, Registered Representative or Financial Advisor. There is no
separate charge imposed by the Fund for the checkwriting service. The
checkwriting service enables you to receive the daily dividends declared on the
Fund shares through the day that your check is presented for payment.
BY SWEEP - A sufficient number of shares will be redeemed automatically on
settlement date to pay for all securities transactions. A sufficient number of
shares will also be redeemed to satisfy any withdrawals or debits posted to the
brokerage account.
Orders that are received by the Fund's transfer agent before 2:00 p.m. (eastern
time) will be processed at the Net Asset Value (NAV) calculated that business
day. Orders received after 2:00 p.m. (eastern time) will be processed at the NAV
calculated on the following business day.
Net Asset Value Shares are sold and redeemed on a continuous basis without sales
or redemption charges at their net asset value which is expected to be constant
at $1.00 per share, although this price is not guaranteed. The NAV of each Fund
is determined as of 2:00 p.m. (eastern time) on each day that the New York Stock
Exchange is open for trading (business day). In calculating the NAV, the
securities held by the Fund are valued using amortized cost.
Once your redemption request is received in proper form by the Fund's transfer
agent, the Fund normally will send the proceeds of such redemption within one or
two business days. However, if making immediate payment could adversely affect a
Fund, the Fund may defer distribution for up to seven days or a longer period if
permitted.
ADDITIONAL INFORMATION For more information on the purchase and redemption of
Fund shares, see the Statement of Additional Information (SAI).
4
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Dividends A distribution from net income of the Fund is declared each business
day at 2:00 p.m. (eastern time) and is paid immediately thereafter pro rata to
shareholders of record via automatic investment in additional full and
fractional shares in each shareholder's account at the close of business. As
such additional shares are entitled to dividends on following days, a
compounding growth of income occurs. Capital gains distributions, if any, are
paid on an annual basis in December. To comply with federal tax regulations, the
Fund may also pay an additional capital gains distribution, usually in June.
Fund shares begin to accrue dividends the business day they are purchased. A
redemption of Fund shares will include dividends declared through the business
day prior to the redemption date.
Both income dividends and capital gains distributions, if any, are paid by the
Fund on a per share basis.
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
[bullet] In general, dividends and short-term capital gains distributions you
receive from the Fund are taxable as ordinary income. This is true even
though your distributions are being reinvested.
[bullet] Distributions of other capital gains 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.
Every year, you will be sent 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.
Backup Withholding By law, 31% of your distributions and proceeds must be
withheld if you have not provided complete, correct taxpayer information
to the Fund or your broker-dealer.
5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
These highlights are intended to help you understand the Fund's performance
since commencement of operations. Certain information reflects financial results
for a single Fund share. The total return in the table represents the rate an
investor would have earned on an investment in the Fund (assuming reinvestment
of all dividends and distributions). The information in this table has been
audited by _____, independent auditors, whose report, along with the Fund's
Financial Statements, are included in the Company's Annual Report, which is
available upon request.
Period From ______, 1999
(Date of Initial Public Offering)
to October 31, 1999
- --------------------------------------------------------------------------------
Net asset value, beginning of period.......... $
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.........................
Net realized and change in unrealized
gain or loss on investments..................
- --------------------------------------------------------------------------------
Total from investment operations............
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income.................... -
From net realized gains on investments........ -
- --------------------------------------------------------------------------------
Total distributions......................... -
- --------------------------------------------------------------------------------
Net asset value, end of period................ $
- --------------------------------------------------------------------------------
Total return.................................. %
Net assets, end of period (000's)............. $
Ratio of net expenses to average net
assets....................................... %
Ratio of net investment income to
average net assets........................... %
Ratio of expenses before
reimbursement and waiver to
average net assets........................... %
6
<PAGE>
- --------------------------------------------------------------------------------
OTHER CONSIDERATIONS
- --------------------------------------------------------------------------------
In addition to the principal investments and strategies described on the
previous pages, the Fund may also invest in other securities, engage in other
practices, and be subject to additional risks, as discussed in the SAI.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The SAI, which is incorporated by reference into this Prospectus, contains
additional information about the Fund. The Fund's most recent annual report also
contains information about the Fund's investments, as well as a discussion of
the market conditions and investment strategies that significantly affected its
performance during the past fiscal period.
You may request free of charge the current SAI or the most recent annual report,
or other information about the Fund, by calling 1-800-238-6263 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
EDGAR Database 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 1-202-942-8090 to get
information about the operations of the public reference room. You may obtain
copies of reports and other information about the Fund, after paying a
duplicating fee, by sending an E-mail request to: [email protected] or by
writing to the SEC's Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act File No. 811-6352.
7
<PAGE>
This page is intentionally left blank.
<PAGE>
BROKERAGE CASH RESERVES
STATEMENT OF ADDITIONAL INFORMATION DATED: MARCH__, 2000
Brokerage Cash Reserves (Fund) is a series of Aetna Series Fund, Inc. (Company).
This Statement of Additional Information (Statement) is not a Prospectus and
should be read in conjunction with the Fund's current Prospectus dated March __,
2000. Capitalized terms not defined herein are used as defined in the
Prospectus.
The Fund's Financial Statements and the independent auditors' report thereon,
included in the Company's Annual Report, are incorporated herein by reference in
this Statement. A free copy of the Company's Annual Report and the Prospectus is
available upon request by writing to: Aetna Series Fund, Inc., 10 State House
Square, Hartford, Connecticut 06103-3602, or by calling _____________.
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION............................................................4
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES................................5
INVESTMENT TECHNIQUES AND RISK FACTORS.........................................7
DIRECTORS AND OFFICERS........................................................11
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS....................................14
THE INVESTMENT ADVISORY AGREEMENT.............................................14
THE ADMINISTRATIVE SERVICES AGREEMENT.........................................14
CUSTODIAN.....................................................................15
TRANSFER AGENT................................................................15
INDEPENDENT AUDITORS..........................................................15
PRINCIPAL UNDERWRITER.........................................................15
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS...........................16
PURCHASE AND REDEMPTION OF SHARES.............................................17
BROKERAGE ALLOCATION AND TRADING POLICIES.....................................18
SHAREHOLDER ACCOUNTS AND SERVICES.............................................19
NET ASSET VALUE...............................................................19
TAX STATUS....................................................................19
PERFORMANCE INFORMATION.......................................................20
FINANCIAL STATEMENTS..........................................................21
<PAGE>
GENERAL INFORMATION
INCORPORATION The Company was incorporated under the laws of Maryland on June
17, 1991.
SERIES The Company currently offers multiple series. Brokerage Cash Reserves is
the only series offered through this Statement of Additional Information and the
corresponding Prospectus.
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 a Fund. Upon liquidation of the
Fund, shareholders in the Fund are entitled to share pro rata in the net assets
of the Fund available for distribution to shareholders.
VOTING RIGHTS Shareholders are entitled to one vote for each full share held
(and fractional votes for fractional shares held) and will vote on the election
of Directors and on other matters submitted to the vote of shareholders.
Generally, all shareholders of the Company have voting rights on all matters
except matters affecting only the interests of one series. 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 Fund's Articles of Incorporation 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 Directors 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 Directors 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.
1940 ACT CLASSIFICATION The Company is an open-end management investment
company, as that term is defined under the 1940 Act. The Fund is a diversified
company, as that term is defined under the 1940 Act. The 1940 Act generally
requires that with respect to 75% of its total assets, a diversified company may
not invest more than 5% of its total assets in the securities of any one issuer.
As a matter of operating policy, the Fund may invest no more than 5% of its
total assets in the securities of any one issuer (as determined pursuant to Rule
2a-7 under the 1940 Act), except that the Fund may invest up to 25% of its total
assets in the first tier securities (as defined in Rule 2a-7) of a single issuer
for a period of up to three business days. Fundamental policy number (1), as set
forth below, would give the Fund the ability to invest, with respect to 25% of
its assets, more than 5% of its assets in any one issuer only in the event Rule
2a-7 is amended in the future.
4
<PAGE>
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES
The investment objectives and certain investment policies of the Fund are
matters of fundamental policy for purposes of the 1940 Act and therefore cannot
be changed without the approval of a majority of the outstanding voting
securities of the Fund. This means 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 of the Fund 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) with respect to 75% of the value of the Fund's total assets, hold more
than 5% of the value of its total assets in the securities of any one
issuer or hold more than 10% of the outstanding voting securities of
any one issuer. Securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities are excluded from this restriction;
(2) concentrate its investments in any one industry, although 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 user of their services, such as
automobile finance, computer finance and consumer finance. This
limitation will not apply to the Fund's investment in securities issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities; securities invested in, or repurchase agreements
for, U.S. Government securities; and certificates of deposit, bankers'
acceptances, and securities of banks;
(3) make loans, except that, to the extent appropriate under its investment
program, the Fund may (i) purchase bonds, debentures or other debt
instruments, including short-term obligations; (ii) enter into
repurchase transactions; and (iii) lend portfolio securities provided
that the value of such loaned securities does not exceed one-third of
the Fund's total assets;
(4) issue any senior security (as defined in the 1940 Act), except that (i)
the Fund may enter into commitments to purchase securities in
accordance with the Fund's investment program, including reverse
repurchase agreements, delayed delivery and when-issued securities,
which may be considered the issuance of senior securities; (ii) the
Fund may engage in transactions that may result in the issuance of a
senior security to the extent permitted under applicable regulations,
interpretations of the 1940 Act or an exemptive order; and (iii)
subject to certain fundamental restrictions set forth below, the Fund
may borrow money as authorized by the 1940 Act;
(5) purchase real estate, interests in real estate or real estate limited
partnership interests except that: (i) to the extent appropriate under
its investment program, the Fund may invest in securities secured by
real estate or interests therein or issued by companies, including real
estate investment trusts, which deal in real estate or interests
therein; or (ii)
5
<PAGE>
the Fund may acquire real estate as a result of ownership of securities
or other interests (this could occur for example if the Fund holds a
security that is collateralized by an interest in real estate and the
security defaults);
(6) 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;
(7) borrow money, except that (i) 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; and (ii) for temporary emergency purposes, the
Fund may borrow money in amounts not exceeding 5% of the value of its
total assets at the time the loan is made;
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by the Fund,
the Fund may be deemed to be an underwriter under the provisions of the
Securities Act of 1933 (1933 Act).
The Board has adopted the following other investment restrictions which may be
changed by the Board and without shareholder vote. The Fund will not:
(1) 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;
(2) invest more than 25% of its total assets in securities or obligations
of foreign issuers, including marketable securities of, or guaranteed
by, foreign governments (or any instrumentality or subdivision
thereof). The Fund may only purchase foreign securities or obligations
that are U.S. dollar denominated;
(3) invest in companies for the purpose of exercising control or
management;
(4) purchase interests in oil, gas or other mineral exploration programs;
however, this limitation will not prohibit the acquisition of
securities of companies engaged in the production or transmission of
oil, gas, or other minerals;
(5) invest more than 10% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be
disposed of promptly within seven days and in the usual course of
business without taking a materially reduced price. Such securities
include, but are not limited to, time deposits and repurchase
agreements with maturities longer than seven days. Securities that may
be resold under Rule 144A under, or securities offered pursuant to
Section 4(2) of the 1933 Act, shall not be deemed illiquid solely by
reason of being unregistered. Aeltus Investment Management, Inc.
(Aeltus), the investment adviser, shall determine whether a particular
security is deemed to be liquid based on the trading markets for the
specific security and other factors.
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
6
<PAGE>
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.
The Fund will invest at least 95% of its total assets in high-quality
securities. High-quality securities are those receiving the highest credit
rating by any two nationally recognized statistical rating organizations (or
one, if only one rating organization has rated the security) and meet the
conditions of Rule 2a-7 under the 1940 Act. High-quality securities may also
include unrated securities if Aeltus determines the security to be of comparable
quality.
The remainder of the Fund's assets will be invested in securities rated within
the two highest rating categories by any two nationally recognized statistical
rating organizations (or one, if only one rating organization has rated the
security) and unrated securities if Aeltus determines the security to be of
comparable quality. With respect to this group of securities, the Fund may not,
however, invest more than 1% of the market value of its total assets or $1
million, whichever is greater, in the securities or obligations of a single
issuer.
INVESTMENT TECHNIQUES AND RISK FACTORS
ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities. Asset-backed securities are
collateralized by short-term loans such as automobile loans, home equity loans,
equipment leases or credit card receivables. The payments from the collateral
are generally passed through to the security holder. The average life for these
securities is the conventional proxy for maturity. Asset-backed securities may
pay all interest and principal to the holder, or they may pay a fixed rate of
interest, with any excess over that required to pay interest going either into a
reserve account or to a subordinate class of securities, which may be retained
by the originator. The originator or other party may guarantee interest and
principal payments. These securities may be subject to prepayment risk. In
periods of declining interest rates, reinvestment would thus be made at lower
and less attractive rates.
ZERO COUPON SECURITIES
The Fund may invest in zero coupon securities. Zero coupon 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.
7
<PAGE>
Zero coupon securities are also subject to the risk that in the event of a
default, the Fund may realize no return on its investment, because these
securities do not pay cash interest.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards approved by
the Board. Under a repurchase agreement, the Fund may acquire a debt instrument
for a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase and the Fund to resell the instrument at
a fixed price and time, thereby determining the yield during the Fund's holding
period. This results in a fixed rate of return insulated from market
fluctuations during such period. Such underlying debt instruments serving as
collateral will meet the quality standards of the Fund. The market value of the
underlying debt instruments will, at all times, be equal to the dollar amount
invested even though the maturity of the underlying instruments may exceed the
397-day maturity limitation of the Fund. Repurchase agreements, although fully
collateralized, involve the risk that the seller of the securities may fail to
repurchase them from the Fund. In that event, the Fund may incur (a) disposition
costs in connection with liquidating the collateral, or (b) a loss if the
collateral declines in value. Also, if the default on the part of the seller is
due to insolvency and the seller initiates bankruptcy proceedings, the Fund's
ability to liquidate the collateral may be delayed or limited. Repurchase
agreements maturing in more than seven days will not exceed 10% of the total
assets of the Fund.
VARIABLE RATE DEMAND INSTRUMENTS
The Fund may invest in variable rate demand instruments. Variable rate demand
instruments held by the Fund may have maturities of more than one year,
provided: (i) the Fund is entitled to the payment of principal at any time, or
during specified intervals not exceeding one year, upon giving the prescribed
notice (which may not exceed 30 days), and (ii) the rate of interest on such
instruments is adjusted at periodic intervals not to exceed one year. In
determining whether a variable rate demand instrument has a remaining maturity
of one year or less, each instrument will be deemed to have a maturity equal to
the longer of the period remaining until its next interest rate adjustment or
the period remaining until the principal amount can be recovered through demand.
The Fund will be able (at any time or during specified periods not exceeding one
year, depending upon the note involved) to demand payment of the principal of a
note. If an issuer of a variable rate demand note defaulted on its payment
obligation, the Fund might be unable to dispose of the note and a loss would be
incurred to the extent of the default. The Fund will invest in variable rate
demand notes only when the investment is deemed to involve minimal credit risk.
The continuing creditworthiness of issuers of variable rate demand notes held by
the Fund will also be monitored to determine whether such notes should continue
to be held. Variable and floating rate instruments with demand periods in excess
of seven days and which cannot be disposed of promptly within seven business
days and in the usual course of business without taking a reduced price will be
treated as illiquid securities.
8
<PAGE>
FOREIGN SECURITIES
The Fund may invest in foreign securities denominated in U.S. dollars.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include adverse foreign political and economic developments and the
possible imposition of exchange controls or other foreign governmental laws or
restrictions. With respect to certain countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability,
or diplomatic developments that could adversely affect investments in those
countries.
There may be less publicly available information about a foreign issuer than
about a U.S. company, and foreign issuers may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or as
uniform as those of U.S. issuers. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than U.S. markets.
Securities of many foreign issuers are less liquid and their prices more
volatile than securities of comparable U.S. issuers. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the U.S. In addition, the
Company might have greater difficulty taking appropriate legal action with
respect to foreign investments in non-U.S. courts than with respect to domestic
issuers in U.S. courts.
All these risks usually are higher in emerging markets, such as most countries
in Africa, Asia, Latin America and the Middle East, than in more established
markets, such as Western Europe.
SUPRANATIONAL AGENCIES
The Fund may invest up to 10% of its net assets in securities of supranational
agencies. These securities are not considered government securities and are not
supported directly or indirectly by the U.S. Government. Examples of
supranational agencies include, but are not limited to, the International Bank
for Reconstruction and Development (commonly referred to as the World Bank),
which was chartered to finance development projects in developing member
countries; the European Community, which is a twelve-nation organization engaged
in cooperative economic activities; the European Coal and Steel Community, which
is an economic union of various European nations' steel and coal industries; and
the Asian Development Bank, which is an international development bank
established to lend funds, promote investment and provide technical assistance
to member nations in the Asian and Pacific regions.
BORROWING
The Fund may borrow up to 5% of the value of its total assets from a bank for
temporary or emergency purposes. The Fund does not intend to borrow.
BANK OBLIGATIONS
The Fund may invest in obligations issued by domestic or foreign banks
(including banker's acceptances, commercial paper, bank notes, time deposits and
certificates of deposit).
9
<PAGE>
MATURITY POLICIES
The average dollar-weighted maturity of securities in the Fund's portfolio will
not exceed ninety days. In addition, all investments in the Fund's portfolio
will have a maturity at the time of purchase, as defined under the federal
securities laws, of 397 calendar days or less.
10
<PAGE>
DIRECTORS AND OFFICERS
The investments and administration of the Company are under the supervision of
the Board. The Directors and executive officers of the Company 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 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
NAME, POSITION(S) HELD (AND 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 (Principal Executive Officer, Chief Financial Officer, Aeltus Investment
Hartford, Connecticut Officer) Management, Inc., October 1997 to present; Director
Age 45 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 Services,
Hartford, Connecticut Inc., July 1993 to May 1998.
Age 56
- ----------------------------------------------------------------------------------------------------------------------
Albert E. DePrince, Jr. Director Professor, Middle Tennessee State University, 1991
3029 St. Johns Drive 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 46 (Principal Financial and Life Insurance and Annuity Company, August 1994
Accounting Officer) to November 1995; Assistant Vice President,
Investors Bank & Trust, January 1993 to August 1994.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<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 Life
Hartford, Connecticut Insurance and Annuity Company, December 1996 to
Age 37 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 and
Closter, New Jersey Alcohol Services, 1973 to present.
Age 56
- ----------------------------------------------------------------------------------------------------------------------
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, Chief
10 State House Square Investment Officer, Aeltus Investment Management,
Hartford, Connecticut Inc., December 1995 to present; Director, Aetna
Age 39 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 50 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 Age 44 1991 to present; Director, Aetna Investment
Services, Inc., July 1993 to present; Senior Vice
President, Aetna Investment Services, Inc., July 1993
to February, 1999.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<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 year ended October 31, 1999, 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 Company. For the year ended October 31,
1999 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NAME OF PERSON AGGREGATE COMPENSATION TOTAL COMPENSATION FROM THE COMPANY
POSITION FROM THE COMPANY AND FUND COMPLEX PAID TO DIRECTORS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corine Norgaard $ $
Director
- ----------------------------------------------------------------------------------------------------------------------
Sidney Koch
Director
- ----------------------------------------------------------------------------------------------------------------------
Maria T. Fighetti*
Director
- ----------------------------------------------------------------------------------------------------------------------
Richard G. Scheide
Director, Chairperson
Audit Committee
- ----------------------------------------------------------------------------------------------------------------------
David L. Grove*
Director, Chairperson
Contract Committee
- ----------------------------------------------------------------------------------------------------------------------
Albert E. DePrince, Jr.
Director
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*During the year ended October 31, 1999, Ms. Fighetti and Dr. Grove deferred
$_______ and $_______, respectively, of their compensation from the Fund
Complex.
13
<PAGE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
To the knowledge of the Fund, the following persons owned of record 5% or more
of the outstanding shares of the Fund as of November 30, 1999:
% of outstanding shares
Pershing Division of Donaldson, Lufkin
& Jenrette Securities Corporation 100.00%
1 Pershing Plaza
Jersey City, NJ 07399-0002
THE INVESTMENT ADVISORY AGREEMENT
The Company, on behalf of the Fund, has 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. Aeltus is
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 Directors of the Company and that the Fund is responsible for
payment of all other of its costs.
Listed below are the Advisory Fees that Aeltus is entitled to receive from the
Fund at an annual rate based on average daily net assets of the Fund:
Rate Average Daily Net Assets
0.20% On first $1 billion
0.19% On next $2 billion
0.18% Over $3 billion
For the period from September 7, 1999 (commencement of operations) to October
31, 1999, investment advisory fees were paid to Aeltus as follows:
Total Investment Advisory fees Waiver Net Advisory Fees Paid
------------------------------ ------ ----------------------
THE ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Administrative Services Agreement, Aeltus acts as administrator
and provides certain administrative and shareholder services necessary for Fund
operations and is responsible for the supervision of other service providers.
The services provided by Aeltus include: (a) internal accounting services; (b)
monitoring regulatory compliance, such as reports and filings
14
<PAGE>
with the Commission and state securities regulatory authorities; (c) preparing
financial information for proxy statements; (d) preparing semiannual and annual
reports to shareholders; (e) calculating net asset values; (f) preparation of
certain shareholder communications; (g) supervision of the custodians 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. For the period from September 7,
1999 (commencement of operations) to October 31, 1999, administrative services
fees were paid to Aeltus as follows:
Total Administrative Administrator Net Administrative
Services Fees Waiver Services Fees Paid
------------- ------ ------------------
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258,
serves as custodian for the Fund's assets. The custodian does not participate in
determining the investment policies of the Fund or 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.
TRANSFER AGENT
PFPC Inc., 4400 Computer Drive, Westborough, Massachusetts 01581, serves as the
transfer agent and dividend-paying agent to the Fund.
INDEPENDENT AUDITORS
_______, CityPlace II, Hartford, Connecticut 06103 serves as independent
auditors to the Company. _____________ provides audit services, assistance and
consultation in connection with the Commission filings.
PRINCIPAL UNDERWRITER
Shares of the Fund are offered on a continuous basis. Aeltus Capital, Inc.
(ACI), 10 State House Square, Hartford, Connecticut 06103-3602, serves as the
Company's principal underwriter. ACI is a Connecticut corporation, and is a
wholly-owned subsidiary of Aeltus and an indirect wholly-owned subsidiary of
Aetna 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 Company.
15
<PAGE>
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS
Fund shares are distributed by ACI. ACI is paid an annual distribution fee at
the rate of 0.50% of the value of average daily net assets attributable to the
Fund's shares under a Distribution Plan adopted by the Company pursuant to Rule
12b-1 under the 1940 Act ("Distribution Plan"). The Fund's distribution fee may
be used to cover expenses incurred in promoting the sale of Fund 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. ACI may reallow all or a
portion of these fees to broker-dealers entering into selling agreements with
it, including its affiliates.
The Fund is 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 0.15% of the average daily net assets of the Fund's shares. The
Service Fee will be used by ACI primarily to pay selling dealers and their
agents for servicing of and recordkeeping for 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.
For the period from September 7, 1999 (commencement of operations) to October
31, 1999, total Shareholder Services and Distribution fees of $__________ were
paid to ACI. Fees in the amount of $______ were waived.
The Distribution Plan 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 Plan 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 Plan must be approved
by the Board in the manner described above. The Distribution Plan 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 Plan. All persons who are under common control
with the Fund could be deemed to have a financial interest in the Plan. No other
interested person of the Fund has a financial interest in the Plan.
For the period from September 7, 1999 (commencement of operations) to October
31, 1999, approximately $___, $___, $___, $___, $___ and $____ of the Company's
total distribution expenses were expended in connection with advertising,
printing and mailing of prospectuses to other than current shareholders,
compensation to underwriters, compensation to broker-dealers and compensation to
sales personnel, respectively.
16
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are purchased and redeemed at the Fund's net asset value next
determined after a purchase or redemption order is received, as described in the
Prospectus.
Except as provided below, 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.
Purchases should be made for investment purposes only. The Fund reserves the
right to reject any specific purchase.
ACCOUNTS NOT MAINTAINED THROUGH FINANCIAL INTERMEDIARIES
If you are a Fund shareholder who is directly registered with the Fund, you may:
[bullet] purchase additional shares of the Fund by sending a letter indicating
your name, account number(s), the name of the Fund and the amount you
want to invest in the Fund. Make your check payable to Aetna Series
Fund, Inc. and mail to:
Aetna Series Fund, Inc.
c/o PFPC Inc.
P. O. Box 9663
Providence, RI 02940
Your check must be drawn on a bank located within the United States and
payable in U.S. dollars. The Fund will accept checks which are made
payable to you and endorsed to Aetna Series Fund, Inc.
[bullet] redeem shares you own by sending written instructions to:
Aetna Series Fund, Inc.
c/o PFPC Inc.
P. O. Box 9681
Providence, RI 02940
Your instructions should identify the Fund, the number of shares or
dollar amount to be redeemed, your name and account number. Your
instructions must be signed by all person(s) required to sign for the
Fund account, exactly as the shares are registered. You
17
<PAGE>
also may redeem shares you own by calling the Transfer Agent at
1-800-367-7732. Please be prepared to provide your account number,
account name and the amount of the redemption.
Once your redemption request is received in good order as described
below, the Fund normally will send the proceeds of such redemption
within one or two business days. However, if making immediate payment
could adversely affect the Fund, the Fund 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 hold payment of
redemption proceeds until a purchase check or systematic investment
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.
A signature guarantee is verification of the authenticity of the
signature given by certain authorized institutions. In addition, if you
wish to have your redemption proceeds 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.
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 of the New York, American,
Boston, Midwest, or Pacific Stock Exchanges. Please note that signature
guarantees are not provided by notaries public.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Board, Aeltus has responsibility for making the
Fund's investment decisions, for effecting the execution of trades for the
Fund's portfolio, and for negotiating the price for any securities, including
any markups, markdowns, or commissions thereon. It is Aeltus' policy to obtain
the best execution available, giving attention to net price, 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.
Purchases and sales of portfolio securities will usually be made through
principal transactions, which will result in the payment of no brokerage
commissions. In such transactions, portfolio securities will normally be
purchased directly from or sold to the issuer or an underwriter or market-maker
for these securities.
Aeltus acts as investment adviser to other investment companies registered under
the 1940 Act. Aeltus has adopted policies designed to prevent disadvantaging the
Fund in placing orders for the purchase and sale of securities. The Fund and
another advisory client of Aeltus or Aeltus itself, may desire to buy or sell
the same security at or about the same time. In such a case, the purchases or
sales will normally be aggregated, and then allocated as nearly as practicable
on a
18
<PAGE>
pro rata basis in proportion to the amounts to be purchased or sold by
each. In determining the amounts to be purchased and sold, the main factors to
be considered are the respective investment objectives of the Fund and the other
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.
For the period from September 7, 1999 (commencement of operations) to October
31, 1999, brokerage commissions of $_____ were paid.
The Fund has not effected, and has no present intention of effecting, any
brokerage transactions in portfolio securities with Aeltus or any other
affiliated person of the Company.
The Company, Aeltus and ACI each have adopted a Code of Ethics (in accordance
with Rule 17j-1 under the 1940 Act). The Codes of Ethics allow personnel subject
to the Codes to invest in securities, including securities that may be held by a
fund; however, the Codes prohibit a person from taking advantage of fund trades
or from acting on inside information.
SHAREHOLDER ACCOUNTS AND SERVICES
SHAREHOLDER INFORMATION
Confirmations and account statements will be sent to you by either the Fund's
transfer agent or your broker-dealer. 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.
NET ASSET VALUE
Securities of the Fund 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.
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 Fund 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 a Fund does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to
19
<PAGE>
the shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits.
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 a 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. 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.
PERFORMANCE INFORMATION
Performance information, including the yield, effective yield and total return
of the Fund, may appear in reports or promotional literature to current or
prospective shareholders.
YIELDS
Current yield will be based on a recently ended seven-day period, computed by
determining the net change, exclusive of capital changes and income other than
investment income, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from that shareholder account, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return. This base period return is then multiplied by
365/7 with the resulting yield figure carried to at least the nearest hundredth
of one percent. Calculation of "effective yield" begins with the same "base
period return" used in the calculation of yield, which is then annualized to
reflect weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1)(365/7)] - 1
20
<PAGE>
The yield and effective yield for the Fund for the seven days ended October 31,
1999 were ____% and ___%, respectively.
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, five and ten 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, 5, or 10 year period at the end of the 1, 5, or 10 year
period (or fractional portion thereof).
The Fund's total return for the period from September 7, 1999 (commencement of
operations) to October 31, 1999, is ___%.
Performance information for the Fund may be compared, in reports and promotional
literature, to the IBC Money Funds Report Average/All Taxable Index or other
indices; (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.
FINANCIAL STATEMENTS
The Financial Statements and the independent auditors' report thereon are
incorporated by reference in this Statement. The Company's Annual Report is
available upon request and without charge by calling ___________.
Statement of Additional Information
21
<PAGE>
AETNA SERIES FUND, INC.
AETNA PRINCIPAL PROTECTION FUND III
PROSPECTUS
________, 2000
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 III (Fund). The Offering Period will run from March 1, 2000
through May 31, 2000. All monies must be received no later than May 30, 2000.
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
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 10
OTHER INFORMATION ABOUT SHAREHOLDER ACCOUNTS AND SERVICES 11
DIVIDENDS AND DISTRIBUTIONS 12
TAX INFORMATION 12
ADDITIONAL INFORMATION 13
<PAGE>
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES
AND RISKS
Aetna Principal Protection Fund III (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 March 1, 2000 through May 31, 2000.
All applications must be received by the transfer agent no later than May 30,
2000 (April 14, 2000 in the case of IRA rollovers). All monies must be received
no later than May 30, 2000. During the Offering Period, Fund assets will be
invested exclusively in short-term instruments. Once the Offering Period
terminates, the Guarantee Period begins. The GUARANTEE PERIOD will run from June
1, 2000 through May 31, 2005 (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
Aetna Series Fund, Inc. (Company) for the benefit of the Fund by MBIA Insurance
Corporation (MBIA), an AAA/Aaa rated monoline financial guarantor.
The Fund is a series of the 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 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 in the Equity Component
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 Investors Services, Inc., futures on U.S. Treasury securities and money
market instruments.
1
<PAGE>
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 the first day of the Guarantee Period 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' ability to allocate 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 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.
2
<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>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(1)
(expenses that are deducted from Fund assets)
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.
3
<PAGE>
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.
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 issued 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.
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 (May 31, 2000), the NAV for Class A shares has increased to
$10.02. Your Guaranteed Amount is based on the NAV determined on the evening of
May 31, 2000. To calculate your full guarantee, multiply the shares you own on
May 31, 2000 by the NAV for your class of shares on May 31, 2000. Using our
example:
Shares you own on May 31, 2000 1,905.000
NAV of Class A shares on May 31, 2000 x $10.02
YOUR GUARANTEED AMOUNT $19,088.10
4
<PAGE>
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 Guaranteed 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.
Using our example, assume it is now December 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 December 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 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 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.
5
<PAGE>
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.
6
<PAGE>
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.
<TABLE>
<CAPTION>
THIS % IS DEDUCTED WHICH EQUALS THIS %
FOR SALES CHARGES OF YOUR INVESTMENT
WHEN YOU INVEST THIS AMOUNT
<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:
7
<PAGE>
WHEN YOU INVEST THIS AMOUNT THIS % IS DEDUCTED FROM YOUR PROCEEDS
$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%
CLASS B SHARES
[bullet] No front-end sales charge applies.
[bullet] CDSC applies (if you sell your shares prior to the Maturity Date).
[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.
SALES CHARGES: CLASS B SHARES The Fund imposes a CDSC on redemptions made prior
to the Maturity Date. The table below shows the applicable CDSC based on the
time invested.
REDEMPTION DURING CDSC
Offering Period or 1st year of
Guarantee Period 5%
2nd year of Guarantee Period 4%
3rd year of Guarantee Period 3%
4th year of Guarantee Period 3%
5th year of Guarantee Period 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.
8
<PAGE>
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 of Fund shares.
ALL APPLICATIONS MUST BE RECEIVED BY THE TRANSFER AGENT NO LATER THAN MAY 30,
2000 (APRIL 14, 2000 IN THE CASE OF IRA ROLLOVERS). MONIES RECEIVED AFTER
MAY 30, 2000 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.
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT
<S> <C>
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 PFPC 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 NO LATER THAN MAY 30, 2000. Cash, credit cards and
third party checks cannot be used to open an account.
- ------------------------------------------------------------------------------------------------------------------------------------
BY OVERNIGHT Follow the instructions above for "By Mail" but send your completed application
COURIER and check to:
Aetna Series Fund, Inc.
c/o PFPC Inc.
4400 Computer Drive
Westborough, MA 01581
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BY WIRE Not Available.
- ------------------------------------------------------------------------------------------------------------------------------------
BY ELECTRONIC Not Available.
FUNDS TRANSFER
</TABLE>
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 may be made in writing or, in amounts up to $50,000, by
telephone. The Company requires a signature guarantee if the amount of the
redemption request is over $50,000. 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 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.
9
<PAGE>
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.
<TABLE>
<S> <C>
REDEMPTIONS BY MAIL You may redeem shares you own by sending written instructions to:
Aetna Series Fund, Inc.
c/o PFPC 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 provide your account number, account
TELEPHONE name and the amount of the redemption, which generally must be no less than $500
and no more than $50,000.
</TABLE>
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 MAY 30, 2000 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 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.
10
<PAGE>
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.
Telephone redemption requests will be accepted if the request is for a minimum
of $500 or a maximum of $50,000. 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).
11
<PAGE>
[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 LATER THAN APRIL 14, 2000.
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 other 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 The tax treatment of any amounts paid to the
Fund or shareholders pursuant to the Guarantee is unclear. The Guarantee is a
relatively new feature that has not previously been offered by many other mutual
funds. Accordingly, shareholders are urged to consult their tax advisers about
the tax treatment of any payments that may be made under the Guarantee.
Any withholding of taxes on distributions by the Fund will result in a reduction
of the benefit under the Guarantee.
12
<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
Edgar Database 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 1-202-942-8090 to get
information on the operations of the public reference room. You may obtain
copies of reports and other information about the Fund, after paying a
duplicating fee, by sending an E-mail request to: [email protected], or by
writing to the SEC's Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act File No. 811-6352.
13
<PAGE>
This page is intentionally left blank.
<PAGE>
AETNA SERIES FUND, INC.
AETNA PRINCIPAL PROTECTION FUND III
STATEMENT OF ADDITIONAL INFORMATION DATED MARCH __, 2000
This Statement of Additional Information (Statement) is not a Prospectus and
should be read in conjunction with the current Prospectus for Aetna Principal
Protection Fund III, 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 Aetna Principal
Protection Fund III (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.
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 STATEMENT OF ADDITIONAL INFORMATION 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. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS.
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION...........................................................1
INVESTMENT OBJECTIVE AND RESTRICTIONS.........................................2
INVESTMENT TECHNIQUES AND RISK FACTORS........................................3
OTHER CONSIDERATIONS..........................................................7
THE ASSET ALLOCATION PROCESS..................................................8
DIRECTORS AND OFFICERS OF THE FUND............................................9
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........................................................16
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS..........................16
PURCHASE AND REDEMPTION OF SHARES............................................19
BROKERAGE ALLOCATION AND TRADING POLICIES....................................22
SHAREHOLDER ACCOUNTS AND SERVICES............................................23
NET ASSET VALUE..............................................................23
TAX STATUS...................................................................25
PERFORMANCE INFORMATION......................................................26
<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 III (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.
3
<PAGE>
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 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.
4
<PAGE>
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% 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.
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.
5
<PAGE>
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.
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.
6
<PAGE>
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.
OTHER CONSIDERATIONS
Acceptance of Deposits During Guarantee Period
The Fund reserves the right to accept additional deposits during the Guarantee
Period 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
7
<PAGE>
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 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.
8
<PAGE>
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 46 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 56
- --------------------------------------------------------------------------------------------------------------------
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 39 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 50 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 Age 44 1991 to present; Director, Aetna Investment
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, 1999, 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, 1999, 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
- --------------------------------------------------------------------------------
Sidney Koch
Director
- --------------------------------------------------------------------------------
Maria T. Fighetti*
Director
- --------------------------------------------------------------------------------
Richard G. Scheide
Director, Chairperson Audit
Committee
- --------------------------------------------------------------------------------
David L. Grove*
Director, Chairperson
Contract Committee
- --------------------------------------------------------------------------------
Albert E. DePrince, Jr.
Director
- --------------------------------------------------------------------------------
*During the fiscal year ended October 31, 1999, Ms. Fighetti and Dr. Grove
elected to defer compensation in the amount of $ and $ , 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 Inc.
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, 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 Company for the benefit of
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 the custodian to sell securities
and replace them with such eligible securities as are necessary to bring the
Fund's allocation of assets in compliance with the terms of the Financial
Guarantee Agreement.
12
<PAGE>
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 or
its affiliate, Russell/Mellon Analytical Services, LLC, 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 Company for the benefit of 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
PFPC Inc., 4400 Computer Drive, Westborough, Massachusetts 01581 serves as the
transfer agent and dividend-paying agent to the Fund.
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.
13
<PAGE>
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 December 15,
1999 to continue through December 31, 2000. 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 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.
14
<PAGE>
<TABLE>
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 3.00
$250,000 or more, but under $500,000 2.00
$500,000 or more, but under $1,000,000 1.50
</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:
<TABLE>
<CAPTION>
Commission
----------
<S> <C>
[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%
</TABLE>
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.
From time to time, ACI or its affiliates may make payments to other dealers
and/or their agents, who may not be affiliates of Aetna, who sell shares or who
provide shareholder services.
In addition, ACI or its affiliates may, from time to time, make payments to
clearing firms that offer networking services which make the Fund available to
their customers. Such payments will not exceed 0.10% of the Fund's average daily
net assets.
The value of a shareholder's investment will be unaffected by these payments.
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 May 11, 2000 (April 3, 2000 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 prior to the redemption (in the case of Class A shares) or shares
redeemed prior to the Maturity Date (in the case of Class B shares).
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.
17
<PAGE>
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
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.
18
<PAGE>
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.
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.
19
<PAGE>
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.
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
The tax treatment of any amounts paid to the Fund or shareholders pursuant to
the Guarantee is unclear. The Guarantee is a relatively new feature that has not
previously been offered by many other mutual funds. Accordingly, shareholders
are urged to consult their tax advisers about the tax treatment of any payments
that may be made under the Guarantee.
Any withholding of taxes on distributions by the Fund will result in a reduction
of the benefit 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) Certificate of Correction (September 22, 1999(7)
(a.9) Articles Supplementary (September 27, 1999)(7)
(a.10) Articles Supplementary (_____________)*
(b) By-laws (as amended September 13, 1994)(8)
(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. (Aeltus) 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 and Aetna Series
Fund, Inc., on behalf of Aetna Principal Protection Fund I
(PPF I)(6)
(d.3) Investment Advisory Agreement between Aeltus and Aetna Series
Fund, Inc., on behalf of Aetna Principal Protection Fund II
(PPF II)(7)
(d.4) Investment Advisory Agreement between Aeltus and Aetna Series
Fund, Inc., on behalf of Aetna Principal Protection Fund III
(PPF III)*
(d.5) Investment Advisory Agreement between Aeltus and Aetna Series
Fund, Inc., on behalf of Brokerage Cash Reserves(6)
(d.6) Investment Advisory Agreement between Aeltus and Aetna Series
Fund, Inc., on behalf of Aetna Technology Fund*
(d.7) Subadvisory Agreement among Aeltus, Aetna Series Fund, Inc.,
on behalf of Aetna Technology Fund and Elijah Asset
Management, LLC*
(e.1) Underwriting Agreement between Aeltus Capital, Inc. and Aetna
Series Fund, Inc.(7)
(e.2) Master Selling Dealer Agreement(3)
<PAGE>
(f) Directors' Deferred Compensation Plan (1)
(g.1) Custodian Agreement - Mellon Bank, N.A. (September 1, 1992)(8)
(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)(8)
(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. (October
4, 1999)(7)
(g.9) Amendment to Custodian Agreement - Mellon Bank, N.A. (_______,
1999)*
(g.10) Custodian Agreement - Brown Brothers Harriman & Company (Aetna
International Fund) (December 12, 1991)(10)
(h.1) Administrative Services Agreement between Aeltus 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
and Aetna Series Fund, Inc., on behalf of PPF I(6)
(h.3) Amendment to Administrative Services Agreement between Aeltus
and Aetna Series Fund, Inc., on behalf of PPF II(7)
(h.4) Amendment to Administrative Services Agreement between Aeltus
and Aetna Series Fund, Inc., on behalf of PPF III*
(h.5) Amendment to Administrative Services Agreement between Aeltus
and Aetna Series Fund, Inc., on behalf of Brokerage Cash
Reserves(6)
(h.6) Amendment to Administrative Services Agreement between Aeltus
and Aetna Series Fund, Inc., on behalf of Aetna Technology
Fund*
(h.7) License Agreement(8)
(h.8) Transfer Agent Agreement(4)
(h.9) Amendment No. 1 to the Transfer Agency and Services
Agreement(11)
(h.10) Amendment No. 2 to the Transfer Agency and Services
Agreement(11)
(h.11) Amendment No. 3 to the Transfer Agency and Services
Agreement(5)
(h.12) Amendment No. 4 to the Transfer Agency and Services
Agreement(7)
(h.13) Amendment No. 5 to the Transfer Agency and Services
Agreement(12)
(h.14) Amendment No. 6 to the Transfer Agency and Services Agreement*
(h.15) Financial Guaranty Agreement among Aetna Series Fund, Inc.,
Aeltus and MBIA(7)
<PAGE>
(h.16) Custodian Service Agreement among Aetna Series Fund, Inc.,
on behalf of PPF I, MBIA, and Mellon Bank, N.A.
(h.17) Custodian Monitoring Agreement among Aetna Series Fund,
Inc., on behalf of PPF I, MBIA, and Russell/Mellon
Analytical Services, LLC (Russell/Mellon)
(h.18) Custodian Service Agreement among Aetna Series Fund, Inc.,
on behalf of PPF II, MBIA, and Mellon Bank, N.A.
(h.19) Custodian Monitoring Agreement among Aetna Series Fund,
Inc., on behalf of PPF II, MBIA, and Russell/Mellon
Analytical Services, LLC (Russell/Mellon)
(h.20) Custodian Service Agreement among Aetna Series Fund, Inc., on
behalf of PPF III, MBIA, and Mellon Bank, N.A.*
(h.21) Custodian Monitoring Agreement among Aetna Series Fund,
Inc., on behalf of PPF III, MBIA, and Russell/Mellon
Analytical Services, LLC (Russell/Mellon)*
(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)(7)
(m.2) Distribution Plan (Class C)(5)
(m.3) Distribution Plan (Class B)(7)
(m.4) Distribution Plan (Brokerage Cash Reserves)(6)
(m.5) Shareholder Service Plan (Class C)(5)
(m.6) Shareholder Service Plan (Class B)(7)
(m.7) Shareholder Service Plan (Brokerage Cash Reserves)(6)
(n) Not applicable
(o) Multiple Class Plan(7)
(p.1) Power of Attorney (November 6, 1998)(11)
(p.2) Authorization for Signatures(13)
*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.
<PAGE>
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. 34 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on October 6, 1999.
8. 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.
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.
12. Incorporated herein by reference to Post-Effective Amendment No. 36 to
Registration Statement on Form N-1A (File No. 33-41694), as filed with the
Securities and Exchange Commission on December 10, 1999.
13. 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 November 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 25.91%
Aetna Bond Fund 55.06% 49.63%
Aetna Government Fund 82.71% 63.93%
Aetna Growth Fund 15.60%
Aetna Growth and Income Fund 15.79%
Aetna High Yield Fund 97.67% 15.28% 32.72%
Aetna Index Plus Bond Fund 99.74% 6.32% 29.44% 28.93%
Aetna Index Plus Large Cap Fund 46.34%
Aetna Index Plus Mid Cap Fund 97.67% 3.56% 24.19%
Aetna Index Plus Small Cap Fund 97.51% 3.70% 41.92%
Aetna International Fund 24.82% 46.39%
Aetna Mid Cap Fund 97.88% 16.61% 90.12% 70.12%
Aetna Money Market Fund 50.12%
Aetna Real Estate Securities Fund 95.87% 10.09% 70.99% 46.98%
Aetna Small Company Fund 51.07% 80.52%
Aetna Value Opportunity Fund 96.23% 12.89% 61.95% 35.65%
Aetna Ascent Fund 84.13% 93.05%
Aetna Crossroads Fund 91.02% 100.00%
Aetna Legacy Fund 79.38% 84.94%
</TABLE>
Aetna is an indirect wholly owned subsidiary of Aetna Inc.
As of November 30, 1999, Pershing Division of Donaldson, Lufkin &
Jenrette Securities Corporation, 1 Pershing Plaza, Jersey City, NJ
07399-0002, owned 100.00% of the outstanding shares of Brokerage Cash
Reserves.
A list of persons directly or indirectly under common control with
the Registrant and a list which indicates the principal business of each
such company referenced in the diagram are incorporated herein by
reference to Item 26 of the Registration Statement on Form N-4 (File No.
333-56297), as filed with the Securities and Exchange Commission on
November 23, 1999.
Item 25. Indemnification
- ------------------------
<PAGE>
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 officers and directors are
covered under a directors and officers/errors and omissions liability
insurance policy issued by ICI Mutual Insurance Company which expires
October 1, 2002.
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 as Exhibit
(e.1) to Registrant's Statement on Form N-1A (File No. 33-41694), as
filed on October 6, 1999, 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.
The following table summarizes the business connections of the directors and
principal officers of the Investment Adviser.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1997/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 Retirement
Chief Operating Officer, Chief Services, Inc.; Director and Senior Vice President
Financial Officer (March 1997 - February 1998) -- Aetna Life Insurance
and Annuity Company.
Thomas J. McInerney Director President (since August 1997) -- Aetna Retirement
Services, Inc.; Director and President (since
September 1997) - Aetna Life Insurance and Annuity
Company; Executive Vice President (since August
1997) -- Aetna Inc.
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.
Stephanie A. DeSisto Vice President
Amy R. Doberman Vice President, General Counsel Counsel (since December 1996) - Aetna Life Insurance
and Secretary and Annuity Company.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1997/Addresses*
----------------------- ------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Neil Kochen Managing Director, Equity Managing Director (since April 1996) -- Aeltus Trust
Investments Company; Managing Director (since August 1996) --
Aeltus Capital, Inc.
Frank Litwin Managing Director, Retail
Marketing and Sales
L. Charles Meythaler Managing Director, Institutional Director (since July 1997) -- Aeltus Trust Company;
Marketing Managing Director (since June 1997) -- Aeltus Trust
and Sales Company.
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 Elijah Asset Management, LLC (EAM), the subadviser for
Aetna Technology Fund, reference is made to the section entitled "Subadviser" in
the Class A, Class B and Class C Prospectus, the Class I Prospectus and the
Statement of Additional Information each dated March __, 2000. For information
as to the business, profession, vacation or employment of a substantial nature
of each of the directors and principal officers of EAM, reference is made to
EAM's current Form ADV (File No. 801-56227) 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
Amy R. Doberman Vice President, General Counsel and Secretary Secretary
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
- ----------------- -------------------------- ---------------
<S> <C> <C>
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 (and its subadviser,
EAM, in the case of Aetna Technology Fund), maintain physical possession
of each account, book or other document, at 10 State House Square,
Hartford, Connecticut 06103-3602 or 100 Pine Street, Suite 420, San
Francisco, California 94111.
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.
Item 30. Undertakings
- ---------------------
Not applicable
<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 16th day of December, 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.
Signature Title Date
- --------- ----- ----
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 ) December
- -------------------------- ) 16th, 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 )
<PAGE>
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) )
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>
99-(h.16) Custodian Service Agreement among Aetna Series
Fund, Inc., on behalf of PPF I, MBIA, and Mellon
Bank, N.A. -----------------
99-(h.17) Custodian Monitoring Agreement among Aetna Series Fund, Inc., on behalf
of PPF I, MBIA, and Russell/Mellon Analytical Services, LLC
(Russell/Mellon) -----------------
99-(h.18) Custodian Service Agreement among Aetna Series
Fund, Inc., on behalf of PPF II, MBIA, and
Mellon Bank, N.A. -----------------
99-(h.19) Custodian Monitoring Agreement among Aetna Series Fund, Inc., on behalf
of PPF II, MBIA, and Russell/Mellon Analytical Services, LLC
(Russell/Mellon) -----------------
99-(i) Opinion and Consent of Counsel -----------------
</TABLE>
Exhibit h.16
Custodian Service Agreement
<PAGE>
CUSTODIAN SERVICE AGREEMENT
THIS AGREEMENT made as of the 30th day of September, 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 Fund, on
behalf of 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 Repayment Obligation ("Policy");
and
WHEREAS, in connection therewith, the Fund intends to open custody
accounts with Mellon under the terms of the Custodian Agreement (the "Custodian
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 Fund, on behalf of 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 Russell/Mellon Analytical Services,
LLC ("Russell/Mellon") to provide investment monitoring services in respect of
the Series, and Russell/Mellon is willing to perform such services upon the
terms and conditions of an Agreement of even date herewith.
<PAGE>
WHEREAS, the Fund and MBIA wish for Mellon to provide trade execution
services in respect of the Series, and Mellon is willing to perform such
services upon the terms and conditions.
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. Custody Services.
The Fund, on behalf of the Series, will open with Mellon one
or more custody account(s) designated "Series" (such designated custody
account(s) 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 Custodian Agreement between Mellon and the Fund.
2
<PAGE>
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 Fund, 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 Fund.
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 Fund) 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. 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
issued directly by the Fund (or its investment adviser) for the Series
3
<PAGE>
Account. 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 Custodian Agreement.
Nothing herein shall be construed as authorizing Mellon to reject for settlement
securities transactions for which trade instructions were issued prior to 12:01
a.m. eastern time on the Business Day immediately following the day on which
Mellon receives an Event of Default Notice.
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 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 Fund, with a copy to MBIA, of trades executed as a result of instructions
received by 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. Delivery of Documents.
The Fund 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 Fund, on behalf of the Series, shall pay
Mellon monthly fees determined as set forth in Schedule A 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,
4
<PAGE>
from time to time, to a change to the fees set forth in Schedule A. 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
Fund, on behalf of 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
(with the exception of specific amounts which may be contested in good faith by
the Fund) 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
and expenses of effecting collection of any such sums, including reasonable
Attorney' fees, shall be paid by the Fund, on behalf of the Series, to Mellon.
(e) In the event that the Fund, on behalf of the Series, is
more than sixty (60) days delinquent in its payments of monthly billings in
connection with this
5
<PAGE>
Agreement (with the exception of specific amounts which may be contested in good
faith by the Fund), this Agreement may be terminated upon sixty (60) days'
written notice to the Fund and MBIA by Mellon. The Fund 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 or the services provided hereunder 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.
(b) Mellon shall not be responsible for, and the Fund shall
indemnify and hold Mellon, its officers, employees and agents (collectively
"Mellon and its agents")
6
<PAGE>
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, the Fund and MBIA relating to the matters
herein, or the Fund's, the Series', 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 or the 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 Fund, 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
7
<PAGE>
of any stop order or other determinations or ruling by any
Federal agency or any state agency with respect to the offer
or sale of such shares in such state (1) resulting from
activities, actions, or omissions by the Fund, the Series or
MBIA, or (2) existing or arising out of activities, actions or
omissions by or on behalf of the Fund, 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
8
<PAGE>
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 Series, the Fund or MBIA (an "Authorized Person") named, and in the
capacity identified, in lists (naming those persons who may authorize the
transactions in 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, on behalf of the Series, 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 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 demand from the Fund, the Series, or MBIA which, in
Mellon's opinion, conflict with any of the provisions of this Agreement, Mellon
shall notify the Fund, the
9
<PAGE>
Series, 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 Custodian Agreement between Mellon and the Fund. Should
there by any conflict between the terms of the Custodian Agreement and the terms
of this Agreement regarding the services set forth in Section 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 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).
(i) Any liability of the Fund under this Agreement with
respect to the Series, or in connection with the transactions contemplated
herein with respect to the Series, shall be discharged only out of the assets of
the Series, and no other series of the Fund shall be liable with respect
thereto.
10
<PAGE>
7. Term.
This Agreement shall become effective immediately and shall
terminate on the earlier of the termination date under the Custodian Agreement
or October 6, 2004, unless earlier terminated by any party hereto on 90 days'
written notice to the other parties. Upon termination of this Agreement, the
Fund, on behalf of 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.
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
11
<PAGE>
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):
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
with copies to:
Attention: Stephanie A. DeSisto
Phone: (860) 275-3413
Fax: (860) 275-2084
Attention: Michael J. Sheridan
Phone: (860) 275-3896
Fax: (860) 616-4565
If to MBIA:
MBIA Insurance Corporation
113 King Street
Armonk, New York 10504
12
<PAGE>
Attention: Mr. Kevin Loescher
Phone: (914) 765-3933
Fax: (914) 765-3161
If to Mellon:
One Mellon Bank Center
15th Floor
Pittsburgh, PA 15258
Attention: William M. Kincaid
Phone: 412-236-1315
Fax: 412-234-8725
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.
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 others persons and circumstances.
13
<PAGE>
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.
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.
14
<PAGE>
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: /s/ J. Scott Fox
----------------------------
Name: J. Scott Fox
----------------------------
Title: President
----------------------------
MBIA INSURANCE CORPORATION
By: /s/ Ann D. McKenna
----------------------------
Name: Ann D. McKenna
----------------------------
Title: Assistant Secretary
----------------------------
MELLON BANK, N.A.
By: /s/ Christi R. Caperton
----------------------------
Name: Christi R. Caperton
----------------------------
Title: Vice President
----------------------------
15
<PAGE>
SCHEDULE A
FEES AND EXPENSES
16
<PAGE>
EXHIBIT 1
EVENT OF DEFAULT NOTICE
17
<PAGE>
EXHIBIT 1 - ATTACHMENT 1
MANUAL TRADE INSTRUCTIONS
18
<PAGE>
EXHIBIT 2
CURE NOTICE
19
<PAGE>
EXHIBIT 3
AUTHORIZED PERSONS - AETNA SERIES FUND, INC.
20
<PAGE>
EXHIBIT 4
AUTHORIZED PERSONS AND SIGNATURE SAMPLES - MBIA INSURANCE CORPORATION
21
<PAGE>
EXHIBIT 5
TRADE EXECUTION NOTIFICATION FILE
Exhibit h.17
Custodian Monitoring Agreement
<PAGE>
CUSTODIAN MONITORING AGREEMENT
------------------------------
THIS AGREEMENT made as of the 7th day October, 1999 by and among AETNA
SERIES FUND, INC. (the "Fund"), MBIA INSURANCE CORPORATION ("MBIA") and
RUSSELL/MELLON ANALYTICAL SERVICES, LLC ("Russell/Mellon").
WHEREAS, the Fund intends to establish a separate series of the
Fund, Aetna Principal Protection Fund II (the "Series"), with an obligation by
the Fund, on behalf of 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 Repayment Obligation (the
"Policy"); and
WHEREAS, in connection therewith, the Fund intends to open custody
accounts with Mellon Bank, N.A. (in its capacity as custodian, "Mellon") under
the terms of the Custodian Agreement (the "Custodian 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 Fund, on behalf of the Series,
has agreed to a particular investment strategy and to provide an arrangement
whereby trades executed on behalf of the Series will be monitored for conformity
with certain guidelines; and
WHEREAS, the Fund and MBIA wish for Russell/Mellon to provide
investment monitoring services in respect of the Series, and Russell/Mellon is
willing to perform such services upon the following terms and conditions.
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 will open with Mellon one or more custody accounts, each
designated "Series" (each such designated custody account hereinafter referred
to as a "Series Account"). Each Series Account will contain the appropriate
designation in its title and will be operated subject to the terms of the
Custodian Agreement. Russell/Mellon will monitor the assets delivered to each
Series Account for conformity with the guidelines set forth in Schedule A
attached hereto entitled Conforming Assets Guidelines (the "Guidelines"). For
purposes of this
<PAGE>
Agreement, Russell/Mellon will only be responsible for performing conforming
assets tests on assets that are traded through the Series Accounts and shall not
be responsible for monitoring the continuing compliance with the Guidelines of
assets held in the Series Accounts. In order to carry out the conforming assets
tests, Russell/Mellon will rely on the trade information that Mellon receives
from the Fund on behalf of 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 complete,
properly formatted and provided to Mellon in a timely manner. Russell/Mellon
shall perform the conforming asset tests 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 by Mellon. If by applying the
conforming assets tests to the Series Accounts an instance of noncompliance with
the Guidelines is noted, Russell/Mellon will notify MBIA and the Fund promptly
of such noncompliance in writing via facsimile transmission. Once Russell/Mellon
has notified the Fund and MBIA as to the existence of noncompliance,
Russell/Mellon shall have no further obligation or duty to the Fund, the Series
or MBIA to monitor the trade, or to report its cure.
3. Delivery of Documents.
The Fund and MBIA will promptly furnish to Russell/Mellon such
copies, properly certified or authenticated, of documents and other related
information that Russell/Mellon may reasonably request or require to properly
discharge its duties herein.
4. Fees and Expenses.
(a) As compensation for the services rendered hereunder, the Fund,
on behalf of the Series, shall pay to Mellon, as billing and collection agent
for Russell/Mellon, the monthly fees determined as set forth in Schedule A to
the Custodian Service Agreement of even date herewith among the Fund, MBIA and
Mellon. Such fees are to be billed monthly and shall be due and payable upon
receipt of the Mellon invoice. 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, on behalf of the Series, 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
Russell/Mellon. If Russell/Mellon elects to provide such services, 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
Russell/Mellon shall be billed on a monthly basis by Mellon, as billing and
collection agent for Russell/Mellon, and shall be due and payable by the Fund,
on behalf of the Series, upon receipt of the invoice.
5. Limitation of Liability and Indemnification.
(a) In undertaking the performance of its obligations hereunder,
Russell/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 or the services provided hereunder except for general damages
solely caused by or resulting from willful misfeasance, bad faith or negligence
on the part of Russell/Mellon, its members, directors, 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 Russell/Mellon be liable for any
indirect, special or consequential losses or damages of any kind
2
<PAGE>
whatsoever (including but not limited to lost profits), even if Russell/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.
(b) Russell/Mellon shall not be responsible for, and the Fund
shall indemnify and hold Russell/Mellon, its members, directors, officers,
employees and agents (collectively "Russell/Mellon Indemnified Parties")
harmless from and against any and all losses, damages, costs, reasonable
attorneys' fees and expenses, incurred by Russell/Mellon Indemnified Parties, 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 Russell/Mellon Indemnified
Parties required to be taken pursuant to this Agreement;
(ii) the reliance on or use by Russell/Mellon Indemnified
Parties of information, records, or documents which are received
by Russell/Mellon Indemnified Parties 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,
the Fund and MBIA relating to the matters herein, or the Fund's,
the Series' 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 Russell/Mellon Indemnified Parties
by MBIA, the Series or the Fund or provided to Russell/Mellon
Indemnified Parties by data or corporate action services or
vendors;
(v) the offer or sale of shares by the Fund, 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 such shares in such state (1) resulting from
activities, actions, or omissions by the Fund, the Series or MBIA,
or (2) existing or arising out of activities, actions or omissions
by or on behalf of the Fund, the Series or MBIA prior to the
effective date of this Agreement; or
(vi) all actions, omissions, or errors caused by third
parties to whom Russell/Mellon, any Russell/Mellon Indemnified
Parties, the Fund, 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, the Series or MBIA;
provided that, in no event shall any Russell/Mellon Indemnified Party be
indemnified for its negligence, bad faith or willful misfeasance in carrying out
its duties hereunder.
(c) Any liability of the Fund under this Agreement with respect to
the Series, or in connection with the transactions contemplated herein with
respect to the Series, shall be discharged only out of the assets of the Series,
and no other series of the Fund shall be liable with respect thereto.
3
<PAGE>
6. Term.
This Agreement shall become effective immediately and shall
terminate on the earlier of the termination date under the Custodian Agreement
or October 6, 2004, unless earlier terminated by any party hereto on 90 days'
prior written notice to the other parties.
7. 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.
8. 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 Russell/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):
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
with copies to:
Attention: Stephanie A. DeSisto
Phone: (860) 275-3413
Fax: (860) 275-2084
Attention: Michael J. Sheridan
Phone: (860) 275-3896
Fax: (860) 616-4565
4
<PAGE>
If to MBIA:
MBIA Insurance Corporation
113 King Street
Armonk, New York 10504
Attention: Mr. Kevin Loescher
Phone: (914) 765-3933
Fax: (914) 765-3161
If to Russell/Mellon:
Russell/Mellon Analytical Services
135 Santilli Highway
Everett, Massachusetts 02149
Attention: Chief Executive Officer
Phone: (617) 382-9935
Fax: (617) 382-9153
9. 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.
10. 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.
11. 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.
12. 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 headings of the sections hereof are included for
convenience of reference only and do not form a part of this Agreement.
5
<PAGE>
13. 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.
14. 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: /s/ J. Scott Fox
-------------------------------------
Name: J. Scott Fox
-------------------------------------
Title: President
-------------------------------------
MBIA INSURANCE CORPORATION
By: /s/Ann D. McKenna
-------------------------------------
Name: Ann D. McKenna
-------------------------------------
Title: Assistant Secretary
-------------------------------------
RUSSELL/MELLON ANALYTICAL SERVICES, LLC
By: /s/ W C Pryor
-------------------------------------
Name: President
-------------------------------------
Title: William Pryor
-------------------------------------
6
<PAGE>
SCHEDULE A
CONFORMING ASSETS GUIDELINES
Exhibit h.18
Custodian Service Agreement
<PAGE>
CUSTODIAN SERVICE AGREEMENT
THIS AGREEMENT made as of the 3rd day of December, 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 II ("Series"), with an obligation by the Fund,
on behalf of 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 Repayment Obligation ("Policy");
and
WHEREAS, in connection therewith, the Fund intends to open custody
accounts with Mellon under the terms of the Custodian Agreement (the "Custodian
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 Fund, on behalf of 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 Russell/Mellon Analytical Services,
LLC ("Russell/Mellon") to provide investment monitoring services in respect of
the Series, and Russell/Mellon is willing to perform such services upon the
terms and conditions of an Agreement of even date herewith.
1
<PAGE>
WHEREAS, the Fund and MBIA wish for Mellon to provide trade execution
services in respect of the Series, and Mellon is willing to perform such
services upon the terms and conditions.
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. Custody Services.
The Fund, on behalf of the Series, will open with Mellon one
or more custody account(s) designated "Series" (such designated custody
account(s) 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 Custodian Agreement between Mellon and the Fund.
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 Fund, 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 Fund.
2
<PAGE>
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 Fund) 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. 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
issued directly by the Fund (or its investment adviser) for the Series Account.
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 Custodian Agreement. Nothing
herein shall be construed as authorizing Mellon to reject for settlement
securities transactions for which trade instructions were issued prior to 12:01
a.m. eastern time on the Business Day immediately following the day on which
Mellon receives an Event of Default Notice.
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 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 Fund, with a copy to MBIA, of trades executed as a result of instructions
received by MBIA.
3
<PAGE>
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. Delivery of Documents.
The Fund 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 Fund, on behalf of the Series, shall pay
Mellon monthly fees determined as set forth in Schedule A 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 A. 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
Fund, on behalf of 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
(with the exception of specific amounts which may be
4
<PAGE>
contested in good faith by the Fund) 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 and expenses of effecting collection of any such
sums, including reasonable Attorney' fees, shall be paid by the Fund, on behalf
of the Series, to Mellon.
(e) In the event that the Fund, on behalf of 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 Fund), this Agreement may be terminated upon
sixty (60) days' written notice to the Fund and MBIA by Mellon. The Fund 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 or the services provided hereunder 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.
5
<PAGE>
(b) Mellon shall not be responsible for, and the Fund 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, the Fund and MBIA relating to the matters
herein, or the Fund's, the Series', 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 or the 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 Fund, 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 determinations or ruling by any Federal agency or any
state agency with respect to the offer or sale of such shares
in such state (1) resulting from activities, actions, or
omissions by the Fund, the Series or MBIA, or (2) existing or
arising out of activities,
6
<PAGE>
actions or omissions by or on behalf of the Fund, 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 Series, the Fund or MBIA (an "Authorized Person") named,
and in the capacity identified, in lists (naming those persons who may authorize
the transactions in 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
7
<PAGE>
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, on behalf of the Series, 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 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 demand from the Fund, the Series, or MBIA which, in
Mellon's opinion, conflict with any of the provisions of this Agreement, Mellon
shall notify the Fund, the Series, 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 Custodian Agreement between Mellon and the Fund. Should
there by any conflict between the terms of the Custodian Agreement and the terms
of this Agreement regarding the services set forth in Section 3 of this
Agreement, the terms of this Agreement shall govern.
8
<PAGE>
(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 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).
(i) Any liability of the Fund under this Agreement with
respect to the Series, or in connection with the transactions contemplated
herein with respect to the Series, shall be discharged only out of the assets of
the Series, and no other series of the Fund shall be liable with respect
thereto.
7. Term.
This Agreement shall become effective immediately and shall
terminate on the earlier of the termination date under the Custodian Agreement
or December 20, 2004, unless earlier terminated by any party hereto on 90 days'
written notice to the other parties. Upon termination of this Agreement, the
Fund, on behalf of 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.
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
9
<PAGE>
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):
If to the Fund or the Series:
Aetna Series Fund, Inc.
10 State House Square, SH11
Hartford, CT 06103-3602
Attention: Counsel
Phone: (860) 275-2032
Fax: (860) 275-2158
with copies to:
Attention: Stephanie A. DeSisto
Phone: (860) 275-3413
Fax: (860) 275-2084
Attention: Michael J. Sheridan
Phone: (860) 275-3896
Fax: (860) 616-4565
10
<PAGE>
If to MBIA:
MBIA Insurance Corporation
113 King Street
Armonk, New York 10504
Attention: Mr. Kevin Loescher
Phone: (914) 765-3933
Fax: (914) 765-3161
If to Mellon:
One Mellon Bank Center
15th Floor
Pittsburgh, PA 15258
Attention: William M. Kincaid
Phone: 412-236-1315
Fax: 412-234-8725
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.
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 others 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
11
<PAGE>
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.
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: /s/ J. Scott Fox
---------------------------------
Name: J. Scott Fox
---------------------------------
Title: President
---------------------------------
MBIA INSURANCE CORPORATION
By: /s/ Ann D. McKenna
---------------------------------
Name: Ann D. McKenna
---------------------------------
Title: Assistant Secretary
---------------------------------
MELLON BANK, N.A.
By /s/ Christi R. Caperton
---------------------------------
Name: Christi R. Caperton
---------------------------------
Title: Vice President
---------------------------------
12
<PAGE>
SCHEDULE A
FEES AND EXPENSES
-----------------
13
<PAGE>
EXHIBIT 1
EVENT OF DEFAULT NOTICE
14
<PAGE>
EXHIBIT 1 - ATTACHMENT 1
MANUAL TRADE INSTRUCTIONS
15
<PAGE>
EXHIBIT 2
CURE NOTICE
16
<PAGE>
EXHIBIT 3
AUTHORIZED PERSONS - AETNA SERIES FUND, INC.
17
<PAGE>
EXHIBIT 4
AUTHORIZED PERSONS AND SIGNATURE SAMPLES - MBIA INSURANCE CORPORATION
18
<PAGE>
EXHIBIT 5
TRADE EXECUTION NOTIFICATION FILE
Exhibit h.19
Custodian Monitoring Agreement
<PAGE>
CUSTODIAN MONITORING AGREEMENT
THIS AGREEMENT made as of the 1st day December, 1999 by and among AETNA
SERIES FUND, INC. (the "Fund"), MBIA INSURANCE CORPORATION ("MBIA") and
RUSSELL/MELLON ANALYTICAL SERVICES, LLC ("Russell/Mellon").
WHEREAS, the Fund intends to establish a separate series of the
Fund, Aetna Principal Protection Fund II (the "Series"), with an obligation by
the Fund, on behalf of 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 Repayment Obligation (the
"Policy"); and
WHEREAS, in connection therewith, the Fund intends to open custody
accounts with Mellon Bank, N.A. (in its capacity as custodian, "Mellon") under
the terms of the Custodian Agreement (the "Custodian 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 Fund, on behalf of the Series,
has agreed to a particular investment strategy and to provide an arrangement
whereby trades executed on behalf of the Series will be monitored for conformity
with certain guidelines; and
WHEREAS, the Fund and MBIA wish for Russell/Mellon to provide
investment monitoring services in respect of the Series, and Russell/Mellon is
willing to perform such services upon the following terms and conditions.
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 will open with Mellon one or more custody accounts, each
designated "Series" (each such designated custody account hereinafter referred
to as a "Series Account"). Each Series Account will contain the appropriate
designation in its title and will be operated subject to the terms of the
Custodian Agreement. Russell/Mellon will monitor the assets delivered to each
Series Account for conformity with the guidelines set forth in Schedule A
attached hereto entitled Conforming Assets Guidelines (the "Guidelines"). For
purposes of this
<PAGE>
Agreement, Russell/Mellon will only be responsible for performing conforming
assets tests on assets that are traded through the Series Accounts and shall not
be responsible for monitoring the continuing compliance with the Guidelines of
assets held in the Series Accounts. In order to carry out the conforming assets
tests, Russell/Mellon will rely on the trade information that Mellon receives
from the Fund on behalf of 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 complete,
properly formatted and provided to Mellon in a timely manner. Russell/Mellon
shall perform the conforming asset tests 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 by Mellon. If by applying the
conforming assets tests to the Series Accounts an instance of noncompliance with
the Guidelines is noted, Russell/Mellon will notify MBIA and the Fund promptly
of such noncompliance in writing via facsimile transmission. Once Russell/Mellon
has notified the Fund and MBIA as to the existence of noncompliance,
Russell/Mellon shall have no further obligation or duty to the Fund, the Series
or MBIA to monitor the trade, or to report its cure.
3. Delivery of Documents.
The Fund and MBIA will promptly furnish to Russell/Mellon such
copies, properly certified or authenticated, of documents and other related
information that Russell/Mellon may reasonably request or require to properly
discharge its duties herein.
4. Fees and Expenses.
(a) As compensation for the services rendered hereunder, the Fund,
on behalf of the Series, shall pay to Mellon, as billing and collection agent
for Russell/Mellon, the monthly fees determined as set forth in Schedule A to
the Custodian Service Agreement of even date herewith among the Fund, MBIA and
Mellon. Such fees are to be billed monthly and shall be due and payable upon
receipt of the Mellon invoice. 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, on behalf of the Series, 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
Russell/Mellon. If Russell/Mellon elects to provide such services, 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
Russell/Mellon shall be billed on a monthly basis by Mellon, as billing and
collection agent for Russell/Mellon, and shall be due and payable by the Fund,
on behalf of the Series, upon receipt of the invoice.
5. Limitation of Liability and Indemnification.
(a) In undertaking the performance of its obligations hereunder,
Russell/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 or the services provided hereunder except for general damages
solely caused by or resulting from willful misfeasance, bad faith or negligence
on the part of Russell/Mellon, its members, directors, 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 Russell/Mellon be liable for any
indirect, special or consequential losses or damages of any kind
2
<PAGE>
whatsoever (including but not limited to lost profits), even if Russell/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.
(b) Russell/Mellon shall not be responsible for, and the Fund
shall indemnify and hold Russell/Mellon, its members, directors, officers,
employees and agents (collectively "Russell/Mellon Indemnified Parties")
harmless from and against any and all losses, damages, costs, reasonable
attorneys' fees and expenses, incurred by Russell/Mellon Indemnified Parties, 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 Russell/Mellon Indemnified
Parties required to be taken pursuant to this Agreement;
(ii) the reliance on or use by Russell/Mellon Indemnified
Parties of information, records, or documents which are received
by Russell/Mellon Indemnified Parties 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,
the Fund and MBIA relating to the matters herein, or the Fund's,
the Series' 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 Russell/Mellon Indemnified Parties
by MBIA, the Series or the Fund or provided to Russell/Mellon
Indemnified Parties by data or corporate action services or
vendors;
(v) the offer or sale of shares by the Fund, 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 such shares in such state (1) resulting from
activities, actions, or omissions by the Fund, the Series or MBIA,
or (2) existing or arising out of activities, actions or omissions
by or on behalf of the Fund, the Series or MBIA prior to the
effective date of this Agreement; or
(vi) all actions, omissions, or errors caused by third
parties to whom Russell/Mellon, any Russell/Mellon Indemnified
Parties, the Fund, 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, the Series or MBIA;
provided that, in no event shall any Russell/Mellon Indemnified Party be
indemnified for its negligence, bad faith or willful misfeasance in carrying out
its duties hereunder.
(c) Any liability of the Fund under this Agreement with respect to
the Series, or in connection with the transactions contemplated herein with
respect to the Series, shall be discharged only out of the assets of the Series,
and no other series of the Fund shall be liable with respect thereto.
3
<PAGE>
6. Term.
This Agreement shall become effective immediately and shall
terminate on the earlier of the termination date under the Custodian Agreement
or October 6, 2004, unless earlier terminated by any party hereto on 90 days'
prior written notice to the other parties.
7. 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.
8. 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 Russell/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):
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
with copies to:
Attention: Stephanie A. DeSisto
Phone: (860) 275-3413
Fax: (860) 275-2084
Attention: Michael J. Sheridan
Phone: (860) 275-3896
Fax: (860) 616-4565
4
<PAGE>
If to MBIA:
MBIA Insurance Corporation
113 King Street
Armonk, New York 10504
Attention: Mr. Kevin Loescher
Phone: (914) 765-3933
Fax: (914) 765-3161
If to Russell/Mellon:
Russell/Mellon Analytical Services
135 Santilli Highway
Everett, Massachusetts 02149
Attention: Chief Executive Officer
Phone: (617) 382-9935
Fax: (617) 382-9153
9. 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.
10. 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.
11. 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.
12. 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 headings of the sections hereof are included for
convenience of reference only and do not form a part of this Agreement.
13. 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.
5
<PAGE>
14. 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: /s/ J. Scott Fox
----------------------------------------
Name: J. Scott Fox
----------------------------------------
Title: President
----------------------------------------
MBIA INSURANCE CORPORATION
By: /s/ Ann D. McKenna
----------------------------------------
Name: Ann D. McKenna
----------------------------------------
Title: Assistant Secretary
----------------------------------------
RUSSELL/MELLON ANALYTICAL SERVICES, LLC
By: /s/ W C Pryor
----------------------------------------
Name: William Pryor
----------------------------------------
Title: CEO & President
----------------------------------------
6
<PAGE>
SCHEDULE A
CONFORMING ASSETS GUIDELINES
----------------------------
Exhibit (i)
Consent of Amy R. Doberman
<PAGE>
[Aeltus logo] 10 State House Square, SH11
Hartford CT 06103-3602
AMY R. DOBERMAN
Counsel
Aetna Series Fund, Inc.
December 16, 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. 36 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>
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Amy R. Doberman
Amy R. Doberman
Counsel
