CLASS A, CLASS B, CLASS C AND CLASS I SHARES
AETNA SERIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION DATED JUNE 30, 2000,
AS AMENDED JULY 11, 2000
This Statement of Additional Information (Statement) is not a Prospectus and
should be read in conjunction with the current Prospectuses for Aetna Series
Fund, Inc. (Company), each dated March 1, 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:
1-800-238-6254.
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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.......................................................30
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS.........................30
PURCHASE AND REDEMPTION OF SHARES...........................................34
BROKERAGE ALLOCATION AND TRADING POLICIES...................................37
SHAREHOLDER ACCOUNTS AND SERVICES...........................................39
NET ASSET VALUE.............................................................40
TAX STATUS..................................................................41
PERFORMANCE INFORMATION.....................................................42
FINANCIAL STATEMENTS........................................................48
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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 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. 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 charter may be amended if the amendment is declared advisable by
the Directors and approved by shareholders of the Company by the affirmative
vote of a majority of all the votes entitled to be cast on the matter.
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.
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.
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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);
(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;
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(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), subadviser 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 Standard
& Poor's (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,
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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.
With respect to fundamental policy number (2), industry classifications are
determined in accordance with the classifications established by Standard &
Poor's Corporation, except that the industry classifications for Growth are
determined in accordance with the classifications established by the Frank
Russell Corporation and the industry classifications for International have been
selected by Aeltus. Aeltus believes that the industry characteristics it has
selected are reasonable and not so broad that the primary economic
characteristics of the companies in a single class are materially different.
Industry classifications may be changed from time to time to reflect changes in
the market place.
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 that 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 purposes, or to gain additional exposure to certain
markets for investment purposes while maintaining liquidity to meet shareholder
redemptions and minimizing trading costs. Mortgage-related and asset-backed
securities other than those described in the preceding paragraph, STRIPS
(Separate Trading of Registered Interest and Principal of Securities) and
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
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out an open futures contract sale or purchase is effected by entering into an
offsetting futures contract purchase or sale, respectively, for the same
aggregate amount of the identical type of underlying instrument and the same
delivery date. There can be no assurance, however, that a Fund will be able to
enter into an offsetting transaction with respect to a particular contract at a
particular time. If a Fund is not able to enter into an offsetting transaction,
it will continue to be required to maintain the margin deposits on the contract.
The prices of futures contracts are volatile and are influenced 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
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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 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.
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In the case of a put option, as long as the obligation of the put writer
continues, it may be assigned an exercise notice by the broker-dealer through
which such option was sold, requiring the writer to take delivery of the
underlying security against payment of the exercise price. A writer has no
control over when it may be required to purchase the underlying security, since
it may be assigned an exercise notice at any time prior to the expiration date.
This obligation terminates earlier if the writer effects a closing purchase
transaction by purchasing a put of the same series as that previously sold.
If a put option is sold by a Fund, the Fund will 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
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applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures contracts or
foreign options transaction occurs. Investors 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 a 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.
STRIPS (Separate Trading of Registered Interest and Principal of Securities)
Each Fund may invest in STRIPS. 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 STRIPS 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.
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 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
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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. 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.
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Variable Rate Demand and Floating Rate Instruments
Each Fund may invest in variable rate demand and floating rate 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 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.
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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 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
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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.
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. 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. A pay-in-kind bond pays interest during the initial few years in
additional bonds rather than in cash. Later the bond may pay cash interest.
Pay-in-kind bonds are typically callable at about the time they begin paying
cash interest. The market prices of zero coupon 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.
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
17
<PAGE>
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 (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.
18
<PAGE>
Maturity Policies
The average dollar-weighted maturity of securities in Money Market's portfolio
will not exceed ninety days. In addition, all investments in 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 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
POSITIONS HELD WITH AFFILIATED PERSONS OR
NAME, POSITION(S) HELD PRINCIPAL UNDERWRITERS OF THE COMPANY)
ADDRESS AND AGE WITH 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, Managing Director, Chief
Operating Officer, Chief Financial Officer, Aeltus
Capital, Inc., November 1997 to present;
Director and Senior Vice President, Aetna Life
Insurance and Annuity Company, March 1997 to
February 1998; Director, Managing Director,
Chief Operating Officer, Chief Financial
Officer and Treasurer, Aeltus, April 1994 to
March 1997.
--------------------------------- ------------------------------ ---------------------------------------------------
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 59
--------------------------------- ------------------------------ ---------------------------------------------------
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; Vice President,
Hartford, Connecticut General Counsel and Secretary, Aeltus Capital,
Age 38 Inc., April 1998 to present; Counsel, Aetna
Retirement Services, Inc., December 1996 to
present; Attorney, Securities and Exchange
Commission, March 1990 to November 1996.
--------------------------------- ------------------------------ ---------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
--------------------------------- ------------------------------ ---------------------------------------------------
<S> <C> <C>
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 82
--------------------------------- ------------------------------ ---------------------------------------------------
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 and President, Aeltus Capital, Inc.,
March 1996 to present; President and Chief
Investment Officer, Aetna Life Insurance and
Annuity Company, May 2000 to present; Director,
Aetna Life Insurance and Annuity Company,
February 1995 to present; Senior Vice President,
Aetna Life Insurance and Annuity Company,
September 1994 to May 2000.
--------------------------------- ------------------------------ ---------------------------------------------------
Sidney Koch Director Financial Adviser, self-employed, January 1993 to
455 East 86th Street present.
New York, New York
Age 65
--------------------------------- ------------------------------ ---------------------------------------------------
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 Hartford, Insurance and Annuity Company, March 1991 to
Connecticut present; Director, Aetna Life Insurance and Annuity
Age 44 Company, March 1991 to May 2000; Director, Aetna
Investment Services, Inc., July 1993 to present;
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 63 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 71
--------------------------------- ------------------------------ ---------------------------------------------------
</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.
21
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------- ------------------------------------- -------------------------------------
TOTAL COMPENSATION FROM THE
NAME OF PERSON AGGREGATE COMPENSATION FROM COMPANY AND FUND COMPLEX
POSITION THE COMPANY PAID TO DIRECTORS
---------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
Corine Norgaard $10,103 $73,500
Director
---------------------------------------- ------------------------------------- -------------------------------------
Sidney Koch 10,103 73,500
Director
---------------------------------------- ------------------------------------- -------------------------------------
Maria T. Fighetti* 10,361 75,375
Director
---------------------------------------- ------------------------------------- -------------------------------------
Richard G. Scheide 10,790 78,500
Director, Chairperson
Audit Committee
---------------------------------------- ------------------------------------- -------------------------------------
David L. Grove* 10,790 78,500
Director
---------------------------------------- ------------------------------------- -------------------------------------
Albert E. DePrince, Jr.** 10,361 75,375
Director, Chairperson
Contract Committee
---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
* During the year ended October 31, 1999, Ms. Fighetti and Dr. Grove deferred
$24,000 and $78,500, respectively, of their compensation from the Fund
Complex.
** Dr. DePrince replaced Dr. Grove as Chairperson of the Contract Committee as
of April 2000.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of May 31, 2000, 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 52.27%
Aetna Government Fund 67.55% 63.17%
Aetna High Yield Fund 98.86% 10.99%
Aetna Index Plus Bond Fund 99.76% 16.31% 24.23%
Aetna Index Plus Large Cap Fund 42.75%
Aetna Index Plus Mid Cap Fund 94.50% 2.12%
Aetna Index Plus Small Cap Fund 97.98% 3.61%
Aetna International Fund 17.62%
Aetna Mid Cap Fund 97.79% 19.59% 83.13% 68.38%
Aetna Money Market Fund 47.43%
Aetna Real Estate Securities Fund 96.98% 9.53% 92.69% 48.64%
Aetna Small Company Fund 26.59%
Aetna Technology Fund 56.04% 2.34% 6.97%
Aetna Value Opportunity Fund 94.08% 2.33% 27.48%
Aetna Ascent Fund 80.90% 80.73%
Aetna Crossroads Fund 77.52% 95.89%
Aetna Legacy 70.08% 91.81%
Aetna Growth Fund 15.85%
Aetna Growth and Income Fund 15.63%
Aetna Balanced Fund 26.79%
</TABLE>
22
<PAGE>
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 March 31, 2000, 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.
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:
ADVISORY FEE ASSETS
CAPITAL APPRECIATION FUNDS
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
23
<PAGE>
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
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
24
<PAGE>
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 $500 million
0.325% On next $250 million
0.300% On next $1.25 billion
0.275% Over $2 billion
Index Plus Large Cap 0.450% On first $500 million
0.425% On next $250 million
0.400% On next $1.25 billion
0.375% Over $2 billion
Index Plus Mid Cap 0.450% On first $500 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 $500 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
25
<PAGE>
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
Company Name Advisory Fees Waiver Fees Paid
------------ ---------------- ------ ------------
<S> <C> <C> <C>
Growth 1,484,231 0 1,484,231
International 507,245 107,259 399,986
Mid Cap 43,756 43,756 0
Small Company 488,647 12,768 475,879
Value Opportunity 43,946 43,946 0
Balanced 1,031,227 0 1,031,227
Growth and Income 4,374,490 0 4,374,490
Real Estate 35,653 35,653 0
Bond Fund 226,218 80,473 145,745
Aetna Government Fund 69,754 69,754 0
High Yield 61,273 61,273 0
Money Market 1,844,102 658,067 1,186,035
Index Plus Bond 53,157 53,157 0
Index Plus Large Cap 667,633 73,563 594,070
Index Plus Mid Cap 42,217 42,217 0
Index Plus Small Cap 35,558 35,558 0
Ascent 409,705 29,401 380,304
Crossroads 387,278 37,728 349,550
Legacy 242,377 77,162 165,215
</TABLE>
Year Ended October 31, 1998
---------------------------
<TABLE>
<CAPTION>
Total Investment Net Advisory
Company Name Advisory Fees Waiver Fees Paid
------------ ---------------- ------ ------------
<S> <C> <C> <C>
Growth 809,670 0 809,670
International 493,627 110,044 383,583
Mid Cap* 29,053 29,053 0
Small Company 298,442 40,629 257,813
Value Opportunity** 28,337 28,337 0
Balanced 955,035 0 955,035
Growth and Income 4,429,415 0 4,429,415
Real Estate** 28,481 28,481 0
Bond Fund 196,033 87,410 108,623
Aetna Government Fund 62,424 62,424 0
High Yield** 47,995 47,995 0
Money Market 1,701,171 1,041,156 660,015
Index Plus Bond* 39,396 39,396 0
Index Plus Large Cap 102,550 102,550 0
Index Plus Mid Cap*** 25,868 25,868 0
Index Plus Small Cap*** 24,996 24,996 0
Ascent 295,978 69,924 226,054
Crossroads 295,895 61,513 234,382
Legacy 174,700 94,604 80,096
</TABLE>
26
<PAGE>
Year Ended October 31, 1997
---------------------------
<TABLE>
<CAPTION>
Total Investment Net Advisory
Company Name Advisory Fees Waiver Fees Paid
------------ ---------------- ------ ------------
<S> <C> <C> <C>
Growth 500,660 0 500,660
International 639,565 0 639,565
Small Company 238,340 0 238,340
Balanced 812,391 0 812,391
Growth and Income 3,385,694 0 3,385,694
Bond Fund 163,110 128,800 34,310
Aetna Government Fund 53,048 53,048 0
Money Market 1,782,769 1,782,769 0
Index Plus Large Cap**** 49,212 49,212 0
Ascent 202,834 21,845 180,989
Crossroads 186,369 19,968 166,401
Legacy 151,110 22,749 128,361
</TABLE>
*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
$9,190 and $629, 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. Aeltus owns 25% of the outstanding voting securities
of EAM.
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
27
<PAGE>
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 Aeltus and Aetna (for the period
January 1, 1997 to April 30, 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 212,043 0 212,043
International 59,676 0 59,676
Mid Cap 5,834 5,834 0
Small Company 57,488 0 57,488
Value Opportunity 6,278 6,278 0
Balanced 128,903 0 128,903
Growth and Income 660,028 0 660,028
Real Estate 4,457 4,457 0
Bond Fund 45,244 0 45,244
Aetna Government Fund 13,951 13,951 0
High Yield 9,427 9,427 0
Money Market 461,026 0 461,026
Index Plus Bond 15,188 15,188 0
Index Plus Large Cap 148,363 0 148,363
Index Plus Mid Cap 9,381 9,381 0
Index Plus Small Cap 7,902 7,902 0
Ascent 51,213 0 51,213
Crossroads 48,410 0 48,410
Legacy 30,297 0 30,297
Year Ended October 31, 1998
---------------------------
Total Administrative Administrator Net Administrative
Company Name Services Fees Waiver Services Fees Paid
------------ ------------- ------ ------------------
Growth 149,789 0 149,789
International 82,614 0 82,614
Mid Cap* 3,874 3,874 0
Small Company 45,674 0 45,674
Value Opportunity** 4,048 4,048 0
Balanced 162,126 0 162,126
Growth and Income 903,105 0 903,105
Real Estate** 3,560 3,560 0
Bond Fund 52,793 0 52,793
Aetna Government Fund 16,722 16,722 0
High Yield** 7,384 7,384 0
Money Market 586,393 0 586,393
Index Plus Bond* 11,256 11,256 0
Index Plus Large Cap 27,653 4,832 22,821
Index Plus Mid Cap*** 5,748 5,748 0
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Index Plus Small Cap*** 5,555 5,555 0
Ascent 47,924 0 47,924
Crossroads 47,989 0 47,989
Legacy 28,950 0 28,950
</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 178,807 0 178,807
International 188,108 0 188,108
Small Company 70,100 0 70,100
Balanced 253,872 0 253,872
Growth and Income 1,228,819 0 1,228,819
Bond Fund 81,555 0 81,555
Aetna Government Fund 26,524 26,524 0
Money Market 1,094,798 175,308 919,490
Index Plus Large Cap**** 27,340 27,340 0
Ascent 63,386 0 63,386
Crossroads 58,240 0 58,240
Legacy 47,222 0 47,222
</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
KPMG LLP, CityPlace II, Hartford, Connecticut 06103 serves as independent
auditors to the Company. KPMG LLP provides audit services, assistance and
consultation in connection with Commission filings.
29
<PAGE>
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 Aeltus Capital, Inc. (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 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 $93,265
International 53,471
30
<PAGE>
Mid Cap 2,833
Small Company 47,171
Value Opportunity 4,741
Balanced 46,064
Growth and Income 123,267
Real Estate 3,676
Bond Fund 22,641
Aetna Government Fund 8,320
High Yield 4,225
Money Market 1,192
Index Plus Bond 5,246
Index Plus Large Cap 267,873
Index Plus Mid Cap 8,318
Index Plus Small Cap 7,896
Ascent 36,042
Crossroads 20,360
Legacy 16,944
Year Ended October 31, 1998
Company Name Total Underwriting Fees
Growth $34,543
International 60,303
Mid Cap* 507
Small Company 29,313
Value Opportunity** 861
Balanced 24,151
Growth and Income 65,703
Real Estate** 656
Bond Fund 4,918
Aetna Government Fund 2,207
High Yield** 630
Money Market 26,009
Index Plus Bond* 616
Index Plus Large Cap 12,230
Index Plus Mid Cap*** 608
Index Plus Small Cap*** 682
Ascent 5,795
Crossroads 5,009
Legacy 4,820
Year Ended October 31, 1997
Company Name Total Underwriting Fees
Growth $49,657
International 166,514
Small Company 37,758
Balanced 37,922
Growth and Income 82,810
Bond Fund 5,949
Aetna Government Fund 3,948
Money Market 141,236
Index Plus Large Cap**** 4,683
31
<PAGE>
Ascent***** 1,691
Crossroads***** 764
Legacy***** 823
*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 $658,067, $26,009 and $141,236, for the years ended
October 31, 1999, 1998, and 1997, respectively, were waived for Money Market.
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 $447,933, $611,129,
$1,201,749, $3,465,558 and $624,802 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>
32
<PAGE>
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>
Securities dealers that sell Class A shares (other than shares of the Index Plus
Funds) in amounts of $1 million or more may be entitled to receive the following
commissions:
Commission
o on sales of $1 million to $3 million 1.00%
o on sales over $3 million to $20 million 0.50%
o 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 may be entitled to receive the following commissions:
Commission
o on sales of $1 million to $3 million 0.50%
o on sales over $3 million to $20 million 0.25%
o 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
securities dealers that enter into agreements providing ACI with preferential
access to registered representatives of the securities 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.
ACI or its affiliates may, from time to time, also make payments to clearing
firms that offer networking services which make the Funds available to their
customers. Such payments to clearing firms will not exceed 0.10% of the total
Fund assets held in omnibus accounts or in customer accounts that designate such
firm(s) as the selling broker-dealer.
ACI has agreed to reimburse Financial Network Investment Corporation, an
affiliate of ACI, for trading costs incurred in connection with trades through
the Pershing brokerage clearing system.
33
<PAGE>
Aeltus makes payments to AISI of 0.10% of total Money Market Class A assets held
in customer accounts that designate AISI as the selling broker-dealer.
ACI may make payments to affiliated and unaffiliated securities dealers that
engage in wholesaling efforts on behalf of the Company and the Funds. These
payments will not exceed 0.33% of the value of Fund shares sold as a result of
such wholesaling efforts. For the period July 1 through August 31, 2000, ACI has
agreed to pay AISI 0.48% of the value of Fund shares sold as a result of such
wholesaling efforts. ACI may also pay such firms a quarterly fee based on a
percentage of assets retained as of the end of a calendar quarter, not to exceed
0.125% of the value of such 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; (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.
34
<PAGE>
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:
o Originally paid a front-end sales charge on the shares and
o Reinvest the money within 60 days of the redemption date.
2. Redemptions from other mutual funds if you:
o Originally paid a front-end sales charge on the shares and
o Reinvest the money within 30 days of the redemption date.
The Fund's front-end sales charges will also not apply to Class A purchases by:
3. Employees of Aetna Inc. and its affiliates (including retired employees and
members of employees' and retired employees' immediate families and board
members and their immediate families), NASD registered representatives of
ACI or any affiliated broker-dealers (including members of their immediate
families) purchasing shares for their own accounts, and members of the
Board (including members of their immediate families).
4. Investors who purchase Fund shares with redemption proceeds received in
connection with a distribution from a retirement plan investing either (1)
directly in any Fund or through an unregistered separate account sponsored
by Aetna or any affiliate thereof or (2) in a registered 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.
5. Certain trust companies and bank trust departments investing on behalf of
their clients.
6. Certain retirement plans that are sponsored by an employer and have plan
assets of $500,000 or more.
7. 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.
8. 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.
9. Registered investment companies.
10. Insurance companies (including separate accounts).
11. Shareholders of the Adviser Class at the time such shares were redesignated
as Class A shares.
12. Certain executive deferred compensation plans.
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:
o redemptions of shares purchased through reinvestment of dividends or capital
gains distributions;
o 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
o redemptions of Money Market Class A and Class C shares unless:
o 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
35
<PAGE>
o the original purchase of the shares exchanged was subject to a
CDSC.
CDSC Waivers
The CDSC will be waived for:
o Exchanges to other Funds of the same class;
o Redemptions following the death or disability of the shareholder or
beneficial owner;
o Redemptions related to distributions from retirement plans or accounts
under Internal Revenue Section 403(b) after you attain age 70 1/2.
o Tax-free returns of excess contributions from employee benefit plans;
o 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:
o are limited annually to no more than 12% of the original account
value;
o are made in equal monthly amounts, not to exceed 1% per month; and
o 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.
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.
36
<PAGE>
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 or in the designation of a portion of the
commissions charged on those transactions to be paid to other broker-dealers,
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, 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.
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.
Aeltus may buy or sell the same security at or about the same time for a Fund
and another advisory client of Aeltus, including clients in which affiliates of
Aeltus have an interest. EAM may also buy or sell the same security at or about
the same time for a Fund and another advisory client of EAM, including clients
in which affiliates of EAM have an interest. Either Aeltus or EAM, as the case
may be, normally will aggregate the respective purchases or sales, and then
allocate as nearly as practicable on a pro rata basis in proportion to the
amount to be purchased or sold. In the event that allocation is done other than
on a pro rata basis, the main factors to be considered in determining the
amounts to be allocated 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.
37
<PAGE>
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 $462,377 $347,005 $170,182
International 497,419 428,858 907,087
Mid Cap* 15,699 16,093 N/A
Small Company 342,043 189,609 167,794
Value Opportunity** 16,153 15,334 N/A
Balanced 106,837 74,562 131,989
Growth and Income 1,575,747 2,363,653 1,908,594
Real Estate** 5,975 21,212 N/A
Bond Fund 275 0 0
Aetna Government Fund 3,615 0 0
High Yield** 0 0 0
Money Market 0 0 0
Index Plus Bond* 0 0 0
Index Plus Large Cap*** 278,464 44,831 15,942
Index Plus Mid Cap**** 11,440 19,919 N/A
Index Plus Small Cap**** 7,225 27,474 N/A
Ascent 145,421 125,071 113,789
Crossroads 106,481 100,787 79,184
Legacy 47,787 44,163 47,247
</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.
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 $68,688
International 27,324
Mid Cap 1,140
Small Company 24,708
Value Opportunity 3,051
Balanced 8,287
Growth and Income 318,858
Real Estate 408
Index Plus Large Cap 131,819
Index Plus Mid Cap 0
Index Plus Small Cap 0
Ascent 21,389
Crossroads 15,008
Legacy 5,815
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.
38
<PAGE>
The Company, Aeltus and ACI, and EAM have adopted Codes 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, they are designed to prohibit a person from taking
advantage of a Fund's trades or from acting on inside information. Each of the
Codes of Ethics has been filed at and is available from the Securities and
Exchange Commission.
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.
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 1-800-367-7732. 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.
39
<PAGE>
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 1-800-367-7732.
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 notary
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 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
40
<PAGE>
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.
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.
41
<PAGE>
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 5.21% and 5.34%, 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
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:
o 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;
o 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.
42
<PAGE>
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 5.29% 4.79% 4.77% 5.81%
Aetna Government Fund 5.17% 4.65% 4.67% 5.64%
High Yield 8.95% 8.60% 8.65% 9.64%
Index Plus Bond 5.93% 5.32% 5.61% 6.37%
</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 5.55%
Aetna Government Fund 5.43%
High Yield 9.40%
Index Plus Bond 6.11%
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:
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>
Bond Fund 5.05% 4.81% 4.33% 4.33%
Aetna Government Fund 4.98% 4.74% 4.22% 4.26%
High Yield 9.37% 8.93% 8.67% 8.60%
Index Plus Bond 5.35% 5.19% 4.68% 4.85%
Average Annual Total Return
</TABLE>
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:
43
<PAGE>
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:
-----------------------------------------------
CLASS I
<TABLE>
<CAPTION>
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
<S> <C> <C> <C> <C>
Money Market 4.88% 5.41% 4.82% 1/3/92
Aetna Government Fund 0.58% 7.01% 5.56% 1/4/94
Bond Fund 1.56% 7.15% 6.30% 1/3/92
Balanced 14.79% 16.40% 12.37% 1/3/92
Growth and Income 23.00% 22.01% 15.79% 1/3/92
Growth 37.09% 25.65% 23.21% 1/4/94
Index Plus Large Cap 29.05% N/A 26.71% 12/10/96
Small Company 20.54% 19.14% 16.99% 1/4/94
International 28.10% 15.55% 12.30% 1/3/92
Ascent Fund 13.66% N/A 15.36% 1/4/95
Crossroads Fund 10.31% N/A 13.02% 1/4/95
Legacy Fund 7.99% N/A 11.23% 1/4/95
High Yield 7.64% N/A 0.37% 2/2/98
Index Plus Bond 0.61% N/A 3.48% 2/4/98
Index Plus Mid Cap 23.14% N/A 15.03% 2/3/98
Index Plus Small Cap 12.46% N/A -0.14% 2/3/98
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Mid Cap 23.79% N/A 8.38% 2/4/98
Real Estate -2.59% N/A -11.36% 2/2/98
Value Opportunity 32.88% N/A 17.65% 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 -4.43% 5.37% 4.07% 1/4/94
Bond Fund -3.39% 5.52% 4.99% 1/3/92
Balanced 7.89% 14.34% 10.79% 1/3/92
Growth and Income 15.61% 19.93% 14.23% 1/3/92
Growth 28.91% 23.49% 21.27% 1/4/94
Index Plus Large Cap 24.91% N/A 24.86% 12/10/96
Small Company 13.25% 17.08% 15.12% 1/4/94
International 20.41% 13.50% 10.72% 1/3/92
Ascent Fund 6.83% N/A 13.36% 1/4/95
Crossroads Fund 3.77% N/A 11.05% 1/4/95
Legacy Fund 1.46% N/A 9.29% 1/4/95
High Yield 2.29% N/A -2.63% 2/2/98
Index Plus Bond -2.64% N/A 1.44% 2/4/98
Index Plus Mid Cap 19.12% N/A 12.73% 2/3/98
Index Plus Small Cap 8.77% N/A -2.10% 2/3/98
Mid Cap 16.29% N/A 4.48% 2/4/98
Real Estate -8.35% N/A -14.53% 2/2/98
Value Opportunity 24.95% N/A 13.44% 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> <C>
Money Market 4.88% 5.41% 4.82% 1/3/92
Aetna Government Fund 0.34% 6.40% 4.95% 1/4/94
Bond Fund 1.43% 6.56% 5.64% 1/3/92
Balanced 14.48% 15.70% 11.63% 1/3/92
Growth and Income 22.67% 21.36% 15.09% 1/3/92
Growth 36.78% 24.96% 22.51% 1/4/94
Index Plus Large Cap 28.78% N/A 26.18% 12/10/96
Small Company 20.16% 18.48% 16.30% 1/4/94
International 27.76% 14.85% 11.56% 1/3/92
Ascent Fund 13.35% N/A 14.76% 1/4/95
Crossroads Fund 10.10% N/A 12.42% 1/4/95
Legacy Fund 7.65% N/A 10.64% 1/4/95
High Yield 7.39% N/A 0.13% 2/2/98
Index Plus Bond 0.37% N/A 3.23% 2/4/98
Index Plus Mid Cap 22.81% N/A 14.72% 2/3/98
Index Plus Small Cap 12.13% N/A -0.38% 2/3/98
Mid Cap 23.38% N/A 8.11% 2/4/98
Real Estate -2.76% N/A -11.57% 2/2/98
Value Opportunity 32.57% N/A 17.36% 2/2/98
</TABLE>
45
<PAGE>
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 -1.16% 4.04% 3.79% 1/3/92
Aetna Government Fund -5.33% 5.62% 4.36% 1/4/94
Bond Fund -4.15% 5.79% 5.26% 1/3/92
Balanced 8.68% 15.03% 11.26% 1/3/92
Growth and Income 16.62% 20.59% 14.63% 1/3/92
Growth 30.82% 24.24% 21.93% 1/4/94
Index Plus Large Cap 22.87% N/A 24.79% 12/10/96
Small Company 14.36% 17.74% 15.73% 1/4/94
International 21.88% 14.22% 11.21% 1/3/92
Ascent Fund 7.45% N/A 13.96% 1/4/95
Crossroads Fund 4.28% N/A 11.63% 1/4/95
Legacy Fund 1.86% N/A 9.83% 1/4/95
High Yield 1.56% N/A -2.86% 2/2/98
Index Plus Bond -5.15% N/A 0.16% 2/4/98
Index Plus Mid Cap 16.85% N/A 11.72% 2/3/98
Index Plus Small Cap 6.30% N/A -3.50% 2/3/98
Mid Cap 17.41% N/A 5.03% 2/4/98
Real Estate -8.24% N/A -14.21% 2/2/98
Value Opportunity 26.59% N/A 14.39% 2/2/98
</TABLE>
CLASS B (without payment of the CDSC)
<TABLE>
<CAPTION>
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
<S> <C> <C> <C> <C>
Money Market 3.84% 4.38% 3.79% 1/3/92
Aetna Government Fund -0.48% 5.94% 4.50% 1/4/94
Bond Fund 0.74% 6.10% 5.26% 1/3/92
Balanced 13.68% 15.26% 11.26% 1/3/92
Growth and Income 21.62% 20.78% 14.63% 1/3/92
Growth 35.82% 24.41% 21.99% 1/4/94
Index Plus Large Cap 27.87% N/A 25.47% 12/10/96
Small Company 19.36% 17.95% 15.82% 1/4/94
International 26.88% 14.45% 11.21% 1/3/92
Ascent Fund 12.45% N/A 14.21% 1/4/95
Crossroads Fund 9.28% N/A 11.90% 1/4/95
Legacy Fund 6.86% N/A 10.12% 1/4/95
High Yield 6.56% N/A -0.68% 2/2/98
Index Plus Bond -0.32% N/A 2.44% 2/4/98
Index Plus Mid Cap 21.85% N/A 13.82% 2/3/98
Index Plus Small Cap 11.30% N/A -1.20% 2/3/98
Mid Cap 22.41% N/A 7.24% 2/4/98
Real Estate -3.41% N/A -12.18% 2/2/98
Value Opportunity 31.59% N/A 16.46% 2/2/98
CLASS C (assuming payment of the CDSC)
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
Aetna Government Fund -1.41% 5.94% 4.51% 1/4/94
Bond Fund -0.30% 6.09% 5.25% 1/3/92
Balanced 12.64% 15.25% 11.25% 1/3/92
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Growth and Income 20.68% 20.79% 14.64% 1/3/92
Growth 34.80% 24.40% 21.99% 1/4/94
Index Plus Large Cap 27.42% N/A 25.77% 12/10/96
Small Company 18.33% 17.94% 15.81% 1/4/94
International 26.01% 14.47% 11.22% 1/3/92
Ascent Fund 11.47% N/A 14.21% 1/4/95
Crossroads Fund 8.30% N/A 11.90% 1/4/95
Legacy Fund 5.88% N/A 10.12% 1/4/95
High Yield 5.66% N/A -0.63% 2/2/98
Index Plus Bond -0.84% N/A 2.66% 2/4/98
Index Plus Mid Cap 21.44% N/A 14.13% 2/3/98
Index Plus Small Cap 10.91% N/A -0.92% 2/3/98
Mid Cap 21.57% N/A 7.32% 2/4/98
Real Estate -4.48% N/A -12.25% 2/2/98
Value Opportunity 30.56% N/A 16.44% 2/2/98
CLASS C (without payment of the CDSC)
FUND NAME 1 YEAR 5 YEARS SINCE INCEPTION INCEPTION DATE*
Money Market 4.88% 5.41% 4.82% 1/3/92
Aetna Government Fund -0.46% 5.94% 4.51% 1/4/94
Bond Fund 0.66% 6.09% 5.25% 1/3/92
Balanced 13.64% 15.25% 11.25% 1/3/92
Growth and Income 21.68% 20.79% 14.64% 1/3/92
Growth 35.80% 24.40% 21.99% 1/4/94
Index Plus Large Cap 28.17% N/A 25.77% 12/10/96
Small Company 19.33% 17.94% 15.81% 1/4/94
International 27.01% 14.47% 11.22% 1/3/92
Ascent Fund 12.47% N/A 14.21% 1/4/95
Crossroads Fund 9.30% N/A 11.90% 1/4/95
Legacy Fund 6.88% N/A 10.12% 1/4/95
High Yield 6.65% N/A -0.63% 2/2/98
Index Plus Bond -0.13% N/A 2.66% 2/4/98
Index Plus Mid Cap 22.19% N/A 14.13% 2/3/98
Index Plus Small Cap 11.66% N/A -0.92% 2/3/98
Mid Cap 22.57% N/A 7.32% 2/4/98
Real Estate -3.54% N/A -12.25% 2/2/98
Value Opportunity 31.56% N/A 16.44% 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.
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<PAGE>
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 1-800-238-6254.
Statement of Additional Information
48
<PAGE>
AETNA SERIES FUND, INC.
AETNA PRINCIPAL PROTECTION FUND IV
STATEMENT OF ADDITIONAL INFORMATION DATED JUNE 30, 2000,
AS AMENDED JULY 11, 2000
This Statement of Additional Information (Statement) is not a Prospectus and
should be read in conjunction with the current Prospectus for the Aetna
Principal Protection Fund IV, a series of Aetna Series Fund, Inc. (Company).
Capitalized terms not defined herein are used as defined in the Prospectus. The
Company is authorized to issue multiple series of shares, each representing a
diversified portfolio of investments with different investment objectives,
policies and restrictions. This Statement applies only to the Aetna Principal
Protection Fund IV (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: 1-800-238-6254.
<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...................................................7
DIRECTORS AND OFFICERS OF THE FUND.............................................8
INVESTMENT ADVISORY AGREEMENT.................................................11
THE GUARANTY AGREEMENT........................................................11
ADMINISTRATIVE SERVICES AGREEMENT.............................................12
CUSTODIAN.....................................................................12
THE GUARANTOR.................................................................12
TRANSFER AGENT................................................................12
INDEPENDENT AUDITORS..........................................................12
PRINCIPAL UNDERWRITER.........................................................13
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS...........................13
PURCHASE AND REDEMPTION OF SHARES.............................................14
BROKERAGE ALLOCATION AND TRADING POLICIES.....................................17
SHAREHOLDER ACCOUNTS AND SERVICES.............................................18
NET ASSET VALUE...............................................................19
TAX STATUS....................................................................19
PERFORMANCE INFORMATION.......................................................20
<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 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 Company's charter may be amended if the amendment is declared advisable by
the Directors and approved by the shareholders of the Company by the affirmative
vote of a majority of all votes entitled to be cast on the matter.
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.
1940 Act Classification The Company is a diversified open-end management
investment company, as 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.
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. With respect to fundamental policy number (7)
above, industry classifications are determined in accordance with the
classifications established by the Standard & Poor's Corporation.
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.
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
4
<PAGE>
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.
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
5
<PAGE>
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 the judgment of Aeltus
Investment Management, Inc. (Aeltus) 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.
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).
6
<PAGE>
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. Any
corporate bond purchased must mature on a date no more than three years before
or after 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 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. The Fund will likely incur increased transactional
costs during periods of high volatility. 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.
7
<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
NAME, POSITION(S) HELD YEARS (AND POSITIONS HELD WITH AFFILIATED
ADDRESS AND AGE WITH EACH FUND PERSONS OR PRINCIPAL UNDERWRITERS OF THE FUND)
--------------------------------- ------------------------------ --------------------------------------------------
<S> <C> <C>
J. Scott Fox* Director and President Director, Managing Director, Chief
10 State House Square (Principal Executive Operating Officer, Chief Financial Officer,
Hartford, Connecticut Officer) Aeltus Investment Management, Inc.,
Age 45 October 1997 to present; Director, Managing
Director, Chief Operating Officer, Chief
Financial Officer, Aeltus Capital, Inc.,
November 1997 to present; Director and
Senior Vice President, Aetna Life Insurance
and Annuity Company, March 1997 to
February 1998; Director, Managing Director,
Chief Operating Officer, Chief Financial
Officer and Treasurer, Aeltus Investment
Management, Inc., April 1994 to March
1997.
--------------------------------- ------------------------------ --------------------------------------------------
Wayne F. Baltzer Vice President Vice President, Aeltus Capital, Inc., May
10 State House Square 1998 to present; Vice President, Aetna
Hartford, Connecticut Investment Services, Inc., July 1993 to May
Age 56 1998.
--------------------------------- ------------------------------ --------------------------------------------------
Albert E. DePrince, Jr. Director Professor, Middle Tennessee State
3029 St. Johns Drive University, 1991 to present.
Murfreesboro, Tennessee
Age 59
--------------------------------- ------------------------------ --------------------------------------------------
Stephanie A. DeSisto Vice President, Vice President, Mutual Fund Accounting,
10 State House Square Treasurer and Chief Aeltus Investment Management, Inc.,
Hartford, Connecticut Financial Officer November 1995 to present; Director, Mutual
Age 46 (Principal Financial and Fund Accounting, Aetna Life Insurance and
Accounting Officer) Annuity Company, August 1994 to
November 1995.
--------------------------------- ------------------------------ --------------------------------------------------
8
<PAGE>
--------------------------------- ------------------------------ --------------------------------------------------
Amy R. Doberman Secretary General Counsel, Aeltus Investment
10 State House Square Management, Inc., February 1999 to present;
Hartford, Connecticut Vice President, General Counsel and
Age 38 Secretary, Aeltus Capital, Inc., April 1998 to
present; Counsel, Aetna Retirement Services,
Inc., December 1996 to present; Attorney,
Securities and Exchange Commission, March
1990 to November 1996.
--------------------------------- ------------------------------ --------------------------------------------------
Maria T. Fighetti Director Manager/Attorney, Health Services, New
325 Piermont Road York City Department of Mental Health,
Closter, New Jersey Mental Retardation and Alcohol Services,
Age 56 1973 to present.
--------------------------------- ------------------------------ --------------------------------------------------
David L. Grove Director Private Investor; Economic/Financial
5 The Knoll Consultant, December 1985 to present.
Armonk, New York
Age 82
--------------------------------- ------------------------------ --------------------------------------------------
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
Age 39 present; Director and President, Aeltus Capital,
Inc., March 1996 to present; President and Chief
Investment Officer, Aetna Life Insurance and
Annuity Company, May 2000 to present; Director,
Aetna Life Insurance and Annuity Company, February
1995 to present; Senior Vice President, Aetna Life
Insurance and Annuity Company, September 1994 to
May 2000.
--------------------------------- ------------------------------ --------------------------------------------------
Sidney Koch Director Financial Adviser, self-employed, January
455 East 86th Street 1993 to present.
New York, New York
Age 65
--------------------------------- ------------------------------ --------------------------------------------------
Frank Litwin Vice President Managing Director, Aeltus Investment
10 State House Square Management, Inc., August 1997 to present;
Hartford, Connecticut Managing Director, Aeltus Capital, Inc., May
Age 50 1998 to present; Vice President, Fidelity
Investments Institutional Services Company,
April 1992 to August 1997.
--------------------------------- ------------------------------ --------------------------------------------------
Shaun P. Mathews* Director Vice President/Senior Vice President, Aetna
151 Farmington Avenue Life Insurance and Annuity Company, March 1991
Hartford, Connecticut to present; Director, Aetna Life Insurance and
Annuity Company, March 1991 to May 2000; Director,
Aetna Investment Services, Inc., July 1993 to
present; Senior Vice President, Aetna Investment
Services, Inc., July 1993 to February, 1999.
--------------------------------- ------------------------------ --------------------------------------------------
9
<PAGE>
--------------------------------- ------------------------------ --------------------------------------------------
Corine T. Norgaard Director Dean of the Barney School of Business,
556 Wormwood Hill University of Hartford (West Hartford, CT),
Mansfield Center, Connecticut August 1996 to present; Professor,
Age 63 Accounting and Dean of the School of
Management, SUNY Binghamton
(Binghamton, NY), August 1993 to August
1996
--------------------------------- ------------------------------ --------------------------------------------------
Richard G. Scheide Director Trust and Private Banking Consultant, David
11 Lily Street Ross Palmer Consultants, July 1991 to
Nantucket, Massachusetts present.
Age 71
-------------------------------- ------------------------------ ---------------------------------------------------
</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.
<TABLE>
<CAPTION>
------------------------------ ------------------- ---------------------------------
AGGREGATE
NAME OF PERSON COMPENSATION FROM TOTAL COMPENSATION FROM THE
POSITION COMPANY COMPANY AND FUND COMPLEX
------------------------------ ------------------- ---------------------------------
<S> <C> <C>
Corine Norgaard $10,103 $73,500
Director
------------------------------ ------------------- ---------------------------------
Sidney Koch 10,103 73,500
Director
------------------------------ ------------------- ---------------------------------
Maria T. Fighetti* 10,361 75,375
Director
------------------------------ ------------------- ---------------------------------
Richard G. Scheide 10,790 78,500
Director, Chairperson
Audit Committee
------------------------------ ------------------- ---------------------------------
David L. Grove* 10,790 78,500
Director
------------------------------ ------------------- ---------------------------------
Albert E. DePrince, Jr.** 10,361 75,375
Director, Chairperson
Contract Committee
------------------------------ ------------------- ---------------------------------
</TABLE>
* During the fiscal year ended October 31, 1999, Ms. Fighetti and Dr. Grove
elected to defer compensation in the amount of $24,000 and $78,500,
respectively.
**Dr. DePrince replaced Dr. Grove as Chairperson of the Contract Committee as
of April 2000.
10
<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) 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
Guaranty Agreement.
11
<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 and Guarantee per Share;
(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
KPMG LLP, CityPlace II, Hartford, Connecticut 06103 serves as independent
auditors to the Fund. KPMG LLP provides audit services, assistance and
consultation in connection with the Commission filings.
12
<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 April 12, 2000
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 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.
13
<PAGE>
<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 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 may
be entitled to receive the following commissions:
<TABLE>
<CAPTION>
Commission
<S> <C>
o on sales of $1 million to $3 million; 1.00%
o on sales over $3 million to $20 million; and 0.50%
o 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
securities dealers that enter into agreements providing ACI with preferential
access to registered representatives of the securities 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.
ACI or its affiliates may, from time to time, also make payments to clearing
firms that offer networking services which make the Fund available to their
customers. Such payments to clearing firms will not exceed 0.10% of the total
Fund assets held in omnibus accounts or in customer accounts that designate such
firm(s) as the selling broker-dealer.
ACI has agreed to reimburse Financial Network Investment Corporation, an
affiliate of ACI, for trading costs incurred in connection with trades through
the Pershing brokerage clearing system.
ACI may make payments to affiliated and unaffiliated securities dealers that
engage in wholesaling efforts on behalf of the Company and the Fund. These
payments will not exceed 0.33% of the value of Fund shares sold as a result of
such wholesaling efforts. For the period July 1 through August 31, 2000, ACI has
agreed to pay AISI 0.48% of the value of Fund shares sold as a result of such
wholesaling efforts. ACI may also pay such firms a quarterly fee based on
a percentage of assets retained as of the end of a calendar quarter, not to
exceed 0.125% of the value of such assets.
The value of a shareholder's investment will be unaffected by these payments.
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 September 5, 2000 (August 7,
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.
14
<PAGE>
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
New York Stock Exchange (NYSE) is restricted as determined by the Securities and
Exchange Commission (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 $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.
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 to Class A purchases if you are:
1. Employees of Aetna Inc. and its affiliates (including retired employees and
members of employees' and retired employees' immediate families and board
members and their immediate families), NASD registered representatives of
ACI or any affiliated broker-dealers (including members of their immediate
families) purchasing shares for their own accounts, and members of the Board
(including their immediate families).
2. Investors who purchase Fund shares with redemption proceeds received in
connection with a distribution from a retirement plan investing either (1)
directly in any Fund or through an unregistered separate account sponsored
by Aetna or any affiliate thereof or (2) in a registered separate account
sponsored by Aetna Life Insurance and Annuity Company 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.
3. Certain trust companies and bank trust departments investing on behalf of
their clients.
4. Certain retirement plans that are sponsored by an employer and have plan
assets of $500,000 or more.
15
<PAGE>
5. 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.
6. 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.
7. Registered investment companies.
8. Insurance companies (including separate accounts).
9. Shareholders of the Adviser Class at the time such shares were designated as
Class A shares.
10. Certain executive deferred compensation plans.
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 Class A shares
purchased more than two years prior to the redemption.
CDSC Waivers
The CDSC will be waived for:
o Redemptions following the death or disability of the shareholder or
beneficial owner;
o Redemptions related to distributions from retirement plans or accounts
under Internal Revenue Code (Code) Section 403(b) after you attain age
70 1/2;
o Tax-free returns of excess contributions from employee benefit plans;
and
o Distributions from employee benefit plans, including those due to plan
termination or plan transfer.
Letter of Intent
You may qualify for a reduced sales charge when you buy Class A shares, as
described in the Prospectus. At any time, you may file with the Company a signed
shareholder application with the Letter of Intent section completed. After the
Letter of Intent is filed, each additional investment in the Fund (or in certain
other series of the Company) will be entitled to the sales charge applicable to
the level of investment indicated on the Letter of Intent. Sales charge
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.
16
<PAGE>
Right of Accumulation/Cumulative Quantity Discount
A purchaser of Class A shares may qualify for a cumulative quantity discount by
combining a current purchase (or combined purchases as described above) with
certain other Class A shares of the Series already owned. To determine if you
may pay a reduced front-end sales charge, the amount of your current purchase is
added to the cost or current value, whichever is higher, of certain other Class
A shares you own, as well as certain Class A shares of your spouse and children
under the age of 21. If you are the sole owner of the Fund, you may also add any
other accounts, including retirement plan accounts invested in certain Class A
shares of the Company. Companies with one or more retirement plans may add
together the total plan assets invested in certain Class A shares of the Series
to determine the front-end sales charge that applies.
To qualify for the cumulative quantity discount on a purchase through an
investment dealer, when each purchase is made the investor or dealer must
provide the Company with sufficient information to verify that the purchase
qualifies for the privilege or discount. The shareholder must furnish this
information to the Company when making direct cash investments.
Additional Rights
The Fund retains certain rights, including the rights to: refuse orders to
purchase shares; vary its requirements for initial or additional investments,
reinvestments, retirement and employee benefit plans, sponsored arrangements and
similar programs; and change or discontinue its sales charge waivers and orders
acceptance practices.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the supervision of the Board, Aeltus has responsibility for making
investment decisions, for effecting the execution of trades and for negotiating
any brokerage commissions thereon. It is Aeltus' policy to obtain the best
quality of execution available, giving attention to net price (including
commissions where applicable), execution capability (including the adequacy of a
firm's capital position), research and other services related to execution. The
relative priority given to these factors will depend on all of the circumstances
regarding a specific trade. Aeltus may also consider the sale of shares of
registered investment companies advised by Aeltus as a factor in the selection
of brokerage firms to execute the Fund's portfolio transactions or in the
designation of a portion of the commissions charged on those transactions to be
paid to other broker-dealers, 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
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in servicing all of its accounts; not all such services will be used by Aeltus
to benefit the Fund.
Consistent with federal law, Aeltus may obtain such brokerage and research
services regardless of whether they are paid for (1) by means of commissions, or
(2) by means of separate, non-commission payments. Aeltus' judgment as to
whether and how it will obtain the specific brokerage and research services will
be based upon its analysis of the quality of such services and the cost
(depending upon the various methods of payment which may be offered by brokerage
firms) and will reflect Aeltus' opinion as to which services and which means of
payment are in the long-term best interests of the Fund.
The Fund has no present intention of effecting any brokerage transactions in
portfolio securities with Aeltus or any other affiliated person.
The Fund, another series of the Company, another advisory client of Aeltus or
Aeltus itself, may desire to buy or sell the same security at or about the same
time. In such a case, the purchases or sales will normally be aggregated, and
then allocated as nearly as practicable on a pro rata basis in proportion to the
amounts to be purchased or sold by each. In some cases the smaller orders will
be filled first. In determining the amounts to be purchased and sold, the main
factors to be considered are the respective investment objectives of the funds
and/or accounts, the relative size of portfolio holdings of the same or
comparable securities, availability of cash for investment, and the size of
their respective investment commitments. Prices are averaged for aggregated
trades.
The Board has adopted a policy allowing trades to be made between affiliated
registered investment companies or series thereof provided they meet the terms
of Rule 17a-7 under the 1940 Act.
The Company, Aeltus and ACI have adopted a Code of Ethics (in accordance with
Rule 17j-1 under the 1940 Act). The Code of Ethics allow personnel subject to
the Codes to invest in securities, including securities that may be purchased or
held by a Fund. However, they are designed to prohibit a person from taking
advantage of a Fund's trades or from acting on inside information. Each of the
Codes of Ethics has been filed at and is available from the Securities and
Exchange Commission.
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 $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.
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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 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 (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 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 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.
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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
In the event MBIA is required to make a guarantee payment to the Fund, this
payment will likely be characterized as a capital gain to the Fund. You should
consult your tax professional for assistance in evaluating the tax implications
of investing in the Fund.
Any withholding of taxes on distributions by the Fund will result in a reduction
of the benefit under the Guarantee.
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
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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
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