- --------------------------------------------------------------------------------
TABLE OF CONTENTS
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President's Letter..................................................... 1
PRINCIPAL PROTECTION FUNDS:
Investment Review...................................................... 3
Portfolios of Investments:
Aetna Principal Protection Fund I..................................... 7
Aetna Principal Protection Fund II.................................... 13
Statements of Assets and Liabilities................................... 14
Statements of Operations............................................... 15
Statements of Changes in Net Assets.................................... 16
Notes to Financial Statements.......................................... 18
Additional Information................................................. 22
Financial Highlights................................................... 24
Independent Auditors' Report........................................... 28
<PAGE>
PRESIDENT'S LETTER
Dear Valued Shareholder,
Thank you for investing in the Aetna Series Fund, Inc. With more than 7,500
mutual funds available in today's market, we particularly appreciate your having
chosen our products.
Let's recap the market. Twelve months ago, high U.S. market volatility and a
number of significant international economic problems created anxiety in the
markets. With the arrival of 1999, however, fears began to abate and the
financial market environment improved. By mid-year, emerging markets began to
rebound. European performance offered hope for its best potential in a decade.
An early-year economic improvement in Japan had been initially viewed as a
short-term statistical anomaly. However, by summer, improving private-sector
demand suggested that Japan's recovery might last.
As welcome as this foreign economic robustness might have been, when combined
with a loss of momentum by the U.S. dollar and signs of possible inflationary
pressures down the line, the Federal Reserve has increased short-term interest
rates twice. This has led to a sell-off in U.S. bond markets and a flattening of
equity-market returns. In fact, the U.S. or domestic market, as a whole,
produced negative returns for the calendar quarter ending September 30. Still,
the U.S. economy continues to show signs of steadiness and vigor. Today, leading
economic reports indicate that the U.S. economy is growing robustly - without
generating an acceleration in inflation.
At Aetna Series Fund, Inc., and its advisor Aeltus Investment Management, Inc.,
we strive to continuously improve our products and services. Here are some
highlights of our efforts since we last wrote to you:
o AETNA PRINCIPAL PROTECTION FUND I enjoyed a successful offering
period, as investors committed over $160 million to the fund; AETNA
PRINCIPAL PROTECTION FUND II is currently in its offering period.
These innovative total-return funds offer investors downside
protection - while providing investors the opportunity for upside
market potential.
o AETNA MUTUAL FUNDS was listed among the best-selling fund groups for
September, based on new incoming flows of dollars (Barron's,
November 1, 1999).
o Fifteen of our nineteen mutual funds OUTPERFORMED THEIR BENCHMARKS
for the one-year period ended October 31, 1999, based upon Class I
returns.
o Aeltus critical business systems are now YEAR 2000 READY.
o As of November 1, 1999, Aetna Ascent Fund, Aetna Crossroads Fund and
Aetna Legacy Fund have LOWER EXPENSE CAPS. Lowering the total
expenses charged to investors will contribute to higher returns for
investors.
As we stand at the gateway to a new fund year - and to a new century - you have
our commitment to bringing you our best in products and services. We wish you a
prosperous new year.
Sincerely,
/s/ John Y. Kim /s/ J. Scott Fox
John Y. Kim J. Scott Fox
President and Chief Investment Officer President
Aeltus Investment Management, Inc. Aetna Series Fund, Inc.
1
<PAGE>
AETNA PRINCIPAL PROTECTION FUND I
HOW DID THE FUND PERFORM DURING THE PERIOD?
Aetna Principal Protection Fund I Class A shares generated a 1.39% total return,
net of fund expenses, for the period from October 7, 1999 through October 31,
1999. The benchmarks, Standard & Poor's (S&P) 500 Index(a) and Lehman Brothers
Aggregate Bond Index(b), returned 2.88% and 0.94%, respectively, for the same
period.
Currently closed to new deposits, the Fund invests primarily in common stocks
and bonds in varying proportions in response to market fluctuations. The
allocation, based on net assets as of October 31, 1999, was 64% equities and 36%
fixed income. This strategy is complemented by a guarantee provided by MBIA
Insurance Corporation that the market value of an investor's assets will not be
less than their market value on the last day of the Fund's Offering Period
(October 6, 1999) if the assets are held to the Fund's maturity on October 6,
2004.
WHAT IS YOUR OUTLOOK GOING FORWARD?
Going forward, we will monitor interest rates to determine if the Fed maintains
its bias towards further short-term rate increases. Rising interest rates could
have an influence on our allocation between large cap stocks and fixed income
securities. When rates rise, as they did during the latter half of the fiscal
year, we are likely to see a further shift to equities.
For the fixed income portion of the Fund, we maintain a cautious outlook on
credit and the narrowness of the spread between government and corporate bonds.
We currently maintain 80% of our fixed income holdings in U.S. Treasuries and
Agencies. As spreads widen we may shift some of our holdings into AAA and AA
corporate bonds.
- -----------------------------------------------------------------------------
ASSET ALLOCATION: % OF
NET ASSETS NOTIONAL VALUE* ECONOMIC EXPOSURE*
ASSET CLASS 10/31/99 OF FUTURES 10/31/99
- -----------------------------------------------------------------------------
Large Cap Stocks 62% 1% 63%
International Stocks 2% -- 2%
International Bonds 4% -- 4%
Fixed Income 30% -- 30%
Cash Equivalents 2% (1)% 1%
-----------------------------------------------------
100% -- 100%
=====================================================
* Notional value refers to the economic value at risk or the exposure to the
financial instruments underlying the options and futures positions. Economic
exposure reflects the Funds' exposure to both changes in the value of the
portfolio of investments as well as the financial instruments underlying the
options and futures positions.
DOMESTIC EQUITY PORTFOLIO BREAKDOWN:
- --------------------------------------------------------------------------
% OF EQUITY % OF S&P OVER/(UNDER)
SECTOR INVESTMENTS 500 WEIGHTING
- --------------------------------------------------------------------------
Basic Materials 2.7% 3.0% (0.3)%
Commercial Services 1.2% 1.4% (0.2)%
Consumer Discretionary 12.9% 11.7% 1.2%
Consumer Non-Discretionary 5.0% 7.2% (2.2)%
Energy 5.3% 6.6% (1.3)%
Finance 15.8% 15.4% 0.4%
Healthcare 9.8% 11.1% (1.3)%
Manufacturing 10.3% 9.9% 0.4%
Technology 27.4% 23.2% 4.2%
Utilities 9.6% 10.5% (0.9)%
See Definition of Terms. 3
<PAGE>
- ------------------------------------------------
% OF NET
TOP TEN EQUITY HOLDINGS ASSETS
- ------------------------------------------------
Microsoft Corp. 3.3%
General Electric Co. 2.5%
Wal-Mart Stores, Inc. 2.1%
Cisco Systems, Inc. 2.0%
Lucent Technologies, Inc. 1.6%
Citigroup Inc. 1.5%
International Business Machines Corp. 1.2%
America Online, Inc. 1.2%
SBC Communications, Inc. 1.0%
Home Depot, Inc. 0.9%
The opinions expressed reflect those of the portfolio manager only through
October 31, 1999. The manager's opinions are subject to change at any time based
on market and other conditions. The composition, industries and holdings of the
Fund are subject to change.
4 See Definition of Terms.
<PAGE>
AETNA PRINCIPAL PROTECTION FUND II
ACCUMULATION PERIOD
Aetna Principal Protection Fund II Class A and Class B is being offered from
October 7, 1999 through December 20, 1999 as a funding option issued by Aetna
Series Fund, Inc. Fund assets will be invested entirely in money market
instruments prior to December 21, 1999. After that date, the Fund will allocate
its investments between equities and fixed income securities in proportions that
are intended to help the Fund attain its investment objective.
See Definition of Terms. 5
<PAGE>
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DEFINITION OF TERMS
- --------------------------------------------------------------------------------
(a) The S&P 500 is the Standard & Poor's 500 Index. Performance is calculated
on a total return basis and dividends are reinvested, as reported by Frank
Russell Company.
(b) The Lehman Brothers Aggregate Bond Index is an unmanaged index and is
composed of securities from Lehman Brothers Government/Corporate Bond
Index, Mortgage-Backed Securities Index and the Asset-Backed Securities
Index.
The unmanaged indices described above are not available for individual
investment.
6
<PAGE>
PRINCIPAL PROTECTION FUNDS
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
PRINCIPAL PROTECTION FUND I
- --------------------------------------------------------------------------------
NUMBER OF MARKET
SHARES VALUE
--------- ------------
COMMON STOCKS (64.4%)
AIR TRANSPORT (0.2%)
AMR Corp. + ...................................... 1,100 $ 69,850
Delta Air Lines, Inc. ............................ 1,500 81,656
FDX Corp. + ...................................... 3,200 137,800
Southwest Airlines Co. ........................... 6,800 114,325
------------
403,631
------------
ALUMINUM (0.2%)
Alcan Aluminum Ltd. .............................. 2,400 79,050
Alcoa Inc. ....................................... 3,800 230,850
Reynolds Metals Co. .............................. 600 36,263
------------
346,163
------------
AUTO PARTS AND HARDWARE (0.1%)
Black & Decker Corp. ............................. 1,000 43,000
Briggs & Stratton Corp. .......................... 200 11,688
Cooper Tire & Rubber Co. ......................... 300 5,044
Genuine Parts Co. ................................ 1,300 33,881
Snap-On, Inc. .................................... 700 21,262
Stanley Works (The) .............................. 800 22,200
------------
137,075
------------
AUTOMOTIVE (1.0%)
Dana Corp. ....................................... 1,900 56,169
Delphi Automotive Systems Corp. .................. 7,900 129,856
Eaton Corp. ...................................... 700 52,675
Ford Motor Co. ................................... 13,900 762,763
General Motors Corp. + ........................... 8,500 597,125
Johnson Controls, Inc. ........................... 1,200 72,900
TRW, Inc. ........................................ 1,200 51,450
------------
1,722,938
------------
BANKS AND THRIFTS (4.2%)
AmSouth Bancorporation ........................... 2,500 64,375
Bank of America Corp. ............................ 15,700 1,010,687
Bank of New York Co., Inc. ....................... 7,500 314,062
Bank One Corp. ................................... 10,700 401,919
BB&T Corp. ....................................... 2,700 98,213
Chase Manhattan Corp. ............................ 10,900 952,387
Comerica, Inc. ................................... 1,600 95,100
Fifth Third Bancorp .............................. 2,600 191,912
First Union Corp. ................................ 8,600 367,112
Firstar Corp. .................................... 9,700 284,937
Fleet Boston Corp. ............................... 7,800 340,275
Golden West Financial Corp. ...................... 800 89,400
Huntington Bancshares Inc. ....................... 2,100 62,213
J.P. Morgan & Co. ................................ 1,900 248,662
KeyCorp .......................................... 4,200 117,338
Mellon Bank Corp. ................................ 5,000 184,687
National City Corp. .............................. 4,800 141,600
Northern Trust Corp. ............................. 1,100 106,219
PNC Bank Corp. ................................... 2,500 149,063
Regions Financial Corp. .......................... 2,200 66,138
Republic New York Corp. .......................... 1,100 69,506
SouthTrust Corp. ................................. 1,700 68,000
State Street Corp. ............................... 1,500 114,188
Summit Bancorp ................................... 1,600 55,400
Suntrust Banks, Inc. ............................. 3,200 234,200
Synovus Financial Corp. .......................... 2,600 55,738
U.S. Bancorp ..................................... 3,100 114,894
Union Planters Co. ............................... 500 22,250
Wachovia Corp. ................................... 1,400 120,750
Washington Mutual, Inc. .......................... 4,200 150,938
Wells Fargo & Co. ................................ 14,900 713,337
------------
7,005,500
------------
BIOTECH AND MEDICAL PRODUCTS (0.6%)
Amgen, Inc. + .................................... 5,400 430,650
Bard (C.R.) Inc. ................................. 700 37,756
Bausch & Lomb, Inc. .............................. 800 43,200
Biomet, Inc. ..................................... 1,000 30,125
Boston Scientific Corp. + ........................ 3,700 74,462
Guidant Corp. .................................... 2,600 128,375
Mallinckrodt Inc. ................................ 600 20,363
Medtronic, Inc. + ................................ 6,500 225,062
Saint Jude Medical, Inc. + ....................... 300 8,213
------------
998,206
------------
CHEMICALS (0.7%)
Dow Chemical Co. ................................. 2,300 271,975
Du Pont (E.I.) de Nemours ........................ 9,400 605,713
Hercules, Inc. ................................... 900 21,656
Monsanto Co. ..................................... 5,500 211,750
Rohm & Haas Co. .................................. 1,900 72,675
------------
1,183,769
------------
COMMERCIAL SERVICES (0.2%)
Deluxe Corp. ..................................... 600 16,950
Interpublic Group of Co., Inc. (The) ............. 2,300 93,438
Omnicom Group, Inc. .............................. 1,700 149,600
Paychex, Inc. .................................... 2,500 98,437
RR Donnelley & Sons Co. .......................... 1,300 31,525
------------
389,950
------------
COMPUTERS (3.4%)
Apple Computer, Inc. + ........................... 1,700 136,213
Compaq Computer Corp. ............................ 9,200 174,800
Dell Computer Corp. + ............................ 29,100 1,167,637
Gateway 2000, Inc. + ............................. 3,100 204,794
Hewlett Packard Co. .............................. 9,200 681,375
International Business Machines Corp. ............ 20,600 2,026,525
Silicon Graphics Inc. + .......................... 1,600 12,400
Sun Microsystems, Inc. + ......................... 10,600 1,121,612
Unisys Corp. + ................................... 2,400 58,200
------------
5,583,556
------------
CONGLOMERATE AND AEROSPACE (3.3%)
Boeing Co. ....................................... 12,600 580,387
Crane Co. ........................................ 700 14,306
General Dynamics Corp. ........................... 1,700 94,244
See Notes to Portfolio of Investments. 7
<PAGE>
PRINCIPAL PROTECTION FUNDS
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
PRINCIPAL PROTECTION FUND I (CONTINUED)
- --------------------------------------------------------------------------------
NUMBER OF MARKET
SHARES VALUE
--------- ------------
CONGLOMERATE AND AEROSPACE (CONTINUED)
General Electric Co. ............................. 29,900 $ 4,053,319
Goodrich (B.F.) Co. .............................. 400 9,475
Lockheed Martin Corp. ............................ 2,200 44,000
Loews Corp. ...................................... 1,500 106,312
National Service Industries, Inc. ................ 400 12,900
Northrop Grumman Corp. ........................... 1,000 54,875
Perkin-Elmer Inc. + .............................. 200 8,163
Raytheon Co. ..................................... 2,100 61,163
Textron, Inc. .................................... 1,600 123,500
United Technologies Corp. ........................ 5,100 308,550
------------
5,471,194
------------
CONSUMER FINANCE (1.2%)
Associates First Capital Corp. ................... 7,100 259,150
Capital One Financial Corp. ...................... 2,000 106,000
Countrywide Credit Industries, Inc. .............. 1,100 37,331
Federal Home Loan Mortgage Corp. ................. 5,800 313,562
Federal National Mortgage Association ............ 9,200 650,900
Household International, Inc. .................... 5,000 223,125
MBNA Corp. ....................................... 8,300 229,288
Ryder System, Inc. ............................... 700 14,963
SLM Holding Corp. ................................ 1,500 73,406
------------
1,907,725
------------
CONSUMER PRODUCTS (1.4%)
Alberto-Culver Co. ............................... 500 11,781
Avon Products, Inc. .............................. 2,500 80,625
Clorox Co. ....................................... 800 32,750
Colgate-Palmolive Co. ............................ 5,000 302,500
Gillette Co. ..................................... 9,800 354,638
International Flavors & Fragrances,
Inc ............................................. 1,000 38,250
Kimberly-Clark Corp. ............................. 4,500 284,063
Procter & Gamble Co. ............................. 12,100 1,268,987
------------
2,373,594
------------
CONSUMER SERVICES (0.8%)
Carnival Corp. ................................... 6,500 289,250
Cendant Corp. + .................................. 7,300 120,450
Darden Restaurants, Inc. ......................... 2,600 49,562
H&R Block, Inc. .................................. 900 38,306
Harrah's Entertainment, Inc. + ................... 1,400 40,513
Hilton Hotels Corp. .............................. 2,200 20,350
Marriott International, Inc. ..................... 2,500 84,219
McDonald's Corp. ................................. 12,200 503,250
Mirage Resorts, Inc. + ........................... 1,700 24,756
Tricon Global Restaurants, Inc. + ................ 2,100 84,394
Wendy's International, Inc. ...................... 1,300 31,038
------------
1,286,088
------------
CONSUMER SPECIALTIES (0.0%)
Brunswick Corp. .................................. 900 20,362
Hasbro, Inc. ..................................... 2,000 41,250
Jostens, Inc. .................................... 300 6,338
------------
67,950
------------
DATA AND IMAGING SERVICES (8.6%)
3Com Corp. + ..................................... 3,000 87,000
Adobe Systems, Inc. .............................. 1,400 97,913
America Online, Inc. + ........................... 15,200 1,971,250
Automatic Data Processing, Inc. .................. 4,800 231,300
BMC Software, Inc. + ............................. 800 51,350
Ceridian Corp. + ................................. 1,400 30,713
Cisco Systems, Inc. + ............................ 44,500 3,293,000
Computer Associates International,
Inc ............................................. 4,900 276,850
Computer Sciences Corp. + ........................ 1,600 109,900
Compuware Corp. + ................................ 3,700 102,906
Eastman Kodak Co. ................................ 2,500 172,344
Electronic Data Systems Corp. .................... 5,000 292,500
EMC Corp. + ...................................... 13,700 1,000,100
First Data Corp. ................................. 5,900 269,556
Microsoft Corp. + ................................ 58,200 5,387,137
Network Appliance, Inc. + ........................ 800 59,200
Novell, Inc. + ................................... 4,500 90,281
Oracle Corp. + ................................... 13,100 623,069
Parametric Technology Co. + ...................... 2,400 45,750
Seagate Technology, Inc. + ....................... 2,800 82,425
------------
14,274,544
------------
DISCRETIONARY RETAIL (4.7%)
Bed Bath & Beyond, Inc. + ........................ 1,500 49,969
Best Buy Co., Inc. + ............................. 2,800 155,575
Circuit City Stores, Inc. ........................ 3,400 145,137
Consolidated Stores Corp. + ...................... 1,000 18,313
Costco Wholesale Corp. + ......................... 2,900 232,906
Dayton Hudson Co. ................................ 5,000 323,125
Dollar General Corp. ............................. 2,400 63,300
Federated Department Stores, Inc. + .............. 2,200 93,912
Gap, Inc. ........................................ 9,700 360,112
Home Depot, Inc. ................................. 20,300 1,532,650
Kmart Corp. + .................................... 8,200 82,513
Kohl's Corp. + ................................... 1,700 127,181
Lowe's Co., Inc. ................................. 4,900 269,500
May Department Stores Co. ........................ 4,500 156,094
Nordstrom, Inc. .................................. 1,400 34,913
Office Depot, Inc. + ............................. 3,900 48,506
Sears, Roebuck & Co. ............................. 3,500 98,656
Staples, Inc. + .................................. 4,800 106,500
Tandy Corp. ...................................... 2,000 125,875
The Limited, Inc. ................................ 2,201 90,489
The Pep Boys - Manny, Moe & Jack ................. 500 6,250
TJX Companies, Inc. .............................. 5,400 146,475
Toys "R" Us, Inc. + .............................. 3,400 48,025
Wal-Mart Stores, Inc. ............................ 60,800 3,446,600
------------
7,762,576
------------
DIVERSIFIED FINANCIAL SERVICES (2.0%)
American Express Co. ............................. 4,100 631,400
Citigroup Inc. ................................... 46,200 2,500,575
8 See Notes to Portfolio of Investments.
<PAGE>
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NUMBER OF MARKET
SHARES VALUE
--------- ------------
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
Providian Financial Corp. ........................ 1,900 $ 207,100
------------
3,339,075
------------
DRUGS (5.4%)
Abbott Laboratories .............................. 13,700 553,137
Allergan, Inc. ................................... 900 96,638
American Home Products Corp. ..................... 10,000 522,500
Baxter International, Inc. ....................... 2,700 175,163
Bristol-Myers Squibb Co. ......................... 18,100 1,390,306
Eli Lilly & Co. .................................. 9,900 681,862
Johnson & Johnson ................................ 12,300 1,288,425
Merck & Co., Inc. ................................ 18,000 1,432,125
Pfizer, Inc. ..................................... 35,500 1,402,250
Pharmacia & Upjohn, Inc. ......................... 4,400 237,325
Schering Plough .................................. 13,300 658,350
Warner Lambert Co. ............................... 6,500 518,781
------------
8,956,862
------------
ELECTRIC UTILITIES (1.0%)
AES Corp. + ...................................... 1,700 95,944
Ameren Corp. ..................................... 1,200 45,375
Carolina Power & Light Co. ....................... 700 24,150
Central & South West Corp. ....................... 2,100 46,594
Consolidated Edison, Inc. ........................ 800 30,550
Constellation Energy Group ....................... 1,200 36,825
Dominion Resources, Inc. ......................... 700 33,688
DTE Energy Co. ................................... 2,000 66,375
Duke Energy Corp. ................................ 3,600 203,400
Edison International Inc. ........................ 2,500 74,062
Entergy Corp. .................................... 2,100 62,869
FirstEnergy Corp. ................................ 2,400 62,550
Florida Progress Corp. ........................... 900 41,231
FPL Group, Inc. .................................. 600 30,188
GPU, Inc. ........................................ 1,800 61,088
Peco Energy Co. .................................. 1,900 72,556
PG&E Corp. ....................................... 2,700 61,931
PP&L Resources, Inc. ............................. 2,600 70,362
Public Service Enterprise Group, Inc. ............ 3,200 126,600
Reliant Energy Inc. .............................. 2,800 76,300
Southern Co. ..................................... 6,500 172,656
Texas Utilities Co. .............................. 2,900 112,375
Unicom Corp. ..................................... 2,100 80,456
------------
1,688,125
------------
ELECTRICAL MACHINERY AND INSTRUMENTS (0.3%)
Harris Corp. ..................................... 1,200 26,925
Lexmark International Group, Inc. + .............. 1,400 109,287
PE Corp-PE Biosystems Group ...................... 900 58,388
Pitney Bowes, Inc. ............................... 2,700 123,019
Rockwell International Corp. ..................... 1,800 87,187
Tektronix, Inc. .................................. 400 13,500
Xerox Corp. ...................................... 2,300 64,400
------------
482,706
------------
ELECTRONIC MEDIA (1.4%)
CBS Corp. + ...................................... 6,300 307,519
Clear Channel Communications, Inc. + ............. 3,000 241,125
Comcast Corp. .................................... 2,900 122,163
King World Production, Inc. + .................... 700 27,125
Mediaone Group, Inc. + ........................... 4,500 319,781
Time Warner, Inc. ................................ 11,800 822,312
Viacom, Inc. + ................................... 3,800 170,050
Walt Disney Co. (The) + .......................... 11,300 298,037
------------
2,308,112
------------
FOOD AND BEVERAGE (1.5%)
Anheuser-Busch Co., Inc. ......................... 4,000 287,250
Archer-Daniels-Midland Co. ....................... 2,400 29,550
Bestfoods ........................................ 2,600 152,750
Brown-Forman Corp. + ............................. 500 33,750
Coca-Cola Enterprises, Inc. ...................... 4,500 115,031
Conagra, Inc. .................................... 4,800 125,100
Coors (Adolph) Co. ............................... 400 22,200
Fortune Brands, Inc. ............................. 1,700 60,244
General Mills, Inc. .............................. 1,500 130,781
Kellogg Co. ...................................... 3,900 155,269
PepsiCo, Inc. .................................... 13,100 454,406
Quaker Oats Co. .................................. 1,400 98,000
Ralston-Ralston Purina Group ..................... 1,300 40,869
Sara Lee Corp. ................................... 7,600 205,675
Seagram Co. Ltd. ................................. 3,300 162,937
Unilever NV ...................................... 5,200 346,775
Wrigley (Wm.) Jr. Co. + .......................... 1,000 79,938
------------
2,500,525
------------
FOOD AND DRUG RETAIL (0.6%)
Albertson's, Inc. ................................ 1,700 61,731
CVS Corp. ........................................ 3,500 152,031
Great Atlantic & Pacific Tea Co., Inc. ........... 300 8,569
Kroger Co. (The) + ............................... 8,700 181,069
Longs Drug Stores, Inc. .......................... 300 8,175
Safeway, Inc. + .................................. 3,600 127,125
SUPERVALU, Inc. .................................. 1,300 27,300
Sysco Corp. ...................................... 2,900 111,469
Walgreen Co. ..................................... 8,500 214,093
Winn-Dixie Stores, Inc. .......................... 1,500 40,594
------------
932,156
------------
FOREST PRODUCTS AND BUILDING MATERIALS (0.6%)
Armstrong World Industries, Inc. ................. 400 14,950
Ball Corp. ....................................... 300 12,094
Bemis Co., Inc. .................................. 700 24,456
Boise Cascade Corp. .............................. 500 17,813
Champion International Corp. ..................... 1,500 86,719
Crown Cork & Seal Co., Inc. ...................... 1,100 26,331
Georgia-Pacific Corp. ............................ 1,500 59,531
International Paper Co. .......................... 4,500 236,812
Louisiana-Pacific Corp. .......................... 1,400 17,763
Masco Corp. ...................................... 3,400 103,700
See Notes to Portfolio of Investments. 9
<PAGE>
PRINCIPAL PROTECTION FUNDS
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
PRINCIPAL PROTECTION FUND I (CONTINUED)
- --------------------------------------------------------------------------------
NUMBER OF MARKET
SHARES VALUE
--------- ------------
FOREST PRODUCTS AND BUILDING MATERIALS (CONTINUED)
Mead Corp. ....................................... 400 $ 14,400
Owens Corning .................................... 700 14,350
Potlatch Corp. ................................... 300 12,656
Sealed Air Corp. + ............................... 800 44,300
Temple-Inland Inc. ............................... 200 11,625
Vulcan Materials Co. ............................. 900 37,181
Westvaco Corp. ................................... 900 26,719
Weyerhaeuser Co. ................................. 3,300 196,969
Willamette Industries, Inc. ...................... 1,600 66,500
------------
1,024,869
------------
GAS UTILITIES (0.5%)
Coastal Corp. (The) .............................. 2,200 92,675
Columbia Energy Group ............................ 800 52,000
Consolidated Natural Gas Co. ..................... 900 57,600
Eastern Enterprises .............................. 200 10,225
El Paso Energy Corp. ............................. 1,000 41,000
Enron Corp. ...................................... 7,200 287,550
NICOR, Inc. ...................................... 500 19,375
People's Energy Corp. ............................ 200 7,600
Sempra Energy .................................... 2,400 49,050
Williams Co., Inc. (The) ......................... 3,300 123,750
------------
740,825
------------
HEALTH SERVICES (0.3%)
Cardinal Health, Inc. ............................ 2,700 116,438
Columbia/HCA Healthcare Corp. .................... 4,800 115,800
HEALTHSOUTH Corp. + .............................. 3,600 20,700
IMS Health, Inc. ................................. 3,200 92,800
Shared Medical Systems Corp. ..................... 200 7,550
United Healthcare Corp. .......................... 2,000 103,375
Wellpoint Health Networks, Inc. + ................ 700 40,600
------------
497,263
------------
HEAVY MACHINERY (0.2%)
Caterpillar, Inc. ................................ 2,600 143,650
Cummins Engine Co., Inc. ......................... 500 25,344
Deere & Co. ...................................... 2,000 72,500
NACCO Industries, Inc. ........................... 100 4,638
Navistar International Corp. + ................... 700 29,181
PACCAR, Inc. ..................................... 1,300 61,262
------------
336,575
------------
HOUSING AND FURNISHINGS (0.2%)
Centex Corp. ..................................... 900 24,131
Fleetwood Enterprises, Inc. ...................... 300 6,544
Kaufman & Broad Home Corp. ....................... 300 6,019
Maytag Corp. ..................................... 1,700 68,106
Newell Rubbermaid Inc. ........................... 2,100 72,713
Pulte Corp. ...................................... 400 8,050
Tupperware Corp. ................................. 500 9,906
Whirlpool Corp. .................................. 800 55,750
------------
251,219
------------
INDUSTRIAL SERVICES (0.1%)
Fluor Corp. ...................................... 800 31,900
Foster Wheeler Corp. ............................. 400 4,500
USA Waste Management, Inc. ....................... 4,600 84,525
------------
120,925
------------
INSURANCE (1.6%)
AFLAC, Inc. ...................................... 2,800 143,150
American General Corp. ........................... 2,400 178,050
American International Group, Inc. ............... 14,100 1,451,418
Aon Corp. ........................................ 2,500 88,750
CIGNA Corp. ...................................... 2,100 156,975
Cincinnati Financial Corp. ....................... 700 25,069
Jefferson-Pilot Corp. ............................ 1,500 112,594
Lincoln National Corp. ........................... 2,100 96,862
Marsh & McLennan Co., Inc. ....................... 2,700 213,469
MBIA, Inc. ....................................... 1,200 68,475
MGIC Investment Corp. ............................ 1,100 65,725
St. Paul Co., Inc. ............................... 900 28,800
Torchmark Corp. .................................. 1,300 40,544
------------
2,669,881
------------
INVESTMENT SERVICES (1.2%)
Bear Stearns Co., Inc. (The) ..................... 2,100 89,512
Charles Schwab Corp. ............................. 9,300 362,119
Franklin Resources, Inc. ......................... 2,300 80,500
Lehman Brothers Holdings Inc. .................... 2,000 147,375
Merrill Lynch & Co., Inc. ........................ 4,800 376,800
Morgan Stanley Dean Witter & Co. ................. 6,400 706,000
Paine Webber Group Inc. .......................... 2,500 101,875
T. Rowe Price & Associates ....................... 1,100 39,050
------------
1,903,231
------------
MAJOR TELECOMMUNICATIONS (5.0%)
ALLTEL Corp. ..................................... 3,000 249,750
AT&T Corp. ....................................... 29,300 1,369,775
Bell Atlantic Corp. .............................. 14,200 922,112
BellSouth Corp. .................................. 17,000 765,000
CenturyTel, Inc. ................................. 2,400 97,050
GTE Corp. ........................................ 8,900 667,500
MCI Worldcom, Inc. + ............................. 17,100 1,467,394
Nextel Communications, Inc. + .................... 3,000 258,563
SBC Communications, Inc. ......................... 31,082 1,583,239
Sprint Corp. ..................................... 4,700 349,269
Sprint PCS + ..................................... 4,300 356,631
U.S. WEST, Inc. .................................. 3,600 219,825
------------
8,306,108
------------
MISCELLANEOUS METALS (0.1%)
Freeport-McMoRan Copper & Gold, Inc. ............ 1,300 21,694
Inco Ltd. ........................................ 1,600 32,400
Phelps Dodge Corp. ............................... 700 39,462
------------
93,556
------------
OIL (3.0%)
Amerada Hess Corp. ............................... 1,000 57,375
Anadarko Petroleum Corp. ......................... 1,100 33,894
Apache Corp. ..................................... 1,500 58,500
10 See Notes to Portfolio of Investments.
<PAGE>
- --------------------------------------------------------------------------------
NUMBER OF MARKET
SHARES VALUE
--------- ------------
OIL (CONTINUED)
Ashland Oil, Inc. ................................ 700 $ 23,100
Atlantic Richfield Co. ........................... 4,200 391,387
Burlington Resources, Inc. ....................... 1,900 66,263
Chevron Corp. .................................... 5,900 538,744
Conoco Inc. ...................................... 4,700 127,487
Exxon Corp. ...................................... 13,300 985,031
Kerr-McGee Corp. ................................. 900 48,375
Mobil Corp. ...................................... 7,100 685,150
Occidental Petroleum Corp. ....................... 3,800 86,688
Phillips Petroleum Co. ........................... 2,300 106,950
Royal Dutch Petroleum Co. ........................ 19,600 1,174,775
Texaco, Inc. ..................................... 5,500 337,562
Unocal Corp. ..................................... 1,300 44,850
USX-Marathon Group ............................... 4,300 125,238
------------
4,891,369
------------
OIL SERVICES (0.0%)
Tosco Corp. ...................................... 1,300 32,906
------------
OTHER TELECOMMUNICATIONS (0.1%)
Global Crossing Holdings Ltd. + .................. 6,700 231,988
------------
PRINT MEDIA (0.5%)
Dow Jones & Co., Inc. ............................ 800 49,200
Dun & Bradstreet Corp. ........................... 1,800 52,875
Equifax, Inc. .................................... 600 16,200
Gannett Co., Inc. ................................ 2,700 208,237
Harcourt General, Inc. ........................... 500 19,250
Knight-Ridder, Inc. .............................. 900 57,150
McGraw-Hill Co., Inc. ............................ 2,700 160,988
Meredith Corp. ................................... 400 14,275
New York Times Co. ............................... 2,500 100,625
Times Mirror Co. ................................. 500 36,063
Tribune Co. ...................................... 2,100 126,000
------------
840,863
------------
PRODUCER GOODS (1.8%)
Allegheny Teledyne, Inc. ......................... 1,800 27,338
Allied Signal, Inc. .............................. 4,700 267,606
Avery Dennison Corp. ............................. 1,400 87,500
Cooper Industries, Inc. .......................... 1,100 47,369
Corning, Inc. .................................... 2,600 204,425
Danaher Corp. .................................... 1,400 67,637
Dover Corp. ...................................... 2,200 93,637
Ecolab, Inc. ..................................... 1,300 43,956
Emerson Electric Co. ............................. 3,300 198,206
FMC Corp. + ...................................... 300 12,206
Honeywell, Inc. .................................. 1,200 126,525
Ikon Office Solutions, Inc. ...................... 1,600 11,000
Illinois Tool Works, Inc. ........................ 2,300 168,475
Ingersoll-Rand Co. ............................... 2,200 114,950
ITT Industries, Inc. ............................. 1,100 37,606
Milacron, Inc. ................................... 200 3,288
Millipore Corp. .................................. 400 12,750
Minnesota Mining and Manufacturing Co. ........... 3,900 370,744
Parker-Hannifin Corp. ............................ 400 18,325
PPG Industries, Inc. ............................. 1,600 97,000
Sherwin-Williams Co. ............................. 1,600 35,800
Thomas & Betts Corp. ............................. 400 17,950
Timken Co. ....................................... 500 8,969
Tyco International Ltd. .......................... 22,400 894,600
------------
2,967,862
------------
SEMICONDUCTORS AND ELECTRONICS (5.6%)
Adaptec, Inc. + .................................. 1,100 49,500
ADC Telecommunications, Inc. + ................... 2,200 104,912
Advanced Micro Devices Corp. + ................... 1,300 25,756
Analog Devices, Inc. + ........................... 2,300 122,187
Applied Materials, Inc. + ........................ 5,000 449,062
General Instrument Corp. + ....................... 1,800 96,863
Intel Corp. ...................................... 18,100 1,401,619
KLA Instruments Corp. + .......................... 1,400 110,862
LSI Logic Corp. + ................................ 1,400 74,463
Lucent Technologies, Inc. ........................ 41,900 2,692,075
Micron Technology, Inc. + ........................ 3,500 249,594
Motorola, Inc. ................................... 6,900 672,319
National Semiconductor Corp. + ................... 2,200 65,863
Nortel Networks Corp. ............................ 17,800 1,102,487
QUALCOMM Inc. + .................................. 2,200 490,050
Scientific-Atlanta, Inc. ......................... 1,300 74,425
Solectron Corp. + ................................ 2,800 210,700
Tellabs, Inc. + .................................. 5,200 328,900
Texas Instruments, Inc. .......................... 10,800 969,300
------------
9,290,937
------------
SPECIALTY CHEMICALS (0.1%)
Air Products and Chemicals, Inc. ................. 1,800 49,500
Engelhard Corp. .................................. 600 10,575
Grace (W.R.) & Co. + ............................. 500 7,469
Great Lakes Chemical Corp. ....................... 600 21,300
Praxair, Inc. .................................... 1,500 70,125
Sigma-Aldrich Corp. .............................. 1,000 28,500
------------
187,469
------------
STEEL (0.0%)
Nucor Corp. ...................................... 800 41,500
Worthington Industries ........................... 400 6,650
------------
48,150
------------
SURFACE TRANSPORT (0.2%)
Burlington Northern Santa Fe Corp. ............... 5,000 159,375
Kansas City Southern Industries, Inc. ............ 1,100 52,181
Union Pacific Corp. .............................. 2,200 122,650
------------
334,206
------------
TEXTILES AND APPAREL (0.2%)
Liz Claiborne, Inc. .............................. 700 28,000
Nike, Inc. ....................................... 3,200 180,600
Reebok International Ltd. + ...................... 500 4,906
VF Corp. ......................................... 1,100 33,069
------------
246,575
------------
See Notes to Portfolio of Investments. 11
<PAGE>
PRINCIPAL PROTECTION FUNDS
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
PRINCIPAL PROTECTION FUND I (CONTINUED)
- --------------------------------------------------------------------------------
NUMBER OF MARKET
SHARES VALUE
--------- ------------
TOBACCO (0.3%)
Nabisco Group Holdings Corp. ..................... 3,200 $ 41,000
Philip Morris Co., Inc. .......................... 13,100 329,956
UST, Inc. ........................................ 1,600 44,300
------------
415,256
------------
TOTAL COMMON STOCKS (COST $103,159,123) .......... 106,554,053
------------
PRINCIPAL
AMOUNT
------------
LONG-TERM BONDS AND NOTES (33.8%)
Abbey National Plc,6.69%,10/17/05 .... $ 3,000,000 2,923,905
ABN AMRO Bank NV,7.55%,06/28/06 ...... 3,200,000 3,244,416
Associates Corp. N.A.,7.25%,05/22/06 . 2,000,000 2,012,380
BellSouth Telecommunication Corp,
6.50%,06/15/05 ...................... 3,150,000 3,095,269
Commercial Credit Co.,6.13%,12/01/05 . 3,200,000 3,060,320
Federal Home Loan Bank,
Zero Coupon,08/16/04 ................ 16,210,000 11,833,300
U.S. Treasury Note,Zero
Coupon,08/15/04...................... 39,567,000 29,746,945
------------
TOTAL LONG-TERM BONDS AND NOTES (COST $55,637,242) 55,916,535
------------
SHORT-TERM INVESTMENTS (1.7%)
Student Loan Marketing
Corp.,5.16%,11/01/99................. 2,684,000 2,684,000
U.S. Treasury Bill,4.91%,02/17/00 @ .. 100,000 98,542
------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,782,527) 2,782,542
------------
TOTAL INVESTMENTS (COST $161,578,892)(A) 165,253,130
OTHER ASSETS LESS LIABILITIES 120,732
------------
TOTAL NET ASSETS $165,373,862
============
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes amounts to
$161,966,912. Unrealized gains and losses, based on identified tax cost at
October 31, 1999, are as follows:
Unrealized gains......................................... $ 5,638,282
Unrealized losses........................................ (2,352,064)
-----------
Net unrealized gain..................................... $ 3,286,218
===========
Information concerning open futures contracts at October 31, 1999 is shown
below:
NO. OF NOTIONAL EXPIRATION UNREALIZED
CONTRACTS VALUE DATE GAIN/(LOSS)
----------- ------------ ------------ ---------------
LONG CONTRACTS
- ----------------------
S&P 500 Index Futures... 4 $1,376,200 Dec 99 $ 65,864
========== =========
+ Non-income producing security.
@ Security pledged to cover initial margin requirements on open futures
contracts at October 31, 1999.
Category percentages are based on net assets.
12 See Notes to Financial Statements.
<PAGE>
PRINCIPAL PROTECTION FUNDS
PORTFOLIO OF INVESTMENTS - OCTOBER 31, 1999
PRINCIPAL PROTECTION FUND II
- --------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
---------- ------------
SHORT-TERM INVESTMENTS (91.9%)
Federal Farm Credit Bank,5.15%,11/12/99 .......... $2,000,000 $ 1,996,853
Federal Farm Credit Bank,5.19%,11/24/99 .......... 700,000 697,679
Federal Farm Credit Bank,5.23%,12/17/99 .......... 1,500,000 1,489,976
Federal Home Loan Bank,5.13%,11/17/99 ............ 2,200,000 2,194,984
Federal Home Loan Bank,5.16%,11/01/99 ............ 4,000,000 4,000,000
Federal Home Loan Mortgage Corp.,
5.18%,12/14/99 .................................. 1,300,000 1,291,957
Federal Home Loan Mortgage Corp.,
5.19%,12/09/99 .................................. 1,000,000 994,522
Federal Home Loan Mortgage Corp.,
5.25%,12/16/99 .................................. 1,000,000 993,437
Federal Home Loan Mortgage Corp.,
5.26%,12/13/99 .................................. 700,000 695,704
Federal National Mortgage Association,
5.20%,12/17/99 .................................. 1,500,000 1,490,033
Federal National Mortgage Association,
5.23%,12/15/99 .................................. 1,500,000 1,490,412
Federal National Mortgage Association,
5.25%,12/15/99 .................................. 700,000 695,508
Student Loan Marketing
Corp.,5.16%,11/01/99 ............................ 6,254,000 6,254,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST $24,285,065) .. 24,285,065
------------
TOTAL INVESTMENTS (COST $24,285,065)(A) .......... 24,285,065
OTHER ASSETS LESS LIABILITIES .................... 2,130,165
------------
TOTAL NET ASSETS ................................. $ 26,415,230
============
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost of investments for federal income tax purposes is identical.
There were no unrealized gains and losses as of October 31, 1999.
Category percentages are based on net assets.
See Notes to Financial Statements. 13
<PAGE>
PRINCIPAL PROTECTION FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
PROTECTION PROTECTION
FUND I FUND II
------------ ------------
ASSETS:
<S> <C> <C>
Investments, at market value ........................................ $165,253,130 $ 24,285,065
Cash ................................................................ 265 195
Receivable for:
Dividends and interest ............................................. 364,410 --
Fund shares sold ................................................... 27,100 2,257,567
Variation margin ................................................... 26,000 --
Reimbursement from Investment Adviser .............................. 44,124 47,028
------------ ------------
Total assets ................................................... 165,715,029 26,589,855
------------ ------------
LIABILITIES:
Payable for:
Fund shares redeemed ............................................... 120 145,160
Other liabilities ................................................... 341,047 29,465
------------ ------------
Total liabilities .............................................. 341,167 174,625
------------ ------------
NET ASSETS ....................................................... $165,373,862 $ 26,415,230
============ ============
NET ASSETS REPRESENTED BY:
Paid-in capital ..................................................... $162,758,964 $ 26,389,796
Net unrealized gain on investments and open futures contracts ....... 3,740,102 --
Undistributed net investment income ................................. 442,649 25,434
Accumulated net realized loss on investments ........................ (1,567,853) --
------------ ------------
NET ASSETS ....................................................... $165,373,862 $ 26,415,230
============ ============
Cost of investments ................................................. $161,578,892 $ 24,285,065
CAPITAL SHARES, $.001 PAR VALUE:
Class A:
Outstanding ........................................................ 2,064,617 207,499
Net Assets ......................................................... $ 21,069,110 $ 2,079,100
Net Asset Value and redemption price per share (net assets
divided by shares outstanding) .................................... $ 10.20 $ 10.02
Offering price (net asset value divided by 1 minus maximum sales
load) ............................................................. $ --* $ 10.52
Class B:
Outstanding ........................................................ 14,167,397 2,429,521
Net Assets ......................................................... $144,304,752 $ 24,336,130
Net Asset Value, offering and redemption price per share (net
assets divided by shares outstanding) .............................. $ 10.19* $ 10.02
</TABLE>
* No longer offered for sale.
14 See Notes to Financial Statements.
<PAGE>
PRINCIPAL PROTECTION FUNDS
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL PROTECTION FUND I PRINCIPAL PROTECTION FUND II
--------------------------- ----------------------------
PERIOD FROM PERIOD FROM
AUGUST 6, 1999 OCTOBER 7, 1999
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) OPERATIONS)
TO OCTOBER 31, 1999 TO OCTOBER 31, 1999
------------------- -------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends ............................................................. $ 44,802 $ --
Interest .............................................................. 758,773 35,376
----------- -----------
Total investment income .......................................... 803,575 35,376
----------- -----------
INVESTMENT EXPENSES:
Investment advisory fees .............................................. 96,488 1,862
Administrative services fees .......................................... 21,058 745
Distribution plan fees - Class A ...................................... 6,525 152
Distribution plan fees - Class B ...................................... 138,360 5,262
Shareholder services fees - Class B ................................... 46,120 1,754
Printing and postage .................................................. 1,696 1,696
Custody fees .......................................................... 9,149 2,337
Transfer agent fees ................................................... 8,356 1,242
Audit fees ............................................................ 9,383 5,014
Directors' fees ....................................................... 743 248
Registration fees ..................................................... 71,656 36,562
Miscellaneous expenses ................................................ 36,460 96
----------- -----------
Expenses before reimbursement and waiver from Investment Adviser ...... 445,994 56,970
Expense reimbursement and waiver from Investment Adviser .............. (85,068) (47,028)
----------- -----------
Net expenses ..................................................... 360,926 9,942
----------- -----------
Net investment income ................................................. 442,649 25,434
----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments .......................................................... (1,567,853) --
----------- -----------
Net realized loss on investments ................................. (1,567,853) --
----------- -----------
Net change in unrealized gain or loss on:
Investments .......................................................... 3,674,238 --
Futures contracts .................................................... 65,864 --
----------- -----------
Net change in unrealized gain or loss on investments ............. 3,740,102 --
----------- -----------
Net realized and change in unrealized gain or loss on investments ..... 2,172,249 --
----------- -----------
Net increase in net assets resulting from operations .................. $ 2,614,898 $ 25,434
=========== ===========
</TABLE>
See Notes to Financial Statements. 15
<PAGE>
PRINCIPAL PROTECTION FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
PRINCIPAL PROTECTION FUND I
-----------------------------
PERIOD FROM
AUGUST 6, 1999
(COMMENCEMENT OF
OPERATIONS)
TO OCTOBER 31, 1999
-------------------
FROM OPERATIONS:
Net investment income .......................... $ 442,649
Net realized loss on investments................ (1,567,853)
Net change in unrealized gain or loss on
investments.................................... 3,740,102
------------
Net increase in net assets resulting from
operations..................................... 2,614,898
------------
FROM FUND SHARE TRANSACTIONS:
Class A:
Proceeds from shares sold..................... 20,861,153
Payments for shares redeemed.................. (143,490)
Class B:
Proceeds from shares sold..................... 142,404,291
Payments for shares redeemed.................. (362,990)
------------
Net increase in net assets from fund share
transactions................................... 162,758,964
------------
Net change in net assets........................ 165,373,862
NET ASSETS:
Beginning of period............................. --
------------
End of period................................... $165,373,862
============
End of period net assets includes undistributed
net investment income.......................... $ 442,649
============
SHARE TRANSACTIONS:
Class A:
Number of shares sold......................... 2,079,001
Number of shares redeemed..................... (14,384)
------------
Net increase................................... 2,064,617
============
Class B:
Number of shares sold......................... 14,203,802
Number of shares redeemed..................... (36,405)
------------
Net increase................................... 14,167,397
============
16 See Notes to Financial Statements.
<PAGE>
PRINCIPAL PROTECTION FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
PRINCIPAL PROTECTION FUND II
------------------------------
PERIOD FROM
OCTOBER 7, 1999
(COMMENCEMENT OF
OPERATIONS)
TO OCTOBER 31, 1999
-------------------
FROM OPERATIONS:
Net investment income ......................... $ 25,434
-----------
Net increase in net assets resulting from
operations.................................... 25,434
-----------
FROM FUND SHARE TRANSACTIONS:
Class A:
Proceeds from shares sold.................... 2,076,588
Class B:
Proceeds from shares sold.................... 24,641,340
Payments for shares redeemed................. (328,132)
-----------
Net increase in net assets from fund share
transactions.................................. 26,389,796
-----------
Net change in net assets....................... 26,415,230
NET ASSETS:
Beginning of period............................ --
-----------
End of period.................................. $26,415,230
===========
End of period net assets includes undistributed
net investment income......................... $ 25,434
===========
SHARE TRANSACTIONS:
Class A:
Number of shares sold........................ 207,499
-----------
Net increase.................................. 207,499
===========
Class B:
Number of shares sold........................ 2,462,302
Number of shares redeemed.................... (32,781)
-----------
Net increase.................................. 2,429,521
===========
See Notes to Financial Statements. 17
<PAGE>
AETNA PRINCIPAL PROTECTION FUNDS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION
Aetna Series Fund, Inc. (Company) is registered under the Investment Company Act
of 1940 (the Act) as an open-end management investment company. It was
incorporated under the laws of Maryland on June 17, 1991. The Articles of
Incorporation permit the Company to offer separate funds, each of which has it's
own investment objective, policies and restrictions.
This report covers two funds, (each a Fund; collectively, the Funds). Aetna
Principal Protection Fund I (PPF I) and Aetna Principal Protection Fund II (PPF
II). Each Fund seeks to achieve maximum total return by participating in
favorable equity market performance while preserving the principal amount of the
Fund as of the inception of the Fund's Guarantee Period.
PPF I accumulated deposits from August 6, 1999 through October 6, 1999. The
Guarantee Period for PPF I is from October 7, 1999 through October 6, 2004, its
maturity date. PPF II accumulates deposits from October 7, 1999 through December
20, 1999. The Guarantee period for PPF II is from December 21, 1999 through
December 20, 2004, its maturity date. The Funds' Guarantee is backed by an
unconditional, irrevocable guarantee from MBIA Insurance Corporation (MBIA), an
AAA/Aaa rated monoline financial guarantor. Each Fund pays MBIA a guarantee fee
of 0.33% of each Fund's average daily net assets. Neither Fund intends to offer
shares after the accumulation period, except for reinvestment of shares.
The Funds are authorized to offer two classes of shares, Class A and Class B.
Information regarding sales charges and fees pursuant to Rule 12b-1 of the Act
are as follows:
CLASS A: Generally, subject to a front-end sales charge; distribution fees
of 0.25% (of average net assets of the class per year).
CLASS B: No front-end sales charge; contingent deferred sales charge
(CDSC) applies if you sell your shares prior to the maturity
date; distribution fees of 0.75%; service fees of 0.25%.
Aeltus Investment Management, Inc. (Aeltus) serves as the investment advisor to
each Fund. Aeltus Capital, Inc. (ACI) is each Fund's principal underwriter.
Aeltus and ACI are indirect wholly-owned subsidiaries of Aetna Inc. (Aetna).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of each Fund have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect amounts
reported therein. Actual results may differ from these estimates.
A. VALUATION OF INVESTMENTS
Exchange traded equity investments are stated at market values based upon prices
furnished by external pricing sources as reported on national securities
exchanges. Over-the-counter securities are stated at the last sale price, or if
there has been no sale that day, at the mean of the bid and asked prices. Fixed
income securities, with the exception of high yield securities, maturing in more
than sixty days for which market quotations are readily available are valued at
the mean of the last bid and asked price. High yield securities are priced at
bid by external pricing sources or brokers making a market in the security.
Short-term investments maturing in sixty days or less are valued at amortized
cost, which when combined with accrued interest, approximates market value.
Securities and fixed income investments for which market quotations are not
considered to be readily available are valued using methods approved by the
Board or Directors (Board).
18
<PAGE>
- --------------------------------------------------------------------------------
B. FUTURES CONTRACTS
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security or financial instrument, including an
index of stocks, at a set price on a future date. The Funds invests in financial
futures contracts as a hedge against their existing portfolio securities, to
manage the risk of changes in interest rates, equity prices, currency exchange
rates or in anticipation of future purchases and sales of portfolio securities.
Upon entering into a futures contract, the Funds are required to deposit with a
broker an amount (initial margin) equal to a percentage of the purchase price
indicated by the futures contract. Subsequent deposits (variation margin) are
received or paid each day by the Funds equal to the daily fluctuations in the
market value of the contract. These amounts are recorded by the Funds as
unrealized gains or losses. When a contract is closed, the Funds record a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed. Generally,
futures contracts held by the Funds are closed prior to expiration.
The risks associated with financial futures may arise from an imperfect
correlation between the change in market value of the securities held by the
Funds and the price of the contracts. Risks may also arise from an illiquid
secondary market or from the inability of counterparties to meet the terms of
the contracts.
Realized and unrealized gains or losses on financial futures are reflected in
the accompanying financial statements. The amounts at risk under such futures
may exceed the amounts reflected in the financial statements. For federal income
tax purposes, any futures contracts which remain open at year end are
marked-to-market and the resultant net gain or loss is reported to shareholders
as federal taxable income.
C. ILLIQUID AND RESTRICTED SECURITIES
Illiquid securities are securities that are not readily marketable. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Funds to sell them promptly at an
acceptable price. Restricted securities are those sold under Rule 144A of the
Securities Act of 1933 (1933 Act) or are securities offered pursuant to Section
4(2) of the 1933 Act, and are subject to legal or contractual restrictions on
resale and may not be publicly sold without registration under the 1933 Act.
Illiquid and restricted securities are valued using market quotations when
readily available. In the absence of market quotations, the securities are
valued based upon their fair value determined under procedures approved by the
Board. The Funds will not pay the costs of disposition of restricted securities
other than ordinary brokerage fees, if any.
D. FEDERAL INCOME TAXES
Each Fund has met the requirements to be taxed as a regulated investment company
for the current year. As such, the Funds are relieved of federal income taxes by
distributing all of its net taxable investment income and capital gains, if any,
in compliance with the applicable provisions of the Internal Revenue Code.
Furthermore, by distributing substantially all of its net taxable investment
income and capital gains during the calendar year, each Fund will avoid federal
excise taxes in accordance with the applicable provisions of the Internal
Revenue Code. Thus, the financial statements contain no provision for federal
income taxes.
E. DISTRIBUTIONS
Distributions are recorded on the ex-dividend date. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing treatments for futures contracts and repurchases of
certain securities sold at a loss. In addition, distributions of
19
<PAGE>
AETNA PRINCIPAL PROTECTION FUNDS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
realized gains from sales of securities held one year or less are taxable to
shareholders at ordinary income tax rates rather than preferred capital gain tax
rates in accordance with the applicable provisions of the Internal Revenue Code.
F. OTHER
Investment transactions are accounted for on the day following trade date,
except same day settlements which are accounted for on the trade date. Interest
income is recorded on an accrual basis. Discounts and premiums on securities
purchased are accreted or amortized, respectively, using an effective yield
method over the life of the security. Dividend income and stock splits are
recorded on the ex-dividend date. Realized gains and losses from investment
transactions are determined on an identified cost basis.
3. INVESTMENT ADVISORY, SHAREHOLDER SERVICES AND DISTRIBUTION FEES
Each Fund pays Aeltus an investment advisory fee expressed as a percentage of
each Fund's average daily net assets. The advisory fee for each Fund is 0.25% of
each Fund's average daily net assets during its accumulation period (August 6,
1999 through October 6, 1999 for PPF I and October 7, 1999 through December 20,
1999 for PPF II) and 0.65% of each Fund's average daily net assets during the
Guarantee Period until maturity.
The Company and Aeltus have entered into an Administrative Services Agreement
under which Aeltus acts as administrator and provides certain administrative and
shareholder services and is responsible for the supervision of other service
providers for each Fund. Each Fund pays Aeltus an administrative services fee at
an annual rate of 0.10% of its average daily net assets.
The Company has adopted a Shareholder Services Plan for the Class B shares.
Under the Shareholder Services Plan, ACI is paid a service fee at an annual rate
of 0.25% of the average daily net assets of Class B shares. This fee is used as
compensation for expenses incurred in servicing shareholders' accounts.
The Company has adopted a Distribution Plan pursuant to Rule 12b-1 under the Act
for the Class A and Class B shares. The Distribution Plan provides for payments
to the principle underwriter at an annual rate of 0.25% of the average daily net
assets of Class A shares of each fund and 0.75% of the average daily net assets
of Class B shares of each Fund. Amounts paid by the Funds are used to pay
expenses incurred by the principle underwriter in promoting the sale of Class A
and Class B shares.The Distribution Plan may be terminated as to each class of
shares upon a majority vote of the Company's independent directors.
Presently, the Funds' class-specific expenses are limited to distribution fees
incurred by the Class A and Class B shares and service fees incurred by the
Class B shares.
4. REIMBURSEMENT AND WAIVER FROM INVESTMENT ADVISER
Aeltus is contractually obligated, through the Maturity Date, to reimburse the
funds for some or all of their operating expenses or to waive fees in order to
maintain a certain expense ratio. Reimbursement and waiver arrangements, will
increase the Fund's yield and total return. Actual expenses for the period ended
October 31, 1999 were at or below contractual limits. Actual expense ratios are
included in the Financial Highlights.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES
Purchases and sales of investment securities, excluding short-term investments,
for the period ended October 31, 1999 were:
COST OF PURCHASES PROCEEDS FROM SALES
----------------- -------------------
PPF I $228,365,441 $68,162,414
20
<PAGE>
- --------------------------------------------------------------------------------
6. CAPITAL LOSS CARRYFORWARDS
As of October 31, 1999, Principal Protection I incurred a capital loss
carryforward of $1,113,968. This capital loss carryforward may be used to offset
future capital gains until October 31, 2007, at which time the carryforward will
expire. It is the policy of each of the Funds to reduce future distributions of
realized gains to shareholders to the extent of the unexpired capital loss
carryforward.
7. AUTHORIZED CAPITAL SHARES
The Company is authorized to issue a total of 14 billion shares. Of those 14
billion shares, each Fund has been allocated 100 million shares each of Class A
and Class B shares.
21
<PAGE>
AETNA PRINCIPAL PROTECTION FUNDS
ADDITIONAL INFORMATION
OCTOBER 31, 1999
- --------------------------------------------------------------------------------
YEAR 2000 (UNAUDITED)
The Funds' critical business systems were Year 2000 ready as of June 30, 1999:
reviewed, fixed, tested and put into production. Like all firms, Aeltus relies
on its business partners for some functions. Management will continue to monitor
its Year 2000 progress to minimize potential risks. Aeltus has developed
contingency plans based on a variety of internal and external factors, including
areas of greatest potential impact to its customers, and created teams to handle
unanticipated situations.
22
<PAGE>
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<PAGE>
PRINCIPAL PROTECTION FUNDS
FINANCIAL HIGHLIGHTS
PRINCIPAL PROTECTION FUND I
- --------------------------------------------------------------------------------
Selected data for a fund share outstanding throughout each period:
PERIOD FROM
AUGUST 6, 1999
(COMMENCEMENT
OF OPERATIONS)
CLASS A TO OCTOBER 31, 1999
- -------------------------------------------------------- -------------------
Net asset value, beginning of period ................... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................. 0.07
Net realized and change in unrealized gain or loss on
investments........................................... 0.13
-------
Total from investment operations .................... 0.20
-------
Net asset value, end of period ......................... $ 10.20
=======
Total return ........................................... 1.39%*
Net assets, end of period (000's) ...................... $21,069
Ratio of net expenses to average net assets ............ 1.06%(1)
Ratio of net investment income to average net assets ... 2.76%(1)
Ratio of expenses before reimbursement and waiver to
average net assets .................................... 1.46%(1)
Portfolio turnover rate ................................ 41.95%
(*) Represents performance beginning on the first day of the Guarantee Period.
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
24 See Notes to Financial Statements.
<PAGE>
PRINCIPAL PROTECTION FUND I
- --------------------------------------------------------------------------------
Selected data for a fund share outstanding throughout each period:
PERIOD FROM
AUGUST 6, 1999
(COMMENCEMENT
OF OPERATIONS)
CLASS B TO OCTOBER 31, 1999
- -------------------------------------------------------- -------------------
Net asset value, beginning of period ................... $ 10.00
--------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................. 0.05
Net realized and change in unrealized gain or loss on
investments........................................... 0.14
--------
Total from investment operations .................... 0.19
--------
Net asset value, end of period ......................... $ 10.19
========
Total return ........................................... 1.39%*
Net assets, end of period (000's) ...................... $144,305
Ratio of net expenses to average net assets ............ 1.80%(1)
Ratio of net investment income to average net assets ... 2.01%(1)
Ratio of expenses before reimbursement and waiver to
average net assets .................................... 2.21%(1)
Portfolio turnover rate ................................ 41.95%
(*) Represents performance beginning on the first day of the Guarantee Period.
(1) Annualized.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
See Notes to Financial Statements. 25
<PAGE>
PRINCIPAL PROTECTION FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
PRINCIPAL PROTECTION FUND II
- --------------------------------------------------------------------------------
Selected data for a fund share outstanding throughout each period:
PERIOD FROM
OCTOBER 7, 1999
(COMMENCEMENT
OF OPERATIONS)
CLASS A TO OCTOBER 31, 1999
- -------------------------------------------------------- -------------------
Net asset value, beginning of period ................... $10.00
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................. 0.02
------
Total from investment operations .................... 0.02
------
Net asset value, end of period ......................... $10.02
======
Total return* .......................................... --
Net assets, end of period (000's) ...................... $2,079
Ratio of net expenses to average net assets ............ 0.58%(1)
Ratio of net investment income to average net assets ... 3.85%(1)
Ratio of expenses before reimbursement and waiver to
average net assets .................................... 6.47%(1)
(1) Annualized.
* PPF II is in its accumulation period. Total return will start to be calculated
on December 21,1999, the first day of the Guarantee Period.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
26 See Notes to Financial Statements.
<PAGE>
PRINCIPAL PROTECTION FUND II
- --------------------------------------------------------------------------------
Selected data for a fund share outstanding throughout each period:
PERIOD FROM
OCTOBER 7, 1999
(COMMENCEMENT
OF OPERATIONS)
CLASS B TO OCTOBER 31, 1999
- -------------------------------------------------------- -------------------
Net asset value, beginning of period ................... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................. 0.02
-------
Total from investment operations .................... 0.02
-------
Net asset value, end of period ......................... $ 10.02
=======
Total return* .......................................... --
Net assets, end of period (000's) ...................... $24,336
Ratio of net expenses to average net assets ............ 1.30%(1)
Ratio of net investment income to average net assets ... 3.12%(1)
Ratio of expenses before reimbursement and waiver to
average net assets .................................... 7.19%(1)
(1) Annualized.
* PPF II is in its accumulation period. Total return will start to be calculated
on December 21,1999, the first day of the Guarantee Period.
Per share data calculated using weighted average number of shares outstanding
throughout the period.
See Notes to Financial Statements. 27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Aetna Series Fund, Inc.:
We have audited the accompanying statements of assets and liabilities of Aetna
Principal Protection Fund I and Aetna Principal Protection Fund II, portfolios
of Aetna Series Fund, Inc. (collectively the Principal Protection Funds),
including the portfolios of investments as of October 31, 1999 and the related
statements of operations and changes in net assets and financial highlights for
Aetna Principal Protection Fund I for the period from August 6, 1999
(commencement of operations) to October 31, 1999, and for Aetna Principal
Protection Fund II for the period from October 7, 1999 (commencement of
operations) to October 31, 1999. These financial statements are the
responsibility of Principal Protection Funds' management. Our responsibility is
to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1999 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects the financial position of the
Principal Protection Funds as of October 31, 1999, the results of their
operations, changes in their net assets and financial highlights for the periods
specified above, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
December 17, 1999
28
