As filed with the Securities and Exchange File No. 33-88334
Commission on March 1, 1996 811-8934
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 2
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 2
AETNA GENERATION PORTFOLIOS, INC.
(Exact Name of Registrant as Specified in Charter)
151 Farmington Avenue RE4C, Hartford, Connecticut 06156
(Address of Principal Executive Offices)
(860) 273-7834
(Registrant's Telephone Number, including Area Code)
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RE4C, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
Approximate date of proposed public offering - as soon after effectiveness as
is practicable.
It is proposed that this filing will become effective (check appropriate
space):
____ immediately upon filing pursuant to paragraph (b) of Rule 485
____ on ________________ pursuant to paragraph (b) of Rule 485
____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_X__ on May 1, 1996 pursuant to paragraph (a)(1) of Rule 485
____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
____ on ________________ pursuant to paragraph (a)(2) of Rule 485
Aetna Generation Portfolios, Inc. has registered an indefinite number of its
securities under the Securities Act of 1933 pursuant to Rule 24f-2 of the
Investment Company Act of 1940. The Fund filed its Rule 24f-2 Notice for its
fiscal year ended December 31, 1995 on February 29, 1996.
<PAGE>
AETNA GENERATION PORTFOLIOS, INC.
Cross-Reference Sheet
<TABLE>
<CAPTION>
Form N-1A
Item No. Caption in Prospectus
- -------- ---------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Not applicable
3. Condensed Financial Information Not applicable
4. General Description of Registrant The Company; Description of the
Generation Portfolios;
Investment Strategies; Investment
Techniques;
Risk Factors and Other Considerations;
Investment Restrictions
5. Management of the Fund Management of the Generation Portfolios;
5A. Management's Discussion of Fund Not applicable
Performance
6. Capital Stock and Other Securities General Information; Tax Matters
7. Purchase of Securities Being Offered Management of the Generation Portfolios;
Net Asset Value;
Sale and Redemption of Shares
8. Redemption or Repurchase Sale and Redemption of Shares
9. Pending Legal Proceedings Not applicable
Caption in Statement of Additional Information
----------------------------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information and History
13. Investment Objectives and Policies General Information and History;
Additional Investment Restrictions and Policies of
the Generation Portfolios
Description of Various Securities and Investment
Techniques
14. Management of the Fund Directors and Officers of the Company
15. Control Persons and Principal Control Persons and Principal Shareholders
Holders of Securities
16. Investment Advisory and Other The Investment Advisory Contract;
Services The Administrative Services Agreement
17. Brokerage Allocation and Other Brokerage Allocation and Trading Policies
Practices
18. Capital Stock and Other Securities Description of Shares; Voting Rights
19. Purchase, Redemption and Pricing Sale and Redemption of Shares; Net Asset Value
of Securities Being Offered
20. Tax Status Tax Status
21. Underwriters Not applicable
22. Calculation of Performance Data Not applicable
23. Financial Statements Financial Statements
</TABLE>
AETNA GENERATION PORTFOLIOS, INC.
Aetna Ascent Variable Portfolio
Aetna Crossroads Variable Portfolio
Aetna Legacy Variable Portfolio
151 Farmington Avenue
Hartford, CT 06156-8962
1-800-525-4225
Prospectus dated: May 1, 1996
Aetna Generation Portfolios, Inc. (the "Company") is an open-end diversified
management investment company authorized to issue multiple series of shares,
each representing a diversified portfolio of investments (individually, a
"Portfolio" and collectively, the "Generation Portfolios"). The Company
currently has three series authorized. The Company's shares are offered only
to insurance companies to fund benefits under their variable annuity
contracts (VA Contracts) and variable life insurance policies (VLI Policies).
Each Portfolio is an asset allocation fund, designed for Participants having
different risk tolerances. See "Description of the Generation Portfolios" and
"Risk Factors and Other Considerations."
This Prospectus sets forth concisely the information that a prospective
contract holder or policy holder ("Participant") should know before directing
an investment to a Portfolio and should be read and kept for future
reference. A Statement of Additional Information ("SAI") dated May 1, 1996
contains more information about the Generation Portfolios. For a free copy of
the SAI, call 1-800-525-4225 or write to Aetna Generation Portfolios, Inc.,
at the address listed above. The SAI has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated into this Prospectus by
reference.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the securities of the Company in any jurisdiction in which such
sale, offer to sell, or solicitation may not be lawfully made.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Please read this Prospectus carefully before investing and retain for future
reference.
<PAGE>
TABLE OF CONTENTS
The Company 3
Description of the Generation Portfolios 3
Investment Strategies 3
Investment Techniques 6
Risk Factors and Other Considerations 9
Investment Restrictions 10
Management of the Generation Portfolios 11
Sale and Redemption of Shares 12
Net Asset Value 12
General Information 12
Tax Matters 13
Glossary of Investment Terms 14
Description of Corporate Bond Ratings 16
2 Aetna Generation Portfolios, Inc.
<PAGE>
THE COMPANY
The Company is an open-end, management investment company, consisting of
multiple series. It currently has authorized three series, Aetna Ascent
Variable Portfolio (Aetna Ascent), Aetna Crossroads Variable Portfolio (Aetna
Crossroads) and Aetna Legacy Variable Portfolio (Aetna Legacy). The Company
may authorize additional series in the future. The Company is intended to
serve as one of the funding vehicles for VA Contracts and VLI Policies to be
offered through the separate accounts of insurance companies. The insurance
companies and not Participants are shareholders of the Company. See "General
Information."
The Company does not foresee any disadvantages to the Participants in funding
both VA Contracts and VLI Policies through the Generation Portfolios or in
offering the Generation Portfolios through more than one insurance company.
The Company's Board of Directors has agreed to monitor the Portfolios'
activities to identify any potentially material, irreconcilable conflicts and
to take appropriate action if necessary to resolve any conflicts which may
arise.
DESCRIPTION OF THE GENERATION PORTFOLIOS
The Generation Portfolios are asset allocation funds that seek to maximize
long-term investment returns at varying levels of risk.
Aetna Ascent's investment objective is to provide capital appreciation. The
Portfolio is designed for Participants who have an investment horizon
exceeding 15 years and who have a high level of risk tolerance.
Aetna Crossroads' investment objective is to provide total return (i.e.,
income and capital appreciation, both realized and unrealized). The Portfolio
is designed for Participants who have an investment horizon exceeding 10
years or who have a moderate level of risk tolerance.
Aetna Legacy's investment objective is to provide total return consistent
with preservation of capital. The Portfolio is designed for Participants who
have an investment horizon exceeding five years or who have a low level of
risk tolerance.
Each Portfolio's investment objective is fundamental and may not be changed
without the vote of a majority of the holders of that Portfolio's outstanding
shares. There can be no assurance that a Portfolio will meet its investment
objective. Each Portfolio is subject to investment policies and restrictions
described in this Prospectus and in the SAI, some of which are fundamental.
No fundamental investment policy or restriction may be changed without the
approval of a majority of the outstanding shares of that Portfolio.
INVESTMENT STRATEGIES
A glossary describing various investment terms used in this Prospectus starts
on page 14.
The Generation Portfolios each have specific asset allocation strategies,
which correspond to their respective investment objectives. Each strategy
contains unique asset allocation ranges and benchmark allocations for the
seven asset classes utilized by the Portfolios. The ranges show what is
permissible for allocations to each asset class in a given Portfolio. The
Investment Adviser may adjust the asset class mix of a Portfolio within the
ranges. The benchmarks describe a typical asset allocation strategy under
neutral market conditions. Benchmarks are also used by the Investment Adviser
to monitor a "hypothetical benchmark portfolio" consisting of the benchmark
allocation in each comparative index. Comparing the actual performance of
each Generation Portfolio against its respective "hypothetical benchmark
portfolio" is useful in evaluating the impact of ongoing asset allocation
decisions.
Aetna Generation Portfolios, Inc. 3
<PAGE>
The allocation ranges, benchmarks and comparative indexes are as follows:
<TABLE>
<CAPTION>
Aetna Aetna Aetna
Asset Class Ascent Crossroads Legacy Comparative Index
------------------------------ -------- ------------ -------- --------------------------------------
<S> <C> <C> <C> <C>
Equities
Large Capitalization Stocks
Range 0-60% 0-45% 0-30% Standard & Poor's 500 Stock Index
Benchmark 20% 15% 10%
Small Capitalization Stocks
Range 0-40% 0-30% 0-20% Russell 2000 Small Cap Stock Index
Benchmark 20% 15% 10%
International Stocks
Range 0-40% 0-30% 0-20% Morgan Stanley Capital International
Benchmark 20% 15% 10% Europe, Australia and Far East Index
Real Estate Stocks
Range 0-40% 0-30% 0-20% National Association Real Estate
Benchmark 20% 15% 10% Investment Trust Equity REIT Index
Fixed Income
U. S. Dollar Bonds
Range 0-30% 0-70% 0-100% Salomon Brothers Broad Investment
Benchmark 10% 25% 40% Grade Index
International Bonds
Range 0-20% 0-20% 0-20% Salomon Brothers Non-U.S. World
Benchmark 10% 10% 10% Government Bond Index
Money Market Securities
Range 0-30% 0-30% 0-30% 91 Day T-Bill
Benchmark 0% 5% 10%
</TABLE>
In addition to investing within the asset allocation ranges, Aetna Crossroads
will invest no more than 60% of its assets in the following types of
securities and Aetna Legacy will invest no more than 35% of its assets in the
following types of securities: securities in the Small Capitalization Stock
Class with capitalization of less than $0.5 billion, securities in the U.S.
Dollar Bond Class that are below investment grade which are known as high
risk, high-yield securities or "junk bonds" (hereinafter, "high risk,
high-yield securities"), securities in the International Stock Class, and
securities in the International Bond Class. Aetna Ascent has no such
restrictions. These restrictions apply at the time of purchase of the
particular securities and are designed to limit the amount of risk assumed by
each Portfolio.
The Generation Portfolios may also invest in options contracts, futures
contracts, and other derivative instruments which are described in greater
detail starting on page 7 and in the SAI.
The Investment Adviser will invest the assets of each Portfolio within the
specified ranges. The actual allocation of assets of each Portfolio may be
above or below the benchmark allocation at any given time, depending on the
Investment Adviser's ongoing evaluation of the expected returns and risks of
each asset class. For example, if the Investment Adviser believes, based on a
review of various economic and financial market factors, that the expected
return and risk for a particular asset class will be better than other
classes, the allocation of assets to that class may be higher than the
benchmark percentage.
4 Aetna Generation Portfolios, Inc.
<PAGE>
Asset allocation strategies are supplemented by security selection decisions
within each asset class. Selection of particular securities will be based on
the Investment Adviser's evaluation of various factors including the
particular issuer or industry, the expected return from the investment, the
price to earnings ratio, dividend payments, yields and inflation factors. The
following describes the securities in each of the asset classes (some of
these securities involve risks which are described in "Risk Factors and Other
Considerations"):
Equity Securities
Each Portfolio may invest its assets in equity securities that the Investment
Adviser believes have the potential for capital appreciation. These may
include the equity securities of larger, widely-traded issuers; smaller,
less well-known issuers; foreign issuers; and real estate-related issuers.
Securities in this asset class include preferred and common stocks,
securities convertible into stock, and warrants to purchase stock.
Large Capitalization Stock Class. Issuers of equity securities in this class
generally have equity market capitalizations at the time of purchase of more
than $1 billion, are U.S. domiciled and their securities generally are widely
traded on U.S. exchanges.
Small Capitalization Stock Class. Equity securities in this class are issued
by smaller, less well-known U.S. companies with equity market capitalization
generally less than $1.0 billion. These securities may involve greater risks
because their issuers may be untested in adverse market conditions, may have
limited product lines or financial resources, or their securities may trade
less frequently than those of larger-capitalized companies. As a result, the
prices of these securities may fluctuate more than prices of more
widely-traded securities of larger companies.
International Stock Class. Equity securities in this class may be issued by
companies domiciled or engaged in business principally in countries outside
of the U.S. The Investment Adviser believes that investment in foreign
securities offers significant potential for long-term capital appreciation
and affords substantial opportunities for investment diversification. Each
Portfolio may invest in ordinary foreign shares, American Depositary Receipts
("ADRs"), futures contracts or foreign stock indices and other derivative
securities within the limits set forth below. Investments in securities of
foreign companies and in securities denominated in foreign currencies involve
certain risks, which are described below under "Risk Factors and Other
Considerations."
Real Estate Stock Class. Equity securities in this class include equity
securities of real estate investment trusts ("REITs"), real estate
development and real estate operating companies, and companies engaged in
other real estate related businesses. Each Portfolio will invest the real
estate portion of its portfolio primarily in equity REITs, which are trusts
that sell shares 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 a geographic region, such as the Northeastern
United States, or both.
Fixed Income Securities
Each Portfolio may invest in fixed income securities, including obligations
of the U.S. and foreign governments as well as obligations of corporations.
The value of fixed income securities fluctuates in response to changes in
interest rates. Generally, when interest rates fall, the value of fixed
income securities increases. Conversely, when interest rates rise, the value
of fixed income securities decreases. The amount of the increase or decrease
in value is affected by other factors, including the maturity of the
security. Fixed income securities are subject to various risks, including the
creditworthiness of the issuer and economic factors.
U.S. Dollar Bonds Class. Securities in this class consist of any fixed income
security denominated in U.S. dollars, including obligations of the U.S.
Government, debt securities issued by U.S. corporations and supranational
agencies and mortgage-backed securities.
Aetna Generation Portfolios, Inc. 5
<PAGE>
U.S. Government Securities consist of direct obligations of the U.S.
Government, such as treasury bills, notes and bonds that are backed by the
full faith and credit of the United States, or obligations, such as notes and
bonds that are guaranteed by agencies and instrumentalities of the U.S.
Government. Securities of these agencies and instrumentalities are backed by
either the full faith and credit of the United States, the right of the
issuer to borrow from the U.S. Treasury, or the credit of the agency or
instrumentality. Securities in this group also include repurchase agreements
collateralized by U.S. Government agency securities and zero coupon bonds.
See "Investment Techniques."
Corporate Bonds include investment grade debt securities, high risk,
high-yield securities, and mortgage-backed and other asset-backed securities
which are rated in the four highest categories by Standard & Poor's
Corporation or Moody's Investors Service, Inc. Corporate bonds may also
include other debt instruments with similar ratings by other nationally
recognized statistical rating organizations or other unrated debt securities
which are considered by the Investment Adviser to be of similar quality. High
risk, high-yield securities carry more risk than do investment grade debt
securities. Each Portfolio will not invest more than 15% of its assets in
high risk, high-yield securities.
Mortgage-backed securities are securities that represent part ownership of a
pool of mortgage loans where principal is scheduled to be paid back by the
borrower over the length of the loan or returned in a lump sum at maturity.
They consist of pass-through securities issued by the U.S. Government and
corporations. Payments of interest and principal on U.S. mortgage-backed
securities may be guaranteed by an agency or instrumentality of the United
States. These agencies and instrumentalities include, but are not limited to,
the Government National Mortgage Association, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. Private mortgage
pass-through securities are backed by pools of conventional fixed-rate or
adjustable-rate mortgage loans but are not guaranteed as to payment of
interest and/or principal by the issuer. Also included in this class are
collateralized mortgage obligations ("CMOs") and securities issued by real
estate mortgage investment conduits ("REMICs"). Additional information about
CMOs and REMICs is contained in the SAI. Mortgage-backed securities are
subject to prepayment risk resulting from early prepayment by individual
homeowners.
International Bond Class includes debt securities denominated in currencies
other than the U.S. dollar. Generally, these securities are issued by foreign
corporations and foreign governments and are traded on foreign markets.
Investment in international debt securities that are denominated in foreign
currencies involve certain risks, which are described under "Risk Factors and
Other Considerations."
Money Market Securities
Each Generation Portfolio may invest in high quality money market obligations
that present minimal credit risk.
Money market securities are short term instruments that are considered safe
and liquid, such as U.S. Treasury Bills, negotiable certificates of deposit,
banker's acceptances, and commercial paper. These securities may include
instruments that have variable interest rates which, in the opinion of the
Investment Adviser, will maintain a value at or close to the face value of
the security.
Each Portfolio may keep a portion of its assets in cash.
INVESTMENT TECHNIQUES
The Generation Portfolios may use the following investment techniques (see
the "Glossary of Investment Terms" for the definition of certain terms used
below):
Borrowing. A Portfolio may borrow up to 5% of the value of its total assets
for temporary or emergency purposes. The Generation Portfolios do not intend
to borrow for leveraging purposes; but they have the authority to do so. A
Portfolio may borrow for leveraging purposes only if after the borrowing the
value of the Portfolio's net assets including amounts from the borrowings, is
equal to at least 300% of all outstanding borrowings. Leveraging can increase
the volatility of a Portfolio since it exaggerates the effects of changes in
the value of the securities purchased with the borrowed funds.
6 Aetna Generation Portfolios, Inc.
<PAGE>
Securities Lending. A Portfolio may lend its portfolio securities; however,
the value of the loaned securities (together with all other assets that are
loaned, including those subject to repurchase agreements) may not exceed
one-third of the Portfolio's total assets. A Portfolio will not lend
portfolio securities to affiliates. Though fully collateralized, lending
portfolio securities involves certain risks, including the possibility that
the borrower may become insolvent or default on the loan. In the event of a
disparity between the value of the loaned security and the collateral, there
is the additional risk that the borrower may fail to return the securities or
provide additional collateral.
Repurchase Agreements. Under a repurchase agreement, a Portfolio may acquire
a debt instrument for a relatively short period subject to an obligation by
the seller to repurchase and by the Portfolio to resell the instrument at a
fixed price and time.
The Generation Portfolios may enter into repurchase agreements with domestic
banks and broker-dealers. Such agreements, although fully collateralized,
involve the risk that the seller of the securities may fail to repurchase
them. In that event, a Portfolio may incur costs in liquidating the
collateral or a loss if the collateral declines in value. If the default on
the part of the seller is due to insolvency and the seller initiates
bankruptcy proceedings, the ability of a Portfolio to liquidate the
collateral may be delayed or limited.
The Board of Directors has established credit standards for repurchase
transactions entered into by the Generation Portfolios.
Asset-Backed Securities. The Generation Portfolios may purchase securities
collateralized by a specified pool of assets, including, but not limited to,
credit card receivables, automobile loans, home equity loans, computer
leases, boat loans, mobile home loans, or recreational vehicles. These
securities are subject to prepayment risk. In periods of declining interest
rates, reinvestment of prepayment proceeds would be made at lower and less
attractive interest rates.
Zero coupon and Pay-in-Kind Bonds. The Generation Portfolios may invest in
zero coupon securities and pay-in-kind bonds. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts to
their value at maturity. Some zero coupon securities call for the
commencement of regular interest payments at a deferred date. Pay-in-kind
bonds pay all or a portion of their interest in the form of debt or equity
securities. Zero coupon securities and pay-in-kind bonds are subject to
greater price fluctuations in response to changes in interest rates than are
ordinary interest-paying instruments with similar maturities; the value of
zero coupon securities and pay-in-kind bonds appreciate more during periods
of declining interest rates and depreciate more during periods of rising
interest rates.
Bank Obligations. The Generation Portfolios may invest in obligations
(including banker's acceptances, time deposits and certificates of deposit)
issued by domestic banks. They may also invest in obligations of foreign
banks provided the issuing bank has a minimum of $5 billion in assets and a
primary capital ratio of at least 4.25%.
Options, Futures and Other Derivative Instruments. A derivative is a
financial instrument, the value of which is "derived" from the performance of
an underlying asset (such as a security or index of securities). In addition
to futures and options, derivatives include, but are not limited to, forward
contracts, swaps, structured notes, and CMOs.
A Portfolio may engage in various strategies using derivatives including
managing its exposure to changing interest rates, securities prices and
currency exchange rates (collectively known as hedging strategies), or
increasing its investment return. For purposes other than hedging, a
Portfolio will invest no more than 5% of its total assets in derivatives
which at the time of purchase are considered by management to involve high
risk to the Portfolio. These would include inverse floaters, interest-only
and principal-only securities.
Aetna Generation Portfolios, Inc. 7
<PAGE>
A Portfolio may buy and sell options contracts including index options and
options on foreign securities. There is no limit on the amount of a
Portfolio's total assets that may be subject to call options; however,
writing a put option requires the segregation of liquid assets to cover the
contract. A Portfolio will not write a put option if it will require more
than 50% of the Portfolio's net assets to be segregated to cover the put
obligation nor will it write a put option if after it is written more than 3%
of the Portfolio's assets would consist of put options.
Investments in futures contracts and related options with respect to foreign
currencies, fixed income securities and foreign stock indices may also be
made by a Portfolio. Although these investments are primarily made to hedge
against price fluctuations, in some cases, a Portfolio may buy a futures
contract for the purpose of increasing its exposure in a particular asset
class or market segment, which strategy may be considered speculative. This
strategy is typically used to manage better portfolio transaction costs. The
aggregate futures market prices of financial instruments required to be
delivered or purchased under open futures contracts may not exceed 30% of
Aetna Legacy's total assets, 60% of Aetna Crossroads' total assets, and 100%
of Aetna Ascent's total assets. With respect to futures contracts or related
options that may be entered into for speculative purposes, the aggregate
initial margin for futures contracts and premiums for options will not exceed
5% of a Portfolio's net assets, after taking into account realized profits
and unrealized losses on such futures contracts.
A Portfolio may invest in forward contracts on foreign currency ("forward
exchange contracts"). These contracts may involve "cross-hedging," a
technique in which a Portfolio hedges with currencies which differ from the
currency in which the underlying asset is denominated.
The use of forward exchange contracts may reduce the gain that would
otherwise result from a change in the relationship between the U.S. dollar
and a foreign currency. In an attempt to limit their risk in forward exchange
contracts, the Generation Portfolios limit their exposure to the amount of
their respective assets denominated in the foreign currency being
cross-hedged. Cross-hedging entails a risk of loss on both the value of the
security that is the basis of the hedge and the currency contract that was
used in the hedge. These risks are described in greater detail in the SAI.
A Portfolio may also invest in interest rate swap transactions. Interest rate
swaps are subject to credit risks (if the other party fails to meet its
obligations) and also interest rate risks, because a Portfolio could be
obligated to pay more under its swap agreements than it receives under them
as a result of interest rate changes.
U.S. Government Derivatives. A Portfolio may purchase separately traded
principal and interest components of certain U.S. Government securities
("Strips"). In addition, a Fund may acquire custodial receipts that represent
ownership in a U.S. Government security's future interest or principal
payments. These securities are known by such exotic names as TIGRS and CATS
and may be issued at a discount to face value. They are generally more
volatile than normal fixed income securities because interest payments are
accrued rather than paid out in regular installments.
Supranational Agencies. Each Portfolio may invest up to 10% of its net assets
in securities of supranational agencies such as: 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.
Securities of supranational agencies are not considered government securities
and are not supported directly or indirectly by the U.S. Government.
8 Aetna Generation Portfolios, Inc.
<PAGE>
Illiquid and Restricted Securities. A Portfolio may invest up to 15% of its
total assets in illiquid securities. Illiquid securities are securities that
are not readily marketable or cannot be disposed of promptly within seven
days in the ordinary course of business without taking a materially reduced
price. In addition, a Portfolio may invest in securities that are subject to
legal or contractual restrictions on resale, including securities purchased
under Rule 144A and Section 4(2) of the Securities Act of 1933.
Because of the absence of a trading market for illiquid and certain
restricted securities, it may take longer to liquidate these securities than
it would unrestricted, liquid securities. A Portfolio may realize less than
the amount originally paid by the Portfolio for the security. The Board of
Directors has established a policy concerning investments in restricted and
illiquid securities.
Cash or Cash Equivalents. The Generation Portfolios reserve the right to
depart from their investment objectives temporarily by investing up to 100%
of their assets in cash or securities in the Money Market Class for defense
against potential market declines.
Other Investments. Each Portfolio may use other investment techniques,
including "when-issued" and "delayed-delivery securities" and variable rate
instruments. A Portfolio will establish a segregated account in which it will
maintain liquid assets in an amount at least equal to the Portfolio's
commitments to purchase securities on a when-issued or delayed-delivery
basis. These techniques are described in the SAI.
RISK FACTORS AND OTHER CONSIDERATIONS
General Considerations. The different types of securities purchased and
investment techniques used by a Portfolio involve varying amounts of risk.
For example, equity securities are subject to a decline in the stock market
or in the value of the issuer, and preferred stocks have price risk and some
interest rate and credit risk. The value of 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, on each debt security, the risk of principal and interest
default is greater with higher-yielding, lower-grade securities. High risk,
high-yield securities may provide a higher return but with added risk. In
addition, foreign securities have currency risk. Some of the risks involved
in the securities acquired by the Generation Portfolios are discussed in this
section. Additional discussion is contained above under "Investment
Techniques" and in the SAI.
Portfolio Turnover. Portfolio turnover refers to the frequency of portfolio
transactions and the percentage of portfolio assets being bought and sold in
the aggregate during the year. The Generation Portfolios do not intend to
make a general practice of short-term trading. It is anticipated that under
normal market conditions the average annual portfolio turnover rate for each
Portfolio will not exceed 125%. A high turnover rate will result in increased
brokerage commissions and may increase taxable capital gains.
International Securities. Investments in securities of foreign issuers or
securities denominated in foreign currencies involve risks not present in
domestic markets. Such risks include: currency fluctuations and related
currency conversion costs; less liquidity; price or income volatility; less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies; possible difficulty in obtaining and enforcing judgments
against foreign entities; adverse foreign political and economic
developments; different accounting procedures and auditing standards; the
possible imposition of withholding taxes on interest income payable on
securities; the possible seizure or nationalization of foreign assets; the
possible establishment of exchange controls or other foreign laws or
restrictions which might adversely affect the payment and transferability of
principal, interest and dividends on securities; higher transaction costs;
possible settlement delays; and less publicly available information about
foreign issuers.
Depositary Receipts. The Generation Portfolios can invest in both sponsored
and unsponsored depositary receipts. Unsponsored depositary receipts, which
are typically traded in the over-the-counter market, may be less liquid than
sponsored depositary receipts and therefore may involve more risk. In
addition, there may be less information available about issuers of
unsponsored depositary receipts.
Aetna Generation Portfolios, Inc. 9
<PAGE>
The Generation Portfolios will generally acquire ADRs which are dollar
denominated, although their market price is subject to fluctuations of the
foreign currency in which the underlying securities are denominated. All
depositary receipts will be considered foreign securities for purposes of a
Portfolio's investment limitation concerning investment in foreign
securities. See the "Glossary of Investment Terms" and the SAI for more
information.
Real Estate Securities. A Portfolio's investments in real estate securities
may be subject to certain of the same risks associated with the direct
ownership of real estate. These risks include: declines in the value of real
estate; risks related to general and local economic conditions, overbuilding
and competition; increases in property taxes and operating expenses; and
variations in rental income. In addition, equity REITS may be dependent upon
management skill, may not be diversified, and may be subject to the risks of
obtaining adequate financing for projects on favorable terms. Equity REITS
are also subject to the possibility of failing to qualify for tax-free
pass-through of income under the Internal Revenue Code and failing to
maintain exemption from the Investment Company Act of 1940, as amended ("1940
Act").
High Risk High-Yield Securities. A Portfolio may invest in high risk,
high-yield securities, often called junk bonds. These securities tend to
offer higher yields than investment-grade bonds because of the additional
risks associated with them. These risks include: a lack of liquidity; an
unpredictable secondary market; a greater likelihood of default; increased
sensitivity to difficult economic and corporate developments; call provisions
which may adversely affect investment returns; and loss of the entire
principal and interest. Although junk bonds are high risk investments, the
Investment Adviser may purchase these securities if they are thought to offer
good value. This may happen if, for example, the rating agencies have, in the
Investment Adviser's opinion, misclassified the bonds or overlooked the
potential for the issuer's enhanced creditworthiness.
Derivatives. The Portfolios may use derivative instruments as described above
under "Investment Techniques--Options, Futures and Other Derivative
Instruments." Derivatives can be volatile investments and involve certain
risks. A Portfolio may be unable to limit its losses by closing a position
due to lack of a liquid market or similar factors. Losses may also occur if
there is not a perfect correlation between the value of futures or forward
contracts and the related securities. The use of futures may involve a high
degree of leverage because of low margin requirements. As a result, small
price movements in futures contracts may result in immediate and potentially
unlimited gains or losses to a Portfolio. Leverage may exaggerate losses of
principal. The amount of gains or losses on investments in futures contracts
depends on the Investment Adviser's ability to predict correctly the
direction of stock prices, interest rates and other economic factors.
Variable Rate Instruments, When-Issued and Delayed-Delivery Transactions.
When-issued, delayed-delivery and variable rate instruments may be subject to
liquidity risks and risks of loss of principal due to market fluctuations.
Special Considerations. The investment results of the Generation Portfolios
depend in part upon the Investment Adviser's ability to anticipate correctly
the relative performance of stocks, bonds and money market instruments. While
the Investment Adviser has substantial experience in managing all asset
classes, there can be no assurance that it will always allocate assets to the
best performing sectors. A Portfolio's performance would suffer if a major
proportion of its assets were allocated to stocks in a declining market or,
similarly, if a major portion of a Portfolio's assets were allocated to bonds
at a time of adverse interest rate movement.
INVESTMENT RESTRICTIONS
In addition to the restrictions discussed under "Investment Strategies" and
"Investment Techniques," a Portfolio will not concentrate its investments in
any one industry, except that a Portfolio 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
10 Aetna Generation Portfolios, Inc.
<PAGE>
limitation will not apply to securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities.
Additionally, a Portfolio will not 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, its agencies or instrumentalities) or purchase more
than 10% of the outstanding voting securities of any one issuer. This
restriction applies only to 75% of a Portfolio's total assets.
MANAGEMENT OF THE GENERATION PORTFOLIOS
Directors. The operations of each Portfolio are managed under the direction
of the Board of Directors ("Directors"). The Directors set broad policies for
the Company and each Portfolio. Information about the Directors is found in
the SAI.
Investment Adviser. Aetna Life Insurance and Annuity Company ("ALIAC" or the
"Investment Adviser"), serves as the Investment Adviser for each of the
Generation Portfolios. ALIAC is a Connecticut insurance corporation with its
principal offices at 151 Farmington Avenue, Hartford, Connecticut 06156, and
is registered with the SEC as an investment adviser. As of December 31, 1995,
ALIAC managed over $22 billion in assets. The Investment Adviser is a
wholly-owned subsidiary of Aetna Retirement Services, Inc., which is in turn
a wholly owned subsidiary of Aetna Life and Casualty Company.
Under the terms of Investment Advisory Agreements between the Company and
ALIAC with respect to each of the Portfolios, ALIAC is, subject to the
supervision of the Directors, responsible for managing the assets of each
Portfolio in accordance with their respective investment objectives and
policies as described under "Description of the Generation Portfolios" and
"Investment Strategies." The Investment Adviser determines what securities
and other instruments are purchased and sold by each Portfolio and is
responsible for obtaining and evaluating financial data for each Portfolio.
The Investment Adviser furnishes all necessary facilities for, and pays the
salaries and other related costs of personnel engaged in providing investment
advice to, the Generation Portfolios. The Investment Adviser also pays any
fees and expenses for Directors and officers of the Generation Portfolios who
are employees or affiliated persons of the Investment Adviser. The Investment
Adviser receives a monthly fee at an annual rate of 0.50% of the average
daily net assets of each Portfolio for its services.
Portfolio Management. Kevin M. Means is the lead portfolio manager for the
Generation Portfolios and is responsible for determining the allocation of
each Portfolio's investments among the seven asset classes described under
"Investment Strategies."
The following individuals are responsible for the selection of securities for
the Generation Portfolios in each of the asset classes:
Mr. Means is also responsible for the selection of securities for the
Generation Portfolios in the Large Capitalization Stocks class. Mr. Means has
over eight years investment management experience. Before joining ALIAC in
1994 he was with INVESCO Capital Management, Inc.
Vince Fioramonti, International Stocks and International Bonds, has over
seven years experience in the investment management business. He has been
with ALIAC since 1994 and was with The Travelers Investment Management
Company from 1988 to 1994.
Yaniv Tepper, Real Estate Stocks, has been with ALIAC since 1994 and has been
a real estate consultant for Aetna since 1992.
Donald Townswick, Small Capitalization Stocks, has three years experience in
the investment management business, with ALIAC since 1994 and with INVESCO
Capital Management, Inc. from 1992 to 1994. He was a management consultant
for Deloitte Touche from 1990 to 1992.
Aetna Generation Portfolios, Inc. 11
<PAGE>
Jeanne Wong-Boehm, U.S. Dollar Bonds and Money Market Instruments, has over
12 years experience in the investment management business with ALIAC.
Expenses and Fund Administration
Under an Administrative Services Agreement with the Fund, ALIAC provides all
administrative services necessary for the Fund's operations and is responsible
for the supervision of the Fund's other service providers. ALIAC also assumes
all ordinary recurring direct costs of the Fund. For the services provided
under the Administrative Services Agreement, ALIAC will receive an annual fee,
payable monthly at a rate of 0.15% of the average daily net assets of the Fund.
SALE AND REDEMPTION OF SHARES
Purchases and redemptions of shares may be made only by insurance companies
for their separate accounts at the direction of Participants. Please refer to
the prospectus for your contract or policy for information on how to direct
investments in or redemptions from a Portfolio and any fees that may apply.
Generally, insurance companies aggregate orders received from Participants
during a day and place an order to purchase or redeem the net number of
shares during the night. Orders are generally executed at the net asset value
per share ("NAV") determined at the end of the previous business day. The
Generation Portfolios reserve the right to suspend the offering of shares, or
to reject any specific purchase order. The Generation Portfolios may suspend
redemptions or postpone payments when the New York Stock Exchange is closed
or when trading is restricted for any reason (other than weekends or
holidays) or under emergency circumstances as determined by the SEC.
NET ASSET VALUE
The NAV of each Portfolio is determined as of 4:15 p.m. New York time on each
day that the New York Stock Exchange is open for trading. Each Portfolio's
NAV is computed by taking the total value of a Portfolio's securities, plus
any cash or other assets (including dividends and interest accrued but not
collected) and subtracting all liabilities (including accrued expenses), and
dividing the total by the number of shares outstanding. Portfolio securities
are valued primarily by independent pricing services, based on market
quotations. All other assets and restricted securities and other 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 Directors.
GENERAL INFORMATION
Incorporation The Company was incorporated under the laws of Maryland on
October 14, 1994.
Capital Stock The Company is authorized to issue two billion shares of
capital stock, par value $0.001 per share. All shares are nonassessable,
transferable and redeemable. There are no preemptive rights.
Shareholder Meetings The Company is not required and does not intend to hold
annual shareholder meetings. The Company's Articles of Incorporation provide
for meetings of shareholders to elect Directors at such times as may be
determined by the Directors or as required by the 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.
Voting Rights Each share of the Company is entitled to one vote for each full
share and fractional votes for fractional shares. Separate votes are taken by
Portfolio only if the matter affects or requires the vote of only that
Portfolio. The insurance companies holding the shares in their separate
accounts will generally request voting instructions from the Participants and
generally must vote the shares in proportion
12 Aetna Generation Portfolios, Inc.
<PAGE>
to the voting instructions received. Participant voting rights are discussed
in the prospectus for the applicable VA Contract or VLI Policy.
TAX MATTERS
Each Portfolio intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), including requirements with respect to
diversification of assets, distribution of income and sources of income. As a
regulated investment company, a Portfolio generally will not be subject to
tax on its ordinary income and net realized capital gains.
Each Portfolio also intends to comply with the diversification requirements
of Section 817(h) of the Code for variable annuity contracts so that the
Participants should not be subject to federal tax on distributions of
dividends and income from a Portfolio to the insurance company separate
accounts. Participants should review the prospectus for their VA Contract or
VLI Policy to determine the tax consequences to them of purchasing a contract
or policy.
Aetna Generation Portfolios, Inc. 13
<PAGE>
GLOSSARY OF INVESTMENT TERMS
Banker's Acceptance A time draft drawn on and accepted by a bank, customarily
used by corporations as a means of effecting payment or financing payment for
traded goods, particularly in international markets.
Call Option The right to buy a security, currency or stock index at a stated
price, or strike price, within a fixed period. A call option will be
exercised if the spot price rises above the strike price; if not, the option
expires worthless.
Certificates of Deposit Debt instruments with a fixed maturity drawn on a
bank.
Collateralized Mortgage Obligations (CMOs) Mortgage-backed bonds that
separate mortgage pools into various classes or tranches in a predetermined,
specified order such as short-, medium-, and long-term portions.
Commercial Paper Short-term debt instruments issued by banks, corporations or
other borrowers with a maturity ranging from five to 270 days.
Convertible Securities Corporate securities (usually bonds or preferred
stock) that can be exchanged for a set number of shares of another security,
usually common stock.
Depositary Receipts Negotiable certificates evidencing ownership of shares of
a non-U.S. corporation, government, or foreign subsidiary of a U.S.
Corporation. A U.S. bank typically issues depositary receipts, which are
backed by ordinary shares that remain on deposit with a custodian bank in the
issuer's home market. A depositary receipt can either be "sponsored" by the
issuing company or established without the involvement of the company, which
is referred to as "unsponsored."
Forward Contracts A purchase or sale of a specific quantity of a commodity,
government security, foreign currency, or other financial instrument at the
current price, with delivery and settlement at a specified future date.
Futures Contracts An agreement to buy or sell a specific amount of a
commodity or financial instrument at a particular price on a stipulated
future date. A futures contract obligates the buyer to purchase and the
seller to sell, unlike an option where one party can choose whether or not to
exercise the option.
High Risk High-Yield Securities debt instruments rated BB or below by
Standard & Poor's Corporation or Ba or below by Moody's Investors Service,
Inc., or securities of comparable ratings by other agencies or, if unrated,
considered by the Investment Adviser to be of comparable quality. These
securities are often called "junk bonds" because of the greater possibility
of default.
Preferred Stock Stock which has a preference over common stock, whether as to
payment of dividends or to assets on liquidation. It ordinarily pays a fixed
dividend.
Primary Capital Ratio The ratio used to evaluate the credit worthiness of
foreign banks which is based on the ratio of total assets to the common and
preferred stock, loan loss reserves, minority interests and mandatory
convertibles.
Put Option The right to sell a security, currency or stock index at a stated
price, or strike price, within a fixed period. A put option will be exercised
if the spot price falls below the strike price; if not, the option expires
worthless.
Swap An exchange of one security for another. A swap may be executed to
change the maturities of a bond portfolio or the quality of the issues in a
stock or bond portfolio.
14 Aetna Generation Portfolios, Inc.
<PAGE>
Variable Rate Instruments An instrument the terms of which provide for the
adjustment of its interest rate on set dates and which can reasonably be
expected to have a market value close to par value.
Warrants A security, normally offered with bonds or preferred stock, that
entitles the holder to buy shares of stock at a prescribed price usually
higher than the market price at the date issued.
When-Issued and Delayed-Delivery Transactions When-issued is a transaction
that is made as of a current date, but conditioned on the actual issuance of
a security that is authorized but not yet issued. A delayed-delivery
transaction is one where both parties agree that the security will be
delivered and the transaction completed at a future date.
Yankee Bonds A dollar denominated bond issued in the United States by foreign
corporations and banks. Similarly, Yankee CDs are issued in the U.S. by
branches and agencies of foreign banks.
Aetna Generation Portfolios, Inc. 15
<PAGE>
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc.
"Aaa" Rating Bonds rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
"Aa" Rating Bonds rated Aa are judged to be of high-quality by all standards.
Together with the Aaa group, they are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat greater than in Aaa securities.
"A" Rating Bonds rated A possess many favorable investment attributes and are
considered upper-medium-grade obligations. Factors relating to security of
principal and interest are considered adequate but elements may be present
which suggest possible impairment sometime in the future.
"Baa" Rating Bonds rated Baa are considered medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and have speculative characteristics.
"Ba" Rating Bonds rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes this class of bond.
"B" Rating Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
The modifier 1 indicates that the bond ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its rating
category.
Standard & Poor's Corporation
"AAA" Rating Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
"AA" Rating Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small
degree.
"A" Rating Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories.
"BBB" Rating Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB" Rating Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, the bonds face major uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
16 Aetna Generation Portfolios, Inc.
<PAGE>
"B" Rating Bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal.
The ratings from "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Aetna Generation Portfolios, Inc. 17
<PAGE>
Statement of Additional Information dated: May 1, 1996
AETNA GENERATION
PORTFOLIOS, INC.
151 Farmington Avenue
Hartford, Connecticut 06156-8962
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the current prospectus for Aetna Generation
Portfolios, Inc. dated May 1, 1996.
A free prospectus is available upon request by writing to Aetna Generation
Portfolios, Inc. at the address listed above or calling 1-800-525-4225.
Read the prospectus before you invest.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
General Information and History 2
Additional Investment Restrictions and Policies of the Generation Portfolios 2
Description of Various Securities and Investment Techniques 4
Directors and Officers of the Company 17
Control Persons and Principal Shareholders 20
The Investment Advisory Contract 20
The Administrative Services Agreement 21
Custodian 21
Independent Auditors 21
Brokerage Allocation and Trading Policies 21
Description of Shares 22
Sale and Redemption of Shares 23
Net Asset Value 23
Tax Status 23
Voting Rights 29
Financial Statements S-1
</TABLE>
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Generation Portfolios, Inc. (the "Company") was incorporated in 1994 in
Maryland. The Company is an open-end diversified management investment
company. The Company is authorized to issue multiple series of shares, each
representing a diversified portfolio of investments with different investment
objectives, policies and restrictions (individually, a "Portfolio" and
collectively, the "Generation Portfolios"). The Company currently has
authorized three series: Aetna Ascent Variable Portfolio (Aetna Ascent);
Aetna Crossroads Variable Portfolio (Aetna Crossroads); and Aetna Legacy
Variable Portfolio (Aetna Legacy).
The investment objective and general investment policies of each Portfolio
are described in the Prospectus.
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES OF THE GENERATION PORTFOLIOS
The investment policies and restrictions of the Generation Portfolios, set
forth below, are matters of fundamental policy for purposes of the Investment
Company Act of 1940 (the "1940 Act") and therefore cannot be changed, with
regard to a particular Portfolio, without the approval of a majority of the
outstanding voting securities of that Portfolio. This means the lesser of:
(i) 67% of the shares of a Portfolio present at a shareholders' meeting if
the holders of more than 50% of the shares of that Portfolio then outstanding
are present in person or by proxy; or (ii) more than 50% of the outstanding
voting securities of a Portfolio.
As a matter of fundamental policy, none of the Generation Portfolios will:
(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 Portfolio's total assets. Securities issued or guaranteed
by the U.S. Government, its agencies and instrumentalities are excluded
from this restriction;
(2) concentrate its investments in any one industry, except that a Portfolio
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, real estate stocks will be classified as separate
industries according to property type, such as apartment, retail, office
and industrial. This limitation will not, however, apply to securities
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities;
(3) make loans, except that, to the extent appropriate under its investment
program, a Portfolio may (a) purchase bonds, debentures or other debt
securities, including short-term obligations; (b) enter into repurchase
transactions; and (c) lend portfolio securities provided that the value
of such loaned securities does not exceed one-third of the Portfolio's
total assets;
(4) issue any senior security (as defined in the 1940 Act), except that (a)
a Portfolio may enter into commitments to purchase securities in
accordance with that Portfolio's investment program, including reverse
repurchase agreements, delayed delivery and when-issued securities,
which may be considered the issuance of senior securities; (b) a
Portfolio 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; (c) a Portfolio
may engage in short sales of securities to the extent permitted in its
investment program and other restrictions; (d) the purchase or sale of
futures contracts and related options shall not be considered to involve
the issuance of senior securities; and (e) subject to fundamental
restrictions, a Portfolio may borrow money as authorized by the 1940
Act;
(5) purchase real estate, interests in real estate or real estate limited
partnership interests except that: (a) to the extent appropriate under
its investment program, a Portfolio may invest in securities
2 Aetna Generation Portfolios, Inc.
<PAGE>
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 (b) a Portfolio may acquire real estate as a
result of ownership of securities or other interests (this could occur
for example if a Portfolio holds a security that is collateralized by an
interest in real estate and the security defaults);
(6) invest in commodity contracts, except that a Portfolio may, to the
extent appropriate under its investment program, purchase securities of
companies engaged in such activities; may enter into transactions in
financial and index futures contracts and related options; may engage in
transactions on a when-issued or forward commitment basis; and may enter
into forward currency contracts;
(7) borrow money, except that (a) a Portfolio may enter into certain futures
contracts and options related thereto; (b) a Portfolio may enter into
commitments to purchase securities in accordance with that Portfolio's
investment program, including delayed delivery and when-issued
securities and reverse repurchase agreements; (c) for temporary
emergency purposes, a Portfolio may borrow money in amounts not
exceeding 5% of the value of its total assets at the time the loan is
made; and (d) for purposes of leveraging, a Portfolio may borrow money
from banks (including its custodian bank) only if, immediately after
such borrowing, the value of that Portfolio'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 Portfolio's assets fails to meet the 300% asset coverage
requirement relative only to leveraging, that Portfolio will, within
three days (not including Sundays and holidays), reduce its borrowings
to the extent necessary to meet the 300% test; or
(8) act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by a Portfolio,
that Portfolio may be deemed to be an underwriter under the provisions
of the Securities Act of 1933 (the "1933 Act").
The Company has also adopted certain other investment restrictions reflecting
the current investment practices of the Generation Portfolios which may be
changed by the Company's directors and without shareholder vote. Some of
these restrictions are described in the prospectus. In addition, none of the
Portfolios will:
(1) make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits
necessary for clearance of portfolio transactions, 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
Portfolio, as described here and in the prospectus;
(2) invest in companies for the purpose of exercising control or management;
(3) purchase the securities of any other investment company, except as
permitted under the 1940 Act;
(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; or
(5) invest more than 15% of its total assets in illiquid securities.
Illiquid securities are securities that are not readily marketable or
cannot be disposed of promptly within seven days and in the usual course
of business without taking a materially reduced price. Such securities
include, but are not limited to, time deposits and repurchase agreements
with maturities longer than seven days. Securities that may be resold
under Rule 144A or securities offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended, shall not be deemed illiquid solely
by reason of being unregistered. The Investment Adviser shall determine
whether a particular security is deemed to be liquid based on the
trading markets for the specific security and other factors.
Where a Portfolio's investment objective or policy restricts it to a
specified percentage of its total assets in any type of instrument, that
percentage is measured at the time of purchase. There will be no violation
Aetna Generation Portfolios, Inc. 3
<PAGE>
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.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
Options, Futures and Other Derivative Instruments
The Generation Portfolios may use derivative instruments as described in the
prospectus under "Investment Techniques." The following provides additional
information about these instruments.
Futures Contracts--Each Portfolio may enter into futures contracts as
described in the prospectus. A Portfolio may enter into futures contracts
which are traded on national futures exchanges and are standardized as to
maturity date and underlying financial instrument. The futures exchanges and
trading in the United States are regulated under the Commodity Exchange Act
by the Commodities Futures Trading Commission (the "CFTC").
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific commodity or financial
instrument(s) for a specified price at a designated date and time. Brokerage
fees are incurred when a futures contract is bought or sold and at
expiration, and margin deposits must be maintained.
Although interest rate futures contracts typically require actual future
delivery of and payment for the underlying instruments or commodities, 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 a Portfolio will be
able to enter into an offsetting transaction with respect to a particular
contract at a particular time. If a Portfolio is not able to enter into an
offsetting transaction, it will continue to be required to maintain the
margin deposits on the contract.
The prices of futures contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates and equities
prices, which in turn are affected by fiscal and monetary policies and
national and international political and economic events.
When using futures contracts as a hedging technique, at best, the correlation
between changes in prices of futures contracts and of the securities being
hedged can be only approximate. The degree of imperfection of correlation
depends upon circumstances such as: variations in speculative market demand
for futures and for securities, including technical influences in futures
trading, and differences between the financial instruments being hedged and
the instruments underlying the standard futures contracts available for
trading. Even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or stock market or interest rate
trends.
Most United States futures exchanges limit the amount of fluctuation
permitted in interest rate futures contract prices during a single trading
day, and, as noted, 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.
4 Aetna Generation Portfolios, Inc.
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Sales of futures contracts which are intended to hedge against a change in
the value of securities held by a Portfolio 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 Portfolio with a
commodities broker in a custodian account in order to initiate futures
trading and to maintain open positions in a Portfolio's futures contracts. A
margin deposit is intended to assure the Portfolio's performance of the
futures contract. The margin required for a particular futures contract is
set by the exchange on which the contract is traded and may be significantly
modified from time to time by the exchange during the term of the contract.
If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will promptly pay the excess to a Portfolio.
These daily payments to and from a Portfolio are called variation margin. At
times of extreme price volatility such as occurred during the week of October
19, 1987, intra-day variation margin payments may be required. In computing
daily net asset values, each Portfolio will mark to market the current value
of its open futures contracts. Each Portfolio expects to earn interest income
on its initial margin deposits. Furthermore, in the case of a futures
contract purchase, each Portfolio has deposited in a segregated account money
market instruments sufficient to meet all futures contract initial margin
requirements.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, small price movements in
futures contracts may result in immediate and potentially unlimited loss or
gain to a Portfolio relative to the size of the margin commitment. For
example, if at the time of purchase 10% of the value of the futures contract
is deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit before any
deduction for the transaction costs, if the contract were then closed out. A
15% decrease in the value of the futures contract would result in a loss
equal to 150% of the original margin deposit, if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount initially invested in the futures contract. However, a
Portfolio would presumably have sustained comparable losses if, instead of
the futures contract, it had invested in the underlying financial instrument
and sold it after the decline.
A Portfolio can enter into options on futures contracts. See "Call and Put
Options" below. The risk involved in writing options on futures contracts or
market indices is that there could be an increase in the market value of such
contracts or indices. If that occurred, the option would be exercised and the
Portfolio involved 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 Portfolio's obligation might be more or less than the premium
received when it originally wrote the option. Further, the Portfolio might
occasionally not be able to close the option because of insufficient activity
in the options market.
Call and Put Options--Each Generation Portfolio may write (sell) covered call
options and purchase put options and may purchase call and sell put options
including options on securities, indices and futures as discussed in the
prospectus and in this Section. A call option gives the holder (buyer) the
right to buy and 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 Portfolio 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 the Investment Adviser.
Aetna Generation Portfolios, Inc. 5
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So long as the obligation of the writer of a call option continues, the
writer may be assigned an exercise notice by the broker-dealer through which
such option was settled, requiring the writer to deliver the underlying
security against payment of the exercise price. This obligation terminates
upon the expiration of the call option, by the exercise of the call option,
or by entering into an offsetting transaction. To secure the writer's
obligation to deliver the underlying security, a writer of a call option is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the clearing corporations and of the exchanges.
A Portfolio will only write a call option on a security which it already owns
and will not write call options on when-issued securities.
When writing a call option, in return for the premium, the writer gives up
the opportunity to profit from the price increase in the underlying security
above the exercise price, but conversely retains the risk of loss should the
price of the security decline. If a call option expires unexercised, the
writer will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying security
during the option period. If the call option is exercised, the writer would
realize a gain or loss from the transaction depending on what it received
from the call and what it paid for the underlying security.
In the case of a put option, as long as the obligation of the put writer
continues, it may be assigned an exercise notice by the broker-dealer through
which such option was sold, requiring the writer to take delivery of the
underlying security against payment of the exercise price. A writer has no
control over when it may be required to purchase the underlying security,
since it may be assigned an exercise notice at any time prior to the
expiration date. This obligation terminates earlier if the writer effects a
closing purchase transaction by purchasing a put of the same series as that
previously sold.
To secure its obligation to pay for the underlying security, the writer of a
put generally must deposit in escrow liquid assets with a value equal to or
greater than the exercise price of the put option. The writer therefore
foregoes the opportunity of investing the segregated assets or writing calls
against those assets. A Portfolio may write put options on debt securities or
futures, only if such puts are covered by segregated liquid assets.
In writing puts, there is the risk that a writer may be required to buy the
underlying security at a disadvantageous price. Writing a put covered by
segregated liquid assets equal to the exercise of the put has the same
economic effect as writing a covered call option. The premium the writer
receives from writing a put option represents a profit, as long as the price
of the underlying instrument remains above the exercise price; however, if
the put is exercised, the writer is obligated during the option period to buy
the underlying instrument from the buyer of the put at the exercise price,
even though the value of the investment may have fallen below the exercise
price. If the put lapses unexercised, the writer realizes a gain in the
amount of the premium, the writer may incur a loss, equal to the difference
between the exercise price and the current market value of the underlying
instrument.
A Portfolio may purchase put options when the Investment Adviser believes
that a temporary defensive position is desirable in light of market
conditions, but does not desire to sell a portfolio security. The purchase of
put options for these purposes may be used to protect a Portfolio'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 Portfolio, 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 Portfolio will reduce any profit it might otherwise have realized in its
underlying security by the premium paid for the put option and by transaction
costs. The security covering the call or put option will be maintained in a
segregated account of a Portfolio's custodian.
The premium received from writing a call or put option, or paid for
purchasing a call or put option will reflect, among other things, the current
market price of the underlying security, the relationship of the exercise
price to such market price, the historical price volatility of the underlying
security, the length of the option period, and the general interest rate
environment. The premium received by a Portfolio for writing call options
will be recorded as a liability in the statement of assets and liabilities of
that Portfolio. This liability
6 Aetna Generation Portfolios, Inc.
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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 Portfolio when purchasing a put option will be recorded as an asset
in the statement of assets and liabilities of that Portfolio. 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
Portfolio 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 Portfolio 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 Portfolio
will be able to effect a closing transaction at a favorable price. If a
Portfolio 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 Portfolio will pay brokerage
commissions in connection with the sale or purchase of options to close out
previously established option positions. Such brokerage commissions are
normally higher as a percentage of underlying asset values than those
applicable to purchases and sales of portfolio securities.
The exercise price of an option may be below, equal to, or above the current
market value of the underlying security at the time the option is written.
From time to time, a Portfolio may purchase an underlying security for
delivery in accordance with an exercise notice of a call option assignment,
rather than delivering such security from its portfolio. In such cases
additional brokerage commissions will be incurred.
A Portfolio will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
the writing of the option; however, any loss so incurred in a closing
purchase transaction may be partially or entirely offset by the premium
received from a simultaneous or subsequent sale of a different option. Also,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in
part by appreciation of the underlying security owned by a Portfolio. Any
profits from writing covered call options are considered short-term gain for
federal income tax purposes and, when distributed by a Portfolio, are taxable
as ordinary income.
Foreign Futures Contracts and Foreign Options--The Generation Portfolios may
engage in transactions in foreign futures contracts and foreign options.
Participation in foreign futures contracts and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the CFTC, the National Futures Association
("NFA") nor any domestic exchange regulates activities of any foreign boards
of trade including the execution, delivery and clearing of transactions, or
has the power to compel enforcement of the rules of a foreign board of trade
or any applicable foreign laws. Generally, the foreign transaction will be
governed by applicable foreign law. This is true even if the exchange is
formally linked to a domestic market so that a position taken on the market
may be liquidated by a transaction on another market. Moreover, such laws or
regulations will vary depending on the foreign country in which the foreign
futures contracts or foreign options transaction occurs. Investors which
trade foreign futures contracts or foreign options contracts may not be
afforded certain of the protective measures provided by domestic exchanges,
including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided by the NFA. In particular, funds received
from customers for foreign futures contracts or foreign options transactions
may not be provided the same protections as funds received for transactions
on United States futures exchanges. The price of any foreign futures
contracts or foreign options contract and, therefore, the potential profit
and loss thereon, may be affected by any variance in the foreign exchange
rate between the time an order is placed and the time it is liquidated,
offset or exercised.
Aetna Generation Portfolios, Inc. 7
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Options on Foreign Currencies--Each Portfolio may write and purchase calls on
foreign currencies. A Portfolio 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 the event of rate fluctuations adverse to a
Portfolio's position, it would lose the premium it paid and transactions
costs. A call written on a foreign currency by a Portfolio is covered if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call may be written by a Portfolio
on a foreign currency to provide a hedge against a decline due to an expected
adverse change in the exchange rate in the U.S. dollar value of a security
which the Portfolio owns or has the right to acquire and which is denominated
in the currency underlying the option. This is a "cross-hedging" strategy. In
such circumstances, the Portfolio collateralizes the position by maintaining
in a segregated account with the Portfolio's custodian cash or U.S.
Government securities in an amount not less than the value of the underlying
foreign currency in U.S. dollars marked-to-market daily.
Forward Exchange Contracts--Each Generation Portfolio 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 Portfolio
may enter into a forward exchange contract in order to "lock in" the U.S.
dollar price of a security denominated in a foreign currency which it has
purchased or sold but which has not yet settled (a "transaction hedge"); or
to lock in the value of an existing portfolio security ( a "position hedge");
or to protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and a foreign currency. There is a risk
that use of forward exchange contracts may reduce the gain that would
otherwise result from a change in the relationship between the U.S. dollar
and a foreign currency. Forward exchange contracts include standardized
foreign currency futures contracts which are traded on exchanges and are
subject to procedures and regulations applicable to futures. Each Portfolio
may also enter into a forward exchange contract to sell a foreign currency
which differs from the currency in which the underlying security is
denominated. This is done in the expectation that there is a greater
correlation between the foreign currency of the forward exchange contract and
the foreign currency of the underlying investment than between the U.S.
dollar and the foreign currency of the underlying investment. This technique
is referred to as "cross hedging." The success of cross hedging is dependent
on many factors, including the ability of the Investment Adviser 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 Portfolio may
experience losses or gains on both the underlying security and the cross
currency hedge.
Each Portfolio 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 Portfolio owns or intends to acquire, but it does
fix a rate of exchange in advance. In addition, although forward exchange
contracts limit the risk of loss due to a decline in the value of the hedged
currencies, at the same time they limit any potential gain that might result
should the value of the currencies increase.
There is no limitation as to the percentage of a Portfolio's assets that may
be committed to forward exchange contracts. The Portfolios will not enter
into a "cross hedge," unless it is denominated in a currency or currencies
that the Investment Adviser believes will have price movements that tend to
correlate closely with the currency in which the investment being hedged is
denominated.
8 Aetna Generation Portfolios, Inc.
<PAGE>
The Generation Portfolios' custodian will place cash or U.S. Government
securities or other liquid high-quality debt securities in a separate
account of each Portfolio having a value equal to the aggregate amount of
that Portfolio's commitments under forward contracts entered into with
respect to position hedges and cross hedges. If the value of the securities
placed in the separate account declines, additional cash or securities will
be placed in the account on a daily basis so that the value of the account
will equal the amount of the Portfolio's commitments with respect to such
contracts. As an alternative to maintaining all or part of the separate
account, a Portfolio may purchase a call option permitting the Portfolio to
purchase the amount of foreign currency being hedged by a forward sale
contract at a price no higher than the forward contract price, or a Portfolio
may purchase a put option permitting the Portfolio to sell the amount of
foreign currency subject to a forward purchase contract at a price as high or
higher than the forward contract price. Unanticipated changes in currency
prices may result in poorer overall performance for a Portfolio than if it
had not entered into such contracts.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of
market movements in the value of these securities between the date the
forward contract is entered into and the date it is sold. Accordingly, it may
be necessary for a Portfolio 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
Portfolio 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 Portfolio 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 Portfolio to sustain
losses on these contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring a
Portfolio to sell a currency, the Portfolio 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 Portfolio will obtain, on
the same maturity date, the same amount of the currency that it is obligated
to deliver. Similarly, a Portfolio 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 Portfolio 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 Portfolio 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, a Portfolio
must evaluate the credit and performance risk of each particular counterparty
under a forward contract.
Although the Generation Portfolios 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 Portfolios may convert foreign
currency from time to time, and investors should be aware of the costs of
currency conversion. Foreign exchange dealers do not charge a fee for
conversion, but they do seek to realize a profit based on the difference
between the prices at which they buy and sell various currencies. Thus, a
dealer may offer to sell a foreign currency to the Portfolio at one rate,
while offering a lesser rate of exchange should the Portfolio desire to
resell that currency to the dealer.
Restrictions on the Use of Futures and Option Contracts--CFTC regulations
require that all short futures positions be entered into for the purpose of
hedging the value of securities held, and that all long futures positions
either constitute bona fide hedging transactions, as defined in such
regulations, or have
Aetna Generation Portfolios, Inc. 9
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a total value not in excess of an amount determined by reference to certain
cash and securities positions maintained, and accrued profits on such
positions. With respect to futures contracts or related options that are
entered into for purposes that may be considered speculative, the aggregate
initial margin for future contracts and premiums for options will not exceed
5% of a Portfolio's net assets, after taking into account realized profits
and unrealized losses on such futures contracts.
A Portfolio's ability to engage in the hedging transactions described herein
may be limited by the current federal income tax requirement that a Portfolio
derive less than 30% of its gross income from the sale or other disposition
of stock or securities held for less than three months.
Interest Rate Swap Transactions--Swap agreements entail both interest rate
risk and credit risk. There is a risk that, based on movements of interest
rates in the future, the payments made by a Portfolio under a swap agreement
will have been greater than those received by it. Credit risk arises from the
possibility that the counterparty will default. If the counterparty to an
interest rate swap defaults, a Portfolio's loss will consist of the net
amount of contractual interest payments that a Portfolio has not yet
received. The Investment Adviser will monitor the creditworthiness of
counterparties to a Portfolio's interest rate swap transactions on an ongoing
basis. A Portfolio will enter into swap transactions with appropriate
counterparties pursuant to master netting agreements. A master netting
agreement provides that all swaps done between a Portfolio and that
counterparty under that master agreement shall be regarded as parts of an
integral agreement. If on any date amounts are payable in the same currency
in respect of one or more swap transactions, the net amount payable on that
date in that currency shall be paid. In addition, the master netting
agreement may provide that if one party defaults generally or on one swap,
the counterparty may terminate the swaps with that party. Under such
agreements, if there is a default resulting in a loss to one party, the
measure of that party's damages is calculated by reference to the average
cost of a replacement swap with respect to each swap (i.e., the
mark-to-market value at the time of the termination of each swap). The gains
and losses on all swaps are then netted, and the result is the counterparty's
gain or loss on termination. The termination of all swaps and the netting of
gains and losses on termination is generally referred to as "aggregation."
Additional Risk Factors in Using Derivatives--In addition to any risk factors
which may be described elsewhere in this section, or in the prospectus under
"Investment Techniques" and "Risk Factors and Other Considerations," the
following sets forth certain information regarding the potential risks
associated with a Portfolio's transactions in derivatives.
Risk of Imperfect Correlation--A Portfolio'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
Portfolio might not be successful and the Portfolio 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 Portfolio's
overall return could be less than if the hedging transactions had not been
undertaken. Stock index futures or options based on a narrower index of
securities may present greater risk than options or futures based on a broad
market index, as a narrower index is more susceptible to rapid and extreme
fluctuations resulting from changes in the value of a small number of
securities. The Portfolio would, however, effect transactions in such futures
or options only for hedging purposes (or to close out open positions).
The trading of futures and options on indices involves the additional risk of
imperfect correlation between movements in the futures or option price and
the value of the underlying index. The anticipated spread between the prices
may be distorted due to differences in the nature of the markets, such as
differences in margin requirements, the liquidity of such markets and the
participation of speculators in the futures
10 Aetna Generation Portfolios, Inc.
<PAGE>
and options market. The purchase of an option on a futures contract also
involves the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The risk of imperfect correlation, however, generally tends to diminish as
the maturity date of the futures contract or termination date of the option
approaches. The risk incurred in purchasing an option on a futures contract
is limited to the amount of the premium plus related transaction costs,
although it may be necessary under certain circumstances to exercise the
option and enter into the underlying futures contract in order to realize a
profit. Under certain extreme market conditions, it is possible that a
Portfolio will not be able to establish hedging positions, or that any
hedging strategy adopted will be insufficient to completely protect the
Portfolio.
The Generation Portfolios will purchase or sell futures contracts or options
for hedging purposes, only if, in the Investment Adviser's judgment, there is
expected to be a sufficient degree of correlation between movements in the
value of such instruments and changes in the value of the assets being hedged
for the hedge to be effective. There can be no assurance that the Investment
Adviser's judgment will be accurate.
Potential Lack of a Liquid Secondary Market--The ordinary spreads between
prices in the cash and futures markets, due to differences in the natures of
those markets, are subject to distortions. First, all participants in the
futures markets are subject to initial deposit and variation margin
requirements. This could require a Portfolio to post additional cash or cash
equivalents as the value of the position fluctuates. Rather than meeting
additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of
the futures or options market may be lacking. Prior to exercise or
expiration, a futures or option position may be terminated only by entering
into a closing purchase or sale transaction, which requires a secondary
market on the exchange on which the position was originally established.
While a Portfolio 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 Portfolio, which could require the Portfolio 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 Portfolio's ability effectively to hedge its portfolio, or the relevant
portion thereof.
The liquidity of a secondary market in a futures contract or an option on a
futures contract may be adversely affected by "daily price fluctuation
limits" established by the exchanges, which limit the amount of fluctuation
in the price of a contract during a single trading day and prohibit trading
beyond such limits once they have been reached. The trading of futures and
options contracts also is subject to the risk of trading halts, suspensions,
exchange or clearing house equipment failures, government intervention,
insolvency of the brokerage firm or clearing house or other disruptions of
normal trading activity, which could at times make it difficult or impossible
to liquidate existing positions or to recover excess variation margin
payments.
Risk of Predicting Interest Rate Movements--Investments in futures contracts
on fixed income securities and related indices involve the risk that if the
Investment Adviser's judgment concerning the general direction of interest
rates is incorrect, a Portfolio's overall performance may be poorer than if
it had not entered into any such contract. For example, if a Portfolio 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 Portfolio 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 Portfolio 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.
Aetna Generation Portfolios, Inc. 11
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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 Generation Portfolios.
Repurchase Agreements
Each Portfolio may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards
established by the Company's Board of Directors. Under a repurchase
agreement, a Portfolio may acquire an underlying debt instrument for a
relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase and the Portfolio to resell the
instrument at a fixed price and time, thereby determining the yield during
the Portfolio'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
Portfolio. 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 Portfolio. In that event, a
Portfolio 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 Portfolio's ability to liquidate the
collateral may be delayed or limited. Under the 1940 Act, repurchase
agreements are considered loans by a Portfolio. Repurchase agreements
maturing in more than seven days will not exceed 10 percent of the total
assets of a Portfolio.
Variable Rate Demand Instruments
Variable rate demand instruments (including floating rate instruments) held
by a Portfolio may have maturities of more than one year, provided: (i) the
Portfolio 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 Portfolio 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 Portfolio might be unable
to dispose of the note and a loss would be incurred to the extent of the
default. A Portfolio 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 Portfolio
will also be monitored to determine whether such notes should continue to be
held. Variable and floating rate instruments with demand periods in excess of
seven days and which cannot be disposed of promptly within seven business
days and in the usual course of business without taking a reduced price will
be treated as illiquid securities that are subject to the Portfolio's
policies and restrictions on illiquid securities.
Securities Lending
The Generation Portfolios can lend securities in its portfolio subject to the
following conditions: (a) the borrower will provide at least 100% collateral
throughout the life of the loan; (b) loans will be made subject to the rules
of the New York Stock Exchange; (c) the loan collateral will be either cash
or direct obligations of the U.S. government or agencies thereof; (d) cash
collateral will be invested only in highly liquid short-term investments;
(e) during the existence of a loan, a Portfolio will continue to receive any
distributions paid on the borrowed securities or amounts equivalent thereto;
and (f) no more than one-third of the net assets of a Portfolio will be on
loan at any one time. A loan may be terminated at any time by the borrower or
lender upon proper notice.
In the Investment Adviser's opinion, lending portfolio securities to
qualified broker-dealers affords a Portfolio a means of increasing the yield
on its portfolio. A Portfolio will be entitled either to receive a fee from
the borrower or to retain some or all of the income derived from its
investment of cash collateral. A Portfolio
12 Aetna Generation Portfolios, Inc.
<PAGE>
will continue to receive the interest or dividends paid on any securities
loaned, or amounts equivalent thereto. Although voting rights will pass to
the borrower of the securities, whenever a material event affecting the
borrowed securities is to be voted on, the Investment Adviser will regain or
direct the vote with respect to loaned securities.
The primary risk a Portfolio assumes in loaning securities is that the
borrower may become insolvent on a day on which the loaned security is
rapidly increasing in price. In such event, if the borrower fails to return
the loaned securities, the existing collateral might be insufficient to
purchase back the full amount of the security loaned, and the borrower would
be unable to furnish additional collateral. The borrower would be liable for
any shortage, but a Portfolio would be an unsecured creditor as to such
shortage and might not be able to recover all or any of it.
Foreign Securities
Investments in foreign securities, including futures and options contracts,
offer potential benefits not available solely through investment in
securities of domestic issuers. Foreign securities offer the opportunity to
invest in foreign issuers that appear to offer growth potential, or in
foreign countries with economic policies or business cycles different from
those of the United States, or to reduce fluctuations in portfolio value by
taking advantage of foreign stock markets that may not move in a manner
parallel to U.S. markets. Investments in securities of foreign issuers
involve certain risks not ordinarily associated with investments in
securities of domestic issuers. Such risks include fluctuations in exchange
rates, adverse foreign political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. Since the Generation Portfolios may invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates will affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments so
far as U.S. investors are concerned. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability, or diplomatic developments that
could adversely affect investments in those countries.
There may be less publicly available information about a foreign issuer than
about a U.S. issuer, and foreign issuers may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or
as uniform as those of U.S. issuers. Foreign securities markets, while
growing in volume, have, for the most part, substantially less volume than
U.S. markets. Securities of many foreign issuers are less liquid and their
prices more volatile than securities of comparable U.S. issuers.
Transactional costs in non-U.S. securities markets are generally higher than
in U.S. securities markets. There is generally less government supervision
and regulation of exchanges, brokers, and issuers than there is in the U.S.
The 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.
Currently, direct investment in equity securities in China and Taiwan is
restricted, and investments may be made only through a limited number of
approved vehicles. At present this includes investment in listed and unlisted
investment companies, subject to limitations under the 1940 Act. Investment
in these closed-end funds may involve the payment of additional premiums to
acquire shares in the open-market and the yield of these securities will be
reduced by the operating expenses of such companies. In addition, an investor
should recognize that he will bear not only his proportionate share of the
expenses of the Generation Portfolio, but also indirectly bear similar
expenses of the underlying closed-end fund. Also, as a result of a
Portfolio's policy of investing in closed-end mutual funds, investors in the
Portfolio may receive taxable capital gains distributions to a greater extent
than if he or she had invested directly in the underlying closed-end fund.
Dividend and interest income from foreign securities may generally be subject
to withholding taxes by the country in which the issuer is located and may
not be recoverable by a Portfolio or its investors.
Aetna Generation Portfolios, Inc. 13
<PAGE>
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.
Mortgage-Related Debt Securities
Federal mortgage-related securities include obligations issued or guaranteed
by the Government National Mortgage Association (GNMA), the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC). GNMA is a wholly owned corporate instrumentality of the United
States, the securities and guarantees of which are backed by the full faith
and credit of the United States. FNMA, a federally chartered and privately
owned corporation, and FHLMC, a federal corporation, are instrumentalities of
the United States with Presidentially-appointed board members. The
obligations of FNMA and FHLMC are not explicitly guaranteed by the full faith
and credit of the federal government.
Pass-through, mortgage-related securities are characterized by monthly
payments to the holder, reflecting the monthly payments made by the borrowers
who received the underlying mortgage loans. The payments to the security
holders, like the payments on the underlying loans, represent both principal
and interest. Although the underlying mortgage loans are for specified
periods of time, often twenty or thirty years, the borrowers can, and
typically do, repay such loans sooner. Thus, the security holders frequently
receive repayments of principal, in addition to the principal which is part
of the regular monthly payment. A borrower is more likely to repay a mortgage
which bears a relatively high rate of interest. This means that in times of
declining interest rates, some higher yielding securities held by a Portfolio
might be converted to cash, and the Portfolio 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 Portfolio buys mortgage-related
securities at a premium, mortgage foreclosures or mortgage prepayments may
result in losses of up to the amount of the premium paid since only timely
payment of principal and interest is guaranteed.
As noted in the Prospectuses, the Generation Portfolios may also invest in
collateralized mortgage obligations (CMOs) and real estate mortgage
investment conduits (REMICs). CMOs and REMICs are securities which are
collateralized by mortgage pass-through securities. Cash flows from
underlying mortgages are allocated to various classes or tranches in a
predetermined, specified order. Each sequential tranche has a "stated
maturity"--the latest date by which the tranche can be completely repaid,
assuming no repayments--and has an "average life"--the average time to
receipt of a principal payment weighted by the size of the principal payment.
The average life is typically used as a proxy for maturity because the debt
is amortized, rather than being paid off entirely at maturity, as would be
the case in a straight debt instrument.
CMOs and REMICs are typically structured as "pass-through" securities. In
these arrangements, the underlying mortgages are held by the issuer, which
then issues debt collateralized by the underlying mortgage assets. The
security holder thus owns an obligation of the issuer and payment of interest
and principal on such obligations is made from payments generated by the
underlying mortgage assets. The underlying mortgages may be guaranteed as to
payment of principal and interest by an agency or instrumentality of the U.S.
Government such as GNMA or otherwise backed by FNMA or FHLMC. Alternatively,
such securities may be backed by mortgage insurance, letters of credit or
other credit enhancing features. Both CMOs and REMICs are issued by private
entities. They are not directly guaranteed by any government agency and are
secured by the collateral held by the issuer.
Asset-Backed Securities
Asset-backed securities are collateralized by short-term loans such as
automobile loans, computer leases, or credit card receivables. The payments
from the collateral are passed through to the security
14 Aetna Generation Portfolios, Inc.
<PAGE>
holder. As noted above with respect to CMOs and REMICs, the average life for
these securities is the conventional proxy for maturity. Asset-backed
securities may pay all interest and principal to the holder, or they may pay
a fixed rate of interest, with any excess over that required to pay interest
going either into a reserve account or to a subordinate class of securities,
which may be retained by the originator. The originator may guarantee
interest and principal payments. These guarantees often do not extend to the
whole amount of principal, but rather to an amount equal to a multiple of the
historical loss experience of similar portfolios.
Other asset-backed securities are similar to CMOs and REMICs in structure and
operations. 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.
CMOs, REMICs and other asset-backed securities are subject to the type of
prepayment risk discussed above due to the possibility that prepayments on
the underlying assets will alter the cash flow. The collateral behind
asset-backed securities 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. 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.
High Risk, High-Yield Securities
The Generation Portfolios may invest in high risk high-yield securities
("junk bonds"), which are fixed income securities that offer a current yield
above that generally available on higher quality debt securities. are
regarded as speculative and generally involve more risk of loss of principal
and income than higher-rated securities. Also their yields and market values
tend to fluctuate more. Fluctuations in value do not affect the cash income
from the securities but are reflected in a Portfolio's net asset value. The
greater risks and fluctuations in yield and value occur, in part, because
investors generally perceive issuers of lower-rated and unrated securities to
be less creditworthy. Lower ratings, however, may not necessarily indicate
higher risks. In pursuing a Portfolio's objectives, the Investment Adviser
seeks to identify situations in which the rating agencies have not fully
perceived the value of the security or in which the Investment Adviser
believes that future developments will enhance the creditworthiness and the
ratings of the issuer.
The yields earned on high risk high-yield securities (junk bonds) generally
are higher than those of higher quality securities with the same maturities
because of the additional risks associated with them. These risks include:
(1) Sensitivity to Interest Rate and Economic Changes. High risk high-yield
securities (junk bonds) are more sensitive to adverse economic changes
or individual corporate developments but less sensitive to interest rate
changes than are investment grade bonds. As a result, when interest
rates rise, causing bond prices to fall, the value of these securities
may not fall as much as investment grade corporate bonds. Conversely,
when interest rates fall, these securities may underperform investment
grade corporate bonds because the prices of high risk high-yield
securities (junk bonds) tend not to rise as much as the prices of these
other bonds.
Also, the financial stress resulting from an economic downturn or
adverse corporate developments could have a greater negative effect on
the ability of issuers of these securities to service their principal
and interest payments, to meet projected business goals and to obtain
additional financing,
Aetna Generation Portfolios, Inc. 15
<PAGE>
than on more creditworthy issuers. Holders of these securities could
also be at greater risk because these securities are generally unsecured
and subordinated to senior debt holders and secured creditors. If the
issuer of a high risk high-yield security (junk bonds) owned by a
Portfolio defaults, the Portfolio may incur additional expenses to seek
recovery. In addition, periods of economic uncertainty and changes can
be expected to result in increased volatility of market prices of these
securities and a Portfolio's net asset value. Furthermore, in the case
of high risk high-yield securities (junk bonds) structured as zero
coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest rate changes and thereby tend to be more
speculative and volatile than securities which pay interest periodically
and in cash.
(2) Payment Expectations. High risk high-yield securities (junk bonds)
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
Portfolio may have to replace the securities with a lower yielding
security, resulting in a decreased return for investors. Also, the
value of these securities may decrease in a rising interest rate
market. In addition, there is a higher risk of non-payment of
interest and/or principal by issuers of these securities than in the
case of investment grade bonds.
(3) Liquidity and Valuation Risks. High risk high-yield securities (junk
bonds) are often traded among a small number of broker-dealers rather
than in a broad secondary market. Purchasers of these securities tend
to be institutions rather than individuals, a factor that further
limits the secondary market. Many of these securities may not be as
liquid as investment grade bonds. The ability to value or sell these
securities will be adversely affected to the extent that such
securities are thinly traded or illiquid. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis,
may decrease or increase the value and liquidity of these securities
more than other securities, especially in a thinly-traded market.
(4) Limitations of Credit Ratings. The credit ratings assigned to high
risk high-yield securities (junk bonds) may not accurately reflect
the true risks of an investment. Credit ratings typically evaluate
the safety of principal and interest payments rather than the market
value risk of such securities. In addition, credit agencies may fail
to adjust credit ratings to reflect rapid changes in economic or
company conditions that affect a security's market value. Although
the ratings of recognized rating services such as Moody's and S&P are
considered, the Investment Adviser 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 Portfolio's
investment objective may be more dependent on the Investment
Adviser's own credit analysis than might be the case for a fund which
does not invest in these securities.
(5) Legislation. Legislation may have a negative impact on the market for
high risk high-yield securities (junk bonds). As examples,
legislation was passed requiring federally-insured savings and loan
associations to divest themselves of their investments in these
securities. There have been other proposals designed to limit the use
of, the tax treatment or other advantages of, these securities. Any
such proposals, if enacted, could have a negative effect on the value
of these assets.
Zero Coupon and Pay-in-Kind Securities
The Generation Portfolios may invest in zero coupon securities and
pay-in-kind securities. In addition, the Portfolios may invest in STRIPS
(Separate Trading of Registered Interest and Principal of Securities). Zero
coupon or deferred interest securities are debt obligations that do not
entitle the holder to any periodic payment of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their
face amounts or par value. The discount varies, depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, decreases
as the final maturity or cash
16 Aetna Generation Portfolios, Inc.
<PAGE>
payment date of the security approaches. STRIPS are created by the Federal
reserve bank by separating the interest and principal components of an
outstanding U.S. treasury bond and selling them as individual securities. The
market prices of zero coupon, STRIPS and deferred interest securities
generally are more volatile than the market prices of securities with similar
maturities that pay interest periodically and are likely to respond to
changes in interest rates to a greater degree than do non-zero coupon
securities having similar maturities and credit quality.
The risks associated with lower-rated debt securities apply to these
securities. Zero coupon and pay-in-kind securities are also subject to the
risk that in the event of a default, a Portfolio may realize no return on its
investment, because these securities do not pay cash interest.
Convertibles
A convertible bond or convertible preferred stock gives the holder the option
of converting these securities into common stock. Some convertible securities
contain a call feature whereby the issuer may redeem the security at a
stipulated price, thereby limiting the possible appreciation.
Warrants
Warrants allow the holder to subscribe for new shares in the issuing company
within a specified time period, according to a predetermined formula
governing the number of shares per warrant and the price to be paid for those
shares. Warrants may be issued separately or in association with a new issue
of bonds, preferred stock, common stock or other securities.
Covered warrants allow the holder to purchase existing shares in the issuing
company, or in a company associated with the issuer, or in a company in which
the issuer has or may have a share stake which covers all or part of the
warrants' subscription rights.
When-Issued or Delayed-Delivery Securities
During any period that a Generation Portfolio has outstanding a commitment to
purchase securities on a when-issued or delayed-delivery basis, that
Portfolio will maintain a segregated account consisting of cash, U.S.
Government securities or other high-quality debt obligations with its
custodian bank. To the extent that the market value of securities held in
this segregated account falls below the amount that the Portfolio will be
required to pay on settlement, additional assets may be required to be added
to the segregated account. Such segregated accounts could affect the
Portfolio's liquidity and ability to manage its portfolio. When a Portfolio
engages in when-issued or delayed-delivery transactions, it is effectively
relying on the seller of such securities to consummate the trade; failure of
the seller to do so may result in the Portfolio's incurring a loss or missing
an opportunity to invest portfolios held in the segregated account more
advantageously. A Portfolio will not pay for securities purchased on a
when-issued or delayed-delivery basis, or start earning interest on such
securities, until the securities are actually received. However, any security
so purchased will be recorded as an asset of the purchasing Portfolio at the
time the commitment is made. Because the market value of securities purchased
on a when-issued or delayed-delivery basis may increase or decrease prior to
settlement as a result of changes in interest rates or other factors, such
securities will be subject to changes in market value prior to settlement and
a loss may be incurred if the value of the security to be purchased declines
prior to settlement.
Portfolio Turnover
The Generation Portfolios' policy on portfolio turnover is discussed in the
prospectus. The portfolio turnover rate for the period ended December 31,
1995 was ___%.
DIRECTORS AND OFFICERS OF THE COMPANY
The investments and administration of the Generation Portfolios are under the
direction of the Board of Directors. The Directors and executive officers of
the Generation Portfolios 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 (*), and hold similar
positions with other investment companies in the same fund complex managed by
the Investment Adviser.
Aetna Generation Portfolios, Inc. 17
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During Past Five Years
Position(s) Held (and Positions held with Affiliated Persons or
Name, Address and Age with Registrant Principal Underwriters of the Registrant)**
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Shaun P. Mathews* Director and Chief Executive, Aetna Investment Services, Inc.,
151 Farmington Avenue President October 1995 to Present; President, Aetna
Hartford, Connecticut Investment Services, Inc., March 1994 to Present;
Age 40 Director and Chief Operations Officer, Aetna
Investment Services, Inc., July 1993 to Present;
Director and Senior Vice President, Aetna Insurance
Company of America, February 1993 to Present;
Senior Vice President and Director of ALIAC, March
1991 to Present; Vice President of Aetna Life
Insurance Company, 1991 to Present.
- --------------------------------------------------------------------------------------------------
James C. Hamilton Vice President Chief Financial Officer, Aetna Investment Services,
151 Farmington Avenue and Treasurer Inc., July 1993 to Present; Director, Vice
Hartford, Connecticut President and Treasurer, Aetna Insurance Company of
Age 55 America, February 1993 to Present; Director, Aetna
Private Capital, Inc., November 1990 to Present;
Vice President and Treasurer of ALIAC, October 1988
to Present; Vice President and Actuary, Aetna Life
Insurance Company, 1988 to Present.
- --------------------------------------------------------------------------------------------------
John Y. Kim* Director and President, Chief Executive Officer, and Chief
151 Farmington Avenue Vice President Investment Officer, Aeltus Investment Management,
Hartford, Connecticut Inc., December 1995 to Present; Senior Vice
Age 35 President and Director, ALIAC and Chief Investment
Officer, Aetna Life and Casualty Company, May 1994
to Present; Managing Director, Mitchell Hutchins
Institutional Investors, New York, NY, September
1993 to April 1994; Vice President of Investor
Relations and Senior Portfolio Manager, Aetna Life
and Casualty Company, October 1991 to August 1993.
- --------------------------------------------------------------------------------------------------
Susan E. Bryant Secretary Counsel, Aetna Life and Casualty Company, March
151 Farmington Avenue 1993 to Present; General Counsel and Corporate
Hartford, Connecticut Secretary, First Investors Corporation, April 1991
Age 48 to March 1993; Administrator, Oklahoma Department
of Securities, March 1986 to April 1991.
- --------------------------------------------------------------------------------------------------
Morton Ehrlich Director Chairman and Chief Executive Officer, Integrated
1000 Venetian Way Management Corp. (an entrepreneurial company) and
Miami, Florida Universal Research Technologies, 1992 to Present;
Age 61 Director and Chairman, Audit Committee, National
Bureau of Economic Research, 1985 to 1992;
President, LIFECO, Travel Services Corp., October
1988 to December 1991.
</TABLE>
18 Aetna Generation Portfolios, Inc.
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During Past Five Years
Position(s) Held (and Positions held with Affiliated Persons or
Name, Address and Age with Registrant Principal Underwriters of the Registrant)**
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Maria T. Fighetti Director Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation and
Closter, New Jersey Alcohol Services, 1973 to Present.
Age 52
- --------------------------------------------------------------------------------------------------
David L. Grove Director Private Investor; Economic/Financial Consultant,
5 The Knoll December 1985 to Present.
Armonk, New York
Age 78
- --------------------------------------------------------------------------------------------------
Daniel P. Kearney* Director Executive Vice President of Aetna Life and Casualty
151 Farmington Avenue Company, 1993 to Present; Group Executive, Aetna
Hartford, Connecticut Life and Casualty Company, 1991 to 1993.
Age 56
- --------------------------------------------------------------------------------------------------
Sidney Koch Financial Adviser, self-employed, January 1993 to
455 East 86th Street Present; Senior Adviser, Daiwa Securities America,
New York, New York Director Inc., January 1992 to January 1993; Executive Vice
Age 61 President, Member of Executive Committee, Daiwa
Securities America, Inc., January 1986 to January 1992
- --------------------------------------------------------------------------------------------------
Corine T. Norgaard Director, Chair Professor, Accounting and Dean of the School of
School of Management Audit Committee Management, Binghamton University (Binghamton, NY),
Binghamton University and Contract August 1993 to Present; Professor, Accounting,
Binghamton, New York Committee University of Connecticut (Storrs, Connecticut),
Age 58 September 1969 to June 1993; Director, The Advest
Group (holding company for brokerage firm).
- --------------------------------------------------------------------------------------------------
Richard G. Scheide Director Trust and Private Banking Consultant, David Ross
11 Lily Street Palmer Consultants, July 1991 to Present; Executive
Nantucket, Massachusetts Vice President and Manager, Bank of New England,
Age 66 N.A., June 1976 to July 1991.
</TABLE>
** All of the above persons hold the same positions with all the other
registered investment companies that comprise the Aetna Mutual Fund Complex.
It is estimated that the independent Directors of the Generation Portfolios
will be paid an aggregate not in excess of $30,000 from the Company for
fiscal year 1995. None of the independent Directors is entitled to retirement
or other benefits. Affiliated officers and Directors receive no compensation
directly from the Company; however, a portion of their salaries may be
allocated to the Company as part of ALIAC's administrative expense.
Aetna Generation Portfolios, Inc. 19
<PAGE>
<TABLE>
<CAPTION>
Total Compensation from Registrant
Name of Person, Aggregate Compensation and Fund Complex* Paid to
Position from Registrant Directors
------------------------ ---------------------- -------------------------------------
<S> <C> <C>
Corine Norgaard $ $
Director and Chairman,
Audit and Contract
Committees
------------------------ ---------------------- -------------------------------------
Sidney Koch $ $
Director and Member,
Audit and Contract
Committees
------------------------ ---------------------- -------------------------------------
Maria T. Fighetti $ $
Director and Member,
Audit and Contract
Committees
------------------------ ---------------------- -------------------------------------
Morton Ehrlich $ $
Director and Member,
Audit and Contract
Committees
------------------------ ---------------------- -------------------------------------
Richard G. Scheide $ $
Director and Member,
Audit and Contract
Committees
------------------------ ---------------------- -------------------------------------
David L. Grove $ $
</TABLE>
Director and Member,
Audit and Contract
Committees
*Fund Complex presently consists of: Aetna Series Fund, Inc., Aetna Variable
Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment
Advisers Fund, Inc., Aetna Get Fund (Series B) and Aetna Generation
Portfolios, Inc.
**Mr. Grove elected to defer all such compensation.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
Shares of the Generation Portfolios will be owned by insurance companies as
depositors of separate accounts which are used to fund variable annuity
contracts ("VA Contracts") and variable life insurance policies ("VLI
Policies"). It is currently expected that all shares will be held by separate
accounts of Aetna Life Insurance and Annuity Company ("ALIAC") and its
subsidiary, Aetna Insurance Company of America, Inc., on behalf of their
respective separate accounts. See "Voting Rights" below.
ALIAC is a wholly owned subsidiary of Aetna Retirement Services, Inc., which
is in turn a wholly owned subsidiary of Aetna Life and Casualty Company and
its principal office is located at 151 Farmington Avenue, Hartford,
Connecticut 06156. ALIAC is registered with the SEC as an investment adviser
and manages over $22 billion in assets including those held by Generation
Portfolios.
THE INVESTMENT ADVISORY CONTRACT
In 1994, the Company's Board of Directors approved an investment advisory
agreement (Advisory Agreement) between the Company and ALIAC for each of the
Generation Portfolios.
20 Aetna Generation Portfolios, Inc.
<PAGE>
Under the Advisory Agreement, the Investment Adviser has responsibility for
managing the assets of the Generation Portfolios, subject to the supervision
of the Directors as described in the prospectus. For its services, the
Investment Adviser receives a monthly fee at an annual rate of 0.50% of the
average daily net assets of each Generation Portfolio. For the period ended
December 31, 1995, Generation Portfolios paid ALIAC an investment advisory
fee of $_____.
Unless terminated earlier, upon approval of the Generation Portfolio's
shareholders the Advisory Agreement will remain in effect for one year.
Thereafter, it will remain in effect from year-to-year if approved annually
by a majority vote of the Directors, including a majority of the Directors
who are not "interested persons," cast in person at a meeting called for that
purpose. The Advisory Agreement may be terminated as to a particular
Portfolio without penalty at any time on sixty days' written notice by (i)
the Directors, (ii) a majority vote of the outstanding voting securities of
that Portfolio, or (iii) the Investment Adviser. The Advisory Agreement
terminates automatically in the event of its assignment.
The service mark of the Generation Portfolios and the name "Aetna" have been
adopted by the Company with the permission of Aetna Life and Casualty Company
and their continued use is subject to the right of Aetna Life and Casualty
Company to withdraw this permission in the event the Investment Adviser or
another subsidiary or affiliated corporation of Aetna Life and Casualty
Company should not be the investment adviser of the Generation Portfolios.
THE ADMINISTRATIVE SERVICES AGREEMENT
The Generation Portfolios entered into an Administrative Services Agreement with
ALIAC effective May 1, 1996 under which ALIAC has agreed to provide all
administrative services in support of the Generation Portfolios. In addition,
ALIAC has agreed to assume all ordinary recurring direct costs of the Generation
Portfolios that it would be required to pay under the terms of the Investment
Advisory Agreement. As a result, ALIAC will be covering all costs of the
Generation Portfolios other than the investment advisory fee and brokerage costs
and other transaction costs in connection with the purchase and sale of
securities for its portfolio. For the services provided under the Administrative
Services Agreement, ALIAC will receive an annual fee, payable monthly at a rate
of 0.15% of the average daily net assets of the Portfolios. Prior to May 1,
1996, ALIAC had an Administrative Services Agreement that provided for the
reimbursement of a proportionate share of ALIAC's overhead in administering the
Generation Portfolios. Prior to May 1, 1996, the Generation Portfolios were
obligated to pay its own direct costs. The total of the direct costs and
administrative costs for the period ended December 31, 1995 was $_____.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, PA, 15258 serves as
custodian for the assets of the Generation Portfolios. The custodian does not
participate in determining the investment policies of a Portfolio or in
deciding which securities are purchased or sold by a Portfolio. A Generation
Portfolio, however, may invest in obligations of the custodian and may
purchase or sell securities from or to the custodian.
INDEPENDENT AUDITORS
City Place II, Hartford, Connecticut 06103 serves as independent auditors to
the Generation Portfolios. provides audit services, assistance and
consultation in connection with SEC filings.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Directors, ALIAC has responsibility for
making the Generation Portfolios' investment decisions, for effecting the
execution of trades for the Generation Portfolios and for negotiating any
brokerage commissions thereon. It is the policy of ALIAC to obtain the best
quality of execution available, giving attention to net price (including
commissions where applicable), execution capability (includ-
Aetna Generation Portfolios, Inc. 21
<PAGE>
ing 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.
In implementing its trading policy, ALIAC may place a Portfolio's
transactions with such brokers or dealers and for execution in such markets
as, in the opinion of the Company, will lead to the best overall quality of
execution for the Portfolio.
ALIAC currently receives a variety of brokerage and research services from
brokerage firms in return for the execution by such brokerage firms of trades
in securities held by a Portfolio. 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
Portfolio and other investment companies, services related to the execution
of trades in a Portfolio's securities and advice as to the valuation of
securities. ALIAC 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 a Portfolio's securities.
Consistent with securities laws and regulations, ALIAC may obtain such
brokerage and research services regardless of whether they are paid for (1)
by means of commissions; or (2) by means of separate, non-commission
payments. ALIAC's 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 ALIAC's
opinion as to which services and which means of payment are in the long-term
best interests of a Portfolio. The Generation Portfolios have no present
intention to effect any brokerage transactions in portfolio securities with
ALIAC or any affiliate of the Generation Portfolios or ALIAC.
Certain officers of ALIAC also manage the securities portfolio of ALIAC's own
accounts. Further, ALIAC also acts as investment adviser to other investment
companies registered under the 1940 Act. ALIAC has adopted policies designed
to prevent disadvantaging the Portfolios in placing orders for the purchase
and sale of securities for the Generation Portfolios.
To the extent ALIAC desires to buy or sell the same publicly traded security
at or about the same time for more than one client, the purchases or sales
will normally be allocated as nearly as practicable on a pro rata basis in
proportion to the amounts to be purchased or sold by each, taking into
consideration the respective investment objectives of the clients, the
relative size of portfolio holdings of the same or comparable securities,
availability of cash for investment, and the size of their respective
investment commitments. Orders for different clients received at
approximately the same time may be bunched for purposes of placing trades, as
authorized by regulatory directives. Prices are averaged for those
transactions.
The Board of Directors has adopted a policy allowing trades to be made
between registered investment companies provided they meet the terms of Rule
17a-7 under the 1940 Act. Pursuant to this policy, a Portfolio may buy a
security from or sell another security to another registered investment
company advised by ALIAC.
For the period ended December 31, 1995, Generation Portfolios paid brokerage
commisions of $_____.
The Board of Directors has also adopted a Code of Ethics governing personal
trading by persons who manage, or who have access to trading activity by, a
Portfolio. The Code allows trades to be made in securities that may be held
by a Portfolio; however, it prohibits a person from taking advantage of
Portfolio trades or from acting on inside information.
For the fiscal year ended December 31, 1995, portfolio transactions in the
amount of $________ were directed to certain brokers because of research
services, of which commissions in the amount of $________ were paid with
respect to such transactions. No brokerage business was placed with any
brokers affiliated with ALIAC during the last three fiscal years.
DESCRIPTION OF SHARES
The Articles of Incorporation authorize the Company to issue two billion
shares of common stock with a par value of $.001 per share. The shares are
nonassessable, transferable, redeemable and do not have pre-emptive rights or
cumulative voting rights. The shares may be issued as whole or fractional
shares and are uncertificated.
22 Aetna Generation Portfolios, Inc.
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The shares may be issued in series or portfolios having separate assets and
separate investment objectives and policies. Upon liquidation of a portfolio,
its shareholders are entitled to share pro rata in the net assets of that
portfolio available for distribution to shareholders. Shares, when issued,
will be fully paid and nonassessable.
SALE AND REDEMPTION OF SHARES
Shares of a Portfolio are sold and redeemed at the net asset value next
determined after receipt of a purchase or redemption order in acceptable form
as described in the prospectus under "Sale and Redemption of Shares" and "Net
Asset Value."
NET ASSET VALUE
Securities of the Generation Portfolios are generally valued by independent
pricing services. The values for equity securities traded on registered
securities exchanges are based on the last sale price or, if there has been
no sale that day, at the mean of the last bid and asked price on the exchange
where the security is principally traded. Securities traded over the counter
(including long-term debt securities) are valued at the mean of the last bid
and asked price if current market quotations are not readily available.
Short-term debt securities which have a maturity date of more than sixty
days will be valued at the mean of the last bid and asked price obtained from
principal market makers. Long-term debt securities are valued at the mean of
the last bid and asked price of such securities obtained from a broker who is
a market-maker in the securities or a service providing quotations based
upon the assessment of market-makers in those securities.
Options are valued at the mean of the last bid and asked price on the
exchange where the option is primarily traded. Stock index futures contracts
and interest rate futures contracts are valued daily at a settlement price
based on rules of the exchange where the futures contract is primarily
traded.
TAX STATUS
The following is only a summary of certain additional tax considerations
generally affecting each Generation Portfolio and its shareholders which are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of each Portfolio or its shareholders, and
the discussions here and in the Prospectus are not intended as substitutes
for careful tax planning.
Qualification as a Regulated Investment Company
Each Generation Portfolio has elected to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, a Portfolio is not subject
to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains over
capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) and at least 90% of its tax-exempt income (net of
expenses allocable thereto) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that are
described in this section. Distributions by a Portfolio made during the
taxable year or, under specified circumstances, within twelve months after
the close of the taxable year, will be considered distributions of income and
gains of the taxable year and can therefore satisfy the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies (the
Aetna Generation Portfolios, Inc. 23
<PAGE>
"Income Requirement"); and (2) derive less than 30% of its gross income
(exclusive of certain gains on designated hedging transactions that are
offset by realized or unrealized losses on offsetting positions) from the
sale or other disposition of stock, securities or foreign currencies (or
options, futures or forward contracts thereon) held for less than three
months (the "Short-Short Gain Test"). For purposes of these calculations,
gross income includes tax-exempt income. However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to
the regulated investment company's investments in stock or securities (or
options or futures thereon). Because of the Short-Short Gain Test, a
Portfolio may have to limit the sale of appreciated securities that it has
held for less than three months. However, the Short-Short Gain Test will not
prevent a Portfolio from disposing of investments at a loss, since the
recognition of a loss before the expiration of the three-month holding period
is disregarded for this purpose. Interest (including original issue discount)
received by a Portfolio at maturity or upon the disposition of a security
held for less than three months will not be treated as gross income derived
from the sale or other disposition of such security within the meaning of the
Short-Short Gain Test. However, income that is attributable to realized
market appreciation will be treated as gross income from the sale or other
disposition of securities for this purpose.
In general, gain or loss recognized by a Portfolio on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation (including municipal obligations) purchased
by a Portfolio at a market discount (generally, at a price less than its
principal amount) will be treated as ordinary income to the extent of the
portion of the market discount which accrued during the period of time the
Portfolio held the debt obligation. In addition, under the rules of Code
Section 988, gain or loss recognized on the disposition of a debt obligation
denominated in a foreign currency or an option with respect thereto (but only
to the extent attributable to changes in foreign currency exchange rates),
and gain or loss recognized on the disposition of a foreign currency forward
contract, futures contract, option or similar financial instrument, or of
foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless the Portfolio elects otherwise),
will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by a Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset
is used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset
so used, (2) the asset is otherwise held by the Portfolio as part of a
"straddle" (which term generally excludes a situation where the asset is
stock and the Portfolio grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto) or (3) the
asset is stock and the Portfolio grants an in-the-money qualified covered
call option with respect thereto. However, for purposes of the Short-Short
Gain Test, the holding period of the asset disposed of may be reduced only in
the case of clause (1) above. In addition, a Portfolio may be required to
defer the recognition of a loss on the disposition of an asset held as part
of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by a Portfolio on the lapse of, or any gain or loss
recognized by a Portfolio from a closing transaction with respect to, an
option written by the Portfolio will be treated as a short-term capital gain
or loss. For purposes of the Short-Short Gain Test, the holding period of an
option written by a Portfolio will commence on the date it is written and end
on the date it lapses or the date a closing transaction is entered into.
Accordingly, a Portfolio may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.
Transactions that may be engaged in by a Portfolio (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes
and futures contracts) will be subject to special tax treatment as "Section
1256 contracts." Section 1256 contracts are treated as if they are sold for
their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of
the year-end deemed disposition of
24 Aetna Generation Portfolios, Inc.
<PAGE>
Section 1256 contracts is taken into account for the taxable year together
with any other gain or loss that was previously recognized upon the
termination of Section 1256 contracts during that taxable year. Any capital
gain or loss for the taxable year with respect to Section 1256 contracts
(including any capital gain or loss arising as a consequence of the year-end
deemed sale of such contracts) is generally treated as 60% long-term capital
gain or loss and 40% short-term capital gain or loss. A Portfolio, however,
may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a "mixed straddle" with other investments of the
Portfolio that are not Section 1256 contracts. The IRS has held in several
private rulings (and Treasury Regulations now provide) that gains arising
from Section 1256 contracts will be treated for purposes of the Short-Short
Gain Test as being derived from securities held for not less than three
months if the gains arise as a result of a constructive sale under Code
Section 1256.
A Portfolio may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If a Portfolio invests in a PFIC, it may elect
to treat the PFIC as a qualifying electing portfolio (a "QEF") in which event
the Portfolio will each year have ordinary income equal to its pro rata share
of the PFIC's ordinary earnings for the year and long-term capital gain equal
to its pro rata share of the PFIC's net capital gain for the year, regardless
of whether the Portfolio receives distributions of any such ordinary earnings
or capital gain from the PFIC. If a Portfolio does not (because it is unable
to, chooses not to or otherwise) elect to treat the PFIC as a QEF, then in
general (1) any gain recognized by the Portfolio upon sale or other
disposition of its interest in the PFIC or any excess distribution received
by the Portfolio from the PFIC will be allocated ratably over the Portfolio's
holding period of its interest in the PFIC, (2) the portion of such gain or
excess distribution so allocated to the year in which the gain is recognized
or the excess distribution is received shall be included in the Portfolio's
gross income for such year as ordinary income (and the distribution of such
portion by the Portfolio to shareholders will be taxable as an ordinary
income dividend, but such portion will not be subject to tax at the Portfolio
level), (3) the Portfolio shall be liable for tax on the portions of such
gain or excess distribution so allocated to prior years in an amount equal
to, for each such prior year, (i) the amount of gain or excess distribution
allocated to such prior year multiplied by the highest tax rate (individual
or corporate) in effect for such prior year plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a
return for such prior year until the date for filing a return for the year in
which the gain is recognized or the excess distribution is received at the
rates and methods applicable to underpayments of tax for such period, and (4)
the distribution by the Portfolio to shareholders of the portions of such
gain or excess distribution so allocated to prior years (net of the tax
payable by the Portfolio thereon) will again be taxable to the shareholders
as an ordinary income dividend.
Under recently proposed Treasury Regulations a Portfolio can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the Portfolio's adjusted
tax basis in that share ("mark to market gain"). Such mark to market gain
will be included by the Portfolio as ordinary income, such gain will not be
subject to the Short-Short Gain Test, and the Portfolio's holding period with
respect to such PFIC stock commences on the first day of the next taxable
year. If a Portfolio makes such election in the first taxable year it holds
PFIC stock, the Portfolio will include ordinary income from any mark to
market gain, if any, and will not incur the tax described in the previous
paragraph.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess
of net long-term capital gain over net short-term capital loss) for any
taxable year, to elect (unless it has made a taxable year election for excise
tax purposes as discussed below) to treat all or any part of any net capital
loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, each Portfolio
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a
Portfolio's taxable year, at least 50% of the value of the Portfolio's assets
must consist of
Aetna Generation Portfolios, Inc. 25
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cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which
the Portfolio has not invested more than 5% of the value of the Portfolio's
total assets in securities of such issuer and as to which the Portfolio does
not hold more than 10% of the outstanding voting securities of such issuer),
and no more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or of two or more
issuers which the Portfolio controls and which are engaged in the same or
similar trades or businesses or related trades or businesses. Generally, an
option (call or put) with respect to a security is treated as issued by the
issuer of the security not the issuer of the option. However, with regard to
forward currency contracts, there does not appear to be any formal or
informal authority which identifies the issuer of such instrument. For
purposes of asset diversification testing, obligations issued or guaranteed
by agencies or instrumentalities of the U.S. Government such as the Federal
Agricultural Mortgage Corporation, the Farm Credit System Financial
Assistance Corporation, a Federal Home Loan Bank, the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the
Government National Mortgage Corporation, and the Student Loan Marketing
Association are treated as U.S. Government securities.
If for any taxable year a Portfolio 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 Portfolio's
current and accumulated earnings and profits. Such distributions generally
will be eligible for the dividends-received deduction in the case of
corporate shareholders.
Qualification of Segregated Asset Accounts
Under Code section 817(h), a segregated asset account upon which a variable
annuity contract or variable life insurance policy is based must be
"adequately diversified." A segregated asset account will be adequately
diversified if it satisfies one of two alternative tests set forth in the
Treasury Regulations. Specifically, the Treasury Regulations provide, that
except as permitted by the "safe harbor" discussed below, as of the end of
each calendar quarter (or within 30 days thereafter) no more than 55% of a
Portfolio's total assets may be represented by any one investment, no more
than 70% by any two investments, no more than 80% by any three investments
and no more than 90% by any four investments. For this purpose, all
securities of the same issuer are considered a single investment, and while
each U.S. Government agency and instrumentality is considered a separate
issuer, a particular foreign government and its agencies, instrumentalities
and political subdivisions are considered the same issuer. As a safe harbor,
a separate account will be treated as being adequately diversified if the
diversification requirements under Subchapter M are satisfied and no more
than 55% of the value of the account's total assets are cash and cash items,
government securities and securities of other regulated investment companies.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be
entitled to "look-through" the regulated investment company to its pro rata
portion of the regulated investment company's assets, provided the regulated
investment company satisfies certain conditions relating to the ownership of
the shares.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or,
at the election of a regulated investment company having a taxable year
ending November 30 or December 31, for its taxable year (a "taxable year
election")). Tax-exempt interest on municipal obligations is not subject to
the excise tax. The balance of such income must be distributed during the
next calendar year. For the foregoing purposes, a regulated investment
company is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end
26 Aetna Generation Portfolios, Inc.
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of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
Each Portfolio 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 Portfolio may in certain circumstances
be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
Portfolio Distributions
Each Portfolio anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be
taxable to the shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they may qualify for the 70%
dividends-received deduction for corporate shareholders to the extent
discussed below.
The Generation Portfolios may either retain or distribute to the shareholders
its net capital gain for each taxable year. The Generation Portfolios
currently intend to distribute any such amounts. If net capital gain is
distributed and designated as a capital gain dividend, it will be taxable to
the shareholders as long-term capital gain, regardless of the length of time
the shareholders have held shares or whether such gain was recognized by the
Generation Portfolio prior to the date on which the shareholder acquired the
shares. The Code provides, however, that under certain conditions only 50% of
the capital gain recognized upon a Generation Portfolio's disposition of
"small business" stock will be subject to tax.
If a Portfolio elects to retain its net capital gain, the Portfolio will be
taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. Where a Portfolio elects to retain its net
capital gain, it is expected that the Portfolio also will elect to have
shareholders of record on the last day of its taxable year treated as if each
received a distribution of its pro rata share of such gain, with the result
that each shareholder will be required to report its pro rata share of such
gain on its tax return as long-term capital gain, will receive a refundable
tax credit for its pro rata share of tax paid by the Portfolio on the gain,
and will increase the tax basis for its shares by an amount equal to the
deemed distribution less the tax credit.
Ordinary income dividends paid by a Portfolio with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations, such as S corporations, which are not
eligible for the deduction because of their special characteristics and other
than for purposes of special taxes such as the accumulated earnings tax and
the personal holding company tax) to the extent of the amount of qualifying
dividends received by a Portfolio from domestic corporations for the taxable
year. A dividend received by the Portfolio will not be treated as a
qualifying dividend (1) if it has been received with respect to any share of
stock that the Portfolio has held for less than 46 days (91 days in the case
of certain preferred stock), excluding for this purpose under the rules of
Code Section 246(c) (3) and (4): (i) any day more than 45 days (or 90 days in
the case of certain preferred stock) after the date on which the stock
becomes ex-dividend and (ii) any period during which the Portfolio has an
option to sell, is under a contractual obligation to sell, has made and not
closed a short sale of, is the grantor of a deep-in-the-money or otherwise
nonqualified option to buy, or has otherwise diminished its risk of loss by
holding other positions with respect to, such (or substantially identical)
stock; (2) to the extent that the Portfolio is under an obligation (pursuant
to a short sale or otherwise) to make related payments with respect to
positions in substantially similar or related property; or (3) to the extent
the stock on which the dividend is paid is treated as debt-financed under the
rules of Code Section 246A. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced (i) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Portfolio or (ii) by application of Code Section 246(b) which
in general limits the dividends-received deduction to 70% of the
shareholder's taxable income (determined without regard to the
dividends-received deduction and certain other items).
Aetna Generation Portfolios, Inc. 27
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Alternative Minimum Tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate
of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. In addition, under the Superfund Amendments and
Reauthorization Act of 1986, a tax is imposed for taxable years beginning
after 1986 and before 1996 at the rate of 0.12% on the excess of a corporate
taxpayer's AMTI (determined without regard to the deduction for this tax and
the AMT net operating loss deduction) over $2 million. For purposes of the
corporate AMT and the environmental super fund tax (which are discussed
above), the corporate dividends-received deduction is not itself an item of
tax preference that must be added back to taxable income or is otherwise
disallowed in determining a corporation's AMTI. However, corporate
shareholders will generally be required to take the full amount of any
dividend received from a Generation Portfolio into account (without a
dividends-received deduction) in determining its adjusted current earnings,
which are used in computing an additional corporate preference item (i.e.,
75% of the excess of a corporate taxpayer's adjusted current earnings over
its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.
Investment income that may be received by a Portfolio from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle a Portfolio to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of a Portfolio's assets to be invested in various
countries is not known.
Distributions by a Portfolio that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the
extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions paid to shareholders are generally reinvested in additional
shares. Shareholders receiving a distribution in the form of additional
shares will be treated as receiving a distribution in an amount equal to the
fair market value of the shares received, determined as of the reinvestment
date. In addition, if the net asset value at the time a shareholder purchases
shares of a Portfolio reflects undistributed net investment income or
recognized capital gain net income, or unrealized appreciation in the value
of the assets of the Portfolio, distributions of such amounts will be taxable
to the shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Portfolio
into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable
to shareholders of record on a specified date in such a month will be deemed
to have been received by the shareholders (and made by the Portfolio) on
December 31 of such calendar year if such dividends are actually paid in
January of the following year. Shareholders will be advised annually as to
the U.S. federal income tax consequences of distributions made (or deemed
made) during the year.
Sale or Redemption of Shares
Shareholders generally will recognize gain or loss on the sale or redemption
of shares of a Portfolio in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis
in the shares. All or a portion of any loss so recognized may be disallowed
if the shareholder purchases other shares of the Portfolio within 30 days
before or after the sale or redemption. In general, any gain or loss arising
from (or treated as arising from) the sale or redemption of shares of a
Portfolio will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year.
However, any capital loss arising from the sale or redemption of shares held
for six months or less will be treated as a long-term capital loss to the
extent of the amount of capital gain dividends received on such shares. For
this purpose, the special holding period rules of Code Section 246(c)(3) and
(4) (discussed above in connection with the dividends-received deduction for
corporations) generally will apply in determining the holding period of
shares.
28 Aetna Generation Portfolios, Inc.
<PAGE>
Tax Effect on Participants
Participants in VA Contracts and VLI Policies are taxed through prior
ownership of such contracts and policies, as described in one's prospectus
for the applicable contract or policy.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this Statement of Additional Information. Future legislative
or administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated
investment companies often differ from the rules for U.S. federal income
taxation described above. Shareholders are urged to consult their tax
advisers as to the consequences of these and other state and local tax rules
affecting investment in a Portfolio.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
Directors (to the extent hereinafter provided) and on other matters submitted
to the vote of the shareholders. The shareholders of the Portfolios are the
insurance companies for their separate accounts using the Portfolios to fund
VA Contracts and VLI Policies. The insurance companies generally pass through
voting to Participants as described in the prospectus for the applicable VA
Contract or VLI Policy.
Once the initial Board is elected, no meeting of the shareholders for the
purpose of electing Directors will be held unless and until such time as less
than a majority of the Directors holding office have been elected by the
shareholders, or shareholders holding 10% or more of the outstanding shares
request such a vote. The Directors then in office will call a shareholder
meeting for election of Directors. Vacancies occurring between any such
meetings shall be filled as allowed by law, provided that immediately after
filling any such vacancy, at least two-thirds of the Directors holding office
have been elected by the shareholders.
Special shareholder meetings may be called when requested in writing by the
holders of not less than 10% of the outstanding voting shares of a Portfolio.
Any request must state the purposes of the proposed meeting.
Except as set forth above, the Directors shall continue to hold office and
may appoint successor Directors. Directors may be removed from office (1) at
any time by two-thirds vote of the Directors; (2) by a majority vote of
Directors where any Director becomes mentally or physically incapacitated;
(3) at a special meeting of shareholders by a two-thirds vote of the
outstanding shares; (4) by written declaration filed with Mellon Bank, N.A.,
the Generation Portfolios' custodian, signed by two-thirds of a Generation
Portfolio's shareholders. Any Director may also voluntarily resign from
office. 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 of the Generation Portfolios, in which event
the holders of the remaining shares will be unable to elect any person as a
Director.
The Articles may be amended by an affirmative vote of a majority of the
shares at any meeting of shareholders or by written instrument signed by a
majority of the Directors and consented to by a majority of the shareholders.
The Directors may also amend the Articles without the vote or consent of
shareholders if they deem it necessary to conform the Articles to the
requirements of applicable federal laws or regulations or the requirements of
the regulated investment company provisions of the Internal Revenue Code of
1986, as amended, but the Directors shall not be liable for failing to do so.
Aetna Generation Portfolios, Inc. 29
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
<TABLE>
<S> <C> <C>
(a) Financial Statements:*
(1) Included in Part A:
Financial Highlights
(2) Included in Part B:
Statements of Assets and Liabilities as of December 31, 1995
Statements of Operations for the period ended December 31, 1995
Statements of Changes in Net Assets for the period ended December
31, 1995
Notes to Financial Statements
Portfolios of Investments
Independent Auditors' Report
(b) Exhibits:
(1) Articles of Incorporation(1)
(2) Bylaws(1)
(3) Not applicable
(4) Not applicable
(5) Form of Advisory Agreement between Registrant and Aetna Life
Insurance and Annuity Company(1)
(6) Form of Underwriting Agreement between Registrant and Aetna Life
Insurance and Annuity Company(1)
(7) Not applicable
(8) Custodian Agreement(1)
(9)(a) Administrative Services Agreement(*)
(9)(b) Form of License Agreement(1)
(10) Opinion and Consent of Counsel(2)
(11) Not applicable
(12) Not applicable
(13) Form of Agreement Concerning Initial Capital(1)
(14) Not applicable
(15) Not applicable
(16) Not applicable
(17) Financial Data Schedule(*)
(18) Power of Attorney(1)
</TABLE>
* To be filed by subsequent Post-Effective Amendment.
1 Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A as filed electronically with the
Securities and Exchange Commission on June 19, 1995.
2 Incorporated herein by reference to Registrant's 24f-2 Notice for the fiscal
year ended December 31, 1995 as filed with the Securities and Exchange
Commission on February 29, 1996.
Item 25. Persons Controlled by or Under Common Control
Registrant is a Maryland corporation for which separate financial
statements are filed.
A diagram of all persons directly or indirectly under common control
with the Registrant is incorporated herein by reference to Item 26 of
Post-Effective Amendment No. 5 to the Registration Statement on Form
N-4, File No. 33-75982, as filed electronically with the Securities and
Exchange Commission on February 20, 1996.
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders
Shares of Beneficial Interest (to be updated by amendment)
$1.00 par value
Item 27. Indemnification
Article 9, Section (d) of the Registrant's Articles of Incorporation,
incorporated herein by reference to Exhibit 24(b)(1) to the
Registrant's Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A filed electronically June 19, 1995 (File No.
33-88334), provides for indemnification of directors and officers. In
addition, the Registrant's officers and directors are covered under a
directors and officers errors and omissions liability insurance policy
issued by Gulf Insurance Company which expires on October 1, 1996.
Reference is also made to Section 2-418 of the Corporations and
Associations Article of the Annotated Code of Maryland which provides
generally that (1) a corporation may (but is not required to) indemnify
its directors for judgments, fines and expenses in proceedings in which
the director is named a party solely by reason of being a director,
provided the director has not acted in bad faith, dishonestly or
unlawfully, and provided further that the director has not received any
"improper personal benefit"; and (2) that a corporation must (unless
otherwise provided in the corporation's charter or articles of
incorporation) indemnify a director who is successful on the merits in
defending a suit against him by reason of being a director for
"reasonable expenses." The statutory provisions are not exclusive;
i.e., a corporation may provide greater indemnification rights than
those provided by statute.
Item 28. Business and Other Connections of Investment Adviser
The Investment Adviser is an insurance company that issues variable and
fixed annuities, variable and universal life insurance policies and
acts as depositor for separate accounts holding assets for variable
contracts and policies. The following table summarizes the business
connections of the directors and principal officers of the Investment
Adviser.
- -------------------------------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1993/Addresses*/**
- -------------------------------------------------------------------------------
Daniel P. Kearney Director, President Executive Vice President (since
and Chairman, December 1993), and Group
Executive Committee Executive, Financial Division
(Principal Executive (February 1993 - December
Officer) 1993), Aetna Life and Casualty
Company; Director, Aetna
Insurance Company of America
(since February 1993).
Christopher J. Burns Director (1991); Director, Aetna Financial
Senior Vice President Services, Inc. (since January
1996); Director (since July
1993) of Aetna Investment
Services, Inc.; Director (1992
- April 1995) and Senior Vice
President, North American
Operations (1993 - April 1995)
of Aetna International, Inc.
Laura R. Estes Director and Senior Director, Aetna Financial
Vice President Services, Inc. (since January
1996); Director and Senior Vice
President, Aetna Insurance
Company of America (since
February 1993); Director, Aetna
Investment Services, Inc.
(since July 1993).
Timothy A. Holt Director, Senior Vice Senior Vice President, Business
President and Chief Strategy & Finance, Aetna
Financial Officer Retirement Services (since
(1996) February 1996); Vice President,
Aetna Portfolio
Management/Investment Group
(August 1992 - February 1996).
Gail P. Johnson Director and Vice Vice President, Service and
President Retain Customers, Aetna
Retirement Services (since
February 1996); Vice President,
Defined Benefit Services
(September 1994 - February
1996); Vice President, Plan
Services, Pensions and
Financial Services (December
1992 - September 1994).
John Y. Kim Director and Senior President, Aeltus Investment
Vice President Management, Inc. (since
December 1995); Chief
Investment Officer, Aetna Life
and Casualty Company (since May
1994); Managing Director,
Mitchell Hutchins Institutional
Investors, New York, NY
(September 1993 - April 1994).
Shaun P. Mathews Director and Vice Senior Vice President,
President Strategic Markets and Products
(February 1993 - January 1996),
of Aetna Life Insurance and
Annuity Company; Director and
Senior Vice President, Aetna
Insurance Company of America
(since February 1993); Vice
President of Aetna Life
Insurance Company (since 1991).
Glen Salow Director and Vice Vice President, Information
President Technology, Investments and
Financial Services (February
1995 - February 1996); Vice
President, Investment Systems,
AIT (1992 - 1995).
Creed R. Terry Director and Vice Vice President, Select and
President Manage Markets, Aetna
Retirement Services (since
February 1996); ALIAC Market
Strategist (August 1995 -
February 1996); President,
Chemical Technology Corporation
(a subsidiary of Chemical Bank)
(1991 - 1995).
Zoe Baird Senior Vice President Senior Vice President and
and General Counsel General Counsel of Aetna Life
and Casualty Company (since
April 1992).
Susan E. Schechter Counsel and Corporate Counsel, Aetna Life and
Secretary Casualty Company (since
November 1993).
Eugene M. Trovato Vice President and Vice President and Controller,
Treasurer, Corporate (February 1995 - Present),
Controller Assistant Vice President,
Planning, Reporting, and
Analysis (October 1992 -
February 1995), Aetna Life
Insurance and Annuity Company.
Diane B. Horn Vice President and Senior Compliance Officer
Chief Compliance (August 1993 - February 1996),
Officer Aetna Life Insurance and
Annuity Company and Aetna Life
Insurance Company.
* The principal business address of each person named is 151 Farmington
Avenue, Hartford, Connecticut 06156.
** Certain officers and directors of the investment adviser currently hold
(or have held during the past two years) other positions with
affiliates of the Registrant which are not deemed to be principal
positions.
Item 29. Principal Underwriters
Not Applicable.
Item 30. Location of Accounts and Records
As required by Section 31(a) of the 1940 Act and the Rules promulgated
thereunder, the Registrant and its investment adviser, ALIAC, maintain
physical possession of each account, book or other documents, except
shareholder records, at its principal offices at 151 Farmington Avenue,
Hartford, Connecticut 06156.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Fund's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
Aetna Generation Portfolios, Inc. (Registrant) has duly caused this
Post-Effective Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Hartford, and
State of Connecticut, on the 1st day of March, 1996.
AETNA GENERATION PORTFOLIOS, INC.
(Registrant)
By Shaun P. Mathews *
--------------------------------
Shaun P. Mathews
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons on March 1, 1996 in the capacities indicated.
Signature Title
Shaun P. Mathews* President and Director
- -------------------------
Shaun P. Mathews (Principal Executive Officer)
Morton Ehrlich* Director
- -------------------------
Morton Ehrlich
Maria T. Fighetti* Director
- -------------------------
Maria T. Fighetti
David L. Grove* Director
- -------------------------
David L. Grove
Daniel P. Kearney* Director
- -------------------------
Daniel P. Kearney
John Y. Kim* Director and Vice President
- -------------------------
John Y. Kim
Sidney Koch* Director
- -------------------------
Sidney Koch
Corine T. Norgaard* Director
- -------------------------
Corine T. Norgaard
<PAGE>
Richard G. Scheide* Director
- -------------------------
Richard G. Scheide
James C. Hamilton* Vice President and Treasurer
- ------------------------- (Principal Financial and Accounting
James C. Hamilton Officer)
By: /s/ Susan E. Bryant
----------------------
* Susan E. Bryant
Attorney-in-Fact
<PAGE>
AETNA GENERATION PORTFOLIOS, INC.
EXHIBIT INDEX
Exhibit No. Exhibit Page
99-(b)(1) Articles of Incorporation *
99-(b)(2) Amended Bylaws *
99-(b)(4) Copies of Securities Issued and *
Registered by Registrant
99-(b)(5) Investment Advisory Agreement *
99-(b)(6) Distribution Agreement *
99-(b)(8) Custodian Agreements and Depository *
Contracts
99-(b)(9) Administrative Services Agreement **
99-(b)(10.1) Opinion of Counsel *
99-(b)(10.2) Consent of Counsel **
99-(b)(11) Consent of Independent Auditors **
99-(b)(18) Powers of Attorney *
27 Financial Data Schedule **
* Incorporated herein by reference.
** To be filed by subsequent Post-Effective Amendment.
