As filed with the Securities and Exchange File No. 33-88334
Commission on April 15, 1997 File No. 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. 5
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 5
AETNA GENERATION PORTFOLIOS, INC.
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
(860) 273-7834
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
X on May 1, 1997 pursuant to paragraph (b) 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 under the
Investment Company Act of 1940. The Registrant filed its Rule 24f-2 Notice for
its fiscal year ended December 31, 1996 on February 28, 1997.
<PAGE>
Aetna Generation Portfolios, Inc.
Cross-Reference Sheet
Form N-1A
<TABLE>
<S> <C> <C>
Item No. Part A Caption in Prospectus
1. Cover Page Cover Page
2. Synopsis .................................... Not applicable
3. Condensed Financial Information.................. Financial Highlights
4. General Description of Registrant................ The Fund; 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 Performance...... Not applicable
6. Capital Stock and Other Securities............... General Information; Tax Matters
7. Purchase of Securities Being Offered............. Management of the Generation
Portfolios; Purchase and Redemption of Shares;
Net Asset Value;
8. Redemption or Repurchase......................... Purchase and Redemption of Shares;
Net Asset Value
9. Legal Proceedings................................ Not applicable
<PAGE>
Form N-1A
Item No. Part B 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 Holders of Securities Control Persons and Principal Shareholders
16. Investment Advisory and Other Investment Advisory Agreement; Subadvisory
Services......................................... Agreement; The Administrative Services
Agreement
17. Brokerage Allocation............................. Brokerage Allocation and Trading Policies
18. Capital Stock and Other Securities............... Description of Shares; Voting Rights
19. Purchase, Redemption and Pricing of Securities Purchase and Redemption of Shares;
Being Offered.................................... Net Asset Value
20. Tax Status....................................... Tax Status
21. Underwriters..................................... Not applicable
22. Calculation of Performance Data.................. Performance Information
23. Financial Statements............................. Financial Statements
</TABLE>
<PAGE>
==============================================================================
AETNA GENERATION PORTFOLIOS, INC.
Aetna Ascent Variable Portfolio
Aetna Crossroads Variable Portfolio
Aetna Legacy Variable Portfolio
151 Farmington Avenue
Hartford, CT 06156-8972
1-800-525-4225
Prospectus dated: May 1, 1997
Aetna Generation Portfolios, Inc. (Fund) 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 "Portfolios"). The Fund currently has three series
authorized. The Fund's shares are offered only to insurance company separate
accounts to fund benefits under their variable annuity contracts (VA Contracts)
and variable life insurance policies (VLI Policies). Each Portfolio is an asset
allocation fund that allocates its investments among equities and fixed income
securities and is designed for retirement plan participants (Participants) with
different investment horizons and risk tolerances. See "Description of the
Generation Portfolios" and "Risk Factors and Other Considerations." An
investment in the Fund is neither insured nor guaranteed by the U.S. Government.
This Prospectus sets forth concisely the information that a prospective contract
holder or policy holder should know before directing an investment to a
Portfolio and should be read and kept for future reference. A Statement of
Additional Information (Statement) dated May 1, 1997 contains more information
about the Portfolios. For a free copy of the Statement, call
1-800-525-4225 or write to the Fund, at the address listed above. The Statement
has been filed with the Securities and Exchange Commission (Commission) and is
incorporated into this Prospectus by reference. Additional information filed
with the Commission can be obtained by contacting the Commission at its Web Site
(http://www.sec.gov).
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the securities of the Fund 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
Financial Highlights ................................................ 3
The Fund ............................................................ 4
Description of the Generation Portfolios .............................. 4
Investment Strategies ................................................ 4
Investment Techniques ................................................ 7
Risk Factors and Other Considerations ................................. 10
Investment Restrictions ............................................. 12
Management of the Generation Portfolios .............................. 12
Purchase and Redemption of Shares .................................... 13
Net Asset Value ...................................................... 14
General Information ................................................... 14
Tax Matters ......................................................... 14
Appendix A -- Glossary of Investment Terms ........................... 15
Appendix B -- Description of Corporate Bond Ratings .................. 17
2 Aetna Generation Portfolios, Inc.
<PAGE>
FINANCIAL HIGHLIGHTS
The selected data presented below for, and as of the end of, each of the periods
listed are derived from the financial statements of the Fund, which financial
statements have been audited by KPMG Peat Marwick LLP, independent auditors. The
financial statements as of, and for the year ended December 31, 1996 and the
period from July 5, 1995 to December 31, 1995 and the independent auditors'
report thereon, are included in the Fund's annual report dated December 31,
1996, which is incorporated by reference into the Statement.
<TABLE>
<CAPTION>
Aetna Aetna Aetna
Ascent Crossroads Legacy
-------------------------- -------------------------- -------------------------
1996 1995+ 1996 1995+ 1996 1995+
---------- ----------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.795 $10.000 $10.740 $10.000 $10.637 $10.000
Income from Investment
Operations ...........................
Net investment income .................. .225 .116 .270 .131 .334 .148
Net realized and change in
unrealized gain ..................... 2.286 .929 1.722 .799 1.150 .679
------- ------- ------- ------- ------- -------
Total from investment
operations ........................ $ 2.511 $ 1.045 $ 1.992 $ .930 $ 1.484 $ .827
------- ------- ------- ------- ------- -------
Less Distributions
From net investment income ............ (.230) (.250) (.300) (.190) (.363) (.190)
------- ------- ------- ------- ------- -------
From net realized gains on
investments ........................... (.457) -- (.453) -- (.503) --
------- ------- ------- ------- ------- -------
Total distributions .................. (.687) (.250) (.753) (.190) (.866) (.190)
------- ------- ------- ------- ------- -------
Net asset value, end of period ......... $12.619 $10.795 $11.979 $10.740 $11.255 $10.637
======= ======= ======= ======= ======= =======
Total Return* ........................... 23.58% 10.45% 18.81% 9.30% 14.19% 8.27%
Net assets, end of period (000's) ...... $45,155 $18,850 $37,690 $18,813 $27,754 $18,253
Ratio of total expenses to average
net assets** ........................... 0.84% 1.59% 0.80% 1.60% 0.80% 1.62%
Ratio of net investment income to
average net assets** .................. 2.53% 2.26% 3.01% 2.56% 3.45% 2.91%
Portfolio turnover rate ................ 109.77% 39.77% 105.66% 49.38% 111.11% 62.43%
Average Commission rate paid per
share ................................. $0.0296 -- $0.0284 -- $0.0274 --
</TABLE>
+ Per share data calculated using weighted average number of shares outstanding
throughout the period.
* The performance data reflects deduction of an investment advisory fee at an
annual rate of 0.50% of the Fund's average daily net assets, prior to August
1, 1996 and 0.60% of average daily net assets thereafter and deductions for
Fund administrative services and other expenses at cost prior to May 1,
1996, and at an annual rate of 0.15% of average daily net assets thereafter.
Performance data above is for the Fund and not for the separate accounts
investing in the Fund. Therefore, the performance does not reflect insurance
charges for mortality and expense risks, contract maintenance charges,
deferred sales charges or other charges relating to the separate account
using the Fund for VA Contracts or VLI Policies. Inclusion of these expenses
would reduce the total return figures.
**Annualized for periods of less than one year.
Additional information about the performance of the Portfolios is contained in
the Fund's Annual Report dated December 31, 1996, which may be obtained, without
charge, by writing to the Fund at the address listed on the cover of this
Prospectus or by calling 1-800-525-4225.
Aetna Generation Portfolios, Inc. 3
<PAGE>
THE FUND
The Fund is an open-end, management investment company, consisting of multiple
series or Portfolios. It currently has authorized three series, Aetna Ascent
Variable Portfolio (Ascent), Aetna Crossroads Variable Portfolio (Crossroads)
and Aetna Legacy Variable Portfolio (Legacy). The Fund may authorize additional
series in the future. The Fund 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, including Aetna Life
Insurance and Annuity Company (Aetna), the Fund's investment adviser, not
Participants, are shareholders of the Fund. See "General Information."
The Fund's Board of Directors (Directors) does not foresee any disadvantages or
conflicts to the Participants in funding both VA Contracts and VLI Policies
through the Portfolios or in offering the Portfolios through more than one
insurance company. The Directors have 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 Portfolios are asset allocation funds that seek to maximize long-term
investment returns at varying levels of risk.
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.
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 and who have
a moderate level of risk tolerance.
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 and 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 Statement, 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
Aetna serves as the investment adviser for each Portfolio and Aeltus Investment
Management, Inc. (Aeltus) serves as the subadviser. Aetna and Aeltus
(collectively, the "Adviser") are both indirect wholly-owned subsidiaries of
Aetna Retirement Services, Inc., which is, in turn, an indirect, wholly-owned
subsidiary of Aetna Inc. See "Management of the Generation Portfolios."
A glossary describing various investment terms used in this Prospectus is
contained in Appendix A.
Each Portfolio has a specific asset allocation strategy, which corresponds to
its respective investment objective. 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 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 Adviser to monitor a "hypothetical benchmark portfolio" consisting of the
benchmark allocation in each comparative index. Comparing the actual performance
of each Portfolio against its respective "hypothetical benchmark portfolio" is
useful in evaluating the impact of ongoing asset allocation decisions.
4 Aetna Generation Portfolios, Inc.
<PAGE>
The allocation ranges, benchmarks and comparative indexes are as follows:
<TABLE>
<CAPTION>
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
Benchmark ............... 20% 15% 10% Stock Index
International Stocks
Range ..................... 0-40% 0-30% 0-20% Morgan Stanley Capital
Benchmark ............... 20% 15% 10% International Europe
Australia and Far East Index
Real Estate Stocks
Range ..................... 0-40% 0-30% 0-20% National Association of Real
Estate Investment Trust
Benchmark ............... 20% 15% 10% Equity REIT Index
Fixed Income
U. S. Dollar Bonds
Range ..................... 0-30% 0-70% 0-100% Salomon Brothers Broad
Benchmark ............... 10% 25% 40% Investment Grade Index
International Bonds
Range ..................... 0-20% 0-20% 0-20% Salomon Brothers Non-U.S.
Benchmark ............... 10% 10% 10% World Government Bond
Index
Money Market Securities
Range ..................... 0-30% 0-30% 0-30% 91 Day T-Bill
Benchmark ............... 0% 5% 10%
</TABLE>
The Adviser will allocate 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 Adviser's ongoing
evaluation of the expected returns and risks of each asset class. For example,
if the Adviser believes, based on a review of various economic and financial
market factors, that the expected ratio of return to 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.
In addition to investing within the asset allocation ranges, Crossroads will
invest no more than 60% of its assets and 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 $1.0 billion,
securities in the U.S. Dollar Bond Class that are below investment grade
otherwise known as high-risk, high-yield securities or "junk bonds"
(hereinafter, "high-risk, high-yield securities" or "junk bonds"), securities in
the International Stock Class, and securities in the International Bond Class.
Ascent has no such restrictions. 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 Portfolios may also invest in options contracts, futures contracts, and
other derivative instruments, which are described in greater detail under
"Investment Techniques" and "Risk Factors and Other Considerations" and in the
Statement.
Aetna Generation Portfolios, Inc. 5
<PAGE>
Asset allocation strategies are supplemented by security selection decisions
within each asset class. Selection of particular securities will be based on the
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 under "Risk Factors and Other Considerations"):
Equity Securities
Each Portfolio may invest its assets in equity securities that the 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 United States. The 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 real
estate investment trusts (REITs), real estate development and real estate
operating companies, and shares of companies engaged in other real estate
related businesses. Each Portfolio will invest the real estate portion of its
assets 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 United States and foreign governments and high-risk, high-yield (junk bond)
securities, 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.
6 Aetna Generation Portfolios, Inc.
<PAGE>
U.S. Government Securities consist of direct obligations of the U.S. Government,
such as treasury bills, notes and bonds which are backed by the full faith and
credit of the United States, or indirect obligations, such as notes and bonds
which are guaranteed by agencies and instrumentalities of the U.S. Government.
Securities of such agencies and instrumentalities are backed by either the full
faith and credit of the U.S. Treasury, 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, separately traded principal and interest components of
certain U.S. Government securities (STRIPS) and zero coupon bonds. See
"Investment Techniques."
Corporate Bonds include investment grade debt securities and high-risk,
high-yield securities or "junk bonds." Investment grade debt securities include
corporate bonds, mortgage-backed and other asset-backed and debt securities
(described below) rated in the four highest categories by Standard & Poor's
Corporation (Standard & Poor's) or Moody's Investor's Services, Inc. (Moody's),
and other debt instruments with similar ratings by other nationally recognized
statistical rating organizations or, if unrated, considered by the Adviser to be
of similar quality. High-risk, high-yield securities, or "junk bonds," carry
more credit risk and are rated BB or below by Standard & Poor's or Ba or below
by Moody's or, if unrated, are considered by the Adviser to be of comparable
quality. No Portfolio will invest more than 15% of its assets in high-risk,
high-yield securities or "junk bonds." See "Risk Factors and Other
Considerations" for further information.
Mortgage-Backed Securities The Portfolios may invest in mortgage-backed and
other pass-through securities. Payments of interest and principal on these
securities may be guaranteed by an agency or instrumentality of the U.S.
Government such as GNMA, FHLMC and FNMA. These securities 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 rather than returned in a lump
sum at maturity. The Portfolios may also invest in private mortgage pass-through
securities backed by pools of conventional fixed-rate or adjustable-rate
mortgage loans. In addition, a Portfolio may invest in CMOs and securities
issued by real estate mortgage investment conduits (REMICs). Additional
information about CMOs and REMICs is contained in the Statement. Mortgage-backed
securities are subject to the same prepayment risk as asset-backed securities.
See "Asset-Backed Securities" below.
International Bond Class. Securities in this class include 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 Instruments
Each Portfolio may invest in high quality money market instruments that present
minimal credit risk.
Money market instruments include U.S. Government obligations, repurchase
agreements, certificates of deposit, banker's acceptances, bank deposits, other
financial institution obligations, commercial paper and other short-term
commercial obligations. These securities may include instruments that have
variable interest rates which, in the opinion of the 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
Appendix A 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 Portfolios do not intend to borrow for
other purposes, except that they may invest in leveraged derivatives which have
certain risks as outlined below. The Portfolios may borrow for leveraging
purposes only if after the borrowing, the value of the Portfolio's net assets,
including proceeds from the borrowings, is equal
Aetna Generation Portfolios, Inc. 7
<PAGE>
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.
Securities Lending. Each 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. The Portfolios will not lend
portfolio securities to affiliates. Though fully collateralized, lending
portfolio securities involves certain risks, including the possibility that a
Portfolio may incur costs in liquidating the collateral or a loss if the
collateral declines in value. 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. Portfolios may enter into repurchase agreements with
domestic banks and broker-dealers. 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 Portfolios to resell the instrument at a
fixed price and time. Such agreements, although fully collateralized, involve
the risk that the seller of the securities may fail to repurchase them. In that
event, the Portfolio may incur costs in liquidating the securities or other
collateral for the agreement or a loss if the securities (or 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 the Portfolio to
liquidate the collateral may be delayed or limited.
Asset-Backed Securities. Each Portfolio may purchase securities collateralized
by a specified pool of assets, including, but not limited to, credit card
receivables, and automobile, home equity, mobile home, or recreational vehicle
loans. 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. Each Portfolio may invest in zero coupon
securities and pay-in-kind bonds. 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 than they do at other times.
Bank Obligations. Each Portfolio may invest in obligations (including banker's
acceptances, commercial paper, bank notes, time deposits and certificates of
deposit) issued by domestic or 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 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. A derivative
is a financial instrument, the value of which depends on (or "derives from") the
value of an underlying asset such as a security, interest rate, currency rate or
index. In addition to futures and options, derivatives include, but are not
limited to, forward contracts, swaps, structured notes, and CMOs.
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 the
Adviser to involve high risk to the Portfolio. These would include inverse
floaters, interest-only and principal-only securities.
Each Portfolio may buy and sell options including index options and options on
foreign securities and may invest in futures contracts and related options with
respect to foreign currencies, fixed income securities and foreign stock
indices. When a Portfolio writes a call option, it gives the purchaser the
right, but not the obligation, to buy a particular security at a set price
within a set time. The Portfolio receives income from the premium paid by the
purchaser. The calls are "covered," which means that the Portfolio owns the
securities that are subject to the call (although it may substitute other
qualifying securities). There is no limit on the amount of a Portfolio's total
assets that may be subject to calls.
When a Portfolio writes a put option, it gives the purchaser the right, but not
the obligation, to require the Portfolio to buy a particular security at a set
price within a set time. Writing puts requires the seg-
8 Aetna Generation Portfolios, Inc.
<PAGE>
regation of liquid assets to cover the put. A Portfolio will not write a put if
it will require more than 50% of the Portfolio's net assets to be segregated to
cover the put obligation.
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 Legacy's total
assets, 60% of Crossroads' total assets, and 100% of 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.
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.
All of these are referred to as "hedging instruments." Investment in these
hedging instruments involves certain risks, which are described below under
"Risk Factors and Other Considerations" and in the Statement.
U.S. Government Derivatives. Each Portfolio may purchase separately traded
principal and interest components of certain U.S. Government securities
(Strips). In addition, a Portfolio 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, nor are they considered foreign securities
for purposes of investment policies.
Illiquid and Restricted Securities. Each 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 liquidated 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.
The Directors have established a policy to monitor the liquidity of securities
acquired by each Portfolio.
Cash or Cash Equivalents. The Adviser reserves the right to depart temporarily
from a Portfolio's investment objective by investing up to 100% of its assets in
cash or money market instruments for defense against potential market declines.
In addition, all Portfolios reserve the right to deposit some or all of their
uninvested cash balances into one or more joint accounts authorized by the
Commission.
Aetna Generation Portfolios, Inc. 9
<PAGE>
Other Investments. Each Portfolio may use other investment techniques, including
when-issued, delayed-delivery, forward commitment securities and variable rate
instruments. These techniques are described in Appendix A and in the Statement.
RISK FACTORS AND OTHER CONSIDERATIONS
General Considerations. The different types of securities purchased and
investment techniques used by the Adviser involve varying amounts of risk. For
example, equity securities are subject to a decline in the stock market or in
the value of the issuing company, and preferred stocks have price risk and some
interest rate and credit risk. The value of fixed income or debt securities may
be affected by changes in general interest rates and in the creditworthiness of
the issuer. Debt securities with longer maturities (for example, over ten years)
are generally 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, there is a risk of principal and interest
default which will be greater with higher-yielding, lower-grade securities.
High-risk, high-yield securities (junk bonds) may provide a higher return but
with added risk. In addition, foreign securities have currency risk.
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. Although the Adviser does not purchase securities
with the intention of profiting from short-term trading, the Adviser may buy and
sell securities when the Adviser believes such action is appropriate. It is
anticipated that the average annual turnover rate may exceed 125%. Higher
turnover rates have resulted and are expected to continue to result in higher
transaction costs relating to stock or equity transactions, which costs are
borne directly by the Portfolios. The Adviser anticipates that these higher
costs are offset by the potentially improved performance that is sought by
numerous portfolio transactions. Higher turnover rates may also result in a
possible increase in short-term capital gains or losses. See "Distributions,"
"Taxes" and the Statement for additional information.
Foreign Securities. The purchase of foreign securities may involve certain
additional risks. 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 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.
The Portfolios will generally acquire American Depositary Receipts (ADRs) which
are dollar denominated depositary receipts, 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 Appendix A and the Statement 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
10 Aetna Generation Portfolios, Inc.
<PAGE>
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 (Code) and failing to
maintain exemption from regulation under the Investment Company Act of 1940
(1940 Act).
High-Risk, High-Yield Securities. A Portfolio may invest in high-risk,
high-yield securities, often called "junk bonds." These securities are rated
BB/Ba or below by Standard & Poor's and Moody's, respectively, or, if unrated,
are considered to be of comparable quality. 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, they may be purchased
if they are thought to offer good value. This may happen if, for example, the
rating agencies have, in the Adviser's opinion, misclassified the bonds or
overlooked the potential for the issuer's enhanced creditworthiness.
Derivatives. Derivatives can be volatile investments and involve certain risks.
As described above under "Investment Techniques--Options, Futures and Other
Derivative Instruments," the Portfolios may use derivative instruments,
including U.S. Government derivatives.
A Portfolio may purchase separately traded principal and interest components of
certain U.S. Government securities (STRIPS). In addition, a Portfolio 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.
Options and futures contracts can be volatile investments and involve certain
risks, including, but not limited to: no assurance that futures contracts
transactions can be effected at favorable prices; possible reduction in a
Portfolio's total return and yield; possible reduction in the value of the
futures instrument; the inability of a Portfolio to limit losses by closing its
position due to lack of a liquid secondary market or due to daily limits of
price fluctuation; imperfect correlation between the value of the contracts and
the related securities; and potential losses in excess of the amount invested in
the futures contracts themselves.
The use of futures involves a high degree of leverage because of the 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. The
amount of gains or losses on investments in futures contracts depends on the
portfolio manager's ability to predict correctly the direction of stock prices,
interest rates and other economic factors.
In writing puts, there is the risk that a Portfolio may be required to buy the
underlying security at a disadvantageous price. In addition, it must segregate
assets to cover its obligations with respect to the sale of a put.
In writing calls, a Portfolio may forego profits on an increase in the price of
an underlying security if the purchaser exercises the call option. In addition,
a Portfolio could experience capital losses that might cause previously
distributed income to be recharacterized for tax purposes as a return of capital
to shareholders.
The use of forward currency contracts may reduce the gain that otherwise would
result from a change in the relationship between the U.S. dollar and a foreign
currency. To limit its exposure in foreign currency exchange contracts, each
Portfolio limits its exposure to the amount of its assets denominated in the
foreign currency. Interest rate swaps are subject to credit risks (if the other
party fails to meet its obligations) and also to interest rate risks, because
the Portfolio could be obligated to pay more under its swap agreements than it
receives under them, as a result of interest rate changes.
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 Statement.
Aetna Generation Portfolios, Inc. 11
<PAGE>
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. Each
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. For more information
about these securities, see Appendix A and the Statement.
Special Considerations. Investors should be aware that the investment results of
the Portfolios depend in part upon the Adviser's ability to anticipate correctly
the relative performance of stocks, bonds and money market instruments.
While the Adviser has substantial experience in managing all asset classes,
there can be no assurance the Adviser will always allocate assets to the best
performing sectors. A Portfolio's performance would suffer if a major portion of
its assets were allocated to stocks in a declining market or, similarly, if a
major portion of its assets were allocated to bonds at a time of adverse
interest rate movement.
INVESTMENT RESTRICTIONS
The restrictions discussed in this section are in addition to those discussed
under "Investment Strategies" and "Investment Techniques." No Portfolio may
invest 25% or more 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 according to the end users of their
services, such as automobile finance, computer finance and consumer finance.
This limitation will not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
No Portfolio will 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. The Portfolios do not invest in the
securities of companies determined by the Adviser to be primarily involved in
the production or distribution of tobacco products.
MANAGEMENT OF THE GENERATION PORTFOLIOS
Directors. The operations of each Portfolio are managed under the direction of
the Directors. The Directors set broad policies for the Fund and each Portfolio.
Information about the Directors is found in the Statement.
Investment Adviser. Aetna serves as the investment adviser for each Portfolio
and Aeltus serves as the subadviser. Aetna is a Connecticut insurance
corporation with its principal offices located at 151 Farmington Avenue,
Hartford, Connecticut 06156. Aetna is registered with the Commission as an
investment adviser. Aetna receives a management fee at an annual rate of 0.60%
of the average daily net assets of each of the Portfolios, payable monthly.
Subadviser. The Fund and Aetna have engaged Aeltus as subadviser of each
Portfolio. Aeltus is a Connecticut corporation with its principal offices
located at 242 Trumbull Street, Hartford, Connecticut 06156- 1205. Aeltus is
registered as an investment adviser with the Commission.
Under the Subadvisory Agreement, Aeltus is responsible for managing the assets
of each Portfolio in accordance with the Portfolio's investment objective and
policies subject to the supervision of Aetna, the Fund and the Directors. Aeltus
determines what securities and other instruments are purchased and sold by each
Portfolio and handles certain related accounting and administrative functions,
including determining each Portfolio's net asset value on a daily basis and
preparing and providing such reports, data and information as Aetna or the
Directors request from time to time. Aeltus receives a fee at an annual rate up
to 0.35% of the average daily net assets of each of the Portfolios, payable
monthly.
12 Aetna Generation Portfolios, Inc.
<PAGE>
Aetna has overall responsibility for monitoring the investment program
maintained by the Subadviser for compliance with applicable laws and regulations
and each Portfolio's investment objective and policies.
Portfolio Management. The following individuals are primarily responsible for
the day-to-day management of the Portfolios, as indicated below. All of the
following individuals may also decide as a group what strategy may benefit all
of the Portfolios.
Kevin M. Means, Managing Director, Aeltus, is the lead portfolio manager for the
Generation Portfolios and has been responsible for determining the allocation of
each Portfolio's investments among the asset classes described under "Investment
Strategies" since the Fund's inception in July 1995. Mr. Means is responsible
for the management of over $6 billion in variable annuity and mutual funds
assets. Mr. Means joined Aetna in July of 1994 after serving as Chief Investment
Officer at INVESCO Management and Research, Boston from 1993 to 1994. He also
served from 1987 to 1993 as the Director of Quantitative Research and Equity
Portfolio Manager at INVESCO Capital Management, Atlanta. Mr. Means is
responsible for the selection of securities for the Generation Portfolios in the
Large Capitalization Stocks class.
The following individuals are responsible for the selection of securities for
the Generation Portfolios in each of the asset classes other than the Large
Capitalization Stock class:
Vince Fioramonti, Vice-President, Aeltus, is currently managing international
stocks and non-U.S. dollar government bonds for several Aetna investment funds.
Mr. Fioramonti joined Aetna in 1994 after serving as Vice President for The
Travelers Investment Management Company. He began his investment career with
Travelers in 1988.
Yaniv Tepper, Vice-President, Aeltus, has responsibility for Real Estate
Investment Trust (REIT) holdings on the equity side, and non-agency mortgage
backed securities on the fixed income side. Mr. Tepper joined Aetna in early
1994 as an Associate in Real Estate Investments Group. Prior to joining Aetna,
Mr. Tepper consulted in the area of real estate finance, valuations, and asset
restructuring.
Donald Townswick, Vice-President, Aeltus, joined Aetna in July of 1994 after
serving as Vice President at INVESCO Management and Research, Boston. Mr.
Townswick was at INVESCO from 1992 to 1994. Prior to his position at INVESCO, he
was an engineer in the Aerospace Industry with Rockwell International and
Douglas Aircraft Company.
Jeanne Wong-Boehm, Managing Director, Aeltus, has been portfolio manager for
the Fund for four years. Ms. Wong-Boehm joined Aetna in 1983 as a fixed income
portfolio analyst. In 1989 she was also assigned primary responsibility for the
money market operations.
Expenses and Fund Administration Under an Administrative Services Agreement with
the Fund, Aetna provides all administrative services necessary for the Fund's
operations and is responsible for the supervision of the Fund's other service
providers. Aetna is also responsible for all ordinary recurring direct costs of
the Fund, such as custodian fees, directors fees, transfer agency costs and
accounting expenses. For the services provided under the Administrative Services
Agreement, Aetna receives an annual fee, payable monthly, at a rate of 0.15% of
the average daily net assets of each Portfolio.
PURCHASE 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.
Orders for the purchase or redemption of shares of each Portfolio that are
received before the close of regular trading on the New York Stock Exchange
(normally 4 p.m. eastern time) are effected at the respective net asset value
per share determined that day, as described below (see Net Asset Value). The
insurance company shall be the designee of the Fund for receipt of purchase and
redemption orders. Therefore, receipt of an order by the insurance company
constitutes receipt by the Fund; provided that the Fund receives notice of the
order by 9:30 a.m. the next day on which the New York Stock Exchange is open
Aetna Generation Portfolios, Inc. 13
<PAGE>
for trading. The Fund reserves the right to suspend the offering of shares, or
to reject any specific purchase order. The Fund 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 Commission.
NET ASSET VALUE
The NAV of each Portfolio is determined as of the earlier of 15 minutes after
the close of the New York Stock Exchange or 4:15 p.m. eastern 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. Short-term debt
instruments maturing in less than 60 days are valued at amortized cost.
Securities for which market quotations are not readily available are valued at
their fair value in such manner as may be determined under the authority of the
Directors.
GENERAL INFORMATION
Incorporation The Fund was incorporated under the laws of Maryland on October
14, 1994.
Capital Stock The Fund 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 Fund is not required and does not intend to hold annual
shareholder meetings. The Fund'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 Fund's outstanding shares, the Fund 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 Fund 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 to the voting instructions received. Voting
rights for VA Contracts and VLI Policies are discussed in the prospectus for the
applicable contract or policy.
Mixed Funding Because Portfolios of the Fund are sold to fund variable annuity
contracts and variable life insurance policies issued by Aetna, certain
conflicts of interest could arise. If a conflict of interest were to occur, one
of the separate accounts invested in a Portfolio of the Fund might withdraw its
investment in a Portfolio, which might force the portfolio to sell its
investment at disadvantageous prices, causing its per share value to decrease.
The Directors have agreed to monitor events in order to identify any material
irreconcilable conflicts which might arise and to determine what action, if any,
should be taken to address such conflict.
TAX MATTERS
Each Portfolio intends to continue to qualify as a regulated investment company
by satisfying the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended (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
for information regarding the tax consequences to them of purchasing a contract
or policy.
14 Aetna Generation Portfolios, Inc.
<PAGE>
APPENDIX A
GLOSSARY OF INVESTMENT TERMS
This glossary describes some of the securities used by the Generation
Portfolios. Further information is available in the Statement:
Banker's Acceptance A banker's acceptance is a time draft drawn on and accepted
by a bank and is customarily used by corporations as a means of financing
payment for traded goods. When a draft is accepted by a bank, the bank
guarantees to pay the face value of the debt at maturity.
Certificates of Deposit For large deposits not withdrawable on demand, banks
issue certificates of deposit (CDs) as evidence of ownership. CDs are usually
negotiable and traded among investors such as mutual funds and banks.
Commercial Paper Commercial paper is unsecured short-term debt instruments
issued by companies or banks with a maturity ranging from two to 270 days.
Depositary Receipts Depositary receipts are 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."
Eurodollars Eurodollars are U.S. dollars held in banks outside the United
States, mainly in Europe but also in other countries, and are commonly used for
the settlement of international transactions. There are many types of Eurodollar
securities including Eurodollar CDs and bonds; these securities are not
registered with the Commission. Certain Eurodollar deposits are not FDIC insured
and may be subject to future political and economic developments and
governmental restrictions.
High-Risk, High-Yield Securities Bonds of low quality security backing rated BB
or below by Standard & Poor's or Ba or below by Moody's or other agencies, or,
if unrated, considered by the Adviser to be of comparable quality. These bonds
are often called "junk bonds" because of the greater possibility of default.
Pay-in-Kind Bonds Pay-in-kind bonds are bonds that pay all or a portion of their
interest through the issuance of additional bonds.
U.S. Government Derivatives A Fund may purchase separately traded principal and
interest components of certain U.S. Government securities (STRIPS). In addition,
a Portfolio 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.
Variable Rate Instruments A variable or floating rate instrument is one whose
terms 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.
When-Issued and Delayed-Delivery Transactions When-issued and delayed-delivery
transactions are trading practices in which payment and delivery for securities
takes place at a future date. The market value of a security could change during
the interim period, which could affect yield.
Yankee Bonds A bond issued in the United States by foreign countries,
corporations and banks. Similarly, Yankee CDs are issued in the U.S. by branches
of foreign banks.
Aetna Generation Portfolios, Inc. 15
<PAGE>
Zero Coupon Bonds Bonds issued at a deep discount to face value. These bonds pay
no interest but are redeemed at full face value. The price of zero coupon bonds
are more volatile than bonds which pay interest but are rated on the same
principles as all fixed-income investments.
The Generation Portfolios also use some of the following securities to manage
risk and volatility:
Call Option The right to buy a security, currency or stock index at a stated
price, or stock 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.
Convertible Stock Corporate securities, which may be either bonds or preferred
shares, that can be exchanged for shares at a fixed price.
Covered Call Options A call option backed by the securities underlying the
option. The owner of a security will normally sell covered call options to
collect premium income or to reduce price fluctuations of the security. A
covered call option limits the capital appreciation of the underlying security.
Futures Contracts to buy securities, currencies or stock indexes in the future
at a price agreed to in advance. A futures contract obliges the buyer to
purchase the security and the seller to sell it, unlike an option where the
buyer can choose whether or not to exercise the option.
Preferred Stock Shares which pay a fixed dividend, in contrast to common stock
whose dividends depend on the profits of the company.
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 market price falls below the strike price; if not, the option expires
worthless.
Warrants A security, normally offered with bonds or preferred stock, that
entitles investors to buy shares at a prescribed price within a named or stated
period to perpetuity. The time period is usually longer than that of a call
option.
16 Aetna Generation Portfolios, Inc.
<PAGE>
APPENDIX B
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.
Aetna Generation Portfolios, Inc. 17
<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.
18 Aetna Generation Portfolios, Inc.
<PAGE>
==============================================================================
Statement of Additional Information dated: May 1, 1997
AETNA GENERATION
PORTFOLIOS, INC.
151 Farmington Avenue
Hartford, Connecticut 06156-8962
This Statement of Additional Information (Statement) is not a prospectus and
should be read in conjunction with the current prospectus for Aetna Generation
Portfolios, Inc. dated May 1, 1997.
A free prospectus is available 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
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 ......................... 21
The Investment Advisory Agreements .................................. 21
The Subadvisory Agreements ........................................... 21
Administrative Services Agreement .................................. 22
License Agreement .................................................... 22
Custodian .......................................................... 22
Independent Auditors ................................................. 23
Brokerage Allocation and Trading Policies ............................ 23
Description of Shares .............................................. 24
Purchase and Redemption of Shares .................................. 24
Net Asset Value .................................................... 25
Per formance Information ........................................... 25
Tax Status .......................................................... 25
Voting Rights ....................................................... 31
Financial Statements ................................................. 32
==============================================================================
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Generation Portfolios, Inc. (Fund) was incorporated in 1994 in Maryland.
The Fund is an open-end diversified management investment company. The Fund 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 "Portfolios").
The Fund currently has authorized three series: Aetna Ascent Variable Portfolio
(Ascent); Aetna Crossroads Variable Portfolio (Crossroads); and Aetna Legacy
Variable Portfolio (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 Portfolios, set forth below, are
matters of fundamental policy for purposes of the Investment Company Act of 1940
(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 as defined by the 1940 Act. 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, no Portfolio will:
(1) with respect to 75% of the value of its total assets hold more than 5% of
the value of its total assets in the securities of any one issuer or hold
more than 10% of the outstanding voting securities of any one issuer.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities are excluded from these restrictions;
(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 or instrumentalities;
securities invested in, or repurchase agreements for, U.S. Government
securities; and certificates of deposit, banker's acceptances, or
securities of banks and bank holding companies;
(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 or 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
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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, as amended (1933 Act).
The Fund has also adopted certain other investment restrictions reflecting the
current investment practices of the Portfolios that may be changed by the
Company's directors and without shareholder vote. Some of these restrictions are
described in the prospectus. In addition, the Portfolios will not:
(1) make short sales of securities, other than short sales "against the box,"
or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, 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, shall not be deemed illiquid solely by reason of being
unregistered. The Investment Adviser (Adviser) shall determine whether a
particular security is deemed to be liquid based on the trading markets
for the specific security and other factors.
(6) invest in the securities of companies determined by the Adviser to be
primarily involved in the production or distribution of tobacco products.
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Where a Portfolio's investment objective or policies restrict 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 of any investment
policy or restriction if that restriction is complied with at the time
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 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 that are traded
on national futures exchanges and are standardized as to maturity date and
underlying financial instrument. The futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the Commodities Futures
Trading Commission (CFTC).
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific commodity, financial
instrument(s) or a specific stock market index 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
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.
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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. With regard to
transactions involving futures contracts, the Fund maintains a segregated
account holding liquid assets in accordance with applicable Securities and
Exchange Commission (Commission) staff position.
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 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 Statement. 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 Adviser.
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
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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 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 segregated at the 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
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
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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 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 that trade foreign futures contracts or foreign
options contracts may not be afforded certain of the protective measures
provided by domestic exchanges, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the NFA. In
particular, funds received from customers for foreign futures contracts or
foreign options transactions may not be provided the same protections as funds
received for transactions on 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.
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 pro-
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tecting 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 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 (transaction hedge); or to lock in the value of an
existing portfolio security (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
Adviser believes will have price movements that tend to correlate closely with
the currency in which the investment being hedged is denominated.
The 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
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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 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 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
Aetna Generation Portfolios, Inc. 9
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that are entered into for purposes that may be considered speculative, 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'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 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 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.
10 Aetna Generation Portfolios, Inc.
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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 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 that reflect the rising market.
Trading and Position Limits--Each contract market on which futures and option
contracts are traded has established a number of limitations governing the
maximum number of positions which may be held by a trader, whether acting alone
or in concert with others. The Adviser does not believe that these trading and
position limits will have an adverse impact on the hedging strategies regarding
the Generation Portfolios.
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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 (Directors). A repurchase agreement allows a
Portfolio to determine 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. In that event, a Portfolio
may incur costs in liquidating the securities (or other collateral for the
agreement), or a loss if the securities (or collateral) decline 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 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 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 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
12 Aetna Generation Portfolios, Inc.
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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 securities of foreign issuers, 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 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 United States. 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 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.
Depositary Receipts
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
typically, Luxembourg, as well as in the United States, 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.
Aetna Generation Portfolios, Inc. 13
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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 repay such loans sooner.
Thus, the security holders frequently receive repayments of principal, in
addition to the principal that is part of the regular monthly payment. A
borrower is more likely to repay a mortgage that 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 Prospectus, the Portfolios may also invest in collateralized
mortgage obligations (CMOs) and real estate mortgage investment conduits
(REMICs). CMOs and REMICs are securities that 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 prepayments--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, home equity loans, or credit card receivables. The payments
from the collateral are passed through to the security holder. As noted above
with respect to CMOs and REMICs, the average life for these securities is the
conventional proxy for maturity. Asset-backed securities may pay all interest
and principal to the holder, or they may pay a fixed rate of interest, with any
excess over that required to pay interest going either into a reserve account or
to a subordinate class of securities, which may be retained by the originator.
The originator 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.
14 Aetna Generation Portfolios, Inc.
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Two varieties of asset-backed securities are CARs and CARDs. CARs are
securities, representing either ownership interests in fixed pools of automobile
receivables, or debt instruments supported by the cash flows from such a pool.
CARDs are participations in fixed pools of credit accounts. These securities
have varying terms and degrees of liquidity.
Asset-backed securities may be subject to the type of prepayment risk discussed
above due to the possibility that prepayments on the underlying assets will
alter the cash flow. Faster prepayments will shorten the security's average life
and slower prepayments will lengthen it.
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 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. These 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 Adviser seeks to identify situations in which the
rating agencies have not fully perceived the value of the security or in which
the 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, 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), like
other debt instruments, 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,
Aetna Generation Portfolios, Inc. 15
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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 junk bonds 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 in the past
tended 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 Investors Service, Inc. and Standard & Poor's
Corporation are considered, the 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 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), such as legislation
requiring federally insured savings and loan associations to divest
themselves of their investments in these securities.
Zero Coupon and Pay-in-Kind Securities
The 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 (cash payment date) and therefore are issued and
traded at a discount from their face amounts or par value. The discount varies,
depending on the time remaining until maturity or cash payment date, prevailing
interest rates, liquidity of the security and the perceived credit quality of
the issuer. The discount, in the absence of financial difficulties of the
issuer, decreases as the final maturity or cash payment date of the security
approaches. STRIPS are created by the Federal reserve bank by separating the
interest and principal components of an outstanding U.S. treasury 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.
16 Aetna Generation Portfolios, Inc.
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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 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 Portfolios' policy on portfolio turnover is discussed in the prospectus. The
portfolio turnover rates for the years ended December 31, 1995 and 1996 were
39.77% and 109.77% for Ascent, 49.38% and 105.66% for Crossroads, and 62.43% and
111.11% for Legacy respectively.
DIRECTORS AND OFFICERS
The investments and administration of the Fund are under the supervision of the
Directors. The Directors and executive officers of the Fund and their principal
occupations for the past five years are listed below. Those directors who are
"interested persons," as defined in the 1940 Act, are indicated by an asterisk
(*) and hold similar positions with other investment companies in the same fund
complex managed by the Adviser.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Principal Occupation During Past Five
Years (and Positions held with Affiliated
Position(s) Held Persons or Principal Underwriters of the
Name, Address and Age with Registrant Registrant)
-------------------------------------------------------------------------------------------
<S> <C> <C>
Shaun P. Mathews* Director and Vice President/Senior Vice President, Aetna
151 Farmington Avenue President Life Insurance and Annuity Company, March
Hartford, Connecticut 1991 to present and Vice President, Aetna
Age 41 Life Insurance Company, 1991 to present.
Director and President, Aetna
Investment Services, Inc.; and
Director and Senior Vice
President, Aetna Insurance
Company of America, March 1991
to present.
- --------------------------------------------------------------------------------------------
</TABLE>
Aetna Generation Portfolios, Inc. 17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Principal Occupation During Past Five
Years (and Positions held with Affiliated
Position(s) Held Persons or Principal Underwriters of the
Name, Address and Age with Registrant Registrant)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Wayne F. Baltzer Vice President Assistant Vice President, Aetna Life
151 Farmington Avenue Insurance and Annuity Company, May 1991
Hartford, Connecticut to present; Vice President, Aetna
Age 53 Investment Services, Inc. July 1993 to
present.
- --------------------------------------------------------------------------------------------
Martin T. Conroy Vice President Assistant Treasurer, Aetna Life Insurance
151 Farmington Avenue and Annuity Company, October 1991 to
Hartford, Connecticut present.
Age 57
- --------------------------------------------------------------------------------------------
J. Scott Fox Vice President Director and Senior Vice President, Aetna
242 Trumbull Street and Treasurer Life Insurance and Annuity Company,
Hartford, Connecticut March 1997 to present; Director, Managing
Age 42 Director, Chief Operating Officer, Chief
Financial Officer and Treasurer, Aeltus
Investment Management, Inc. (Aeltus), April
1994 to present; Managing Director and
Treasurer, Equitable Capital Management
Corp., March 1987 to September 1993.
Director and Chief Financial Officer, Aeltus
Capital, Inc. and Aeltus Trust Company,
Inc.; Director, President and Chief
Executive Officer, Aetna Investment
Management, (Bermuda) Holding, Ltd.
- --------------------------------------------------------------------------------------------
Susan E. Bryant Secretary Counsel, Aetna Inc. (formerly Aetna Life
151 Farmington Avenue and Casualty Company) March 1993 to
Hartford, Connecticut present; General Counsel and Corporate
Age 49 Secretary, First Investors Corporation, April
1991 to March 1993. Secretary, Aetna
Investment Services, Inc. and Vice
President and Senior Counsel, Aetna
Financial Services, Inc.
- --------------------------------------------------------------------------------------------
Morton Ehrlich Director Chairman and Chief Executive Officer,
1000 Venetian Way Integrated Management Corp. (an
Miami, Florida entrepreneurial company) and Universal
Age 62 Research Technologies, 1992 to present;
Director and Chairman, Audit
Committee, National Bureau of
Economic Research, 1985 to
1992.
- --------------------------------------------------------------------------------------------
Maria T. Fighetti Director Manager/Attorney, Health Services, New
325 Piermont Road York City Department of Mental Health,
Closter, New Jersey Mental Retardation and Alcohol Services,
Age 53 1973 to present.
- --------------------------------------------------------------------------------------------
David L. Grove Director Private Investor; Economic/Financial
5 The Knoll Consultant, December 1985 to present.
Armonk, New York
Age 78
- --------------------------------------------------------------------------------------------
</TABLE>
18 Aetna Generation Portfolios, Inc.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Principal Occupation During Past Five
Years (and Positions held with Affiliated
Position(s) Held Persons or Principal Underwriters of the
Name, Address and Age with Registrant Registrant)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Timothy A. Holt* Director Director, Senior Vice President and Chief
151 Farmington Avenue Financial Officer, Aetna Life Insurance and
Hartford, Connecticut Annuity Company, February 1996 to
Age 43 present; Vice President, Portfolio
Management/Investment Group, Aetna Inc.
(formerly Aetna Life and Casualty
Company), June 1991 to February 1996.
Director and Vice President, Aetna
Retirement Holdings Services, Inc.
- --------------------------------------------------------------------------------------------
Daniel P. Kearney* Director Director, President, and Chief Executive
151 Farmington Avenue Officer, Aetna Life Insurance and Annuity
Hartford, Connecticut Company, December 1993 to present;
Age 57 Executive Vice President, Aetna Inc.
(formerly Aetna Life and Casualty Company),
December 1993 to present; Group Executive,
Aetna Inc. (formerly Aetna Life and
Casualty Company), 1991 to 1993; Director,
Aetna Investment Services, Inc., November
1994 to present; Director, Aetna Insurance
Company of America, May 1994 to present.
- --------------------------------------------------------------------------------------------
Sidney Koch Director Financial Adviser, self-employed, January
455 East 86th Street 1993 to present; Senior Adviser, Daiwa
New York, New York Securities America, Inc., January 1992 to
Age 61 January 1993; Executive Vice President,
Member of Executive Committee, Daiwa
Securities America, Inc., January 1986 to
January 1992.
- --------------------------------------------------------------------------------------------
Corine T. Norgaard Director, Chair Dean of the Barney School of Business,
556 Wormwood Hill Audit Committee University of Hartford, (West Hartford, CT),
Mansfield Center, and Contract August 1996 to present; Professor,
Connecticut Committee Accounting and Dean of the School of
Age 59 Management, Binghamton University,
(Binghamton, NY), August 1993 to August
1996, Professor, Accounting, University of
Connecticut, (Storrs, Connecticut), September
1969 to June 1993; Director, The Advest Group
(holding company for brokerage firm) through
September 1996.
- --------------------------------------------------------------------------------------------
Richard G. Scheide Director Trust and Private Banking Consultant,
11 Lily Street David Ross Palmer Consultants, July 1991
Nantucket, to present.
Massachusetts
Age 67
- --------------------------------------------------------------------------------------------
</TABLE>
* Interested persons as defined in the Investment Company Act of 1940 (1940
Act).
Aetna Generation Portfolios, Inc. 19
<PAGE>
During the year ended December 31, 1996, Directors of the Funds within the
Aetna Mutual Fund Complex who are also directors, officers or employees of
Aetna Life and Casualty Company and its affiliates were not entitled to any
compensation from the Funds. Directors who are not affiliated as employees of
Aetna or its subsidiaries are entitled to receive an annual retainer of
$30,000 for service on the Boards of the Funds within the Aetna Mutual Fund
Complex. In addition, each Director will receive a fee of $5,000 per meeting
for each regularly scheduled Board meeting; $5,000 for each Contract Committee
meeting which is held on any day on which a regular Board meeting is not
scheduled; and $3,000 for each committee meeting other than for a Contract
Committee meeting on any day on which a regular Board meeting is not
scheduled. A Committee Chairperson fee of $2,000 each will be paid to the
Chairperson of the Contract and Audit Committees. All of the above fees are to
be allocated proportionately to each Fund within the Aetna Mutual Fund Complex
based on the net assets of the Fund as of the date compensation is earned.
As of December 31, 1996, the unaffiliated Directors received compensation in
the amounts included in the following table. None of these Directors were
entitled to receive pension or retirement benefits.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Total Compensation from
Name of Person, Aggregate Compensa- Registrant and Fund Complex*
Position tion from Registrant Paid to Directors
- -------------------------------------------------------------------------------
<S> <C> <C>
Corine Norgaard $495.00 $72,950.00
Director and Chairman,
Audit and Contract
Committees
- -------------------------------------------------------------------------------
Sidney Koch $495.00 $72,950.00
Director and Member,
Audit and Contract
Committees
- -------------------------------------------------------------------------------
Maria T. Fighetti $434.00 $63,950.00
Director and Member,
Audit and Contract
Committees
- -------------------------------------------------------------------------------
Morton Ehrlich $434.00 $63,950.00
Director and Member,
Audit and Contract
Committees
- -------------------------------------------------------------------------------
Richard G. Scheide $468.00 $68,950.00
Director and Member,
Audit and Contract
Committees
- -------------------------------------------------------------------------------
David L. Grove $468.00** $68,950.00**
Director and Member,
Audit and Contract
Committees
- -------------------------------------------------------------------------------
</TABLE>
* 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), Aetna Get Fund (Series C),
Aetna Generation Portfolios, Inc. and Aetna Variable Portfolios, Inc.
** Mr. Grove elected to defer all such compensation under an existing deferred
compensation plan.
The Fund has applied for an order by the Commission to allow the Directors who
are not affiliated with Aetna Inc. or any of its subsidiaries to defer all or
a portion of their compensation in accordance with the terms of a new Deferred
Compensation Plan (Plan). Under the Plan, compensation deferred by an
unaffiliated Director is periodically adjusted as though an equivalent amount
had been invested and reinvested in shares of one or more portfolios of Aetna
Series Fund, Inc. designated by the Director. The amount paid to the
unaffiliated Director under the Plan will be based upon the performance of
such investments. Deferral compensation in accordance with the Plan will have
a negligible effect on the assets, liabilities and net income per share of any
Portfolio and will not obligate the Fund to retain the services of any
Director or to pay any particular level of compensation to any Director.
20 Aetna Generation Portfolios, Inc.
<PAGE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of March 31, 1997 all of the shares of the Generation Portfolios were 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 and its subsidiary, Aetna Insurance Company of
America, Inc. (AICA), on behalf of their respective separate accounts. See
"Voting Rights" below.
INVESTMENT ADVISORY AGREEMENT
The Fund, on behalf of each Portfolio, has entered into Investment Advisory
Agreements (Advisory Agreements) appointing Aetna as the Adviser of each
Portfolio. These Advisory Agreements were adopted by the Directors in February
1996 and approved by the shareholders in June 1996. The Advisory Agreements will
remain in effect if approved at least annually by a majority of the Directors,
including a majority of the Directors who are not "interested persons" of the
Fund, at a meeting called for that purpose, and held in person. Each Advisory
Agreement may be terminated as to a particular Portfolio without penalty at any
time by the Directors or by a majority vote of the outstanding voting securities
of that Portfolio, or they may be terminated on sixty days' written notice by
Aetna. The Advisory Agreements terminate automatically in the event of
assignment.
These Advisory Agreements replace agreements with Aetna that were initially
approved by shareholders at the Portfolios' inception. Under the Advisory
Agreements and subject to the direction of the Directors of the Fund, Aetna has
responsibility for supervising all aspects of the operations of each Portfolio
including the selection, purchase and sale of securities on behalf of each
Portfolio, the calculation of net asset values and the preparation of financial
and other reports as requested by the Directors. Under both the old and the new
agreements, Aetna is given the right to delegate any or all of its obligations
to a subadviser.
The Advisory Agreements provide that Aetna is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
officers or Directors of the Fund. Each Portfolio is responsible for payment of
all of its other costs; however, under the Administrative Services Agreement
described below, Aetna has agreed to pay all direct expenses for each Portfolio
except for broker's commissions and other costs incurred in effecting
transactions on behalf of the Portfolio.
For its services under the prior Agreements, Aetna received a monthly fee at an
annual rate of 0.50% of the average daily net assets of each portfolio, payable
monthly. For the years ended December 31, 1995 and December 31, 1996, Aetna
received fees of $44,673 and $136,513 from Ascent; $44,352 and $129,138 from
Crossroads; and $43,540 and $105,706 from Legacy, respectively. Under the new
Advisory Agreement, Aetna receives an advisory fee at an annual rate of 0.60% of
the average daily net assets of the Fund, payable monthly.
THE SUBADVISORY AGREEMENTS
Aetna and the Fund, on behalf of each Series, have entered into agreements
(Subadvisory Agreements) with Aeltus Investment Management, Inc. (Aeltus)
effective August 1, 1996 appointing Aeltus subadviser of each Series. These
Subadvisory Agreements were adopted by the Directors in February 1996 and
approved by the shareholders in July 1996. Each Subadvisory Agreement will be
effective through December 31, 1997. The Subadvisory Agreements will remain in
effect thereafter if approved at least annually by a majority of the Directors,
including a majority of the Independent Directors of the Fund, at a meeting
called for that purpose, and held in person. The Subadvisory Agreements may be
terminated without penalty at any time by the Directors or by a majority of the
outstanding voting securities of the
Aetna Generation Portfolios, Inc. 21
<PAGE>
Series of the Fund or they may be terminated on sixty (60) days' written notice
by Aetna, the Fund or the Subadviser. The Subadvisory Agreements terminate
automatically in the event of their assignment.
Under the Subadvisory Agreements, Aeltus is responsible for managing the assets
of each Portfolio in accordance with their investment objectives and policies,
subject to the supervision of Aetna and the Directors, and for preparing and
providing accounting and financial information as requested by the Adviser and
the Directors. The Subadviser pays the salaries, employment benefits and other
related costs of its personnel. For its services, Aetna has agreed to pay the
Subadviser a fee at an annual rate of up to 0.35% of the average daily net
assets of each Portfolio, payable monthly. This fee is not charged to the Fund
but is paid by Aetna out of its investment advisory fees.
Aetna, as the Investment Adviser, retains overall responsibility for monitoring
the investment program maintained by Aeltus for compliance with applicable laws
and regulations and each Portfolio's investment objectives and policies.
THE ADMINISTRATIVE SERVICES AGREEMENTS
Pursuant to the Administrative Services Agreements described below, Aetna acts
as administrator and provides certain administrative and shareholder services
necessary for Fund operations and is responsible for the supervision of other
service providers. The services provided by Aetna include: (1) internal
accounting services; (2) regulatory compliance, such as reports and filings with
the Commission and state securities commissions; (3) preparing financial
information for proxy statements; (4) preparing semiannual and annual reports to
shareholders; (5) preparing federal, state and local income tax returns; (6)
overseeing the determination and publication of net asset values; (7) certain
shareholder communications; (8) supervision of the custodians and transfer
agent; and (9) reporting to the Directors.
For its services and as reimbursement for the costs it incurs under the
Administrative Services Agreement, Aetna receives an annual fee, payable
monthly, at a rate of 0.15% of the average daily net assets of each Portfolio.
The Administrative Services Agreement will continue in effect if approved
annually by a majority of the Directors. They may be terminated by either party
on sixty days' written notice.
Prior to May 1, 1996, Aetna provided administrative services under agreements
that allowed for the reimbursement of a proportionate share of Aetna's overhead
in administering the Portfolios and the Portfolios reimbursed Aetna directly for
all other costs. The total of the direct costs and administrative costs
reimbursed to Aetna for the years ended December 31, 1995 and December 31, 1996
were $96,041 and $34,751 for Ascent; $96,465 and $26,567 for Crossroads; $96,465
and $21,226 for Legacy, respectively.
LICENSE AGREEMENT
The Fund uses the service mark of Aetna Generation Portfolios, Inc. and the name
"Aetna" with the permission of Aetna Inc. granted under a License Agreement. The
continued use is subject to the right of Aetna Inc. to withdraw this permission
in the event Aetna or another subsidiary or affiliated corporation of Aetna Inc.
should not be the investment adviser of the Fund.
CUSTODIAN
Mellon Bank, N.A., One Mellon Bank Center, Pittsburgh, Pennsylvania, 15258
serves as custodian for the assets of the 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 Portfolio may, however,
invest in obligations of the custodian and may purchase or sell securities from
or to the custodian.
22 Aetna Generation Portfolios, Inc.
<PAGE>
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, City Place II, Hartford, Connecticut 06103 serves as
independent auditors to the Generation Portfolios. KPMG Peat Marwick LLP
provides audit services, assistance and consultation in connection with
Commission filings.
BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the direction of the Directors, Aetna and Aeltus have responsibility
for making the Aetna Generation Portfolios' investment decisions, for effecting
the execution of trades for the Aetna Generation Portfolios and for negotiating
any brokerage commissions thereof. It is the policy of Aetna and Aeltus to
obtain the best quality of execution available, giving attention to net price
(including commissions where applicable), execution capability (including the
adequacy of a brokerage 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 their trading policy, Aetna and Aeltus may place a Portfolio's
transactions with such brokers or dealers and for execution in such markets as,
in the opinion of Aetna and Aeltus, will lead to the best overall quality of
execution.
Aetna and Aeltus currently receive 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 the Portfolios. 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 and accounts, services related to the
execution of trades in a Portfolio's securities and advice as to the valuation
of securities. Aetna and Aeltus consider the quantity and quality of such
brokerage and research services provided by a brokerage firm along with the
nature and difficulty of the specific transaction in negotiating commissions for
trades in a Portfolio's securities and may pay higher commission rates than the
lowest available when it is reasonable to do so in light of the value of the
brokerage and research services received generally or in connection with a
particular transaction. Aetna and Aeltus' policy in selecting a broker to effect
a particular transaction is to seek to obtain "best execution," which means
prompt and efficient execution of the transaction at the best obtainable price
with payment of commissions which are reasonable in relation to the value of the
services provided by the broker, taking into consideration research and other
services provided. When either Aetna or Aeltus believes that more than one
broker can provide best execution, preference may be given to brokers who
provide additional services to Aetna or Aeltus.
Consistent with securities laws and regulations, Aetna and Aeltus may obtain
such brokerage and research services regardless of whether they are paid for (1)
by means of commissions; or (2) by means of separate, non-commission payments.
Aetna's and Aeltus' judgment as to whether and how they will obtain the specific
brokerage and research services will be based upon their 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 Aetna's and Aeltus'
opinion as to which services and which means of payment are in the long-term
best interests of a Portfolio. Research services furnished by brokers through
whom the Fund affects securities transactions may be used by Aetna and Aeltus in
servicing all of their accounts; not all such services will be used by Aetna and
Aeltus to benefit the Fund. The Aetna Generation Portfolios have no present
intention to effect any brokerage transactions in portfolio securities with
Aetna or any affiliate of the Aetna Generation Portfolios or Aetna except in
accordance with Rule 17e-1 under the 1940 Act.
Certain officers of Aetna and Aeltus also manage the securities portfolios of
Aetna's own accounts. Further, Aetna and Aeltus also act as investment adviser
to other investment companies registered under
Aetna Generation Portfolios, Inc. 23
<PAGE>
the 1940 Act and other client accounts. Aetna and Aeltus have adopted policies
designed to prevent disadvantaging the Aetna Generation Portfolios in placing
orders for the purchase and sale of securities for the Aetna Generation
Portfolios.
To the extent Aetna or Aeltus desires to buy or sell the same security at or
about the same time for more than one client, the purchases or sales will
normally be aggregated (or "bunched") and 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. Prices are averaged for all aggregated transactions. In some cases,
this procedure may adversely affect the size of the position obtained for or
disposed of by a Portfolio or the price paid or received by a Portfolio.
The Directors have adopted a policy allowing trades to be made between
registered investment companies or portfolios thereof 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 Aetna.
For the period ended December 31, 1996, brokerage commissions were paid in the
amount of $97,427 from Ascent; $69,844 from Crossroads; and $39,942 from Legacy.
The Directors have 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 of Ethics 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 period ended December 31, 1996, portfolio transactions in the amounts
listed below were directed to certain brokers because of research services, of
which commissions in the amounts listed below were paid with respect to such
transactions. No brokerage business was placed with any brokers affiliated with
Aetna.
Commissions Paid on
Total Transactions Total Transactions
Ascent $19,368,281 $14,836
Crossroads 12,769,544 10,644
Legacy 8,328,906 6,434
DESCRIPTION OF SHARES
The Articles of Incorporation authorize the Fund 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.
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.
PURCHASE AND REDEMPTION OF SHARES
Shares of a Portfolio are purchased 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 "Purchase and Redemption of Shares" and "Net
Asset Value."
24 Aetna Generation Portfolios, Inc.
<PAGE>
NET ASSET VALUE
Securities of the 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 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.
PERFORMANCE INFORMATION
Total return of a Portfolio for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $10,000
investment in the Portfolio made at the beginning of each period, then
calculating the average annual compounded rate of return which would produce the
same investment return on the $10,000 investment over the same period. Total
return for a period of one year or less is equal to the actual investment return
on a $10,000 investment in the Portfolio during that period. Total return
calculations assume that all Portfolio distributions are reinvested at net asset
value on their respective reinvestment dates.
The performance of the Portfolios may, from time to time, be compared to that of
other mutual funds tracked by mutual fund rating services, to broad groups of
comparable mutual funds, or to unmanaged indices which may assume investment of
dividends but generally do not reflect deductions for administrative and
management costs.
The performance of the Portfolios is commonly measured as total return. An
average annual compounded rate of return ("T") may be computed by using the
redeemable value at the end of a specified period ("ERV") of a hypothetical
initial investment of $10,000 ("P") over a period of time ("n") according to the
formula:
P(1+T)(n)=ERV
The total returns of the Portfolios calculated based on the formula above for
the periods ended December 31, 1996 are:
Aetna Ascent Portfolio one year period 23.58%
Inception (7/5/95) through 12/31/96 23.21%
Aetna Crossroads Portfolio one year period 18.81%
Inception (7/5/95) through 12/31/96 19.16%
Aetna Legacy Portfolio one year period 14.19%
Inception (7/5/95) through 12/31/96 15.30%
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.
Aetna Generation Portfolios, Inc. 25
<PAGE>
Qualification as a Regulated Investment Company
Each Portfolio has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (Code). As a
regulated investment company, a Portfolio generally 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
(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 (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
(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
26 Aetna Generation Portfolios, Inc.
<PAGE>
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 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
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 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,
provided that the contract is actually held by the Portfolio uninterrupted for a
total of at least three months.
Because only a few regulations regarding the treatment of swap agreements and
other financial derivatives have been issued, the tax consequences of
transactions in these types of instruments are not always entirely clear. The
Fund intends to account for derivatives transactions in a manner deemed by it to
be appropriate, but the Internal Revenue Service might not necessarily accept
such treatment. If it did not, the status of a Fund as a regulated investment
company and/or its compliance with the diversification requirement under Code
section 817(h) might be affected. The Fund intends to monitor developments in
this area. Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
it will be able to engage in swap agreements.
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 (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
Aetna Generation Portfolios, Inc. 27
<PAGE>
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 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.
Spe-
28 Aetna Generation Portfolios, Inc.
<PAGE>
cifically, 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 may be 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, U.S. 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 (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 from Section 988 transactions incurred after October 31 of any
year (or after the end 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 dividends-received deduction
for corporate shareholders to the extent discussed below.
Each Portfolio may either retain or distribute to the shareholders its net
capital gain for each taxable year. Each Portfolio currently intends 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 Portfolio prior to the date on which
the shareholder acquired the shares. All distributions paid to Aetna, whether
characterized as ordinary income or capital gain, are not taxable to VA Contract
or VLI Policy holders.
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
Aetna Generation Portfolios, Inc. 29
<PAGE>
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 may
qualify for the 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 and if the shareholder
meets eligibility requirements in the Code. 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.
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,
30 Aetna Generation Portfolios, Inc.
<PAGE>
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, or deemed under Code rules to be
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.
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 company depositors of the separate accounts pass voting
rights attributable to shares held for VA Contracts and VLI Policies through to
Contract holders or 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
Aetna Generation Portfolios, Inc. 31
<PAGE>
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 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.
FINANCIAL STATEMENTS
Financial Statements for Aetna Generation Portfolios, Inc. are incorporated
herein by reference to the Annual Report dated December 31, 1996. The Annual
Report is available upon request and without charge by calling 1-800-525-4225 or
by writing to Aetna Income Shares at 151 Farmington Avenue, CT 06156.
32 Aetna Generation Portfolios, Inc.
<PAGE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A:
Financial Highlights
(2) Included in Part B by incorporation by reference to the
Fund's Annual Report dated December 31, 1996, as filed
electronically with the Securities and Exchange Commission
on March 7, 1997 (File No. 811-8934):
Portfolio of Investments
Statement of Assets and Liabilities as of December 31,
1996
Statement of Operations for the year ended December 31,
1996
Statements of Changes in Net Assets for the year ended
December 31, 1996 and the period from July 5, 1995 to
December 31, 1995
Notes to Financial Statements
Independent Auditors' Report
(b) Exhibits:
(1)(a) Articles of Incorporation(1)
(1)(b) Articles Supplementary (March 13, 1996)
(2) Amended Bylaws
(3) Not applicable
(4) Investment Defining Rights of Holders(2)
(5)(a) Form of (executed) Investment Advisory
Agreement between Aetna Life Insurance and
Annuity Company and Aetna Generation Portfolios,
Inc. (August 1, 1996)
(5)(b) Form of (executed) Subadvisory Agreement between
Aetna Life Insurance and Annuity Company and
Aetna Generation Portfolios, Inc. (August 1,
1996)
(6) Underwriting Agreement between Aetna Life
Insurance and Annuity Company and Aetna
Generation Portfolios, Inc. (June 19, 1996)
(7) Not applicable
(8) Custodian Agreement (May 8, 1995)(1)
(9)(a) Administrative Services Agreement between Aetna
Life Insurance and Annuity Company and Aetna
Generation Portfolios, Inc. on behalf of Aetna
Variable Ascent Portfolio (May 1, 1996)(2)
(9)(b) Administrative Services Agreement between Aetna
Life Insurance and Annuity Company and Aetna
Generation Portfolios, Inc. on behalf of Aetna
Variable Crossroads Portfolio (May 1, 1996)(2)
<PAGE>
(9)(c) Administrative Services Agreement between
Aetna Life Insurance and Annuity Company and
Aetna Generation Portfolios, Inc. on behalf of
Aetna Variable Legacy Portfolio (May 1, 1996)(2)
(9)(d) License Agreement (November 8, 1994)(1)
(10)(a) Opinion of Counsel(3)
(10)(b) Consent of Counsel
(11) Consent of Independent Auditors'
(12) Not applicable
(13) Agreement Concerning Initial Capital(1)
(14) Not applicable
(15) Not applicable
(16) Schedule for Computation of Performance Data
(17) Not applicable
(19) Power of Attorney(4)
(27) Financial Data Schedule
1. Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-88334), as filed
electronically with the Securities and Exchange Commission on June 19,
1995.
2. Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form N-1A (File No. 33-88334), as filed electronically on
April 25, 1996.
3. Incorporated by reference to Registrant's Rule 24f-2 Notice for the fiscal
year ended December 31, 1996, as filed with the Securities and Exchange
Commission on February 28, 1997.
4. Incorporated by reference to Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A (File No. 33-27247), as filed
electronically with the Securities and Exchange Commission on April 11,
1997.
<PAGE>
Item 25. Persons Controlled by or Under Common Control
Registrant is a Maryland corporation for which separate financial
statements are filed. As of February 28, 1997, Aetna Life
Insurance and Annuity Company owned 99.60% of Registrant's
outstanding voting securities
Aetna Life Insurance and Annuity Company is a wholly owned
subsidiary of Aetna Retirement Holdings, Inc. which is in turn a
wholly owned subsidiary of Aetna Retirement Services, Inc. which
is a wholly owned subsidiary of Aetna Services, Inc., and an
indirectly wholly owned subsidiary of Aetna Inc.
A list of all persons directly or indirectly under common control
with the Registrant and a list which indicates the principal
business of each such company referenced in the diagram are
incorporated herein by reference to Item 26 of Post-Effective
Amendment No. 2 to the Registration Statement on Form N-4 (File
No. 33-61897), as filed electronically with the Securities and
Exchange Commission on April 11, 1997.
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders
------------------ ----------------------------
Aetna Ascent Variable Portfolio 2
Aetna Legacy Variable Portfolio 2
Aetna Crossroads Variable Portfolio 2
Item 27. Indemnification
Article 9, Section (d) of the Registrant's Articles of
Incorporation, incorporated herein be reference to Exhibit
24(b)(1), as filed electronically on 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 in
October, 1997.
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.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
The Investment Adviser, Aetna Life Insurance and Annuity Company
(Aetna), is an insurance company that issues variable and fixed
annuities, and variable and universal life insurance policies and
acts as principal underwriter and depositor for separate accounts
holding assets for variable contracts and policies. It also acts
as the principal underwriter and investment adviser for the
Registrant and Aetna Series Fund, Inc., Aetna Variable Fund, Aetna
Income Shares, Aetna Variable Encore Fund, Aetna Investment
Advisers Fund, Inc., Aetna GET Fund, and Aetna Variable
Portfolios, Inc. (all management investment companies registered
under the Investment Company Act of 1940 (1940 Act)).
Additionally, Aetna acts as the principal underwriter and
depositor for Variable Annuity Account B of Aetna, Variable
Annuity Account C of Aetna, Variable Annuity Account G of Aetna,
and Variable Life Account B of Aetna (separate accounts of Aetna
registered as unit investment trusts under the 1940 Act). Aetna is
also the principal underwriter for Variable Annuity Account I of
Aetna Insurance Company of America (AICA) (a separate account of
AICA registered as a unit investment trust under the 1940 Act).
The following table summarizes the business connections of the
directors and principal officers of the Investment Adviser.
<TABLE>
<S> <C> <C>
------------------------------ ----------------------------------- ----------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1994/Addresses*/**
----------------------- ---------------------------------
------------------------------ ----------------------------------- ----------------------------------------------
Daniel P. Kearney Director, President and Executive Director and President (since March 1996) --
Officer Aetna Retirement Holdings, Inc.; President
(since December 1995) -- Aetna Retirement
Services, Inc.; President (since December
1993) -- Aetna Life Insurance and Annuity
Company; Executive Vice President (since
December 1993) -- Aetna Inc. (formerly Aetna
Life and Casualty Company); Director (since
1992) -- MBIA, Inc.
<PAGE>
Christopher J. Burns Director and Senior Vice Director, Aetna Financial Services, Inc.
President (since January 1996), and Aetna Investment
Services, Inc. (since July 1992) and
President, Chief Operations Officer (since
November 1996) -- Aetna Investment Services,
Inc.; Director (since March 1996) -- Aetna
Retirement Holdings, Inc.
Laura R. Estes Director and Senior Vice President Director (since December 1996) -- Aetna
Insurance Agency Holding Company, Inc.);
Director (since March 1996) -- Aetna
Retirement Holdings, Inc.; Senior Vice
President (since March 1991) -- Aetna Life
Insurance and Annuity Company.
J. Scott Fox Director and Senior Vice President Director and Senior Vice President (since
March 1997) -- Aetna Retirement Holdings,
Inc.; Senior Vice President (since March
1997) -- Aetna Life Insurance and Annuity
Company; Managing Director, Chief Operating
Officer, Chief Financial Officer, Treasurer
(April 1994 - March 1997) -- Aeltus
Investment Management, Inc.
Timothy A. Holt Director, Senior Vice President Senior Vice President and Chief Financial
and Chief Financial Officer Officer (since February 1996) -- Aetna Life
Insurance and Annuity Company; Vice President
(June 1991 - February 1996) -- Portfolio
Management/Investment Group, Aetna Inc.
(formerly known as Aetna Life and Casualty
Company); Director (since March 1996) -- Aetna
Retirement Holdings, Inc.; Vice President
(since September 1996) -- Aetna Retirement
Holdings, Inc.
<PAGE>
Gail P. Johnson Director and Vice President Vice President (since December 1992) --
Aetna Life Insurance and Annuity Company.
John Y. Kim Director and Senior Vice President President (since December 1995) -- Aeltus
Investment Management, Inc.; Chief
Investment Officer (since May 1994) -- Aetna
Life Insurance and Annuity Company.
Shaun P. Mathews Director and Vice President Director (since December 1996) -- Aetna
Insurance Agency Holding Company, Inc.; Vice
President (since February 1996), Senior Vice
President (March 1991 - Present) -- Aetna
Life Insurance and Annuity Company;
Director, Aetna Investment Services, Inc.
(since July 1993), and Aetna Insurance
Company of America (since February 1993).
Glen Salow Director and Vice President Vice President (since 1992) -- Aetna Life
Insurance and Annuity Company.
Creed R. Terry Director and Vice President Vice President (since February 1996), Market
Strategist (August 1995 - February 1996) --
Aetna Life Insurance and Annuity Company;
President, (1991 - 1995) Chemical Technology
Corporation (a subsidiary of Chemical Bank).
Kirk P. Wickman Vice President, General Counsel Vice President, General Counsel and
and Secretary Corporate Secretary (since March 1997) --
Aetna Retirement Holdings, Inc.; Vice
President, General Counsel and Secretary (since
November 1996) -- Aetna Life Insurance and
Annuity Company; Vice President and Counsel
(June 1992 - November 1996) -- Aetna Life
Insurance Company.
<PAGE>
Deborah Koltenuk Vice President and Treasurer, Vice President, Investment Planning and
Corporate Controller Financial Reporting (April 1996 to July
1996) -- Aetna Life Insurance Company; Vice
President, Investment Planning and Financial
Reporting (October 1994 to April 1996) Aetna
Life Insurance Company, the Aetna Casualty and
Surety Company and The Standard Fire and
Insurance Company; Vice President and
Treasurer, Corporate Controller (since March
1996) -- Aetna Retirement Holdings, Inc.
Frederick D. Kelsven Vice President and Chief Director of Compliance (January 1985 to
Compliance Officer September 1996) -- Nationwide Life Insurance
Company.
</TABLE>
* 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 that are not deemed to be principal
positions.
For information regarding Aeltus Investment Management, Inc. (Aeltus), the
subadviser for the Portfolios, reference is hereby made to "Management of The
Generation Portfolios" in the Prospectus. For information as to the business,
profession, vocation or employment of a substantial nature of each of the
officers and directors of Aeltus, reference is hereby made to the current Form
ADV (File No. 801-9046) of Aeltus filed under the Investment Advisers Act of
1940, incorporated herein by reference.
Item 29. Principal Underwriters
(a) In addition to serving as the principal underwriter and investment
adviser for the Registrant, Aetna Life Insurance and Annuity
Company (Aetna) also acts as the principal underwriter and
investment adviser for Aetna Variable Fund, Aetna Variable Encore
Fund, Aetna Series Fund, Inc., Aetna Income Shares, Aetna
Investment Advisers Fund, Inc., Aetna Variable Portfolios, Inc.,
and Aetna GET Fund (all management investment companies registered
under the Investment Company Act of 1940 (1940 Act)). Additionally,
Aetna acts as the principal underwriter and depositor for Variable
Annuity Account B of Aetna, Variable Annuity Account C of Aetna,
Variable Annuity Account G of Aetna and
<PAGE>
Variable Life Account B of Aetna (separate accounts of Aetna
registered as unit investment trusts under the 1940 Act). Aetna is
also the principal underwriter for Variable Annuity Account I of
Aetna Insurance Company of America (AICA) (a separate account of
AICA registered as a unit investment trust under the 1940 Act).
(b) The following are the directors and principal officers of the
Underwriter:
<TABLE>
<S> <C> <C>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
- ------------------ -------------------------- ---------------------
Daniel P. Kearney Director and President Director
Timothy A. Holt Director, Senior Vice President and Chief Director
Financial Officer
Christopher J. Burns Director and Senior Vice President
Laura R. Estes Director and Senior Vice President
J. Scott Fox Director and Senior Vice President Vice President and Treasurer
Gail P. Johnson Director and Vice President
John Y. Kim Director and Senior Vice President
Shaun P. Mathews Director and Vice President Director and President
Glen Salow Director and Vice President
Creed R. Terry Director and Vice President
Kirk P. Wickman Vice President, General Counsel and Secretary
Deborah Koltenuk Vice President and Treasurer, Corporate
Controller
Frederick D. Kelsven Vice President and Chief Compliance Officer
</TABLE>
* The principal business address of all directors and officers listed is 151
Farmington Avenue, Hartford, Connecticut 06156.
(c) Not applicable.
<PAGE>
Item 30. Location of Accounts and Records
As required by Section 31(a) of the 1940 Act and the rules
thereunder, the Registrant and its investment adviser, Aetna,
maintain physical possession of each account, book and other
documents at their principal place of business located at:
151 Farmington Avenue
Hartford, Connecticut 06156.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
The Registrant undertakes that if requested by the holders of at
least 10% of the Registrant's outstanding shares, the Registrant
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 as if Section
16(c) of the 1940 Act applied.
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of its latest annual report to
shareholders, upon request and without charge.
Insofar as indemnification for liability arising under the
Securities Act of 1933 (1933 Act) may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
1933 Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
Aetna Generation Portfolios, Inc. (Registrant) certifies that it meets the
requirements of Securities Act Rule 485(b) for effectiveness of this
Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A (File
No. 33-88334) and has duly caused this Post-Effective Amendment No. 5 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 15th
day of April, 1997.
AETNA GENERATION PORTFOLIOS, INC.
---------------------------------
(Registrant)
By Shaun P. Mathews*
---------------------------------
Shaun P. Mathews
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons on April 15, 1997 in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Shaun P. Mathews* President and Director )
- ------------------------------------ (Principal Executive Officer) )
Shaun P. Mathews )
)
Morton Ehrlich* Director )
- ------------------------------------ )
Morton Ehrlich )
)
Maria T. Fighetti* Director ) April
- ------------------------------------ ) 15, 1997
Maria T. Fighetti )
)
David L. Grove* Director )
- ------------------------------------ )
David L. Grove )
)
Timothy A. Holt* Director )
- ------------------------------------ )
Timothy A. Holt )
)
Daniel P. Kearney* Director )
- ------------------------------------ )
Daniel P. Kearney )
<PAGE>
)
Sidney Koch* Director )
- ------------------------------------ )
Sidney Koch )
)
Corine T. Norgaard* Director )
- ------------------------------------ )
Corine T. Norgaard )
)
Richard G. Scheide* Director )
- ------------------------------------ )
Richard G. Scheide )
)
J. Scott Fox* Vice President and Treasurer )
- ------------------------------------ (Principal Financial and Accounting Officer) )
J. Scott Fox )
</TABLE>
By: /s/Susan E. Bryant
-----------------------------------------------
*Susan E. Bryant
Attorney-in-Fact
<PAGE>
Aetna Generation Portfolios, Inc.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
----------- ------- ----
<S> <C> <C>
99-(b)(1)(a) Articles of Incorporation *
99-(b)(1)(b) Articles Supplementary
--------------------
99-(b)(2) Amended Bylaws
--------------------
99-(b)(4) Instrument Defining Rights of Holders *
99-(b)(5)(a) Form of (executed) Investment Advisory Agreement between Aetna Life
Insurance and Annuity Company and Aetna Generation Portfolios, Inc.
--------------------
99-(b)(5)(b) Form of (executed) Subadvisory Agreement between Aetna Life Insurance
and Annuity Company and Aetna Generation Portfolios, Inc.
--------------------
99-(b)(6) Underwriting Agreement between Aetna Life Insurance and Annuity
Company and Aetna Generation Portfolios, Inc.
--------------------
99-(b)(8) Custodian Agreement *
99-(b)(9)(a) Administrative Services Agreement between Aetna Life Insurance and *
Annuity Company and Aetna Generation Portfolios, Inc. on behalf of
Aetna Variable Ascent Portfolio
99-(b)(9)(b) Administrative Services Agreement between Aetna Life Insurance and *
Annuity Company and Aetna Generation Portfolios, Inc. on behalf of
Aetna Variable Crossroads Portfolio
99-(b)(9)(c) Administrative Services Agreement between Aetna Life Insurance and *
Annuity Company and Aetna Generation Portfolios, Inc. on behalf of
Aetna Variable Legacy Portfolio
*Incorporated by reference
<PAGE>
Exhibit No. Exhibit Page
----------- ------- ----
99-(b)(9)(d) License Agreement *
99-(b)(10)(a) Opinion of Counsel *
99-(b)(10)(b) Consent of Counsel
--------------------
99-(b)(11) Consent of Independent Auditors
--------------------
99-(b)(13) Agreement Concerning Initial Capital *
99-(b)(16) Schedule for Computation of Performance Data
--------------------
99-(b)(19) Powers of Attorney *
27 Financial Data Schedule
--------------------
</TABLE>
*Incorporated by reference
AETNA GENERATION PORTFOLIOS, INC.
ARTICLES SUPPLEMENTARY
AETNA GENERATION PORTFOLIOS, INC., a Maryland corporation registered as
an open-end investment company under the Investment Company Act of 1940 and
having its principal office in the State of Maryland in Baltimore City, Maryland
(hereinafter called the "Corporation") , hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation, at its November 8, and
December 13 and 14, 1994 meetings, by resolution designated and classified
shares into three series as follows:
Number of Shares
Name of Series Allocated
- -------------- ---------
Aetna Ascent Variable Portfolio 100,000,000
Aetna Crossroads Variable Portfolio 100,000,000
Aetna Legacy Variable Portfolio 100,000,000
SECOND: The shares of the Corporation authorized and classified pursuant
to Article First of these Articles Supplementary have been so authorized and
classified by the Board of Directors under the authority contained in the
Charter of the Corporation. The number of Shares of capital stock of the Series
that the Corporation has authority to issue has been established by the Board of
Directors in accordance with Section 2-105(c) of the Maryland General
Corporation Law.
1
<PAGE>
THIRD: The preferences, rights, voting powers, restrictions, limitations
as to dividends, qualifications and terms and conditions of redemption of the
Series of shares shall be as set forth in the Corporation's Articles of
Incorporation and those set forth as follows:
(a) Assets Belonging to the Series. All consideration received by the
Corporation for the issue or sale of shares of the Series, together with
all assets in which such consideration is invested or reinvested, all
income, earnings, profits, and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation of such assets, and any
funds or payments derived from any reinvestment of such proceeds in
whatever form the same may be, shall irrevocably belong to the Series for
all purposes, subject only to the rights of creditors, and shall be so
recorded upon the books and accounts of the Corporation. Such
consideration, assets, income, earnings, profits, and proceeds thereof
including any proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any reinvestment of
such proceeds, in whatever form the same may be, together with any
General Items allocated to the Series as provided in the following
sentence, are herein referred to as "assets belonging to" the Series. In
the event that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable
as belonging to any particular series (collectively "General Items"),
such General Items shall be allocated by or under the supervision of the
Board of Directors to and among any one or more of the Series of the
Corporation and designated from time to time in such manner and on such
basis as the Board of Directors, in its sole discretion, deems fair and
equitable, and any General Items so allocated to a particular
2
<PAGE>
series shall belong to that series. Each such allocation by the Board of
Directors shall be conclusive and binding for all purposes.
(b) Liabilities Belonging to the Series. The assets belonging to the
Series shall be charged with the liabilities of the Corporation in
respect of the Series and all expenses, costs, charges and reserves
attributable to the Series and any general liabilities, expenses, costs,
charges or reserves of the Corporation which are not readily identifiable
as belonging to any particular series shall be allocated and charged by
or under the supervision of the Board of Directors to and among any one
or more of the series established and designated from time to time in
such manner and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable. The liabilities, expenses, costs,
charges and reserves allocated and so charged to the Series are herein
referred to as "liabilities belonging to" the Series. Each allocation of
liabilities, expenses, costs, charges and reserves by the Board of
Directors shall be conclusive and binding for all purposes.
(c) Income Belonging to the Series. The Board of Directors shall have
full discretion, to the extent not inconsistent with the Maryland
Corporations Code and the Investment Company Act of 1940 to determine
which items shall be treated as income and which items as capital; and
each such determination and allocation shall be conclusive and binding.
"Income belonging to" the Series, includes all income, earnings and
profits derived from assets belonging to the Series, less any expenses,
costs, charges or reserves belonging to the Series, for the relevant time
period.
3
<PAGE>
(d) Dividends. Dividends and distributions on Shares of the Series may be
declared and paid with such frequency, in such form and in such amount as
the Board of Directors may from time to time determine. Dividends may be
declared daily or otherwise pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Board of
Directors may determine, after providing for actual and accrued
liabilities belonging to the Series.
All dividends on Shares of the Series shall be paid only out of the
income belonging to the Series and capital gains distributions on Shares
of the Series shall be paid only out of the capital gains belonging to
the Series. All dividends and distributions on Shares of the Series shall
be distributed pro rata to the holders of the Series in proportion to the
number of Shares of the Series held by such holders at the date and time
of record established for the payment of such dividends or distributions,
except that in connection with any dividend or distribution program or
procedure the Board of Directors may determine that no dividend or
distribution shall be payable on Shares as to which the Shareholder's
purchase order and/or payment have not been received by the time or times
established by the Board of Directors under such program or procedure.
The Board of Directors shall have the power, in its sole discretion, to
distribute in any fiscal year as dividends, including dividends
designated in whole or in part as capital gains distributions, amounts
sufficient, in the opinion of the Board of Directors, to enable the
4
<PAGE>
Corporation or Series to qualify as a regulated investment company under
the Internal Revenue Code of 1986 as amended, or any successor or
comparable statute thereto, and regulations promulgated thereunder, and
to avoid liability of the Corporation or Series for Federal income tax in
respect of that year. However, nothing in the foregoing shall limit the
authority of the Board of Directors to make distributions greater than or
less than the amount necessary to qualify as a regulated investment
company and to avoid liability of the Corporation or Series for such tax.
Dividends and distributions may be paid in cash, property or Shares, or a
combination thereof, as determined by the Board of Directors or pursuant
to any program that the Board of Directors may have in effect at the
time. Any such dividend or distribution paid in Shares will be paid at
the current net asset value thereof as defined in subsection (h).
(e) Liquidation. In the event of liquidation of the Corporation or of the
Series, the Shareholders of the Series, shall be entitled to receive, as
a series, when and as declared by the Board of Directors, the excess of
the assets belonging to the Series over the liabilities belonging to it.
The holders of Shares of such series shall not be entitled thereby to any
distribution upon liquidation of any other series. The assets so
distributable to the Shareholders of the Series shall be distributed
among such Shareholders in proportion to the number of Shares of the
Series held by them and recorded on the books of the Corporation. The
liquidation of the Series in which there are Shares then outstanding may
5
<PAGE>
be authorized by vote of a majority of the Board of Directors then in
office, subject to the approval of a majority of the outstanding Shares
of the Series, as defined in the 1940 Act.
(f) Voting. On each matter submitted to a vote of the Shareholders, each
holder of a Share shall be entitled to one vote for each Share
outstanding in his name on the books of the Corporation, and all shares
of the Series shall vote as a single series ("Single Series Voting");
provided, however, that (i) as to any matter with respect to which a
separate vote of the Series is required by the 1940 Act or by the
Maryland Corporations Code, such requirement as to a separate vote by
that Series shall apply in lieu of Single Series Voting as described
above; (ii) in the event that the separate vote requirements referred to
in (i) above apply with respect to one or more series, then subject to
(iii) below, the Shares of all other series shall vote as a single
series; and (iii) as to any matter which does not affect the interest of
a particular series, only the holders of Shares of the one or more
affected series shall be entitled to vote.
(g) Redemption by Shareholder. Each holder of Shares of the Series shall
have the right at such times as may be permitted by the Corporation to
require the Corporation to redeem all or any part of his Shares of the
Series at a redemption price per share equal to the net asset value per
Share of the Series next determined (in accordance with subsection (h))
after the Shares are properly tendered for redemption. Payment of the
proceeds of redemption shall be in cash unless the Board of Directors
determines, which determination shall be conclusive, that conditions
exist which make payment wholly in cash unwise or
6
<PAGE>
undesirable. In the event of such determination, the Corporation may make
payment wholly or partly in securities or other assets belonging to the
Series at the value of such securities or assets used in such
determination of net asset value. Notwithstanding the foregoing, the
Corporation may postpone payment of the redemption price and may suspend
the right of the holders of Shares of the Series to require the
Corporation to redeem shares of the Series during any period or at any
time when and to the extent permissible under the 1940 Act.
(h) Net Asset Value Per Share. The net asset value per Share of the
Series shall be the quotient obtained by dividing the value of the net
assets of the Series (being the value of the assets belonging to the
Series less the liabilities belonging to the Series) by the total number
of outstanding Shares of the Series.
(i) Equality. All Shares of the Series shall represent an equal
proportionate interest in the assets belonging to the Series (subject to
the liabilities belonging to the Series), and each Share of the Series
shall be equal to each other Share of the Series. The Board of Directors
may from time to time divide or combine the Shares of the Series into a
greater or lesser number of shares of the Series without thereby changing
the proportionate beneficial interest in the assets belonging to the
Series or in any way affecting the rights of Shares of any other Series.
7
<PAGE>
(j) Conversion or Exchange Rights. Subject to compliance with the
requirements of the 1940 Act the Board of Directors shall have the
authority to provide that holders of shares of the Series shall have the
right to convert or exchange said Shares into Shares of one or more other
series of Shares in accordance with such requirements and procedures as
may be established by the Board of Directors.
(k) Redemption by the Corporation. The Board of Directors may cause the
Corporation to redeem at current net asset value the shares of the Series
from a shareholder whose shares have an aggregate current net asset value
less than an amount established by the Board of Directors. No such
redemption shall be effected unless the Corporation has given the
shareholder reasonable notice of its intention to redeem the shares and
an opportunity to purchase a sufficient number of additional shares to
bring the aggregate current net asset value of his shares to the minimum
amount established. Upon redemption of shares pursuant to this section,
the Corporation shall cause prompt payment of the full redemption price
to be made to the holder of shares so redeemed.
IN WITNESS WHEREOF, Aetna Generation Portfolios, Inc. has caused these
Articles Supplementary to be signed in its name on its behalf by its authorized
officers who acknowledge that these Articles Supplementary are the act of the
Corporation, that to the best of their knowledge, information and belief, all
matters and facts set forth herein relating to the
8
<PAGE>
authorization and approval of these Articles Supplementary are true in all
material respects and that this statement is made under the penalties of
perjury.
Date: March 12, 1996
AETNA GENERATION PORTFOLIOS, INC.
(CORPORATE SEAL)
Attest: By: /s/ Shaun P.Mathews
---------------------------
Shaun P. Mathews, President
/s/ Susan E. Bryant
- ---------------------------------
Susan E. Bryant, Secretary
9
AETNA GENERATION PORTFOLIOS, INC.
AMENDED BY-LAWS
ARTICLE I
MEETING OF SHAREHOLDERS
Section 1. ANNUAL MEETINGS. An Annual Meeting of Shareholders shall be
held in those years in which it is required under the Investment Company Act of
1940 or at such times as approved by the Board of Directors. At such annual
meeting, any other proper business within the power of shareholders may be
transacted.
Section 2. SPECIAL MEETINGS. Special meetings of Shareholders may be
called by the President or by the Board of Directors; and shall be called by the
President, Secretary or any Director at the request in writing of the holders of
not less than 10% of the outstanding voting shares of the capital stock of the
Corporation (hereinafter, the outstanding voting shares of the capital stock of
the Corporation are referred to as "Shares"). Any such request shall state the
purposes of the proposed meeting.
Section 3. PLACE OF MEETINGS. All meetings of the Shareholders shall be
held at the office of the Corporation in Hartford, Connecticut, or at such other
place within or without the State of Maryland as may be fixed by the party or
parties making the call as stated in the notice thereof.
Section 4. NOTICE. Not less than ten or more than ninety days before the
date of every Annual or Special Meeting of Shareholders, the Secretary or an
Assistant Secretary shall give to each Shareholder of record notice of such
meeting by mail, telegraph, cable or radio. Such notice shall be deemed to have
been given when deposited in the mail or with a telegraph or cable office or
radio station for transmission to the Shareholder at his address appearing on
the books of the Corporation. It shall not be necessary to set forth the
business proposed to be transacted in the notice of any Annual Meeting, except
that any proposal to amend the Articles of Incorporation of the Corporation
shall be set forth in such notice. Notice of a Special Meeting shall state the
purpose or purposes for which it is called.
Section 5. QUORUM. At all meetings of the Shareholders (including
meetings of Shareholders of a particular series), the presence in person or by
proxy of Shareholders entitled to cast a majority in number of votes shall be
necessary to constitute a quorum for the transaction of business. In the absence
of a quorum at any meeting, a majority of those Shareholders present in person
or by proxy may adjourn the meeting from time to time to be held at the same
place without further notice other than by announcement until a quorum, as above
defined, shall be present, whereupon any business may be transacted which might
have been transacted at the meeting originally called had the same been held at
the time so called.
<PAGE>
Section 6. VOTING. At all meetings of Shareholders, each Shareholder
shall be entitled to one vote or fraction thereof for each Share standing in his
name on the books of the Corporation on the date for the determination of
Shareholders entitled to vote at such meeting. On any matter submitted to a vote
of Shareholders, all Shares of the Corporation then issued and outstanding and
entitled to vote shall be voted in the aggregate and not by class except that
(1) when otherwise expressly required by the Maryland General Corporation Law or
the Investment Company Act of 1940, as amended, Shares shall be voted by
individual class; and (2) only Shares of the respective portfolios are entitled
to vote on matters concerning only that portfolio.
Section 7. PROXIES. Any Shareholder entitled to vote at any meeting of
Shareholders may vote either in person or by proxy, but no proxy which is dated
more than eleven months before the meeting named therein shall be accepted.
Every proxy shall be in writing subscribed by the Shareholder or his duly
authorized attorney and dated, but need not be sealed, witnessed or
acknowledged. All proxies shall be filed with and verified by the Secretary or
an Assistant Secretary of the Corporation or, if the meeting shall so decide, by
the Secretary of the Meeting.
Section 8. CONSENTS. Any action required or permitted to be taken at any
meeting of Shareholders may be taken without a meeting if a written consent,
setting forth such action, is signed by all the Shareholders entitled to vote on
the subject matter thereof, and such consent is filed with the records of the
Corporation.
ARTICLE II
BOARD OF DIRECTORS
Section 1. POWERS. The Board of Directors shall have control and
management of the affairs, business and properties of the Corporation. They
shall have and exercise in the name and on behalf of the Corporation all the
rights and privileges legally exercisable by the Corporation except as otherwise
provided by law, the Articles of Incorporation or these By-Laws.
Section 2. NUMBER, QUALIFICATIONS, MANNER OF ELECTION AND TERM OF OFFICE.
The number of directors of the Corporation shall be fixed from time to time by a
majority of the entire Board of Directors but shall be not less than three nor
more than twenty. Subject to the foregoing, the Board of Directors may from time
to time by a majority of the entire Board increase or decrease the number of
directors to such number as they deem expedient and fill the vacancies so
created. The term of office of a Director shall not be affected by any decrease
in the number of Directors made by the Board pursuant to the foregoing
authorization. Directors need not be Shareholders. Until the first Annual
Meeting of Shareholders or until successors are duly elected and qualify, the
Board of Directors shall consist of the persons named as such in the Articles of
Incorporation. The members of the Board of Directors shall be elected by the
Shareholders at the Annual Meeting of Shareholders.
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Each Director shall hold office until the Annual Meeting next held after his
election or until his successor shall be elected and qualified.
Section 3. PLACE OF MEETING. The Board of Directors may hold its meetings
at such place or places within or without the State of Maryland as the Board may
from time to time determine.
Section 4. ANNUAL MEETINGS. The Board of Directors shall meet for the
election of officers annually in March of each year or at such other time as is
approved by the Board. At such annual meeting, any other proper business within
the power of the Directors may be transacted.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such intervals and on such dates as the Board may from time to
time designate.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be held at such times and at such places as may be designated in the call of
such meeting. Special meetings shall be called by the Secretary or Assistant
Secretary at the request of the President or any Director.
Section 7. NOTICE. The Secretary or Assistant Secretary shall give notice
of each Annual, Regular or Special Meeting of the Board of Directors to each
member of the Board at least two days before the meeting by mail, telegram or
telephone to his last known address. It should not be necessary to state the
purpose or business to be transacted in the notice of any Annual or Regular
meeting. The notice of a Special Meeting shall state the purpose or purposes for
which it is called. Personal attendance at any meeting by a Director other than
to protest the validity of said meeting shall constitute a waiver of the
foregoing requirement of notice.
Section 8. CONDUCT OF MEETINGS AND BUSINESS. The Board of Directors may
adopt such rules and regulations for the conduct of their meetings and the
management of the affairs of the Corporation as they may deem proper and not
inconsistent with applicable law, the Articles of Incorporation of the
Corporation or these By-Laws.
Section 9. QUORUM. A majority of the total membership of the Board of
Directors shall constitute a quorum at any meeting of the Board of Directors.
The action of a majority of Directors present at any meeting at which a quorum
is present shall be the action of the Board of Directors unless the concurrence
of a greater proportion is required by applicable law, the Articles of
Incorporation of the Corporation or these By-Laws. In the absence of a quorum at
any meeting a majority of the Directors present may adjourn the meeting from day
to day or for such longer periods as they may designate without notice other
than by announcement at the meeting.
Section 10. RESIGNATIONS. Any Director of the Corporation may resign at
any time by mailing or delivering, or transmitting by radio, telegraph or cable,
written notice to the President or to the Secretary of the Corporation. The
resignation of any Director shall take
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effect at the time specified therein and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
Section 11. REMOVAL. At any meeting of Shareholders duly called for the
purpose, any Director may by the vote of a majority of all of the Shares
entitled to vote be removed from office. At the same meeting, the vacancy in the
Board of Directors may be filled by the election of a Director to serve for the
remainder of the term and until the election and qualification of his successor.
Section 12. VACANCIES. Except as otherwise provided by the Investment
Company Act of 1940 or other applicable law, any vacancy occurring in the Board
of Directors for any cause other than by reason of an increase in the number of
Directors may be filled by a majority of the remaining members of the Board of
Directors although such majority is less than a quorum, and any vacancy
occurring by reason of an increase in the number of Directors may be filled by
action of a majority of the entire Board of Directors; provided, however, that
upon the death, resignation or removal during any consecutive period of twelve
months of more than one-half of the Directors holding office at the beginning of
such period, a Shareholders' Meeting shall be called for the purpose of electing
an entire new Board, including the vacancies filled pursuant to this Section of
the By-Laws. A Director elected by the Board to fill a vacancy shall be elected
to hold office until the next Annual Meeting of Shareholders or until his
successor is duly elected and qualified. Notwithstanding the foregoing, the
Shareholders may, at any time during the term of such director, elect to fill a
vacancy or elect some other person to fill said vacancy and thereupon the
election by the Board shall be superseded and the election by the Shareholders
shall be deemed a filling of the vacancy and not a removal and may be made at
any meeting called for such purpose.
Section 13. COMPENSATION OF DIRECTORS. The Directors may receive a stated
salary for their services as Directors, and by Resolution of the Board of
Directors a fixed fee and expenses of attendance may be allowed for attendance
at each Meeting. Nothing herein contained shall be construed to preclude any
Director from serving the Corporation in any other capacity, as an officer,
agent or otherwise, and receiving compensation therefor.
Section 14. TELEPHONE PARTICIPATION. Unless otherwise restricted by law,
the Articles of Incorporation of the Corporation or these By-Laws, any member of
the Board of Directors may participate in any meeting of the Board by conference
telephone or similar communications equipment whereby all persons participating
in the meeting can hear each other, and such participation shall constitute
presence in person at the meeting.
Section 15. CONSENTS. Any action required or permitted to be taken at any
Annual, Regular or Special Meeting of the Board of Directors may be taken
without a meeting if a written consent, setting forth such action, is signed by
all members of the Board and such consent is filed with the minutes of
proceedings of the Board.
Section 16. POWER TO DECLARE DIVIDENDS. The Board of Directors is
expressly authorized to determine in accordance with generally accepted
accounting principles and
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practices what constitutes net profits, earnings, surplus or net assets in
excess of capital, and to determine what accounting periods shall be used by the
Corporation for any purpose, whether annual or any other period, including
daily; to set apart out of any funds of the Corporation such reserves for such
purposes as it shall determine and to abolish the same; to declare and pay
dividends and distributions on any series by means of a formula or other method
of determination, at meetings held less frequently than the frequency of the
effectiveness of such declarations; to establish payment dates for dividends or
any other distributions on any basis, including dates occurring less frequently
than the effectiveness of declarations thereof; and to provide for the payment
of declared dividends on a date earlier or later than the specified payment date
in the case of Shareholders redeeming their entire ownership of shares.
ARTICLE III
EXECUTIVE AND OTHER COMMITTEES
Section 1. APPOINTMENT AND TERM OF OFFICE. The Board of Directors, by
resolution passed by a vote of at least a majority of the entire Board, may
appoint an Executive Committee, which shall consist of two (2) or more
Directors.
Section 2. VACANCIES. Vacancies occurring in the Executive Committee from
any cause shall be filled by the Board of Directors at any Meeting thereof by a
vote of the majority of the entire Board.
Section 3. REPORTS TO BOARD. All actions by the Executive Committee shall
be reported to the Board of Directors at its meeting next succeeding such
action.
Section 4. PROCEDURES. The Executive Committee shall fix its own rules of
procedure not inconsistent with these By-Laws or with any directions of the
Board of Directors. It shall meet at such times and places and upon such notice
as shall be provided by such rules or by resolution of the Board of Directors.
The presence of a majority shall constitute a quorum for the transaction of
business, and the vote of a majority of the members of the Committee present at
which a quorum is present shall be necessary for the taking of any action.
Section 5. POWERS OF EXECUTIVE COMMITTEE. During the intervals between
the meetings of the Board of Directors, the Executive Committee, except as
limited by the By-Laws of the Corporation or by specific directions of the Board
of Directors, shall possess and may exercise all the powers of the Board of
Directors in the management and direction of the business and conduct of the
affairs of the Corporation in such manner as the Executive Committee shall deem
to be in the best interests of the Corporation, and shall have power to
authorize the Seal of the Corporation to be affixed to all instruments and
documents requiring same. Notwithstanding the foregoing, the Executive Committee
shall not have the power to elect Directors, increase or decrease the number of
Directors, elect or remove any officer,
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declare dividends, issue shares or recommend to Shareholders any action
requiring Shareholder approval.
Section 6. OTHER COMMITTEES. From time to time the Board of Directors may
appoint any other Committee or Committees for any purpose or purposes to the
extent lawful, which shall have such powers as shall be specified in the
resolution of appointment.
Section 7. COMPENSATION. The members of any duly appointed Committee
shall receive such compensation and/or fees as may be fixed from time to time by
the Board of Directors.
Section 8. TELEPHONE PARTICIPATION. Unless otherwise restricted by law,
the Articles of Incorporation or these By-Laws, any member of any Committee of
the Board may participate in any meeting of such Committee by conference
telephone or similar communications equipment whereby all persons participating
in the meeting can hear each other, and such participation shall constitute
presence in person at the meeting.
Section 9. CONSENTS. Any action required or permitted to be taken at any
meeting of the Executive Committee or any other duly appointed Committee may be
taken without a meeting if a written consent, setting forth such action, is
signed by all members of such Committee and such consent is filed with the
minutes of the proceedings of such Committee.
ARTICLE IV
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall be
the President, one or more Vice Presidents, a Treasurer and a Secretary. The
Board of Directors shall elect or appoint such other officers or agents as the
business of the Corporation may require, including one or more Assistant Vice
Presidents, one or more Assistant Secretaries and one or more Assistant
Treasurers. The same person may hold any two offices except those of President
and Vice President.
Section 2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers
shall be elected annually by the Board of Directors at its Annual Meeting
following the Annual Meeting of Shareholders, if an Annual Meeting of
Shareholders is held. Each officer shall hold office until the Annual Meeting in
the next year and until the election and qualification of his successor. Any
vacancy in any of the offices may be filled for the unexpired portion of the
term by the Board of Directors at any Regular or Special Meeting of the Board.
The Board of Directors may elect or appoint additional officers or agents at any
Regular or Special Meeting of the Board.
Section 3. REMOVAL. Any officer elected by the Board of Directors may be
removed with or without cause at any time upon a vote of the majority of the
entire Board of Directors.
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Any other employee of the Corporation may be removed or dismissed at any time
by the President.
Section 4. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors. Any such resignation shall take effect
at the date of receipt of each notice or at any later time specified therein,
and unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective.
Section 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed in these By-Laws for
regular election or appointment to such office.
Section 6. PRESIDENT. The President shall be the chief executive officer
of the Corporation. The President shall, unless other provisions are made
therefor by the Board or Executive Committee, employ and define the duties of
all employees of the Corporation; have the power to discharge any such
employees; exercise general supervision over the affairs of the Corporation; and
perform such other duties as may be assigned from time to time by the Board of
Directors. In the absence of the President, an officer or Director appointed by
the President shall preside at all meetings of Shareholders.
Section 7. VICE PRESIDENT. The Vice President (or if more than one, the
senior Vice President) in the absence of the President shall perform all duties
and may exercise any of the powers of the President subject to the control of
the Board. Each Vice President shall perform such other duties as may be
assigned from time to time by the Board of Directors, the Executive Committee,
or the President.
Section 8. SECRETARY. The Secretary shall (i) keep or cause to be kept in
books provided for the purpose the Minutes of the Meetings of the Shareholders
and of the Board of Directors; (ii) see that all Notices are duly given in
accordance with the provisions of these By-Laws and as required by law; (iii) be
custodian of the records and of the Seal of the Corporation and see that the
Seal is affixed to all documents which have been duly authorized to be executed
on behalf of the Corporation under its seal; (iv) keep directly or through a
transfer agent a register of the post office address of each Shareholder and
make all proper changes in such register, retaining and filing his authority for
such entries; (v) see that the books, reports, statements, certificates and all
other documents and records required by law are properly kept and filed; and
(vi) in general perform all duties incident to the office of Secretary and such
other duties as may, from time to time, be assigned by the Board of Directors,
the Executive Committee, or the President.
Section 9. TREASURER. The Treasurer shall have supervision of the custody
of the funds and securities of the Corporation, subject to the Articles of
Incorporation of the Corporation and applicable law. The Treasurer shall submit
to the Annual Meeting of Shareholders a statement of the financial condition of
the Corporation and whenever required by the Board of Directors shall make and
render a statement of the accounts of the Corporation
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and such other statements as may be required. The Treasurer shall cause to be
kept in books of the Corporation a full and accurate account of all moneys
received and paid out for the account of the Corporation and perform such other
duties as may be from time to time be assigned by the Board of Directors, the
Executive Committee, or the President.
Section 10. ASSISTANT VICE PRESIDENT. The Assistant Vice President or
Vice Presidents of the Corporation shall have such authority and perform such
duties as may be assigned to them by the Board of Directors, the Executive
Committee, or the President of the Corporation.
Section 11. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Assistant
Secretary or Secretaries and the Assistant Treasurer or Treasurers of the
Corporation shall perform the duties of the Secretary and of the Treasurer,
respectively, in the absence of those officers and shall have such further
powers and perform such other duties as may be assigned to them, respectively,
by the Board of Directors, the Executive Committee or the President.
Section 12. SALARIES. The salaries of the officers shall be fixed from
time to time by the Board of Directors. No officer shall be prevented from
receiving such salary by reason of the fact that he is also a Director of the
Corporation.
ARTICLE V
SHARES AND THEIR TRANSFER
Section 1. REGISTER OF SHARES. A register of shares shall be kept at the
principal office of the Corporation or of any transfer agent duly appointed by
the Board of Directors and shall contain the names and addresses of all the
shareholders, the number of shares held by them and a record of all transfers
thereof. Fractional shares may be issued. Share certificates will not be issued.
Section 2. TRANSFER OF SHARES. Shares shall be transferable on the books
of the Corporation by request of the holder thereof in person or by duly
authorized attorney.
Section 3. CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE. The Board of
Directors may fix in advance a date as the record date for the purpose of
determining Shareholders entitled to notice of or to vote at any Meeting of
Shareholders or Shareholders entitled to receive payment of any dividend. Such
date shall in any case not be more than 60 days and, in case of a Meeting of
Shareholders, not less than 10 days prior to the date on which the particular
action is to be taken. In lieu of fixing a record date, the Board of Directors
may provide that the share transfer books of the Corporation shall be closed for
a stated period not to exceed in any case 20 days. If the share transfer books
are closed for the purpose of determining Shareholders entitled to notice of or
to vote at a Meeting of Shareholders, such books shall be closed for at least 10
days immediately preceding such meeting.
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Section 4. TRANSFER AGENT; REGULATIONS. The Board of Directors shall have
power and authority to make all such rules and regulations as they may deem
expedient concerning the issuance and transfer of shares and may appoint a
Transfer Agent for that purpose.
ARTICLE VI
AGREEMENTS, CHECKS, DRAFTS, ENDORSEMENTS, ETC.
Section 1. AGREEMENTS, ETC. The Board of Directors or the Executive
Committee may authorize any officer or officers or agent or agents of the
Corporation to enter into any Agreement or execute and deliver any instrument in
the name and on behalf of the Corporation, and such authority may be general or
confined to specific instances. Unless so authorized by the Board of Directors
or by the Executive Committee or these By-Laws, no officer, agent or employee
shall have any power or authority to bind the Corporation by any Agreement or
engagement, to pledge its credit, or to render it liable pecuniarily for any
purpose or to any amount.
Section 2. CHECKS, DRAFTS, ETC. All checks, drafts, or orders for the
payment of money, notes and other evidences of indebtedness shall be signed by
such officer or officers, employee or employees, or agent or agents as shall be
from time to time designated by the Board of Directors or the Executive
Committee, or as may be specified in or pursuant to the agreement between the
Corporation and the bank or trust company appointed as custodian, pursuant to
the provisions of the Articles of Incorporation of the Corporation.
Section 3. ENDORSEMENTS, ASSIGNMENTS AND TRANSFER OF SECURITIES. All
endorsements, assignments, stock powers or other instruments of transfer of
securities standing in the name of the Corporation or its nominee, or directions
for the transfer of securities belonging to the Corporation, shall be made by
such officer or officers, employee or employees, or agent or agents as may be
authorized by the Board of Directors or the Executive Committee.
Section 4. EVIDENCE OF AUTHORITY. Anyone dealing with the Corporation
shall be fully justified in relying on a copy of a resolution of the Board of
Directors or of any Committee thereof empowered to act in the premises which is
certified as true by the Secretary or an Assistant Secretary under the Seal of
the Corporation.
Section 5. DESIGNATION OF A CUSTODIAN. The Corporation shall place and at
all times maintain in the custody of a Custodian all funds, securities and
similar investments owned by the Corporation, with the exception of securities
loaned under a properly authorized securities loan agreement. The Custodian
shall be a bank having not less than $5,000,000 aggregate capital, surplus and
undivided profits and shall be appointed from time to time by the Board of
Directors, which shall fix its remuneration.
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Section 6. ACTION UPON TERMINATION OF A CUSTODIAN AGREEMENT. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the Board of Directors shall promptly appoint a successor custodian,
but in the event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Board of Directors shall call as
promptly as possible a Special Meeting of the Shareholders to determine whether
the Corporation shall function without a custodian or shall be liquidated. If so
directed by vote of the holders of a majority of the outstanding Shares, the
Custodian shall deliver and pay over all property of the Corporation held by it
as specified in such vote.
Section 7. WHEN TO DETERMINE NET ASSET VALUE. The net asset value per
Share of the outstanding Shares shall be determined at such times as the Board
of Directors shall prescribe, provided that such net asset value shall be
determined at least weekly.
ARTICLE VII
MISCELLANEOUS
Section 1. SEAL. The Seal of the Corporation shall be a disk inscribed
with the words "AETNA GENERATION PORTFOLIOS, INC."
Section 2. WAIVER OF NOTICE. Whenever under the provisions of these
By-Laws or of any law, the Shareholders or Directors or members of the Executive
Committee or other Committee are authorized to hold any meeting after notice or
after the lapse of any prescribed period of time, such meeting may be held
without notice or without such lapse of time by the written waiver of notice
signed by every person entitled to notice, or if every person entitled to notice
shall be present at such meeting.
Section 3. BOOKS AND RECORDS. The books and records of the Corporation,
including the stock ledger or ledgers, may be kept in or outside the State of
Maryland at such office or agency of the Corporation as may from time to time be
determined by the Board of Directors.
ARTICLE VIII
AMENDMENTS
Section 1. BY THE DIRECTORS. The Board of Directors shall have the power,
at any Regular or Special Meeting, if notice thereof be included in the notice
of such Special Meeting, to alter, amend or repeal any By-Laws of the
Corporation and to make new By-Laws.
Section 2. BY THE SHAREHOLDERS. The Shareholders shall have the power, at
any Annual or Special Meeting if notice thereof be included in the notice of
such Special Meeting, to alter, amend or repeal any By-Laws of the Corporation
or to make new By-Laws.
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INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between AETNA LIFE INSURANCE AND ANNUITY COMPANY,
a Connecticut corporation (the "Adviser") and AETNA GENERATION PORTFOLIOS, INC.,
a Maryland corporation (the "Fund"), on behalf of its AETNA ASCENT VARIABLE
PORTFOLIO (the "Portfolio"), as of the date set forth below.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company
consisting of multiple investment portfolios under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, pursuant to authority granted by the Fund's Articles of Incorporation,
the Fund has established the Portfolio as a separate investment portfolio; and
WHEREAS, the Adviser is registered with the Commission as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and
is in the business of acting as an investment adviser; and
WHEREAS, the Fund, on behalf of the Portfolio, and the Adviser desire to enter
into an agreement to provide for investment advisory and management services for
the Portfolio on the terms and conditions hereinafter set forth;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement and the policies and
control of the Fund's Board of Directors (the "Board"), the Fund, on behalf of
the Portfolio, hereby appoints the Adviser to serve as the investment adviser to
the Portfolio, to provide the investment advisory services set forth below in
Section II. The Adviser agrees that, except as required to carry out its duties
under this Agreement or otherwise expressly authorized, it is acting as an
independent contractor and not as an agent of the Portfolio and has no authority
to act for or represent the Portfolio in any way.
II. DUTIES OF THE ADVISER
In carrying out the terms of this Agreement, the Adviser shall do the following:
1. supervise all aspects of the operations of the Portfolio;
2. select the securities to be purchased, sold or exchanged by the
Portfolio or otherwise represented in the Portfolio's investment
portfolio, place trades for all such securities and regularly report
thereon to the Board;
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3. formulate and implement continuing programs for the purchase and sale
of securities and regularly report thereon to the Board;
4. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally, the
Portfolio, securities held by or under consideration for the
Portfolio, or the issuers of those securities;
5. provide economic research and securities analyses as the Adviser
considers necessary or advisable in connection with the Adviser's
performance of its duties hereunder;
6. obtain the services of, contract with, and provide instructions to
custodians and/or subcustodians of the Portfolio's securities,
transfer agents, dividend paying agents, pricing services and other
service providers as are necessary to carry out the terms of this
Agreement;
7. prepare financial and performance reports, calculate and report daily
net asset values, and prepare any other financial data or reports, as
the Adviser from time to time, deems necessary or as are requested by
the Board; and
8. take any other actions which appear to the Adviser and the Board
necessary to carry into effect the purposes of this Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Adviser
Adviser hereby represents and warrants to the Fund as follows:
1. Due Incorporation and Organization. The Adviser is duly organized
and is in good standing under the laws of the State of Connecticut
and is fully authorized to enter into this Agreement and carry out
its duties and obligations hereunder.
2. Registration. The Adviser is registered as an investment adviser
with the Commission under the Advisers Act, and is registered or
licensed as an investment adviser under the laws of all
jurisdictions in which its activities require it to be so
registered or licensed. The Adviser shall maintain such
registration or license in effect at all times during the term of
this Agreement.
3. Best Efforts. The Adviser at all times shall provide its best
judgment and effort to the Portfolio in carrying out its
obligations hereunder.
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B. Representations and Warranties of the Portfolio and the Fund,
The Fund, on behalf of the Portfolio, hereby represents and warrants to
the Adviser as follows:
1. Due Incorporation and Organization. The Fund has been duly
incorporated under the laws of the State of Maryland and it is
authorized to enter into this Agreement and carry out its
obligations hereunder.
2. Registration. The Fund is registered as an investment company with
the Commission under the 1940 Act and shares of the Portfolio are
registered or qualified for offer and sale to the public under the
Securities Act of 1933, as amended (the "1933 Act") and all
applicable state securities laws. Such registrations or
qualifications will be kept in effect during the term of this
Agreement.
IV. DELEGATION OF RESPONSIBILITIES
A. Appointment of Subadviser
Subject to the approval of the Board and the shareholders of the
Portfolio, the Adviser may enter into a Subadvisory Agreement to engage a
subadviser (the "Subadviser") to the Adviser with respect to the
Portfolio.
B. Duties of Subadviser
Under a Subadvisory Agreement, the Subadviser may be delegated some or
all of the following duties of the Adviser:
1. select the securities to be purchased, sold or exchanged by the
Portfolio or otherwise represented in the Portfolio's investment
portfolio, place trades for all such securities and regularly
report thereon to the Board;
2. formulate and implement continuing programs for the purchase and
sale of the securities of such issuers and regularly report thereon
to the Board;
3. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy
generally, the Portfolio, securities held by or under consideration
for the Portfolio, or the issuers of those securities;
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4. provide economic research and securities analyses as the Adviser
considers necessary or advisable in connection with the Adviser's
performance of its duties hereunder;
5. give instructions to the custodian and/or sub-custodian of the
Portfolio appointed by the Board, as to deliveries of securities,
transfers of currencies and payments of cash for the Portfolio as
required to carry out the investment activities of the Portfolio,
in relation to the matters contemplated by this Agreement; and
6. provide such financial support, administrative services and other
duties as the Adviser deems necessary and appropriate.
C. Duties of the Adviser
In the event the Adviser delegates certain responsibilities hereunder
to a Subadviser, the Adviser shall, among other things:
1. monitor the investment program maintained by the Subadviser for the
Portfolio and the Subadviser's compliance program to ensure that
the Portfolio's assets are invested in compliance with the
Subadvisory Agreement and the Portfolio's investment objectives and
policies as adopted by the Board and described in the most current
effective amendment of the registration statement for the
Portfolio, as filed with the Commission under the 1933 Act and the
1940 Act ("Registration Statement");
2. review all data and financial reports prepared by the Subadviser to
assure that they are in compliance with applicable requirements and
meet the provisions of applicable laws and regulations;
3. establish and maintain regular communications with the Subadviser
to share information it obtains with the Subadviser concerning the
effect of developments and data on the investment program
maintained by the Subadviser; and
4. oversee all matters relating to the offer and sale of the
Portfolio's shares, the Fund's corporate governance, reports to the
Board, contracts with all third parties on behalf of the Portfolio
for services to the Portfolio, reports to regulatory authorities
and compliance with all applicable rules and regulations affecting
the Portfolio's operations.
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V. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Adviser, at its own expense, shall place all orders for the purchase
and sale of portfolio securities for the Portfolio with brokers or
dealers selected by the Adviser, which may include brokers or dealers
affiliated with the Adviser. The Adviser shall use its best efforts to
seek to execute portfolio transactions at prices that are advantageous to
the Portfolio and at commission rates that are reasonable in relation to
the benefits received.
B. Selection of Broker-Dealers
In selecting broker-dealers qualified to execute a particular
transaction, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Portfolio and/or the
other accounts over which the Adviser or its affiliates exercise
investment discretion. The Adviser may also select brokers or dealers to
effect transactions for the Portfolio who provide payment for expenses of
the Portfolio. The Adviser is authorized to pay a broker or dealer who
provides such brokerage and research services or expenses, a commission
for executing a portfolio transaction for the Portfolio that is in excess
of the amount of commission another broker or dealer would have charged
for effecting that transaction if the Adviser determines in good faith
that such amount of commission is reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer and
is paid in compliance with Section 28(e) or other rules and regulations
of the Commission. This determination may be viewed in terms of either
that particular transaction or the overall responsibilities that the
Adviser and its affiliates have with respect to accounts over which they
exercise investment discretion. The Board shall periodically review the
commissions paid by the Portfolio to determine if the commissions paid
over representative periods of time were reasonable in relation to the
benefits received.
VI. CONTROL BY THE BOARD
Any investment program undertaken by the Adviser pursuant to this Agreement, as
well as any other activities undertaken by the Adviser on behalf of the
Portfolio pursuant thereto, shall at all times be subject to any directives of
the Board.
VII. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Adviser shall at all
times conform to:
1. all applicable provisions of the 1940 Act, the Advisers Act and any
rules and regulations adopted thereunder;
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2. all policies and procedures of the Fund as adopted by the Board and
as described in the Registration Statement;
3. the provisions of the Fund's Articles of Incorporation, as amended;
4. the provisions of the Bylaws of the Fund, as amended; and
5. any other applicable provisions of state and federal law.
VIII. COMPENSATION
For the services to be rendered, the facilities furnished and the expenses
assumed by the Adviser, the Fund, on behalf of the Portfolio, shall pay to the
Adviser an annual fee, payable monthly, equal to .60% of the average daily net
assets of the Portfolio. Except as hereinafter set forth, compensation under
this Agreement shall be calculated and accrued daily at the rate of 1/365 of
.60% of the daily net assets of the Portfolio. If this Agreement becomes
effective subsequent to the first day of a month or terminates before the last
day of a month, compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the calculation of the fees
set forth above. Subject to the provisions of Section X hereof, payment of the
Adviser's compensation for the preceding month shall be made as promptly as
possible. For so long as a Subadvisory Agreement is in effect, the Portfolio
acknowledges on behalf of the Portfolio that the Adviser will pay to the
Subadviser, as compensation for acting as Subadviser to the Portfolio, the fees
specified in the Subadvisory Agreement.
IX. EXPENSES
The expenses in connection with the management of the Portfolio shall be
allocated between the Portfolio and the Adviser as follows:
A. Expenses of the Adviser
The Adviser shall pay:
1. the salaries, employment benefits and other related costs and
expenses of those of its personnel engaged in providing investment
advice to the Portfolio, including without limitation, office
space, office equipment, telephone and postage costs;
2. all fees and expenses of all directors, officers and employees, if
any, of the Fund who are employees of the Adviser or an affiliated
entity, including any salaries and employment benefits payable to
those persons;
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B. Expenses of the Portfolio
The Portfolio shall pay:
1. investment advisory fees pursuant to this Agreement;
2. brokers' commissions, issue and transfer taxes or other transaction
fees payable in connection with any transactions in the securities
in the Portfolio's investment portfolio or other investment
transactions incurred in managing the Portfolio's assets, including
portions of commissions that may be paid to reflect brokerage
research services provided to the Adviser;
3. fees and expenses of the Portfolio's independent accountants and
legal counsel and the independent directors' legal counsel;
4. fees and expenses of any administrator, transfer agent, custodian,
dividend, accounting, pricing or disbursing agent of the Portfolio;
5. interest and taxes;
6. fees and expenses of any membership in the Investment Company
Institute or any similar organization in which the Board deems it
advisable for the Fund to maintain membership;
7. insurance premiums on property or personnel (including officers and
directors) of the Fund which benefit the Portfolio;
8. all fees and expenses of the Company's directors, who are not
"interested persons" (as defined in the 1940 Act) of the Fund or
the Adviser;
9. expenses of preparing, printing and distributing proxies, proxy
statements, prospectuses and reports to shareholders of the
Portfolio, except for those expenses paid by third parties in
connection with the distribution of Portfolio shares and all costs
and expenses of shareholders' meetings;
10. all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in shares of the
Portfolio or in cash;
11. costs and expenses of promoting the sale of shares in the
Portfolio, including preparing prospectuses and reports to
shareholders of the Portfolio, provided, nothing in this Agreement
shall prevent the charging of such costs to third parties involved
in the distribution and sale of Portfolio shares;
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<PAGE>
12. fees payable by the Portfolio to the Commission or to any state
securities regulator or other regulatory authority for the
registration of shares of the Portfolio in any state or territory
of the United States or of the District of Columbia;
13. all costs attributable to investor services, administering
shareholder accounts and handling shareholder relations,
(including, without limitation, telephone and personnel expenses),
which costs may also be charged to third parties by the Adviser;
and
14. any other ordinary, routine expenses incurred in the management of
the Portfolio's assets, and any nonrecurring or extraordinary
expenses, including organizational expenses, litigation affecting
the Portfolio and any indemnification by the Fund of its officers,
directors or agents.
X. EXPENSE LIMITATION
If, for any fiscal year, the total of all ordinary business expenses payable by
the Portfolio, including all investment advisory fees but excluding brokerage
commissions, distribution fees, taxes, interest and extraordinary expenses and
certain other excludable expenses, would exceed the most restrictive expense
limits imposed by any statute or regulatory authority of any jurisdiction in
which shares of the Portfolio are offered for sale (unless a waiver is
obtained), the Adviser shall reduce its advisory fee to the extent necessary to
meet such expense limit, but the Adviser will not be required to reimburse the
Portfolio for any ordinary business expenses which exceed the amount of its
advisory fee for such fiscal year. The amount of any such reduction is to be
borne by the Adviser and shall be deducted from the monthly advisory fee
otherwise payable to the Adviser during such fiscal year. For the purposes of
this paragraph, the term "fiscal year" shall exclude the portion of the current
fiscal year which shall have elapsed prior to the date hereof and shall include
the portion of the then current fiscal year which shall have elapsed at the date
of termination of this Agreement.
XI. ADDITIONAL SERVICES
Upon the request of the Board, the Adviser may perform certain accounting,
shareholder servicing or other administrative services on behalf of the
Portfolio that are not required by this Agreement. Such services will be
performed on behalf of the Portfolio and the Adviser may receive from the
Portfolio such reimbursement for costs or reasonable compensation for such
services as may be agreed upon between the Adviser and the Board on a finding by
the Board that the provision of such services by the Adviser is in the best
interests of the Portfolio and its shareholders. Payment or assumption by the
Adviser of any Portfolio expense that the Adviser is not otherwise required to
pay or assume under this Agreement shall not relieve the Adviser of any of its
obligations to the Portfolio nor obligate the Adviser to pay or assume any
similar Portfolio expense on any subsequent occasions. Such services may
include, but are not limited to, (a) the services of a principal financial
officer of the Fund (including applicable office space, facilities and
equipment) whose normal duties consist of maintaining the financial accounts and
books and records of the Fund and the Portfolio and the services (including
applicable office space, facilities and equipment) of any
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<PAGE>
of the personnel operating under the direction of such principal financial
officer; (b) the services of staff to respond to shareholder inquiries
concerning the status of their accounts, providing assistance to shareholders in
exchanges among the investment companies managed or advised by the Adviser,
changing account designations or changing addresses, assisting in the purchase
or redemption of shares; or otherwise providing services to shareholders of the
Portfolio; and (c) such other administrative services as may be furnished from
time to time by the Adviser to the Fund or the Portfolio at the request of the
Board.
XII. NONEXCLUSIVITY
The services of the Adviser to the Portfolio are not to be deemed to be
exclusive, and the Adviser shall be free to render investment advisory or other
services to others (including other investment companies) and to engage in other
activities, so long as its services under this Agreement are not impaired
thereby. It is understood and agreed that officers and directors of the Adviser
may serve as officers or directors of the Fund, and that officers or directors
of the Fund may serve as officers or directors of the Adviser to the extent
permitted by law; and that the officers and directors of the Adviser are not
prohibited from engaging in any other business activity or from rendering
services to any other person, or from serving as partners, officers, directors
or trustees of any other firm or trust, including other investment companies.
XIII. TERM
This Agreement shall become effective at the close of business on July 31, 1996,
and shall remain in force and effect through December 31, 1997, unless earlier
terminated under the provisions of Article XV.
XIV. RENEWAL
Following the expiration of its initial term, the Agreement shall continue in
force and effect from year to year, provided that such continuance is
specifically approved at least annually:
1. a. by the Board, or
b. by the vote of a majority of the Portfolio's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act), and
2. by the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a director of the Fund), by votes cast in
person at a meeting specifically called for such purpose.
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<PAGE>
XV. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Board or by vote of a majority of the Portfolio's
outstanding voting securities (as defined in Section 2(a)(42) of the 1940 Act),
or by the Adviser, on sixty (60) days' written notice to the other party. The
notice provided for herein may be waived by the party required to be notified.
This Agreement shall automatically terminate in the event of its "assignment",
as that term is defined in Section 2(a)(4) of the 1940 Act.
XVI. LIABILITY
The Adviser shall be liable to the Portfolio and shall indemnify the Portfolio
for any losses incurred by the Portfolio, whether in the purchase, holding or
sale of any security or otherwise, to the extent that such losses resulted from
an act or omission on the part of the Adviser or its officers, directors or
employees, that is found to involve willful misfeasance, bad faith or
negligence, or reckless disregard by the Adviser of its duties under this
Agreement, in connection with the services rendered by the Adviser hereunder.
XVII. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such addresses shall be:
if to the Fund, on behalf of the Portfolio or the Adviser:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attn: Secretary
XVIII. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940 Act
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or, in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Commission issued pursuant to the 1940 Act. In addition, where the effect
of a requirement of the 1940 Act reflected in the provisions of this Agreement
is revised by rule, regulation or order of the Commission, such provisions shall
be deemed to incorporate the effect of such rule, regulation or order.
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<PAGE>
XIX. SERVICE MARK
The service mark of the Fund and the Portfolio and the name "Aetna" have been
adopted by the Fund 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 Adviser or another subsidiary or
affiliated corporation of Aetna Life and Casualty Company should not be the
investment adviser of the Portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 1st day of August, 1996.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Shaun P. Mathews
-------------------------------
Name: Shaun P. Mathews
-------------------------------
Attest: Title: Vice President
-------------------------------
/s/ DeAnn S. Anastasio
- -----------------------------
DeAnn S. Anastasio AETNA GENERATION PORTFOLIOS, INC.
Assistant Corporate Secretary on behalf of its
Aetna Ascent Variable Portfolio
By: /s/ Shaun P. Mathews
-------------------------------
Name: Shaun P. Mathews
-------------------------------
Attest: Title: President
-------------------------------
/s/ Susan E. Bryant
- -----------------------------
Susan E. Bryant
Secretary
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<PAGE>
Investment Advisory Agreement
Schedule Pursuant to Rule 483(d)(2) under the Securities Act of 1933
Investment Advisory Agreements have been entered into by Aetna Generation
Portfolios, Inc. on behalf of the following portfolios in substantially the same
form and type as exhibit 24(b)(5)(a) - Investment Advisory Agreement between
Aetna Life Insurance and Annuity Company and Aetna Generation Portfolios, Inc.,
on behalf of its Aetna Ascent Variable Portfolio, included herewith.
Date Portfolio Difference
---- --------- ----------
8/1/96 Aetna Crossroads Variable Portfolio none
8/1/96 Aetna Legacy Variable Portfolio none
SUBADVISORY AGREEMENT
THIS AGREEMENT is made by and among AETNA LIFE INSURANCE AND ANNUITY COMPANY, a
Connecticut corporation (the "Adviser"), AETNA GENERATION PORTFOLIOS, INC., a
Maryland Corporation, (the "Fund"), on behalf of its AETNA ASCENT VARIABLE
PORTFOLIO (the "Portfolio") and AELTUS INVESTMENT MANAGEMENT, INC., a
Connecticut corporation (the "Subadviser") as of the date set forth below.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company
consisting of multiple investment portfolios, under the Investment Company Act
of 1940, as amended (the "1940 Act"); and
WHEREAS, pursuant to authority granted by the Fund's Articles of Incorporation,
the Fund has established the Portfolio as a separate investment portfolio; and
WHEREAS, both the Adviser and the Subadviser are registered with the Commission
as investment advisers under the Investment Advisers Act of 1940, as amended
(the "Advisers Act") and both are in the business of acting as investment
advisers; and
WHEREAS, the Adviser has entered into an Investment Advisory Agreement with the
Fund, on behalf of the Portfolio, (the "Investment Advisory Agreement") which
appoints the Adviser as the investment adviser for the Portfolio; and
WHEREAS, Article IV of the Investment Advisory Agreement authorizes the Adviser
to delegate all or a portion of its obligations under the Investment Advisory
Agreement to a subadviser;
NOW THEREFORE, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER
Subject to the terms and conditions of this Agreement, the Adviser and the Fund,
on behalf of the Portfolio, hereby appoint the Subadviser to manage the assets
of the Portfolio as set forth below in Section II, under the supervision of the
Adviser and subject to the approval and direction of the Fund's Board of
Directors (the "Board"). The Subadviser hereby accepts such appointment and
agrees that it shall, for all purposes herein, undertake such obligations as an
independent contractor and not as an agent of the Adviser. The Subadviser
agrees, that except as required to carry out its duties under this Agreement or
otherwise expressly authorized, it has no authority to act for or represent the
Portfolio in any way.
<PAGE>
II. DUTIES OF THE SUBADVISER AND THE ADVISER
A. Duties of the Subadviser
The Subadviser shall regularly provide investment advice with respect to
the assets held by the Portfolio and shall continuously supervise the
investment and reinvestment of cash, securities and instruments or other
property comprising the assets of the Portfolio. In carrying out these
duties, the Subadviser shall:
1. select the securities to be purchased, sold or exchanged by the
Portfolio or otherwise represented in the Portfolio's investment
portfolio, place trades for all such securities and regularly
report thereon to the Adviser and, at the request of the Adviser,
to the Board;
2. formulate and implement continuing programs for the purchase and
sale of securities and regularly report thereon to the Adviser and,
at the request of the Adviser or the Portfolio, to the Board;
3. obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy
generally, the Portfolio, securities held by or under consideration
for the Portfolio, or the issuers of those securities;
4. provide economic research and securities analyses as requested by
the Adviser from time to time, or as the Adviser considers
necessary or advisable in connection with the Subadviser's
performance of its duties hereunder; and
5. give instructions to the custodian and/or sub-custodian of the
Portfolio appointed by the Board, concerning deliveries of
securities, transfers of currencies and payments of cash for the
Portfolio, as required to carry out the investment activities of
the Portfolio as contemplated by this Agreement; and
6. provide such financial support, administrative and other services,
such as preparation of financial data, determination of the
Portfolio's net asset value, preparation of financial and
performance reports, as the Adviser from time to time, deems
necessary and appropriate and which the Subadviser is willing and
able to provide.
B. Duties of the Adviser
The Adviser shall retain responsibility for oversight of all activities
of the Subadviser and for monitoring its activities on behalf of the
Portfolio. In carrying out its obligations under this Agreement and the
Investment Advisory Agreement, the Adviser shall:
1. monitor the investment program maintained by the Subadviser for the
Portfolio and the Subadviser's compliance program to ensure that
the
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Portfolio's assets are invested in compliance with the Subadvisory
Agreement and the Portfolio's investment objectives and policies as
adopted by the Board and described in the most current effective
amendment of the registration statement for the Portfolio, as filed
with the Commission under the Securities Act of 1933, as amended
(the "1933 Act"), and the 1940 Act ("Registration Statement");
2. review all data and financial reports prepared by the Subadviser to
assure that they are in compliance with applicable requirements and
meet the provisions of applicable laws and regulations;
3. file all periodic reports required to be filed by the Portfolio
with the applicable regulatory authorities;
4. review and deliver to the Board all financial, performance and
other reports prepared by the Subadviser under the provisions of
this Agreement or as requested by the Adviser;
5. establish and maintain regular communications with the Subadviser
to share information it obtains concerning the effect of
developments and data on the investment program maintained by the
Subadviser;
6. maintain contact with and enter into arrangements with the
custodian, transfer agent, auditors, outside counsel, and other
third parties providing services to the Portfolio;
7. oversee all matters relating to (i) the offer and sale of shares of
the Portfolio, including promotions, marketing materials,
preparation of prospectuses, filings with the Commission and state
securities regulators, and negotiations with broker-dealers; (ii)
shareholder services, including, confirmations, correspondence and
reporting to shareholders; (iii) all corporate matters on behalf of
the Portfolio, including monitoring the corporate records of the
Portfolio, maintaining contact with the Board, preparing for,
organizing and attending meetings of the Board and the Portfolio's
shareholders; (iv) preparation of proxies when required; and (v)
any other matters not expressly delegated to the Subadviser by this
Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of the Subadviser
The Subadviser hereby represents and warrants to the Adviser as follows:
1. Due Incorporation and Organization. The Subadviser is duly
organized and is in good standing under the laws of the State of
Connecticut and is fully
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authorized to enter into this Agreement and carry out its duties
and obligations hereunder.
2. Registration. The Subadviser is registered as an investment adviser
with the Commission under the Advisers Act, and is registered or
licensed as an investment adviser under all of the laws of all
jurisdictions in which its activities require it to be so
registered or licensed. The Subadviser shall maintain such
registration or license in effect at all times during the term of
this Agreement.
3. Regulatory Orders. The Subadviser is not subject to any stop
orders, injunctions or other orders of any regulatory authority
affecting its ability to carry out the terms of this Agreement. The
Subadviser will notify the Adviser and the Portfolio immediately if
any such order is issued or if any proceeding is commenced that
could result in such an order.
4. Compliance. The Subadviser has in place compliance systems and
procedures designed to meet the requirements of the Advisers Act
and the 1940 Act and it shall at all times assure that its
activities in connection with managing the Portfolio follow these
procedures.
5. Authority. The Subadviser is authorized to enter into this
Agreement and carry out the terms hereunder.
6. Best Efforts. The Subadviser at all times shall provide its best
judgment and effort to the Portfolio in carrying out its
obligations hereunder.
B. Representations and Warranties of the Adviser
The Adviser hereby represents and warrants to the Subadviser as follows:
1. Due Incorporation and Organization. The Adviser is duly organized
and is in good standing under the laws of the State of Connecticut
and is fully authorized to enter into this Agreement and carry out
its duties and obligations hereunder.
2. Registration. The Adviser is registered as an investment adviser
with the Commission under the Advisers Act, and is registered or
licensed as an investment adviser under all of the laws of all
jurisdictions in which its activities require it to be so
registered or licensed. The Adviser shall maintain such
registration or license in effect at all times during the term of
this Agreement.
3. Regulatory Orders. The Adviser is not subject to any stop orders,
injunctions or other orders of any regulatory authority affecting
its ability to carry out the terms of this Agreement. The Adviser
will notify the Subadviser and the
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Portfolio immediately if any such order is issued or if any
proceeding is commenced that could result in such an order.
4. Authority. The Adviser is authorized to enter into this Agreement
and carry out the terms hereunder.
5. Best Efforts. The Adviser at all times shall provide its best
judgment and effort to the Portfolio in carrying out its
obligations hereunder.
C. Representations and Warranties of the Portfolio and the Fund
The Fund, on behalf of the Portfolio, hereby represents and warrants to
the Adviser as follows:
1. Due Incorporation and Organization. The Fund has been duly
incorporated as a Corporation under the laws of the State of
Maryland and it is authorized to enter into this Agreement and
carry out its obligations hereunder.
2. Registration. The Fund is registered as an investment company with
the Commission under the 1940 Act and shares of the Portfolio are
registered or qualified for offer and sale to the public under the
1933 Act and all applicable state securities laws. Such
registrations or qualifications, will be kept in effect during the
term of this Agreement.
IV. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Subadviser shall place all orders for the purchase and sale of
portfolio securities for the Portfolio with brokers or dealers selected
by the Subadviser, which may include brokers or dealers affiliated with
the Subadviser. The Subadviser shall use its best efforts to seek to
execute portfolio transactions at prices that are advantageous to the
Portfolio giving consideration to the services and research provided and
at commission rates that are reasonable in relation to the benefits
received.
B. Selection of Broker-Dealers
In selecting broker-dealers qualified to execute a particular
transaction, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Portfolio and/or the
other accounts over which the Subadviser or its affiliates exercise
investment discretion. The Subadviser may also select brokers or dealers
to effect transactions for the Portfolio who provide payment for expenses
of the Portfolio. The Subadviser is authorized to pay a broker or dealer
who provides such brokerage and research services or expenses, a
commission for
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<PAGE>
executing a portfolio transaction for the Portfolio that is in excess of
the amount of commission another broker or dealer would have charged for
effecting that transaction if the Subadviser determines in good faith
that such amount of commission is reasonable in relation to the value of
the brokerage, research and other services provided by such broker or
dealer and is paid in compliance with Section 28(e) or other rules and
regulations of the Commission. This determination may be viewed in terms
of either that particular transaction or the overall responsibilities
that the Subadviser and its affiliates have with respect to accounts over
which they exercise investment discretion. The Board shall periodically
review the commissions paid by the Portfolio to determine if the
commissions paid over representative periods of time were reasonable in
relation to the benefits received.
V. CONTROL BY THE BOARD OF TRUSTEES
Any investment program undertaken by the Subadviser pursuant to this Agreement,
as well as any other activities undertaken by the Subadviser at the direction of
the Adviser on behalf of the Portfolio, shall at all times be subject to any
directives of the Board.
VI. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Subadviser shall at
all times conform to:
1. all applicable provisions of the 1940 Act, the Advisers Act and any
rules and regulations adopted thereunder;
2. all policies and procedures of the Portfolio as adopted by the
Board and as described in the Registration Statement;
3. the provisions of the Articles of Incorporation of the Fund, as
amended from time to time;
4. the provisions of the Bylaws of the Fund, as amended from time to
time; and
5. any other applicable provisions of state or federal law.
VII. COMPENSATION
A. Payment Schedule
The Adviser shall pay the Subadviser, as compensation for services
rendered hereunder, from its own assets, an annual fee of up to .35% of
the average daily net assets in the Portfolio, payable monthly. Except as
hereinafter set forth, compensation under this Agreement shall be
calculated and accrued daily at the rate of 1/365 of the annual
Subadvisory fee of up to .35% applied to the daily net assets of the
Portfolio. If this Agreement becomes effective
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<PAGE>
subsequent to the first day of a month or shall terminate before the last
day of a month, compensation for that part of the month this Agreement is
in effect shall be prorated in a manner consistent with the calculation
of the fees set forth above.
B. Reduction
Payment of the Subadviser's compensation for the preceding month shall be
made as promptly as possible, except as provided below. The Subadviser
acknowledges that, pursuant to the Investment Advisory Agreement, the
Adviser has agreed to reduce its fee or reimburse the Portfolio if the
expenses borne by the Portfolio exceed the expense limitations applicable
to the Portfolio imposed by the securities laws or regulations of any
jurisdiction in which the Portfolio shares are qualified for sale.
Accordingly, the Subadviser agrees that, if, for any fiscal year, the
total of all ordinary business expenses of the Portfolio, including all
investment advisory fees but excluding brokerage commissions,
distribution fees, taxes, interest, extraordinary expenses and certain
other excludable expenses, would exceed the most restrictive expense
limits imposed by any statute or regulatory authority of any jurisdiction
in which shares of the Portfolio are offered for sale (unless a waiver is
obtained), the Subadviser shall reduce its advisory fee to the extent
necessary to meet such expense limit, but will not be required to
reimburse the Portfolio for any ordinary business expenses which exceed
the amount of its advisory fee for the fiscal year. The Subadviser shall
contribute to the amount of such reduction by reimbursing the Adviser in
proportion to the amounts which the Adviser and Subadviser would have
been entitled to receive for such year. For the purposes of this
paragraph, the term "fiscal year" shall exclude the portion of the
current fiscal year which elapsed prior to the effective date of this
Agreement, but shall include the portion of the then current fiscal year
has elapsed at the date of termination of this Agreement.
VIII. ALLOCATION OF EXPENSES
The Subadviser shall pay the salaries, employment benefits and other related
costs of those of its personnel engaged in providing investment advice to the
Portfolio hereunder, including, but not limited to, office space, office
equipment, telephone and postage costs. In the event the Subadviser incurs any
expense that is the obligation of the Adviser as set out in this Agreement, the
Adviser shall reimburse the Subadviser for such expense on presentation of a
statement indicating the expenses incurred and the amount paid by the
Subadviser.
IX. NONEXCLUSIVITY
The services of the Subadviser with respect to the Portfolio are not to be
deemed to be exclusive, and the Subadviser shall be free to render investment
advisory and administrative or other services to others (including other
investment companies) and to engage in other activities. It is understood and
agreed that officers or directors of the Subadviser may serve as officers or
directors of the Adviser or officers or directors of the Fund; that officers or
directors of the Adviser or officers or directors of the Fund may serve as
officers or directors of the Subadviser to the extent permitted by law; and that
the officers and directors of the Subadviser are not prohibited from engaging in
any other business
-7-
<PAGE>
activity or from rendering services to any other person, or from serving as
partners, officers, directors or trustees of any other firm or trust, including
other investment advisory companies.
X. TERM
This Agreement shall become effective at the close of business on July 31, 1996,
and shall remain in force and effect through December 31, 1997, unless earlier
terminated under the provisions of Article XI. Following the expiration of its
initial term, the Agreement shall continue in force and effect for one year
periods, provided such continuance is specifically approved at least annually:
1. (a) by the Board or (b) by the vote of a majority of the
Portfolio's outstanding voting securities (as defined in Section
2(a)(42) of the 1940 Act), and
2. by the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a director of the Fund), by votes cast in
person at a meeting specifically called for such purpose.
XI. TERMINATION
This Agreement may be terminated:
1. at any time, without the payment of any penalty, by vote of the
Board or by vote of a majority of the outstanding voting securities
of the Portfolio; or
2. by the Adviser, the Fund, on behalf of the Portfolio, or the
Subadviser on sixty (60) days' written notice to the other party,
unless written notice is waived by the party required to be
notified; or
3. automatically in the event there is an "assignment" of this
Agreement, as defined in Section 2 (a) (4) of the 1940 Act.
XII. LIABILITY
The Subadviser shall be liable to the Portfolio and the Adviser and shall
indemnify the Portfolio and the Adviser for any losses incurred by the
Portfolio, or the Adviser whether in the purchase, holding or sale of any
security or otherwise, to the extent that such losses resulted from an act or
omission on the part of the Subadviser or its officers, directors or employees,
that is found to involve willful misfeasance, bad faith or negligence, or
reckless disregard by the Subadviser of its duties under this Agreement, in
connection with the services rendered by the Subadviser hereunder.
-8-
<PAGE>
XIII. NOTICES
Any notices under this Agreement shall be in writing, addressed and delivered,
mailed postage paid, or sent by other delivery service, or by facsimile
transmission to each party at such address as each party may designate for the
receipt of notice. Until further notice, such address shall be:
if to the Fund, on behalf of the Portfolio or the Adviser:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
Attn: Secretary
if to the Subadviser:
242 Trumbull Street
Hartford, Connecticut 06103-1205
Fax number: 860/275-4440
Attention: President
XIV. QUESTIONS OF INTERPRETATION
This Agreement shall be governed by the laws of the State of Connecticut. Any
question of interpretation of any term or provision of this Agreement having a
counterpart in or otherwise derived from a term or provision of the 1940 Act
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or, in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Commission issued pursuant to the 1940 Act. In addition, where the effect
of a requirement of the 1940 Act reflected in any provision of the Agreement is
revised by rule, regulation or order of the Commission, such provision shall be
deemed to incorporate the effect of such rule, regulation or order.
XV. SERVICE MARK
The service mark of the Fund and the Portfolio and the name "Aetna" have been
adopted by the Fund 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 Subadviser or another subsidiary or
affiliated corporation of Aetna Life and Casualty Company should not be the
investment adviser of the Portfolio.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 1st day of August 1996.
Aetna Life Insurance and Annuity Company
By: /s/ Shaun P. Mathews
-----------------------------------
Attest: Name: Shaun P. Mathews
Title: Vice President
/s/ DeAnn S. Anastasio
- ------------------------------
DeAnn S. Anastasio
Assistant Corporate Secretary
Aeltus Investment Management, Inc.
Attest: By: /s/ John Y. Kim
-----------------------------------
Name: John Y. Kim
Title: President
/s/ Melinda L. Dziavit
- ------------------------------
Melinda L. Dziavit
Asst. Secretary Aetna Generation Portfolios, Inc.
on behalf of its
Aetna Ascent Variable Portfolio
By: /s/ Shaun P. Mathews
-----------------------------------
Name: Shaun P. Mathews
Attest: Title: President
/s/ Susan E. Bryant
- ------------------------------
Susan E. Bryant
Secretary
-10-
<PAGE>
Subadvisory Agreement
Schedule Pursuant to Rule 483(d)(2) under the Securities Act of 1933
Subadvisory Agreements have been entered into by Aetna Generation Portfolios,
Inc. on behalf of the following portfolios in substantially the same form and
type as exhibit 24(b)(5)(b) - Subadvisory Agreement between Aetna Life Insurance
and Annuity Company and Aeltus Investment Management, Inc., included herewith.
Date Portfolio Difference
---- --------- ----------
8/1/96 Aetna Crossroads Variable Portfolio none
8/1/96 Aetna Legacy Variable Portfolio none
AETNA GENERATION PORTFOLIOS, INC.
UNDERWRITING AGREEMENT
THIS AGREEMENT, is entered into this 19th day of June, 1996, by and between
Aetna Life Insurance and Annuity Company, Inc., a Connecticut corporation
(Aetna), and Aetna Generation Portfolios, Inc. (the "Fund") on behalf of its
investment portfolios (the "Portfolios").
WHEREAS, the Fund is an open-end management investment company registered with
the Securities and Exchange Commission (Commission) under the Investment Company
Act of 1940, as amended (1940 Act) authorized to issue shares of distinct
investment portfolios; and
WHEREAS the Fund has registered the shares of its common stock (Shares) in its
Portfolios for offer and sale to the public under the Securities Act of 1933, as
amended; and
WHEREAS, the Fund wishes to retain Aetna, and Aetna is willing to act, as
principal underwriter in connection with the offer and sale of the Shares; and
NOW, THEREFORE, in consideration of the promises and mutual covenants herein
contained, the parties agree as follows:
1. Appointment of Underwriter. The Fund hereby appoints Aetna and Aetna hereby
accepts appointment as underwriter in connection with the distribution of the
Shares. The Fund authorizes Aetna to solicit orders for the purchase of the
Shares as set forth in the Registration Statement currently effective with the
Commission for the Shares. It is understood that the Shares are offered only
through variable annuity contracts and variable life policies issued by Aetna
and its affiliates.
2. Compensation. Aetna shall receive no separate compensation for providing
services under this Agreement. It is understood that the compensation Aetna
receives in connection with the issuance of the variable annuity contracts or
variable life policies shall be the only consideration it receives for serving
as underwriter hereunder.
3. Aetna Expenses. Aetna shall be responsible for any costs of printing and
distributing prospectuses and statements of additional information necessary to
offer and sell the Shares, and such other sales literature, reports, forms and
advertisements in connection as it elects to prepare, provided such materials
comply with the applicable provisions of federal and state law.
4. Fund Expenses. The Fund shall be responsible for the costs of registering the
Shares with the Commission and for the costs of preparing prospectuses,
statements of additional information and such other documents as are required to
maintain the registration of the Shares with the Commission.
<PAGE>
5. Share Certificates. The Fund shall not issue certificates representing
Shares.
6. Status of underwriter and Other Persons. Aetna is an independent contractor
and shall be agent for the Fund only in respect to the sale and redemption of
the Shares. Any person, even though also an officer, director, employee or agent
of Aetna, who may be or become an officer, director, employee or agent of the
Fund, shall be deemed, when rendering services to the Fund or acting in any
business of the Fund, to be rendering such services to or acting solely for the
Fund and not as an officer, director, employee or agent or one under the control
or direction of Aetna even though paid by Aetna.
7. Nonexclusivity. The services of Aetna to the Fund under this Agreement are
not to be deemed exclusive, and Aetna shall be free to render similar services
or other services to others and to engage in other activities related or
unrelated to those provided under this Agreement.
8. Effectiveness and Termination of Agreement. This Agreement shall become
effective at the close of business on the date set forth in the first paragraph
of this Agreement and shall remain in force and effect, through December 31,
1997, unless earlier terminated under the provisions of Section 9. Following the
expiration of its initial term, the Agreement shall continue in force and effect
for one year periods, provided such continuance is specifically approved at
least annually by the Fund's trustees, or by the vote of a majority of the
Fund's outstanding voting securities (as defined in Section 2(a)(42) of the 1940
Act.
9. Termination. This Agreement may be terminated at any time, by either party,
without the payment of any penalty, on sixty (60) days' written notice to the
other party.
10. Liability of Aetna. Aetna shall be liable to the Fund and shall indemnify
the Fund for any losses incurred by the Fund, to the extent that such losses
resulted from an act or omission on the part of Aetna or its officers, directors
or employees in carrying out its duties hereunder, that is found to involve
willful misfeasance, bad faith or negligence, or reckless disregard by Aetna of
its duties under this Agreement.
11. Amendments. This Agreement may be amended or changed only by an instrument
in writing signed by both parties.
12. Applicable Law. This Agreement shall be construed in accordance with the
laws of the State of Connecticut and the 1940 Act. To the extent that the
applicable laws of the State of Connecticut conflict with the applicable
provisions of the 1940 Act, however, the latter shall control.
13. Notices. Any notices under this Agreement shall be in writing, addressed and
delivered, mailed postage paid, or sent by other delivery service, or by
facsimile transmission to each party at such address as each party may designate
for the receipt of notice. Until further notice, such addresses shall be:
-2-
<PAGE>
if to the Fund orAetna:
151 Farmington Avenue, RE4C
Hartford, Connecticut 06156
Fax number: 860/273-8340
14. Questions of Interpretation. This Agreement shall be governed by the laws of
the State of Connecticut. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the 1940 Act shall be resolved by reference to such term or
provision of the 1940 Act and to interpretations thereof, if any, by the United
States Courts or, in the absence of any controlling decision of any such court,
by rules, regulations or orders of the Commission issued pursuant to the 1940
Act. In addition, where the effect of a requirement of the 1940 Act reflected in
the provisions of this Agreement is revised by rule, regulation or order of the
Commission, such provisions shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the 19th day of June, 1996.
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Attest: By: /s/Shaun P. Mathews
-----------------------------------------
Name: Shaun P. Mathews
-----------------------------------------
/s/DeAnn S. Anastasio Title: Vice President
- ------------------------ -----------------------------------------
Assistant Secretary
AETNA GENERATION PORTFOLIOS, INC.
By: /s/Shaun P. Mathews
-----------------------------------------
Name: Shaun P. Mathews
-----------------------------------------
Attest: Title: President
-----------------------------------------
/s/Susan E. Bryant
- ------------------------
Secretary
-3-
151 Farmington Avenue
Hartford, CT 06156
April 15, 1997 Susan E. Bryant
Counsel
Law Division, RC4A
Investments & Financial Services
(860) 273-7834
Fax: (860) 273-0356
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir or Madam:
As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I hereby
consent to the use of my opinion dated February 28, 1997 (incorporated herein by
reference to the Rule 24f-2 Notice for the fiscal year ended December 31, 1995
filed on behalf of Aetna Generation Portfolios, Inc.) as an exhibit to this
Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A (File
No. 33-88334 and 811-8934).
Sincerely,
/s/Susan E. Bryant
Susan E. Bryant
Counsel
Consent of Independent Auditors
The Board of Directors
Aetna Generation Portfolios, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "Financial Highlights" in the
Prospectus and "Independent Auditors" in the Statement of Additional
Information.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Hartford, Connecticut
April 15, 1997
SCHEDULE FOR COMPUTATION OF PERFORMANCE DATA
AETNA GENERATION PORTFOLIOS, INC.
Aetna Ascent Variable Portfolio
TOTAL RETURN CALCULATION
One Year Period Ended December 31, 1996
Formula P (1+T)(n) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 12,358.05 = ERV
One Year Period Ended 12/31/96 1 = n
TOTAL RETURN FOR THE PERIOD 23.58% = T
Aetna Ascent Variable Portfolio
TOTAL RETURN CALCULATION
Inception (July 3, 1995) through December 31, 1996
Formula P (1+T)(n) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 13,649.73 = ERV
Inception (7/5/95) through 12/31/96 1.4904 = n
TOTAL RETURN FOR THE PERIOD 23.21% = T
<PAGE>
Aetna Crossroads Variable Portfolio
TOTAL RETURN CALCULATION
One Year Period Ended December 31, 1996
Formula P (1+T)(n) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 11,880.74 = ERV
One Year Period Ended 12/31/96 1 = n
TOTAL RETURN FOR THE PERIOD 18.81% = T
Aetna Crossroads Variable Portfolio
TOTAL RETURN CALCULATION
Inception (July 3, 1995) through December 31, 1996
Formula P (1+T)(n) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 12,985.88 = ERV
Inception (7/5/95) through 12/31/96 1.4904 = n
TOTAL RETURN FOR THE PERIOD 19.16% = T
<PAGE>
Aetna Legacy Variable Portfolio
TOTAL RETURN CALCULATION
One Year Period Ended December 31, 1996
Formula P (1+T)(n) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 11,419.01 = ERV
One Year Period Ended 12/31/96 1 = n
TOTAL RETURN FOR THE PERIOD 14.19% = T
Aetna Legacy Variable Portfolio
TOTAL RETURN CALCULATION
Inception (July 3, 1995) through December 31, 1996
Formula P (1+T)(n) = ERV
Initial Investment 10,000.00 = P
Ending Redeemable Value 12,363.65 = ERV
Inception (7/5/95) through 12/31/96 1.4904 = n
TOTAL RETURN FOR THE PERIOD 15.30% = T
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 25,664,064
<INVESTMENTS-AT-VALUE> 27,439,388
<RECEIVABLES> 121,452
<ASSETS-OTHER> 317,678
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 27,878,518
<PAYABLE-FOR-SECURITIES> 72,723
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 51,989
<TOTAL-LIABILITIES> 124,712
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,759,287
<SHARES-COMMON-STOCK> 2,466,029
<SHARES-COMMON-PRIOR> 1,715,991
<ACCUMULATED-NII-CURRENT> 10,864
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 260,710
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,722,945
<NET-ASSETS> 27,753,806
<DIVIDEND-INCOME> 300,660
<INTEREST-INCOME> 518,828
<OTHER-INCOME> 0
<EXPENSES-NET> 154,037
<NET-INVESTMENT-INCOME> 665,451
<REALIZED-GAINS-CURRENT> 1,158,631
<APPREC-INCREASE-CURRENT> 844,869
<NET-CHANGE-FROM-OPS> 2,668,951
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (730,661)
<DISTRIBUTIONS-OF-GAINS> (1,061,503)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,350,084
<NUMBER-OF-SHARES-REDEEMED> (1,760,792)
<SHARES-REINVESTED> 160,746
<NET-CHANGE-IN-ASSETS> 9,500,372
<ACCUMULATED-NII-PRIOR> 13,801
<ACCUMULATED-GAINS-PRIOR> 196,869
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 105,706
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 154,037
<AVERAGE-NET-ASSETS> 19,301,069
<PER-SHARE-NAV-BEGIN> 10.637
<PER-SHARE-NII> 0.334
<PER-SHARE-GAIN-APPREC> 1.150
<PER-SHARE-DIVIDEND> (0.363)
<PER-SHARE-DISTRIBUTIONS> (0.503)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.255
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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<SERIES>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 38,971,417
<INVESTMENTS-AT-VALUE> 43,656,988
<RECEIVABLES> 1,114,573
<ASSETS-OTHER> 660,071
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 45,431,632
<PAYABLE-FOR-SECURITIES> 246,920
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29,259
<TOTAL-LIABILITIES> 276,179
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,951,363
<SHARES-COMMON-STOCK> 3,578,309
<SHARES-COMMON-PRIOR> 1,746,134
<ACCUMULATED-NII-CURRENT> 213,667
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 354,192
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,636,231
<NET-ASSETS> 45,155,453
<DIVIDEND-INCOME> 619,835
<INTEREST-INCOME> 209,898
<OTHER-INCOME> 0
<EXPENSES-NET> (206,947)
<NET-INVESTMENT-INCOME> 622,786
<REALIZED-GAINS-CURRENT> 1,629,617
<APPREC-INCREASE-CURRENT> 3,478,032
<NET-CHANGE-FROM-OPS> 5,730,435
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (646,312)
<DISTRIBUTIONS-OF-GAINS> (1,314,791)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,852,183
<NUMBER-OF-SHARES-REDEEMED> (1,179,070)
<SHARES-REINVESTED> 159,062
<NET-CHANGE-IN-ASSETS> 26,305,567
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 217,810
<OVERDISTRIB-NII-PRIOR> (5,803)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 136,513
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 206,947
<AVERAGE-NET-ASSETS> 24,608,084
<PER-SHARE-NAV-BEGIN> 10.795
<PER-SHARE-NII> 0.225
<PER-SHARE-GAIN-APPREC> 2.286
<PER-SHARE-DIVIDEND> (0.230)
<PER-SHARE-DISTRIBUTIONS> (0.457)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.619
<EXPENSE-RATIO> 0.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 33,731,925
<INVESTMENTS-AT-VALUE> 37,060,775
<RECEIVABLES> 354,762
<ASSETS-OTHER> 525,935
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 37,941,472
<PAYABLE-FOR-SECURITIES> 226,498
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24,597
<TOTAL-LIABILITIES> 251,095
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 33,989,852
<SHARES-COMMON-STOCK> 3,146,469
<SHARES-COMMON-PRIOR> 1,751,685
<ACCUMULATED-NII-CURRENT> 171,098
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 278,552
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,250,875
<NET-ASSETS> 37,690,377
<DIVIDEND-INCOME> 454,832
<INTEREST-INCOME> 434,616
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<EXPENSES-NET> (186,132)
<NET-INVESTMENT-INCOME> 703,316
<REALIZED-GAINS-CURRENT> 1,447,814
<APPREC-INCREASE-CURRENT> 2,213,205
<NET-CHANGE-FROM-OPS> 4,364,335
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (790,607)
<DISTRIBUTIONS-OF-GAINS> (1,203,828)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,665,935
<NUMBER-OF-SHARES-REDEEMED> (1,440,613)
<SHARES-REINVESTED> 169,462
<NET-CHANGE-IN-ASSETS> 18,876,950
<ACCUMULATED-NII-PRIOR> 7,137
<ACCUMULATED-GAINS-PRIOR> 231,145
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<OVERDIST-NET-GAINS-PRIOR> 0
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<PER-SHARE-NII> 0.270
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