As filed with the Securities and Exchange File No. 33-88334
Commission on February 26, 1998 File No. 811-8934
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 6
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 6
AETNA GENERATION PORTFOLIOS, INC.
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
-------------------------------------------------------
(860) 273-1409
Amy R. Doberman, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue RE4A, Hartford, Connecticut 06156
-------------------------------------------------------
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective:
X on May 1, 1998 pursuant to paragraph (a)(1) of Rule 485
--------
<PAGE>
Aetna Generation Portfolios, Inc.
Cross-Reference Sheet
<TABLE>
<CAPTION>
Form N-1A
Item No. Part A Caption in Prospectus
- --------- ------ ---------------------
<S> <C> <C>
1. Cover Page ...................................... Cover Page
2. Synopsis .................................... Not applicable
3. Condensed Financial Information.................. Financial Highlights
4. General Description of Registrant................ Cover Page
The Fund
Description of the Generation
Portfolios
Investment Strategies
Investment Techniques
Risk Factors and Other
Considerations
Concentration
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............... Purchase and Redemption of Shares
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>
<CAPTION>
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............... Additional Investment Restrictions
and Policies of the Generation
Portfolios
Description of Various Securities
and Investment Techniques
14. Management of the Fund........................... Directors and Officers
15. Control Persons and Principal Holders of
Securities ...................................... Control Persons and Principal
Shareholders
16. Investment Advisory and Other
Services......................................... The Investment Advisory Agreements
The Administrative Services
Agreement
The License Agreement
Custodian
Independent Auditors
17. Brokerage Allocation............................. Brokerage Allocation and Trading
Policies
18. Capital Stock and Other Securities............... Description of Shares
Purchase and Redemption of Shares
Voting Rights
19. Purchase, Redemption and Pricing of Securities
Being Offered.................................... Purchase and Redemption of Shares
Net Asset Value
20. Tax Status....................................... Tax Status
21. Underwriters..................................... Principal Underwriter
22. Calculation of Performance Data.................. Performance Information
23. Financial Statements............................. Financial Statements
</TABLE>
<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>
===============================================================================
AETNA GENERATION PORTFOLIOS,
INC.
Aetna Ascent VP
Aetna Crossroads VP
Aetna Legacy VP
151 Farmington Avenue
Hartford, CT 06156-8972
1-800-525-4225
Prospectus dated: May 1, 1998
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 Portfolios
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, 1998 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...................................................................5
Description of the Generation Portfolios...................................5
Investment Strategies......................................................5
Investment Techniques......................................................8
Risk Factors and Other Considerations......................................9
Concentration.............................................................11
Management of the Generation Portfolios...................................11
Reimbursements/Fee Waiver Arrangements....................................12
Purchase and Redemption of Shares.........................................12
Net Asset Value...........................................................12
General Information.......................................................13
Tax Matters...............................................................13
Year 2000.................................................................13
Aetna Generation Portfolios, Inc. 2
<PAGE>
FINANCIAL HIGHLIGHTS
The selected data presented below for, and as of the end of, each of the periods
listed are obtained from the financial statements of Aetna Generation
Portfolios, Inc., which have been ___________________________, independent
auditors. Additional information about the performance of each Portfolio
included in the tables is contained in
- ------------------------------.
(for one outstanding share throughout each period)
<TABLE>
<CAPTION>
Aetna Ascent VP Aetna Crossroads VP
Period from Period from
08/05/95 to 08/05/95 to
Year ended Year ended 12/31/95 Year ended Year ended 12/31/95
12/31/97 12/31/96 12/31/97 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.619 $10.795 $10.000 $11.979 $10.740 $10.000
Income from Investment Operations
Net investment income............ 0.248 0.225 0.116 0.303 0.270 0.131
Net realized and change in
unrealized gain............... 2.247 2.286 0.929 1.786 1.722 0.799
----- ----- ----- ----- ----- -----
Total from investment
operations................. 2.495 2.511 1.045 2.089 1.992 0.930
Less Distributions
From net investment income....... (0.339) (0.230) (0.250) (0.383) (0.300) (0.190)
From net realized gains on
investments...................... (0.656) (0.457) -- (0.600) (0.453) --
------- ------- -- ------- ------- --
Total distributions................ (0.995) (0.687) (0.250) (0.983) (0.753) (0.190)
Net asset value, end of period...... $14.119 $12.619 $10.795 $13.085 $11.979 $10.740
======= ======= ======= ======= ======= =======
Total Return*....................... 19.90% 23.58% 10.45% 17.57% 18.81% 9.30%
Net assets, end of period (000's)... $148,810 $45,155 $18,850 $122,990 $37,690 $18,813
Ratio of total expenses to average
net assets....................... 0.75% 0.84% 1.59%(1) 0.75% 0.80% 1.60%(1)
Ratio of net investment income to
average net assets............... 2.51% 2.53% 2.26%(1) 3.20% 3.01% 2.56%(1)
Portfolio turnover rate............. 124.82% 109.77% 39.77% 103.08% 105.66% 49.38%
Average Commission rate paid per
share............................ $0.0311 $0.0296 -- $0.0325 $0.0284 --
</TABLE>
* The Total Return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
(1) Annualized.
Aetna Generation Portfolios, Inc. 3
<PAGE>
(for one outstanding share throughout each period)
Aetna Legacy VP
Period
from
Year ended Year ended 08/05/95 to
12/31/97 12/31/96 12/31/95
Net asset value, beginning of period $11.255 $10.637 $10.000
Income from Investment Operations
Net investment income............ 0.355 0.334 0.148
Net realized and change in
unrealized gain............... 1.263 1.150 0.679
----- ----- -----
Total from investment
operations................. 1.618 1.484 0.827
Less Distributions
From net investment income....... (0.392) (0.363) (0.190)
From net realized gains on
investments...................... (0.381) (0.503) --
------- ------- --
Total distributions................ (0.773) (0.866) (0.190)
Net asset value, end of period...... $12.100 $11.255 $10.637
======= ======= =======
Total Return*....................... 14.50% 14.19% 8.27%
Net assets, end of period (000's)... $81,650 $27,754 $18,253
Ratio of total expenses to average
net assets....................... 0.75% 0.80% 1.62%(1)
Ratio of net investment income to
average net assets............... 3.75% 3.45% 2.91%(1)
Portfolio turnover rate............. 85.01% 111.11% 62.43%
Average Commission rate paid per
share............................ $0.0297 $0.0274 --
* The Total Return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
(1) Annualized.
Aetna Generation Portfolios, Inc. 4
<PAGE>
THE FUND
The Fund is an open-end, management investment company, consisting of multiple
Portfolios. It currently has authorized three Portfolios, Aetna Ascent VP
(Ascent VP), Aetna Crossroads VP (Crossroads VP) and Aetna Legacy VP (Legacy
VP). The Fund may authorize additional Portfolios in the future. The Portfolios
are intended to serve as funding vehicles for VA Contracts and VLI Policies to
be offered through the separate accounts of insurance companies. The insurance
companies, 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 VP'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 VP's 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 VP'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 a fundamental policy. 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
Aeltus Investment Management, Inc. (Aeltus) serves as the investment adviser to
each Portfolio. Aeltus is an indirect wholly-owned subsidiary of Aetna
Retirement Services, Inc., which is, in turn, an indirect, wholly-owned
subsidiary of Aetna Inc. See "Management of the Generation Portfolios."
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. Aeltus 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 Aeltus 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.
Aetna Generation Portfolios, Inc. 5
<PAGE>
The allocation ranges, benchmarks and comparative indexes are as follows:
<TABLE>
<CAPTION>
Asset Class Ascent VP Crossroads VP Legacy VP Comparative Index
Equities
<S> <C> <C> <C> <C>
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>
Aeltus 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 Aeltus' ongoing evaluation
of the expected returns and risks of each asset class. For example, if Aeltus
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 VP will
invest no more than 60% of its assets and Legacy VP 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-yield bonds, securities in the International Stock
Class, and securities in the International Bond Class. Ascent VP has no such
restrictions. Restrictions apply at the time of purchase of the particular
securities and are intended 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. Asset allocation strategies are supplemented by security selection
decisions within each asset class. Selection of particular securities will be
based on Aeltus' 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 described under "Risk Factors and Other Considerations."
Equity Securities
Each Portfolio may invest its assets in equity securities that Aeltus 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.
Aetna Generation Portfolios, Inc. 6
<PAGE>
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 capitalizations
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, and may have total capitalizations of any size. Aeltus
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
and depositary receipts. 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 interests in 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 type of commercial real estate, such as apartment
complexes, or a geographic region, such as the Northeastern United States, or
both. Investments in securities of real estate companies involve certain risks,
which are described below under "Risk Factors and Other Considerations."
Fixed Income Securities
Each Portfolio may invest in fixed income securities, including obligations of
the United States and foreign governments, as well as obligations of
corporations and high-yield bonds.
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 may
be 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.
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 as to principal, interest, or both 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-yield bonds.
Investment grade debt securities include corporate debt securities 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 corporate debt
instruments with similar ratings by other nationally recognized statistical
rating organizations or, if unrated, considered by Aeltus to be of similar
quality. High-yield 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
Aeltus to be of comparable quality. No Portfolio will invest more than 15% of
its assets in high-yield bonds.
See "Risk Factors and Other Considerations" for further information.
Mortgage-Backed and Asset-Backed Securities The Portfolios may invest in
mortgage-backed, asset-backed and other securities which represent interest in
pools of mortgages or assets, as the case may be, and which pass through to the
holders of the securities payments of principal, interest or other cash flow
generated by the underlying mortgages or assets. In the case of certain
mortgage-backed securities, payments of interest, principal or both may be
guaranteed by an agency or instrumentality of the U. S. Government, such as
GNMA, FHLMC and FNMA. Other mortgage-backed securities, such as commercial
mortgage-backed securities (CMOs) and real estate mortgage investment conduits
(REMICs) and many asset-backed securities generally
Aetna Generation Portfolios, Inc. 7
<PAGE>
are secured by the underlying pool of mortgages and assets or the backing of a
third party, and are rated similarly to corporate bonds. Additional information
about CMOs and REMICs is contained in the Statement. Mortgage-backed and
asset-backed securities are subject to prepayment risk.
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 Aeltus, 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 Portfolios may use the following investment techniques:
Borrowing. Each 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 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.
Repurchase Agreements. Each Portfolio 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) decline
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. The Directors have
established credit standards for counterparties to repurchase agreements entered
into by the Portfolios.
Zero coupon and Pay-in-Kind Bonds. Each Portfolio may invest in zero coupon
securities and pay-in-kind bonds. Zero coupon securities and payment-in-kind
bonds are debt securities that are purchased and traded at a discount to their
face value because they pay no interest for some or all of their lives. 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. In order to manage exposure
to changing interest rates, securities prices and currency exchange rates, or to
increase investment return, each Portfolio may engage in hedging and other
strategies using derivatives. 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 exchange rate or index. Derivatives that may
be used by a Portfolio include forward contracts, swaps, structured notes,
futures (see "Futures Contracts" below), options (see "Options" below),
collateralized mortgage obligations (CMOs) (see "Mortgage-Backed Securities"
above), and U.S. Government derivatives (see "U.S. Government Derivatives"
below). In addition, derivatives may be used to enhance a Portfolio's yield. See
the Statement for additional information on the use of and risks associated with
derivatives.
Aetna Generation Portfolios, Inc. 8
<PAGE>
Some of these strategies, such as selling futures contracts, buying puts and
writing calls are designed to hedge against price fluctuations. Other
strategies, such as writing puts, buying futures contracts, calls, and interest
rate swaps, tend to increase market exposure. In some cases, a Portfolio may buy
a futures contract for the purpose of increasing its exposure in a particular
market segment, which may be considered speculative, rather than for hedging.
For purposes other than hedging, a Portfolio will invest no more than 5% of its
assets in derivatives which at the time of purchase are considered by management
to involve high risk to the Portfolio, such as inverse floaters, interest-only
and principal-only debt instruments. Each Portfolio may invest up to 30% of its
assets in lower risk derivatives for hedging or to gain additional exposure to
certain markets for investment purposes, while maintaining liquidity to meet
shareholder redemptions and to minimize trading costs.
Futures Contracts - Futures contracts are agreements that obligate the buyer to
buy and the seller to sell a specific quantity of securities at a specific price
on a specific date. Investments in futures contracts or options on futures may
be made subject to the limits discussed in the Statement.
The aggregate futures market prices of financial instruments required to be
delivered or purchased under open futures contracts may not exceed 100% of
Ascent VP's total assets, 60% of Crossroads VP's total assets and 30% of Legacy
VP's total assets.
Options - Each Portfolio may purchase and write (sell) call options and put
options, including options on securities, indices and futures. Call options on
securities may be sold only if covered. Options are agreements that for a fee or
premium, give the holder the right, but not the obligation, to pay or settle for
cash a certain amount of securities during a specified period or on a specified
date. Options are used to minimize principal fluctuation or to generate
additional premium income but they do involve risks. See "Risk Factors and Other
Considerations," below.
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.
Forward-Exchange Contracts - Each Portfolio may engage in forward-exchange
contracts. The use of forward-exchange contracts may reduce the gain that would
otherwise result from a change in the relationship between the U.S. dollar and a
foreign currency. In an attempt to limit their risk in forward-exchange
contracts, the Portfolios limit their exposure to the amount of their respective
assets denominated in the foreign currency being cross-hedged. Cross-hedging
entails a risk of loss on both the value of the security that is the basis of
the hedge and the currency contract that was used in the hedge. These risks are
described in greater detail in the Statement.
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 pursuant to Rule 144A
under, and Section 4(2) of, the Securities Act of 1933.
Cash or Cash Equivalents. Aeltus 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.
RISK FACTORS AND OTHER CONSIDERATIONS
General Considerations. The different types of securities purchased and
investment techniques used by Aeltus 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
Aetna Generation Portfolios, Inc. 9
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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-yield 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 Aeltus does not purchase securities with the
intention of profiting from short-term trading, Aeltus may buy and sell
securities when Aeltus believes such action is appropriate. Turnover rates for
each of the Series in excess of 100% may result in higher transaction costs
(which are borne directly by the respective Series) and a possible increase in
short-term capital gains (or losses). See "Financial Highlights" for the actual
turnover rates for the respective Portfolios and see 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 may 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 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 of obtaining adequate
financing for projects on favorable terms.
High-Yield Bonds. A Portfolio may invest in high-yield bonds. These securities
are rated BB/Ba or below by Standard & Poor's and Moody's, respectively, or, if
unrated, are considered by Aeltus 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 high-yield bonds are high risk investments, they may be
purchased if Aeltus believes that they offer good value. This may happen if, for
example, the rating agencies have, in Aeltus' 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.
Generally, the risks involved in using derivatives include the risk that the
derivative may experience greater price swings than other securities and may be
less liquid than other securities.
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.
Aetna Generation Portfolios, Inc. 10
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In writing puts, there is the risk that a Portfolio may be required to buy the
underlying security (or other instrument) at a disadvantageous price. 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. Purchasing put
and call options involve the risk of losing the entire purchase price of the
option.
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.
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 the Statement.
Special Considerations. Investors should be aware that the investment results of
the Portfolios depend in part upon Aeltus' ability to anticipate correctly the
relative performance of stocks, bonds and money market instruments. While Aeltus
has substantial experience in managing all asset classes, there can be no
assurance Aeltus 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.
CONCENTRATION
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. With respect to 75% of a
Portfolio's total assets, 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.
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. Aeltus has entered into an investment advisory agreement
with the Fund on behalf of each Portfolio which provides that Aeltus is
responsible for managing the assets of each Portfolio in accordance with its
investment objective and policies. Aeltus is a Connecticut corporation with its
principal offices located at 242 Trumbull Street, Hartford, Connecticut
06103-1205. Aeltus is registered as an investment adviser with the Commission.
Aeltus is entitled to receive a management fee at an annual rate of 0.60% of the
average daily net assets of each of the Portfolios, payable monthly.
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
Portfolios and has been responsible for determining the allocation of
investments since the Fund's inception in January 1995. Mr. Means joined Aetna
in July 1994 after serving as Chief Investment Officer at INVESCO Management and
Research, Boston, since 1993. 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 also responsible for the selection of large
capitalization stocks for the Portfolios. Mr. Means is supported by a team of
investment professionals, each of whom focuses on a particular asset class:
Vince Fioramonti, Vice President, Aeltus, is responsible for the selection of
international stocks and bonds for the Portfolios. Mr. Fioramonti manages
international stocks and non-U.S. dollar government bonds for several Aeltus
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.
Aetna Generation Portfolios, Inc. 11
<PAGE>
Yaniv Tepper, Vice President, Aeltus, is responsible for the selection of Real
Estate Investment Trust (REIT) holdings on the equity side, and non-agency
mortgage backed securities on the fixed income side for the Portfolios. Mr.
Tepper has been managing real estate securities for several investment funds
managed by Aeltus since 1994. Mr. Tepper joined the Aetna organization in 1994
as an Associate in the Real Estate Investments Group. Prior thereto, Mr. Tepper
consulted in the area of real estate finance.
Donald Townswick, Vice President, Aeltus, is responsible for the selection of
small- and mid-cap stocks for the Portfolios. Mr. Townswick has been managing
small- and mid-cap stocks for several investment funds managed by Aeltus. Mr.
Townswick joined Aetna in July 1994 after serving as a Vice President at INVESCO
Management and Research for two years.
Jeanne Wong-Boehm, Managing Director, Aeltus, is responsible for the selection
of U.S. Dollar Bonds and money market investments for the Portfolios. Ms.
Wong-Boehm joined Aetna in 1983 as a fixed income portfolio analyst and in 1989
she was assigned primary responsibility for the money market operations.
Expenses and Fund Administration. The Fund has appointed Aeltus as administrator
for each Portfolio. Aeltus has responsibility for certain administrative and
internal accounting and reporting services, maintenance of relationships with
third party service providers such as the Transfer Agent and custodians,
shareholder communications, calculation of the net asset value per share (NAV)
and other financial reports prepared for the Portfolios (collectively referred
to as Administrative Services). Aeltus is entitled to the following fees from
the Fund for providing administrative services, on an annual rate based on
average daily net assets of the Fund:
Administrative Fee Fund Assets
------------------ -----------
0.075% On the first $5 billion
0.050% On all assets over $5 billion
As administrator, Aeltus may contract with other entities to perform certain
Administrative Services.
REIMBURSEMENTS/FEE WAIVER ARRANGEMENTS
Aeltus has agreed to waive a portion of its fee or to reimburse the Portfolios
for certain expenses so that aggregate expenses do not exceed 0.80% of each
Portfolio's net assets. These waiver/reimbursement arrangements are voluntary on
Aeltus' part and may be modified or eliminated at any time. These
reimbursement/fee waiver arrangements will increase total return.
Without these arrangements, aggregate expenses for Ascent VP, Crossroads VP and
Legacy VP would have been 0.83%, 0.85% and 0.91%, respectively. These expenses
are estimates based on expenses incurred for the year ended December 31, 1997
restated to reflect changes in the Administrative Services agreement.
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
documents pertaining to 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 (and thus the Portfolios)
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 notices of the order by 9:30 the next day on which the New York Stock
Exchange is open 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 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.
Aetna Generation Portfolios, Inc. 12
<PAGE>
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 a
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.
Principal Underwriter Aetna Life Insurance and Annuity Company (ALIAC) is the
principal underwriter for the Fund. ALIAC is a Connecticut corporation, and is a
wholly-owned subsidiary of Aetna Retirement Holdings, Inc. and an indirect
wholly-owned subsidiary of Aetna Inc. ALIAC contracts with various
broker-dealers, including one or more of its affiliates, for distribution of
shares. Custodian Mellon Bank, N.A., is the custodian for the Fund.
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.
YEAR 2000
Aetna Inc. (referred to collectively with its subsidiaries and affiliates as
"Aetna") has developed and is currently executing a plan to make its computer
systems and applications accommodate date-sensitive information relating to the
Year 2000. The plan covers four stages including (i) inventory, (ii) assessment,
(iii) remediation and (iv) testing and certification. Aetna is currently in the
assessment or remediation stages of its plan for the systems and applications
related to the Fund, including those relating to Aeltus. Testing and
certification of these systems is targeted for completion by mid-1999. The costs
of these efforts will not affect the Fund.
Aeltus and the Fund also have relationships with broker dealers, transfer
agents, custodians and other securities industry participants and service
providers that are not affiliated with Aetna. Aetna is currently examining its
relationships with third parties as part of its Year 2000 plan. While Aeltus
believes that United States securities industry participants generally are
preparing their computer systems and applications to accommodate Year 2000
date-sensitive information, preparation by third parties is outside Aeltus' and
the Fund's control. There can be no assurance that failure of third parties to
complete adequate preparations in a timely manner, and any resulting systems
interruptions or other consequences, would not have an adverse effect, directly
or indirectly, on the Fund, including, without limitation, its operation or the
valuation of its assets.
Aetna Generation Portfolios, Inc. 13
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===============================================================================
Statement of Additional Information dated: May 1, 1998
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, 1998.
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.......................................................17
Control Persons and Principal Shareholders ..................................20
The Investment Advisory Agreements...........................................20
The Administrative Services Agreement .......................................21
The License Agreement .......................................................21
Custodian....................................................................21
Independent Auditors ........................................................21
Principal Underwriter .......................................................21
Brokerage Allocation and Trading Policies ...................................22
Description of Shares .......................................................23
Purchase and Redemption of Shares ...........................................23
Net Asset Value .............................................................23
Performance Information .....................................................24
Tax Status ..................................................................24
Voting Rights ...............................................................29
Financial Statements ........................................................30
===============================================================================
<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 VP (Ascent VP);
Aetna Crossroads VP (Crossroads VP); and Aetna Legacy VP (Legacy VP). Aeltus
Investment Management, Inc. (Aeltus) serves as the investment adviser for each
of the Portfolios.
The investment objective and general investment policies of each Portfolio are
described in the prospectus.
ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES OF THE 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;
Aetna Generation Portfolios, Inc. 2
<PAGE>
(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 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 Fund's
Board of Directors (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 1933 Act,
shall not be deemed illiquid solely by reason of being unregistered.
Aeltus shall determine whether a particular security is deemed to be
liquid based on the trading markets for the specific security and other
factors; or
(6)invest in securities issued by any entity listed in the Wall Street
Journal's Quarterly "Corporate Performance Report" under the heading
"Consumer, Noncyclical-Tobacco," or are otherwise determined by Aeltus to
be primarily involved in the production or distribution of tobacco
products.
Aetna Generation Portfolios, Inc. 3
<PAGE>
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
Each Portfolio may use derivative instruments as described below and 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 but subject to restrictions described below under
"Restrictions on the Use of Futures and Related Option Contracts." A Portfolio
may enter into futures contracts or options thereon, which are traded on
national futures exchanges and are standardized as to maturity date and
underlying financial instrument. The futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the Commodities Futures
Trading Commission (the "CFTC").
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific commodity, financial
instrument(s) or a specific stock market index for a specified price at a
designated date, time, and place. Brokerage fees are incurred when a futures
contract is bought or sold and at expiration, and margin deposits must be
maintained.
Although interest rate futures contracts typically require actual future
delivery of and payment for the underlying instruments or commodities, those
contracts are usually closed out before the delivery date. Stock index futures
contracts do not contemplate actual future delivery and will be settled in cash
at expiration or closed out prior to expiration. Closing out an open futures
contract sale or purchase is effected by entering into an offsetting futures
contract purchase or sale, respectively, for the same aggregate amount of the
identical type of underlying instrument and the same delivery date. There can be
no assurance, however, that a Portfolio will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If a
Portfolio is not able to enter into an offsetting transaction, it will continue
to be required to maintain the margin deposits on the contract.
The prices of futures contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates and equities prices,
which in turn are affected by fiscal and monetary policies and national and
international political and economic events.
When using futures contracts as a hedging technique, at best, the correlation
between changes in prices of futures contracts and of the securities being
hedged can be only approximate. The degree of imperfection of correlation
depends upon circumstances such as: variations in speculative market demand for
futures and for securities, including technical influences in futures trading,
and differences between the financial instruments being hedged and the
instruments underlying the standard futures contracts available for trading.
Even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or stock market or interest rate trends.
Most United States futures exchanges limit the amount of fluctuation permitted
in interest rate futures contract prices during a single trading day, and, as
noted, temporary regulations limiting price fluctuations for stock index futures
contracts are also now in effect. The daily limit establishes the maximum amount
that the price of a futures contract may vary either up or down from the
previous day's settlement price at the end of a trading session. Once the daily
limit has been reached in a particular type of contract, no trades may be made
on that day at a price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not limit potential
losses, because the limit may prevent the liquidation of unfavorable positions.
Futures contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some persons engaging in futures
transactions to substantial losses.
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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' futures contracts. A margin
deposit is intended to assure the Portfolios' 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,
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.
When a Portfolio buys or sells a futures contract, unless it already owns an
offsetting position, it will maintain in a segregated account held by the
custodian, cash and/or liquid securities having an aggregate value at least
equal to the full "notional" value of the futures contract, thereby insuring
that the leveraging effect of such futures contract is minimized, in accordance
with regulatory requirements.
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.
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 Portfolios' 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 purchase and write (sell) call options
and put options including options on securities, indices and futures subject to
the restrictions described in this section and under "Restrictions on the Use of
Futures and Option Contracts." Call options may be written on securities only if
they are covered. 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 Aeltus.
No Portfolio may buy put options if more than 3% of its assets immediately
following such purchase would consist of put options. No Portfolio will write a
call option on a security unless the call is covered, i.e., it already owns the
underlying security. Securities it "already owns" include any stock which it has
the right to
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acquire without any additional payment, at its discretion for as long as the put
or call remains outstanding. The Portfolios will not write call options on
when-issued securities.
So long as the obligation of the writer of a call option continues, the writer
may be assigned an exercise notice by the broker-dealer through which such
option was settled, requiring the writer to deliver the underlying security
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, by the exercise of the call option, or by
entering into an offsetting transaction. To secure the writer's obligation to
deliver the underlying security, a writer of a call option is required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the clearing corporations and of the exchanges.
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.
A call option sold by a Portfolio is "covered" if the Portfolio owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration upon conversion or exchange
of other securities held in its portfolio. A call option is considered offset,
and thus held in accordance with regulatory requirements, if a Portfolio holds a
call on the same security and in the same principal amount as the call sold when
the exercise price of the call held (a) is equal to or less than the exercise
price of the call sold or (b) is greater than the exercise price of the call
sold if the difference is maintained by the Portfolio in liquid securities in a
segregated account with its custodian.
The Portfolios may purchase and write call options on indices as well as on any
individual security, as described below. The Portfolios will use these
techniques primarily as a temporary substitute for taking positions in certain
securities or in the securities that comprise a relevant index, particularly if
Aeltus considers these instruments to be undervalued relative to the prices of
particular securities or of the securities that comprise that index.
An option on an index (or a particular security) is a contract that gives the
purchaser of the option, in return for the premium paid, the right to receive
from the writer of the option cash equal to the difference between the closing
price of the index (or security) and the exercise price of the option, expressed
in dollars, times a specified multiple (the "multiplier"). The Portfolios may,
in particular, purchase call options on an index (or a particular security) to
protect against increases in the price of securities underlying that index (or
individual securities) that the Portfolio(s) intends to purchase pending its
ability to invest in such securities in an orderly manner.
In the case of a put option, as long as the obligation of the put writer
continues, it may be assigned an exercise notice by the broker-dealer through
which such option was sold, requiring the writer to take delivery of the
underlying security against payment of the exercise price. A writer has no
control over when it may be required to purchase the underlying security, since
it may be assigned an exercise notice at any time prior to the expiration date.
This obligation terminates earlier if the writer effects a closing purchase
transaction by purchasing a put of the same series as that previously sold.
If a put option is sold by a Portfolio, the Portfolio will maintain cash and/or
liquid securities with a value equal to the exercise price in a segregated
account with its custodian, or else will hold a put on the same security and in
the same principal amount as the put sold where the exercise price of the put
held is less than the exercise price of the put sold if the Portfolio maintains
in a segregated account with the custodian, liquid securities with an aggregate
value equal to the difference. The writer of a put 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. 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.
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
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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. If the put is exercised, the writer may incur a loss, equal to the
difference between the exercise price and the current market value of the
underlying instrument.
A Portfolio may purchase put options when Aeltus believes that a temporary
defensive position is desirable in light of market conditions, but does not
desire to sell a portfolio security. The purchase of put options may be used to
protect a 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 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 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. 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 call 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.
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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 (the "NFA") nor any
domestic exchange regulates activities of any foreign boards of trade including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
laws. Generally, the foreign transaction will be governed by applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures contracts or foreign options
transaction occurs. Investors which trade foreign futures contracts or foreign
options contracts may not be afforded certain of the protective measures
provided by domestic exchanges, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the NFA. In
particular, funds received from customers for foreign futures contracts or
foreign options transactions may not be provided the same protections as funds
received for transactions on United States futures exchanges. The price of any
foreign futures contracts or foreign options contract and, therefore, the
potential profit and loss thereon, may be affected by any variance in the
foreign exchange rate between the time an order is placed and the time it is
liquidated, offset or exercised.
Options on Foreign Currencies--Each Portfolio may write and purchase calls on
foreign currencies. A Portfolio may purchase and write puts and calls on foreign
currencies that are traded on a securities or commodities exchange or quoted by
major recognized dealers in such options for the purpose of protecting against
declines in the dollar value of foreign securities and against increases in the
dollar cost of foreign securities to be acquired. If a rise is anticipated in
the dollar value of a foreign currency in which securities to be acquired are
denominated, the increased cost of such securities may be partially offset by
purchasing calls or writing puts on that foreign currency. If a decline in the
dollar value of a foreign currency is anticipated, the decline in value of
portfolio securities denominated in that currency may be partially offset by
writing calls or purchasing puts on that foreign currency. In the event of rate
fluctuations adverse to a Portfolio's position, it would lose the premium it
paid and transactions costs. A call written on a foreign currency by a Portfolio
is covered if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call may be written by a Portfolio on
a foreign currency to provide a hedge against a decline due to an expected
adverse change in the exchange rate in the U.S. dollar value of a security which
the Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option. This is a "cross-hedging" strategy. In such
circumstances, the Portfolio collateralizes the position by maintaining in a
segregated account with the Portfolio's custodian cash or U.S. Government
securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
Forward Exchange Contracts--Each Portfolio may enter into forward contracts for
foreign currency (forward exchange contracts), which obligate the seller to
deliver and the purchaser to take a specific amount of a specified foreign
currency at a future date at a price set at the time of the contract. These
contracts are generally traded in the interbank market conducted directly
between currency traders and their customers. A Portfolio may enter into a
forward exchange contract in order to "lock in" the U.S. dollar price of a
security denominated in a foreign currency which it has purchased or sold but
which has not yet settled (a "transaction hedge"); or to lock in the value of an
existing portfolio security (a "position hedge"); or to protect against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and a foreign currency. There is a risk that use of forward exchange
contracts may reduce the gain that would otherwise result from a change in the
relationship between the U.S. dollar and a foreign currency. Forward exchange
contracts include standardized foreign currency futures contracts which are
traded on exchanges and are subject to procedures and regulations applicable to
futures. Each Portfolio may also enter into a forward exchange contract to sell
a foreign currency which differs from the currency in which the underlying
security is denominated. This is done in the expectation that there is a greater
correlation between the foreign currency of the forward exchange contract and
the foreign currency of the underlying investment than between the U.S. dollar
and the foreign currency of the underlying investment. This technique is
referred to as "cross hedging." The success of cross hedging is dependent on
many factors, including the ability of Aeltus to correctly identify and monitor
the
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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 Aeltus
believes will have price movements that tend to correlate closely with the
currency in which the investment being hedged is denominated.
The Fund's custodian will segregate liquid securities of a Portfolio having a
value equal to the aggregate amount of that Portfolio's commitments under
forward contracts entered into with respect to position hedges and cross hedges.
If the value of the securities segregated 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 Portfolios 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.
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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.
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 Related Option Contracts-- A Portfolio
may purchase and sell futures contracts and related options under the following
conditions: at the time of entering into a contract (a) the then-current
aggregate futures market prices of financial instruments required to be
delivered and purchased under open futures contracts shall not exceed 30% of a
Portfolio's total assets (60% in the case of Crossroads VP and 100% in the case
of Ascent VP) at market value and (b) no more than 5% of the assets, shall be
committed to margin deposits in relation to futures contracts. CFTC regulations
require that to prevent a Portfolio from being a commodity pool, the Portfolios
enter into all short futures for the purpose of hedging the value of securities
held, and that all long futures positions either constitute bona fide hedging
transactions, as defined in such regulations, or have a total value not in
excess of an amount determined by reference to certain cash and securities
positions maintained, and accrued profits on such positions. As evidence of its
hedging intent, each Portfolio expects that at least 75% of futures contract
purchases will be "completed"; that is, upon the sale of these long contracts,
equivalent amounts of related securities will have been or are then being
purchased by that Portfolio in the cash market. With respect to futures
contracts or related options that are entered into for purposes that may be
considered speculative, the aggregate initial margin for future contracts and
premiums for options will not exceed 5% of a Portfolios' net assets, after
taking into account realized profits and unrealized losses on such futures
contracts.
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. Aeltus 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, 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
Aetna Generation Portfolios, Inc. 10
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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. 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.
Each Portfolio will purchase or sell futures contracts or options for hedging
purposes only if, in Aeltus' 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 relevant portion of the assets being hedged for the
hedge to be effective. There can be no assurance that Aeltus' 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
market 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 Aeltus'
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
Aetna Generation Portfolios, Inc. 11
<PAGE>
it may be disadvantageous to do so. Such sale of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market.
Trading and Position Limits--Each contract market on which futures and option
contracts are traded has established a number of limitations governing the
maximum number of positions which may be held by a trader, whether acting alone
or in concert with others. The Fund does not believe that these trading and
position limits will have an adverse impact on the hedging strategies regarding
the Portfolios.
Repurchase Agreements
Each Portfolio may enter into repurchase agreements with domestic banks and
broker-dealers meeting certain size and creditworthiness standards established
by the 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.
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,
Aetna Generation Portfolios, Inc. 12
<PAGE>
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 Fund
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.
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
Aetna Generation Portfolios, Inc. 13
<PAGE>
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 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.
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.
Both CMOs and REMICs are issued by private entities. Their securities are not
directly guaranteed by any government agency and are secured by the collateral
held by the issuer. 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.
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.
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-Yield Bonds
The Portfolios may invest in high-yield 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, Aeltus seeks to identify situations in which the rating agencies
have not fully perceived the value of the security or in which Aeltus believes
that future developments will enhance the creditworthiness and the ratings of
the issuer.
Aetna Generation Portfolios, Inc. 14
<PAGE>
The yields earned on high-yield 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-yield 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-yield 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 high-yield 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-yield bonds
structured as zero coupon or pay-in-kind securities, their market prices
are affected to a greater extent by interest rate changes and thereby tend
to be more speculative and volatile than securities which pay interest
periodically and in cash.
(2)Payment Expectations. High-yield 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, 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 high-yield
bonds than in the case of investment grade bonds.
(3)Liquidity and Valuation Risks. High-yield 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-yield
bonds may not accurately reflect the true risks of an investment. Credit
ratings typically evaluate the safety of principal and interest payments
rather than the market value risk of such securities. In addition, credit
agencies may fail to adjust credit ratings to reflect rapid changes in
economic or company conditions that affect a security's market value.
Although the ratings of recognized rating services such as Moody's
Investors Service, Inc. and Standard & Poor's Corporation are considered,
Aeltus primarily relies on its own credit analysis which includes a study
of existing debt, capital structure, ability to service debts and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history and the current trend of earnings. Thus the achievement of a
Portfolio's investment objective may be more dependent on Aeltus' own
credit analysis than might be the case for a fund which does not invest in
these securities.
(5)Legislation. Legislation may have a negative impact on the market for
high-yield bonds, such as legislation requiring federally insured savings
and loan associations to divest themselves of their investments in these
securities.
Aetna Generation Portfolios, Inc. 15
<PAGE>
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.
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 securities 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.
Aetna Generation Portfolios, Inc. 16
<PAGE>
Portfolio Turnover
The Portfolios' policy on portfolio turnover is discussed in the prospectus. The
portfolio turnover rates for the years ended December 31, 1996 and 1997 were
109.77% and 124.82% for Ascent VP; 105.66% and 103.08% for Crossroads VP; and
111.11% and 85.01% for Legacy VP, 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
(*). All Directors and officers hold similar positions with certain other
investment companies in the same Fund Complex. The Fund Complex presently
consists of Aetna Series Fund, Inc., Aetna Variable Fund, Aetna Income Shares,
Aetna Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund
(Series B and Series C), Aetna Generation Portfolios, Inc., Aetna Variable
Portfolios, Inc. and Portfolio Partners, Inc.
<TABLE>
<CAPTION>
Principal Occupation During Past Five Years (and
Position(s) Held with the Positions held with Affiliated Persons or Principal
Name Address and Age Fund Underwriters of the Fund)
<S> <C> <C>
J. Scott Fox* Director and President Director, Managing Director, Chief Operating Officer, Chief
242 Trumbull Street Financial Officer, Aeltus Investment Management, Inc.
Hartford, Connecticut (Aeltus), October 1997 to present; Vice President, Aetna
Age 42 Retirement Services, Inc., April 1997 to present; Director
and Senior Vice President, Aetna Retirement Holdings, Inc.,
April 1997 to present; Director and President, Aetna Life
Assignment Company, September 1997 to present; Director and
Senior Vice President, Aetna Life Insurance and Annuity
Company, March 1997 to present; Director, Managing Director,
Chief Operating Officer, Chief Financial Officer and
Treasurer, Aeltus, April 1994 to March 1997; Managing
Director and Treasurer, Equitable Capital Management Corp.,
March 1987 to September 1993; Director, Aeltus Capital,
Inc., March 1996 to July 1997; Managing Director, Chief
Financial Officer, Aeltus Capital, Inc., March 1996 to April
1997; Director, Aeltus Trust Company, Inc., May 1996 to July
1997; Managing Director, Chief Operating Officer, Chief
Financial Officer and Treasurer, Aeltus Trust Company, Inc.,
May 1996 to April 1997; Director and President, Aetna
Investment Management (Bermuda) Holding, Ltd., May 1996 to
October 1997.
Wayne F. Baltzer Vice President Assistant Vice President, Aetna Life Insurance and
242 Trumbull Street Annuity Company, May 1991 to present; Vice President,
Hartford, Connecticut Aetna Investment Services, Inc., July 1993 to present.
Age 54
Amy R. Doberman Secretary Counsel, Aetna Life Insurance and Annuity Company,
151 Farmington Avenue December 1996 to present; Attorney, Securities and
Hartford, Connecticut Exchange Commission, March 1990 to November 1996.
Age 35
Aetna Generation Portfolios, Inc. 17
<PAGE>
<CAPTION>
Principal Occupation During Past Five Years (and
Position(s) Held with the Positions held with Affiliated Persons or Principal
Name Address and Age Fund Underwriters of the Fund)
Maria T. Fighetti Director Manager/Attorney, Health Services, New York City
325 Piermont Road Department of Mental Health, Mental Retardation and
Closter, New Jersey Alcohol Services, 1973 to present.
Age 54
David L. Grove Director, Chairperson Private Investor; Economic/Financial Consultant,
5 The Knoll Contract Committee December 1985 to present.
Armonk, New York
Age 79
John Y. Kim* Director Director, President, Chief Executive Officer, Chief
242 Trumbull Street Investment Officer, Aeltus Investment Management,
Hartford, Connecticut Inc., December 1995 to present; Director, Aetna Life
Age 37 Insurance and Annuity Company, February 1995 to
present; Senior Vice President, Aetna Life Insurance
and Annuity Company, September 1994 to present.
Sidney Koch Director Financial Adviser, self-employed, January 1993 to
455 East 86th Street present.
New York, New York
Age 62
Frank Litwin Vice President Managing Director, Aeltus Investment Management,
242 Trumbull Street Inc., August 1997 to present; Vice President,
Hartford, Connecticut Fidelity Investments Institutional Services Company,
Age 48 April 1992 to August 1997.
Shaun P. Mathews* Director Vice President/Senior Vice President, Aetna Life
151 Farmington Avenue Insurance and Annuity Company, March 1991 to present;
Hartford, Connecticut Vice President, Aetna Life Insurance Company, 1991 to present;
Age 42 Director and Senior Vice President, Aetna Investment Services,
Inc., July 1993 to present; Director and Senior Vice
President, Aetna Insurance Company of America, September
1992 to present.
Corine T. Norgaard Director Dean of the Barney School of Business, University of
556 Wormwood Hill Hartford (West Hartford, CT), August 1996 to present;
Mansfield Center, Connecticut Professor, Accounting and Dean of the School of
Age 60 Management, Binghamton University (Binghamton, NY),
August 1993 to August 1996; Professor, Accounting,
University of Connecticut (Storrs, CT), September 1969 to
June 1993; Director, The Advest Group (holding company for
brokerage firm) through September 1996.
Aetna Generation Portfolios, Inc. 18
<PAGE>
<CAPTION>
Principal Occupation During Past Five Years (and
Position(s) Held with the Positions held with Affiliated Persons or Principal
Name Address and Age Fund Underwriters of the Fund)
Richard G. Scheide Director, Chairperson Trust and Private Banking Consultant, David Ross
11 Lily Street Audit Committee Palmer Consultants, July 1991 to present.
Nantucket, Massachusetts
Age 68
Stephanie A. Taylor Treasurer and Chief Director Mutual Fund Accounting, Aeltus Investment
242 Trumbull Street Financial Officer Management, Inc., November 1995 to present; Director
Hartford, Connecticut Mutual Fund Accounting, Aetna Life Insurance and
Age 44 Annuity Company, August 1994 to November 1995;
Assistant Vice President, Investors Bank & Trust,
January 1993 to August 1994.
</TABLE>
During the period ended December 31, 1997, members of the Board of Directors who
are also directors, officers or employees of Aetna Inc. and its affiliates were
not entitled to any compensation from the Fund. Members of the Board of
Directors who are not affiliated as employees of Aetna Inc. or its subsidiaries
received an annual retainer of $30,000 for service on the Board, and a fee of
$5,000 for each meeting of such Board (equal to an aggregate annual fee of
$20,000). They also received a fee of $3,000 per Audit Committee meeting, and
$5,000 per Contract Committee meeting.
As of December 31, 1997, the unaffiliated members of the Board of 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>
Aggregate Compensation Total Compensation from the Fund
Name of Person, Position from the Fund and Fund Complex Paid to Directors
<S> <C> <C>
Corine Norgaard
Director $1,344 $55,500
Sidney Koch
Director $1,356 $56,000
Maria T. Fighetti
Director 1,344 $55,500
Richard G. Scheide
Director, Chairperson
Audit Committee $1,477 $61,000
David L. Grove
Director, Chairperson
Contract Committee $1,392* $57,500*
</TABLE>
*Mr. Grove elected to defer all such compensation under an existing deferred
compensation plan.
The Fund has obtained an order from the Securities and Exchange Commission
(Commission) which allows the members of the Board of 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 (the "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 series of Aetna Series
Fund, Inc. designated by the Director. The amount paid to the unaffiliated
Director under the
Aetna Generation Portfolios, Inc. 19
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Plan will be based upon the performance of such investments. Deferral of
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.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of December 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 Life Insurance and Annuity Company (Aetna) and its
subsidiary, Aetna Insurance Company of America, Inc. (AICA), on behalf of their
respective separate accounts. See "Voting Rights" below.
Aetna is an indirect wholly-owned subsidiary of Aetna Retirement Services, Inc.,
which is in turn an indirect wholly-owned subsidiary of Aetna Inc. Aetna's
principal office is located at 151 Farmington Avenue, Hartford, Connecticut
06156. Aetna is registered with the Commission as an investment adviser.
THE INVESTMENT ADVISORY AGREEMENTS
The Fund, on behalf of each Portfolio, has entered into investment advisory
agreements (Advisory Agreements) appointing Aeltus as the Investment Adviser of
each Portfolio. These Advisory Agreements were approved by the Directors on
December 10, 1997, and replace investment advisory agreements with Aetna. Each
Advisory Agreement will be effective through December 31, 1998. The Advisory
Agreements will remain in effect thereafter 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, as defined by the 1940 Act (Independent
Directors), at a meeting called for that purpose, and held in person. Each
Advisory Agreement may be terminated without penalty upon sixty (60) days'
written notice by the Directors or by a majority vote of the outstanding voting
securities of that Portfolio, or by Aeltus. The Advisory Agreements terminate
automatically in the event of assignment. Under the Advisory Agreements and
subject to the supervision of the Directors of the Fund, Aeltus 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. Under the Advisory Agreements, Aeltus is given the right to delegate
any or all of its obligations to a subadviser.
The Advisory Agreements provide that Aeltus is responsible for payment of all
costs of its personnel, its overhead and of its employees who also serve as
officers or Directors of the Fund and each Portfolio is responsible for payment
of all other of its costs.
For the services under the Advisory Agreements, Aeltus will receive an annual
fee, payable monthly, as described in the prospectus.
Prior to the date of this Statement, Aetna served as investment adviser to each
Portfolio. Aetna received investment advisory fees as follows:
For Year Ended For Year Ended For Year Ended
December 31, 1995 December 31, 1996 December 31, 1997
Ascent VP $44,673 $136,513 $_________
Crossroads VP 44,352 129,138 _________
Legacy VP 43,350 105,706 _________
Aetna Generation Portfolios, Inc. 20
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THE ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to an Administrative Services Agreement, Aeltus acts as administrator
and provides certain administrative and shareholder services necessary for Fund
operations and is responsible for the supervision of other service providers.
The services provided by Aeltus include: (1) internal accounting services; (2)
monitoring 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) calculating net asset values; (6) the preparation of certain
shareholder communications; (7) supervision of the custodians and transfer
agent; and (8) reporting to the Directors.
For its services, each Portfolio pays Aeltus an annual fee, payable monthly, as
described in the prospectus.
Prior to the date of this Statement Aetna acted as Administrator. Aetna received
administrative service fees as follows:
For Year Ended For Year Ended For Year Ended
December 31, 1995 December 31, 1996 December 31, 1997
Ascent VP $96,041 $34,751 $ _________
Crossroads VP 96,465 26,567 _________
Legacy VP 96,465 21,226 _________
THE 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 Aeltus 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.
INDEPENDENT AUDITORS
_________________________, City Place II, Hartford, Connecticut 06103 serves as
independent auditors to the Fund. provides audit services, assistance and
consultation in connection with Commission filings.
PRINCIPAL UNDERWRITER
Shares of the Generation Portfolios are offered on a continuous basis. Aetna has
agreed to use its best efforts to distribute the shares as the principal
underwriter of the Portfolios pursuant to an Underwriting Agreement between it
and the Fund. The Agreement was originally approved on June 18, 1996 and is
scheduled to continue through December 31, 1998. The Underwriting Agreement may
be continued from year to year if approved annually by the Directors or by a
vote of holders of a majority of each Variable Portfolio's shares, and by a vote
of a majority of the Directors who are not "interested persons," as that term is
defined in the 1940 Act, of Aetna, and who are not interested persons of the
Fund, appearing in person at a meeting called for the purpose of approving such
Agreement. This Agreement terminates automatically upon assignment, and may be
terminated at any time on sixty (60) days' written notice by the Directors or
Aetna or by vote of holders of a majority of a Variable Portfolio's shares
without the payment of any penalty.
Aetna Generation Portfolios, Inc. 21
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BROKERAGE ALLOCATION AND TRADING POLICIES
Subject to the supervision of the Directors, Aeltus has responsibility for
making investment decisions, for effecting the execution of trades and for
negotiating any brokerage commissions thereon. It is Aeltus' policy to obtain
the best quality of execution available, giving attention to net price
(including commissions where applicable), execution capability (including the
adequacy of a firm's capital position), research and other services related to
execution; the relative priority given to these factors will depend on all of
the circumstances regarding a specific trade.
Aeltus receives a variety of brokerage and research services from brokerage
firms in return for the execution by such brokerage firms of trades on behalf of
the Fund. These brokerage and research services include, but are not limited to,
quantitative and qualitative research information and purchase and sale
recommendations regarding securities and industries, analyses and reports
covering a broad range of economic factors and trends, statistical data relating
to the strategy and performance of the Portfolios and other investment
companies, services related to the execution of trades in a Portfolio's
securities and advice as to the valuation of securities, the providing of
equipment used to communicate research information and specialized consultations
with Portfolio personnel with respect to computerized systems and data furnished
to the Portfolios as a component of other research services. Aeltus considers
the quantity and quality of such brokerage and research services provided by a
brokerage firm along with the nature and difficulty of the specific transaction
in negotiating commissions for trades in 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. Aeltus' policy in selecting a
broker to effect a particular transaction is to seek to obtain "best execution,"
which means prompt and efficient execution of the transaction at the best
obtainable price with payment of commissions which are reasonable in relation to
the value of the services provided by the broker, taking into consideration
research and brokerage services provided. When the trader believes that more
than one broker can provide best execution, preference may be given to brokers
who provide additional services to Aeltus.
Research services furnished by brokers through whom the Fund effects securities
transactions may be used by Aeltus in servicing all of its accounts; not all
such services will be used by Aeltus to benefit the Fund.
Consistent with Federal law, Aeltus may obtain such brokerage and research
services regardless of whether they are paid for (1) by means of commissions, or
(2) by means of separate, non-commission payments. Aeltus' judgment as to
whether and how it will obtain the specific brokerage and research services will
be based upon its analysis of the quality of such services and the cost
(depending upon the various methods of payment which may be offered by brokerage
firms) and will reflect Aeltus' opinion as to which services and which means of
payment are in the long-term best interests of the Portfolios.
The Portfolios have not effected and have no present intention of effecting any
brokerage transactions in portfolio securities with Aeltus or any other
affiliated person of the Fund. If Aeltus effects brokerage transactions through
any affiliated person of the Fund or with any affiliated person of such person
in the future, all such transactions will comply with Rule 17e-1 under the 1940
Act.
Aeltus acts as investment adviser to other investment companies registered under
the 1940 Act. The Directors and Aeltus have adopted policies designed to prevent
disadvantaging the Portfolios in placing orders for the purchase and sale of
securities.
A Portfolio and another advisory client of Aeltus or Aeltus itself, may desire
to buy or sell the same security at or about the same time. In such a case, the
purchases or sales will normally be aggregated, and then allocated as nearly as
practicable on a pro rata basis in proportion to the amounts to be purchased or
sold by each. In some cases the smaller orders will be filled first. In
determining the amounts to be purchased and sold, the main factors to be
considered are the respective investment objectives of a Portfolio, the relative
size of Portfolio holdings of the same or comparable securities, availability of
cash for investment, and the size of their respective investment commitments.
Prices are averaged for aggregated trades.
Aetna Generation Portfolios, Inc. 22
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Brokerage commissions were paid as follows:
For Year Ended For Year Ended
December 31, 1996 December 31, 1997
Ascent VP $97,427 $416,625
Crossroads VP 69,844 264,845
Legacy VP 39,942 126,465
For the fiscal year ended December 31, 1997, commissions in the amounts listed
below were paid with respect to portfolio transactions directed to certain
brokers because of research services provided:
Ascent VP $41,042
Crossroads VP 24,769
Legacy VP 12,212
The Directors have adopted a policy allowing trades to be made between
affiliated registered investment companies or series thereof provided they meet
the terms of Rule 17a-7 under the 1940 Act. Pursuant to this policy, a Portfolio
may buy a security from or sell a security to another registered investment
company or series thereof advised by Aeltus.
The Fund is subject to a Code of Ethics, approved by the Directors, governing
personal trading by persons who manage, or who have access to trading activity
by, a Portfolio. The Code of Ethics allows personal 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.
Aeltus has also adopted a Code of Ethics, which the Directors review annually.
No brokerage business was placed with any brokers affiliated with Aetna during
1997.
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."
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 (other than
high-yield bonds) 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
Aetna Generation Portfolios, Inc. 23
<PAGE>
based upon the assessment of market-makers in those securities. High-yield bonds
are valued at the last bid price of such securities obtained from a broker.
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:
(n)
P(1+T) = ERV
The total returns of the Portfolios calculated based on the formula above for
the periods ended December 31, 1997 are:
Total Return Quotations as of December 31, 1997:
1 Year Since Inception Inception Date
Ascent VP 19.90% 21.85% 12/13/96
Crossroads VP 17.57% 18.50% 9/16/96
Legacy VP 14.50% 14.96% 12/27/96
TAX STATUS
The following is only a summary of certain additional tax considerations
generally affecting each Portfolio and its shareholders which are not described
in the prospectus. No attempt is made to present a detailed explanation of the
tax treatment of each Portfolio or its shareholders, and the discussions here
and in the prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
Each Portfolio has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, (Code). As a regulated
investment company, a Portfolio is not subject to federal income tax on the
portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year
(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
Aetna Generation Portfolios, Inc. 24
<PAGE>
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 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).
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.
For purposes of determining whether capital gain or loss recognized by a
Portfolio on the disposition of an asset is long-term or short-term, the holding
period of the asset may be affected if (1) the asset is used to close a "short
sale" (which includes for certain purposes the acquisition of a put option ) or
is substantially identical to another asset so used, (2) the asset is otherwise
held by the Portfolio as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Portfolio grants a qualified covered
call option (which, among other things, must not be deep-in-the-money) with
respect thereto) or (3) the asset is stock and the Portfolio grants an
in-the-money qualified covered call option with respect thereto. 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.
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.
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 Portfolio 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 a Portfolio to qualify as a regulated investment company may limit
the extent to which a Portfolio will be able to engage in swap agreements.
Aetna Generation Portfolios, Inc. 25
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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 (QEP) 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 QEP, then in general (1) any gain
recognized by the Portfolio upon sale or other disposition of its interest in
the PFIC or any excess distribution received by the Portfolio from the PFIC will
be allocated ratably over the Portfolio's holding period of its interest in the
PFIC, (2) the portion of such gain or excess distribution so allocated to the
year in which the gain is recognized or the excess distribution is received
shall be included in the Portfolio's gross income for such year as ordinary
income (and the distribution of such portion by the Portfolio to shareholders
will be taxable as an ordinary income dividend, but such portion will not be
subject to tax at the Portfolio level), (3) the Portfolio shall be liable for
tax on the portions of such gain or excess distribution so allocated to prior
years in an amount equal to, for each such prior year, (i) the amount of gain or
excess distribution allocated to such prior year multiplied by the highest tax
rate (individual or corporate) in effect for such prior year plus (ii) interest
on the amount determined under clause (i) for the period from the due date for
filing a return for such prior year until the date for filing a return for the
year in which the gain is recognized or the excess distribution is received at
the rates and methods applicable to underpayments of tax for such period, and
(4) the distribution by the portfolio to shareholders of the portions of such
gain or excess distribution so allocated to prior years (net of the tax payable
by the Portfolio thereon) will again be taxable to the shareholders as an
ordinary income dividend.
Under recently proposed Treasury Regulations a Portfolio can elect to recognize
as gain the excess, as of the last day of its taxable year, of the fair market
value of each share of PFIC stock over the Portfolio's adjusted tax basis in
that share ("mark to market gain"). Such mark to market gain will be included by
the Portfolio as ordinary income, 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
Aetna Generation Portfolios, Inc. 26
<PAGE>
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Qualification of Segregated Asset Accounts
Under Code Section 817(h), a segregated asset account upon which a variable
annuity contract or variable life insurance policy is based must be "adequately
diversified." A segregated asset account will be adequately diversified if it
satisfies one of two alternative tests set forth in the Treasury Regulations.
Specifically, the Treasury Regulations provide, that except as permitted by the
"safe harbor" discussed below, as of the end of each calendar quarter (or within
30 days thereafter) no more than 55% of a Portfolio's total assets may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are considered
a single investment, and while each U.S. Government agency and instrumentality
is considered a separate issuer, a particular foreign government and its
agencies, instrumentalities and political subdivisions 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
If a Portfolio has shareholders that are not VA Contract or VLI Policy holders
and those shareholders have invested more than $250,000 in the Portfolio for any
portion of the Portfolio's fiscal year, that Portfolio will be subject to a 4%
non-deductible excise tax unless it meets certain requirements. In order to
avoid the excise tax, a regulated investment company must distribute in each
calendar year an amount equal to 98% of ordinary taxable income for the calendar
year and 98% of capital gain net income for the one-year period ended on October
31 of such calendar year (or, at the election of a regulated investment company
having a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). Tax-exempt interest on municipal obligations is not
subject to the excise tax. The balance of such income must be distributed during
the next calendar year. For the foregoing purposes, a regulated investment
company is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall (1) reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year; and (2) exclude foreign currency
gains and losses from Section 998 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
Aetna Generation Portfolios, Inc. 27
<PAGE>
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 a Portfolio prior to the date on which
the shareholder acquired the shares.
If a Portfolio elects to retain its net capital gain, the Portfolio will be
taxed thereon (except to the extent of any available capital loss carryovers) at
the 35% corporate tax rate. Where a Portfolio elects to retain its net capital
gain, it is expected that the Portfolio also will elect to have shareholders of
record on the last day of its taxable year treated as if each received a
distribution of its pro rata share of such gain, with the result that each
shareholder will be required to report its pro rata share of such gain on its
tax return as long-term capital gain, will receive a refundable tax credit for
its pro rata share of tax paid by the Portfolio on the gain, and will increase
the tax basis for its shares by an amount equal to the deemed distribution less
the tax credit. All distributions paid to Aetna, whether characterized as
ordinary income or capital gain, are not taxable to VA Contract or VLI Policy
holders.
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 246(a). 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 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.
Aetna Generation Portfolios, Inc. 28
<PAGE>
Distributions by a Portfolio that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in his shares; any excess will
be treated as gain from the sale of his shares, as discussed below.
Distributions paid to shareholders are generally reinvested in additional
shares. Shareholders receiving a distribution in the form of additional shares
will be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment date. In
addition, if the net asset value at the time a shareholder purchases shares of a
Portfolio reflects undistributed net investment income or recognized capital
gain net income, or unrealized appreciation in the value of the assets of the
Portfolio, distributions of such amounts will be taxable to the shareholder in
the manner described above, although such distributions economically constitute
a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Portfolio into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Portfolio) on December
31 of such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Tax Effect on Contract Owners and Policy Owners
Owners of VA Contracts and VLI Policies are taxed through prior ownership of
such contracts and policies, as described in the insurance company'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. 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 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,
Aetna Generation Portfolios, Inc. 29
<PAGE>
N.A., the Fund's 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
The financial statements and independent auditor's reports thereon, appearing in
the Fund's Annual Report for the fiscal year ended
________________________________________. The Annual Report is available upon
request and without charge by calling 1-800-525-4225 or by writing to Aetna
Generation Portfolios, Inc., 151 Farmington Avenue, Hartford, CT 06156.
Aetna Generation Portfolios, Inc. 30
<PAGE>
PART C
OTHER INFORMATION
-----------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:*
(1) Included in Part A:
Financial Highlights
(2) Incorporated by reference in Part B to the Fund's Annual
Report dated December 31, 1997 on Form N-30D (File No.
811-8934), as filed electronically with the Securities and
Exchange Commission on __________, 1998 (Accession No.
_______________):
Audited Financial Statements for Aetna Ascent Variable
Portfolio(1), Aetna Crossroads Variable Portfolio(2) and
Aetna Legacy Variable Portfolio(3) as of December 31,
1997, which include the following:
Portfolios of Investments
Statements of Assets and Liabilities as of December
31, 1997
Statements of Operations for the year ended
December 31, 1997
Statements of Changes in Net Assets for the years
ended December 31, 1997 and 1996
Notes to Financial Statements
Independent Auditors' Reports
1. Renamed Aetna Ascent VP effective May 1, 1998.
2. Renamed Aetna Crossroads VP effective May 1, 1998.
3. Renamed Aetna Legacy VP effective May 1, 1998.
(b) Exhibits:
(1)(a) Articles of Incorporation(1)
(1)(b) Articles Supplementary(2)
(2) Amended Bylaws(2)
(3) Not applicable
(4) Investment Defining Rights of Holders(3)
(5) Investment Advisory Agreement between Aeltus
Investment Management, Inc. ("Aeltus") and Aetna
Generation Portfolios, Inc., on behalf of Aetna
Ascent VP, Aetna Crossroads VP and Aetna Legacy
VP
(6) Underwriting Agreement between Aetna Life
Insurance and Annuity Company and Aetna
Generation Portfolios, Inc.(2)
(7) Directors' Deferred Compensation Plan
(8) Custodian Agreement between Aetna Generation
Portfolios, Inc. and Mellon Bank, N.A.(1)
(9)(a) Administrative Services Agreement between Aeltus
and Aetna Generation Portfolios, Inc., on behalf
of Aetna Ascent VP, Aetna Crossroads VP and Aetna
Legacy VP
(9)(b) License Agreement(1)
(10) Opinion and Consent of Counsel
(11) Consent of Independent Auditors*
<PAGE>
(12) Not applicable
(13) Agreement Concerning Initial Capital(1)
(14) Not applicable
(15) Not applicable
(16) Schedule for Computation of Performance Data(2)
(17) See exhibit 27 below
(18) Not applicable
(19)(a) Power of Attorney(4)
(19)(b) Authorization for Signature(5)
(27) Financial Data Schedule*
* To be filed by amendment
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
(Accession No. 0000950109-95-002377).
2. Incorporated by reference to Post-Effective Amendment No. 5 to Registration
Statement on Form N-1A (File No. 33-88334), as filed electronically with
the Securities and Exchange Commission on April 15, 1997 (Accession No.
0000950146-97-000605).
3. Incorporated by reference Post-Effective Amendment No. 3 to Registration
Statement on Form N-1A (File No. 33-88334), as filed electronically with
the Securities and Exchange Commission on April 25, 1996 (Accession No.
0000950146-96-000588).
4. Incorporated by reference to Post-Effective Amendment No. 24 to
Registration Statement on Form N-1A (File No. 33-41694), as filed
electronically with the Securities and Exchange Commission on January 16,
1998 (Accession No. 0000950146-98-000093).
5. Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement on Form N-1A (File No. 333-05173), as filed electronically with
the Securities and Exchange Commission on September 26, 1997 (Accession No.
0000950146-97-001480).
<PAGE>
Item 25. Persons Controlled by or Under Common Control
- ------------------------------------------------------
Registrant is a Maryland corporation for which separate financial
statements are filed. As of January 31, 1998, Aetna Life Insurance
and Annuity Company ("Aetna") owned 99.35% of Registrant's
outstanding voting securities.
Aetna is 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. 16 to the Registration Statement on Form N-4 (File
No. 33-75964), as filed electronically with the Securities and
Exchange Commission on February 9, 1998 (Accession No.
0000950146-98-000179).
Item 26. Number of Holders of Securities
- ----------------------------------------
(1) Title of Class (2) Number of Record Holders
as of January 31, 1998
Aetna Ascent Variable VP
(formerly Aetna Ascent Portfolio) 2
Aetna Crossroads Variable VP
(formerly Aetna Crossroads Portfolio) 2
Aetna Legacy Variable VP
(formerly Aetna Legacy Portfolio) 2
Item 27. Indemnification
- ------------------------
Article 9, Section (d) of the Registrant's Articles of
Incorporation, incorporated by reference to Registrant's
Registration Statement on Form N-1A (File No. 33-88334), as filed
electronically on June 19, 1995 (Accession No.
0000950109-95-002377), 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 October 1, 1999.
Section XI.B of the Administrative Services Agreement filed
herewith as Exhibit 9(a)) provides for indemnification of the
Administrator.
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, Aeltus Investment Management, Inc.
("Aeltus"), is registered as an investment adviser with the
Securities and Exchange Commission. In addition to serving as the
investment adviser and administrator for Aetna Generation
Portfolios, Inc., Aeltus acts as investment adviser and
administrator for Aetna Variable Fund, Aetna Income Shares, Aetna
Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna
GET Fund, Aetna Variable Portfolios, Inc., and Aetna Series Fund,
Inc. (all management investment companies registered under the
Investment Company Act of 1940 (the "1940 Act")). It also acts as
investment adviser to certain private accounts.
The following table summarizes the business connections of the
directors and principal officers of the investment adviser.
<TABLE>
<CAPTION>
----------------------------- ---------------------------------- -------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1995/Addresses*/**
----------------------------- ---------------------------------- -------------------------------------------------------
<S> <C> <C>
J. Scott Fox Director, Managing Director, Director and President (since September 1997)
Chief Operating Officer, Chief -- Aetna Life Assignment Company; Vice President
Financial Officer (since April 1997) -- Aetna Retirement Services,
Inc.; Director and Senior Vice President (since April 1997)
-- Aetna Retirement Holdings, Inc.; Director and 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.; Director (March 1996
- July 1997) -- Aeltus Capital, Inc.; Managing Director,
Chief Financial Officer (March 1996 - April 1997) -- Aeltus
Capital, Inc.; Director (May 1996 July 1997) -- Aeltus Trust
Company, Inc.; Managing Director, Chief Operating Officer,
Chief Financial Officer and Treasurer (May 1996 - April
1997) -Aeltus Trust Company, Inc.; Director and President
(May 1996 - October 1997) -- Aetna Investment Management
(Bermuda) Holding, Ltd.
<PAGE>
<CAPTION>
----------------------------- ---------------------------------- -------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1995/Addresses*/**
----------------------------- ---------------------------------- -------------------------------------------------------
Timothy A. Holt Director Senior Vice President (since September 1997) -- Aetna
Retirement Holdings, Inc.; Director (since September
1997) -- Aetna Investment Services, Inc.; Senior Vice
President and Chief Financial Officer (since February
1996) -- Aetna Life Insurance and Annuity Company;
Director (since March 1996) -- Aetna Retirement
Holdings, Inc.; Vice President (September 1996 -
September 1997) -- Aetna Retirement Holdings, Inc.;
Vice President, Portfolio Management/Investment Group
(June 1991 - February 1996) -- Aetna Inc. (formerly
known as Aetna Life and Casualty Company).
John Y. Kim Director, President, Chief Director (since February 1995) -- Aetna Life
Executive Officer, Chief Insurance and Annuity Company; Senior Vice President
Investment Officer (since September 1994) -- Aetna Life Insurance and
Annuity Company.
Thomas J. McInerney Director President (since August 1997) -- Aetna Retirement
Services, Inc.; Director and President (since
September 1997) -- Aetna Life Insurance and Annuity
Company; Director and President (since September
1997) -- Aetna Retirement Holdings, Inc.; Director
and President (since September 1997) -- Aetna
Insurance Company of America; Executive Vice
President (since August 1997) -- Aetna Inc.; Vice
President, Strategy (March 1997 - August 1997) --
Aetna Inc.; Vice President, Marketing and Sales
(December 1996 - March 1997) -- Aetna U.S.
Healthcare; Vice President, National Accounts (April
1996 - December 1996) -- Aetna U.S. Healthcare; Vice
President, Strategy, Finance, & Administration (July
1995 - April 1996) -- Aetna Inc.
Peter B. Canoni Managing Director, Equity Managing Director (since January 1996) -- Aeltus
Investments Trust Company; Registered Representative (since March
1994) -- Aeltus Capital, Inc.
<PAGE>
<CAPTION>
----------------------------- ---------------------------------- -------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
with Investment Adviser Since Oct. 31, 1995/Addresses*/**
----------------------------- ---------------------------------- -------------------------------------------------------
Lennart A. Carlson Managing Director, Fixed Income Managing Director (since January 1996) -- Aeltus
Investments Trust Company; Registered Representative (since
February 1993) -- Aeltus Capital, Inc.
Steven C. Huber Managing Director, Fixed Income Portfolio Manager (August 1991 - August 1996) --
Investments Aetna Life Insurance and Annuity Company; Managing
Director (since August 1996) -- Aeltus Trust Company.
Brian K. Kawakami Vice President, Chief Compliance Chief Compliance Officer & Director (since January
Officer 1996) -- Aeltus Trust Company; Chief Compliance
Officer (since August 1993) -- Aeltus Capital, Inc.
Frank Litwin Managing Director, Retail Vice President, Strategic Marketing (April, 1992 -
Marketing and Sales August, 1997) -- Fidelity Investments Institutional
Services Company.
Kevin M. Means Managing Director, Equity Managing Director (July 1994 - August 1996) -- Aetna
Investments Life Insurance and Annuity Company; Managing Director
(since August 1996) -- Aeltus Trust Company.
Jeanne Wong-Boehm Managing Director, Fixed Income Portfolio Manager (March 1982 - August 1996) -- Aetna
Investments Life Insurance and Annuity Company; Portfolio Manager
March 1982 - August 1996) -- Aetna Inc.; Managing Director
since August 1996) -- Aeltus Trust Company; Registered
Representative (since August 1996) -- Aeltus Capital, Inc.
</TABLE>
* Except with respect to Messrs. Holt and McInerney, the principal
business address of each person named is 242 Trumbull Street, Hartford,
Connecticut 06103-1205. The address of Messrs. Holt and McInerney 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.
Item 29. Principal Underwriters
- -------------------------------
(a) In addition to serving as the principal underwriter for the Registrant,
Aetna also acts as the principal underwriter for Aetna Variable Fund,
Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment
Advisers Fund, Inc., Aetna GET Fund, Aetna Variable Portfolios, Inc.,
and Portfolio Partners, Inc. (all management investment companies
registered under the 1940
<PAGE>
Act). Additionally, Aetna acts as the principal underwriter and
depositor for Aetna Variable Annuity Account B of Aetna, Variable
Annuity Account C of Aetna, Variable Annuity Account G of Aetna, and
Aetna 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>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Principal Underwriter with Registrant
- ----------------- -------------------------- ---------------------
<S> <C> <C>
Thomas J. McInerney Director and President None
Robert D. Friedhoff Director and Senior Vice President None
John Y. Kim Director and Senior Vice President Director
Shaun P. Mathews Director and Senior Vice President Director
Catherine H. Smith Director, Chief Financial Officer and Senior None
Vice President
Thomas P. Waldron Director and Vice President None
Kirk P. Wickman Vice President, General Counsel and None
Corporate Secretary
Deborah Koltenuk Vice President and Treasurer, Corporate None
Controller
Frederick D. Kelsven Vice President and Chief Compliance Officer None
</TABLE>
* Except with respect to Messrs. Fox and Kim, the principal business address
of all directors and officers listed is 151 Farmington Avenue, Hartford,
Connecticut 06156. The address of Messrs. Fox and Kim is 242 Trumbull
Street, Hartford, Connecticut 06103-1205.
(c) Not applicable
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, Aeltus,
maintain physical possession of each account, book or other
document, at 151 Farmington Avenue, Hartford, Connecticut 06156 or
242 Trumbull Street, Hartford, Connecticut 06103-1205.
Item 31. Management Services
Not applicable.
<PAGE>
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. has duly caused this Post-Effective Amendment
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 26th day of February, 1998.
AETNA GENERATION PORTFOLIOS, INC.
(Registrant)
J. Scott Fox*
By__________________________________
J. Scott Fox
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 February 26, 1998 in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C> <C>
J Scott Fox* President and Director )
- ------------------------------------ (Principal Executive Officer) )
J. Scott Fox )
)
Maria T. Fighetti* Director ) February
- ------------------------------------ )
Maria T. Fighetti ) 26, 1998
)
David L. Grove* Director )
- ------------------------------------ )
David L. Grove )
)
John Y. Kim* Director )
- ------------------------------------ )
John Y. Kim )
)
Sidney Koch* Director )
- ------------------------------------ )
Sidney Koch )
)
Shaun P. Mathews* Director )
- ------------------------------------ )
Shaun P. Mathews )
)
Corine T. Norgaard* Director )
- ------------------------------------ )
Corine T. Norgaard )
)
<PAGE>
<CAPTION>
Richard G. Scheide* Director )
- ------------------------------------ )
Richard G. Scheide )
)
Stephanie A. Taylor* Treasurer and Chief Financial Officer )
- ------------------------------------ (Principal Financial and Accounting )
Stephanie A. Taylor Officer) )
By: /s/ Amy R. Doberman
-----------------------
*Amy R. Doberman
Attorney-in-Fact
</TABLE>
(Executed pursuant to Power of Attorney dated December 10, 1997 and filed with
the Securities and Exchange Commission on January 16, 1998 (Accession No.
0000950146-98-000093)).
<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) Investment Advisory Agreement between Aeltus Investment Management,
Inc. ("Aeltus") and Aetna Generation Portfolios, Inc., on behalf of
Aetna Ascent VP, Aetna Crossroads VP and Aetna Legacy VP
------------------
99-(b)(6) Underwriting Agreement between Aetna Life Insurance and Annuity Company *
and Aetna Generation Portfolios, Inc.
99-(b)(7) Directors' Deferred Compensation Plan
------------------
99-(b)(8) Custodian Agreement between Aetna Generation Portfolios, Inc. and *
Mellon Bank, N.A.
99-(b)(9)(a) Administrative Services Agreement between Aeltus and Aetna Generation
Portfolios, Inc., on behalf of Aetna Ascent VP, Aetna Crossroads VP and
Aetna Legacy VP
------------------
99-(b)(9)(b) License Agreement *
99-(b)(10) Opinion and 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)(a) Power of Attorney *
99-(b)(19)(b) Authorization for Signature *
27 Financial Data Schedule **
</TABLE>
*Incorporated by reference.
**To be filed by amendment.
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between AELTUS INVESTMENT MANAGEMENT, INC., a
Connecticut corporation (the "Adviser") and AETNA GENERATION PORTFOLIOS, INC., a
Maryland corporation (the "Fund"), on behalf of its portfolio, Aetna Ascent VP
(the "Portfolio"), with respect to the following recital of facts:
R E C I T A L
-------------
WHEREAS, the Fund is registered with the Securities and Exchange Commission (the
"Commission") as an open-end, diversified, management investment company under
the Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, the Fund has established the Portfolio; and
WHEREAS, the Adviser is registered with the Commission as an investment adviser
under the Investment Advisers Act of 1940 (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;
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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;
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; and
7. 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. The
Adviser shall maintain such registration 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 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
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 to the
Adviser with respect to the Portfolio.
V. BROKER-DEALER RELATIONSHIPS
A. Portfolio Trades
The Adviser 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 or research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to the Adviser 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 that provide payment for expenses
of the Portfolio. The Adviser is authorized to pay a broker or dealer who
provides such brokerage or research services or expenses, and that has
provided assistance in the distribution of shares of the Portfolio to the
extent permitted by law, 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
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reasonable in relation to the value of the brokerage or research
services provided by such broker or dealer and is paid in compliance
with Section 28(e). 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;
2. the provisions of the current Registration Statement of the Fund;
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.
4
<PAGE>
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; and
2. all fees and expenses of all directors, officers and
employees, if any, of the Fund who are employees of the
Adviser, including any salaries and employment benefits
payable to those persons.
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;
5
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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 (other than those detailed in paragraph 9
above) 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;
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. 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
6
<PAGE>
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 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 on 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 on May 1, 1998, and shall remain in force
and effect through December 31, 1998, 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
7
<PAGE>
director of the Fund), by votes cast in person at a meeting
specifically called for such purpose.
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."
XVI. LIABILITY
The Adviser shall be liable to the Fund and shall indemnify the Fund for any
losses incurred by the Fund, 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:
151 Farmington Avenue
Hartford, Connecticut 06156
Fax number 860/273-8340
if to the Adviser:
242 Trumbull Street
Hartford, Connecticut 06103-1205
Fax number 860/275-4440
8
<PAGE>
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 or orders of the
Commission issued pursuant to the 1940 Act, or contained in no-action and
interpretive positions taken by the Commission staff. In addition, where the
effect of a requirement of the 1940 Act reflected in the provisions of this
Agreement is revised by rule or order of the Commission, such provisions shall
be deemed to incorporate the effect of such rule or order.
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 Services, Inc. (formerly known
as Aetna Life and Casualty Company) and their continued use is subject to the
right of Aetna Services, Inc. to withdraw this permission in the event the
Adviser or another affiliated corporation of Aetna Services, Inc. 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 18th day of February, 1998.
Aeltus Investment Management, Inc.
Attest: /s/ Arnold B. West By: /s/ John Y. Kim
------------------- ------------------------
Name: Arnold B. West Name: John Y. Kim
------------------- ------------------------
Title: Secretary Title: Chief Executive Officer
Aetna Generation Portfolios, Inc.
on behalf of its portfolio,
Aetna Ascent VP
Attest: /s/ DeAnn S. Anastasio By: /s/ J. Scott Fox
------------------- ------------------------
Name: DeAnn S. Anastasio Name: J. Scott Fox
------------------- ------------------------
Title: Assistant Secretary Title: President
9
<PAGE>
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) - Investment Advisory Agreement between Aeltus
Investment Management Inc. and Aetna Generation Portfolios, Inc., included
herewith.
Date Portfolio Difference
2/18/98 Aetna Crossroads VP None
2/18/98 Aetna Legacy VP None
10
AETNA GENERATION PORTFOLIOS, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
I. INTRODUCTION
1.01 This Deferred Compensation Plan (the "Plan") has been
established by resolution of the Boards of Trustees/Directors
(the "Board") of Aetna Generation Portfolios, Inc. (the
"Fund") using the format that has been established for use by
all open-end management investment companies, whether now
existing or to be created, that are advised by Aetna Life
Insurance and Annuity Company ("ALIAC") or its successor. The
purpose of the Plan is to provide retirement benefits for
those directors or trustees, as the case may be, of the Fund
who are not employees of the Fund, its distributor or
administrator, or ALIAC, or any affiliate of ALIAC.
1.02 The Plan shall be administered by the Board or by such person
or persons as the Board may designate to carry out
administrative functions hereunder (the "Plan Administrator").
The Plan Administrator shall have complete discretion to
interpret and administer the Plan in accordance with its
terms, and its determinations shall be binding on all persons
except for the provisions of ARTICLE VIII, whereunder action
by the full Board shall be required.
II. DEFINITIONS
2.01 Beneficiary or Beneficiaries: The person, persons, or legal
entities designated by the Participant in the Participant's
Deferral Agreement who are entitled to receive payments under
this Plan that become payable to such person, persons, or
legal entities in the event of the Participant's death. If
more than one designated beneficiary survives the Participant,
payments shall be made equally, unless otherwise provided in
the beneficiary designation. Nothing herein shall prevent the
Participant from designating primary and secondary
beneficiaries. Secondary beneficiaries are considered
designated beneficiaries and are entitled to payments under
the Plan only in the event that there are no primary
beneficiaries surviving the Participant.
2.02 Compensation. The annual retainer fees earned by a Participant
for service as a director of the Fund; the annual retainer fee
earned by a Participant for membership to a Committee of the
Board; and any fees earned by a Participant for attendance at
meetings of the Board and any of its Committees, all or a
portion of which may be deferred.
<PAGE>
2.03 Deferral Agreement: The agreement between the Fund and the
Participant to defer Compensation under the Plan.
2.04 Deferred Compensation: The amount, as mutually agreed to by
the Participant and the Fund, by which any Compensation not
yet earned shall be reduced in return for the benefits
provided under this Plan.
2.05 Lump Sum: A single payment of the entire balance credited to
the Participant's bookkeeping account under ARTICLE IV.
2.06 Notional Fund: Any open-end management investment company
registered under the Investment Company Act of 1940 with
respect to which ALIAC serves as investment adviser, shares of
which are sold to the public, and which the Plan Administrator
designates as a Notional Fund under the Plan.
2.07 Participant: Any Eligible Director of the Fund who fulfills
the eligibility and enrollment requirements of ARTICLE III.
2.08 Retirement: The time at which the Participant ceases to serve
as an Eligible Director of the Fund in conformity with the
Retirement Policy of the Board in effect at the time of such
cessation of service.
2.09 Termination of Services: The time at which the Participant
ceases to serve as an Eligible Director of the Fund for any
reason other than Retirement or death.
2.10 Unforeseeable Emergency: An unanticipated emergency that is
caused by an event beyond the control of the Participant and
that would result in severe financial hardship to the
individual if early withdrawal were not permitted in
accordance with ARTICLE VII hereof.
III. PARTICIPATION IN THE PLAN
3.01 Eligibility: Any director or trustee of the Fund who is not an
employee of the Fund or of the Fund's distributor or
administrator, or who is not an employee of ALIAC or any
affiliate of ALIAC, and who is not eligible to participate in
the Retirement Plan for Employees of Aetna Inc. ("Eligible
Director"), is eligible to participate in the Plan.
3.02 Enrollment in the Plan:
-----------------------
(a) An Eligible Director may become a Participant by
executing a Deferral Agreement whereunder that
Eligible Director agrees to
2
<PAGE>
defer all or a portion of Compensation not yet
earned and agrees to the provisions of the Plan.
(b) An election by the Eligible Director to defer
Compensation under the Plan for any calendar year
shall not be effective unless such election is made
on or before December 31 of the preceding year,
except that
(1) in the year in which the Plan is first
implemented, the Eligible Director may elect
to participate in the Plan within thirty
days of the date on which the Plan is
implemented, with deferral of Compensation
to begin on the first day of the month
subsequent to the month in which the
election is made, or
(2) An Eligible Director may elect to
participate in the Plan within thirty days
of the date upon which such Director first
meets the eligibility requirements of
Section 3.01, with deferral of Compensation
to begin on the first day of the month
subsequent to the month in which the
election is made.
(c) An Eligible Director who defers Compensation may not
modify the Eligible Director's Deferral Agreement to
change the amount deferred except with respect to
Compensation earned in a subsequent calendar year
where the Participant notifies the Plan Administrator
in writing or except as provided in ARTICLE VII
hereof with respect to WITHDRAWALS.
(d) A Participant may elect the manner in which benefits
will be distributed under the Deferral Agreement. The
distribution election may be subsequently changed by
the Participant by notifying the Plan Administrator
in writing of the Participant's election, but such
amendment will only be effective with respect to the
distribution of Compensation earned and amounts
credited on such Compensation in the Participant's
bookkeeping account in calendar years following the
year in which the amendment is requested.
IV. ACCUMULATION OF DEFERRED COMPENSATION
4.01 The Plan Administrator shall establish a bookkeeping account
on behalf of the Participant, the value of which at any given
time shall determine the benefits payable to the Participant
under ARTICLES V and VI and the Withdrawal values under
ARTICLE VII. Beginning on the date the
3
<PAGE>
Participant first enrolls in the Plan, the account shall be
credited with an amount equal to the Participant's Deferred
Compensation at such times as the Compensation subject to
deferral would otherwise have been paid. Until the account is
removed from the books of the Fund, the account shall be
further adjusted for notional investment experience as
described in Section 4.02.
4.02 Amounts credited to the Participant's bookkeeping account
shall be periodically adjusted for notional investment
experience. In each case such notional investment experience
shall be determined by treating such account as though an
equivalent dollar amount had been invested and reinvested in
one or more of the Notional Funds. The Notional Funds used as
a basis for determining notional investment experience with
respect to the Participant's account shall be designated by
the Participant in writing by instrument of election and may
be changed prospectively by similar written election no later
than thirty days before the end of a calendar quarter
effective as of the first day of the subsequent calendar
quarter. The Plan Administrator may from time to time limit
the Notional Funds available for purposes of such election. If
at any time any Notional Fund that has previously been
designated by the Participant as a notional investment shall
cease to exist or shall be unavailable for any reason, or if
the Participant fails to designate one or more Notional Funds
pursuant to this Section 4.02, the Plan Administrator may, at
its discretion and upon notice to the Participant, treat any
amounts previously notionally invested or to be notionally
invested in such Notional Fund as being invested in Aetna
Money Market Fund or if such Notional Fund ceases to exist or
is unavailable for any reason, such other short-term
high-quality fixed-income Notional Fund as the Plan
Administrator may from time to time designate, in all cases
only until such time as the Participant shall have made
another investment election in accordance with the foregoing
procedures. The Participant's bookkeeping account shall
continue to be adjusted for notional investment experience
until distributed in full in accordance with the distribution
methods set forth in this Plan.
4.03 It is specifically provided that neither the Plan
Administrator nor the Fund shall be obligated to make actual
cash deposits in the account, but only to make bookkeeping
entries as if deposits had been made. If for its own
convenience the Fund should make deposits, it is further
provided that any sums thus deposited shall remain a general
unrestricted asset of the Fund and shall not be deemed as
being held in trust, escrow, or in any other fiduciary manner
for the benefit of the Participant. The Participant
understands that the value of the Participant's bookkeeping
account will fluctuate due to the investment experience of the
Notional Funds and that at the time at which benefits become
payable under the Plan, the value of the Participant's
bookkeeping account may be less than the total amount of
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<PAGE>
Compensation deferred under the Plan. The Fund is not
responsible or liable for any amount by which the total amount
of Compensation deferred exceeds the value of the bookkeeping
account and the Fund shall have no obligation to restore any
such difference.
V. BENEFITS ON RETIREMENT
5.01 If the Participant continues in the service of the Fund until
Retirement, the Fund shall pay to such Participant the amount
then and thereafter standing credited to the bookkeeping
account described in ARTICLE IV at the time and in the manner
as elected by the Participant in the Participant's Deferral
Agreement. If monthly or annual installments are elected by
the Participant, the estimated payments must be at least
$1,000 per month or $10,000 per year; if the applicable
minimum is not met, the payout duration will be adjusted to
meet the minimums. Installment payments shall be substantially
equal over the period elected. Any excess amounts remaining in
the account shall be paid out in the final installment. With
respect to benefits payable in a Lump Sum, the Lump Sum shall
be an amount equal to the current value of the Participant's
bookkeeping account on the date of the Participant's
Retirement. The Lump Sum shall be paid to the Participant no
later than the fifteenth day of the month following the date
of the Participant's Retirement.
5.02 Should the Participant die at any time after Retirement,
whether prior to or after the Participant has begun to receive
the retirement payments provided for in Section 5.01, the
Participant's designated Beneficiary or Beneficiaries shall be
entitled to receive the balance of such payments as they fall
due, or, in the sole discretion of the Plan Administrator, in
a Lump Sum equal to the current value of the deceased
Participant's bookkeeping account on the date of the
Participant's death. If no Beneficiary or Beneficiaries are
designated as provided in Section 2.01 of this Plan at the
time the Participant dies, then the Participant's estate shall
be paid by the Plan as promptly as possible after due proof of
death a Lump Sum amount equal to the value of the
Participant's bookkeeping account on the date of the
Participant's death. If a designated Beneficiary or
Beneficiaries survive the death of the Participant, and said
designated Beneficiary or Beneficiaries do not survive the
period during which payments are to be made under this Plan,
then:
(a) If there is only one designated Beneficiary, then the
designated Beneficiary's estate shall be paid by the
Plan as promptly as possible after due proof of death
a Lump Sum amount equal to the value of the
Participant's bookkeeping account on the date of the
designated Beneficiary's death, or
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(b) If there is more than one designated Beneficiary,
then the death of any designated Beneficiary who is
not the last to die shall cause all prospective
payments under this Plan previously designated to the
deceased Beneficiary to be redistributed
proportionately among the surviving designated
Beneficiaries.
Upon the death of the last designated Beneficiary, such
designated Beneficiary's estate shall be paid by the Plan as
promptly as possible after due proof of death a Lump Sum
amount equal to the value of the Participant's bookkeeping
account on the date of the designated Beneficiary's death.
VI. BENEFITS ON TERMINATION OF SERVICES OR DEATH PRIOR TO RETIREMENT
6.01 In the event there is a Termination of Services, the Fund
shall pay to the Participant the amount then and thereafter
standing credited to the bookkeeping account described in
ARTICLE IV at the time and in the manner as elected by the
Participant in the Participant's Deferral Agreement. If
monthly or annual installments are elected by a Participant,
the estimated payments must be at least $1,000 per month or
$10,000 per year; if the applicable minimum is not met, the
payout duration will be adjusted to meet the minimums.
Installment payments shall be substantially equal over the
period elected. Any excess amounts remaining in the account
shall be paid out in the final installment. With respect to
benefits payable in a Lump Sum, the Lump Sum shall be an
amount equal to the current value of the Participant's
bookkeeping account on the date of Termination of Services.
The Lump Sum shall be paid to the Participant no later than
the fifteenth day of the month following the date of
Termination of Services.
6.02 In the event the Participant dies before the Participant's
Retirement or the Participant dies prior to receiving all of
the payments under Section 6.01, the Participant's designated
Beneficiary or Beneficiaries shall be entitled to receive the
balance remaining of such payments as they fall due, or, in
the sole discretion of the Plan Administrator, in a Lump Sum
equal to the current value of the deceased Participant's
bookkeeping account on the date of the Participant's death. If
no Beneficiary or Beneficiaries are designated as provided in
Section 2.01 of this Plan at the time the Participant dies,
then the Participant's estate shall be paid by the Plan as
promptly as possible after due proof of death a Lump Sum
amount equal to the value of the Participant's bookkeeping
account on the date of the Participant's death. If a
designated Beneficiary or Beneficiaries survive the death of
the Participant, and said designated Beneficiary or
Beneficiaries
6
<PAGE>
do not survive the period during which payments are to be made
under this Plan, then:
(a) If there is only one designated Beneficiary, then the
designated Beneficiary's estate shall be paid by the
Plan as promptly as possible after due proof of death
a Lump Sum amount equal to the value of the
Participant's bookkeeping account on the date of the
designated Beneficiary's death, or
(b) If there is more than one designated Beneficiary, then
the death of any designated Beneficiary who is not
the last to die shall cause all prospective payments
under this Plan previously designated to the deceased
Beneficiary to be redistributed proportionately among
the surviving designated Beneficiaries.
Upon the death of the last designated Beneficiary,
such designated Beneficiary's estate shall be paid by
the Plan as promptly as possible after due proof of
death a Lump Sum amount equal to the value of the
Participant's bookkeeping account on the date of the
designated Beneficiary's death.
VII. WITHDRAWALS
In the event of an Unforeseeable Emergency, the Participant
may apply to the Plan Administrator for early withdrawal from
the Plan of an amount limited to that which is necessary to
meet the emergency. If such application for withdrawal is
approved by the Plan Administrator, the withdrawal will be
effective at the latter of the date specified in the
Participant's application or the date of approval by the Plan
Administrator. Whenever an application for withdrawal is
honored, the Plan Administrator shall pay the Participant from
the Participant's bookkeeping account described in ARTICLE IV
only those amounts necessary to meet the emergency. The
Participant's bookkeeping account shall be appropriately
adjusted to reflect the amounts withdrawn. An Unforeseeable
Emergency shall include the following: bankruptcy or impending
bankruptcy, unexpected and nonreimbursable major expenses
resulting from illness to person or accident to person or
property and other types of unexpected and nonreimbursable
expenses of a major or emergency nature where withdrawal of
funds would be necessary to prevent serious financial hardship
to the Participant. Withdrawals for foreseeable expenditures
such as the down payment on a home, vacation expenses,
purchase of an automobile, or education expenses will not be
permitted. As provided in Section 1.02, the Plan Administrator
shall make the required findings under this provision and such
findings shall be binding upon all persons.
7
<PAGE>
VIII. AMENDMENT OR TERMINATION OF PLAN
8.01 The Board may at any time terminate this Plan. Upon such
termination, the Participant will be deemed to have revoked
the election to defer Compensation as of the date of such
termination. Upon termination, no part of the Participant's
Compensation will be deferred and the Participant shall be
treated as if there had been a Termination of Services under
Section 6.01 on the date of the termination for purposes of
payment of benefits under the Plan.
8.02 The Board may amend the provisions of this Plan at any time
provided, however, that no amendment shall adversely affect
the rights of the Participant or the designated Beneficiary or
Beneficiaries, if any, as to the receipt of payments under the
Plan to the extent of any Compensation deferred before the
time of the amendment.
IX. PARTICIPANT STATUS
The Participant in the Plan shall have only the status of
general unsecured creditor of the Fund. The Plan constitutes a
mere promise by the Fund to make payments in the future.
X. NON-ASSIGNABILITY CLAUSE
It is expressly provided that neither the Participant nor the
Participant's Beneficiary or Beneficiaries, nor any other
designee, shall have any right to commute, sell, assign,
transfer or otherwise convey the right to receive any payments
hereunder which payments and rights thereto are expressly
declared to be non-assignable and non-transferable and, in the
event of any attempted assignment or transfer, the Fund shall
have no further liability hereunder. Moreover, no unpaid
benefits shall be subject to attachment, garnishment or
execution, or be transferable by operation of law in the event
of bankruptcy or insolvency, except to the extent otherwise
required by law. The right of the Participant or the
Participant's Beneficiary or Beneficiaries to payments under
the Plan are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors of the Participant or
the Participant's Beneficiary or Beneficiaries.
XI. APPLICABLE LAW
This Plan shall be construed under the law of the State of
Connecticut.
8
<PAGE>
XII. EFFECTIVE DATE
This Plan shall be effective on the date of its adoption by
the Fund's Board of Directors or on such later date as may be
provided in the vote, resolution or consent in which such
adoption takes place.
Adopted by the Board, by resolution, on September 24, 1997.
9
ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT is made by and between AETNA GENERATION PORTFOLIOS,
INC., a Maryland Corporation (the "Fund"), on behalf of each of its portfolios,
Aetna Ascent VP, Aetna Crossroads VP and Aetna Legacy VP (the "Portfolios"), and
AELTUS INVESTMENT MANAGEMENT, INC., a Connecticut corporation (the
"Administrator"), with respect to the following recital of facts:
R E C I T A L
-------------
WHEREAS, the Fund is registered as an open-end diversified management
investment company under the Investment Company Act of 1940 (the "1940 Act");
and
WHEREAS, the Administrator is registered as an investment adviser under
the Investment Advisers Act of 1940 (the "Advisers Act"), and engages in the
business of acting as an investment adviser and an administrator of investment
companies; and
WHEREAS, the Fund has established the Portfolios; and
WHEREAS, the Fund, on behalf of each of its Portfolios, and the
Administrator desire to enter into an agreement to provide for administrative
services for the Portfolios on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable considerations, the receipt of which is
hereby acknowledged, the parties agree as follows:
I. APPOINTMENT AND OBLIGATIONS OF THE ADMINISTRATOR
The Administrator is hereby appointed to serve as the Administrator to
the Portfolios, to provide the administrative services described herein and
assume the obligations set forth in Section II, subject to the terms of this
Agreement and the control of the Fund's Board of Directors (the "Board"). The
Administrator shall, for all purposes herein, be deemed an independent
contractor and shall have, unless otherwise expressly provided or authorized, no
authority to act for or represent the Portfolios in any way or otherwise be
deemed an agent of the Portfolios.
II. DUTIES OF THE ADMINISTRATOR
In carrying out the terms of this Agreement, the Administrator shall:
A. provide office space, equipment and facilities (which may be the
Administrator's or its affiliates') for maintaining the Fund's organization, for
meetings of the Fund's Board and shareholders, and for performing administrative
services hereunder;
<PAGE>
B. supervise and manage all aspects of the Portfolios' operations
(other than investment advisory activities), supervise relations with, and
monitor the performance of, custodians, depositories, transfer and pricing
agents, accountants, attorneys, underwriters, brokers and dealers, insurers and
other persons in any capacity deemed to be necessary and desirable by the Board;
C. provide internal clerical and legal services, and stationery and
office supplies;
D. provide accounting services, including:
1. determining and arranging for the publication of the net
asset value of each Portfolio;
2. preparing financial information for presentation to the Fund's
Board and management;
3. preparing and monitoring the Fund's annual expense budget, and
establishing daily accruals;
4. coordinating payment of fund expenses;
5. calculating periodic dividend rates to be declared in
accordance with management guidelines;
6. calculating total return information as defined in the
current prospectus and statement of additional information;
7. coordinating audit packages for use by independent public
accountants;
8. responding to regulatory audits;
E. provide non-investment related statistical and research data and
such other reports, evaluations and information as the Portfolios may request
from time to time;
F. monitor each Portfolio's compliance with the current prospectus and
statement of additional information, the 1940 Act, the Internal Revenue Code and
other applicable laws and regulations;
G. prepare, to the extent requested by the Fund, registration
statements, proxy statements and annual and semi-annual reports to shareholders;
H. arrange for the printing and mailing (at the Portfolios' expense) of
proxy statements and other reports or other materials provided to the
Portfolios' shareholders;
I. support outside auditors in preparing and filing all the Portfolios'
federal and state tax returns and required tax filings other than those required
to be made by the Portfolios' custodian and transfer agent;
2
<PAGE>
J. prepare periodic reports to and filings with the Securities and
Exchange Commission (the "SEC") and state Blue Sky authorities with the advice
of the Portfolios' counsel;
K. maintain the Fund's existence, and during such times as the shares
of the Portfolios are publicly offered, maintain the registration and
qualification of the Portfolios' shares under federal and state law;
L. keep and maintain the financial accounts and records of the
Portfolios;
M. provide the Board on a regular basis with reports and analyses of
the Portfolios' operations and the operations of comparable investment
companies; and
N. take any other actions which appear to the Administrator and the
Board necessary to carry into effect the purposes of this Agreement.
III. REPRESENTATIONS AND WARRANTIES
A. REPRESENTATIONS AND WARRANTIES OF THE ADMINISTRATOR
The Administrator hereby represents and warrants to the Fund as
follows:
1. Due Incorporation and Organization. The Administrator 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. Best Efforts. The Administrator at all times shall provide
its best judgment and effort to the Portfolios in carrying
out its obligations hereunder.
B. REPRESENTATIONS AND WARRANTIES OF THE PORTFOLIOS AND THE FUND
The Fund, on behalf of each of its Portfolios, hereby represents
and warrants to the Administrator 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
terms.
2. Registration. The Fund is registered as an investment
company with the SEC under the 1940 Act and shares of the
Portfolios are registered or qualified for offer and sale to
the public under the Securities Act of 1933 (the "1933
Act"), and all applicable state securities laws. Such
registrations or qualifications will be kept in effect
during the term of this Agreement.
3
<PAGE>
IV. CONTROL BY THE BOARD OF DIRECTORS
Any activities undertaken by the Administrator pursuant to this
Agreement on behalf of the Portfolios shall at all times be subject to any
directives of the Board.
V. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Administrator
shall at all times conform to:
A. all applicable provisions of the 1940 Act;
B. the provisions of the registration statement of the Fund under the
1933 Act and the 1940 Act;
C. the provisions of the Fund's Articles of Incorporation, as
amended;
D. the provisions of the By-Laws of the Fund, as amended; and
E. any other applicable provisions of state and federal law.
VI. DELEGATION OF RESPONSIBILITIES
All services to be provided by the Administrator under this Agreement
may be furnished by any directors, officers or employees of the Administrator or
by any affiliates of the Administrator under the Administrator's supervision.
VII. COMPENSATION
For the services to be rendered, the facilities furnished and the
expenses assumed by the Administrator, the Fund, on behalf of each of its
Portfolios, shall pay to the Administrator an annual fee, payable monthly (in
arrears), based upon the following average daily net assets of each of its
Portfolios:
Rate Net Assets
---- ----------
.075% on the 1st $5 billion
.05% over $5 billion
Except as hereinafter set forth, compensation under this Agreement shall be
calculated and accrued daily at the rate of 1/365 of the annual administration
fee applied to the daily net assets of the Portfolios. If this Agreement becomes
effective 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 as set forth above.
4
<PAGE>
VIII. NON-EXCLUSIVITY
The services of the Administrator to the Portfolios are not to be
deemed to be exclusive, and the Administrator shall be free to render
administrative 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 Administrator 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 Administrator to the extent permitted by law; and that the
officers and directors of the Administrator 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.
IX. TERM
This Agreement shall become effective on May 1, 1998, and shall
continue through December 31, 1998. Thereafter it shall continue for successive
annual 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 Portfolios' 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.
X. TERMINATION
This Agreement may be terminated at any time, without the payment of
any penalty, by vote of the Fund's directors or by vote of a majority of the
Portfolios' outstanding voting securities, as defined in Section 2(a)(42) of the
1940 Act, or by the Administrator, on sixty (60) days' written notice to the
other party.
XI. LIABILITY OF ADMINISTRATOR AND INDEMNIFICATION
A. LIABILITY
The Administrator shall be liable to the Fund and shall indemnify the
Fund for any losses incurred by the Fund, 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 Administrator or its officers, directors
or employees, that is found to involve willful misfeasance, bad faith or
negligence,
5
<PAGE>
or reckless disregard by the Administrator of its duties under this
Agreement, in connection with the services rendered by the Administrator
hereunder.
B. INDEMNIFICATION
In the absence of willful misfeasance, bad faith, negligence or
reckless disregard of obligations or duties hereunder on the part of the
Administrator or any officer, director or employee of the Administrator, to the
extent permitted by applicable law, the Fund hereby agrees to indemnify and hold
the Administrator harmless from and against all claims, actions, suits and
proceedings at law or in equity, whether brought or asserted by a private party
or a governmental agency, instrumentality or entity of any kind, relating to the
sale, purchase, pledge of, advertisement of, or solicitation of sales or
purchases of any security (whether of the Portfolios or otherwise) by the Fund,
its officers, directors, employees or agents in alleged violation of applicable
federal, state or foreign laws, rules or regulations.
XII. NOTICES
Any notices under this Agreement shall be in writing, addressed and
delivered or mailed postage paid to the other party at such address as such
other party may designate for the receipt of such notice. Until further notice
to the other party, it is agreed that the address of the Administrator for this
purpose shall be 242 Trumbull Street, Hartford, Connecticut 06103-1205, and the
address of the Fund for this purpose shall be 151 Farmington Avenue, Hartford,
Connecticut 06156.
XIII. QUESTIONS OF INTERPRETATIONS
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 or orders
of the SEC issued pursuant to the 1940 Act, or contained in no-action and
interpretive positions taken by the SEC staff. In addition, where the effect of
a requirement of the 1940 Act reflected in the provisions of this Agreement is
revised by rule or order of the SEC, such provisions shall be deemed to
incorporate the effect of such rule or order.
XIV. SERVICE MARK
The service mark of the Fund and the Portfolios and the name "Aetna"
have been adopted by the Fund with the permission of Aetna Services, Inc.
(formerly known as Aetna Life and Casualty Company) and their continued use is
subject to the right of Aetna Services, Inc. to withdraw this permission in the
event the Administrator or another subsidiary or affiliated corporation of Aetna
Services, Inc. should not be the Administrator of the Portfolios.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers as of the 18th day of
February, 1998.
AETNA GENERATION PORTFOLIOS, INC.
on behalf of each of its Portfolios,
Aetna Ascent VP
Aetna Crossroads VP
Aetna Legacy VP
AELTUS INVESTMENT
MANAGEMENT, INC.
By: /s/ John Y. Kim By: /s/ J. Scott Fox
------------------------- ------------------------
Name: John Y. Kim Name: J. Scott Fox
------------------------- ------------------------
Title: Chief Executive Officer Title: President
------------------------- ------------------------
Attest: Attest:
/s/ Arnold B. West /s/ DeAnn S. Anastasio
------------------------- -------------------------------
Name: Arnold B. West Name: DeAnn S. Anastasio
------------------------- ------------------------
Title: Secretary Title: Assistant Secretary
------------------------- ------------------------
7
[AETNA LETTERHEAD]
[AETNA LOGO]
Aetna Inc.
151 Farmington Avenue
Hartford, CT 06156-3124
Amy R. Doberman
Counsel
Law Division, RE4A
February 26, 1998 Investments & Financial Services
(860) 273-1409
Fax: (860) 273-0356
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Filing Desk
Re: Aetna Generation Portfolios, Inc.
Post-Effective Amendment No. 6 to
Registration Statement on Form N-1A
(File No. 33-88334 and 811-8934)
Dear Sir or Madam:
The undersigned serves as counsel to Aetna Life Insurance and Annuity Company
(ALIAC), the investment adviser to Aetna Generation Portfolios, Inc., a Maryland
corporation (the "Company"). It is my understanding that the Company has
registered an indefinite number of shares of beneficial interest under the
Securities Act of 1933 (the "1933 Act") pursuant to Rule 24f-2 under the
Investment Company Act of 1940 (the "1940 Act").
Insofar as it relates or pertains to the Company, I have reviewed the prospectus
and the Company's Registration Statement on Form N-1A, as amended to the date
hereof, filed with the Securities and Exchange Commission under the 1933 Act and
the 1940 Act, pursuant to which the Shares will be sold (the "Registration
Statement"). I have also examined originals or copies, certified or otherwise
identified to my satisfaction, of such documents and other instruments I have
deemed necessary or appropriate for the purpose of this opinion. For purposes of
such examination, I have assumed the genuineness of all signatures on original
documents and the conformity to the original of all copies.
I am admitted to practice law in Maryland and the District of Columbia. My
opinion herein as to Maryland law is based upon a limited inquiry thereof that I
have deemed appropriate under the circumstances.
<PAGE>
Page 2
February 26, 1998
Based upon the foregoing, and assuming the securities are issued and sold in
accordance with the provisions of the Company's Articles of Incorporation and
the Registration Statement, I am of the opinion that the securities will when
sold be legally issued, fully paid and nonassessable.
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Amy R. Doberman
- -------------------
Amy R. Doberman
Counsel
