As filed with the Securities and Exchange File No. 33-88334
Commission on April 27, 1998 File No. 811-8934
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
- --------------------------------------------------------------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 7
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7
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 (b) 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Form N-1A
Item No. Part B Caption in Statement of Additional
- -------- ------ ----------------------------------
Information
-----------
<S> <C> <C>
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 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........................................ Investment Advisory Agreements
The Administrative Services
Agreement
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>
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- --------------------------------------------------------------------------------
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 contract holders and 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
<TABLE>
<S> <C>
Financial Highlights ............................. 3
The Fund ......................................... 5
Description of the Generation Portfolios ......... 5
Investment Strategies ............................ 5
Investment Techniques ............................ 8
Risk Factors and Other Considerations ............ 10
Concentration .................................... 12
Management of the Generation Portfolios .......... 13
Reimbursements/Fee Waiver Arrangements ........... 14
Purchase and Redemption of Shares ................ 14
Net Asset Value .................................. 14
General Information .............................. 15
Tax Matters ...................................... 15
Year 2000 ........................................ 16
</TABLE>
2 Aetna Generation Portfolios, Inc.
<PAGE>
FINANCIAL HIGHLIGHTS
The selected data presented below for, and as of the end of, each of the
periods listed are obtained from the financial statements of Aetna Generation
Portfolios, Inc., which have been audited by KPMG Peat Marwick LLP, independent
auditors. Additional information about the performance of each Portfolio
included in the tables is contained in the Fund's Annual Report dated December
31, 1997.
(for one share outstanding throughout each period)
<TABLE>
<CAPTION>
Aetna Ascent VP
------------------------------------------------
Period
Year Year From
Ended Ended 07/05/95 to
12/31/97 12/31/96 12/31/95+
------------- -------------- -------------------
<S> <C> <C> <C>
Net asset value,
beginning of period ............ $ 12.619 $ 10.795 $ 10.000
-------- -------- -----------
Income from
Investment Operations
Net investment
income ........................ 0.248 0.225 0.116
Net realized and
change in
unrealized gain on
investments .................. 2.247 2.286 0.929
-------- -------- -----------
Total from
investment
operations .................. 2.495 2.511 1.045
-------- -------- -----------
Less Distributions
From net investment
income ........................ ( 0.339) ( 0.230) ( 0.250)
From net realized gains
on investments ................. ( 0.656) ( 0.457) --
-------- -------- -----------
Total distributions ............. ( 0.995) ( 0.687) ( 0.250)
-------- -------- -----------
Net asset value, end of
period ......................... $ 14.119 $ 12.619 $ 10.795
======== ======== ===========
Total Return* ................... 19.90% 23.58% 10.45%
Net assets, end of
period (000's) ................. $ 148,810 $ 45,155 $ 18,850
Ratio of total expenses
to average net assets 0.75% 0.84% 1.59%(1)
Ratio of net investment
income to average
net assets ..................... 2.51% 2.53% 2.26%(1)
Portfolio turnover rate ......... 124.82% 109.77% 39.77%
Average Commission
rate paid per share
on equity securities
traded ......................... $ 0.0311 $ 0.0296 --
<CAPTION>
Aetna Crossroads VP
------------------------------------------------
Period
Year Year From
Ended Ended 07/05/95 to
12/31/97 12/31/96 12/31/95+
------------- -------------- -------------------
<S> <C> <C> <C>
Net asset value,
beginning of period ............ $ 11.979 $ 10.740 $ 10.000
-------- -------- -----------
Income from
Investment Operations
Net investment
income ........................ 0.303 0.270 0.131
Net realized and
change in
unrealized gain on
investments .................. 1.786 1.722 0.799
-------- -------- -----------
Total from
investment
operations .................. 2.089 1.992 0.930
-------- -------- -----------
Less Distributions
From net investment
income ........................ ( 0.383) ( 0.300) ( 0.190)
From net realized gains
on investments ................. ( 0.600) ( 0.453) --
-------- -------- -----------
Total distributions ............. ( 0.983) ( 0.753) ( 0.190)
-------- -------- -----------
Net asset value, end of
period ......................... $ 13.085 $ 11.979 $ 10.740
======== ======== ===========
Total Return* ................... 17.57% 18.81% 9.30%
Net assets, end of
period (000's) ................. $ 122,990 $ 37,690 $ 18,813
Ratio of total expenses
to average net assets 0.75% 0.80% 1.60%(1)
Ratio of net investment
income to average
net assets ..................... 3.20% 3.01% 2.56%(1)
Portfolio turnover rate ......... 103.08% 105.66% 49.38%
Average Commission
rate paid per share
on equity securities
traded ......................... $ 0.0325 $ 0.0284 --
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares
outstanding throughout the period.
Aetna Generation Portfolios, Inc. 3
<PAGE>
(for one share outstanding throughout each period)
<TABLE>
<CAPTION>
Aetna Legacy VP
---------------------------------------------------
Period From
Year Ended Year Ended 07/05/95 to
12/31/97 12/31/96 12/31/95+
------------ -------------- -------------------
<S> <C> <C> <C>
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 on
investments ......................................... 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 on equity
securities traded .................................... $ 0.0297 $ 0.0274 --
</TABLE>
(1) Annualized.
* The total return percentage does not reflect any separate account charges
under variable annuity contracts and life policies.
+ Per share data calculated using weighted average number of shares
outstanding throughout the period.
4 Aetna Generation Portfolios, Inc.
<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>
Ascent Crossroads Legacy
Asset Class VP VP VP Comparative Index
- --------------------------- -------- ------------ ---------- -----------------------------
<S> <C> <C> <C> <C>
Equities
Large Capitalization Stocks
Range ................... 0-60% 0-45% 0-30% Standard & Poor's 500
Stock Index
Benchmark ............... 20% 15% 10%
Small Capitalization Stocks
Range ................... 0-40% 0-30% 0-20% Russell 2000 Small Cap
Benchmark ............... 20% 15% 10% Stock Index
International Stocks
Range ................... 0-40% 0-30% 0-20% Morgan Stanley Capital
Benchmark ............... 20% 15% 10% International Europe
Australia and Far East Index
Real Estate Stocks
Range ................... 0-40% 0-30% 0-20% National Association of Real
Estate Investment Trust
Benchmark ............... 20% 15% 10% Equity REIT Index
Fixed Income
U. S. Dollar Bonds
Range ................... 0-30% 0-70% 0-100% Salomon Brothers Broad
Benchmark ............... 10% 25% 40% Investment Grade Index
International Bonds
Range ................... 0-20% 0-20% 0-20% Salomon Brothers Non-U.S.
Benchmark ............... 10% 10% 10% World Government Bond Index
Money Market Securities
Range ................... 0-30% 0-30% 0-30% 91 Day T-Bill
Benchmark ............... 0% 5% 10%
</TABLE>
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 par-
6 Aetna Generation Portfolios, Inc.
<PAGE>
ticular 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.
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
Aetna Generation Portfolios, Inc. 7
<PAGE>
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 (S&P) 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 S&P 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 collateralized
mortgage-backed securities (CMOs) and real estate mortgage investment conduits
(REMICs) and many asset-backed securities generally 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 Generation 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.
8 Aetna Generation Portfolios, Inc.
<PAGE>
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), 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.
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.
Aetna Generation Portfolios, Inc. 9
<PAGE>
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 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 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
10 Aetna Generation Portfolios, Inc.
<PAGE>
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
Portfolio in excess of 100% may result in higher transaction costs (which are
borne directly by the respective Portfolio). 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 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 S&P 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.
Aetna Generation Portfolios, Inc. 11
<PAGE>
Options and futures contracts can be volatile investments and involve certain
risks, including, but not limited to: no assurance that futures contracts
transactions can be effected at favorable prices; possible reduction in a
Portfolio's total return and yield; possible reduction in the value of the
futures instrument; the inability of a Portfolio to limit losses by closing its
position due to lack of a liquid secondary market or due to daily limits of
price fluctuation; imperfect correlation between the value of the contracts and
the related securities; and potential losses in excess of the amount invested
in the futures contracts themselves.
The use of futures involves a high degree of leverage because of the low margin
requirements. As a result, small price movements in futures contracts may
result in immediate and potentially unlimited gains or losses to a Portfolio.
The amount of gains or losses on investments in futures contracts depends on
the portfolio manager's ability to predict correctly the direction of stock
prices, interest rates and other economic factors.
In writing puts, there is the risk that a Portfolio may be required to buy the
underlying security (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.
12 Aetna Generation Portfolios, Inc.
<PAGE>
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 monthly fee from the Fund at an annual rate of 0.60% of the average
daily net assets of each of the Portfolios.
Portfolio Transactions and Commissions
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 may also consider the sale
of shares of registered investment companies advised by Aeltus as a factor in
the selection of brokerage firms to execute the Fund's portfolio transactions,
subject to its duty to obtain best execution. See the Statement for more
information.
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.
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
Aetna Generation Portfolios, Inc. 13
<PAGE>
income portfolio analyst and in 1989 she was assigned primary responsibility
for the money market operations.
Administrator
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:
<TABLE>
<CAPTION>
Administrative Fee Fund Assets
- -------------------- ------------------------------
<S> <C>
0.075% On the first $5 billion
0.050% On all assets over $5 billion
</TABLE>
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 based on a percentage of net
assets 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
(NYSE) (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
NYSE 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 NYSE 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 NYSE or 4:15 p.m. eastern time on each day that the NYSE 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.
14 Aetna Generation Portfolios, Inc.
<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 (Aetna) is the principal underwriter
for the Fund. Aetna is a Connecticut corporation, and is a wholly-owned
subsidiary of Aetna Retirement Holdings, Inc. and an indirect wholly-owned
subsidiary of Aetna Inc.
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.
Aetna Generation Portfolios, Inc. 15
<PAGE>
YEAR 2000
Aetna Inc. (referred to collectively with its subsidiaries and affiliates as
"Aetna Inc.") 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
Inc. 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 Inc. Aetna Inc. 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
Aetna Inc.'s, 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.
16 Aetna Generation Portfolios, Inc.
<PAGE>
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INVESTMENT ADVISER
Aeltus Investment Management, Inc.
242 Trumbull Street
Hartford, Connecticut 06103-1205
CUSTODIAN
Mellon Bank N.A.
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
TRANSFER, DIVIDEND DISBURSING
AND REDEMPTION AGENT
Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
CityPlace II
Hartford, Connecticut 06103-4103
- -----------------------------------------
[AETNA LOGO]
Aetna Life Insurance and Annuity Company
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<TABLE>
<S> <C>
General Information and History ............................................. 2
Additional Investment Restrictions and Policies of the Portfolios ........... 2
Description of Various Securities and Investment Techniques ................. 4
Directors and Officers ...................................................... 17
Control Persons and Principal Shareholders .................................. 21
The Investment Advisory Agreements .......................................... 21
The Administrative Services Agreement ....................................... 21
The License Agreement ....................................................... 22
Custodian ................................................................... 22
Independent Auditors ........................................................ 22
Principal Underwriter ....................................................... 22
Brokerage Allocation and Trading Policies ................................... 22
Description of Shares ....................................................... 24
Purchase and Redemption of Shares ........................................... 24
Net Asset Value ............................................................. 24
Per formance Information .................................................... 25
Tax Matters ................................................................. 25
Voting Rights ............................................................... 30
Financial Statements ........................................................ 31
</TABLE>
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<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
2 Aetna Generation Portfolios, Inc.
<PAGE>
securities; and (e) subject to fundamental restrictions, a Portfolio may
borrow money as authorized by the 1940 Act;
(5) purchase real estate, interests in real estate or real estate limited
partnership interests except that: (a) to the extent appropriate under its
investment program, a Portfolio may invest in securities 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
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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.
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
4 Aetna Generation Portfolios, Inc.
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that the price of a futures contract may vary either up or down from the
previous day's settlement price at the end of a trading session. Once the daily
limit has been reached in a particular type of contract, no trades may be made
on that day at a price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not limit potential
losses, because the limit may prevent the liquidation of unfavorable positions.
Futures contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some persons engaging in
futures transactions to substantial losses.
Sales of futures contracts which are intended to hedge against a change in the
value of securities held by a 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
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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 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
6 Aetna Generation Portfolios, Inc.
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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 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
Aetna Generation Portfolios, Inc. 7
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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.
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
8 Aetna Generation Portfolios, Inc.
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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 cash and/or liquid
securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
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 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
Aetna Generation Portfolios, Inc. 9
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foreign currency on the spot (i.e., cash) market (and bear the expense of such
purchase), if the market value of the security is less than the amount of
foreign currency the Portfolio is obligated to deliver and if a decision is
made to sell the security and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Portfolio to sustain
losses on these contracts and transactions costs.
At or before the maturity of a forward exchange contract requiring a Portfolio
to sell a currency, the Portfolio may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Portfolio will obtain, on the same
maturity date, the same amount of the currency that it is obligated to deliver.
Similarly, a Portfolio may close out a forward contract requiring it to
purchase a specified currency by entering into a second contract entitling it
to sell the same amount of the same currency on the maturity date of the first
contract. The Portfolio would realize a gain or loss as a result of entering
into such an offsetting forward contract under either circumstance to the
extent the exchange rate(s) between the currencies involved moved between the
execution dates of the first contract and the offsetting contract.
The cost to a Portfolio of engaging in forward exchange contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such contracts are not traded on an exchange, a Portfolio must evaluate the
credit and performance risk of each particular counterparty under a forward
contract.
Although the Portfolios value their assets daily in terms of U.S. dollars, they
do not intend to convert their holdings of foreign currencies into U.S. dollars
on a daily basis. The Portfolios may convert foreign currency from time to
time. 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. 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
10 Aetna Generation Portfolios, Inc.
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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 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.
Aetna Generation Portfolios, Inc. 11
<PAGE>
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 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.
12 Aetna Generation Portfolios, Inc.
<PAGE>
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, 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-
Aetna Generation Portfolios, Inc. 13
<PAGE>
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 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 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
14 Aetna Generation Portfolios, Inc.
<PAGE>
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.
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
Aetna Generation Portfolios, Inc. 15
<PAGE>
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.
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.
16 Aetna Generation Portfolios, Inc.
<PAGE>
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 liquid securities. 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.
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
Aetna Generation Portfolios, Inc. 17
<PAGE>
(*). 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 Positions held with Affiliated
Position(s) Held Persons or Principal Underwriters of
Name, Address and Age with each Fund the Fund)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
J. Scott Fox* Director and Director, Managing Director, Chief Operating
242 Trumbull Street President Officer, Chief Financial Officer, Aeltus
Hartford, Connecticut Investment Management, Inc. (Aeltus),
Age 42 October 1997 to present; Vice President,
Aetna Retirement Services, Inc., April 1997 to
present; Director and Senior Vice President,
Aetna Retirement Holdings, Inc., April 1997 to
February 1998; 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 February 1998;
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 In-
242 Trumbull Street surance and Annuity Company, May 1991 to
Hartford, Connecticut present; Vice President, Aetna Investment
Age 54 Services, Inc., July 1993 to present.
- -----------------------------------------------------------------------------------------------
Amy R. Doberman Secretary Counsel, Aetna Life Insurance and Annuity
151 Farmington Avenue Company, December 1996 to present;
Hartford, Connecticut Attorney, Securities and Exchange Com-
Age 36 mission, March 1990 to November 1996.
- -----------------------------------------------------------------------------------------------
Maria T. Fighetti Director Manager/Attorney, Health Services, New
325 Piermont Road York City Department of Mental Health,
Closter, New Jersey Mental Retardation and Alcohol Services,
Age 54 1973 to present.
</TABLE>
18 Aetna Generation Portfolios, Inc.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Occupation During Past Five
Years (and Positions held with Affiliated
Position(s) Held Persons or Principal Underwriters of
Name, Address and Age with each Fund the Fund)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
David L. Grove Director, Private Investor; Economic/Financial Consult-
5 The Knoll Chairperson ant, December 1985 to present.
Armonk, New York Contract
Age 79 Committee
- -----------------------------------------------------------------------------------------------
John Y. Kim* Director Director, President, Chief Executive Officer,
242 Trumbull Street Chief Investment Officer, Aeltus Investment
Hartford, Connecticut Management, Inc., December 1995 to
Age 37 present; Director, Aetna Life 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
455 East 86th Street 1993 to present.
New York, New York
Age 62
- -----------------------------------------------------------------------------------------------
Frank Litwin Vice President Managing Director, Aeltus Investment Man-
242 Trumbull Street agement, Inc., August 1997 to present; Vice
Hartford, Connecticut President, Fidelity Investments Institutional
Age 48 Services Company, April 1992 to August
1997.
- -----------------------------------------------------------------------------------------------
Shaun P. Mathews* Director Vice President/Senior Vice President, Aetna
151 Farmington Avenue Life Insurance and Annuity Company, March
Hartford, Connecticut 1991 to present; Vice President, Aetna Life
Age 42 Insurance Company, 1991 to present;
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,
556 Wormwood Hill University of Hartford (West Hartford, CT),
Mansfield Center, August 1996 to present; Professor,
Connecticut 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.
</TABLE>
Aetna Generation Portfolios, Inc. 19
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Occupation During Past Five
Years (and Positions held with Affiliated
Position(s) Held Persons or Principal Underwriters of
Name, Address and Age with each Fund the Fund)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Richard G. Scheide Director, Trust and Private Banking Consultant, David
11 Lily Street Chairperson Ross Palmer Consultants, July 1991 to
Nantucket, Audit Committee present.
Massachusetts
Age 68
- -----------------------------------------------------------------------------------------------
Stephanie A. Taylor Vice President, Vice President Mutual Fund Accounting,
242 Trumbull Street Treasurer and Aeltus Investment Management, Inc., Nov-
Hartford, Connecticut Chief Financial ember 1995 to present; Director Mutual Fund
Age 44 Officer Accounting, Aetna Life Insurance and 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. 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 Total Compensation from the
Name of Person, Compensation from Fund and Fund Complex
Position the Fund Paid to Directors
- -------------------------------------------------------------------------
<S> <C> <C>
Corine Norgaard $ 1,344 $ 55,500
Director
- -------------------------------------------------------------------------
Sidney Koch $ 1,356 $ 56,000
Director
- -------------------------------------------------------------------------
Maria T. Fighetti $ 1,344 $ 55,500
Director
- -------------------------------------------------------------------------
Richard G. Scheide $ 1,477 $ 61,000
Director, Chairperson
Audit Committee
- -------------------------------------------------------------------------
David L. Grove $ 1,392* $ 57,500*
Director, Chairperson
Contract Committee
</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 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.
20 Aetna Generation Portfolios, Inc.
<PAGE>
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:
<TABLE>
<CAPTION>
For Year Ended For Year Ended For Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------- ------------------- ------------------
<S> <C> <C> <C>
Ascent VP $ 584,891 $ 136,513 $44,673
Crossroads VP 495,598 129,138 44,352
Legacy VP 315,966 105,706 43,540
</TABLE>
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.
Aetna Generation Portfolios, Inc. 21
<PAGE>
Prior to the date of this Statement Aetna acted as Administrator. Aetna
received administrative service fees as follows:
<TABLE>
<CAPTION>
For Year Ended For Year Ended For Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------- ------------------- ------------------
<S> <C> <C> <C>
Ascent VP $146,223 $34,751 $96,041
Crossroads VP 123,899 26,567 96,465
Legacy VP 78,991 21,226 96,465
</TABLE>
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
KPMG Peat Marwick LLP, City Place II, Hartford, Connecticut 06103-4103 serves
as independent auditors to the Fund. KPMG Peat Marwick LLP 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.
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 may also consider the sale
of shares of registered investment companies advised by Aeltus as a factor in
the selection of brokerage firms to execute the Portfolios' portfolio
transactions, subject to Aeltus' duty to obtain best execution.
22 Aetna Generation Portfolios, Inc.
<PAGE>
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. 23
<PAGE>
Brokerage commissions were paid as follows:
<TABLE>
<CAPTION>
For Year Ended For Year Ended For Period Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------- ------------------- ------------------
<S> <C> <C> <C>
Ascent VP $416,625 $97,427 $58,624
Crossroads VP 264,845 69,844 48,862
Legacy VP 126,465 39,942 40,590
</TABLE>
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:
<TABLE>
<S> <C>
Ascent VP $41,042
Crossroads VP 24,769
Legacy VP 12,212
</TABLE>
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
24 Aetna Generation Portfolios, Inc.
<PAGE>
securities or a service providing quotations 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:
P(1+T)[n exponent] = 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:
<TABLE>
<CAPTION>
1 Year Since Inception Inception Date
----------- ----------------- ---------------
<S> <C> <C> <C>
Ascent VP 19.90% 21.85% 7/05/95
Crossroads VP 17.57% 18.50% 7/05/95
Legacy VP 14.50% 14.96% 7/05/95
</TABLE>
TAX MATTERS
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
Aetna Generation Portfolios, Inc. 25
<PAGE>
specified circumstances, within twelve months after the close of the taxable
year, will be considered distributions of income and gains of the taxable year
and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must 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). For purposes of these calculations, gross
income includes tax-exempt income.
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 business day of the taxable year, even though a
taxpayer's obligations (or rights) under such contracts have not terminated (by
delivery, exercise, entering into a closing transaction or otherwise) as of
such date. Any gain or loss recognized as a consequence of the year-end deemed
disposition of 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
26 Aetna Generation Portfolios, Inc.
<PAGE>
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.
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
Aetna Generation Portfolios, Inc. 27
<PAGE>
controls and which are engaged in the same or similar trades or businesses or
related trades or businesses. Generally, an option (call or put) with respect
to a security is treated as issued by the issuer of the security not the issuer
of the option. However, with regard to forward currency contracts, there does
not appear to be any formal or informal authority which identifies the issuer
of such instrument. For purposes of asset diversification testing, obligations
issued or guaranteed by agencies or instrumentalities of the U.S. Government
such as the Federal Agricultural Mortgage Corporation, the Farm Credit System
Financial Assistance Corporation, a Federal Home Loan Bank, the Federal Home
Loan Mortgage Corporation, the Federal National Mortgage Association, the
Government National Mortgage Corporation, and the Student Loan Marketing
Association are treated as U.S. Government securities.
If for any taxable year a Portfolio does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Qualification of Segregated Asset Accounts
Under Code Section 817(h), a segregated asset account upon which a variable
annuity contract or variable life insurance policy is based must be "adequately
diversified." A segregated asset account will be adequately diversified if it
satisfies one of two alternative tests set forth in the Treasury Regulations.
Specifically, the Treasury Regulations provide, that except as permitted by the
"safe harbor" discussed below, as of the end of each calendar quarter (or
within 30 days thereafter) no more than 55% of a Portfolio's total assets may
be represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are considered
a single investment, and while each U.S. Government agency and instrumentality
is considered a separate issuer, a particular foreign government and its
agencies, instrumentalities and political subdivisions 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).
28 Aetna Generation Portfolios, Inc.
<PAGE>
Each Portfolio intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Portfolio may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid
excise tax liability.
Portfolio Distributions
Each Portfolio anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be
taxable to the shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they may qualify for the dividends-received
deduction for corporate shareholders to the extent discussed below.
Each Portfolio may either retain or distribute to the shareholders its net
capital gain for each taxable year. Each Portfolio currently intends to
distribute any such amounts. If net capital gain is distributed and designated
as a capital gain dividend, it will be taxable to the shareholders as long-term
capital gain, regardless of the length of time the shareholders have held
shares or whether such gain was recognized by 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
Aetna Generation Portfolios, Inc. 29
<PAGE>
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.
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 com-
30 Aetna Generation Portfolios, Inc.
<PAGE>
pany 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, 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 auditors report thereon, are
incorporated here by reference to the Fund's Annual Report dated December 31,
1997. 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. 31
<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 March 5, 1998 (Accession No. 0000950146-98-000359):
Audited Financial Statements for Aetna Ascent Variable
Portfolio(1), Aetna Crossroads Variable Portfolio(2) and Aetna
Legacy Variable Portfolio(3), which include the following:
Portfolios of Investments as of December 31, 1997
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
Financial Highlights for Each of the Years Ended in the
Two Year Period December 31, 1997 and the Period ending
December 31, 1995
Independent Auditors' Report
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)
(1)(c) Articles of Amendment
(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(4)
(6) Underwriting Agreement between Aetna Life Insurance and
Annuity Company and Aetna Generation Portfolios, Inc.(2)
(7) Directors' Deferred Compensation Plan(4)
(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(4)
(9)(b) License Agreement(1)
(10) Opinion and Consent of Counsel
<PAGE>
(11) Consent of Independent Auditors
(12) Not applicable
(13) Agreement Concerning Initial Capital(1)
(14) Not applicable
(15) Not applicable
(16) Schedule for Computation of Performance Data(2)
(17) See exhibit 27 below
(18) Not applicable
(19)(a) Power of Attorney(5)
(19)(b) Authorization for Signature(6)
(27) Financial Data Schedule
1. Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-88334), as filed
electronically with the Securities and Exchange Commission on June 19, 1995
(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. 6 to Registration
Statement on Form N-1A (File No. 33-88334), as filed electronically with the
Securities and Exchange Commission on February 26, 1998 (Accession No.
0000950146-98-000288).
5. 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).
6. 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 March 31, 1998, Aetna Life Insurance and
Annuity Company ("Aetna") owned 100% 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. 9 to the
Registration Statement on Form N-4 (File No. 333-01107), as filed
electronically with the Securities and Exchange Commission on April
7, 1998 (Accession No. 0000950146-98-000564).
Item 26. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders
as of March 31, 1998
--------------------
Aetna Ascent Variable VP 2
(formerly Aetna Ascent Portfolio)
Aetna Crossroads Variable VP 2
(formerly Aetna Crossroads Portfolio)
Aetna Legacy Variable VP 2
(formerly Aetna Legacy Portfolio)
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 Agrement 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 the Registrant, Aeltus acts as investment
adviser and administrator for Aetna Variable Fund, Aetna Income
Shares, Aetna Variable Encore Fund, Aetna Balanced VP, Inc. (formerly
Aetna Investment Adviser 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, -- Aetna Life Assignment Company; Vice
Chief Financial Officer President (since April 1997) -- Aetna Retirement
Services, Inc.; Director and Senior Vice
President (April 1997 - February 1998) -- Aetna
Retirement Holdings, Inc.; Director and Senior
Vice President (March 1997 - February 1998) --
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>
- ----------------------------- ---------------------------------- -------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1995/Addresses*/**
----------------------- ---------------------------------------
- ----------------------------- ---------------------------------- -------------------------------------------------------
Timothy A. Holt Director Senior Vice President (September 1997 -
February 1998) -- Aetna Retirement Holdings,
Inc.; Director (since September 1997) -- Aetna
Investment Services, Inc.; Senior Vice President
and Chief Financial Officer (February 1996 -
February 1998) -- Aetna Life Insurance and
Annuity Company; Director (March 1996 -
February 1998) -- 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
Investment Officer President 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>
- ----------------------------- ---------------------------------- -------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1995/Addresses*/**
----------------------- ---------------------------------------
- ----------------------------- ---------------------------------- -------------------------------------------------------
Lennart A. Carlson Managing Director, Fixed Managing Director (since January 1996) -- Aeltus
Income Investments Trust Company; Registered Representative (since
February 1993) -- Aeltus Capital, Inc.
Steven C. Huber Managing Director, Fixed Portfolio Manager (August 1991 - August 1996)
Income Investments -- Aetna Life Insurance and Annuity Company;
Managing Director (since August 1996) --
Aeltus Trust Company.
Brian K. Kawakami Vice President, Chief Chief Compliance Officer & Director (since January
Compliance Officer 1996) -- Aeltus Trust Company; Chief Compliance
Officer (since August 1993) -- Aeltus Capital, Inc.
Neil Kochen Managing Director, Product Managing Director (since April 1996) -- Aeltus
Development Investment Management, Inc.; Managing Director
(since April 1996) -- Aeltus Trust Company;
Managing Director (since August 1996) -- Aeltus
Capital, Inc.; Managing Director (July 1994 -
August 1996) -- Aetna Life Insurance and Annuity
Company.
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) --
Investments Aetna Life Insurance and Annuity Company; Managing
Director (since August 1996) -- Aeltus Trust Company.
L. Charles Meythaler Managing Director, Managing Director (since April 1997) -- Aeltus
Institutional Marketing and Investment Management, Inc.; Director (since
Sales July 1997) -- Aeltus Trust Company; Managing
Director (since June 1997) -- Aeltus Trust Company;
President (June 1993 - April 1997) -- New England
Investment Association.
<PAGE>
- ----------------------------- ---------------------------------- -------------------------------------------------------
Name Positions and Offices Other Principal Position(s) Held
- ---- with Investment Adviser Since Oct. 31, 1995/Addresses*/**
----------------------- ---------------------------------------
- ----------------------------- ---------------------------------- -------------------------------------------------------
Jeanne Wong-Boehm Managing Director, Fixed Portfolio Manager (March 1982 - August 1996) --
Income Investments Aetna Life Insurance and Annuity Company;
Portfolio Manager (March 1982 - August 1996) --
Aetna Inc.; Managing Director (since August 1996)
-- Aeltus Trust Company; egistered 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 Balanced VP,
Inc. (formerly Aetna Investment Adviser Fund, Inc.), Aetna GET Fund and
Aetna Variable Portfolios, Inc. and as investment adviser, principal
underwriter and administrator for Portfolio Partners, Inc. (all
management investment companies registered under the 1940 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 Senior Vice President None
John Y. Kim Senior Vice President Director
Shaun P. Mathews Director and Senior Vice President Director
Catherine H. Smith Director, Senior Vice President and None
Chief Financial Officer
<PAGE>
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 None
Officer
* Except with respect to Mr. Kim, the principal business address of all directors and officers listed is
151 Farmington Avenue, Hartford, Connecticut 06156. Mr. Kim's address is 242 Trumbull Street, Hartford,
Connecticut 06103-1205.
</TABLE>
(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.
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 (the "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. certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Post-Effective Amendment to
the Registration Statement on Form N-1A (File No. 33-88334) and has duly caused
this Post-Effective Amendment to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Hartford, and State of Connecticut, on
the 27th day of April, 1998.
AETNA GENERATION PORTFOLIOS, INC.
---------------------------------
(Registrant)
By J. Scott Fox*
------------------------------
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 April 27, 1998 in the capacities indicated.
Signature Title Date
- --------- ----- ----
J. Scott Fox* President and Director )
- ---------------------- (Principal Executive Officer) )
J. Scott Fox )
)
Maria T. Fighetti* Director ) April
- ---------------------- )
Maria T. Fighetti ) 27, 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>
Richard G. Scheide* Director )
- ---------------------- )
Richard G. Scheide )
)
Stephanie A. Taylor* Treasurer and Chief Financial Officer )
- ---------------------- (Principal Financial )
Stephanie A. Taylor and Accounting Officer) )
By: /s/ Amy R. Doberman
-------------------
*Amy R. Doberman
Attorney-in-Fact
(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
Exhibit No. Exhibit Page
----------- ------- ----
99-(b)(1)(a) Articles of Incorporation *
99-(b)(1)(b) Articles Supplementary *
99-(b)(1)(c) Articles of Amendment ______
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
______
*Incorporated by reference
AETNA GENERATION PORTFOLIOS, INC.
ARTICLES OF AMENDMENT
AETNA GENERATION PORTFOLIOS, INC., a Maryland corporation registered as
an open-end investment company under the Investment Company Act of 1940 and
having its principal office in the State of Maryland in Baltimore City, Maryland
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland (the "Department") that:
The Board of Directors of the Corporation, by action taken on December
10, 1997, and pursuant to Section 2-602 of the Maryland General
Corporation Law ("MGCL"), redesignated three series of stock of the
Corporation as follows:
1. Aetna Ascent Variable Portfolio is redesignated
Aetna Ascent VP; and
2. Aetna Crossroads Variable Portfolio is redesignated
Aetna Crossroads VP; and
3. Aetna Legacy Variable Portfolio is redesignated
Aetna Legacy VP,
such redesignations are to apply to all issued and outstanding and
authorized but unissued shares of the series.
This amendment has been approved by a majority of the entire Board of
Directors of the Corporation and is limited to a change expressly permitted by
Section 2-605 of the MGCL to be made without action by the stockholders of the
Corporation.
Furthermore, this amendment shall become effective on Friday, May 1,
1998 at 7:59 a.m., which date does not exceed thirty (30) days after these
Articles of Amendment have been accepted for record by the Department, in
accordance with and pursuant to Section 2-610.1 of the MGCL.
IN WITNESS WHEREOF, Aetna Generation Portfolios, Inc. has caused these
Articles of Amendment to be signed in its name on its behalf by its authorized
officers who acknowledge that these Articles of Amendment are the act of the
Corporation, that to the best of their knowledge, information and belief, all
matters and facts set forth herein relating to the authorization and approval of
these Articles of Amendment are true in all material respects and that this
statement is made under the penalties of perjury.
Date: April 6, 1998
AETNA GENERATION PORTFOLIOS, INC.
(CORPORATE SEAL)
By: /s/ J. Scott Fox
-------------------------------
J. Scott Fox
Attest: President
/s/ Amy R. Doberman
- ---------------------------------------
Amy R. Doberman
Secretary
[Aetna Letterhead]
[Aetna Logo]
Aetna Inc.
151 Farmington Avenue
Hartford, CT 06156-3124
Amy R. Doberman
Counsel
Law Division, RE4A
April 27, 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. 7 to
Registration Statement on Form N-1A
(File No. 33-88334 and 811-8934)
Dear Sir or Madam:
The undersigned serves as counsel to Aeltus Investment Management, Inc., the
investment adviser, effective May 1, 1998, 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
April 27, 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
Consent of Independent Auditors
The Board of Directors and Shareholders of
Aetna Generation Portfolios, Inc.:
We consent to the use of our report dated February 13, 1998 incorporated by
reference herein this Post-Effective Amendment No. 7 to Registration Statement
(No. 33-88334) and to the references to our firm under the heading "Financial
Highlights" in the prospectus and "Independent Auditors" in the statement of
additional information.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Hartford, Connecticut
April 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000935070
<NAME> Aetna Generations Portfolio, Inc.
<SERIES>
<NUMBER> 01
<NAME> Aetna Ascent Variable Portfolio
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 135,902,857
<INVESTMENTS-AT-VALUE> 147,540,214
<RECEIVABLES> 1,536,983
<ASSETS-OTHER> 1,015,706
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 150,092,903
<PAYABLE-FOR-SECURITIES> 1,176,915
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 105,591
<TOTAL-LIABILITIES> 1,282,506
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 135,821,815
<SHARES-COMMON-STOCK> 10,539,978
<SHARES-COMMON-PRIOR> 3,578,309
<ACCUMULATED-NII-CURRENT> 402,167
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 746,371
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,840,044
<NET-ASSETS> 148,810,397
<DIVIDEND-INCOME> 1,458,078
<INTEREST-INCOME> 1,709,456
<OTHER-INCOME> 0
<EXPENSES-NET> (731,114)
<NET-INVESTMENT-INCOME> 2,436,420
<REALIZED-GAINS-CURRENT> 7,553,548
<APPREC-INCREASE-CURRENT> 7,203,813
<NET-CHANGE-FROM-OPS> 17,193,781
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,979,730)
<DISTRIBUTIONS-OF-GAINS> (6,365,007)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,640,539
<NUMBER-OF-SHARES-REDEEMED> (344,396)
<SHARES-REINVESTED> 665,526
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 731,114
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<PER-SHARE-NII> 0.248
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<EXPENSE-RATIO> 0.75
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000935070
<NAME> Aetna Generations Portfolio, Inc.
<SERIES>
<NUMBER> 02
<NAME> Aetna Variable Crossroads Portfolio
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 114,019,466
<INVESTMENTS-AT-VALUE> 122,190,630
<RECEIVABLES> 1,630,956
<ASSETS-OTHER> 676,840
<OTHER-ITEMS-ASSETS> 0
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<OTHER-ITEMS-LIABILITIES> 86,531
<TOTAL-LIABILITIES> 1,508,678
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 114,319,427
<SHARES-COMMON-STOCK> 9,399,130
<SHARES-COMMON-PRIOR> 3,146,469
<ACCUMULATED-NII-CURRENT> 263,241
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 113,227
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,293,853
<NET-ASSETS> 122,989,748
<DIVIDEND-INCOME> 968,298
<INTEREST-INCOME> 2,280,552
<OTHER-INCOME> 0
<EXPENSES-NET> (619,497)
<NET-INVESTMENT-INCOME> 2,629,353
<REALIZED-GAINS-CURRENT> 5,606,557
<APPREC-INCREASE-CURRENT> 5,042,978
<NET-CHANGE-FROM-OPS> 13,278,888
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<DISTRIBUTIONS-OF-INCOME> (3,038,631)
<DISTRIBUTIONS-OF-GAINS> (5,215,788)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,075,990
<NUMBER-OF-SHARES-REDEEMED> (457,343)
<SHARES-REINVESTED> 634,014
<NET-CHANGE-IN-ASSETS> 85,299,371
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 619,497
<AVERAGE-NET-ASSETS> 82,292,924
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<PER-SHARE-NII> 0.303
<PER-SHARE-GAIN-APPREC> 1.786
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
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<TABLE> <S> <C>
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<CIK> 0000935070
<NAME> Aetna Generations Portfolio, Inc.
<SERIES>
<NUMBER> 03
<NAME> Aetna Legacy Variable Portfolio
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<PERIOD-START> JAN-01-1997
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<INVESTMENTS-AT-COST> 76,620,296
<INVESTMENTS-AT-VALUE> 80,907,056
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<OVERDISTRIBUTION-GAINS> 0
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</TABLE>
