-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SPUGMj6VPVO6NIWayKs9qczmuwBjMLwPuWwpE6XqFe9QwNLBJH5KELauF45N4CST co9Qf4wLCTzrdGnxoYd8Ig== 0000950146-97-001124.txt : 19970801 0000950146-97-001124.hdr.sgml : 19970801 ACCESSION NUMBER: 0000950146-97-001124 CONFORMED SUBMISSION TYPE: N-1A EL PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19970731 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PORTFOLIO PARTNERS INC CENTRAL INDEX KEY: 0001039001 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-1A EL SEC ACT: 1933 Act SEC FILE NUMBER: 333-32575 FILM NUMBER: 97649516 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVENUE CITY: HARTFORD STATE: CT ZIP: 06156-8962 BUSINESS PHONE: 6602737834 MAIL ADDRESS: STREET 1: 161 FARMINGTON AVENUE CITY: HARTFORD STATE: CT ZIP: 06156-8962 N-1A EL 1 FORM N-1A EL As filed with the Securities and Exchange Commission on July 31, 1997 Registration Nos. 333- 811- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 PORTFOLIO PARTNERS, INC. ------------------------ (Exact name of registrant as specified in charter) 151 Farmington Avenue Hartford, CT 06156-8962 (Address of Principal Executive Offices) (Zip Code) ____________________________________________________________________ Amy R. Doberman, Esq. Aetna Life Insurance and Annuity Company 151 Farmington Avenue, RE4A, Hartford, CT 06156-8962 (Name and Address of Agent For Service) Approximate date of proposed public offering: August 21, 1997 Registrant is registering an indefinite number of securities under the Securities Act of 1933 pursuant to Investment Company Act Rule 24f-2. =============================================================================== The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. PORTFOLIO PARTNERS, INC. CROSS REFERENCE SHEET PART A
N-1A - ---- Item No. Location - -------- -------- 1. Cover Page Cover Page 2. Synopsis Not Applicable 3. Financial Highlights Not Applicable 4. General Description of Registrant....... Cover Page; The Fund; Description of the Portfolios; Investment Policies and Practices; Risk Factors and Other Considerations; Investment Restrictions; General Information 5. Management of the Fund.................. Management of the Portfolios 6. Capital Stock and Other Securities...... Purchase and Redemption of Shares; Net Asset Value; Tax Matters; General Information 7. Purchase of Securities Being Offered.... The Fund; Purchase and Redemption of Shares; Net Asset Value 8. Redemption or Repurchase................ Purchase and Redemption of Shares; Net Asset Value 9. Pending Legal Proceedings............... Not Applicable PART B 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 Policies and Practices 14. Management of the Fund.................. Directors and Officers of the Fund 15. Control Persons and Principal Holders of Securities........................ Control Persons and Principal Shareholders -2- 16. Investment Advisory and Other Services.......................... The Investment Advisory Agreement; The Subadvisory Agreements; The Administrative Services Agreement; Custodian; Independent Auditors 17. Brokerage Allocation and Other Practices............................. Brokerage Allocation and Trading Practices 18. Capital Stock and Other Securities...... Description of Shares 19. Purchase, Redemption and Pricing of Securities Being Offered.............. Net Asset Value 20. Tax Status.............................. Tax Status 21. Underwriters............................ Principal Underwriter 22. Calculation of Performance Data......... Performance Information 23. Financial Statements.................... Financial Statements
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. -3- SUBJECT TO COMPLETION OR AMENDMENT INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PORTFOLIO PARTNERS, INC. 151 FARMINGTON AVENUE HARTFORD, CT 06156-8962 MFS EMERGING EQUITIES PORTFOLIO MFS RESEARCH GROWTH PORTFOLIO MFS VALUE EQUITY PORTFOLIO SCUDDER INTERNATIONAL GROWTH PORTFOLIO T. ROWE PRICE GROWTH EQUITY PORTFOLIO PROSPECTUS DATED: August 21, 1997 Portfolio Partners, Inc. (the "Fund") is an open-end management investment company authorized to issue multiple series of shares, each representing a diversified portfolio of investments (individually, a "Portfolio," and collectively, the "Portfolios"). Aetna Life Insurance and Annuity Company serves as the Investment Adviser of each Portfolio, and each has a Subadviser. The Fund's five Portfolios (and their Subadvisers) are: MFS Emerging Equities Portfolio (Massachusetts Financial Services Company) MFS Research Growth Portfolio (Massachusetts Financial Services Company) MFS Value Equity Portfolio (Massachusetts Financial Services Company) Scudder International Growth Portfolio (Scudder, Stevens & Clark, Inc.) T. Rowe Price Growth Equity Portfolio (T. Rowe Price Associates, Inc.) The Fund's shares are offered only to insurance companies to fund benefits under their variable annuity contracts ("VA Contracts") and variable life insurance policies ("VLI Policies"). 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 August 21, 1997, contains more information about the Portfolios. For a free copy of the Statement, call 1-800-238-6263 or write to Portfolio Partners, Inc., at the address listed above. The Statement has been filed with the Securities and Exchange Commission ("SEC") and is incorporated by reference into this Prospectus. 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. INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. SHARES OF THE FUND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND IS SUBJECT TO RISK THAT MAY CAUSE THE VALUE OF THE INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS REDEEMED, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED BY THE INVESTOR. LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE 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. TABLE OF CONTENTS PAGE THE FUND....................................................................... DESCRIPTION OF THE PORTFOLIOS.................................................. INVESTMENT POLICIES AND PRACTICES.............................................. RISK FACTORS AND OTHER CONSIDERATIONS.......................................... INVESTMENT RESTRICTIONS........................................................ MANAGEMENT OF THE PORTFOLIOS................................................... PURCHASE AND REDEMPTION OF SHARES.............................................. NET ASSET VALUE................................................................ PERFORMANCE.................................................................... TAX MATTERS.................................................................... GENERAL INFORMATION............................................................ -2- THE FUND The Fund is an open-end, management investment company, consisting of multiple Portfolios. It currently has authorized five Portfolios: MFS Emerging Equities Portfolio, MFS Research Growth Portfolio, MFS Value Equity Portfolio, Scudder International Growth Portfolio and T. Rowe Price Growth Equity Portfolio. The Fund may authorize additional Portfolios in the future. Aetna Life Insurance and Annuity Company ("Aetna") serves as the Investment Adviser for each Portfolio, and Aetna has appointed various Subadvisers that are responsible for the day-to-day management of the Portfolios. The Fund is intended to serve as one of the funding vehicles for VA Contracts and VLI Policies to be offered through the separate accounts of insurance companies. The insurance companies, not the owners of the VA Contracts or VLI Policies or participants therein ("Participants"), are shareholders of the Fund. See "General Information." DESCRIPTION OF THE PORTFOLIOS Each Portfolio has an investment objective, which is a fundamental policy. A Portfolio's fundamental policies and restrictions may not be changed without the vote of a majority of the holders of that Portfolio's outstanding shares (see "Voting Rights," below). Investment in a Portfolio involves risk, and, as with all mutual funds, 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. MFS EMERGING EQUITIES PORTFOLIO INVESTMENT OBJECTIVE. The MFS Emerging Equities Portfolio ("MFS Emerging Equities") seeks to provide long-term growth of capital. Dividend and interest income from portfolio securities, if any, is incidental to MFS Emerging Equities' investment objective. INVESTMENT POLICIES. Under normal market conditions, MFS Emerging Equities invests primarily in common stocks issued by companies that its Subadviser believes are early in their life cycle but which have the potential to become major enterprises (emerging growth companies). The Subadviser generally expects these companies, which may include domestic and foreign companies, to show earnings growth over time that is well above the growth rate of the overall economy and the rate of inflation. In addition, the Subadviser generally expects these companies to have the products, technologies, management and market and other opportunities that are usually necessary to become more widely recognized as growth companies. Emerging growth companies can be of any size, and MFS Emerging Equities may invest in larger or more established companies whose rates of earnings growth are expected to accelerate because of special factors, such as rejuvenated management, new products, changes in consumer demand, or basic changes in the economic environment. The nature of investing in emerging growth companies involves greater risk than is customarily associated with investments in more established companies. Emerging growth companies often have limited product lines, markets or other financial resources, and they may be dependent on one-person management. In addition, there may be less research available on many promising small- and medium-sized emerging growth companies, making it more difficult to find and analyze these companies. Securities issued by emerging growth companies may have limited marketability and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general. Shares of MFS Emerging Equities are therefore subject to greater fluctuation in value than shares of a conservative equity fund or of a growth fund that invests primarily in proven growth stocks. When the Subadviser determines that other investments appear attractive, MFS Emerging Equities may, to a limited extent, invest in other types of securities, including investment grade fixed-income securities and -3- high-yield, below investment grade fixed-income securities ("below investment grade fixed-income securities"), or unrated fixed-income securities of comparable quality; convertible securities and warrants. (For a description of bond ratings, see the Statement, Appendix A.) MFS Emerging Equities may hold cash equivalents or other forms of debt securities as a reserve for future purchases of common stock or to meet liquidity needs. MFS Emerging Equities may engage in strategic transactions, which may include the use of derivatives. See "Investment Policies and Practices" and "Risk Factors and Other Considerations." Massachusetts Financial Services Company ("MFS") serves as the Subadviser of MFS Emerging Equities and is responsible for its day-to-day management, subject to the oversight of Aetna and the Fund's Board of Directors. See "Management of the Portfolios." MFS RESEARCH GROWTH PORTFOLIO INVESTMENT OBJECTIVE. The MFS Research Growth Portfolio ("MFS Research Growth") seeks long-term growth of capital and future income. INVESTMENT POLICIES. Under normal market conditions, MFS Research Growth invests primarily in common stocks or securities convertible into common stocks issued by companies that the Subadviser believes to possess better-than-average prospects for long-term growth. MFS Research Growth may invest a smaller proportion of its assets in fixed-income securities such as bonds and short-term debt obligations, preferred stocks or common stocks whose principal characteristic is income production rather than growth. In the case of both growth stocks and income issues, the Subadviser emphasizes securities issued by progressive, well-managed companies. MFS Research Growth may invest in investment grade fixed-income securities and in below investment grade fixed-income securities, or unrated fixed-income securities of comparable quality. In making investment decisions, the Subadviser does not rely exclusively on ratings on fixed-income securities provided by established rating agencies, but rather supplements those ratings with its own independent and ongoing review of credit quality. Therefore, the ability of MFS Research Growth to achieve its investment objective may be more dependent on its Subadviser's own credit analysis than a fund that invests primarily in higher-quality bonds. The Subadviser allocates a proportion of assets invested in growth stocks, income-producing securities or cash (including foreign currency) and cash equivalents, depending on its view of the relative attractiveness of each type of investment. MFS serves as the Subadviser of MFS Research Growth and is responsible for its day-to-day management, subject to the oversight of Aetna and the Fund's Board of Directors. See "Management of the Portfolios." MFS VALUE EQUITY PORTFOLIO INVESTMENT OBJECTIVE. The MFS Value Equity Portfolio ("MFS Value Equity") seeks capital appreciation. Dividend income, if any, is a consideration incidental to MFS Value Equity's objective of capital appreciation. INVESTMENT POLICIES. Under normal market conditions, MFS Value Equity invests primarily in common stocks (which may be issued by domestic or foreign companies), and may seek appreciation by investing in other types of securities, including fixed-income securities, convertible bonds, convertible preferred stocks and warrants, when relative values make such purchases appear attractive either as individual issues or as types of securities in certain economic environments. MFS Value Equity may invest in investment grade fixed-income securities and below investment grade fixed-income securities or unrated securities of comparable quality. These may include zero coupon bonds, deferred interest bonds and bonds -4- on which the interest is payable in kind ("PIK bonds"). MFS Value Equity may hold cash equivalents or other forms of debt securities as a reserve for future purchases of common stock or to meet liquidity needs. MFS Value Equity may engage in strategic transactions, which may include the use of derivatives. See "Investment Policies and Practices" and "Risk Factors and Other Considerations." MFS serves as the Subadviser of MFS Value Equity and is responsible for its day-to-day management, subject to the oversight of Aetna and the Fund's Board of Directors. See "Management of the Portfolios." SCUDDER INTERNATIONAL GROWTH PORTFOLIO INVESTMENT OBJECTIVE. The Scudder International Growth Portfolio ("Scudder International Growth") seeks long-term growth of capital primarily through a diversified portfolio of marketable foreign equity securities. INVESTMENT POLICIES. Under normal market conditions, Scudder International Growth invests primarily in securities that, in the opinion of its Subadviser, allow it to participate in non-U.S. companies and economies with prospects for growth. Scudder International Growth invests in securities issued by companies, wherever organized, that do business primarily outside the U.S., including emerging market countries. Scudder International Growth intends to diversify investments among several countries and to have represented, in substantial proportions, business activities in not less than three countries. Scudder International Growth generally invests in equity securities issued by established companies listed on foreign exchanges that the Subadviser believes have favorable characteristics. When the Subadviser believes that it is appropriate in order to achieve long-term capital growth, Scudder International Growth may invest in fixed-income securities of foreign governments, supranational organizations and private issuers, including bonds denominated in the European Currency Unit ("ECU"). The Subadviser will select fixed-income securities on the basis of, among other things, yield, credit quality, and the fundamental outlook for currency and interest rate trends in different parts of the globe, taking into account the ability to hedge a degree of currency or local bond price risk. Scudder International Growth may invest in investment grade fixed-income securities and below investment grade fixed-income securities, or unrated securities of comparable quality. Scudder International Growth may hold cash equivalents or other forms of debt securities as a reserve for future purchases of common stock or to meet liquidity needs. When the Subadviser determines that exceptional conditions exist abroad, Scudder International Growth may, for temporary defensive purposes, invest all or a portion of its assets in Canadian or U.S. Government obligations or currencies, or securities of companies incorporated in and having their principal activities in Canada or the U.S. In addition, Scudder International Growth may engage in strategic transactions, which may include the use of derivatives. See "Investment Policies and Practices" and "Risk Factors and Other Considerations." Scudder, Stevens & Clark, Inc. ("Scudder") serves as the Subadviser of Scudder International Growth and is responsible for its day-to-day management, subject to the oversight of Aetna and the Fund's Board of Directors. See "Management of the Portfolios." -5- T. ROWE PRICE GROWTH EQUITY PORTFOLIO INVESTMENT OBJECTIVE. The T. Rowe Price Growth Equity Portfolio ("T. Rowe Price Growth Equity") seeks long-term growth of capital and, secondarily, to increase dividend income by investing primarily in common stocks of well established growth companies. INVESTMENT POLICIES. Under normal market conditions, T. Rowe Price Growth Equity invests primarily in common stocks issued by a diversified group of growth companies. The companies in which T. Rowe Price Growth Equity invests normally (but not always) pay dividends, which are generally expected to rise in future years as earnings increase. Most of its assets will be invested in U.S. common stocks. However, T. Rowe Price Growth Equity may invest in foreign securities and convertible securities and warrants, when the Subadviser considers such investments consistent with the Portfolio's investment objective and policies. T. Rowe Price Growth Equity generally seeks to invest in securities of companies that satisfy one or more of several criteria established by the Subadviser. For example, the Subadviser generally seeks companies with superior growth in earnings and cash flow; the ability to sustain earnings momentum even during economic slowdowns by operating in so-called "fertile fields" (areas where earnings and dividends can outpace inflation and the overall economy); and the capability to expand even during times of slow growth. The Subadviser generally favors companies whose profits increase due to economic factors rather than one-time events such as lower taxes. T. Rowe Price Growth Equity may engage in strategic transactions, which may include the use of derivatives. See "Investment Policies and Practices" and "Risk Factors and Other Considerations." T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as the Subadviser of T. Rowe Price Growth Equity and is responsible for its day-to-day management, subject to the oversight of Aetna and the Fund's Board of Directors. See "Management of the Portfolios." INVESTMENT POLICIES AND PRACTICES The Portfolios are managed in accordance with the following investment policies and practices. See "Risk Considerations" and the Statement for a description of the risks that these policies and practices may involve. Investment Policies Generally: When a Portfolio invests "primarily" in particular securities, it will invest at least 65% of its total assets in those securities (80% in the case of MFS Emerging Equities). Repurchase Agreements: Each Portfolio may enter into repurchase agreements in order to earn income on available cash or as a temporary defensive measure. Under a repurchase agreement, a Portfolio acquires securities subject to the seller's agreement to repurchase them at a specified time and price. If the seller becomes subject to a proceeding under the bankruptcy laws or its assets are otherwise subject to a stay order, a Portfolio's right to liquidate the securities may be restricted (during which time the value of the securities could decline). As discussed in the Statement, the Fund has adopted certain procedures that are intended to minimize this risk. Restricted Securities: Each Portfolio may also purchase securities that are not registered under the Securities Act of 1933 (the "1933 Act") ("restricted securities"), including those that can be offered and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A securities"). Under a policy established by the Board of Directors, the Subadvisers periodically review the trading markets for the -6- specific Rule 144A security and determine whether the security is liquid. Subject to each Portfolio's respective limitation on investments in illiquid investments, a Portfolio may also invest in restricted securities that may not be sold under Rule 144A, which presents certain risks. Limit: A Portfolio will not invest more than 15% of its net assets in securities that are deemed to be illiquid. When-Issued Securities: In order to help ensure the availability of suitable securities, each Portfolio may purchase securities on a "when-issued" or on a "forward delivery" basis, which means that the obligations will be delivered to a Portfolio at a future date, usually beyond customary settlement time. It is expected that, under normal circumstances, a Portfolio will take delivery of such securities. In general, a Portfolio does not pay for the securities until received and does not start earning interest on the obligations until the contractual settlement date. For a further discussion, see the Statement. Investments for Temporary Defensive Purposes: During periods of unusual market conditions when a Subadviser believes that investing for temporary defensive purposes is appropriate, or in order to meet anticipated redemption requests, a Portfolio may invest up to 100% of its assets in cash or cash equivalents including, but not limited to, obligations of banks with assets of $1 billion or more (including certificates of deposit, bankers' acceptances and repurchase agreements), commercial paper, short-term notes, obligations issued or guaranteed by the U.S. Government or any of its agencies, authorities or instrumentalities and related repurchase agreements. See the Statement for a description of U.S. Government obligations and certain short-term investments. Corporate Asset-Backed Securities: MFS Emerging Equities and Scudder International Growth may invest in corporate asset-backed securities. These securities, issued by trusts and special purpose corporations, are backed by a pool of assets, such as credit card or automobile loan receivables, representing the obligations of a number of different parties. Corporate asset-backed securities present certain risks. For instance, in the case of credit card receivables, these securities may not have the benefit of any security interest in the related collateral. See the Statement for further information about these securities. Limit: Neither MFS Emerging Equities nor Scudder International Growth will invest more than 20% of its total assets at the time of purchase in corporate asset-backed securities. Investment Grade Fixed-Income Securities: MFS Emerging Equities, MFS Value Equity, MFS Research Growth and Scudder International Growth may invest in "investment grade" fixed-income securities. Investment grade fixed-income securities are rated Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by Standard and Poor's Rating Services ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or, if unrated, are of comparable quality. See "Risk Factors and Other Considerations." High-Yield, Below Investment Grade Fixed-Income Securities: MFS Emerging Equities, MFS Research Growth, MFS Value Equity and Scudder International Growth may invest in below investment grade fixed-income securities. These securities, rated lower than Baa by Moody's or BBB by S&P or Fitch, or, if unrated, of comparable quality, are considered speculative. Limit: The maximum percentage of its total assets that a Portfolio may invest in below investment grade fixed-income securities, measured at the time of purchase, is as follows: MFS Emerging Equities: 5%; MFS Value Equity: 25%; MFS Research Growth: 10%; Scudder International Growth: 5%. Foreign Securities: Each Portfolio may invest in securities issued by foreign companies or governments, and in American Depository Receipts ("ADRs") and similar securities. Limit: The limits on Portfolio investment in foreign securities are as follows: Scudder International Growth: 100% of assets may be invested in foreign securities (including emerging market securities and -7- Brady Bonds); MFS Value Equity: 50% of net assets may be invested in foreign securities (including emerging market securities and Brady Bonds), although it generally expects to invest between 10% and 25% of net assets; MFS Emerging Equities: 25% of net assets may be invested in foreign securities (including emerging market securities and Brady Bonds), although it generally expects to invest up to 15% of net assets; MFS Research Growth: 20% of net assets may be invested in foreign securities (including emerging market securities); T. Rowe Price Growth Equity: 30% of total assets (excluding reserves) may be invested in foreign securities (including emerging market securities). ADRs are included within these limits with respect to T. Rowe Price Growth Equity, but not for the other Portfolios. Foreign Currencies: Each Portfolio may hold foreign currency received in connection with investments in foreign securities when, in the judgment of its Subadviser, it would be beneficial to convert such currency into U.S. dollars at a later date, based on anticipated changes in the relevant exchange rate. Each Portfolio may also hold foreign currency in anticipation of purchasing foreign securities. See "Risk Factors and Other Considerations." Brady Bonds: MFS Value Equity, MFS Emerging Equities and Scudder International Growth may invest in Brady Bonds, which are securities created through the exchange of existing commercial bank loans to public and private entities in certain emerging markets for new bonds in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued only recently, and for that reason do not have a long payment history. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (but primarily in the U.S. dollar), and are actively traded in over-the-counter secondary markets. U.S. dollar-denominated, Brady Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally collateralized in full as to principal by U.S. Treasury zero coupon bonds having the same maturity as the bonds. Investments in Brady Bonds may be viewed as speculative. Emerging Market Securities: MFS Emerging Equities, MFS Research Growth, MFS Value Equity and Scudder International Growth may invest in securities of issuers whose principal activities are located in emerging market countries. Emerging market countries include any country determined by a Subadviser to have an emerging market economy, taking into account a number of factors, including whether the country has a low- to middle-income economy according to the International Bank for Reconstruction and Development, the country's foreign currency debt rating, its political and economic stability and the development of its financial and capital markets. See "Risk Factors and Other Considerations." American Depository Receipts: Each Portfolio may invest in ADRs, which are certificates issued by a U.S. depository (usually a bank) and represent a specified quantity of shares of an underlying non-U.S. stock on deposit with a custodian bank as collateral. ADRs are subject to many of the risks of foreign securities such as exchange rates and more limited information about foreign issuers. See "Risk Factors and Other Considerations." Strategic Transactions and Derivatives: Certain Portfolios may, but are not required to, utilize various investment strategies involving the use of "derivative instruments" described below. A Portfolio may utilize a strategic transaction for one or more reasons, including: [BULLET] to hedge various market risks (such as interest rates, currency exchange rates, and broad or specific equity or fixed-income market movements); [BULLET] to manage the effective maturity or duration of fixed-income securities; [BULLET] to establish a position in the derivatives market as a temporary substitute for purchasing or selling a particular security or index; or -8- [BULLET] to enhance potential gain. Derivatives are instruments whose value is derived from, or linked to, the value of another source, typically a commodity, a security, an index, or some other readily measurable economic variable. These strategies are generally accepted as part of modern portfolio management and are utilized by many mutual funds and portfolio managers. A Portfolio may use any or all of these investment techniques at any time and in any combination, and there is no particular strategy that dictates the use of one technique rather than another, or none at all. The ability of a Portfolio to utilize these transactions successfully will depend on the Subadviser's ability to predict pertinent market movements, which cannot be assured. Strategic transactions involve certain risks. See "Risk Factors and Other Considerations." These strategic transactions are briefly described below and are described in greater detail in the Statement. Limit: Unless otherwise noted, a Portfolio may only commit up to 5% of its total assets, measured at the time of purchase, for initial margin requirements or premiums to engage in strategic transactions, although MFS Emerging Equities, MFS Value Equity, Scudder International Growth and T. Rowe Price Growth Equity are subject to this limit only when they engage in strategic transactions for non-hedging purposes (that is, for speculation to increase its income rather than to hedge against adverse price movements). To prevent "leverage," a Portfolio will, consistent with applicable regulatory requirements, either "cover" its strategic transaction or segregate liquid assets equal in value to the exposure created by the transaction. Options on Securities, Indices and Other Financial Instruments: MFS Emerging Equities, MFS Value Equity, Scudder International Growth and T. Rowe Price Growth Equity may purchase and sell exchange-listed and over-the-counter put and call options on securities, equity and fixed-income indices and other financial instruments, including foreign currencies. MFS Emerging Equities, MFS Value Equity and Scudder International Growth may write (sell) calls on securities only if such calls are covered. Scudder International Growth may sell options on securities indices only to close out open positions. A Portfolio may also sell combinations of put and call options on the same security, known as "straddles." When a Portfolio buys an option, it pays a premium for the right, not the obligation, to buy or sell a security or index within a certain time at a certain price. The Portfolio's losses will be limited to the premium it pays for the option. When a Portfolio sells a call option, it earns a premium and it is obligated (if the option is exercised) to sell a security or index within a certain time at a certain price, without regard to current market price. When a Portfolio sells a put option, it earns a premium and it is obligated (if the option is exercised) to buy the security or index within a certain time at a certain price, without regard to current market price. In certain instances, a Portfolio may enter into options on Treasury securities which may be referred to as "reset" options or "adjustable strike" options. These options provide for periodic adjustment of the strike price and may also provide for the periodic adjustment of the premium during the term of the option. Limit: MFS Emerging Equities, MFS Value Equity and T. Rowe Price Growth Equity will not purchase put and call options if as a result more than 5% of their total assets would be invested in premiums for those options. Futures Contracts and Options on Futures Contracts: MFS Emerging Equities, MFS Value Equity, Scudder International Growth, and T. Rowe Price Growth Equity may buy and sell futures contracts on indices and financial instruments. When a Portfolio enters into a futures contract, it becomes obligated to buy or sell an asset in the future at an agreed-upon price. The Portfolio will pay initial margin deposits, which usually are small in relation to the size of the value of the underlying assets. Each of these Portfolios may also buy and sell options on futures contracts. Options on futures contracts are similar to options on securities and indices, described above. These Portfolios may engage in "cross hedges," that is, hedge a -9- particular index or currency as a substitute for another index or currency. For more information about futures contracts and related options, see "Risk Factors and Other Considerations" and the Statement. Limit: MFS Emerging Equities and MFS Value Equity will not enter into a futures contract if, immediately thereafter, the value of the securities and other obligations underlying all futures contracts exceeds 50% of their total assets. Scudder International Growth will invest in futures contracts only for hedging purposes. Swaps and Related Transactions: Scudder International Growth may, without limit, enter into various interest rate transactions, including swaps, caps, floors or collars, and may enter into currency swaps. Generally, swaps are customized agreements between two parties to exchange or swap cash flows or assets at specified intervals in the future. Hybrid Instruments: T. Rowe Price Growth Equity and MFS Value Equity may enter into transactions involving hybrid instruments. Hybrid instruments are derivative instruments whose value is derived from, or linked to, the value of another source, typically a commodity, a futures contract, an index, or some other readily measurable economic variable. Issued by banks, brokerage firms, insurance companies, financial institutions or producers of commodities, hybrid instruments typically are short- to intermediate-term fixed income securities that bear interest at below-market or nominal rates. The instrument's value at maturity, or the interest payable by the issuer, may rise or fall according to the change in the value of the underlying instrument or index. See "Risk Factors and Other Considerations." Limit: Neither T. Rowe Price Growth Equity nor MFS Value Equity will invest more than 10% of its total assets, measured at the time of purchase, in hybrid instruments. RISK FACTORS AND OTHER CONSIDERATIONS General Considerations: Shares of a Portfolio represent an investment in securities with fluctuating market prices. Thus, the value of those shares will vary over time as the aggregate value of the securities held by a Portfolio increases or decreases. Moreover, any dividends a Portfolio pays will increase or decrease in relation to the income received from its investments. The different types of securities purchased and investment techniques used by a Portfolio involve varying amounts of risk. For example, equity securities are subject to a decline in the stock market or in the value of the issuer, and preferred stocks have price risk and some interest rate and credit risk. The value of debt securities may be affected by changes in general interest rates and in the creditworthiness of the issuer. Debt securities with longer maturities (for example, over ten years) are 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). Some of the risks involved in the securities acquired by the Portfolios are discussed in this section. Additional discussion is contained above under "Investment Techniques" and in the Statement. Portfolio Turnover: Portfolio turnover refers to the frequency of portfolio transactions and the percentage of portfolio assets being bought and sold in the aggregate during the year. Although the Portfolios do not purchase securities with the intention of profiting from short-term trading, each Portfolio may buy and sell securities when the Adviser or Subadviser believes such action is advisable. It is anticipated that the average annual turnover rate of each of the Portfolios may exceed 125%. Such turnover rates may result in higher transaction costs (which are borne directly by the respective Portfolio) and a possible increase in short-term capital gains (or losses). See "Tax Status" in the Statement. Hybrid Instruments: These derivative instruments, which can combine the characteristics of securities, futures, and options, may be particularly volatile. Under certain conditions, the redemption value of such an investment could be zero. Some hybrid instruments in which T. Rowe Price Growth Equity or MFS Value -10- Equity may invest involve economic leverage, which would increase the Portfolio's exposure to a commodity, futures contract or index. Some hybrid instruments have principal protection, while others may have partial principal protection or none at all. An instrument with full principal protection will pay the stated principal amount upon maturity. Partially protected instruments may lose a portion of their principal upon maturity if the underlying commodity, index or contract to which it is linked declines in value, and a hybrid instrument without principal protection may lose all its value upon maturity. Fixed-Income Securities: The net asset value of the shares of an open-end investment company which may invest to a limited extent in fixed income securities changes as the general level of interest rates fluctuate. When interest rates decline, the value of a fixed income portfolio can be expected to rise. Conversely, when interest rates rise, the value of a fixed income portfolio can be expected to decline. High-Yield, Below Investment Grade Fixed-Income Securities: Investments in below investment grade fixed-income securities, while generally providing greater income and opportunity for gain than investments in higher-rated securities, usually entail greater risks. These risks include lack of liquidity; an unpredictable secondary market; a greater likelihood of default; increased sensitivity to adverse economic or corporate developments and thus greater price fluctuation; call provisions that may adversely affect returns; and loss of principal and interest. Because yields may vary over time, no specified level of income can ever be assured. Below investment grade fixed-income securities, which are usually rated lower than Baa by Moody's or BBB by S&P or by Fitch, or, if unrated, of comparable quality, are considered speculative. For a description of these and other rating categories, see the Statement. Options, Futures Contracts and Forward Contracts: Transactions in futures contracts, options on futures contracts, forward contracts and options involve certain risks. For example, a lack of correlation between the index or instrument underlying an option, futures contract or forward contract and the assets being hedged, or unexpected adverse price movements, could render a Portfolio's hedging strategy unsuccessful and could result in losses. "Cross hedging" transactions may involve greater correlation risks. In addition, there can be no assurance that a liquid secondary market will exist for any contract purchased or sold, and the Portfolio may be required to maintain a position until exercise or expiration, which could result in losses. For more information about these risks, see the Statement. Foreign Securities: Investing in securities of foreign issuers generally involves risks not ordinarily associated with investing in securities of domestic issuers. These include changes in currency rates, exchange control regulations, governmental administration or economic or monetary policy (in the United States or abroad) or circumstances in dealings between nations. Costs may be incurred in connection with conversions between various currencies. Special considerations may also include more limited information about foreign issuers, higher brokerage and custodial costs, different accounting standards and thinner trading markets. Foreign securities markets may also be less liquid, more volatile and less subject to government supervision than those in the United States. Investments in foreign countries could be affected by other factors including expropriation, confiscatory taxation and potential difficulties in enforcing contractual obligations and could be subject to extended settlement periods. For more information about the risks involved in foreign securities, see the Statement. -11- Emerging Market Securities: The risks of investing in foreign securities may be intensified in the case of investments in emerging markets. Securities of many issuers in emerging markets may be less liquid and more volatile than securities of comparable domestic issuers. Emerging markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Investment in certain foreign emerging market debt obligations may be restricted or controlled to varying degrees. These restrictions or controls may at times preclude investment in certain foreign emerging market debt obligations or increase the expenses of a Portfolio. INVESTMENT RESTRICTIONS In addition to the restrictions discussed under "Investment Policies and Practices," each Portfolio has adopted other investment restrictions and limitations, which are described in the Statement. Some of these restrictions are fundamental, which means that they cannot be changed without shareholder approval. For example, each Portfolio may not invest more than 25% of its assets in securities of companies engaged in the same industry (other than U.S. Government securities). Each Portfolio may borrow money, but not for leverage purposes. As a matter of non-fundamental policy, no Portfolio may invest more than 15% of its net assets in securities that are not readily marketable and in repurchase agreements that mature in more than seven days. In addition, each Portfolio is "diversified." Generally, this means that with respect to 75% of its total assets, a Portfolio may not purchase the securities of any single issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, (a) more than 5% of the Portfolio's total assets would be invested in the securities of that issuer, or (b) the Portfolio would hold more than 10% of the outstanding voting securities of that issuer. MANAGEMENT OF THE PORTFOLIOS DIRECTORS. The operations of each Portfolio are managed under the direction of the Board of Directors ("Directors"). The Directors set broad policies for the Fund and each Portfolio. Information about the Directors is found in the Statement. INVESTMENT ADVISER. Aetna serves as the investment adviser for each of the Portfolios. Aetna is a Connecticut insurance corporation with its principal offices at 151 Farmington Avenue, Hartford, Connecticut 06156, and is registered with the Securities and Exchange Commission as an investment adviser. As of June 30, 1997, Aetna managed over $____ billion in assets. Aetna is an indirect wholly owned subsidiary of Aetna Retirement Services, Inc., which is in turn an indirect wholly owned subsidiary of Aetna Inc. Under the terms of the Investment Advisory Agreement between the Fund and Aetna with respect to each of the Portfolios, Aetna, subject to the supervision of the Directors, is obligated to manage and oversee the Fund's day-to-day operations and to manage the investments of each Portfolio. The Investment Advisory Agreement gives Aetna broad latitude in selecting securities for each Portfolio subject to the Directors' oversight. Under the Investment Advisory Agreement, Aetna may delegate to a subadviser the responsibility for day-to-day management of the investments of each Portfolio, subject to Aetna's oversight. Aetna receives a monthly fee from each Portfolio at an annual rate based on the average daily net assets of each Portfolio as follows: -12- Portfolio Fee --------- --- MFS Emerging Equities 0.70% on the first $500 million of average daily net assets; 0.65% on assets over $500 million MFS Research Growth 0.70% on the first $500 million of average daily net assets; 0.65% on assets over $500 million MFS Value Equity 0.65% of average daily net assets Scudder International Growth 0.80% of average daily net assets T. Rowe Price Growth Equity 0.60% of average daily net assets Under the Investment Advisory Agreement, Aetna is responsible for all of its own costs, including costs of Aetna's personnel, required to carry out its investment advisory duties. SUBADVISERS. MFS Emerging Equities, MFS Research Growth and MFS Value Equity. Aetna has engaged Massachusetts Financial Services Company ("MFS"), 500 Boylston Street, Boston, Massachusetts 02116, as Subadviser to MFS Emerging Equities, MFS Research Growth and MFS Value Equity. MFS is a subsidiary of Sun Life of Canada (U.S.), which is a subsidiary of Sun Life of Canada (U.S.) Holdings, Inc., which in turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada. Net assets under management of the MFS Organization were approximately $___ billion as of June 30, 1997. John W. Ballen, a Senior Vice President of MFS, is portfolio manager of MFS Emerging Equities. Mr. Ballen has been employed as a portfolio manager by MFS since 1984. Portfolio securities of MFS Research Growth are selected by a committee of investment research analysts. This committee includes investment analysts employed not only by MFS but also by MFS International (U.K.) Limited, a wholly owned subsidiary of MFS. MFS Research Growth's assets are allocated among industries by the analysts acting together as a group. Individual analysts are then responsible for selecting what they view as the securities best suited to meet MFS Research Growth's investment objective within their assigned industry responsibility. John F. Brennan, Jr., a Vice President of MFS, is portfolio manager of MFS Value Equity. Mr. Brennan has been employed by MFS as a portfolio manager since 1985. Scudder International Growth. Aetna has engaged Scudder, Stevens & Clark, Inc., a Delaware corporation ("Scudder"), 345 Park Avenue, New York, New York 10154 as Subadviser to Scudder International Growth. Scudder managed over $____ billion as of June 30, 1997. Scudder International Growth is managed by a team of Scudder professionals, each of whom plays an important role. Co-lead Portfolio Managers Carol L. Franklin and Irene T. Cheng joined Scudder in 1981 and 1993, respectively. Ms. Franklin has eighteen years of experience and Ms. Cheng has twelve years of experience in finance and investing. Nicholas Bratt, portfolio manager, directs Scudder's overall global equity investment strategies and has been with Scudder since 1976. Marc Joseph is a senior portfolio manager for institutional international equity accounts and joined Scudder in 1997. Sheridan Reilly joined Scudder in 1995 and is a member of Scudder's Global Equity Group. Mr. Reilly has over ten years of industry experience focusing on strategies for global portfolios, currency hedging, and foreign equity markets. Joan Gregory, portfolio manager, focuses on stock selection and has been with Scudder since 1992. Ms. Gregory has been involved with investment in global and international stocks as an assistant portfolio manager since 1989. T. Rowe Price Growth Equity. Aetna has engaged T. Rowe Price Associates, Inc. ("T. Rowe Price"), 100 East Pratt Street, Baltimore, Maryland 21202 as Subadviser to T. Rowe Price Growth Equity. T. Rowe Price and its affiliates managed over $___ billion as of June 30, 1997. T. Rowe Price Growth Equity is managed by a committee. The committee chairman, Robert W. Smith, has day-to-day responsibility for managing T. Rowe Price Growth Equity and works with the committee in developing and executing its -14- investment program. Mr. Smith joined T. Rowe Price in 1992 and has been managing investments since 1988. Under separate subadvisory agreements, each Subadviser, subject to the supervision of Aetna and the Directors, is responsible for managing the assets of its respective Portfolio(s) in accordance with the Portfolio's investment objective and policies. Each Subadviser pays the salaries and other related costs of personnel engaged in providing investment advice, including office space, facilities and equipment. Aetna has overall responsibility for monitoring the investment program maintained by each Subadviser for compliance with applicable laws and regulations and the respective Portfolio's investment objective. Each Subadvisory Agreement gives each Subadviser broad latitude in selecting securities for each Portfolio subject to Aetna's oversight. Each Subadvisory Agreement provides that Aetna will pay the Subadviser a fee at an annual rate based on the average daily net asset value of each Portfolio as described below. Aetna pays the subadvisory fee out of its advisory fee. MFS Emerging Equities .425% on the first $150 million of MFS Research Growth aggregate average daily MFS Value Equity net assets under management . .40% on the next $150 million .375% on the next $450 million .35% on the next $550 million .30% on the next $200 million .25% on assets over $1.5 billion Scudder International Growth .75% on the first $20 million of average daily net assets .65% on the next $15 million .50% on the next $65 million .40% on the next $200 million .30% on assets over $300 million T. Rowe Price Growth Equity .40% on the first $500 million of average daily net assets .375% on assets over $500 million BROKERAGE ALLOCATION. The Investment Advisory Agreement and each Subadvisory Agreement allow Aetna or the Subadviser, as the case may be, to place trades through brokers of its choosing and to take into consideration the quality of the brokers' services and execution, as well as services such as research provided to the Adviser/Subadviser, in setting the amount of commissions paid to a broker. The use of research and expense reimbursements in determining and paying commissions are referred to as "soft dollar" practices. Aetna and the Subadviser will engage in soft dollar practices only to the extent authorized by applicable law. EXPENSES AND PORTFOLIO ADMINISTRATION. Under an Administrative Services Agreement with the Fund, Aetna provides all administrative services necessary for the Fund's operations and is responsible for the supervision of the Fund's other service providers. Aetna also assumes all ordinary recurring direct costs of the Fund, such as custodian fees, directors fees, transfer agency costs and accounting expenses. As compensation for these services, Aetna receives a monthly fee from each Portfolio at an annual rate based on the average daily net assets of each Portfolio as follows: -14- Portfolio Fee --------- --- MFS Emerging Equities 0.13% MFS Research Growth 0.15% MFS Value Equity 0.25% Scudder International Growth 0.20% T. Rowe Price Growth Equity 0.15% CAP ON AGGREGATE FUND FEES AND EXPENSES. Each Portfolio's aggregate expenses are limited to the advisory and administrative fees disclosed above. Aetna has agreed to reimburse the Portfolios for expenses and/or waive its fees, so that, through at least April 30, 1999, the aggregate of each Portfolio's expenses will not exceed the amounts shown above. PRINCIPAL UNDERWRITER. Aetna, 151 Farmington Avenue, Hartford, Connecticut 06156, serves as the Fund's principal underwriter. TRANSFER AGENT. Investors Bank & Trust Company, 200 Clarendon Street, Boston, Massachusetts 02116, serves as the Fund's Transfer Agent. CUSTODIAN. Investors Bank & Trust Company also serves as the Fund's custodian. PURCHASE AND REDEMPTION OF SHARES Purchases and redemptions of shares may be made only by insurance companies for their separate accounts at the direction of Participants. Please refer to the prospectus for your contract or policy for information on how to direct investments in or redemptions from a Portfolio and any fees that may apply. Orders received by the insurance company before 4:00 p.m. will be priced at the net asset value per share ("NAV") calculated that day, as described below. The Portfolios reserve the right to suspend the offering of shares, or to reject any specific purchase order. The Portfolios may suspend redemptions or postpone payments when the New York Stock Exchange is closed or when trading is restricted for any reason or under emergency circumstances as determined by the SEC. NET ASSET VALUE The NAV of each Portfolio is determined as of the later of 15 minutes following the close of the New York Stock Exchange or 4:15 p.m. on each day that the New York Stock Exchange is open for trading. Each Portfolio's NAV is computed by taking the total value of a Portfolio's securities, plus any cash or other assets (including dividends and interest accrued but not collected) and subtracting all liabilities (including accrued expenses), and dividing the total by the number of shares outstanding. Portfolio securities are valued primarily by independent pricing services, based on market quotations. Short-term debt instruments maturing in less than 60 days are valued at amortized cost. Securities for which market quotations are not readily available are valued at their fair value in such manner as may be determined, from time to time, in good faith, by or under the authority of the Directors. -15- PERFORMANCE PERFORMANCE OF PORTFOLIOS From time to time advertisements and other sales materials for the Fund may include information concerning each Portfolio's historical performance. These advertisements will also describe the performance of the relevant insurance company separate accounts. Advertising information will include the average annual total return of the Portfolio calculated on a compounded basis for specified periods of time. Total return information will be calculated pursuant to rules established by the SEC. In lieu of or in addition to total return calculations, such information may include performance rankings and similar information from independent organizations such as Lipper Analytical Services, Inc., Morningstar, Business Week, Forbes or other industry publications. A Portfolio calculates average annual total return by determining the redemption value at the end of specified periods (assuming reinvestment of all dividends and distributions) of a $1,000 investment in the Portfolio at the beginning of the period, deducting the initial $1,000 investment, annualizing the increase or decrease over the specified period and expressing the result as a percentage. Total return figures utilized by the Fund are based on historical performance and are not intended to indicate future performance. Total return and net asset value per share can be expected to fluctuate over time and, accordingly, upon redemption shares may be worth more or less than their original cost. PERFORMANCE OF SIMILARLY MANAGED MUTUAL FUNDS Each Portfolio is newly organized and does not yet have its own performance record. Each Portfolio, however, has substantially the same investment objective, policies and strategies as one or more existing mutual funds ("other Mutual Funds") that are either sold directly to the public or through variable products, advised by MFS, Scudder or T. Rowe Price, as the case may be. The historical performance of the Funds that are comparable to the Portfolios is presented below. Investors should not consider the performance of the other Mutual Funds as an indication of the future performance of a similarly managed Portfolio. The performance figures shown below reflect the deduction of the historical fees and expenses paid by each other Mutual Fund, and not those to be paid by the Portfolio. The figures do not reflect the deduction of any insurance fees or charges that are imposed by the insurance company in connection with its sale of the VA Contracts and VLI Policies. Investors should refer to the separate account prospectuses describing the VA Contracts and VLI Policies for information pertaining to these insurance fees and charges. The insurance separate account fees will have a detrimental effect on the performance of the Portfolios. The results shown below reflect the reinvestment of dividends and distributions, and were calculated in the same manner that will be used by each Portfolio to calculate its own performance. The following table shows average annualized total returns of the other Mutual Funds for the stated periods ending June 30, 1997, as well as a comparison with the performance of the applicable benchmark.* - -------- * The S&P 500 (Standard & Poor's 500) Index is a value-weighted, unmanaged index of 500 widely held stocks considered to be representative of the stock market in general. The Russell 2000 Index is a value-weighted, unmanaged index of small capitalization stocks. Both indices assume reinvestment of all dividends. The Morgan Stanley Capital International-Europe, Australia, Far East (MSCI EAFE) Index is an unmanaged, market value-weighted average of the performance of more than 900 securities listed on the stock exchanges of countries in Europe, Australia and the Far East. -16-
One Year Five Year Ten Year MFS Emerging Growth Fund (Class A)(1) 13.61 24.27 17.00 (Model for MFS Emerging Equities)(2) Russell 2000 16.33 17.88 11.16 S&P 500 34.70 19.78 14.65 MFS Research Fund (Class A)(1) 23.59 22.13 14.13 (Model for MFS Research Growth)(3) S&P 500 34.70 19.78 14.65 MFS Value Fund (Class A)(1) 17.58 21.80 13.50 (Model for MFS Value Equity)(4) S&P 500 34.70 19.78 14.65 Scudder VLIF International 19.88 13.61 10.38 Portfolio (Model for Scudder International Growth) MSCI EAFE 12.84 12.83 6.58 Scudder International Fund 19.83 13.31 9.47 (Model for Scudder International Growth) MSCI EAFE 12.84 12.83 6.58 T. Rowe Price Growth Stock Fund 29.79 18.67 12.63 (Model for T. Rowe Price Growth Equity) S&P 500 34.70 19.78 14.65
- -------- (1) Class A share performance includes the performance of the Fund's Class B shares for periods prior to the commencement of offering of Class A shares on September 13, 1993, adjusted to include Class A's 5.75% front-end sales charge, but not adjusted to reflect differences in internal operating expenses. (2) MFS also manages another fund with substantially the same investment objective, policies and strategies as those of Portfolio Partners - MFS Emerging Equities. The performance of that fund, MFS Variable Insurance Trust - Emerging Growth Series, was not included in the chart because it has been in existence only since July 24, 1995, and thus has a much shorter track record than MFS Emerging Growth Fund (Class A). The performance of MFS Variable Insurance Trust - Emerging Growth Series for the one-year period ending June 30, 1997, was 12.68%. (3) MFS also manages another fund with substantially the same investment objective, policies and strategies as those of Portfolio Partners - MFS Research Growth. The performance of that fund, MFS Variable Insurance Trust - Research Series, was not included in the chart because it has been in existence only since July 26, 1995, and thus has a much shorter track record than MFS Emerging Growth Fund (Class A). The performance of MFS Variable Insurance Trust - Research Series for the one-year period ending June 30, 1997, was 23.98%. (4) MFS also manages another fund with substantially the same investment objective, policies and strategies as those of Portfolio Partners - MFS Value Equity. The performance of that fund, MFS Variable Insurance Trust Value Series, was not included in the chart because it has been in existence only since August 14, 1996. -17- TAX MATTERS Each Portfolio intends to qualify as a regulated investment company for federal income tax purposes by satisfying the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), including requirements with respect to diversification of assets, distribution of income and sources of income. As a regulated investment company, a Portfolio generally will not be subject to tax on its ordinary income and net realized capital gains. Each Portfolio also intends to comply with the diversification requirements of Section 817(h) of the Code for variable annuity contracts and variable life insurance policies so that the VA Contract owners and VLI Policy owners should not be subject to federal tax on distributions of dividends and income from a Portfolio to the insurance company separate accounts. Contract owners and policy owners 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. GENERAL INFORMATION INCORPORATION. The Fund was incorporated under the laws of Maryland on May 7, 1997. CAPITAL STOCK. The Fund is authorized to issue one 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 50% of the Fund's outstanding shares, the Fund will hold a shareholder meeting for the purpose of voting on the removal and replacement 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. -18- STATEMENT OF ADDITIONAL INFORMATION DATED: August 21, 1997 PORTFOLIO PARTNERS, INC. 151 Farmington Avenue Hartford, Connecticut 06156-8962 This Statement of Additional Information is not a prospectus but should be read in conjunction with the current prospectus for Portfolio Partners, Inc. dated August 21, 1997 (the "Prospectus"). This Statement of Additional Information is incorporated by reference in its entirety into the Prospectus. A free Prospectus is available upon request by writing to Portfolio Partners, Inc. at the address listed above or calling 1-800-238-6263. READ THE PROSPECTUS BEFORE YOU INVEST. TABLE OF CONTENTS PAGE ---- GENERAL INFORMATION AND HISTORY ADDITIONAL INVESTMENT RESTRICTIONS AND POLICIES OF THE PORTFOLIOS DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT POLICIES AND PRACTICES FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS RISKS ASSOCIATED WITH INVESTING IN OPTIONS, FUTURES AND FORWARD CONTRACTS DIRECTORS AND OFFICERS OF THE FUND CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS THE INVESTMENT ADVISORY AGREEMENT THE SUBADVISORY AGREEMENTS THE ADMINISTRATIVE SERVICES AGREEMENT CUSTODIAN INDEPENDENT AUDITORS PRINCIPAL UNDERWRITER BROKERAGE ALLOCATION AND TRADING POLICIES DESCRIPTION OF SHARES NET ASSET VALUE PERFORMANCE INFORMATION TAX STATUS VOTING RIGHTS FINANCIAL STATEMENTS GENERAL INFORMATION AND HISTORY Portfolio Partners, Inc. (the "Fund") was incorporated in 1997 in Maryland. The Fund is an open-end 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 five Portfolios: MFS Emerging Equities Portfolio ("MFS Emerging Equities"); MFS Research Growth Portfolio ("MFS Research Growth"); MFS Value Equity Portfolio ("MFS Value Equity"); Scudder International Growth Portfolio ("Scudder International Growth"); and T. Rowe Price Growth Equity Portfolio ("T. Rowe Price Growth Equity"). Much of the information contained in this Statement of Additional Information expands on subjects discussed in the Prospectus. Capitalized terms not defined herein are used as defined in the Prospectus. 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 (the "1940 Act"), and therefore cannot be changed, with regard to a particular Portfolio, without the approval of a majority of the outstanding voting securities of that Portfolio 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. Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent a Portfolio from purchasing or selling options and futures contracts or from investing in securities or other instruments backed by physical commodities). 2. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent a Portfolio from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business). 3. Issue any senior security (as defined in the 1940 Act), except that (a) a Portfolio may engage in transactions that may result in the issuance of senior securities to the extent permitted under applicable regulations and interpretations of the 1940 Act or an exemptive order; (b) a Portfolio may acquire other securities, the acquisition of which may result in the issuance of a senior security, to the extent permitted under applicable regulations or interpretations of the 1940 Act; and (c) subject to the restrictions set forth below, a Portfolio may borrow money as authorized by the 1940 Act. 4. Borrow money, except that (a) a Portfolio may enter into commitments to purchase securities in accordance with its investment program, including when-issued securities and reverse repurchase agreements, provided that the total amount of any such borrowing does not exceed 33-1/3% of the Portfolio's total assets; and (b) a Portfolio may borrow money in an amount not to exceed 33-1/3% of the value of its total assets at the time the loan is made. 5. Lend any security or make any other loan if, as a result, more than 33-1/3% of its total assets would be lent to other parties, but this limitation does not apply to purchases of publicly issued debt securities or to repurchase agreements. 6. Underwrite securities issued by others, except to the extent that a Portfolio may be considered an underwriter within the meaning of the Securities Act of 1933 (the "1933 Act") in the disposition of restricted securities. -2- 7. Purchase the securities of an issuer if, as a result, more than 25% of its total assets would be invested in the securities of companies whose principal business activities are in the same industry. This limitation does not apply to securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities. With respect to MFS Emerging Equities, MFS Research Growth and MFS Value Equity only: 8. No Portfolio will 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 program of the Portfolio. 9. With respect to 100% of its total assets, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities) if, as a result, (a) more than 5% of the Portfolio's total assets would be invested in the securities of that issuer, or (b) the Portfolio would hold more than 10% of the outstanding voting securities of that issuer. With respect to Scudder International Growth and T. Rowe Price Growth Equity only: 10. With respect to 75% of its total assets, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities) if, as a result, (a) more than 5% of the Portfolio's total assets would be invested in the securities of that issuer, or (b) the Portfolio would hold more than 10% of the outstanding voting securities of that issuer. The following restrictions are not fundamental and may be changed without shareholder approval: a. No Portfolio will invest more than 15% of its net 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 at approximately the price at which a Portfolio has valued them. 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, securities offered pursuant to Section 4(2) of, or securities otherwise subject to restrictions on resale under, the 1933 Act ("Restricted Securities"), shall not be deemed illiquid solely by reason of being unregistered. A Subadviser determines whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors. b. No Portfolio will borrow for leverage purposes. c. No Portfolio will make short sales of securities, other than short sales "against the box." This restriction does not apply to transactions involving options, futures contracts and related options, and other strategic transactions. d. No Portfolio will lend portfolio securities. With respect to Scudder International Growth and T. Rowe Price Growth Equity only: e. No Portfolio will 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 program of the Portfolio. -3- General. The limitations listed above supplement those set forth in the Prospectus. Unless otherwise noted, whenever an investment policy or limitation states a maximum percentage of a Portfolio's assets that may be invested in any security or other asset, or sets forth a policy regarding quality standards, such standard or percentage limitation will be determined immediately after and as a result of the Portfolio's acquisition of such security or other asset except in the case of borrowing (or other activities that may be deemed to result in the issuance of a "senior security" under the 1940 Act). Accordingly, any subsequent change in values, net assets or other circumstances will not be considered when determining whether the investment complies with the Portfolio's investment policies and limitations. If the value of a Portfolio's holdings of illiquid securities at any time exceeds the percentage limitation applicable at the time of acquisition due to subsequent fluctuations in value or other reasons, the Directors will consider what actions, if any, are appropriate to maintain adequate liquidity. DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT POLICIES AND PRACTICES "WHEN-ISSUED" SECURITIES - Each Portfolio may purchase securities on a "when-issued" or on a "forward delivery" basis. It is expected that, under normal circumstances, a Portfolio will take delivery of such securities. When a Portfolio commits to purchase a security on a "when-issued" or on a "forward delivery" basis, it will set up procedures consistent with the applicable interpretations of the Securities and Exchange Commission (the "SEC") concerning such purchases. Since that policy currently recommends that an amount of a Portfolio's assets equal to the amount of the purchase be held aside or segregated to be used to pay for the commitment, a Portfolio will always have cash, short-term money market instruments or other liquid securities sufficient to fulfill any commitments or to limit any potential risk. However, although such purchases will not be made for speculative purposes and SEC policies will be adhered to, purchases of securities on such bases may involve more risk than other types of purchases. For example, a Portfolio may have to sell assets which have been set aside in order to meet redemptions. Also, if a Portfolio determines it is necessary to sell the "when-issued" or "forward delivery" securities before delivery, it may incur a loss because of market fluctuations since the time the commitment to purchase such securities was made. When the time comes to pay for "when-issued" or "forward delivery" securities, a Portfolio will meet its obligations from the then-available cash flow on the sale of securities, or, although it would not normally expect to do so, from the sale of the "when-issued" or "forward delivery" securities themselves (which may have a value greater or less than the Portfolio's payment obligation). CORPORATE ASSET-BACKED SECURITIES - As described in the Prospectus, MFS Emerging Equities and Scudder International Growth may invest in corporate asset-backed securities. These securities, issued by trusts and special purpose corporations, are backed by a pool of assets, such as credit card and automobile loan receivables, representing the obligations of a number of different parties. Corporate asset-backed securities present certain risks. For instance, in the case of credit card receivables, these securities may not have the benefit of any security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. The underlying assets (e.g., loans) are also subject to prepayments which shorten the securities' weighted average life and may lower their return. Corporate asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failures by obligors on underlying assets to make payments, the securities may contain elements of credit support which fall into two categories: (i) liquidity protection and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the receipt of payments on the underlying pool occurs in a timely fashion. Protection against losses resulting from -4- ultimate default ensures payment through insurance policies or letters of credit obtained by the issuer or sponsor from third parties. The Portfolio will not pay any additional or separate fees for credit support. The degree of credit support provided for each issue is generally based on historical information respecting the level of credit risk associated with the underlying assets. Delinquency or loss in excess of that anticipated or failure of the credit support could adversely affect the return on an investment in such a security. REPURCHASE AGREEMENTS - As described in the Prospectus, each of the Portfolios may enter into repurchase agreements with sellers that are member firms (or subsidiaries thereof) of the New York Stock Exchange, members of the Federal Reserve System, recognized primary U.S. Government securities dealers or institutions which the Subadviser has determined to be of comparable creditworthiness. The securities that a Portfolio purchases and holds through its agent are U.S. Government securities, the values, including accrued interest, of which are equal to or greater than the repurchase price agreed to be paid by the seller. The repurchase price may be higher than the purchase price, the difference being income to a Portfolio, or the purchase and repurchase prices may be same, with interest at a standard rate due to the Portfolio together with the repurchase price on repurchase. In either case, the income to a Portfolio is unrelated to the interest rate on the U.S. Government securities. The repurchase agreement provides that in the event the seller fails to pay the price agreed upon on the agreed upon delivery date or upon demand, as the case may be, a Portfolio will have the right to liquidate the securities. If, at the time a Portfolio is contractually entitled to exercise its right to liquidate the securities, the seller is subject to a proceeding under the bankruptcy laws or its assets are otherwise subject to a stay order, the Portfolio's exercise of its right to liquidate the securities may be delayed and result in certain losses and costs to the Portfolio. The Fund has adopted and follows procedures which are intended to minimize the risks of repurchase agreements. For example, a Portfolio only enters into repurchase agreements after its Subadviser has determined that the seller is creditworthy, and the Subadviser monitors the seller's creditworthiness on an ongoing basis. Moreover, under such agreements, the value, including accrued interest, of the securities (which are marked to market every business day) is required to be greater than the repurchase price, and the Portfolio has the right to make margin calls at any time if the value of the securities falls below the agreed upon margin. LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS - MFS Emerging Equities and MFS Value Equity may each invest up to 5% of their total assets in loans and other direct indebtedness. The highly leveraged nature of many such loans and other direct indebtedness may make such loans especially vulnerable to adverse changes in economic or market conditions. Loans and other direct indebtedness may not be in the form of securities or may be subject to restrictions on transfer, and only limited opportunities may exist to resell such instruments. As a result, a Portfolio may be unable to sell such investments at an opportune time or may have to resell them at less than fair market value. In purchasing a loan, a Portfolio acquires some or all of the interest of a bank or other lending institution in a loan to a corporate borrower. Many such loans are secured, although some may be unsecured. Such loans may be in default at the time of purchase. Loans and other direct indebtedness that are fully secured offer a Portfolio more protection than an unsecured loan in the event of non-payment of scheduled interest or principal. However, there is no assurance that the liquidation of collateral from a secured loan or other direct indebtedness would satisfy the corporate borrower's obligation, or that the collateral can be liquidated. These loans and other direct indebtedness are made generally to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buyouts and other corporate activities. Such loans and other direct indebtedness loans are typically made by a syndicate of lending institutions, represented by an agent lending institution which has negotiated and structured the loan and is responsible for collecting interest, principal and other amounts due on its own behalf and on behalf of the others in the syndicate, and for enforcing its and their other rights against the borrower. Alternatively, such loans and other direct indebtedness may be structured as a novation, pursuant to which a Portfolio would assume all of the rights of the lending institution in a loan, or as an assignment, pursuant to which the Portfolio would purchase an assignment of a portion of a lender's interest in a loan or other direct indebtedness either directly from the lender or through an intermediary. A Portfolio may also purchase trade or other claims against companies, which generally represent money owed by the company to a supplier of goods or services. These claims may also be purchased at a time when the company is in default. -5- Certain of the loans and other direct indebtedness acquired by a Portfolio may involve revolving credit facilities or other standby financing commitments which obligate the Portfolio to pay additional cash on a certain date or on demand. These commitments may have the effect of requiring a Portfolio to increase its investment in a company at a time when the Portfolio might not otherwise decide to do so (including at a time when the company's financial condition makes it unlikely that such amounts will be repaid). To the extent that a Portfolio is committed to advance additional funds, it will at all times hold and maintain in a segregated account cash or other liquid securities in an amount sufficient to meet such commitments. A Portfolio's ability to receive payment of principal, interest and other amounts due in connection with these investments will depend primarily on the financial condition of the borrower. In selecting the loans and other direct indebtedness which a Portfolio will purchase, the Subadviser will rely upon its own (and not the original lending institution's) credit analysis of the borrower. As a Portfolio may be required to rely upon another lending institution to collect and pass on to the Portfolio amounts payable with respect to the loan and to enforce the Portfolio's rights under the loan and other direct indebtedness, an insolvency, bankruptcy or reorganization of the lending institution may delay or prevent the Portfolio from receiving such amounts. In such cases, a Portfolio will evaluate as well the creditworthiness of the lending institution and will treat both the borrower and the lending institution as an "issuer" of the loan for purposes of certain investment restrictions pertaining to the diversification of the Portfolio's portfolio investments. The highly leveraged nature of many such loans and other direct indebtedness may make such loans and other direct indebtedness especially vulnerable to adverse changes in economic or market conditions. Investments in such loans and other direct indebtedness may involve additional risk to the Portfolio. For example, if a loan or other direct indebtedness is foreclosed, the Portfolio could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is conceivable that under emerging legal theories of lender liability, the Portfolio could be held liable. It is unclear whether loans and other forms of direct indebtedness offer securities law protections against fraud and misrepresentation. In the absence of definitive regulatory guidance, the Portfolio relies on the Subadviser's research in an attempt to avoid situations where fraud and misrepresentation could adversely affect the Portfolio. In addition, loans and other direct investments may not be in the form of securities or may be subject to restrictions on transfer, and only limited opportunities may exist to resell such instruments. As a result, the Portfolio may be unable to sell such investments at an opportune time or may have to resell them at less than fair market value. To the extent that the Subadviser determines that any such investments are illiquid, the Portfolio will include them in the investment limitations described below. FOREIGN SECURITIES - The Portfolios may invest in foreign securities (and foreign currencies) to the extent described in the Prospectus. Investing in foreign securities generally presents a greater degree of risk than investing in domestic securities. As a result of its investments in foreign securities, a Portfolio may receive interest or dividend payments, or the proceeds of the sale or redemption of such securities, in the foreign currencies in which such securities are denominated. Under certain circumstances, such as where a Subadviser believes that the applicable exchange rate is unfavorable at the time the currencies are received or the Subadviser anticipates, for any other reason, that the exchange rate will improve, a Portfolio may hold such currencies for an indefinite period of time. A Portfolio may also hold foreign currency in anticipation of purchasing foreign securities. While the holding of currencies will permit the Portfolio to take advantage of favorable movements in the applicable exchange rate, such strategy also exposes the Portfolio to risk of loss if exchange rates move in a direction adverse to the Portfolio's position. Such losses could reduce any profits or increase any losses sustained by a Portfolio from the sale or redemption of securities and could reduce the dollar value of interest or dividend payments received. AMERICAN DEPOSITARY RECEIPTS - Each Portfolio may invest in ADRs, which are certificates issued by a U.S. depository (usually a bank) that represent a specified quantity of shares of an underlying non-U.S. stock on deposit with a custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a depository which has an exclusive relationship with the issuer of the underlying security. An unsponsored ADR may be issued by any number of U.S. depositories. Under the terms of most sponsored arrangements, depositories agree to distribute notices of shareholder meetings and voting instructions, and to provide shareholder communications and other information to the ADR holders at the request of the issuer of the deposited securities. The depository of an unsponsored ADR, on the other hand, is under no obligation to distribute shareholder -6- communications received from the issuer of the deposited securities or to pass through voting rights to ADR holders in respect of the deposited securities. A Portfolio may invest in either type of ADR. Although the U.S. investor holds a substitute receipt of ownership rather than direct stock certificates, the use of the depository receipts in the United States can reduce costs and delays as well as potential currency exchange and other difficulties. A Portfolio may purchase securities in local markets and direct delivery of these ordinary shares to the local depository of an ADR agent bank in the foreign country. Simultaneously, the ADR agents create a certificate that settles at the Portfolio's custodian in five days. A Portfolio may also execute trades on the U.S. markets using existing ADRs. A foreign issuer of the security underlying an ADR is generally not subject to the same reporting requirements in the United States as a domestic issuer. Accordingly the information available to a U.S. investor will be limited to the information the foreign issuer is required to disclose in its own country and the market value of an ADR may not reflect undisclosed material information concerning the issuer of the underlying security. ADRs may also be subject to exchange rate risks if the underlying foreign securities are traded in foreign currency. ZERO COUPON, DEFERRED INTEREST AND PIK BONDS - Fixed income securities that MFS Value Equity may invest in include zero coupon bonds, deferred interest bonds and bonds on which the interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest bonds are debt obligations which are issued at a significant discount from face value. The discount approximates the total amount of interest the bonds will accrue and compound over the period until maturity or the first interest payment date at a rate of interest reflecting the market rate of the security at the time of issuance. While zero coupon bonds do not require the periodic payment of interest, deferred interest bonds provide for a period of delay before the regular payment of interest begins. PIK bonds are debt obligations which provide that the issuer thereof may, at its option, pay interest on such bonds in cash or in the form of additional debt obligations. Such investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of such cash. Such investments may experience greater volatility in market value than debt obligations that make regular payments of interest. The Portfolio will accrue income on such investments for tax and accounting purposes, as required, which is distributable to shareholders and which, because no cash is received at the time of accrual, may require the liquidation of other portfolio securities to satisfy the Portfolio's distribution obligations. RISK OF INVESTING IN LOWER RATED FIXED-INCOME SECURITIES - Certain of the Portfolios may invest in lower rated fixed-income securities rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Service ("S&P") or by Fitch Investors Service, Inc. ("Fitch") and comparable unrated securities. These securities, while normally exhibiting adequate protection parameters, have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than in the case of higher grade fixed income securities. A Portfolio may also invest in high-yield, below investment grade fixed-income securities, which are rated Ba or lower by Moody's or BB or lower by S&P or by Fitch, or, if unrated, of comparable quality, to the extent described in the Prospectus. No minimum rating standard is required by the Portfolios. These securities are considered speculative and, while generally providing greater income than investments in higher rated securities, will involve greater risk of principal and income (including the possibility of default or bankruptcy of the issuers of such securities) and may involve greater volatility of price (especially during periods of economic uncertainty or change) than securities in the higher rating categories and because yields vary over time, no specific level of income can ever be assured. High-yield, below investment grade fixed-income securities generally tend to reflect economic changes (and the outlook for economic growth), short-term corporate and industry developments and the market's perception of their credit quality (especially during times of adverse publicity) to a greater extent than higher rated securities which react primarily to fluctuations in the general level of interest rates (although these lower rated fixed income securities are also affected by changes in interest rates). In the past, economic downturns or an increase in interest rates have, under certain circumstances, caused a higher incidence of default by the issuers of these securities and may do so in the future, especially in the case of highly leveraged issuers. The prices for these securities may be affected by legislative and regulatory developments. The market for these lower rated fixed income securities may be less liquid than the market for investment grade fixed income securities. Furthermore, the liquidity of these lower rated securities may be affected by the market's perception of their credit quality. Therefore, the Subadviser's judgment may at times play a greater role in valuing these securities than in the case of investment grade fixed income securities, and it also may be more difficult during times of certain adverse market conditions to sell these -7- lower rated securities to meet redemption requests or to respond to changes in the market. For a description of the rating categories described above, see Appendix A. While a Subadviser may refer to ratings issued by established credit rating agencies, it is not the Portfolios' policy to rely exclusively on ratings issued by these rating agencies, but rather to supplement such ratings with the Subadviser's own independent and ongoing review of credit quality. To the extent a Portfolio invests in these lower rated securities, the achievement of its investment objective may be more dependent on the Subadviser's own credit analysis than in the case of a fund investing in higher quality fixed income securities. These lower rated securities may also include zero coupon bonds, deferred interest bonds and PIK bonds which are described above. HYBRID INSTRUMENTS - T. Rowe Price Growth Equity and MFS Value Equity may invest in hybrid instruments. Hybrid instruments (a type of potentially high-risk derivative) combine the elements of futures contracts or options with those of debt, preferred equity or a depository instrument (hereinafter "Hybrid Instruments"). Generally, a Hybrid Instrument will be a debt security, preferred stock, depository share, trust certificate, certificate of deposit or other evidence of indebtedness on which a portion of or all interest payments, and/or the principal or stated amount payable at maturity, redemption or retirement, is determined by reference to prices, changes in prices, or differences between prices, of securities, currencies, intangibles, goods, articles or commodities (collectively "Underlying Assets") or by another objective index, economic factor or other measure, such as interest rates, currency exchange rates, commodity indices, and securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may take a variety of forms, including, but not limited to, debt instruments with interest or principal payments or redemption terms determined by reference to the value of a currency or commodity or securities index at a future point in time, preferred stock with dividend rates determined by reference to the value of a currency, or convertible securities with the conversion terms related to a particular commodity. Hybrid Instruments can be an efficient means of creating exposure to a particular market, or segment of a market, with the objective of enhancing total return. For example, the Portfolio may wish to take advantage of expected declines in interest rates in several European countries, but avoid the transaction costs associated with buying and currency-hedging the foreign bond positions. One solution would be to purchase a U.S. dollar-denominated Hybrid Instrument whose redemption price is linked to the average three year interest rate in a designated group of countries. The redemption price formula would provide for payoffs of greater than par if the average interest rate was lower than a specified level, and payoffs of less than par if rates were above the specified level. Furthermore, the Portfolio could limit the downside risk of the security by establishing a minimum redemption price so that the principal paid at maturity could not be below a predetermined minimum level if interest rates were to rise significantly. The purpose of this arrangement, known as a structured security with an embedded put option, would be to give the Portfolio the desired European bond exposure while avoiding currency risk, limiting downside market risk, and lowering transactions costs. Of course, there is no guarantee that the strategy would be successful and the Portfolio could lose money if, for example, interest rates do not move as anticipated or credit problems develop with the issuer of the Hybrid Instrument. The risks of investing in Hybrid Instruments reflect a combination of the risks of investing in securities, options, futures and currencies. Thus, an investment in a Hybrid Instrument may entail significant risks that are not associated with a similar investment in a traditional debt instrument that has a fixed principal amount, is denominated in U.S. dollars or bears interest either at a fixed rate or a floating rate determined by reference to a common, nationally published Benchmark. The risks of a particular Hybrid Instrument will, of course, depend upon the terms of the instrument, but may include, without limitation, the possibility of significant changes in the Benchmarks or the prices of Underlying Assets to which the instrument is linked. Such risks generally depend upon factors which are unrelated to the operations or credit quality of the issuer of the Hybrid Instrument and which may not be readily foreseen by the purchaser, such as economic and political events, the supply and demand for the Underlying Assets and interest rate movements. In recent years, various Benchmarks and prices for Underlying Assets have been highly volatile, and such volatility may be expected in the future. Reference is also made to the discussion of futures, options, and forward contracts herein for a discussion of the risks associated with such investments. Hybrid Instruments are potentially more volatile and carry greater market risks than traditional debt instruments. Depending on the structure of the particular Hybrid Instrument, changes in a Benchmark may be -8- magnified by the terms of the Hybrid Instrument and have an even more dramatic and substantial effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid Instrument and the Benchmark or Underlying Asset may not move in the same direction or at the same time. Hybrid Instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Alternatively, Hybrid Instruments may bear interest at above market rates but bear an increased risk of principal loss (or gain). The latter scenario may result if "leverage" is used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid Instrument is structured so that a given change in a Benchmark or Underlying Asset is multiplied to produce a greater value change in the Hybrid Instrument, thereby magnifying the risk of loss as well as the potential for gain. Hybrid Instruments may also carry liquidity risk since the instruments are often "customized" to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such instruments in the secondary market may be smaller than that for more traditional debt securities. In addition, because the purchase and sale of Hybrid Instruments could take place in an over-the-counter market without the guarantee of a central clearing organization or in a transaction between the Portfolio and the issuer of the Hybrid Instrument, the creditworthiness of the counterparty or issuer of the Hybrid Instrument would be an additional risk factor which the Portfolio would have to consider and monitor. Hybrid Instruments also may not be subject to regulation of the CFTC, which generally regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority. The various risks discussed above, particularly the market risk of such instruments, may in turn cause significant fluctuations in the net asset value of the Portfolio. Accordingly, each Portfolio will limit its investments in Hybrid Instruments to 10% of net assets. However, because of their volatility, it is possible that the Portfolio's investment in Hybrid Instruments will account for more than 10% of its return (positive or negative). The performance of indexed securities depends to a great extent on the performance of the security, currency, or other instrument to which they are indexed, and may also be influenced by interest rate changes in the U.S. and abroad. At the same time, indexed securities are subject to the credit risks associated with the issuer of the security, and their values may decline substantially if the issuer's creditworthiness deteriorates. Recent issuers of indexed securities have included banks, corporations, and certain U.S. government agencies. SWAPS, CAPS, FLOORS AND COLLARS - Among the transactions into which Scudder International Growth may enter are interest rate, currency and index swaps and the purchase or sale of related caps, floors and collars. The Portfolio expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio, to protect against currency fluctuations, as a duration management technique or to protect against any increase in the price of securities the Portfolio anticipates purchasing at a later date. The Portfolio intends to use these transactions as hedges and not as speculative investments and will not sell interest rate caps or floors where it does not own securities or other instruments providing the income stream it may be obligated to pay. Interest rate swaps involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. A currency swap is an agreement to exchange cash flows on a notional amount of two or more currencies based on the relative value differential among them and an index swap is an agreement to swap cash flows on a notional amount based on changes in the values of the reference indices. The purchase of a cap entitles the purchaser to receive payments on a notional principal amount from the party selling such cap to the extent that a specified index exceeds a predetermined interest rate or amount. The purchase of a floor entitles the purchaser to receive payments on a notional principal amount from the party selling such floor to the extent that a specified index falls below a predetermined interest rate or amount. A collar is a combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates or values. The Portfolio will usually enter into swaps on a net basis, i.e., the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments. Inasmuch as these swaps, caps, floors and collars are entered -9- into for good faith hedging purposes, the Subadviser and the Portfolio believe such obligations do not constitute senior securities under the 1940 Act, and, accordingly, will not treat them as being subject to its borrowing restrictions. The Portfolio will not enter into any swap, cap, floor or collar transaction unless, at the time of entering into such transaction, the unsecured long-term debt of the counterparty, combined with any credit enhancements, is rated at least A by S&P or Moody's or has an equivalent rating from a NRSRO or is determined to be of equivalent credit quality by the Subadviser. If there is a default by the counterparty, the Portfolio may have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps, floors and collars are more recent innovations for which standardized documentation has not yet been fully developed and, accordingly, they are less liquid than swaps. EURODOLLAR INSTRUMENTS - Scudder International Growth and MFS Value Equity may make investments in Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated futures contracts or options thereon which are linked to the London Interbank Offered Rate ("LIBOR"), although foreign currency-denominated instruments are available from time to time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. Scudder International Growth might use Eurodollar futures contracts and options thereon to hedge against changes in LIBOR, to which many interest rate swaps and fixed income instruments are linked. OPTIONS ON SECURITIES - As noted in the Prospectus, MFS Emerging Equities, MFS Value Equity, Scudder International Growth and T. Rowe Price Growth Equity may purchase and write (sell) call and put options on securities. A Portfolio may sell options on securities for the purpose of increasing its return on such securities and/or to protect the value of its Portfolio. MFS Emerging Equities, MFS Value Equity and Scudder International Growth may only sell calls on securities if such calls are "covered," as explained below. A Portfolio may also write combinations of put and call options on the same security, known as "straddles." Such transactions can generate additional premium income but also present increased risk. A Portfolio may also purchase put or call options in anticipation of market fluctuations which may adversely affect the value of its portfolio or the prices of securities that the Portfolio wants to purchase at a later date. A Portfolio may sell call and put options only if it takes certain steps to cover such options or segregates assets, in accordance with regulatory requirements, as described below. 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 (or for additional cash consideration held in a segregated account by its custodian) 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. If a put option is sold by a Portfolio, the Portfolio will maintain 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 equal to or greater than the exercise price of the put sold or 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. Effecting a closing transaction in the case of a sold call option will permit a Portfolio to sell another call option on the underlying security with either a different exercise price or expiration date or both, or in the case of a sold put option will permit the Portfolio to sell another put option to the extent that the exercise price thereof is secured by liquid securities in a segregated account. Such transactions permit a Portfolio to generate additional premium income, which will partially offset declines in the value of portfolio securities or increases in the cost of securities to be acquired. Also, effecting a closing transaction will permit the cash or proceeds from the concurrent sale of any subject to the option to be used for other investments of a Portfolio, provided that another option on such security is not sold. If the Portfolio desires to sell a particular security from its portfolio on which it has sold a call -10- option, it will effect a closing transaction in connection with the option prior to or concurrent with the sale of the security. A Portfolio will realize a profit from a closing transaction if the premium paid in connection with the closing of an option sold by the Portfolio is less than the premium received from selling the option, or if the premium received in connection with the closing of an option by the Portfolio is more than the premium paid for the original purchase. Conversely, a Portfolio will suffer a loss if the premium paid or received in connection with a closing transaction is more or less, respectively, than the premium received or paid in establishing the option position. 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 previously sold by the Portfolio is likely to be offset in whole or in part by appreciation of the underlying security owned by the Portfolio. A Portfolio may sell options in connection with buy-and-write transactions; that is, the Portfolio may purchase a security and then sell a call option against that security. The exercise price of the call a Portfolio determines to sell will depend upon the expected price movement of the underlying security. The exercise price of a call option may be below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the current value of the underlying security at the time the option is sold. Buy-and-write transactions using in-the-money call options may be used when it is expected that the price of the underlying security will decline moderately during the option period. Buy-and-write transactions using out-of-the-money call options may be used when it is expected that the premiums received from selling the call option plus the appreciation in the market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. If the call options are exercised in such transactions, a Portfolio's maximum gain will be the premium received by it for selling the option, adjusted upwards or downwards by the difference between the Portfolio's purchase price of the security and the exercise price, less related transaction costs. If the options are not exercised and the price of the underlying security declines, the amount of such decline will be offset in part, or entirely, by the premium received. The selling of put options is similar in terms of risk/return characteristics to buy-and-write transactions. If the market price of the underlying security rises or otherwise is above the exercise price, the put option will expire worthless and the Portfolio's gain will be limited to the premium received. If the market price of the underlying security declines or otherwise is below the exercise price, a Portfolio may elect to close the position or retain the option until it is exercised, at which time the Portfolio will be required to take delivery of the security at the exercise price; the Portfolio's return will be the premium received from the put option minus the amount by which the market price of the security is below the exercise price, which could result in a loss. Out-of-the-money, at-the-money and in-the-money put options may be used by a Portfolio in the same market environments that call options are used in equivalent buy-and-write transactions. A Portfolio may also sell combinations of put and call options on the same security, known as "straddles," with the same exercise price and expiration date. By entering into a straddle, a Portfolio undertakes a simultaneous obligation to sell and purchase the same security in the event that one of the options is exercised. If the price of the security subsequently rises sufficiently above the exercise price to cover the amount of the premium and transaction costs, the call will likely be exercised and the Portfolio will be required to sell the underlying security at a below market price. This loss may be offset, however, in whole or in part, by the premiums received on the writing of the call options. Conversely, if the price of the security declines by a sufficient amount, the put will likely be exercised. Straddles will likely be effective, therefore, only where the price of the security remains stable and neither the call nor the put is exercised. In those instances where one of the options is exercised, the loss on the purchase or sale of the underlying security may exceed the amount of the premiums received. By selling a call option, a Portfolio limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option. By selling a put option, a Portfolio assumes the risk that it may be required to purchase the underlying security for an exercise price above its then current market value, resulting in a capital loss unless the security subsequently appreciates in value. The selling of options on securities will not be undertaken by a Portfolio solely for hedging purposes, and could involve certain risks which are not present in the case of hedging transactions. Moreover, even where options are sold for hedging purposes, such -11- transactions constitute only a partial hedge against declines in the value of portfolio securities or against increases in the value of securities to be acquired, up to the amount of the premium. A Portfolio may purchase options for hedging purposes or to increase its return. Put options may be purchased to hedge against a decline in the value of portfolio securities. If such decline occurs, the put options will permit a Portfolio to sell the securities at the exercise price, or to close out the options at a profit. By using put options in this way, the Portfolio will reduce any profit it might otherwise have realized in the underlying security by the amount of the premium paid for the put option and by transaction costs. A Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio anticipates purchasing in the future. If such increase occurs, the call option will permit the Portfolio to purchase the securities at the exercise price, or to close out the options at a profit. The premium paid for the call option plus any transaction costs will reduce the benefit, if any, realized by the Portfolio upon exercise of the option, and, unless the price of the underlying security rises sufficiently, the option may expire worthless to the Portfolio. In certain instances, a Portfolio may enter into options on U.S. Treasury securities which provide for periodic adjustment of the strike price and may also provide for the periodic adjustment of the premium during the term of each such option. Like other types of options, these transactions, which may be referred to as "reset" options or "adjustable strike" options, grant the purchaser the right to purchase (in the case of a "call"), or sell (in the case of a "put"), a specified type and series of U.S. Treasury security at any time up to a stated expiration date (or, in certain instances, on such date). In contrast to other types of options, however, the price at which the underlying security may be purchased or sold under a "reset" option is determined at various intervals during the term of the option, and such price fluctuates from interval to interval based on changes in the market value of the underlying security. As a result, the strike price of a "reset" option, at the time of exercise, may be less advantageous to the Portfolio than if the strike price had been fixed at the initiation of the option. In addition, the premium paid for the purchase of the option may be determined at the termination, rather than the initiation, of the option. If the premium is paid at termination, the Portfolio assumes the risk that (i) the premium may be less than the premium which would otherwise have been received at the initiation of the option because of such factors as the volatility in yield of the underlying Treasury security over the term of the option and adjustments made to the strike price of the option, and (ii) the option purchaser may default on its obligation to pay the premium at the termination of the option. OPTIONS ON STOCK INDICES - As noted in the Prospectus, MFS Emerging Equities, MFS Value Equity, Scudder International Growth and T. Rowe Price Growth Equity may purchase and sell call and put options on stock indices. A portfolio generally may sell options on stock indices for the purpose of increasing gross income and to protect the portfolio against declines in the value of securities they own or increases in the value of securities to be acquired, although a Portfolio may also purchase put or call options on stock indices in order, respectively, to hedge its investments against a decline in value or to attempt to reduce the risk of missing a market or industry segment advance. A Portfolio's possible loss in either case will be limited to the premium paid for the option, plus related transaction costs, although Scudder International Growth may sell options on indices only to close out open positions. In contrast to an option on a security, an option on a stock index provides the holder with the right but not the obligation to make or receive a cash settlement upon exercise of the option, rather than the right to purchase or sell a security. The amount of this settlement is equal to (i) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a call) or is below (in the case of a put) the closing value of the underlying index on the date of exercise, multiplied by (ii) a fixed "index multiplier." A Portfolio may sell call options on stock indices if it owns securities whose price changes, in the opinion of the Subadviser, are expected to be similar to those of the underlying index, or if it has an absolute and immediate right to acquire such securities without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities in its Portfolio. When a Portfolio covers a call option on a stock index it has sold by holding securities, such securities may not match the composition of the index and, in that event, the Portfolio will not be fully covered and could be subject to risk of loss in the event of adverse changes in the value of the index. A Portfolio may also sell call options on stock indices if it -12- holds a call on the same index 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. A Portfolio may sell put options on stock indices if it maintains liquid securities with a value equal to the exercise price in a segregated account with its custodian, or by holding a put on the same stock index and in the same principal amount as the put sold when the exercise price of the put is equal to or greater than the exercise price of the put sold if the difference is maintained by the Portfolio in liquid securities in a segregated account with its custodian. Put and call options on stock indices may also be covered in such other manner as may be in accordance with the rules of the exchange on which, or the counterparty with which, the option is traded and applicable laws and regulations. A Portfolio will receive a premium from selling a put or call option, which increases the Portfolio's gross income in the event the option expires unexercised or is closed out at a profit. If the value of an index on which a Portfolio has sold a call option falls or remains the same, the Portfolio will realize a profit in the form of the premium received (less transaction costs) that could offset all or a portion of any decline in the value of the securities it owns. If the value of the index rises, however, the Portfolio will realize a loss in its call option position, which will reduce the benefit of any unrealized appreciation in the Portfolio's stock investments. By selling a put option, the Portfolio assumes the risk of a decline in the index. To the extent that the price changes of securities owned by the Portfolio correlate with changes in the value of the index, selling covered put options on indices will increase the Portfolio's losses in the event of a market decline, although such losses will be offset in part by the premium received for selling the option. A Portfolio may also purchase put options on stock indices to hedge its investments against a decline in value. By purchasing a put option on a stock index, the Portfolio will seek to offset a decline in the value of securities it owns through appreciation of the put option. If the value of the Portfolio's investments does not decline as anticipated, or if the value of the option does not increase, the Portfolio's loss will be limited to the premium paid for the option plus related transaction costs. The success of this strategy will largely depend on the accuracy of the correlation between the changes in value of the index and the changes in value of the Portfolio's security holdings. The purchase of call options on stock indices may be used by a Portfolio to attempt to reduce the risk of missing a broad market advance, or an advance in an industry or market segment at a time when the Portfolio holds uninvested cash or short-term debt securities awaiting investment. When purchasing call options for this purpose, the Portfolio will also bear the risk of losing all or a portion of the premium paid if the value of the index does not rise. The purchase of call options on stock indices when the Portfolio is substantially fully invested is a form of leverage, up to the amount of the premium and related transaction costs, and involves risks of loss and of increased volatility similar to those involved in purchasing calls on securities the Portfolio owns. The index underlying a stock index option may be a "broad-based" index, such as the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index, the changes in value of which ordinarily will reflect movements in the stock market in general. In contrast, certain options may be based on narrower market indices, such as the Standard & Poor's 100 Index, or on indices of securities of particular industry groups, such as those of oil and gas or technology companies. A stock index assigns relative values to the stocks included in the index and the index fluctuates with changes in the market values of the stocks so included. The composition of the index is changed periodically. YIELD CURVE OPTIONS - MFS Value Equity may also enter into options on the "spread," or yield differential, between two fixed income securities, in transactions referred to as "yield curve" options. In contrast to other types of options, a yield curve option is based on the difference between the yields of designated securities, rather than the prices of the individual securities, and is settled through cash payments. Accordingly, a yield curve option is profitable to the holder if this differential widens (in the case of a call) or narrows (in the case of a put), regardless of whether the yields of the underlying securities increase or decrease. Yield curve options may be used for the same purposes as other options on securities. Specifically, the Portfolio may purchase or sell such options for hedging purposes. For example, the Portfolio may purchase a call -13- option on the yield spread between two securities, if it owns one of the securities and anticipates purchasing the other security and wants to hedge against an adverse change in the yield spread between the two securities. The Portfolio may also purchase or sell yield curve options for other than hedging purposes (i.e., in an effort to increase its current income) if, in the judgment of the Subadviser, the Portfolio will be able to profit from movements in the spread between the yields of the underlying securities. The trading of yield curve options is subject to all of the risks associated with the trading of other types of options. In addition, however, such options present risk of loss even if the yield of one of the underlying securities remains constant, if the spread moves in a direction or to an extent which was not anticipated. Yield curve options will be sold by the Portfolio only if the Portfolio holds another call (or put) option on the spread between the same two securities and maintains in a segregated account with its custodian liquid securities sufficient to cover the Portfolio's net liability under the two options. Therefore, the Portfolio's liability for such a covered option is generally limited to the difference between the amount of the Portfolio's liability under the option sold by the Portfolio less the value of the option held by the Portfolio. Yield curve options may also be covered in such other manner as may be in accordance with the requirements of the counterparty with which the option is traded and applicable laws and regulations. Yield curve options are traded over-the-counter and because they have been recently introduced, established trading markets for these securities have not yet developed. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS MFS Emerging Equities, MFS Value Equity, Scudder International Growth and T. Rowe Price Growth Equity may engage in the following types of transactions: FUTURES CONTRACTS - As noted in the Prospectus, the Portfolios may enter into stock index futures contracts, including futures contracts related to stock indices and interest rates among others. Such investment strategies will be used for hedging purposes and for non-hedging purposes, subject to applicable law. Purchases or sales of stock index futures contracts for hedging purposes may be used to attempt to protect a Portfolio's current or intended stock investments from broad fluctuations in stock prices, to act as a substitute for an underlying investment, or to enhance yield ("speculation"). A futures contract is a bilateral agreement providing for the purchase and sale of a specified type and amount of a financial instrument or for the making and acceptance of a cash settlement, at a stated time in the future for a fixed price. By its terms, a futures contract provides for a specified settlement date on which, in the case of stock index futures contracts, the difference between the price at which the contract was entered into and the contract's closing value is settled between the purchaser and seller in cash. Futures contracts differ from options in that they are bilateral agreements, with both the purchaser and the seller equally obligated to complete the transaction. Futures contracts call for settlement only on the date and cannot be "exercised" at any other time during their term. The purchase or sale of a futures contract differs from the purchase or sale of a security or the purchase of an option in that no purchase price is paid or received. Instead, an amount of cash or cash equivalents, which varies but may be as low as 5% or less of the value of the contract, must be deposited with the broker as "initial margin." Subsequent payments to and from the broker, referred to as "variation margin," are made on a daily basis as the value of the index or instrument underlying the futures contract fluctuates, making positions in the futures contract more or less valuable - a process known as "marking to the market." Purchases or sales of stock index futures contracts are used to attempt to protect the Portfolio's current or intended stock investments from broad fluctuations in stock prices. For example, a Portfolio may sell stock index futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of the Portfolio's portfolio securities that might otherwise result if such decline occurs, because the loss in value of portfolio securities may be offset, in whole or part, by gains on the futures position. When a Portfolio is not fully invested in the securities market and anticipates a significant market advance, it may purchase stock index futures contracts in order to gain rapid market exposure that may, in part or entirely, offset increases in the cost of securities that the Portfolio intends to purchase. As such purchases are made, the corresponding position in stock index futures contracts will be closed out. In a substantial majority of these transactions, the Portfolio will purchase such securities upon termination of the futures position, but under usual market conditions, a long futures position may be terminated without a related purchase of securities. -14- 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, 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. OPTIONS ON FUTURES CONTRACTS - As noted in the Prospectus, the Portfolios may purchase and sell options to buy or sell futures contracts in which they may invest ("options on futures contracts"). Such investment strategies will be used for hedging purposes and for non-hedging purposes, subject to applicable law, except that Scudder International Growth may utilize such strategies only for hedging purposes. Put and call options on futures contracts may be traded by a Portfolio in order to protect against declines in the values of portfolio securities or against increases in the cost of securities to be acquired, to act as a substitute for an underlying investment, or to enhance yield. An option on a futures contract provides the holder with the right to enter into a "long" position in the underlying futures contract, in the case of a call option, or a "short" position in the underlying futures contract, in the case of a put option, at a fixed exercise price up to a stated expiration date or, in the case of certain options, on such date. Upon exercise of the option by the holder, the contract market clearinghouse establishes a corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position in the case of a put option. In the event that an option is exercised, the parties will be subject to all the risks associated with the trading of futures contracts. In addition, the seller of an option on a futures contract, unlike the holder, is subject to initial and variation margin requirements on the option position. A position in an option on a futures contract may be terminated by the purchaser or seller prior to expiration by effecting a closing purchase or sale transaction, subject to the availability of a liquid secondary market, which is the purchase or sale of an option of the same series (i.e., the same exercise price and expiration date) as the option previously purchased or sold. The difference between the premiums paid and received represents the trader's profit or loss on the transaction. Options on futures contracts that are sold or purchased by a Portfolio on U.S. exchanges are traded on the same contract market as the underlying futures contract, and, like futures contracts, are subject to regulation by the Commodities Futures Trading Commission ("CFTC") and the performance guarantee of the exchange clearinghouse. In addition, options on futures contracts may be traded on foreign exchanges. A Portfolio may sell call options on futures contracts only if it also (a) purchases the underlying futures contract, (b) owns the instrument, or instruments included in the index, underlying the futures contract, or (c) holds a call on the same futures contract and in the same principal amount as the call sold when the exercise price of the call held (i) is equal to or less than the exercise price of the call sold or (ii) 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. A Portfolio may sell put options on futures contracts only if it also (A) sells the underlying futures contract, (B) segregates liquid securities in an amount equal to the value of the security or index underlying the futures contract, or (C) holds a put on the same futures contract and in the same principal amount as the put sold when the exercise price of the put held is equal to or greater than the exercise price of the put written or when the exercise price of the put held is less than the exercise price of the put sold if the difference is maintained by the Portfolio in liquid securities in a segregated account with it its custodian. Upon the exercise of a call option on a futures contract sold by a Portfolio, the Portfolio will be required to sell the underlying futures contract which, if the Portfolio has covered its obligation through the purchase of such contract, will serve to liquidate its futures position. Similarly, where a put option on a futures contract sold by the Portfolio is exercised, the Portfolio will be required to purchase the underlying futures contract which, if the Portfolio has covered its obligation through the sale of such contract, will close out its futures position. The selling of a call option on a futures contract for hedging purposes constitutes a partial hedge against declining prices of the securities or other instruments required to be delivered under the terms of the futures contract. If the futures price at expiration of the option is below the exercise price, the Portfolio will retain the full amount of -15- the option premium, less related transaction costs, which provides a partial hedge against any decline that may have occurred in the Portfolio's holdings. The selling of a put option on a futures contract constitutes a partial hedge against increasing prices of the securities or other instruments required to be delivered under the terms of the futures contract. If the futures price at expiration of the option is higher than the exercise price, the Portfolio will retain the full amount of the option premium, which provides a partial hedge against any increase in the price of securities the Portfolio intends to purchase. If a put or call option the Portfolio has sold is exercised, the Portfolio will incur a loss which will be reduced by the amount of the premium it receives. Depending on the degree of correlation between changes in the value of its portfolio securities and the changes in the value of its futures positions, the Portfolio's losses from existing options on futures contracts may to some extent be reduced or increased by changes in the value of portfolio securities. A Portfolio may purchase options on futures contracts for hedging purposes instead of purchasing or selling the underlying futures contracts. For example, where a decrease in the value of portfolio securities is anticipated as a result of a projected market-wide decline or changes in interest or exchange rates, the Portfolio could, in lieu of selling futures contracts, purchase put options thereon. In the event that such decrease occurs, it may be offset, in whole or in part, by a profit on the option. Conversely, where it is projected that the value of securities to be acquired by the Portfolio will increase prior to acquisition, due to a market advance or changes in interest or exchange rates, the Portfolio could purchase call options on futures contracts, rather than purchasing the underlying futures contracts. FORWARD CONTRACTS ON FOREIGN CURRENCY - As noted in the Prospectus, the Portfolios may enter into forward foreign currency exchange contracts for hedging and non-hedging purposes. Forward contracts may be used for hedging to attempt to minimize the risk to a Portfolio from adverse changes in the relationship between the U.S. dollar and foreign currencies. Each Portfolio intends to enter into forward contracts for hedging purposes. In particular, a forward contract to sell a currency may be entered into where the Portfolio seeks to protect against an anticipated increase in the rate for a specific currency which could reduce the dollar value of portfolio securities denominated in such currency. Conversely, a Portfolio may enter into a forward contract to purchase a given currency to protect against a projected increase in the dollar value of securities denominated in such currency which the Portfolio intends to acquire. The Portfolio also may enter into a forward contract in order to assure itself of a predetermined exchange rate in connection with a security denominated in a foreign currency. In addition, the Portfolio may enter into forward contracts for "cross hedging" purposes; e.g., the purchase or sale of a forward contract on one type of currency as a hedge against adverse fluctuations in the value of a second type of currency. If a hedging transaction in forward contracts is successful, the decline in the value of portfolio securities or other assets or the increase in the cost of securities or other assets to be acquired may be offset, at least in part, by profits on the forward contract. Nevertheless, by entering into such forward contracts, a Portfolio may be required to forgo all or a portion of the benefits which otherwise could have been obtained from favorable movements in exchange rates. The Portfolio will usually seek to close out positions in such contracts by entering into offsetting transactions, which will serve to fix the Portfolio's profit or loss based upon the value of the contracts at the time the offsetting transaction is executed. A Portfolio will also enter into transactions in forward contracts for other than hedging purposes, which present greater profit potential but also involve increased risk. For example, a Portfolio may purchase a given foreign currency through a forward contract if, in the judgment of the Subadviser, the value of such currency is expected to rise relative to the U.S. dollar. Conversely, the Portfolio may sell the currency through a forward contract if the Subadviser believes that its value will decline relative to the dollar. A Portfolio will profit if the anticipated movements in foreign currency exchange rates occur which will increase its gross income. Where exchange rates do not move in the direction or to the extent anticipated, however, the Portfolio may sustain losses which will reduce its gross income. Such transactions, therefore, could be considered speculative and could involve significant risk of loss. Each Portfolio has established procedures consistent with statements by the SEC and its staff regarding the use of forward contracts by registered investment companies, which require the use of segregated assets or "cover" in -16- connection with the purchase and sale of such contracts. In those instances in which the Portfolio satisfies this requirement through segregation of assets, it will maintain, in a segregated account cash, cash equivalents or other liquid securities, which will be marked to market on a daily basis, in an amount equal to the value of its commitments under forward contracts. While these contracts are not presently regulated by the CFTC, the CFTC may in the future assert authority to regulate forward contracts. In such event the Portfolio's ability to utilize forward contracts in the manner set forth above may be restricted. A Portfolio may hold foreign currency received in connection with investments in foreign securities when, in the judgment of the Subadviser, it would be beneficial to convert such currency into U.S. dollars at a later date, based on anticipated changes in the relevant exchange rate. A Portfolio may also hold foreign currency in anticipation of purchasing foreign securities. OPTIONS ON FOREIGN CURRENCIES - As noted in the Prospectus, the Portfolios may purchase and sell options on foreign currencies for hedging purposes in a manner similar to that in which forward contracts will be utilized. For example, a decline in the dollar value of a foreign currency in which portfolio securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of portfolio securities, the Portfolio may purchase put options on the foreign currency. If the value of the currency does decline, the Portfolio will have the right to sell such currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on its portfolio which otherwise would have resulted. Conversely, where a rise in the dollar value of a currency in which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, the Portfolio may purchase call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As in the case of other types of options, however, the benefit to the Portfolio deriving from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Portfolio could sustain losses on transactions in foreign currency options which would require it to forgo a portion or all of the benefits of advantageous changes in such rates. A Portfolio may sell options on foreign currencies for the same types of hedging purposes. For example, where the Portfolio anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, sell a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised, and the diminution in value of portfolio securities will be offset by the amount of the premium received. As in the case of other types of options, however, the selling of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received, and the Portfolio could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against fluctuations in exchange rates although, in the event of rate movements adverse to the Portfolio's position, it may forfeit the entire amount of the premium plus related transaction costs. As in the case of forward contracts, certain options on foreign currencies are traded over-the-counter and involve risks which may not be present in the case of exchange-traded instruments. Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, the Portfolio could sell a put option on the relevant currency which, if rates move in the manner projected, will expire unexercised and allow the Portfolio to hedge such increased cost up to the amount of the premium. Foreign currency options sold by the Portfolio will generally be covered in a manner similar to the covering of other types of options. As in the case of other types of options, however, the selling of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Portfolio would be required to purchase or sell the underlying currency at a loss which may not be offset by the amount of the premium. Through the selling of options on foreign currencies, the Portfolio also may be required to forgo all or a portion of the benefits which might otherwise have been obtained from favorable movements in exchange rates. -17- RISKS ASSOCIATED WITH INVESTING IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH A PORTFOLIO'S SECURITIES - A Portfolio's abilities effectively to hedge all or a portion of its portfolio through transactions in options, futures contracts, options on futures contracts, forward contracts and options on foreign currencies depend on the degree to which price movements in the underlying index or instrument correlate with price movements in the relevant portion of the Portfolio's securities. In the case of futures and options based on an index, the Portfolio will not duplicate the components of the index, and in the case of futures and options on fixed income securities, the portfolio securities that are being hedged may not be the same type of obligation underlying such contract. The use of forward contracts for cross-hedging purposes may involve greater correlation risks. As a result, the correlation probably will not be exact. Consequently, the Portfolio bears the risk that the price of the portfolio securities being hedged will not move in the same amount or direction as the underlying index or obligation. For example, if a Portfolio purchases a put option on an index and the index decreases less than the value of the hedged securities, the Portfolio would experience a loss that is not completely offset by the put option. It is also possible that there may be a negative correlation between the index or obligation underlying an option or futures contract in which the Portfolio has a position and the portfolio securities the Portfolio is attempting to hedge, which could result in a loss on both the portfolio and the hedging instrument. In addition, a Portfolio may enter into transactions in forward contracts or options on foreign currencies in order to hedge against exposure arising from the currencies underlying such forwards. In such instances, the Portfolio will be subject to the additional risk of imperfect correlation between changes in the value of the currencies underlying such forwards or options and changes in the value of the currencies being hedged. It should be noted that stock index futures contracts or options based upon a narrower index of securities, such as those of a particular industry group, may present greater risk than options or futures based on a broad market index. This is due to the fact that a narrower index is more susceptible to rapid and extreme fluctuations as a result of changes in the value of a small number of securities. Nevertheless, where a Portfolio enters into transactions in options or futures on narrow-based indices for hedging purposes, movements in the value of the index should, if the hedge is successful, correlate closely with the portion of the Portfolio's portfolio or the intended acquisitions being hedged. The trading of futures contracts, options and forward contracts for hedging purposes entails the additional risk of imperfect correlation between movements in the futures or option price and the price of the underlying index or obligation. The anticipated spread between the prices may be distorted due to the 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 options, futures and forward markets. In this regard, trading by speculators in options, futures and forward contracts has in the past occasionally resulted in market distortions, which may be difficult or impossible to predict, particularly near the expiration of contracts. The trading of options on futures contracts also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option. The risk of imperfect correlation, however, generally tends to diminish as the maturity date of the futures contract or expiration date of the option approaches. Further, with respect to options on securities, options on stock indices, options on currencies and options on futures contracts, the Portfolio is subject to the risk of market movements between the time that the option is exercised and the time of performance thereunder. This could increase the extent of any loss suffered by the Portfolio in connection with such transactions. In selling a covered call option on a security, index or futures contract, a Portfolio also incurs the risk that changes in the value of the instruments used to cover the position will not correlate closely with changes in the value of the option or underlying index or instrument. For example, where the Portfolio sells a call option on a stock index and segregates securities, such securities may not match the composition of the index, and the -18- Portfolio may not be fully covered. As a result, the Portfolio could be subject to risk of loss in the event of adverse market movements. The selling of options on securities, options on stock indices or options on futures contracts constitutes only a partial hedge against fluctuations in value of a Portfolio's portfolio. When a Portfolio sells an option, it will receive premium income in return for the holder's purchase of the right to acquire or dispose of the underlying obligation. In the event that the price of such obligation does not rise sufficiently above the exercise price of the option, in the case of a call, or fall below the exercise price, in the case of a put, the option will not be exercised and the Portfolio will retain the amount of the premium, less related transaction costs, which will constitute a partial hedge against any decline that may have occurred in the Portfolio's portfolio holdings or any increase in the cost of the instruments to be acquired. When the price of the underlying obligation moves sufficiently in favor of the holder to warrant exercise of the option, however, and the option is exercised, the Portfolio will incur a loss which may only be partially offset by the amount of the premium it received. Moreover, by selling an option, the Portfolio may be required to forgo the benefits which might otherwise have been obtained from an increase in the value of portfolio securities or other assets or a decline in the value of securities or assets to be acquired. In the event of the occurrence of any of the foregoing adverse market events, the Portfolio's overall return may be lower than if it had not engaged in the hedging transactions. It should also be noted that a Portfolio may enter into transactions in options (except for options on foreign currencies), futures contracts, options on futures contracts and forward contracts not only for hedging purposes, but also for non-hedging purposes intended to increase portfolio returns. Non-hedging transactions in such investments involve greater risks and may result in losses which may not be offset by increases in the value of portfolio securities or declines in the cost of securities to be acquired. A Portfolio will only sell covered options, such that liquid securities with an aggregate value equal to an amount necessary to satisfy an option exercise will be segregated at all times, unless the option is covered in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. Nevertheless, the method of covering an option employed by the Portfolio may not fully protect it against risk of loss and, in any event, the Portfolio could suffer losses on the option position which might not be offset by corresponding portfolio gains. A Portfolio also may enter into transactions in futures contracts, options on futures contracts and forward contracts for other than hedging purposes, which could expose the Portfolio to significant risk of loss if foreign currency exchange rates do not move in the direction or to the extent anticipated. In this regard, the foreign currency may be extremely volatile from time to time, as discussed in the Prospectus and in this Statement, and the use of such transactions for non-hedging purposes could therefore involve significant risk of loss. With respect to entering into straddles on securities, a Portfolio incurs the risk that the price of the underlying security will not remain stable, that one of the options sold will be exercised and that the resulting loss will not be offset by the amount of the premiums received. Such transactions, therefore, create an opportunity for increased return by providing the Portfolio with two simultaneous premiums on the same security, but involve additional risk, since the Portfolio may have an option exercised against it regardless of whether the price of the security increases or decreases. RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET - Prior to exercise or expiration, a futures or option position can only be terminated by entering into a closing purchase or sale transaction. This requires a secondary market for such instruments on the exchange on which the initial transaction was entered into. While a Portfolio will enter into options or futures positions 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 contracts at any specific time. In that event, it may not be possible to close out a position held by the Portfolio, and the Portfolio could be required to purchase or sell the instrument underlying an option, make or receive a cash settlement or meet ongoing variation margin requirements. Under such circumstances, if a Portfolio has insufficient cash available to meet margin requirements, it will be necessary to liquidate portfolio securities or other assets at a time when it is -19- disadvantageous to do so. The inability to close out options and futures positions, therefore, could have an adverse impact on the Portfolio's ability effectively to hedge its portfolio, and could result in trading losses. The liquidity of a secondary market in the futures contract or option thereon may be adversely affected by "daily price fluctuation limits," established by exchanges, which limit the amount of fluctuation in the price of a contract during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures or option positions and requiring traders to make additional margin deposits. Prices have in the past moved the daily limit on a number of consecutive trading days. The trading of futures contracts and options is also subject to the risk of trading halts, suspensions, exchange or clearinghouse equipment failures, government intervention, insolvency of a brokerage firm or clearinghouse 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. MARGIN - Because of low initial margin deposits made upon the opening of a futures or forward position and the selling of an option, such transactions involve substantial leverage. As a result, relatively small movements in the price of the contract can result in substantial unrealized gains or losses. Where a Portfolio enters into such transactions for hedging purposes, any losses incurred in connection therewith should, if the hedging strategy is successful, be offset, in whole or in part, by increases in the value of securities or other assets held by the Portfolio or decreases in the prices of securities or other assets the Portfolio intends to acquire. Where a Portfolio enters into such transactions for other than hedging purposes, the margin requirements associated with such transactions could expose the Portfolio to greater risk. TRADING AND POSITION LIMITS - The exchanges on which futures and options are traded may impose limitations governing the maximum number of positions on the same side of the market and involving the same underlying instrument which may be held by a single investor, whether acting alone or in concert with others (regardless of whether such contracts are held on the same or different exchanges or held or written in one or more accounts or through one or more brokers). Further, the CFTC and the various contract markets have established limits referred to as "speculative position limits" on the maximum net long or net short position which any person may hold or control in a particular futures or option contract. An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. The Subadvisers do not believe that these trading and position limits will have any adverse impact on the strategies for hedging the portfolio of the Portfolios. RISKS OF OPTIONS ON FUTURES CONTRACTS - The amount of risk a Portfolio assumes when it purchases an option on a futures contract is the premium paid for the option, plus related transaction costs. In order to profit from an option purchased, however, it may be necessary to exercise the option and to liquidate the underlying futures contract subject to the risks of the availability of a liquid offset market described herein. The seller of an option on a futures contract is subject to the risks of commodity futures trading, including the requirement of initial and variation margin payments, as well as the additional risk that movements in the price of the option may not correlate with movements in the price underlying security, index, currency or futures contracts. RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES - Transactions in forward contracts on foreign currencies, as well as futures and options on foreign currencies and transactions executed on foreign exchanges, are subject to all of the correlation, liquidity and other risks outlined above. In addition, however, such transactions are subject to the risk of governmental actions affecting trading in or the prices of currencies underlying such contracts, which could restrict or eliminate trading and could have a substantial adverse effect on the value of positions held by a Portfolio. Further, the value of such positions could be adversely affected by a number of other complex political and economic factors applicable to the countries issuing the underlying currencies. Further, unlike trading in most other types of instruments, there is no systematic reporting of last sale information with respect to the foreign currencies underlying contracts thereon. As a result, the available information -20- on which trading systems will be based may not be as complete as the comparable data on which the Portfolio makes investment and trading decisions in connection with other transactions. Moreover, because the foreign currency market is a global, 24-hour market, events could occur in that market which will not be reflected in the forward, futures or options markets until the following day, thereby making it more difficult for the Portfolio to respond to such events in a timely manner. Settlements of exercises of over-the-counter forward contracts or foreign currency options generally must occur within the country issuing the underlying currency, which in turn requires traders to accept or make delivery of such currencies in conformity with any U.S. or foreign restrictions and regulations regarding the maintenance of foreign banking relationships, fees, taxes or other charges. Unlike transactions entered into by a Portfolio in futures contracts and exchange-traded options, options on foreign currencies, forward contracts and over-the-counter options on securities are not traded on contract markets regulated by the CFTC or (with the exception of certain foreign currency options) the SEC. To the contrary, such instruments are traded through financial institutions acting as market-makers, although foreign currency options are also traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, the option seller and a trader of forward contracts could lose amounts substantially in excess of their initial investments, due to the margin and collateral requirements associated with such positions. In addition, over-the-counter transactions can only be entered into with a financial institution willing to take the opposite side, as principal, of a Portfolio's position unless the institution acts as broker and is able to find another counterparty willing to enter into the transaction with the Portfolio. Where no such counterparty is available, it will not be possible to enter into a desired transaction. There also may be no liquid secondary market in the trading of over-the-counter contracts, and the Portfolio could be required to retain options purchased or sold, or forward contracts entered into, until exercise, expiration or maturity. This in turn could limit the Portfolio's ability to profit from open positions or to reduce losses experienced, and could result in greater loses. Further, over-the-counter transactions are not subject to the guarantee of an exchange clearinghouse, and the Portfolio will therefore be subject to the risk of default by, or the bankruptcy of, the financial institution serving as its counterparty. One or more of such institutions also may decide to discontinue their role as market-makers in a particular currency or security, thereby restricting the Portfolio's ability to enter into desired hedging transactions. The Portfolio will enter into an over-the-counter transaction only with parties whose creditworthiness has been reviewed and found satisfactory by the Subadviser. Options on securities, options on stock indexes, futures contracts, options on futures contracts and options on foreign currencies may be traded on exchanges located in foreign countries. Such transactions may not be conducted in the same manner as those entered into on U.S. exchanges, and may be subject to different margin, exercise, settlement or expiration procedures. As a result, many of the risks of over-the-counter trading may be present in connection with such transactions. Options on foreign currencies traded on national securities exchanges are within the jurisdiction of the SEC, as are other securities traded on such exchanges. As a result, many of the protections provided to traders on organized exchanges will be available with respect to such transactions. In particular, all foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting the Portfolio to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. -21- The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of the availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in applicable foreign countries for this purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on the OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise. POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS - In order to assure that a Portfolio will not be deemed to be a "commodity pool" for purposes of the Commodity Exchange Act, regulations of the CFTC require that a Portfolio enter into transactions in futures contracts and options on futures contracts only (i) for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for non-hedging purposes, provided that the aggregate initial margin and premiums on such non-hedging positions does not exceed 5% of the liquidation value of the Portfolio's assets. The staff of the SEC has taken the position that over-the-counter options and assets used to cover sold over-the-counter options are illiquid and, therefore, together with other illiquid securities held by a Portfolio, cannot exceed 15% of a Portfolio's assets (the "SEC illiquidity ceiling"). Although the Subadvisers may disagree with this position, each Subadviser intends to limit the Portfolios' selling of over-the-counter options in accordance with the following procedure. Except as provided below, MFS Emerging Growth and MFS Value Equity intend to sell over-the-counter options only with primary U.S. Government securities dealers recognized as such by the Federal Reserve Bank of New York. Also, the contracts a Portfolio has in place with such primary dealers provide that the Portfolio has the absolute right to repurchase an option it sells at a maximum price to be calculated by a pre-determined formula. Each Portfolio will treat all or a portion of the formula as illiquid for purposes of the SEC illiquidity ceiling test. Each Portfolio may also sell over-the-counter options with non-primary dealers, including foreign dealers (where applicable), and will treat the assets used to cover these options as illiquid for purposes of such SEC illiquidity ceiling test. The policies described above are not fundamental and may be changed without shareholder approval, as may each Portfolio's investment objective. DIRECTORS AND OFFICERS OF THE FUND The investments and administration of the Fund are under the direction of the Board of Directors. The Directors and executive officers of the Fund and their principal occupations for the past five years are listed below. Persons who have consented to being referenced in this Statement of Additional Information as persons about to become Directors, are indicated by an asterisk (*) below. Some Directors and officers hold similar positions with other investment companies in the same Fund Complex managed by Aetna as the investment adviser. 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.
Name, Address and Age Position(s) Held with Registrant Principal Occupation During Past Five - --------------------- -------------------------------- Years (and Positions held with Affiliated Persons or Principal Underwriter of the Registrant) ------------------------------ Daniel P. Kearney* Director and President Director, President, and Chief Executive 151 Farmington Avenue (Interested person, as defined Officer, Aetna Life Insurance and Annuity Hartford, Connecticut by the 1940 Act.) Company, December 1993 to present; Executive Age 57 Vice President, Aetna Inc. (formerly Aetna Life and Casualty Company), December 1993 to present; Group Executive, Aetna Inc. (formerly Aetna Life and Casualty Company), 1991 to 1993; Director, Aetna Investment Services, Inc., November 1994 to present; Director, Aetna Insurance Company of America, May 1994 to present. Peter C. Aldrich* Director Chairman and Chief Executive Officer, AEW 151 Coolidge Hill International, January 1997 to present; Cambridge, Massachusetts Co-Chairman, AEW Capital Management, March 1981 Age 53 to present. Edward Lowenthal* Director President, Wellsford Real Properties, Inc., 201 Hamilton Road May 1997 to present; President, Wellsford Ridgewood, New Jersey Residential Property Trust, August 1986 to Age 52 May 1997. Martin T. Conroy Vice President, Chief Financial Assistant Treasurer, Aetna Life 151 Farmington Avenue Officer and Treasurer Insurance and Annuity Company, October Hartford, Connecticut 1991 to present. Age 57 -22- Laurie M. LeBlanc, CFP Vice President Vice President, Aetna Retirement 151 Farmington Avenue Services, Fund Strategy and Management, Hartford, Connecticut December 1995 to present; Vice Age 45 President, Connecticut Mutual Financial Services, Investment Products, July 1994 to December 1995; Vice President, CIGNA Investments, Inc. and CIGNA International Investment Advisers, Ltd., October 1988 to July 1994. Amy R. Doberman Secretary Counsel, Aetna Life Insurance and 151 Farmington Avenue Annuity Company, December 1996 to Hartford, Connecticut present; Assistant Chief Counsel, Age 35 Division of Investment Management, Securities and Exchange Commission, January 1995 to November 1996; Senior Special Counsel, Securities and Exchange Commission, September 1994 to January 1995; Special Counsel, Securities and Exchange Commission, September 1993 to September 1994; Staff Attorney, Securities and Exchange Commission, June 1992 to September 1993.
Members of the Board of the Fund who are also directors, officers or employees of Aetna Inc. or its affiliates are not entitled to any compensation from the Fund. Members of the Board who are not affiliated with Aetna or its subsidiaries are entitled to receive an annual retainer of $20,000 for service on the Board. In addition, each such member will receive a fee of $2,500 per meeting for each regularly scheduled Board meeting; and $1,500 for each in-person committee meeting on any day on which a regular Board meeting is not scheduled. A Committee Chairperson fee of $1,500 each will be paid to the Chairperson of the Valuation and Audit Committees. All of the above fees are to be paid proportionately by each Portfolio based on the net assets of the Portfolios as of the date compensation is earned. CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS Shares of the Portfolios will be owned by insurance companies as depositors of separate accounts which are used to fund variable annuity contracts ("VA Contracts") and variable life insurance policies ("VLI Policies"). It is currently expected that all shares will be held by separate accounts of Aetna and its subsidiary, Aetna Insurance Company of America, Inc., 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 SEC as an investment adviser and as of June 30, 1997, manages over $___ billion in assets. -23- THE INVESTMENT ADVISORY AGREEMENT On , 1997, the Fund's Board of Directors approved an investment advisory agreement (Investment Advisory Agreement) between the Fund and Aetna for each of the Portfolios to continue through June 30, 1999. Under the Investment Advisory Agreement and subject to the direction of the Board of Directors of the Fund, Aetna has responsibility, among other things, to (i) select the securities to be purchased, sold or exchanged by each Portfolio, and place trades on behalf of each Portfolio, or delegate such responsibility to one or more subadvisers; (ii) supervise all aspects of the operations of the Portfolios; (iii) obtain the services of, contract with, and provide instructions to custodians and/or subcustodians of each Portfolio's securities, transfer agents, dividend paying agents, pricing services and other service providers as are necessary to carry out the terms of the Investment Advisory Agreement; (iv) monitor the investment program maintained by each Subadviser for the Portfolios and the Subadvisers' compliance programs to ensure that the Portfolio's assets are invested in compliance with the Subadvisory Agreement and the Portfolio's investment objectives and policies as adopted by the Board and described in the most current effective amendment of the registration statement for the Portfolio, as filed with the Commission under the 1933 Act and the 1940 Act ("Registration Statement"); (v) review all data and financial reports prepared by each Subadviser to assure that they are in compliance with applicable requirements and meet the provisions of applicable laws and regulations; (vi) establish and maintain regular communications with each Subadviser to share information it obtains with each Subadviser concerning the effect of developments and data on the investment program maintained by the Subadviser; (vii) oversee all matters relating to the offer and sale of the Portfolios' shares, the Fund's corporate governance, reports to the Board, contracts with all third parties on behalf of the Portfolios for services to the Portfolios, reports to regulatory authorities and compliance with all applicable rules and regulations affecting the Portfolios' operations; and (viii) take other actions that appear to Aetna and the Board to be necessary. The Investment Advisory Agreement provides that Aetna shall pay (a) the salaries, employment benefits and other related costs of those of its personnel engaged in providing investment advice to the Portfolio, including, without limitation, office space, office equipment, telephone and postage costs and (b) any fees and expenses of all Directors, officers and employees, if any, of the Fund who are employees of Aetna or an affiliated entity and any salaries and employment benefits payable to those persons. The Investment Advisory Agreement has an initial term of just under two years and provides that it will remain in effect from year-to-year thereafter if approved annually by a majority vote of the Directors, including a majority of the Directors who are not "interested persons" as that term is defined in the 1940 Act, of the Fund or of Aetna, in person at a meeting called for that purpose. The Investment Advisory Agreement may be terminated as to a particular Portfolio without penalty at any time on sixty days' written notice by (i) the Directors, (ii) a majority vote of the outstanding voting securities of that Portfolio, or (iii) Aetna. The Investment Advisory Agreement terminates automatically in the event of assignment. Aetna also serves as investment adviser to the following investment companies: Aetna Series Fund, Inc., Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund, Aetna Generation Portfolios, Inc. and Aetna Variable Portfolios, Inc. THE SUBADVISORY AGREEMENTS On , 1997, the Fund's Board of Directors approved subadvisory agreements ("Subadvisory Agreements") between Aetna and Massachusetts Financial Services Company ("MFS") with respect to MFS Emerging Equities, MFS Research Growth and MFS Value Equity; with Scudder, Stevens & Clark, Inc. ("Scudder") with respect to Scudder International Portfolio; and with T. Rowe Price Associates, Inc. ("T. Rowe Price") with respect to T. Rowe Price Growth Equity, to continue through . Each Subadvisory Agreement remains in effect from year-to-year if approved annually by a majority vote of the Directors, including a majority of the Directors who are not "interested persons" of the Fund, Aetna or any Subadviser, in person, at a meeting called for that purpose. Each Subadvisory Agreement may be terminated without penalty at any time on sixty days' written notice by (i) the Directors, (ii) a majority vote of the outstanding voting securities of the respective Portfolio, (iii) Aetna, or (iv) the relevant -24- Subadviser. Each Subadvisory Agreement terminates automatically in the event of its assignment or in the event of the termination of the Investment Advisory Agreement with Aetna. Under each Subadvisory Agreement, the Subadviser supervises the investment and reinvestment of cash and securities comprising the assets of the Portfolios. Each Subadvisory Agreement also directs the Subadviser to (a) determine the securities to be purchased or sold by the Portfolios, and (b) take any actions necessary to carry out its investment subadvisory responsibilities. Each Subadviser pays the salaries, employment benefits and other related costs of personnel engaged in providing investment advice including office space, facilities and equipment. As compensation, Aetna pays each Subadviser a monthly fee as described in the Prospectus. Aetna has certain obligations under the Subadvisory Agreements and retains overall responsibility for monitoring the investment program maintained by the Subadviser for compliance with applicable laws and regulations and each Portfolio's respective investment objectives. In addition, Aetna will consult with and assist the Subadviser in maintaining appropriate policies, procedures and records and oversee matters relating to promotion, marketing materials and reports by the Subadvisers to the Fund's Board of Directors. THE ADMINISTRATIVE SERVICES AGREEMENT Pursuant to an Administrative Services Agreement, between the Fund and Aetna, Aetna has agreed to provide all administrative services in support of the Portfolios. As a result, a Portfolio's costs and fees are limited to its advisory fee, the administrative services charge and transaction costs. The Administrative Services Agreement will remain in effect until ________ __, 1999. Thereafter, it will remain in effect from year-to-year if approved annually by a majority of the Directors. It may be terminated by either party on sixty days' written notice. CUSTODIAN Investors Bank & Trust Company, Boston, Massachusetts, 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. INDEPENDENT AUDITORS KPMG Peat Marwick LLP, Hartford, Connecticut 06103 will serve as independent auditors to the Portfolios. KPMG Peat Marwick LLP provides audit services, assistance and consultation in connection with SEC filings. PRINCIPAL UNDERWRITER Shares of the Portfolios are offered on a continuous basis. Aetna has agreed to use its best efforts to distribute the shares of the Portfolios as the principal underwriter of the Fund pursuant to an Underwriting Agreement between it and the Fund. The Agreement was approved on ____________, 1997 to continue through _______________ . Thereafter, 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 Portfolio's shares, and by a vote of a majority of the Directors who are not "interested persons" of Aetna, or 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 Portfolio's shares without the payment of any penalty. -25- BROKERAGE ALLOCATION AND TRADING POLICIES Subject to the direction of the Directors, Aetna and the Subadvisers have responsibility for making the Portfolios' investment decisions, for effecting the execution of trades for the Portfolios and for negotiating any brokerage commissions thereof. It is the policy of Aetna and the Subadvisers to obtain the best quality of execution available, giving attention to net price (including commissions where applicable), execution capability (including the adequacy of a brokerage firm's capital position), research and other services related to execution; the relative priority given to these factors will depend on all of the circumstances regarding a specific trade. In implementing their trading policy, Aetna and the Subadvisers may place a Portfolio's transactions with such brokers or dealers and for execution in such markets as, in the opinion of the Adviser or Subadvisers, will lead to the best overall quality of execution for the Portfolio. Aetna and the Subadvisers may receive a variety of brokerage and research services from brokerage firms that execute trades on behalf of the Portfolios. These services may benefit the Adviser and/or advisory clients other than the Portfolios. These brokerage and research services include, but are not limited to, quantitative and qualitative research information and purchase and sale recommendations regarding securities and industries, analyses and reports covering a broad range of economic factors and trends, statistical data relating to the strategy and performance of the Portfolio and other investment companies and accounts, services related to the execution of trades in a Portfolio's securities and advice as to the valuation of securities. Aetna and the Subadvisers may consider the quantity and quality of such brokerage and research services provided by a brokerage firm along with the nature and difficulty of the specific transaction in negotiating commissions for trades in a Portfolio's securities and may pay higher commission rates than the lowest available when it is reasonable to do so in light of the value of the brokerage and research services received generally or in connection with a particular transaction. Aetna's and the Subadvisers' 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 that are reasonable in relation to the value of the services provided by the broker, taking into consideration research and other services provided. When either Aetna or the Subadvisers believe that more than one broker can provide best execution, preference may be given to brokers who provide additional services to Aetna or the Subadvisers. Consistent with securities laws and regulations, Aetna and the Subadvisers may obtain such brokerage and research services regardless of whether they are paid for (1) by means of commissions; or (2) by means of separate, non-commission payments. Aetna's and the Subadvisers' judgment as to whether and how they will obtain the specific brokerage and research services will be based upon their analysis of the quality of such services and the cost (depending upon the various methods of payment which may be offered by brokerage firms) and will reflect Aetna's and the Subadvisers' opinion as to which services and which means of payment are in the long-term best interests of a Portfolio. The Portfolios have no present intention to effect any brokerage transactions in portfolio securities through Aetna, the Subadvisers or any affiliate thereof. If a Portfolio enters into a transaction with any such person in the future, the transaction will comply with Rule 17e-1 under the 1940 Act. Certain officers of Aetna and the Subadvisers also manage the securities portfolios of their own and their affiliates. Further, Aetna and the Subadvisers also act as investment adviser to other investment companies registered under the 1940 Act and other client accounts. To the extent Aetna or the Subadvisers desire to buy or sell the same publicly traded security at or about the same time for more than one client, the purchases or sales will normally be aggregated, and allocated as nearly as practicable on a pro rata basis in proportion to the amounts to be purchased or sold by each, taking into consideration the respective investment objectives of the clients, the relative size of portfolio holdings of the same or comparable securities, availability of cash for investment, and the size of their respective investment commitments. Prices are averaged for those transactions. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by a Portfolio or the price paid or received by a Portfolio. The Board of Directors has adopted a policy allowing trades to be made between a Portfolio and a registered investment company or series thereof that is an affiliated person of the Portfolio (and certain noninvestment company affiliated persons) provided the transactions meet the terms of Rule 17a-7 under the 1940 Act. Pursuant to this policy, a Portfolio may buy a security from or sell another security to another registered investment company or private -26- advisory account advised by Aetna or by one of the Subadvisers. The Board of Directors, Aetna and each Subadviser have also adopted Codes of Ethics governing personal trading by persons who manage, or who have access to trading activity by, a Portfolio. The Codes allow trades to be made in securities that may be held by a Portfolio. However, they prohibit a person from taking advantage of Portfolio trades or from acting on inside information. DESCRIPTION OF SHARES The Articles of Incorporation authorize the Fund to issue one 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. 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 last sale price or at the last bid price if there has been no sale that day. Short-term debt securities that have a maturity date of more than sixty days will be valued at the mean of the last bid and asked price obtained from principal market makers. Long-term debt securities are valued at the mean of the last bid and asked price of such securities obtained from a broker that is a market-maker in the securities or a service providing quotations based upon the assessment of market-makers in those securities. Options are valued at the mean of the last bid and asked price on the exchange where the option is primarily traded. Stock index futures contracts and interest rate futures contracts are valued daily at a settlement price based on rules of the exchange where the futures contract is primarily traded. PERFORMANCE INFORMATION Total return of a Portfolio for periods longer than one year is determined by calculating the actual dollar amount of investment return on a $1,000 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 $1,000 investment over the same period. Total return for a period of one year or less is equal to the actual investment return on a $1,000 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 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 $1,000 ("P") over a period of time ("n") according to the formula: P ( 1 + T ) (n) = ERV Investors should not consider this performance data as an indication of the future performance of any of the Portfolios. The performance of a Portfolio 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. Each Portfolio is newly organized and does not yet have its own performance record. However, each Portfolio has the same investment objective and follows substantially the same investment strategies as a mutual fund -27- or funds whose shares are currently sold to the public or through variable insurance products and is/are managed by MFS, Scudder or T. Rowe Price, as applicable. The Prospectus contains historical performance information of these similarly managed funds. Advertisements for Portfolio Partners, Inc. may also include historical performance of these similarly managed Funds, subject to regulatory approval. A Portfolio's investment results will vary from time to time depending upon market conditions, the composition of its investment portfolio and its operating expenses. The total return for a Portfolio should be distinguished from the rate of return of a corresponding division of the insurance company's separate account, which rate will reflect the deduction of additional insurance charges, including mortality and expense risk charges, and will therefore be lower. Accordingly, performance figures for a Portfolio will only be included in sales literature if comparable performance figures for the corresponding division of the separate account accompany the sales literature. VA Contract owners and VLI Policy owners should consult their contract and policy prospectuses, respectively, for further information. Each Portfolio's results also should be considered relative to the risks associated with its investment objectives and policies. TAX STATUS The following is only a summary of certain additional tax considerations generally affecting each Portfolio that are not described in the Prospectus. The discussions below and in the Prospectus are not intended as substitutes for careful tax planning. The holders of variable life insurance policies or annuity contracts should not be subject to tax with respect to distributions made on, or redemptions of, Portfolio shares, assuming that the variable life insurance policies and annuity contracts qualify under the Internal Revenue Code of 1986, as amended (the "Code"), as life insurance or annuities, respectively, and that the shareholders are treated as owners of the Portfolio shares. See "Qualification of Segregated Asset Accounts." Thus, this summary does not describe the tax consequences to a holder of a life insurance policy or annuity contract as a result of the ownership of such policies or contracts. Policy or contract holders must consult the prospectuses of their respective policies or contracts for information concerning the federal income tax consequences of owning such policies or contracts. This summary also does not describe the tax consequences applicable to the owners of the Portfolio shares because the Portfolio shares will be sold only to insurance companies. Thus, purchasers of Portfolio shares must consult their own tax advisers regarding the federal, state, and local tax consequences of owning Portfolio shares. QUALIFICATION AS A REGULATED INVESTMENT COMPANY Each Portfolio has elected to be taxed as a regulated investment company under Subchapter M of the Code. As a regulated investment company, a Portfolio is not subject to federal income tax on the portion of its net investment income (i.e., taxable interest, dividends and other taxable ordinary income, net of expenses) and capital gain net income (i.e., the excess of capital gains over capital losses) that it distributes to shareholders, provided that it distributes at least 90% of its investment company taxable income (i.e., net investment income and the excess of net short-term capital gain over net long-term capital loss) for the taxable year (the "Distribution Requirement"), and satisfies certain other requirements of the Code that are described in this section. Distributions by a Portfolio made during the taxable year or, under specified circumstances, within twelve months after the close of the taxable year, will be considered distributions of income and gains of the taxable year and will therefore satisfy the Distribution Requirement. In addition to satisfying the Distribution Requirement, a regulated investment company must (1) derive at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies (to the extent such currency gains are directly related to the regulated investment company's principal business of investing in stock or securities) and other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies (the "Income Requirement"); and (2) derive less than 30% of its gross income (exclusive of certain gains on designated hedging transactions that are offset by realized or unrealized losses on offsetting positions) from the sale or other disposition of stock, securities or foreign currencies (or options, futures -28- or forward contracts thereon) held for less than three months (the "Short-Short Gain Test"). However, foreign currency gains, including those derived from options, futures and forwards, will not in any event be characterized as Short-Short Gain if they are directly related to the regulated investment company's investments in stock or securities (or options or futures thereon). Because of the Short-Short Gain Test, a Portfolio may have to limit the sale of appreciated securities that it has held for less than three months. However, the Short-Short Gain Test will not prevent a Portfolio from disposing of investments at a loss, since the recognition of a loss before the expiration of the three-month holding period is disregarded for this purpose. Interest (including original issue discount) received by a Portfolio at maturity or upon the disposition of a security held for less than three months will not be treated as gross income derived from such sale or other disposition of such security within the meaning of the Short-Short Gain Test. However, income that is attributable to realized market appreciation will be treated as gross income from such sale or other disposition of securities for this purpose. In general, gain or loss recognized by a Portfolio on the disposition of an asset will be a capital gain or loss. However, gain recognized on the disposition of a debt obligation purchased by a Portfolio at a market discount (generally, at a price less than its principal amount) will be treated as ordinary income to the extent of the portion of the market discount which accrued during the period of time the Portfolio held the debt obligation. In addition, under the rules of Code Section 988, gain or loss recognized on the disposition of a debt obligation denominated in a foreign currency or an option with respect thereto (but only to the extent attributable to changes in foreign currency exchange rates), and gain or loss recognized on the disposition of a foreign currency forward contract, futures contract, option or similar financial instrument, or of foreign currency itself, except for regulated futures contracts or non-equity options subject to Code Section 1256 (unless the Portfolio elects otherwise), will generally be treated as ordinary income or loss. In general, for purposes of determining whether capital gain or loss recognized by a Portfolio on the disposition of an asset is long-term or short-term, the holding period of the asset may be affected if (as applicable, depending on the type of Portfolio) (1) the asset is used to close a "short sale" (which includes for certain purposes the acquisition of a put option) or is substantially identical to another asset so used, (2) the asset is otherwise held by the Portfolio as part of a "straddle" (which term generally excludes a situation where the asset is stock and the Portfolio grants a qualified covered call option (which, among other things, must not be deep-in-the-money) with respect thereto) or (3) the asset is stock and the Portfolio grants an in-the-money qualified covered call option with respect thereto. However, for purposes of the Short-Short Gain Test, the holding period of the asset disposed of may be reduced only in the case of clause (1) above. In addition, a Portfolio may be required to defer the recognition of a loss on the disposition of an asset held as part of a straddle to the extent of any unrecognized gain on the offsetting position. Any gain recognized by a Portfolio on the lapse of, or any gain or loss recognized by a Portfolio from a closing transaction with respect to, an option written by the Portfolio will be treated as a short-term capital gain or loss. For purposes of the Short-Short Gain Test, the holding period of an option written by a Portfolio will commence on the date it is written and end on the date it lapses or the date a closing transaction is entered into. Accordingly, a Portfolio may be limited in its ability to write options which expire within three months and to enter into closing transactions at a gain within three months of the writing of options. Certain transactions that may be engaged in by a Portfolio (such as regulated futures contracts, certain foreign currency contracts, and options on stock indexes and futures contracts) will be subject to special tax treatment as "Section 1256 contracts." Section 1256 contracts are treated as if they are sold for their fair market value on the last day of the taxable year, even though a taxpayer's obligations (or rights) under such contracts have not terminated (by delivery, exercise, entering into a closing transaction or otherwise) as of such date. Any gain or loss recognized as a consequence of the year-end deemed disposition of Section 1256 contracts is taken into account for the taxable year together with any other gain or loss that was previously recognized upon the termination of Section 1256 contracts during that taxable year. Any capital gain or loss for the taxable year with respect to Section 1256 contracts (including any capital gain or loss arising as a consequence of the year-end deemed sale of such contracts) is generally treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. A Portfolio, however, may elect not to have this special tax treatment apply to Section 1256 contracts that are part of a "mixed straddle" with other investments of the Portfolio that are not Section 1256 contracts. Under Treasury regulations, gains arising from -29- Section 1256 contracts will be treated for purposes of the Short-Short Gain Test as being derived from securities held for not less than three months if the gains arise as a result of a constructive sale under Code Section 1256. A Portfolio may enter into notional principal contracts, including interest rate swaps, caps, floors, and collars. Under Treasury regulations, in general, the net income or deduction from a notional principal contract for a taxable year is included in or deducted from income for that taxable year. The net income or deduction from a notional principal contract for a taxable year equals the total of all the periodic payments (generally, payments that are payable or receivable at fixed periodic intervals of one year or less during the entire term of the contract) that are recognized from that contract for the taxable year and all of the non-periodic payments (including premiums for caps, floors and collars) that are recognized from that contract for the taxable year. No portion of a payment by a party to a notional principal contract is recognized prior to the first year to which any portion of a payment by the counterparty relates. A periodic payment is recognized ratable over the period to which it relates. In general, a non-periodic payment must be recognized over the term of the notional principal contract in a manner that reflects the economic substance of the contract. A non-periodic payment that relates to an interest rate swap, cap, floor or collar shall be recognized over the term of the contract by allocating it in accordance with the values of a series of cash-settled forward or option contracts that reflect the specified index and notional principal amount upon which the notional principal contract is based (or, in the case of a swap, a cap or floor, under an alternative method contained in the regulations). A Portfolio may purchase securities of certain foreign investment funds or trusts which constitute passive foreign investment companies ("PFIC") for federal income tax purposes. If a Portfolio invests in a PFIC, it may elect to treat the PFIC as a qualified electing fund (a "QEF") in which event the Portfolio will each year have ordinary income equal to its pro rata share of the PFIC's ordinary earnings for the year and long-term capital gain equal to its pro rata share of the PFIC's net capital gain for the year, regardless of whether the Portfolio receives distributions of any such ordinary earnings or capital gain from the PFIC. If a Portfolio does not elect to treat the PFIC as a QEF, then in general (1) any gain recognized by the Portfolio upon sale or other disposition of its interest in the PFIC or any excess distribution received by the Portfolio from the PFIC will be allocated ratably over the Portfolio's holding period of its interest in the PFIC, (2) the portion of such gain or excess distribution so allocated to the year in which the gain is recognized or the excess distribution is received shall be included in the Portfolio's gross income for such year as ordinary income (and the distribution of such portion by the Portfolio to shareholders will be taxable as an ordinary income dividend, but such portion will not be subject to tax at the Portfolio level), (3) the Portfolio shall be liable for tax on the portions of such gain or excess distribution so allocated to prior years in an amount equal to, for each such prior year, the sum of (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 and (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 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 constitute ordinary income and will not be subject to the Short-Short Gain Test, and the Portfolio's holding period with respect to such PFIC stock will commence on the first day of the next taxable year. If a Portfolio makes such election in the first taxable year it holds PFIC stock, it 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. -30- 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 each of which the Portfolio has not invested more than 5% of the value of the Portfolio's total assets in securities of such issuer and does not hold more than 10% of the outstanding voting securities of such issuer), and no more than 25% of the value of its total assets may be invested in the securities of any one issuer (other than U.S. Government securities and securities of other regulated investment companies), or of two or more issuers which the Portfolio controls and which are engaged in the same or similar trades or businesses or related trades or businesses. Generally, an option (call or put) with respect to a security is treated as issued by the issuer of the security not the issuer of the option. However, with regard to forward currency contracts, there does not appear to be any formal or informal authority which identifies the issuer of such instrument. 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 variable life insurance or annuity contract will not be treated as a life insurance policy or annuity contract, respectively, under the Code, unless the segregated asset account upon which such contract or policy is based is "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 the segregated asset account'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 each U.S. Government agency and instrumentality is considered a separate issuer. As a safe harbor, a segregated asset 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. In addition, a segregated asset account with respect to a variable life insurance contract is treated as adequately diversified to the extent of its investment in securities issued by the United States Treasury. 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 that the shares of such regulated investment company are held only by insurance companies and certain fund managers (a "Closed Fund"). If the segregated asset account upon which a variable contract is based is not "adequately diversified" under the foregoing rules for each calendar quarter, then (a) the variable contract is not treated as a life insurance contract or annuity contract under the Code for all subsequent periods during which such account is not "adequately diversified" and (b) the holders of such contract must include as ordinary income the "income on the contract" for each taxable year. Further, the income on a life insurance contract for all prior taxable years is treated as received or accrued during the taxable year of the policyholder in which the contract ceases to meet the definition of a "life insurance contract" under the Code. The "income on the contract" is, generally, the excess of (i) the sum of the increase in the net surrender value of the contract during the taxable year and the cost of the life insurance protection provided under the contract during the year, over (ii) the premiums paid under the contract during the taxable year. In addition, if a Portfolio does not constitute a Closed Fund, the holders of the contracts and annuities which invest in the Portfolio through a segregated asset account may be treated as owners of Portfolio shares and may be subject to tax on distributions made by the Portfolio. -31- EXCISE TAX ON REGULATED INVESTMENT COMPANIES A 4% non-deductible excise tax is imposed on a regulated investment company that fails to distribute in each calendar year an amount equal to 98% of ordinary taxable income for the calendar year and 98% of capital gain net income for the one-year period ended on October 31 of such calendar year (or, at the election of a regulated investment company having a taxable year ending November 30 or December 31, for its taxable year (a "taxable year election")). The balance of such income must be distributed during the next calendar year. For the foregoing purposes, a regulated investment company is treated as having distributed any amount on which it is subject to income tax for any taxable year ending in such calendar year. For purposes of the excise tax, a regulated investment company shall (1) reduce its capital gain net income (but not below its net capital gain) by the amount of any net ordinary loss for the calendar year, and (2) exclude foreign currency gains and losses from Section 998 transactions incurred after October 31 of any year (or after the end of its taxable year if it has made a taxable year election) in determining the amount of ordinary taxable income for the current calendar year (and, instead, include such gains and losses in determining ordinary taxable income for the succeeding calendar year). Each Portfolio intends to make sufficient distributions or deemed distributions of its ordinary taxable income and capital gain net income prior to the end of each calendar year to avoid liability for the excise tax. However, investors should note that a Portfolio may in certain circumstances be required to liquidate portfolio investments to make sufficient distributions to avoid excise tax liability. EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS The foregoing general discussion of U.S. federal income tax consequences is based on the Code and the Treasury Regulations issued thereunder as in effect on the date of this Statement of Additional Information. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect with respect to the transactions contemplated herein. Rules of state and local taxation 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 state and local tax rules affecting investment in a Portfolio. VOTING RIGHTS Shareholders are entitled to one vote for each full share held (and fractional votes for fractional shares held) and will vote in the election of Directors (to the extent hereinafter provided) and on other matters submitted to the vote of the shareholders. The shareholders of the Portfolios are the insurance companies for their separate accounts using the Portfolios to fund VA Contracts and VLI Policies. The insurance company depositors of the separate accounts pass voting rights attributable to shares held for VA Contracts and VLI Policies through to Contract owners and Policy owners as described in the prospectus for the applicable VA Contract or VLI Policy. The Directors of the Fund shall continue to hold office until the Annual Meeting of Shareholders next held after his/her election, or until his/her successor is duly elected and qualified. No meeting of the shareholders for the purpose of electing Directors will be held. However, Shareholders holding a majority of outstanding shares may request a special meeting for the purpose of removing and replacing a Director. Vacancies on the Board occurring between any such meetings shall be filled by the remaining Directors. 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 Fund, in which event the holders of the remaining shares will be unable to elect any person as a Director. Special shareholder meetings may be called when requested in writing by the holders of not less than 50% of the outstanding voting shares of a Portfolio. Any request must state the purposes of the proposed meeting. -32- The Articles may be amended if duly advised by a majority of the Directors and approved by the affirmative vote of a majority of votes entitled to be cast. -33- FINANCIAL STATEMENTS A Statement of Assets and Liabilities of each of the Portfolios as of , 1997 and related footnotes is set forth below. [To be filed by amendment] -34- APPENDIX A DESCRIPTION OF CORPORATE BOND RATINGS MOODY'S INVESTORS SERVICE, INC. Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa -- Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. The modifier 1 indicates that the bond ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates the issuer ranks in the lower end of its rating category. STANDARD & POOR'S RATING SERVICE AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's to a debt obligation. Capacity to pay interest and repay principal is extremely strong. AA -- Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in small degree. A -- Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories. BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher rated categories. A-1 BB -- Bonds rated BB have less near-term vulnerability to default than other speculative issues. However, the bonds face major uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. B -- Bonds rated B have a greater vulnerability to default but currently have the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The ratings from "AA" to "B" may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. FITCH INVESTORS SERVICES, INC. AAA: Bonds considered to be investment grade and of the highest quality. The obligor has an exceptionally strong ability to pay interest and repay principal which is unlikely to be affected by reasonably foreseeable events. AA: Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong although not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+". A: Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB: Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB: Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC: Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC: Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C: Bonds are in imminent default in payment of interest or principal. Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the "AAA" category. A-2 NR: Indicates that Fitch does not rate the specific issue. Conditional: A conditional rating is premised on the successful completion of a project or the occurrence of a specific event. Suspended: A rating is suspended when Fitch deems the amount of information available from the issuer to be inadequate for rating purposes. Withdrawn: A rating will be withdrawn when an issue matures or is called or refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper and timely information. FitchAlert: Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to result in a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may be raised or lowered. FitchAlert is relatively short-term, and should be resolved within 12 months. A-3 PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS a. FINANCIAL STATEMENTS (1) Included in Part A: -- None (2) Included in Part B: -- To be filed by amendment.
b. EXHIBITS EX-99.B1 Articles of Incorporation EX-99.B2 By-laws EX-99.B3 Not Applicable EX-99.B4 Not Applicable EX-99.B5(a) Form of Investment Advisory Agreement between Portfolio Partners, Inc. and Aetna Life Insurance and Annuity Company ("Aetna") EX-99.B5(b) Form of Subadvisory Agreement between Aetna and Massachusetts Financial Services Company EX-99.B5(c) Form of Subadvisory Agreement between Aetna and Scudder, Stevens & Clark, Inc. EX-99.B5(d) Form of Subadvisory Agreement between Aetna and T. Rowe Price Associates, Inc. EX-99.B6 Form of Underwriting Agreement between the Registrant and Aetna Life Insurance and Annuity Company EX-99.B7 Not Applicable EX-99.B8 Form of Custodian Agreement EX-99.B9(a) Form of Administrative Services Agreement EX-99.B9(b) License Agreement between Aetna and T. Rowe Price Associates, Inc. EX-99.B10 Opinion and Consent of Counsel EX-99.B11(a) Consent of Independent Auditors(1) EX-99.B11(b) Form of Consents of proposed Directors EX-99.B12 Not Applicable EX-99.B13 Agreement re: Initial Contribution to Working Capital EX-99.B14 Not Applicable EX-99.B15 Not Applicable EX-99.B16 Schedule for Computation of Performance Data(1) EX-99.B17 (See Exhibit 27 below) EX-99.B18 Not Applicable EX-99.B19 Powers of Attorney(1) 27 Financial Data Schedule(1)
______________________________ (1) To be filed by amendment. -4- ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL A list of all persons directly or indirectly under common control with the Registrant which indicates principal business of each such company referenced is incorporated herein by reference to Item 25 of the Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A (File No. 33-41694), as filed electronically with the Securities and Exchange Commission on July 9, 1997. ITEM 26. NUMBER OF HOLDERS OF SECURITIES None ITEM 27. INDEMNIFICATION Article Ninth, Section (d) of the Registrant's Articles of Incorporation provides for indemnification of directors and officers. In addition, the Registrant's officers and directors will be covered under a directors and officers errors and omissions liability insurance policy issued by Gulf Insurance Company. 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 if he or she is successful on the merits in defending a suit against him or her by reason of being a director. The statutory provisions are not exclusive; a corporation may provide greater indemnification rights than those provided by statute. ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Aetna Life Insurance and Annuity Company (Aetna) is an insurance company that issues variable and fixed annuities and variable and universal life insurance policies, and acts as principal underwriter and depositor for separate accounts holding assets for variable contracts and policies. Aetna acts as the investment adviser and principal underwriter for the Registrant, Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna Generation Portfolios, Inc., Aetna GET Fund and Aetna Variable Portfolios, Inc. (all management investment companies registered under the Investment Company Act of 1940 (1940 Act)), and acts as investment adviser only for Aetna Series Fund, Inc. Additionally, Aetna acts as the principal underwriter and depositor for Variable Annuity Account B of Aetna, Variable Annuity Account C of Aetna, Variable Annuity Account G of Aetna, and Variable Life Account B of Aetna (separate accounts of Aetna registered as unit investment trusts under the 1940 Act). Aetna is also the principal underwriter for Variable Annuity Account I of Aetna Insurance Company of America (AICA) (a separate account of AICA registered as a unit investment trust under the 1940 Act). The following table summarizes the business connections of the directors and principal officers of the Investment Adviser.
Positions and Offices Other Principal Position(s) Held Name with Investment Adviser Since Oct. 31, 1994/Addresses*/** - ---- ----------------------- --------------------------------- Daniel P. Kearney Director, President and Director and President (since March 1996) -- Executive Officer Aetna Retirement Holdings, Inc.; President (since December 1995) -- Aetna Retirement Services, Inc.; President (since December 1993) -- Aetna Life Insurance and Annuity Company; Executive Vice President (since -5- December 1993) -- Aetna Inc. (formerly Aetna Life and Casualty Company); Director (since 1992) -- MBIA, Inc. Christopher J. Burns Director and Senior Director, Aetna Financial Services, Inc. (since January Vice President 1996), and Aetna Investment Services, Inc. (since July 1992); President, Chief Operations Officer (since November 1996) -- Aetna Investment Services, Inc.; Director (since March 1996) -- Aetna Retirement Holdings, Inc. J. Scott Fox Director and Senior Vice Director and Senior Vice President (since March President 1997) -- Aetna Retirement Holdings, Inc.; Senior Vice President (since March 1997) -- Aetna Life Insurance and Annuity Company Managing Director, Chief Operating Officer, Chief Financial Officer, Treasurer (April 1994 - March 1997) -- Aeltus Investment Management, Inc. Timothy A. Holt Director, Senior Vice Senior Vice President and Chief Financial Officer President and Chief (since February 1996) -- Aetna Life Life Insurance Financial Officer and Annuity Company; Vice President (June 1991 - February 1996) -- Portfolio Management/Investment Group, Aetna Inc. (formerly known as Aetna Life and Casualty Company); Director (since March 1996) -- Aetna Retirement Holdings, Inc.; Vice President (since September 1996) -- Aetna Retirement Holdings, Inc. John Y. Kim Director and Senior Vice President (since December 1995) -- Aeltus Investment President Management, Inc.; Chief Investment Officer (since May 1994) -- Aetna Life Insurance and Annuity Company. Shaun P. Mathews Director and Senior Vice Director (since December 1996) -- Aetna Insurance President Agency Holding Company, Inc.; Vice President (since February 1996), Senior Vice President (March 1991 Present) -- Aetna Life Insurance and Annuity Company; Director, Aetna Investment Services, Inc. (since July 1993), and Aetna Insurance Company of America (since February 1993). Glen Salow Director and Vice President Vice President (since 1992) -- Aetna Life Insurance and Annuity Company. -6- Kirk P. Wickman Vice President, General Vice President, General Counsel and Corporate Counsel and Secretary Secretary (since March 1997) -- Aetna Retirement Holdings, Inc.; Vice President, General Counsel and Secretary (since November 1996) -- Aetna Life Insurance and Annuity Company; Vice President and Counsel (June 1992 - November 1996) -- Aetna Life Insurance Company. Deborah Koltenuk Vice President and Vice President, Investment Planning and Financial Treasurer, Corporate Reporting (April 1996 to July 1996) -- Aetna Life Controller Insurance Company; Vice President, Investment Planning and Financial Reporting (October 1994 to April 1996) Aetna Life Insurance Company, the Aetna Casualty and Surety Company and The Standard Fire and Insurance Company; Vice President and Treasurer, Corporate Controller (since March 1996) -- Aetna Retirement Holdings, Inc. Frederick D. Kelsven Vice President and Chief Director of Compliance (January 1985 to September Compliance Officer 1996) -- Nationwide Life Insurance Company.
* The principal business address of each person named is 151 Farmington Avenue, Hartford, Connecticut 06156. ** Certain officers and directors of the Investment Adviser currently hold (or have held during the past two years) other positions with affiliates of the Registrant which are not deemed to be principal positions. The following information relates to the Subadvisers of the Registrant. Massachusetts Financial Services Company (MFS) - ---------------------------------------------- MFS serves as investment adviser to the following open-end Funds comprising the MFS Family of Funds: Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series Trust I (which has thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS Science and Technology Fund and MFS Research International Fund), MFS Series Trust II (which has four series: MFS Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and MFS Gold & Natural Resources Fund), MFS Series Trust III (which has two series: MFS High Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two series: MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which has three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited Maturity Fund), MFS Series Trust X (which has four series: MFS Government Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial International Growth Fund and MFS/Foreign & Colonial International Growth and Income Fund), and MFS Municipal Series Trust (which has 16 series: MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania -7- Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address of each of the aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116. MFS also serves as investment adviser of the following no-load, open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union Standard Trust ("UST"). The principal business address of each of the aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116. In addition, MFS serves as investment adviser to the following closed-end Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The principal business address of each of the MFS closed-end Funds is 500 Boylston Street, Boston, Massachusetts 02116. Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust ("MFS/SL"), Money Market Variable Account, High Yield Variable Account, Capital Appreciation Variable Account, Government Securities Variable Account, World Government Variable Account, Total Return Variable Account and Managed Sectors Variable Account. The principal business address of each of the aforementioned funds is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181. MFS International Ltd. ("MIL"), a limited liability company organized under the laws of Bermuda and a subsidiary of MFS, whose principal business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as investment adviser to and distributor for MFS American Funds (which has six portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S. Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American Funds-U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS American Fund-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are organized in Luxembourg and qualify as an undertaking for collective investments in transferable securities (UCITS). The principal business address of the MIL Funds is 47, Boulevard Royal, L-2449 Luxembourg. MIL also serves as investment adviser to and distributor for MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian U.S. High Yield Fund and MFS Emerging Markets Debt Fund" (collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is organized as an exempt company under the laws of the Cayman Islands. The principal business address of each of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman Islands, British West Indies. MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company registered with the Registrar of Companies for England and Wales whose current address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved primarily in marketing and investment research activities with respect to private clients and the MIL Funds and the MFS Meridian Funds. MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT. Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of MFS, serves as distributor for certain life insurance and annuity contracts issued by Sun Life Assurance Company of Canada (U.S.). -8- MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End Funds, MFSIT, MVI and UST. MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of MFS, provides investment advice to substantial private clients. MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of MFS, markets MFS products to retirement plans and provides administrative and record keeping services for retirement plans. MFS --- The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice President and Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., Patricia A. Zlotin, John W. Ballen, Thomas J. Cashman, Jr., Joseph W. Dello Russo and Kevin R. Parke are Executive Vice Presidents, Stephen E. Cavan is a Senior Vice President, General Counsel and an Assistant Secretary, Robert T. Burns is a Senior Vice President, Associate General Counsel and an Assistant Secretary of MFS, and Thomas B. Hastings is a Vice President and Treasurer of MFS. Massachusetts Investors Trust ----------------------------- Massachusetts Investor Growth Stock Fund ---------------------------------------- MFS Growth Opportunities Fund ----------------------------- MFS Government Securities Fund ------------------------------ MFS Series Trust I ------------------ MFS Series Trust V ------------------ MFS Series Trust VI ------------------- MFS Series Trust X ------------------ MFS Government Limited Maturity Fund ------------------------------------ A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Senior Vice President and Associate General Counsel of MFS, is the Assistant Secretary. MFS Series Trust II ------------------- A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary. MFS Government Markets lncome Trust ----------------------------------- MFS Intermediate Income Trust ----------------------------- A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary. MFS Series Trust III -------------------- A. Keith Brodkin is the Chairman and President, James T. Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice Presidents of MFS, and Bernard Scozzafava, Vice President of MFS are Vice Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E. McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas -9- London is the Treasurer, James O. Yost is the Assistant Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary. MFS Series Trust IV ------------------- MFS Series Trust IX ------------------- A. Keith Brodkin is the Chairman and President, Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary. MFS Series Trust VII -------------------- A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary. MFS Series Trust VIII --------------------- A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D. Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary. MFS Municipal Series Trust -------------------------- A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus, Vice President of MFS, is an Assistant Vice President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary. MFS Variable Insurance Trust ---------------------------- MFS Union Standard Trust ------------------------ MFS Institutional Trust ----------------------- A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr. is the Assistant Secretary. MFS Municipal Income Trust -------------------------- A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary. MFS Multimarket Income Trust ---------------------------- MFS Charter Income Trust ------------------------ A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary. -10- MFS Special Value Trust ----------------------- A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary. MFS/Sun Life Series Trust ------------------------- John D. McNeil, Chairman and Director of Sun Life Assurance Company of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, is the Assistant Treasurer and James R. Bordewick Jr., is the Assistant Secretary, Money Market Variable Account ----------------------------- High Yield Variable Account --------------------------- Capital Appreciation Variable Account ------------------------------------- Government Securities Variable Account -------------------------------------- Total Return Variable Account ----------------------------- World Governments Variable Account ---------------------------------- Managed Sectors Variable Account -------------------------------- John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and James R. Bordewick, Jr., is the Assistant Secretary. MIL --- A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and Jeffrey L. Shames are Directors, Thomas J. Cashman, Jr., an Executive Vice President of MFS, is a Senior Vice President, Stephen E. Cavan is a Director, Senior Vice President and the Clerk, James F. Bordewick, Jr. is a Director, Vice President and an Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo, Executive Vice President and Chief Financial Officer of MFS, is the Treasurer and Thomas D. Hastings is the Assistant Treasurer. MIL-UK ------ A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott, Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors. Stephen E. Cavan is a Director and the Secretary, James E. Russell is the Treasurer, and Robert T. Burns is the Assistant Secretary. MIL Funds --------- A. Keith Brodkin is the Chairman, President and a Director, Richard B. Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary. MFS Meridian Funds ------------------ A. Keith Brodkin is the Chairman, President and a Director, Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott, Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant Secretary and James O. Yost is the Assistant Treasurer. -11- MFD --- A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice President of MFS, is the President, Stephen E. Cavan is the Secretary, Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer, and Thomas B. Hastings is the Assistant Treasurer. CIAI ---- A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and Jeffery L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery is the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant Secretary. MFSC ---- A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the Executive Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is the Assistant Secretary. MFSI ---- A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President and a Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director and a Director, George F. Bennett, Carol A. Corley, John A. Gee, Brianne Grady and Kevin R. Parke are Senior Vice Presidents and Managing Directors, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns is the Secretary. RSI --- William W. Scott, Jr. and Bruce Avery are Directors, Arnold D. Scott is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and Martin E. Beaulieu are Senior Vice Presidents. In addition, the following persons, Directors or officers of MFS, have the affiliations indicated: A. Keith Brodkin Director, Sun Life Assurance Company of Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts Director, Sun Life Insurance and Annuity Company of New York, 67 Broad Street, New York, New York Donald A. Stewart President and a Director, Sun Life Assurance Company of Canada, Sun Life Centre, 150 King Street West, Toronto, Ontario, Canada (Mr. Stewart is also an officer and/or Director of various subsidiaries and affiliates of Sun Life) -12- John D. McNeil Chairman, Sun Life Assurance Company of Canada, Sun Life Centre, 150 King Street West, Toronto, Ontario, Canada (Mr. McNeil is also an officer and/or Director of various subsidiaries and affiliates of Sun Life) Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston Company, Exchange Place, Boston, Massachusetts (until August, 1994) Scudder, Stevens & Clark, Inc. - ------------------------------ Scudder, Stevens & Clark, Inc. has stockholders and employees who are denominated officers but do not as such have corporation-wide responsibilities. Such persons are not considered officers for the purpose of this Item 28.
Name Business and Other Connections of Board of Directors ---- ---------------------------------------------------- Stephen R. Beckwith Director, Vice President, Assistant Treasurer, Chief Operating Officer & Chief Financial Officer, Scudder, Stevens & Clark, Inc. (investment adviser)** Lynn S. Birdsong Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Supervisory Director, The Latin America Income and Appreciation Fund N.V. (investment company) + Supervisory Director, The Venezuela High Income Fund N.V. (investment company) xx Supervisory Director, Scudder Mortgage Fund (investment company)+ Supervisory Director, Scudder Floating Rate Funds for Fannie Mae Mortgage Securities I & II (investment company)+ Director, Scudder, Stevens & Clark (Luxembourg) S.A. (investment manager)# Trustee, Scudder Funds Trust (investment company)* President & Director, The Latin America Dollar Income Fund, Inc. (investment company)** President & Director, Scudder World Income Opportunities Fund, Inc. (investment company)** Director, Canadian High Income Fund (investment company)# Director, Hot Growth Companies Fund (investment company)# President, The Japan Fund, Inc. (investment company)** Director, Sovereign High Yield Investment Company (investment company)+ Nicholas Bratt Director, Scudder, Stevens & Clark, Inc. (investment adviser)** President & Director, Scudder New Europe Fund, Inc. (investment company)** President & Director, The Brazil Fund, Inc. (investment company)** President & Director, The First Iberian Fund, Inc. (investment company)** President & Director, Scudder International Fund, Inc. (investment company)** President & Director, Scudder Global Fund, Inc. (President on all series except Scudder Global Fund) (investment company)** President & Director, The Korea Fund, Inc. (investment company)** President & Director, Scudder New Asia Fund, Inc. (investment company)** President, The Argentina Fund, Inc. (investment company)** Vice President, Scudder, Stevens & Clark Corporation (Delaware) (investment adviser)** -13- Vice President, Scudder, Stevens & Clark Japan, Inc. (investment adviser)### Vice President, Scudder, Stevens & Clark of Canada Ltd. (Canadian investment adviser) Toronto, Ontario, Canada Vice President, Scudder, Stevens & Clark Overseas Corporationoo E. Michael Brown Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Trustee, Scudder GNMA Fund (investment company)* Trustee, Scudder U.S. Treasury Fund (investment company)* Trustee, Scudder Tax Free Money Fund (investment company)* Assistant Treasurer, Scudder Investor Services, Inc. (broker/dealer)* Director & President, Scudder Realty Holding Corporation (a real estate holding company)* Director & President, Scudder Trust Company (a trust company)+++ Director, Scudder Trust (Cayman) Ltd. Mark S. Casady Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Director & Vice President, Scudder Investor Services, Inc. (broker/dealer)* Vice President, Scudder Service Corporation (in-house transfer agent)* Director, SFA, Inc. (advertising agency)* Linda C. Coughlin Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Director & Senior Vice President, Scudder Investor Services, Inc. (broker/dealer)* President & Trustee, AARP Cash Investment Funds (investment company)** President & Trustee, AARP Growth Trust (investment company)** President & Trustee, AARP Income Trust (investment company)** President & Trustee, AARP Tax Free Income Trust (investment company)** Director, SFA, Inc. (advertising agency)* Margaret D. Hadzima Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Assistant Treasurer, Scudder Investor Services, Inc. (broker/dealer)* Jerard K. Hartman Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Vice President, Scudder California Tax Free Trust (investment company)* Vice President, Scudder Equity Trust (investment company)** Vice President, Scudder Cash Investment Trust (investment company)* Vice President, Scudder Fund, Inc. (investment company)** Vice President, Scudder Global Fund, Inc. (investment company)** Vice President, Scudder GNMA Fund (investment company)* Vice President, Scudder Portfolio Trust (investment company)* Vice President, Scudder Institutional Fund, Inc. (investment company)** Vice President, Scudder International Fund, Inc. (investment company)** Vice President, Scudder Investment Trust (investment company)* Vice President, Scudder Municipal Trust (investment company)* Vice President, Scudder Mutual Funds, Inc. (investment company)** Vice President, Scudder New Asia Fund, Inc. (investment company)** Vice President, Scudder New Europe Fund, Inc. (investment company)** Vice President, Scudder Securities Trust (investment company)* Vice President, Scudder State Tax Free Trust (investment company)* Vice President, Scudder Funds Trust (investment company)** Vice President, Scudder Tax Free Money Fund (investment company)* Vice President, Scudder Tax Free Trust (investment company)* Vice President, Scudder U.S. Treasury Money Fund (investment company)* -14- Vice President, Scudder Variable Life Investment Fund (investment company)* Vice President, The Brazil Fund, Inc. (investment company)** Vice President, The Korea Fund, Inc. (investment company)** Vice President, The Argentina Fund, Inc. (investment company)** Vice President & Director, Scudder, Stevens & Clark of Canada, Ltd. (Canadian investment adviser) Toronto, Ontario, Canada Vice President, The First Iberian Fund, Inc. (investment company)** Vice President, The Latin America Dollar Income Fund, Inc. (investment company)** Vice President, Scudder World Income Opportunities Fund, Inc. (investment company)** Richard A. Holt Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Vice President, Scudder Variable Life Investment Fund (investment company)* Dudley H. Ladd Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Director, Scudder Global Fund, Inc. (investment company)** Director, Scudder International Fund, Inc. (investment company)** Senior Vice President & Director, Scudder Investor Services, Inc. (broker/dealer)* President & Director, SFA, Inc. (advertising agency)* Vice President & Trustee, Scudder Cash Investment Trust (investment company)* Trustee, Scudder Investment Trust (investment company)* Trustee, Scudder Portfolio Trust (investment company)* Trustee, Scudder Municipal Trust (investment company)* Trustee, Scudder Securities Trust (investment company)* Trustee, Scudder State Tax Free Trust (investment company)* Trustee, Scudder Equity Trust (investment company)** Vice President, Scudder U.S. Treasury Money Fund (investment company)* John T. Packard Director, Scudder, Stevens & Clark, Inc. (investment adviser)** President, Montgomery Street Income Securities, Inc. (investment company)(o) Director, Scudder Realty Advisors, Inc. (realty investment adviser)(x) Daniel Pierce Chairman & Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Chairman & Director, Scudder New Europe Fund, Inc. (investment company)** Trustee, Scudder California Tax Free Trust (investment company)* President & Trustee, Scudder Equity Trust (investment company)** Director, The First Iberian Fund, Inc. (investment company)** President & Trustee, Scudder GNMA Fund (investment company)* President & Trustee, Scudder Portfolio Trust (investment company)* President & Trustee, Scudder Funds Trust (investment company)** President & Director, Scudder Institutional Fund, Inc. (investment company)** President & Director, Scudder Fund, Inc. (investment company)** Chairman & Director, Scudder International Fund, Inc. (investment company)** President & Trustee, Scudder Investment Trust (investment company)* Vice President & Trustee, Scudder Municipal Trust (investment company)* President & Director, Scudder Mutual Funds, Inc. (investment company)** Director, Scudder New Asia Fund, Inc. (investment company)** President & Trustee, Scudder Securities Trust (investment company)* Trustee, Scudder State Tax Free Trust (investment company)* Vice President & Trustee, Scudder Variable Life Investment Fund (investment company)* Director, The Brazil Fund, Inc. (until 7/94) (investment company)** -15- Vice President & Assistant Treasurer, Montgomery Street Income Securities, Inc. (investment company)(o) Chairman, Vice President & Director, Scudder Global Fund, Inc. (investment company)** Vice President, Director & Assistant Treasurer, Scudder Investor Services, Inc. (broker/dealer)* President & Director, Scudder Service Corporation (in-house transfer agent)* Chairman & President, Scudder, Stevens & Clark of Canada, Ltd. (Canadian investment adviser), Toronto, Ontario, Canada President & Director, Scudder Precious Metals, Inc.(xxx) Chairman & Director, Scudder Global Opportunities Funds (investment company) Luxembourg Chairman, Scudder, Stevens & Clark, Ltd. (investment adviser) London, England Director, Scudder Fund Accounting Corporation (in-house fund accounting agent)* Director, Vice President & Assistant Secretary, Scudder Realty Holdings Corporation (a real estate holding company)* Director, Scudder Latin America Investment Trust PLC (investment company)@ Incorporator, Scudder Trust Company (a trust company)+++ Director, Fiduciary Trust Company (banking & trust company) Boston, MA Director, Fiduciary Company Incorporated (banking & trust company) Boston, MA Trustee, New England Aquarium, Boston, MA Kathryn L. Quirk Director & Secretary, Scudder, Stevens & Clark, Inc. (investment adviser)** Vice President, Scudder Fund, Inc. (investment company)** Vice President, Scudder Institutional Fund, Inc. (investment company)** Vice President & Assistant Secretary, Scudder World Income Opportunities Fund, Inc. (investment company)** Vice President & Assistant Secretary, The Korea Fund, Inc. (investment company)** Vice President & Assistant Secretary, The Argentina Fund, Inc. (investment company)** Vice President & Assistant Secretary, The Brazil Fund, Inc. (investment company)** Vice President & Assistant Secretary, Scudder International Fund, Inc. (investment company)** Vice President & Assistant Secretary, Scudder Equity Trust (investment company)** Vice President & Assistant Secretary, Scudder Securities Trust (investment company)* Vice President & Assistant Secretary, Scudder Funds Trust (investment company)** Vice President & Assistant Secretary, Scudder Global Fund, Inc.(investment company)** Vice President & Assistant Secretary, Montgomery Street Income Securities, Inc. (investment company)(o) Vice President & Assistant Secretary, Scudder Mutual Funds, Inc. (investment company)** Vice President & Assistant Secretary, Scudder New Europe Fund, Inc. (investment company)** Vice President & Assistant Secretary, Scudder Variable Life Investment Fund (investment company)* Vice President & Assistant Secretary, The First Iberian Fund, Inc. (investment company)** Vice President & Assistant Secretary, The Latin America Dollar Income Fund, Inc. (investment company)** Vice President & Secretary, AARP Growth Trust (investment company)** Vice President & Secretary, AARP Income Trust (investment company)** -16- Vice President & Secretary, AARP Tax Free Income Trust (investment company)** Vice President & Secretary, AARP Cash Investment Funds (investment company)** Vice President, Scudder GNMA Fund (investment company)* Vice President & Secretary, The Japan Fund, Inc. (investment company)** Director, Vice President & Secretary, Scudder Fund Accounting Corporation (in-house fund accounting agent)* Senior Vice President, Scudder Investor Services, Inc. (broker/dealer)* Director, Vice President & Secretary, Scudder Realty Holdings Corporation (a real estate holding company)* Vice President & Assistant Secretary, Scudder Precious Metals, Inc.(xxx) Cornelia M. Small Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Vice President, Scudder Global Fund, Inc. (investment company)** Vice President, AARP Cash Investment Funds (investment company)** Vice President, AARP Growth Trust (investment company)** Vice President, AARP Income Trust (investment company)** Vice President, AARP Tax Free Income Trust (investment company)** Edmond D. Villani Director, President & Chief Executive Officer, Scudder, Stevens & Clark, Inc. (investment adviser)** Chairman & Director, Scudder New Asia Fund, Inc. (investment company)** Chairman & Director, The Argentina Fund, Inc. (investment company)** Director, Scudder Realty Advisors, Inc. (realty investment adviser)(x) Supervisory Director, Scudder Mortgage Fund (investment company)+ Chairman & Director, The Latin America Dollar Income Fund, Inc. (investment company)** Director, Scudder, Stevens & Clark Japan, Inc. (investment adviser)### Chairman & Director, Scudder World Income Opportunities Fund, Inc. (investment company)** Supervisory Director, Scudder Floating Rate Funds for Fannie Mae Mortgage Securities & II (investment company)+ Director, The Brazil Fund, Inc. (investment company)** Director, Indosuez High Yield Bond Fund (investment company) Luxembourg President & Director, Scudder, Stevens & Clark Overseas Corporation(oo) President & Director, Scudder, Stevens & Clark Corporation (Delaware) (investment adviser)** Director, IBJ Global Investment Management S.A. (Luxembourg investment management company) Luxembourg, Grand-Duchy of Luxembourg Stephen A. Wohler Director, Scudder, Stevens & Clark, Inc. (investment adviser)** Vice President, Montgomery Street Income Securities, Inc. (investment company)(o)
* Two International Place, Boston, MA x 333 South Hope Street, Los Angeles, CA ** 345 Park Avenue, New York, NY ++ Two Prudential Plaza, 180 N. Stetson Avenue, Chicago, IL +++ 5 Industrial Way, Salem, NH o 101 California Street, San Francisco, CA # Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564 + John B. Gorsiraweg 6, Willemstad Curacao, Netherlands Antilles xx De Ruyterkade 62, P.O. Box 812, Willemstad Curacao, Netherlands Antilles ## 2 Boulevard Royal, Luxembourg -17- *** B1 2F3F 248 Section 3, Nan King East Road, Taipei, Taiwan xxx Grand Cayman, Cayman Islands, British West Indies oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan ### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan @ c/o Sinclair Hendersen Limited, 23 Cathedral Yard, Exeter, Devon
T. Rowe Price Associates, Inc. (T. Rowe Price) - ---------------------------------------------- Listed below are the Directors of T. Rowe Price who have other substantial businesses, professions, vocations, or employment aside from that of Director of T. Rowe Price: James E. Halbkat, Jr., President of U.S. Monitor Corporation, a provider of public response systems. Mr. Halbkat's address is P.O. Box 23109, Hilton Head Island, South Carolina 29925. Richard L. Menschel, limited partner of the Goldman Sachs Group, L.P. Mr. Menschel's address is 85 Broad Street, 2nd Floor, New York, New York 10004. John W. Rosenblum, Dean of the Jepson School of Leadership Studies at the University of Richmond, and a Director of: Cheaspeake Corporation, a manufacturer of paper products, Camdus Corp., a provider of printing and communication services, Comdial Corporation, a manufacturer of telephone systems for business, Cone Mills Corporation, a textiles producer, and Providence Journal Company, a publisher of newspapers and owner of broadcast television stations. Mr. Rosenblum's address is University of Richmond, Virginia 23173. Robert L. Strickland, Chairman of Loew's Companies, Inc., a retailer of specialty home supplies, and a Director of Hannaford Bros, Co., a food retailer. Mr. Strickland's address is 604 Piedmont Building, Winston-Salem, North Carolina 27104. Phillip C. Walsh, Consultant to Cyprus Amax Minerals Company, Englewood, Colorado. Mr. Walsh's address is Pleasant Valley, Peapack, New Jersey 07977. Ann Marie Whittemore, partner of the law firm of McGuire, Woods, Battle and Boothe and is a director of Owens & Minor, Inc.; USF&G Corporation, the James River Corporation of Virginia, and Albemarle Corporation. Mrs. Whittemore's address is One James Center, Richmond, Virginia 23219. With the exception of Messrs. Halbkat, Menschel, Rosenblum, Strickland, Walsh, and Mrs. Whittemore (listed above), all Directors of T. Rowe Price are employees of T. Rowe Price. Listed below are the additional Directors and the principal executive officer of T. Rowe Price: James S. Riepe, M. David Testa, Henry H. Hopkins, Charles P. Smith, Peter Van Dyke, James A. C. Kennedy II, John H. Laporte, Jr., William T. Reynolds, Brian C. Rogers, George J. Collins George A. Roche, Chairman of the Board and President of T. Rowe Price. The address of each of the above individuals is 100 East Pratt Street, Baltimore, Maryland 21202. ITEM 29. PRINCIPAL UNDERWRITERS (a) In addition to serving as the principal underwriter and investment adviser for the Registrant, Aetna Life Insurance and Annuity Company (Aetna) also acts as the principal underwriter and investment adviser for -18- Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna Generation Portfolios, Inc., Aetna GET Fund and Aetna Variable Portfolios, Inc. (all management investment companies registered under the 1940 Act). Additionally, Aetna is the principal underwriter and depositor for Variable Annuity Account B of Aetna, Variable Annuity Account C of Aetna, Variable Annuity Account G of Aetna and Variable Life Account B (separate accounts of Aetna registered as unit investment trusts under the 1940 Act). Aetna is also the principal underwriter for Variable Annuity Account I 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:
Name and Principal Positions and Offices Positions and Offices Business Address* with Principal Underwriter with Registrant - ----------------- -------------------------- --------------- Daniel P. Kearney Director and President Timothy A. Holt Director, Senior Vice President and Chief Financial Officer Christopher J. Burns Director and Senior Vice President J. Scott Fox Director and Senior Vice President John Y. Kim Director and Senior Vice President Shaun P. Mathews Director and Senior Vice President Director Glen Salow Director and Vice President Kirk P. Wickman Vice President, General Counsel and Secretary Deborah Koltenuk Vice President and Treasurer, Corporate Controller Frederick D. Kelsven Vice President and Chief Compliance Officer
* The principal business address of all directors and officers listed is 151 Farmington Avenue, Hartford, Connecticut 06156. (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, Aetna, maintain physical possession of each account, book or other documents at its principal place of business located at: 151 Farmington Avenue Hartford, Connecticut 06156. -19- Shareholder records are maintained by the transfer agent, Investors Bank & Trust Company, 200 Clarendon Street, Boston, Massachusetts 02116. ITEM 31. MANAGEMENT SERVICES Not Applicable ITEM 32. UNDERTAKINGS The Registrant undertakes that if requested by the holders of at least 50% of a Portfolio'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 Investment Company Act of 1940 applied. The Registrant undertakes to furnish to each person to whom a prospectus is delivered a copy of the Registrant's latest annual report to shareholders, upon request and without charge. Insofar as indemnification for liability arising under the Securities Act of 1933 (1933 Act) may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. The Registrant undertakes to file a Post-Effective Amendment to this Registration Statement, using financial statements which need not be certified, within four to six months from the commencement of operations of Registrant's 1933 Act Registration Statement. -20- SIGNATURES Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940, Portfolio Partners, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned thereto duly authorized, in the City of Hartford and State of Connecticut on the 31st day of July, 1997. PORTFOLIO PARTNERS, INC. By: /s/Martin T.Conroy ----------------------------- Martin T. Conroy Director, Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933 this Registration Statement has been signed below by the following persons on July 31, 1997 in the capacities indicated. SIGNATURE TITLE /s/Martin T. Conroy Director, Vice President and ----------------------- Chief Financial Officer Martin T. Conroy /s/Laurie M. Leblanc Director ----------------------- Laurie M. Leblanc /s/Shaun P. Mathews Director ----------------------- Shaun P. Mathews -21- PORTFOLIO PARTNERS, INC. EXHIBIT INDEX
Exhibit No. Exhibit Page - ----------- ------- ---- EX-99.B1 Articles of Incorporation ____ EX-99.B2 Bylaws ____ EX-99.B5(a) Form of Investment Advisory Agreement between Portfolio Partners, Inc. and Aetna ____ EX-99.B5(b) Form of Subadvisory Agreement between Aetna and Massachusetts Financial Services Company ____ EX-99.B5(c) Form of Subadvisory Agreement between Aetna and Scudder, Stevens & Clark, Inc. ____ EX-99.B5(d) Form of Subadvisory Agreement between Aetna and T. Rowe Price Associates, Inc. ____ EX-99.B6 Form of Underwriting Agreement between the Registrant and Aetna Life Insurance and Annuity Company ____ EX-99.B8 Form of Custodian Agreement ____ EX-99.B9(a) Form of Administrative Services Agreement ____ EX-99.B9(b) License Agreement between Aetna and T. Rowe Price Associates, Inc. ____ EX-99.B-10 Opinion and Consent of Counsel ____ EX-99.B11(a) Consent of Independent Auditors * EX-99.B11(b) Form of Consents of Proposed Directors ____ EX-99.B-13 Agreement re: Initial Contribution to Working Capital ____ EX-99.B-16 Schedule for Calculation of Performance Data * EX-99.B19 Powers of Attorney * 27 Financial Data Schedule *
*To be filed by Amendment. -22- EX-99.B1 2 ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION OF PORTFOLIO PARTNERS, INC. The undersigned, Amy R. Doberman, whose post office address is 151 Farmington Avenue, RE4A, Hartford, Connecticut 06156, being at least eighteen years of age, acting as incorporator, does, under and by virtue of the General Laws of the State of Maryland authorizing formation of corporations, hereby forms a corporation. FIRST: The name of the Corporation (which is hereinafter referred to as the "Corporation") is: Portfolio Partners, Inc. SECOND: The purposes for which, and any of which, the Corporation is formed, and the business to be carried on and promoted by it are: 1. To act as an open-end investment company of the management type registered as such with the Securities and Exchange Commission pursuant to the Investment Company Act of 1940 (the "1940 Act"), and to perform any and all activities necessary or desirable in connection therewith. 2. To engage in and perform any other activities or functions which may lawfully be performed by a business corporation organized under the General Laws of the State of Maryland. The forgoing enumerated purposes shall be in no way limited or restricted by reference to, or inference from, the terms of any clauses of this or any other article of these Articles of Incorporation, and each shall be regarded as independent; and they are intended to be and shall be construed as powers as well as purposes of the Corporation and shall be in addition to and not in limitation of the general powers of corporations under the General Laws of the State of Maryland. THIRD: The post office address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202. FOURTH: The name and address of the resident agent of the Corporation in the State of Maryland is The Corporation Trust 1 Incorporated, 32 South Street, Baltimore, Maryland 21202. Said resident agent is a Maryland corporation. FIFTH: (a) The Corporation has the authority to issue an aggregate of 1,000,000,000 shares of Capital Stock (hereinafter referred to as "Shares"); (b) 500,000,000 of the Shares shall be classified in the following series (each a "Portfolio" and collectively the "Portfolios"): 100,000,000 Shares in MFS Emerging Equities Portfolio; 100,000,000 Shares in MFS Research Growth Portfolio; 100,000,000 Shares in MFS Value Equity Portfolio; 100,000,000 Shares in Scudder International Growth Portfolio; and 100,000,000 Shares in T.Rowe Price Growth Equity Portfolio; (c) 500,000,000 of the Shares shall be unclassified, subject to classification by the Board of Directors pursuant to the authority granted to the Board of Directors in Article EIGHTH of these Articles of Incorporation; (d) the par value of each Share is $0.001; (e) the aggregate par value of all Shares is $1,000,000. SIXTH: The Shares of each Portfolio of the Corporation shall have the following preferences, rights, powers, restrictions, limitations, qualifications and terms and conditions of redemption, subject to the right of the Board of Directors acting by properly adopted resolution to amend, add to or remove such preferences, rights, powers, restrictions, limitations, qualifications and terms and conditions of redemption of any unissued Shares of any Portfolio: (a) Assets. All consideration received by the Corporation from the sale and/or issuance of Shares of a Portfolio, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof, including any proceeds derived from the 2 sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to that Portfolio for all purposes, subject only to the rights of creditors of that Portfolio, and shall be so recorded upon the books and accounts of the Corporation. Any assets, income, earnings, profits, and proceeds thereof, funds, or payments of the Corporation which are not readily identifiable as belonging to any particular Portfolio (collectively "General Items") shall be allocated by or under the supervision of the Board of Directors to and among any one or more of the Portfolios of the Corporation and designated from time to time in such manner and on such basis as the Board of Directors, in its sole discretion, deems fair and equitable and any General items so allocated to a particular Portfolio shall belong to that Portfolio. Each such allocation by the Board of Directors shall be conclusive and binding for all purposes; and all such consideration, assets, income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, together with any General Items allocated to the Portfolio, are herein referred to as "assets belonging to" that Portfolio. (b) Liabilities. The assets belonging to a Portfolio shall be charged with the liabilities of the Corporation incurred on behalf of the Portfolio and all expenses, costs, charges and reserves attributable to the Portfolio. Any general liabilities, expenses, costs, charges or reserves of the Corporation which are not readily identifiable as belonging to any particular Portfolio shall be allocated and charged by or under the supervision of the Board of Directors to and among any one or more of the Portfolio established and designated from time to time in such manner and on such basis as the Board of Directors, in its sole discretion, deems fair and equitable. Each allocation of liabilities, expenses, costs, charges and reserves by the Board of Directors shall be conclusive and binding for all purposes; and the liabilities, expenses, costs, charges and reserves allocated and so charged to the Portfolio are herein referred to as "liabilities belonging to" the Portfolio. (c) Income. The Board of Directors shall have full discretion, to the extent not inconsistent with the General Laws of the State of Maryland and the 1940 Act, to determine which items shall be treated as income and which items as capital; and each such determination and allocation shall be conclusive and binding. "Income belonging to" the Portfolio 3 includes all income, earnings and profits derived from assets belonging to the Portfolio, less any expenses, costs, charges or reserves belonging to the Portfolio, for the relevant time period. (d) Dividends. Dividends and distributions on Shares of the Portfolio may be declared and paid with such frequency, in such form and in such amount as the Board of Directors may from time to time determine. Dividends may be declared daily or otherwise pursuant to a standing resolution or resolutions adopted only once or with such frequency as the Board of Directors may determine, after providing for actual and accrued liabilities belonging to the Portfolio. All dividends on Shares of the Portfolio shall be paid only out of the income belonging to the Portfolio and capital gains distributions on Shares of the Portfolio shall be paid only out of the capital gains belonging to the Portfolio. All dividends and distributions on Shares of the Portfolio shall be distributed pro rata to the holders of Shares ("Shareholders") of the Portfolio in proportion to the number of Shares of the Portfolio held by each Shareholder at the date and time of record established for the payment of such dividends or distributions, except that in connection with any dividend or distribution program or procedure the Board of Directors may determine that no dividend or distribution shall be payable on Shares as to which the Shareholder's purchase order and/or payment have not been received by the time or times established by the Board of Directors under such program or procedure. The Board of Directors shall have the power, in its sole discretion, to distribute in any fiscal year as dividends, including dividends designated in whole or in part as capital gains distributions, amounts sufficient, in the opinion of the Board of Directors, to enable the Corporation and each Portfolio to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended, (the "Code") or any successor or comparable statute thereto, regulations promulgated thereunder, and to avoid liability of the Corporation or Portfolio for Federal income tax in respect of that year. However, nothing in the foregoing shall limit the authority of the Board of Directors to make distributions greater than or less than the amount necessary to qualify as a regulated investment company and to avoid liability of the Corporation or Portfolio for such tax. Dividends and distributions may be paid in cash, property or Shares, or a combination thereof, as determined by the Board of Directors or pursuant to any program that the Board of Directors may -4- have in effect at the time. Dividends or distributions paid in Shares will be paid at the current net asset value thereof as defined in section (g) of this Article SIXTH. (e) Liquidation. In the event of liquidation of the Corporation or of any Portfolio, the Shareholders of the Portfolio shall be entitled to receive when and as declared by the Board of Directors, the excess of the assets belonging to the Portfolio over the liabilities belonging to it. The Shareholders of such Portfolio shall not be entitled thereby to any distribution upon liquidation of any other Portfolio. The assets so distributable to the Shareholders of the Portfolio shall be distributed among such Shareholders in proportion to the number of Shares of the Portfolio held by them and recorded on the books of the Corporation. The liquidation of the Portfolio in which there are Shares then outstanding may be authorized by vote of a majority of the Board of Directors then in office, subject to the approval of a majority of the outstanding Shares of the Portfolio, as defined in the 1940 Act. (f) Voting. On each matter submitted to a vote of the Shareholders, each Shareholder shall be entitled to one vote for each Share outstanding in name of such Shareholder on the books of the Corporation, and all Shares of the Portfolio shall vote as a single Portfolio ("Single Portfolio Voting"); provided, however, that (i) as to any matter with respect to which a separate vote of the Portfolio is required by the 1940 Act or by the General Laws of the State of Maryland, such requirement as to a separate vote by that Portfolio shall apply in lieu of Single Portfolio Voting as described above; (ii) in the event that the separate vote requirements referred to in (i) above apply with respect to one or more Portfolio, then Subject to (iii) below, the Shares of all other Portfolios shall vote as a single Portfolio; and (iii) as to any matter which does not affect the interest of a particular Portfolio, only the holders of the Shares of the one or more affected Portfolios shall be entitled to vote. (g) Net Asset Value. The net asset value per Share of the Portfolio shall be the quotient obtained by dividing the value of the net assets of the Portfolio (being the value of the assets belonging to the Portfolio less the liabilities belonging to the Portfolio) by the total number of outstanding Shares of the Portfolio. (h) Equality. All Shares of the Portfolio shall represent an equal proportionate interest in the assets belonging to the Portfolio (subject to the liabilities -5- belonging to the Portfolio), and each Share of the Portfolio shall be equal to each other Share of the Portfolio. The Board of Directors may from time to time divide or combine the Shares of the Portfolio into a greater or lesser number of Shares of the Portfolio without thereby changing the proportionate beneficial interest in the assets belonging to the Portfolio or in any way affecting the rights of Shares of any other Portfolio. (i) Conversion or Exchange Rights. Subject to compliance with the requirements of the 1940 Act, the Board of Directors shall have the authority to provide that Shareholders of the Portfolio shall have the right to convert or exchange said Shares into Shares of one or more other Portfolios of Shares in accordance with such requirements and procedures as may be established by the Board of Directors. (j) Redemption by the Corporation. The Board of Directors may cause the Corporation to redeem at current net asset value the Shares of the Portfolio from a Shareholder whose Shares have an aggregate current net asset value less than an amount established by the Board of Directors. No such redemption shall be effected unless the Corporation has given the Shareholder reasonable notice of its intention to redeem the Shares and an opportunity to purchase a sufficient number of additional Shares to bring the aggregate current net asset value of Shares held by such Shareholder to the minimum amount established. Upon redemption of Shares pursuant to this section (j) of Article SIXTH, the Corporation shall cause prompt payment of the full redemption price to be made to the holder of Shares so redeemed. Each Share is subject to redemption by the Corporation at the redemption price computed in the manner set forth in section (k) of this Article SIXTH, if at any time the Board of Directors, in its sole discretion, determines that failure to so redeem may result in the Corporation being classified as a personal holding company as defined in the Code. (k) Redemption by Shareholders. To the extent the Corporation has funds or property legally available therefor, each Shareholder of the Corporation shall have the right at such times as may be permitted by the Corporation, but no less frequently than once each day, to require the Corporation to redeem all or any part Shares held by such Shareholder at a redemption price equal to the net asset value per Share next determined after the Shares are tendered for redemption; said determination of the net asset value per Share to be made in accordance with the requirements of the 1940 Act and the applicable rules and regulations of the Securities and -6- Exchange Commission and in conformity with generally accepted accounting practices and principles. Notwithstanding the foregoing, the Corporation may postpone payment or deposit of the redemption price and may suspend the right of the Shareholders to require the Corporation to redeem Shares pursuant to the applicable rules and regulations, or any order, of the Securities and Exchange Commission. (l) Transfer. Transfer of Shares will be recorded on the stock transfer records of the Corporation at the request of the holders thereof at any time during normal business hours of the Corporation unless the Board of Directors of the Corporation determines, in its sole discretion, that allowing such transfer may result in the Corporation being classified as a personal holding company as defined in the Code. SEVENTH: (a) The number of Directors of the Corporation shall be determined by the Board of Directors in the manner provided by the bylaws of the Corporation but shall not be less than three (3). (b) The names of the Directors who shall act until the first Annual Meeting of Shareholders and until their successors are duly chosen and qualify are: Martin T. Conroy Laurie M. LeBlanc Shaun P. Mathews EIGHTH: The Board of Directors is empowered to authorize the issuance from time to time of Shares of the Corporation, whether now or hereafter authorized; provided, however, that the consideration per Share to be received by the Corporation upon the issuance or sale of any Shares shall be the net asset value per Share determined in accordance with the requirements of the 1940 Act and the applicable rules and regulations of the Securities and Exchange Commission and in conformity with generally accepted accounting practices and principles. The Shares may be issued in one or more Portfolios, and each Portfolio may consist of one or more classes. The Board of Directors of the Corporation shall have the power and authority to classify or reclassify any unissued Shares, including, but not limited to, Shares of any Portfolio or any class of any Portfolio, from time to time by setting or changing the preferences, conversions or other rights, voting powers, restrictions, limitations as to dividends, qualifications, terms or conditions of redemption or other terms and conditions of such Shares. Each Portfolio of Shares and each class of a Portfolio shall be issued upon such terms and conditions, and shall confer upon the holders of Shares of such Portfolio or class thereof such -7- rights as are set forth in these Articles of Incorporation or as the Board of Directors may otherwise determine, consistent with the requirements of the laws of the State of Maryland and the 1940 Act and the applicable rules and regulations of the Securities and Exchange Commission, these Articles of Incorporation and the Bylaws of this Corporation. In addition, the Board of Directors is hereby expressly authorized to change the designation of any Portfolio or class, and to increase or decrease the number of Shares of any Portfolio or class, but the number of Shares of any Portfolio or class shall not be decreased by the Board of Directors below the number of Shares of such Portfolio or class then outstanding. NINTH: Except as limited specifically by the provisions of this Article NINTH or any other provision of these Articles of Incorporation, the Corporation shall have and may exercise and generally enjoy all of the powers, rights and privileges granted to, or conferred upon, a corporation by the General Laws of the State of Maryland now or hereafter in force. The following provisions are hereby adopted for the purpose of defining, limiting and regulating the powers of the Corporation and of the Directors and Shareholders: (a) No Preemptive Rights. No Shareholder shall have any preemptive or preferential right of subscription to any Shares of any Portfolio or any class thereof whether now or hereafter authorized. The Board of Directors may issue Shares without offering the same either in whole or in part to the Shareholders. (b) Contracts with Affiliates. The Corporation may enter into exclusive or nonexclusive contract(s) for the sale of its Shares and may also enter into contracts, including but not limited to investment advisory, management, custodial, transfer agency and administrative services. The terms and conditions, methods of authorization, renewal, amendment and termination of the aforesaid contracts shall be as determined at the discretion of the Board of Directors; subject, however, to the provisions of these Articles of Incorporation, the bylaws of the Corporation, applicable state law, and the 1940 Act and the rules and regulations of the Securities and Exchange Commission thereunder. (c) Conflicts. Subject to and in compliance with the provisions of the General Laws of the State of Maryland respecting interest director transactions, and the 1940 Act and the rules thereunder, the Corporation may enter into a written underwriting contract, management contract or contracts for research, advisory or administrative services with Aetna Life Insurance and Annuity Company or its parent, -8- affiliates or subsidiaries thereof, or its respective successors, or otherwise do business with such corporations, notwithstanding the fact that one or more of the Directors of the Corporation and some or all of its officers are, have been, or may become directors, officers, employees or stockholders of Aetna Life Insurance and Annuity Company or its parent, affiliates or subsidiaries or successors, and in the absence of actual fraud the Corporation may deal freely with Aetna Life Insurance and Annuity Company or its parent, affiliates, subsidiaries or successors, and neither such underwriting contract, management contract or contract for research, advisory of administrative services, nor any other contract or transaction between the Corporation and Aetna Life Insurance and Annuity Company or its parent, affiliates, subsidiaries or successors shall be invalidated or in any way affected thereby, nor shall any Director or officer, of the Corporation be liable to the Corporation or to any Shareholder or creditor of the Corporation or to any other person for any loss incurred under or by reason of any such contract or transaction. Notwithstanding the foregoing, no officer, director, underwriter or investment adviser of the Corporation shall be protected against any liability to the Corporation or to its security holders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. (d) Indemnification. The Corporation shall indemnify its officers and directors, and any officer or director who serves at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise as follows: (i) Every person who is or has been a director or officer of the Corporation, and every person who while an officer or director of the Corporation serves or has served at the Corporation's request as director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the Corporation to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him or her in connection with any debt, claim, action, demand, suit, proceeding, judgment, decree, liability or obligation of any kind in which he or she becomes involved as a party or otherwise by virtue of his or her being or having been a director or officer of the Corporation or a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise at the -9- request of the Corporation, and against amounts paid or incurred by him or her in the settlement thereof. (ii) The words "claim," "action," "suit" or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal administrative, legislative, investigative or other, including appeals), actual or threatened, and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. (iii) No indemnification shall be provided hereunder to a director or officer against any liability to the Corporation or its Shareholders by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. (iv) The rights of indemnification provided herein may be insured against by policies maintained by the Corporation, shall be severable, shall not affect any other rights to which any director or officer may now or hereafter be entitled, shall continue as to a person who has ceased to be such director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. (v) In the absence of a final decision on the merits by a court or other body before which such proceeding was brought, an indemnification payment will not be made, except as provided in subsection (vi) of this Section (d) of Article NINTH, unless in the absence of such a decision, a reasonable determination based upon a factual review has been made: (1) by a majority vote of a quorum of non-party Directors who are not "interested" persons of the Corporation (as defined in the 1940 Act), or (2) by independent legal counsel in a written opinion that the indemnitee was not liable for an act of willful misfeasance, bad faith, gross negligence, or reckless disregard of duties. (vi) The Corporation further undertakes that advancement of expenses incurred in the defense of a proceeding (upon undertaking for repayment unless it is ultimately determined that indemnification is appropriate) against an officer, director or controlling person of the -10- Corporation will not be made absent the fulfillment of at least one of the following conditions: (1) the indemnitee provides security for his undertaking, (2) the Corporation is insured against losses arising by reason of any lawful advances or (3) a majority of a quorum of non-party Directors who are not "interested" persons or independent legal counsel in a written opinion makes a factual determination that there is a reason to believe the indemnitee will be entitled to indemnification. The Corporation may, with the approval of the Board of Directors, provide such indemnification and advancement of expenses as set forth in subsections (i) through (vi) of this Section (d) of Article Ninth to employees and agents of the Corporation and to any person (other than officers or directors of the Corporation) who serves at the request for the Corporation as an officer, director, employee or agent of another corporation, partnership, joint venture or other enterprise. Any repeal or amendment of any of the provisions of this section (d) of Article NINTH, and any adoption or amendment of any other provision of the Charter or bylaws of the Corporation which may be inconsistent with the provisions of this section (d) of Article NINTH, shall be prospective in operation and effect only, and shall not affect in any manner any right to indemnification hereunder existing at the time of any such repeal, amendment or adoption. (e) Limitation of Liability. The liability of the directors and officers of the Corporation to the Corporation or its Shareholders for money damages shall be limited to the fullest extent permitted under the General Laws of the State of Maryland now or hereafter in force, including, but not limited to, section 5-349 of the Courts and Judicial Proceedings Article of the Annotated Code of Maryland, or any successor provision or law of similar import, and the directors and officers of the Corporation shall have no liability whatsoever to the Corporation or its shareholders for money damages except to the extent which such liability cannot be limited or restricted under the General Laws of the State of Maryland now or hereafter enforced. Any repeal or amendment of the foregoing sentence of this Section (e) of Article NINTH, and any adoption or amendment of any other provision of the Charter or Bylaws of the Corporation which may be inconsistent with the foregoing sentence, shall be prospective in operation and effect only, and shall affect in any manner the applicability of the foregoing sentence with respect to any act or omission of any director or officer -11- occurring prior to any such repeal, amendment or adoption. (f) Books and Records. The Board of Directors shall, subject to the General Laws of the State of Maryland, have the power to determine, from time to time, whether and to what extent and at what times and places and under what conditions and regulations any accounts and books of the Corporation, or any of them, shall be open to the inspection of Shareholders. (g) Voting. Notwithstanding any provision of law requiring a greater proportion than a majority of the votes of all classes of Shares entitled to be cast to take or authorize any action, the Corporation may take or authorize any action upon the concurrence of a majority of the aggregate number of the votes entitled to be cast thereon. (h) Amendments. The Corporation reserves the right from time to time to make any amendment to its Articles of Incorporation now or thereafter authorized by law, including any amendment which alters the contract rights, as expressly set forth in the Articles of Incorporation, or any outstanding Shares, except that no action affecting the validity or accessibility of such Shares shall be taken without the unanimous approval of the outstanding Shares affected thereby. (i) Additional Powers. In addition to the powers and authority conferred upon them by the Articles of Incorporation of the Corporation or Bylaws, the Board of Directors may exercise all such powers and authority and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of applicable state law and the Articles of Incorporation and Bylaws of the Corporation. (j) Financial Matters. The Board of Directors is expressly authorized to determine in accordance with generally accepted accounting principles and practices what constitutes net profits, earnings, surplus or net assets in excess of capital, and to determine what accounting periods shall be used by the Corporation for any purpose, whether annual or any other period, including daily; to set apart from any funds of the Corporation such reserves for such purposes as it shall determine and to abolish the same; to declare and pay dividends and distributions in cash, securities or other property from surplus or any funds legally available therefor, at such intervals (which may be as frequent as daily) or on such other periodic basis, as it shall determine; to declare such dividends or distributions by means of a formula or other method of determination, at meetings held less frequently than -12- the frequency of the effectiveness of such declarations; to establish payment dates for dividends or any other distributions on any basis, including dates occurring less frequently than the effectiveness of declarations thereof; and to provide for the payment of declared dividends on a date earlier or later than the specified payment date in the case of Shareholders redeeming their entire ownership of Shares. TENTH: The duration of the Corporation shall be perpetual. IN WITNESS WHEREOF, the undersigned has signed these Articles of Incorporation on the 6th day of May, 1997 and by her signature hereby acknowledges the same to be her act and that, to the best of her knowledge, the matters and facts set forth herein are true in all material respects under the penalties of perjury. WITNESS: /s/ Bonita C. McCoy /s/ Amy R. Doberman Amy R. Doberman -13- EX-99.B2 3 BYLAWS PORTFOLIO PARTNERS, INC. BYLAWS ARTICLE I MEETING OF SHAREHOLDERS Section 1. ANNUAL MEETINGS. An annual meeting of Shareholders of the Corporation shall be held only in those years in which the election of Directors is required to be acted on under the Investment Company Act of 1940 ("1940 Act"). At each annual meeting, any other proper business within the power of Shareholders may be transacted. An annual meeting shall be held on a date and at a time designated by the Board of Directors. Section 2. SPECIAL MEETINGS. Special meetings of Shareholders may be called by the President or by the Board of Directors; and shall be called by the President, Secretary or any Director at the request in writing of the holders of the outstanding voting shares of the capital stock of the corporation (hereinafter, the outstanding voting shares of the capital stock of the Corporation are referred to as "Shares") entitled to cast not less than 50% of the votes entitled to be cast at such meeting. Any such request shall state the purposes of the proposed meeting. Section 3. PLACE OF MEETINGS. All meetings of the Shareholders shall be held at the office of the Corporation in Hartford, Connecticut, or at such other place within or outside the State of Maryland as may be fixed by the party or parties making the call as stated in the notice thereof. Section 4. NOTICE. Not less than ten or more than ninety days before the date of every Annual or Special Meeting of Shareholders, the Secretary or an Assistant Secretary shall give to each Shareholder of record notice of such meeting by mail, telegraph, cable or radio. Such notice shall be deemed to have been given when deposited in the mail or with a telegraph or cable office or radio station for transmission to the Shareholder at his address appearing on the books of the Corporation. It shall not be necessary to set forth the business proposed to be transacted in the notice of any Annual Meeting, except that any proposal to amend the Articles of Incorporation of the Corporation shall be set forth in such notice. Notice of a Special Meeting shall state the purpose or purposes for which it is called. Section 5. QUORUM. At all meetings of the Shareholders (including meetings of Shareholders of a particular series), the presence in person or by proxy of Shareholders entitled to cast a majority in number of votes shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum at any meeting, a majority of those Shareholders present in person or by proxy may adjourn the meeting from time to time to be held at the same place without further notice other than by announcement until a quorum, as above defined, shall be present, whereupon any business may be transacted which might have been transacted at the meeting originally called had the same been held at the time so called. Section 6. VOTING. At all meetings of Shareholders, each Shareholder shall be entitled to one vote or fraction thereof for each Share standing in his name on the books of the Corporation on the date for the determination of Shareholders entitled to vote at such meeting. On any matter submitted to a vote of Shareholders, all Shares of the Corporation then issued and outstanding and entitled to vote shall be voted in the aggregate and not by class except that (1) when otherwise expressly required by the Maryland General Corporation Law or the 1940 Act, Shares shall be voted by individual class; and (2) only Shares of the respective Portfolios are entitled to vote on matters concerning only that Portfolio. Section 7. PROXIES. Any Shareholder entitled to vote at any meeting of Shareholders may vote either in person or by proxy, but no proxy which is dated more than eleven months before the meeting named therein shall be accepted. Every proxy shall be in writing subscribed by the Shareholder or his duly authorized attorney and dated, but need not be sealed, witnessed or acknowledged. All proxies shall be filed with and verified by the Secretary or an Assistant Secretary of the Corporation. Section 8. NOMINATIONS AND SHAREHOLDER BUSINESS. (a) Annual Meetings of Shareholders. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the Shareholders may be made at an annual meeting of Shareholders (i) pursuant to the Corporation's notice of meeting; (ii) by or at the direction of the Board of Directors; or (iii) by any Shareholder of the Corporation who was a Shareholder of record at the time of giving of notice provided for in this Section 8(a), who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 8(a). (2) For nominations or other business to be properly brought before an annual meeting by a Shareholder pursuant to clause (iii) of paragraph (a)(1) of this Section 8, the Shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a Shareholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such Shareholder's notice shall set forth (i) as to each person whom the Shareholder proposes to nominate for election or reelection as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to applicable federal securities laws, rules and regulations (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the Shareholder proposes to bring before the meeting, a brief description of the business desired to be brought -2- before the meeting, the reason for conducting such business at the meeting and any material interest in such business of such Shareholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the Shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such Shareholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the class and number of shares of stock of the Corporation which are owned beneficially and of record by such Shareholder and such beneficial owner. (b) Special Meetings of Shareholders. (1) Only such business shall be conducted at a special meeting of Shareholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a meeting of Shareholders at which directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any Shareholder of the Corporation who is a Shareholder of record at the time of giving of notice provided for in this Section 8(b), who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 8(b). (2) In the event the Corporation calls a special meeting of Shareholders for the purpose of electing one or more directors to the Board of Directors, any such Shareholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation's notice of meeting, if the Shareholder's notice required by paragraph (a) (2) of this Section 8 shall be delivered to the secretary at the principal executive offices of the Corporation not earlier than the 90th day prior to such special meeting and not later of the close of business on the later of the 60th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) General (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 8 shall be eligible to serve as Directors and only such business shall be conducted at a meeting of Shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 8. The presiding officer of the meeting shall have the power an duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 8 and, if any proposed nomination or business is not in compliance with this Section 8, to declare that such defective nomination or proposal be disregarded. (2) For purposes of this Section 8, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to applicable federal securities laws, rules or regulations. -3- (3) Notwithstanding the foregoing provisions of this Section 8, a Shareholder shall also comply with all applicable requirements of state law and of federal securities laws, rules and regulations with respect to the matters set forth in this Section 8. Nothing in this Section 8 shall be deemed to affect any rights of Shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to applicable federal securities laws, rules and regulations. Section 9. CONSENTS. Any action required or permitted to be taken at any meeting of Shareholders may be taken without a meeting if a written consent, setting forth such action, is signed by all the Shareholders entitled to vote on the subject matter thereof, and such consent is filed with the records of the Corporation. ARTICLE II BOARD OF DIRECTIONS Section 1. POWERS. The Board of Directors shall have control and management of the affairs, business and properties of the Corporation. They shall have and exercise in the name and on behalf of the Corporation all the rights and privileges legally exercisable by the Corporation except as otherwise provided by law, the Articles of Incorporation or these Bylaws. Section 2. NUMBER, QUALIFICATIONS, MANNER OF ELECTION AND TERM OF OFFICE. The number of Directors of the Corporation shall be fixed from time to time by a majority of the entire Board of Directors but shall be not less than three nor more than twenty. Subject to the foregoing, the Board of Directors may from time to time by a majority of the entire Board increase or decrease the number of Directors to such number as they deem expedient and fill the vacancies so created. The term of office of a Director shall not be affected by any decrease in the number of Directors made by the Board pursuant to the foregoing authorization. Directors need not be Shareholders. Until the first Annual Meeting of Shareholders or until successors are duly elected and qualified, the Board of Directors shall consist of the persons named as such in the Articles of Incorporation. The members of the Board of Directors shall be elected by the Shareholders at the Annual Meeting of Shareholders or at a Special Meeting of Shareholders called for that purpose. Each Director shall hold office until the Annual Meeting next held after his election or until his successor shall be elected and qualified. Section 3. PLACE OF MEETING. The Board of Directors may hold its meetings at such place or places within or without the State of Maryland as the Board may from time to time determine. -4- Section 4. ANNUAL MEETINGS. The Board of Directors shall meet for the election of officers and any other business as promptly as possible after the adjournment of the Annual Meeting of Shareholders or at such other time as the Board of Directors may designate. Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such intervals and on such dates as the Board may from time to time designate. Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at such times and at such places as may be designated in the call of such meeting. Special meetings shall be called by the Secretary or Assistant Secretary at the request of the President or any Director. Section 7. NOTICE. The Secretary or Assistant Secretary shall give notice of each Annual, Regular or Special Meeting of the Board of Directors to each member of the Board at least two days before the meeting by mail, facsimile, telegram or telephone to his last known address. It should not be necessary to state the purpose or business to be transacted in the notice of any Annual or Regular meeting. The notice of a Special Meeting shall state the purpose or purposes for which it is called. Personal attendance at any meeting by a Director other than to protest the validity of said meeting shall constitute a waiver of the foregoing requirement of notice. Section 8. CONDUCT OF MEETINGS AND BUSINESS. The Board of Directors may adopt such rules and regulations for the conduct of their meetings and the management of the affairs of the Corporation as they may deem proper and not inconsistent with applicable law, the Article of Incorporation of the Corporation or these Bylaws. Section 9. QUORUM. A majority of the total membership of the Board of Directors shall constitute a quorum at any meeting of the Board of Directors. The action of a majority of Directors present at any meeting at which a quorum is present shall be the action of the Board of Directors unless the concurrence of a greater proportion is required by applicable law, the Articles of Incorporation of the Corporation or these Bylaws. In the absence of a quorum at any meeting a majority of the Directors present may adjourn the meeting from day to day or for such longer periods as they may designate without notice other than by announcement at the meeting. Section 10. RESIGNATIONS. Any Director of the Corporation may resign at any time by mailing or delivering, or transmitting by radio, telegraph or cable, written notice to the President or to the Secretary of the Corporation. The resignation of any Director shall take effect at the time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 11. REMOVAL. At any meeting of Shareholders duly called for the purpose, any Director may by the vote of a majority of all of the Shares entitled to vote be removed from office. At the same meeting, the vacancy in the Board of Directors may be filled by -5- the election of a Director to serve for the remainder of the term and until the election and qualification of his successor. Section 12. VACANCIES. Except as otherwise provided by the 1940 Act or other applicable law, any vacancy occurring in the Board of Directors for any cause other than by reason of an increase in the number of Directors may be filled by a majority of the remaining members of the Board of Directors although such majority is less than a quorum, and any vacancy occurring by reason of an increase in the number of Directors may be filled by action of a majority of the entire Board of Directors. A Director elected by the Board to fill a vacancy shall be elected to hold office until the next Annual Meeting of Shareholders or until his successor is duly elected and qualified. Notwithstanding the foregoing, the Shareholders may, at any time during the term of such Director, elect to fill a vacancy or elect some other person to fill said vacancy and thereupon the election by the Board shall be superseded and the election by the Shareholders shall be deemed a filling of the vacancy and not a removal any may be made at any meeting called for such purpose. Section 13. COMPENSATION OF DIRECTORS. The Directors may receive a stated salary for their services as Directors, and by Resolution of the Board of Directors a fixed fee and expenses of attendance may be allowed for attendance at each Meeting. Nothing herein contained shall be construed to preclude any Director from serving the Corporation in any other capacity, as an officer, agent or otherwise, and receiving compensation therefor. Section 14. TELEPHONE PARTICIPATION. Unless otherwise restricted by law, the Articles of Incorporation of the Corporation or these Bylaws, any member of the Board of Directors may participate in any meeting of the Board by conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at the meeting. Section 15. CONSENTS. Any action required or permitted to be taken at any Annual, Regular or Special Meeting of the Board of Directors may be taken without a meeting if a written consent, setting forth such action, is signed by all members of the Board and such consent is filed with the minutes of proceedings of the Board. Section 16. POWER TO DECLARE DIVIDENDS. The Board of Directors is expressly authorized to determine in accordance with generally accepted accounting principles and practices what constitutes net profits, earnings, surplus or net assets in excess of capital, and to determine what accounting periods shall be used by the Corporation for any purpose, whether annual or any other period, including daily; to set apart out of any funds of the corporation such reserves for such purposes as it shall determined and to abolish the same; to declare and pay dividends and distributions on any series by means of a formula or other method of determination, at meetings held less frequently than the frequency of the effectiveness of such declarations; to establish payment dates for dividends or any other distributions on any basis, including dates occurring less frequently than the effectiveness of declarations thereof; and to provide for the payment of declared dividends on a date earlier or later than the specified payment date in the case of Shareholders redeeming their entire ownership of shares. -6- ARTICLE III EXECUTIVE AND OTHER COMMITTEES Section 1. APPOINTMENT AND TERM OF OFFICE. The Board of Directors, by resolution passed by a vote of at least a majority of the entire Board, may appoint an Executive Committee, which shall consist of two (2) or more Directors. Section 2. VACANCIES. Vacancies occurring in the Executive Committee from any cause shall be filled by the Board of Directors at any Meeting thereof by a vote of the majority of the entire Board. Section 3. REPORTS TO BOARD. All actions by the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action. Section 4. PROCEDURES. The Executive Committee shall fix its own rules of procedure not inconsistent with these Bylaws or with any directions of the Board of Directors. It shall meet at such times and places and upon such notice as shall be provided by such rules or by resolution of the Board of Directors. The presence of a majority shall constitute a quorum for the transaction of business, and the vote of a majority of the members of the Committee present at which a quorum is present shall be necessary for the taking of any action. Section 5. POWERS OF EXECUTIVE COMMITTEE. During the intervals between the meetings of the Board of Directors, the Executive Committee, except as limited by the Bylaws of the corporation or by specific directions of the Board of Directors, shall possess and may exercise all the powers of the Board of Directors in the management and direction of the business and conduct of the affairs of the Corporation in such manner as the Executive Committee shall deem to be in the best interests of the Corporation, and shall have power to authorize the Seal of the Corporation to be affixed to all instruments and documents requiring same. Notwithstanding the foregoing, the Executive Committee shall not have the power to elect Directors, increase or decrease the number of Directors, elect or remove any officer, declare dividends, issue shares or [recommend to Shareholders] by action requiring Shareholder approval. Section 6. OTHER COMMITTEES. From time to time the Board of Directors may appoint any other Committee or Committees for any purpose or purposes to the extent lawful, which shall have such powers as shall be specified in the resolution of appointment. Section 7. COMPENSATION. The members of any duly appointed Committee shall receive such compensation and/or fees as may be fixed from time to time by the Board of Directors. -7- Section 8. TELEPHONE PARTICIPATION. Unless otherwise restricted by law, the Articles of Incorporation or these Bylaws, any member of any Committee of the Board may participate in any meeting of such Committee by conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at the meeting. Section 9. CONSENTS. Any action required or permitted to be taken at any meeting of the Executive Committee or any other duly appointed Committee may be taken without a meeting if a written consent, setting forth such action, is signed by all members of such Committee and such consent is filed with the minutes of the proceedings of such Committee. ARTICLE IV OFFICERS Section 1. GENERAL PROVISIONS. The officers of the Corporation shall be the President, one or more Vice Presidents, a Treasurer and a Secretary. The Board of Directors shall elect or appoint such other officers or agents as the business of the Corporation may require, including one or more Assistant Vice Presidents, one or more Assistant Secretaries and one or more Assistant Treasurers. The same person may hold any two offices except those of President and Vice President. Section 2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers shall be elected annually by the Board of Directors at its Annual Meeting following the Annual Meeting of Shareholders, if an Annual Meeting of Shareholders is held. Each officer shall hold office until the Annual Meeting in the next year and until the election and qualification of his successor. Any vacancy in any of the offices may be filled for the unexpired portion of the term by the Board of Directors at any Regular or Special Meeting of the Board. The Board of Directors may elect or appoint additional officers or agents at any Regular or Special Meeting of the Board. Section 3. REMOVAL. Any officer elected by the Board of Directors may be removed with or without cause at any time upon a vote of the majority of the entire Board of Directors. Any other employee of the Corporation may be removed or dismissed at any time by the President. Section 4. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors. Any such resignation shall take effect at the date of receipt of each notice or at any later time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of -8- the term in the manner prescribed in these Bylaws for regular election or appointment to such office. Section 6. PRESIDENT. The President shall be the chief executive officer of the Corporation. The President shall, unless other provisions are made therefor by the Board or Executive Committee, employ and define the duties of all employees of the corporation; have the power to discharge any such employees; exercise general supervision over the affairs of the corporation; and perform such other duties as may be assigned from time to time by the Board of Directors. In the absence of the President, an officer or Director appointed by the President shall preside at all meetings of Shareholders. Section 7. VICE PRESIDENT. The Vice President (or if more than one, the Senior Vice President) in the absence of the President shall perform all duties and may exercise any of the powers of the President subject to the control of the Board. Each Vice President shall perform such other duties as may be assigned from time to time by the Board of Directors, the Executive Committee, or the President. Section 8. SECRETARY. The Secretary shall (i) keep or cause to be kept in books provided for the purpose the Minutes of the Meetings of the Shareholders and of the Board of Directors; (ii) see that all Notices are duly given in accordance with the provisions of these Bylaws and as required by law; (iii) be custodian of the records and of the Seal of the Corporation and see that the Seal is affixed to all documents which have been duly authorized to be executed on behalf of the Corporation under its seal; (iv) keep directly or through a transfer agent a register of the post office address of each Shareholder and make all proper changes in such register, retaining and filing his authority for such entries; (v) see that the books, reports, statements, certificates and all other documents and records required by law are properly kept and filed; and (vi) in general perform all duties incident to the office of secretary and such other duties as may, from time to time, be assigned by the Board of Directors, the Executive Committee, or the President. Section 9. TREASURER. The Treasurer shall have supervision of the custody of the funds and securities of the corporation, subject to the Articles of Incorporation of the Corporation and applicable law. The Treasurer shall submit to the Annual Meeting of Shareholders a statement of the financial condition of the Corporation and whenever required by the Board of Directors shall make and render a statement of the accounts of the Corporation and such other statements as may be required. The Treasurer shall cause to be kept in books of the Corporation a full and accurate account of all moneys received and paid out for the account of the Corporation and perform such other duties as may be from time to time be assigned by the Board of Directors, the Executive Committee, or the President. Section 10. ASSISTANT VICE PRESIDENT. The Assistant Vice President or Vice Presidents of the Corporation shall have such authority and perform such duties as may be assigned to them by the Board of Directors, the Executive Committee, or the President of the Corporation. -9- Section 11. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Assistant Secretary or Secretaries and the Assistant Treasurer or Treasurers of the Corporation shall perform the duties of the Secretary and of the Treasurer, respectively, in the absence of those officers and shall have such further powers and perform such other duties as may be assigned to them, respectively, by the Board of Directors, the Executive Committee or the President. Section 12. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors. No officer shall be prevented from receiving such salary by reason of the fact that he is also a Director of the Corporation. ARTICLE V SHARES AND THEIR TRANSFER Section 1. REGISTER OF SHARES. A register of shares shall be kept at the principal office of the Corporation or of any transfer agent duly appointed by the Board of Directors and shall contain the names and addresses of all the Shareholders, the number of shares held by them and a record of all transfers thereof. Fractional shares may be issued. Share certificates will not be issued. Section 2. TRANSFER OF SHARES. Shares shall be transferable on the books of the Corporation by request of the holder thereof in person or by duly authorized attorney. Section 3. CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE. The Board of Directors may fix in advance a date as the record date for the purpose of determining Shareholders entitled to notice of or to vote at any Meeting of Shareholders or Shareholders entitled to receive payment of any dividend. Such date shall in any case not be more than 60 days and, in case of a Meeting of Shareholders, not less than 10 days prior to the date on which the particular action is to be taken. In lieu of fixing a record date, the Board of Directors may provide that the share transfer books of the Corporation shall be closed for a stated period not to exceed in any case 20 days. If the share transfer books are closed for the purpose of determining Shareholders entitled to notice of or to vote at a Meeting of Shareholders, such books shall be closed for at least 10 days immediately preceding such meeting. -10- Section 4. TRANSFER AGENT; REGULATIONS. The Board of Directors shall have power and authority to make all such rules and regulations as they may deem expedient concerning the issuance and transfer of shares and may appoint a Transfer Agent for that purpose. ARTICLE VI AGREEMENTS, CHECKS, DRAFTS, ENDORSEMENTS, ETC. Section 1. AGREEMENTS, ETC. The Board of Directors or the Executive Committee may authorize any officer or officers or agent or agents of the Corporation to enter into any Agreement or execute and deliver any instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances. Unless so authorized by the Board of Directors or by the Executive Committee or these Bylaws, no officer, agent or employee shall have any power or authority to bind the Corporation by any Agreement or engagement, to pledge its credit, or to render it liable pecuniarily for any purpose or to any amount. Section 2. CHECKS, DRAFTS, ETC. All checks, drafts, or orders for the payment of money, noted and other evidences of indebtedness shall be signed by such officer or officers, employee or employees, or agent or agents as shall be from time to time designated by the Board of Directors or the Executive Committee, or as may be specified in or pursuant to the agreement between the Corporation and the bank or trust company appointed as custodian, pursuant to the provisions of the Articles of Incorporation of the Corporation. Section 3. ENDORSEMENTS, ASSIGNMENTS AND TRANSFER OF SECURITIES. All endorsements, assignments, stock powers or other instruments of transfer of securities standing in the name of the Corporation or its nominee, or directions for the transfer of securities belonging to the Corporation, shall be made by such officer or officers, employee or employees, or agent or agents as may be authorized by the Board of Directors or the Executive Committee. Section 4. EVIDENCE OF AUTHORITY. Anyone dealing with the Corporation shall be fully justified in relying on a copy of a resolution of the Board of Directors or of any Committee thereof empowered to act in the premises which is certified as true by the Secretary or an Assistant Secretary under the Seal of the Corporation. Section 5. DESIGNATION OF A CUSTODIAN. The Corporation shall place and at all times maintain in the custody of a Custodian all funds, securities and similar investments owned by the Corporation, with the exception of securities loaned under a properly authorized securities loan agreement. The Custodian shall be a bank having not less than $5,000,000 aggregate capital, surplus and undivided profits and shall be appointed from time to time by the Board of Directors, which shall fix its remuneration. -11- Section 6. ACTION UPON TERMINATION OF A CUSTODIAN AGREEMENT. Upon termination of a Custodian Agreement or inability of the Custodian to continue to serve, the Board of Directors shall promptly appoint a successor custodian. Section 7. WHEN TO DETERMINE NET ASSET VALUE. The net asset value per Share of the outstanding Shares shall be determined at such times as the Board of Directors shall prescribe, provided that such net asset value shall be determined at least weekly. ARTICLE VII MISCELLANEOUS Section 1. SEAL. The Seal of the Corporation shall be a disk inscribed with the words "PORTFOLIO PARTNERS, INC." Section 2. WAIVER OF NOTICE. Whenever under the provisions of these Bylaws or of any law, the Shareholders or Directors or members of the Executive Committee or other Committee are authorized to hold any meeting after notice or after the lapse of any prescribed period of time, such meeting may be held without notice or without such lapse of time by the written waiver of notice signed by every person entitled to notice or if every person entitled to notice shall be present at such meeting. Section 3. BOOKS AND RECORDS. The books and records of the Corporation, including the stock ledger or ledgers, may be kept in or outside the State of Maryland at such office or agency of the Corporation as may from time to time be determined by the Board of Directors. ARTICLE VIII AMENDMENTS The Board of Directors shall have the exclusive power to alter, amend or repeal any Bylaws of the Corporation and to make new Bylaws. -12- EX-99.B5(A) 4 INVESTMENT SUBADVISORY AGREEMENT INVESTMENT ADVISORY AGREEMENT THIS AGREEMENT is made by and between AETNA LIFE INSURANCE AND ANNUITY COMPANY, a Connecticut corporation (the "Adviser") and PORTFOLIO PARTNERS, INC., a Maryland corporation (the "Company"), on behalf of each of its Series, MFS Emerging Equities Portfolio, MFS Research Growth Portfolio, MFS Value Equity Portfolio, and Scudder International Growth Portfolio, T. Rowe Price Growth Equity Portfolio (the "Series"), as of the date set forth below the parties' signatures. W I T N E S S E T H WHEREAS, the Company is registered with the Securities and Exchange Commission (the "Commission") as an open-end, diversified, management investment company under the Investment Company Act of 1940 (the "1940 Act"); and WHEREAS, the Company has established the Series; and WHEREAS, the Adviser is registered with the Commission as an investment adviser under the Investment Advisers Act of 1940 (the "Advisers Act"), and is in the business of acting as an investment adviser; and WHEREAS, the Company, on behalf of the Series, and the Adviser desire to enter into an agreement to provide for investment advisory and management services for the Company on the terms and conditions hereinafter set forth; NOW THEREFORE, the parties agree as follows: I. APPOINTMENT AND OBLIGATIONS OF THE ADVISER Subject to the terms and conditions of this Agreement and the policies and control of the Company's Board of Directors (the "Board"), the Company, on behalf of the Series, hereby appoints the Adviser to serve as its investment adviser, to provide the investment advisory services set forth below in Section II. The Adviser agrees that, except as required to carry out its duties under this Agreement or otherwise expressly authorized, it is acting as an independent contractor and not as an agent of the Company and has no authority to act for or represent the Company in any way. II. DUTIES OF THE ADVISER In carrying out the terms of this Agreement, the Adviser shall do the following: 1. supervise all aspects of the operations of the Company; 2. select the securities to be purchased, sold or exchanged by the Series or otherwise represented in the Series' investment portfolio, place trades for all such securities and regularly report thereon to the Board; 3. formulate and implement continuing programs for the purchase and sale of securities and regularly report thereon to the Board; 4. obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally, the Series, securities held by or under consideration for the Series, or the issuers of those securities; 5. provide economic research and securities analyses as the Adviser considers necessary or advisable in connection with the Adviser's performance of its duties hereunder; 6. obtain the services of, contract with, and provide instructions to custodians and/or subcustodians of the Series' securities, transfer agents, dividend paying agents, pricing services and other service providers as are necessary to carry out the terms of this Agreement; 7. prepare financial and performance reports, calculate and report daily net asset values, and prepare any other financial data or reports, as the Adviser from time to time, deems necessary or as are requested by the Board; and 8. take any other actions which appear to the Adviser and the Board necessary to carry into effect the purposes of this Agreement. III. REPRESENTATIONS AND WARRANTIES A. Representations and Warranties of the Adviser Adviser hereby represents and warrants to the Company as follows: 1. Due Incorporation and Organization. The Adviser is duly organized and is in good standing under the laws of the State of Connecticut and is fully authorized to enter into this Agreement and carry out its duties and obligations hereunder. 2. Registration. The Adviser is registered as an investment adviser with the Commission under the Advisers Act. The Adviser shall maintain such registration in effect at all times during the term of this Agreement. 3. Best Efforts. The Adviser at all times shall provide its best judgment and effort to the Series in carrying out its obligations hereunder. B. Representations and Warranties of the Company The Company, on behalf of the Series, hereby represents and warrants to the Adviser as follows: 1. Due Incorporation and Organization. The Company has been duly incorporated under the laws of the State of Maryland and it is authorized to enter into this Agreement and carry out its obligations hereunder. 2 2. Registration. The Company is registered as an investment company with the Commission under the 1940 Act and shares of the Series are registered or qualified for offer and sale to the public under the Securities Act of 1933 (the "1933 Act") and all applicable state securities laws. Such registrations or qualifications will be kept in effect during the term of this Agreement. IV. DELEGATION OF RESPONSIBILITIES A. Appointment of Subadviser(s) Subject to the approval of the Board and the shareholders of the Series, the Adviser may enter into a Subadvisory Agreement to engage one or more subadvisers (the "Subadviser") to the Adviser with respect to the Series. B. Duties of Subadviser Under a Subadvisory Agreement, the Subadviser may be delegated some or all of the following duties of the Adviser: 1. determine which securities from which issuers shall be purchased, sold or exchanged by the Series or otherwise represented in the Series' investment portfolio, place trades for all such securities, select brokers or dealers for the execution thereof, and regularly report thereon to the Board; 2. formulate and implement continuing programs for the purchase and sale of the securities of such issuers and regularly report thereon to the Board; 3. obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally, the Series, securities held by or under consideration for the Series, or the issuers of those securities; 4. provide economic research and securities analyses as the Adviser considers necessary or advisable in connection with the Adviser's performance of its duties hereunder; 5. give instructions to the custodian and/or sub-custodian of the Series appointed by the Board, as to deliveries of securities, transfers of currencies and payments of cash for the Series as required to carry out the investment activities of the Series, in relation to the matters contemplated by this Agreement; and 6. provide such financial support, administrative services and other duties as the Adviser deems necessary and appropriate. C. Duties of the Adviser 3 In the event the Adviser delegates certain responsibilities hereunder to a Subadviser, the Adviser shall, among other things: 1. monitor the investment program maintained by the Subadviser for the Series and the Subadviser's compliance program to ensure that the Series' assets are invested in compliance with the Subadvisory Agreement and the Series' investment objectives and policies as adopted by the Board and described in the most current effective amendment of the registration statement, as filed with the Commission under the 1933 Act and the 1940 Act ("Registration Statement"); 2. review all data and financial reports prepared by the Subadviser to assure that they are in compliance with applicable requirements and meet the provisions of applicable laws and regulations; 3. establish and maintain regular communications with the Subadviser to share information it obtains with the Subadviser concerning the effect of developments and data on the investment program maintained by the Subadviser; and 4. oversee all matters relating to the offer and sale of the Series' shares, the Company's corporate governance, reports to the Board, contracts with all third parties on behalf of the Company for services to the Series, reports to regulatory authorities and compliance with all applicable rules and regulations affecting the Company's operations. V. BROKER-DEALER RELATIONSHIPS A. Portfolio Trades The Adviser, at its own expense, shall place all orders for the purchase and sale of portfolio securities with brokers or dealers selected by the Adviser, which may include brokers or dealers affiliated with the Adviser. The Adviser shall use its best efforts to seek to execute portfolio transactions at prices that are advantageous to the Series and at commission rates that are reasonable in relation to the benefits received. B. Selection of Broker-Dealers In selecting broker-dealers qualified to execute a particular transaction, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Series and/or the other accounts over which the Adviser or its affiliates exercise investment discretion. The Adviser may also select brokers or dealers to effect transactions for the Series who provide payment for expenses of the Series. The Adviser is authorized to pay a broker or dealer who provides such brokerage and research services or expenses, and that have provided assistance in the distribution of shares of the Series to the extent permitted by law, a commission for executing a portfolio transaction for the Series that is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser determines in good faith that such amount of commission 4 is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer and is paid in compliance with Section 28(e) or other rules and regulations of the Commission. This determination may be viewed in terms of either that particular transaction or the overall responsibilities that the Adviser and its affiliates have with respect to accounts over which they exercise investment discretion. The Board shall periodically review the commissions paid by the Series to determine if the commissions paid over representative periods of time were reasonable in relation to the benefits received. Any delegation to a Subadviser (as authorized in Section IV above) of the selection of broker-dealers to execute portfolio transactions will include instructions consistent with the parameters outlined in this Section. VI. CONTROL BY THE BOARD Any investment program undertaken by the Adviser pursuant to this Agreement, as well as any other activities undertaken by the Adviser on behalf of the Series pursuant thereto, shall at all times be subject to any directives of the Board. VII. COMPLIANCE WITH APPLICABLE REQUIREMENTS In carrying out its obligations under this Agreement, the Adviser shall at all times conform to: 1. all applicable provisions of the 1940 Act; 2. the provisions of the current Registration Statement of the Company; 3. the provisions of the Fund's Articles of Incorporation, as amended; 4. the provisions of the Bylaws of the Fund, as amended; and 5. any other applicable provisions of state or federal law. VIII. COMPENSATION For the services to be rendered, the facilities furnished and the expenses assumed by the Adviser, the Company, on behalf of the Series, shall pay to the Adviser an annual fee, payable monthly, based upon the following average daily net assets of the Series: Rate Assets ---- ------ Except as hereinafter set forth, compensation under this Agreement shall be calculated and accrued daily at the rate of 1/365 of the annual advisory fee applied to the daily net assets of the Series. If this 5 Agreement becomes effective subsequent to the first day of a month or terminates before the last day of a month, compensation for that part of the month this Agreement is in effect shall be prorated in a manner consistent with the calculation of the fees set forth above. Subject to the provisions of Section X hereof, payment of the Adviser's compensation for the preceding month shall be made as promptly as possible. For so long as a Subadvisory Agreement is in effect, the Company acknowledges on behalf of the Series that the Adviser will pay to the Subadviser, as compensation for acting as Subadviser to the Series, the fees specified in the Subadvisory Agreement. IX. EXPENSES The expenses in connection with the management of the Company shall be allocated between the Series and the Adviser as follows: A. Expenses of the Adviser The Adviser shall pay: 1. the salaries, employment benefits and other related costs and expenses of those of its personnel engaged in providing investment advice to the Series, including without limitation, office space, office equipment, telephone and postage costs; 2. all fees and expenses of all directors, officers and employees, if any, of the Company who are employees of the Adviser or an affiliated entity, including any salaries and employment benefits payable to those persons; B. Expenses of the Series The Series shall pay: 1. investment advisory fees pursuant to this Agreement; 2. brokers' commissions, issue and transfer taxes or other transaction fees payable in connection with any transactions in the securities in the Series' investment portfolio or other investment transactions incurred in managing the Series' assets, including portions of commissions that may be paid to reflect brokerage research services provided to the Adviser; 3. fees and expenses of the Company's independent accountants and legal counsel and the independent Directors' legal counsel; 4. fees and expenses of any administrator, transfer agent, custodian, dividend, accounting, pricing or disbursing agent of the Series; 5. interest and taxes; 6 6. fees and expenses of any membership in the Investment Company Institute or any similar organization in which the Board deems it advisable for the Company to maintain membership; 7. insurance premiums on property or personnel (including officers and directors) of the Company which benefit the Series; 8. all fees and expenses of the Company's directors, who are not "interested persons" (as defined in the 1940 Act) of the Company or the Adviser; 9. expenses of preparing, printing and distributing proxies, proxy statements, prospectuses and reports to shareholders of the Series, except for those expenses paid by third parties in connection with the distribution of Series shares and all costs and expenses of shareholders' meetings; 10. all expenses incident to the payment of any dividend, distribution, withdrawal or redemption, whether in shares of the Series or in cash; 11. costs and expenses (other than those detailed in paragraph 9 above) of promoting the sale of shares issued by the Series, provided that nothing in this Agreement shall prevent the charging of such costs to third parties involved in the distribution of shares issued by the Series; 12. fees payable by the Series to the Commission or to any state securities regulator or other regulatory authority for the registration of shares of the Series in any state or territory of the United States or of the District of Columbia; 13. all costs attributable to investor services, administering shareholder accounts and handling shareholder relations (including, without limitation, telephone and personnel expenses), which costs may also be charged to third parties by the Adviser; and 14. any other ordinary, routine expenses incurred in the management of the Series' assets, and any nonrecurring or extraordinary expenses, including organizational expenses, litigation affecting the Series and any indemnification by the Company of its officers, directors or agents. X. NONEXCLUSIVITY The services of the Adviser to the Company are not to be deemed to be exclusive, and the Adviser shall be free to render investment advisory or other services to others (including other investment companies) and to engage in other activities, so long as its services under this Agreement are not impaired thereby. It is understood and agreed that officers and directors of the Adviser may serve as officers or directors of the Company, and that officers or directors of the Company may serve as officers or directors of the Adviser to the extent permitted by law; and that the officers and directors of the Adviser are not prohibited from engaging in any other business activity or from rendering services to any other person, 7 or from serving as partners, officers, directors or trustees of any other firm or trust, including other investment companies. XI. TERM This Agreement shall become effective at the close of business on , 1997, and shall remain in force and effect through , 1998, unless earlier terminated under the provisions of Article XIII. XII. RENEWAL Following the expiration of its initial term, the Agreement shall continue in force and effect from year to year, provided that such continuance is specifically approved at least annually: 1. a. by the Board, or b. by the vote of a majority of the Series' outstanding voting securities (as defined in Section 2(a)(42) of the 1940 Act), and 2. by the affirmative vote of a majority of the directors who are not parties to this Agreement or interested persons of a party to this Agreement (other than as a director of the Company), by votes cast in person at a meeting specifically called for such purpose. XIII. TERMINATION This Agreement may be terminated at any time, without the payment of any penalty, by vote of the Board or by vote of a majority of the Series' outstanding voting securities (as defined in Section 2(a)(42) of the 1940 Act), or by the Adviser, on sixty (60) days' written notice to the other party. The notice provided for herein may be waived by the party required to be notified. This Agreement shall automatically terminate in the event of its "assignment," as that term is defined in Section 2(a)(4) of the 1940 Act. XIV. LIABILITY The Adviser shall be liable to the Company and shall indemnify the Company for any losses incurred by the Company, whether in the purchase, holding or sale of any security or otherwise, to the extent that such losses resulted from an act or omission on the part of the Adviser or its officers, directors or employees, that is found to involve willful misfeasance, bad faith or negligence, or reckless disregard by the Adviser of its duties under this Agreement, in connection with the services rendered by the Adviser hereunder. XV. NOTICES Any notices under this Agreement shall be in writing, addressed and delivered, mailed postage paid, or sent by other delivery service, or by facsimile transmission to each party at such address as each party may designate for the receipt of notice. Until further notice, such addresses shall be: 8 if to the Company, the Series or the Adviser: Martin T. Conroy 151 Farmington Avenue, TS31 Hartford, Connecticut 06156 Fax number: 860/273-9614 XVI. QUESTIONS OF INTERPRETATION This Agreement shall be governed by the laws of the State of Connecticut. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the 1940 Act shall be resolved by reference to such term or provision of the 1940 Act and to interpretations thereof, if any, by the United States Courts or, in the absence of any controlling decision of any such court, by rules, releases or orders of the Commission issued pursuant to the 1940 Act. In addition, where the effect of a requirement of the 1940 Act reflected in the provisions of this Agreement is revised by rule, release or order of the Commission, such provisions shall be deemed to incorporate the effect of such rule, release or order. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on ___________, 1997. Aetna Life Insurance and Annuity Company By: ---------------------------------- Attest: Name: ------------------------------ ---------------------------------- Assistant Corporate Secretary Title: ---------------------------------- Portfolio Partners, Inc. on behalf of its series, MFS Emerging Equities Portfolio, MFS Research Growth Portfolio, MFS Value Equity Portfolio, Scudder International Growth Portfolio T. Rowe Price Growth Equity Portfolio By: Attest: -------------------------- ------------------------------ Name: Secretary -------------------------- Title: -------------------------- 9 EX-99.B5(B) 5 INVESTMENT SUBADVISORY AGREEMENT INVESTMENT SUBADVISORY AGREEMENT Between Aetna Life Insurance and Annuity Company and Massachusetts Financial Services Company INVESTMENT SUBADVISORY AGREEMENT, made as of the ______ day of August, 1997, between Aetna Life Insurance and Annuity Company (the "Adviser"), an insurance corporation organized and existing under the laws of the State of Connecticut, and Massachusetts Financial Services Company ("Subadviser"), a business trust organized and existing under the laws of the State of Delaware. WHEREAS, the Adviser has entered into an Investment Advisory Agreement dated as of the _____ day of ________, 1997 ("Advisory Agreement") with Portfolio Partners, Inc. ("Company"), which is engaged in business as an open-end management investment company registered under the Investment Company Act of 1940 ("1940 Act"); and WHEREAS, the Company is and will continue to be a series fund having two or more investment portfolios, each with its own assets, investment objectives, policies and restrictions; and WHEREAS, the Company shareholders are and will be separate accounts maintained by insurance companies for variable life insurance policies and variable annuity contracts (the "Policies") under which income, gains, and losses, whether or not realized, from assets allocated to such accounts are, in accordance with the Policies, credited to or charged against such accounts without regard to other income, gains, or losses of such insurance companies; and WHEREAS, the Subadviser is engaged principally in the business of rendering investment advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940 ("Advisers Act"); and WHEREAS, the Board of Directors and the Adviser desire to retain the Subadviser as subadviser for MFS Emerging Equities Portfolio, MFS Research Growth Portfolio and MFS Value Equity Portfolio, portfolios of the Company (collectively, the "Portfolios"), to furnish certain investment advisory services to the Adviser and the Company and the Subadviser is willing to furnish such services; NOW, THEREFORE, in consideration of the premises and mutual promises herein set forth, the parties hereto agree as follows: 1. Appointment. Adviser hereby appoints the Subadviser as its investment Subadviser with respect to the Portfolios for the period and on the terms set forth in this Agreement. The Subadviser accepts such appointment and agrees to render the services herein set forth, for the compensation herein provided. 2. Duties of the Subadviser A. Investment Subadvisory Services. Subject to the supervision of the Company's Board of Directors ("Board") and the Adviser, the Subadviser shall act as the investment Subadviser and shall supervise and direct the investments of each Portfolio in accordance with its investment objective, policies, and restrictions as provided in the Company's Prospectus and Statement of Additional Information, as currently in effect and as amended or supplemented from time to time (hereinafter referred to as the "Prospectus"), and such other limitations as the Company may impose by notice in writing to the Subadviser. The Subadviser shall obtain and evaluate such information relating to the economy, industries, businesses, securities markets, and individual securities as it may deem necessary or useful in the discharge of its obligations hereunder and shall formulate and implement a continuing program for the management of the assets and resources of each Portfolio in a manner consistent with each Portfolio's investment objective, policies, and restrictions, and in compliance with the requirements applicable to registered investment companies under applicable laws and those requirements applicable to both regulated investment companies and segregated asset accounts under Subchapters M and L of the Internal Revenue Code of 1986, as amended ("Code"). To implement its duties, the Subadviser is hereby authorized to: (i) buy, sell, exchange, convert, lend, and otherwise trade in any stocks, bonds, and other securities or assets on behalf of each Portfolio; and (ii) place orders and negotiate the commissions (if any) for the execution of transactions in securities or other assets with or through such brokers, dealers, underwriters or issuers as the Subadviser may select. B. Subadviser Undertakings. In all matters relating to the performance of this Agreement, the Subadviser shall act in conformity with the Company's Articles of Incorporation, By-Laws, and current Prospectus and with the written instructions and directions of the Board and the Adviser. The Subadviser hereby agrees to: (i) regularly (but no less frequently than quarterly) report to the Board and the Adviser (in such form as the Adviser and Subadviser mutually agree) with respect to the implementation of the investment program and, in addition, provide such statistical information and special reports concerning the Portfolios and/or important developments materially affecting the investments held, or contemplated to be purchased, by the Portfolios, as may reasonably be requested by the Board or the Adviser and agreed to by the Subadviser, including attendance at Board 2 meetings, as reasonably requested, to present such information and reports to the Board; (ii) consult with the Company's pricing agent regarding the valuation of securities that are not registered for public sale, not traded on any securities markets, or otherwise may be deemed illiquid for purposes of the 1940 Act and for which market quotations are not readily available; (iii) provide any and all information, records and supporting documentation about accounts the Subadviser manages that have investment objectives, policies, and strategies substantially similar to those employed by the Subadviser in managing the Portfolios which may be reasonably necessary, under applicable laws, to allow the Company or its agent to present historical performance information concerning the Subadviser's similarly managed accounts, for inclusion in the Company's Prospectus and any other reports and materials prepared by the Company or its agent, in accordance with regulatory requirements; (iv) establish appropriate personal contacts with the Adviser and the Company's Administrator in order to provide the Adviser and Administrator with information as reasonably requested by the Adviser or Administrator; and (v) execute account documentation, agreements, contracts and other documents as the Adviser shall be requested by brokers, dealers, counterparties and other persons to execute in connection with its management of the assets of the Portfolios, provided that the Subadviser receives the express agreement and consent of the Adviser and/or the Board to execute such documentation, agreements, contracts and other documents. In such respect, and only for this limited purpose, the Subadviser shall act as the Adviser and/or the Portfolios' agent and attorney-in-fact. C. The Subadviser, at its expense, will furnish: (i) all necessary investment and management facilities and investment personnel, including salaries, expenses and fees of any personnel required for it to faithfully perform its duties under this Agreement; and (ii) administrative facilities, including bookkeeping, clerical personnel and equipment required for it to faithfully and fully perform its duties and obligations under this Agreement. D. The Subadviser will select brokers and dealers to effect all Portfolio transactions subject to the conditions set forth herein. The Subadviser will place all necessary orders with brokers, dealers, or issuers, and will negotiate brokerage commissions if applicable. The Subadviser is directed at all times to seek to execute brokerage transactions for the Portfolios in accordance with such policies or practices as may be established by the Board and the Adviser and described in the current Prospectus as amended from time to time. In placing orders for the purchase or sale of investments for the Portfolios, in the name of the Portfolios or their nominees, the Subadviser shall use its best efforts to obtain for the Portfolios the most favorable price and best execution available, considering all of the 3 circumstances, and shall maintain records adequate to demonstrate compliance with this requirement. Subject to the appropriate policies and procedures approved by the Adviser and the Board, the Subadviser may, to the extent authorized by Section 28(e) of the Securities Exchange Act of 1934, cause the Portfolio to pay a broker or dealer that provides brokerage or research services to the Subadviser, an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Subadviser determines, in good faith, that such amount of commission is reasonable in relationship to the value of such brokerage or research services provided viewed in terms of that particular transaction or the Subadviser's overall responsibilities to the Portfolio or its other advisory clients. To the extent authorized by said Section 28(e) and the Adviser and the Board, the Subadviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of such action. In addition, subject to seeking the best execution available, the Subadviser may also consider sales of shares of the Portfolio as a factor in the selection of brokers and dealers. E. On occasions when the Subadviser deems the purchase or sale of a security to be in the best interest of a Portfolio as well as other clients of the Subadviser, the Subadviser to the extent permitted by applicable laws and regulations, and subject to the Adviser approval of the Subadviser procedures, may, but shall be under no obligation to, aggregate the orders for securities to be purchased or sold to attempt to obtain a more favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Subadviser in the manner the Subadviser considers to be the most equitable and consistent with its fiduciary obligations to the Portfolios and to its other clients. F. With respect to the provision of services by the Subadviser hereunder, the Subadviser will maintain all accounts, books and records with respect to each Portfolio as are required of an investment adviser of a registered investment company pursuant to the 1940 Act and the Advisers Act and the rules under both statutes. G. The Subadviser and the Adviser acknowledge that the Subadviser is not the compliance agent for the Portfolios, and does not have access to all of the Company's books and records necessary to perform certain compliance testing. However, to the extent that the Subadviser has agreed to perform the services specified in this Agreement, the Subadviser shall perform compliance testing with respect to the Portfolios based upon information in its possession and upon information and written instructions received from the Adviser or the Administrator and shall not be held in breach of this Agreement so long as it performs in accordance with such information and instructions. The Adviser or Administrator shall promptly provide the Subadviser with copies of the Company's current Prospectus and any written policies or procedures adopted by the Board applicable to the Portfolios and any amendments or revisions thereto. 4 H. Unless the Adviser gives the Subadviser written instructions to the contrary, the Subadviser shall use its good faith judgment in a manner which it reasonably believes best serves the interests of a Portfolio's shareholders to vote or abstain from voting all proxies solicited by or with respect to the issuers of securities in which assets of the Portfolio may be invested. The Adviser shall furnish the Subadviser with any further documents, materials or information that the Subadviser may reasonably request to enable it to perform its duties pursuant to this Agreement. I. Subadviser hereby authorizes Adviser to use Subadviser's name and any applicable trademarks in the Company's Prospectus, as well as in any advertisement or sales literature used by the Adviser or its agents to promote the Company and/or to provide information to shareholders of the Portfolios. During the term of this Agreement, the Adviser shall furnish to the Subadviser at its principal office all prospectuses, proxy statements, reports to shareholders, sales literature, or other material prepared for distribution to shareholders of the Company or the public, which refer to the Subadviser or its clients in any way, prior to the use thereof, and the Adviser shall not use any such materials if the Subadviser reasonably objects within three business days (or such other time as may be mutually agreed) after receipt thereof. The Adviser shall ensure that materials prepared by employees or agents of the Adviser or its affiliates that refer to the Subadviser or its clients in any way are consistent with those materials previously approved by the Subadviser. 3. Compensation of Subadviser. The Adviser will pay the Subadviser, with respect to each Portfolio, the compensation specified in Appendix A to this Agreement. Payments shall be made to the Subadviser on the second day of each month; however, this advisory fee will be calculated based on the daily average value of the aggregate assets of all Portfolios subject to the Subadviser's management and accrued on a daily basis. Compensation for any partial period shall be pro-rated based on the length of the period. 4. Liability of Subadviser. Neither the Subadviser nor any of its directors, officers, employees or agents shall be liable to the Adviser or the Company for any loss or expense suffered by the Adviser or the Company resulting from its acts or omissions as Subadviser to the Portfolios, except for losses or expenses to the Adviser or the Company resulting from willful misconduct, bad faith, or gross negligence in the performance of, or from reckless disregard of, the Subadviser's duties under this Agreement. Neither the Subadviser nor any of its agents shall be liable to the Adviser or the Company for any loss or expense suffered as a consequence of any action or inaction of other service providers to the Company in failing to observe the instructions of the Adviser, provided such action or inaction of such other service providers to the Company is not a result of the willful misconduct, bad faith or gross negligence in the performance of, or from reckless disregard of, the duties of the Subadviser under this Agreement. 5. Non-Exclusivity. The services of the Subadviser to the Portfolios and the Company are not to be deemed to be exclusive, and the Subadviser shall be free to render investment advisory or other services to others (including other investment companies) and to engage in other activities. 5 It is understood and agreed that the directors, officers, and employees of the Subadviser are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers, directors, trustees, or employees of any other firm or corporation, including other investment companies. 6. Adviser Oversight and Cooperation with Regulators. The Adviser and Subadviser shall cooperate with each other in providing records, reports and other materials to regulatory and administrative bodies having proper jurisdiction over the Company, the Adviser and the Subadviser, in connection with the services provided pursuant to this Agreement; provided, however, that this agreement to cooperate does not apply to the provision of information, reports and other materials which either the Subadviser or Adviser reasonably believes the regulatory or administrative body does not have the authority to request or which is privileged or confidential information of the Subadviser. 7. Records. The records relating to the services provided under this Agreement required to be established and maintained by an investment adviser under applicable law or those required by the Adviser or the Board of Directors for the Subadviser to prepare and provide shall be the property of the Company and shall be under its control; however, the Company shall permit the Subadviser to retain such records (either in original or in duplicate form) as it shall reasonably require. In the event of the termination of this Agreement, such records shall promptly be returned to the Company by the Subadviser free from any claim or retention of rights therein; provided however, that the Subadviser may retain copies thereof. The Subadviser shall keep confidential any nonpublic information concerning the Adviser or any Subadviser's duties hereunder and shall disclose such information only if the Company has authorized such disclosure or if such disclosure is expressly required or requested by applicable federal or state regulatory authorities. 8. Duration of Agreement. This Agreement shall become effective with respect to the Portfolios on the later of the date of its execution or the date of the commencement of operations of the Portfolios. This Agreement will continue in effect for a period of more than two years from the date of its execution only so long as such continuance is specifically approved at least annually by the Board, provided that in such event such continuance shall also be approved by the vote of a majority of the Directors who are not "interested persons" (as defined in the 1940 Act) ("Independent Directors") of any party to this Agreement cast in person at a meeting called for the purpose of voting on such approval or by a vote of a majority of the outstanding voting securities (as determined in accordance with the 1940 Act). 9. Representations of Subadviser. The Subadviser represents, warrants, and agrees as follows: A. The Subadviser: (i) is registered as an investment adviser under the Advisers Act and will continue to be so registered for so long as this Agreement remains in effect; (ii) is not prohibited by the 1940 Act or the Advisers Act from performing the services contemplated by this Agreement; (iii) has met, and will continue to meet for so long as this Agreement remains in effect, any other applicable federal or state requirements, or the applicable requirements of any regulatory or industry self-regulatory organization, necessary to be met 6 in order to perform the services contemplated by this Agreement; (iv) has the authority to enter into and perform the services contemplated by this Agreement; and (v) will immediately notify the Adviser of the occurrence of any event that would disqualify the Subadviser from serving as an investment adviser of an investment company pursuant to Section 9(a) of the 1940 Act or otherwise. B. The Subadviser has adopted a written code of ethics complying with the requirements of Rule 17j-1 under the 1940 Act and, if it has not already done so, will provide the Adviser and the Company with a copy of such code of ethics, together with evidence of its adoption. C. The Subadviser has provided the Adviser and the Company with a copy of its Form ADV as most recently filed with the SEC and will, promptly after filing any amendment to its Form ADV with the SEC, furnish a copy of such amendment to the Adviser. 10. Provision of Certain Information by Subadviser. The Subadviser will promptly notify the Adviser in writing of the occurrence of any of the following events: A. the Subadviser fails to be registered as an investment adviser under the Advisers Act or under the laws of any jurisdiction in which the Subadviser is required to be registered as an investment adviser in order to perform its obligations under this Agreement; B. the Subadviser is served or otherwise receives notice of any action, suit, proceeding, inquiry, or investigation, at law or in equity, before or by any court, public board, or body, involving the affairs of the Company; C. a controlling stockholder of the Subadviser or the portfolio manager of a Portfolio changes or there is otherwise an actual change in control or management of the Subadviser. 11. Provision of Certain Information by the Adviser. The Adviser will promptly notify the Subadviser in writing of the occurrence of any of the following events: A. the Adviser fails to be registered as an investment adviser under the Advisers Act or under the laws of any jurisdiction in which the Adviser is required to be registered as an investment adviser in order to perform its obligations under this Agreement; B. the Adviser is served or otherwise receives notice of any action, suit, proceeding, inquiry, or investigation, at law or in equity, before or by any court, public board, or body, involving the affairs of the Company; C. a controlling stockholder of the Adviser changes or there is otherwise an actual change in control or management of the Adviser. 12. Termination of Agreement. Notwithstanding the foregoing, this Agreement may be terminated at any time with respect to a Portfolio, without the payment of any penalty, by vote of the Board or by a vote of a majority of the outstanding voting securities of such Portfolio on 60 7 days' prior written notice to the Subadviser. This Agreement may also be terminated by the Adviser: (i) on at least 120 days' prior written notice to the Subadviser, without the payment of any penalty; (ii) upon material breach by the Subadviser of any of the repretsentations and warranties, if such breach shall not have been cured within a 20-day period after notice of such breach; or (iii) if the Subadviser becomes unable to discharge its duties and obligations under this Agreement. The Subadviser may terminate this Agreement at any time, without the payment of any penalty, on at least 90 days' prior notice to the Adviser. This Agreement shall terminate automatically in the event of its assignment or upon termination of the Advisory Agreement between the Company and the Adviser. 13. Amendment of Agreement. No provision of this Agreement may be changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge, or termination is sought, and no material amendment of this Agreement shall be effective until approved by vote of a majority of the Independent Directors cast in person at a meeting called for the purpose of such approval. 14. Miscellaneous. A. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Maryland without giving effect to the conflicts of laws principles thereof, and the 1940 Act. To the extent that the applicable laws of the State of Maryland conflict with the applicable provisions of the 1940 Act, the latter shall control. B. Captions. The Captions contained in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. C. Entire Agreement. This Agreement represents the entire agreement and understanding of the parties hereto and shall supersede any prior agreements between the parties concerning management of the Portfolios and all such prior agreements shall be deemed terminated upon the effectiveness of this Agreement. D. Interpretation. Nothing herein contained shall be deemed to require the Company to take any action contrary to its Articles of Incorporation, By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Board of its responsibility for and control of the conduct of the affairs of the Company. E. Definitions. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the 1940 Act shall be resolved by reference to such term or provision of the 1940 Act and to interpretations thereof, if any, by the United States courts or, in the absence of any controlling decision of any such court, by rules, releases or orders of the SEC validly issued pursuant to the Act. As used in this Agreement, the terms "majority of the outstanding voting securities," "affiliated person," "interested person," "assignment," "broker," "investment adviser," "net 8 assets," "sale," "sell," and "security" shall have the same meaning as such terms have in the 1940 Act, subject to such exemptions as may be granted by the SEC by any rule, release or order. Where the effect of a requirement of the federal securities laws reflected in any provision of this Agreement is made less restrictive by a rule, release, or order of the SEC, whether of special or general application, such provision shall be deemed to incorporate the effect of such rule, release, or order. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized signatories as of the date and year first above written. Aetna Life Insurance and Annuity Company Attest: By:_____________________________________ ___________________________________ Massachusetts Financial Services Company Attest: By:_____________________________________ ___________________________________ 9 Appendix A Fee Schedule MFS Emerging Equities .425% on the first $150 million of aggregate average daily MFS Research Growth net assets under management MFS Value Equity .40% on the next $150 million .375% on the next $450 million .35% on the next $550 million .30% on the next $200 million .25% on assets over $1.5 billion 10 EX-99.B5(C) 6 INVESTMENT SUBADVISORY AGREEMENT INVESTMENT SUBADVISORY AGREEMENT Between Aetna Life Insurance and Annuity Company and Scudder, Stevens & Clark, Inc. INVESTMENT SUBADVISORY AGREEMENT, made as of the ______ day of __________, 1997, between Aetna Life Insurance and Annuity Company (the "Adviser"), an insurance corporation organized and existing under the laws of the State of Connecticut, and Scudder, Stevens & Clark, Inc. ("Subadviser"), a corporation organized and existing under the laws of the State of Delaware . WHEREAS, the Adviser has entered into an Investment Advisory Agreement dated as of the _____ day of ________, 1997 ("Advisory Agreement") with Portfolio Partners, Inc. ("Company"), which is engaged in business as an open-end management investment company registered under the Investment Company Act of 1940 ("1940 Act"); and WHEREAS, the Company is and will continue to be a series fund having two or more investment portfolios, each with its own assets, investment objectives, policies and restrictions; and WHEREAS, the Company shareholders are and will be separate accounts maintained by insurance companies for variable life insurance policies and variable annuity contracts (the "Policies") under which income, gains, and losses, whether or not realized, from assets allocated to such accounts are, in accordance with the Policies, credited to or charged against such accounts without regard to other income, gains, or losses of such insurance companies; and WHEREAS, the Subadviser is engaged principally in the business of rendering investment advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940 ("Advisers Act"); and WHEREAS, the Board of Directors and the Adviser desire to retain the Subadviser as subadviser for the Scudder International Growth Portfolio (the "Portfolio"), a portfolio of the Company, to furnish certain investment advisory services to the Adviser and the Company and the Subadviser is willing to furnish such services; NOW, THEREFORE, in consideration of the premises and mutual promises herein set forth, the parties hereto agree as follows: 1. Appointment. Adviser hereby appoints the Subadviser as its investment Subadviser with respect to the Portfolio for the period and on the terms set forth in this Agreement. The Subadviser accepts such appointment and agrees to render the services herein set forth, for the compensation herein provided. The Adviser and the Company understand that the Subadviser has entered into an agreement with Zurich Insurance Group ("Zurich") under which Zurich will acquire a majority interest in the Portfolio Manager and Zurich Kemper Investments, Inc. (an investment management company and a subsidiary of Zurich) will become part of the Subadviser. The Subadviser's name will be changed to Scudder Kemper Investments, Inc. ("SKI"). The Subadviser's current employee-shareholders will retain a significant minority ownership interest in SKI. Under the Advisers Act, the transaction will constitute an "assignment" of this contract. By signing below, notwithstanding anything in this Agreement to the contrary, the Adviser consents to the assignment and agrees that SKI and/or its subsidiaries may continue to provide the services described herein to the Adviser and the Company following the closing. The Subadviser agrees to pay costs associated with any amendments to the Company's Registration Statement and mailings to Company shareholders necessitated by this assignment. 2. Duties of the Subadviser A. Investment Subadvisory Services. Subject to the supervision of the Company's Board of Directors ("Board") and the Adviser, the Subadviser shall act as the investment Subadviser and shall supervise and direct the investments of the Portfolio in accordance with the portfolio's investment objective, policies, and restrictions as provided in the Company's Prospectus and Statement of Additional Information, as currently in effect and as amended or supplemented from time to time (hereinafter referred to as the "Prospectus"), and such other limitations as the Company may impose by notice in writing to the Subadviser. The Subadviser shall obtain and evaluate such information relating to the economy, industries, businesses, securities markets, and individual securities as it may deem necessary or useful in the discharge of its obligations hereunder and shall formulate and implement a continuing program for the management of the assets and resources of the Portfolio in a manner consistent with the Portfolio's investment objective, policies, and restrictions, and in compliance with the requirements applicable to registered investment companies under applicable laws and those requirements applicable to both regulated investment companies and segregated asset accounts under Subchapters M and L of the Internal Revenue Code of 1986, as amended ("Code"). To implement its duties, the Subadviser is hereby authorized to: (i) buy, sell, exchange, convert, lend, and otherwise trade in any stocks, bonds, and other securities or assets on behalf of the Portfolio; and (ii) directly or through the trading desks of the Subadviser or its affiliate place orders and negotiate the commissions (if any) for the execution of transactions in securities or other assets with or through such brokers, dealers, underwriters or issuers as the Subadviser may select. 2 B. Subadviser Undertakings. In all matters relating to the performance of this Agreement, the Subadviser shall act in conformity with the Company's Articles of Incorporation, By-Laws, and current Prospectus and with the written instructions and directions of the Board and the Adviser. The Subadviser hereby agrees to: (i) regularly (but no less frequently than quarterly) report to the Board and the Adviser with respect to the implementation of the investment program and, in addition, provide such statistical information and special reports concerning the Portfolio and/or important developments materially affecting the investments held, or contemplated to be purchased, by the Portfolio, as may reasonably be requested by the Board or the Adviser and agreed to by the Subadviser, including attendance at Board meetings, as reasonably requested, to present such information and reports to the Board; (ii) consult with the Company's pricing agent regarding the valuation of securities that are not registered for public sale, not traded on any securities markets, or otherwise may be deemed illiquid for purposes of the 1940 Act and for which market quotations are not readily available; (iii) provide any and all information, records and supporting documentation about accounts the Subadviser manages that have investment objectives, policies, and strategies substantially similar to those employed by the Subadviser in managing the Portfolio which may be reasonably necessary, under applicable laws, to allow the Company or its agent to present historical performance information concerning the Subadviser's similarly managed accounts, for inclusion in the Company's Prospectus and any other reports and materials prepared by the Company or its agent, in accordance with regulatory requirements; (iv) establish appropriate personal contacts with the Adviser and the Company's Administrator in order to provide the Adviser and Administrator with information as reasonably requested by the Adviser or Administrator; and (v) execute account documentation, agreements, contracts and other documents as the Adviser shall be requested by brokers, dealers, counterparties and other persons to execute in connection with its management of the assets of the Portfolio, provided that the Subadviser receives the express agreement and consent of the Adviser and/or the Board to execute such documentation, agreements, contracts and other documents. In such respect, and only for this limited purpose, the Subadviser shall act as the Adviser and/or the Portfolio's agent and attorney-in-fact. C. Adviser and Company Undertakings. To facilitate the Subadviser's fulfillment of its obligations under this Agreement, the Adviser and the Company will undertake the following: 3 (i) the Adviser agrees promptly to provide the Subadviser with all amendments or supplements to the Prospectus, the Company's Articles of Incorporation, and By-Laws; (ii) the Company and the Adviser each agrees, on an ongoing basis, to notify the Subadviser expressly in writing of each change in the fundamental and nonfundamental investment policies of the Portfolio; (iii) the Adviser agrees to provide or cause to be provided to the Subadviser with such assistance as may be reasonably requested by the Subadviser in connection with its activities pertaining to the Portfolio under this Agreement, including, without limitation, information concerning the Portfolio, its available funds, or funds that may reasonably become available for investment, and information as to the general condition of the Portfolio's affairs; (iv) the Adviser agrees to provide or cause to be provided to the Subadviser on an ongoing basis, such information as is reasonably requested by the Subadviser for performance by the Subadviser of its obligations under this Agreement, and the Subadviser shall not be in breach of any term of this Agreement or be deemed to have acted negligently if the Adviser fails to provide or cause to be provided such requested information and the Subadviser relies on the information most recently furnished to the Subadviser; and (v) the Adviser will promptly provide the Subadviser with any guidelines and procedures applicable to the Subadviser or the Portfolio adopted from time to time by the Board and agrees to promptly provide the Subadviser copies of all amendments thereto. D. The Subadviser, at its expense, will furnish: (i) all necessary investment and management facilities and investment personnel, including salaries, expenses and fees of any personnel required for it to faithfully perform its duties under this Agreement; and (ii) administrative facilities, including bookkeeping, clerical personnel and equipment required for it to faithfully and fully perform its duties and obligations under this Agreement. E. The Subadviser will select brokers and dealers to effect all Portfolio transactions subject to the conditions set forth herein. The Subadviser will place all necessary orders with brokers, dealers, or issuers, and will negotiate brokerage commissions if applicable. The Subadviser is directed at all times to seek to execute brokerage transactions for the Portfolio in accordance with such policies or practices as may be established by the Board and the Adviser and described in the current Prospectus as amended from time to time. In placing orders for the purchase or sale of investments for the Portfolio, in the name of the Portfolio or its nominees, the Subadviser shall use its best efforts to obtain for the Portfolio the most favorable price and best execution available, considering all of the circumstances, and shall maintain such records as are required of an investment adviser under applicable law. 4 Subject to the appropriate policies and procedures approved by the Adviser and the Board, the Subadviser may, to the extent authorized by Section 28(e) of the Securities Exchange Act of 1934, cause the Portfolio to pay a broker or dealer that provides brokerage or research services to the Subadviser, an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Subadviser determines, in good faith, that such amount of commission is reasonable in relationship to the value of such brokerage or research services provided viewed in terms of that particular transaction or the Subadviser's overall responsibilities to the Portfolio or its other advisory clients. To the extent authorized by said Section 28(e) and the Adviser and the Board, the Subadviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of such action. In addition, subject to seeking the best execution available, the Subadviser may also consider sales of shares of the Portfolio as a factor in the selection of brokers and dealers. F. On occasions when the Subadviser deems the purchase or sale of a security to be in the best interest of the Portfolio as well as other clients of the Subadviser, the Subadviser to the extent permitted by applicable laws and regulations, and subject to the Adviser approval of the Subadviser's procedures, may, but shall be under no obligation to, aggregate the orders for securities to be purchased or sold to attempt to obtain a more favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Subadviser in the manner the Subadviser considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to its other clients. G. With respect to the provision of services by the Subadviser hereunder, the Subadviser will maintain all accounts, books and records with respect to the Portfolio as are required of an investment adviser of a registered investment company pursuant to the 1940 Act and the Advisers Act and the rules under both statutes. H. The Subadviser and the Adviser acknowledge that the Subadviser is not the compliance agent for the Portfolio, and does not have access to all of the Company's books and records necessary to perform certain compliance testing. However, to the extent that the Subadviser has agreed to perform the services specified in Section 2A, the Subadviser shall perform compliance testing with respect to the Portfolio based upon information in its possession and upon information and written instructions received from the Adviser or the Administrator. I. Unless the Adviser gives the Subadviser written instructions to the contrary, the Subadviser shall use its good faith judgment in a manner which it reasonably believes best serves the interests of the Portfolio's shareholders to vote or abstain from voting all proxies solicited by or with respect to the issuers of securities in which assets of the Portfolio may be invested. The Adviser shall furnish the Subadviser with any further documents, materials 5 or information that the Subadviser may reasonably request to enable it to perform its duties pursuant to this Agreement. J. Subadviser hereby authorizes Adviser to use Subadviser's name and any applicable trademarks in the Company's Prospectus, as well as in any advertisement or sales literature used by the Adviser or its agents to promote the Company and/or to provide information to shareholders of the Portfolio. Upon termination of this Agreement, the Adviser and the Company shall immediately cease to use such name and trademarks, except as necessary to comply with disclosure requirements under the federal securities laws. During the term of this Agreement, the Adviser shall furnish to the Subadviser at its principal office all prospectuses, proxy statements, reports to shareholders, sales literature, or other material prepared for distribution to shareholders of the Company or the public, which refer to the Subadviser or its clients in any way, prior to the use thereof, and the Adviser shall not use any such materials if the Subadviser reasonably objects within five business days (or such other time as may be mutually agreed) after receipt thereof. The Adviser shall ensure that materials prepared by employees or agents of the Adviser or its affiliates that refer to the Subadviser or its clients in any way are consistent with those materials previously approved by the Subadviser. Subadviser will provide reasonable marketing support to Adviser in connection with the promotion of the Portfolio. 3. Compensation of Subadviser. The Adviser will pay the Subadviser, with respect to the Portfolio, the compensation specified in Appendix A to this Agreement. Payments shall be made to the Subadviser on the second business day of each month; however, this advisory fee will be calculated based on the daily average value of the Portfolio's assets and accrued on a daily basis. Compensation for any partial period shall be pro-rated based on the length of the period. 4. Liability of Subadviser. Neither the Subadviser nor any of its directors, officers, employees or agents shall be liable to the Adviser or the Company for any loss or expense suffered by the Adviser or the Company resulting from its acts or omissions as Subadviser to the Portfolio, except for losses or expenses to the Adviser or the Company resulting from willful misconduct, bad faith, or gross negligence in the performance of, or from reckless disregard of, the Subadviser's duties under this Agreement. Neither the Subadviser nor any of its agents shall be liable to the Adviser or the Company for any loss or expense suffered as a consequence of any action or inaction of other service providers to the Company in failing to observe the instructions of the Adviser, provided such action or inaction of such other service providers to the Company is not a result of the willful misconduct, bad faith or gross negligence in the performance of, or from reckless disregard of, the duties of the Subadviser under this Agreement. 5. Non-Exclusivity. The services of the Subadviser to the Portfolio and the Company are not to be deemed to be exclusive, and the Subadviser shall be free to render investment advisory or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that the directors, officers, and employees of the Subadviser are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers, directors, trustees, or employees of any other firm or 6 corporation, including other investment companies. Furthermore, the Company and the Adviser recognize that the Subadviser may give advice, and take action, with respect to its other clients that may differ from the advice given, or the time or nature of action taken, with respect to the Portfolio. 6. Adviser Oversight and Cooperation with Regulators. The Subadviser shall cooperate in providing records, reports and other materials relating to the Company that are in its possession, at the request of the Adviser, and in response to inquiries by regulatory and administrative bodies having proper jurisdiction over the Company, in connection with the services provided pursuant to this Agreement; provided, however, that this agreement to cooperate does not apply to the provision of information, reports and other materials which the Subadviser reasonably believes the regulatory or administrative body does not have the authority to request or which is privileged or confidential information of the Subadviser. 7. Records. The records relating to the services provided under this Agreement required to be established and maintained by an investment adviser under applicable law or those required by the Adviser or the Board of Directors for the Subadviser to prepare and provide shall be the property of the Company and shall be under its control; however, the Company shall permit the Subadviser to retain such records (either in original or in duplicate form) as it shall reasonably require in order to carry out its duties. In the event of the termination of this Agreement, such records shall promptly be returned to the Company by the Subadviser free from any claim or retention of rights therein. The Subadviser shall keep confidential any information concerning the Adviser or any Subadviser's duties hereunder and shall disclose such information only if the Company has authorized such disclosure or if such disclosure is expressly required or requested by applicable federal or state regulatory authorities. 8. Duration of Agreement. This Agreement shall become effective with respect to the Portfolio on the later of the date of its execution or the date of the commencement of operations of the Portfolio. This Agreement will continue in effect for a period of more than two years from the date of its execution only so long as such continuance is specifically approved at least annually by the Board, provided that in such event such continuance shall also be approved by the vote of a majority of the Directors who are not "interested persons" (as defined in the 1940 Act) of any party to this Agreement ("Independent Directors") cast in person at a meeting called for the purpose of voting on such approval or by a vote of a majority of the outstanding voting securities (as determined in accordance with the 1940 Act). 9. Representations of Subadviser. The Subadviser represents, warrants, and agrees as follows: A. The Subadviser: (i) is registered as an investment adviser under the Advisers Act and will continue to be so registered for so long as this Agreement remains in effect; (ii) is not prohibited by the 1940 Act or the Advisers Act from performing the services contemplated by this Agreement; (iii) has met, and will continue to meet for so long as this Agreement remains in effect, any other applicable federal or state requirements, or the applicable requirements of any regulatory or industry self-regulatory organization, necessary to be met 7 in order to perform the services contemplated by this Agreement; (iv) has the authority to enter into and perform the services contemplated by this Agreement; and (v) will immediately notify the Adviser of the occurrence of any event that would disqualify the Subadviser from serving as an investment adviser of an investment company pursuant to Section 9(a) of the 1940 Act or otherwise. B. The Subadviser has adopted a written code of ethics complying with the requirements of Rule 17j-1 under the 1940 Act and, if it has not already done so, will provide the Adviser and the Company with a copy of such code of ethics, together with evidence of its adoption. C. The Subadviser has provided the Adviser and the Company with a copy of its Form ADV as most recently filed with the SEC and will, promptly after filing any amendment to its Form ADV with the SEC, furnish a copy of such amendment to the Adviser. 10. Provision of Certain Information by Subadviser. The Subadviser will promptly notify the Adviser in writing of the occurrence of any of the following events: A. the Subadviser fails to be registered as an investment adviser under the Advisers Act or under the laws of any jurisdiction in which the Subadviser is required to be registered as an investment adviser in order to perform its obligations under this Agreement; B. the Subadviser is served or otherwise receives notice of any action, suit, proceeding, inquiry, or investigation, at law or in equity, before or by any court, public board, or body, involving the affairs of the Company; C. a controlling stockholder of the Subadviser or the portfolio manager of the Portfolio changes or there is otherwise an actual change in control or management of the Subadviser. 11. Provision of Certain Information by the Adviser. The Adviser will promptly notify the Subadviser in writing of the occurrence of any of the following events: A. the Adviser fails to be registered as an investment adviser under the Advisers Act or under the laws of any jurisdiction in which the Adviser is required to be registered as an investment adviser in order to perform its obligations under this Agreement; B. the Adviser is served or otherwise receives notice of any action, suit, proceeding, inquiry, or investigation, at law or in equity, before or by any court, public board, or body, involving the affairs of the Company; C. a controlling stockholder of the Adviser changes or there is otherwise an actual change in control or management of the Adviser. 12. Termination of Agreement. Notwithstanding the foregoing, this Agreement may be terminated at any time, without the payment of any penalty, by vote of the Board or by a vote of a majority of the outstanding voting securities of the Portfolio on 60 days' prior written notice to 8 the Subadviser. This Agreement may also be terminated by the Adviser: (i) on at least 60 days' prior written notice to the Subadviser, without the payment of any penalty; (ii) upon material breach by the Subadviser of any of the representations and warranties, if such breach shall not have been cured within a 20-day period after notice of such breach; or (iii) if the Subadviser becomes unable to discharge its duties and obligations under this Agreement. The Subadviser may terminate this Agreement at any time, without the payment of any penalty, on at least 60 days' prior notice to the Adviser. This Agreement shall terminate automatically in the event of its assignment or upon termination of the Advisory Agreement between the Company and the Adviser. 13. Amendment of Agreement. No provision of this Agreement may be changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge, or termination is sought, and no material amendment of this Agreement shall be effective until approved by vote of a majority of the Independent Directors cast in person at a meeting called for the purpose of such approval. 14. Miscellaneous. A. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Maryland without giving effect to the conflicts of laws principles thereof, and the 1940 Act. To the extent that the applicable laws of the State of Maryland conflict with the applicable provisions of the 1940 Act, the latter shall control. B. Captions. The Captions contained in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. C. Entire Agreement. This Agreement represents the entire agreement and understanding of the parties hereto and shall supersede any prior agreements between the parties concerning management of the Portfolio and all such prior agreements shall be deemed terminated upon the effectiveness of this Agreement. D. Interpretation. Nothing herein contained shall be deemed to require the Company to take any action contrary to its Articles of Incorporation, By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Board of its responsibility for and control of the conduct of the affairs of the Company. E. Definitions. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the 1940 Act shall be resolved by reference to such term or provision of the 1940 Act and to interpretations thereof, if any, by the United States courts or, in the absence of any controlling decision of any such court, by rules, releases or orders of the SEC validly issued pursuant to the Act. As used in this Agreement, the terms "majority of the outstanding voting securities," "affiliated person," "interested person," "assignment," "broker," "investment adviser," "net 9 assets," "sale," "sell," and "security" shall have the same meaning as such terms have in the 1940 Act, subject to such exemptions as may be granted by the SEC by any rule, release or order. Where the effect of a requirement of the federal securities laws reflected in any provision of this Agreement is made less restrictive by a rule, release, or order of the SEC, whether of special or general application, such provision shall be deemed to incorporate the effect of such rule, release, or order. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized signatories as of the date and year first above written. Aetna Life Insurance and Annuity Company Attest: By:_____________________________________ ___________________________________ Scudder, Stevens & Clark, Inc. By:_____________________________________ Attest: ___________________________________ 10 Appendix A Fee Schedule Scudder International Growth .75% on the first $20 million of average daily net assets .65% on the next $15 million .50% on the next $65 million .40% on the next $200 million .30% on assets over $300 million 11 EX-99.B5(D) 7 INVESTMENT SUBADVISORY AGREEMENT INVESTMENT SUBADVISORY AGREEMENT Between Aetna Life Insurance and Annuity Company and T. Rowe Price Associates, Inc. INVESTMENT SUBADVISORY AGREEMENT, made as of the ______ day of __________, 1997, between Aetna Life Insurance and Annuity Company (the "Adviser"), an insurance corporation organized and existing under the laws of the State of Connecticut, and T. Rowe Price Associates, Inc. ("Subadviser"), a corporation organized and existing under the laws of the State of Maryland . WHEREAS, the Adviser has entered into an Investment Advisory Agreement dated as of the _____ day of ________, 1997 ("Advisory Agreement") with Portfolio Partners, Inc. ("Company"), which is engaged in business as an open-end management investment company registered under the Investment Company Act of 1940 ("1940 Act"); and WHEREAS, the Company is and will continue to be a series fund having two or more investment portfolios, each with its own assets, investment objectives, policies and restrictions; and WHEREAS, the Company shareholders are and will be separate accounts maintained by insurance companies for variable life insurance policies and variable annuity contracts (the "Policies") under which income, gains, and losses, whether or not realized, from assets allocated to such accounts are, in accordance with the Policies, credited to or charged against such accounts without regard to other income, gains, or losses of such insurance companies; and WHEREAS, the Subadviser is engaged principally in the business of rendering investment advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940 ("Advisers Act"); and WHEREAS, the Board of Directors and the Adviser desire to retain the Subadviser as subadviser for the T. Rowe Price Growth Equity Portfolio (the "Portfolio"), a portfolio of the Company, to furnish certain investment advisory services to the Adviser and the Company and the Subadviser is willing to furnish such services; NOW, THEREFORE, in consideration of the premises and mutual promises herein set forth, the parties hereto agree as follows: 1. Appointment. Adviser hereby appoints the Subadviser as its investment Subadviser with respect to the Portfolio for the period and on the terms set forth in this Agreement. The Subadviser accepts such appointment and agrees to render the services herein set forth, for the compensation herein provided. 2. Duties of the Subadviser A. Investment Subadvisory Services. Subject to the supervision of the Company's Board of Directors ("Board") and the Adviser, the Subadviser shall act as the investment Subadviser and shall supervise and direct the investments of the Portfolio in accordance with the portfolio's investment objective, policies, and restrictions as provided in the Company's Prospectus and Statement of Additional Information, as currently in effect and as amended or supplemented from time to time (hereinafter referred to as the "Prospectus"), and such other limitations as the Company may impose by notice in writing to the Subadviser. The Subadviser shall obtain and evaluate such information relating to the economy, industries, businesses, securities markets, and individual securities as it may deem necessary or useful in the discharge of its obligations hereunder and shall formulate and implement a continuing program for the management of the assets and resources of the Portfolio in a manner consistent with the Portfolio's investment objective, policies, and restrictions, and in compliance with the requirements applicable to registered investment companies under applicable laws and those requirements applicable to both regulated investment companies and segregated asset accounts under Subchapters M and L of the Internal Revenue Code of 1986, as amended ("Code"). To implement its duties, the Subadviser is hereby authorized to: (i) buy, sell, exchange, convert, lend, and otherwise trade in any stocks, bonds, and other securities or assets on behalf of the Portfolio; and (ii) directly or through the trading desks of T. Rowe Price Associates, Inc. place orders and negotiate the commissions (if any) for the execution of transactions in securities or other assets with or through such brokers, dealers, underwriters or issuers as the Subadviser may select. B. Subadviser Undertakings. In all matters relating to the performance of this Agreement, the Subadviser shall act in conformity with the Company's Articles of Incorporation, By-Laws, and current Prospectus and with the written instructions and directions of the Board and the Adviser. The Subadviser hereby agrees to: (i) regularly (but no less frequently than quarterly) report to the Board and the Adviser with respect to the implementation of the investment program and, in addition, provide such statistical information and special reports concerning the Portfolio and/or important developments materially affecting the investments held, or contemplated to be purchased, by the Portfolio, as may reasonably be requested by the Board or the Adviser and agreed to by the Subadviser, 2 including attendance at Board meetings, as reasonably requested, to present such information and reports to the Board; (ii) consult with the Company's pricing agent regarding the valuation of securities that are not registered for public sale, not traded on any securities markets, or otherwise may be deemed illiquid for purposes of the 1940 Act and for which market quotations are not readily available; (iii) establish appropriate personal contacts with the Adviser and the Company's Administrator in order to provide the Adviser and Administrator with information as reasonably requested by the Adviser or Administrator; and (iv) execute account documentation, agreements, contracts and other documents as the Adviser shall be requested by brokers, dealers, counterparties and other persons to execute in connection with its management of the assets of the Portfolio, provided that the Subadviser receives the express agreement and consent of the Adviser and/or the Board to execute such documentation, agreements, contracts and other documents. In such respect, and only for this limited purpose, the Subadviser shall act as the Adviser and/or the Portfolio's agent and attorney-in-fact. C. The Subadviser, at its expense, will furnish: (i) all necessary investment and management facilities and investment personnel, including salaries, expenses and fees of any personnel required for it to faithfully perform its duties under this Agreement; and (ii) administrative facilities, including bookkeeping, clerical personnel and equipment required for it to faithfully and fully perform its duties and obligations under this Agreement. D. The Subadviser will select brokers and dealers to effect all Portfolio transactions subject to the conditions set forth herein. The Subadviser will place all necessary orders with brokers, dealers, or issuers, and will negotiate brokerage commissions if applicable. The Subadviser is directed at all times to seek to execute brokerage transactions for the Portfolio in accordance with such policies or practices as may be established by the Board and the Adviser and described in the current Prospectus as amended from time to time. In placing orders for the purchase or sale of investments for the Portfolio, in the name of the Portfolio or its nominees, the Subadviser shall use its best efforts to obtain for the Portfolio the best execution available, considering all of the circumstances, and shall maintain records adequate to demonstrate compliance with this requirement. Subject to the appropriate policies and procedures approved by the Adviser and the Board, the Subadviser may, to the extent authorized by Section 28(e) of the Securities Exchange Act of 1934, cause the Portfolio to pay a broker or dealer that provides brokerage or research services to the Subadviser, an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Subadviser determines, in good faith, that such 3 amount of commission is reasonable in relationship to the value of such brokerage or research services provided viewed in terms of that particular transaction or the Subadviser's overall responsibilities to the Portfolio or its other advisory clients. To the extent authorized by said Section 28(e) and the Adviser and the Board, the Subadviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of such action. In addition, subject to seeking the best execution available, the Subadviser may also consider sales of shares of the Portfolio as a factor in the selection of brokers and dealers. E. On occasions when the Subadviser deems the purchase or sale of a security to be in the best interest of the Portfolio as well as other clients of the Subadviser, the Subadviser, to the extent permitted by applicable laws and regulations, and subject to the Adviser's initial approval of the Subadviser's procedures, may, but shall be under no obligation to, aggregate the orders for securities to be purchased or sold to attempt to obtain a more favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Subadviser in the manner the Subadviser considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to its other clients. F. With respect to the provision of services by the Subadviser hereunder, the Subadviser will maintain all accounts, books and records with respect to the Portfolio as are required of an investment adviser of a registered investment company pursuant to the 1940 Act and the Advisers Act and the rules under both statutes. G. The Subadviser and the Adviser acknowledge that the Subadviser is not the compliance agent for the Portfolio, and does not have access to all of the Company's books and records necessary to perform certain compliance testing. However, to the extent that the Subadviser has agreed to perform the services specified in Section 2A, the Subadviser shall perform compliance testing with respect to the Portfolio based upon information in its possession and upon information and written instructions received from the Adviser or the Administrator. The Adviser or Administrator shall promptly provide the Subadviser with copies of the Company's current Prospectus, Articles of Incorporation and By-Laws and any written policies or procedures adopted by the Board applicable to the Portfolio and any amendments or revisions thereto. H. Unless the Adviser gives the Subadviser written instructions to the contrary, the Subadviser shall use its good faith judgment in a manner which it reasonably believes best serves the interests of the Portfolio's shareholders to vote or abstain from voting all proxies solicited by or with respect to the issuers of securities in which assets of the Portfolio may be invested. The Adviser shall furnish the Subadviser with any further documents, materials or information that the Subadviser may reasonably request to enable it to perform its duties pursuant to this Agreement. 4 I. Subadviser hereby authorizes Adviser to use Subadviser's name and any applicable trademarks in the Company's Prospectus, as well as in any advertisement or sales literature used by the Adviser or its agents to promote the Company and/or to provide information to shareholders of the Portfolio in accordance with the terms of the License Agreement entered into between the parties hereto dated _______________, 1997. Subadviser will provide reasonable marketing support to Adviser in connection with the promotion of the Portfolio. 3. Compensation of Subadviser. The Adviser will pay the Subadviser, with respect to the Portfolio, the compensation specified in Appendix A to this Agreement. Payments shall be made to the Subadviser on the second day of each month; however, this advisory fee will be calculated based on the daily average value of the Portfolio's assets and accrued on a daily basis. Compensation for any partial period shall be pro-rated based on the length of the period. 4. Liability of Subadviser. Neither the Subadviser nor any of its directors, officers, employees or agents shall be liable to the Adviser, the Company, or the Company's shareholders for any loss or expense suffered by the Adviser, the Company, or the Company's shareholders resulting from its acts or omissions as Subadviser to the Portfolio, except for losses or expenses to the Adviser, the Company, or the Company's shareholders resulting from willful misconduct, bad faith, or gross negligence in the performance of, or from reckless disregard of, the Subadviser's duties under this Agreement. Neither the Subadviser nor any of its agents shall be liable to the Adviser, the Company, or the Company's shareholders for any loss or expense suffered as a consequence of any action or inaction of other service providers to the Company in failing to observe the instructions of the Adviser, provided such action or inaction of such other service providers to the Company is not a result of the willful misconduct, bad faith or gross negligence in the performance of, or from reckless disregard of, the duties of the Subadviser under this Agreement. 5. Non-Exclusivity. The services of the Subadviser to the Portfolio and the Company are not to be deemed to be exclusive, and the Subadviser shall be free to render investment advisory or other services to others (including other investment companies) and to engage in other activities. It is understood and agreed that the directors, officers, and employees of the Subadviser are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers, directors, trustees, or employees of any other firm or corporation, including other investment companies. 6. Adviser Oversight and Cooperation with Regulators. The Subadviser shall cooperate in providing records, reports and other materials relating to the Company that are in its possession, at the request of the Adviser, and in response to inquiries by regulatory and administrative bodies having proper jurisdiction over the Company, in connection with the services provided pursuant to this Agreement; provided, however, that this agreement to cooperate does not apply to the provision of information, reports and other materials which the Subadviser reasonably believes the 5 regulatory or administrative body does not have the authority to request or which is privileged or confidential information of the Subadviser. 7. Records. The records relating to the services provided under this Agreement required to be established and maintained by an investment adviser under applicable law or those required by the Adviser or the Board of Directors for the Subadviser to prepare and provide shall be the property of the Company and shall be under its control; however, the Company shall permit the Subadviser to retain such records (either in original or in duplicate form) as it shall reasonably require in order to carry out its duties. In the event of the termination of this Agreement, such records shall promptly be returned to the Company by the Subadviser free from any claim or retention of rights therein. The Subadviser shall keep confidential any information concerning the Adviser or any Subadviser's duties hereunder and shall disclose such information only if the Company has authorized such disclosure or if such disclosure is expressly required or requested by applicable federal or state regulatory authorities. 8. Duration of Agreement. This Agreement shall become effective with respect to the Portfolio on the later of the date of its execution or the date of the commencement of operations of the Portfolio. This Agreement will continue in effect for a period of more than two years from the date of its execution only so long as such continuance is specifically approved at least annually by the Board, provided that in such event such continuance shall also be approved by the vote of a majority of the Directors who are not "interested persons" (as defined in the 1940 Act) of any party to this Agreement ("Independent Directors") cast in person at a meeting called for the purpose of voting on such approval or by a vote of a majority of the outstanding voting securities (as determined in accordance with the 1940 Act). 9. Representations of Subadviser. The Subadviser represents, warrants, and agrees as follows: A. The Subadviser: (i) is registered as an investment adviser under the Advisers Act and will continue to be so registered for so long as this Agreement remains in effect; (ii) is not prohibited by the 1940 Act or the Advisers Act from performing the services contemplated by this Agreement; (iii) has met, and will use its best efforts to continue to meet for so long as this Agreement remains in effect, any other applicable federal or state requirements, or the applicable requirements of any regulatory or industry self-regulatory organization, necessary to be met in order to perform the services contemplated by this Agreement; (iv) has the authority to enter into and perform the services contemplated by this Agreement; and (v) will immediately notify the Adviser of the occurrence of any event that would disqualify the Subadviser from serving as an investment adviser of an investment company pursuant to Section 9(a) of the 1940 Act or otherwise. B. The Subadviser has adopted a written code of ethics complying with the requirements of Rule 17j-1 under the 1940 Act and, if it has not already done so, will provide the Adviser and the Company with a copy of such code of ethics, together with evidence of its adoption. 6 C. The Subadviser has provided the Adviser and the Company with a copy of its Form ADV as most recently filed with the SEC and hereafter will furnish a copy of its annual amendment to the Adviser. 10. Provision of Certain Information by Subadviser. The Subadviser will promptly notify the Adviser in writing of the occurrence of any of the following events: A. the Subadviser fails to be registered as an investment adviser under the Advisers Act or under the laws of any jurisdiction in which the Subadviser is required to be registered as an investment adviser in order to perform its obligations under this Agreement; B. the Subadviser or the Company is served or otherwise receives notice of any action, suit, proceeding, inquiry, or investigation, at law or in equity, before or by any court, public board, or body, involving the affairs of the Company; C. a controlling stockholder of the Subadviser or the portfolio manager of the Portfolio changes or there is otherwise an actual change in control or management of the Subadviser. 11. Provision of Certain Information by the Adviser. The Adviser will promptly notify the Subadviser in writing of the occurrence of any of the following events: A. the Adviser fails to be registered as an investment adviser under the Advisers Act or under the laws of any jurisdiction in which the Adviser is required to be registered as an investment adviser in order to perform its obligations under this Agreement; B. the Adviser is served or otherwise receives notice of any action, suit, proceeding, inquiry, or investigation, at law or in equity, before or by any court, public board, or body, involving the affairs of the Company; C. a controlling stockholder of the Adviser changes or there is otherwise an actual change in control or management of the Adviser. 12. Termination of Agreement. Notwithstanding the foregoing, this Agreement may be terminated at any time, without the payment of any penalty, by vote of the Board or by a vote of a majority of the outstanding voting securities of the Portfolio on 60 days' prior written notice to the Subadviser. This Agreement may also be terminated by the Adviser: (i) on at least 120 days' prior written notice to the Subadviser, without the payment of any penalty; (ii) upon material breach by the Subadviser of any of the representations and warranties, if such breach shall not have been cured within a 20-day period after notice of such breach; or (iii) if the Subadviser becomes unable to discharge its duties and obligations under this Agreement. The Subadviser may terminate this Agreement at any time, without the payment of any penalty, on at least 90 days' prior notice to the Adviser. This Agreement shall terminate automatically in the event of its assignment or upon termination of the Advisory Agreement between the Company and the Adviser. 7 13. Amendment of Agreement. No provision of this Agreement may be changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge, or termination is sought, and no material amendment of this Agreement shall be effective until approved by vote of a majority of the Independent Directors cast in person at a meeting called for the purpose of such approval. 14. Miscellaneous. A. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Maryland without giving effect to the conflicts of laws principles thereof, and the 1940 Act. To the extent that the applicable laws of the State of Maryland conflict with the applicable provisions of the 1940 Act, the latter shall control. B. Captions. The Captions contained in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. C. Entire Agreement. This Agreement represents the entire agreement and understanding of the parties hereto and shall supersede any prior agreements between the parties concerning management of the Portfolio and all such prior agreements shall be deemed terminated upon the effectiveness of this Agreement. D. Interpretation. Nothing herein contained shall be deemed to require the Company to take any action contrary to its Articles of Incorporation, By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Board of its responsibility for and control of the conduct of the affairs of the Company. E. Definitions. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the 1940 Act shall be resolved by reference to such term or provision of the 1940 Act and to interpretations thereof, if any, by the United States courts or, in the absence of any controlling decision of any such court, by rules, releases or orders of the SEC validly issued pursuant to the Act. As used in this Agreement, the terms "majority of the outstanding voting securities," "affiliated person," "interested person," "assignment," "broker," "investment adviser," "net assets," "sale," "sell," and "security" shall have the same meaning as such terms have in the 1940 Act, subject to such exemptions as may be granted by the SEC by any rule, release or order. Where the effect of a requirement of the federal securities laws reflected in any 8 provision of this Agreement is made less restrictive by a rule, release, or order of the SEC, whether of special or general application, such provision shall be deemed to incorporate the effect of such rule, release, or order. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized signatories as of the date and year first above written. Aetna Life Insurance and Annuity Company By:_____________________________________ Attest: ___________________________________ T. Rowe Price Associates, Inc. By:____________________________________ Attest: ___________________________________ 9 APPENDIX A Fee Schedule T. Rowe Price Growth Equity .40% on the first $500 million of average daily net assets .375% on assets over $500 million EX-99.B6 8 FORM OF UNDERWRITING AGREEMENT FORM OF UNDERWRITING AGREEMENT PORTFOLIO PARTNERS, INC. THIS AGREEMENT, is entered into this day of , 1997, by and between Aetna Life Insurance and Annuity Company, Inc. ("Aetna"), a Connecticut corporation, and Portfolio Partners, Inc. (the "Fund") on behalf of its investment portfolios (the "Portfolios"). WHEREAS, the Fund is an open-end management investment company registered with the Securities and Exchange Commission ("Commission") under the Investment Company Act of 1940 ("1940 Act") and is authorized to issue shares of distinct investment portfolios; and WHEREAS the Fund has registered the shares of its common stock ("Shares") in its Portfolios for offer and sale to the public under the Securities Act of 1933; and WHEREAS, the Fund wishes to retain Aetna, and Aetna is willing to act, as principal underwriter in connection with the offer and sale of the Shares; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, the parties agree as follows: 1. Appointment of Underwriter. The Fund hereby appoints Aetna and Aetna hereby accepts appointment as underwriter in connection with the distribution of the Shares. The Fund authorizes Aetna to solicit orders for the purchase of the Shares as set forth in the Registration Statement on Form N-1A currently effective with the Commission. It is understood that the Shares are offered only through variable annuity contracts and variable life policies issued by Aetna and its affiliates. 2. Compensation. Aetna shall receive no separate compensation for providing services under this Agreement. It is understood that the compensation Aetna receives in connection with the issuance of the variable annuity contracts or variable life policies shall be the only consideration it receives for serving as underwriter hereunder. 3. Aetna Expenses. Aetna shall be responsible for any costs of printing and distributing prospectuses and statements of additional information necessary to offer and sell the Shares, and such other sales literature, reports, forms and advertisements as it elects to prepare, provided such materials comply with the applicable provisions of federal and state law. 4. Fund Expenses. The Fund shall be responsible for the costs of registering the Shares with the Commission and for the costs of preparing prospectuses, statements of additional information and such other documents as are required to maintain the registration of the Shares with the Commission. 5. Share Certificates. The Fund shall not issue certificates representing Shares. 6. Status of underwriter and Other Persons. Aetna is an independent contractor and shall be agent for the Fund only in respect to the sale and redemption of the Shares. Any person, even though also an officer, director, employee or agent of Aetna, who may be or become an officer, director, employee or agent of the Fund, shall be deemed, when rendering services to the Fund or acting in any business of the Fund, to be rendering such services to or acting solely for the Fund and not as an officer, director, employee or agent or one under the control or direction of Aetna even though paid by Aetna. 7. Nonexclusivity. The services of Aetna to the Fund under this Agreement are not to be deemed exclusive, and Aetna shall be free to render similar services or other services to others and to engage in other activities related or unrelated to those provided under this Agreement. 8. Effectiveness and Termination of Agreement. This Agreement shall become effective at the close of business on the date set forth in the first paragraph of this Agreement and shall remain in force and effect, through_________________, unless earlier terminated under the provisions of Section 9. Following the expiration of its initial term, the Agreement shall continue in force and effect for one-year periods, provided such continuance is specifically approved at least annually by the Fund's Board of Directors, or by the vote of a majority of the Fund's outstanding voting securities (as defined in Section 2(a)(42) of the 1940 Act), and approved by vote of a majority of Directors who are not parties to this Agreement or interested persons (as defined in Section 2(a)(19) of the 1940 Act) of the Fund or of Aetna, cast in person at a meeting called for the purpose of voting on such approval. This Agreement will automatically terminate in the event of its assignment. 9. Termination. This Agreement may be terminated at any time, by either party, without the payment of any penalty, on sixty (60) days' written notice to the other party. 10. Liability of Aetna. Aetna shall be liable to the Fund and shall indemnify the Fund for any losses incurred by the Fund, to the extent that such losses resulted from an act or omission on the part of Aetna or its officers, directors or employees in carrying out its duties hereunder, that is found to involve willful misfeasance, bad faith or negligence, or reckless disregard by Aetna of its duties under this Agreement. 11. Amendments. This Agreement may be amended or changed only by an instrument in writing signed by both parties. 12. Applicable Law. This Agreement shall be construed in accordance with the laws of the State of Connecticut and the 1940 Act. To the extent that the applicable laws of the State of Connecticut conflict with the applicable provisions of the 1940 Act, however, the latter shall control. 13. Notices. Any notices under this Agreement shall be in writing, addressed and delivered, mailed postage paid, or sent by other delivery service, or by facsimile transmission to each party -2- at such address as each party may designate for the receipt of notice. Until further notice, such addresses shall be: if to the Fund or Aetna: 151 Farmington Avenue, RE4A Hartford, Connecticut 06156 Fax number: 860/273-8340 14. Questions of Interpretation. This Agreement shall be governed by the laws of the State of Connecticut. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the 1940 Act shall be resolved by reference to such term or provision of the 1940 Act and to interpretations thereof, if any, by the United States Courts or, in the absence of any controlling decision of any such court, by rules, releases or orders of the Commission issued pursuant to the 1940 Act. In addition, where the effect of a requirement of the 1940 Act reflected in the provisions of this Agreement is revised by rule, release or order of the Commission, such provisions shall be deemed to incorporate the effect of such rule, release or order. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers on the day of , 1997. AETNA LIFE INSURANCE AND ANNUITY COMPANY Attest: By ------------------------------ Name: ------------------------------ - ------------------------------ Title ------------------------------ Assistant Secretary PORTFOLIO PARTNERS, INC. By: ------------------------------ Name: ------------------------------ Attest: Title: ------------------------------ - ------------------------------ Secretary -3- EX-99.B8 9 CUSTODIAN AGREEMENT CUSTODIAN AGREEMENT BETWEEN PORTFOLIO PARTNERS, INC. AND INVESTORS BANK & TRUST COMPANY
TABLE OF CONTENTS Page 1. Bank Appointed Custodian......................................................................... 1 2. Definitions...................................................................................... 1 2.1 Authorized Person.......................................................... 1 2.2 Board .................................................................. 1 2.3 Security .................................................................. 1 2.4 Portfolio Security......................................................... 1 2.5 Officers' Certificate...................................................... 2 2.6 Book-Entry System.......................................................... 2 2.7 Depository................................................................. 2 2.8 Proper Instructions........................................................ 2 3. Separate Accounts ............................................................................... 2 4. Certification as to Authorized Persons........................................................... 2 5. Custody of Cash ............................................................................... 3 5.1 Purchase of Securities..................................................... 3 5.2 Redemptions .......................................................... 3 5.3 Distributions and Expenses of Fund......................................... 3 5.4 Payment in Respect of Securities........................................... 3 5.5 Repayment of Loans......................................................... 3 5.6 Repayment of Cash.......................................................... 3 5.7 Foreign Exchange Transactions.............................................. 4 5.8 Other Authorized Payments.................................................. 4 5.9 Termination................................................................ 4 6. Securities....................................................................................... 4 6.1 Segregation and Registration............................................... 4 6.2 Voting and Proxies......................................................... 5 6.3 Corporate Action .......................................................... 5 6.4 Book-Entry System.......................................................... 5 6.5 Use of a Depository........................................................ 6 6.6 Use of Book-Entry System for Commercial Paper.............................. 7 6.7 Use of Immobilization Programs............................................. 8 6.8 Eurodollar CDs .......................................................... 8 6.9 Options and Futures Transactions........................................... 8 (a) Puts and Calls Traded on Securities Exchanges, NASDAQ or Over-the-Counter........................................ 8 (b) Puts, Calls, and Futures Traded on Commodities Exchanges.......................................... 9 6.10 Segregated Account......................................................... 9 2 Page 6.11 Interest Bearing Call or Time Deposits..................................... 10 6.12 Transfer of Securities..................................................... 10 7. Redemptions ............................................................................... 12 8. Merger, Dissolution, etc. of Series.............................................................. 12 9. Actions of Bank Without Prior Authorization...................................................... 12 10. Collection and Defaults.......................................................................... 13 11. Maintenance of Records and Accounting Services................................................... 13 12. Fund Evaluation and Yield Calculation............................................................ 13 12.1 Fund Evaluation............................................................ 13 12.2 Yield Calculation.......................................................... 14 13. Additional Services ...................................................................... 15 14. Duties of the Bank ...................................................................... 15 14.1 Performance of Duties and Standard of Care .......................................................... 15 14.2 Agents and Subcustodians with Respect to Property of the Company Held in the United States................................... 15 14.3 Duties of the Bank with Respect to Property of the Company Held Outside of the United States.......................................... 16 14.4 Insurance.................................................................. 18 14.5 Fees and Expenses of Bank.................................................. 18 14.6 Advances by Bank.......................................................... 18 15. Limitation of Liability.......................................................................... 19 15.1 Liability of the Custodian with Respect to Use of Securities Systems and Foreign Depositories................................ 19 15.2 Standard of Care; Liability; Indemnification............................... 19 16. Termination...................................................................................... 20 17. Confidentiality.................................................................................. 21 18. Notices ........................................................................................ 21 19. Amendments....................................................................................... 22 3 Page 20. Parties ........................................................................................ 22 21. Governing Law.................................................................................... 22 22. Counterparts..................................................................................... 22 23. Entire Agreement................................................................................. 22 24. Limitation of Liability.......................................................................... 22
APPENDICES Appendix A ................................... Fee Schedule Appendix B ................................... Additional Services 4 CUSTODIAN AGREEMENT THIS AGREEMENT made as of this _____ day of __________, 1997, between Portfolio Partners, Inc., a company organized under the laws of the State of Maryland (the "Company"), and Investors Bank & Trust Company, a Massachusetts trust company (the "Bank"). WHEREAS, the Company is registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end, diversified management investment company that currently issues five series of shares, each of which represents a separate investment portfolio and which may create additional series in the future; and WHEREAS, the Company, for which Aetna Life Insurance and Annuity Company ("Adviser") serves as investment adviser, desires to retain the Bank to serve as the Company's custodian for each such existing investment portfolio ("Series"), as well as for some or all of any additional Series created by the Company in the future and the Bank is willing to serve as custodian for each such Series on the terms set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained herein, the parties hereto agree as follows: 1. Bank Appointed Custodian. The Company hereby appoints the Bank as custodian of its Portfolio Securities and cash delivered to the Bank as hereinafter described and the Bank agrees to act as such upon the terms and conditions hereinafter set forth. For the services rendered pursuant to this Agreement the Company agrees to pay to the Bank the fees set forth on Appendix A hereto. 2. Definitions. Whenever used herein, the terms listed below will have the following meaning: 2.1 Authorized Person. Authorized Person will mean any of the persons duly authorized to give Proper Instructions or otherwise act on behalf of the Company by appropriate resolution of its Board, or as authorized by the Company's Administrator (the "Administrator"), and set forth in a certificate as required by Section 4 hereof. 2.2 Board. Board will mean the Board of Directors of the Company. 2.3 Security. The term security as used herein will have the same meaning assigned to such term in the Securities Act of 1933, including, without limitation, any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to a foreign currency, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to, or option contract to purchase or sell any of the foregoing, and futures, forward contracts and options thereon. 2.4 Portfolio Security. Portfolio Security will mean any security owned by the Series within the Company. 2.5 Officers' Certificate. Officers' Certificate will mean, unless otherwise indicated, any request, direction, instruction, or certification in writing signed or initialed on behalf of the Company by one or more person or persons as the Board of Directors shall have from time to time authorized. 2.6 Book-Entry System. Book-Entry System shall mean the Federal Reserve-Treasury Department Book Entry System for United States government, instrumentality and agency securities operated by the Federal Reserve Bank, its successor or successors and its nominee or nominees. 2.7 Depository. Depository shall mean The Depository Trust Company ("DTC"), a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934 ("Exchange Act"), its successor or successors and its nominee or nominees. The term "Depository" shall further mean and include any other person authorized to act as a depository under the 1940 Act, its successor or successors and its nominee or nominees, specifically identified in a certified copy of a resolution of the Board. 2.8 Proper Instructions. Proper Instructions shall mean (i) instructions regarding the purchase or sale of Portfolio Securities, and payments and deliveries in connection therewith, given by an Authorized Person, such instructions to be given in such form and manner as the Bank and the Administrator shall agree upon from time to time, and (ii) instructions (which may be continuing instructions) regarding other matters signed or initialed by an Authorized Person. Oral instructions will be considered Proper Instructions if the Bank reasonably believes them to have been given by an Authorized Person. All oral instructions are to be promptly confirmed in writing. The Bank shall act upon and comply with any subsequent Proper Instruction that modifies a prior instruction and the sole obligation of the Bank with respect to any follow-up or confirmatory instruction shall be to make reasonable efforts to detect any discrepancy between the original instruction and such confirmation and to report such discrepancy to the Administrator. The Administrator shall be responsible, at the Administrator's expense, for taking any action, including any reprocessing, necessary to correct any such discrepancy or error, and to the extent such action requires the Bank to act, the Administrator shall give the Bank specific Proper Instructions as to the action required. Upon receipt by the Bank of an Officers' Certificate as to the authorization by the Board accompanied by a detailed description of procedures approved by the Administrator, Proper Instructions may include communication effected directly between electro-mechanical or electronic devices provided that the Administrator and the Bank agree in writing that such procedures afford adequate safeguards for the Company's assets. 3. Separate Accounts. The Bank will segregate the assets of each Series to which this Agreement relates into a separate account for each such Series containing the assets of such Series (and all investment earnings thereon). Unless the context otherwise requires, any reference in this Agreement to any actions to be taken by the Administrator shall be deemed to refer to the Company acting on behalf of one or more of its Series, any reference in this Agreement to any assets of the Company, including, without limitation, any Portfolio Securities and cash and earnings thereon, shall be deemed to refer only to assets of the applicable Series, any duty or obligation of the Bank hereunder to the Company shall be deemed to refer to duties and obligations with respect to such individual Series and any obligation or liability of the Company hereunder shall be binding only with respect to such individual Series, and shall be discharged only out of the assets of such Series. 4. Certification as to Authorized Persons. The Secretary or Assistant Secretary of the Company will at all times maintain on file with the Bank his or her certification to the Bank, in such form as may be acceptable to the Bank, of (i) the names and signatures of the Authorized Persons and (ii) the names of the members of the Board, it being understood that upon the occurrence of any change in the 2 information set forth in the most recent certification on file (including without limitation any person named in the most recent certification who is no longer an Authorized Person as designated therein), the Secretary or Assistant Secretary of the Company will sign a new or amended certification setting forth the change and the new, additional or omitted names or signatures. The Bank will be entitled to rely and act upon any Officers' Certificate given to it by the Company which has been signed by Authorized Persons named in the most recent certification received by the Bank. 5. Custody of Cash. As custodian for the Company, the Bank will open and maintain a separate account or accounts in the name of each Series within the Company or in the name of the Bank, as Custodian for the Company's Series, and will deposit to the account of the Series all of the cash, except for cash held by a subcustodian appointed pursuant to Sections 14.2 or 14.3 hereof, including borrowed funds, delivered to the Bank, subject only to draft or order by the Bank acting pursuant to the terms of this Agreement. Pursuant to the Bank's internal policies regarding the management of cash accounts, the Bank may segregate certain portions of the cash of the Series as permitted in subsections 5.1-5.9 below. 5.1 Purchase of Securities. Upon the purchase of securities for the Series, against contemporaneous receipt of such securities by the Bank or against delivery of such securities to the Bank in accordance with generally accepted settlement practices and customs in the jurisdiction or market in which the transaction occurs registered in the name of the Series or in the name of, or properly endorsed and in form for transfer to, the Bank, or a nominee of the Bank, or receipt for the account of the Bank pursuant to the provisions of Section 6 below, each such payment to be made at the purchase price shown on a broker's confirmation (or transaction report in the case of Book Entry Paper (as that term is defined in Section 6.6 hereof) of purchase of the securities received by the Bank before such payment is made, as confirmed in the Proper Instructions received by the Bank before such payment is made. 5.2 Redemptions. In such amount as may be necessary for the repurchase or redemption of common shares of the Series offered for repurchase or redemption in accordance with Section 7 of this Agreement. 5.3 Distributions and Expenses of Fund. For the payment on the account of a Series of dividends or other distributions to shareholders as may from time to time be declared by the Board, interest, taxes, management, administrative or supervisory fees, distribution fees, fees of the Bank for its services hereunder and reimbursement of the expenses and liabilities of the Bank as provided hereunder, fees of any transfer agent, fees for legal, accounting, and auditing services, or other operating expenses of the Series. 5.4 Payment in Respect of Securities. For payments in connection with the conversion, exchange or surrender of Portfolio Securities or securities subscribed to by the Series held by or to be delivered to the Bank. 5.5 Repayment of Loans. To repay loans of money made to a Series, but, in the case of final payment, only upon redelivery to the Bank of any Portfolio Securities pledged or hypothecated therefor and upon surrender of documents evidencing the loan; 5.6 Repayment of Cash. To repay the cash delivered to a Series for the purpose of collateralizing the obligation to return to the Series certificates borrowed from the Series representing Portfolio Securities, but only upon redelivery to the Bank of such borrowed certificates. 3 5.7 Foreign Exchange Transactions. (a) For payments in connection with foreign exchange contracts or options to purchase and sell foreign currencies for spot and future delivery (collectively, "Foreign Exchange Agreements") which may be entered into by the Bank on behalf of a Series upon the receipt of Proper Instructions, such Proper Instructions to specify the currency broker or banking institution (which may be the Bank, or any other subcustodian or agent hereunder, acting as principal) with which the contract or option is made, and the Bank shall have no duty with respect to the selection of such currency brokers or banking institutions with which the Series deals or for their failure to comply with the terms of any contract or option. (b) In order to secure any payments in connection with Foreign Exchange Agreements that may be entered into by the Bank pursuant to Proper Instructions, each Series agrees that the Bank shall have a continuing lien and security interest, to the extent of any payment due under any Foreign Exchange Agreement, in and to any property at any time held by the Bank for the Series' benefit or in which the Series has an interest and which is then in the Bank's possession or control (or in the possession or control of any third party acting on the Bank's behalf). The Series authorize the Bank, in the Bank's sole discretion, at any time to charge any such payment due under any Foreign Exchange Agreement against any balance of account standing to the credit of such Series on the Bank's books. 5.8 Other Authorized Payments. For other authorized transactions of a Series, or other obligations of a Series incurred for proper Series purposes; provided that before making any such payment the Bank will also receive a certified copy of a resolution of the Board signed by an Authorized Person (other than the Person certifying such resolution) and certified by its Secretary or Assistant Secretary, naming the person or persons to whom such payment is to be made, and either describing the transaction for which payment is to be made and declaring it to be an authorized transaction of the Series, or specifying the amount of the obligation for which payment is to be made, setting forth the purpose for which such obligation was incurred and declaring such purpose to be a proper corporate purpose. 5.9 Termination: Upon the termination of this Agreement as hereinafter set forth pursuant to Section 8 and Section 16 of this Agreement. 6. Securities. 6.1 Segregation and Registration. Except as otherwise provided herein, and except for securities to be delivered to any subcustodian appointed pursuant to Sections 14.2 or 14.3 hereof, the Bank as custodian will receive and hold pursuant to the provisions hereof, in a separate account or accounts and physically segregated at all times from those of other persons, any and all Portfolio Securities which may now or hereafter be delivered to it by or for the account of each Series. All such Portfolio Securities will be held or disposed of by the Bank for, and subject at all times to, the instructions of the Company pursuant to the terms of this Agreement. Subject to the specific provisions herein relating to Portfolio Securities that are not physically held by the Bank, the Bank will register all Portfolio Securities (unless otherwise directed by Proper Instructions or an Officers' Certificate) in the name of a registered nominee of the Bank as defined in the Internal Revenue Code and any Regulations of the Treasury Department issued thereunder, and will execute and deliver all such certificates in connection therewith as may be required by such laws or regulations or under the laws of any state. 4 The Company will from time to time furnish to the Bank appropriate instruments to enable it to hold or deliver in proper form for transfer, or to register in the name of its registered nominee, any Portfolio Securities which may from time to time be registered in the name of a Series. 6.2 Voting and Proxies. Neither the Bank nor any nominee of the Bank will vote any of the Portfolio Securities held hereunder, except in accordance with Proper Instructions or an Officers' Certificate. The Bank will execute and deliver, or cause to be executed and delivered, to each Series all notices, proxies and proxy soliciting materials delivered to the Bank with respect to such Securities, such proxies to be executed by the registered holder of such Securities [(if registered otherwise than in the name of the Series)], but without indicating the manner in which such proxies are to be voted. 6.3 Corporate Action. If at any time the Bank is notified that an issuer of any Portfolio Security has taken or intends to take a corporate action (a "Corporate Action") that affects the rights, privileges, powers, preferences, qualifications or ownership of a Portfolio Security, including without limitation, liquidation, consolidation, merger, recapitalization, reorganization, reclassification, subdivision, combination, stock split or stock dividend, which Corporate Action requires an affirmative response or action on the part of the holder of such Portfolio Security (a "Response"), the Bank shall notify the affected Series promptly of the Corporate Action, the Response required in connection with the Corporate Action and the Bank's deadline for receipt of Proper Instructions regarding the Response (the "Response Deadline"). The Bank shall forward to the Series via telecopier and/or overnight courier all notices, information statements or other materials relating to the Corporate Action within twenty-four (24) hours of receipt of such materials by the Bank. (a) The Bank shall act upon a required Response only after receipt by the Bank of Proper Instructions from the Series no later than 5:00 p.m. on the date specified as the Response Deadline and only if the Bank (or its agent or subcustodian hereunder) has actual possession of all necessary Securities, consents and other materials no later than 5:00 p.m. on the date specified as the Response Deadline. (b) The Bank shall have no duty to act upon a required Response if Proper Instructions relating to such Response and all necessary Securities, consents and other materials are not received by and in the possession of the Bank no later than 5:00 p.m. on the date specified as the Response Deadline. Notwithstanding, the Bank may, in its sole discretion, use its best efforts to act upon a Response for which Proper Instructions and/or necessary Securities, consents or other materials are received by the Bank after 5:00 p.m. on the date specified as the Response Deadline, it being acknowledged and agreed by the parties that any undertaking by the Bank to use its best efforts in such circumstances shall in no way create any duty upon the Bank to complete such Response prior to its expiration. (c) In the event that a Series notifies the Bank of a Corporate Action requiring a Response and the Bank has received no other notice of such Corporate Action, the Response Deadline shall be 48 hours prior to the Response expiration time set by the depository processing such Corporate Action. (d) Section 14.3(g) of this Agreement shall govern any Corporate Action involving Foreign Portfolio Securities held by a Selected Foreign Subcustodian. 6.4 Book-Entry System. Provided (i) the Bank has received a certified copy of a resolution of the Board specifically approving deposits of Company assets in the Book-Entry System, and (ii) for any 5 subsequent changes to such arrangements following such approval, the Board has reviewed and approved the arrangement and has not delivered an Officer's Certificate to the Bank indicating that the Board has withdrawn its approval: (a) The Bank may keep Portfolio Securities in the Book-Entry System provided that such Portfolio Securities are represented in an account ("Account") of the Bank (or its agent) in such System which shall not include any assets of the Bank (or such agent) other than assets held as a fiduciary, custodian, or otherwise for customers; (b) The records of the Bank (and any such agent) with respect to a Series' participation in the Book-Entry System through the Bank (or any such agent) will identify by book entry the Portfolio Securities which are included with other securities deposited in the Account and shall at all times during the regular business hours of the Bank (or such agent) be open for inspection by duly authorized officers, employees or agents of the Company. Where securities are transferred to a Series' account, the Bank shall also, by book entry or otherwise, identify as belonging to the Series a quantity of securities in a fungible bulk of securities (i) registered in the name of the Bank or its nominee, or (ii) shown on the Bank's account on the books of the Federal Reserve Bank; (c) The Bank (or its agent) shall pay for securities purchased for the account of the Series or shall pay cash collateral against the return of Portfolio Securities loaned by the Series upon (i) receipt of advice from the Book-Entry System that such Securities have been transferred to the Account, and (ii) the making of an entry on the records of the Bank (or its agent) to reflect such payment and transfer for the account of the Series. The Bank (or its agent) shall transfer securities sold or loaned for the account of the Series upon (i) receipt of advice from the Book-Entry System that payment for securities sold or payment of the initial cash collateral against the delivery of securities loaned by the Series has been transferred to the Account; and (ii) the making of an entry on the records of the Bank (or its agent) to reflect such transfer and payment for the account of the Series. Copies of all advices from the Book-Entry System of transfers of securities for the account of the Series shall identify the Series, be maintained for the Series by the Bank and shall be provided to the Series at its request. The Bank shall send the Series a confirmation, as defined by Rule 17f-4 under the 1940 Act, of any transfers to or from the account of the Series; (d) The Bank will promptly provide the Company with any report obtained by the Bank or its agent on the Book-Entry System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Book-Entry System. 6.5 Use of a Depository. Provided (i) the Bank has received a certified copy of a resolution of the Board specifically approving deposits in DTC or other such Depository and (ii) for any subsequent changes to such arrangements following such approval, the Board has reviewed and approved the arrangement and has not delivered an Officer's Certificate to the Bank indicating that the Board has withdrawn its approval: (a) The Bank may use a Depository to hold, receive, exchange, release, lend, deliver and otherwise deal with Portfolio Securities including stock dividends, rights and other items of like nature, and to receive and remit to the Bank on behalf of a Series all income and other payments thereon and to take all steps necessary and proper in connection with the collection thereof; 6 (b) Registration of Portfolio Securities may be made in the name of any nominee or nominees used by such Depository; (c) Payment for securities purchased and sold may be made through the clearing medium employed by such Depository for transactions of participants acting through it. Upon any purchase of Portfolio Securities, payment will be made only upon delivery of the securities to or for the account of the Series and the Series shall pay cash collateral against the return of Portfolio Securities loaned by the Series only upon delivery of the Securities to or for the account of the Series; and upon any sale of Portfolio Securities, delivery of the Securities will be made only against payment therefor or, in the event Portfolio Securities are loaned, delivery of Securities will be made only against receipt of the initial cash collateral to or for the account of the Series; and (d) The Bank shall use its best efforts to provide that: (i) The Depository obtains replacement of any certificated Portfolio Security deposited with it in the event such Security is lost, destroyed, wrongfully taken or otherwise not available to be returned to the Bank upon its request; (ii) Proxy materials received by a Depository with respect to Portfolio Securities held by a Series deposited with such Depository are forwarded immediately to the Bank for prompt transmittal to the Series; (iii) Such Depository promptly forwards to the Bank confirmation of any purchase or sale of Portfolio Securities on behalf of a Series and of the appropriate book entry made by such Depository to the Series' account; (iv) Such Depository prepares and delivers to the Bank such records with respect to the performance of the Bank's obligations and duties hereunder as may be necessary for the Series to comply with the recordkeeping requirements of Section 31(a) of the 1940 Act and Rule 31(a) thereunder; and (v) Such Depository delivers to the Bank all internal accounting control reports, whether or not audited by an independent public accountant, as well as such other reports as the Series may reasonably request in order to verify the Portfolio Securities held by such Depository. 6.6 Use of Book-Entry System for Commercial Paper. Provided (i) the Bank has received a certified copy of a resolution of the Board specifically approving participation in a system maintained by the Bank for the holding of commercial paper in book-entry form ("Book-Entry Paper") and (ii) for each year following such approval the Board has reviewed the arrangement, upon receipt of Proper Instructions and upon receipt of confirmation from an Issuer (as defined below) that the Series has purchased such Issuer's Book-Entry Paper, the Bank shall issue and hold in book-entry form, on behalf of each Series, commercial paper issued by issuers with whom the Bank has entered into a book-entry agreement (the "Issuers"). In maintaining procedures for Book-Entry Paper, the Bank agrees that: (a) The Bank will maintain all Book-Entry Paper held by the Series in an account of the Bank that includes only assets held by it for customers; (b) The records of the Bank with respect to each Series' purchase of Book-Entry Paper through the Bank will identify, by book-entry, commercial paper belonging to each Series which is 7 included in the Book-Entry System and shall at all times during the regular business hours of the Bank be open for inspection by duly authorized officers, employees or agents of that Series; (c) The Bank shall pay for Book-Entry Paper purchased for the account of each Series upon contemporaneous (i) receipt of advice from the Issuer that such sale of Book-Entry Paper has been effected, and (ii) the making of an entry on the records of the Bank to reflect such payment and transfer for the account of the Series; (d) The Bank shall cancel such Book-Entry Paper obligation upon the maturity thereof upon contemporaneous (i) receipt of advice that payment for such Book-Entry Paper has been transferred to a Series, and (ii) the making of an entry on the records of the Bank to reflect such payment for the account of the Series; and (e) The Bank will send to the Company such reports on its system of internal accounting control with respect to the Book-Entry Paper as the Company may reasonably request from time to time. 6.7 Use of Immobilization Programs. Provided (i) the Bank has received a certified copy of a resolution of the Board specifically approving the maintenance of Portfolio Securities in an immobilization program operated by a bank which meets the requirements of Section 26(a)(1) of the 1940 Act, and (ii) for each year following such approval the Board has reviewed the arrangement and has not delivered an Officer's Certificate to the Bank indicating that the Board has withdrawn its approval, the Bank shall enter into such immobilization program with such bank acting as a subcustodian hereunder. 6.8 Eurodollar CDs. Any Portfolio Securities that are Eurodollar CDs may be physically held by the European branch of the U.S. banking institution that is the issuer of such Eurodollar CD (a "European Branch"), provided that such Portfolio Securities are identified on the books of the Bank as belonging to a Series and that the books of the Bank identify the European Branch holding such Portfolio Securities. Notwithstanding any other provision of this Agreement to the contrary, except as stated in the first sentence of this subsection 6.8, the Bank shall be under no other duty with respect to such Eurodollar CDs belonging to a Series. 6.9 Options and Futures Transactions. (a) Puts and Calls Traded on Securities Exchanges, NASDAQ or Over-the-Counter. (i) The Bank shall take action as to put options ("puts") and call options ("calls") purchased or sold (written) by a Series regarding escrow or other arrangements (i) in accordance with the provisions of any agreement entered into upon receipt of Proper Instructions among the Bank, any broker-dealer registered with the National Association of Securities Dealers, Inc. (the "NASD"), and, if necessary, the Series, relating to the compliance with the rules of the Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations. (ii) The Bank shall be under a duty and obligation to see that each Series has deposited or is maintaining adequate margin, as required, with any broker in connection with any option, and the Bank shall be under duty and obligation to present such option to the broker for exercise upon receiving Proper Instructions from the Series. The Bank shall have responsibility for the legality of any put or call purchased or sold on behalf of a Series, the propriety of any such purchase or sale, or the adequacy of any collateral delivered to a broker in connection with an option or deposited to or 8 withdrawn from a Segregated Account (as defined in subsection 6.10 below). The Bank specifically, but not by way of limitation, shall be under any duty and obligation to: (i) periodically check and notify the Series that the amount of such collateral held by a broker or held in a Segregated Account is insufficient to protect such broker or the Series against any loss; (ii) effect the return of any collateral delivered to a broker; or (iii) advise the Series that any option it holds has or is about to expire. Such duties or obligations shall be the responsibility of the Bank and the Series. (b) Puts, Calls and Futures Traded on Commodities Exchanges (i) The Bank shall take action as to puts, calls and futures contracts ("Futures") purchased or sold by a Series in accordance with the provisions of any agreement entered into upon the receipt of Proper Instructions among the Series, the Bank and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Series. (ii) The responsibilities of the Bank as to futures, puts and calls traded on commodities exchanges, any Futures Commission Merchant account and the Segregated Account shall be limited as set forth in subparagraph (a)(2) of this Section 6.9 as if such subparagraph referred to Futures Commission Merchants rather than brokers, and Futures and puts and calls thereon instead of options. 6.10 Segregated Account. The Bank shall upon receipt of Proper Instructions establish and maintain a Segregated Account or Accounts for and on behalf of each Series. (a) Cash and/or Portfolio Securities may be transferred into a Segregated Account upon receipt of Proper Instructions in the following circumstances: (i) in accordance with the provisions of any agreement among the Series, the Bank and a broker-dealer registered under the Exchange Act and a member of the NASD or any Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Options Clearing Corporation and of any registered national securities exchange or the Commodity Futures Trading Commission or any registered Contract Market, or of any similar organizations regarding escrow or other arrangements in connection with transactions by the Series; (ii) for the purpose of segregating cash or securities in connection with options purchased or written by the Series or commodity futures purchased or written by the Series; (iii) for the deposit of liquid assets, having a market value (marked-to-market on a daily basis) at all times equal to not less than the aggregate purchase price due on the settlement dates of the Series' then outstanding forward commitments or "when-issued" agreements relating to the purchase of Portfolio Securities and the Series' then outstanding commitments under reverse repurchase agreements entered into with broker-dealer firms; (iv) for the purposes of compliance by the Series with the procedures required by Investment Company Act Release No. 10666, or any subsequent Commission releases or Commission staff positions relating to the maintenance of Segregated Accounts by registered investment companies; 9 (v) for other proper corporate purposes, but only, in the case of this clause (e), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board, or of the executive committee of the Board signed by an officer of the Company and certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such Segregated Account and declaring such purposes to be proper corporate purposes. (b) Cash and/or Portfolio Securities may be withdrawn from a Segregated Account pursuant to Proper Instructions in the following circumstances: (i) with respect to assets deposited in accordance with the provisions of any agreements referenced in (a)(i) or (a)(ii) above, in accordance with the provisions of such agreements; (ii) with respect to assets deposited pursuant to (a)(iii) or (a)(iv) above, for sale or delivery to meet the Series' obligations under outstanding forward commitment or when-issued agreements for the purchase of Portfolio Securities and under reverse repurchase agreements; (iii) for exchange for other liquid assets of equal or greater value deposited in the Segregated Account; (iv) to the extent that the Series' outstanding forward commitment or when-issued agreements for the purchase of Portfolio Securities or reverse repurchase agreements are sold to other parties or the Series' obligations thereunder are met from assets of the Series other than those in the Segregated Account; (v) for delivery upon settlement of a forward commitment or when-issued agreement for the sale of Portfolio Securities; or (vi) with respect to assets deposited pursuant to (e) above, in accordance with the purposes of such account as set forth in Proper Instructions. 6.11 Interest Bearing Call or Time Deposits. The Bank shall, upon receipt of Proper Instructions relating to the purchase by a Series of interest-bearing fixed-term and call deposits, transfer cash, by wire or otherwise, in such amounts and to such bank or banks as shall be indicated in such Proper Instructions. The Bank shall include in its records with respect to the assets of the Series appropriate notation as to the amount of each such deposit, the banking institution with which such deposit is made (the "Deposit Bank"), and shall retain such forms of advice or receipt evidencing the deposit, if any, as may be forwarded to the Bank by the Deposit Bank. Such deposits shall be deemed Portfolio Securities of the Series and the responsibility of the Bank therefore shall be the same as and no greater than the Bank's responsibility in respect of other Portfolio Securities of the Series. 6.12 Transfer of Securities. The Bank will transfer, exchange, deliver or release Portfolio Securities held by it hereunder, insofar as such Securities are available for such purpose, provided that before making any transfer, exchange, delivery or release under this Section only upon receipt of Proper Instructions. The Proper Instructions shall state that such transfer, exchange or delivery is for a purpose permitted under the terms of this Section 6.11, and shall specify the applicable subsection, or describe the purpose of the transaction with sufficient particularity to permit the Bank to ascertain the applicable subsection. After receipt of such Proper Instructions, the Bank will transfer, exchange, deliver or release Portfolio Securities only in the following circumstances: 10 (a) Upon sales of Portfolio Securities for the account of the Series, against contemporaneous receipt by the Bank of payment therefor in full, or against payment to the Bank in accordance with generally accepted settlement practices and customs in the jurisdiction or market in which the transaction occurs, each such payment to be in the amount of the sale price shown in a broker's confirmation of sale received by the Bank before such payment is made, as confirmed in the Proper Instructions received by the Bank before such payment is made; (b) In exchange for or upon conversion into other securities alone or other securities and cash pursuant to any plan of merger, consolidation, reorganization, share split-up, change in par value, recapitalization or readjustment or otherwise, upon exercise of subscription, purchase or sale or other similar rights represented by such Portfolio Securities, or for the purpose of tendering shares in the event of a tender offer therefor, provided, however, that in the event of an offer of exchange, tender offer, or other exercise of rights requiring the physical tender or delivery of Portfolio Securities, the Bank shall have no liability for failure to so tender in a timely manner unless such Proper Instructions are received by the Bank at least two business days prior to the date required for tender, and unless the Bank (or its agent or subcustodian hereunder) has actual possession of such Security at least two business days prior to the date of tender; (c) Upon conversion of Portfolio Securities pursuant to their terms into other securities; (d) For the purpose of redeeming in-kind shares of a Series upon authorization from the Company; (e) In the case of option contracts owned by a Series, for presentation to the endorsing broker; (f) When such Portfolio Securities are called, redeemed or retired or otherwise become payable; (g) For the purpose of effectuating the pledge of Portfolio Securities held by the Bank in order to collateralize loans made to a Series by any bank, including the Bank; provided, however, that such Portfolio Securities will be released only upon payment to the Bank for the account of the Series of the moneys borrowed, provided further, however, that in cases where additional collateral is required to secure a borrowing already made, and such fact is made to appear in the Proper Instructions, Portfolio Securities may be released for that purpose without any such payment. In the event that any pledged Portfolio Securities are held by the Bank, they will be so held for the account of the lender, and after notice to the Fund from the lender in accordance with the normal procedures of the lender and any loan agreement between the fund and the lender that an event of deficiency or default on the loan has occurred, the Bank may deliver such pledged Portfolio Securities to or for the account of the lender; (h) for the purpose of releasing certificates representing Portfolio Securities, against contemporaneous receipt by the Bank of the fair market value of such security, as set forth in the Proper Instructions received by the Bank before such payment is made; (i) for the purpose of delivering securities lent by a Series to a bank or broker dealer, but only against receipt in accordance with street delivery custom except as otherwise provided herein, of adequate collateral as agreed upon from time to time by the Series and the Bank, and upon receipt of payment in connection with any repurchase agreement relating to such securities entered into by the Series; 11 (j) for other authorized transactions of a Series or for other proper corporate purposes; provided that before making such transfer, the Bank will also receive a certified copy of resolutions of the Board, signed by an authorized officer of the Company (other than the officer certifying such resolution) and certified by its Secretary or Assistant Secretary, specifying the Portfolio Securities to be delivered, setting forth the transaction in or purpose for which such delivery is to be made, declaring such transaction to be an authorized transaction of the Company or such purpose to be a proper corporate purpose, and naming the person or persons to whom delivery of such securities shall be made; and (k) upon termination of this Agreement as hereinafter set forth pursuant to Section 8 and Section 16 of this Agreement. As to any deliveries made by the Bank pursuant to this Section 6.12, securities or cash receivable in exchange therefor shall be delivered to the Bank. 7. Redemptions. In the case of payment of assets of a Series held by the Bank in connection with redemptions and repurchases by the Series of outstanding common shares, the Bank will rely on notification by the Series' transfer agent of receipt of a request for redemption and certificates, if issued, in proper form for redemption before such payment is made. Payment shall be made in accordance with the Articles of Incorporation or Declaration of Trust and By-laws of the Company (the "Articles"), from assets available for said purpose. 8. Merger, Dissolution, etc. of a Series. In the case of the following transactions, not in the ordinary course of business, namely, the merger of a Series into or the consolidation of a Series with another investment company or series thereof, the sale by a Series of all, or substantially all, of its assets to another investment company or series thereof, or the liquidation or dissolution of a Series and distribution of its assets, the Bank will deliver the Portfolio Securities held by it under this Agreement and disburse cash only upon the order of the Company set forth in an Officers' Certificate, accompanied by a certified copy of a resolution of the Board authorizing any of the foregoing transactions. Upon completion of such delivery and disbursement and the payment of the fees, disbursements and expenses of the Bank, this Agreement will terminate and the Bank shall be released from any and all obligations hereunder. 9. Actions of Bank Without Prior Authorization. Notwithstanding anything herein to the contrary, unless and until the Bank receives an Officers' Certificate to the contrary, the Bank will take the following actions without prior authorization or instruction of the Company or the transfer agent: 9.1 Endorse for collection and collect on behalf of and in the name of the Series all checks, drafts, or other negotiable or transferable instruments or other orders for the payment of money received by it for the account of the Series and hold for the account of the Series all income, dividends, interest and other payments or distributions of cash with respect to the Portfolio Securities held thereunder; 9.2 Present for payment all coupons and other income items held by it for the account of the Series which call for payment upon presentation and hold the cash received by it upon such payment for the account of the Series; 9.3 Receive and hold for the account of the Series all securities received as a distribution on Portfolio Securities as a result of a stock dividend, share split-up, reorganization, recapitalization, 12 merger, consolidation, readjustment, distribution of rights and similar securities issued with respect to any Portfolio Securities held by it hereunder. 9.4 Execute as agent on behalf of the Series all necessary ownership and other certificates and affidavits required by the Internal Revenue Code or the regulations of the Treasury Department issued thereunder, or by the laws of any State, now or hereafter in effect, inserting the Series' name on such certificates as the owner of the securities covered thereby, to the extent it may lawfully do so and as may be required to obtain payment in respect thereof. The Bank will execute and deliver such certificates in connection with Portfolio Securities delivered to it or by it under this Agreement as may be required under the provisions of the Internal Revenue Code and any Regulations of the Treasury Department issued thereunder, or under the laws of any State; 9.5 Present for payment all Portfolio Securities which are called, redeemed, retired or otherwise become payable, and hold cash received by it upon payment for the account of each Series; and 9.6 Exchange interim receipts or temporary securities for definitive securities. 10. Collections and Defaults. The Bank will use reasonable efforts to collect any funds which may to its knowledge become collectible arising from Portfolio Securities, including dividends, interest and other income, and to transmit to the Series notice actually received by it of any call for redemption, offer of exchange, right of subscription, reorganization or other proceedings affecting such Securities. If Portfolio Securities upon which such income is payable are in default or payment is refused after due demand or presentation, the Bank will notify the Series in writing of any default or refusal to pay within two business days from the day on which it receives knowledge of such default or refusal. 11. Maintenance of Records and Accounting Services. The Bank will maintain records with respect to transactions for which the Bank is responsible pursuant to the terms and conditions of this Agreement, and in compliance with the applicable rules and regulations of the 1940 Act. The books and records of the Bank pertaining to its actions under this Agreement and reports by the Bank or its independent accountants concerning its accounting system, procedures for safeguarding securities and internal accounting controls will be open to inspection and audit at reasonable times by officers of or auditors employed by the Company and will be preserved by the Bank in the manner and in accordance with the applicable rules and regulations under the 1940 Act. The Bank shall perform fund accounting and shall keep the books of account and render statements or copies from time to time as reasonably requested by the Treasurer or any executive officer of the Company. The Bank shall assist generally in the preparation of reports to shareholders and others, audits of accounts, and other ministerial matters of like nature. 12. Fund Evaluation and Yield Calculation 12.1 Fund Evaluation. The Bank shall compute and, unless otherwise directed by the Board, determine as of the close of regular trading on the New York Stock Exchange on each day on which said Exchange is open for unrestricted trading and as of such other days, or hours, if any, as may be authorized by the Board, the net asset value and the public offering price of a share of capital stock of each Series of the Company, such determination to be made in accordance with the provisions of the Articles and By-laws of the Company and the Prospectus and Statement of Additional Information 13 relating to the Company, as they may from time to time be amended, and any applicable resolutions of the Board at the time in force and applicable; and promptly to notify the Company, the proper exchange and the NASD or such other persons as the Company may request of the results of such computation and determination. In computing the net asset value hereunder, the Bank may rely in good faith upon information furnished to it by any Authorized Person in respect of (i) the manner of accrual of the liabilities of each Series and in respect of liabilities of each Series not appearing on its books of account kept by the Bank, (ii) reserves, if any, authorized by the Board or that no such reserves have been authorized, (iii) the source of the quotations to be used in computing the net asset value, (iv) the value to be assigned to any security for which no price quotations are available, and (v) the method of computation of the public offering price on the basis of the net asset value of the shares, and the Bank shall not be responsible for any loss occasioned by such reliance or for any good faith reliance on any quotations received from a source pursuant to (iii) above. 12.2. Yield Calculation. The Bank will compute the performance results of each Series (the "Yield Calculation") in accordance with the provisions of Release No. 33-6753 and Release No. IC-16245 (February 2, 1988) (the "Releases") promulgated by the Securities and Exchange Commission, and any subsequent amendments to, published interpretations of or general conventions accepted by the staff of the Securities and Exchange Commission with respect to such releases or the subject matter thereof ("Subsequent Staff Positions"), subject to the terms set forth below: (a) The Bank shall compute the Yield Calculation for each Series for the stated periods of time as shall be mutually agreed upon, and communicate in a timely manner the result of such computation to the Series. (b) In performing the Yield Calculation, the Bank will derive the items of data necessary for the computation from the records it generates and maintains for each Series pursuant Section 11 hereof. The Bank shall have no responsibility to review, confirm, or otherwise assume any duty or liability with respect to the accuracy or correctness of any such data supplied to it by the Series, any of the Series' designated agents or any of the Series' designated third party providers. (c) At the request of the Bank, the Company shall provide, and the Bank shall be entitled to rely on, written standards and guidelines to be followed by the Bank in interpreting and applying the computation methods set forth in the Releases or any Subsequent Staff Positions as they specifically apply to the Series. In the event that the computation methods in the Releases or the Subsequent Staff Positions or the application to the Series of a standard or guideline is not free from doubt or in the event there is any question of interpretation as to the characterization of a particular security or any aspect of a security or a payment with respect thereto (e.g., original issue discount, participating debt security, income or return of capital, etc.) or otherwise or as to any other element of the computation which is pertinent to the Series, the Company or its designated agent shall have the full responsibility for making the determination of how the security or payment is to be treated for purposes of the computation and how the computation is to be made and shall inform the Bank thereof on a timely basis. The Bank shall have no responsibility to make independent determinations with respect to any item which is covered by this Section, and shall not be responsible for its computations made in accordance with such determinations so long as such computations are mathematically correct. (d) The Company shall keep the Bank informed of all publicly available information and of any non-public advice, or information obtained by the Company from its independent auditors or by its personnel or the personnel of its investment adviser, or Subsequent Staff Positions related to the computations to be undertaken by the Bank pursuant to this Agreement and the Bank shall not be deemed 14 to have knowledge of such information (except as contained in the Releases) unless it has been furnished to the Bank in writing. 13. Additional Services. The Bank shall perform the additional services for the Company as are set forth on Appendix B hereto. Appendix B may be amended from time to time upon agreement of the parties to include further additional services to be provided by the Bank to the Company, at which time the fees set forth in Appendix A shall be appropriately increased. 14. Duties of the Bank. 14.1 Performance of Duties and Standard of Care. In performing its duties hereunder and any other duties listed on any Schedule hereto, if any, the Bank will be entitled to receive and act upon the advice of independent counsel of its own selection, which may be counsel for the Company, and will be without liability for any action taken or thing done or omitted to be done in accordance with this Agreement in good faith in conformity with such advice. The Bank will be under no duty or obligation to inquire into and will not be liable for: (a) the validity of the issue of any Portfolio Securities purchased by or for the Series, the legality of the purchases thereof or the propriety of the price incurred therefor; (b) the legality of any sale of any Portfolio Securities by or for any Series or the propriety of the amount for which the same are sold; (c) the legality of an issue or sale of any common shares of a Series or the sufficiency of the amount to be received therefor; (d) the legality of the repurchase of any common shares of a Series or the propriety of the amount to be paid therefor; (e) the legality of the declaration of any dividend by a Series or the legality of the distribution of any Portfolio Securities as payment in kind of such dividend; and (f) any property or moneys of a Series unless and until received by it, and any such property or moneys delivered or paid by it pursuant to the terms hereof. Moreover, the Bank will not be under any duty or obligation to ascertain whether any Portfolio Securities at any time delivered to or held by it for the account of a Series are such as may properly be held by the Series under the provisions of the Company's Articles, By-laws, any federal or state statutes or any rule or regulation of any governmental agency. 14.2 Agents and Subcustodians with Respect to Property of the Company Held in the United States. The Bank may employ agents in the performance of its duties hereunder and shall be responsible for the acts and omissions of such agents as if performed by the Bank hereunder. Without limiting the foregoing, certain duties of the Bank hereunder may be performed by one or more affiliates of the Bank. Upon receipt of Proper Instructions, the Bank may employ subcustodians selected by or at the direction of the Company, provided that any such subcustodian meets at least the minimum qualifications required by Section 17(f)(1) of the 1940 Act to act as a custodian of the Company's assets with respect to property of the Company held in the United States. 15 14.3 Duties of the Bank with Respect to Property of the Company Held Outside of the United States. (a) Appointment of Foreign Subcustodians. The Company hereby authorizes and instructs the Bank to employ as subcustodians for the Company's Portfolio Securities and other assets maintained outside the United States the foreign banking institutions and foreign securities depositories designated on the Schedule attached hereto (each, a "Selected Foreign Subcustodian"). Upon receipt of Proper Instructions, the Bank and the Company may agree to designate additional foreign banking institutions and foreign securities depositories to act as Selected Foreign Subcustodians hereunder. Upon receipt of Proper Instructions, the Company, upon recommendation of the Bank, may instruct the Bank to cease the employment of any one or more such Selected Foreign Subcustodians for maintaining custody of the Company's assets, and the Bank shall so cease to employ such subcustodian as soon as alternate custodial arrangements have been implemented. (b) Foreign Securities Depositories. Except as may otherwise be agreed upon in writing by the Bank and the Company, assets of the Company shall be maintained in foreign securities depositories only through arrangements implemented by the foreign banking institutions serving as Selected Foreign Subcustodians pursuant to the terms hereof. Where possible, such arrangements shall include entry into agreements containing the provisions set forth in subparagraph (d) hereof. Notwithstanding the foregoing, except as may otherwise be agreed upon in writing by the Bank and the Company, the Company authorizes the use of Foreign Securities Depositories as recommended by the Bank including: deposit in Euro-clear, the securities clearance and depository facilities operated by Morgan Guaranty Trust Company of New York in Brussels, Belgium, of Foreign Portfolio Securities eligible for deposit therein and the use of Euro-clear in connection with settlements of purchases and sales of securities and deliveries and returns of securities, until notified to the contrary pursuant to subparagraph (a) hereunder. (c) Segregation of Securities. The Bank shall identify on its books as belonging to each Series the Foreign Portfolio Securities held by each Selected Foreign Subcustodian. Each agreement pursuant to which the Bank employs a foreign banking institution shall require that such institution establish a custody account for the Bank and hold in that account Foreign Portfolio Securities and other assets of the Series, and, in the event that such institution deposits Foreign Portfolio Securities in a foreign securities depository, that it shall identify on its books as belonging to the Bank the securities so deposited. (d) Agreements with Foreign Banking Institutions. Each of the agreements pursuant to which a foreign banking institution holds assets of a Series (each, a "Foreign Subcustodian Agreement") shall be substantially in the form provided to the Series and shall provide that: (a) the Series' assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the foreign banking institution or its creditors or agent, except a claim of payment for their safe custody or administration (including, without limitation, any fees or taxes payable upon transfers or reregistration of securities); (b) beneficial ownership of the Series' assets will be freely transferable without the payment of money or value other than for custody or administration (including, without limitation, any fees or taxes payable upon transfers or reregistration of securities); (c) adequate records will be maintained identifying the assets as belonging to the Bank; (d) officers of or auditors employed by, or other representatives of the Bank, including to the extent permitted under applicable law, the independent public accountants for the Company, will be given access to the books and records of the foreign banking institution relating to its actions under its agreement with the Bank; and (e) assets of the 16 Series held by the Selected Foreign Subcustodian will be subject only to the instructions of the Bank or its agents. (e) Access of Independent Accountants of the Company. Upon request of the Company, the Bank will use its best efforts to arrange for the independent accountants of the Company to be afforded access to the books and records of any foreign banking institution employed as a Selected Foreign Subcustodian insofar as such books and records relate to the performance of such foreign banking institution under its Foreign Subcustodian Agreement. (f) Reports by Bank. The Bank will supply to the Company from time to time, as mutually agreed upon, statements in respect of the securities and other assets of each Series held by Selected Foreign Subcustodians, including but not limited to an identification of entities having possession of the Foreign Portfolio Securities and other assets of the Series. (g) Transactions in Foreign Custody Account. Transactions with respect to the assets of each Series held by a Selected Foreign Subcustodian shall be effected pursuant to Proper Instructions from the Series to the Bank and shall be effected in accordance with the applicable Foreign Subcustodian Agreement. If at any time any Foreign Portfolio Securities shall be registered in the name of the nominee of the Selected Foreign Subcustodian, each Series agrees to hold any such nominee harmless from any liability by reason of the registration of such securities in the name of such nominee. Notwithstanding any provision of this Agreement to the contrary, settlement and payment for Foreign Portfolio Securities received for the account of a Series and delivery of Foreign Portfolio Securities maintained for the account of the Series may be effected in accordance with the customary established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer. In connection with any action to be taken with respect to the Foreign Portfolio Securities held hereunder, including, without limitation, the exercise of any voting rights, subscription rights, redemption rights, exchange rights, conversion rights or tender rights, or any other action in connection with any other right, interest or privilege with respect to such Securities (collectively, the "Rights"), the Bank shall promptly transmit to the Series such information in connection therewith as is made available to the Bank by the Foreign Subcustodian, and shall promptly forward to the applicable Foreign Subcustodian any instructions, forms or certifications with respect to such Rights, and any instructions relating to the actions to be taken in connection therewith, as the Bank shall receive from the Series pursuant to Proper Instructions. Notwithstanding the foregoing, the Bank shall have no further duty or obligation with respect to such Rights, including, without limitation, the determination of whether the Series is entitled to participate in such Rights under applicable U.S. and foreign laws, or the determination of whether any action proposed to be taken with respect to such Rights by the Series or by the applicable Foreign Subcustodian will comply with all applicable terms and conditions of any such Rights or any applicable laws or regulations, or market practices within the market in which such action is to be taken or omitted. (h) Liability of Selected Foreign Subcustodians. Each Foreign Subcustodian Agreement with a foreign banking institution shall require the institution to exercise reasonable care in the performance of its duties and to indemnify, and hold harmless, the Bank and each Series from and against certain losses, damages, costs, expenses, liabilities or claims arising out of or in connection with the institution's performance of such obligations, all as set forth in the applicable Foreign Subcustodian 17 Agreement. The Company acknowledges that the Bank, as a participant in Euro-clear, is subject to the Terms and Conditions Governing the Euro-Clear System, a copy of which has been made available to the Company. The Company acknowledges that pursuant to such Terms and Conditions, Morgan Guaranty Brussels shall have the sole right to exercise or assert any and all rights or claims in respect of actions or omissions of, or the bankruptcy or insolvency of, any other depository, clearance system or custodian utilized by Euro-clear in connection with each Series' Portfolio Securities and other assets. (i) Monitoring Responsibilities. The Bank shall furnish annually to the Company information concerning the Selected Foreign Subcustodians employed hereunder for use by the Company in evaluating such Selected Foreign Subcustodians to ensure compliance with the requirements of Rule 17f-5 under the 1940 Act. In addition, the Bank will promptly inform the Company in the event that the Bank is notified by a Selected Foreign Subcustodian that there appears to be a substantial likelihood that its shareholders' equity will decline below US$200 million (or the equivalent thereof) or that its shareholders' equity has declined below US$200 million (in each case computed in accordance with generally accepted U.S. accounting principles) or any other capital adequacy test applicable to it by exemptive order, or if the Bank has actual knowledge of any material loss of the assets of a Series held by a Foreign Subcustodian. (j) Tax Law. The Bank shall have no responsibility or liability for any obligations now or hereafter imposed on a Series or the Bank as custodian for the Series by the tax laws of any jurisdiction, and it shall be the responsibility of the Series to notify the Bank of the obligations imposed on the Series or the Bank as the custodian for the Series by the tax law of any non-U.S. jurisdiction, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibility of the Selected Foreign Subcustodian with regard to such tax law shall be to use reasonable efforts to assist the Series with respect to any claim for exemption or refund under the tax law of jurisdictions for which the Series has provided such information. 14.4 Insurance. The Bank shall use the same care with respect to the safekeeping of Portfolio Securities and cash of the Series held by it as it uses in respect of its own similar property but it need not maintain any special insurance for the benefit of the Series. 14.5. Fees and Expenses of the Bank. The Series will pay or reimburse the Bank from time to time for any transfer taxes payable upon transfer of Portfolio Securities made hereunder, and for all necessary proper disbursements, expenses and charges made or incurred by the Bank in the performance of this Agreement (including any duties listed on any Schedule hereto, if any) including any indemnities for any loss, liabilities or expense to the Bank as provided above. For the services rendered by the Bank hereunder, the Company will pay to the Bank such compensation or fees at such rate and at such times as shall be agreed upon in writing by the parties from time to time. The Bank will also be entitled to reimbursement by the Company for all reasonable expenses incurred in conjunction with termination of this Agreement. 14.6 Advances by the Bank. The Bank may, in its sole discretion, advance funds on behalf of a Series to make any payment permitted by this Agreement upon receipt of any proper authorization required by this Agreement for such payments by a Series. Should such a payment or payments, with advanced funds, result in an overdraft (due to insufficiencies of the Series' account with the Bank, or for any other reason) this Agreement deems any such overdraft or related indebtedness a loan made by the Bank to the Series payable on demand. Such overdraft shall bear interest at the current rate charged by the Bank for such loans unless the Series shall provide the Bank with agreed upon compensating balances. The Series agree that the Bank shall have a continuing lien and security interest to the extent of 18 any overdraft or indebtedness, in and to any property at any time held by it for the Series' benefit or in which the Series has an interest and which is then in the Bank's possession or control (or in the possession or control of any third party acting on the Bank's behalf). The Series authorizes the Bank, in the Bank's sole discretion, at any time to charge any overdraft or indebtedness, together with interest due thereon, against any balance of account standing to the credit of the Series on the Bank's books. 15. Limitation of Liability. 15.1 Liability of the Custodian with Respect to Use of Securities Systems and Foreign Depositories. With respect to the Portfolio Securities, cash and other property of a Series held by a Securities system or by a Foreign Depository utilized by the Custodian or any Subcustodian, the Custodian shall be liable to the Series only for any loss or damage to the Series resulting from use of the Securities System or Foreign Depository if caused by any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its agents' employees or from any failure of the Custodian or any such agent to undertake reasonable efforts to enforce effectively such rights as it may have against the Securities System or Foreign Depository. At the election of the Company, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the Securities System, Foreign Depository or any other person which the Custodian may have as a consequence of any such loss or damage to the Series if and to the extent that the Series has not been made whole for any such loss or damage. 15.2 Standard of Care; Liability; Indemnification. The Custodian shall be held only to the exercise of reasonable care and diligence in carrying out the provisions of this Agreement, provided that the Custodian shall not thereby be required to take any action which is in contravention of any applicable law, rule or regulation or any order or judgment of any court of competent jurisdiction. The Company agrees to indemnify and hold harmless the Custodian and its nominees from all claims and liabilities (including counsel fees) incurred or assessed against it or its nominees in connection with the Custodian's performance of this Agreement, except such as may arise from the Custodian's or its nominee's negligence or willful misconduct. Without limiting the foregoing indemnification obligation of the Company, the Company agrees to indemnify the Custodian and any nominee in whose name Portfolio Securities or other property of the Series is registered against any liability the Custodian or such nominee may incur by reason of taxes assessed to the Custodian or such nominee or other costs, liability or expense incurred by the Custodian or such nominee resulting directly or indirectly from the fact that Portfolio Securities or other property of the Series is registered in the name of the Custodian or such nominee. Without limiting the foregoing, neither the Bank nor the Indemnified Parties shall be liable for, and the Bank and the Indemnified Parties shall be indemnified against, any Claim arising as a result of: (a) Any act or omission by the Bank or any Indemnified Party in good faith reliance upon the terms of this Agreement, any Officer's Certificate, Proper Instructions, resolution of the Board, telegram, telecopier, notice, request, certificate or other instrument reasonably believed by the Bank to genuine; (b) Any act or omission of any subcustodian selected by or at the direction of the Company; (c) Any act or omission of a Selected Foreign Subcustodian to the extent which such Selected Foreign Subcustodian is not liable to the Bank; 19 (d) Any Corporate Action requiring a Response for which the Bank has not received Proper Instructions or obtained actual possession of all necessary Securities, consents or other materials by 5:00 p.m. on the date specified as the Response Deadline; (e) Any act or omission of any European Branch of a U.S. banking institution that is the issuer of Eurodollar CDs in connection with any Eurodollar CDs held by such European Branch; (f) Information relied on in good faith by the Bank and supplied by any Authorized Person in connection with the calculation of (i) the net asset value and public offering price of the shares of capital stock of the Series or (ii) the Yield Calculation. In no event shall the Custodian incur liability under this Agreement if the Custodian or any Subcustodian, Securities System, Foreign Depository, Banking Institution or any agent or entity utilized by any of them is prevented, forbidden or delayed from performing, or omits to perform, any act or thing which this Agreement provides shall be performed or omitted to be performed, by reason of (i) any Sovereign Risk or (ii) any provision of any present or future law or regulation or order of the United States of America or any state thereof, or of any foreign country or political subdividion thereof, or of any securities depository or clearing agency which operates a central system for handling of securities or equivalent book-entries, or (iii) any provision of any order or judgment of any court of competent jurisdiction. A "Sovereign Risk" shall mean nationalization, expropriation, devaluation, revaluation, confiscation, seizure, cancellation, destruction or similar action by any governmental authority, de facto or de jure; or enactment, promulgation, imposition or enforcement by any such governmental authority of currency restrictions, exchange controls, taxes, levies or other charges affecting the Company's property; or acts of war, terrorism, insurrection or revolution, strikes, riots, epidemics or any other act or event beyond the Custodian's control. Notwithstand anything to the contrary in this Agreement, in no event shall the Bank or the Indemnified Parties be liable to the Fund or any third party for lost revenues or any special, consequential, punitive or incidental damages of any kind whatsoever in connection with this Agreement or any activities hereunder. 16. Termination. 16.1 The term of this Agreement shall be three years commencing upon the date of conversion of the Company's assets to the Bank (the "Initial Term"), unless earlier terminated as provided herein. After the expiration of the Initial Term, the term of this Agreement shall automatically renew for successive one-year terms (each a "Renewal Term") unless notice of non-renewal is delivered by the non-renewing party to the other party no later than sixty days prior to the expiration of the Initial Term or any Renewal Term, as the case may be. (a) Either party hereto may terminate this Agreement prior to the expiration of the Initial Term in the event the other party violates any material provision of this Agreement, provided that the non-violating party gives written notice of such violation to the violating party and the violating party does not cure such violation within 90 days of receipt of such notice. (b) Either party may terminate this Agreement during any Renewal Term upon sixty days written notice to the other party. Any termination pursuant to this paragraph 16.1(b) shall be effective upon expiration of such sixty days, provided, however, that the effective date of such termination may be postponed to a date not more than ninety days after delivery of the written notice: (i) 20 at the request of the Bank, in order to prepare for the transfer by the Bank of all of the assets of the Company held hereunder; or (ii) at the request of the Company, in order to give the Company an opportunity to make suitable arrangements for a successor custodian. 16.2 In the event of the termination of this Agreement, the Bank will immediately upon receipt or transmittal, as the case may be, of notice of termination, commence and prosecute diligently to completion the transfer of all cash and the delivery of all Portfolio Securities duly endorsed and all records maintained under Section 11 to the successor custodian when appointed by the Company. The obligation of the Bank to deliver and transfer over the assets of the Company held by it directly to such successor custodian will commence as soon as such successor is appointed and will continue until completed as aforesaid. If the Company does not select a successor custodian within ninety (90) days from the date of delivery of notice of termination the Bank may, subject to the provisions of subsection (16.3), deliver the Portfolio Securities and cash of each Series held by the Bank to a bank or trust company of the Bank's own selection meeting the requirements of Section 17(f)(1) of the 1940 Act and has a reported capital, surplus and undivided profits aggregating not less than $2,000,000, to be held as the property of the Company under terms similar to those on which they were held by the Bank, whereupon such bank or trust company so selected by the Bank will become the successor custodian of such assets of the Company with the same effect as though selected by the Board. Thereafter, the Bank shall be released from any and all obligations under this Agreement. 16.3 Prior to the expiration of ninety (90) days after notice of termination has been given, the Company may furnish the Bank with an order of the Company advising that a successor custodian cannot be found willing and able to act upon reasonable and customary terms and that there has been submitted to the shareholders of the Series the question of whether the Series will be liquidated or will function without a custodian for the assets of the Series held by the Bank. In that event the Bank will deliver the Portfolio Securities and cash of each Series held by it, subject as aforesaid, in accordance with one of such alternatives which may be approved by the requisite vote of shareholders, upon receipt by the Bank of a copy of the minutes of the meeting of shareholders at which action was taken, certified by the Company's Secretary and an opinion of counsel to the Company in form and content satisfactory to the Bank. Thereafter, the Bank shall be released from any and all obligations under this Agreement. 16.4 The Company shall reimburse the Bank for any reasonable expenses incurred by the Bank in connection with the termination of this Agreement, unless such termination is sought by the Company as a result of a material violation of this Agreement committed by the Bank, in accordance with paragraph 16.1(a) above. 16.5 At any time after the termination of this Agreement, the Company may, upon written request, have reasonable access to the records of the Bank relating to its performance of its duties as custodian. 17. Confidentiality. Both parties hereto agree than any non-public information obtained hereunder concerning the other party is confidential and may not be disclosed without the consent of the other party, except as may be required by applicable law or at the request of a governmental agency. The parties further agree that a breach of this provision would irreparably damage the other party and accordingly agree that each of them is entitled, in addition to all other remedies at law or in equity, to an injunction or injunctions without bond or other security to prevent breaches of this provision. 18. Notices. Any notice or other instrument in writing authorized or required by this Agreement to be given to either party hereto will be sufficiently given if addressed to such party and delivered via (i) 21 United States Postal Service registered mail, (ii) telecopier with written confirmation, (iii) hand delivery with signature to such party at its office at the address set forth below, namely: (a) In the case of notices sent to the Company to: Martin T. Conroy, TS31 Aetna Life Insurance and Annuity Company 151 Farmington Avenue Hartford, CT 06156 (b) In the case of notices sent to the Bank to: Investors Bank & Trust Company 200 Clarendon Street Boston, Massachusetts 02116 Attention: [Client Manager] With a copy to: John E. Henry, General Counsel or at such other place as such party may from time to time designate in writing. 19. Amendments. This Agreement may not be altered or amended, except by an instrument in writing, executed by both parties. 20. Parties. This Agreement will be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that this Agreement will not be assignable by the Company without the written consent of the Bank or by the Bank without the written consent of the Company, authorized and approved by its Board; and provided further that termination proceedings pursuant to Section 16 hereof will not be deemed to be an assignment within the meaning of this provision. 21. Governing Law. This Agreement and all performance hereunder will be governed by the laws of the Commonwealth of Massachusetts, without regard to conflict of laws provisions. 22. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument. 23. Entire Agreement. This Agreement, together with its Appendices, constitutes the sole and entire agreement between the parties relating to the subject matter herein and does not operate as an acceptance of any conflicting terms or provisions of any other instrument and terminates and supersedes any and all prior agreements and undertakings between the parties relating to the subject matter herein. 24. Limitation of Liability. The Bank agrees that the obligations assumed by the Company hereunder shall be limited in all cases to the assets of the Company and that the Bank shall not seek satisfaction of any such obligation from the officers, agents, employees, trustees, or shareholders of the Company. 22 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first written above. PORTFOLIO PARTNERS, INC. By:_________________________________________ Name: Title: INVESTORS BANK & TRUST COMPANY By:_________________________________________ Name: Title: 23 EX-99.B9(A) 10 ADMINISTRATIVE SERVICES AGREEMENT ADMINISTRATIVE SERVICES AGREEMENT THIS AGREEMENT is made by and between PORTFOLIO PARTNERS, INC., a Maryland corporation (the "Company"), on behalf of each of its Series, MFS Emerging Equities Portfolio, MFS Research Growth Portfolio, MFS Value Equity Portfolio, Scudder International Growth Portfolio, T.Rowe Price Growth Equity Portfolio, and AETNA LIFE INSURANCE AND ANNUITY COMPANY, a Connecticut insurance corporation ("Aetna" or the "Administrator"), with respect to the following recital of facts: R E C I T A L WHEREAS, the Company is registered as an open-end diversified management investment company under the Investment Company Act of 1940 (the "1940 Act"); and WHEREAS, the Administrator is registered as an investment adviser under the Investment Advisers Act of 1940 (the "Advisers Act"), and engages in the business of acting as an investment adviser and an administrator of investment companies; and WHEREAS, the Company has established the Series; and WHEREAS, the Company, on behalf of each of its Series, and the Administrator desire to enter into an agreement to provide for administrative services for the Series on the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: I. APPOINTMENT AND OBLIGATIONS OF THE ADMINISTRATOR Aetna is hereby appointed to serve as the Administrator to the Company, to provide the administrative services described herein and assume the obligations set forth in Section II, subject to the terms of this Agreement and the control of the Company's Board of Directors (the "Board"). The Administrator shall, for all purposes herein, be deemed an independent contractor and shall have, unless otherwise expressly provided or authorized, no authority to act for or represent the Company in any way or otherwise be deemed an agent of the Company or its Series. II. DUTIES OF THE ADMINISTRATOR In carrying out the terms of this Agreement, the Administrator shall: A. provide office space, equipment and facilities (which may belong to the Administrator or its affiliates) for maintaining the Company's organization, for meetings of the Company's Board of Directors and shareholders, and for performing administrative services hereunder; 1 B. supervise and manage all aspects of the Company's operations (other than investment advisory activities), and supervise relations with, and monitor the performance of, custodians, depositories, transfer and pricing agents, accountants, attorneys, underwriters, brokers and dealers, insurers and other persons in any capacity deemed to be necessary and desirable by the Board; C. determine and arrange for the publication of the net asset value of the shares of each Series; D. provide non-investment related statistical and research data and such other reports, evaluations and information as the Series may request from time to time; E. provide internal clerical, accounting and legal services, and stationery and office supplies; F. prepare, amend, and update (with the advice of the Company's counsel) the Company's Registration Statement on Form N-1A and state Blue Sky filings, and prepare any necessary proxy statements and all annual and semi-annual reports to shareholders; G. arrange for the printing and mailing (at the expense of the Company or affected Series) of proxy statements and other reports or other materials provided to shareholders; H. prepare for execution and file each Series' federal and state tax returns and required tax filings other than those required to be made by the Series' custodian and transfer agent; I. maintain the Company's existence, and during such times as the shares of the Series are publicly offered, maintain the registration and qualification of the shares under federal and state law; J. keep and maintain the financial accounts and records of the Company; K. develop and implement, if appropriate, management or shareholder services designed to enhance the convenience of investing in the Series; L. provide the Board on a regular basis with reports and analyses of the Series' operations and the operations of comparable investment companies; M. respond to inquiries from shareholders or participants of employee benefit plans (for which the Administrator or any affiliate provides recordkeeping) relating to the Series, concerning, among other things, exchanges among Series, refer any such inquiries to the Company's officers or the Series' transfer agent; N. provide recordkeeping services; and -2- O. provide such information as may be reasonably requested by a shareholder representative of or a participant in an employee benefit plan to comply with applicable federal or state laws. III. REPRESENTATIONS AND WARRANTIES A. REPRESENTATIONS AND WARRANTIES OF THE ADMINISTRATOR The Administrator hereby represents and warrants to the Fund as follows: 1. Incorporation and Organization. The Administrator is duly organized and is in good standing under the laws of the State of Connecticut and is fully authorized to enter into this Agreement and carry out its duties and obligations hereunder. 2. Best Efforts. The Administrator at all times shall provide its best judgment and effort to the Company in carrying out its obligations hereunder. B. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company, on behalf of each of its Series, hereby represents and warrants to the Administrator as follows: 1. Incorporation and Organization. The Company has been duly incorporated under the laws of the State of Maryland and it is authorized to enter into this Agreement and carry out its terms. 2. Registration. The Company is registered as an investment company with the SEC under the 1940 Act and shares of the Series are registered or qualified for offer and sale to the public under the Securities Act of 1933 (the "1933 Act") and all applicable state securities laws. Such registrations or qualifications will be kept in effect during the term of this Agreement. IV. CONTROL BY THE BOARD OF DIRECTORS Any activities undertaken by the Administrator pursuant to this Agreement on behalf of the Company shall at all times be subject to any directives of the Board. V. COMPLIANCE WITH APPLICABLE REQUIREMENTS In carrying out its obligations under this Agreement, the Administrator shall at all times conform to: A. all applicable provisions of the 1940 Act; B. the provisions of the Company's Registration Statement; -3- C. the provisions of the Company's Articles of Incorporation; D. the provisions of the By-Laws of the Company; and E. any other applicable provisions of state or federal law. VI. DELEGATION OF RESPONSIBILITIES All services to be provided by the Administrator under this Agreement may be furnished by any directors, officers or employees of the Administrator or the Administrator may retain the services of any other entity to provide certain administrative duties under the Administrator's supervision. VII. COMPENSATION For the services to be rendered, the facilities furnished and the expenses assumed by the Administrator, the Company, on behalf of each of its Series, shall pay to the Administrator an annual fee, payable monthly, based upon the following average daily net assets of each of its Series: Series Rate Net Assets - ------ ---- ---------- Except as hereinafter set forth, compensation under this Agreement shall be calculated and accrued daily at the rate of 1/365 of the annual administration fee applied to the daily net assets of each Series. If this Agreement becomes effective subsequent to the first day of a month or shall terminate before the last day of a month, compensation for that part of the month this Agreement is in effect shall be prorated in a manner consistent with the calculation of the fees as set forth above. VIII. NON-EXCLUSIVITY The services of the Administrator to the Company are not to be deemed to be exclusive, and the Administrator shall be free to render administrative or other services to others (including other investment companies) and to engage in other activities, so long as its services under this Agreement are not impaired thereby. It is understood and agreed that officers and directors of the Administrator may serve as officers or directors of the Company, and that officers or directors of the Company may serve as officers or directors of the Administrator to the extent permitted by law; and that the officers and directors of the Administrator are not prohibited from engaging in any other business activity or from rendering services to any other person, or from serving as partners, officers, directors or trustees of any other firm or trust, including other investment companies. IX. TERM This Agreement shall become effective at the close of business on the date hereof and shall continue through December 31, 1999. Thereafter it shall continue for successive annual periods, -4- provided such continuance is specifically approved at least annually by the Company's directors who are not parties to this Agreement or "interested persons" as defined in the 1940 Act ("disinterested directors"), or by the vote of the holders of a "majority" as so defined in Section 2(a)(42) of the 1940 Act ("majority") of the outstanding voting securities of the Series and by a majority of the disinterested directors. X. TERMINATION This Agreement may be terminated at any time, without the payment of any penalty, by vote of the Company's directors or by vote of a majority of the Series' outstanding voting securities, as defined in Section 2(a)(42) of the 1940 Act, or by the Administrator, on sixty (60) days' written notice to the other party. XI. LIABILITY OF ADMINISTRATOR AND INDEMNIFICATION A. LIABILITY The Administrator shall be liable to the Company and shall indemnify the Company for any losses incurred by the Company, whether in the purchase, holding or sale of any security or otherwise, to the extent that such losses resulted from an act or omission on the part of the Administrator or its officers, directors or employees, that is found to involve willful misfeasance, bad faith or negligence, or reckless disregard by the Administrator of its duties under this Agreement, in connection with the services rendered by the Administrator hereunder. B. INDEMNIFICATION In the absence of willful misfeasance, bad faith, negligence or reckless disregard of obligations or duties hereunder on the part of the Administrator or any officer, director or employee of the Administrator, to the extent permitted by applicable law, the Company hereby agrees to indemnify and hold the Administrator harmless from and against all claims, actions, suits and proceedings at law or in equity, whether brought or asserted by a private party or a governmental agency, instrumentality or entity of any kind, relating to the sale, purchase, pledge of, advertisement of, or solicitation of sales or purchases, of any security by or on behalf of the Series, or issued by the Series, in alleged violation of applicable federal, state or foreign laws, rules or regulations. XII. MATERIALS FOR DISTRIBUTION TO SHAREHOLDERS During the term of this Agreement, the Company shall furnish to the Administrator at its principal office copies of all prospectuses, proxy statements, reports to shareholders, sales literature and other material referring to the Administrator that were prepared for distribution to shareholders of the Company and to participants in employee benefit plans owning interests in the Series (prior to the public distribution of such materials). The Company shall not use any such materials that refer to the Administrator if the Administrator reasonably objects in writing within five business days (or such other time as the parties may agree) after receipt thereof, unless prior to such use the material is modified in a manner that is satisfactory to the Administrator. Subsequent to the termination of this -5- Agreement, the Company will continue to furnish to the Administrator copies of such materials. The Company shall also furnish or otherwise make available to the Administrator other information relating to the business affairs of the Company as the Administrator reasonably requests from time to time. XIII. NOTICES Any notices under this Agreement shall be in writing, addressed and delivered or mailed postage paid to the other party at such address as such other party may designate for the receipt of such notice. Until further notice to the other party, it is agreed that the address of the Administrator and that of the Company for this purpose shall be 151 Farmington Avenue, Hartford, Connecticut 06156. XIV. QUESTIONS OF INTERPRETATION This Agreement shall be governed by the laws of the State of Connecticut. Any question of interpretation of any term or provision of this Agreement having a counterpart in or otherwise derived from a term or provision of the 1940 Act shall be resolved by reference to such term or provision of the 1940 Act and to interpretations thereof, if any, by the United States Courts or, in the absence of any controlling decision of any such court, by rules, releases or orders of the SEC issued pursuant to said Act. In addition, where the effect of a requirement of the 1940 Act reflected in the provisions of this Agreement is revised by rule, release or order of the SEC, such provisions shall be deemed to incorporate the effect of such rule, release or order. -6- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their respective officers as of the day of July, 1997. AETNA LIFE INSURANCE PORTFOLIO PARTNERS, INC. on AND ANNUITY COMPANY behalf of its Series, MFS Emerging Equities Portfolio MFS Research Growth Portfolio MFS Value Equity Portfolio By _____________________________ Scudder International Growth Portfolio Name: T. Rowe Price Growth Equity Portfolio Title: Attest: ________________________________ Karen A. Peddle Assistant Corporate Secretary Aetna Life Insurance and Annuity Company By __________________________________ Name: Martin T. Conroy Title: Attest: _____________________________________ Amy R. Doberman Secretary -7- EX-99.B9(B) 11 LICENSE AGREEMENT LICENSE AGREEMENT Agreement effective as of this day of , 1997, between T. Rowe Price Associates, Inc. (hereinafter called "Price"), a corporation organized and existing under the laws of the State of Maryland, with a principal place of business at 100 East Pratt Street, Baltimore, Maryland, and Aetna Life Insurance and Annuity Company (hereinafter called "Company"), a Connecticut corporation whose principal offices are located at 151 Farmington Avenue, Hartford, Connecticut. WHEREAS, Price and Company have entered into a Subadvisory Agreement dated as of for the purpose of engaging Price to manage the assets of the T. Rowe Price Growth Equity Portfolio, a series of Portfolio Partners, Inc. ("Subadvisory Agreement"); and WHEREAS, Price is the owner of the registered service mark and tradename T. Rowe Price and a service mark in a bighorn sheep design a copy of which is attached hereto as Exhibit "1" (hereinafter, collectively the "Price Trademarks"); and WHEREAS, Company is desirous of using the Price Trademarks in connection with distribution of prospectuses, sales literature and other promotional material with information, including the Price Trademarks, printed in said material (such material hereinafter called the "Promotional Material"); and WHEREAS, Price is desirous of having the Price Trademarks used in connection with the Promotional Material. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy thereof is hereby acknowledged, and of the mutual promises hereinafter set forth, the parties hereby agree as follows: 1. Price hereby grants to Company a non-exclusive, non-transferable license to use the Price Trademarks in connection with the distribution of the Promotional Material and Company accepts said license, subject to the terms and conditions set forth herein. 2. Company acknowledges that Price is the owner of all right, title and interest in the Price Trademarks and agrees that benefit of the use of the Price Trademarks inures to Price, that it will do nothing inconsistent with the ownership of the Price Trademarks by Price, and that it will not, now or hereafter, contest any registration or application for registration of the Price Trademarks by Price, nor will it, now or hereafter, aid anyone in contesting any registration or application for registration of the Price Trademarks by Price. 3. Company agrees to use the Price Trademarks only in the form and manner depicted in Exhibit 1 or otherwise approved in writing by Price and not use any other trademark, service mark or registered trademark in connection with Promotional Material offered under any of the Price Trademarks without prior written approval by Price. - 2 - 4. Company agrees that it will place all necessary and proper notices and legends in order to protect the interests of Price therein pertaining to the Price Trademarks on the Promotional Material including, but not limited to, common law trademark symbol; "TM", common law service mark symbol "SM", and registered mark symbol "(R)". Company will place such symbols and legends on the Promotional Material as requested by Price upon receipt of notice of same from Price. Company will include a legend on the Promotional Material stating that "[t]he mark T. Rowe Price and the Bighorn Sheep logo are owned by T. Rowe Price Associates, Inc." The legend shall appear on the title verso page, front cover, back cover or first page of the Promotional Material. The foregoing shall not apply to the use of the name T. Rowe Price in the prospectus. 5. Company agrees that its use of the Price Trademarks in any and all Promotional Material distributed by the Company and or any of its affiliates shall conform to the standards and guidelines established and communicated by Price in respect of the use thereof. 6. Company agrees to cooperate with Price in facilitating Price s control of the use of the Price Trademarks and of the quality of the Promotional Material to permit reasonable inspection of samples of same by Price and to supply Price with reasonable quantities of samples of the Promotional Material upon request. Price, recognizing the time-sensitivity involved in the publication of Promotional Material, agrees to use its best efforts to inspect such Promotional Material in a timely fashion; the inspection period for which shall not exceed five (5) business days from the receipt thereof. 7. Company shall comply in all material respects with all applicable laws and regulations pertaining to the distribution of said Promotional Material. 8. Company agrees to notify Price of any unauthorized use of the Price Trademarks by others promptly in the event the Company obtains actual knowledge of such unauthorized use. Price shall have the sole right and discretion to commence actions or other proceedings for infringement, unfair competition or the like involving the Price Trademarks and Company shall cooperate, at Price s expense, in any such proceedings if so requested by Price. 9. This agreement shall continue in force until terminated by Price. This agreement shall automatically terminate upon termination of the Subadvisory Agreement. In addition, Price shall have the right to terminate this agreement without cause at any time upon ninety days written notice to the Company. Within ninety days after notice of such termination, Company agrees to cease all use of the Price Trademarks and destroy, at the Company s expense, any and all materials in its possession bearing the Price Trademarks. Notwithstanding the foregoing, Price shall also have the right to terminate this agreement for cause at any time upon written notice to the Company, and in such a case, Company agrees that as soon as practicable, but in no event more than thirty days after such termination, Company shall cease all use of the Price Trademarks and destroy, at the Company expense, any and all materials in its possession bearing the Price Trademarks. Company agrees that both during the term of this agreement and upon termination all rights in the Price Trademarks and in the goodwill connected therewith shall remain the property of Price. Notwithstanding the foregoing, Company shall have the right to use the name "T. Rowe Price Growth Equity Portfolio" or any abbreviation thereof and to use the tradename "T. Rowe Price" in Promotional Material, if required to comply with federal securities law disclosure requirements. -3- 10. Company shall indemnify Price and hold it harmless from and against any loss, damage, liability, cost or expense of any nature whatsoever, including without limitation, reasonable attorneys' fees and all court costs, arising directly out of use of the Price Trademarks' by Company in a manner inconsistent with the terms hereof. Price shall indemnify the Company and hold it harmless from and against any loss, damage, liability, cost or expense of any nature whatsoever, including without limitation, reasonable attorneys' fees and court costs, arising directly out of its use of the Price Trademarks; provided, however, that the Company shall not be entitled to indemnification for losses, damages, liabilities, costs or expenses resulting from its use of a Price Trademark in a manner inconsistent with the terms hereof. 11. In consideration for the promotion and advertising of Price as a result of the distribution by Company of the Promotional Material, Company shall not pay any monies as a royalty to Price for this license. 12. This agreement is not intended in any manner to modify the terms and conditions of the Subadvisory Agreement. In the event of any conflict between the terms and conditions herein and thereof, the terms and conditions of the Subadvisory Agreement shall control. 13. This agreement shall be interpreted according to the laws of Maryland. IN WITNESS WHEREOF, the parties hereunto set their hands and seals, and hereby execute this agreement, as of the date first above written. T. ROWE PRICE ASSOCIATES, INC. BY: ___________________________________ TITLE: ________________________________ DATE: _________________________________ AETNA LIFE INSURANCE AND ANNUITY COMPANY BY: __________________________________ TITLE: ________________________________ DATE: _________________________________ EX-99.B10 12 OPINION AND CONSENT OF COUNSEL [Aetna Letterhead] 151 Farmington Avenue [Aetna Logo] Hartford, CT 06156 Amy R. Doberman Counsel Portfolio Partners Inc. (860) 273-1409 Fax: (860) 273-9407 July 31, 1997 U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Portfolio Partners, Inc. Registration Statement on Form N-1A Dear Sir: The undersigned serves as counsel to Portfolio Partners, 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 filed with the Securities and Exchange Commission under the Securities Act and the Investment Company 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. 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 EX-99.B11(B) 13 FORM OF CONSENT FORM OF CONSENT OF PERSONS ABOUT TO BECOME DIRECTORS In accordance with Rule 438 under the Securities Act of 1933, the undersigned hereby consent to being referenced in the Registration Statement on Form N-1A for Portfolio Partners, Inc. as persons about to become directors of Portfolio Partners, Inc. /s/ Peter C. Aldrich 7/25/97 - ------------------------------------------- Peter C. Aldrich Date /s/ Edward Lowenthal 7/25/97 - ------------------------------------------- Edward Lowenthal Date /s/ Daniel P. Kearney 7/25/97 - ------------------------------------------- Daniel P. Kearney Date EX-99.B13 14 AGREEMENT INITIAL CONTRIBUTION TO WORKING CAPITAL [Aetna Letterhead] 151 Farmington Avenue [Aetna Logo] Hartford, CT 06156 Shaun P. Mathews Vice President Aetna Life Insurance and Annuity Company, TN41 (860) 273-4908 Fax: (860) 273-4247 Board of Directors Portfolio Partners, Inc. 151 Farmington Avenue Hartford, CT 06156 Ladies and Gentlemen: Aetna Life Insurance and Annuity Company ("Aetna") will provide on or before August 21, 1997 a minimum of $20,000 of initial capital to each of the various series ("Portfolios") of Portfolio Partners, Inc. (the "Fund"). Form N-1A under the Securities Act of 1933 and the Investment Company Act of 1940 requires that there be filed with the Fund's registration statement, as an exhibit, "copies of any agreements or understandings made in consideration for providing the initial capital between or among the Registrant, the underwriter, adviser, promoter or initial stockholders and written assurances from promoters or initial stockholders that their purchases were made for investment purposes without any present intention of redeeming or reselling;..." This will advise you that, while there are no formal agreements or understandings between the Fund and Aetna in consideration for Aetna's providing the initial capital, Aetna hereby assures you that its purchase of $20,000 worth of shares of each of the Portfolios was made for investment purposes and that Aetna has no present intention of redeeming or reselling those shares. Aetna does, however, reserve the right to make additional investments in shares of each of the Portfolios and to redeem any or all of its shares in a manner which would be consistent with the Securities Act of 1933 and the Investment Company Act of 1940. Sincerely, Shaun P. Mathews Vice President Aetna Life Insurance and Annuity Company -----END PRIVACY-ENHANCED MESSAGE-----