File Nos. 333-08543
811-07717
As filed with the Securities and Exchange Commission on February 27, 1998
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO. 2 /X/
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 4 /X/
DIVERSIFIED INVESTORS STRATEGIC
VARIABLE FUNDS
(Exact Name of Registrant as Specified in Charter)
Four Manhattanville Road, Purchase, New York 10577
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 914-697-8000
Robert F. Colby, Esq.
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, New York 10577
(Name and Address of Agent for Service)
Copy to:
Roger P. Joseph, Esq.
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
It is proposed that this filing will become effective (check appropriate
box):
[ ] immediately upon filing pursuant to paragraph (b).
[ ] on October 6, 1997 pursuant to paragraph (b).
[X] 60 days after filing pursuant to paragraph (a)(1).
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
[ ] 75 days after filing pursuant to paragraph (a)(2).
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
FORM N-3
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PART A
ITEM NO. PROSPECTUS HEADINGS
<S> <C> <C>
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis or Highlights Synopsis
4. Condensed Financial Information Condensed Financial Information
5. General Description of Registrant and Insurance AUSA; Diversified Investors Strategic
Company Variable Funds; Diversified Investors
Variable Funds; Diversified Investors
Portfolios
6. Management Diversified Investors Strategic
Variable Funds -- Management
7. Deductions and Expenses Charges
8. General Description of Variable Annuity Contracts Summary of the Contracts
9. Annuity Period Payment Options
10. Death Benefit Death Benefit; Payments To A
Beneficiary Following the Annuitant's
Death
11. Purchases and Contract Value Credit of Purchase Payments;
Allocation of Purchase Payments;
Determination of Unit Value
12. Redemptions Redemption During the Accumulation
Period; Restrictions Under The Texas
Optional Retirement Program
13. Taxes Federal Tax Status; Tax Treatment of
AUSA; Section 403(b) Annuities;
Section 401(a) Plans; Section
408(IRA) Contracts; Section 457
Plans; Non-Qualified Deferred
Compensation Contracts; Income Tax
Withholding
14. Legal Proceedings Legal Proceedings
15. Table of Contents of the Statement of Additional Table of Contents of Statement
Information of Additional Information
<PAGE>
PART B STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION HEADINGS
16. Cover Page Cover Page
17. Table of Contents Table of Contents
18. General Information and History Not Applicable
19. Investment Objectives and Policies Diversified Investors Portfolios;
Investment Restrictions Relating to
The Strategic Variable Funds
Subaccounts
20. Management Management of The Strategic
Variable Funds Account
21. Investment Advisory and Other Services Management of The Strategic
Variable Funds Account --
Investment Advisory Services;
Management of Diversified Investors
Portfolios -- Investment Advisory
Services
22. Brokerage Allocation Diversified Investors Portfolios--
Portfolio Transactions and Brokerage
Commissions
23. Purchase and Pricing of Securities Being Offered Not Applicable
24. Underwriters Sale of Contracts/Principal
Underwriter
25. Calculation of Performance Data Performance Data
26. Annuity Payments Not applicable
27. Financial Statements Financial Statements and Notes to
Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this registration statement.
<PAGE>
Prospectus
DIVERSIFIED INVESTORS VARIABLE FUNDS
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
GROUP VARIABLE ANNUITY CONTRACTS
SECTIONS 401(A), 401(K), 403(B), 408(IRA), 457 AND NQDC
ISSUED BY
AUSA LIFE INSURANCE COMPANY, INC. ("AUSA")
4 MANHATTANVILLE ROAD, PURCHASE, NEW YORK 10577; (914) 697-8000
The Group Variable Annuity Contracts ("Contracts") described in this
Prospectus are designed and offered as funding vehicles for retirement Plans
maintained by state educational organizations, certain tax-exempt
organizations, IRA Contractholders, and taxed organizations in the case of the
Section 401(a) and/or Section 401(k) Contracts and corporate nonqualified
deferred compensation contracts ("NQDC"). The Contracts described in this
Prospectus include certain group variable annuity contracts of the above
described types which were originally issued by the Mutual Life Insurance
Company of New York and which have been assumed by AUSA. See page __ for a
description of this assumption reinsurance.
Insofar as possible, the provisions of the Contracts are identical, and
the information provided in this Prospectus is generally applicable to all
Contracts. However, whenever statutory or administrative considerations require
significant differences among the Contracts, such differences are explained
separately for each.
Purchase Payments under the Contracts are allocated to one of two
segregated investment accounts of AUSA Life Insurance Company, Inc.: the
Diversified Investors Variable Funds (the "Variable Funds Account") and the
Diversified Investors Strategic Variable Funds (the "Strategic Variable Funds
Account", and, together with the Variable Funds Account, the "Accounts").
Purchase Payments directed to the Variable Funds Account may be allocated
among such of the Subaccounts in the Variable Funds Account (the "Variable
Funds Subaccounts") as are made available under the Contracts. The assets in
each Variable Funds Subaccount are invested in a series of Diversified
Investors Portfolios or in the Calvert Socially Responsible Series (the
"Calvert Series") at their net asset value. See "Diversified Investors
Portfolios" at page __ and "Calvert Series" at page __. The thirteen currently
available series of Diversified Investors Portfolios are the Money Market
Series, High Quality Bond Series, Intermediate Government Bond Series,
Government/Corporate Bond Series, High-Yield Bond Series, Balanced Series,
Equity Income Series, Equity Value Series, Growth & Income Series, Equity
Growth Series, Special Equity Series, Aggressive Equity Series and
International Equity Series. The Calvert Series is an actively managed,
diversified portfolio of common and preferred stocks, bonds, and money market
instruments which offer income and capital growth opportunity and which satisfy
the social concern criteria established by the Calvert Series. A copy of the
Calvert Series Prospectus appears at the end of this Prospectus.
Purchase Payments directed to the Strategic Variable Funds Account may be
allocated among such of the Subaccounts in the Strategic Variable Funds Account
(the "Strategic Variable Funds Subaccounts", and, together with the Variable
<PAGE>
Funds Subaccounts, the "Subaccounts") as are made available under the
Contracts. The three currently available Strategic Variable Funds Subaccounts
are the Diversified Investors Short Horizon Strategic Allocation Variable Fund
(formerly known as the Diversified Investors Conservative Strategic Allocation
Variable Fund), the Diversified Investors Intermediate Horizon Strategic
Allocation Variable Fund (formerly known as the Diversified Investors Moderate
Strategic Allocation Variable Fund) and the Diversified Investors
Intermediate/Long Horizon Strategic Allocation Variable Fund (formerly known as
the Diversified Investors Aggressive Strategic Allocation Variable Fund).
Diversified Investment Advisors, Inc. ("Diversified") is the investment adviser
(the "Adviser") to each Strategic Variable Funds Subaccount. Diversified seeks
to achieve the investment objective of each Strategic Variable Funds Subaccount
by investing the assets of that Subaccount in a diversified portfolio of units
issued by certain Variable Funds Subaccounts. The Variable Funds Subaccounts
invest in turn in series of Diversified Investors Portfolios. See "Diversified
Investors Strategic Variable Funds" at page __.
VARIABLE FUNDS SUBACCOUNTS WHICH INVEST IN DIVERSIFIED INVESTORS
PORTFOLIOS DO SO UNDER A CORE/FEEDER ARRANGEMENT. UNLIKE OTHER FUNDING VEHICLES
INTO WHICH PURCHASE PAYMENTS MAY BE INVESTED THROUGH VARIABLE ANNUITY CONTRACTS
ISSUED BY INSURANCE COMPANIES, DIVERSIFIED INVESTORS PORTFOLIOS OFFERS ITS
INTERESTS FOR SALE TO OTHER TYPES OF COLLECTIVE INVESTMENT VEHICLES IN ADDITION
TO INSURANCE COMPANY SEPARATE ACCOUNTS REGISTERED AS INVESTMENT COMPANIES UNDER
THE INVESTMENT COMPANY ACT OF 1940. SUCH INVESTORS MAY INCLUDE MUTUAL FUNDS,
BANK COLLECTIVE TRUSTS AND UNREGISTERED INSURANCE COMPANY SEPARATE ACCOUNTS.
SEE "DIVERSIFIED INVESTORS PORTFOLIOS -- CORE/FEEDER STRUCTURE" ON PAGE __
HEREIN.
The value of the Accumulation Accounts maintained in the Accounts will
vary based upon the investment experience of the Subaccounts to which Purchase
Payments are allocated. The investment experience of the Variable Funds
Subaccounts will vary based on the underlying investment performance of the
series of the Diversified Investors Portfolios and the Calvert Series invested
in. The investment experience of the Strategic Variable Funds Subaccounts will
vary based on the underlying investment performance of the Variable Funds
Subaccounts invested in.
This Prospectus sets forth the basic information that a prospective
purchaser should know before investing. Please keep this Prospectus for future
reference.
To learn more about the Contracts, the Accounts and their underlying
investments, you can obtain a copy of the Accounts' most recent financial
reports or a copy of the Statement of Additional Information dated the date of
this Prospectus. The Statement of Additional Information has been filed with
the Securities and Exchange Commission and is incorporated into this Prospectus
by reference. The Table of Contents of the Statement of Additional Information
can be found on page __ of this Prospectus. Either document is available from
AUSA without charge upon written request to the above address or by telephoning
(914) 697-8000. You can also obtain copies of these documents from the
Securities and Exchange Commission's web site at http://www.sec.gov.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE CONTRACTS IN ANY JURISDICTION IN WHICH SUCH MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
<PAGE>
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Dated May 1, 1998
<PAGE>
CONTENTS
PAGE
Definitions ............................................................
Synopsis................................................................
Expense Summary....................................................
The Contracts .....................................................
The Accounts ......................................................
Charges ...........................................................
Credit And Allocation of Purchase Payments ........................
Redemption ........................................................
Transfers .........................................................
Payments Options ..................................................
Voting Rights .....................................................
Death Benefit .....................................................
Distribution Of the Contracts .....................................
Financial Information .............................................
AUSA ...................................................................
Diversified Investors Variable Funds ...................................
Calvert Series ....................................................
Diversified Investors Portfolios ..................................
Diversified Investors Strategic Variable Funds .........................
Management.........................................................
Charges ................................................................
Charges For Mortality And Expense Risks ...........................
Annual Contract Charge ............................................
Investment Management Fee .........................................
Premium Tax .......................................................
Summary of the Contracts ...............................................
Eligible Purchasers ...............................................
Ownership .........................................................
Purchase Payments .................................................
Employer Sponsored Plan Requirements ..............................
Rights of the Participant Under The Contract ......................
Rights Upon Suspension Of Contract Or Termination of Plan .........
403(b) Contract ..............................................
401(a) Contract/401(k) Contract and NQDC Contracts ...........
457 and 408(IRA) Contracts ...................................
Failure Of Qualification ..........................................
Transfers .........................................................
401(a), 401(k), 403(b), 457, 408(IRA) and NQDC Contracts .....
Rights Reserved By AUSA ................................................
Credit of Purchase Payments ............................................
Allocation of Purchase Payments ...................................
Determination of Unit Value .......................................
Death Benefit ..........................................................
Redemption During The Accumulation Period ..............................
Restrictions Under The Texas Optional Retirement Program ...............
Payment Options ........................................................
Annuity Purchase Date .............................................
<PAGE>
PAGE
Fixed Annuity .....................................................
Fixed Annuity Options .............................................
Payments To A Beneficiary Following the Annuitant's Death .........
Voting Rights ..........................................................
Distribution of The Contracts ..........................................
Federal Tax Status .....................................................
Tax Treatment of AUSA .............................................
Taxation of Diversified Investors Portfolios ......................
Section 403(b) Annuities ..........................................
Restrictions On Withdrawals Of Elective Contributions ........
Section 401(a) Plans ..............................................
Section 408(IRA) Contracts ........................................
Minimum Distribution Requirements .................................
Section 457 Plans .................................................
Non-Qualified Deferred Compensation Contracts......................
Income Tax Withholding ............................................
Assumption Reinsurance .................................................
Performance Data .......................................................
Diversified Investors Portfolios .......................................
Core/Feeder Structure .............................................
Money Market Portfolio ............................................
Bond Portfolios ...................................................
Balanced Portfolio ................................................
Stock Portfolios ..................................................
Additional Investment Policies ....................................
Risk Considerations ...............................................
Management Of Diversified Investors Portfolios .........................
Board of Trustees .................................................
Investment Adviser ................................................
Advisory Fees .....................................................
Administrator .....................................................
Distribution Arrangements .........................................
Custodian and Dividend Disbursing Agent ...........................
Other Information Regarding Diversified Investors Portfolios ...........
Purchase and Redemption of Interests in
Diversified Investors Portfolios ................................
Net Asset Value ...................................................
Taxation of Diversified Investors Portfolios ......................
Distribution of Beneficial Interests, Voting Rights and Liabilities
Independent Accountants ................................................
Legal Proceedings ......................................................
Financial Statements ...................................................
Additional Information .................................................
Miscellaneous...........................................................
Table of Contents of Statement of Additional Information ...............
Request Form for Statement of Additional Information ...................
Appendix A -- Strategic Variable Funds Subaccounts .....................
Appendix B -- Applicable Premium Tax Rates .............................
Appendix C -- Composite Performance of Subadvisers......................
Appendix D -- Permitted Investments and Investment Practices ...........
<PAGE>
DEFINITIONS
As used in this Prospectus, the following terms have the meanings indicated:
ACCUMULATION ACCOUNT: an account maintained for each Participant in which is
recorded the number of Units held for his/her credit.
ACCUMULATION PERIOD: the accumulation period for each Participant is the period
during which Purchase Payments may be made on his/her behalf. It begins when
the Participant begins participation under the Plan and ends as of his/her
Annuity Purchase Date (see "Annuity Purchase Date" on page __), or earlier
termination of his/her Accumulation Account.
AGGRESSIVE EQUITY PORTFOLIO: Diversified Investors Aggressive Equity Portfolio,
a series of Diversified Investors Portfolios.
BALANCED PORTFOLIO: Diversified Investors Balanced Portfolio, a series of
Diversified Investors Portfolios.
CALVERT SERIES: the Calvert Responsibly Invested Balanced Portfolio, a series
of Acacia Capital Corporation, an open-end management investment company
registered under the Investment Company Act of 1940, as amended.
CONTRACTHOLDER: a state educational organization or certain tax-exempt
organization employer or employer association for affiliated employers, taxed
subsidiaries of tax-exempt organizations and taxed stand-alone organizations.
CONTRACTS: the group variable annuity contracts offered by AUSA to
Contractholders, IRA Contractholders or NQDC Contractholders as described in
this Prospectus.
CONTRACT YEAR: a period of 12 months measured from the date of the Contract
issued to or adopted by the Contractholder, and anniversaries thereof.
DISC: Diversified Investors Securities Corp., a registered broker-dealer under
the Securities Exchange Act of 1934, as amended, and a wholly-owned subsidiary
of Diversified.
DIVERSIFIED: Diversified Investment Advisors, Inc., a registered investment
adviser under the Investment Advisers Act of 1940, as amended, and an affiliate
of AUSA.
DIVERSIFIED INVESTORS PORTFOLIOS: an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended.
EQUITY GROWTH PORTFOLIO: Diversified Investors Equity Growth Portfolio, a
series of Diversified Investors Portfolios.
EQUITY INCOME PORTFOLIO: Diversified Investors Equity Income Portfolio, a
series of Diversified Investors Portfolios.
EQUITY VALUE PORTFOLIO: Diversified Investors Equity Value Portfolio, a series
of Diversified Investors Portfolios.
<PAGE>
FIXED ANNUITY: an annuity with payments which remain fixed throughout the
payment period and which do not reflect the investment experience of a separate
account.
GOVERNMENT/CORPORATE BOND PORTFOLIO: Diversified Investors Government/Corporate
Bond Portfolio, a series of Diversified Investors Portfolios.
GROWTH & INCOME PORTFOLIO: Diversified Investors Growth & Income Portfolio, a
series of Diversified Investors Portfolios.
HIGH QUALITY BOND PORTFOLIO: Diversified Investors High Quality Bond Portfolio,
a series of Diversified Investors Portfolios.
HIGH-YIELD BOND PORTFOLIO: Diversified Investors High-Yield Bond Portfolio, a
series of Diversified Investors Portfolios.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO: Diversified Investors Intermediate
Government Bond Portfolio, a series of Diversified Investors Portfolios.
INTERNATIONAL EQUITY PORTFOLIO: Diversified Investors International Equity
Portfolio, a series of Diversified Investors Portfolios.
IRA CONTRACTHOLDER: a tax-exempt, or taxed organization or an association of
members who share a common interest.
MONEY MARKET PORTFOLIO: Diversified Investors Money Market Portfolio, a series
of Diversified Investors Portfolios.
NQDC: Non-qualified deferred compensation arrangement available to taxed
organizations only.
PARTICIPANT: an employee participating under a Contract issued to or adopted by
his/her employer or an individual participating under a Contract issued to an
IRA Contractholder.
PLAN: a retirement plan or program under which benefits are to be provided
pursuant to a Contract described herein or by a Participant.
PORTFOLIOS: the series of Diversified Investors Portfolios described herein.
PURCHASE PAYMENT: the amount contributed and remitted to AUSA by an employer on
behalf of a Participant.
SPECIAL EQUITY PORTFOLIO: Diversified Investors Special Equity Portfolio, a
series of Diversified Investors Portfolios.
STRATEGIC MANAGING BOARD: The Managing Board of the Strategic Variable Funds
Account.
STRATEGIC VARIABLE FUNDS ACCOUNT: a segregated investment account of AUSA which
has been designated Diversified Investors Strategic Variable Funds and to which
Purchase Payments may be allocated.
STRATEGIC VARIABLE FUNDS SUBACCOUNTS: those Subaccounts of the Strategic
Variable Funds Account that are made available under the Contracts.
<PAGE>
UNIT: the measure by which the value of an investor's interest in each
Subaccount is determined.
VALUATION DATE: each day at the close of business of the New York Stock
Exchange (currently at 4:00 p.m. New York City time), each day that the New
York Stock Exchange is open for trading, or any other day on which there is
sufficient trading in securities of a series of Diversified Investors
Portfolios or the Calvert series, as applicable, to affect materially the value
of the Units of a Subaccount. If the New York Stock Exchange extends its
closing beyond 4:00 p.m. New York City time, and continues to value after the
time of closing of the New York Stock Exchange, AUSA reserves the right to
treat any payment or communication received after 4:00 p.m. New York City time
as being received as of the beginning of the next day.
VALUATION PERIOD: The period between the ending of two successive Valuation
Dates.
VARIABLE FUNDS ACCOUNT: a segregated investment account of AUSA which has been
designated Diversified Investors Variable Funds and to which Purchase Payments
may be allocated.
VARIABLE FUNDS BOND SUBACCOUNTS: The High Quality Bond, Intermediate Government
Bond, Government/Corporate Bond and High-Yield Bond Subaccounts of the Variable
Funds Account, each of which invests in a corresponding series of Diversified
Investors Portfolios.
VARIABLE FUNDS MONEY MARKET SUBACCOUNT: The Money Market Subaccount of the
Variable Funds Account, which invests in the Money Market series of Diversified
Investors Portfolios.
VARIABLE FUNDS STOCK SUBACCOUNTS: The Equity Value, Equity Income, Growth &
Income, Equity Growth, Special Equity, Aggressive Equity and International
Equity Subaccounts of the Variable Funds Account, each of which invests in a
corresponding series of Diversified Investors Portfolios.
VARIABLE FUNDS SUBACCOUNTS: those Subaccounts of the Variable Funds Account
that are made available under the Contracts.
<PAGE>
SYNOPSIS
FEE TABLES
The purpose of these tables is to assist you in understanding the various
costs and expenses that a Contractholder allocating Purchase Payments under the
Contracts to the Variable Funds Account or the Strategic Variable Funds Account
would incur, either directly or indirectly. Each Variable Funds Subaccount will
bear directly Mortality and Risk Expense Fees equal to .90% of average account
value of that Subaccount. Because each Variable Funds Subaccount invests its
assets in a series of Diversified Investors Portfolios or the Calvert Series,
each of these Subaccounts will also bear, indirectly, its pro rata share of the
fees and expenses of the underlying Portfolios (or the Calvert Series) in which
it invests. Each Strategic Variable Funds Subaccount will bear directly a
Management Fee equal to .20% of average daily net assets of that Subaccount.
Because each Strategic Variable Funds Subaccount invests its assets in a
combination of Variable Funds Subaccounts, each of these Subaccounts will also
bear, indirectly, its pro rata share of the Mortality and Risk Expense Fees
charged at the Variable Funds Subaccount level and of the fees and expenses of
the underlying Portfolios in which the Variable Funds Subaccounts invest.
Accordingly, the total fees and expenses of an investment in the Variable Funds
Account is an aggregate of fees incurred at two levels, and the total fees and
expenses of an investment in the Strategic Variable Funds Account is an
aggregate of fees incurred at three levels.
DIVERSIFIED INVESTORS VARIABLE FUNDS
TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
Annual Contract Fee None (1)
Mortality and Expense Risk Fees .90(2)
(1)AUSA reserves the right to deduct an annual contract charge from a
Participant's Accumulation Account not to exceed $50. See "Charges -- Annual
Contract Charge" at page __.
(2)AUSA reserves the right to charge maximum mortality and expense risk fees
of up to 1.25% upon notice.
As described above, each Variable Funds Subaccount will also pay its pro
rata share of the fees and expenses of the underlying Portfolio or the Calvert
Series, as applicable, in which it invests. The following table provides the
expense ratios (net of waivers and reimbursements) as a percentage of net
assets for each Portfolio and the Calvert Series.
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS AND
CALVERT SERIES
ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
HIGH INTERMEDIATE GOVERNMENT/
MONEY QUALITY GOVERNMENT CORPORATE HIGH-YIELD EQUITY
MARKET BOND BOND BOND BOND BALANCED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees (after
waivers/reimbursements)(1)...... .25% .35% .32% .35% .00% .45% .45%
Other Expenses ................. .05% .05% .08% .04% .60% .05% .03%
Reimbursement from AUSA (2)..... (20%) -- -- -- -- -- --
------ ---- ---- ---- ---- ---- ----
TOTAL ANNUAL EXPENSES (AFTER
WAIVERS/REIMBURSEMENTS) (1)..... .10% .40% .40% .39% .60% .50% .48%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE INTERNATIONAL
VALUE INCOME GROWTH EQUITY EQUITY CALVERT EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO SERIES PORTFOLIO
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees (after
waivers/reimbursements)(1)...... .45% .58% .69% .79% .72% .70% .68%
Other Expenses ................. .15% .07% .04% .06% .28% .13% .22%
Reimbursement from AUSA (2)..... -- -- (.23%) -- -- -- --
---- ---- ------ ---- ---- ---- ----
TOTAL ANNUAL EXPENSES (AFTER
WAIVERS/REIMBURSEMENTS)(1)...... .60% .65% .50% .85% 1.00% .83% .90%
</TABLE>
- ----------------------
(1)Without fee waivers and reimbursements, advisory fees and total annual
expenses would be .25% and .42% for the Money Market Portfolio, .35% and
.40% for the High Quality Bond Portfolio, .35% and .43% for the Intermediate
Government Bond Portfolio, .35% and .39% for the Government/Corporate Bond
Portfolio, .55% and 1.21% for the High-Yield Bond Portfolio, .45% and .50%
for the Balanced Portfolio, .45% and .49% for the Equity Income Portfolio,
.57% and 1.17% for the Equity Value Portfolio, .60% and .67% for the Growth
& Income Portfolio, .70% and .97% for the Equity Growth Portfolio, .80% and
.86% for the Special Equity Portfolio, .97% and 1.60% for the Aggressive
Equity Portfolio, .70% and .83% for the Calvert Series and .75% and 1.82%
for the International Equity Portfolio.
(2)AUSA has agreed to provide reimbursements to limit total expenses for
Variable Funds Subaccounts investing in either the Money Market Portfolio or
the Equity Growth Portfolio to .10% and .50%, respectively, of average net
assets of the applicable Portfolio, with AUSA reserving the right to raise
the limit upon notice. Prior to May 1, 1996, AUSA also provided
reimbursements to limit total expenses for Participants in the Equity Income
Series to .46% of average net assets; effective May 1, 1996, AUSA
discontinued such reimbursements.
Example(1)
If you surrender your contract at the end of the applicable time period,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual rate of return.
AFTER 1 AFTER 3 AFTER 5 AFTER 10
SUBACCOUNT YEAR YEARS YEARS YEARS
Money Market..................... $10 $32 $55 $122
High Quality Bond................ $13 $41 $71 $157
Intermediate Government Bond..... $13 $41 $71 $157
Government/Corporate Bond........ $13 $41 $71 $156
High-Yield Bond.................. $15 $47 $82 $179
Balanced......................... $14 $44 $77 $168
Equity Income.................... $14 $44 $76 $166
Equity Value..................... $15 $47 $82 $179
Growth & Income.................. $16 $49 $84 $185
Equity Growth.................... $14 $44 $77 $168
Special Equity................... $18 $55 $95 $206
Calvert.......................... $18 $54 $94 $204
Aggressive Equity................ $19 $60 $103 $222
International Equity............. $18 $57 $97 $212
- --------------
(1)The assumption in the example of a 5% annual return is required by the
Securities and Exchange Commission for all investment companies, and is not
a prediction of any Subaccount's future performance. THIS EXAMPLE SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL
EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. PREMIUM TAXES MAY ALSO
BE APPLICABLE.
<PAGE>
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
Annual Contract Fee......................... None(1)
ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fees............................. .20%(2)
Mortality and Expense Risk Fees............. .90%(3)
Other Expenses.............................. None
TOTAL ANNUAL EXPENSES....................... 1.10%(3)
=========
- ---------------------
(1)AUSA reserves the right to deduct an annual contract charge from a
Participant's Accumulation Account not to exceed $50. See "Charges -- Annual
Contract Charge" at page __.
(2)These fees are charged directly to the Strategic Variable Funds
Subaccounts. Each Strategic Variable Funds Subaccount will also pay a pro
rata portion of the expenses of the Portfolios in which it invests
indirectly through various Variable Funds Subaccounts. See below for a table
providing the expense ratios (net of waivers and reimbursements) as a
percentage of net assets for the various Portfolios in which the Strategic
Variable Funds Subaccounts will, through the Variable Funds Subaccounts,
invest.
(3)AUSA reserves the right to charge maximum mortality and expense risk fees
of up to 1.25% upon notice. These Mortality and Expense Fees are charged to
the underlying Variable Funds Subaccounts. Each Strategic Variable Funds
Subaccount will bear, indirectly, its pro rata share of the mortality and
expense risk fees charged at the Variable Funds Subaccount level.
As described above, each Strategic Variable Funds Subaccount will also
pay its pro rata share of the fees and expenses of the underlying Portfolios.
The following table provides the expense ratios (net of waivers and
reimbursements) as a percentage of net assets for each Portfolio in which the
Subaccounts will, indirectly, invest.
<TABLE>
<CAPTION>
SHORT HORIZON TOTAL ANNUAL
STRATEGIC ALLOCATION PORTFOLIO
VARIABLE FUND MANAGEMENT FEE EXPENSES
(AFTER WAIVERS AND OTHER (AFTER WAIVERS AND
REIMBURSEMENTS) EXPENSES REIMBURSEMENTS)(2)
<S> <C> <C> <C>
--------------------------------------
Money Market Portfolio(1) .25% .05% .30%
High Quality Bond Portfolio .35% .05% .40%
Intermediate Government Bond Portfolio .32% .08% .40%
Government/Corporate Bond Portfolio .35% .04% .39%
High Yield Bond Portfolio .00% .60% .60%
Equity Income Portfolio .45% .03% .48%
Equity Value Portfolio .45% .15% .60%
Growth & Income Portfolio .58% .07% .65%
INTERMEDIATE AND TOTAL ANNUAL
INTERMEDIATE/LONG HORIZON STRATEGIC PORTFOLIO
ALLOCATION VARIABLE FUNDS MANAGEMENT FEE EXPENSES
(AFTER WAIVERS AND OTHER (AFTER WAIVERS AND
REIMBURSEMENTS) EXPENSES REIMBURSEMENTS)(2)
---------------------------------------
Money Market Portfolio(1) .25% .05% .30%
High Quality Bond Portfolio .35% .05% .40%
Intermediate Government Bond Portfolio .32% .08% .40%
Government/Corporate Bond Portfolio .35% .04% .39%
High Yield Bond Portfolio .00% .60% .60%
Equity Value Portfolio .45% .15% .60%
Growth & Income Portfolio .58% .07% .65%
Equity Growth Portfolio(1) .69% .04% .73%
Special Equity Portfolio .79% .06% .85%
<PAGE>
Aggressive Equity Portfolio .72% .28% 1.00%
International Equity Portfolio .68% .22% .90%
</TABLE>
(1) AUSA has agreed to provide reimbursements to limit total expenses to
.10% and .50% for investors in the Variable Funds Subaccounts which invest
in the Money Market Portfolio and Equity Growth Portfolio, respectively.
(2) Without fee waivers and reimbursements, Total Annual Portfolio
Expenses would be as follows for the following Portfolios: Money Market
Portfolio -- .42%; Intermediate Government Bond Portfolio -- .43%;
High-Yield Bond Portfolio --1.21%; Equity Income Portfolio -- .49%; Equity
Value Portfolio -- 1.17%; Growth & Income Portfolio -- .67%; Equity Growth
Portfolio -- .97%; Special Equity Portfolio -- .86%; Aggressive Equity
Portfolio -- 1.60%; and International Equity Portfolio -- 1.82%.
Based on the foregoing, the range of the average weighted expense ratio
for the Short Horizon Strategic Allocation Variable Fund is expected to be
1.12% to 1.26%, for the Intermediate Horizon Strategic Allocation Variable Fund
1.22% to 1.27% and for the Intermediate/Long Horizon Strategic Allocation
Variable Fund 1.43% to 1.49%. A range is provided since the average assets of
the Strategic Variable Funds Subaccounts invested in each of the Variable Funds
Subaccounts will fluctuate.
Example(1)
If you (i) surrender your contract at the end of the applicable time
period, (ii) annuitize at the end of the applicable time period or (iii) do not
surrender your contract, you would pay, using the midpoint ratios of 1.19, 1.35
and 1.40, respectively, of the ranges set forth above, the following expenses
on a $1,000 investment, assuming a 5% annual rate of return.
AFTER AFTER AFTER AFTER
STRATEGIC ALLOCATION VARIABLE FUND 1 YEAR 3 YEAR 5 YEAR 10 YEARS
Short Horizon............................
Intermediate Horizon.....................
Intermediate/Long Horizon................
--------------
(1)The assumption in the example of a 5% annual return is required by the
Securities and Exchange Commission for all investment companies, and is not
a prediction of any Subaccount's future performance. THIS EXAMPLE SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL
EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. PREMIUM TAXES MAY ALSO
BE APPLICABLE.
THE CONTRACTS
The Group Variable Annuity Contracts (the "Contracts") described in this
Prospectus are designed and offered as funding vehicles for retirement Plans
maintained by state educational organizations, certain tax-exempt
organizations, and IRA Contractholders and for taxed organizations in the case
of the Section 401(a) and/or Section 401(k) Contracts and corporate
nonqualified deferred compensation Contracts ("NQDC"). The Section 401(k)
Contract will fund the benefits for tax-qualified pension and profit-sharing
plans from employee/employer contributions of such organizations. The Section
403(b) Contract will purchase tax-deferred annuities for employees of these
same organizations. The Section 457 Contract will provide deferred compensation
eligible for deferred tax treatment. The Section 401(a) Contract will fund
benefits for tax-qualified pension and profit-sharing Plans of such tax-exempt
organizations as well as taxed subsidiaries of these organizations and
stand-alone taxed organizations; the NQDC Contracts will fund benefits for
taxed organizations. The Section 408 (Individual Retirement Account ("IRA"))
Contract is a Group Variable Annuity Contract which will provide for on-going
or rollover contributions from individuals who are eligible under Section 408
to make such contributions. Section references are to the Internal Revenue Code
of 1986, as amended (the "Code").
<PAGE>
Insofar as possible, the provisions of the Contracts are identical, and
the information provided in this Prospectus is generally applicable to all
Contracts. However, whenever statutory or administrative considerations require
significant differences among the Contracts, such differences are explained
separately for each.
With respect to the Section 401(a), Section 401(k) and NQDC Contracts,
the employer and/or the employee will make contributions pursuant to the terms
and conditions of the underlying retirement Plan. As to the Section 403(b) and
Section 457 Contracts, the employer will make Purchase Payments for each
participating employee pursuant to either a salary reduction agreement or an
agreement to forego a salary increase under which the employee decides the
level and number of Purchase Payments to his/her Accumulation Account, except
with respect to employer-sponsored Section 401(a) Plans under which the
employer will make contributions pursuant to the underlying retirement Plan. In
the case of the Section 408 IRA Contract, Purchase Payments will be made by the
employer on behalf of and as determined by each participating employee pursuant
to a salary reduction agreement or by the Participant.
THE ACCOUNTS
Purchase Payments under the Contracts are allocated to one of two
segregated investment accounts of AUSA Life Insurance Company, Inc., which have
been designated the Diversified Investors Variable Funds (the "Variable Funds
Account") and the Diversified Investors Strategic Variable Funds (the
"Strategic Variable Funds Account", and, together with the Variable Funds
Account, the "Accounts").
The Variable Funds Account
The Variable Funds Account is divided into fourteen Subaccounts (the
"Variable Funds Subaccounts"), thirteen of which correspond to Diversified
Investors Portfolios' Money Market, High Quality Bond, Intermediate Government
Bond, Government/Corporate Bond, High-Yield Bond, Balanced, Equity Income,
Equity Value, Growth & Income, Equity Growth, Special Equity, Aggressive Equity
and International Equity Portfolios, respectively. The Calvert Series
Subaccount invests in the Calvert Series. The assets in each Variable Funds
Subaccount are invested in the corresponding series of Diversified Investors
Portfolios or the Calvert Series at their net asset value. See "Diversified
Investors Portfolios" at page __ and "Calvert Series" at page __.
Diversified Investors Portfolios is an open-ended, diversified management
investment company which has thirteen series with differing investment
objectives available under the Contracts. Each series of Diversified Investors
Portfolios is managed by Diversified, an affiliate of AUSA. DISC, a
wholly-owned subsidiary of Diversified, is the principal underwriter and
distributor.
The Calvert Series is a series of Acacia Capital Corporation, an open-end
management investment company whose investment adviser is Calvert Asset
Management Company, Inc. The Calvert Series in an actively managed portfolio of
common and preferred stocks, bonds, and money market instruments which offer
income and capital growth opportunity and which satisfy the social concern
criteria established by the Calvert Series. A copy of the Calvert Series
Prospectus appears at the end of this Prospectus.
<PAGE>
The value of a Participant's Accumulation Account maintained in a
Variable Funds Subaccount will vary based upon the investment experience of the
corresponding Portfolio or Calvert Series to which Purchase Payments are
allocated.
The Strategic Variable Funds Account
The Strategic Variable Funds Account is divided into three Subaccounts
(the "Strategic Variable Funds Subaccounts"), the Diversified Investors Short
Horizon Strategic Allocation Variable Fund (formerly known as the Diversified
Investors Conservative Strategic Allocation Variable Fund), the Diversified
Investors Intermediate Horizon Strategic Allocation Variable Fund (formerly
known as the Diversified Investors Moderate Strategic Allocation Variable Fund)
and the Diversified Investors Intermediate/Long Horizon Strategic Allocation
Variable Fund (formerly known as the Diversified Investors Aggressive Strategic
Allocation Variable Fund).
Diversified is the investment adviser to each Strategic Variable Funds
Subaccount and seeks to achieve the investment objective of each Strategic
Variable Funds Subaccount by investing in a diversified portfolio of units
issued by the Variable Funds Subaccounts. There are currently twelve Variable
Funds Subaccounts with varying investment objectives available for investment
by the Strategic Variable Funds Subaccounts; the Balanced Subaccount and the
Calvert Series Subaccount are not available to the Strategic Variable Funds
Subaccounts. See "Diversified Investors Strategic Variable Funds" at page __.
As noted above, the assets in each Variable Funds Subaccount are invested in a
corresponding series of Diversified Investors Portfolios. See "Diversified
Investors Portfolios" at page __.
The value of a Participant's Accumulation Account maintained in a
Strategic Variable Funds Subaccount will vary based upon the investment
experience of the various Variable Funds Subaccounts and their corresponding
Portfolios to which Purchase Payments are allocated.
CHARGES
AUSA makes daily charges against the net assets of the Variable Funds
Subaccounts at a maximum annual rate of 1.25%, consisting of .80% for mortality
risks and .45% for administrative expense risks. Currently, the annual rate
charged is .90% consisting of .60% for mortality risks and .30% for
administrative expense risk. However, AUSA reserves the right to charge a
maximum fee of 1.25% upon notice thereof. See "Charges -- Charges for Mortality
and Expense Risks" on page __.
Diversified, as investment adviser to each Strategic Variable Funds
Subaccount, imposes a charge against the net assets of each Strategic Variable
Funds Subaccount, computed daily, at an annual rate of .20% for investment
advisory and other services.
In addition, AUSA reserves the right to deduct an annual contract charge
not to exceed $50 from a Participant's Accumulation Account. See "Charges --
Annual Contract Charge" on page __.
In addition to the charges set forth above, Diversified, which serves as
investment adviser to each Portfolio, and Calvert Asset Management Company,
Inc., which serves as investment adviser to the Calvert Series, impose a charge
against the net asset value of each Portfolio or the Calvert Series, as
appropriate, computed daily, for investment advisory services and other
expenses. See "Charges -- Investment Management Fee" on page __.
<PAGE>
Premium taxes may be payable on annuity considerations. See "Charges --
Premium Tax" on page __.
CREDIT AND ALLOCATION OF PURCHASE PAYMENTS
Each Participant must direct Purchase Payments to the Variable Funds
Account or the Strategic Variable Funds Account, or a combination of the two.
Each Participant must also designate Subaccounts within each Account to which
Purchase Payments will be directed. Purchase Payments will be credited to the
Subaccounts designated by the Participant in the form of Units. The number of
Units credited will not change but the dollar value of a Unit will vary
depending upon the investment experience of the underlying Portfolio or the
Calvert Series, as appropriate, and, in the case of the Strategic Variable
Funds Subaccounts, the investment experience of the Variable Funds Subaccounts
in which the Strategic Variable Funds Subaccounts invest. See "Credit of
Purchase Payments" on page __.
REDEMPTION
A Participant may redeem at any time prior to the time an annuity benefit
takes effect and prior to his/her death all or a portion of the Units credited
to his/her Accumulation Account without any charge, subject to any limitations
in the underlying Plan. There are no redemption charges. See "Restrictions
Under the Texas Optional Retirement Program" on page __ for withdrawal
restrictions applicable to Contracts issued under the Texas Optional Retirement
Program.
A penalty tax may be payable under the Code upon the redemption of
amounts from an Accumulation Account under a Contract and other significant
withdrawal restrictions may be imposed by the Code. See "Federal Tax Status" on
page __.
TRANSFERS
A Participant may transfer all or a portion of his/her Accumulation
Account in the Variable Funds Account among the Variable Funds Subaccounts.
Similarly, a Participant may transfer all or a portion of his/her Accumulation
Account in the Strategic Variable Funds Account among the Strategic Variable
Funds Subaccounts. In either case, no transfer charges are imposed, and there
is no limit to the number of transfers. While AUSA has no present intention to
do so, it reserves the right to impose transfer charges at a later date.
Transfers may be made in writing or by telephone by calling (914) 697-8000. See
"Transfers" on page __. AUSA reserves the right to discontinue allowing
telephone transfers.
PAYMENT OPTIONS
Unless a Fixed Annuity is elected, a Participant will receive a lump sum
payment at the end of the Accumulation Period. The Contracts may provide for
several Fixed Annuity options: Life Annuity, Life Annuity With Period Certain,
Specified Fixed Period Annuity, Contingent Annuity and Contingent Annuity With
Period Certain. For NQDC, an installment payment option may also be available.
See "Payment Options" on page __.
VOTING RIGHTS
To the extent required by law, AUSA will vote the interests in the
Portfolios and the Calvert Series held in the Variable Funds Subaccounts in
<PAGE>
accordance with the instructions received from Contractholders, IRA
Contractholders and NQDC Contractholders. Similarly, to the extent required by
law, AUSA will vote the interests in the Variable Funds Subaccounts held in the
Strategic Variable Funds Subaccounts in accordance with the instructions
received from Contractholders, IRA Contractholders and NQDC Contractholders. In
each case, the Contractholders will instruct AUSA in accordance with the
instructions received from Participants. See "Voting Rights" on page __.
DEATH BENEFIT
If a Participant dies before the Annuity Purchase Date, the Accumulation
Account value will be paid to his/her beneficiary in a lump sum. See "Death
Benefit" on page __.
DISTRIBUTION OF THE CONTRACTS
DISC will be the principal underwriter and distributor of the Contracts
which will be sold by registered representatives who are also licensed
insurance agents of AUSA. The Contracts may also be sold through registered
representatives of other broker-dealers authorized by DISC and applicable law
who may be insurance agents licensed by an insurance company other than AUSA.
See "Distribution of the Contracts" on page __.
FINANCIAL INFORMATION
Information about the performance of each Account is contained in the
Annual Report of that Account which is available, free of charge, by contacting
AUSA at the address or telephone number on the cover of this Prospectus.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION
DIVERSIFIED INVESTORS VARIABLE FUNDS
ACCUMULATION UNIT VALUES
[TO BE FILED BY AMENDMENT.]
UNIT VALUE
------------------------------------------------------------------------
DEC. 31, 1997 DEC.31, 1996 DEC. 31, 1995 DEC. 31, 1994 AUG. 18, 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market.....................
High Quality Bond(a).............
Intermediate Government Bond.....
Government/Corporate Bond........
High-Yield Bond(a)...............
Balanced.........................
Equity Income....................
Equity Value(b)..................
Growth & Income(c)...............
Equity Growth....................
Special Equity(c)................
Aggressive Equity(b).............
Calvert..........................
International Equity(d)..........
</TABLE>
<TABLE>
<CAPTION>
UNITS OUTSTANDING
--------------------------------------------------------
DEC. 31,1997 DEC. 31,1996 DEC. 31, 1995 DEC. 31, 1994
--------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market.....................
High Quality Bond (a)............
Intermediate Government Bond.....
Government/Corporate Bond........
High-Yield Bond(a)...............
Balanced.........................
Equity Income....................
Equity Value(b)..................
Growth & Income(c)...............
Equity Growth....................
Special Equity(c)................
Aggressive Equity(b).............
Calvert..........................
International Equity(d)..........
</TABLE>
- --------------------------------
(a) Commencement of Operations August 20, 1996 at $10.00 unit value.
(b) Commencement of Operations May 10, 1996 at $10.00 unit value.
(c) Commencement of Operations August 24, 1994 at the stated unit value.
(d) The International Equity Subaccount fully redeemed its shares in the
Scudder Variable Life Fund on October 18, 1996, and invested the proceeds
in the International Equity series of Diversified Investors Portfolios.
The unit value continued after the change in investment options.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
PER ACCUMULATION UNIT INCOME AND CAPITAL CHANGES
[TO BE FILED BY AMENDMENT.]
SHORT HORIZON STRATEGIC VARIABLE FUNDS SUBACCOUNT
---------------------------------------------------------------------------------------
YEAR ENDING YEAR ENDING
DEC. 31, 1997 DEC. 31, 1996
---------------------------
<S> <C> <C>
Investment Income...........................................
Expenses....................................................
Net Investment Income.......................................
Net realized and unrealized gains (losses) on securities....
Net increase (decrease) in accumulation unit value..........
Accumulation unit value at beginning of period..............
Accumulation unit value at end of period....................
Expenses to average net assets..............................
Net investment income to average net assets.................
Portfolio turnover rate.....................................
Number of accumulation units outstanding at end of period...
INTERMEDIATE HORIZON STRATEGIC VARIABLE FUNDS SUBACCOUNT
---------------------------------------------------------------------------------------
YEAR ENDING YEAR ENDING
DEC. 31, 1997 DEC.3 1, 1996
---------------------------
Investment Income...........................................
Expenses....................................................
Net Investment Income.......................................
Net realized and unrealized gains (losses) on securities....
Net increase (decrease) in accumulation unit value..........
Accumulation unit value at beginning of period..............
Accumulation unit value at end of period....................
Expenses to average net assets..............................
Net investment income to average net assets.................
Portfolio turnover rate.....................................
Number of accumulation units outstanding at end of period...
INTERMEDIATE/LONG HORIZON STRATEGIC VARIABLE FUNDS SUBACCOUNT
---------------------------------------------------------------------------------------
YEAR ENDING YEAR ENDING
DEC. 31, 1997 DEC. 31, 1996
---------------------------
Investment Income...........................................
Expenses....................................................
Net Investment Income.......................................
Net realized and unrealized gains (losses) on securities....
Net increase (decrease) in accumulation unit value..........
Accumulation unit value at beginning of period..............
Accumulation unit value at end of period....................
Expenses to average net assets..............................
Net investment income to average net assets.................
Portfolio turnover rate.....................................
Number of accumulation units outstanding at end of period...
</TABLE>
<PAGE>
AUSA
AUSA Life Insurance Company, Inc. is a stock life insurance company which
was organized under the laws of the State of New York on October 3, 1947. AUSA
is an indirect, wholly-owned subsidiary of AEGON USA, Inc. ("AEGON"), a
financial services holding company whose primary emphasis is life insurance and
annuity and investment products. AEGON is an indirect, wholly-owned subsidiary
of AEGON nv, a Netherlands corporation which is a publicly traded international
insurance group. AUSA's principal place of business is 4 Manhattanville Road,
Purchase, N.Y. 10577; (914) 697-8000.
DIVERSIFIED INVESTORS VARIABLE FUNDS
Diversified Investors Variable Funds (the "Variable Funds Account") was
established by AUSA under New York Insurance Law on November 30, 1993 as a
separate account. The Variable Funds Account will hold assets that are
segregated from all of AUSA's other assets and at present are used only to
support Contracts for which Purchase Payments have been allocated to the
Variable Funds Account. AUSA is the legal holder of the assets in the Variable
Funds Account and will at all times maintain assets in the Variable Funds
Account with a total market value at least equal to the contract liabilities
for the Variable Funds Account. The obligations under the Contracts are
obligations of AUSA. Income, gains, and losses, whether or not realized, from
assets allocated to the Variable Funds Account, are, in accordance with the
Contracts, credited to or charged against the Variable Funds Account without
regard to other income, gains, or losses of AUSA. The assets in the Variable
Funds Account may not be charged with liabilities which arise from any other
business AUSA conducts. The Variable Funds Account assets may include
accumulation of the charges AUSA makes against a Contract participating in the
Variable Funds Account. From time to time, any such additional assets may be
transferred in cash to AUSA's general account.
The Variable Funds Account is registered with the Securities and Exchange
Commission (the "SEC") under the Investment Company Act of 1940, as amended
(the "1940 Act"), as a unit investment trust, which is a type of investment
company. This does not involve any supervision by the SEC of the management or
investment policies or practices of the Variable Funds Account. For state law
purposes, the Variable Funds Account is treated as a part or division of AUSA.
There are currently fourteen Subaccounts within the Variable Funds
Account which are available for allocation of Purchase Payments under the
Contracts. The Calvert Series Subaccount invests only in the Calvert
Responsibly Invested Balanced Portfolio (the "Calvert Series"), a series of
Acacia Capital Corporation, an open-end management investment company
registered with the SEC under the 1940 Act. The thirteen other Variable Funds
Subaccounts invest in thirteen corresponding series of Diversified Investors
Portfolios (the "Portfolios"), an open-end diversified management investment
company registered with the SEC under the 1940 Act. Set forth below is a brief
description of the Calvert Series and the thirteen Portfolios. A full
description of the Calvert Series, its investment objects, policies and
restrictions, its expenses, the risks attendant in investing therein and other
aspects of its operations are contained in the accompanying prospectus for the
Calvert Series. Full descriptions of the thirteen Portfolios, their investment
objectives, policies and restrictions, their expenses, the risks attendant to
investing therein and other aspects of their operations are set forth herein
under "Diversified Investors Portfolios" at page __. Further disclosure appears
in the Statement of Additional Information. Each Participant should
<PAGE>
periodically consider his/her allocation among the Variable Funds Subaccounts
in light of current market conditions and the investment risks attendant to
investment in the various Portfolios and the Calvert Series.
CALVERT SERIES
The Calvert Series is a series of Acacia Capital Corporation ("Acacia"),
a Maryland corporation registered with the SEC under the 1940 Act as an
open-end management company, whose investment adviser is Calvert Asset
Management Company, Inc. The shares of Acacia are currently sold only to
insurance companies for allocation to their separate accounts to fund the
benefits under certain variable annuity and variable life insurance policies
issued by such companies. Because the Calvert Series sells its shares to
insurance companies offering both variable annuity and variable life insurance
policies, potential for conflict between the interests of Contractholders of
these contracts may arise. The Board of Directors of Acacia will monitor the
Calvert Series for the existence of any material irreconcilable conflicts
between interests of Contractholders of all separate accounts investing in the
Calvert Series. If it is determined by a majority of the Board of Directors of
Acacia that such material conflict exists, then AUSA will take whatever steps
are necessary to eliminate the material conflict including withdrawing the
assets allocable to the Calvert Series and reinvesting them in a different
investment medium. For additional risk exposure, see the Calvert Series
prospectus which follows this Prospectus. The Calvert Series Subaccount of the
Variable Funds Account will purchase and redeem shares from the Calvert Series
at net asset value.
The investment objective of the Calvert Series is set forth in the
prospectus for the Calvert Series which appears at the end of this Prospectus.
Briefly, the objective is to achieve a total return above the rate of inflation
through an actively managed, diversified portfolio of common and preferred
stocks, bonds and money market instruments which offer income and capital
growth opportunity and which satisfy the social concern criteria established
for the Calvert Series. There can be no assurance that the objective of the
Calvert Series will be realized.
DIVERSIFIED INVESTORS PORTFOLIOS
Each of the other thirteen Variable Funds Subaccounts invests exclusively
in a corresponding Portfolio, as set forth below:
<TABLE>
<CAPTION>
VARIABLE FUNDS SUBACCOUNT SERIES OF DIVERSIFIED INVESTORS PORTFOLIOS
<S> <C>
Diversified Investors Variable Funds Money Market Diversified Investors Money Market Portfolio
Subaccount........................................ (the "Money Market Portfolio")
Diversified Investors Variable Funds High Quality Diversified Investors High Quality Bond Portfolio
Bond Subaccount................................... (the High Quality Bond Portfolio")
Diversified Investors Intermediate Government
Diversified Investors Variable Funds Intermediate Bond Portfolio (the "Intermediate Government
Government Bond Subaccount........................ Bond Portfolio")
Diversified Investors Government/Corporate Bond
Diversified Investors Variable Funds Portfolio (the "Government/Corporate Bond
Government/Corporate Bond Subaccount.............. Portfolio")
Diversified Investors Variable Funds High-Yield Diversified Investors High-Yield Bond Portfolio
Bond Subaccount................................... (the "High-Yield Bond Portfolio")
Diversified Investors Variable Funds Balanced Diversified Investors Balanced Portfolio (the
Subaccount........................................ "Balanced Portfolio")
<PAGE>
Diversified Investors Variable Funds Equity Value Diversified Investors Equity Value Portfolio (the
Subaccount........................................ "Equity Value Portfolio")
Diversified Investors Variable Funds Equity Income Diversified Investors Equity Income Portfolio (the
Subaccount........................................ "Equity Income Portfolio")
Diversified Investors Variable Funds Growth & Diversified Investors Growth & Income Portfolio
Income Subaccount................................. (the "Growth & Income Portfolio")
Diversified Investors Variable Funds Equity Diversified Investors Equity Growth Portfolio (the
Growth Subaccount................................. "Equity Growth Portfolio")
Diversified Investors Variable Funds Special Diversified Investors Special Equity Portfolio
Equity Subaccount................................. (the "Special Equity Portfolio")
Diversified Investors Variable Funds Aggressive Diversified Investors Aggressive Equity Portfolio
Equity Subaccount................................ (the "Aggressive Equity Portfolio")
Diversified Investors Variable Funds International Diversified Investors International Equity
Equity Subaccount................................. Portfolio (the "International Equity Portfolio")
</TABLE>
Diversified Investors Portfolios is registered with the SEC under the
1940 Act as an open-end diversified management investment company. This
registration does not involve supervision by the SEC of the management or
investment practices or policies of Diversified Investors Portfolios.
Diversified acts as investment adviser and administrator to each
Portfolio. Diversified has contracted with one or more subadvisers for certain
investment advisory services for each Portfolio. The investment objectives of
the Portfolios currently available under the Contracts through Variable Funds
Subaccounts are described briefly below. There can be no assurance that the
investment objectives of any of the Portfolios will be met.
MONEY MARKET PORTFOLIO: To provide liquidity and as high a level of
income as is consistent with the preservation of capital.
HIGH QUALITY BOND PORTFOLIO: To provide a high risk-adjusted return while
focusing on the preservation of capital.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO: To provide as high a level of
current income as is consistent with the preservation of capital.
GOVERNMENT/CORPORATE BOND PORTFOLIO: To achieve maximum total return.
HIGH-YIELD BOND PORTFOLIO: To provide a high level of current income.
BALANCED PORTFOLIO: To provide a high total investment return through
investment in a balanced portfolio of stocks, bonds and money market
instruments.
EQUITY INCOME PORTFOLIO: To provide a high level of current income
through investment in a diversified portfolio of common stocks with relatively
high current yield. Capital appreciation is a secondary objective.
EQUITY VALUE PORTFOLIO: To provide a high total investment return through
investment primarily in a diversified portfolio of common stocks.
<PAGE>
GROWTH & INCOME PORTFOLIO: To provide capital appreciation and current
income.
EQUITY GROWTH PORTFOLIO: To provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks with a potential
for above-average growth in earnings. Current income is a secondary objective.
SPECIAL EQUITY PORTFOLIO: To provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks of small to
medium size companies.
AGGRESSIVE EQUITY PORTFOLIO: To provide a high level of capital
appreciation primarily through investing in a diversified portfolio of common
stocks.
INTERNATIONAL EQUITY PORTFOLIO: To provide a high level of long-term
capital appreciation primarily through investment in a diversified portfolio of
securities of foreign issuers.
See "Diversified Investors Portfolios" at page __ and the Statement of
Additional Information for more information on each of the Portfolios described
above.
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
Diversified Investors Strategic Variable Funds (the "Strategic Variable
Funds Account") was established by AUSA under New York Insurance Law on April
15, 1996 as a separate account. The Strategic Variable Funds Account will hold
assets that are segregated from all of AUSA's other assets and at present are
used only to support Contracts for which Purchase Payments have been allocated
to the Strategic Variable Funds Account. AUSA is the legal holder of the assets
in the Strategic Variable Funds Account and will at all times maintain assets
in the Strategic Variable Funds Account with a total market value at least
equal to the contract liabilities for the Strategic Variable Funds Account. The
obligations under the Contracts are obligations of AUSA. Income, gains, and
losses, whether or not realized, from assets allocated to the Strategic
Variable Funds Account, are, in accordance with the Contracts, credited to or
charged against the Strategic Variable Funds Account without regard to other
income, gains, or losses of AUSA. The assets in the Strategic Variable Funds
Account may not be charged with liabilities which arise from any other business
AUSA conducts. The Strategic Variable Funds Account assets may include
accumulation of the charges AUSA makes against a Contract participating in the
Strategic Variable Funds Account. From time to time, any such additional assets
may be transferred in cash to AUSA's general account.
The Strategic Variable Funds Account is registered with the SEC under the
1940 Act as a management investment company, which is a type of investment
company. This does not involve any supervision by the SEC of the management or
investment policies or practices of the Strategic Variable Funds Account. For
state law purposes, the Strategic Variable Funds Account is treated as a part
or division of AUSA.
The investment objectives of the Strategic Variable Funds Subaccounts
currently available under the Contracts are described briefly below. There can
be no assurance that the investment objectives of any of the Strategic Variable
Funds Subaccounts will be met.
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SHORT HORIZON STRATEGIC ALLOCATION VARIABLE FUND (formerly known as the
Conservative Strategic Allocation Variable Fund): To provide a high level of
income and preservation of capital.
INTERMEDIATE HORIZON STRATEGIC ALLOCATION VARIABLE FUND (formerly known
as the Moderate Strategic Allocation Variable Fund): To provide a high total
investment return.
INTERMEDIATE/LONG HORIZON STRATEGIC ALLOCATION VARIABLE FUND (formerly
known as the Aggressive Strategic Allocation Variable Fund): To provide
long-term growth of capital and growth of income.
As a fundamental policy, each Strategic Variable Funds Subaccount offers
a professionally managed asset allocation investment program by investing in a
combination of the Variable Funds Subaccounts (other than the Balanced and
Calvert Series Subaccounts) described above. These Variable Funds Subaccounts
in turn invest in the Portfolios. Consistent with its investment objective,
each Strategic Variable Funds Subaccount will allocate its assets among the
Variable Funds Subaccounts according to Diversified's outlook for the economy,
financial markets and relative market valuation of the Variable Funds
Subaccounts and the underlying Portfolios. Each Strategic Variable Funds
Subaccount's share price will fluctuate with changing market conditions and the
value of the Variable Funds Subaccounts in which it invests. Purchase Payments
should not be allocated to the Strategic Variable Funds Subaccounts for
short-term financial needs nor used to play short-term swings in the stock or
bond markets. The Strategic Variable Funds Subaccounts cannot guarantee that
they will achieve their objectives.
As noted above, each Variable Funds Subaccount is a subaccount of the
Variable Funds Account. Each Variable Funds Subaccount available under the
Strategic Variable Funds Subaccounts seeks to achieve its investment objective
by investing all of its assets in a corresponding Portfolio. See "Diversified
Investors Variable Funds" above at page __ and the Statement of Additional
Information for more information on the Variable Funds Subaccounts. See
"Diversified Investors Portfolios" below at page __ and the Statement of
Additional Information for more information on the Portfolios.
Diversified has established general percentage allocations for the assets
of each Strategic Variable Funds Subaccount among the Variable Funds Money
Market, Bond and Stock Subaccounts. These general allocations reflect
Diversified's present strategy for asset allocation during normal market
conditions, and may be changed at any time without shareholder approval.
Diversified also may allocate the assets of each Strategic Variable Funds
Subaccount without limit to the Variable Funds Money Market Subaccount to
reduce volatility, to provide a reserve for future allocations and for
temporary defensive purposes.
Under normal circumstances, at least 65% of the assets of the Short
Horizon Strategic Allocation Variable Fund are invested in the Variable Funds
Money Market and Bond Subaccounts, with at least 10% of the assets of the Fund
invested in the Money Market Subaccount. The Fund may also invest in the
Variable Funds Equity Income, Equity Value and Growth & Income Subaccounts. The
assets of the Fund are generally allocated 0-50% to the Money Market
Subaccount, 50-100% to the Bond Subaccounts and 0-20% to the Stock Subaccounts.
For specific allocations to the underlying Subaccounts, see Appendix A.
Under normal circumstances, the assets of the Intermediate Horizon
Strategic Allocation Variable Fund are generally allocated 0-25% to the
<PAGE>
Variable Funds Money Market Subaccount, 25-75% to the Variable Funds Bond
Subaccounts and 25-75% to the Variable Funds Stock Subaccounts. For specific
allocations to the underlying Subaccounts, see Appendix A.
Under normal circumstances, at least 65% of the assets of the
Intermediate/Long Horizon Strategic Allocation Variable Fund are invested in
the Variable Funds Stock Subaccounts. The Fund may also invest in the Variable
Funds Money Market and Bond Subaccounts. The assets of the Fund are generally
allocated 0-20% to the Money Market Subaccount, 0-50% to the Bond Subaccounts
and 50-100% to the Stock Subaccounts. For specific allocations to the
underlying Subaccounts see Appendix A.
MANAGEMENT
Subject to such policies as the Board of Directors of AUSA may determine
and pursuant to the Investment Advisory Agreement with AUSA with respect to the
Strategic Variable Funds Subaccounts, Diversified manages the assets of each
Strategic Variable Funds Subaccount in accordance with the investment policies
approved by the Board of Directors of AUSA. Subject to such policies,
Diversified provides general investment advice to each Strategic Variable Funds
Subaccount. For its services under the Investment Advisory Agreement,
Diversified receives from each Strategic Variable Funds Subaccount fees accrued
daily and paid monthly at an annual rate equal to 0.20% of the average daily
net assets. Investment management decisions are taken by a committee of
Diversified's personnel and not by a particular individual.
The management of each Strategic Variable Funds Subaccount's business and
affairs is the responsibility of the Board of Directors of AUSA. The Board of
Directors of AUSA has established a managing board (the "Strategic Managing
Board") and has delegated certain responsibilities for the operation of the
Strategic Variable Funds Subaccounts to the Strategic Managing Board. A
majority of the members of the Strategic Managing Board will be non-interested
persons as defined in Section 2(a)(19) of the 1940 Act. However, the members of
the Strategic Managing Board also serve in similar positions with the
Portfolios. Thus, if the interests of a Strategic Variable Funds Subaccount and
the Portfolios were ever to become divergent, it is possible that a conflict of
interest could arise and affect how these persons fulfill their fiduciary
duties to that Strategic Variable Funds Subaccount and the Portfolios. The
Strategic Managing Board believes they have structured each Strategic Variable
Funds Subaccount to avoid these concerns. However, it is conceivable that a
situation could occur where proper action for a Strategic Variable Funds
Subaccount could be adverse to the interests of a Portfolio, or vice versa. If
such a possibility arises, the Trustees/Directors and Officers of the affected
funds and Diversified will carefully analyze the situation and take all steps
they believe reasonable to minimize and, where possible, eliminate the
potential conflict.
Before approving any advisory contract, the Strategic Managing Board,
including a majority of the members who are not "interested persons" as defined
in Section 2(a)(19) of the 1940 Act, must find that advisory fees charged under
such contract are based on services provided that are in addition to, rather
than duplicative of, services provided pursuant to any Portfolio advisory
contract.
CHARGES
Following is a discussion of various charges relating to an investment in
either the Variable Funds Account or the Strategic Variable Funds Account. To
the extent that charges are made against the Variable Funds Subaccounts, a pro
rata share of these charges will ultimately be borne by Strategic Variable
Funds Subaccounts investing in the Variable Funds Subaccounts.
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CHARGES FOR MORTALITY AND EXPENSE RISKS
The maximum daily charges against the Variable Funds Subaccounts for
mortality and expense risks assumed by AUSA are computed and deducted from the
value of the net assets of the Variable Funds Subaccounts. The maximum daily
charge will be at the rate of 0.003425% (equivalent to an annual rate of 1.25%)
of the average daily net assets of the Variable Funds Subaccounts. The daily
charge will be deducted from the net asset value of each Variable Funds
Subaccount on each Valuation Date. Where the previous day (or days) was not a
Valuation Date, the maximum deduction on the Valuation Date will be 0.003425%
multiplied by the number of days since the last Valuation Date. The sum of
these charges on an annual basis will not exceed 1.25% of the average net
assets invested in the Variable Funds Subaccounts. Of this charge, AUSA
estimates that .80% is for mortality risk and .45% is for expense risk. (The
daily charge from the Variable Funds Subaccounts based on an annual mortality
and expense risk rate of .90%, .60% for mortality risks and .30% for
administrative expense risks, is 0.002466%.)
The mortality risk is that individuals may live for a longer period of
time than projected and therefore a greater amount of annuity benefits than
projected will be payable. The expense risk is that expenses incurred in
issuing and administering the Contract will exceed the administrative expense
charge provided in the Contract. AUSA believes that this level of charge is
within the range of industry practice for comparable group variable annuity
contracts.
Sales distribution expenses and any other expenses in excess of the
described charges will be paid from AUSA's general account and not directly
from any Subaccount or from the mortality and expense risk charges. However,
asset charges for AUSA's assumption of mortality and expense risks might be a
source of contribution to the surplus in AUSA's general account.
ANNUAL CONTRACT CHARGE
AUSA reserves the right to deduct an annual contract charge from a
Participant's Accumulation Account to reimburse AUSA for administrative
expenses relating to the maintenance of the Contracts. AUSA has no present
intention to impose such a charge; however, AUSA may, in the future, impose
such a charge in accordance with the provisions of the Contracts. Any such
annual charge will not exceed $50. AUSA also reserves the right, if such a
charge is imposed, to waive, on a temporary or permanent basis, all or part of
such charge for certain classes of Contracts or for certain new classes of
Contracts which may be sold in the future where circumstances exist that result
in differences in AUSA's costs or in the services required from AUSA. For
example, waivers may be granted for Contractholders with large numbers of
participants with large account balances or for Contractholders which assume
certain administrative expenses which AUSA would otherwise bear. If imposed,
this charge would represent reimbursement for administrative costs expected to
be incurred over the life of the Contracts. AUSA does not anticipate any profit
from this charge.
INVESTMENT MANAGEMENT FEES
The Variable Funds Subaccounts
Because the Variable Funds Account, through the Variable Funds
Subaccounts, purchases interests in the Portfolios and the Calvert Series, the
net assets of the Variable Funds Subaccounts will reflect the investment
management fee and other expenses incurred by the Portfolios and the Calvert
Series, as applicable.
<PAGE>
Diversified serves as the investment adviser to each Portfolio. For
information with respect to the arrangements under which Diversified provides
such advisory services, including charges and arrangements with subadvisers,
see "Management of Diversified Investors Portfolios" at page __.
The Calvert Series' investment adviser is the Calvert Asset Management
Company, Inc. (the "Calvert Adviser"), which is located at 4550 Montgomery
Avenue, Suite 1000N, Bethesda, Maryland 20814. The Calvert Adviser is a
wholly-owned subsidiary of Calvert Group, Ltd., which is in turn a wholly-owned
subsidiary of Acacia Mutual Life Insurance Company. Pursuant to its investment
advisory agreement with the Calvert Series, the Calvert Adviser manages the
fixed-income investments of the Calvert Series and is responsible for the
overall management of the business affairs of the Calvert Series subject to the
direction and authority of the Board of Directors of Acacia. The subadviser to
the Calvert Series is NCM Capital Management Group, Inc. ("NCM"). Pursuant to
its Investment Subadvisory Agreement with the Calvert Adviser, NCM manages the
equity portion of investments for the Calvert Series. NCM is an employee-owned
subsidiary of Sloan Financial Group. Sloan Financial Group is controlled by
Maceo K. Sloan and Justin K. Beckett and is one of the largest minority-owned
investment management firms in the country. The Calvert Adviser receives from
the Calvert Series a monthly base fee, computed on a daily basis at an annual
rate of 0.70% of the average daily net assets of the Calvert Series. The
Calvert Adviser pays NCM a base fee of 0.25% of one-half of the Calvert Series'
net assets. In addition, the Calvert Adviser and NCM may earn (or have their
fees reduced by) performance fee adjustments based on the extent to which
performance of the Calvert Series exceeds or trails the Lipper Balanced Funds
Index. Payment of the performance fee adjustment began July 1, 1996. The
specific adjustments are as follows:
CALVERT ADVISER'S PERFORMANCE FEE ADJUSTMENT
----------------------------------------------
Performance versus the Performance Fee
Lipper Balanced Fund Index Adjustment
6% to less than 12% 0.05%
12% to less than 18% 0.10%
18% or more 0.15%
NCM'S PERFORMANCE FEE ADJUSTMENT
---------------------------------------------
Performance versus the Performance Fee
Lipper Balanced Fund Index Adjustment
6% to less than 12% 0.05%
12% to less than 18% 0.10%
18% or more 0.15%
The performance fee adjustment to NCM is paid out of the fee the Calvert
Adviser receives from the Calvert Series. The initial performance period was
the twelve month period between July 1, 1995 and July 1, 1996. Each month an
additional month's performance is factored into the calculation until a total
of 36 months comprises the performance computation period. Payment by the
Calvert Series of the performance fee adjustment will be conditioned on (i) the
performance of the Calvert Series as a whole having exceeded the Lipper
Balanced Fund Index and (ii) payment of the performance fee adjustment not
causing the Calvert Series' performance to fall below the Lipper Balanced Fund
Index.
<PAGE>
The Strategic Variable Funds Subaccounts
For its services as investment adviser to the Strategic Variable Funds
Subaccounts, Diversified receives fees, accrued daily and paid monthly, at an
annual rate equal to 0.20% of the average daily net assets of each Strategic
Variable Funds Subaccount.
Because the Strategic Variable Funds Subaccounts purchase interests in
the Variable Funds Subaccounts, which, in turn, purchase interests in the
Portfolios, the net assets of the Strategic Variable Funds Subaccounts will
reflect the investment management fee and other expenses incurred by the
Portfolios. Diversified serves as the investment adviser to each Portfolio. For
information with respect to the arrangements under which Diversified provides
such advisory services, including charges and arrangements with subadvisers,
see "Management of Diversified Investors Portfolios" at page __.
PREMIUM TAX
Under the laws of certain jurisdictions, premium taxes are payable on
annuity considerations which can include Purchase Payments or the Accumulation
Account under the Contracts. Any applicable premium taxes will generally be
deducted when the Accumulation Account under a Contract is applied to purchase
an annuity. Under present laws, the range of premium taxes is from .5% to 4.0%.
Attached as Appendix B is a schedule of applicable premium taxes payable upon
annuitization which are in effect as of the date of this Prospectus. The laws
of the various jurisdictions relating to annuity taxes and the interpretations
of such laws are subject to changes which may affect the deductions, if any,
under the Contracts for such taxes.
SUMMARY OF THE CONTRACTS
ELIGIBLE PURCHASERS
State educational organizations and organizations that qualify for
tax-exempt status under Code Section 501(c)(3), including associations thereof
that qualify for tax-exempt status under Code Section 501(c)(3), are eligible
purchasers. In addition, any organization qualifying as an IRA Contractholder
may purchase or hold an IRA Contract. Any type of non-profit organization as
well as taxed subsidiaries of tax-exempt organizations and taxed stand-alone
organizations may purchase a Section 401(a) and/or a Section 401(k) or an NQDC
Contract.
OWNERSHIP
The organization purchasing or holding a Contract is the owner of the
Contract for the benefit of the Participants. The Contract will cover all
eligible Participants under a Plan. Each Participant will receive a certificate
at the time his/her first annuity payment becomes payable, or earlier, if
required by applicable law. The certificate summarizes the Participant's
benefits under the Contract.
PURCHASE PAYMENTS
With respect to the Section 401(a) Contract, the employer and/or employee
will make contributions pursuant to the underlying retirement Plan. The Section
401(k) and NQDC Contracts will accept employer and/or employee contributions
pursuant to the terms and conditions of the underlying Plan. As to the Section
403(b) Contract, the employer will make Purchase Payments in accordance with a
<PAGE>
salary reduction agreement or an agreement to forego a salary increase, except
with respect to employer-sponsored Section 403(b) Plans under which the
employer will make contributions pursuant to the underlying retirement Plan. In
the case of the Section 408 IRA Contract, Purchase Payments will be made by the
employer on behalf of and as determined by each participating employee pursuant
to a salary reduction agreement or by the Participant. An Accumulation Account
will be established for each Participant which will record the number of Units
held in each Subaccount. Purchase Payments to the Variable Funds Account may be
allocated among any of the Variable Funds Subaccounts. Similarly, Purchase
Payments to the Strategic Variable Funds Account may be allocated among any of
the Strategic Variable Funds Subaccounts.
All Purchase Payments credited to an Accumulation Account are vested and
nonforfeitable. However, Purchase Payments made by employers, including all
such payments made under a Section 401(a) Contract, which are not the result of
a reduction in salary or a give up in salary agreement, under an
employer-sponsored Plan may be forfeitable but are generally subject to the
vesting requirements, where applicable, of the Employee Retirement Income
Security Act of 1974, as amended. In general, all Purchase Payments made to
NQDC and Section 457 Contracts may be forfeitable even though partially or
fully vested.
EMPLOYER SPONSORED PLAN REQUIREMENTS
Since the Contracts are intended to implement the Plans of state
educational organizations, organizations that qualify for tax-exempt status
under Code Section 501(c)(3), IRA Contractholders and, in the case of Section
401(a) and/or Section 401(k) and NQDC Contracts, for taxed subsidiaries of such
organizations and stand-alone taxed organizations and since such Plans may be
sponsored by employers or associations who may have their own desires regarding
certain Plan details and the manner in which the Plan is to be administered,
there will be some variations in details in the Contract and Plan to reflect
such desires. Reference to the provisions of the Plan in which the individual
is a Participant must be made in all cases for particulars.
RIGHTS OF THE PARTICIPANT UNDER THE CONTRACT
There are no stipulated or required Purchase Payments to be made under
the Contract. Except for the 15 days prior to a Participant's Annuity Purchase
Date (see "Annuity Purchase Date" on page __) during which no Purchase Payments
will be accepted by AUSA, during a Participant's Accumulation Period Purchase
Payments may be made in the amount authorized by the Participant. The Contract
permits the Participant to elect his/her Annuity Purchase Date, to allocate
Purchase Payments, to redeem all or a portion of the Units in his/her
Accumulation Account, to designate beneficiaries, and to elect Fixed Annuity
options, except that employer-sponsored Plans may affect these rights.
During a Participant's Accumulation Period, one's rights and those of the
Contractholder or IRA Contractholder shall be as set forth in the Contract and
Plan. On and after the Annuity Purchase Date, or on the Participant's death, if
earlier, all rights, as specified in the Contract and Plan, shall belong to the
Participant or beneficiary as the case may be.
RIGHTS UPON SUSPENSION OF CONTRACT OR TERMINATION OF PLAN
403(b) Contract
In the event that the making or receipt of all Purchase Payments under
certain 403(b) Contracts is discontinued or a Contractholder terminates its
<PAGE>
Plan or discontinues Purchase Payments for a Participant, AUSA shall give
written notice thereof to the appropriate Participant(s) together with notice
of the right of the Participant to elect to have the value of his/her
Accumulation Account applied under one of the following options: (1) to be held
and distributed by AUSA in accordance with the terms of the Contract, (2) to be
paid to him/her in cash, or (3) in the event of suspension of the Contract or
termination of the Plan, to be transferred to an alternate funding agency
(e.g., another insurance company). Certain other 403(b) Contracts require the
Contractholder, not AUSA, to give written notice thereof to Participants.
401(a) Contract/401(k) Contract and NQDC Contracts
If the Contractholder terminates its Plan or discontinues Purchase
Payments, it is the Contractholder's responsibility, and not AUSA's, to give
written notice thereof to the affected Participants. In such cases, the
Contractholder shall elect to have the entire balance held under the Contract
applied under one of the following options: (1) to be held and distributed by
AUSA in accordance with the terms of the Contract; (2) to be transferred to an
alternate funding agency (e.g., another insurance company); or (3) to purchase
deferred, paid-up life annuity benefits for Participants.
457 and 408(IRA) Contracts
If the Contractholder or IRA Contractholder terminates its Plan or
discontinues Purchase Payments for a Participant, AUSA shall give written
notice thereof to the appropriate Participant(s) together with notice of the
right of the Participant to elect to have the value of his/her Accumulation
Account applied under either of the following options: (1) to be held and
distributed by AUSA in accordance with the terms of the Contract or (2) to be
paid to him/her in cash, except that, under the terms of certain 457 Contracts,
the Contractholder, not AUSA, shall give notice to affected Participants.
FAILURE OF QUALIFICATION
In the event that a Plan, Contractholder or IRA Contractholder or a
Participant thereunder becomes ineligible for any previously applicable tax
benefits under the Code, AUSA upon notice thereof shall refuse during the
period of such ineligibility to accept Purchase Payments with respect to that
Plan or Participant. A failure of qualification under a particular Contract
shall have no effect on other issued and outstanding Contracts.
TRANSFERS
No transfers may be made between any of the Contracts; however, the
following transfers are permissible with respect to each Contract.
401(a), 401(k), 403(b), 457, 408(IRA) and NQDC Contracts
A Participant may transfer all or a portion of his/her Accumulation
Account in the Diversified Investors Variable Funds or the Diversified
Investors Strategic Variable Funds among the various Subaccounts of that
Account. No transfer charges are imposed, and there is no limit to the number
of transfers permitted. While AUSA has no present intention to do so, AUSA
reserves the right to impose transfer charges at a later date.
Transfers from the Section 403(b), 401(a) and (k) and NQDC Group Fixed
Annuity Contracts to a Participant's Accumulation Account under the Diversified
<PAGE>
Investors Variable Funds Contracts are permitted only to the Subaccounts which
invest in the Balanced Portfolio, Equity Income Portfolio, Growth & Income
Portfolio, Equity Growth Portfolio, Special Equity Portfolio, Calvert Series or
International Equity Portfolio. Transfers from the Section 403(b), 401(a) and
(k) and NQDC Group Fixed Annuity Contracts to a Participant's Accumulation
Account under the Diversified Investors Strategic Variable Funds Contracts are
permitted only to the Intermediate Strategic Allocation Variable Fund or the
Intermediate/Long Strategic Allocation Variable Fund.
Certain other restrictions which apply to transfers from the AUSA Section
403(b), Section 401(a), Section 401(k), NQDC and Section 408(IRA) Group Fixed
Annuity Contracts to the Diversified Investors Variable Funds Contracts or the
Diversified Investors Strategic Variable Funds Contracts are contained in the
AUSA Section 403(b) and Section 401(a) and NQDC and 408(IRA) Group Fixed
Annuity Contracts.
Transfers may be made in writing or by telephoning (914) 697-8000.
Transfers are effective within 48 hours of receipt of instructions. All
Participants should be aware that a transfer authorized by telephone and
reasonably believed to be genuine by AUSA may subject the Participant to risk
of loss if such instruction is subsequently found not to be genuine. AUSA will
employ reasonable procedures, including requiring Participants to give certain
identification information and tape recording of telephone instructions, to
confirm that instructions communicated by telephone are genuine. To the extent
that AUSA fails to use reasonable procedures to verify the genuineness of
telephone instructions, AUSA may be liable for any losses due to telephone
instructions that prove to be fraudulent or unauthorized.
RIGHTS RESERVED BY AUSA
Subject to compliance with applicable laws and, when required by law,
approval of the Contractholders, IRA Contractholders, NQDC Contractholders
and/or Participants and any appropriate regulatory authority, AUSA reserves the
right to make the following changes:
(1) To operate the Diversified Investors Variable Funds and the Diversified
Investors Strategic Variable Funds in any form permitted under the 1940 Act
or in any other form permitted by law;
(2) To take any action necessary to comply with or obtain and continue any
exemptions from the 1940 Act;
(3) To transfer any assets in a Subaccount to another Subaccount or to one
or more separate accounts, or to AUSA's general account to the extent
permitted by law or to add, combine or remove Subaccounts in a separate
account;
(4) To substitute, for the interests in a Portfolio or the Calvert Series
held in any Variable Funds Subaccount, interests in another Portfolio or
interests in another investment company or any other investment permitted by
law; and
(5) To make any necessary technical changes in the Contracts in order to
conform with any of the above-described actions or as may be required or
permitted by applicable laws affecting Diversified Investors Variable Funds,
Diversified Investors Strategic Variable Funds or the Contracts.
AUSA will exercise its right to make any of these changes when, in AUSA's
judgment, such change is in the best interests of Contractholders and
<PAGE>
Participants and/or such change is required under applicable law.
Contractholders will be notified of any changes and Participants will be
notified of any changes that result in a material change in their Contract or
in the investment options thereunder.
CREDIT OF PURCHASE PAYMENTS
A Participant's initial Purchase Payment will be credited to the
Participant's Accumulation Account to provide Units as of a Valuation Date for
the Valuation Period, not later than (1) two business days after receipt of the
Purchase Payment by AUSA at 4 Manhattanville Road, Purchase, New York 10577, if
the contract application and/or Participant's enrollment form is complete upon
receipt, or (2) two business days after an application and/or enrollment form
which is incomplete upon receipt by AUSA is made complete, provided that if
such information is not made complete within five business days after receipt
(i) the prospective Participant will be informed of the reasons for the delay,
and (ii) the initial Purchase Payment will be returned immediately and in full,
unless the prospective Participant specifically consents to AUSA retaining the
Purchase Payment until such information is made complete.
Subsequent Purchase Payments will be credited to the Participant's
Accumulation Account to provide Units as of the Valuation Date for the
Valuation Period in which the Purchase Payment is received in good order by
AUSA.
ALLOCATION OF PURCHASE PAYMENTS
Upon receipt of a Purchase Payment, it will be credited to the Account
and the Subaccount or Subaccounts thereof designated by the Participant in the
form of Units. The number of Units to be credited is determined by dividing the
dollar amount allocated to the particular Subaccount(s) by the Unit value of
that Subaccount for the Valuation Date for the Valuation Period on which the
Purchase Payment is received. The number of Units shall not be changed by any
subsequent change in the value of a Unit, but the dollar allocation value of a
Unit will vary in amount depending upon the investment experience of the
applicable Subaccount.
Allocation instructions may be changed at any time by sending to AUSA a
correctly completed allocation form. Any change in allocations will be
effective within 10 business days following receipt of the allocation form by
AUSA. If an allocation form is incorrectly completed, Purchase Payments will be
credited in accordance with the most recent allocation form on record. AUSA
reserves the right to limit a Participant's right to change allocation
instructions to four times a calendar year.
DETERMINATION OF UNIT VALUE
The Variable Funds Subaccounts
The Unit value for a Variable Funds Subaccount for any Valuation Date is
determined by subtracting (b) from (a) and dividing the result by (c), where
(a) is the aggregate net asset value on the Valuation Date of all
investments by the Variable Funds Subaccount in the Portfolio or the
Calvert Series in which the Variable Funds Subaccount invests; and
(b) is the mortality and expense risk charge accrued as of that Valuation
Date; and
<PAGE>
(c) is the total number of Units held in the Variable Funds Subaccount on
the Valuation Date before the purchase or redemption of any Units on
that Date.
The Strategic Variable Funds Subaccounts
The Unit value for a Strategic Variable Funds Subaccount for any
Valuation Date is determined by subtracting (b) from (a) and dividing the
result by (c), where
(a) is the aggregate net asset value on the Valuation Date of all
investments by the Strategic Variable Funds Subaccount in the Variable
Funds Subaccounts; and
(b) is the investment advisory fee accrued as of that Valuation Date; and
(c) is the total number of Units held in the Strategic Variable Funds
Subaccount on the Valuation Date before the purchase or redemption of
any Units on that Date.
AUSA values the investment of each Strategic Variable Funds Subaccount at
the respective unit values of the Variable Funds Subaccounts invested in. The
unit values of such Variable Funds Subaccounts are, in turn, determined by the
valuation practices of the underlying Portfolios. The Portfolios value the
securities of the Money Market Portfolio based on the amortized cost method of
valuation. Securities of other Portfolios are valued based on their current
market value when market quotations are available. Where market quotations are
not available, assets are valued at fair value as determined in good faith
under the direction of the Board of Trustees of the Portfolios. Debt
obligations with 60 days or less remaining to maturity may be valued by the
amortized cost method, which the Board of Trustees of the Portfolios has
determined to constitute fair value for such securities.
DEATH BENEFIT
Under Section 403(b), Section 457, and 408(IRA) Contract, if a
Participant dies before the Annuity Purchase Date (see "Annuity Purchase Date"
on page __), the value of his/her Accumulation Account will be paid to the
beneficiary in a lump sum. If the beneficiary is under the age of 75 at the
time of the Participant's death, the beneficiary may elect to have this lump
sum applied to provide a Fixed Annuity. A lump sum payment to some extent may
be taxed as ordinary income to the beneficiary in the year received. A
beneficiary should consider the possible tax advantages to electing an annuity.
See "Section 403(b) Annuities" on page __. Under Section 401(a) and/or Section
401(k) Contracts, however, the underlying tax-qualified Plan is generally
required to provide that in the case of a married Participant, a survivorship
annuity death benefit will be paid to the surviving spouse if the Participant
dies prior to retirement. In each case involving Section 401(a) and/or Section
401(k) Contracts, reference must be made to the underlying Plan for
particulars.
If the Participant dies before the Annuity Purchase Date, his/her entire
interest must generally be distributed within five years after the date of
death, or if payable to a designated beneficiary must be annuitized over the
life of that designated beneficiary or over a period not extending beyond the
life expectancy of that beneficiary, within one year after the date of death.
If the beneficiary is the Participant's spouse, distributions are not required
to be made until the April 1st after the end of the calendar year in which the
Participant would have attained age 70 1/2; if the spouse dies before
distributions begin, the rules discussed above will apply as if the spouse were
the Participant (owner).
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If a lump sum payment is elected, the Accumulation Account value will be
determined on the Valuation Date for the Valuation Period in which a certified
copy of the death certificate evidencing the Participant's death is received by
AUSA. If a Fixed Annuity is elected, the Accumulation Account value will be
determined on the Valuation Date for the Valuation Period of the beneficiary's
Annuity Purchase Date. For Section 401(a) and/or Section 401(k) and NQDC
Contracts, the underlying Plan should be consulted to determine the options
available.
For NQDC Contracts, the remaining value will be paid to a designated
beneficiary. If no such beneficiary is so designated or in existence, the
remaining value will be paid in the following order: Participant's (1) spouse,
(2) children, (3) parents, (4) siblings and (5) estate.
For all Contracts except NQDC Contracts, the death benefit is guaranteed
to be not less than the total amount of all contributions, less any
withdrawals, made by the Participant.
REDEMPTION DURING THE ACCUMULATION PERIOD
For Section 403(b), Section 457 and Section 408(IRA) Contracts and
subject to applicable federal tax law restrictions, a Participant at any time
during his/her Accumulation Period and prior to his/her death may redeem all or
a portion of the Units credited to the Accumulation Account. There is no
redemption charge. See "Federal Tax Status" on page __.
The Accumulation Account value redeemed or the Units remaining after a
partial redemption will be determined on the Valuation Date for the Valuation
Period in which a written request for a redemption on a form approved by AUSA
is received by AUSA. The Accumulation Account will be reduced by the lesser of
the number of Units obtained by dividing the amount of the redemption request
by the Unit value for that day or the number of Units remaining in the
Accumulation Account.
A full or partial redemption payment will be made within seven days after
receipt of the written request. A request for a partial redemption must specify
the Subaccount(s) from which the partial withdrawal is to be made. Payment may
be postponed as permitted by the 1940 Act. Currently, deferment is permissible
only when the New York Stock Exchange is closed or trading is restricted, when
an emergency exists as a result of which disposal of interests in the
Portfolios or the Calvert Series held by Variable Funds Subaccounts is not
reasonably practicable or it is not reasonably practicable to determine fairly
the value of these assets, or when the SEC has provided for such deferment for
the protection of Participants.
A withdrawal will generally have federal income tax consequences which
may include penalties. See "Federal Tax Status" on page __.
With respect to Section 401(a), Section 401(k) and NQDC Contracts, the
ability to withdraw funds during the Accumulation Period is generally more
limited; however, in each instance the underlying Plan document should be
consulted to determine what options, if any, are available.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
The Texas Optional Retirement Program ("Program") imposes on participants
in such Program certain restrictions on withdrawal, which affect redemptions
with respect to any variable annuity contract issued under the Program. Under
section 830.104 of the Texas Government Code, such participant in the Program,
in order to withdraw accumulated contributions from the retirement system, must
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complete the required application form prescribed by the board of trustees. A
person who withdraws contributions pursuant to section 830.104 relinquishes all
accrued rights in the retirement system.
Nothing in section 830.105 of the Texas Government Code, entitled
Termination of Participation, precludes the election by a participant to
withdraw accumulated contributions pursuant to section 830.104. However,
section 830.105 restricts the availability of an annuity purchased under the
Program to situations where the participant attains age 70 1/2 or terminates
participation in the Program by: death, retirement, or termination of
employment in all institutions of higher education.
PAYMENT OPTIONS
With respect to Section 403(b), Section 457 and Section 408(IRA)
Contracts, unless a Fixed Annuity as described below is elected, payment to the
Participant shall be made at the end of his/her Accumulation Period in a lump
sum calculated in the same manner as if a total withdrawal request of one's
Accumulation Account had been received by AUSA on his/her Annuity Purchase
Date. See page __ for "Redemption During the Accumulation Period". However,
Section 401(a), Section 401(k) and NQDC Contracts provide the funding for the
Plans and reference to the particular Plan must be made in each case for
details. For example, tax-qualified Plans must generally provide by law that in
the case of a married Participant who does not properly elect otherwise,
retirement annuity benefits will be paid in the form of a contingent annuity
with a survivorship annuity benefit for his surviving spouse at least equal to
50% of the amount which would have been payable if the Participant were living.
For NQDC Contracts, the employer may also provide for installment payments
without the purchase of an annuity.
ANNUITY PURCHASE DATE
The Annuity Purchase Date is the first day of the month coincident with
or following the receipt by AUSA of written notice, submitted through the
Participant's employer, of the Participant's retirement (i.e., the termination
of employment with his/her employer). Subject to the terms of the Plan, a
Participant may elect to retire at any time and receive annuity benefits. As a
general rule, benefits must begin no later than April 1 of the calendar year
following the year in which the Participant attains age 70 1/2 at which time an
election to receive an annuity or lump sum benefit must be made.
In the case of a beneficiary who elects a Fixed Annuity, the Annuity
Purchase Date will be the first day of the month following receipt by AUSA of
the election of a Fixed Annuity; however, if any election is received during
the last 15 days of a month, the Annuity Purchase Date will be the first day of
the second month after receipt of the election.
For Section 408(IRA) Contracts, the Annuity Purchase Date is the date the
annuity first begins under the terms of the IRA Contract.
FIXED ANNUITY
Fixed Annuity payments are not made from the Variable Funds Account or
the Strategic Variable Funds Account but are made from the general account of
AUSA which supports insurance and annuity obligations. Because of exemptive and
exclusionary provisions, Fixed Annuity payments and interests in the general
account have not been registered under the Securities Act of 1933, as amended,
(the "1933 Act") nor is the general account registered as an investment company
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under the 1940 Act. Accordingly, neither the general account nor any interests
therein are generally subject to the provisions of the 1933 or 1940 Acts. The
SEC staff has not reviewed the disclosures in this Prospectus that relate to
the Fixed Annuity payments and interests in the general account. Disclosures
regarding Fixed Annuity payments and the general account in this Prospectus,
however, may be subject to certain generally applicable provisions of the
federal securities laws relating to the accuracy and completeness of statements
made in prospectuses.
A Fixed Annuity may not be elected if the initial monthly payment under
the form elected would be less than $20. Fixed Annuity payments will be made
monthly unless the annuitant elects to receive payments annually, semi-annually
or quarterly. Any such election must be made at the same time that the
annuitant elects to receive a Fixed Annuity and cannot be changed during the
annuity period. Once a Fixed Annuity takes effect, it may not be redeemed,
surrendered or changed to any other form of annuity.
FIXED ANNUITY OPTIONS
The following Fixed Annuity options may be available:
(i) Life Annuity -- Annuity payments will be made during the lifetime of the
annuitant. It would be possible for the annuitant to receive no annuity
payment if he/she died prior to the date of the first annuity payment.
(ii) Life Annuity With Period Certain -- Annuity payments will be made
during the lifetime of the annuitant with the guarantee that if the
annuitant dies before a period certain elected, the beneficiary will receive
payments for the duration of the period. The period certain may be any
number of years between 5 and 20 inclusive.
(iii) Specified Fixed Period Annuity -- Annuity payments will be made for a
specified fixed period selected by the annuitant. If the annuitant dies
during the specified fixed period, the annuity payments for the remainder of
the period will be paid to the beneficiary. No annuity payments are made
after the expiration of the specified fixed period even if the annuitant
survives. The specified fixed period may be for any number of years between
10 and 30 years inclusive.
(iv) Contingent Annuity -- Annuity payments will be made during the joint
lifetimes of the annuitant and a designated second person ("contingent
annuitant") with payments continued during the remaining lifetime of the
contingent annuitant. Annuity payments to the contingent annuitant may be
made in the same amount paid while both annuitants lived or a lesser
percentage of this amount. For Section 401(a) and/or Section 401(k)
Contracts, in the absence of a proper election by the Participant, a
contingent annuity with a survivorship annuity benefit for the surviving
spouse at least equal to 50% of the amount which would have been payable if
the Participant were living will be the normal form of benefit.
If the contingent annuitant dies before the first annuity payment to the
annuitant, the contingent annuity election will be void and the annuitant
will receive a Life Annuity. If the contingent annuitant dies after the
first annuity payment to the annuitant, but before the death of the
annuitant, annuity payments under the Contingent Annuity election will be
made to the annuitant during his/her lifetime. If the annuitant and the
contingent annuitant die before the date of the first annuity payment, no
annuity payments will be made.
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(v) Contingent Annuity With Period Certain -- Annuity payments will be made
during the joint lifetimes of the annuitant and a designated second person
("contingent annuitant"). Annuity payments to the contingent annuitant may
be in the same amount as paid to the annuitant or a lessor percentage of
that amount and will be made for a period certain of any number of years
between 5 and 20 years inclusive.
The Life Annuity With Period Certain and the Specified Fixed Period
Annuity may only be elected for a number of years that will not exceed an
annuitant's life expectancy. The annuity benefit option elected by the
Participant will affect the level of annuity payments the Participant will
receive. The longer annuity payments are projected to continue based upon
actuarial possibilities, the lower annuity payments will be.
The annuity purchase rates for these Fixed Annuity benefits shall not
exceed, during the initial period set forth in the Contract, the maximum rates
set forth in the Contract. Thereafter, the annuity purchase rate will be the
rate in effect as declared by AUSA or the Annuity Purchase Date. The guaranteed
level of Fixed Annuity payments will be determined based upon (i) a
Participant's Accumulation Account value on the Annuity Purchase Date, (ii) the
applicable annuity purchase rate on the Annuity Purchase Date which will
reflect the age of the Participant and (iii) the type of Fixed Annuity option
elected.
PAYMENTS TO A BENEFICIARY FOLLOWING THE ANNUITANT'S DEATH
If any annuity payment is payable to the beneficiary after the death of
an annuitant on or after his/her Annuity Purchase Date but during a period
certain, it shall be payable as each payment becomes due to the beneficiary. If
the benefit is payable to more than one beneficiary, it shall be paid in equal
shares to such beneficiaries, the survivors or survivor, unless the annuitant
has elected otherwise. Upon the death of the last surviving beneficiary, AUSA
shall pay the commuted value of any remaining payments in a lump sum cash
payment to the estate of such last surviving beneficiary in lieu of any further
income payments.
The annuitant's beneficiary may direct in writing to AUSA that any income
payable after the death of the annuitant or contingent annuitant be terminated
and a single commuted value be paid to the beneficiary. The commuted values
referred to above shall be based upon the value of the payments for the balance
of the period certain determined as of the date AUSA receives written notice of
the beneficiary's election to receive the commuted value on the basis of the
interest rate (compounded annually) inherent in the annuity purchase rate
applied to provide the annuitant's Fixed Annuity.
VOTING RIGHTS
The Variable Funds Subaccounts
The assets held in the Variable Funds Subaccounts will be invested in the
Portfolios or the Calvert Series, as applicable. AUSA is the legal holder of
the interests and shares held in a Variable Funds Subaccount and as such has
the right to vote to elect the governing boards of Diversified Investors
Portfolios and Acacia, to vote upon certain matters that are required by the
1940 Act to be approved or ratified by the shareholders of a mutual fund, and
to vote upon any other matter that may be voted upon at a shareholders'
meeting. To the extent required by law, AUSA will vote at regular and special
shareholder meetings in accordance with the instructions received from
<PAGE>
Contractholders, IRA Contractholders and NQDC Contractholders. AUSA will
furnish Contractholders, IRA Contractholders and NQDC Contractholders with the
proper forms to enable them to give these instructions. The record date for any
such vote shall be selected by the governing boards of Diversified Investors
Portfolios or Acacia.
Each Contractholder, IRA Contractholder and NQDC Contractholder will have
the equivalent of one vote per $100 of the dollar value of the Accumulation
Accounts in a Contract held in each Variable Funds Subaccount, with fractional
votes for amounts less than $100. These votes, are converted into a
proportionate number of votes in beneficial interests in a Portfolio or shares
of the Calvert Series. Interests held in each Variable Funds Subaccount for
which no timely instructions from Contractholders, IRA Contractholders or NQDC
Contractholders are received will be voted by AUSA in the same proportion as
those interests in that Subaccount for which instructions are received. Should
applicable federal securities laws or regulations permit, AUSA may elect to
vote in its own right.
A Participant will have the right to instruct the Contractholder, IRA
Contractholder or NQDC Contractholder with respect to interests in the
Portfolio or the Calvert Series attributable to his/her portion of the
Accumulation Account held in each Variable Funds Subaccount. Each Participant
under the Contract shall receive a statement of the amount attributable to
his/her participation in each Variable Funds Subaccount and stating his/her
right to instruct the Contractholder as to how to vote such interest. AUSA will
provide voting instruction materials to the Contractholder, IRA Contractholder
or NQDC Contractholder and to the Participants.
The Contractholder, IRA Contractholder and NQDC Contractholder shall
provide voting instructions to AUSA with respect to interests attributable to
the Accumulation Account values held in each Variable Funds Subaccount in
accordance with instructions received by Participants. For interests for which
no timely instructions from Participants are received, the Contractholder, IRA
Contractholder or NQDC Contractholder will instruct AUSA to vote these
interests in the same proportion as those shares for which instructions from
Participants are received.
Matters on which the Contractholder, IRA Contractholder or NQDC
Contractholder may give voting instructions include the following: (1) election
of the governing boards of Diversified Investors Portfolios or Acacia; (2)
ratification of the independent accountant of a Portfolio or the Calvert Series
corresponding to the Contractholder's, IRA Contractholder's or NQDC
Contractholder's selected Subaccount(s); (3) approval of any change in the
Investment Advisory Agreement or any Subadvisory Agreement for a Portfolio or
the Calvert Series corresponding to the Contractholder's, IRA Contractholder's
or NQDC Contractholder's selected Subaccount(s); (4) any change in the
fundamental investment policies of a Portfolio or the Calvert Series
corresponding to the Contractholder's, IRA Contractholder's or NQDC
Contractholder's selected Subaccount(s); and (5) any other matter requiring a
vote of the investors in Diversified Investors Portfolios or the Calvert
Series. With respect to approval of the Investment Advisory Agreements or
Subadvisory Agreements or any change in a fundamental investment policy,
Contractholders, IRA Contractholders and NQDC Contractholders participating in
the affected Subaccount will vote separately on the matter pursuant to the
requirements of Rule 18f-2 under the 1940 Act.
The Strategic Variable Funds Subaccounts
The assets held in the Strategic Variable Funds Subaccounts will be
invested in units of the Variable Funds Subaccounts. AUSA is the legal holder
of the units in the Strategic Variable Funds Subaccounts and as such has the
right to vote upon any matter that may be voted upon by holders of units. To
<PAGE>
the extent required by law, AUSA will vote at regular and special meetings in
accordance with the instructions received from Contractholders, IRA
Contractholders and NQDC Contractholders. AUSA will furnish Contractholders,
IRA Contractholders and NQDC Contractholders with the proper forms to enable
them to give these instructions.
Each Contractholder, IRA Contractholder and NQDC Contractholder will have
the equivalent of one vote per $100 of the dollar value of the Accumulation
Accounts in a Contract held in each Strategic Variable Funds Subaccount, with
fractional votes for amounts less than $100. Interests held in each Strategic
Variable Funds Subaccount for which no timely instructions from
Contractholders, IRA Contractholders or NQDC Contractholders are received will
be voted by AUSA in the same proportion as those interests in that Strategic
Variable Funds Subaccount for which instructions are received. Should
applicable federal securities laws or regulations permit, AUSA may elect to
vote in its own right.
A Participant will have the right to instruct the Contractholder, IRA
Contractholder or NQDC Contractholder with respect to interests in Strategic
Variable Funds Subaccounts attributable to his/her portion of the Accumulation
Account. Each Participant under the Contract shall receive a statement of the
amount attributable to his/her participation in each Strategic Variable Funds
Subaccount and stating his/her right to instruct the Contractholder as to how
to vote such interest. AUSA will provide voting instruction materials to the
Contractholder, IRA Contractholder or NQDC Contractholder and to the
Participants.
The Contractholder, IRA Contractholder and NQDC Contractholder shall
provide voting instructions to AUSA with respect to interests attributable to
the Accumulation Account values held in a Strategic Variable Funds Subaccount
in accordance with instructions received by Participants. For interests for
which no timely instructions from Participants are received, the
Contractholder, IRA Contractholder or NQDC Contractholder will instruct AUSA to
vote these interests in the same proportion as those shares for which
instructions from Participants are received.
Matters on which the Contractholder, IRA Contractholder or NQDC
Contractholder may give voting instructions include the following: (1) approval
of any change in the Investment Advisory Agreement corresponding to the
Contractholder's, IRA Contractholder's or NQDC Contractholder's selected
Subaccount(s); (2) any change in the fundamental investment policies of the
Contractholder's, IRA Contractholder's or NQDC Contractholder's selected
Subaccount(s); and (3) any other matter requiring a vote of the unitholders of
a Subaccount. With respect to approval of the Investment Advisory Agreements or
any change in a fundamental investment policy, Contractholders, IRA
Contractholders and NQDC Contractholders participating in the affected
Subaccount will vote separately on the matter pursuant to the requirements of
Rule 18f-2 under the 1940 Act. On matters submitted for consideration by
holders of units of the underlying Variable Funds Subaccounts, AUSA will vote
in proportion to the vote of all other holders of units in that underlying
Variable Funds Subaccount.
General
AUSA may, if required by state insurance officials, disregard voting
instructions if those instructions would require voting to cause a change in
the subclassification or investment objectives or policies of one or more of
the Portfolios, the Calvert Series or the Variable Funds Subaccounts, or to
approve or disapprove an investment adviser or principal underwriter for one or
more of the Variable Funds Subaccounts. In addition, AUSA may disregard voting
instructions that would require changes in the investment objectives or
<PAGE>
policies of any of the Portfolios, the Calvert Series or the Variable Funds
Subaccounts or in an investment adviser or principal underwriter, if AUSA
reasonably disapproves those changes in accordance with applicable federal
regulations. If AUSA disregards voting instructions, it will advise
Contractholders, IRA Contractholders, NQDC Contractholders and Participants of
that action and its reasons for the action in the next semiannual report to
Contractholders, IRA Contractholders, NQDC Contractholders and Participants.
DISTRIBUTION OF THE CONTRACTS
DISC will act as the principal underwriter and the distributor of the
Contracts. DISC will perform all sales, marketing and administrative functions
relative to the Contracts which participate in the Variable Funds Account or
the Strategic Variable Funds Account, with certain exceptions in connection
with the use of other authorized broker-dealers. DISC is registered as a
broker-dealer under the Securities Exchange Act of 1934, as amended, and is a
member of the National Association of Securities Dealers, Inc. The principal
business address of DISC is 4 Manhattanville Road, Purchase, New York 10577.
The Contracts are sold by individuals who are registered representatives of
DISC and who are also licensed as insurance agents for AUSA. The Contracts may
also be sold through registered representatives of other broker-dealers
authorized by DISC and applicable law who may be insurance agents licensed by
an insurance company other than AUSA. Commissions and other expenses directly
related to the sale of the Contracts will not exceed 8 percent of Purchase
Payments. Additional expense allowance may be paid for other services not
directly related to the sale of the Contracts. Such services include the
training of personnel and the production of promotional literature.
FEDERAL TAX STATUS
The ultimate effect of federal income taxes on Fixed Annuity payments and
on the economic benefit to the Participant, annuitant, payee and beneficiary
depends on the tax and employment status of the individual concerned.
The discussion which follows on the treatment of AUSA and of the
Contracts under federal income tax law is general in nature, is based upon
AUSA's understanding of current federal income tax laws, and is not intended as
tax advice. No representation is made regarding the likelihood of continuation
of the present federal income tax law or of the current interpretations by the
Internal Revenue Service. No attempt is made to consider any applicable state
or other tax laws. Each Contractholder, IRA Contractholder, NQDC
Contractholders and Participant contemplating investment in the Contracts
should consult a qualified tax adviser.
Participants receiving large distributions (generally those in excess of
$150,000 per year; or lump sum distributions in excess of $150,000) from
qualified retirement Plans, including those funded through Section 401(a),
Section 408(IRA) and Section 403(b) Contracts, may be subject to a 15% excise
tax on their distributions in excess of a specified amount.
TAX TREATMENT OF AUSA
AUSA is taxed as a life insurance company under the Code.
Investment income from the assets of the Variable Funds Account are
reinvested and taken into account in determining the value of the Variable
Funds Account. Under existing federal income tax law, the investment income of
the Variable Funds Account, including realized capital gains, is substantially
not taxed to AUSA.
<PAGE>
Investment income from the assets of the Strategic Variable Funds Account
and the underlying Variable Funds Subaccounts are reinvested and taken into
account in determining the value of the Strategic Variable Funds Account and
the underlying Variable Funds Subaccounts. Under existing federal income tax
law, the investment income of the Strategic Variable Funds Account, including
realized capital gains, is substantially not taxed to AUSA.
TAXATION OF DIVERSIFIED INVESTORS PORTFOLIOS
Diversified Investors Portfolios is organized as a New York trust. None
of its series are subject to any income or franchise tax in the State of New
York. AUSA, as an investor in series of Diversified Investors Portfolios, will
be taxable on its share (as determined in accordance with the governing
instruments of Diversified Investors Portfolios) of such series' ordinary
income and capital gain in determining its income tax liability. The
determination of such share will be made in accordance with the Code and
regulations promulgated thereunder. See "Tax Treatment of AUSA" above.
SECTION 403(B) ANNUITIES
Purchase Payments made under a Contract meeting the requirements of
Section 403(b) of the Code afford certain federal income tax benefits to
employees of state educational organizations, and organizations which are
tax-exempt under Section 501(c)(3) of the Code.
The employer may make contributions to the Contract or the employer may
agree with the Participant that in return for employer contributions to the
Contract, the Participant will take a reduction in salary or give up a salary
increase. The agreement may not be changed with respect to earnings of the
Participant while the agreement is in effect. The Participant can only make one
agreement with his/her employer during the year, but the Participant may
terminate the agreement at any time with respect to amounts not yet earned. No
federal income tax is payable by the Participant on increases in the value of
his/her Accumulation Account until payments are received by the Participant.
Purchase Payments meeting the requirements of Sections 402(g), Section
403(b) and Section 415 of the Code are not includable in the gross income of
the Participant at the time they are made. Under Section 402(g) of the Code,
Purchase Payments made under a reduction in salary or a give up in salary
increase agreement ("elective deferrals") are excluded from a Participant's
gross income to the extent of the lesser of $9,500 or the Participant's
exclusion allowance. The $9,500 limit will be reduced on a dollar for dollar
basis by employee pre-tax elective deferrals made by that individual under a
Section 401(k) Plan, a simplified employee pension plan, or other tax deferred
annuity. Under Section 403(b) of the Code, Purchase Payments made under a
reduction in salary or a give up in salary agreement and/or contributed by the
employer are excluded from a Participant's gross income to the extent of the
applicable "exclusion allowance". The "exclusion allowance" is equal to 20% of
a Participant's includable compensation (taxable earnings) for the tax year,
multiplied by the number of years of employment, reduced by the total of
Purchase Payments made in prior tax years.
When Fixed Annuity payments commence, or if the Participant obtains a
partial or full redemption of the Units credited to his/her Accumulation
Account under the Contract, the amount received will be includable as ordinary
income in the year received, except that such portion of any amount received as
is deemed to represent a return of Purchase Payments originally included as
gross income made by the Participant will not be taxed. Full redemptions do not
qualify for special capital gains treatment nor 5-year income averaging
<PAGE>
applicable to qualified plan lump sum distributions. However, if a Participant
makes a full redemption after attaining age 59 1/2 or on account of a
separation from service, he/she may delay including the distribution in income
by making a rollover transfer, subject to requirements set by the Code, to an
Individual Retirement Account or another Section 403(b) annuity. A partial
redemption of at least 50% of the balance to the credit of a Participant on
account of a separation from service may be rolled over to an Individual
Retirement Account, subject to requirements set by the Code.
If the Participant receives any amount under the Contract, the
Participant must pay an additional tax of 10% of the amount of the distribution
includable in gross income for the taxable year. This additional tax shall not
apply to distributions which are (1) made after the date on which the
Participant attains age 59 1/2, (2) made to a beneficiary on or after the death
of the Participant, (3) attributable to the Participant's becoming permanently
disabled, (4) made after separation from service in a series of substantially
equal periodic payments made for the life (or life expectancy) of the
Participant or the joint lives (or joint life expectancies) of the Participant
and his beneficiary, (5) made to a Participant after separation of service
after attainment of age 55, (6) made to a Participant for medical care (not to
exceed the amount deductible by the employee), or (7) paid to alternate payees
under a qualified domestic relations order.
RESTRICTIONS ON WITHDRAWALS OF ELECTIVE CONTRIBUTIONS. Effective January
1, 1989 and thereafter, any funds in the Participant's account balance other
than funds attributable to assets held at the close of the last year beginning
before January 1, 1989 will be restricted from withdrawal except upon
attainment of age 59 1/2, separation from service, death, disability or
hardship (hardship withdrawals are to be limited to the amount of the
Participant's own contributions exclusive of earnings). However, any funds in
the Participant's account balance attributable to employer contributions, if
any, and the earnings thereon will not be restricted unless specifically
provided for by the employer's plan.
In tax years beginning after 1988, Section 403(b) Plans (other than
church plans) will be subject to nondiscrimination and coverage requirements,
as well as special rules with respect to minimum distributions.
SECTION 401(A) PLANS
An employer maintaining a pension or profit sharing Plan which satisfies
the requirements of Section 401(a) of the Code may make contributions to the
Contract which are generally currently deductible by the employer and are not
currently taxed to the Participants. The Code prescribes various limitations on
the maximum amount which may be contributed on behalf of any Participant. In
addition, Participants may make after-tax contributions to the Contract if
their Section 401(a) Plan permits.
When Fixed Annuity payments commence, or if the Participant obtains a
partial redemption of the Units credited to his/her Accumulation Account under
the Contract, the amount received will be includable as ordinary income in the
year received, except that such portion of any amount received as is deemed to
represent a return of Participant after-tax Purchase Payments will not be
taxed. Full redemptions may qualify for special capital gains treatment or
5-year or 10-year income averaging if the payment constitutes a "lump sum
distribution," as that term is defined in the Code.
The rules governing rollovers of distributions from a Section 401(a) Plan
are parallel to those dealing with distributions from Section 403(b) annuities.
<PAGE>
In addition, the 10% penalty on premature distributions from Section 403(b)
annuities is also applicable to Section 401(a) Plan distributions.
SECTION 408 (IRA) CONTRACTS
An individual, participating under a Contract which satisfies the
requirements of Section 408 of the Code, may make contributions to the
Contract. The Code prescribes various limitations on the maximum amounts which
may be contributed by or on behalf of the Participant and on the deductibility
of the contributions for federal income tax purposes. No federal income tax is
payable by the Participant on increases in the value of his/her Accumulation
Account until payments are received by the Participant.
When Fixed Annuity payments commence, or if the Participant obtains a
partial redemption of the Units credited to his/her Accumulation Account under
the Contract, the amount received will be includable as ordinary income in the
year received, except that such portion of any amount received which is deemed
to represent a return of Participant non-deductible Purchase Payments will not
be taxed. Full or partial redemptions do not qualify for special capital gains
treatment nor 10-year income averaging applicable to certain qualified plan
distributions.
If the Participant receives any amount under the Contract prior to
attainment of age 59 1/2, the Participant must pay an additional excise tax of
10% of the amount of the distribution includable in gross income for the
taxable year. The additional tax shall not apply to distributions which are (1)
made to a beneficiary on or after the death of the Participant, (2)
attributable to the Participant's becoming permanently disabled or (3) made in
a series of substantially equal periodic payments made for the life (or life
expectancy) of the Participant or the joint lives (or joint life expectancies)
of the Participant and his/her beneficiary. Any full or partial redemption will
not be includable in ordinary income if the Participant rolls over the
distribution within 60 days to another IRA.
MINIMUM DISTRIBUTION REQUIREMENTS
If the actual distributions from a qualified retirement plan, eligible
state or local government deferred compensation plan or an IRA are less than
the minimum required to be distributed commencing by April 1 in the calendar
year following the year the Participant attains age 70 1/2 (see "Annuity
Purchase Date", on page __) the difference is considered to be an excess
accumulation and the IRS may impose a 50% excise tax on this excess amount.
SECTION 457 PLANS
Section 457 of the Code allows employees of or independent contractors
who furnish services to a state or local government to establish a deferred
compensation plan allowing the deferral of certain limited amounts of
compensation by way of salary reduction. State and local government includes a
state, a political subdivision of a state, any agency or instrumentality of
either of them, a tax-exempt rural electric cooperative or its tax-exempt
affiliates. Contributions are based on a special definition of compensation and
include any amounts contributed to a Section 403(b) tax sheltered annuity for
determining the contribution limits. All amounts deferred property bought with
those amounts or income earned on those amounts remain the property of the
employer and are subject to the claims of its general creditors. Distributions
from a Section 457 Plan are subject to Section 401(a)(9) of the Code in
addition to the rules applicable under Section 457 of the Code and must begin
no later than the April 1st of the calendar year following the year in which
the participant attains age 70 1/2.
<PAGE>
NON-QUALIFIED DEFERRED COMPENSATION CONTRACTS
Taxed employers may establish a non-qualified deferred compensation
arrangement funded by non-qualified deferred compensation contracts allowing
the deferral of compensation through salary reduction. Such Plans include, but
are not limited to, excess benefit plans, plans maintained by an employer
primarily for a select group of management or highly compensated employees, as
well as rabbi and secular trusts. Taxed employers for these non-qualified
deferred compensation Plans include corporations, partnerships, S corporations
and any of their affiliates or subsidiaries. Contributions are determined on
the Plan's definition of compensation. All amounts deferred by employees and
any income earned thereon remain the property of the employer and are subject
to the claims of its general creditors. In-service withdrawals from deferred
compensation Plans may be permitted for reasons of hardship under certain
conditions as specified in the Plans. Distributions from these Plans are
permitted when the Participant terminates employment, becomes permanently
disabled, retires, dies or as otherwise specified in the Plan. As a general
rule, the Participant is subject to taxation upon receipt of the funds, and
there is usually no tax consequences to the employer, i.e., no deduction is
available for an employee's salary reduction agreement until paid out.
INCOME TAX WITHHOLDING
Unless the Participant or payee elects to have no withholding, the
taxable portion of distributions under a Contract will be subject to income tax
withholding under federal and certain state laws. AUSA will notify recipients
of taxable distributions under a Contract of their right to elect not to have
withholding apply.
For NQDC Contracts, no withholding is made and no election is needed.
Effective January 1, 1992, distributions from qualified retirement plans
and Section 403(b) Contracts, other than individual retirement arrangements
("IRAs") generally are subject to mandatory federal income tax withholding
unless they either are:
1. Part of a series of substantially equal periodic payments (at least
annually) for the participant's life or life expectancy, the joint
lives or life expectancies of the participant and his/her
beneficiary, or a period certain of not less than 10 years, or
2. Required by the Code upon the participant's attainment of age 70 1/2
or death.
Such withholding will apply even if the distribution is rolled over into
another qualified plan including an IRA. The withholding can be avoided if the
participant's interest is directly transferred by the old plan to another
eligible qualified plan including an IRA. A direct transfer to the new plan can
be made only in accordance with the terms of the old plan. If withholding is
not avoided, the amount withheld may be subject to income tax and penalties.
Pursuant to Revenue Ruling 90-24 of the Code, an exchange of a Section
403(b) annuity contract for another Section 403(b) annuity contract may qualify
as a tax-free exchange.
ASSUMPTION REINSURANCE
The Contracts described in this Prospectus include group variable annuity
contracts which were originally issued by The Mutual Life Insurance Company of
<PAGE>
New York ("MONY") and are assumed by AUSA pursuant to certain assumption
reinsurance agreements executed by MONY and AUSA effective December 31, 1993.
Pursuant to the terms of these agreements and applicable state insurance laws,
affected MONY contractholders may elect to participate and "opt in" or choose
to remain contractholders of MONY and "opt out" of the assumption. All affected
MONY contractholders shall receive a Notice of Election which describes the
assumption and procedures for opting in or opting out. This Prospectus should
be read carefully before deciding whether to opt in. In certain jurisdictions a
contractholder that fails to opt out may be deemed under the terms of the
assumption to have opted in.
The former holders of MONY contracts who opt in to the assumption of
their contracts by AUSA will experience no differences in the terms or charges
under the Contracts. All investment options available to MONY contractholders
will be available under the Contracts under Variable Funds Subaccounts which
correspond to investment options under the MONY contracts. In addition, such
assumed AUSA Contractholders may be able to direct the investment of their
funds into certain additional investment options which were not available under
the MONY contracts.
PERFORMANCE DATA
From time to time the performance of one or more of the Subaccounts may
be advertised. The performance data contained in these advertisements is based
upon historical earnings and is not indicative of future performance. The data
for each Variable Funds Subaccount reflects the results of the corresponding
Portfolio or the Calvert Series and recurring charges and deductions borne by
or imposed on the Variable Funds Subaccount and on the corresponding Portfolio
or the Calvert Series. The data for each Strategic Variable Funds Subaccount
reflects the results of the underlying Variable Funds Subaccounts invested in
and the corresponding Portfolios and recurring charges and deductions borne by
or imposed on the Strategic Variable Funds Subaccount, the underlying Variable
Funds Subaccounts and the corresponding Portfolios. Set forth below for each
Subaccount is the manner in which the data contained in such advertisements
will be calculated.
Variable Funds Money Market Subaccount
The performance data for this Subaccount will reflect "yield", "effective
yield" and "total return". The "yield" of the Subaccount refers to the income
generated by an investment in the Subaccount over the seven day period stated
in the advertisement. This income is "annualized", that is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The "effective yield" is calculated similarly, but, when annualized, the income
earned by an investment in the Subaccount is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. The total return is calculated
as shown below.
Other Variable Funds Subaccounts
The performance data for these Subaccounts will reflect "yield" and
"total return". The "yield" of each of these Subaccounts refers to the income
generated by an investment in that Subaccount over the 30 day period stated in
the advertisement and is the result of dividing that income by the value of the
Subaccount. The value of each Subaccount is the average daily number of Units
outstanding multiplied by the Unit Value on the last day of the period. The
"yield" reflects deductions for all charges, expenses, and fees of both the
underlying Portfolio or Calvert Series, as applicable, and the Subaccount
<PAGE>
itself. "Annualized total return" for each of these Subaccounts and the
Variable Funds Money Market Subaccount refers to the return a Contractholder
would receive during the period indicated if a $1,000 Purchase Payment was made
the indicated number of years ago. It reflects historical investment results
less charges and deductions of both the Portfolio or Calvert Series, as
applicable, and the Subaccount itself, with the distribution being made in cash
rather than in the form of one of the settlement options, at the close of the
period for which the "annualized total return" data is given.
Strategic Variable Funds Subaccounts
The performance data for the Strategic Variable Funds Subaccounts will
reflect "yield" and "total return". The "yield" of each of the Strategic
Variable Funds Subaccounts refers to the income generated by an investment in
that Strategic Variable Funds Subaccount over the 30 day period stated in the
advertisement and is the result of dividing that income by the value of the
Strategic Variable Funds Subaccount. The value of each Strategic Variable Funds
Subaccount is the average daily number of Units outstanding multiplied by the
Unit Value on the last day of the period. The "yield" reflects deductions for
all charges, expenses, and fees. "Annualized total return" for each of the
Strategic Variable Funds Subaccounts refers to the return a Contractholder
would receive during the period indicated if a $1,000 Purchase Payment was made
the indicated number of years ago. It reflects historical investment results
less charges and deductions, with the distribution being made in cash rather
than in the form of one of the settlement options, at the close of the period
for which the "annualized total return" data is given.
Information Relating To All Subaccounts
Total return is historical in nature and is not intended to indicate
future performance. Total return will be quoted for the most recent one-year
period, and annualized total return will be quoted for the most recent five-
and ten-year periods, or the period from the commencement of the public
offering of the Contracts, if shorter.
Actual total return quotations may also be advertised for other specified
periods, such as calendar years and calendar quarters. Cumulative total return
for periods of more than one year may also be quoted. These figures will be
accompanied by the standard, annualized total return quotations.
From time to time, information may be provided concerning general
economic conditions and supply comparative performance data and rankings, with
respect to comparable investments for the same period, for unmanaged market
indices such as the Dow Jones Industrial Average and the Standard and Poor's
500, and from recognized independent sources such as Donoghue's Money Fund
Report, Bank Rate Monitor, Money, Forbes, Barron's, Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc., Frank Russell Universe Data,
Wiesenberger Investment Companies Service, Mutual Fund Values, Mutual Fund
Forecaster, VARDS and Morningstar.
In addition, reference may be made in advertisements to various indices
including, without limitation, the Standard & Poor's 500 Stock Index, Salomon
Brothers Broad Investment Grade Index and Lehman Brothers Government/Corporate
Bond Index, and Russell Price Driven Index, in order to provide the reader a
basis of comparison for performance.
<PAGE>
Average Annual Total Returns
The annualized total return for the Subaccounts is shown for the periods
indicated in the table below.
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE FOR THE FOR THE PERIOD SINCE
YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
INCEPTION ENDED ENDED ENDED ENDED THROUGH
FUND DATE 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
- ------------------------------------- --------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Money Market(1)......................
High Quality Bond(1).................
Intermediate Government Bond(1)......
Government/Corporate Bond(1).........
High-Yield Bond......................
Balanced(1)..........................
Equity Income(1).....................
Equity Value.........................
Growth & Income(1)...................
Equity Growth(1).....................
Special Equity(1)....................
Aggressive Equity....................
International Equity(1)..............
Calvert(2)...........................
Short Horizon Strategic..............
Intermediate Horizon Strategic.......
Intermediate/Long Horizon Strategic..
</TABLE>
- ----------------
(1)Each of the corresponding Pooled Separate Accounts of The Mutual Life
Insurance Company of New York ("MONY") set forth below contributed all of
its assets to, and thereby established, the Portfolios in which the
corresponding Variable Funds Subaccounts invest their assets:
MONY POOLED
SERIES SEPARATE ACCOUNT
Money Market...................... Pooled Account No. 4
High Quality Bond................. Pooled Account No. 15
Intermediate Government Bond...... Pooled Account No. 10d
Government/Corporate Bond......... Pooled Account No. 5
Balanced.......................... Pooled Account No. 14
Equity Income..................... Pooled Account No. 6
Equity Growth..................... Pooled Account No. 1
Growth & Income................... Pooled Account No. 10a
Special Equity.................... Pooled Account No. 10b
International Equity.............. Pooled Account No. 12
Total returns calculated for any period for each of the Money Market, High
Quality Bond, Intermediate Government Bond, Government/Corporate Bond,
Balanced, Equity Income, Growth & Income, Equity Growth, Special Equity and
International Equity Subaccounts reflect the performance of the
corresponding Pooled Separate Account for any period prior to its
establishment and the performance of the corresponding Portfolio thereafter.
Such total returns calculated for each of the Subaccounts reflect the
performance of the corresponding Pooled Separate Account only from the date
that such corresponding Pooled Separate Account adopted investment
objectives, policies and practices substantially similar to those of the
<PAGE>
corresponding Portfolio invested in by the Subaccount. All total return
percentages reflect the historical rates of return for such period adjusted
to assume that all charges, expenses and fees of the applicable Subaccount
and the corresponding Portfolio which are presently in effect were deducted
during such period. The corresponding Pooled Separate Accounts were not
registered under the Investment Company Act of 1940 and, therefore, were not
subject to certain investment restrictions imposed by the Act. If the
corresponding Pooled Separate Accounts had been registered under the Act,
investment performance might have been adversely affected.
(2)The annualized total returns for the Calvert Series Subaccount reflect the
annualized total returns of the Calvert Series. The commencement date of the
Calvert Series is September 30, 1986.
The table above assumes that a $1,000 payment was made to each Subaccount
at the beginning of the period shown, that no further payments were made, that
any distribution from the corresponding series (or its predecessor investment
vehicle) were reinvested, and that a Contractholder surrendered the Contract
for cash, rather than electing commencement of annuity benefits in the form of
one of the Settlement Options available, at the end of the period shown. The
average annual total return percentages shown in the table reflect the
annualized historical rates of return and deductions for all charges, expenses,
and fees which would be imposed on the payment assumed by both the
corresponding Portfolio or Calvert Series, as applicable, and the corresponding
Subaccount.
See Appendix C for the past performance of the Subadvisers to the
High-Yield Bond Portfolio, Equity Value Portfolio, Growth & Income Portfolio,
Equity Growth Portfolio and Aggressive Equity Portfolio in managing
substantially similar accounts.
DIVERSIFIED INVESTORS PORTFOLIOS
The Variable Funds Subaccounts other than the Calvert Series Subaccount
(and the Strategic Variable Funds Subaccounts, through those Variable Funds
Subaccounts other than the Balanced Subaccount) invest exclusively in
corresponding series of Diversified Investors Portfolios. Diversified Investors
Portfolios is a trust organized on September 1, 1993 under the laws of the
State of New York and is registered under the 1940 Act as an open-end,
diversified management investment company.
Each of these Subaccounts seeks its investment objective by investing all
of its assets in a corresponding Portfolio. The investment objective of each
Portfolio may be changed without the approval of investors in that Portfolio,
but not without written notice thereof to its investors (including the
applicable Subaccount) 30 days prior to implementing the change. AUSA may
withdraw the investment of a Subaccount from its Portfolio on any Portfolio
Business Day (see page ___ ). Upon any such withdrawal, AUSA would consider
what action might be taken, including investment of the assets of the
Subaccount in another pooled investment entity having the same investment
objective.
INVESTMENT OBJECTIVES AND POLICIES
This section describes the investment objective and principal investment
policies of the series of Diversified Investors Portfolios currently available
under the Contracts through such Subaccounts. There can, of course, be no
assurance that any Portfolio will achieve its objective. Each Portfolio can be
expected to have different investment results and to be subject to different
risks. See "Risk Considerations" below.
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to provide
liquidity and as high a level of current income as is consistent with the
preservation of capital.
<PAGE>
This Portfolio invests primarily in high quality, short-term money market
instruments. These instruments include short-term U.S. government obligations,
corporate bonds, bank obligations (including certificates of deposit, bankers'
acceptances and fixed time obligations), commercial paper and other short-term
debt obligations and repurchase agreements.
The Portfolio complies with industry regulations applicable to money
market funds. These regulations require that the Portfolio's investments mature
or be deemed to mature within 397 days from the date of acquisition, that the
average maturity of the Portfolio's investments (on a dollar-weighted basis) be
90 days or less, and that all of the Portfolio's investments be in U.S.
dollar-denominated high quality securities which have been determined by the
Portfolio to present minimal credit risks. The Portfolio reserves the right to
concentrate 25% or more of its total assets in domestic bank obligations.
Investments in high quality, short-term instruments may, in many circumstances,
result in a lower yield than would be available from investments in instruments
with a lower quality or a longer term.
Unlike many money market funds, the Portfolio does not maintain a stable
net asset value of $1.00 per share and will not declare dividends on a daily
basis. Undeclared investment income may cause the Portfolio's net asset value
per share to fluctuate.
BOND PORTFOLIOS
The investment objective of the High Quality Bond Portfolio is to provide
a high risk-adjusted return while focusing on the preservation of capital.
The High Quality Bond Portfolio invests at least 65% of its assets under
normal circumstances in high quality debt securities with short and
intermediate maturities (including repurchase agreements and reverse repurchase
agreements). The Portfolio's duration generally is between one and three years.
Duration is a way of measuring the Portfolio's overall sensitivity to interest
rate fluctuations. The dollar-weighted average maturity of the Portfolio will
generally will not exceed three years under normal circumstances. Individual
securities held by the Portfolio may have longer maturities. Short-term debt
securities generally fluctuate less in price, and have lower yields, than
longer-term securities of comparable quality.
The Portfolio considers high quality debt securities to be those rated A
or better by Standard & Poor's or A3 or better by Moody's and securities of
comparable quality as determined by the Portfolio's advisers. Ratings are
described in the Statement of Additional Information. Investments in higher
quality instruments may result in a lower yield than would be available from
investments in lower quality instruments.
The investment objective of the Intermediate Government Bond Portfolio is
to provide as high a level of current income as is consistent with the
preservation of capital.
The Intermediate Government Bond Portfolio invests in U.S. government
obligations and high quality, short-term obligations (including repurchase
agreements and reverse repurchase agreements). Under normal circumstances the
Portfolio invests at least 65% of its assets in U.S. government obligations and
repurchase agreements secured by U.S. government obligations. U.S. government
obligations are issued or guaranteed as to principal and interest by the U.S.
government or one of its agencies or instrumentalities. Some obligations of
U.S. government agencies and instrumentalities are supported by the "full faith
and credit" of the United States, others by the right of the issuer to borrow
from the U.S. Treasury, and others only by the credit of the agency or
<PAGE>
instrumentality. The Portfolio also invests in mortgage-backed securities
backed by pass-through certificates issued or guaranteed by the U.S. government
or its agencies. ALTHOUGH THE PORTFOLIO INVESTS IN U.S. GOVERNMENT OBLIGATIONS,
AN INVESTMENT IN THE PORTFOLIO IS NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT.
The Portfolio's duration generally is between one and five years, and its
dollar-weighted average maturity generally is between three and five years (and
does not exceed ten years) under normal circumstances. The Portfolio may invest
in securities with maturities of as much as 30 years.
The investment objective of the Government/Corporate Bond Portfolio is to
achieve the maximum total return.
The Government/Corporate Bond Portfolio invests in investment grade debt
securities, U.S. government obligations (including U.S. government agency and
instrumentality obligations and collateralized mortgage obligations guaranteed
by these agencies and instrumentalities), and high quality short-term
obligations (including repurchase agreements and reverse repurchase
agreements). Under normal circumstances the Portfolio invests at least 65% of
its assets in U.S. government securities, corporate bonds and short-term
instruments.
Investment grade debt securities carry a rating of at least BBB from
Standard & Poor's or Baa from Moody's or are of comparable quality as
determined by the Portfolio's advisers. The Portfolio also invests in
securities of non-U.S. issuers.
The Portfolio's duration generally is between three and ten years, and
its dollar-weighted average maturity generally is between five and fifteen
years (and does not exceed thirty years) under normal circumstances. While
longer-term securities tend to have higher yields than short-term securities,
they are subject to greater price fluctuations as a result of interest rate
changes and other factors.
The investment objective of the High-Yield Bond Portfolio is to provide a
high level of current income.
The High-Yield Bond Portfolio invests at least 65% of its assets under
normal circumstances in high-yielding, income producing debt securities, such
as debentures and notes, and preferred stocks, including convertible and zero
coupon securities. The Portfolio may invest in equity securities, including
common stocks, warrants and rights. The Portfolio may invest all or a
substantial portion of its assets in lower-rated debt securities, commonly
referred to as "junk bonds." Investing in junk bonds is an aggressive approach
to income investing. Investors should carefully consider the special risks of
investing in this Portfolio. See "Risk Considerations."
BALANCED PORTFOLIO
The investment objective of the Balanced Portfolio is to provide a high
total investment return through investment in a balanced portfolio of stocks,
bonds and money market instruments.
The Portfolio seeks to meet its investment objective by maintaining a
balanced portfolio of stocks and bonds. The Portfolio invests in a managed mix
of common and preferred stocks (and their equivalents including American
Depositary Receipts), debt securities and commercial paper of U.S.
corporations, U.S. government securities and bank obligations. The Portfolio
<PAGE>
varies the percentage of assets invested in any one type of security in
accordance with its advisers' interpretation of economic and market conditions,
fiscal and monetary policy, and underlying securities values. Under normal
circumstances, approximately 60% of the Portfolio's assets will be invested in
equity securities and 40% of the Portfolio's assets will be invested in fixed
income securities (at least 25% of which will be invested in fixed-income
senior securities, including debt securities and preferred stock). In selecting
common stocks, emphasis is placed on investing in established companies. Most
of the Portfolio's non-convertible long-term debt investments consist of
investment grade securities (those rated BBB or better by Standard & Poor's or
Baa or better by Moody's) and those of equivalent quality as determined by the
Portfolio's advisers. Less than 5% of the Portfolio's investments consist of
securities rated BBB by Standard & Poor's or Baa by Moody's. These ratings are
described in the Statement of Additional Information.
STOCK PORTFOLIOS
The investment objective of the Equity Income Portfolio is to provide a
high level of current income through investment in a diversified portfolio of
common stocks with relatively high current yields; capital appreciation is a
secondary objective.
The investment objective of the Equity Value Portfolio is to provide a
high total investment return through investment primarily in a diversified
portfolio of common stocks.
The investment objective of the Growth & Income Portfolio is to provide
capital appreciation and current income.
The Equity Income Portfolio invests primarily in stocks of companies
which, in the opinion of the Portfolio's advisers, are fundamentally sound
financially and which pay relatively high dividends on a consistent basis. The
Equity Value Portfolio invests primarily in stocks of companies which, in the
opinion of the Portfolio's advisers, are trading at low valuations relative to
market and/or historical levels. These stocks tend to have relatively low
price/earnings ratios and/or relatively low price/book value ratios. Low
price/earnings ratios or price/book value ratios mean that the stock is less
expensive than average relative to the company's earnings or book value,
respectively. The Growth & Income Portfolio invests primarily in a diversified
portfolio of securities selected in large part for their potential to generate
long term capital appreciation. The Portfolio also may select securities based
on their potential to generate current income. The Portfolio emphasizes
securities of growing, financially stable and undervalued companies. This
Portfolio attempts to achieve more capital appreciation than an income fund and
less price volatility than a growth fund. In selecting investments, these three
Portfolios emphasize common stocks and preferred stocks listed on the New York
Stock Exchange and on other national securities exchanges and, to a lesser
extent, stocks that are traded over-the-counter.
The investment objective of the Equity Growth Portfolio is to provide a
high level of capital appreciation through investment in a diversified
portfolio of common stocks with potential for above average growth in earnings
and dividends; current income is a secondary objective.
The Equity Growth Portfolio invests primarily in a diversified portfolio
of common stocks, of companies with potential for above average growth in
earnings and dividends. As a fundamental policy that cannot be changed without
shareholder approval, under normal circumstances, at least 65% of the assets of
the Portfolio are invested in equity securities. The Portfolio emphasizes
common and preferred stocks listed on the New York Stock Exchange and other
<PAGE>
national securities exchanges and, to a lesser extent, stocks that are traded
over-the-counter. Multiple managers are used to control the volatility often
associated with growth funds.
The investment objective of the Special Equity Portfolio is to provide a
high level of capital appreciation through investment in a diversified
portfolio of common stocks of small to medium size companies.
The Special Equity Portfolio invests primarily in a diversified portfolio
of stocks of small to medium size companies which, in the opinion of the
Portfolio's advisers, present an opportunity for significant increases in
earnings, revenue and/or value, without consideration for current income. The
Special Equity Portfolio emphasizes common stocks of U.S. companies with market
capitalizations of less than $2 billion. Investing in securities of smaller
companies involves special risks. Multiple managers are used to control the
volatility often associated with investments in companies of this size.
Investors should carefully consider the risks of investing in the Special
Equity Portfolio. See "Risk Considerations".
The investment objective of the Aggressive Equity Portfolio is to provide
a high level of capital appreciation primarily through investing in a
diversified portfolio of common stocks.
The Aggressive Equity Portfolio invests primarily in high growth
companies without regard to market capitalization. The Portfolio seeks to
invest in companies which present an opportunity for significant increases in
earnings, revenue and/or value, without consideration for current income, to
achieve excess market returns relative to its benchmark, the Russell 2000
Growth Index. The Portfolio also emphasizes stocks of companies with
consistent, above-average and accelerating profitability and growth. The
investment characteristics, such as price-to-earnings ratio, of the Portfolio
can undergo major changes at any time. As a result, the price of shares of this
fund may be very volatile.
The investment objective of the International Equity Portfolio is to
provide a high level of long-term capital appreciation through investment in a
diversified portfolio of securities of foreign issuers.
The International Equity Portfolio invests primarily in foreign
securities, meaning securities of issuers that, in the opinion of the
Portfolio's advisers, have their principal activities outside the United States
or whose securities are traded primarily outside the United States. Under
normal circumstances, at least 65% of the Portfolio's assets are invested in
equity securities of issuers in at least three countries other than the United
States. The Portfolio invests most of its assets in securities of issuers in
Canada, Australia and developed countries in Europe and the Far East. The
Portfolio may invest up to 10% of its assets in securities of issuers in
developing countries. The Portfolio may also invest in any type or quality of
debt securities, including lower-rated securities, and may enter into forward
currency exchange contracts solely for hedging purposes. See "Risk
Considerations".
Each of the Stock Portfolios may also invest in bonds and short-term
obligations as well as securities convertible into common stocks, preferred
stocks, debt securities and short-term obligations.
ADDITIONAL INVESTMENT POLICIES
This section describes additional investment policies of the Portfolios.
See "Risk Considerations" below for more information.
<PAGE>
Foreign Securities
Each Portfolio may invest a portion of its assets in foreign securities.
The International Equity Portfolio will invest a substantial portion of its
assets in foreign securities. Investing in foreign securities involves risks in
addition to those of investing in U.S. securities. These risks are heightened
for investments in securities of issuers in developing countries. See "Risk
Considerations."
Temporary Investments
During periods of unusual economic or market conditions or for temporary
defensive purposes or liquidity, each Portfolio may invest without limit in
cash and in U.S. dollar-denominated high quality money market and short-term
instruments. These investments may result in a lower yield than would be
available from investments with a lower quality or longer term.
Other Permitted Investments
For more information regarding the Portfolios' permitted investments and
investment practices, see Appendix D. The Portfolios will not necessarily
invest or engage in each of the investments and investment practices in
Appendix D but reserve the right to do so. The Money Market Portfolio will
invest or engage in the investments and investment practices in Appendix D only
to the extent consistent with industry regulations applicable to money market
funds.
Investment Restrictions
The Statement of Additional Information contains a list of specific
investment restrictions which govern the investment policies of the Portfolios.
Under its investment restrictions, each Portfolio may borrow money and enter
into reverse repurchase agreements in an amount not to exceed 331/3% of the
Portfolio's assets (including the borrowing) less liabilities (not including
the borrowing). Except as otherwise noted, the Portfolios' investment
objectives and policies may be changed without shareholder approval. If a
percentage or rating restriction (other than a restriction as to borrowing) is
adhered to at the time an investment is made, a later change in percentage or
rating resulting from changes in a Portfolio's securities is not a violation of
policy.
Portfolio Turnover
Securities of a Portfolio are sold whenever the Portfolio's advisers
believe it is appropriate to do so in light of the Portfolio's investment
objective, without regard to the length of time a particular security may have
been held. The amount of brokerage commissions and realization of taxable
capital gains will tend to increase as the level of portfolio activity
increases.
Brokerage Transactions
The primary consideration in placing each Portfolio's securities
transactions with broker-dealers for execution is to obtain and maintain the
availability of execution at the most favorable prices and in the most
effective manner possible. A Portfolio may execute brokerage or other agency
transactions through an investment adviser or distributor of the Portfolio.
These entities may be paid for these transactions.
<PAGE>
CORE/FEEDER STRUCTURE
Each Subaccount which invests in a Portfolio does so through a two tier,
core/feeder fund structure in which each such Subaccount invests in a
corresponding Portfolio.
In addition to selling beneficial interests to such Subaccounts,
Diversified Investors Portfolios may sell beneficial interests in its series to
other insurance company separate accounts, mutual funds, collective investment
vehicles or institutional investors. Such investors will invest in a Portfolio
on the same terms and conditions as the applicable Subaccount and will pay a
proportionate share of the Portfolio's expenses. However, the other investors
investing in such Portfolio are not required to sell their shares at the same
public offering price as the Subaccount due to variations in sales commissions
and other operating expenses. Therefore, Contractholders should be aware that
these differences may result in differences in returns experienced by investors
in the different entities that invest in each Portfolio.
Smaller entities investing in a Portfolio may be materially affected by
the actions of larger entities investing in that Portfolio. For example, if a
large fund withdraws from a Portfolio, the remaining investors may experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, the affected Portfolio may become less diverse, resulting in
increased portfolio risk. (However, this possibility also exists for any type
of collective investment vehicle which has institutional or other large
investors.) Also, investors with a greater pro rata ownership in a Portfolio
could have effective voting control of the operations of that series. Whenever
a Subaccount is requested to vote on matters pertaining to a Portfolio (other
than a vote to continue the Portfolio upon the withdrawal of an investor in the
Portfolio), AUSA, as the legal owner of all assets in the Subaccount, shall
vote in accordance with the procedures set forth under "Voting Rights" at page
__, including, to the extent required by law, procedures through which AUSA
shall receive instructions with respect to such vote from Contractholders
and/or Participants. Certain changes in the investment objectives, policies or
restrictions of a Portfolio may require that AUSA withdraw a Subaccount's
interest in that Portfolio. Any such withdrawal could result in a distribution
"in kind" of portfolio securities (as opposed to a cash distribution from the
Portfolio). If securities are distributed, the Subaccount could incur brokerage
or other charges in converting the securities to cash. In addition, the
distribution in kind may result in a less diversified portfolio of investments
or adversely affect the liquidity of the Subaccount. Notwithstanding the above,
there are other ways for Diversified Investors Portfolios to meet redemption
requests from its investors, such as temporary borrowings.
RISK CONSIDERATIONS
The risks of investing in each Portfolio vary depending upon the nature
of the securities held, and the investment practices employed, on its behalf.
Certain of these risks are described in this section.
Changes in Net Asset Value
Each Portfolio's net asset value will fluctuate based on changes in the
values of its underlying portfolio securities. This means that an investor's
shares may be worth more or less at redemption than at the time of purchase.
Equity securities fluctuate in response to general market and economic
conditions and other factors, including actual and anticipated earnings,
changes in management, political developments and the potential for takeovers
and acquisitions. The value of debt securities generally goes down when
<PAGE>
interest rates go up, and up when interest rates go down. Changes in interest
rates will generally cause larger changes in the prices of longer-term
securities than in the prices of shorter-term securities. Prices of debt
securities also fluctuate based on changes in the actual and perceived
creditworthiness of issuers. The prices of lower-rated securities often
fluctuate more than those of higher-rated securities.
Credit Risk of Debt Securities
Investors should be aware that securities offering above-average yields
may involve above-average risks. It is possible that some issuers will not make
payments on debt securities held by a Portfolio.
Lower-rated debt securities usually are defined as securities rated BB or
lower by Standard & Poor's or Ba or lower by Moody's. See the Statement of
Additional Information for more information on ratings. Lower-rated debt
securities are considered speculative and involve greater volatility of price
and greater risk of loss than higher-rated securities due to changes in
creditworthiness and ability to pay. In adverse economic or other
circumstances, issuers of these securities are more likely to have difficulty
making principal and interest payments than issuers of higher grade
obligations. A Portfolio may incur additional expenses to the extent that is it
required to seek recovery upon a default in the payment of lower-rated debt
security. The values of lower-rated debt securities tend to reflect individual
corporate developments or adverse economic changes to a greater extent than
higher-rated securities, which react primarily to fluctuations in the general
level of interest rates. Periods of economic uncertainty and changes generally
result in increased volatility in the market prices of such securities, and
thus in a Portfolio's net asset value.
In the event of default, lower-rated debt securities are frequently
subordinated to the prior payment of senior indebtedness and are traded in
markets that may be relatively less liquid that the market for higher-rated
securities. Under adverse market or economic conditions or in the event of
adverse changes in the financial condition of the issuer, a Portfolio may find
it more difficult to sell these securities when it may be advisable to do so or
may be able to sell these securities only at prices lower than if the
securities were more widely held.
Foreign Securities
In general, investments in foreign securities entail risks relating to
political, social and economic developments abroad. There are also risks from
the differences between the regulations to which U.S. and foreign issuers and
markets are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes on dividends and interest, limitations on the use
or transfer of portfolio assets and political or social instability. Asserting
legal rights and claims may be difficult, costly and slow in foreign countries.
In addition, foreign companies may be subject to accounting standards or
governmental supervision less extensive than in the U.S., resulting in less
public information about their operations.
Foreign markets may be less liquid and more volatile than U.S. markets,
and may offer less protection to investors such as the Portfolios. Prices at
which a Portfolio may acquire securities may be affected by persons trading
with material non-public information and by brokers effecting securities
transactions in anticipation of transactions by the Portfolios. In addition,
costs of trading may be higher than those in the U.S., due to the differing
compensation and commission structures in foreign securities markets.
Equity securities traded in certain foreign countries may trade at
price-earnings multiples higher than those of comparable companies trading on
<PAGE>
securities markets in the United States. These multiples may not be
sustainable. Rapid increases in money supply in certain countries may result in
speculative investment in equity securities which may contribute to volatility
of trading markets.
Because foreign securities often trade in currencies other than the U.S.
dollar, changes in currency exchange rates will affect a Portfolio's net asset
value, the value of dividends and interest earned and gains and losses realized
on the sale of securities. In addition, some foreign currency values may be
volatile and there is the possibility of governmental controls on currency
exchanges or governmental intervention in currency markets.
The costs attributable to foreign investing, such as the costs of
maintaining custody of securities in foreign countries, frequently are higher
than those involved in U.S. investing. As a result, the operating expense
ratios of the Portfolios may be higher than those of investment companies
investing exclusively in U.S. securities.
The Stock Portfolios, and in particular the International Equity
Portfolio, may invest in issuers located in developing countries, which are
generally defined as countries in the initial stages of their industrialization
cycles with low per capita income. All of the risks of investing in non-U.S.
securities are heightened by investing in developing countries. Historical
experience indicates that the markets of developing countries have been more
volatile than the markets of developed countries with more mature economies;
these markets often have provided wider fluctuations in rates of return, and
greater risks, to investors.
Smaller Companies
Investors in the Stock Portfolios, particularly the Special Equity
Portfolio, should be aware that the securities of companies with small market
capitalizations may have more risks than the securities of other companies.
Smaller companies may be more susceptible to market downturns or setbacks
because they may have limited product lines, markets, distribution channels,
and financial and management resources. There is often less publicly available
information about smaller companies than about more established companies. As a
result, the prices of securities issued by smaller companies may be volatile.
Shares of the Stock Portfolios, particularly the Special Equity Portfolio, may
fluctuate in value more than shares of an equity fund with more investments in
larger, more established companies.
Investment Practices
Certain of the investment practices employed for the Portfolios may
entail certain risks. These risks are in addition to the risks described above
and are described in Appendix D.
MANAGEMENT OF DIVERSIFIED INVESTORS PORTFOLIOS
BOARD OF TRUSTEES
The Board of Trustees of Diversified Investors Portfolios provides broad
supervision over the affairs of Diversified Investors Portfolios. For further
information about the Board of Trustees, see "Diversified Investors Portfolios"
in the Statement of Additional Information. A majority of the Board of Trustees
are not affiliated with Diversified or any Subadviser.
<PAGE>
INVESTMENT ADVISER
Diversified manages the assets of each Portfolio pursuant to an
Investment Advisory Agreement with Diversified Investors Portfolios with
respect to that Portfolio and in accordance with the investment policies
described herein and in the Statement of Additional Information. Subject to
such further policies as the Board of Trustees may determine, Diversified
provides general investment advice to each Portfolio. It is Diversified's
responsibility to select, subject to the review and approval of the Diversified
Investors Portfolio's Board of Trustees, appropriate subadvisers with
distinguished backgrounds and to review such subadviser's continued
performance. For its services under the Investment Advisory Agreements,
Diversified receives from each Portfolio the fees specified below. Diversified
is currently waiving a portion of its investment advisory fee. Investment
management decisions are taken by a committee of Diversified's personnel and
not by a particular individual.
Diversified is an indirect, wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"), a financial services holding company whose primary emphasis is life
and health insurance and annuity and investment products. AEGON is an indirect,
wholly-owned subsidiary of AEGON nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as the investment adviser to the Portfolios.
Diversified has selected Subadvisers for each Portfolio which have been
approved by the Board of Trustees of Diversified Investors Portfolios and the
investors in that Portfolio and was entered into an Investment Subadvisory
Agreement with each Subadviser. It is the responsibility of the Subadviser(s)
to each Portfolio to make the day-to day investment decisions for the Portfolio
and to place the purchase and sale orders for securities transactions, subject
in all cases to the general supervision of Diversified and the policies set by
the Trustees of Diversified Investors Portfolios. The Subadvisers are as
follows:
MONEY MARKET PORTFOLIO,
INTERMEDIATE GOVERNMENT
BOND PORTFOLIO AND
GOVERNMENT/CORPORATE BOND PORTFOLIO:
Capital Management Group, a division of 1740
Advisers, Inc., a wholly-owned subsidiary of The
Mutual Life Insurance Company of New York. Capital
Management Group has been a registered investment
adviser since [_____________]. The address of Capital
Management Group is 1740 Broadway, New York 10019
The following representatives of Capital Management
Group are primarily responsible for the day-to day
management of the Portfolios:
Money Market Portfolio: David E. Wheeler, Investment
Vice President and Portfolio Manager, has been
responsible for the day-to-day management of the
Portfolio since 1997. Mr. Wheeler has been employed
by Capital Management Group since 1994 and was
employed at AIG Investment Advisers prior to 1994.
<PAGE>
Intermediate Government Bond Portfolio and
Government/Corporate Bond Portfolio: Gregory Staples,
Vice President, has been responsible for the day-to
day management of the Intermediate Government Bond
Portfolio since 1996 and the Government/Corporate
Bond Portfolio since 1994. Mr. Staples has been
employed by Capital Management Group since 1987.
HIGH QUALITY BOND PORTFOLIO:
Merganser Capital Management Corporation. Merganser
was formed in 1987 and is owned by certain of its
employees. Merganser has been a registered investment
adviser since [_______________]. The principal
business address of Merganser is One Cambridge
Center, Cambridge, Massachusetts 02142
Investment management decisions of Merganser are made
by committee and not by managers individually.
HIGH-YIELD BOND PORTFOLIO:
Delaware Investment Advisers. Delaware Investment
Advisers is a business trust. Delaware Investment
Advisers is owned by Lincoln National Corp. Delaware
Investment Advisers has been a registered investment
adviser since [_______________]. The principal
business address of Delaware Investment Advisers is
2005 Market Street, Philadelphia, Pennsylvania 19103.
Investment management decisions of Delaware
Investment Advisers are made by committee and not by
managers individually.
BALANCED PORTFOLIO:
Institutional Capital Corporation. Institutional
Capital was formed in January of 1970 and is owned by
certain of its employees. Institutional Capital has
been a registered investment adviser since
[_____________]. The principal business address of
Institutional Capital is 303 West Madison Street,
Chicago, Illinois 60606.
Investment management decisions of Institutional
Capital are made by committee and not by managers
individually.
EQUITY INCOME PORTFOLIO:
Asset Management Group, a division of 1740 Advisers,
Inc., which is a wholly-owned subsidiary of MONY.
Asset Management Group has been a registered
investment adviser since [___________]. The address
<PAGE>
of Asset Management Group is 1740 Broadway, New York,
New York 10019.
Investment management decisions at Asset Management
Group are made by committee and not by managers
individually.
EQUITY VALUE PORTFOLIO:
Ark Asset Management Co., Inc. Ark was formed in July
of 1989 and is owned by Ark Asset Holdings, Inc. Ark
Asset Holdings, Inc. is owned by certain of its
employees. Ark has been a registered investment
adviser since [______________]. The principal address
of Ark is 55 Water Street, New York, New York 10041.
Investment management decisions of Ark are made by
committee and not by managers individually.
GROWTH & INCOME PORTFOLIO:
Putnam Advisory Company, Inc. Putnam was formed in
1937 and is owned by Marsh & McLennon Companies, Inc.
Putnam has been a registered investment adviser since
[_____________]. The principal address of Putnam is
One Post Office Square, Boston, Massachusetts 02109.
The investment management decisions of Putnam are
made by committee and not by managers individually.
EQUITY GROWTH PORTFOLIO:
Dresdner RCM Global Investors, LLC
Montag & Caldwell, Inc.
Dresdner RCM Global Investors, LLC was established in
1996, when Dresdner Bank acquired RCM Capital
Management, LLC. Dresdner RCM has been a registered
investment adviser since [_____________]. The
principal address of Dresdner RCM is Four Embarcadero
Center, Suite 2900, San Francisco, California 94111.
Investment management decisions of Dresdner RCM are
made by committee and not by managers individually.
Montag & Caldwell Incorporated was established in
1945 and is owned by Alleghany Corporation. Montag &
Caldwell has been a registered investment adviser
since [_____________]. The principal address of
Montag & Caldwell is 3343 Peachtree Road, N.E., Suite
1100, Atlanta, Georgia 30326-1022.
Investment management decisions of Montag & Caldwell
are made by committee and not by managers
individually.
<PAGE>
SPECIAL EQUITY PORTFOLIO:
Ark Asset Management Co., Inc.
Liberty Investment Management
Pilgrim Baxter & Associates, Ltd.
Westport Asset Management, Inc.
Ark Asset Management Co., Inc. was formed in July of
1989 and is owned by Ark Asset Holdings, Inc. Ark
Asset Holdings, Inc. is owned by certain of its
employees. Ark has been a registered investment
adviser since [______________]. The principal address
of Ark is 55 Water Street, New York, New York 10041.
Ronald Wiener, Vice Chairman and Portfolio Manager,
has been primarily responsible for the day-to-day
management of the Portfolio on behalf of Ark since
1994. Mr. Wiener has been employed by Ark since 1986
and was employed at Lehman Management Co., Inc. as
Senior Vice President and Senior Portfolio Manager,
Specialty Growth Equity Management, from 19__ to
19__.
Liberty Investment Management is a division of
Goldman Sachs Asset Management and was established in
January of 1997 when Goldman, Sachs & Co. acquired
Liberty Investment Management, Inc. Goldman Sachs
Asset Management is a separate operating division of
Goldman, Sachs & Co., a worldwide investment banking
firm. Liberty has been a registered investment
adviser since [____________]. The principal business
address of Liberty is 2502 Rocky Point Drive, Suite
500, Tampa, Florida 33607.
Herbert E. Ehlers, Managing Director, and Timothy G.
Ebright, Portfolio Manager, have been responsible for
the day-to-day management of the Portfolio on behalf
of Liberty since 1994. Both Mr. Ehlers and Ebright
have been employed at Liberty or its predecessor
Liberty Investment Management, Inc. since 1988.
Pilgrim Baxter & Associates, Ltd. was formed in 1995
and is owned by United Asset Management, Inc., a
publicly-owned corporation. Pilgrim has been a
registered investment adviser since [____________].
The principal business address of Pilgrim is 1255
Drummers Lane, Wayne, Pennsylvania 19807.
John Force, Portfolio Manager, has been responsible
for the day-to-day management of the Portfolio on
behalf of Pilgrim since 1994 and has been employed by
Pilgrim since 1992.
<PAGE>
Westport Asset Management, Inc. was formed in 1993
and is owned by certain of its employees. Westport
has been a registered investment adviser since
[____________]. The principal business address of
Westport is 253 Riverside Avenue, Westport,
Connecticut 06880.
Andrew Knuth, Portfolio Manager, has been responsible
for the day-to day management of the Portfolio on
behalf of Westport since 1994 and has been employed
by Westport since 1983.
AGGRESSIVE EQUITY PORTFOLIO:
McKinley Capital Management, Inc. McKinley was formed
in March of 1991 and is owned by Robert Gilliam.
McKinley has been a registered investment adviser
since [______________]. The principal business
address of McKinley is 3301 C Street, Anchorage
Alaska 99503.
Robert Gilliam, Portfolio Manager, has been
responsible for the day-to-day management of the
Portfolio since 1996 and has been employed by
McKinley since 1991.
INTERNATIONAL EQUITY PORTFOLIO:
Capital Guardian Trust Company. Capital Guardian was
formed in 1968 and is owned by The Capital Group
Companies, Inc. Capital Guardian has been a
registered investment adviser since [_____________].
The principal address of Capital Guardian is 333
South Hope Street, Los Angeles, California 90071.
Capital Guardian uses a system of multiple portfolio
managers. Within investment guidelines, each
portfolio manager makes individual decisions as to
company, country, industry, timing and percentage
based on extensive field research and direct company
contact.
<PAGE>
ADVISORY FEES
For its services under the Investment Advisory Agreements Diversified is
entitled to receive investment advisory fees, which are accrued daily and
payable monthly, at an annual rate equal to the percentage of each Portfolio's
average daily net assets shown in the table below. Diversified is currently
waiving a portion of its investment advisory fees.
For its services under its Investment Subadvisory Agreement with
Diversified, each of the Subadvisers is entitled to receive a fee from
Diversified at an annual rate equal to the percentage of the applicable
Portfolio's average daily net assets shown in the table below.
<TABLE>
<CAPTION>
COMPENSATION COMPENSATION
PORTFOLIO SUBADVISERS (%) (%)
TO DIVERSIFIED(1) TO SUBADVISERS
<S> <C> <C> <C>
Money Market Portfolio Capital Management Group 0.25 0.05
High Quality Bond Merganser Capital 0.35 (2)
Portfolio Management Corporation
Intermediate Capital Management Group 0.35 0.15
Government Bond
Portfolio
Government/Corporate Capital Management Group 0.35 0.15
Bond Portfolio
High-Yield Bond Delaware Investment Advisers 0.55 (3)
Portfolio
Balanced Portfolio Institutional Capital 0.45 (4)
Corporation
Equity Income Portfolio Asset Management Group 0.45 0.25
Equity Value Portfolio Ark Asset Management Co., Inc. 0.57 (5)
Growth & Income Putnam Advisory Company, 0.60 (6)
Portfolio Inc.
Equity Growth Portfolio Dresdner RCM Global 0.62 (7)
Investors, LLC
Montag & Caldwell, Inc.
Special Equity Portfolio Pilgrim Baxter & Associates, 0.80 0.50
Ltd.
Ark Asset Management Co., Inc.
Liberty Investment
Management
Westport Asset Management,
Inc.
<PAGE>
Aggressive Equity McKinley Capital Management 0.97 (8)
Portfolio
International Equity Capital Guardian Trust 0.75 (9)
Portfolio Company
</TABLE>
- ----------------------------------
(1)Diversified is currently waiving a portion of its fees. See "Expense
Summary" on page __ for a review of the fee waivers currently in effect.
(2)0.50% on the first $10,000,000 of average net assets of the High Quality
Bond Portfolio, 0.375% on the next $15,000,000 in assets, 0.25% on the next
$75,000,000 in assets and 0.1875% on all assets in excess of $100,000,000.
(3)0.40% on the first $20,000,000 of average net assets of the High-Yield Bond
Portfolio, 0.30% on the next $20,000,000 in assets and 0.20% on assets in
excess of $40,000,000.
(4)0.55% on the first $25,000,000 of average net assets of the Balanced
Portfolio, 0.45% on the next $25,000,000 in assets and 0.35% on assets in
excess of $50,000,000.
(5)0.45% on the first $100,000,000 of average net assets of the Equity Value
Portfolio, 0.40% on the next $50,000,000 in assets and 0.35% on the next
$50,000,000 in assets; when the Portfolio achieves $200,000,000 in assets,
the rate shall be 0.40% on assets up to $200,000,000 and 0.35% on assets in
excess of $200,000,000 so long as the Portfolio continues to have more than
$200,000,000 in assets.
(6)0.30% on the first $100,000,000 of average net assets of the Growth &
Income Portfolio, 0.20% on assets in excess of $100,000,000.
(7)With respect to assets of the Equity Growth Portfolio allocated to each
Subadviser: 0.50% on the first $50,000,000 of average net assets, 0.25% on
the next $50,000,000 in assets and 0.20% on all assets in excess of
$100,000,000.
(8)0.90% on the first $10,000,000 of average net assets of the Aggressive
Equity Portfolio, 0.80% on the next $15,000,000 in assets, 0.60% on the next
$25,000,000 in assets, 0.40% on the next $50,000,000 in assets and 0.35% on
assets in excess of $100,000,000.
(9)0.75% on the first $25,000,000 of average net assets of the International
Equity Portfolio, 0.60% on the next $25,000,000 in assets, 0.425% from
$50,000,000 in assets to $250,000,000 in assets, and 0.375% on all assets in
excess of $250,000,000.
Diversified has agreed to waive its investment advisory fees to the
extent necessary to limit the total operating expenses of each Portfolio to a
specified level. See "Expense Summary" on page __ for a review of the fee
waivers currently in effect. Diversified also may contribute to the Portfolios
from time to time to help them maintain competitive expense ratios. These
arrangements are voluntary and may be terminated at any time.
ADMINISTRATOR
Diversified provides administrative services to the Portfolios, including
regulatory reporting, office facilities and equipment and personnel.
Diversified receives no additional fee for its administrative services to
Diversified Investors Portfolios.
DISTRIBUTION ARRANGEMENTS
Diversified Investors Portfolios has retained the services of DISC as
Exclusive Placement Agent. The principal business address of DISC is Four
Manhattanville Road, Purchase, New York 10577. DISC receives no compensation as
Exclusive Placement Agent.
<PAGE>
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02205, is the custodian of the securities held by the Portfolios and is
authorized to use the facilities of the Depositary Trust Company and the
facilities of the book-entry system for the Federal Reserve Bank. Securities
may be held by sub-custodians approved by the Board of Trustees of Diversified
Investors Portfolios. Investors Bank & Trust Company is also
dividend-disbursing agent for Diversified Investors Portfolios.
EXPENSES
The expenses of Diversified Investors Portfolios include the compensation
of its Trustees who are not affiliated with Diversified; governmental fees;
interest charges; taxes; fees and expenses of independent auditors, of legal
counsel and of any transfer agent, depository, registrar or dividend disbursing
agent of Diversified Investors Portfolios; insurance premiums; and expenses of
calculating the net asset value of, and the net income on, beneficial interests
in the series of Diversified Investors Portfolios. Expenses of Diversified
Investors Portfolios also include the expenses connected with the execution,
recording and settlement of securities transactions; fees and expenses of
Diversified Investors Portfolios' custodian for all services to the series of
Diversified Investors Portfolios, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of preparing and mailing
reports to investors and to governmental officers and commissions; expenses of
meetings of investors and Trustees of Diversified Investors Portfolios; and the
advisory fees payable to Diversified under the Investment Advisory Agreements.
OTHER INFORMATION REGARDING
DIVERSIFIED INVESTORS PORTFOLIOS
PURCHASE AND REDEMPTION OF INTERESTS IN DIVERSIFIED INVESTORS PORTFOLIOS
Beneficial interests in the Portfolios described in this Prospectus are
currently being offered by DISC to AUSA for allocation to the appropriate
Variable Funds Subaccount to fund benefits payable under the Contracts.
Investments in the Portfolios may only be made by investment companies,
insurance company separate accounts, common or commingled trust funds or
similar organizations or entities that are "accredited investors" within the
meaning of Regulation D under the 1933 Act. This Prospectus does not constitute
an offer to sell, or the solicitation of an offer to buy, any beneficial
interests in any of the Portfolios.
The net asset value of each Portfolio is determined each day during which
the Advisers of that Portfolio are open for business ("Portfolio Business
Day"). This determination is made once each day as of 4:00 p.m., New York time
(the "Valuation Time").
Each investor in a Portfolio may add to or reduce its investment in such
Portfolio on each Portfolio Business Day. As of the Valuation Time on each such
day, the value of each investor's beneficial interest in a Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
reductions, which are to be effected as of the Valuation Time on such day, will
then be effected. The investor's percentage of the aggregate beneficial
interests in a Portfolio will then be recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
<PAGE>
in the Portfolio as of the Valuation Time on such day plus or minus, as the
case may be, the amount of net additions to or reductions in the investor's
investment in the Portfolio effected as of the Valuation Time, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
the Valuation Time on such day, plus or minus, as the case may be, the amount
of net additions to or reductions in the aggregate net asset value of the
Portfolio as of the Valuation Time on such day, plus or minus as the case may
be, the amount of net additions to or reductions in the aggregate investments
in the Portfolio by all investors in such Portfolio. The percentage so
determined will then be applied to determine the value of the investor's
interest in the Portfolio as of the Valuation time on the following Portfolio
Business Day.
An investor in a Portfolio may withdraw all or any portion of its
investment at the net asset value next determined if a withdrawal request in
proper form is furnished by the investor to Diversified Investors Portfolios by
the designated cut-off time for each accredited investor. The proceeds of a
eduction or a withdrawal will be paid by Diversified Investors Portfolios in
federal funds normally on the Portfolio Business Day the withdrawal is
effected, but in any event within seven days. Diversified Investors Portfolios,
on behalf of each of its Portfolios, reserves the right to pay redemptions in
kind. Unless requested by an investor, Diversified Investors Portfolios will
not make a redemption in kind to the investor, except in situations where that
investor may make redemptions in kind. Diversified Investors Portfolios, on
behalf of each of its Portfolios, has elected, however, to be governed by Rule
18f-1 under the 1940 Act, as a result of which Diversified Investors Portfolios
is obligated to redeem beneficial interests in each Portfolio with respect to
any one investor during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Portfolio at the beginning of the
period. Investments in a Portfolio may not be transferred.
The right to redeem beneficial interests or to receive payment with
respect to any redemption may be suspended only (i) for any period during which
trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission or when the New York Stock Exchange is
closed (other than customary weekend and holiday closings), (ii) for any period
during which an emergency exists as defined by the Securities and Exchange
Commission as a result of which disposal of a Portfolio's securities or
determination of the net asset value of each Portfolio is not reasonably
practicable, and (iii) for such other periods as the SEC may by order permit
for the protection of investors in any Portfolio.
NET ASSET VALUE
Diversified Investors Portfolios values the securities of the Money
Market Portfolio based on the amortized cost method of valuation. Securities of
other Portfolios are valued based on their current market value when market
quotations are available. Where market quotations are not available, assets are
valued at fair value as determined in good faith under the direction of the
Board of Trustees of Diversified Investors Portfolios. Debt obligations with 60
days or less remaining to maturity may be valued by the amortized cost method,
which the Board of Trustees of Diversified Investors Portfolios has determined
to constitute fair value for such securities. For more information on the
valuation of portfolio securities, see "Diversified Investors Portfolios" in
the Statement of Additional Information.
TAXATION OF DIVERSIFIED INVESTORS PORTFOLIOS
Diversified Investors Portfolios is organized as a New York trust. None
of its series is subject to any income or franchise tax in the State of New
York. However, each investor in a Portfolio will be taxable on its share (as
determined in accordance with the governing instruments of Diversified
<PAGE>
Investors Portfolio) of the Portfolio's ordinary income and capital gain in
determining its income tax liability. The determination of such share will be
made in accordance with the Code, and regulations promulgated thereunder.
Diversified Investors Portfolios, since it is taxed as a partnership, is
not subject to federal income taxation. Instead, any investor in Diversified
Investors Portfolios must take into account, in computing its federal income
tax liability, its share of Diversified Investors Portfolios' income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from Diversified Investors Portfolios.
Withdrawals by any investor in Diversified Investors Portfolios from its
corresponding Portfolio generally will not result in recognizing any gain or
loss for federal income tax purposes, except that (1) gain will be recognized
to the extent that any cash distributed exceeds the basis of such investor's
interest in the Portfolio prior to the distribution, (2) income or gain will be
realized if the withdrawal is in liquidation of such investor's entire interest
in the Portfolio and includes a disproportionate share of any unrealized
receivables held by the Portfolio and (3) loss will be recognized if the
distribution is in liquidation of that entire interest and consists solely of
cash and/or unrealized receivables. The basis of any investor's interest in
Diversified Investors Portfolios generally equals the amount of cash and the
basis of any property that such investor invests in a Portfolio, increased by
such investor's share of income from that Portfolio and decreased by the amount
of any cash distributions and the basis of any property distributed from that
Portfolio.
DESCRIPTION OF BENEFICIAL INTERESTS, VOTING RIGHTS AND LIABILITIES
Diversified Investors Portfolios is organized as a series trust under the
laws of the State of New York. Under the Declaration of Trust, the Trustees are
authorized to issue beneficial interests in one or more series (referred to
herein as "Portfolios"). Investment in each Portfolio may not be transferred,
but an investor may withdraw all or any portion of its investment at any time
at net asset value. Investors in a Portfolio (e.g., investment companies,
insurance company separate accounts and common and commingled trust funds) will
each be liable for all obligations of that Portfolio (and of no other
Portfolio). However, the risk of an investor in a Portfolio incurring financial
loss on account of such liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations. Investments in each Portfolio have no preemptive or conversion
rights and are fully paid and nonassessable, except as set forth below.
Each investor is entitled to a vote in proportion to the amount of its
investment in each Portfolio. Investors in a Portfolio will vote as a separate
class, except as to voting for election of Trustees of Diversified Investors
Portfolios, as otherwise required by the 1940 Act, or if determined by the
Trustees of Diversified Investors Portfolios to be a matter which affects all
Portfolios. As to any matter which does not affect a particular Portfolio, only
investors in the one or more affected Portfolios are entitled to vote.
Diversified Investors Portfolios is not required and has no current intention
of holding special meetings of investors, but special meetings of investors
will be held when in the judgment of the Trustees of Diversified Investors
Portfolios it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees of Diversified Investors Portfolios. Investors also have the right to
remove one or more Trustees of Diversified Investors Portfolios without a
meeting by a declaration in writing by a specified number of investors. Upon
liquidation of a Portfolio, investors would be entitled to share pro rata in
<PAGE>
the net assets of that Portfolio (and no other Portfolio) available for
distribution to investors. See Voting Rights at page __.
Each Portfolio determines its net income and realized capital gains, if
any, on each Portfolio Business Day (as defined below) and allocates all such
income and gain pro rata among the investors in such Portfolio at the time of
such determination.
The "net income" of each Portfolio shall consist of (i) all income
accrued, less the amortization of any premium, on the assets of the Portfolio,
less (ii) all actual and accrued expenses of the Portfolio determined in
accordance with generally accepted accounting principles. Interest income
includes discount earned (including both original issue and market discount) on
discount paper accrued ratably to the date of maturity and any net realized
gains or losses on the assets of a Portfolio. All the net income of each
Portfolio is allocated pro rata among the investors in the Portfolio (and no
other Portfolio).
Inquiries regarding Diversified Investors Portfolios may be directed to 4
Manhattanville Road, Purchase, New York 10577 (914-697-8000).
INDEPENDENT ACCOUNTANTS
The financial statements of AUSA included in the Statement of Additional
Information have been audited by Ernst & Young LLP, independent auditors, Des
Moines, Iowa. Coopers & Lybrand L.L.P., New York, New York serve as independent
accountants to Diversified Investors Variable Funds, Diversified Investors
Strategic Variable Funds and Diversified Investors Portfolios.
LEGAL PROCEEDINGS
There are no material legal proceedings to which AUSA, Diversified
Investors Variable Funds or Diversified Investors Strategic Variable Funds is a
party.
FINANCIAL STATEMENTS
The financial statements for AUSA, included in the Statement of
Additional Information, should be distinguished from the financial statements
of Diversified Investors Variable Funds and Diversified Investors Strategic
Variable Funds and should be considered only as bearing on the ability of AUSA
to meet its obligations under the Contracts. The financial statements of AUSA
should not be considered as bearing on the investment performance of the assets
held in Diversified Investors Variable Funds or Diversified Investors Strategic
Variable Funds.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information set forth in the
registration statement, certain portions of which have been omitted (including
financial statements relating to AUSA) pursuant to the rules and regulations of
the SEC. The omitted information may be obtained from the SEC's principal
office in Washington, D.C., upon payment of the fees prescribed by the
Commission.
For further information with respect to AUSA and the Contracts offered by
this Prospectus, including the Statement of Additional Information (which
<PAGE>
includes financial statements relating to AUSA), contact AUSA at its address or
phone number set forth on the cover of this Prospectus.
For further information with respect to the Calvert Series, Acacia
Capital Corporation or Calvert Asset Management Company, Inc., including a
Statement of Additional Information, contact Acacia Capital Corporation at 4550
Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814, or call (301)
951-4820.
MISCELLANEOUS
The Accounts are separate registered accounts of AUSA. There is a
possibility that one Account might become liable for a misstatement in this
Prospectus about the other Account. AUSA believes this possibility to be
remote.
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
ITEM PAGE
Independent Accountants
Sale of Contracts/Principal Underwriter
Texas Optional Retirement Program
Performance Data
Variable Funds Money Market Subaccount
Diversified Investors Portfolios
Investment Objectives, Policies and Restrictions Relating
to the Portfolios
Portfolio Transactions and Brokerage Commissions
Investment Restrictions Relating To The Strategic
Variable Funds Subaccounts
Performance Information Relating To The Strategic
Variable Funds Subaccounts
Determination of Unit Value; Valuation of Securities
Management of Diversified Investors Portfolios
Management of The Strategic Variable Funds Account
Diversified Investors Portfolios: Description of Trust
Tax Information Relating to Diversified Investors Portfolios
Financial Statements of AUSA
Appendix A -- Description of Security Ratings
Financial Statements
<PAGE>
REQUEST FOR
DIVERSIFIED INVESTORS VARIABLE FUNDS/
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
Detach and return in an envelope addressed to:
AUSA
4 Manhattanville Road
Purchase, New York 10577
Please make sure that your name and the address to which you wish AUSA to
send the current Statement of Additional Information appears below:
Name
Address
Employer
<PAGE>
APPENDIX A
STRATEGIC SUBACCOUNTS
Under normal circumstances, the Strategic Variable Funds
Subaccounts are allocated among the Variable Funds Money Market,
Bond and Stock Subaccounts as follows:
Short Horizon Strategic Allocation Variable Fund:
Money Market Subaccount 0-40%
High Quality Bond Subaccount 10-50%
Intermediate Government Bond Subaccount 10-40%
Government/Corporate Bond Subaccount 10-50%
High-Yield Bond Subaccount 0-30%
Equity Income Subaccount 0-20%
Equity Value Subaccount 0-10%
Growth & Income Subaccount 0-10%
Intermediate Horizon Strategic Allocation Variable Fund:
Money Market Subaccount 0-30%
High Quality Bond Subaccount 10-30%
Intermediate Government Bond Subaccount 0-20%
Government/Corporate Bond Subaccount 15-40%
High-Yield Bond Subaccount 0-20%
Equity Income Subaccount 0-25%
Equity Value Subaccount 0-25%
Growth & Income Subaccount 0-25%
Equity Growth Subaccount 0-25%
Special Equity Subaccount 0-20%
Aggressive Equity Subaccount 0-10%
International Equity Subaccount 0-15%
Intermediate/Long Horizon Strategic Allocation Variable Fund:
Money Market Subaccount 0-20%
High Quality Bond Subaccount 0-20%
Intermediate Government Bond Subaccount 0-20%
Government/Corporate Bond Subaccount 0-20%
High-Yield Bond Subaccount 0-15%
Equity Income Subaccount 0-40%
Equity Value Subaccount 0-40%
Growth & Income Subaccount 0-40%
Equity Growth Subaccount 0-40%
Special Equity Subaccount 0-40%
Aggressive Equity Subaccount 0-10%
International Equity Subaccount 0-20%
<PAGE>
APPENDIX B
APPLICABLE PREMIUM TAX RATES
PREMIUM TAX RATE PERCENT
------------------------
QUALIFIED NON-QUALIFIED
--------- -------------
California .50% 2.35%
District 2.25% 2.25%
of Columbia
Kentucky 2.00% 2.00%
Maine -- 2.00%
Nevada -- 3.50%
Pennsylvania -- 2.00%
Puerto Rico 1.00% 1.00%
South Dakota -- 1.25%
West Virginia 1.00% 1.00%
Wyoming -- 1.00%
<PAGE>
APPENDIX C
COMPOSITE PERFORMANCE OF SUBADVISERS
The following table sets forth the average annual total returns of all
institutional private accounts and collective investment vehicles managed by
the Subadvisers to the High-Yield Bond Portfolio, Equity Value Portfolio,
Growth & Income Portfolio, Equity Growth Portfolio and Aggressive Equity
Portfolio with investment objectives, policies and restrictions substantially
similar to each such Portfolio and which have been managed as each Portfolio is
managed. The data is provided to illustrate the past performances of the
Subadvisers in managing substantially similar accounts as measured against
specified market indices and does not represent the performance of the
Portfolios. Investors should not consider this performance data as an
indication of future performance of the Portfolios or the Subadvisers.
The institutional private accounts and collective investment vehicles
that are included in the Subadvisers' composites are not subject to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Accounts or the Portfolios by the Investment Company
Act or the Internal Revenue Code. The performance results of the Subadvisers'
composites could have been adversely affected if the institutional private
accounts and collective investment vehicles included in the composites had been
regulated as investment companies under the federal securities law. The
investment results of the Subadvisers' composites presented below are unaudited
and are not intended to predict or suggest the returns that might be
experienced by the Portfolios or any investor in the Portfolios. Investors
should also be aware that the use of a methodology different from that used to
calculate the performance date set forth below could result in different
performance data.
The Subadvisers' composite performance data shown below were calculated
in accordance with recommended standards of the Association for Investment
Management and Research, retroactively applied to all time periods. All returns
presented were calculated on a total return basis and include all dividends and
interest, accrued income and realized and unrealized gains and losses, and
deductions for brokerage commissions and execution costs. Returns for each
period are adjusted to assume that all charges, expenses and fees of each
Portfolio which are presently in effect were deducted during such periods. All
returns are for the periods ended on December 31, 1997.
SINCE
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
------ ------- ------- -------- ---------
Delaware Investment Advisers,
Subadviser to High-Yield Bond
Portfolio
Subadviser's composite(1)......
Benchmark Index(2).............
Peer Group(3)..................
Ark Asset Management Co., Inc.
Subadviser to Equity Value
Portfolio
Subadviser's composite(4)......
Benchmark Index(5).............
Peer Group(6)..................
<PAGE>
Putnam Advisory Company, Inc.,
Subadviser to Growth & Income
Portfolio
Subadviser's composite(7)......
Benchmark Index(8).............
Peer Group(6)..................
[Dresdner RCM Global Investors,
LLC]
Subadviser to Equity Growth
Portfolio
Subadviser's composite(9)......
Benchmark Index(5).............
Peer Group(10).................
[Montag & Caldwell, Inc.]
Subadviser to Equity Growth
Portfolio
Subadviser's composite(11).....
Benchmark Index(5).............
Peer Group(10).................
McKinley Capital Management, Inc.,
Subadviser to Aggressive Equity
Portfolio
Subadviser's composite(12)....
Benchmark Index(13)...........
Peer Group(14)................
- ------------
(1) Commencement of investment operations is January 1, 1980 for the
Subadviser's composite.
(2) The Benchmark Index is the Salomon Brothers High-Yield Market Index. The
Salomon Brothers High-Yield Market Index tracks the performance of below
investment-grade corporate bonds issued in the United States. The index
includes cashpay and deferred-interest bonds that are public, have a fixed
coupon and are non convertible. To enter the index, bonds must also have $50
million or more in face value outstanding, one year or more left to maturity,
and one high-yield rating by Moody's or Standard & Poor's. The index excludes
bonds of bankrupt issuers.
(3) The Peer Group is the Lipper High Current Yield Fund Index. The Lipper
High Current Yield Fund Index tracks the net performance of mutual funds which,
as determined by Lipper Analytical Services, Inc., are managed in accordance
with an investment objective defined as follows: "Aim at high (relative)
current yield from fixed income securities. No quality or maturity
restrictions. Tend to invest in lower grade debt issues".
(4) Commencement of investment operations is April 1, 1985 for the
Subadviser's composite.
(5) The Benchmark Index is the Russell 1000 Value Index. The Russell 1000
Value Index measures the performance of those companies included in the Russell
1000 Index with lower price-to-book ratios and lower forecasted growth values.
The Russell 1000 Index measures the performance of the one thousand largest
U.S. companies based on total market capitalization, which represents
approximately 88% of the investable U.S. equity market.
(6) The Peer Group is the Lipper Growth & Income Fund Index. The Lipper
Growth & Income Fund Index tracks the net performance of mutual funds which, as
determined by Lipper Analytical Services, Inc., are managed in accordance with
an investment objective defined as follows: "A fund which combines a growth of
earnings orientation and an income requirement for level and/or rising
dividends".
(7) Commencement of investment operations is January 1, 1989 for the
Subadviser's composite.
(8) The Benchmark Index is the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500"). The S&P 500 is used as a broad-based measurement of
changes in domestic stock market conditions and is based on the average
performance of 500 widely held common stocks traded in the United States.
(9) Commencement of investment operations is [___________] for the
Subadviser's composite.
<PAGE>
(10) The Peer Group is the Lipper Growth Fund Index. The Lipper Growth Fund
Index tracks the net performance of mutual funds which, as determined by Lipper
Analytical Services, Inc., are managed in accordance with an investment
objective defined as follows: "A fund which normally invests in companies whose
long-term earnings are expected to grow significantly faster than the earnings
of the stocks represented in the major unmanaged stock indices".
(11) Commencement of investment operations is [___________] for the
Subadviser's composite.
(12) Commencement of investment operations is October 1, 1990 for the
Subadviser's composite.
(13) The Benchmark Index is the Russell 2000 Growth Index. The Russell 2000
Growth Index measures the performance of those companies included in the
Russell 2000 Index with higher price-to-book ratios and higher forecasted
growth values. The Russell 2000 Index measures the performance of the two
thousand smallest companies in the Russell 3000 Index, which represents
approximately 10% of the total market capitalization of the Russell 3000 Index
(the Russell 3000 Index represents approximately 98% of the investable U.S.
equity market).
(14) The Peer Group is the Lipper Mid Cap Fund Index. The Lipper Mid Cap Fund
Index tracks the net performance of mutual funds which, as determined by Lipper
Analytical Services, Inc., are managed in accordance with an investment
objective defined as follows: "A fund which limits its investments to companies
with average market capitalizations between $800 million and the average market
capitalization of the Wilshire 4500 Index".
<PAGE>
APPENDIX D
PERMITTED INVESTMENTS
AND INVESTMENT PRACTICES
U.S. Treasury Obligations - U.S. Treasury obligations include bills, notes and
bonds issued by the U.S. Treasury and separately traded interest and principal
component parts of these obligations that are transferable through the Federal
book-entry system known as Separately Traded Registered Interest and Principal
Securities (STRIPS). STRIPS are sold as zero coupon securities. These
securities are usually structured with two classes that receive different
portions of the interest and principal payments from the underlying obligation.
The yield to maturity on the interest-only class is extremely sensitive to the
rate of principal payments on the underlying obligation. The market value of
the principal-only class generally is unusually volatile in response to changes
in interest rates. See "Zero Coupon Securities" for more information.
U.S. Government Agencies - Certain Federal agencies such as the Government
National Mortgage Association (GNMA) have been established as instrumentalities
of the U.S. government to supervise and finance certain types of activities.
Issues of these agencies, while not direct obligations of the U.S. government,
are either backed by the full faith and credit of the United States (e.g.,
GNMA) or supported by the issuing agencies' right to borrow from the Treasury.
The issues of other agencies are supported only by the credit of the
instrumentality (e.g., Federal National Mortgage Association).
Receipts - Receipts are interests in separately traded interest and principal
component parts of U.S. Treasury obligations that are issued by banks and
brokerage firms and are created by depositing U.S. Treasury obligations into a
special account at a custodian bank. The custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
or receipts. Receipts include Treasury Receipts (TRs), Treasury Investment
Growth Receipts (TIGRs) and Certificates of Accrual on Treasury Securities
(CATS). TRs, TIGRs, and CATS are sold as zero coupon securities.
Zero Coupon Securities - A zero coupon security pays no interest or principal
to its holder during its life. A zero coupon security is sold at a discount,
frequently substantial, and redeemed at face value at its maturity date. The
market prices of zero coupon securities are generally more volatile than the
market prices of securities of similar maturity that pay interest periodically,
and zero coupon securities are likely to react more to interest rate changes
than non-zero coupon securities with similar maturity and credit qualities.
Bank Obligations - Bank obligations include certificates of deposit, time
deposits (including Eurodollar time deposits) and bankers' acceptances and
other short-term debt obligations issued by domestic banks, foreign
subsidiaries or foreign branches of domestic banks, domestic and foreign
branches of foreign banks, domestic savings and loan associations and other
banking institutions. The Portfolios have established certain minimum credit
quality standards for bank obligations in which they invest.
Bankers' Acceptances - A banker's acceptance is a bill of exchange or time
draft drawn on and accepted by a commercial bank. It is used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange.
Maturities are generally six months or less.
Certificates of Deposit - A certificate of deposit is a negotiable
interest-bearing instrument with a specific maturity. Certificates of deposit
are issued by banks and savings and loan institutions in exchange for the
deposit of funds and normally can be traded in the secondary market prior to
maturity.
<PAGE>
Time Deposits - A time deposit is a non-negotiable receipt issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot
be traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
Commercial Paper - Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations and other entities.
Maturities on these issues vary from one to 270 days.
Money Market Funds - A money market fund is a mutual fund that limits its
investments to high quality money market instruments with a weighted average
maturity of 90 days or less. Consistent with applicable regulations the
Portfolios may not invest more than certain percentages of their assets in
other mutual funds. Investing in other mutual funds causes shareholders to bear
not only Portfolio expenses, but also expenses of the underlying mutual funds.
Variable and Floating Rate Instruments - Certain obligations may carry variable
or floating rates of interest and may involve a conditional or unconditional
demand feature permitting the holder to demand payment of principal at any time
or at specified intervals. These obligations may include variable amount master
demand notes. Such instruments bear interest at rates which are not fixed, but
which vary with changes in specified market rates or indices, such as a Federal
Reserve composite index. A demand instrument with a demand notice period
exceeding seven days may be considered illiquid if there is no secondary market
for such security. The interest rate on these securities may be reset daily,
weekly, quarterly, or some other reset period and may have a floor or ceiling
on interest rate charges. There is a risk that the current interest rate on
such obligations may not accurately reflect existing market interest rates.
Repurchase Agreements - A repurchase agreement is an agreement where a person
buys a security and simultaneously commits to sell the security to the seller
at an agreed upon price (including principal and interest) on an agreed upon
date within a number of days from the date of purchase. A Portfolio bears a
risk of loss in the event the other party defaults on its obligations and the
Portfolio is delayed or prevented from its right to dispose of the collateral
securities or if the Portfolio realizes a loss on the sale of the collateral
securities.
Reverse Repurchase Agreements - Reverse repurchase agreements involve the sale
of securities held by a Portfolio and the agreement by the Portfolio to
repurchase the securities at an agreed-upon price, date and interest payment.
When a Portfolio enters into reverse repurchase transactions, securities of a
dollar amount equal in value to the securities subject to the agreement will be
maintained in a segregated account with the Portfolio's custodian. The
segregation of assets could impair the Portfolio's ability to meet its current
obligations or impede investment management if a large portion of the
Portfolio's assets are involved. Reverse repurchase agreements are considered
to be a form of borrowing.
Mortgage-Backed Securities - The Portfolios may purchase mortgage-backed
securities issued or guaranteed as to payment of principal and interest by the
U.S. government or one of its agencies and backed by the full faith and credit
of the U.S. government, including direct pass-through certificates of GNMA, as
well as mortgage-backed securities for which principal and interest payments
are backed by the credit of particular agencies of the U.S. government.
Mortgage-backed securities are generally backed or collateralized by a pool of
mortgages. These securities are sometimes called collateralized mortgage
obligations or CMOs.
<PAGE>
Even if the U.S. government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market
volatility. When interest rates decline, mortgage-backed securities experience
higher rates of prepayment because the underlying mortgages are refinanced to
take advantage of the lower rates. Thus, prices of mortgage-backed securities
may not increase as much as prices of other debt obligations when interest
rates decline, and mortgage-backed securities may not be an effective means of
locking in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid. When interest rates
increase, mortgage-backed securities experience lower rates of prepayment. This
has the effect of lengthening the expected maturity of a mortgage-backed
security. As a result, prices of mortgage-backed securities may decrease more
than prices of other debt obligations when interest rates increase.
Additionally mortgage-backed securities are also subject to maturity
extension risk, that is, the possibility that rising interest rates may cause
prepayments to occur at a slower than expected rate. This particular risk may
effectively convert a security that was considered short or intermediate-term
at the time of purchase into a long-term security. Long-term securities
generally fluctuate more widely in response to changes in interest rates than
short or intermediate-term securities. Thus, a rising interest rate would not
only likely decrease the value of a Portfolio's securities, but would also
increase the inherent volatility of the Portfolio by effectively converting
short term debt instruments into long term debt instruments.
Forward Commitments or Purchases on a When-Issued Basis - Forward commitments
or purchases of securities on a when-issued basis are transactions where the
price of the securities is fixed at the time of commitment and the delivery and
payment ordinarily takes place beyond customary settlement time. The interest
rate realized on these securities is fixed as of the purchase date and no
interest accrues to the buyer before settlement. The securities are subject to
market fluctuation due to changes in market interest rates; the securities are
also subject to fluctuation in value pending settlement based upon public
perception of the creditworthiness of the issuer of these securities.
Yankee Bonds and Eurodollar Bonds - Yankee bonds are U.S. dollar denominated
bonds issued in the United States market by foreign issuers and are subject to
the regulations of the Securities and Exchange Commission. Eurodollar bonds are
fixed income securities that are denominated in U.S. dollars, underwritten by
an international syndicate and sold to non-U.S. investors. U.S.-based investors
may purchase eurodollar bonds in the secondary market after a seasoning period.
Eurodollar bonds are not subject to regulation by the Securities and Exchange
Commission.
Asset-Backed Securities - The Portfolios 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.
Standby Commitments - A security purchased subject to a standby commitment may
be sold at a fixed price prior to maturity and may be sold at any time at
market rates. A premium may be paid for a standby commitment and will have the
effect of reducing the yield otherwise payable on the underlying security.
<PAGE>
Guaranteed Investment Contracts (GIC) - A GIC is a contract between an
insurance company and, generally, an institutional investor that guarantees the
investor a specified interest rate for a specific period and the return of the
investor's principal.
Common and Preferred Stock - Common stocks are generally more volatile than
other securities. Preferred stocks share some of the characteristics of both
debt and equity investments and are generally preferred over common stocks with
respect to dividends and in liquidation.
Convertible Securities - Convertible securities have characteristics similar to
both fixed income and equity securities. Because of the conversion feature, the
market value of convertible securities tends to move together with the market
value of the underlying stock. The value of convertible securities is also
affected by prevailing interest rates, the credit quality of the issuer, and
any call provisions. Convertible securities include both debt obligations and
preferred stock.
American, European and Continental Depositary Receipts - American Depositary
Receipts (ADRs) are securities, typically issued by a U.S. financial
institution, that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer. European Depositary Receipts (EDRs),
which are sometimes referred to as Continental Depositary Receipts (CDRs), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs and CDRs may be available for investment
through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the security underlying the receipt and a
depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holdings of an unsponsored depositary receipt generally bear all the costs of
the unsponsored facility and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass voting rights
through to the holders of the receipts in respect of the deposited securities.
Investments in securities of foreign issuers (including ADRs, EDRs and CDRs)
are subject to special risks. See "Risk Considerations."
Foreign Currency Transactions - Forward currency exchange contracts may be
entered into for each Portfolio for the purchase or sale of foreign currency to
hedge against adverse rate changes or otherwise to achieve the Portfolio's
investment objectives. A currency exchange contract allows a definite price in
dollars to be fixed for securities of foreign issuers that have been purchased
or sold (but not settled) for the Portfolio.
Each Portfolio may also enter into proxy hedges and cross hedges. In a
proxy hedge, which generally is less costly than a direct hedge, a Portfolio,
having purchased a security, will sell a currency whose value is believed to be
closely linked to the currency in which the security is denominated. Interest
rates prevailing in the country whose currency was sold would be expected to be
closer to those in the U.S. and lower than those of securities denominated in
the currency of the original holding. This type of hedging entails greater risk
than a direct hedge because it is dependent on a stable relationship between
the two currencies paired as proxies and the relationships can be very unstable
at times. A Portfolio may enter into a cross hedge if a particular currency is
expected to decrease against another currency. The Portfolio would sell the
currency expected to decrease and purchase a currency which is expected to
increase against the currency sold in an amount equal to some or all of the
Portfolio's holdings denominated in the currency sold.
<PAGE>
Entering into exchange contracts may result in the loss of all or a
portion of the benefits which otherwise could have been obtained from favorable
movements in exchange rates. In addition, entering into such contracts means
incurring certain transaction costs and bearing the risk of incurring losses if
rates do not move in the direction anticipated.
Warrants - A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time. Each Portfolio may
invest up to 5% of its net assets in warrants, except that this limitation does
not apply to warrants acquired in units or attached to securities. Included in
this limitation, but not to exceed 2% of the Portfolio's net assets, may be
warrants not listed on the New York Stock Exchange or American Stock Exchange.
Securities Lending - Consistent with applicable regulatory requirements and in
order to generate additional income, each Portfolio may lend securities to
broker-dealers and other institutional borrowers. The Portfolio must be able to
terminate the loan at any time and the loan must be continuously secured by
collateral (usually cash or U.S. government securities) in an amount not less
than the market value, determined daily, of the securities loaned. It is
intended that the value of securities loaned by a Portfolio would not exceed
331/3% of the Portfolio's total assets. In the event of the bankruptcy of the
other party to a securities loan, a Portfolio could experience delays in
recovering either the securities lent or cash. To the extent that, in the
meantime, the value of the securities lent has increased or the value of the
securities purchased has decreased, the Portfolio could experience a loss. The
voting rights of such securities may pass to the borrower; however, the lending
Portfolio will seek to call loans, to vote proxies, or otherwise to obtain
rights to vote or consent if a material event affecting the investment is to
occur.
Restricted or Illiquid Securities - Securities that may not be sold freely to
the public absent registration or securities for which there is no readily
available market are referred to as restricted or illiquid securities,
respectively. Each Portfolio may invest up to 15% (10% for the Money Market
Portfolio) of its net assets in illiquid securities, including restricted
securities that are illiquid. The absence of a trading market can make it
difficult to ascertain a market value for these investments. Disposing of
illiquid securities may involve time-consuming negotiation and legal expense,
and it may be difficult or impossible for a Portfolio to sell them promptly at
an acceptable price.
Rule 144A Securities - A Portfolio may purchase restricted securities that are
not registered for sale to the general public if it is determined that there is
a dealer or institutional market in the securities. In that case, the
securities will not be treated as illiquid for purposes of the Portfolio's
investment limitation described above. The Trustees will review these
determinations. These securities are known as "Rule 144A securities" because
they are traded under SEC Rule 144A among qualified institutional buyers.
Institutional trading in Rule 144A securities is relatively new and the
liquidity of these investments could be impaired if trading in Rule 144A
securities does not develop or if qualified institutional buyers become, for a
time, uninterested in purchasing Rule 144A securities.
Options - The Portfolios may engage in writing call options from time to time.
Under a call option, the purchaser of the option has the right to purchase, and
the writer (the Portfolio) the obligation to sell, the underlying security at
the exercise price during the option period. Options written on individual
securities are written solely as covered call options (such as options written
on securities owned by the Portfolio) and may be written for hedging purposes.
Such options must be listed on a national securities exchange.
<PAGE>
There are risks associated with options transactions, including that the
success of a hedging strategy may depend on the ability of the Adviser to
predict movements in the prices of individual securities, market fluctuations
and movements in interest rates; there may be an imperfect correlation between
the movement in prices of securities held by a Portfolio and price movements of
the related options; there may not be a liquid secondary market for options;
and while a Portfolio will receive a premium when it writes covered call
options, it may not participate fully in a rise in the market value of the
underlying security.
Futures and Options on Futures - Futures contracts provide for the future sale
by one party and purchase by another party of a specified amount of a specified
security at a specified future time and at a specified price. An option on a
futures contract gives the purchaser the right, in exchange for a premium, to
assume a position in a futures contract at a specified exercise price during
the term of the option. The Portfolios may enter into futures contracts and
options on futures contracts provided that the sum of a Portfolio's initial
margin deposits on open futures contracts which are not for hedging purposes
plus the amount paid for premiums for unexpired options on futures contracts
which are not for hedging purposes does not exceed 5% of the market value of
the Portfolio's total assets. In addition, the outstanding obligations to
purchase securities under futures contracts will not exceed 50% of the
Portfolio's total assets.
The Portfolios may purchase and sell interest rate futures contracts and
options on interest rate futures contracts, stock index futures contracts and
options on stock index futures contracts; and currency futures contracts and
options on currency futures contracts.
The Portfolios intend to use futures contracts and related options only
for bona fide hedging purposes, i.e., to offset unfavorable changes in the
value of securities otherwise held or expected to be acquired for investment
purposes. There are risks associated with these hedging activities. See
"Options."
Other Investment Companies - Subject to applicable statutory and regulatory
limitations, assets of each Portfolio may be invested in shares of other
investment companies and foreign investment trusts. Each Portfolio may invest
up to 5% of its assets in closed-end investment companies which primarily hold
securities of non-U.S. issuers.
Currency Swaps - Currency swaps involve the exchange of rights to make or
receive payments in specified currencies. Currency swaps usually involve the
delivery of the entire principal value of one designated currency. Therefore,
the entire principal value of a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations.
The use of currency swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values and currency exchange rates, the investment performance of the
Portfolio would be less favorable that it would have been if this investment
technique were not used.
Short Sales "Against the Box" - In a short sale, a Portfolio sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. A Portfolio may engage in a short sale only if at the time
of the short sale it owns or has the right to obtain, at no additional cost, an
equal amount of the security being sold short. This investment technique is
known as a short sale "against the box." A Portfolio may make a short sale as a
hedge, when it believes that the value of a security owned by the Portfolio (or
a security convertible or exchangeable for such security) may decline.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1998
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED BY
DIVERSIFIED INVESTORS VARIABLE FUNDS
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
AND
AUSA LIFE INSURANCE COMPANY, INC.
4 MANHATTANVILLE ROAD, PURCHASE, N.Y. 10577; (914) 697-8000
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT IT
RELATES TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE PROSPECTUS DATED MAY 1,
1998 (THE "PROSPECTUS") FOR THE GROUP VARIABLE ANNUITY CONTRACTS ISSUED BY AUSA
LIFE INSURANCE COMPANY, INC. ("AUSA") WHICH INVEST IN DIVERSIFIED INVESTORS
VARIABLE FUNDS (THE "VARIABLE FUNDS ACCOUNT") OR DIVERSIFIED INVESTORS
STRATEGIC VARIABLE FUNDS (THE "STRATEGIC VARIABLE FUNDS ACCOUNT", AND, TOGETHER
WITH THE VARIABLE FUNDS ACCOUNT, THE "ACCOUNTS"). THE PROSPECTUS IS AVAILABLE,
AT NO CHARGE, BY WRITING AUSA AT 4 MANHATTANVILLE RD., PURCHASE, NEW YORK 10577
OR BY CALLING (914) 697-8000.
A separate Statement of Additional Information is available without
charge for Acacia Capital Corporation of which the Calvert Responsibly Invested
Balanced Portfolio is part by writing to Acacia Capital Corporation at 4550
Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814 or
by telephoning (301) 951-4820.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
Independent Accountants
Sale of Contracts/Principal Underwriter
Texas Optional Retirement Program
Performance Data
Variable Funds Money Market Subaccount
Diversified Investors Portfolios
Investment Objectives, Policies and Restrictions Relating
to the Portfolios
Portfolio Transactions and Brokerage Commissions
Investment Restrictions Relating to The Strategic
Variable Funds Subaccounts
Performance Information Relating to The Strategic Variable
Funds Subaccounts
Determination of Unit Value; Valuation of Securities
Management of Diversified Investors Portfolios
Management of The Strategic Variable Funds Account
Diversified Investors Portfolios: Description of Trust
Tax Information Relating to Diversified Investors Portfolios
Financial Statements of AUSA
Appendix A -- Description of Security Ratings
Financial Statements
<PAGE>
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., New York, New York serve as independent
accountants to the Accounts. The financial statements of AUSA appearing on the
following pages have been audited by Ernst & Young L.L.P., independent
auditors, Des Moines, Iowa.
SALE OF CONTRACTS/PRINCIPAL UNDERWRITER
Diversified Investors Securities Corp. ("DISC") is the principal
underwriter and distributor of the Contracts which will be sold by registered
representatives who are also licensed insurance agents of AUSA. The Contracts
may also be sold through other broker-dealers authorized by DISC and applicable
law and who may be insurance agents licensed by an insurance company other than
AUSA. DISC is registered with the Securities and Exchange Commission as a
broker-dealer under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc.
DISC will not receive underwriting commissions. Registration as a
broker-dealer does not mean that the SEC has passed upon the financial
standing, fitness or conduct of any broker or dealer, or upon the merits of any
security offering or upon any other matter relating to the business of any
broker or dealer.
TEXAS OPTIONAL RETIREMENT PROGRAM
Participants in the Texas Optional Retirement Program (the "Program") are
subject to certain restrictions pertaining to redemptions. (See "Restrictions
Under The Texas Optional Retirement Program" in the Prospectus). Pursuant to
Rule 6c-7 of the Investment Company Act of 1940, as amended, (the "1940 Act"),
the Registrant hereby represents that Rule 6c-7 of the 1940 Act is being relied
upon and that the provisions of paragraphs (a) through (d) of each Rule have
been complied with.
PERFORMANCE DATA
VARIABLE FUNDS MONEY MARKET SUBACCOUNT
For the seven day period ended December 31, 1997, the yield for the
Variable Funds Money Market Subaccount (the "Money Market Subaccount") was __%
and the effective yield was __%.
The yield is calculated by dividing the result of subtracting the value
of one Unit at the end of the seven day period ("Seventh Day Value") from the
value of one Unit at the beginning of the seven day period ("First Day Value")
by the First Day Value (the resulting quotient being the "Base Period Return")
and multiplying the Base Period Return by 365 divided by 7 to obtain the
annualized yield.
The effective yield is calculated by compounding the Base Period Return
calculated in accordance with the preceding paragraph, adding 1 to Base Period
Return, raising that sum to a power equal to 365 divided by 7 and subtracting 1
from the result.
As the Money Market Subaccount invests only in the Money Market Portfolio
(the "Money Market Portfolio") of Diversified Investors Portfolios, the First
Day Value reflects the net asset value of the interest in the Money Market
<PAGE>
Portfolio held in the Money Market Subaccount. The Seventh Day Value reflects
increases or decreases in the net asset value of the interest in the Money
Market Portfolio held in the Money Market Subaccount due to the declaration of
dividends, net investment income and the daily charges and deductions from the
Subaccount for mortality and expense risk. Net investment income reflects
earnings on investments less expenses of the Money Market Portfolio including
the investment management fee.
DIVERSIFIED INVESTORS PORTFOLIOS
There are thirteen Subaccounts of Diversified Investors Variable Funds
that are presently available for investment under the Contracts (the "Variable
Funds Subaccounts"). There are three Subaccounts of Diversified Investors
Strategic Variable Funds (the "Strategic Variable Funds Subaccounts") which are
presently available for investment under the Contracts. Each Variable Funds
Subaccount, other than the Variable Funds Subaccount which invests in the
Calvert Series, invests in a corresponding series of Diversified Investors
Portfolios. Those series of Diversified Investors Portfolios (the "Portfolios")
are described in this Statement of Additional Information. Each Strategic
Variable Funds Subaccount invests in a combination of the Variable Funds
Subaccounts (other than the Variable Funds Subaccounts which invest in the
Balanced Portfolio and the Calvert Series), which, in turn, invest in the
Portfolios.
This section of the Statement of Additional Information describes each
Portfolio, including the Money Market Portfolio, the High Quality Bond
Portfolio, the Intermediate Government Bond Portfolio, the Government/Corporate
Bond Portfolio, the High-Yield Bond Portfolio, the Balanced Portfolio, the
Equity Income Portfolio, the Equity Value Portfolio, the Growth & Income
Portfolio, the Equity Growth Portfolio, the Special Equity Portfolio, the
Aggressive Equity Portfolio and the International Equity Portfolio.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS RELATING TO THE PORTFOLIOS
INVESTMENT OBJECTIVES
The investment objective of each Portfolio is described in the
Prospectus. There can, of course, be no assurance that a Portfolio will achieve
its investment objective.
INVESTMENT POLICIES
The following supplements the discussion of the various investment
strategies and techniques employed by the Portfolios as set forth in the
Prospectus.
Bank Obligations
Domestic commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to federal examination and to a substantial body of federal law and
regulation. As a result of federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
<PAGE>
Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
and time deposits, may be general obligations of the parent banks in addition
to the issuing branch, or may be limited by the terms of a specific obligation
and governmental regulation. Such obligations are subject to risks that are
different from or are in addition to those of domestic banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign withholding and other taxes
on interest income. These foreign branches and subsidiaries are not necessarily
subject to the same or similar regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements, loan limitations, and
accounting, auditing and financial record keeping requirements. In addition,
less information may be publicly available about a foreign branch of a domestic
bank or about a foreign bank than about a domestic bank. A domestic branch of a
foreign bank with assets in excess of $1 billion may be subject to reserve
requirements imposed by the Federal Reserve System or by the state in which the
branch is located if the branch is licensed in that state.
In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (a) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (b) maintain assets within the state in
an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state.
U.S. Government and Agency Securities
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one
to ten years; and Treasury Bonds generally have initial maturities of greater
than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law.
Commercial Paper
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the
lender may determine to invest varying amounts.
<PAGE>
The Portfolios may purchase three types of commercial paper, as
classified by exemption from registration under the Securities Act of 1933, as
amended (the "1933 Act"). The three types include open market, privately
placed, and letter of credit commercial paper. Trading of such commercial paper
is conducted primarily by institutional investors through investment dealers or
directly through the issuers. Individual investor participation in the
commercial paper market is very limited.
Open Market. "Open market" commercial paper refers to the commercial
paper of any industrial, commercial, or financial institution which is
openly traded, including directly issued paper. "Open market" paper's
1933 Act exemption is under Section 3(a)(3) which limits the use of
proceeds to current transactions, limits maturities to 270 days and
requires that the paper contain no provision for automatic rollovers.
Privately Placed. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2), which exempts
transactions by an issuer not involving any public offering. The
commercial paper may only be offered to a limited number of accredited
investors. "Privately placed" commercial paper has no maturity
restriction.
Letter of Credit. "Letter of credit" commercial paper is exempt from
registration under Section 3(a)(2) of the 1933 Act. It is backed by an
irrevocable or unconditional commitment by a bank to provide funds for
repayment of the notes. "Letter of credit" paper has no limitations on
purchases.
Variable Rate and Floating Rate Securities
The Portfolios may purchase floating and variable rate demand notes and
bonds, which are obligations ordinarily having stated maturities in excess of
397 days, but which permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding 397 days, in each case upon not
more than 30 days' notice. Variable rate demand notes include master demand
notes which are obligations that permit a Portfolio to invest fluctuating
amounts, which may change daily without penalty, pursuant to direct
arrangements between the Portfolio, as lender, and the borrower. The interest
rates on these notes fluctuate from time to time. The issuer of such
obligations normally has a corresponding right, after a given period, to prepay
in its discretion the outstanding principal amount of the obligations plus
accrued interest upon a specified number of days' notice to the holders of such
obligations. The interest rate on a floating rate demand obligation is based on
a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand obligation is adjusted automatically at specified intervals.
Frequently, such obligations are collateralized by letters of credit or other
credit support arrangements provided by banks. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there
generally is no established secondary market for these obligations, although
they are redeemable at face value. Accordingly, where these obligations are not
secured by letters of credit or other credit support arrangements, a
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and a Portfolio may invest in obligations which are not
so rated only if the investment adviser or advisers of the Portfolio (the
"Advisers") determine that at the time of investment the obligations are of
comparable quality to the other obligations in which the Portfolio may invest.
The Advisers, on behalf of a Portfolio, will consider on an ongoing basis the
<PAGE>
creditworthiness of the issuers of the floating and variable rate demand
obligations held by the Portfolio. The Portfolios will not invest more than 15%
(10% in the case of the Money Market Portfolio) of the value of their net
assets in floating or variable rate demand obligations as to which they cannot
exercise the demand feature on not more than seven days' notice if there is no
secondary market available for these obligations, and in other securities that
are not readily marketable. See "Investment Restrictions of the Portfolios"
below.
Participation Interests
A Portfolio may purchase from financial institutions participation
interests in securities in which such Portfolio may invest. A participation
interest gives a Portfolio an undivided interest in the security in the
proportion that the Portfolio's participation interest bears to the total
principal amount of the security. These instruments may have fixed, floating or
variable rates of interest, with remaining maturities of 13 months or less. If
the participation interest is unrated, or has been given a rating below that
which is permissible for purchase by the Portfolio, the participation interest
will be backed by an irrevocable letter of credit or guarantee of a bank, or
the payment obligation otherwise will be collateralized by U.S. Government
securities, or, in the case of unrated participation interests, the Advisers
must have determined that the instrument is of comparable quality to those
instruments in which a Portfolio may invest. For certain participation
interests, a Portfolio will have the right to demand payment, on not more than
seven days' notice, for all or any part of the Portfolio's participation
interest in the security, plus accrued interest. As to these instruments, a
Portfolio intends to exercise its right to demand payment only upon a default
under the terms of the security, as needed to provide liquidity to meet
redemptions, or to maintain or improve the quality of its investment portfolio.
A Portfolio will not invest more than 15% (10% in the case of the Money Market
Portfolio) of its net assets in participation interests that do not have this
demand feature, and in other securities that are not readily marketable. See
"Investment Restrictions of the Portfolios" below.
Illiquid Securities
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid securities because
of the potential for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. A mutual fund
might also have to register such restricted securities in order to dispose of
them which, if possible at all, would result in additional expense and delay.
Adverse market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
<PAGE>
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has recently adopted
Rule 144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act for resales of certain securities to qualified institutional buyers.
The Advisers will monitor the liquidity of Rule 144A securities for each
Portfolio under the supervision of the Board of Trustees of Diversified
Investors Portfolios. In reaching liquidity decisions, the Advisers will
consider, among other things, the following factors: (a) the frequency of
trades and quotes for the security, (b) the number of dealers and other
potential purchasers wishing to purchase or sell the security, (c) dealer
undertakings to make a market in the security and (d) the nature of the
security and of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer).
Unsecured Promissory Notes
A Portfolio also may purchase unsecured promissory notes ("Notes") which
are not readily marketable and have not been registered under the 1933 Act,
provided such investments are consistent with the Portfolio's investment
objective. The Notes purchased by the Portfolio will have remaining maturities
of 13 months or less. The Portfolio will invest no more than 15% (10% in the
case of the Money Market Portfolio) of its net assets in such Notes and in
other securities that are not readily marketable (which securities would
include floating and variable rate demand obligations as to which the Portfolio
cannot exercise the demand feature described above and as to which there is no
secondary market). See "Investment Restrictions of the Portfolios" below.
Repurchase Agreements and Reverse Repurchase Agreements
Repurchase agreements are agreements by which a person purchases a
security and simultaneously commits to resell that security to the seller
(which is usually a member bank of the Federal Reserve System or a member firm
of the New York Stock Exchange (or a subsidiary thereof)) at an agreed-upon
date within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus an agreed-upon
market rate of interest which is unrelated to the coupon rate or maturity of
the purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed-upon price, which obligation is in effect secured by
the value of the underlying security, usually U.S. Government or government
agency issues. Under the 1940 Act, repurchase agreements may be considered to
be loans by the buyer. A Portfolio's risk is limited to the ability of the
seller to pay the agreed upon amount on the delivery date. If the seller
defaults, the underlying security constitutes collateral for the seller's
obligation to pay although a Portfolio may incur certain costs in liquidating
this collateral and in certain cases may not be permitted to liquidate this
collateral. All repurchase agreements entered into by the Portfolios are fully
collateralized, with such collateral being marked to market daily.
The Portfolios may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
<PAGE>
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
a Portfolio enters into a reverse repurchase agreement it will place in a
segregated custodial account cash, U.S. Government securities or high-grade
debt obligations having a value equal to the repurchase price, including
accrued interest. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
Foreign Securities--All Portfolios
The Portfolios may invest their assets in securities of foreign issuers.
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, brokerage or other taxation, limitation on the removal
of funds or other assets of a Portfolio, political or financial instability or
diplomatic and other developments which would affect such investments. Further,
economies of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States.
It is anticipated that in most cases the best available market for
foreign securities would be on exchanges or in over-the-counter markets located
outside the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable United States companies. Foreign security trading practices,
including those involving securities settlement where a Portfolio's assets may
be released prior to receipt of payment, may expose a Portfolio to increased
risk in the event of a failed trade or the insolvency of a foreign
broker-dealer. In addition, foreign brokerage commissions are generally higher
than commissions on securities traded in the United States and may be
non-negotiable. In general, there is less overall governmental supervision and
regulation of foreign securities exchanges, brokers and listed companies than
in the United States.
Foreign Securities--Money Market Portfolio
The Money Market Portfolio may invest in the following foreign
securities: (a) U.S. dollar-denominated obligations of foreign branches and
subsidiaries of domestic banks and foreign banks (such as Eurodollar CDs, which
are U.S. dollar-denominated CDs issued by branches of foreign and domestic
banks located outside the United States; Eurodollar TDs ("ETDs"), which are
U.S. dollar-denominated deposits in a foreign branch of a foreign or domestic
bank; and Canadian TDs, which are essentially the same as ETDs except they are
issued by branches of major Canadian banks); (b) high quality, U.S.
dollar-denominated short-term bonds and notes (including variable amount master
demand notes) issued by foreign corporations (including Canadian commercial
paper, which is commercial paper issued by a Canadian corporation or a Canadian
subsidiary of a U.S. corporation, and Europaper, which is U.S.
<PAGE>
dollar-denominated commercial paper of a foreign issuer); and (c) U.S.
dollar-denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Advisers to be of comparable
quality to the other obligations in which the Money Market Portfolio may
invest. Such securities also include debt obligations of supranational
entities. Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
Foreign Securities--Portfolios other than the Money Market Portfolio
Not more than 5% of a Portfolio's assets may be invested in closed-end
investment companies which primarily hold foreign securities. Investments in
such companies may entail the risk that the market value of such investments
may be substantially less than their net asset value and that there would be
duplication of investment management and other fees and expenses.
American Depository Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") and other forms of depositary
receipts for securities of foreign issuers provide an alternative method for a
Portfolio to make foreign investments. These securities are not denominated in
the same currency as the securities into which they may be converted and
fluctuate in value based on the underlying security. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and EDRs and
GDRs, in bearer form, are designed for use in European and global securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. EDRs and GDRs are European
and global receipts evidencing a similar arrangement.
The Portfolios may invest in foreign securities that impose restrictions
on transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions.
Forward Foreign Currency Exchange Contracts
Because some Portfolios may buy and sell securities denominated in
currencies other than the U.S. dollar and receive interest, dividends and sale
proceeds in currencies other than the U.S. dollar, the Portfolios from time to
time may enter into foreign currency exchange transactions to convert to and
from different foreign currencies and to convert foreign currencies to and from
the U.S. dollar. The Portfolios either enter into these transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market or use forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a
Portfolio to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract. Forward foreign
currency exchange contracts establish an exchange rate at a future date. These
contracts are transferable in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward foreign currency exchange contract generally has no deposit requirement
and is traded at a net price without commission. A Portfolio maintains with its
custodian a segregated account of high grade liquid assets in an amount at
least equal to its obligations under each forward foreign currency exchange
<PAGE>
contract. Neither spot transactions nor forward foreign currency exchange
contracts eliminate fluctuations in the prices of the Portfolio's securities or
in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
The Portfolios may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes
in foreign currency exchange rates that would adversely affect a portfolio
position or an anticipated investment position. The Portfolios may enter into
foreign currency cross hedging transactions if a particular currency is
expected to decrease against another currency. A Portfolio would sell the
currency expected to decrease and purchase a currency which is expected to
increase against the currency sold in an amount equal to some or all of the
Portfolio's holdings denominated in the currency sold.
With respect to Portfolios other than the International Equity Portfolio
consideration of the prospect for currency parities will be incorporated into
the Advisers' long-term investment decisions. Therefore these Portfolios will
not routinely enter into foreign currency hedging transactions with respect to
security transactions; however, the Advisers believe that it is important to
have the flexibility to enter into foreign currency hedging transactions when
they determine that the transactions would be in a Portfolio's best interest.
Although these transactions tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of the hedged currency
increase. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.
While these contracts are not presently regulated by the Commodity
Futures Trading Commission ("CFTC"), the CFTC may in the future assert
authority to regulate forward contracts. In such event a Portfolio's ability to
utilize forward contracts in the manner set forth in the Prospectus for the
Portfolio may be restricted. Forward contracts may reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for a Portfolio than if it had not entered into such
contracts. The use of foreign currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject the Portfolio to certain
risks.
Even if a hedge is generally successful, the matching of the increase in
value of a forward contract and the decline in the U.S. dollar equivalent value
of the foreign currency denominated asset that is the subject of the hedge
generally will not be precise. In addition, a Portfolio may not always be able
to enter into foreign currency forward contracts at attractive prices and this
will limit a Portfolio's ability to use such contract to hedge or cross-hedge
its assets. Also, with regard to a Portfolio's use of cross-hedges, there can
be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying a Portfolio's cross-hedges and the movements in
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the exchange rates of the foreign currencies in which the Portfolio's assets
that are the subject of such cross-hedges are denominated.
Guaranteed Investment Contracts
The Portfolios may invest in guaranteed investment contracts ("GICs")
issued by insurance companies. Pursuant to such contracts, a Portfolio makes
cash contributions to a deposit fund of the insurance company's general
account. The insurance company then credits to the Portfolio guaranteed
interest. The GICs provide that this guaranteed interest will not be less than
a certain minimum rate. The insurance company may assess periodic charges
against a GIC for expenses and service costs allocable to it, and the charges
will be deducted from the value of the deposit fund. Because a Portfolio may
not receive the principal amount of a GIC from the insurance company on seven
days' notice or less, the GIC is considered an illiquid investment and,
together with other instruments in a Portfolio which are not readily
marketable, will not exceed 15% (10% in the case of the Money Market Portfolio)
of the Portfolio's net assets. The term of a GIC will be 13 months or less. In
determining average weighted portfolio maturity, a GIC will be deemed to have a
maturity equal to the longer of the period of time remaining until the next
readjustment of the guaranteed interest rate or the period of time remaining
until the principal amount can be recovered from the issuer through demand.
When-issued Securities
The Portfolios may purchase securities on a "when-issued" or on a
"forward delivery" basis. It is expected that, under normal circumstances, the
Portfolios would take delivery of such securities. When a Portfolio commits to
purchase a security on a "when-issued" or on a "forward delivery" basis, the
Portfolio establishes procedures consistent with the relevant policies of the
SEC. Since those policies currently require 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, the Portfolios expect always to have cash, cash
equivalents, or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, although the Portfolios do
not intend to make such purchases for speculative purposes and intends to
adhere to the provisions of SEC policies, 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 advisable as a matter of investment
strategy to sell the "when-issued" or "forward delivery" securities, the
Portfolio would be required to meet its obligations from the then available
cash flow or 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).
Zero Coupon Obligations
A Portfolio may acquire zero coupon obligations when consistent with its
investment objective and policies. Such obligations have greater price
volatility than coupon obligations and will not result in payment of interest
until maturity. Since interest income is accrued throughout the term of the
zero coupon obligation but is not actually received until maturity, a Portfolio
may have to sell other securities to pay dividends based on such accrued income
prior to maturity of the zero coupon obligation.
<PAGE>
Futures Contracts and Options on Futures Contracts and Foreign Currencies--
Portfolios other than the Money Market Portfolio
Futures Contracts. A Portfolio may enter into contracts for the purchase
or sale for future delivery of fixed-income securities or foreign currencies,
or contracts based on financial indices including any index of U.S. Government
securities, foreign government securities or corporate debt securities. U.S.
futures contracts have been designed by exchanges which have been designated
"contracts markets" by the CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. A Portfolio may
enter into futures contracts which are based on debt securities that are backed
by the full faith and credit of the U.S. Government, such as long-term U.S.
Treasury Bonds, Treasury Notes, Government National Mortgage Association
modified pass-through mortgage-backed securities and three-month U.S. Treasury
Bills. A Portfolio may also enter into futures contracts which are based on
bonds issued by entities other than the U.S. Government.
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, the Portfolio may sell stock index
futures contracts in anticipation of or during a decline in the market value of
the Portfolio's securities. If such decline occurs, 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 positions 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 unusual market conditions, a long futures
position may be terminated without a related purchase of securities.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It
is expected that the initial deposit would be approximately 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms may call for the actual
delivery or acquisition of securities, in most cases the contractual obligation
is fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
<PAGE>
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded, a
Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the acquisition or sale of a futures contract, in the case
of a Portfolio which holds or intends to acquire fixed-income securities, is to
attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currencies. For example, if interest rates were expected to increase, a
Portfolio might enter into futures contracts for the sale of debt securities.
Such a sale would have much the same effect as selling an equivalent value of
the debt securities owned by the Portfolio. If interest rates did increase, the
value of the debt security in a Portfolio would decline, but the value of the
futures contracts to the Portfolio would increase at approximately the same
rate, thereby keeping the net asset value of the Portfolio from declining as
much as it otherwise would have. The Portfolio could accomplish similar results
by selling debt securities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the futures market is
more liquid than the cash market, the use of futures contracts as an investment
technique allows a Portfolio to maintain a defensive position without having to
sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of
futures contracts should be similar to those of debt securities, a Portfolio
could take advantage of the anticipated rise in the value of debt securities
without actually buying them until the market had stabilized. At that time, the
futures contracts could be liquidated and the Portfolio could then buy debt
securities on the cash market.
To the extent a Portfolio enters into futures contracts, the assets in
the segregated asset account maintained to cover the Portfolio's obligations
with respect to such futures contracts will consist of cash, cash equivalents
or high quality liquid debt securities from its portfolio in an amount equal to
the difference between the fluctuating market value of such futures contracts
and the aggregate value of the initial and variation margin payments made by
the Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Advisers may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Advisers
believe that use of such contracts will benefit the Portfolios, if the
<PAGE>
Advisers' investment judgment about the general direction of interest rates is
incorrect, a Portfolio's overall performance would be poorer than if it had not
entered into any such contract. For example, if a Portfolio has hedged against
the possibility of an increase in interest rates which would adversely affect
the price of debt securities held by it and interest rates decrease instead,
the Portfolio will lose part or all of the benefit of the increased value of
its debt securities which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if a Portfolio has
insufficient cash, it may have to sell debt securities to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily be,
at increased prices which reflect the rising market. A Portfolio may have to
sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. The Portfolios may purchase and write
options on futures contracts for hedging purposes. The purchase of a call
option on a futures contract is similar in some respects to the purchase of a
call option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when a Portfolio is not fully invested it
may purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.
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 addition to the correlation risks discussed above, the purchase of an
option 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
purchased.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or currency which is deliverable
upon exercise of the futures contract. If the futures price at expiration of
the option is below the exercise price, a Portfolio will retain the full amount
of the option premium which provides a partial hedge against any decline that
may have occurred in the Portfolio's portfolio holdings. The writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the security or foreign currency which is deliverable upon exercise
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 which the Portfolio intends to purchase. If a put or call
option the Portfolio has written is exercised, the Portfolio will incur a loss
which will be reduced by the amount of the premium it receives. In the case of
a call option written by the Portfolio, the loss is potentially unlimited.
Depending on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures positions, the
Portfolio's losses from options on futures may to some extent be reduced or
increased by changes in the value of portfolio securities.
The Board of Trustees of Diversified Investors Portfolios have adopted
the requirement that futures contracts and options on futures contracts be used
<PAGE>
either (a) as a hedge without regard to any quantitative limitation, or (b) for
other purposes to the extent that immediately thereafter the aggregate amount
of margin deposits on all (non-hedge) futures contracts of the Portfolio and
premiums paid on outstanding (non-hedge) options on futures contracts owned by
the Portfolio does not exceed 5% of the market value of the total assets of the
Portfolio. In addition, the aggregate market value of the outstanding futures
contracts purchased by the Portfolio may not exceed 50% of the market value of
the total assets of the Portfolio. Neither of these restrictions will be
changed by the Board of Trustees of Diversified Investors Portfolios without
considering the policies and concerns of the various applicable federal and
state regulatory agencies.
Options on Foreign Currencies. A Portfolio may purchase and write options
on foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, may 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, a 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 forego a
portion or all of the benefits of advantageous changes in such rates.
A Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, where a Portfolio anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
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 write 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. As in the case of
other types of options, however, the writing 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 writing of options on foreign currencies, the Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
<PAGE>
Losses from the writing of call options are potentially unlimited.
Accordingly, the Portfolios intend that any call options on foreign currencies
that they write (other than for cross-hedging purposes as described below) will
be covered. A call option written on a foreign currency by a Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian) upon conversion or exchange of
another foreign currency held in its portfolio. A call option is also covered
if the Portfolio has a call on the same foreign currency and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, U.S. Government securities and other high
quality liquid debt securities in a segregated account with its custodian.
The Portfolios may also write call options on foreign currencies that are
not covered for cross-hedging purposes. A call option on a foreign currency is
for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the
Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate.
In such circumstances, the Portfolio collateralizes the option by maintaining
in a segregated account with its custodian, cash or U.S. Government securities
or other high quality liquid debt securities in an amount not less than the
value of the underlying foreign currency in U.S. dollars marked to market
daily.
Additional Risks of Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies. Unlike transactions entered into by a Portfolio
in futures contracts, forward contracts and options on foreign currencies are
not traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by 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. Similarly, options on currencies
may be traded over-the-counter. 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. Moreover, the option writer 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.
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 ("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 a Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
<PAGE>
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.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. A
Portfolio's ability to terminate over-the-counter options will be more limited
than with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, each
Portfolio will treat purchased over-the-counter options and assets used to
cover written over-the-counter options as illiquid securities. With respect to
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the
repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (a) other complex foreign
political and economic factors, (b) lesser availability than in the United
States of data on which to make trading decisions, (c) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (d) the imposition of different
exercise and settlement terms and procedures and margin requirements than in
the United States, and (e) lesser trading volume.
The successful use of futures contracts, options on futures contracts and
options on foreign currencies draws upon the Advisers' skill and experience
with respect to such instruments. Should interest or exchange rates move in an
unexpected manner, a Portfolio may not achieve the anticipated benefits of
futures contracts or options on futures contracts or foreign currencies or may
realize losses and thus will be in a worse position than if such strategies had
not been used. In addition, the correlation between movements in the price of
futures contracts or options on futures contracts or foreign currencies and
movements in the price of the securities and currencies hedged or used for
cover will not be perfect and could produce unanticipated losses.
Options on Securities--Portfolios other than the Money Market Portfolio
The Portfolios may write (sell) covered call and put options to a limited
extent on their portfolio securities ("covered options"). However, a Portfolio
<PAGE>
may forego the benefits of appreciation on securities sold or may pay more than
the market price on securities acquired pursuant to call and put options
written by the Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period. If the option expires unexercised, the Portfolio will
realize income in an amount equal to the premium received for writing the
option. If the option is exercised, a decision over which a Portfolio has no
control, the Portfolio must sell the underlying security to the option holder
at the exercise price. By writing a covered call option, a Portfolio forgoes,
in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser of
the option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which a Portfolio has no control, the Portfolio must purchase the
underlying security from the option holder at the exercise price. By writing a
covered put option, a Portfolio, in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
below the exercise price. A Portfolio will only write put options involving
securities for which a determination is made at the time the option is written
that the Portfolio wishes to acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing
purchase transaction." Where a Portfolio cannot effect a closing purchase
transaction, it may be forced to incur brokerage commissions or dealer spreads
in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to reflect
the current market value of the option written. The current market value of a
traded option is the last sale price or, in the absence of a sale, the mean
between the closing bid and asked price. If an option expires on its stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
the Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated
on the books of the custodian for the Portfolio.
A Portfolio may purchase call and put options on any securities in which
it may invest. A Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The
purchase of a call option would entitle the Portfolio, in exchange for the
<PAGE>
premium paid, to purchase a security at a specified price during the option
period. A Portfolio would ordinarily have a gain if the value of the securities
increased above the exercise price sufficiently to cover the premium and would
have a loss if the value of the securities remained at or below the exercise
price during the option period.
A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle a Portfolio, in exchange for the premium paid, to sell
a security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's portfolio securities. Put options also may be purchased by a
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. A Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The Portfolios have adopted certain other nonfundamental policies
concerning option transactions which are discussed below. A Portfolio's
activities in options may also be restricted by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options, and
there can be no assurance that viable exchange markets will develop or
continue.
The Portfolios may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolios will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New
York and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Advisers will monitor
the creditworthiness of dealers with whom a Portfolio enters into such options
transactions under the general supervision of the Board of Trustees of
Diversified Investors Portfolios.
Options on Securities Indices--Portfolios other than the Money Market Portfolio
In addition to options on securities, the Portfolios may also purchase
and write (sell) call and put options on securities indices. Such options give
the holder the right to receive a cash settlement during the term of the option
<PAGE>
based upon the difference between the exercise price and the value of the
index. Such options will be used for the purposes described above under
"Options on Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Portfolios generally will only purchase or write such an option if the Advisers
believe the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Portfolios will not purchase such options unless
the Advisers believe the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the Portfolios' securities may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, the Advisers may be forced to liquidate portfolio
securities to meet settlement obligations.
Short Sales "Against the Box"--Portfolios other than the Money Market Portfolio
In a short sale, a Portfolio sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. A
Portfolio may engage in short sales only if at the time of the short sale it
owns or has the right to obtain, at no additional cost, an equal amount of the
security being sold short. This investment technique is known as a short sale
"against the box".
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Portfolio engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Portfolio maintains in a segregated account an amount
of securities equal in kind and amount to the securities sold short or
securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Portfolio's long position.
The Portfolios will not engage in short sales against the box for
investment purposes. A Portfolio may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security (or a security convertible or exchangeable for such
security). In such case, any future losses in a Portfolio's long position
should be reduced by a gain in the short position. Conversely, any gain in the
long position should be reduced by a loss in the short position. The extent to
which such gains or losses are reduced depends upon the amount of the security
sold short relative to the amount a Portfolio owns. There are certain
additional transaction costs associated with short sales against the box, but
the Portfolios endeavor to offset these costs with the income from the
investment of the cash proceeds of short sales.
As a nonfundamental operating policy, the Advisers do not expect that
more than 40% of a Portfolio's total assets would be involved in short sales
against the box. The Advisers do not currently intend to engage in such sales.
<PAGE>
Certain Other Obligations
In order to allow for investments in new instruments that may be created
in the future, if the Prospectus for a Portfolio is supplemented, the Portfolio
may invest in obligations other than those listed previously, provided such
investments are consistent with the Portfolio's investment objective, policies
and restrictions.
Rating Services
The ratings of rating services represent their opinions as to the quality
of the securities that they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although these ratings are an initial criterion for
selection of portfolio investments, the Advisers also make their own
evaluations of these securities, subject to review by the Board of Trustees of
Diversified Investors Portfolios. After purchase by a Portfolio, an obligation
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Portfolio. Neither event would require a Portfolio to
dispose of the obligation, but the Advisers will consider such an event in
their determination of whether a Portfolio should continue to hold the
obligation. A description of the ratings used herein and in each Prospectus for
the Portfolios is set forth in Appendix A to this Statement of Additional
Information.
Except as stated otherwise, all investment policies and restrictions
described herein are nonfundamental, and may be changed without prior
shareholder approval.
INVESTMENT RESTRICTIONS OF THE PORTFOLIOS
The "fundamental policies" of each Portfolio may not be changed with
respect to the Portfolio without the approval of a "majority of the outstanding
voting securities" of the Portfolio. "Majority of the outstanding voting
securities" under the 1940 Act and as used in this Statement of Additional
Information and the Prospectus means, with respect to the Portfolio, the lesser
of (i) 67% or more of the total beneficial interests of the Portfolio present
at a meeting, if the holders of more than 50% of the total beneficial interests
of the Portfolio are present or represented by proxy, or (ii) more than 50% of
the total beneficial interests of the Portfolio.
If a percentage or a rating restriction on investment or utilization of
assets is adhered to at the time an investment is made or assets are so
utilized, a later change in such percentage resulting from changes in a
Portfolio's total assets or the value of a Portfolio's securities, or a later
change in the rating of a portfolio security, will not be considered a
violation of the relevant policy.
Fundamental Policies. As a matter of fundamental policy, no Portfolio
may:
(1) borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 1/3 of the current value of the
Portfolio's assets (including such borrowing) less liabilities (not
including such borrowing), it may borrow money and enter into reverse
repurchase agreements, and except that it may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings or
reverse repurchase agreements, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes of
this restriction and except that assets may be pledged to secure letters
<PAGE>
of credit solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute;
(2) underwrite securities issued by other persons except insofar as
Diversified Investors Portfolios or a Portfolio may technically be deemed
an underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except (a) through the lending of
the Portfolio's portfolio securities and provided that any such loans not
exceed 30% of the Portfolio's total assets (taken at market value), (b)
through the use of repurchase agreements or the purchase of short-term
obligations or (c) by purchasing debt securities of types distributed
publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the ordinary
course of business (Diversified Investors Portfolios may hold and sell,
for the Portfolio's portfolio, real estate acquired as a result of the
Portfolio's ownership of securities);
(5) concentrate its investments in any particular industry
(excluding U.S. Government securities), but if it is deemed appropriate
for the achievement of the Portfolio's investment objective(s), up to 25%
of its total assets may be invested in any one industry (except that the
Money Market Portfolio reserves the freedom of action to concentrate 25%
or more of its assets in obligations of domestic branches of domestic
banks); or
(6) issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.
Non-Fundamental Policies. Each of the Portfolios will
not as a matter of operating policy:
(1) borrow money for any purpose in excess of 10% of the Portfolio's
total assets (taken at cost), except that the Portfolio may borrow for
temporary or emergency purposes up to 1/3 of its assets;
(2) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Portfolio's net assets (taken at market value), provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, reverse repurchase
agreements, when-issued securities and other similar investment
techniques are not considered a pledge of assets for purposes of this
restriction;
(3) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance
of purchases and sales of securities may be obtained and except that
deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures;
<PAGE>
(4) invest for the purpose of exercising control or management;
(5) purchase securities issued by any other investment company
except by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary
broker's commission, or except when such purchase, though not made in the
open market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be purchased
for the Portfolio if such purchase at the time thereof would cause (a)
more than 10% of the Portfolio's total assets (taken at the greater of
cost or market value) to be invested in the securities of such issuers;
(b) more that 5% of the Portfolio's total assets (taken at the greater of
cost or market value) to be invested in any one investment company; or
(c) more than 3% of the outstanding voting securities of any such issuer
to be held for the Portfolio; and provided further that the Portfolio may
not purchase any security from any open-end investment company;
(6) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an
issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(7) purchase or retain in the Portfolio's portfolio any securities
issued by an issuer any of whose officers, directors, trustees or
security holders is an officer or Trustee of Diversified Investors
Portfolios, or is an officer or partner of the Adviser or subadviser, if
after the purchase of the securities of such issuer for the Portfolio one
or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both, all taken at market value, of such issuer,
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or
both, all taken at market value;
(8) invest more than 5% of the Portfolio's net assets in warrants or
rights (valued at the lower of cost or market), but not more than 2% of
the Portfolio's net assets may be invested in warrants not listed on the
New York Stock Exchange or the American Stock Exchange;
(9) make short sales of securities or maintain a short position
(excluding short sales if the Portfolio owns an equal amount of such
securities or securities convertible into or exchangeable for, without
payment of any further consideration, securities of equivalent kind and
amount) if such short sales represent more than 25% of the Portfolio's
net assets (taken at market value); provided, however, that the value of
the Portfolio's short sales of securities (excluding U.S. Government
securities) of any one issuer may not be greater than 2% of the value
(taken at market value) of the Portfolio's net assets or more than 2% of
the securities of any class of any issuer; or
(10) enter into repurchase agreements providing for settlement in
more than seven days after notice or purchase securities which are not
readily marketable (which securities would include participation
interests and floating and variable rate demand obligations as to which
no secondary market exists and the Portfolios cannot exercise a demand
feature on more than seven days' notice), if, in the aggregate, more than
<PAGE>
15% (10% in the case of the Money Market Portfolio) of its net assets
would be so invested. A Portfolio may not invest in time deposits
maturing in more than seven days.
The non-fundamental policies (1) through (10) may be changed by the Board
of Trustees of Diversified Investors Portfolios.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Except as may be required to ensure satisfaction of certain tests
applicable to regulated investment companies under the Internal Revenue Code,
portfolio changes are made without regard to the length of time a security has
been held, or whether a sale would result in the recognition of a profit or
loss. Therefore, the rate of portfolio turnover is not a limiting factor when
changes are appropriate. Portfolio trading is engaged in for a Portfolio if the
Advisers believe that a transaction net of costs (including custodian charges)
will help achieve the Portfolio's investment objective.
A Portfolio's purchases and sales of securities may be principal
transactions, that is, securities may be purchased directly from the issuer or
from an underwriter or market maker for the securities. There usually are no
brokerage commissions paid for such purchases and, therefore, the Portfolios do
not anticipate paying brokerage commissions in such transactions. Any
transactions for which a Portfolio pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and the asked price.
Allocations of transactions, including their frequency, to various
dealers is determined by the Subadvisers in their best judgment and in a manner
deemed to be in the best interest of the investors in a Portfolio rather than
by any formula. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price.
Investment decisions for a Portfolio will be made independently from
those for any other account or investment company that is or may in the future
become managed by the Advisers or their affiliates. If, however, a Portfolio
and other investment companies or accounts managed by the Subadvisers are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by a Portfolio or the size of the position obtainable for the
Portfolio. In addition, when purchases or sales of the same security for a
Portfolio and for other investment companies managed by the Subadvisers occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
Furthermore, in certain circumstances affiliates of the Subadvisers whose
investment portfolios are managed internally, rather than by the Subadvisers,
might seek to purchase or sell the same type of investments at the same time as
a Portfolio. Such an event might also adversely affect that Portfolio.
<PAGE>
The following Portfolios paid the approximate brokerage commissions
indicated for the fiscal years noted below:
Balanced Portfolio:
Fiscal year ended December 31, 1995: $199,128
Fiscal year ended December 31, 1996: $317,179
Fiscal year ended December 31, 1997: $______
Equity Income Portfolio
Fiscal year ended December 31, 1995: $377,904
Fiscal year ended December 31, 1996: $565,943
Fiscal year ended December 31, 1997: $______
Equity Value Portfolio
Fiscal year ended December 31, 1996: $64,207
Fiscal year ended December 31, 1997: $______
Growth & Income Portfolio
Fiscal year ended December 31, 1995: $348,828
Fiscal year ended December 31, 1996: $397,075
Fiscal year ended December 31, 1997: $______
Equity Growth Portfolio
Fiscal year ended December 31, 1995: $174,716
Fiscal year ended December 31, 1996: $670,631
Fiscal year ended December 31, 1997: $______
Special Equity Portfolio
Fiscal year ended December 31, 1995: $425,803
Fiscal year ended December 31, 1996: $678,431
Fiscal year ended December 31, 1997: $______
Aggressive Equity Portfolio
Fiscal year ended December 31, 1996: $15,490
Fiscal year ended December 31, 1997: $______
International Equity Portfolio
Fiscal year ended December 31, 1995: $ 38,261
Fiscal year ended December 31, 1996: $211,629
Fiscal year ended December 31, 1997: $______
<PAGE>
INVESTMENT RESTRICTIONS RELATING
TO THE STRATEGIC VARIABLE FUNDS SUBACCOUNTS
Fundamental policies of the Strategic Variable Funds Subaccounts may not
be changed without the approval of the lesser of (1) 67% of the beneficial
holders of units present at a meeting if the holders of more than 50% are
present in person or by proxy or (2) more than 50% of the beneficial holders of
units. Other restrictions, in the form of operating policies, are subject to
change by the Managing Board of the Strategic Variable Funds Account without
unitholder approval. Any investment restriction which involves a maximum
percentage of securities or assets shall not be considered to be violated
unless an excess over the percentage occurs immediately after, and is caused
by, an acquisition of securities or assets of, or borrowings by, a Strategic
Variable Funds Subaccount.
As a matter of fundamental policy, each Strategic Variable Funds
Subaccount may not:
(1) Borrowing. Borrow money, except each Strategic Variable Funds
Subaccount may borrow as a temporary measure for extraordinary or
emergency purposes, and then only in amounts not exceeding 30% of its
total assets valued at market. Each Strategic Variable Funds Subaccount
will not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require untimely
investment liquidations;
(2) Loans. Make loans, although the Portfolios through which the Strategic
Variable Funds Subaccounts invest may purchase money market securities and
enter into repurchase agreements;
(3) Margin. Purchase securities on margin;
(4) Mortgaging. Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the Strategic Variable Funds Subaccounts as security
for indebtedness except as may be necessary in connection with permissible
borrowings, in which event such mortgaging, pledging, or hypothecating may
not exceed 30% of each Subaccount's total assets, valued at market;
(5) Real Estate. Purchase or sell real estate;
(6) Senior Securities. Issue senior securities (except permitted
borrowings);
(7) Short Sales. Effect short sales of securities; or
(8) Underwriting. Underwrite securities issued by other persons, except to
the extent that the Strategic Variable Funds Account or Subaccounts may be
deemed to be underwriters within the meaning of the Securities Act of 1933
in connection with the purchase and sale of their portfolio securities in
the ordinary course of pursuing their investment programs.
In addition, as a matter of fundamental policy, each Strategic Variable
Funds Subaccount may engage in futures and options transactions through
investments in the Portfolios.
<PAGE>
As a matter of operating policy, each Strategic Variable Funds Subaccount
may not:
(1) Control of Portfolio Companies. Invest in companies for the purpose of
exercising management or control;
(2) Illiquid Securities. Purchase a security if, as a result of such
purchase, more than 15% of the value of each Strategic Variable Funds
Subaccount's net assets would be invested in illiquid securities or other
securities that are not readily marketable;
(3) Oil and Gas Programs. Purchase participations or other direct
interests or enter into leases with respect to, oil, gas, other mineral
exploration or development programs;
(4) Options. Invest in options;
(5) Ownership of Portfolio Securities by Officers and Directors. Purchase
or retain the securities of any issuer if, to the knowledge of the
Managing Board of the Strategic Variable Funds Account, those officers and
directors of AUSA and Diversified, who each owns beneficially more than
.5% of the outstanding securities of such issuer, together own
beneficially more than 5% of such securities;
(6) Unseasoned Issuers. Purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government or any foreign
government, their agencies or instrumentalities) if, as a result, more
than 5% of the value of each Subaccount's total assets would be invested
in the securities of issuers which at the time of purchase had been in
operation for less than three years, including predecessors and
unconditional guarantors; or
(7) Warrants. Invest in warrants.
Each Strategic Variable Funds Subaccount may invest more than 5% of its
assets in any one Variable Funds Subaccount, and each Strategic Variable Funds
Subaccount may invest substantially all of its assets, collectively, in
Variable Funds Subaccounts.
Because of their investment objectives and policies, the Strategic
Variable Funds Subaccounts will each concentrate more than 25% of their assets
in the investment company industry. In accordance with the Strategic Variable
Funds Subaccounts' investment programs set forth in the Prospectus, each of the
Strategic Variable Funds Subaccounts may invest more than 25% of its assets in
certain of the Variable Funds Subaccounts. However, each of the Portfolios in
which each Variable Funds Subaccount will invest will not concentrate more than
25% of its total assets in any one industry (except that the Money Market
Portfolio reserves the right to concentrate 25% or more of its assets in
obligations of domestic branches of domestic banks).
PERFORMANCE INFORMATION
RELATING TO THE STRATEGIC VARIABLE FUNDS SUBACCOUNTS
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of a Strategic Variable Funds Subaccount's
performance may be included in advertisements, sales literature or shareholder
<PAGE>
reports. These performance figures are calculated in the following manner for
each Strategic Variable Funds Subaccount:
Total Return
The Strategic Variable Funds Subaccount's total return will be calculated
for certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000 to reach the
value of that investment at the end of the periods. The Strategic Variable
Funds Subaccount may also calculate (i) a total return assuming an initial
account value of $1,000 and/or (ii) total rates of return which represent
aggregate performance over a period of year-by-year performance.
Yield
The Strategic Variable Funds Subaccount's yield quotation will be based
on the annualized net investment income per unit of the Strategic Variable
Funds Subaccount over a 30-day period. The current yield for the Strategic
Variable Funds Subaccount is calculated by dividing the net investment income
per unit of the Strategic Variable Funds Subaccount earned during the period by
the net asset value per unit of the Strategic Variable Funds Subaccount on the
last day of that period. The resulting figure is then annualized. Net
investment income per unit is determined by dividing (i) the dividends and
interest earned during the period, minus accrued expenses for the period, by
(ii) the average number of units entitled to receive dividends during the
period multiplied by the unit value on the last day of the period.
COMPARISON OF STRATEGIC VARIABLE FUNDS SUBACCOUNT PERFORMANCE
Comparison of the quoted non-standardized performance of various
investments is valid only if performance is calculated in the same manner.
Since there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of a Strategic Variable Funds Subaccount with performance quoted
with respect to other investment companies or types of investments.
In connection with communicating its performance to current or
prospective investors, a Strategic Variable Funds Subaccount also may compare
these figures to the performance of other funds tracked by fund rating services
or to unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs. An
underlying Portfolio may invest in some instruments not eligible for inclusion
in such an index, and may be prohibited from investing in some instruments
included in this index. Evaluations of a Strategic Variable Funds Subaccount's
performance made by independent sources may also be used in advertisements
concerning a Strategic Variable Funds Subaccount. Sources for a Strategic
Variable Funds Subaccount's performance information may include, but are not
limited to, the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
<PAGE>
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.
Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the
performance of the nation's money market funds, summarizing money market
fund activity, and including certain averages as performance benchmarks,
specifically "Donoghue's Money Fund Average" and "Donoghue's Government
Money Fund Average."
Financial Times, Europe's business newspaper, which features from time to
time articles on international or country specific funds.
Financial World, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Investor's Daily, a daily newspaper that features financial, economic and
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific
funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
<PAGE>
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
World Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
DETERMINATION OF UNIT VALUE; VALUATION OF SECURITIES
AUSA determines the unit value of each Subaccount each day on which the
New York Stock Exchange is open for trading. (As a result, a Subaccount will
normally determine its net asset value every weekday except for the following
holidays or the days on which they are observed: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas.) This daily determination of unit
value is made as of the close of regular trading on the New York Stock
Exchange, currently 4:00 p.m., New York time unless the Exchange closes
earlier, by dividing the total assets of a Subaccount less all of its
liabilities, by the total number of units outstanding at the time the
determination is made. Purchases and redemptions will be effected at the time
of determination of unit value next following the receipt of any purchase or
redemption order deemed to be in good order.
Units of each Variable Funds Subaccount are valued based upon the
valuation of the securities held by the corresponding underlying Portfolio in
which the assets of the particular Variable Funds Subaccount are invested.
Units of each Strategic Variable Funds Subaccount are valued based upon the
valuation of the units of each Variable Funds Subaccount in which the assets of
the particular Strategic Variable Funds Subaccount are invested. Therefore, the
valuation of units in both the Variable Funds Subaccounts and the Strategic
Variable Funds Subaccounts depends on the valuation policies of the underlying
Portfolios. The following discussion describes the valuation policies of the
Portfolios.
Beneficial interests in each Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
Trading in securities on most non-U.S. exchanges and over-the-counter
markets is normally completed before the close of regular trading on the New
York Stock Exchange and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of non-U.S.
securities occur between the time when the exchange on which they are traded
closes and the time when a Portfolio's net asset value is calculated, such
securities may be valued at fair value in accordance with procedures
established by and under the general supervision of the Board of Trustees of
Diversified Investors Portfolios.
<PAGE>
Equity securities are valued at the last sale price on the exchange on
which they are primarily traded or at the ask price on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for securities
in which there were no sales during the day or for unlisted securities not
reported on the NASDAQ system. Bonds and other fixed income securities (other
than short-term obligations, but including listed issues) are valued on the
basis of valuations furnished by a pricing service, the use of which has been
approved by the Board of Trustees of Diversified Investors Portfolios. In
making such valuations, the pricing service utilizes both dealer-supplied
valuations and electronic data processing techniques that take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Short-term obligations which mature in 60 days or less are valued at amortized
cost, which approximates fair value as determined by the Board of Trustees of
Diversified Investors Portfolios. Futures and option contracts that are traded
on commodities or securities exchanges are normally valued at the settlement
price on the exchange on which they are traded. Portfolio securities (other
than short-term obligations) for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees of Diversified Investors Portfolios.
Interest income on long-term obligations is determined on the basis of
interest accrued plus amortization of discount (generally, the difference
between issue price and stated redemption price at maturity) and premiums
(generally, the excess of purchase price over stated redemption price at
maturity). Interest income on short-term obligations is determined on the basis
of interest and discount accrued less amortization of premium.
Any assets or liabilities initially denominated in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a
regular participant in the foreign exchange market or on the basis of a pricing
service that takes into account the quotes provided by a number of such major
banks. If neither of these alternatives is available or both are deemed not to
provide a suitable methodology for converting a foreign currency into U.S.
dollars, the Board of Trustees of Diversified Investors Portfolios, in good
faith, will establish a conversion rate for such currency.
A determination of value used in calculating net asset value must be a
fair value determination made in good faith utilizing procedures approved by
the Board of Trustees of Diversified Investors Portfolios. While no single
standard for determining fair value exists, as a general rule, the current fair
value of a security would appear to be the amount which a Portfolio could
expect to receive upon its current sale. Some, but not necessarily all, of the
general factors which may be considered in determining fair value include: (a)
the fundamental analytical data relating to the investment; (b) the nature and
duration of restrictions on disposition of the securities; and (c) an
evaluation of the forces which influence the market in which these securities
are purchased and sold. Without limiting or including all of the specific
factors which may be considered in determining fair value, some of the specific
factors include: type of security, financial statements of the issuer, cost at
date of purchase, size of holding, discount from market value, value of
unrestricted securities of the same class at the time of purchase, special
reports prepared by analysts, information as to any transactions or offers with
respect to the security, existence of merger proposals or tender offers
<PAGE>
affecting the securities, price and extent of public trading in similar
securities of the issuer or comparable companies, and other relevant matters.
Each investor in each Portfolio, including the Variable Funds
Subaccounts, may add to or reduce its investment in the Portfolio on each day
that the New York Stock Exchange is open for trading. As of 4:00 p.m. (New York
time) (or any earlier close of regular trading on the Exchange) on each such
day, the value of each investor's interest in a Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage representing
that investor's share of the aggregate beneficial interests in the Portfolio.
Any additions or reductions which are to be effected on that day will then be
effected. The investor's percentage of the aggregate beneficial interests in
the Portfolio will then be recomputed as the percentage equal to the fraction
(a) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m. (or the earlier close of regular trading on the
Exchange) on such day plus or minus, as the case may be, the amount of net
additions to or reductions in the investor's investment in the Portfolio
effected on such day, and (b) the denominator of which is the aggregate net
asset value of the Portfolio as of 4:00 p.m. (or the earlier close of regular
trading on the Exchange) on such day plus or minus, as the case may be, the
amount of the net additions to or reductions in the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined
will then be applied to determine the value of the investor's interest in a
Portfolio as of 4:00 p.m. (or the earlier close of regular trading on the
Exchange) on the following day the New York Stock Exchange is open for trading.
MANAGEMENT OF DIVERSIFIED INVESTORS PORTFOLIOS
The Trustees and officers of Diversified Investors Portfolios and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate those Trustees
who are "interested persons" (as defined in the 1940 Act) of Diversified
Investors Portfolios. Unless otherwise indicated, the address of each Trustee
and officer of Diversified Investors Portfolios is 4 Manhattanville Road,
Purchase, New York 10577.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
AGE
(AS OF PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS 11/15/97) DURING PAST 5 YEARS
<S> <C> <C>
Tom A. Schlossberg*.... 47 10/92 to present -- President, Chief Executive
(Trustee) Officer and Chairman of the Managing Board,
Diversified Investment Advisors, Inc.; 3/1995 to
present -- President and Director, AUSA Life
Insurance Company, Inc.; 1/93 to 12/93-- Exec-
utive Vice President, 1/91 to 12/93-- Senior
Vice President, The Mutual Life Insurance Company
of New York.
Donald E. Flynn*....... 57 1988 to present-- Vice President, AEGON, USA,
(Trustee) Inc., 1988 to present--Executive Vice
President, AEGON USA Investment Management, Inc.;
1988 to present-- Vice President, AEGON USA
Managed Portfolios, Inc.
Neal M. Jewell......... 62 1/1995 to present-- Consultant; 11/1991 to
(Trustee) 1/1995 -- Executive Vice President, 12/1990 to
355 Thornridge Drive 10/1991-- Director of Overseas Pensions,
Stamford, CT 06903 American International Group Asset Management.
<PAGE>
Eugene M. Mannella..... 43 8/1993 to present -- Vice President, Investment
(Trustee) Management Services Inc.; 5/1986 to
2 Orchard Neck Road 5/1993-- Senior Vice President, Lehman Brothers,
Center Moriches, New York 19934 Inc.
Patricia L. Sawyer..... 47 1/1995 to present -- Partner, Smith & Sawyer;
(Trustee) 7/1990 to 1/1995 -- Executive Vice President and
256 East 10th Street Director, Robert L. Smith & Co.; 9/1988 to
New York, New York 10014 7/1990 -- Vice President, American Express.
Robert F. Colby........ 42 1/1993 to present-- Vice President and General
Counsel, Diversified Investment Advisors Inc.;
3/1995 to present-- Vice President and Assistant
Secretary, AUSA Life Insurance Company, Inc.;
11/1993 to present-- Vice President, Diversified
Investors Securities Corp.; 4/1990 to
12/1993-- Secretary, Vice President and Chief
Corporate Counsel, The Mutual Life Insurance
Company of New York.
Alfred C. Sylvain...... 46 11/1993 to present-- Vice President, Treasurer
and Assistant Secretary, Diversified Investment
Advisors, Inc.; 11/1993 to present-- Treasurer,
Diversified Investors Securities Corp.; 1/1991 to
12/1993-- Vice President, The Mutual Life Insurance
Company of New York.
John F. Hughes......... 56 12/1993 to present-- Vice President and Senior
Counsel, Diversified Investment Advisors, Inc.;
8/1995 to present-- Vice President and Assistant
Secretary, AUSA Life Insurance
Company, Inc.;
11/1993 to present-- Assistant Secretary, Di-
versified Investors Securities Corp.; 1/1988 to
11/1993-- Assistant Secretary, Senior Counsel,
The Mutual Life Insurance Company of New York.
</TABLE>
The Declaration of Trust of Diversified Investors Portfolios provides
that Diversified Investors Portfolios will indemnify its Trustees and officers
as described below under "Diversified Investors Portfolios--Description of the
Trust"
For the fiscal year ended December 31, 1997, the Diversified Investors
Portfolios provided the following compensation to its trustees.
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ACCRUED ESTIMATED AND FUND
NAME OF PERSON, COMPENSATION AS PART OF ANNUAL BENEFITS COMPLEX PAID
POSITION FROM REGISTRANT FUND EXPENSES UPON RETIREMENT TO TRUSTEES
<S> <C> <C> <C> <C>
Tom A. Schlossberg..
Trustee
Donald E. Flynn.....
Trustee
Neal M. Jewell......
Trustee
<PAGE>
Eugene M. Mannella..
Trustee
Patricia L. Sawyer..
Trustee
</TABLE>
INVESTMENT ADVISORY SERVICES
Diversified Investment Advisers, Inc. (the "Adviser") manages the assets
of each Portfolio pursuant to an Investment Advisory Agreement (the "Advisory
Agreement") with Diversified Investors Portfolios with respect to that
Portfolio, and subject to the investment policies described herein and in the
Prospectus for the Portfolios. Subject to such further policies as the Board of
Trustees of Diversified Investors Portfolios may determine, the Adviser
provides general investment advice to each Portfolio.
For each Portfolio, the Adviser has entered into an Investment
Subadvisory Agreement (each a "Subadvisory Agreement") with one or more
Subadvisers.
Each Advisory Agreement and Subadvisory Agreement provides that the
Adviser or a Subadviser, as the case may be, may render services to others.
Each agreement is terminable without penalty on not more than 60 days' nor less
than 30 days' written notice by the Portfolio when authorized either by
majority vote of the investors in the Portfolio (with the vote of each being in
proportion to the amount of its investment) or by a vote of a majority of the
Board of Trustees of Diversified Investors Portfolios, or by the Adviser or a
Subadviser on not more than 60 days' nor less than 30 days' written notice, as
the case may be, and will automatically terminate in the event of its
assignment. Each agreement provides that neither the Adviser nor Subadviser nor
their personnel shall be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
execution of security transactions for the Portfolio, except for willful
misfeasance, bad faith, gross negligence or reckless disregard of its or their
obligations and duties under the Advisory Agreement and the Subadvisory
Agreement, as the case may be.
The Adviser's and Subadviser's fees with respect to each Portfolio are
described in the Prospectus.
Diversified is an investment firm dedicated to meeting the complete needs
of retirement plan sponsors and participants from pre- through post-retirement.
Diversified provides flexible, high-quality services coupled with the
employment of independent investment managers in an innovative investment
structure.
Diversified provides services with respect to [$10 billion] in retirement
plan assets and has offices in Boston, Charlotte, Chicago, Cincinnati, Dallas,
Houston, New Orleans, New York, Philadelphia, Portland and San Francisco. It
maintains recordkeeping for 400,000 participants and has 600 employees
dedicated to retirement plan investment and administration. Its employees
average more than seven years of retirement plan experience.
As experts in customizing retirement solutions, Diversified offers
comprehensive programs of high-quality investments and administrative services
to defined benefit, defined contribution and not-for-profit pension plan
sponsors. Diversified forms a partnership with its clients to provide
<PAGE>
exceptional plan design, participant communication programs, recordkeeping
services and technical guidance. Diversified's investment structure provides
access to an array of complementary investment alternatives representing the
major asset classes along the risk/reward spectrum.
Subadvisers are selected from more than 2,000 independent firms. Through
a rigorous portfolio manager selection process which includes researching each
potential subadviser's asset class, track record, organizational structure,
management team, consistency of performance and assets under management, five
to ten potential subadvisers are chosen. Out of that group, Diversified then
carefully chooses the three most qualified potential subadvisers based on
performance evaluation, ownership structure, personnel and philosophy to return
for an on-site visit and a quantitative and qualitative analysis by the
investment committee. Out of those three potential subadvisers, Diversified
then hires the most qualified, independent subadviser for each Portfolio,
subject to approval by the Board of Trustees of Diversified Investors
Portfolios, including a majority of the Trustees who are not "interested
persons" of Diversified Investors Portfolios.
Each Subadviser's performance on behalf of a Portfolio is carefully
monitored by Diversified taking into consideration investment objectives and
policies and level of risk. Diversified brings comprehensive monitoring and
control to the investment management process. It seeks superior portfolio
management and moves purposefully in replacing managers when warranted. From a
plan sponsor's perspective, replacing a manager, and not the investment fund,
is a key advantage in avoiding the expense and difficulty of re-enrolling
participants or disrupting established plan administration. Diversified and
Diversified Investors Portfolios have applied for an Exemptive Order from the
Securities and Exchange Commission which would permit Diversified to obtain the
services of one or more subadvisers without investor or shareholder approval.
Highly disciplined manager evaluation on both a quantitative and
qualitative basis is an ongoing process. Diversified's Manager Monitoring Group
gathers and analyzes performance and Diversified's Investment Committee reviews
it. Performance attribution, risk/return ratios and purchase/sale assessments
are prepared monthly and, each quarter, a more comprehensive review is
completed which consists of manager visits, fundamental analysis and
statistical analysis. Extensive quarterly analysis is conducted to ensure that
the investment fund is being managed in line with the stated objectives.
Semiannually, the Investment Committee reviews the back-up manager selection,
regression analysis and universe comparisons.
A number of "red flags" signal a more extensive and frequent manager
review. These flags consist of a return inconsistent with the investment
objective, changes in subadviser leadership, ownership or portfolio managers,
large changes in assets under management and changes in philosophy or
discipline. The immediate response to any red flag is to assess the potential
impact on the manager's ability to meet investment objectives. Diversified
monitors "back-up" additional independent managers for each investment class so
that, should a manager change be warranted, the transition can be effected on a
timely basis.
<PAGE>
For the fiscal year ended December 31, 1994, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market..................... $312,079 $29,141
High Quality Bond................ 607,967 20,204
Intermediate Government Bond..... 246,814 32,308
Government/Corporate Bond........ 776,654 10,376
Balanced......................... 443,372 38,936
Equity Income.................... 2,470,354 2,000
Growth & Income.................. 576,431 23,726
Equity Growth.................... 629,874 31,377
Special Equity................... 1,628,738 61,756
For the fiscal year ended December 31, 1995, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market..................... $391,657 $22,086
High Quality Bond................ 562,958 9,897
Intermediate Government Bond..... 286,019 44,808
Government/Corporate Bond........ 1,011,116 --
High-Yield Bond.................. 11,146 11,146
Balanced......................... 639,345 51,146
Equity Income.................... 2,878,308 --
Growth & Income.................. 639,911 28,140
Equity Growth.................... 1,272,213 --
Special Equity................... 2,018,861 82,511
International Equity............. 143,910 6,191
For the fiscal year ended December 31, 1996, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market..................... $445,832 $ 680
High Quality Bond................ 627,049 --
Government/Corporate Bond........ 1,232,524 --
High-Yield Bond.................. 60,742 60,742
Balanced......................... 995,489 --
Equity Income.................... 3,895,211 --
Equity Value..................... 84,055 70,088
Growth & Income.................. 1,052,349 39,117
Equity Growth.................... 1,730,632 1,462
Special Equity................... 3,255,893 47,350
Aggressive Equity................ 95,060 57,964
International Equity............. 799,760 69,256
For the fiscal year ended December 31, 1997, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
<PAGE>
PORTFOLIO EARNED WAIVED
Money Market.....................
High Quality Bond................
Intermediate Government Bond.....
Government/Corporate Bond........
High-Yield Bond..................
Balanced.........................
Equity Income....................
Equity Value.....................
Growth & Income..................
Equity Growth....................
Special Equity...................
Aggressive Equity................
International Equity.............
ADMINISTRATOR
The Administrative Services Agreement between Diversified, as
Administrator, and Diversified Investors Portfolios is described in the
Prospectus. The agreement provides that Diversified may render services to
others as administrator. In addition, the agreement terminates automatically if
it is assigned and may be terminated without penalty by majority vote of the
investors in Diversified Investors Portfolios (with the vote of each being in
proportion to the amount of their investment). The Administrative Services
Agreement also provides that neither Diversified nor its personnel shall be
liable for any error of judgment or mistake of law or for any act or omission
in connection with any Portfolio, except for willful misfeasance, bad faith or
gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their duties or obligations under said agreements.
CUSTODIAN
Pursuant to a Custodian Contract, Investors Bank & Trust Company acts as
the custodian of each Portfolio's assets (the "Custodian"). The Custodian's
business address is 89 South Street, Boston, Massachusetts 02205-1537. The
Custodian's responsibilities include safeguarding and controlling cash and
securities, handling the receipt and delivery of securities, determining income
and collecting interest on the Portfolios' investments, maintaining books of
original entry for portfolio accounting and other required books and accounts,
and calculating the daily net asset value of beneficial interests in each
Portfolio. Securities held by a Portfolio may be deposited into the Federal
Reserve-Treasury Department Book Entry System or the Depository Trust Company
and may be held by a subcustodian bank if such arrangements are reviewed and
approved by the Board of Trustees of Diversified Investors Portfolios. The
Custodian does not determine the investment policies of any Portfolio or decide
which securities any Portfolio will buy or sell. A Portfolio may, however,
invest in securities of the Custodian and may deal with the Custodian as
principal in securities and foreign exchange transactions. For its services,
the Custodian will receive such compensation as may from time to time be agreed
upon by it and Diversified Investors Portfolios.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., serves as the independent accountants for
Diversified Investors Portfolios providing audit and accounting services
<PAGE>
including (i) audit of the annual financial statements, (ii) assistance and
consultation with respect to the preparation of filings with the Securities and
Exchange Commission and (iii) preparation of annual income tax returns.
MANAGEMENT OF THE STRATEGIC VARIABLE FUNDS ACCOUNT
The members of the Managing Board of Diversified Investors Strategic
Variable Funds and officers of AUSA directly involved in activities related to
Diversified Investors Strategic Variable Funds, and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those members of the Managing Board who
are "interested persons" (as defined in the 1940 Act) of Diversified Investors
Strategic Variable Funds. Unless otherwise indicated, the address of each
member and officer of AUSA is Four Manhattanville Road, Purchase, New York
10577.
<TABLE>
<CAPTION>
AGE
(AS OF PRINCIPAL OCCUPATION(S) DURING
NAME AND ADDRESS 11/15/97) PAST 5 YEARS
<S> <C> <C>
Tom A. Schlossberg* 47 10/92 to present -- President, Chief Executive
(Managing Board Member) Officer and Chairman of the Managing Board,
Diversified Investment Advisors, Inc.; 3/1995 to
present -- President and Director, AUSA Life
Insurance Company, Inc.; 1/93 to 12/93 -- Execu-
tive Vice President, 1/91 to 12/93 -- Senior Vice
President, The Mutual Life Insurance Company of New
York.
Donald E. Flynn* 57 1988 to present -- Vice President, AEGON, USA,
(Managing Board Member) Inc., 1988 to present -- Executive Vice President,
AEGON USA Investment Management, Inc.; 1988 to
present -- Vice President, AEGON USA Managed
Portfolios, Inc.
Neal M. Jewell 62 1/1995 to present -- Consultant; 11/1991 to
(Managing Board Member) 1/1995 -- Executive Vice President, 12/1990 to
355 Thornridge Drive 10/1991 -- Director of Overseas Pensions, American
Stamford, CT 06903 International Group Asset Management.
Eugene M. Mannella 43 8/1993 to present -- Vice President, Investment
(Managing Board Member) Management Services Inc.; 5/1986 to
2 Orchard Neck Road 5/1993 -- Senior Vice President, Lehman Brothers,
Center Moriches, New York Inc.
19934
Patricia L. Sawyer 47 1/1995 to present -- Partner, Smith & Sawyer;
(Managing Board Member) 7/1990 to 1/1995 -- Executive Vice President and
256 East 10th Street Director, Robert L. Smith & Co.; 9/1988 to
New York, New York 10014 7/1990 -- Vice President, American Express.
Robert F. Colby 42 1/1993 to present -- Vice President and General
Counsel, Diversified Investment Advisors Inc.;
3/1995 to present -- Vice President and
Assistant Secretary, AUSA Life Insurance
Company, Inc.; 11/1993 to present -- Vice
President, Diversified Investors Securities
Corp.; 4/1990 to 12/1993 -- Secretary, Vice
President and Chief Corporate Counsel, The
Mutual Life Insurance Company of New York.
Alfred C. Sylvain 46 11/1993 to present -- Vice President, Treasurer
and Assistant Secretary, Diversified Investment
Advisors, Inc.; 11/1993 to present -- Treasurer,
Diversified Investors Securities Corp.; 1/1991
<PAGE>
to 12/1993 -- Vice President, The Mutual Life
Insurance Company of New York.
John F. Hughes 56 12/1993 to present-- Vice President and Senior
Counsel, Diversified Investment Advisors, Inc.;
8/1995 to present -- Vice President and
Assistant Secretary, AUSA Life Insurance
Company, Inc.; 11/1993 to present -- Assistant
Secretary, Diversified Investors Securities
Corp.; 1/1988 to 11/1993 -- Assistant
Secretary, Senior Counsel, The Mutual Life
Insurance Company of New York.
Catherine A. Mohr 76 11/1993 to present -- Vice President, Diversified
Investment Advisors, Inc.; 8/1995 to
present-- Assistant Secretary, AUSA Life
Insurance Company, Inc.; 1/1993 to
present -- Assistant Secretary, Diversified
Investors Securities Corp.; 1/1992 to
present-- Assistant Vice President, The Mutual
Life Insurance Company of New York.
</TABLE>
Compensation
For the fiscal year ended December 31, 1997, Diversified Investors
Strategic Variable Funds provided the following compensation to members of the
Managing Board.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT ESTIMATED TOTAL
AGGREGATE BENEFITS ANNUAL COMPENSATION
COMPENSATION ACCRUED AS BENEFITS FROM REGISTRANT
NAME OF PERSON, FROM PART OF FUND UPON AND FUND COMPLEX
POSITION REGISTRANT EXPENSES RETIREMENT PAID TO TRUSTEES
<S> <C> <C> <C> <C>
Tom A. Schlossberg......
Managing Board
Member
Donald E. Flynn.........
Managing Board
Member
Neal M. Jewell..........
Managing Board
Member
Eugene M. Mannella......
Managing Board
Member
Patricia L. Sawyer......
Managing Board
Member
</TABLE>
INVESTMENT ADVISORY SERVICES
Diversified manages the assets of each Strategic Variable Funds
Subaccount pursuant to an Investment Advisory Agreement with AUSA with respect
to such Strategic Variable Funds Subaccount and the investment policies
described herein and in the Prospectus. AUSA will bear any expenses of the
Strategic Variable Funds Subaccounts other than the 0.20% advisory fee. Of
course, the Strategic Variable Funds Subaccounts will still indirectly bear
their proportionate share of the cost of operating the underlying Variable
Funds Subaccounts in which the Strategic Variable Funds Subaccounts invest
because the Strategic Variable Funds Subaccounts, as shareholders of the
underlying Variable Funds Subaccounts, will bear their proportionate share of
any fees and expenses paid by the underlying Variable Funds Subaccounts.
<PAGE>
Under the Investment Advisory Agreement with each Strategic Variable
Funds Subaccount, Diversified provides each Strategic Variable Funds Subaccount
with discretionary investment services. Specifically, Diversified is
responsible for supervising and directing the investments of each Strategic
Variable Funds Subaccount in accordance with each Strategic Variable Funds
Subaccount's investment objectives, program, and restrictions as provided in
the Prospectus and this Statement of Additional Information. Diversified is
also responsible for effecting all security transactions on behalf of each
Strategic Variable Funds Subaccount. The Strategic Variable Funds Subaccounts
will invest their assets in units of the underlying Variable Funds Subaccounts
and such investments will be made without the payment of any commission or
other sales charges. In addition to these services, Diversified provides each
Strategic Variable Funds Subaccount with certain administrative services,
including: maintaining records, and registering and qualifying each Strategic
Variable Funds Subaccount's units under federal and state laws; monitoring the
financial, accounting, and administrative functions of each Strategic Variable
Funds Subaccount; maintaining liaison with the agents employed by each
Strategic Variable Funds Subaccount such as the custodian; assisting each
Strategic Variable Funds Subaccount in the coordination of such agents'
activities; and permitting Diversified's employees to serve as officers,
managing board members, and committee members of the Strategic Variable Funds
Account without cost to the Strategic Variable Funds Account.
Each Strategic Variable Funds Subaccount's Investment Advisory Agreement
also provides that Diversified, its directors, officers, employees, and certain
other persons performing specific functions for the Strategic Variable Funds
Subaccount will only be liable to the Strategic Variable Funds Subaccount for
losses resulting from willful misfeasance, bad faith, gross negligence, or
reckless disregard of duty.
For general information regarding Diversified, see the discussion in
"Management of Diversified Investors Portfolios--Investment Advisory Services"
on page __ above.
CUSTODIAN
Pursuant to a Custodian Agreement, Investors Bank & Trust Company (the
"Custodian") acts as the custodian of each Strategic Variable Funds
Subaccount's assets, i.e., each Strategic Variable Funds Subaccount's interest
in the underlying Variable Funds Subaccounts. For its services, the Custodian
will receive such compensation as may from time to time be agreed upon by it
and AUSA. AUSA has agreed to pay all such fees.
DIVERSIFIED INVESTORS PORTFOLIOS: DESCRIPTION OF TRUST
Diversified Investors Portfolios is organized as a trust under the law of
the State of New York. Under Diversified Investors Portfolios' Declaration of
Trust, the Trustees are authorized to issue beneficial interests in one or more
series. Currently there are fifteen active series of Diversified Investors
Portfolios. Investors in a Portfolio will be held personally liable for the
obligations and liabilities of that Portfolio (and of no other Portfolio),
subject, however, to indemnification by Diversified Investors Portfolios in the
event that there is imposed upon an investor a greater portion of the
liabilities and obligations of the Portfolio than its proportionate beneficial
interest in the Portfolio. The Declaration of Trust also provides that
Diversified Investors Portfolios shall maintain appropriate insurance (for
example, a fidelity bond and errors and omissions insurance) for the protection
of Diversified Investors Portfolios, its investors, Trustees of Diversified
<PAGE>
Investors Portfolios, officers, employees and agents, and covering possible
tort and other liabilities. Thus, the risk of an investor incurring financial
loss on account of investor liability is limited to circumstances in which both
inadequate insurance existed and Diversified Investors Portfolios itself was
unable to meet its obligations.
Investors in a Portfolio are entitled to participate pro rata in
distributions of taxable income, loss, gain and credit of their respective
Portfolio only. Upon liquidation or dissolution of a Portfolio, investors are
entitled to share pro rata in that Portfolio's (and no other Portfolio) net
assets available for distribution to its investors. Diversified Investor
Portfolios reserves the right to create and issue additional series of
beneficial interest, in which case the beneficial interests in each new
Portfolio would participate equally in the earnings, dividends and assets of
that particular Portfolio only (and no other Portfolio). Any property of
Diversified Investors Portfolios is allocated and belongs to a specific
Portfolio to the exclusion of all other Portfolios. All consideration received
by Diversified Investors Portfolios for the issuance and sale of beneficial
interests in a particular Portfolio, together with all assets in which such
consideration is invested or reinvested, all income, earnings and proceeds
thereof, and any funds or payments derived from any reinvestment of such
proceeds, is held by the Trustees of Diversified Investors Portfolios in a
separate subtrust (a Portfolio) for the benefit of investors in that Portfolio
and irrevocably belongs to that Portfolio for all purposes. Neither a Portfolio
nor investors in that Portfolio possess any right to or interest in the assets
belonging to any other Portfolio.
Investments in a Portfolio have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Investments in a Portfolio may not be transferred.
Each investor is entitled to a vote in proportion to the amount of its
investment in each Portfolio. Investors in a Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interests in all outstanding Portfolios may elect all of the Trustees if they
choose to do so and in such event other investors would not be able to elect
any Trustees. Investors in each Portfolio will vote as a separate class except
as to voting for the election of Trustees, as otherwise required by the 1940
Act, or if determined by the Trustees to be a matter which affects all
Portfolios. As to any matter which does not affect the interest of a particular
Portfolio, only investors in the one or more affected Portfolios are entitled
to vote. Diversified Investors Portfolios is not required and has no current
intention of holding annual meetings of investors, but will hold special
meetings of investors when in the judgment of Trustees it is necessary or
desirable to submit matters for an investor vote. The Declaration of Trust may
be amended without the vote of investors, except that investors have the right
to approve by affirmative majority vote any amendment which would affect their
voting rights, alter the procedures to amend the Declaration of Trust, or as
required by law or by Diversified Investors Portfolios' registration statement,
or as submitted to them by the Trustees. Any amendment submitted to investors
which the Trustees determine would affect the investors of any Portfolio shall
be authorized by vote of the investors of such Portfolio and no vote will be
required of investors in a Portfolio not affected.
Diversified Investors Portfolios or any Portfolio may enter into a merger
or consolidation, or sell all or substantially all of its assets, if approved
(a) at a meeting of investors by investors representing the lesser of (i) 67%
or more of the beneficial interest in the affected Portfolio present or
represented at such meeting, if investors in more that 50% of all such
<PAGE>
beneficial interests are present or represented by proxy, or (ii) more than 50%
of all such beneficial interests, or (b) by an instrument in writing without a
meeting, consented to by investors representing not less than a majority of the
beneficial interest in the affected Portfolio. Diversified Investors Portfolios
or any Portfolio may also be terminated (i) upon liquidation and distribution
of its assets if approved by the vote of two thirds of its investors (with the
vote of each being in proportion to the amount of its investment), (ii) by the
Trustees by written notice to its investors, or (iii) upon the bankruptcy or
expulsion of an investor in the affected Portfolio, unless the investors in
such Portfolio, by majority vote, agree to continue the Portfolio. Diversified
Investors Portfolios will be dissolved upon the dissolution of the last
remaining Portfolio.
The Declaration of Trust provides that obligations of Diversified
Investors Portfolios are not binding upon the Trustees individually but only
upon the property of Diversified Investors Portfolios and that the Trustees
will not be liable for any action or failure to act, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he 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.
The Declaration of Trust further provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with
Diversified Investors Portfolios, unless, as to liability to Diversified
Investors Portfolios or its investors, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or unless with respect to
any other matter it is finally adjudicated that they did not act in good faith
in the reasonable belief that their actions were in the best interests of
Diversified Investors Portfolios. In the case of settlement, such
indemnification will not be provided unless it has been determined by a court
or other body approving the settlement or other disposition, or by a reasonable
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees or in a written opinion of independent
counsel, that such officers or Trustees have not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
TAX INFORMATION RELATING
TO DIVERSIFIED INVESTORS PORTFOLIOS
Diversified Investors Portfolios is organized as a New York trust. The
Trust and each Portfolio are not subject to any income or franchise tax in the
State of New York. However, each investor in a Portfolio will be taxable on its
share (as determined in accordance with the governing instruments of the Trust)
of the Portfolio's ordinary income and capital gain in determining its income
tax liability. The determination of such share will be made in accordance with
the Internal Revenue Code and regulations promulgated thereunder.
Each Portfolio, since it is taxed as a partnership, is not subject to
federal income taxation. Instead, and investor must take into account, in
computing its federal income tax liability, its share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether it has received any cash distributions from the Portfolio.
Withdrawals by investors from each Portfolio generally will not result in
their recognizing any gain or loss for federal income tax purposes, except that
(1) gain will be recognized to the extent that any cash distributed exceeds the
<PAGE>
basis of the investor's interest in the Portfolio prior to the distribution,
(2) income or gain will be realized if the withdrawal is in liquidation of the
investor's entire interest in the Portfolio and includes a disproportionate
share of any unrealized receivables held by the Portfolio, and (3) loss will be
recognized if the distribution is in liquidation of that entire interest and
consists solely of cash and/or unrealized receivables. The basis of an
investor's interest in a Portfolio generally equals the amount of cash and the
basis of any property that the investor invests in the Portfolio, increased by
the investor's share of income from the Portfolio and decreased by the amount
of any cash distributions and the basis of any property distributed from the
Portfolio.
Each Portfolio's taxable year-end will be December 31. Although, as
described above, the Portfolios will not be subject to federal income tax, each
will file appropriate income tax returns.
It is intended that each Portfolio's assets, income and distributions
will be managed in such a way that an investor in each Portfolio will be able
to satisfy the requirements of Subchapter M of the Code.
There are certain tax issues that will be relevant to only certain of the
investors, specifically investors that are segregated asset accounts and
investors who contribute assets rather than cash to a Portfolio. It is intended
that such segregated asset accounts will be able to satisfy diversification
requirements applicable to them and that such contributions of assets will not
be taxable provided certain requirements are met. Such Investors are advised to
consult their own tax advisors as to the tax consequences of an investment in a
Portfolio.
HEDGING STRATEGIES
The use of hedging strategies, such as a Portfolio's entering into
interest rate futures contracts and purchasing options thereon, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith. Income
from the disposition of futures contracts and options thereon will be subject
to the limitation that a Portfolio must derive less than 30% of its gross
income from the sale or other disposition of securities, options or futures
contracts held for less than three months (the "Short-Short Limitation").
If certain requirements are satisfied, any increase in value on a
position that is part of a "designated hedge" will be offset by an decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Short-Short
Limitation is satisfied. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Portfolio intends to qualify for this treatment when it engages in hedging
transactions, but at the present time it is not clear whether this treatment
will be available for all of a Portfolio's hedging transactions. To the extent
this treatment is not available, a Portfolio may be forced to defer the closing
out of certain options and futures contracts beyond the time when it otherwise
would be advantageous to do so, in order for an investor in the Portfolio to
qualify as a RIC.
OTHER TAXATION
The investment by an investor in a Portfolio does not cause the investor
to be liable for any income or franchise tax in the State of New York.
<PAGE>
Investors are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Portfolio.
FINANCIAL STATEMENTS OF AUSA
The financial statements of AUSA that are included in this Statement of
Additional Information are different from the financial statements of
Diversified Investors Variable Funds and Diversified Investors Strategic
Variable Funds. The financial statements of AUSA should be considered only as
bearing upon the ability of AUSA to meet its obligations under the Contracts
and should not be considered as bearing on the investment performance of the
assets held in Diversified Investors Variable Funds or Diversified Investors
Strategic Variable Funds.
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA--An obligation rated AAA has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA--An obligation rated AA differs from the highest rated obligations
only in a small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
A--An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB--An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB--An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
Plus (+) or minus (-)--The ratings from AA to BB may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Commercial Paper, including Tax Exempt
A-1--A short-term obligation rated A-1 is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2--A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3--A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
<PAGE>
MOODY'S
Corporate and Municipal Bonds
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 edged". 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 risk appear somewhat larger than the 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 some time 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.
Commercial Paper
PRIME-1--Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well-established access to a range of financial markets and assured
as sources of alternate liquidity.
<PAGE>
PART C
OTHER INFORMATION
ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements (**)
(b) Exhibits
(1) Any form of Form N-3 Exhibits (1), (3), (5) through (8) and (16)
previously filed with the Commission as part of Pre-Effective Amendment
No. 1 dated July 1, 1994 to the Diversified Investors Variable Fund
Registration Statement filed on Form N-4, Registration No. 33-73734 under
the Securities Act of 1933 incorporated herein by reference.
(2) Not Applicable.
(4) Investment Advisory Contract previously filed with the Commission as
part of Pre-Effective Amendment No. 1 Registration Statement dated
November 19, 1996 to Diversified Investors Strategic Variable Funds filed
on Form N-3, Registration No. 333-08543 under the Securities Act of 1933
incorporated herein by reference.
(9) Not applicable.
(10) Not applicable.
(11) Not applicable.
(12) Opinion and Consent of counsel as to the legality of the securities
being registered previously filed with the Commission as part of
Pre-Effective Amendment No. 1 Registration Statement dated November 19,
1996 to Diversified Investors Strategic Variable Funds filed on Form N-3,
Registration No. 333-08543 under the Securities Act of 1933 incorporated
herein by reference.
(13) Consent of Independent Auditors.(**)
(14) Not applicable.
(15) Not applicable.
(17) Not applicable.
(18) Powers of Attorney previously filed with the Commission as part of
initial Registration Statement dated July 22, 1996 to Diversified
Investors Strategic Variable Funds filed on Form N-3, Registration No.
333-08543 under the Securities Act of 1933 incorporated herein by
reference.
**To be filed by amendment
<PAGE>
ITEM 29. DIRECTORS AND OFFICERS OF AUSA
The Directors and officers of AUSA are set forth below.
DIRECTORS
AEGON USA, Inc., 4333 Edgewood Road, N.E.,
William L. Busler.......... Cedar Rapids, Iowa 52499.
AEGON USA, Inc., 9151 Grapevine Highway, North
Jack R. Dykhouse........... Richland Hills, Texas 76180.
EMMERLING POST, Inc., 135 East 55th Street,
Peter P. Post.............. New York, New York 10022.
AEGON INSURANCE GROUP, 51 JFK Parkway,
Cor H. Verhagen............ Short Hills, New Jersey 07078.
COLUMBIA UNIVERSITY SCHOOL OF
BUSINESS, 725 Uris Hall, 116th Street &
Professor E. Kirby Warren.. Broadway, New York, New York 10027.
WIENER, FRUSHTICK & STRAUB, 500 Fifth
Steven E. Frushtick........ Avenue, New York, New York 10110.
National Multiple Sclerosis Society, 900 Birdseye
Vice Admiral Thor Hanson... Road, P.O. Box 112, Orient, New York 11957-0112.
Monumental Life Insurance Company, 2 East Chase
B. Larry Jenkins .......... Street, Baltimore, Maryland 21202.
DIRECTOR-OFFICERS
Chairman of the Board and Secretary, AEGON
USA, Inc., 111 North Charles Street,
Larry G. Brown............. Baltimore, Maryland 21201.
Vice President, INTERNATIONAL LIFE
INVESTORS INSURANCE Company, 666 Fifth
Vera F. Mihaic............. Avenue, New York, New York 10103-0001.
President, DIVERSIFIED INVESTMENT
ADVISORS, Inc., 4 Manhattanville Road, Purchase,
Tom Schlossberg............ New York 10577.
Chief Actuary, AEGON USA, Inc., 4333 Edgewood
Douglas C. Kolsrud......... Road, N.E., Cedar Rapids, Iowa 52499.
<PAGE>
ITEM 30. PERSONS CONTROLLED BY OR UNDER CONTROL WITH THE INSURANCE COMPANY
No person is directly or indirectly controlled by the Registrant. The
Registrant is a separate account of the Insurance Company.
The chart below shows all corporations directly or indirectly controlled
or under common control with the Insurance Company, showing the state or other
sovereign power under the laws of which each is organized and the percentage
ownership of voting securities giving rise to the control relationship.
Brief Description of Chart:
The following is a listing of all subsidiaries/affiliates of AEGON N.V.
arranged by state/country of incorporation:
ALABAMA
ZCI, Inc. -- 100%
ARIZONA
Bankers Financial Life Insurance Company (Footnote 6)
Iowa Fidelity Life Insurance Company -- (Footnote 2)
Southwest Equity Life Insurance Company -- 100%
CALIFORNIA
ISI Insurance Agency, Inc. and its subsidiaries -- 100% (Footnote 9)
Zahorik Company, Inc. -- 100%
DELAWARE
AEGON U.S. Holding Corporation -- 100%
Diversified Investors Securities Corp. -- 100%
Diversified Investment Advisors, Inc. -- 100%
Idex Management, Inc. -- 50% (Footnote 7)
Intersecurities Inc. -- 100%
Landauer Associates, Inc. -- 100%
Zuantra Corporation -- 100%
Zuantra Software Corporation -- 100%
Money Services, Inc. -- 100%
RCC North America, Inc. Voting Trust -- 100% (Footnote 8)
<PAGE>
FLORIDA
Idex Investor Services, Inc. -- 100%
INDIANA
AEGON Management Company
IOWA
AEGON USA Investment Management -- 100%
AEGON USA Realty Advisors, Inc. -- 100% (Footnote 12)
AEGON USA Realty Management, Inc. -- 100%
AEGON USA, Inc. -- 100% (Footnote 1)
AEGON USA Securities, Inc. -- 100%
American Forum For Fiscal Fitness -- 100%
AUSA Financial Markets, Inc. -- 100%
Bankers United Life Assurance Company -- 100%
Cadet Holding Corp. -- 100%
Cedar Income Fund, Ltd. (Footnote 5)
Investors Warranty of America Inc. -- 100%
Landauer Realty Advisors, Inc. -- 100%
Life Investors Insurance Company of America -- 100%
Massachusetts Fidelity Trust Company -- 100%
PFL Life Insurance Company -- 100%
Realty Information Systems, Inc. -- 100% (Footnote 11)
Transunion Casualty Company -- 100%
Universal Benefits Corporation -- 100%
USP Real Estate Investment Trust (Footnote 4)
<PAGE>
MARYLAND
AEGON USA Managed Portfolios, Inc. (Footnote 3)
AUSA Holding Company -- 100%
Executive Management and Consultant Services, Inc. -- 100%
First USA Life Insurance Company -- 100%
Monumental General Administrators, Inc. -- 100%
Monumental General Casualty Company -- 100%
Monumental General Insurance Group, Inc. -- 100%
Monumental General Mass Marketing, Inc. -- 100%
Monumental Life Insurance Company -- 100%
The Whitestone Corporation -- 100%
United Financial Services, Inc. -- 100%
WRL Series Fund Inc. -- 100% (Footnote 3)
MASSACHUSETTS
Idex Fund (Footnote 3)
Idex II Series Fund (Footnote 3)
Idex Fund 3 (Footnote 3)
MICHIGAN
Associated Mariner Agency, Inc. and its subsidiaries -- 100% (Footnote 10)
Associated Mariner Financial Group Inc. -- 100%
Mariner Financial Services, Inc. -- 100%
Mariner Mortgage Corp. -- 100%
Mariner/ISI Planning Corporation -- 100%
MINNESOTA
AUSA Institutional Marketing Group, Inc. -- 100%
Colorado Annuity Agency, Inc. -- 100%
<PAGE>
NEW JERSEY
Short Hills Management Company -- 100%
NEW YORK
AUSA Life Insurance Company, Inc. -- 100%
Corpa Reinsurance Company -- 100%
OHIO
Western Reserve Life Assurance Co. of Ohio -- 100%
TENNESSEE
Supplemental Insurance Division, Inc. -- 100%
CANADA
CRC Creditor Resource Canadian Dealer Network Inc. -- 100%
Note: In addition to the foregoing United States and
Canadian entities, these are the following foreign based
corporations/associations:
Vereniging AEGON Netherlands Membership Association which has a 53.83%
interest in AEGON N.V. Netherlands Corporation which corporation owns
100% of AEGON Nederland N.V. (Netherlands Corporation), AEGON
International N.V. (Netherlands Corporation), AEGON Nevak Holding B.V.
(Netherlands Corporation) and Groninger Financieringen B.V. (Netherlands
Corporation)
FOOTNOTES
(1) 150,000 shares of Class B Non-Voting Common Stock owned by Ennia
Reinsurance Antilles N.V.
(2) Ordinary common stock is allowed 60% of total cumulative vote.
Participating common stock is allowed 40% total cumulative vote.
(3) Denotes relationships as advisor, administrator, sponsor, underwriter or
general partner.
(4) First AUSA Life Insurance Company owns 12.89%. PFL Life Insurance
Company owns 13.11%. Bankers United Life Assurance Company owns 4.86%.
(5) PFL Life Insurance Company owns 16.73%. Bankers United Life Assurance
Company owns 3.77%. Life Investors Insurance Company of America owns
3.38%. AEGON USA Realty Advisors, Inc. owns 1.97%. First AUSA Life
Insurance Company owns .18%.
(6) Class B Common Stock is allocated 75% of total cumulative vote. Class A
Common Stock is allocated 25% of total cumulative vote.
<PAGE>
(7) 50% of Idex Management, Inc. is owned by Janus Capital Corporation, a
Colorado corporation.
(8) RCC Group: FGH Realty Credit Corp., FGH USA, Inc., RCC North America,
Inc., FGH USA Realty, Inc., FGH Eastern Region, Inc., FGH Appraisal
Services, Inc., FGH Western Region, Inc., ALH Properties, Inc., First
FGP, Inc., Second FGP, Inc., Third FGP, Inc., Fourth FGP, Inc. Fifth
FGP, Inc., Sixth FGP, Inc., Seventh FGP, Inc., FGP Midwood, Inc., FGP
Parsippany, Inc., ALH Properties Two, Inc., ALH Properties Three, Inc.,
ALH Properties Four, Inc., ALH Properties Five, Inc., ALH Properties
Six, Inc., ALH Properties Seven, Inc., ALH Properties Eight, Inc., ALH
Properties Nine, Inc., ALH Properties Ten, Inc., ALH Properties Eleven,
Inc., ALH Properties Twelve, Inc., ALH Properties Thirteen, Inc., ALH
Properties Fourteen, Inc., ALH Properties Fifteen, Inc., ALH Properties
Sixteen, Inc., ALH Properties Seventeen, Inc., FGP Keene, Inc., FGP
Broadway, Inc., FGP West Street, Inc., FGP West Street Two, Inc., FGP 90
West Street, Inc., FGP Branford, Inc., FGP Franklin, Inc., FGP Bala,
Inc., FGP Twenty-One, Inc., FGP Twenty-Two, Inc., FGP Twenty-Three,
Inc., FGP Twenty-Four, Inc., FGP Twenty-Five, Inc., FGP Schenectady,
Inc., FGP Country Estates, Inc., FGP Eleventh Street, Inc., FGP 109th
Street, Inc., FGP Seventy-Second Street, Inc., FGP Gaithersburg, Inc.,
FGP West 32nd Street, Inc., FGP Beekman, Inc., Dutch Hotel Management,
Inc., FGP Landmark, Inc., FGP Islandia, Inc., FGP Bridgeport, Inc., FGP
Varick, Inc., FGP Real Property Management, Inc., FGP Union Gardens,
Inc., FGP Burkewood, Inc., FGP Stamford, Inc., FGP Meadow Lane, Inc.,
FGP Main Street, Inc., FGP Property Services, Inc., FGP Merrick, Inc.,
FGP West 14th Street, Inc., FGP 106 Fulton, Inc., FGP Bush Terminal,
Inc., FGP Northern Boulevard, Inc., FGP Seventh Avenue, Inc., FGP
Parsons, Inc., FGP City Hall, Inc., FGP West 88th Street, Inc., FGP
Lincoln, Inc., FGP Emerson, Inc., FGP Brooke, Inc., FGP 86th Street,
Inc., FGP Edison, Inc., FGP Rider Avenue, Inc., FGP Remson, Inc., and
FGP Rockbeach, Inc.
(9) Subsidiaries of ISI Insurance Agency, Inc. are: ISI Insurance Agency of
Ohio, Inc., ISI Insurance Agency of Massachusetts, Inc., and ISI
Insurance Agency of Texas, Inc.
(10) Subsidiaries of Associated Mariner Agency, Inc. are Associated Mariner
Agency of Hawaii, Inc., Associated Mariner Insurance Agency of
Massachusetts, Inc., Associated Mariner Agency Ohio, Inc., Associated
Mariner Agency Texas, Inc., and Associated Mariner Agency New Mexico,
Inc.
(11) Owns 50% interest in DJA Partners, a Delaware general partnership.
(12) Owns 49% of Melson Technologies Consulting, Inc., a Delaware
corporation.
* Includes qualifying shares for Directors.
ITEM 31. As of December 31, 1997 there were 650 Contractholders.
ITEM 32. INDEMNIFICATION
Any person made a party to any action, suit, or proceeding by reason of
the fact that he, his testator or intestate, is or was a director, officer, or
employee of the Company or of any Company which he served as such at the
request of the Company, shall be indemnified by the Company against the
<PAGE>
reasonable expenses, including attorney's fees, actually and necessarily
incurred by him in connection with the defense of such action, suit or
proceeding, or in connection with appeal therein, except in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
officer, Director, or employee is liable for negligence or misconduct in the
performance of his duties. The Company may also reimburse to any Director,
officer, or employee the reasonable costs of settlement of any such action,
suit, or proceeding, if it shall be found by a majority of a committee composed
of the Directors not involved in the matter in controversy (whether or not a
quorum) that it was in the interest of the Company that such settlement be made
and that such Director, officer or employee was not guilty of negligence or
misconduct. The amount to be paid by way of indemnity shall be determined and
paid, in each instance, pursuant to action of the Board of Directors, and the
stockholders shall be given notice thereof in accordance with applicable
provisions of law. Such right of indemnification shall not be deemed exclusive
of any other rights to which such Director, officer, or employee may be
entitled.
ITEM 33. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
Diversified Investment Advisors, Inc. ("Diversified") is an indirect,
wholly-owned subsidiary of AEGON USA, Inc., a financial services holding
company whose primary emphasis is life and health insurance and annuity and
investment products. AEGON is an indirect, wholly-owned subsidiary of AEGON nv,
a Netherlands corporation which is a publicly traded international insurance
group.
Information as to the name, address and principal business of the directors
and executive officers of Diversified is included in its Form ADV as filed with
the Commission, and such information is hereby incorporated herein by reference
from such Form ADV.
ITEM 34. PRINCIPAL UNDERWRITERS
(a) Diversified Investors Securities Corp. ("DISC") is the principal
underwriter of the Registrant. The names, titles and principal business
addresses of the officers and directors of "DISC" are as stated on Forms U-4 of
Form BD (File No. 8-45671) as declared effective May 18, 1993, as amended, the
text of which is herein incorporated by reference. Diversified Investment
Advisors, Inc. an affiliate of AUSA, acts as investment advisor and
administrator to each series of Diversified Investors Portfolios. With respect
to each series of Diversified Investors Portfolios, Diversified has contracted
for certain investment advisory services with one or more subadvisors.
(b) The names, titles and principal business addresses of the officers of
DISC are listed on Schedule A of Form BD for DISC (Registration No. 8-45691)
and Form U-4 filed by each individual officer, the text of which is hereby
incorporated by reference.
(c) Refer to Prospectus pages __ and __, "Charges" and Part B, Statement
of Additional Information, page __, "Sale of Contracts/Principal Underwriter"
for information regarding compensation.
ITEM 35. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books, and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are primarily maintained by AUSA Insurance Company, Inc. in whole or
in part, at its principal offices at 4 Manhattanville Road, Purchase, NY 10577.
<PAGE>
ITEM 36. MANAGEMENT SERVICES
Not applicable.
ITEM 37. UNDERTAKINGS
(a) Registrant hereby undertakes to file post-effective amendments to the
Registration Statement as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more than 16
months old for so long as payments under the group variable annuity contract
may be accepted;
(b) Registrant hereby undertakes to include either (1) as part of any
application to purchase a Contract offered by the prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
post card or similar written communication affixed to or included in the
prospectus that the applicant can remove to send for a Statement of Additional
Information;
(c) Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request.
(d) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
(e) Insofar as indemnification for liability arising under the Securities
Act of 1933 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
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 whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(f) Registrant hereby represents that the fees and charges deducted under
the Contracts, in the aggregate, are reasonable in relation to the services
rendered; the expenses expected to be incurred and the risks assumed by the
insurance company.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrant has caused this Registration Statement to be signed on
its behalf, in the County of Westchester and the State of New York, on this
27th day of February, 1998.
DIVERSIFIED INVESTORS STRATEGIC
VARIABLE FUNDS
(Registrant)
By: /s/ Tom A. Schlossberg
-----------------------
Tom A. Schlossberg
AUSA LIFE INSURANCE COMPANY, INC.
(Insurance Company)
By: /s/ Tom A. Schlossberg
-----------------------
Tom A. Schlossberg
(Director and President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on February 27th, 1998.
SIGNATURES TITLE
/s/ Tom A. Schlossberg
- --------------------------
Tom A. Schlossberg Director and President
*/s/ Larry G. Brown
- --------------------------
Larry G. Brown Director
*/s/ William L. Busler
- --------------------------
William L. Busler Director
*/s/ Jack R. Dykhouse
- --------------------------
Jack R. Dykhouse Director
*/s/ Steven E. Frushtick
- --------------------------
Steven E. Frushtick Director
*/s/ Carl T. Hanson
- --------------------------
Carl T. Hanson Director
*By:/s/ Tom A. Schlossberg
- --------------------------
Tom A. Schlossberg
Attorney-in-Fact
<PAGE>
*/s/ B. Larry Jenkins
- --------------------------
B. Larry Jenkins Director
*/s/ Douglas C. Kolsrud
- --------------------------
Douglas C. Kolsrud Director
*/s/ Vera F. Mihaic
- --------------------------
Vera F. Mihaic Director
*/s/ Peter P. Post
- --------------------------
Peter P. Post Director
*By:/s/ Tom A. Schlossberg
- --------------------------
Tom A. Schlossberg
Attorney-in-Fact
