<PAGE> 1
REGISTRATION NOS. 33-19836
811-5457
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1997.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-4
------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 16 [X]
REGISTRATION STATEMENT [ ]
UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 16 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
Keynote Series Account
(EXACT NAME OF REGISTRANT)
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
(NAME OF DEPOSITOR)
1740 Broadway
New York, New York 10577
(ADDRESS AND DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
(212) 708-2000
(DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
EDWARD P. BANK
VICE PRESIDENT AND DEPUTY GENERAL COUNSEL
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
1740 Broadway
New York, New York 10019
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Approximate date of proposed public offering:
It is proposed that this filing will become effective on May 1, 1997
pursuant to paragraph (b) of Rule 485.
The registrant has registered an indefinite amount of securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice
was filed on February 25, 1997.
Diversified Investors Portfolios has also executed this Post-Effective
Amendment No. 16 to Registration Statement.
================================================================================
<PAGE> 2
KEYNOTE
SERIES ACCOUNT
("KEYNOTE")
GROUP VARIABLE ANNUITY CONTRACTS
SECTIONS 401(A), 401(K), 403(B), 408(IRA), 457 AND NQDC
ISSUED BY
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK ("MONY")
1740 BROADWAY, NEW YORK, NEW YORK 10019; (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, 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 contributions of such
organizations and employer contributions, if any. The Section 403(b) Contract
will purchase tax-deferred annuities for the 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
organizations as well as taxed subsidiaries of such organizations and
stand-alone 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 employees of tax-exempt or taxed
organizations and from members and employees of associations. The NQDC Contract
will provide deferred compensation eligible for deferred tax treatment to
employees of taxed organizations. Section references are to the Internal Revenue
Code of 1986, as amended.
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 a segregated
investment account of The Mutual Life Insurance Company of New York ("MONY"),
which account has been designated Keynote. Purchase Payments directed to Keynote
may be allocated among such of the Subaccounts in Keynote as are made available
under the Contracts. The assets in each Subaccount are invested in a series of
Diversified Investors Portfolios or in the Calvert Responsibly Invested Balanced
Portfolio ("Calvert Series") at their net asset value. (See "Diversified
Investors Portfolios" at page 13 and Calvert Series at page 12.) The six
currently available Series of Diversified Investors Portfolios are the Money
Market Series, Intermediate Government Bond Series, Government/Corporate Bond
Series, Balanced Series, Equity Income Series and Equity Growth 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 Keynote Prospectus.
KEYNOTE 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 31 HEREIN.
The value of the Accumulation Accounts maintained in Keynote will vary based
upon the investment experience of the Subaccounts to which Purchase Payments are
allocated. The investment experience of the Subaccounts will vary based on the
underlying investment performance of the series of Diversified Investors
Portfolios and the Calvert Series.
This Prospectus sets forth the basic information that a prospective
purchaser should know before investing. Please keep this Prospectus for future
reference.
A Statement of Additional Information dated May 1, 1997 incorporated herein
by reference, and containing additional information about the Contracts and
Diversified Investors Portfolios, has been filed with the Securities and
Exchange Commission. The Statement of Additional Information is available from
MONY without charge upon written request to the above address or by telephoning
(914) 697-8000. The Table of Contents of the Statement of Additional Information
can be found on page 50 of this Prospectus.
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.
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 ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS
PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED (OR PRECEDED) BY A CURRENT PROSPECTUS
FOR THE CALVERT SERIES.
DATED MAY 1, 1997
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions........................................................................... 4
Synopsis.............................................................................. 6
Fee Table............................................................................. 6
The Contracts......................................................................... 7
Keynote............................................................................... 8
Charges............................................................................... 8
Credit And Allocation Of Purchase Payments............................................ 8
Redemption............................................................................ 9
Transfers............................................................................. 9
Payment Options....................................................................... 9
Substitution of Shares of Diversified Investors Portfolios............................ 9
Voting Rights......................................................................... 9
Death Benefit......................................................................... 9
Distribution Of The Contracts......................................................... 9
Condensed Financial Information....................................................... 10
MONY.................................................................................. 11
Keynote Series Account................................................................ 11
Calvert Series........................................................................ 11
Diversified Investors Portfolios...................................................... 12
The Transaction....................................................................... 13
Charges............................................................................... 14
Charges for Mortality and Expense Risks............................................... 14
Annual Contract Charge................................................................ 14
Investment Management Fee............................................................. 14
Premium Tax........................................................................... 15
Summary Of The Contracts.............................................................. 16
Eligible Purchasers................................................................... 16
Ownership............................................................................. 16
Purchase Payments..................................................................... 16
Employer Sponsored Plan Requirements.................................................. 16
Rights Of The Participant Under The Contract.......................................... 16
Rights Upon Suspension Of Contract or Termination Of Plan............................. 17
403(b) Contract....................................................................... 17
401(a) Contract/401(k) Contract and NQDC.............................................. 17
457 and 408 (IRA) Contracts........................................................... 17
Failure Of Qualification.............................................................. 17
Transfers............................................................................. 17
Rights Reserved By MONY............................................................... 18
Credit Of Purchase Payments........................................................... 18
Allocation Of Purchase Payments....................................................... 18
Determination Of Unit Values.......................................................... 19
Death Benefit......................................................................... 19
Redemption During The Accumulation Period............................................. 20
Restrictions Under The Texas Optional Retirement Program.............................. 20
Payment Options....................................................................... 20
Annuity Purchase Date................................................................. 20
Fixed Annuity......................................................................... 21
Fixed Annuity Options................................................................. 21
Payments To A Beneficiary Following The Annuitant's Death............................. 22
Voting Rights......................................................................... 22
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Distribution Of The Contracts......................................................... 23
Federal Tax Status.................................................................... 24
Tax Treatment of MONY................................................................. 24
Taxation of Diversified Investors Portfolios.......................................... 24
Section 403(b) Annuities.............................................................. 24
Section 401(a) Plans.................................................................. 25
Section 408 (IRA) Contracts........................................................... 26
Minimum Distribution Requirements..................................................... 26
Section 457 Plans..................................................................... 26
Non-Qualified Deferred Compensation Contracts......................................... 26
Income Tax Withholding................................................................ 27
Performance Data...................................................................... 28
Diversified Investors Portfolios...................................................... 29
Core/Feeder Structure................................................................. 29
Investment Objectives and Policies.................................................... 30
Investment Techniques and Restrictions................................................ 41
Management of Diversified Investors Portfolios........................................ 43
Other Information Regarding Diversified Investors Portfolios.......................... 45
Purchase and Redemption of Interests in Diversified Investors Portfolios.............. 45
Experts............................................................................... 48
Legal Proceedings..................................................................... 48
Financial Statements.................................................................. 48
Additional Information................................................................ 48
Table Of Contents Of Statement Of Additional Information.............................. 49
Request For Keynote Statement Of Additional Information............................... 50
Appendix.............................................................................. 51
</TABLE>
3
<PAGE> 5
DEFINITIONS
As used in this Prospectus, the following terms have the indicated meaning:
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" page 21), or earlier
termination of his/her Accumulation Account.
BALANCED SERIES: 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.
CONTRACT(S): the group variable annuity contract(s) offered by MONY to
Contractholders or IRA Contractholders as described in this Prospectus.
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.
CONTRACT YEAR: a period of 12 months measured from the date of the Contract
issued to or adopted by the Contractholder, and anniversaries thereof.
DIVERSIFIED: Diversified Investment Advisors, Inc., a registered investment
adviser under the Investment Advisers Act of 1940.
DIVERSIFIED INVESTORS PORTFOLIOS: Diversified Investors Portfolios, an
open-end diversified management investment company registered under the
Investment Company Act of 1940, as amended.
EQUITY GROWTH SERIES: Diversified Investors Equity Growth Portfolio, a
series of Diversified Investors Portfolios.
EQUITY INCOME SERIES: Diversified Investors Equity Income Portfolio, a
series of Diversified Investors Portfolios.
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 SERIES: Diversified Investors
Government/Corporate Bond Portfolio, a series of Diversified Investors
Portfolios.
INTERMEDIATE GOVERNMENT BOND SERIES: Diversified Investors Intermediate
Government Bond 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 SERIES: 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.
PLAN: a retirement plan or program under which benefits are to be provided
pursuant to a Contract described herein.
4
<PAGE> 6
PORTFOLIO BUSINESS DAY: each day during which the Advisers of a Series are
open for business.
PURCHASE PAYMENT: the amount contributed and remitted to MONY by an
employer on behalf of a Participant.
SUBSTITUTION: the investment by Keynote Subaccounts in corresponding series
of Diversified Investors Portfolios of the proceeds received upon the redemption
by each Subaccount of shares of MONY Series Fund, Inc. in accordance with an
order of the Securities and Exchange Commission dated June 8, 1994.
SUBACCOUNT: a subdivision of Keynote which is available for the allocation
of Purchase Payments under the Contracts. Six Subaccounts invest in a
corresponding series of Diversified Investors Portfolios. The Calvert Series
Subaccount invests in the Calvert Series.
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), 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 to affect materially the value of the Units of the corresponding
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
NYSE, MONY 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.
NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
5
<PAGE> 7
SYNOPSIS
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
KEYNOTE SERIES ACCOUNT
TABLE OF FEES(1)
<TABLE>
<S> <C>
Total Separate Account Annual Expenses (as a percentage of average account values)
Mortality and Expense Risk Fees................................................... 0.90%(2)
</TABLE>
(1) In addition to the mortality and expense risk fees, MONY 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 15.
(2) MONY reserves the right to charge maximum mortality and expense risk
fees of 1.25% upon notice.
Portfolio Company Annual Expenses:
DIVERSIFIED INVESTORS PORTFOLIOS AND CALVERT RESPONSIBLY INVESTED BALANCED
PORTFOLIO
ANNUAL EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1996
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT/
MONEY GOVERNMENT CORPORATE EQUITY EQUITY
MARKET BOND BOND BALANCED INCOME GROWTH CALVERT
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
------ ------------ ------------ -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fee (After fee
reimbursements)(1)............. .25% .32% .35% .45% .45% .69% .70%
Other Expenses(2)................ .05% .08% .04% .05% .03% .04% .13%
Reimbursement from MONY(3)....... (.20)% -- -- -- -- (.23)% --
------ --- --- --- ------ ------ -------
Total Annual Expenses After Fee
Reimbursements(4).............. .10% .40% .39% .50% .48% .50% .83%
</TABLE>
- ---------------
(1) The fees shown on the line "Management Fee" are the fees charged to each
series of Diversified Investors Portfolios by Diversified Investment
Advisors, Inc., after waiver. The expense table for Portfolio Company Annual
Expenses and the example reflect a voluntary undertaking by Diversified to
waive a portion of the investment advisory fees payable by series of
Diversified Investors Portfolios. Without such a waiver, the annual
investment advisory fee would be .25% for the Money Market Series, .35% for
the Intermediate Government Bond Series, .35% for the Government/Corporate
Bond Series, .45% for the Balanced Series, .45% for the Equity Income Series
and .70% for the Equity Growth Series. For the Calvert Series, the fees
shown are those charged by Calvert Asset Management Company to the Calvert
Series.
(2) "Other Expenses" for each series of Diversified Investors Portfolios and for
the Calvert Series are actual for the year ended December 31, 1996.
(3) MONY has agreed to provide reimbursements to limit total Diversified
Investors Portfolios expenses for Keynote Participants in the Money Market
Series and the Equity Growth Series to .10% and .50%, respectively, of
average net assets of the applicable series with MONY reserving the right to
raise the limit upon notice.
6
<PAGE> 8
(4) "Total Annual Expenses After Fee Reimbursements" for certain of the series
of Diversified Investors Portfolios reflect voluntary waivers and
reimbursements by Diversified. In the absence of such waivers and
reimbursements, "Total Annual Expenses After Fee Reimbursements" would be as
follows for the following series: Money Market Series -- .42%; Intermediate
Government Bond Series -- .43%; Equity Income Series -- .48%; and Equity
Growth Series -- .97%.
The purpose of this table is to assist you in understanding the various
costs and expenses that you will bear directly and indirectly and reflects
expenses of the separate account as well as the portfolio applicable company.
(See Charges at page 15 for a more complete description of applicable costs and
expenses.)
Example
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 the following expenses on a $1,000
investment, assuming a 5% annual rate of return.
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market............................................ $ 10 $32 $55 $122
Intermediate Government Bond............................ $ 13 $41 $71 $157
Government/Corporate Bond............................... $ 13 $41 $71 $157
Balanced................................................ $ 14 $44 $77 $168
Equity Income........................................... $ 14 $44 $76 $166
Equity Growth........................................... $ 14 $44 $77 $168
Calvert Series.......................................... $ 18 $54 $94 $204
</TABLE>
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 Contract(s) ("Contract(s)") 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 for taxed organizations for 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 non-qualified deferred compensation Contracts ("NQDC") 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 employees of tax-exempt or taxed organizations and
from members and employees of associations. Section references are to the
Internal Revenue Code of 1986, as amended (the "Code").
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 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
7
<PAGE> 9
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, the employer will make Purchase Payments on
behalf of and as determined by each participating employee pursuant to a salary
deduction agreement.
KEYNOTE
Purchase Payments under the Contract(s) are allocated to Keynote which is a
separate account of MONY. Keynote is divided into Subaccounts, six of which
correspond to Diversified Investors Portfolios' Money Market, Intermediate
Government Bond, Government/Corporate Bond, Balanced, Equity Income, and Equity
Growth Series, respectively. The Calvert Series Subaccount invests in the
Calvert Series. The assets in each 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 13 and "Calvert
Series" at page 12.) Each series of Diversified Investors Portfolios is managed
by Diversified Investment Advisors, Inc. ("Diversified"). MONY Securities Corp.,
a wholly-owned subsidiary of MONY, is the principal underwriter and distributor.
The Calvert Series is a series of Acacia Capital Corporation, a diversified
open-end management company whose investment adviser is Calvert Asset Management
Company, Inc.
The value of a Participant's Accumulation Account maintained in Keynote
will vary based upon the investment experience of the series of Diversified
Investors Portfolios or the Calvert Series to which Purchase Payments are
allocated.
The Calvert Series is 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 Keynote Prospectus. Diversified Investors Portfolios is an open-end,
diversified management investment company which has six series with differing
investment objectives available under the Contracts. See "Diversified Investors
Portfolios" at page 13 herein.
CHARGES
MONY makes daily charges against the net assets of Keynote at a maximum
annual rate of 1.25%, consisting of .80% for mortality risks and .45% for
administrative expense risks. Effective May 1, 1993, the annual rate charged is
.90% consisting of .60% for mortality risks and .30% for administrative expense
risk. However, MONY reserves the right to charge a maximum fee of 1.25% upon
notice thereafter. (See "Charges -- Charges for Mortality and Expense Risks" on
page 13.) In addition, MONY 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 15.)
In addition to the charges set forth above, Diversified, which serves as an
investment adviser to each series of Diversified Investors Portfolios, 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 series
of Diversified Investors Portfolios or the Calvert Series, as appropriate,
computed daily, for investment advisory services and other expenses.
Premium taxes may be payable on annuity considerations. (See "Premium Tax"
on page 16.)
CREDIT AND ALLOCATION OF PURCHASE PAYMENTS
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 series of Diversified Investors Portfolios or the Calvert
Series, as appropriate. (See "Credit of Purchase Payments" on page 19.)
8
<PAGE> 10
REDEMPTION
A Participant may redeem at any time prior to the time an annuity benefit
takes effect and prior to his death all or a portion of the Units credited to
his 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 21, 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 the Contract and other significant withdrawal
restrictions may be imposed by the Code. (See, "Section 403(b) Annuities" on
page 25 and "Section 408 IRA Contracts" on page 27.)
TRANSFERS
A Participant may transfer all or a portion of his/her Accumulation Account
in Keynote among the various Subaccounts. No transfer charges are imposed, and
there is no limit to the number of transfers. While MONY 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 18.) MONY 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 21.)
VOTING RIGHTS
To the extent required by law, MONY will vote the interests in Diversified
Investors Portfolios and the Calvert Series held in Keynote in accordance with
the instructions received from Contractholders, IRA Contractholders and NQDC
Contractholders; the Contractholders will instruct MONY in accordance with the
instructions received from Participants. (See "Voting Rights" on page 23.)
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 20.)
DISTRIBUTION OF THE CONTRACTS
MONY Securities Corp. ("MSC") will be the principal underwriter and
distributor of the Contracts which will be sold by registered representatives
who are also licensed insurance agents of MONY. The Contracts may also be sold
through other broker-dealers authorized by MSC and applicable law and who may be
insurance agents licensed by an insurance company other than MONY. (See
"Distribution of the Contracts" on page 24.)
9
<PAGE> 11
CONDENSED FINANCIAL INFORMATION
KEYNOTE SERIES ACCOUNT
ACCUMULATION UNIT VALUES
KEYNOTE SUBACCOUNT*
<TABLE>
<CAPTION>
UNIT VALUE
----------------------------------------------------------------------------------------
AUG. 1, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1989 1989 1990 1991 1992 1993 1994 1995
----------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Growth...................... $10.00 $13.89 $13.65 $18.32 $18.07 $19.67 $21.65 $25.58
Money Market....................... 10.00 10.93 11.81 12.49 12.90 13.20 13.65 14.35
Balanced........................... 10.00 12.46 12.74 15.29 15.37 16.92 16.66 21.25
Government/Corporate Bond.......... 10.00 11.68 12.38 14.52 15.71 17.81 16.70 19.63
Equity Income...................... 10.00 12.19 11.34 13.60 14.93 16.91 16.86 22.48
Intermediate Government Bond....... -- -- 10.00 11.00 11.73 12.58 12.24 13.84
Calvert Series..................... -- 10.00 10.26 11.91 12.75 13.36 13.11 16.87
<CAPTION>
UNITS OUTSTANDING
--------------------------------------------------------------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1996 1989 1990 1991 1992 1993 1994 1995
-------- -------- --------- --------- --------- --------- --------- ---------
<S> <C>
Equity Growth...................... $30.06 47,235 429,986 1,334,644 2,115,942 2,907,819 994,859 201,470
Money Market....................... 15.00 15,100 590,354 702,177 637,701 656,262 179,143 58,026
Balanced........................... 24.62 59,050 322,563 814,494 1,268,765 1,835,594 762,735 145,593
Government/Corporate Bond.......... 20.10 21,080 97,161 493,084 328,126 471,446 125,870 24,207
Equity Income...................... 26.38 30,585 7,198,970 7,227,359 6,883,795 7,852,650 2,135,776 571,730
Intermediate Government Bond....... 14,21 -- -- 3,840,526 1,628,553 1,591,845 768,905 50,325
Calvert Series..................... 18.83 -- 16,681 180,569 355,343 685,428 291,806 19,147
<CAPTION>
DEC. 31,
1996
--------
Equity Growth...................... 237,959
Money Market....................... 56,311
Balanced........................... 156,241
Government/Corporate Bond.......... 25,670
Equity Income...................... 489,820
Intermediate Government Bond....... 47,901
Calvert Series..................... 25,095
</TABLE>
- ---------------
* The commencement dates for the Calvert Series Subaccount and the Intermediate
Government Bond Subaccount are May 1, 1990 and May 1, 1991, respectively.
Further information about the performance of Keynote is contained in the
Annual Report of Keynote which is available, free of charge, by contacting
MONY at the address or at the telephone number set forth on the cover of this
Prospectus.
10
<PAGE> 12
MONY
The Mutual Life Insurance Company of New York is a mutual life insurance
company which was organized under the laws of the State of New York in 1842. Its
principal place of business is 1740 Broadway, New York, N.Y. 10019. MONY is
currently licensed to sell life insurance and annuities in all states of the
United States, the District of Columbia, Puerto Rico and all Provinces of
Canada.
KEYNOTE SERIES ACCOUNT
Keynote was established by MONY under New York Insurance Law on December
16, 1987 as a separate account. Keynote will hold assets that are segregated
from all of MONY's other assets and at present is used only to support the
Contracts. MONY is the legal holder of the assets in Keynote and will at all
times maintain assets in Keynote with a total market value at least equal to the
contract liabilities for Keynote. The obligations under the Contracts are
obligations of MONY. Income, gains, and losses, whether or not realized, from
assets allocated to Keynote, are, in accordance with the Contracts, credited to
or charged against Keynote without regard to other income, gains, or losses of
MONY. The assets in Keynote may not be charged with liabilities which arise from
any other business MONY conducts. Keynote assets may include accumulation of the
charges MONY makes against a Contract participating in Keynote. From time to
time, any such additional assets may be transferred in cash to MONY's general
account.
Keynote is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 ("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
Keynote. For state law purposes, Keynote is treated as a part or division of
MONY.
There are currently seven Subaccounts within Keynote 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
six other Subaccounts invest in six respective series of Diversified Investors
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 Diversified Investors Portfolios. A full description of the
Calvert Series, its investment objectives, policies and restrictions, its
expenses, the risks attendant in investing therein and other aspects of its
operations is contained in the accompanying prospectus for the Calvert Series.
Full descriptions of the six series of Diversified Investors 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 12. Further
disclosure appears in the Statement of Additional Information. Each Participant
should periodically consider his/her allocation among the Subaccounts in light
of current market conditions and the investment risks attendant to investment in
the various series of Diversified Investors 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 conflict between interests of
Contractholders of all separate accounts investing in the Calvert Series. If it
is determined by a majority of the Board of Acacia that such conflict exists
then MONY will take
11
<PAGE> 13
whatever steps are necessary to eliminate the material conflict, including
withdrawing the assets allocable to some of the separate accounts from Calvert
Series and reinvesting them in a different investment medium. For additional
risk exposure, see the Calvert Series prospectus which is contained in the last
section of this Prospectus. Keynote 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 six Subaccounts of Keynote listed below invests
exclusively in the corresponding series of Diversified Investors Portfolios set
forth below:
<TABLE>
<CAPTION>
DIVERSIFIED SUBACCOUNT SERIES OF DIVERSIFIED INVESTORS PORTFOLIOS
- --------------------------------------------- ---------------------------------------------
<S> <C>
Keynote Money Market Subaccount.............. Diversified Investors Money Market Portfolio
(the "Money Market Series")
Keynote Intermediate Government Bond
Subaccount................................. Diversified Investors Intermediate Government
Bond Portfolio (the "Intermediate Government
Bond Series")
Keynote Government/Corporate Bond Subaccount
(formerly the Keynote Long Term Bond
Subaccount)................................ Diversified Investors Government/Corporate
Bond Portfolio (the "Government/Corporate
Bond Series")
Keynote Balanced Subaccount (formerly the
Keynote Diversified/Balanced Subaccount)... Diversified Investors Balanced Portfolio (the
"Balanced Series")
Keynote Equity Income Subaccount............. Diversified Investors Equity Income Portfolio
(the "Equity Income Series")
Keynote Equity Growth Subaccount............. Diversified Investors Equity Growth Portfolio
(the "Equity Growth Series")
</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 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 subadvisers. Diversified and the subadviser or
subadvisers for a particular series of Diversified Investors Portfolios are
referred to herein collectively as the "Advisers". The investment objectives of
the series of Diversified Investors Portfolios currently available under the
Contracts through Subaccounts are described briefly below. There can be no
assurance that the investment objectives of any of the series will be met.
Money Market Series: To provide liquidity and as high a level of current
income as is consistent with the preservation of capital through investment in
domestic and foreign U.S. dollar-denominated money market obligations with
maturities of 397 days or less. An investor's interest in the Keynote Money
Market Subaccount is neither insured nor guaranteed by the U.S. Government.
Intermediate Government Bond Series: To provide as high a level of current
income as is consistent with the preservation of capital through investment in
U.S. Government and U.S. Government agency and instrumentality securities with
short and intermediate maturities and high quality short-term obligations.
12
<PAGE> 14
Government/Corporate Bond Series: To achieve the maximum total return
through investment in investment grade debt securities, U.S. Government and U.S.
Government agency and instrumentality securities, collateralized mortgage
obligations guaranteed by these agencies and instrumentalities and high quality
short-term obligations.
Balanced Series: To provide a high total return consistent with a broad
diversified mix of stocks, bonds and money market instruments.
Equity Income Series: 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.
Equity Growth Series: 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; current income is a secondary objective.
See "Diversified Investors Portfolios" at page 13 and the Statement of
Additional Information for more information on each series.
THE TRANSACTION
On December 31, 1993, MONY and AEGON USA, Inc. ("AEGON") entered into a
transaction pursuant to which MONY sold its group pension operation to AEGON
(the "Transaction"). As a part of the Transaction, the Contracts may be
transferred through assumption reinsurance to AUSA Life Insurance Company, Inc.
("AUSA"), a New York domiciled stock life insurance company and an indirect,
wholly-owned subsidiary of AEGON. Subject to the receipt of any necessary state
insurance department approvals and authorizations each Contractholder will
receive materials relating to this assumption.
In addition, as a result of the Transaction, the group fixed annuity
contracts which have been issued by MONY to Contractholders may also be
transferred to AUSA through assumption reinsurance. Based upon regulatory and
other consideration, the transfer of any fixed contract may occur before,
concurrent with, or after the transfer of the companion variable Contract which
is offered through this Prospectus. Accordingly, all references in this
Prospectus to a companion fixed annuity contract shall refer to the fixed
contract issued by MONY or the fixed contract which has been assumed by AUSA, as
appropriate.
AUSA is a wholly-owned subsidiary of First AUSA Life Insurance Company, a
stock life insurance company which is wholly-owned by AEGON. AEGON is a
financial services holding company whose primary emphasis is on life and health
insurance and annuity and investment products. AEGON is a wholly-owned indirect
subsidiary of AEGON nv, a Netherlands corporation which is a publicly traded
international insurance group.
13
<PAGE> 15
CHARGES
CHARGES FOR MORTALITY AND EXPENSE RISKS
The maximum daily charges against Keynote for mortality and expense risks
assumed by MONY are computed and deducted from the value of the net assets of
Keynote. This 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 Keynote. The
daily charge will be deducted from the net asset value of Keynote, and therefore
the Subaccounts, on each Valuation Date. Where the previous day (or days) was
not a Valuation Date, the 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 Keynote. Of this charge, MONY estimates that .80% is for mortality
risk and .45% is for expense risk. (The daily charge from Keynote based on an
annual mortality and expense risk rate of .90%, .60% for mortality risks and
.30% for administrative expense risks, which was effective May 1, 1994, 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. MONY 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 MONY's general account and not directly from
Keynote or from the mortality and expense risk charges. However, asset charges
for MONY's assumption of mortality and expense risks might be a source of
contribution to the surplus in MONY's general account.
ANNUAL CONTRACT CHARGE
MONY reserves the right to deduct an annual contract charge from a
Participant's Accumulation Account to reimburse MONY for administrative expenses
relating to the maintenance of the Contracts. MONY has no present intention to
impose such a charge; however, MONY may, in the future, impose such a charge in
accordance with the provisions of the Contracts. Any such annual charge will not
exceed $50. MONY 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. If imposed, this charge would represent reimbursement for
administrative costs expected to be incurred over the life of the Contracts.
MONY does not anticipate any profit from this charge.
INVESTMENT MANAGEMENT FEE
Because Keynote purchases interests in certain series of Diversified
Investors Portfolios and the Calvert Series, the net assets of Keynote will
reflect the investment management fee and other expenses incurred by those
series of Diversified Investors Portfolios and the Calvert Series.
Diversified serves as the investment adviser to each series of Diversified
Investors Portfolios. For information with respect to the arrangements under
which Diversified provides such advisory services,including charges and
arrangements with subadvisers, reference is made to the information set forth
under "Management of Diversified Investors Portfolios" at page 44.
The Calvert Series' investment adviser is the Calvert Asset Management Company,
Inc. ("Investment Adviser") which is located at 4550 Montgomery Avenue, Suite
1000N, Bethesda, Maryland 20814. The Investment 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 Investment Adviser manages the fixed
income investment 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 sub-adviser to
the Calvert Series is NCM Capital Management Group, Inc. ("NCM"). Pursuant to
its Investment Subadvisory Agreement with the Investment Adviser, NCM manages
the equity portion of investments for the Calvert Series. NCM is an
employee-owned subsidiary of Sloan Financial Group. Sloan
14
<PAGE> 16
Financial Group is controlled by Maceo K. Sloan and Justin F. Beckett and is one
of the largest minority-owned investment management firms in the country. The
Investment 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 Investment Adviser pays NCM a base fee of 0.25% of
one-half of the Calvert Series' net assets. In addition, the Investment 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:
INVESTMENT ADVISER'S PERFORMANCE FEE ADJUSTMENT
<TABLE>
<CAPTION>
PERFORMANCE VERSUS THE PERFORMANCE FEE
LIPPER BALANCED FUND INDEX ADJUSTMENT
-------------------------- ---------------
<S> <C> <C>
6% to <12% 0.05%
12% to <18% 0.10%
18% or more 0.15%
</TABLE>
NCM'S PERFORMANCE FEE ADJUSTMENT
<TABLE>
<CAPTION>
PERFORMANCE VERSUS THE PERFORMANCE FEE
LIPPER BALANCED FUND INDEX ADJUSTMENT
-------------------------- ---------------
<S> <C> <C>
6% to <12% 0.05%
12% to <18% 0.10%
18% or more 0.15%
</TABLE>
The performance fee adjustment to NCM is paid out of the fee the Investment
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.
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 an Appendix to this Prospectus 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.
15
<PAGE> 17
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 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(s).
OWNERSHIP
The employer or association purchasing 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
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, the employer will make Purchase Payments on
behalf of and as determined by each participating employee pursuant to a salary
reduction agreement. An Accumulation Account will be established for each
Participant which will record the number of Units held in each Subaccount.
Purchase Payments may be allocated among any of the Subaccounts.
All Purchase Payments in Keynote 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 the
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" at page 20) during which no Purchase Payments will
be accepted by MONY, an employer may make Purchase Payments during a
Participant's Accumulation Period 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.
16
<PAGE> 18
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 Plan
or discontinues Purchase Payments for a Participant, MONY 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 MONY 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 MONY'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
MONY 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, MONY 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
MONY 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, MONY 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 Keynote among the various Subaccounts. No transfer charges are imposed, and
there is no limit to the number of transfers permitted. While MONY has no
present intention to do so, MONY reserves the right to impose transfer charges
at a later date.
Transfers from the MONY Section 403(b), Section 401(a), Section 401(k) and
NQDC Group Fixed Annuity Contracts to a Participant's Accumulation Account under
the Keynote Contracts are permitted only to the Subaccounts which invest in the
Balanced Series, Equity Income Series, Equity Growth Series or Calvert Series.
Certain other restrictions which apply to transfers from the MONY Section
403(b), Section 401(a), Section 401(k) and NQDC Group Fixed Annuity and 408(IRA)
Contracts
17
<PAGE> 19
to the Keynote Contracts are contained in the MONY Section 403(b), Section
401(a), Section 401(k) and NQDC Group Fixed Annuity and Section 408(IRA)
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 MONY may subject the Participant to risk of
loss if such instruction is subsequently found not to be genuine. MONY 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 MONY fails to use reasonable procedures to verify the genuineness of
telephone instructions, MONY may be liable for any losses due to telephone
instructions that prove to be fraudulent or unauthorized.
RIGHTS RESERVED BY MONY
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, MONY reserves the
right to make the following changes:
(1) To operate Keynote 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 of Keynote to another Subaccount
of Keynote, or to one or more separate accounts, or to MONY'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 series of Diversified Investors
Portfolios or the Calvert Series held in any Subaccount, interests in
another series of Diversified Investors Portfolios 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 Keynote or the Contracts.
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 MONY 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 MONY 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 MONY 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 MONY.
ALLOCATION OF PURCHASE PAYMENTS
Upon receipt of a Purchase Payment, it will be credited to the Subaccount
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
18
<PAGE> 20
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 MONY a
correctly completed allocation form. Any change in allocations will be effective
within 10 business days following receipt of the allocation form by MONY. If an
allocation form is incorrectly completed, Purchase Payments will be credited in
accordance with the most recent allocation form on record. MONY reserves the
right to limit a Participant's right to change allocation instructions to four
times a calendar year.
DETERMINATION OF UNIT VALUE
The Unit value for each of the Subaccounts was established at $10 for the
first Valuation Date. The Unit value for a Subaccount for any subsequent
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 Subaccount in the series of Diversified Investors
Portfolios or the Calvert Series in which the Subaccount invests, and
(b) is the mortality and expense risk charge accrued as of that Valuation
Date, and
(c) is the total number of Units held in the Subaccount on the Valuation
Date before the purchase or redemption of any Units on that Date.
DEATH BENEFIT
Under a Section 403(b), Section 457 and Section 408(IRA) Contract, if a
Participant dies before the Annuity Purchase Date (See "Annuity Purchase Date"
on page 21), 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 25). Under a Section 401(a) and/or Section
401(k) Contract, 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 a Section 401(a) and/or Section
401(k) Contract, 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 (5) 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).
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
MONY. 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.
19
<PAGE> 21
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 25.)
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 MONY is
received by MONY. 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 the interests in
Diversified Investors Portfolios or Calvert Series held by Keynote 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 25.)
With respect to Section 401(a) and Section 401(k) or 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 Teacher Retirement System of Texas permits Participants in the Texas
Optional Retirement Program ("ORP") to redeem their interest in a variable
annuity contract issued under the ORP only upon termination of employment in the
Texas public institutions of higher education, retirement or death. Accordingly,
a Participant in the ORP will be required to obtain a certificate of termination
from his/her employer before he/she can redeem his/her Accumulation Account.
PAYMENT OPTIONS
With respect to Section 403(b), Section 457 and Section 408(IRA) Contracts,
unless a Fixed Annuity as described at page 22 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 MONY on his/her Annuity Purchase Date.
(See page 19 for, "Redemption During the Accumulation Period".) However, Section
401(a) and 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 MONY 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
20
<PAGE> 22
Participant attains age 70 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 MONY 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 Keynote but are made from the
general account of MONY 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, nor is the general account registered as an investment company
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 elected 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
21
<PAGE> 23
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.
(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 first 10 years of the Contracts, the maximum rates set forth
in the Contracts. Thereafter, the annuity purchase rate will be the rate
declared by MONY for all Fixed Annuity benefits purchased under the applicable
Contract in the same Contract Year in which the Annuity Purchase Date occurs.
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, MONY
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 MONY 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 MONY 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 assets held in the Subaccounts of Keynote will be invested in the
corresponding series of Diversified Investors Portfolios or the Calvert Series.
MONY is the legal holder of these interests and shares held in a 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, MONY will vote at regular and special
shareholder meetings in accordance with the instructions received from
Contractholders, IRA Contractholders and NQDC Contractholders. The record date
for any such vote shall be selected by the governing Boards of Diversified
Investors Portfolios or the Calvert Series. MONY will furnish Contractholders,
IRA Contractholders and NQDC Contractholders with the proper forms to enable
them to give it 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
22
<PAGE> 24
Subaccount of Keynote, with fractional votes for amounts less than $100. These
votes, represented as votes per $100 of Accumulation Account value in each
Subaccount of Keynote, are converted into a proportionate number of votes in
beneficial interests in a series of Diversified Investors Portfolios or shares
of the Calvert Series. Interests held in each Subaccount for which no timely
instructions from Contractholders, IRA Contractholders or NQDC Contractholders
are received will be voted by MONY in the same proportion as those interests in
that Subaccount for which instructions are received. Should applicable federal
securities laws or regulations permit, MONY 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 series of
Diversified Investors Portfolios or the Calvert Series attributable to his/her
portion of the Accumulation Account held in each Subaccount of Keynote. Each
Participant under the Contract shall receive a statement of the amount
attributable to his/her participation in each Subaccount of Keynote and stating
his/her right to instruct the Contractholder as to how to vote such interest.
MONY 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 MONY with respect to interests attributable to
the Accumulation Account values held in a 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 MONY 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 Diversified Investors Portfolios or Acacia; (2)
ratification of the independent accountant of Diversified Investors Portfolios
or the Calvert Series; (3) approval of any change in the Investment Advisory
Agreement or any Subadvisory Agreement for a series of Diversified Investors
Portfolios 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 series of Diversified Investors
Portfolios 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 shareholders of 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 that Subaccount will vote separately on the matter pursuant to
the requirements of Rule 18f-2 under the 1940 Act.
MONY 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
series of Diversified Investors Portfolios or the Calvert Series, or to approve
or disapprove an investment adviser or principal underwriter for one or more
series of Diversified Investors Portfolios or the Calvert Series. In addition,
MONY may disregard voting instructions that would require changes in the
investment objectives or policies of any series of Diversified Investors
Portfolios or the Calvert Series or in an investment adviser or principal
underwriter for Diversified Investors Portfolios or the Calvert Series, if MONY
reasonably disapproves those changes in accordance with applicable federal
regulations. If MONY 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
MSC will act as the principal underwriter and the distributor of the
Contracts pursuant to an underwriting agreement, on behalf of Keynote, with
Diversified Investors Portfolios and the Calvert Series. MSC will perform all
sales, marketing and administrative functions relative to the Contracts which
participate in Keynote, with certain exceptions in connection with the use of
other authorized broker-dealers. MSC is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a
23
<PAGE> 25
member of the National Association of Securities Dealers. The Contracts are sold
by individuals who are registered representatives of MSC and who are also
licensed as insurance agents for the Company. The Contracts may also be sold
through registered representatives of other broker-dealers authorized by MSC and
applicable law who may be insurance agents licensed by an insurance company
other than MONY. 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 MONY and of the Contracts
under federal income tax law is general in nature, is based upon MONY'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 MONY
MONY is taxed as a life insurance company under Part I, Subchapter L of the
Code. Investment income from the assets of Keynote are reinvested and taken into
account in determining the value of Keynote. Under existing federal income tax
law, the investment income of Keynote, including realized capital gains, is
substantially not taxed to MONY.
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.
Each of its series, since it is taxed as a partnership, is not subject to
federal income taxation. MONY, as an investor in a 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 MONY" 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), 403(b) and
415 of the Code are not includable in the gross income of the Participant at the
time they are made. Under Sec-
24
<PAGE> 26
tion 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 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
25
<PAGE> 27
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.
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 nondeductible 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 21) 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.
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
26
<PAGE> 28
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
non-qualified 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.
Such non-qualified deferred compensation arrangements for taxable employers
may be funded by either a Keynote Contract alone or by a Keynote Contract in
combination with a Fixed Annuity Contract.
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. MONY 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 will be 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.
27
<PAGE> 29
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 Subaccount reflects the results of the corresponding series of Diversified
Investors Portfolios or the Calvert Series and recurring charges and deductions
borne by or imposed on the Subaccount and on the corresponding series of the
Diversified Investors Portfolios or the Calvert Series. Set forth below for each
Subaccount is the manner in which the data contained in such advertisements will
be calculated.
Money Market Subaccount. The performance data for this Subaccount will
reflect the "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.
Intermediate Government Bond, Government/Corporate Bond, Balanced, Equity
Income, Equity Growth and Calvert Series Subaccounts. The performance data for
these Subaccounts will reflect the "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 Series and the Subaccount Variable.
"average annual total return" for each of these Subaccounts and the 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 Series and the Subaccount, 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.
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 the average annual 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, average annual total return
quotations.
From time to time, any series of Diversified Investors Portfolios or the
Calvert Series may provide information 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.
28
<PAGE> 30
DIVERSIFIED INVESTORS PORTFOLIOS
Six Subaccounts of Keynote 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. The investment objectives of the series of Diversified Investors
Portfolios currently available under the Contracts through such Subaccounts are
as follows:
Money Market Series: To provide liquidity and as high a level of income as
is consistent with the preservation of capital, through investment in domestic
and foreign U.S. dollar-denominated money market obligations with maturities of
397 days or less. An investor's interest in the Money Market Series is neither
insured nor guaranteed by the U.S. Government.
Intermediate Government Bond Series: To provide as high a level of current
income as is consistent with preservation of capital, through investment in U.S.
Government and U.S. Government agency and instrumentality securities with short
and intermediate maturities, and high quality short-term obligations.
Government/Corporate Bond Series: To achieve the maximum total return
through investment in investment grade debt securities, U.S. Government and U.S.
Government agency and instrumentality securities, collateralized mortgage
obligations guaranteed by these agencies or instrumentalities and high quality
short-term obligations.
Balanced Series: To provide a high total return consistent with a broad
diversified mix of stocks, bonds and money market instruments.
Equity Income Series: 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.
Equity Growth Series: 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; current income is a secondary objective.
There can, of course, be no assurance that any series of Diversified
Investors Portfolios will achieve its investment objectives.
CORE/FEEDER STRUCTURE
Each Subaccount which invests in Diversified Investors Portfolios does so
through a two tier, core/feeder fund structure in which each Subaccount invests
in a corresponding series of Diversified Investors Portfolios.
In addition to selling beneficial interests to such Subaccounts,
Diversified Investors Portfolios may sell beneficial interests of its series to
other insurance company separate accounts, mutual funds, collective investment
vehicles or institutional investors. Such investors will invest in a series of
Diversified Investors Portfolios on the same terms and conditions as the
applicable Subaccount and will pay a proportionate share of the Series'
expenses. However, the other investors investing in such series 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 series of Diversified Investors Portfolios.
Smaller entities investing in a series of Diversified Investors Portfolios
may be materially affected by the actions of larger entities investing in that
series. For example, if a large fund withdraws from a series of Diversified
Investors Portfolios, the remaining investors may experience higher pro rata
operating expenses, thereby producing lower returns. Additionally, the affected
series 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 series of Diversified Investors Portfolios could have
effective voting control of the operations of that series. Whenever a Subaccount
is requested to vote on matters pertaining to a series of the Diversified
Investors Portfolios (other than a vote to continue a series upon
29
<PAGE> 31
the withdrawal of an investor in the series), MONY, as the legal owner of all
assets in the Subaccount, shall vote in accordance with the procedures set forth
under "Voting Rights" at page 23, including, to the extent required by law,
procedures through which MONY shall receive instructions with respect to such
vote from Contractholders and/or Participants. Certain changes in the investment
objectives, policies or restrictions of a series of Diversified Investors
Portfolios may require that MONY withdraw a Subaccount's interest in that
series. Any such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the series). 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.
INVESTMENT OBJECTIVES AND POLICIES
Each of the Subaccounts described above seeks to achieve its investment
objective by investing all of its assets in a corresponding series of
Diversified Investors Portfolios, which is a diversified, open-end management
investment company. The investment objective of each series of Diversified
Investors Portfolios may be changed without the approval of the investors in
that series, but not without written notice thereof to its investors (including
a Subaccount) 30 days prior to implementing the change. MONY may withdraw the
investment of a Subaccount from its corresponding series of Diversified
Investors Portfolios on any Portfolio Business Day (see page 46). Upon any such
withdrawal, MONY would consider what action might be taken, including the
investment of all the assets of the Subaccount in another pooled investment
entity having the same investment objective.
Each series of Diversified Investors Portfolios has a different investment
objective which it pursues through the investment policies described below.
Since each series of Diversified Investors Portfolios has a different investment
objective, each can be expected to have different investment results and be
subject to different market and financial risks. See "Investment Techniques and
Restrictions" herein and in the Statement of Additional Information for a
description of the fundamental policies of each series of Diversified Investors
Portfolios that cannot be changed without approval by the holders of a "majority
of the outstanding voting securities" (as defined in the 1940 Act) of such
series. Except as stated otherwise, all investment guidelines, policies and
restrictions of each series described herein and in the Statement of Additional
Information are non-fundamental.
Each series of Diversified Investors Portfolios has a different portfolio
turnover rate which is the percentage computed by dividing the lesser of
portfolio purchases or sales by the average value of the series in each case
excluding securities with maturities at the time of acquisition of one year or
less. Brokerage expenses can be expected to be higher as a result of higher
portfolio turnover rates. The rate of portfolio turnover is not a limiting
factor when it is deemed appropriate to purchase or sell securities of a series.
With respect to each series of Diversified Investors Portfolios,
Diversified has contracted for certain investment advisory services with one or
more subadvisers. Diversified and the subadviser(s) for a particular series of
Diversified Investors Portfolios are referred to herein collectively as the
"Advisers". There can be no guarantee that the investment objective of any of
the series of Diversified Investors Portfolios will be met. The following
sections describe the investment objective and policies of each series of
Diversified Investors Portfolio currently available under the Contracts through
Subaccounts.
MONEY MARKET SERIES. The investment objective of the Money Market Series
is to provide liquidity and as high a level of current income as is consistent
with the preservation of capital. The Money Market Series invests in high
quality short-term money market instruments. Securities in which the Money
Market Series invests may not earn as high a level of current income as
long-term or lower quality securities which generally have less liquidity,
greater market risk and more fluctuation in market value.
To achieve its investment objective, the Money Market Series invests in
U.S. dollar-denominated short-term money market obligations, including
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits, bankers' acceptances
and
30
<PAGE> 32
other short-term obligations issued by domestic banks and domestic branches and
subsidiaries of foreign banks, and high quality commercial paper and other
short-term corporate obligations, including those with floating or variable
rates of interest. In addition, the Money Market Series may lend its portfolio
securities, enter into repurchase agreements and reverse repurchase agreements,
and invest in securities issued by foreign banks and corporations outside the
United States. The Money Market Series reserves the right to concentrate 25% or
more of its total assets in obligations of banks.
In accordance with Rule 2a-7 under the 1940 Act, the Money Market Series
will maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of 397 days or less and
invest only in U.S. dollar-denominated securities determined in accordance with
procedures established by the Board of Trustees of Diversified Investors
Portfolios (the "Board of Trustees") to present minimal credit risks and which
are rated in one of the two highest rating categories for debt obligations by at
least two nationally recognized statistical rating organizations (an "NRSRO")
(or one NRSRO if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Board of Trustees (collectively, "Eligible Securities").
Eligible Securities include "First Tier Securities" and "Second Tier
Securities." First Tier Securities include those that possess a rating in the
highest category in the case of a single-rated security or at least two ratings
in the highest rating category in the case of multiple-rated securities or, if
the securities do not possess a rating, are determined to be of comparable
quality by the Advisers pursuant to the guidelines adopted by the Board of
Trustees. All other Eligible Securities are Second Tier Securities. The Money
Market Series will invest at least 95% of its total assets in First Tier
Securities.
The NRSROs currently rating instruments of the type the Money Market Series
may purchase are Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), Duff & Phelps, Inc., Fitch Investors Service, Inc., IBCA
Limited, IBCA Inc. and Thomson BankWatch, Inc., and their rating criteria are
described in the Appendix to the Statement of Additional Information. The
Statement of Additional Information contains further information concerning the
rating criteria and other requirements governing the Money Market Series'
investments, including information relating to the treatment of securities
subject to a tender or demand feature and securities deemed to possess a rating
based on comparable rated securities of the same issuer.
In addition, the Money Market Series will not invest more than 5% of its
total assets in the securities (including the securities collateralizing a
repurchase agreement) of, or subject to puts (including letters of credit,
guaranties or other credit support) issued by, a single issuer, except that (i)
the Money Market Series may invest more than 5% of its total assets in a single
issuer for a period of up to three business days in certain limited
circumstances, (ii) the Money Market Series may invest in obligations issued or
guaranteed by the U.S. Government without any such limitation, and (iii) the
limitation with respect to puts does not apply to unconditional puts if no more
than 10% of the Money Market Series' total assets is invested in securities
issued or guaranteed by the issuer of the unconditional put. Investments in
Second Tier Securities will be limited to 5% of the Money Market Series' total
assets, with the investment in any one such issuer being limited to no more than
the greater of 1% of the Money Market Series' total assets or $1,000,000. As to
each security, these percentages are measured at the time the Money Market
Series purchases the security.
The Money Market Series seeks to achieve its investment objective through
investments in the following types of U.S. dollar-denominated money market
instruments.
BANK OBLIGATIONS. The Money Market Series may invest in U.S.
dollar-denominated certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by banks. Certificates
of deposit are certificates evidencing the obligation of a bank to repay
funds deposited with it for a specified period of time. Such instruments
include Yankee Certificates of Deposit, which are certificates of deposit
denominated in U.S. dollars and issued in the United States by the domestic
branch of a foreign bank. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a
stated interest rate. Time deposits which may be held by the Money Market
Series are not insured by the Federal Deposit Insurance Corporation or any
other agency of the U.S. Government. The Money Market Series will not
invest more than
31
<PAGE> 33
10% of the value of its net assets in time deposits maturing in longer than
seven days and other instruments which are illiquid or not readily
marketable. The Money Market Series may also invest in certificates of
deposit and time deposits issued by foreign banks outside the United
States.
The Money Market Series may also invest in bankers' acceptances and other
short-term obligations. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of
the drawer to pay the face amount of the instrument upon maturity. The
other short-term obligations may include uninsured, direct obligations
which have either fixed, floating or variable interest rates.
To the extent the Money Market Series' investments are concentrated in the
banking industry, the Money Market Series will have correspondingly greater
exposure to the risk factors which are characteristic of such investments.
Sustained increases in interest rates can adversely affect the availability
or liquidity and cost of capital funds for a bank's lending activities, and
a deterioration in general economic conditions could increase the exposure
to credit losses. In addition, the value of and the investment return on
investments in the Money Market Series could be affected by economic or
regulatory developments in or related to the banking industry, which
industry also is subject to the effects of the concentration of loan
portfolios in leveraged transactions and in particular businesses, and
competition within the banking industry, as well as with other types of
financial institutions. The Money Market Series, however, will seek to
minimize its exposure to such risks by investing only in debt securities
which are determined to be of high quality.
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. The Money Market Series will invest in such securities only when the
Advisers are satisfied that the credit risk with respect to the issuer is
minimal. The Money Market Series itself, and its share price and yield, are
not guaranteed by the U.S. Government. For additional information on U.S.
Government securities, see "Diversified Investors Portfolios" in the
Statement of Additional Information.
COMMERCIAL PAPER. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The commercial
paper purchased by the Money Market Series will consist only of U.S.
dollar-denominated direct obligations issued by domestic and foreign
entities. The other corporate obligations in which the Money Market Series
may invest consist of high quality, U.S. dollar-denominated short-term
bonds and notes issued by domestic corporations.
The Money Market Series may invest in commercial paper issued by major
corporations in reliance on the exemption from registration afforded by
Section 3(a)(3) of the Securities Act of 1933, as amended (the "1933 Act").
Such commercial paper may be issued only to finance current transactions
and must mature in nine months or less. Trading of such commercial paper is
conducted primarily by institutional investors through investment dealers,
and individual investor participation in the commercial paper market is
very limited.
UNSECURED PROMISSORY NOTES. The Money Market Series also may purchase
unsecured promissory notes ("Notes") which are not readily marketable and
have not been registered under the
32
<PAGE> 34
1933 Act, provided such investments are consistent with the Money Market
Series' investment objective. The Notes purchased by the Money Market
Series will have remaining maturities of 13 months or less and will be
deemed by the Board of Trustees of Diversified Investors Portfolios, or by
the Advisers on its behalf, to present minimal credit risks and will meet
the quality criteria set forth above. The Money Market Series will invest
no more than 10% 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 Money Market Series
cannot exercise the demand feature described in the Statement of Additional
Information and as to which there is no secondary market).
RESTRICTED SECURITIES. The Money Market Series may invest in securities
that are subject to legal or contractual restrictions on resale. These
securities may be illiquid and, thus, the Money Market Series may not
purchase them to the extent that more than 10% of the value of its net
assets would be invested in illiquid securities. However, if a substantial
market of qualified institutional buyers develops pursuant to Rule 144A
under the 1933 Act for such securities held by the Money Market Series, the
Money Market Series intends to treat such securities as liquid securities
in accordance with procedures approved by the Board of Trustees of
Diversified Investors Portfolios. To the extent that for a period of time,
qualified institutional buyers cease purchasing such restricted securities
pursuant to Rule 144A, the Money Market Series' investing in such
securities may have the effect of increasing the level of illiquidity in
the Money Market Series during such period.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements involve the acquisition by the Money Market Series of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Money Market Series to resell, the instrument at a
fixed price, usually not more than one week after its purchase. The Money
Market Series or a sub-custodian will have custody of securities acquired
by the Money Market Series under a repurchase agreement.
Repurchase agreements may be entered into for the Series with sellers which
are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions
afford an opportunity for the Series to earn a return on available cash
with minimal market risk. Certain costs may be incurred by the Money Market
Series in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition,
if bankruptcy proceedings are commenced with respect to the seller of the
securities, realization on the securities by the Money Market Series may be
delayed or limited. The Money Market Series will consider on an ongoing
basis the creditworthiness of the institutions with which it enters into
repurchase agreements. Repurchase agreements are considered collateralized
loans under the 1940 Act.
The Money Market Series 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 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 the Money Market Series 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 Money Market Series may decline
below the repurchase price of those securities.
FOREIGN SECURITIES. The Money Market Series may invest in U.S.
dollar-denominated foreign securities issued outside the United States,
such as obligations of foreign branches and subsidiaries of domestic banks
and foreign banks, including Eurodollar certificates of deposit, Eurodollar
time deposits and Canadian time deposits, commercial paper of Canadian and
other foreign issuers, and U.S. dollar-denominated obligations issued or
guaranteed by one or more foreign governments or any of their agencies or
instrumentalities. Foreign securities may represent a greater degree of
risk than do securities of domestic issuers due to possible exchange rate
fluctuations, possible exchange controls, less publicly available
information, more volatile markets, less securities regulation, less
33
<PAGE> 35
favorable tax provisions (including possible withholding taxes), changes in
governmental administration or economic or monetary policy (in the United
States or abroad), war or expropriation. For a complete description of
foreign securities the Money Market Series may purchase, see "Diversified
Investors Portfolios -- Investment Policies" in the Statement of Additional
Information.
CERTAIN OTHER OBLIGATIONS. In order to allow for investments in new
instruments that may be created in the future, upon MONY supplementing this
Prospectus, the Money Market Series may invest in obligations other than
those listed previously, provided such investments are consistent with the
investment objective, policies and restrictions of the Money Market Series.
The Statement of Additional Information includes a discussion of additional
investment techniques such as zero coupon obligations, variable rate and
floating rate securities, participation interests, guaranteed investment
contracts and when-issued and forward commitment securities. The Statement
of Additional Information also includes a discussion of non-fundamental
investment policies, as well as a listing of specific investment
restrictions which constitute fundamental policies of the Money Market
Series and which cannot be changed without the approval of the holders of a
"majority of the outstanding voting securities" (as defined in the 1940
Act) of the Money Market Series. See "Diversified Investors
Portfolios -- Investment Restrictions" in the Statement of Additional
Information.
INTERMEDIATE GOVERNMENT BOND SERIES. The investment objective of the
Intermediate Government Bond Series is to provide as high a level of current
income as is consistent with the preservation of capital. The yield of the
Intermediate Government Bond Fund Series normally is expected to be higher than
a money market fund but lower than a longer-term or lower quality bond fund. The
Intermediate Government Bond Series pursues its investment objective by
investing in U.S. Government obligations and high quality short-term obligations
(including repurchase agreements and reverse repurchase agreements).
The Advisers attempt to maintain the Intermediate Government Bond Series'
"duration" between one and five years, which means that the Intermediate
Government Bond Fund Series' overall sensitivity to interest rates should be
similar to that of bonds and notes with remaining average maturities from one to
five years. The Intermediate Government Bond Series' dollar-weighted average
maturity (or dollar-weighted average life in the case of mortgage-backed
securities) may be longer than four years from time to time, but will not exceed
ten years under normal conditions. The Intermediate Government Bond Series may
hold individual securities with remaining maturities of up to thirty years.
Since the value of fixed income securities generally fluctuates inversely
with changes in interest rates, the duration of the Intermediate Government Bond
Series will vary to reflect the Advisers' assessments of prospective changes in
interest rates. The Advisers' strategy will be to adjust the duration of the
Intermediate Government Bond Fund Series so that the Intermediate Government
Bond Series may benefit from relative price appreciation when interest rates
decline and may protect capital value when interest rates rise. The success of
this strategy will depend on the Advisers' ability to manage the Intermediate
Government Bond Fund Series through changes in interest rates, and there is a
risk that the value of the securities held by the Intermediate Government Bond
Series will decline.
The following is a discussion of the various investments of and techniques
employed by the Intermediate Government Bond Series. Additional information
about the investment policies of the Intermediate Government Bond Series appears
under "Diversified Investors Portfolios" in the Statement of Additional
Information.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Intermediate Government Bond
Series may invest in U.S. Government securities. See "U.S. Government and
Agency Securities" above under Money Market Series.
The Intermediate Government Bond Series may invest a portion of its assets
in short-term U.S. Government securities with remaining maturities of one
year or less and repurchase agreements relating thereto. When the Advisers
believe market conditions warrant a temporary defensive
34
<PAGE> 36
position, the Intermediate Government Bond Series may invest up to 100% of
its assets in these instruments.
SHORT-TERM INSTRUMENTS. Cash, commercial paper, short-term obligations,
repurchase agreements or other forms of debt securities may be held to
provide a reserve for future purchases of securities during periods of
unusual market conditions or in order to reduce volatility, or as a
temporary defensive measure when the Advisers determine securities markets
to be overvalued. The Intermediate Government Bond Series limits its
short-term investments to those U.S. dollar-denominated instruments which
are determined by or on behalf of the Board of Trustees to present minimal
credit risks and which are of "high quality" as determined by a major
rating service or, in the case of instruments which are not rated, are of
comparable quality pursuant to procedures established by the Board of
Trustees. 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 longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements and reverse repurchase agreements may be entered into for the
Intermediate Government Bond Series. See "Repurchase Agreements and Reverse
Repurchase Agreements" under Money Market Series.
The Intermediate Government Bond Series may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption
requests, and not for leverage.
RESTRICTED SECURITIES. The Intermediate Government Bond Series may not
invest more than 15% of its net assets in securities that are subject to
legal or contractual restrictions on resale unless a dealer or
institutional trading market in such securities exists, in which case such
restricted securities would be considered exempt from such 15% limit. Under
the supervision of the Board of Trustees, the Advisers determine the
liquidity of restricted securities and, through reports from the Advisers,
the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to
predict how these markets will develop. If institutional trading in
restricted securities were to decline, the liquidity of the Intermediate
Government Bond Series could be adversely affected. See "Restricted
Securities" above under Money Market Series.
OPTIONS AND FUTURES CONTRACTS. The Intermediate Government Bond Series may
buy and sell options and futures contracts to manage its exposure to
changing interest rates and securities prices. Some options and futures
strategies, including selling futures, buying puts, and writing calls,
hedge the Intermediate Government Bond Series' investments against price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. The Intermediate Government
Bond Series may invest in options (including over-the-counter options) and
futures contracts based on any type of security or index related to its
investments.
Options and futures can be volatile investments, and involve certain risks.
If the Advisers apply a hedge at an inappropriate time or judge interest
rates incorrectly, options and futures strategies may lower the
Intermediate Government Bond Series' return. The costs of hedging are not
reflected in the Intermediate Government Bond Series' yield but are
reflected in the Intermediate Government Bond Series' total return. The
Intermediate Government Bond Series' could also experience losses if its
options and futures positions were poorly correlated with its other
investments, or if it could not close out its positions because of an
illiquid secondary market.
The Intermediate Government Bond Series currently does not intend to engage
in the writing of options, except for the purpose of terminating an
existing position or under the limited circumstances described under
"Diversified Investors Portfolios" in the Statement of Additional
Information. Nevertheless, the Intermediate Government Bond Series has the
authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the
Intermediate Government Bond Series.
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the availability of
suitable securities for the Intermediate Government Bond Series, the
Advisers may purchase securities for the Interme-
35
<PAGE> 37
diate Government Bond Series on a "when-issued" or on a "forward delivery"
basis, which means that the obligations would be delivered to the
Intermediate Government Bond Series at a future date beyond customary
settlement time. Under normal circumstances, the Intermediate Government
Bond Series would take delivery of such securities. In general, the
Intermediate Government Bond Series would not pay for the securities until
they are received, and would not start earning interest on the obligations
until the contractual settlement date. While awaiting delivery of the
obligations purchased on such basis, the Intermediate Government Bond
Series would establish a segregated account consisting of cash, cash
equivalents or high grade liquid debt securities equal to the amount of its
commitments to purchase "when-issued" securities. An increase in the
percentage of the Intermediate Government Bond Series' assets committed to
the purchase of securities on a "when-issued" basis may increase the
volatility of its net asset value.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Intermediate Government
Bond Series may also utilize the following investments and investment
techniques and practices: investments in foreign securities, options on
futures contracts, foreign currency exchange transactions, options on
foreign currencies. The Intermediate Government Bond Series does not intend
to utilize any of these investment practices to the extent of more than 5%
of its assets. See "Diversified Investors Portfolios" in the Statement of
Additional Information for further information.
GOVERNMENT/CORPORATE BOND SERIES. The investment objective of the
Government/Corporate Bond Series is to achieve the maximum total return. The
Government/Corporate Bond Series' yield normally is expected to be higher than a
money market fund but lower than a longer-term or lower quality bond fund. The
Government/Corporate Bond Series pursues its investment objective by investing
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 high quality short-term obligations
(including repurchase agreements and reverse repurchase agreements). At least
65% of the Series' assets is invested in U.S. Government securities, corporate
bonds and short-term instruments.
The Advisers attempt to maintain the Government/Corporate Bond Series'
"duration" between three and ten years, which means that the
Government/Corporate Bond Series' overall sensitivity to interest rates should
be slightly more then that of bonds and notes with remaining average maturities
from three to fifteen years. The Government/Corporate Bond Government/Corporate
Bond Series' dollar-weighted average maturity (or dollar-weighted average life
in the case of mortgage-backed securities) may be longer than fifteen years from
time to time, but will not exceed thirty years under normal conditions.
Since the value of fixed income securities generally fluctuates inversely
with changes in interest rates, the duration of the Government/Corporate Bond
Series will vary to reflect the Advisers' assessments of prospective changes in
interest rates. The Advisers' strategy will be to adjust the duration of the
Government/Corporate Bond Series so that the Government/Corporate Bond Series
may benefit from relative price appreciation when interest rates decline and may
protect capital value when interest rates rise. The success of this strategy
will depend on the Advisers' ability to manage the Government/Corporate Bond
Series through changes in interest rates, and there is a risk that the value of
the securities held by the Government/Corporate Bond Series will decline.
The following is a discussion of the various investments of and techniques
employed by the Government/Corporate Bond Series. Additional information about
the investment policies of the Government/Corporate Bond Series appears under
"Diversified Investors Portfolios" in the Statement of Additional Information.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Government/Corporate Bond
Series may invest in U.S. Government securities. See "U.S. Government and
Agency Securities" above under Money Market Series.
The Government/Corporate Bond Series may invest a portion of its assets in
short-term U.S. Government securities with remaining maturities of one year
or less and repurchase agreements relating thereto. When the Advisers
believe market conditions warrant a temporary defensive
36
<PAGE> 38
position, the Government/Corporate Bond Series may invest up to 100% of its
assets in these instruments.
CORPORATE BONDS. The Government/Corporate Bond Series may purchase debt
securities of United States corporations only if they carry a rating of at
least Baa from Moody's or BBB from S&P or which, if not rated by these
rating agencies, are judged by the Advisers to be of comparable quality.
Securities rated Baa by Moody's or BBB by S&P may have speculative
characteristics. Changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher grade securities. See the Appendix to
the Statement of Additional Information for an explanation of these
ratings.
FOREIGN SECURITIES. The Government/Corporate Bond Series may invest in
securities of foreign issuers. The Government/Corporate Bond Series'
investments in unlisted foreign securities are subject to the overall
restrictions applicable to investments in illiquid securities. Foreign
securities may represent a greater degree of risk than do securities of
domestic issuers due to possible exchange rate fluctuations, possible
exchange controls, less publicly available information, more volatile
markets, less securities regulation, less favorable tax provisions
(including possible withholding taxes), changes in governmental
administration or economic or monetary policy (in the United States or
abroad), war or expropriation. Forward foreign currency exchange contracts
may also be entered into for the purchase or sale of foreign currency
solely for hedging purposes against adverse rate changes. A currency
exchange contract allows a definite price in dollars to be fixed for
foreign securities that have been purchased or sold (but not settled) for
the Government/Corporate Bond Series. Entering into such 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 risks of incurring losses if rates do not move in the
direction anticipated.
SHORT-TERM INSTRUMENTS. Cash, commercial paper, short-term obligations,
repurchase agreements, bank certificates of deposit or other forms of debt
securities may be held to provide a reserve for future purchases of
securities, during periods of unusual market conditions or in order to
reduce volatility, or as a temporary defensive measure when the Advisers
determine securities markets to be overvalued. See "Short-Term Instruments"
above under Intermediate Government Bond Series.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. The
Government/Corporate Bond Series may enter into repurchase agreements and
reverse repurchase agreements. See "Repurchase Agreements and Reverse
Repurchase Agreements" above under Money Market Series. The
Government/Corporate Bond Series may borrow Funds for temporary or
emergency purposes, such as meeting larger then anticipated redemption
requests, and not for leverage.
RESTRICTED SECURITIES. The Government/Corporate Bond Series may not invest
more than 15% of its net assets in securities that are subject to legal or
contractual restrictions on resale. See "Restricted Securities" above under
Money Market Series.
OPTIONS AND FUTURES CONTRACTS. The Government/Corporate Bond Series may
buy and sell options and futures contracts to manage its exposure to
changing interest rates and securities prices. See "Options and Futures
Contracts" above under Intermediate Government Bond Series.
The Government/Corporate Bond Series currently does not intend to engage in
the writing of options, except for the purpose of terminating an existing
position or under the limited circumstances described in the Statement of
Additional Information. Nevertheless, the Government/Corporate Bond Series
has the authority to write options and may do so in the future if the
Advisers determine that such transactions are in the best interests of the
Government/Corporate Bond Series.
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the availability of
suitable securities for the Government/Corporate Bond Series, the Advisers
may purchase securities for the Government/Corporate Bond Series on a
"when-issued" or on a "forward delivery" basis, which means that the
Securities would be delivered to the Government/Corporate Bond Series at a
future date
37
<PAGE> 39
beyond customary settlement times. See "Delayed Delivery Transactions"
above under Intermediate Government Bond Series.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Government/Corporate Bond
Series may also utilize the following investments and investment techniques
and practices: options on futures contracts and options on foreign
currencies. The Government/Corporate Bond Series does not intend to utilize
any of these investments or techniques to the extent of more than 5% of its
assets. See the Statement of Additional Information for further
information.
BALANCED SERIES. The investment objective of the Balanced Series is to
provide a high total investment return consistent with a broad diversified mix
of stocks, bonds and money market instruments. The Balanced Series pursues its
investment objective by investing in a managed mix of common stocks (and/or
equivalents including American Depository Receipts), preferred stocks, debt
securities of U.S. domiciled corporations, U.S. government securities,
commercial paper of U.S. corporations, and bank obligations. The Advisers will
determine the proportions of each type of investment to achieve an asset mix
they believe appropriate for an investor who desires diversification of
investment. The Balanced Series will vary the proportion of each type of asset
purchased according to the Advisers' interpretations of changes in economic
conditions and the sensitivity of each type of investment to those changes. The
Advisers seek to shift emphasis among stocks, bonds and short-term instruments
to maximize participation in positive markets and preservation of capital in
negative markets and otherwise in response to market conditions.
The Balanced Series policy is to invest its assets in a broad list of
equity and fixed income securities, such as common stocks, preferred stocks and
bonds, including short-term obligations. The list may be diversified not only by
companies and industries, but also by type of security. Some fixed income
securities may also have a right to purchase common stock by means of a
conversion privilege or attached warrants. The Balanced Series may vary the
percentage of assets invested in any one type of security in accordance with the
Advisers' interpretation of economic and market conditions, fiscal and monetary
policy, and underlying securities values. However, at least 25% of the total
assets of the Balanced Series are always invested in fixed income senior
securities including debt securities and preferred stock. In selecting common
stocks, emphasis is placed on investing in established companies with market
capitalizations of $100,000,000 or more and seasoned management teams. Most of
the Balanced Series' non-convertible long-term debt investments consist of
"investment grade" securities (rated Baa or better by Moody's or BBB or better
by S&P), although unrated debt securities may be purchased and held if they are
judged by the Advisers to be of equivalent quality. Securities rated Baa by
Moody's or BBB by S&P may have speculative characteristics. Changes in economic
conditions or other circumstances may weaken more severely the capacity of
issuers of Baa or BBB securities to make principal and interest payments than in
the case for issuers of higher grade bonds. Less than 5% of the Balanced Series
investments consist of securities rated Baa by Moody's or BBB by S&P. For a
description of these ratings, see the Appendix to the Statement of Additional
Information.
The Balanced Series may invest a portion of its assets in short-term U.S.
Government securities with remaining maturities of one year or less and
repurchase agreements relating thereto. When the Advisers believe market
conditions warrant a temporary defensive position, the Balanced Series may
invest up to 100% of its assets in these instruments or other money market
instruments.
EQUITY INCOME SERIES. The investment objective of the Equity Income Series
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 Equity Income Series seeks to achieve
its investment objective by investing primarily in a diversified portfolio of
stocks of companies which, in the opinion of the Advisers, are fundamentally
sound financially and which pay relatively high dividends on a consistent basis.
The Advisers attempt to manage the Equity Income Series so that it will
out-perform other equity income funds in negative markets. As a result of this
objective, the Equity Income Series may underperform relative to other equity
income funds in positive markets. The Equity Income Series invests primarily in
common stocks listed on the New York Stock Exchange and on other national
securities exchanges and, to a lesser extent, in stocks that are traded
over-the-counter. The Equity Income Series also invests in bonds and short-term
obligations as well as securities
38
<PAGE> 40
convertible into common stocks, preferred stocks, debt securities and short-term
obligations. The Equity Income Series allocates its investments among different
industries and companies, and changes its portfolio securities for investment
considerations and not for trading purposes.
The Equity Income Series' policy is to invest in a broad list of equity and
fixed income securities, including short-term obligations. The list may be
diversified not only by companies and industries, but also by type of security.
Some fixed income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Equity Income Series may vary the
percentage of assets invested in any one type of security in accordance with the
Advisers' interpretation of economic and market conditions, fiscal and monetary
policy, and underlying security values. It is contemplated that most of the
Equity Income Series' non-convertible long-term debt investments will consist of
"investment grade" securities (rated Baa or better by Moody's or BBB or better
by S&P). However, the Equity Income Series may also invest not more than 25% of
its assets in fixed income securities which either are rated in lower than
"investment grade" categories by either Moody's or S&P or are unrated when, in
the opinion of the Advisers, such an investment presents a greater opportunity
to achieve the Equity Income Series' investment objective with comparable risk
to an investment in "investment grade" securities. Securities rated Baa by
Moody's or BBB by S&P may have speculative risk characteristics.
Non-Investment Grade Obligations. Non-investment grade obligations (those
that are rated Ba or lower by Moody's or BB or lower by S&P or comparable
unrated obligations), commonly referred to as "junk bonds", are speculative in
nature. Risks associated with junk bonds are (a) the relative youth and growth
of the market for such securities, (b) the sensitivity of such securities to
interest rate and economic changes, (c) the lower degree of protection of
principal and interest payments, (d) the relatively low trading market liquidity
for the securities, (e) the impact that legislation may have on the high yield
bond market (and, in turn, on the Equity Income Series' net asset value and
investment practices), and (f) the creditworthiness of the issuers of such
securities. During an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress which would
adversely affect their ability to service their principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing. An economic downturn could also disrupt the market for junk bonds and
adversely effect the value of outstanding bonds and the ability of the issuers
to repay principal and interest. If the issuer of a debt obligation held by the
Equity Income Series defaulted, the Equity Income Series could incur additional
expenses to seek recovery. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may also decrease the values and liquidity
of junk bonds held by the Equity Income Series, especially in a thinly traded
market. For a description of ratings of debt obligations which may be purchased
by the Equity Income Series, see the Appendix to the Statement of Additional
Information.
EQUITY GROWTH SERIES. The investment objective of the Equity Growth Series
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
Income seeks to achieve its investment objective by investing primarily in a
diversified portfolio of common stocks, but may also invest in other types of
securities such as preferred stocks, convertible and non-convertible bonds,
warrants and foreign securities including American Depository Receipts. Under
normal circumstances, at least 65% of the assets of the Equity Income are
invested in equity securities. This is a fundamental investment policy and may
not be changed without investor approval. The Equity Growth Series invests
primarily in stocks of companies that have a market value of all their issued
and outstanding common stock of $10 to $15 billion and preferred stocks and
common stocks listed on the New York Stock Exchange and on other national
securities exchanges and, to a lesser extent, in stocks that are traded
over-the-counter. The Equity Growth Series also invests in bonds and short-term
obligations as well as securities convertible into common stocks, preferred
stocks, debt securities and short-term obligations. The Equity Growth Series
allocates its investments among different industries and companies, and changes
its portfolio securities for investment considerations and not for trading
purposes.
39
<PAGE> 41
The Equity Growth Series' policy is to invest in a broad list of equity and
fixed income securities, including short-term obligations. The list may be
diversified not only by companies and industries, but also by type of security.
Some fixed income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Equity Growth Series may vary the
percentage of assets invested in any one type of security in accordance with the
Adviser's interpretation of economic and market conditions, fiscal and monetary
policy, and underlying security values. It is contemplated that most of the
Equity Growth Series' non-convertible long-term debt investments will consist of
"investment grade" securities (rated Baa or better by Moody's or BBB or better
by S&P). However, the Equity Growth Series may also invest not more than 25% of
its assets in fixed income securities which either are rated in lower than
"investment grade" categories by either Moody's or S&P or are unrated when, in
the opinion of the Adviser, such an investment presents a greater opportunity to
achieve the Equity Growth Series' investment objective with comparable risk to
an investment in "investment grade" securities. Such lower rated or unrated
fixed income securities have speculative risk characteristics. See
"Non-Investment Grade Obligations" above under Equity Income Series.
40
<PAGE> 42
INVESTMENT TECHNIQUES AND RESTRICTIONS
INVESTMENT TECHNIQUES FOR THE BALANCED SERIES, EQUITY INCOME SERIES AND EQUITY
GROWTH SERIES (COLLECTIVELY, THE "SERIES").
Foreign Securities. Each Series' current policy is not to invest more than
25% of its assets in securities of foreign issuers, including investments in
sponsored American Depository Receipts ("ADRs"). ADRs are receipts typically
issued by an American bank or trust company evidencing ownership of the
underlying foreign securities. Each Series' investments in unlisted foreign
securities, not including ADRs, are subject to the overall restrictions
applicable to investments in illiquid securities. Foreign securities, including
ADRs, may represent a greater degree of risk than do securities of domestic
issuers due to possible exchange rate fluctuations, possible exchange controls,
less publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions (including possible withholding
taxes), changes in governmental administration or economic or monetary policy
(in the United States or abroad), war or expropriation. Each Series may invest
up to 5% of its assets in closed-end investment companies which primarily hold
foreign securities. Forward foreign currency exchange contracts may also be
entered into for the purchase or sale of foreign currency solely for hedging
purposes against adverse rate changes. A currency exchange contract allows a
definite price in dollars to be fixed for foreign securities that have been
purchased or sold (but not settled) for each Series. Entering into such 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.
Options and Futures Contracts. Each Series may enter into transactions in
futures contracts, options on futures contracts, options on securities indexes
and options on securities, for the purpose of hedging each Series' securities,
which would have the effect of reducing the volatility of its net asset value.
In general, each such transaction involves the establishment of a position which
is expected to move in a direction opposite to that of the security or
securities being hedged.
For example, each Series may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
that Series. In the event that such decline occurs, and the hedging transaction
is successful, the reduced value of portfolio securities will be offset, in
whole or in part, by a corresponding gain on the futures or option position.
Conversely, when the Series is not fully invested in the securities market, and
it expects a significant market advance, it may purchase futures contracts or
call options on futures contracts, securities indexes or securities in order to
gain rapid market exposure that may in part or entirely offset increases in the
cost of securities that that Series intends to purchase.
The Statement of Additional Information includes further information about
the transactions in futures and option contracts that may be entered into by
each Series.
Gain or loss to each Series on transactions in security index futures or
options will depend on price movements in the stock market generally (or in a
particular industry or segment of the market), rather than price movements of
individual securities. A securities index assigns relative values to the
securities included in the index and the index fluctuates with changes in the
market values of the securities so included. Some securities index futures or
options are based on broad market indexes, such as the Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures or options on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Options on indexes and options on securities are traded on
securities exchanges regulated by the SEC. Futures contracts and options on
futures contracts are traded only on designated contract markets regulated by
the Commodity Futures Trading Commission and through a registered futures
commission merchant which is a member of such contract market. A commission must
be paid on each completed purchase and sale transaction. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.
41
<PAGE> 43
Each Series currently does not intend to engage in the writing of options,
except for the purpose of terminating an existing position or under the limited
circumstances described in the Statement of Additional Information.
Nevertheless, each Series has the authority to write options and may do so in
the future if the Advisers determine that such transactions are in the best
interests of the Series.
Short-Term Instruments. Each of the Series may invest in cash, commercial
paper, short-term obligations, repurchase agreements or other forms of debt
securities. See "Short-Term Instruments" above under Intermediate Government
Bond Series.
Repurchase Agreements and Reverse Repurchase Agreements. Each of the
Series may enter into repurchase agreements and reverse repurchase agreements
and may borrow funds for temporary or emergency purposes, such as meeting larger
than expected redemption requests, and not for leverage. See "Repurchase
Agreements and Reverse Repurchase Agreements" above under Intermediate
Government Bond Series.
Restricted Securities. Each of the Series may not invest more than 15% of
its net assets in securities that are subject to legal or contractual
restrictions on resale. See "Restricted Securities" above under Money Market
Bond Series.
Delayed Delivery Transactions. In order to help insure the availability of
suitable securities for each of the Series the Advisers may purchase securities
for each such Series on a "when-issued" or on a "forward delivery" basis. See
"Delayed Delivery Transactions" above under Intermediate Government Bond Series.
Changes to the securities of each Series are generally 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 to trading when such trading is deemed
appropriate. Each Series engages in trading if it believes a transaction net of
costs (including custodian charges) will help it achieve its investment
objectives. The amount of brokerage commissions and realized capital gains will
tend to increase as the level of portfolio activity increases. The primary
consideration in placing portfolio security 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. See "Portfolio
Transactions and Brokerage Commissions" in the Statement of Additional
Information.
INVESTMENT RESTRICTIONS FOR ALL SERIES OF DIVERSIFIED INVESTORS PORTFOLIOS
As "diversified" funds, no more than 5% of the assets of any series of
Diversified Investors Portfolios may be invested in the securities of one issuer
(other than U.S. Government securities), except that up to 25% of each series'
assets may be invested without regard to this limitation. No series of
Diversified Investors Portfolios will invest more than 25% of its assets in the
securities of issuers in any one industry. These are fundamental investment
policies which may not be changed without investor approval. As a nonfundamental
operating policy, no more than 15% (10% in the case of the Money Market Series)
of the net assets of any series may be invested in (i) securities the resale of
which is restricted under federal securities laws and (ii) illiquid or not
readily marketable securities (including repurchase agreements maturing in more
than seven days). Additional fundamental and operating policies of Diversified
Investors Portfolios are contained in the Statement of Additional Information.
LENDING OF PORTFOLIO SECURITIES
The Series have the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, a Series
can increase its income by continuing to receive interest on the loaned
securities as well as by either investing the cash collateral in short-term
securities or obtaining yield in the form of interest paid when U.S. Government
obligations are used as collateral. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities or even
loss of rights in the collateral should the borrower of the securities fail
financially. A Series will adhere to the following conditions whenever its
securities are loaned: (i) the Series must receive at least 100% cash collateral
or equivalent securities from the borrower; (ii) the borrower must increase this
collateral whenever the market value of the loaned securities including accrued
interest exceeds the level of the collateral; (iii) the Series must be able to
terminate the loan at any time; (iv) the Series must receive reasonable interest
on the loan, as well as any dividends, interest or other
42
<PAGE> 44
distributions on the loaned securities, and any increase in market value; (v)
the Series may pay only reasonable custodian fees in connection with the loan;
and (vi) voting rights on the loaned securities may pass to the borrower.
However, if a material event adversely affecting the loaned securities were to
occur, the Series would terminate the loan and regain the right to vote the
securities.
MANAGEMENT OF DIVERSIFIED INVESTORS PORTFOLIOS
The Board of Trustees of Diversified Investors Portfolios provides broad
supervision over the affairs of Diversified Investors Portfolios. For further
information about the Trustees of Diversified Investors Portfolios, see
"Diversified Investors Portfolios" in the Statement of Additional Information. A
majority of the Trustees of Diversified Investors Portfolios are not affiliated
with the Advisers.
INVESTMENT ADVISORY SERVICES. Diversified Investment Advisors, Inc.
("Diversified") manages the assets of each series of Diversified Investors
Portfolios pursuant to an Investment Advisory Agreement (the "Advisory
Agreement") with Diversified Investors Portfolios with respect to each series
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 of Diversified Investors Portfolios may determine, Diversified
provides general investment advice to each series. For its services under the
Advisory Agreement, Diversified receives from each series fees accrued daily and
paid monthly at an annual rate equal to the percentages specified in the table
below of the corresponding series' average daily net assets. Diversified is
currently waiving a portion of its investment advisory fee. Investment
management decisions are made 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") which is 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 N.V., a Netherlands corporation which
is a publicly traded international insurance group. Diversified was incorporated
in 1992 for the purpose of acting as investment adviser to Diversified Investors
Portfolios. Accordingly, Diversified Investors Portfolios is the first family of
investment companies for which Diversified serves as investment adviser. It is
Diversified's responsibility to select, subject to the review and approval of
the Diversified Investors Portfolios' Board of Trustees, appropriate subadvisers
with distinguished backgrounds and to review such subadvisers' continued
performance.
For each series, Diversified has entered into an Investment Subadvisory
Agreement (each a "Subadvisory Agreement") with the subadvisers listed in the
table below (each a "Subadviser," and collectively the "Subadvisers"). For its
services under each Subadvisory Agreement, the Subadvisers receive a fee from
Diversified at an annual rate equal to the percentages specified in the table
below of the corresponding series' average daily net assets. Each fee will be
accrued monthly by multiplying the arithmetic average of the beginning and
ending monthly net assets in the series by the fee schedule and dividing by 12.
Each fee will be paid on a quarterly basis.
<TABLE>
<CAPTION>
COMPENSATION RATES(%)
DIVERSIFIED INVESTORS PORTFOLIO ------------------------
PORTFOLIO SERIES SUBADVISERS ADVISER(1) SUBADVISERS
- --------------------------------------- ---------------------------------- ---------- -----------
<S> <C> <C> <C>
Money Market Series Capital Management Group 0.25 0.05
Intermediate Government Bond Series Capital Management Group 0.35 0.15
Government/Corporate Bond Series Capital Management Group 0.35 0.15
Balanced Series Institutional Capital Corporation 0.45 (2)
Equity Income Series Asset Management Group 0.45 0.25
Equity Growth Series Chancellor LGT Asset Management, 0.62 (3)
Inc.
</TABLE>
- ---------------
(1) The Adviser is currently waiving a portion of its fee. See
"Synopsis -- Table of Fees" at page 6 for a discussion of the fee waivers
currently in effect.
(2) 0.55% on the first $25,000,000 in assets, 0.45% on the next $25,000,000 in
assets and 0.35% on all assets in excess of $50,000,000.
(3) 0.50% on the first $50,000,000 in assets, 0.30% on the next $75,000,000 in
assets, 0.25% on the next $75,000,000 in assets; and 0.20% on assets in
excess of $200,000,000.
It is the responsibility of a Subadviser to make the day-to-day investment
decisions of the series and to place the purchase and sales orders for
securities transactions of such series, subject in all cases
43
<PAGE> 45
to the general supervision of Diversified. Each Subadviser makes the investment
selections for its respective series consistent with the guidelines and
directions set by Diversified and the Board of Trustees of Diversified Investors
Portfolios. Each Subadviser furnishes at its own expense all services,
facilities and personnel necessary in connection with managing the corresponding
series' investments and effecting securities transactions for a series.
Diversified has entered into separate Subadvisory Agreements with respect
to each of the Money Market Series, Intermediate Government Bond Series and
Government/Corporate Bond Series with Capital Management Group, a division of
1740 Advisers, Inc., a wholly-owned subsidiary of MONY. The address of Capital
Management Group is 1740 Broadway, New York, New York 10019. Total assets under
management by Capital Management Group at December 31, 1996 were approximately
$890 million, of which $890 million were assets of registered investment
companies. Diversified has entered into separate Subadvisory Agreements with
respect to each of the Money Market Portfolio, Intermediate Government Bond
Portfolio and Government/Corporate Bond Portfolio with Capital Management Group,
a division of 1740 Advisers, Inc., a wholly-owned subsidiary of The Mutual Life
Insurance Company of New York ("MONY"). The address of Capital Management Group
is 1740 Broadway, New York, New York 10019. Total assets under management by
Capital Management Group at December 31, 1996 were approximately $890 million,
of which $890 million of which were assets of registered investment companies.
The following persons are primarily responsible for the day-to-day management of
the Portfolios (the inception date of such person's responsibility for the
Portfolios and such person's experience for the past five years is indicated
parenthetically -- Money Market Portfolio -- David Wheeler, Investment Vice
President (since 1997, employed by Capital Management group since 1994,
previously employed at AIG Investment Advisors; Intermediate Government Bond
Portfolio and Government/Corporate Bond Portfolio -- Gregory Staples, Vice
President (since 1996 and 1994, respectively, employed by Capital Management
Group since 1987).
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Income Series with Asset Management Group, a division of 1740 Advisers,
Inc., a wholly-owned subsidiary of MONY. The address of Asset Management Group
is 1740 Broadway, New York, New York 10019. Total assets under management by
Asset Management Group at December 31, 1996 were approximately $1.3 billion,
$1.1 million of which were assets of registered investment companies. Investment
management decisions of Asset Management Group are made by committee and not by
managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Growth Portfolio with Chancellor LGT Asset Management, Inc.
("Chancellor"). Chancellor was formed in 1996 as a result of the merger between
LGT Asset Management, Inc., a wholly-owned subsidiary of Liechtenstein Global
Trust AG ("LGT"), and Chancellor Capital Management, Inc., a wholly-owned
subsidiary of LGT which was acquired by LTG in 1996. Chancellor is a
wholly-owned subsidiary of LGT. LGT is controlled by the Prince of Liechtenstein
Foundation, which serves as the parent organization for the various business
enterprises of the Princely Family of Liechtenstein. Total assets under
management for all equity growth clients at December 31, 1996 were approximately
$2.1 billion, $ of which were assets of registered investment
companies. The principal business address of Chancellor is 1166 Avenue of the
Americas, New York, NY 10036. Investment management decisions of Chancellor are
made by committee and not by managers individually.
ADMINISTRATOR. Pursuant to an Administrative Services Agreement (and the
Advisory Agreement), Diversified, as Administrator, provides Diversified
Investors Portfolios with general office facilities and supervises the overall
administration of Diversified Investors Portfolios, including, among other
responsibilities, the negotiation of contracts and fees with, and the monitoring
of performance and billings of, the independent contractors and agents of
Diversified Investors Portfolios; the preparation and filing of all documents
required for compliance by Diversified Investors Portfolios with applicable laws
and regulations; providing equipment and clerical personnel necessary for
maintaining the organization of Diversified Investors Portfolios; preparation of
certain documents in connection with meetings of Trustees and investors of
Diversified Investors Portfolios; and the maintenance of books and records of
Diversified Investors Portfolios. Diversified provides persons satisfactory to
the
44
<PAGE> 46
Board of Trustees of Diversified Investors Portfolios to serve as officers of
Diversified Investors Portfolios. Such officers, as well as certain other
employees and Trustees of Diversified Investors Portfolios, may be directors,
officers or employees of Diversified or its affiliates. The Administrator
receives no additional fee for its administrative services to Diversified
Investors Portfolios.
EXPENSES. The expenses of Diversified Investors Portfolios include the
compensation of its Trustees who are not affiliated with the Adviser or
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 Advisory Agreement.
CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT. Investors Bank &
Trust Company is the custodian of the securities held by Diversified Investors
Portfolios and is authorized to use the facilities of the Depository Trust
Company and the facilities of the book-entry system for the Federal Reserve
Bank. Investors Bank & Trust Company is the transfer agent and
dividend-disbursing agent for Diversified Investors Portfolios.
EXCLUSIVE PLACEMENT AGENT. Diversified Investors Portfolios has retained
the services of Diversified Investors Securities Corp., ("DISC") as Exclusive
Placement Agent. The principal business address of DISC is 4 Manhattanville
Road, Purchase, New York 10577. DISC receives no compensation as Exclusive
Placement Agent.
OTHER INFORMATION REGARDING
DIVERSIFIED INVESTORS PORTFOLIOS
PURCHASE AND REDEMPTION OF INTERESTS IN DIVERSIFIED INVESTORS
PORTFOLIOS. Beneficial interests in the series of Diversified Investors
Portfolios described in this Prospectus are currently being offered by DISC to
MONY for allocation to Subaccounts to fund benefits payable under the Contracts.
Investments in Diversified Investors 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 the series of Diversified Investors Portfolios.
The net asset value of each series of Diversified Investors Portfolios is
determined each day during which the Advisers of that series are open for
business ("Portfolio Business Day"). This determination is made once each day as
of the close of regular trading on the New York Stock Exchange, currently 4:00
p.m., New York time (the "Valuation Time").
Each investor in a series of Diversified Investors Portfolios may add to or
reduce its investment in such series on each Portfolio Business Day. As of the
Valuation Time on each such day, the value of each investor's beneficial
interest in a series will be determined by multiplying the net asset value of
the series by the percentage, effective for that day, which represents that
investor's share of the aggregate beneficial interests in the series. 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 series will then be recomputed as the percentage equal
to the fraction (i) the numerator of which is the value of such investor's
investment in the series 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 series effected as of the Valuation Time, and (ii) the
denominator of which is the aggregate net asset value of the series 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 series as of
the
45
<PAGE> 47
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 series by all
investors in such series. The percentage so determined will then be applied to
determine the value of the investor's interest in the series as of the Valuation
time on the following Portfolio Business Day.
An investor in a series of Diversified Investors Portfolios 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 reduction 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 series, 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 series, 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 series
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 series at the
beginning of the period. Investments in a series 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 series' securities or determination of the net
asset value of each series is not reasonably practicable, and (iii) for such
other periods as the Securities and Exchange Commission may by order permit for
the protection of investors in any series of Diversified Investors Portfolios.
NET ASSET VALUE. Diversified Investors Portfolios values the securities of
the Money Market Series based on the amortized cost method of valuation.
Securities of other series of Diversified Investors 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 Diversified Investors Portfolios' Board of
Trustees. Debt obligations with 60 days or less remaining to maturity may be
valued by the amortized cost method, which the Diversified Investor Portfolios'
Trustees have 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 series will be taxable on its share (as determined in accordance with the
governing instruments of Diversified Investors Portfolio) of the 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.
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 series 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 series 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
series and includes a disproportionate share of any unrealized receivables held
by the series 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
46
<PAGE> 48
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
series, increased by such investor's share of income from that series and
decreased by the amount of any cash distributions and the basis of any property
distributed from that series.
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
(each a "Series"). Investment in each series 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 series (e.g., investment companies, insurance
company separate accounts and common and commingled trust funds) will each be
liable for all obligations of that series (and of no other series). However, the
risk of an investor in a series incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance existed
and the series itself was unable to meet its obligations. Investments in each
series 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 series. Investors in a series 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
series. As to any matter which does not affect a particular series, only
investors in the one or more affected series 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 of Diversified Investors Portfolios 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 series, investors would be entitled to share
pro rata in the net assets of that series (and no other series) available for
distribution to investors. See "Voting Rights" at page 23.
Each series determines its net income and realized capital gains, if any,
on each Portfolio Business Day and allocates all such income and gain pro rata
among the investors in such series at the time of such determination.
The "net income" of each series shall consist of (i) all income accrued,
less the amortization of any premium, on the assets of the series, less (ii) all
actual and accrued expenses of the series 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 series. All the net income of each series is allocated pro rata
among the investors in the series (and no other series).
Inquiries regarding the Diversified Investors Portfolios may be directed to
4 Manhattanville Road, Purchase, New York 10577 (914-697-8000).
47
<PAGE> 49
EXPERTS
The balance sheets of MONY as of December 31, 1996 and 1995, and the
related statements of operations and cash flows for the years then ended, as
well as the statements of assets and liabilities for Keynote Series Account as
of December 31, 1996, and the related statements of operations for the year then
ended and the statements of changes in net assets for the years ended December
31, 1996 and December 31, 1995 have been audited by Coopers & Lybrand L.L.P.,
independent accountants, whose reports thereon are set forth in the Statement of
Additional Information. These financial statements have been included upon the
authority of said firm as experts in auditing and accounting.
LEGAL PROCEEDINGS
MONY is engaged in various kinds of routine litigation which, in the
opinion of MONY, are not of material importance in relation to the total capital
and surplus of MONY. There are no legal proceedings to which Keynote is a party.
FINANCIAL STATEMENTS
The financial statements for MONY, included in the Statement of Additional
Information, should be distinguished from the financial statements of Keynote,
included in the Statement of Additional Information, and should be considered
only as bearing on the ability of MONY to meet its obligations under the
Contracts. The financial statements of MONY should not be considered as bearing
on the investment performance of the assets held in Keynote.
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 MONY) 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 MONY, the Contracts offered by this
Prospectus and Diversified Investors Portfolios, including the Statement of
Additional Information (which includes financial statements relating to MONY),
contact MONY at its address or phone number set forth on the cover of this
Prospectus for requesting such statement.
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.
48
<PAGE> 50
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM PAGE
---------------------------------------------------------------------- ----
<S> <C>
Independent Accountants............................................... 2
Sale of Contracts/Principal Underwriter............................... 2
Performance Data...................................................... 2
Diversified Investors Portfolios...................................... 5
Investment Objectives, Policies and Restrictions,..................... 5
Determination of Net Asset Value; Valuation of Securities............. 23
Management of Diversified Investors Portfolios........................ 23
Independent Accountants............................................... 26
Capital Stock and Other Securities.................................... 26
Taxation.............................................................. 27
Financial Statements of MONY.......................................... 28
Appendix.............................................................. A-1
</TABLE>
49
<PAGE> 51
REQUEST FOR KEYNOTE
STATEMENT OF ADDITIONAL INFORMATION
Detach and return in an envelope addressed:
MONY
c/o Diversified Investment Advisors, Inc.
4 Manhattanville Road
Purchase, New York 10577
Attn: Not-For-Profit Service
Please make sure that your name and the address to which you wish MONY to
send the current Keynote Statement of Additional Information appears below:
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Employer
- --------------------------------------------------------------------------------
50
<PAGE> 52
APPENDIX
APPLICABLE PREMIUM TAX RATES
<TABLE>
<CAPTION>
PREMIUM TAX RATE PERCENT
---------------------------
QUALIFIED NON QUALIFIED
--------- -------------
<S> <C> <C>
California.......................................................... .50% 2.35%
District of Columbia................................................ 2.25% 2.25%
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%
</TABLE>
51
<PAGE> 53
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED BY
KEYNOTE SERIES ACCOUNT
AND
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
1740 BROADWAY, NEW YORK, N.Y. 10019;
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, 1997 FOR THE
GROUP VARIABLE ANNUITY CONTRACTS ISSUED BY THE MUTUAL LIFE INSURANCE COMPANY OF
NEW YORK ("MONY") WHICH INVEST IN THE KEYNOTE SERIES ACCOUNT ("KEYNOTE") . THE
PROSPECTUS IS AVAILABLE, AT NO CHARGE, BY WRITING MONY 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 A PART BY WRITING TO ACACIA CAPITAL CORPORATION AT 4550 MONTGOMERY
AVENUE, SUITE 1000N, BETHESDA, MARYLAND 20814 OR BY TELEPHONING 301-951-4820.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ------------------------------------------------------------------------------------- ----
<S> <C>
Independent Accountants.............................................................. 2
Sale of Contract/Principal Underwriter............................................... 2
Performance Data..................................................................... 2
Diversified Investors Portfolios..................................................... 5
Investment Objectives, Policies and Restrictions,.................................. 5
Determination of Net Asset Value; Valuation of Securities.......................... 23
Management of Diversified Investors Portfolios..................................... 23
Independent Accountant............................................................. 26
Capital Stock and Other Securities................................................. 26
Taxation........................................................................... 27
Financial Statements of MONY......................................................... 28
Appendix............................................................................. A-1
</TABLE>
<PAGE> 54
INDEPENDENT ACCOUNTANTS
The financial statements of Keynote and MONY appearing on the following
pages have been audited by Coopers & Lybrand L.L.P., independent accountants,
and are included herein in reliance on the reports of Coopers & Lybrand L.L.P.
given upon the authority of said firm as experts in accounting and auditing.
Coopers & Lybrand's L.L.P. office is located at 1301 Avenue of the Americas, New
York, New York 10019.
SALE OF CONTRACTS/PRINCIPAL UNDERWRITER
MONY Securities Corp ("MSC") is the principal underwriter and distributor
of the Contracts which will be sold by registered representatives who are also
licensed insurance agents of MONY. The Contracts may also be sold through other
broker-dealers authorized by MSC and applicable law and who may be insurance
agents licensed by an insurance company other than MONY. MSC 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.
MSC will not receive underwriting commissions. Registration as a
broker-dealer does not mean that Securities and Exchange Commission ("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.
PERFORMANCE DATA
MONEY MARKET SUBACCOUNT
For the seven day period ended December 31, 1996, the yield for the Money
Market Subaccount was 4.42% and the effective yield was 4.51%.
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 Series (the
"Money Market Series") of Diversified Investors Portfolios, the First Day Value
reflects the net asset value of the interest in the Money Market Series 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 Series 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 Series including the investment
management fee.
2
<PAGE> 55
AVERAGE ANNUAL TOTAL RETURNS: The average annual 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
YEAR 3 YEAR 5 YEAR 10 YEAR SINCE
ENDED ENDED ENDED ENDED INCEPTION
DEC. 31, DEC. 31, DEC. 31, DEC. 31, THROUGH
1996 1996 1996 1996 DEC. 31, 1996
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Subaccount:
Money Market(1)........................ 4.59% 4.36% 3.66% 5.26% 7.59%
Intermediate Government Bond(1)........ 2.69% 4.30% 5.24% N/A 6.76%
Government/Corporate Bond(1)........... 2.40% 5.01% 6.58% 7.45% 8.41%
Balanced(1)............................ 15.86% 13.44% N/A N/A 13.26%
Equity Income(1)....................... 17.38% 15.77% 14.13% 12.59% 13.42%
Equity Growth(1)....................... 17.51% 13.11% N/A N/A 11.94%
Calvert Series(2)...................... 11.62% 11.27% 9.59% 10.68% 9.95%
</TABLE>
- ---------------
(1) On January 3, 1994, each of the corresponding Pooled Separate Accounts of
MONY set forth below contributed all of its assets to the corresponding
Series of Diversified Investors Portfolios in which a corresponding Keynote
Subaccount invests its assets:
<TABLE>
<CAPTION>
MONY POOLED
SERIES SEPARATE ACCOUNT
-------------------------------------------- -----------------------
<S> <C>
Money Market................................ Pooled Account No. 4
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
</TABLE>
Total returns calculated for any period for the Money Market,
Intermediate Government Bond, Government/Corporate Bond, Balanced, Equity
Income Subaccounts reflect the performance of the corresponding Pooled
Separate Account for any period prior to January 3, 1994 and the
performance of the corresponding series of Diversified Investors Portfolios
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 utilized the
services of the same investment adviser as is presently providing such
advice to the corresponding Series of Diversified Investors Portfolios
invested in by the Subaccount. Such commencement dates are November 1978
for the Money Market Subaccount, July 1990 for the Intermediate Government
Bond Subaccount, January 1978 for the Government/Corporate Bond Subaccount,
December 1992 for the Balanced Subaccount and January 1978 for the Equity
Income Subaccount, and February 1993 for the Equity Growth 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 series of Diversified Investors
Portfolios which are presently in effect were deducted during such period.
(2) The average annual total returns for the Calvert Series Subaccount reflect
the average annual 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
3
<PAGE> 56
Settlement Options available, at the end of the period shown. The annualized
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 series and Keynote.
OTHER SUBACCOUNTS
The yield for each of the Subaccounts other than the Money Market
Subaccount and the Calvert Subaccount is shown for the periods indicated in the
table below.
KEYNOTE SERIES ACCOUNT
YIELD FOR 30-DAY PERIOD*
<TABLE>
<CAPTION>
GOVERNMENT/ INTERMEDIATE
YIELD FOR 30 EQUITY EQUITY CORPORATE GOVERNMENT
DAYS ENDED GROWTH INCOME BALANCED BOND BOND
- -------------------------------------- ------ ------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996..................... .03% 1.84% 3.63% 5.61% 6.54%
</TABLE>
- ---------------
* The 30 day yield is not indicative of future performance.
The yield shown in the table above is computed by subtracting from the net
investment income of the underlying investment vehicle all charges, expenses and
fees as well as expenses imposed by Keynote and dividing the result by the value
of the Subaccount. For the underlying investment vehicle of the Equity Growth,
Equity Income and for the equity portion of the Balanced Subaccount, net
investment income is the net of the dividends accrued (1/360 of the stated
dividend rate multiplied by the number of days the particular security is in the
underlying investment vehicle) on all equity securities during the 30-day period
and expenses accrued for the period. It does not reflect capital gains or
losses. For the fixed income portion of the Balanced Subaccount, as well as the
Government/Corporate Bond and Intermediate Government Bond Subaccounts, net
investment income is the net of interest earned on the obligations held by the
underlying investment vehicle of the applicable Subaccount and expenses accrued
for the period determined by (i) computing the yield to maturity based on the
market value of each obligation held in the underlying investment vehicle at the
close of business on the thirtieth day of the period, based on the purchase
price plus accrued interest); (ii) dividing the yield to maturity for each
obligation by 360; (iii) multiplying that quotient by the market value of each
obligation (including actual accrued interest) for each day of the subsequent
30-day month that the obligation is in the underlying investment vehicle; and
(iv) totaling the interest on each obligation. Discount or premium amortization
is recomputed at the beginning of each 30-day period and with respect to
discount and premium on mortgage or other receivables-backed obligations subject
to monthly payment of principal and interest, discount and premium is amortized
on the remaining security, based on the cost of the security, to the weighted
average maturity date, if available, or to the remaining term of the security,
if the weighted average maturity date is not available. Gain or loss
attributable to actual monthly paydowns is reflected as an increase or decrease
in interest income during that period.
The yield shown for each Subaccount reflects deductions for all charges,
expenses, and fees of both its underlying investment vehicle and Keynote.
Net investment income of the underlying investment vehicle less all charges
and expenses imposed by Keynote is divided by the product of the average daily
number of Units outstanding and the value of one Unit on the last day of the
period. The sum of the quotient and 1 is raised to the 6th power, 1 is
subtracted from the result, and then multiplied by 2.
4
<PAGE> 57
DIVERSIFIED INVESTORS PORTFOLIOS
Six series of Diversified Investors Portfolios are presently available for
investment under the Contracts through Subaccounts of Keynote. This section of
the Statement of Additional Information describes each such series, including
Diversified Investors Money Market Portfolio (the "Money Market Series"),
Diversified Investors Intermediate Government Bond Portfolio (the "Intermediate
Government Bond Series"), Diversified Investors Government/Corporate Bond
Portfolio (the "Government/Corporate Bond Series"), Diversified Investors
Balanced Portfolio (the "Balanced Series"), Diversified Investors Equity Income
Portfolio (the "Equity Income Series") and Diversified Investors Equity Growth
Portfolio (the "Equity Growth Series"). The series of Diversified Investors
Portfolios available under the Contracts may be collectively referred to herein
as the "Series".
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective of each Series is described in the Prospectus of
Keynote Series Account. There can, of course, be no assurance that a Series will
achieve its investment objective.
INVESTMENT POLICIES
The following discussion supplements the information regarding the
investment objective of each Series and the policies to be employed to achieve
this objective as set forth in the Prospectus of Keynote Series Account.
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.
Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as Certificates of Deposit
("CDs") and time deposits ("TDs"), 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
different risks than are 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.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to
5
<PAGE> 58
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: (1) 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 (2) 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.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Advisers carefully evaluate such investments on a
case-by-case basis.
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. A Series will invest in such securities only when
the Advisers are satisfied that the credit risk with respect to the issuer is
minimal.
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 a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Each Series may invest in commercial paper issued by major corporations in
reliance on the exemption from registration afforded by Section 3(a)(3) of the
Securities Act of 1933, as amended (the "1933 Act"). Such commercial paper may
be issued only to finance current transactions and must mature in nine months or
less. Trading of such commercial paper is conducted primarily by institutional
investors through investment dealers, and individual investor participation in
the commercial paper market is very limited.
LENDING OF PORTFOLIO SECURITIES
All Series have the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, a Series
can increase its income by continuing to receive interest on the loaned
securities as well as by either investing the cash collateral in short-term
securities or obtaining yield in the form of interest paid by the borrower when
U.S. Government obligations are used as collateral. There may be risks of delay
in receiving additional collateral or risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. A Series will adhere to the following conditions
whenever its securities are loaned: (i) the
6
<PAGE> 59
Series must receive at least 100 percent cash collateral or equivalent
securities from the borrower; (ii) the borrower must increase this collateral
whenever the market value of the securities including accrued interest rises
above the level of the collateral; (iii) the Series must be able to terminate
the loan at any time; (iv) the Series must receive reasonable interest on the
loan, as well as any dividends, interest or other distributions on the loaned
securities, and any increase in market value; (v) the Series may pay only
reasonable custodian fees in connection with the loan; and (vi) voting rights on
the loaned securities may pass to the borrower. However, if a material event
adversely affecting the investment were to occur, the Series would terminate the
loan and regain the right to vote the securities.
VARIABLE RATE AND FLOATING RATE SECURITIES
Each Series 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 Series to invest fluctuating amounts, which may change
daily without penalty, pursuant to direct arrangements between the Series, 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 secured 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 Series' 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 Series may invest in obligations which are not so rated only if the
Advisers determine that at the time of investment the obligations are of
comparable quality to the other obligations in which the Series may invest. The
Advisers, on behalf of a Series, will consider on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand
obligations held by the Series. A Series will not invest more than 15% (10% in
the case of the Money Market Series) of the value of its net assets in floating
or variable rate demand obligations as to which it 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" below.
PARTICIPATION INTERESTS
A Series may purchase from financial institutions participation interests
in securities in which such Series may invest. A participation interest gives a
Series an undivided interest in the security in the proportion that the Series'
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 Series, 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 Series may invest. For
certain participation interests, a Series will have the right to demand payment,
on not more than seven days' notice, for all or any part of the Series'
participation interest in the security, plus accrued interest. As to these
instruments, a Series intends to exercise its right to demand payment only
7
<PAGE> 60
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 Series will not invest more than 15% (10% in the case of the Money
Market Series) 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" 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 Securities Act of 1933, as amended (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 resulting 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 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 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 of resales of certain securities
to qualified institutional buyers. The Advisers anticipate that the market for
certain restricted securities such as institutional commercial paper will expand
further as a result of this new regulation and the development of automated
systems for the trading, clearance and settlement of unregistered securities of
domestic and foreign issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc.
The Advisers will monitor the liquidity of Rule 144A securities for each
Series under the supervision of the Diversified Investors Portfolio's Board of
Trustees. In reaching liquidity decisions, the Advisers will consider, among
other things, the following factors: (1) the frequency of trades and quotes for
the security, (2) the number of dealers and other potential purchasers wishing
to purchase or sell the security, (3) dealer undertakings to make a market in
the security and (4) 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 Series 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 Series' investment objective. The Notes
purchased by a Series will have remaining maturities of 13 months or less and
will be deemed by the Board of Trustees of Diversified Investors Portfolios to
present minimal credit risks and will meet the quality criteria set forth above
under "Investment Policies." A Series will invest no more than 15% (10% in the
case of the Money Market Series) of its
8
<PAGE> 61
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 Series cannot exercise the demand feature described
above and as to which there is no secondary market). See "Investment
Restrictions" 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 Investment Company Act of 1940, as amended (the "1940 Act"), repurchase
agreements may be considered to be loans by the buyer. A Series' 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 Series 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 a Series
are fully collateralized, with such collateral being marked to market daily.
A Series may borrow funds for temporary or emergency purposes, such as
meeting larger than anticipated redemption requests, and not for leverage, and
by agreeing to sell portfolio securities to financial 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 Series 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 Series may
decline below the repurchase price of those securities. Reverse repurchase
agreements are considered to be borrowings by a Series.
FOREIGN SECURITIES - ALL SERIES
Each Series may invest its 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 Series, 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 U.S.
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 U.S. Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those in the U.S., and securities of some foreign
issuers (particularly those located in developing countries) may be less liquid
and more volatile than securities of comparable U.S. companies. Foreign security
trading practices, including those involving securities settlement where a
Series' assets may be released prior to receipt of payment, may expose a Series
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 commis-
9
<PAGE> 62
sions on securities traded in the U.S. 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 U.S.
FOREIGN SECURITIES - MONEY MARKET SERIES
The Money Market Series may invest in foreign securities, including only
U.S. dollar-denominated obligations of foreign branches and subsidiaries of
domestic banks and foreign banks, such as Eurodollar certificates of deposit,
which are U.S. dollar-denominated certificates of deposit issued by branches of
foreign and domestic banks located outside the United States, and Yankee CDs,
which are certificates of deposit issued by a U.S. branch of a foreign bank
denominated in U.S. dollars and held in the United States; Eurodollar time
deposits ("ETDs"), which are U.S. dollar-denominated deposits in a foreign
branch of a foreign or domestic bank, and Canadian time deposits, which are
essentially the same as ETDs except they are issued by branches of major
Canadian banks; 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 counterpart of a U.S. corporation, and
Europaper, which is U.S. dollar-denominated commercial paper of a foreign
issuer; and 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 Adviser to be of comparable quality
to the other obligations in which the Money Market Series 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 - SERIES OTHER THAN MONEY MARKET SERIES
Each Series' policy is not to invest more than 25% of its assets in
securities of foreign issuers; not more than 5% of a Series' 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. Securities of foreign issuers include investments in sponsored
American Depository Receipts ("ADRs"). ADRs are depository receipts for
securities of foreign issuers and provide an alternative method for a Series to
make foreign investments. These securities will not be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities.
Each Series 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 Series 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, such Series 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. Such Series 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.
10
<PAGE> 63
A forward foreign currency exchange contract is an obligation by a Series
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 Series 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 contract. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Series' securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Series 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. Since consideration of the prospect for
currency parities will be incorporated into the Advisers' long-term investment
decisions, the Series 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 Series' 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 Series' ability to utilize forward
contracts in the manner set forth herein and in the Prospectus 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 Series 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
Series' foreign currency denominated portfolio securities and the use of such
techniques will subject a Series to certain risks.
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
Series may not always be able to enter into foreign currency forward contracts
at attractive prices and this will limit a Series' ability to use such contract
to hedge or cross-hedge its assets. Also, with regard to a Series' 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 Series' cross-hedges and
the movements in the exchange rates of the foreign currencies in which a Series'
assets that are the subject of such cross-hedges are denominated.
GUARANTEED INVESTMENT CONTRACTS
Each Series may invest in guaranteed investment contracts ("GICs") issued
by insurance companies. Pursuant to such contracts, a Series makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the fund 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
11
<PAGE> 64
allocable to it, and the charges will be deducted from the value of the deposit
fund. Because a Series 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 Series which are
not readily marketable, will not exceed 15% (10% in the case of the Money Market
Series) of the Series' net assets. The term of a GIC will be thirteen 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
Each Series may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, under normal circumstances, a Series would
take delivery of such securities. When a Series commits to purchase a security
on a "when-issued" or on a "forward delivery" basis, the Series establishes
procedures consistent with the relevant policies of the Securities and Exchange
Commission. Since those policies currently recommend that an amount of a Series'
assets equal to the amount of the purchase be held aside or segregated to be
used to pay for the commitment, the Series expects always to have cash, cash
equivalents, or high quality debt securities sufficient to cover any commitments
or to limit any potential risk. However, although a Series does not intend to
make such purchases for speculative purposes and intends to adhere to the
provisions of Securities and Exchange Commission policies, purchases of
securities on such bases may involve more risk than other types of purchases.
For example, a Series may have to sell assets which have been set aside in order
to meet redemptions. Also, if a Series determines it is advisable as a matter of
investment strategy to sell the "when-issued" or "forward delivery" securities,
the Series 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 Series' payment
obligation).
ZERO COUPON OBLIGATIONS
Each Series 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 dividend income is accrued throughout the term of the zero
coupon obligation but is not actually received until maturity, a Series may have
to sell other securities to pay said accrued dividends prior to maturity of the
zero coupon obligation.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS - SERIES OTHER THAN MONEY
MARKET SERIES
GENERAL. The successful use of such instruments draws upon the Advisers'
skill and experience with respect to such instruments and usually depends on the
Advisers' ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, a
Series may not achieve the anticipated benefits of futures contracts or options
on futures contracts 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 and
movements in the price of the securities and currencies hedged or used for cover
will not be perfect and could produce unanticipated losses.
FUTURES CONTRACTS. A Series 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 Series may enter
into futures contracts which are
12
<PAGE> 65
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 Series may also enter into
futures contracts which are based on bonds issued by entities other than the
U.S. Government.
At the same time a futures contract is purchased or sold, the Series 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 Series 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 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. 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 Series 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 Series which holds or intends to acquire fixed-income securities, is to
attempt to protect the Series 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 Series
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 Series. If interest rates did increase, the value of the
debt securities in a Series would decline, but the value of the futures
contracts to the Series would increase at approximately the same rate, thereby
keeping the net asset value of the Series from declining as much as it otherwise
would have. The Series 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
Series 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 Series 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 Series could then buy debt securities on
the cash market. To the extent a Series enters into futures contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Series' 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 Series 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
13
<PAGE> 66
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 Series, if the Advisers' investment
judgment about the general direction of interest rates is incorrect, a Series'
overall performance would be poorer than if it had not entered into any such
contract. For example, if a Series 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 Series 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 Series 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 Series may have to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. The Series intend to purchase and write
options on futures contracts for edging 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 Series 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 writing of a call option on a futures contract constitutes a partial
hedge against declining 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 below the exercise price, a Series will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Series' 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 Series will retain the full amount
of the option premium which provides a partial hedge against any increase in the
price of securities which the Series intends to purchase. If a put or call
option the Series has written is exercised, the Series will incur a loss which
will be reduced by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its portfolio
securitiesand changes in the value of its futures positions, the Series' losses
from existing options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
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 Series 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 Series 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 Board of Trustees of Diversified Investors Portfolios has adopted the
requirement that futures contracts and options on futures contracts be used
either (i) as a hedge without regard to any quantitative limitation, or (ii) for
other purposes to the extent that immediately thereafter the aggregate
14
<PAGE> 67
amount of margin deposits on all (non-hedge) futures contracts of the Series and
premiums paid on outstanding (non-hedge) options on futures contracts owned by
the Series does not exceed 5% of the market value of the total assets of a
Series. In addition, the aggregate market value of the outstanding futures
contracts purchased by a Series may not exceed 50% of the market value of the
total assets of the Series. Neither of these restrictions will be changed by the
Board of Trustees of Diversified Investors Portfolios withhout considering the
policies and concerns of the various applicable federal and state regulatory
agencies.
OPTIONS ON FOREIGN CURRENCIES. A Series 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, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
a Series may purchase put options on the foreign currency. If the value of the
currency does decline, the Series 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, a Series 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 a Series 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, a Series 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 Series may write options on foreign currencies for the same types of
hedging purposes. For example, where a Series 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 Series
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Series 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
Series 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
ofoptions on foreign currencies, the Series 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.
The Series intend to write covered call options on foreign currencies. A
call option written on a foreign currency by a Series is "covered" if the Series
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Series 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 Series in cash, U.S. Government
securities and other high quality liquid debt securities in a segregated account
with its custodian.
15
<PAGE> 68
The Series also intend to 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 Series
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, a Series 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 Series in
futures contracts, options on foreign currencies and forward contracts 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.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option 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 Series
to liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
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 Series' 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 Series 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
16
<PAGE> 69
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 (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the Series'
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
OPTIONS ON SECURITIES - SERIES OTHER THAN MONEY MARKET SERIES
The Series may write (sell) covered call and put options to a limited
extent on its portfolio securities ("covered options") in an attempt to increase
income. However, a Series may forgo 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 Series.
When a Series 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 Series 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 Series has no control, the Series must
sell the underlying security to the option holder at the exercise price. By
writing a covered call option, a Series 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 Series writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Series at the specified
exercise price at any time during the option period. If the option expires
unexercised, the Series 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 Series has no control, the Series must purchase the underlying security
from the option holder at the exercise price. By writing a covered put option, a
Series, 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
Series will only write put options involving securities for which a
determination is made at the time the option is written that the Series wishes
to acquire the securities at the exercise price.
A Series 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 Series 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 Series writes an option, an amount equal to the net premium received
by the Series is included in the liability section of the Series' 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 Series
enters into a closing purchase transaction, the Series 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 Series 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
17
<PAGE> 70
written. Securities against which call options are written will be segregated on
the books of the custodian for the Series.
A Series may purchase call and put options on any securities in which it
may invest. A Series 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 Series, in exchange for the premium paid, to purchase a
security at a specified price during the option period. A Series 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 Series 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 Series, in exchange for the premium paid, to sell a
security, which may or may not be held in the Series' 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 Series'
portfolio securities. Put options also may be purchased by a Series for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Series does not own. A Series 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 Series have adopted certain other nonfundamental policies concerning
option transactions which are discussed below. A Series' 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 Series may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. 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 Series
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 Series enters into such options
transactions under the general supervision of the Trustees of Diversified
Investors Portfolios.
OPTIONS ON SECURITIES INDICES - SERIES OTHER THAN MONEY MARKET SERIES
In addition to options on securities, the Series 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
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."
18
<PAGE> 71
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
Series 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 Series 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 Series 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" - SERIES OTHER THAN MONEY MARKET SERIES
In a short sale, a Series sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. A Series 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 Series 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 Series 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 Series' long position.
The Series will not engage in short sales against the box for investment
purposes. A Series 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), or when
a Series wants to sell the security at an attractive current price, but also
wishes to defer recognition of gain or loss for federal income tax purposes or
for purposes of satisfying certain tests applicable to regulated investment
companies under the Code. In such case, any future losses in a Series' 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 Series owns. There are certain
additional transaction costs associated with short sales against the box, but
the Series endeavor to offset these costs with the income from the investment of
the cash proceeds of short sales.
As a non-fundamental operating policy, the Advisers do not expect that more
than 40% of a Series' total assets would be involved in short sales against the
box. The Advisers do not currently intend to engage in such sales.
CERTAIN OTHER OBLIGATIONS
In order to allow for investments in new instruments that may be created in
the future, a Series may, upon supplementing this Statement of Additional
Information, invest in obligations other than those listed previously, provided
such investments are consistent with a Series' 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
19
<PAGE> 72
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 Series, an obligation
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Series. Neither event would require a Series to dispose of
the obligation, but the Advisers will consider such an event in their
determination of whether a Series should continue to hold the obligation. A
description of the ratings used herein and in the Prospectus is set forth in the
Appendix to this Statement of Additional Information.
Except as stated otherwise, all investment policies and restrictions
described herein are non-fundamental, and may be changed without prior
shareholder approval.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of each
Series and may not be changed without the approval of a "majority of the
outstanding voting securities" of the Series. "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 a Series, the
lesser of (i) 67% or more of the total beneficial interests of the Series
present at a meeting if the holders of more than 50% of the total beneficial
interests of the Series are present or represented by proxy or (ii) more than
50% of the total beneficial interests of the Series. 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 Series' total assets or the value of a Series'
securities, or a later change in the rating of a portfolio security, will not be
considered a violation of the relevant policy.
As a matter of fundamental policy, no Series may:
(1) borrow money or mortgage or hypothecate assets of the Series,
except that in an amount not to exceed 1/3 of the current value of the
Series' 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 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 Series 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
portfolio securities and provided that any such loans not exceed 30% of the
Series' 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), except in the ordinary
course of business a Series may hold and sell portfolio real estate
acquired as a result of a Series' 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 Series' investment objective(s), up to 25% of its total
assets may be invested in any one industry (except that the
20
<PAGE> 73
Money Market Series reserves the right to concentrate 25% or more of its
assets in obligations of domestic branches of domestic banks);
(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; or
(7) 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 Series cannot exercise a demand feature on not more
than seven days' notice), if, in the aggregate, more than 15% (10% in the
case of the Money Market Series) of its net assets would be so invested. A
Series may not invest in time deposits maturing in more than seven days.
State and Federal Restrictions. In order to comply with certain state and
federal statutes and policies each Series will not as a matter of operating
policy:
<TABLE>
<C> <S>
(i) borrow money for any purpose in excess of 10% of the Series' total assets (taken
at cost), except that the Series may borrow for temporary or emergency purposes
up to 1/3 of its assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of the Series'
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;
(iii) 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;
(iv) invest for the purpose of exercising control or management;
(v) 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 a Series if such purchase at the time thereof would
cause (a) more than 10% of the Series' 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 Series' 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 Series; and
provided further that a Series may not purchase any security from any open-end
investment company;
(vi) purchase securities of any issuer if such purchase at the time thereof would
cause the Series 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;
</TABLE>
21
<PAGE> 74
<TABLE>
<C> <S>
(vii) purchase or retain in a Series' 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 a Series 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;
(viii) invest more than 5% of a Series' net assets in warrants (valued at the lower of
cost or market), but not more than 2% of a Series' net assets may be invested in
warrants not listed on the New York Stock Exchange or the American Stock
Exchange; or
(ix) make short sales of securities or maintain a short position (excluding short
sales if the Series 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 Series' net assets (taken at market value);
provided, however, that the value of the Series' 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 Series' net assets or more than
2% of the securities of any class of any issuer.
</TABLE>
Policies (i) through (ix) may be changed by the Board of Trustees of
Diversified Investors Portfolios.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
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 Series if the
Advisers believe that a transaction net of costs (including custodian charges)
will help achieve the Series' investment objectives.
A Series' 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 Series do not anticipate
paying brokerage commissions in such transactions. Any transactions for which a
Series 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 judgement and in a manner deemed
to be in the best interest of the investors in a Series 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 Series 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 Series 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 Series or the size of the position obtainable for the Series. In
addition, when purchases or sales of the same security for a Series 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. Further-
22
<PAGE> 75
more, 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 Series. Such
an event might also adversely affect that Series.
DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES
Beneficial interests in each Series of Diversified Investors Portfolios are
issued solely in private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the Act. of 1933 Act.
Portfolio securities are valued on the basis of market quotations when they
are readily available. Each Series values mortgage-backed and other debt
securities for which market quotations are not readily available at their fair
value as determined in good faith, utilizing procedures approved by the Board of
Trustees of Diversified Investors Portfolios, on the basis of valuations
provided either by dealers or a pricing service. Debt securities having a
remaining maturity of sixty days or less when purchased and debt securities
originally purchased with maturities in excess of sixty days but which currently
have maturities of sixty days or less are valued at cost adjusted for
amortization of premiums and accretion of discounts.
Interest rate futures contracts held by a Series are valued on the basis of
closing market quotations, which are normally available daily. When market
quotations are not readily available, the fair value of these contracts will be
determined in good faith utilizing procedures approved by the Board of Trustees
of Diversified Investors Portfolios.
A determination of value used in calculating net asset value must be a fair
value determination made in good faith utilizing procedures approved by
Diversified Investors Portfolios Board of Trustees. 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 Series 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: (i) the fundamental
analytical data relating to the investment; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) 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 affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
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 OF DIVERSIFIED INVESTORS PORTFOLIOS
TRUSTEES
Tom A. Schlossberg*........ President, Diversified, 10/92 to present; Executive
Vice President and Head of Pension Operations,
Mutual Life Insurance Company of New York, 1/89 to
12/93.
23
<PAGE> 76
Donald E. Flynn*........... Vice President, AEGON USA, Inc., 1988 to present;
Executive Vice President, AEGON USA Investment
Management, Inc., 1988 to present; Vice President,
AEGON USA Managed Portfolios, Inc., 1988 to
present.
Neal M. Jewell............. Executive Vice President, American International
Group Asset Management (since November 1991);
Director of Oversees Pensions, American
International Group Asset Management (December 1990
to October 1991); Executive Vice President
Pensions, Mutual of New York (prior to June 1989).
His address is 355 Thornridge Drive, Stamford,
Connecticut 06903.
Eugene M. Mannella......... Vice President, Investment Management Services,
Inc. (since August 1993); Senior Vice President,
Lehman Brothers Inc. (May 1986 to August 1993). His
address is Two Orchard Neck Road, Center Moriches,
New York 11934.
Patricia L. Sawyer......... Executive Vice President and Director, Robert L.
Smith & Co. (since July 1990); Vice President,
American Express (September 1988 to July 1990). Her
address is 256 East 10th Street, New York, New York
10014.
OFFICERS
Mr. Schlossberg is President, Chief Executive Officer and Chairman of the
Board of Diversified Investors Portfolios.
Robert F. Colby............ Secretary; Vice President and Chief Corporate
Counsel, Mutual Life Insurance Company of New York,
1/88 to 12/93; Vice President and General Counsel,
Diversified, 11/93 to present.
Alfred C. Sylvain.......... Treasurer and Assistant Secretary; Vice President
and Treasurer of Diversified, 11/93 to present;
Vice President, Mutual Life Insurance Company of
New York, 1/88 to present.
John F. Hughes............. Assistant Secretary; Senior Counsel, Mutual Life
Insurance Company of New York, 1/88 to present;
Vice President and Senior Counsel, Diversified,
11/93 to present.
The Declaration of Trust provides that the Diversified Investors Portfolios
will indemnify its Trustees and officers as described below under "Description
of the Trust; Fund Shares."
INVESTMENT ADVISORY SERVICES
The Diversified Investment Advisors, Inc. ("Diversified") manages the
assets of each Series pursuant to an Investment Advisory Agreement (the
"Advisory Agreement") with Diversified Investors Portfolios with respect to that
Series and the investment policies described herein and in the Prospectus.
Subject to such further policies as the Diversified Investors Portfolios' Board
of Trustees may determine, the Diversified provides general investment advice to
each Series. For its services under each Advisory Agreement, Diversified
receives from each Series fees accrued daily and paid monthly at an annual rate
equal to the percentages specified in the table set forth in the Prospectus of
the corresponding Series' average daily net assets.
For each Series of Diversified Investors Portfolios, Diversified has
entered into an Investment Subadvisory Agreement (each a "Subadvisory
Agreement") with one or more of the subadvisers (each "Subadviser," and
collectively the "Subadvisers"). It is the responsibility of a Subadviser to
make the day to day investment decisions for its Series and to place the
purchase and sales orders for securities
24
<PAGE> 77
transactions of such Series, subject in all cases to the general supervision of
Diversified. Each Subadviser furnishes at its own expense all services,
facilities and personnel necessary in connection with managing the corresponding
Series' investments and effecting securities transactions for a Series.
Each Advisory Agreement provides that Diversified 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 a
Series when authorized either by majority vote of the investors in the Series
(with the vote of each being in proportion to the amount of their investment) or
by a vote of a majority of its Board of Trustees of Diversified Investors
Portfolios, or by Diversified 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
Diversified 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
corresponding Series, 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.
Diversified's and Subadviser's fees are described in to the Prospectus.
Diversified, if required by applicable state law, shall reimburse a Series or
waive all or part of its fees up to, but not exceeding, its investment advisory
fees from the Series. Such reimbursement, if required, will be equal to the
combined aggregate annual expenses which exceed that expense limitation with the
lowest threshold prescribed by any state in which such Series is qualified for
offer or sale. Management of Diversified Investors Portfolios has been advised
that the lowest such threshold currently in effect is 2 1/2% of net assets up to
$30,000,000, 2% of the next $70,000,000 of net assets and 1/2% of net assets in
excess of that amount.
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 Series, 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 AND TRANSFER AGENT
Pursuant to a Custodian Contract, Investors Bank & Trust Company acts as
the custodian of each Series' 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 Series' 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 Series.
Securities held by a Series 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 Series or decide which securities any
Series will buy or sell. A Series 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.
25
<PAGE> 78
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., serves as the independent accountants for
Diversified Investors Portfolios providing audit and accounting services
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.
The financial statements of Diversified Investors Portfolios included herein
have been so included in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
CAPITAL STOCK AND OTHER SECURITIES
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 interest in one or more
Series. Currently there are nine active Series of Diversified Investors
Portfolios. Investors in a Series will be held personally liable for the
obligations and liabilities of that Series (and of no other Series), 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 Series than its proportionate beneficial interest in the
Series. 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, 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 Series are entitled to participate pro rata in distributions
of taxable income, loss, gain and credit of their respective Series only. Upon
liquidation or dissolution of a Series, investors are entitled to share pro rata
in that Series' (and no other Series) 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 Series would participate equally in the earnings,
dividends and assets of that particular Series only (and no other Series). Any
property of Diversified Investors Portfolios is allocated and belongs to a
specific Series to the exclusion of all other Series. All consideration received
by Diversified Investors Portfolios for the issuance and sale of beneficial
interests in a particular Series, 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 Series) for the benefit of investors in that Series and
irrevocably belongs to that Series for all purposes. Neither a Series no
investors in that Series possess any right to or interest in the assets
belonging to any other Series.
Investments in a Series have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Investments in a Series may not be transferred.
Each investor is entitled to a vote in proportion to the amount of its
investment in each Series. Investors in a Series do not have cumulative voting
rights, and investors holding more than 50% of the aggregate beneficial
interests in all outstanding Series 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 Series 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 Series. As to any
matter which does not affect the interest of a particular Series, only investors
in the one or more affected Series 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
26
<PAGE> 79
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 Series shall be authorized by vote
of the investors of such Series and no vote will be required of investors in a
Series not affected.
Diversified Investors Portfolios or any Series 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 Series present or represented at
such meeting, if investors in more that 50% of all such 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 Series. Diversified Investors Portfolios or any Series 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 Series, unless the investors in such Series, by
majority vote, agree to continue the Series. Diversified Investors Portfolios
will be dissolved upon the dissolution of the last remaining Series.
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 wilful 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 wilful 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 wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
TAXATION
Diversified Investors Portfolios is organized as a New York trust. The
Trust and each Series are not subject to any income or franchise tax in the
State of New York or the Commonwealth of Massachusetts. However, each investor
in a Series will be taxable on its share (as determined in accordance with the
governing instruments of the Trust) of the 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.
Each Series, 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 Series' income, gains, losses,
deductions, credits and tax preference items, without regard to whether it has
received any cash distributions from the Series.
Withdrawals by investors from each Series 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
basis of the investor's interest in the Series prior to the distribution, (2)
income
27
<PAGE> 80
or gain will be realized if the withdrawal is in liquidation of the investor's
entire interest in the Series and includes a disproportionate share of any
unrealized receivables held by the Series, 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
Series generally equals the amount of cash and the basis of any property that
the investor invests in the Series, increased by the investor's share of income
from the Series and decreased by the amount of any cash distributions and the
basis of any property distributed from the Series.
Each Series' taxable year-end will be December 31. Although, as described
above, the Series will not be subject to federal income tax, each will file
appropriate income tax returns.
It is intended that each Series' assets, income and distributions will be
managed in such a way that an investor in each Series will be able to satisfy
the requirements of Subchapter M of the Code.
HEDGING STRATEGIES
The use of hedging strategies, such as a Series' 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 Series 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 Series 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 Series' hedging transactions. To the extent this treatment is not available, a
Series 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 Series to qualify as a Regulated Investment
Company.
OTHER TAXATION
The investment by an investor in a Series does not cause the investor to be
liable for any income or franchise tax in the State of New York. Investors are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in a Series.
FINANCIAL STATEMENTS OF MONY
The financial statements of MONY that are included in this Statement of
Additional Information are different from the financial statements of Keynote.
The financial statements of MONY should be considered only as bearing upon the
ability of MONY to meet its obligations under the Contracts and should not be
considered as bearing on the investment performance of the assets held in
Keynote.
28
<PAGE> 81
APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
STANDARD & POOR'S BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree.
The rating "AA" may be modified by the addition of a plus or minus sign to
show relative standing within such category.
MOODY'S BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa -
judged to be the best quality, carry the smallest degree of investment risk; Aa
- -judged to be of high quality by all standards.
FITCH INVESTORS SERVICE BOND RATINGS
AAA. Securities of this rating are regarded as strictly high-grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions, an liable to but slight market fluctuation other than through
changes in the money rate. The factor last named is of importance varying with
the length of maturity. Such securities are mainly senior issues of strong
companies, and are most numerous in the railway and public utility fields,
though some industrial obligations have this rating. The prime feature of an AAA
rating is showing of earnings several times or many times interest requirements
with such stability of applicable earnings that safety is beyond reasonable
question whatever changes occur in conditions. Other features may enter in, such
as a wide margin of protection through collateral security or direct lien on
specific property as in the case of high class equipment certificates or bonds
that are first mortgages on valuable real estate. Sinking funds or voluntary
reduction of the debt by call or purchase are often factors, while guarantee or
assumption by parties other than the original debtor may also influence the
rating.
AA. Securities in this group are of safety virtually beyond question, and
as a class are readily salable while many are highly active. Their merits are
not greatly unlike those of the AAA class, but a security so rated may be of
junior though strong lien--in many cases directly following an AAA security--or
the margin of safety is less strikingly broad. The issue may be the obligation
of a small company, strongly secured but influenced as to ratings by the lesser
financial power of the enterprise and more local type of market.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A is the highest commercial paper rating category utilized by S&P, which
uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
A-1 MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset
A-1
<PAGE> 82
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 sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
FITCH-1, FITCH-2, DUFF 1 AND DUFF 2 COMMERCIAL PAPER RATINGS
Commercial paper rated "Fitch-1" is considered to be the highest grade
paper and is regarded as having the strongest degree of assurance for timely
payment. "Fitch-2" is considered very good grade paper and reflects an assurance
of timely payment only slightly less in degree than the strongest issue.
Commercial paper issues rate "Duff 1" by Duff & Phelps, Inc. have the
following characteristics: very high certainty of timely payment, excellent
liquidity factors supported by strong fundamental protection factors, and risk
factors which are very small. Issues rated "Duff 2" have a good certainty of
timely payment, sound liquidity factors and company fundamentals, small risk
factors, and good access to capital markets.
A-2
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of the
Mutual Life Insurance Company of New York and the
Contractholders of Keynote Series Account:
We have audited the accompanying statements of assets and liabilities of
the Money Market, Intermediate Government Bond, Government/Corporate Bond,
Balanced, Equity Income, Equity Growth and Calvert Subaccounts (seven of the
subaccounts constituting the Keynote Series Account) ("Keynote") as of December
31, 1996, and the related statements of operations for the year then ended and
the statements of changes in net assets for each of the two years in the period
then ended. These financial statements are the responsibility of Keynotes'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1996, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of each of the respective
Subaccounts' included herein, constituting Keynote Series Account as of December
31, 1996, the results of their operations and the changes in their net assets
for the periods referred to above, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
February 11, 1997
F-1
<PAGE> 84
KEYNOTE SERIES ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT/
MONEY GOVERNMENT CORPORATE EQUITY EQUITY
MARKET BOND BOND BALANCED INCOME GROWTH CALVERT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ----------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in the
Funds, at value
(Notes 1 and 2)..... $844,530 $ 680,739 $ 515,059 $3,846,819 $12,927,563 $7,153,650 $472,440
Receivable for
purchase
of units............ 931 334 1,250 3,415 6,238 10,773 450
Receivable from MONY.. 10,444 -- -- -- 29,413 98,656 --
-------- -------- -------- ---------- ----------- ---------- --------
Total
assets.... 855,905 681,073 516,309 3,850,234 12,963,214 7,263,079 472,890
-------- -------- -------- ---------- ----------- ---------- --------
LIABILITIES:
Payable for sale of
units............... -- -- -- 259 1,152 7,027 --
Accrued expenses...... 10,959 537 404 3,018 39,373 103,410 372
-------- -------- -------- ---------- ----------- ---------- --------
Total
liabilities.. 10,959 537 404 3,277 40,525 110,437 372
-------- -------- -------- ---------- ----------- ---------- --------
Net assets
attributable
to annuity
contractholders.. $844,946 $ 680,536 $ 515,905 $3,846,957 $12,922,689 $7,152,642 $472,518
======== ======== ======== ========== =========== ========== ========
Accumulation units.... 56,311 47,901 25,670 156,241 489,820 237,959 25,095
======== ======== ======== ========== =========== ========== ========
Unit value............ $ 15.00 $ 14.21 $ 20.10 $ 24.62 $ 26.38 $ 30.06 $ 18.83
======== ======== ======== ========== =========== ========== ========
</TABLE>
See notes to financial statements.
F-2
<PAGE> 85
KEYNOTE SERIES ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
-----------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT/
MONEY GOVERNMENT CORPORATE EQUITY EQUITY
MARKET BOND BOND BALANCED INCOME GROWTH CALVERT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Allocated net investment
income (loss) from
Diversified Investors
Portfolios (Note 2)..... $ 44,397 $ 38,004 $ 30,848 $115,963 $ 376,790 $ (24,023) $ --
Dividend income (Note
2)...................... -- -- -- -- -- -- 10,239
------- -------- -------- -------- ---------- ---------- -------
Total investment
income
(loss)........ 44,397 38,004 30,848 115,963 376,790 (24,023) 10,239
------- -------- -------- -------- ---------- ---------- -------
Expenses: (Note 3)
Mortality and expense
risk................. 7,886 6,103 4,427 30,865 121,396 55,133 3,379
Less expenses reimbursed
by MONY.............. 2,614 -- -- -- 24,105 25,844 --
------- -------- -------- -------- ---------- ---------- -------
Net expenses............ 5,272 6,103 4,427 30,865 97,291 29,289 3,379
------- -------- -------- -------- ---------- ---------- -------
Net investment income
(loss).................. 39,125 31,901 26,421 85,098 279,499 (53,312) 6,860
------- -------- -------- -------- ---------- ---------- -------
Realized and unrealized
gains (losses) on
investments (Note 2)
Net realized gains
(losses) on
investments.......... (38) (4,321) (907) 371,395 614,061 1,667,681 31,681
Net change in unrealized
appreciation
(depreciation) on
investments.......... -- (10,125) (12,033) 63,377 1,282,153 (596,767) 4,906
------- -------- -------- -------- ---------- ---------- -------
Net realized and
unrealized gains
(losses) on
investments.......... (38) (14,446) (12,940) 434,772 1,896,214 1,070,914 36,587
------- -------- -------- -------- ---------- ---------- -------
Net increase in net assets
resulting from
operations.............. $ 39,087 $ 17,455 $ 13,481 $519,870 $2,175,713 $1,017,602 $ 43,447
======= ======== ======== ======== ========== ========== =======
</TABLE>
See notes to financial statements.
F-3
<PAGE> 86
KEYNOTE SERIES ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
----------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT/
MONEY GOVERNMENT CORPORATE EQUITY EQUITY
MARKET BOND BOND BALANCED INCOME GROWTH CALVERT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income
(loss)................ $ 39,125 $ 31,901 $ 26,421 $ 85,098 $ 279,499 $ (53,312) $ 6,860
Net realized gains
(losses) on
investments........... (38) (4,321) (907) 371,395 614,061 1,667,681 31,681
Net change in unrealized
appreciation
(depreciation) on
investments........... -- (10,125) (12,033) 63,377 1,282,153 (596,767) 4,906
-------- -------- -------- ---------- ----------- ---------- --------
Net increase in net
assets resulting from
operations............ 39,087 17,455 13,481 519,870 2,175,713 1,017,602 43,447
-------- -------- -------- ---------- ----------- ---------- --------
From unit transactions
(Note 4):
Net proceeds from the
issuance of units..... 370,991 46,617 138,465 766,044 2,341,587 1,972,865 154,841
Net asset value of units
redeemed.............. (397,562) (79,793) (111,135) (533,262) (4,445,437) (991,157) (48,761)
-------- -------- -------- ---------- ----------- ---------- --------
Net increase (decrease)
in net assets from
unit transactions..... (26,571) (33,176) 27,330 232,782 (2,103,850) 981,708 106,080
-------- -------- -------- ---------- ----------- ---------- --------
Net increase (decrease) in
net assets............... 12,516 (15,721) 40,811 752,652 71,863 1,999,310 149,527
Net assets:
Beginning of year........ 832,430 696,257 475,094 3,094,305 12,850,826 5,153,332 322,991
-------- -------- -------- ---------- ----------- ---------- --------
End of year.............. $844,946 $680,536 $515,905 $3,846,957 $12,922,689 $7,152,642 $472,518
======== ======== ======== ========== =========== ========== ========
Units outstanding beginning
of year.................. 58,026 50,325 24,207 145,593 571,730 201,470 19,147
Units issued during year... 25,172 3,364 7,138 34,195 97,638 71,367 8,710
Units redeemed during
year..................... (26,887) (5,788) (5,675) (23,547) (179,548) (34,878) (2,762)
-------- -------- -------- ---------- ----------- ---------- --------
Units outstanding end of
year..................... 56,311 47,901 25,670 156,241 489,820 237,959 25,095
======== ======== ======== ========== =========== ========== ========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 87
KEYNOTE SERIES ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT/
MONEY GOVERNMENT CORPORATE EQUITY EQUITY
MARKET BOND BOND BALANCED INCOME GROWTH CALVERT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
From operations:
Net investment income
(loss)............. $51,191 $ 77,103 $ 44,151 $ 150,734 $ 378,026 $ (26,315) $ 9,392
Net realized gains
(losses) on
investments........ (26) 4,194 2,823 270,599 135,455 278,119 118,534
Net increase in
unrealized
appreciation on
investments........ -- 114,939 86,758 794,247 3,770,853 998,205 150,725
---------- ---------- ---------- ----------- ----------- ----------- ----------
Net increase in net
assets resulting
from operations.... 51,165 196,236 133,732 1,215,580 4,284,334 1,250,009 278,651
---------- ---------- ---------- ----------- ----------- ----------- ----------
From unit transactions
(Note 4):
Net proceeds from the
issuance of
units.............. 1,078,472 227,488 336,269 1,555,267 3,106,742 3,338,367 436,495
Net asset value of
units redeemed..... (2,742,151) (9,139,807) (2,097,303) (12,384,361) (30,545,949) (20,974,543) (4,216,432)
---------- ---------- ---------- ----------- ----------- ----------- ----------
Net decrease in net
assets from unit
transactions....... (1,663,679) (8,912,319) (1,761,034) (10,829,094) (27,439,207) (17,636,176) (3,779,937)
---------- ---------- ---------- ----------- ----------- ----------- ----------
Net decrease in net
assets................ (1,612,514) (8,716,083) (1,627,302) (9,613,514) (23,154,873) (16,386,167) (3,501,286)
Net assets:
Beginning of year..... 2,444,944 9,412,340 2,102,396 12,707,819 36,005,699 21,539,499 3,824,277
---------- ---------- ---------- ----------- ----------- ----------- ----------
End of year........... $832,430 $ 696,257 $ 475,094 $ 3,094,305 $12,850,826 $ 5,153,332 $ 322,991
========== ========== ========== =========== =========== =========== ==========
Units outstanding
beginning of year..... 179,143 768,905 125,870 762,735 2,135,776 994,859 291,806
Units issued during
year.................. 77,179 17,854 19,018 83,977 165,063 146,476 30,571
Units redeemed during
year.................. (198,296) (736,434) (120,681) (701,119) (1,729,109) (939,865) (303,230)
---------- ---------- ---------- ----------- ----------- ----------- ----------
Units outstanding end of
year.................. 58,026 50,325 24,207 145,593 571,730 201,470 19,147
========== ========== ========== =========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 88
KEYNOTE SERIES ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Keynote Series Account ("Keynote") is a separate investment account
established on December 16, 1987 by The Mutual Life Insurance Company of New
York ("MONY") under the laws of the State of New York.
Keynote operates as a unit investment trust under the Investment Company
Act of 1940, as amended (the "1940 Act"). Keynote holds assets that are
segregated from all of MONY's other assets and, at present, is used as an
investment vehicle under certain tax-deferred annuity contracts issued by MONY
to fund retirement plans maintained by certain not-for-profit and other
organizations ("Group Plans"). MONY is the legal holder of the assets in
Keynote.
There are currently seven subaccounts within Keynote which are available to
contractholders of Group Plans. Six of the subaccounts invest in a corresponding
portfolio of Diversified Investors Portfolios (the "Portfolios") and the seventh
subaccount invests in Calvert Responsibly Invested Balanced Portfolio, a series
of Acacia Capital Corporation ("Calvert") (collectively the "Funds"). The
respective financial statements of the Funds are contained elsewhere in this
report.
At December 31, 1996, each of the subaccounts' investment in the
corresponding Portfolios was as follows:
<TABLE>
<CAPTION>
PERCENTAGE INVESTMENT
SUBACCOUNT IN PORTFOLIO
----------------------------------------- ---------------------
<S> <C>
Money Market............................. 0.46%
Intermediate Government Bond............. 0.66
Government/Corporate Bond................ 0.16
Balanced................................. 1.45
Equity Income............................ 1.35
Equity Growth............................ 2.39
</TABLE>
2. SIGNIFICANT ACCOUNTING POLICIES
A. Investments:
The investment by Keynote in the Portfolios reflects Keynote's
proportionate interest in the net assets of each of the Portfolios. The
investment in shares of Calvert is stated at net asset value. The Keynote
subaccount that invests in Calvert records its security transactions at the
prior day's ending net asset value per share. Valuation of the securities held
in each of the Portfolios is discussed in Note 2A of the Portfolios' Notes to
Financial Statements which are included elsewhere in this report. A description
of the portfolio valuation policy for Calvert can be found in Note A of its
financial statements contained elsewhere in this report.
B. Investment Income:
Each Keynote subaccount earns income, net of expenses, daily on its
investment in the corresponding Portfolio. All of the net investment income and
realized and unrealized gains and losses from the security transactions of the
corresponding Portfolios are allocated pro rata among the investors at the time
of such determination. Dividend income is recorded on the ex-dividend date.
Realized gains and losses from investments sold are determined on the basis of
identified cost.
C. Federal Income Taxes:
The operations of Keynote form a part of, and are taxed with, the
operations of MONY. MONY does not expect, based upon current tax law, to incur
any income tax upon the earnings or realized
F-6
<PAGE> 89
KEYNOTE SERIES ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
C. Federal Income Taxes (Continued):
capital gains attributed to Keynote. Based upon this expectation, no charges are
currently being deducted from Keynote for federal income tax purposes.
D. Other:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. FEES AND TRANSACTIONS WITH AFFILIATES
Daily charges to Keynote for mortality and expense risks assumed by MONY
are computed at an annual rate of 0.90%; however, MONY reserves the right to
charge maximum fees of 1.25% upon notice.
MONY has voluntarily undertaken to waive expenses of the Money Market
Subaccount, to the extent necessary, to limit the expenses (other than mortality
and expense risk charges) to 0.10% of average net assets. Effective June 24,
1994, MONY has voluntarily undertaken to waive expenses of the Equity Income and
Equity Growth Subaccounts, to the extent necessary, to limit the expenses (other
than mortality and expense risk charges) to 0.46% and 0.50%, respectively, of
their average net assets. MONY reserves the right to raise this limit upon
notice.
4. GROUP PLAN ASSUMPTIONS
On December 31, 1993, MONY entered into an agreement with AUSA Life
Insurance Company, Inc. ("AUSA"), a wholly owned subsidiary of AEGON, USA,
pursuant to which the Group Plans may be transferred through assumption
reinsurance to AUSA. Subject to receipt of any necessary state insurance
department approvals and authorizations, each Group Plan contractholder receives
materials relating to this assumption. The assumption reinsurance of any Group
Plan to AUSA will result in the transfer of the applicable assets out of Keynote
and into a corresponding separate account of AUSA. Assets transferred to AUSA
pursuant to this assumption reinsurance transaction for the years ended December
31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS 1996 AMOUNT 1995 AMOUNT
---------------------------------------------------- ----------- -----------
<S> <C> <C>
Money Market........................................ $ 216,407 $ 1,867,363
Intermediate Government Bond........................ 10,488 8,782,763
Government/Corporate Bond........................... 18,592 1,841,524
Balanced............................................ 14,962 11,617,343
Equity Income....................................... 2,378,391 29,614,226
Equity Growth....................................... 136,247 19,543,177
Calvert............................................. 4,201 3,908,172
---------- -----------
$2,779,288 $77,174,568
========== ===========
</TABLE>
The amounts related to these assumptions are reflected as redemptions in the
Statements of Changes in Net Assets.
F-7
<PAGE> 90
ECONOMIC AND MARKET REVIEW
Economy The pace of the nation's economic growth slowed in the second half
of 1996. Final third quarter Gross Domestic Product was revised downward to 2.1%
from the previous estimate of 3.2%. While growth for the entire year is expected
to be above the Federal Reserve's targeted range of 2.0-2.25%, the moderate
growth in the second half of the year seems to have calmed the bond market.
Inflation as measured by both the Consumer Price and Producer Price Indices
remained under control despite some volatility attributable to the food and
energy components. As a result, the Federal Reserve left interest rates
unchanged at its November and December Federal Open Market Committee meetings.
The economy is growing at a moderate pace and inflation remains subdued. As
we enter 1997, the debate continues as to whether the economy and inflation are
accelerating, and the Federal Reserve needs to tighten; or whether the economy
is slowing, and the Federal Reserve needs to begin easing to avoid a recession
in 1997. We believe that economic growth and inflation may pick up during 1997.
This could result in higher interest rates as we move into the second quarter
and a possible Federal Reserve tightening.
Bonds Long term interest rates started the quarter at 6.92%. In October
and November the bond market rallied as interest rates fell across most of the
yield curve. The long bond fell to 6.36%, a drop of 56 basis points. The
catalysts for the rally were an economy demonstrating moderate growth,
accommodating Federal policy, and the maintenance of political balance between
Congress and the White House. The rally ended in December as interest rates rose
and the long bond finished the quarter at 6.64%. The decline was prompted by
investors who felt that the market had moved to an over bought level. For the
quarter, the Lehman Brothers Government/Corporate Index rose 3.1% to finish the
year with a return of 2.9%.
Long term interest rates should remain within a range of 6 1/4% to 7% until
there is more evidence that economic growth is either accelerating or slowing
significantly. If the economy slows, bonds will rally as rates drop below the 6%
level toward 5% to 5 1/2%. A more likely scenario is for growth and inflation to
pick up into the second quarter with the Fed eventually tightening. Bonds will
decline as rates move above 7%. Bonds should then rally later in the year as
higher rates slow economic activity.
Stocks U.S. stocks, as measured by the S&P 500 Index, returned a strong
8.3% in the fourth quarter, bringing the return for 1996 to 22.7%. The robust
performance by the market over the past two calendar years has only been matched
twice during the past 50 years. The rapid movement in the market during the
fourth quarter was brought about by generally better than expected earnings
reports for the prior quarter, a declining interest rate environment, and large
amounts of cash flowing into equity mutual funds.
The stock market should continue its upward momentum in early 1997 as the
economy grows moderately and interest rates remain stable. Large cap stocks
should continue to lead the market while international equities lag. Small cap
stocks could bounce back after their sluggish performance in the second half of
1996. As the stock market rallies to more overvalued levels, it becomes
increasingly more vulnerable to earnings disappointments. Only a moderately
growing economy with low inflation and steady to slightly declining interest
rates can sustain a prolonged stock market rally in 1997. More likely stronger
growth will unfold in about the second quarter and will result in a moderate
correction in the stock market.
MONEY MARKET PORTFOLIO
The Federal Reserve appears to have been very pleased with the soft landing
of the economy in 1996 that resulted from their interest rate changes in 1995.
With the one last tweak of interest rates in early 1996, placing the Fed Funds
rate at 5.25%, the Federal Reserve has sat back and watched the economy show
overall moderate growth through the past year. Employment and wages remain
strong, but have not skyrocketed out of control. Consumers have generally been
restrained although
F-8
<PAGE> 91
somewhat more optimistic in their buying patterns this year as housing sales
were sluggish until rates dropped toward the end of 1996, and as consumers made
only moderate increases in Christmas purchases.
The economy continues on its relatively steady moderate growth path.
Federal Reserve members are watching closely for a turn in the economy one way
or the other but overall, they seem to be relatively happy
with the current economic course. With no pitfalls in sight, we expect the Fed
to remain steady with interest rates through most of 1997. Late 1997 data may
provide information that will lead to a very modest change in interest rates as
another pre-emptive move by the Fed.
The interest rate curve remains relatively flat. Investors are predicting a
steady course in interest rates by the Federal Reserve. We are therefore
generally running an average portfolio maturity of 45 days, while taking
advantage of market anomalies that periodically occur in one particular maturity
or another. At 12/31/96, the average maturity was 35 days, shorter than usual to
take advantage of the year end spike in short maturity interest rates.
The Portfolio continues to be invested in high quality short-term
instruments, principally commercial paper. Our investment strategy is to
emphasize purchases of 30-90 day maturities to provide flexibility to respond to
any changes in the market place without sacrificing current income. The 30-day
and 7-day current yields of the Portfolio were 5.18% and 5.19%, respectively as
of December 31, 1996, after changes imposed by the Portfolio. Of course, past
performance does not guarantee future investment results.
Investments made in the Money Market Portfolio are not insured nor
guaranteed by the U.S. government. There is no assurance that the Portfolio will
maintain a steady net asset value.
HIGH QUALITY BOND PORTFOLIO
High Quality Bond investors surely saved the best for last in 1996 as the
Portfolio enjoyed its highest quarterly returns of the year. The Merrill Lynch
1-3 Year Treasury Index posted a solid 1.9% return for the three month period,
helping to boost one year returns to 5%. The High Quality Bond Portfolio
outperformed the benchmark every quarter in 1996, culminating in a 5.5% return
for the year.
October opened the quarter with rising bond prices. Leading economic
indicators released during the month suggested a slowdown in economic activity
and benign inflation at both the producer and consumer levels, supporting the
bond market's rally. Economic indicators included an unexpectedly weak
employment report, lower employment costs, and declining housing starts, all
contributing to lower yields by the end of October.
The bond market viewed November's Election Day results favorably, as the
Democrats retained the White House, and Republicans held their majorities in the
House and Senate. Bond investors hoped the political mix would yield continued
slow growth and benign inflation, a mix that has worked nicely for bonds.
Investors were not disappointed as the continued slow growth/benign inflation
scenario fostered rising bond values. November's economic indicators reported a
slowdown in retail sales, a tame Consumer Price Index (CPI) report, and a fifth
straight month of declining existing home sales, driving yields down further.
December dampened the bond market's spirit. Federal Reserve Chairman Alan
Greenspan opened the month suggesting that values of U.S. assets were too high,
leaving investors worried about possible Federal Reserve tightening. Reports of
brisk holiday sales early in December suggested signs of accelerated economic
activity, forcing yields higher. Although the Federal Open Market Committee
(FOMC) left rates unchanged at its December 17th meeting, several month-end
indicators pointed towards accelerated growth. Higher than expected consumer
confidence, combined with a sharp resurgence of existing and new home sales,
contributed to lower bond prices by month end, dampening an overall positive
quarter.
F-8A
<PAGE> 92
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
Bonds, as measured by the Lehman Brothers Intermediate Government Index,
gained 2.3% for the three month period ending December 31, the highest calendar
quarterly return in 1996. The total return for bonds for the year ended December
31, 1996 was 4.1%. In contrast to last year, shorter-term securities generally
outperformed longer-term issues, which were much more affected by the rise in
interest rates over the period. Much of the performance in the fourth quarter
could be attributed to falling interest rates in October and November. There was
a back-up in rates in December due to renewed fears that strong economic
activity would be followed by a pick-up in inflation.
The quarter began on a positive note for bond investors, as much of the
data released in October measuring levels of economic activity indicated a
continued slowing from the rapid advance of the second quarter. Reports on new
job creation, which probably raised inflation concerns among bond traders more
than any other indicator throughout the year, were far weaker than anticipated.
Moreover, closely watched measures of employment costs were lower as well.
Together with a drop in consumer confidence levels and slower home sales, bonds
in this sector had their best one month return since May, 1995. November was
similar in that generally weaker than expected economic data, coupled with
favorable inflation readings, pushed bond yields down, resulting in solid
returns for the month. December, however, was not as positive as the previous
two months. Bonds in most sectors posted negative returns. Many of the economic
releases in the last few weeks of the year pointed toward a possible rebound in
activity. Although inflation indicators remained within expectations, many bond
traders feared the prospect of stronger growth would finally cause inflation to
become a problem in the future.
The Portfolio maintained a duration slightly shorter than that of its
benchmark, the Lehman Intermediate Government Bond Index, throughout the fourth
quarter of this year. It is expected to be managed to a duration close to that
of its benchmark over the near term. The Portfolio will continue to eliminate
credit risk by seeking and holding only high quality Government issues.
GOVERNMENT/CORPORATE BOND PORTFOLIO
Although there were significant moves in bond yields this quarter, the
market did not experience the same day-to-day volatility associated with the
third quarter of 1996. Except for the very shortest maturities, bond prices
ended this period higher than where they started, which translated into positive
returns for investors. Bonds in the Lehman Brothers Government/Corporate Index
gained 3.1% for the three months ending December 31, bringing the total return
for 1996 to 2.9%. Returns in October and November were responsible for all of
this quarter's gain, as stronger than expected economic reports in December
caused the market to see negative returns.
Early in the quarter, the bond market continued a rally that began when the
Federal Open Market Committee (FOMC), the policy arm of the Federal Reserve
Bank, decided to leave interest rates unchanged at their September meeting. Bond
prices were bid higher as traders believed the long awaited, but never enacted,
bump-up in rates by the Fed would not happen this year. A hands-off policy by
the Federal Reserve, coupled with lackluster economic data, suggested slower
growth in the months ahead. October returns were the strongest in sixteen
months. In November, the market again saw weaker than expected employment
reports, lower consumer confidence levels, and no rebound in retail sales
figures. No increase in interest rates at the November FOMC meeting and strong
foreign demand for U.S. fixed income securities completed the picture, so that
bonds again had solid returns. There seemed, however, to be a dramatic
turnaround in market sentiment in December. Indicators on housing, employment,
and consumer confidence were all reported higher than anticipated. Continued
favorable inflation readings and a decision to leave rates unchanged at the
Federal Reserve's December meeting couldn't reverse the trend toward higher bond
yields. Returns for the month were negative due to concerns the tight labor
markets could result in wage inflation.
F-8B
<PAGE> 93
The Portfolio benefited from its overweighting of corporate issues relative
to the Index during the period. Generally, Government issues were not able to
match the returns of most of the corporate sectors. The Portfolio was maintained
at about the same duration as its benchmark index during the quarter, but may
extend relative to the benchmark should yields climb to levels where these bonds
could be considered undervalued.
HIGH YIELD BOND PORTFOLIO
As measured by the Salomon Brothers Cash Pay Index, the high yield bond
market returned 3.7% for the fourth quarter of 1996, beating most other fixed
income indices. For the year, bonds in this sector gained over 10%, more than
doubling the return of most investment-grade bond measures. Heavy investor
demand and a benign economic backdrop supported the advance. Credit quality had
a noticeable impact on return for the
quarter. BB-rated issues returned 4.4%, outperforming both the lower quality B's
(3.9%), and lower rated CCC's (-3.1%) during the period.
Despite the compression of spreads during the year, demand for high yield
securities remains strong. Faced with an aging bull market in stocks and a
shortage of high income alternatives, investors have poured cash into high yield
mutual funds at an unparalleled rate. More new monies flowed into high yield
market this year than in any other year. Heavy investor demand and secular low
interest rates have also spurred new high yield issuance into record territory,
with $80 billion of new issues this year. Investor uncertainty regarding the
economy, stocks, and interest rates continues to benefit the high yield bond
market. While individuals in need of high income remain the market's core
constituency, both retail and institutional investors are increasingly embracing
high yield as a refuge. These bonds offer equity-like returns, but have risk
characteristics closer to investment grade debt issues. With a yield roughly
comparable to the long term return on common stocks, low correlation to the
broad stock and bond markets, and a roster of names familiar in most households,
the market is entering the mainstream of investment alternatives. The high yield
market has grown in size from $220 billion in 1991 to about $400 billion as of
year end. These issues now comprise 25% of the total corporate bonds
outstanding.
The outlook for the high yield market remains positive, particularly
relative to other fixed income investments. Investor demand for these securities
is likely to remain strong, especially in light of the recent volatility of the
broader stock and bond markets. The Portfolio remains defensively positioned
with respect to industry exposure, and slightly overweighted in top tier BB
rated issues relative to the Salomon Index.
BALANCED PORTFOLIO
Balanced portfolios, as measured by a 60/40 mix of the S&P 500 and the
Lehman Government/Corporate Index, posted their highest quarterly returns of the
year of 6.3%. Bonds had their strongest return in 1996 due to perceptions of
slowing growth and continued favorable inflation readings over the period.
Equity returns, however, were clearly the determining force for the strong gain
in the Index. As has been true for most of the year, stocks were helped by low
levels of interest rates over the period and a healthy growth in corporate
profits.
Asset allocation and equity sector returns had the greatest impact on the
quarterly results of the Balanced Fund. The Portfolio increased its equity
exposure throughout the quarter. This helped performance relative to the Index
in a period in which equities outperformed bonds. The Portfolio finished the
year with a 62% weighting in stocks, slightly higher than the benchmark's 60%.
Although the S&P 500 returned 8.4% for the quarter, financial and
technology issues gained 13.5% and 13.1% respectively. Financial institutions,
like banks, were positively impacted by lower interest rates over the last three
months. However, bank shares were bid higher more due to their improved balanced
sheets, solid dividend and earnings growth, and the reduction in loan losses.
The Balanced
F-8C
<PAGE> 94
Portfolio was equally weighted versus the Index in this sector. Individual
issues that did well within the Portfolio during the quarter included Travelers
(23.5%) and Citicorp (14.2%).
Technology, up 40%, was the best performing sector of the market this year.
This industry continues to benefit from soaring demand, as companies are more
determined than ever to increase productivity. More than 50% of capital spending
by businesses is now technology related. The Portfolio was slightly
underweighted versus the Index over the quarter. However, impressive returns of
individual issues helped the technology sector to an overall 14.1% gain over the
past three months, with Nokia Corp. (30.2%) and International Business Machines
(22%) leading the way.
EQUITY INCOME PORTFOLIO
In the fourth quarter, equity income investing, as measured by the Lipper
Equity Income Index, posted its best results for the year with a total return of
about 7.5%. This puts the total return for the past year at 17.9% and brings
performance over the past two years to about 53%. The Index thus enjoyed its
best two year period since 1981-1982 when it returned over 60%. However, as in
1995, these more conservative equity strategies failed to beat the rapidly
advancing S&P 500 Index, which returned 23.3% for the year. The key factors
behind the market's advance in the fourth quarter were declining interest rates,
fairly strong corporate profits, and election results which preserved the
political status quo in Washington.
Fourth quarter performance of the Equity Income Portfolio was most
influenced by the technology, energy, and cyclical sectors. The technology
sector was a source of weakness due to a lack of exposure to some of the
sector's best performing industries, such as networking and software companies.
It is difficult to reconcile these types of holdings with the Portfolio's yield
oriented, value strategy, inasmuch as these industries predominantly contain
growth companies which pay little or no dividends.
The energy sector of the Portfolio underperformed due to stock selection.
Holdings in this area are biased toward oil and oil service companies, such as
Mobil, Chevron, and McDermott International, which were negatively impacted by
company specific news. Mobil underperformed following reports that declining
prices for some of its key chemical products, and shutdowns at several U.S.
refineries hurt earnings. Chevron, also hurt by lower chemical prices suffered a
decline in refining profits last quarter. McDermott International shares fell
after the company said it expects to report a fiscal second quarter loss and
could cut its dividend. This company has since been eliminated from the Equity
Income Portfolio.
The cyclical sector enhanced total return, as holdings in auto and rail
stocks rallied sharply. General Motors and Chrysler were both up over 16%. Both
companies announced that third quarter profits more than doubled and easily
topped analyst expectations. Conrail stock appreciated about 40% due to its
pending merger with CSX and was the Portfolio's best performer.
EQUITY VALUE PORTFOLIO
Value investing, as measured by the Russell 1000 Value Index, performed
well in the fourth quarter by posting a 9.8% return. This capped-off a very
strong year as the Index returned 21.6%. The quarter's strong result was largely
attributable to the energy, utility and finance sectors, which comprise
approximately 60% of the Index's total weight. The energy stocks benefited from
the rising cost of crude oil and from generally better than expected earnings
from oil producers and service companies. Investors believe that increased
global demand will add to already strong profit growth. The utility and finance
sectors, which tend to be very interest rate sensitive, ascended due to falling
bond yields. The finance sector also was aided by brokerage and investment
firms, which posted strong earnings.
Performance of the Portfolio was enhanced by the utility and consumer
non-cyclical sectors, while the basic industry and consumer cyclical sectors
detracted from the quarter's performance. The utility
F-8D
<PAGE> 95
sector returned approximately 13% for the Portfolio and was the best performer
for the quarter. The primary determinants were telephone stocks which bounced
back after underperforming the previous nine months. In an environment where
interest rates are falling, the dividend yield is enhanced making these stocks
very attractive to investors. In addition, Federal regulators moved to allow the
regional telephone companies to continue levying access charges on long distance
providers. Stocks which directly contributed were AT&T Corp., NYNEX Corp., and
GTE Corp.
The consumer non-cyclical sector, dominated by health care related
companies such as HMO's, ethical drug companies and acute care providers,
benefited from the November election as Washington was kept status-quo. A
Republican controlled Congress makes any kind of health care reform less likely.
Now that such a reform is put to rest, investors are confident that managed care
providers will be able to raise premiums more easily and spend less on care,
ultimately helping the bottom line.
The basic industry sector has not had the ability to raise prices and is
also ailing from unsatisfactory levels of demand. Moreover, profits are being
squeezed as rising cost of raw materials, particularly sources of energy, are
causing profit margins to fall. The consumer cyclical sector fell prey to
expectations that economic growth will continue to slow. Retailing in particular
detracted from sector returns since holiday sales were not as robust as
originally anticipated.
GROWTH & INCOME PORTFOLIO
Growth & Income investors generally saw their best returns of the year in
the fourth quarter. The Lipper Growth & Income Index returned 7.8% for the
quarter and finished the year with a total return of over 20%. This marks only
the fourth time in the Index's 25 year history that it has gained over 20% for
two consecutive calendar years. Additionally, 1996 results compared favorably
with other investment styles, as measured by the Lipper Equity Income, Growth,
and Small Company Indices. One of the key factors in the relative strength of
Growth & Income funds in general was uncertainty over the state of the economy,
bringing investors' focus towards larger companies with stable earnings growth.
Typically, these companies are prominently represented in Growth & Income funds.
In the fourth quarter, the advance of the equity markets could be attributed to
an accommodative Federal Reserve, good earnings reports, and election results
which preserved the political balance in Washington.
Fourth quarter performance of the Growth & Income Portfolio was mixed as
weakness in the non-cyclical sector was mitigated by strength in the Portfolio's
basic industry and financial stocks. The non-cyclical area was hurt by stock
selection because company specific news on some larger holdings (Clorox and
Nike) was viewed unfavorably by investors. Clorox announced that it plans to
finance its proposed acquisition of Armor All Products with debt issuance. Some
felt that this may hurt its earnings somewhat in the near term. Nike shares
failed to keep pace with the market. Some analysts lowered their estimates for
fiscal second quarter earnings because of rising the company's operating costs.
Nike recently signed golf sensation Tiger Woods to a multimillion dollar
endorsement contract and also opened a new NikeTown store.
The basic industry sector was a source of value added. This can be
attributed to Putnam's strict growth criterion steering the Portfolio away from
the area's worst performing industries. The Portfolio had essentially no
exposure to specialty chemical and/or forest product stocks which were both
generally weak due to poor prospects for earnings growth. Finance stocks within
the Portfolio were particularly strong returning about 15% as a group. This
sector was led by money center banks such as BankAmerica and Citicorp which both
outperformed. These issues continue to benefit from stronger than anticipated
earnings and the positive sentiment created by declining interest rates.
EQUITY GROWTH PORTFOLIO
Growth Fund investing, as measured by the Lipper Growth Fund Index,
finished the year strongly with a fourth quarter total return of 5.8%. This
brings performance for all of 1996 to 17.5%. This performance is generally in
line with the 19.5% average return for equity funds tracked by Lipper, and
F-8E
<PAGE> 96
is well ahead of the average fixed income return of 4.7%. Moreover, annual
results were quite good relative to historical standards as calendar year
returns for the Growth Fund Index of better than 17% had occurred only twelve
times since 1970. Some of the catalysts which propelled the equity markets to
record highs in the fourth quarter were declining interest rates, corporate
profits generally exceeding expectations, and mutual funds continuing to receive
large cash flows from investors.
Fourth quarter performance of the Growth Portfolio was most influenced by
the technology and consumer cyclical sectors. Technology was a source of value
added due to sector emphasis. Throughout the period, the Portfolio maintained a
relatively high weighting in this group, which generally outperformed. S&P 500
technology stocks returned about 13%, as investors, uncertain about the state of
the economy, focused on this group whose secular growth prospects still seem
relatively strong. Microsoft and 3Com were two of the Portfolio's best
performers in this sector. Microsoft, which had exhibited tremendous relative
strength all year, rallied an additional 25% in the fourth quarter due to
stronger than anticipated earnings. 3Com advanced about 22% after the company
stated that they expect increasing profit margins and sales growth for the next
few quarters.
The consumer cyclical sector of the Portfolio detracted from total return
from both sector allocation and stock selection perspectives. S&P 500 cyclical
stocks returned only 1.6% for the quarter and were among the broad market's
worst performing groups. This proved somewhat troublesome for the Portfolio,
which maintained a healthy allocation to the sector. In addition, company
specific news, particularly in the specialty retailing area, caused some issues
to decline. Lowe's shares fell after the home improvement retailer said fourth
quarter earnings would fall below analysts' expectations. CompUSA was hurt by
slow sales growth for the quarter. Management cited a shorter Christmas shopping
season and consumer anticipation of new products as key factors.
SPECIAL EQUITY PORTFOLIO
As the famous Hall of Fame catcher Yogi Berra once said, "It's deja-vu all
over again." There couldn't have been a more fitting phrase to summarize the
performance of small company stocks relative to their brethren large company
stocks, in 1996. The Russell 2000 Index, a small company index, returned 16.5%,
while the S&P 500 Index, a measure of large company stocks, returned 23.3%,
bettering the performance of small company stocks for the third consecutive
year. The relative underperformance of the small company stocks is largely
attributable to investors flocking to the comfort of more liquid, blue chip
names, due to uncertainty about the economy, interest rates, earnings, and to
relatively high valuations in the market. This frenzy for large company stocks
is not uncommon in late cycles of a bull market.
Despite this, 1996 was another year in which the Special Equity Portfolio
demonstrated superior results versus its benchmark, the Russell 2000 Index. More
impressive was the Portfolio's ability to post a return comparable to the S&P
500 Index. The multiple manager approach utilized within the Portfolio continues
to provide superior results, while reducing the risks associated with this style
of investing.
During the fourth quarter, the Portfolio was helped by the consumer
cyclical sector, while the industrial and basic industry sectors were primary
detractors. The consumer cyclical sector's outperformance was largely associated
with the Portfolio's exposure to air transportation, publishing and the trucking
stocks, with returns of approximately 11.7%, 12.5%, and 6.8%, respectively. The
air freight companies did well as volume either matched or exceeded investors
expected levels. The trucking and publishing stocks benefited from generally
strong earnings reports.
The largest detractor to performance was the industrial sector, led by
capital equipment, multiple industry and metal fabrication stocks. There was no
common underlying theme for this sector's performance as much as issues specific
to certain companies.
The basic industry sector's underperformance was linked to lackluster
levels of demand and a slowing global economic environment. The latter has made
it nearly impossible to raise prices on
F-8F
<PAGE> 97
products that companies manufacture. Moreover, the cost of materials needed to
manufacture products, such as energy, have increased, causing profit margins to
decline.
AGGRESSIVE EQUITY PORTFOLIO
The fourth quarter proved turbulent for Aggressive Equity investors, as the
benchmark Russell 2000 Growth Index posted a .3% gain. October set the tone for
the quarter. Growth investors experienced broad losses largely due to investors
favoring more liquid, less volatile securities. Although November was more
profitable for Aggressive Equity investors, with positive returns, the trend
continued toward brand name blue chip issues, where returns were more favorable.
Growth oriented investors experienced a mediocre December, as the Russell 2000
Growth Index posted a gain of 2% for the final month of the year. Aggressive
Equity investments underperformed the benchmark for the quarter.
The Aggressive Equity Portfolio remained heavily weighted in technology,
and therefore did not partake in the gains of energy, the hottest sector of the
Russell 2000 Growth Index for the quarter. The Portfolio's technology issues had
mixed returns, with some stocks experiencing broad losses. Cascade
Communications, which makes equipment that links and routes phone calls within
computer networks, could not sustain blistering 1996 growth through the fourth
quarter, as the company announced lower than expected revenue. Sun Microsystems,
a supplier of high-performance workstations, received intense pressure from
rivals in the workstation market. Sun was prompted to slash prices, draining
profits and gross margins.
Although Aggressive Equity investors generally underperformed in the
quarter, several issues in the Portfolio managed to enjoy significant gains
because investors favored issues with larger market capitalizations. Stocks of
larger companies are perceived as being more liquid in today's volatile market.
Intel Corp. posted big gains for the Portfolio over the quarter, as technology
analysts expect increased earnings in 1997. The semiconductor company's earnings
are poised for large gains because many corporate customers are planning
upgrades. Dell Computer Corp. has already benefited from increased corporate
demand. Revenue jumped 42%, helped in part by an 80% increase in notebook
computer sales. Microsoft was also included in the list of large cap performers
as it expects to increase spending on research and development six-fold in 1997,
creating the world's largest computer science lab. The software leader will
continue to develop new internet products including technology for letting
people make video phone calls using the Internet.
The Portfolio also enjoyed strong performance from pharmaceutical companies
in the consumer non-cyclical sector. In a quest to reduce costs, many managed
health-care companies are recommending more use of medications. The expectation
is to avoid expensive surgery or long-term care by solving a medical problem
earlier through medication. Bristol-Myers Squibb, producing drugs to treat
cholesterol, and Pfizer, producing drugs to combat depression, enjoyed strong
fourth quarter performance. Pharmaceutical companies also rallied in response to
November's election results, where a Republican controlled Congress has dimmed
prospects for any efforts by President Clinton for health care reform in his
second term.
INTERNATIONAL EQUITY PORTFOLIO
U.S. investors in foreign markets experienced lackluster yet positive
returns as 1996 came to a close, with the Morgan Stanley Capital International
Europe, Australia, and Far East (MSCI EAFE) Index up 1.7% for the final quarter
of the year. Of the 22 countries which make up the Index, 20 had positive
returns as measured in U.S. dollars, and all but one were positive when viewed
in terms of local currency. Spain, Norway and Finland led the way while Japan
trailed, posting its second negative 1996 quarterly return.
Japanese market losses were intensified by an 11.1% depreciation of the
yen. This depreciation, together with an easing monetary policy and a good
economic rebound for the country, should have
F-8G
<PAGE> 98
helped boost Japan's stock market over the past year. However, overriding
factors caused Japanese returns to falter. Among these were lagging profit
growth, sluggish economic and corporate restructuring, and concern in the
markets over a tighter fiscal policy in the new year as the government moves to
repair the worst fiscal deficit of the major industrial countries. On a
prospective basis, although Japan's prospects currently appear dim, this is one
country whose markets can gain if and when interest rates rise since such a
trend will signal a powerful economic recovery.
In Europe, the news over the past year has been dominated by the European
Union's execution of strategies that will eventually bring about a single
currency for all. Specifically, the emphasis was on "convergence" -- narrowing
the gap in interest rates among the 15 member countries. The goal is for the
Italian lira, for example, to be no different than Germany's deutsche mark by
the year 2000. A side effect of convergence measures was a huge bond market
rally across the Continent as rates fell, with stock markets consequently
posting healthy gains. Another overriding trend in Europe is the beginning of
American-style corporate restructuring. This is unfamiliar territory for
traditionally paternalistic European corporations. However, underperforming
businesses should benefit as companies opt to enhance shareholder value by
aggressively cutting costs.
Looking forward, it is possible that Alan Greenspan's question about
"irrational exuberance" as applied to the U.S. market could also be relevant to
most of the developed markets outside Japan. There are signs that European
economies are finally emerging from two sluggish years with low inflation and
monetary authorities therefore unlikely to hike interest rates. Looming over the
Continent is the threat of a U.S. market correction should the Federal Reserve
elect to tighten monetary policy. Whenever U.S. market returns faltered last
year in the face of a possible Fed tightening, Europe's markets also stumbled.
F-8H
<PAGE> 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Owners of Beneficial Interests of the
Diversified Investors Portfolios:
We have audited the accompanying statements of assets and liabilities of
Diversified Investors Portfolios (comprising, respectively, the Money Market
Portfolio, High Quality Bond Portfolio, Intermediate Government Bond Portfolio,
Government/Corporate Bond Portfolio, Balanced Portfolio, Equity Income
Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity Growth
Portfolio, Special Equity Portfolio, Aggressive Equity Portfolio, High Yield
Bond Portfolio and International Equity Portfolio) (collectively the
"Portfolios") as of December 31, 1996, and the related statements of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended for each of the Portfolios other than the
Equity Value Portfolio and Aggressive Equity Portfolio for which the periods are
from April 19, 1996 (commencement of operations) to December 31, 1996 and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Portfolios'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
respective Portfolios constituting Diversified Investors Portfolios as of
December 31, 1996, the results of their operations, the changes in their net
assets, and the financial highlights for the periods referred to above in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
February 10, 1997
F-9
<PAGE> 100
DIVERSIFIED INVESTORS PORTFOLIOS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT/
MONEY HIGH GOVERNMENT CORPORATE EQUITY
MARKET QUALITY BOND BOND BOND BALANCED INCOME
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities, at cost......... $185,029,634 $194,090,614 $118,789,459 $323,055,033 $273,163,752 $760,718,204
============ ============ ============ ============ ============ ============
Securities, at market....... $185,029,634 $194,122,807 $118,462,438 $328,052,630 $291,482,580 $989,350,281
Repurchase agreement, at
value...................... -- 4,346,634 35,994 52,064 2,456,326 26,914
Cash........................ 55,534 -- 272,437 -- -- 24,843
Foreign currency holdings,
at value (cost $612).......
Receivable for securities
sold....................... -- 110,127 -- -- -- 452,910
Receivable for foreign
currency forward
contracts.................. -- -- -- -- -- --
Interest receivable......... 193 2,226,143 959,953 4,696,158 1,413,326 105
Dividends receivable........ -- -- -- -- 241,387 1,843,283
Receivable from securities
lending.................... -- 170 4,044 -- -- --
Reimbursement from advisor.. -- -- 4,884 -- 14,213 1,087
------------ ------------ ------------ ------------ ------------ ------------
Total assets....... 185,085,361 200,805,881 119,739,750 332,800,852 295,607,832 991,699,423
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES:
Deposit for securities
loaned..................... -- 3,417,000 16,628,750 9,969,600 30,543,450 30,492,400
Payable for securities
loaned..................... -- -- -- 19,264 16,667 10,038
Payable for securities
purchased.................. -- -- -- -- -- 3,890,433
Payable for foreign currency
forward contracts.......... -- -- -- -- -- --
Payable to advisor.......... 7,901 12,209 -- 2,904 -- --
Accrued expenses:
Investment advisory fees... 43,277 63,279 34,105 98,085 106,456 385,563
Custody fees............... 3,324 -- -- 17,404 12,056 55,314
Professional fees.......... 15,038 14,999 13,080 13,254 14,451 28,996
Reports to shareholders.... 1,323 1,360 633 1,501 1,619 6,120
Miscellaneous fees......... 2,244 2,371 3,302 2,823 3,294 9,890
------------ ------------ ------------ ------------ ------------ ------------
Total
liabilities...... 73,107 3,511,218 16,679,870 10,124,835 30,697,993 34,878,754
------------ ------------ ------------ ------------ ------------ ------------
NET ASSETS......... $185,012,254 $197,294,663 $103,059,880 $322,676,017 $264,909,839 $956,820,669
============ ============ ============ ============ ============ ============
NET ASSETS CONSIST OF:
Paid-in capital............ $185,012,254 $197,262,470 $103,386,901 $317,678,420 $246,591,011 $728,188,592
Net unrealized appreciation
(depreciation) on
securities............... -- 32,193 (327,021) 4,997,597 18,318,828 228,632,077
Net unrealized appreciation
on translation of assets
and liabilities in
foreign currencies....... -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSETS......... $185,012,254 $197,294,663 $103,059,880 $322,676,017 $264,909,839 $956,820,669
============ ============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-10
<PAGE> 101
<TABLE>
<CAPTION>
EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE HIGH YIELD INTERNATIONAL
VALUE INCOME GROWTH EQUITY EQUITY BOND EQUITY
----------- ------------ ------------ ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$26,959,909 $192,911,663 $276,480,203 $446,828,750 $14,563,091 $12,969,120 $126,340,686
=========== ============ ============ ============ =========== =========== ============
$28,527,741 $214,948,333 $290,199,537 $524,487,533 $14,798,550 $13,341,450 $138,412,521
1,693,498 6,969,777 6,063,591 44,826,526 1,393,598 1,751,451 8,711,664
-- -- -- -- -- -- --
597
45,355 -- 3,678,252 1,702,254 -- -- 600,679
-- -- -- -- -- -- 425,249
-- -- 120 -- -- 306,105 37,258
54,436 256,354 213,394 330,003 200 -- 346,211
-- 5,282 23,099 5,466 -- -- --
25,881 -- -- 271,382 13,002 5,118 14,632
----------- ------------ ------------ ------------ ----------- ----------- ------------
30,346,911 222,179,746 300,177,993 571,623,164 16,205,350 15,404,124 148,548,811
----------- ------------ ------------ ------------ ----------- ----------- ------------
-- 13,875,100 -- 54,293,050 -- -- --
-- -- -- -- -- -- --
1,257,288 536,120 859,543 9,382,748 679,437 -- 132,503
-- -- -- -- -- -- 74,068
-- 7,664 10,867 -- -- -- --
14,349 114,836 156,083 629,284 13,188 7,137 95,010
21,977 16,805 5,450 27,902 14,270 114 33,450
10,996 12,433 13,515 14,293 10,838 16,648 21,121
189 1,420 1,552 6,574 86 121 152
8,599 2,942 3,297 5,070 8,401 7,418 7,610
----------- ------------ ------------ ------------ ----------- ----------- ------------
1,313,398 14,567,320 1,050,307 64,358,921 726,220 31,438 363,914
----------- ------------ ------------ ------------ ----------- ----------- ------------
$29,033,513 $207,612,426 $299,127,686 $507,264,243 $15,479,130 $15,372,686 $148,184,897
=========== ============ ============ ============ =========== =========== ============
$27,465,681 $185,575,756 $285,408,352 $429,605,460 $15,243,671 $15,000,356 $135,763,072
1,567,832 22,036,670 13,719,334 77,658,783 235,459 372,330 12,071,835
-- -- -- -- -- -- 349,990
----------- ------------ ------------ ------------ ----------- ----------- ------------
$29,033,513 $207,612,426 $299,127,686 $507,264,243 $15,479,130 $15,372,686 $148,184,897
=========== ============ ============ ============ =========== =========== ============
</TABLE>
F-11
<PAGE> 102
DIVERSIFIED INVESTORS PORTFOLIOS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT/
MONEY HIGH GOVERNMENT CORPORATE EQUITY
MARKET QUALITY BOND BOND BOND BALANCED INCOME
---------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income................ $ -- $ -- $ -- $ -- $ 2,558,348 $ 24,105,695
Less withholding tax........... -- -- -- -- 29,310 27,363
Interest income................ 9,760,937 11,653,443 5,846,155 23,444,967 6,061,234 5,661,475
----------- ----------- ------------ ------------ ------------ ------------
Total income............ 9,760,937 11,653,443 5,846,155 23,444,967 8,590,272 29,739,807
----------- ----------- ------------ ------------ ------------ ------------
Expenses:
Investment advisory fees....... 445,832 627,049 340,989 1,232,524 995,489 3,895,211
Custody fees................... 45,297 39,474 34,276 85,984 62,393 186,413
Professional fees.............. 22,338 23,564 20,891 22,528 23,323 44,998
Reports to shareholders........ 2,148 2,272 1,125 3,396 2,845 10,746
Miscellaneous fees............. 17,525 17,715 17,480 19,438 18,592 30,709
----------- ----------- ------------ ------------ ------------ ------------
Total expenses.......... 533,140 710,074 414,761 1,363,870 1,102,642 4,168,077
Expenses waived by the investment
advisor........................ 680 -- 27,685 -- -- --
----------- ----------- ------------ ------------ ------------ ------------
Net expenses............ 532,460 710,074 387,076 1,363,870 1,102,642 4,168,077
----------- ----------- ------------ ------------ ------------ ------------
Net investment income (loss)..... 9,228,477 10,943,369 5,459,079 22,081,097 7,487,630 25,571,730
----------- ----------- ------------ ------------ ------------ ------------
Net realized and unrealized gains
(losses) on securities and
foreign currencies:
Net realized gains (losses) on
securities................... (8,786) (34,374) (586,993) (913,114) 23,946,320 39,593,303
Net realized gains on foreign
currency transactions........ -- -- -- -- -- --
Net change in unrealized
appreciation (depreciation)
on securities................ -- (1,571,971) (1,394,326) (11,013,287) 3,998,704 83,552,175
Net change in unrealized
appreciation on translation
of assets and liabilities in
foreign currencies........... -- -- -- -- -- --
----------- ----------- ------------ ------------ ------------ ------------
Net realized and unrealized gains
(losses) on securities and
foreign currencies............. (8,786) (1,606,345) (1,981,319) (11,926,401) 27,945,024 123,145,478
----------- ----------- ------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations...... $9,219,691 $ 9,337,024 $ 3,477,760 $10,154,696 $35,432,654 $148,717,208
=========== =========== ============ ============ ============ ============
</TABLE>
- ---------------
* Commencement of operations, April 19, 1996
See notes to financial statements.
F-12
<PAGE> 103
<TABLE>
<CAPTION>
EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE HIGH YIELD INTERNATIONAL
VALUE* INCOME GROWTH EQUITY EQUITY* BOND EQUITY
---------- ----------- ----------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 288,192 $ 2,447,876 $ 800,318 $ 2,576,979 $ 7,542 $ -- $ 1,933,704
-- 11,760 -- 7,724 -- -- 193,860
41,011 480,282 596,092 1,850,409 19,676 983,639 421,402
----------
-
----------- ------------ ----------- ----------- ------------
329,203 2,916,398 1,396,410 4,419,664 27,218 983,639 2,161,246
----------
-
----------- ------------ ----------- ----------- ------------
84,055 1,052,349 1,730,632 3,255,893 95,060 60,742 799,760
41,576 84,559 55,663 194,409 28,524 43,101 185,048
17,932 21,706 22,507 25,638 17,734 18,462 25,981
305 2,444 3,022 9,078 164 150 1,542
14,699 17,978 18,845 21,673 14,482 15,131 16,596
----------
-
----------- ------------ ----------- ----------- ------------
158,567 1,179,036 1,830,669 3,506,691 155,964 137,586 1,028,927
70,088 39,117 1,462 47,350 57,964 72,277 69,256
----------
-
----------- ------------ ----------- ----------- ------------
88,479 1,139,919 1,829,207 3,459,341 98,000 65,309 959,671
----------
-
----------- ------------ ----------- ----------- ------------
240,724 1,776,479 (432,797) 960,323 (70,782) 918,330 1,201,575
----------
-
----------- ------------ ----------- ----------- ------------
910,307 16,329,122 64,682,669 55,282,281 594,156 (43,340) 2,640,559
-- -- -- -- -- -- 478,445
1,567,832 13,845,816 (25,830,434) 32,173,450 235,459 210,284 10,896,919
-- -- -- -- -- -- 190,167
----------
-
----------- ------------ ----------- ----------- ------------
2,478,139 30,174,938 38,852,235 87,455,731 829,615 166,944 14,206,090
----------
-
----------- ------------ ----------- ----------- ------------
$2,718,863 $31,951,417 $38,419,438 $88,416,054 $758,833 $1,085,274 $15,407,665
=========== ============ =========== =========== =========== ============
</TABLE>
F-13
<PAGE> 104
DIVERSIFIED INVESTORS PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT/
MONEY HIGH GOVERNMENT CORPORATE
MARKET QUALITY BOND BOND BOND BALANCED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss)................ $ 9,228,477 $10,943,369 $ 5,459,079 $22,081,097 $ 7,487,630
Net realized gains (losses) on securities... (8,786) (34,374) (586,993) (913,114) 23,946,320
Net realized gains on foreign currency
transactions.............................. -- -- -- -- --
Net change in unrealized appreciation
(depreciation) on securities.............. -- (1,571,971) (1,394,326) (11,013,287) 3,998,704
Net change in unrealized appreciation on
translation of assets and liabilities in
foreign currencies........................ -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net increase in net assets resulting from
operations................................ 9,219,691 9,337,024 3,477,760 10,154,696 35,432,654
------------ ------------ ------------ ------------ ------------
From capital transactions:
Proceeds from capital invested.............. 574,726,828 132,353,083 50,100,883 107,972,231 106,232,881
Value of capital withdrawn.................. 540,572,513 116,921,547 36,510,377 131,990,320 43,788,651
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from capital transactions......... 34,154,315 15,431,536 13,590,506 (24,018,089) 62,444,230
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets......... 43,374,006 24,768,560 17,068,266 (13,863,393) 97,876,884
Net assets:
Beginning of year........................... 141,638,248 172,526,103 85,991,614 336,539,410 167,032,955
------------ ------------ ------------ ------------ ------------
End of year................................. $185,012,254 $197,294,663 $103,059,880 $322,676,017 $264,909,839
============ ============ ============ ============ ============
</TABLE>
- ---------------
* Commencement of operations, April 19, 1996
See notes to financial statements.
F-14
<PAGE> 105
<TABLE>
<CAPTION>
EQUITY EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE HIGH YIELD INTERNATIONAL
INCOME VALUE* INCOME GROWTH EQUITY EQUITY* BOND EQUITY
------------ ----------- ------------ ------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,571,730 $ 240,724 $ 1,776,479 $ (432,797) $ 960,323 $ (70,782) 918,330 $ 1,201,575
39,593,303 910,307 16,329,122 64,682,669 55,282,281 594,156 (43,340) 2,640,559
-- -- -- -- -- -- -- 478,445
83,552,175 1,567,832 13,845,816 (25,830,434) 32,173,450 235,459 210,284 10,896,919
-- -- -- -- -- -- -- 190,167
------------ ----------- ------------ ------------ ----------- ------------ ------------
148,717,208 2,718,863 31,951,417 38,419,438 88,416,054 758,833 1,085,274 15,407,665
------------ ----------- ------------ ------------ ----------- ------------ ------------
293,027,464 28,849,346 146,312,325 136,832,312 247,735,078 20,875,494 7,896,234 77,505,278
249,226,533 2,534,696 95,463,047 98,486,454 144,345,114 6,155,197 2,606,417 28,174,361
------------ ----------- ------------ ------------ ----------- ------------ ------------
43,800,931 26,314,650 50,849,278 38,345,858 103,389,964 14,720,297 5,289,817 49,330,917
------------ ----------- ------------ ------------ ----------- ------------ ------------
192,518,139 29,033,513 82,800,695 76,765,296 191,806,018 15,479,130 6,375,091 64,738,582
764,302,530 -- 124,811,731 222,362,390 315,458,225 -- 8,997,595 83,446,315
------------ ----------- ------------ ------------ ----------- ------------ ------------
$956,820,669 $29,033,513 $207,612,426 $299,127,686 $507,264,243 $15,479,130 $15,372,686 $ 148,184,897
============ =========== ============ ============ =========== ============ ============
</TABLE>
F-15
<PAGE> 106
DIVERSIFIED INVESTORS PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT/
MONEY HIGH GOVERNMENT CORPORATE
MARKET QUALITY BOND BOND BOND
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
From operations:
Net investment income....................... $ 8,949,654 $ 9,914,104 $ 4,558,386 $18,181,947
Net realized gains (losses) on securities... (4,226) (634,835) 379,479 1,365,500
Net realized (losses) on foreign currency
transactions.............................. -- -- -- --
Net change in unrealized appreciation on
securities................................ -- 7,048,911 5,777,385 29,472,541
Net change in unrealized appreciation on
translation of assets and liabilities in
foreign currencies........................ -- -- -- --
------------ ------------ ------------ ------------
Net increase in net assets resulting from
operations................................ 8,945,428 16,328,180 10,715,250 49,019,988
------------ ------------ ------------ ------------
From capital transactions:
Proceeds from capital invested.............. 393,166,782 141,659,639 38,046,469 151,446,357
Value of capital withdrawn.................. 421,983,754 129,457,932 49,408,845 110,912,327
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from capital transactions......... (28,816,972) 12,201,707 (11,362,376) 40,534,030
------------ ------------ ------------ ------------
Net increase (decrease) in net assets......... (19,871,544) 28,529,887 (647,126) 89,554,018
Net assets:
Beginning of year........................... 161,509,792 143,996,216 86,638,740 246,985,392
------------ ------------ ------------ ------------
End of year................................. $141,638,248 $172,526,103 $ 85,991,614 $336,539,410
============ ============ ============ ============
</TABLE>
- ---------------
* Commencement of operations, August 22, 1995.
** Commencement of operations, September 29, 1995.
See notes to financial statements.
F-16
<PAGE> 107
<TABLE>
<CAPTION>
EQUITY GROWTH & EQUITY SPECIAL HIGH YIELD INTERNATIONAL
BALANCED INCOME INCOME GROWTH EQUITY BOND* EQUITY**
------------ ------------ ------------ ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 5,658,158 $ 21,635,258 $ 1,556,678 $ 868,631 $ 763,542 $ 223,398 $ 102,394
11,609,960 9,847,566 19,009,812 4,768,375 45,159,729 6,659 16,793
-- -- -- -- -- -- (8,241)
17,788,835 158,219,366 9,319,254 24,304,762 40,748,255 162,046 1,174,916
-- -- -- -- -- -- 159,823
------------ ------------ ------------ ------------ --------- ---------- ------------
35,056,953 189,702,190 29,885,744 29,941,768 86,671,526 392,103 1,445,685
------------ ------------ ------------ ------------ --------- ---------- ------------
80,590,418 231,491,356 93,751,429 93,276,744 113,103,544 9,081,530 86,991,521
74,123,531 245,585,114 93,408,742 49,673,952 101,988,710 476,038 4,990,891
------------ ------------ ------------ ------------ --------- ---------- ------------
6,466,887 (14,093,758) 342,687 43,602,792 11,114,834 8,605,492 82,000,630
------------ ------------ ------------ ------------ --------- ---------- ------------
41,523,840 175,608,432 30,228,431 73,544,560 97,786,360 8,997,595 83,446,315
125,509,115 588,694,098 94,583,300 148,817,830 217,671,865 -- --
------------ ------------ ------------ ------------ --------- ---------- ------------
$167,032,955 $764,302,530 $124,811,731 $222,362,390 $315,458,225 $8,997,595 $ 83,446,315
============ ============ ============ ============ ========= ========== ============
</TABLE>
F-17
<PAGE> 108
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL VALUE
- ---------- ------------
<C> <S> <C> <C>
COMMERCIAL PAPER
$6,200,000 American Express Credit Corp., 5.30%, 02/28/97.............. $ 6,147,057
2,000,000 Avco Financial Services Inc. -- Canada, 5.34%, 01/21/97..... 1,994,067
700,000 Avco Financial Services Inc. -- Canada, 5.32%, 01/23/97..... 697,724
6,500,000 Avco Financial Services Inc. -- Canada, 5.52%, 04/04/97..... 6,407,310
1,500,000 Banc One Corp., 5.46%, 01/06/97............................. 1,498,863
4,000,000 Banco Real S.A., 5.36%, 04/21/97............................ 3,934,489
5,500,000 Bank of New York, 5.30%, 01/10/97........................... 5,492,712
1,000,000 Bank of New York, 5.45%, 01/15/97........................... 997,881
7,800,000 Bell South Telecommunications Inc., 5.40%, 02/04/97......... 7,760,220
8,000,000 Chevron Transport Corp., 5.32%, 01/16/97.................... 7,982,266
400,000 CIT Group Holdings Inc., 5.48%, 01/31/97.................... 398,173
1,000,000 Conagra Inc., 6.20%, 01/07/97............................... 998,967
3,300,000 Cooperative Finance Corp., 5.50%, 02/14/97.................. 3,277,817
4,700,000 Du Pont (E.I.) de Nemours, 5.30%, 01/27/97.................. 4,686,161
1,485,000 Enterprise Funding Corp., 5.50%, 01/06/97................... 1,483,866
300,000 Enterprise Funding Corp., 5.77%, 01/07/97................... 299,711
2,800,000 Enterprise Funding Corp., 5.77%, 01/09/97................... 2,796,410
3,000,000 Ford Motor Credit Corp., 5.30%, 01/08/97.................... 2,996,909
4,400,000 Ford Motor Credit Corp., 5.32%, 02/03/97.................... 4,378,542
3,900,000 General Electric Capital Corp., 5.40%, 01/03/97............. 3,898,830
2,700,000 General Electric Capital Corp., 5.41%, 01/09/97............. 2,696,754
1,700,000 General Electric Capital Corp., 5.32%, 01/28/97............. 1,693,217
500,000 General Motors Acceptance Corp., 5.42%, 01/24/97............ 498,269
8,000,000 General Motors Acceptance Corp., 5.33%, 02/05/97............ 7,958,544
6,600,000 Goldman Sachs Group, L.P., 5.37%, 01/14/97.................. 6,587,202
700,000 Heller Financial Inc., 5.70%, 01/15/97...................... 698,448
100,000 Household Finance Corp., 5.45%, 01/14/97.................... 99,803
2,300,000 Household Finance Corp., 5.31%, 01/17/97.................... 2,294,572
8,000,000 Lucent Technologies, Inc., 5.28%, 01/28/97.................. 7,968,320
1,900,000 Merrill Lynch and Company, Inc., 5.44%, 01/21/97............ 1,894,258
6,000,000 Merrill Lynch and Company, Inc., 5.34%, 01/27/97............ 5,976,860
1,000,000 National Westminster Bank, 5.37%, 02/28/97.................. 991,349
6,600,000 Norwest Corp., 5.40%, 01/09/97.............................. 6,592,080
3,000,000 Paccar Financial Company, 5.44%, 01/03/97................... 2,999,093
1,800,000 Penney (JC) Funding Company, 5.30%, 01/30/97................ 1,792,315
8,500,000 Philip Morris Companies, 5.30%, 01/14/97.................... 8,483,732
1,700,000 Quebec Province, 5.30%, 01/23/97............................ 1,694,494
5,000,000 Royal Bank Of Canada, 5.40%, 01/15/97....................... 5,135,633
1,800,000 Sanwa Business Credit, 5.58%, 01/16/97...................... 1,795,815
</TABLE>
See notes to financial statements.
F-18
<PAGE> 109
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
$6,200,000 Sears Roebuck Acceptance Corp., 5.34%, 02/06/97............. $ 6,166,892
2,800,000 Toronto Dominion Bank, 5.40%, 01/09/97...................... 2,796,640
Transamerica Commercial Finance -- Canada, 5.33%,
2,000,000 01/13/97.................................................... 1,996,447
Transamerica Commercial Finance -- Canada, 5.43%,
4,500,000 01/13/97.................................................... 4,491,855
------------
TOTAL COMMERCIAL PAPER (Cost $151,430,567).................. 151,430,567 81.85%
------------
CERTIFICATES OF DEPOSIT
5,300,000 Bank of Nova Scotia, 5.50%, 01/03/97........................ 5,374,494
Capital One Funding Corp., Floating Rate, 5.84%,
5,900,000 01/02/97+................................................... 5,926,388
7,000,000 JP Morgan, 5.52%, 01/06/97.................................. 7,132,509
9,000,000 Mellon Bank Corp., 5.40%, 02/07/97.......................... 9,112,050
------------
TOTAL CERTIFICATES OF DEPOSIT (Cost $27,545,441)............ 27,545,441 14.89%
------------
US GOVERNMENT AGENCY SECURITIES
6,000,000 Federal Home Loan Bank, 5.85%, 11/6/97 (Cost $6,053,626).... 6,053,626 3.27%
------------ -------
Total Investments (Cost $185,029,634)....................... 185,029,634 100.01%
Other assets less liabilities............................... (17,380) (0.01)%
------------ -------
NET ASSETS.................................................. $185,012,254 100.00%
============ =======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996, is $185,029,634.
- ---------------
+ This interest rate is subject to change weekly based on the greater of the 30
day or 90 day Federal composite rate. The rate shown was in effect as of
December 31, 1996.
See notes to financial statements.
F-19
<PAGE> 110
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES
BANKS
$2,000,000 Banque Nationale de Paris, 9.875%, 05/25/98................. $ 2,080,574
1,000,000.. European Investment Bank, 6.60%, 05/15/97................... 1,004,234
8,000,000 First Omni Bank, Series 96, Class A, 6.65%, 09/15/03........ 8,082,400
2,467,079 Fleet Finance, Series 90-1, 6.70%, 01/15/06................. 2,470,827
1,402,778 Fleet Finance, Series 91-A, 8.45%, 4/15/06.................. 1,425,770
3,000,000 Korea Development Bank, 7.73%, 05/05/97..................... 3,021,447
2,905,000 Korea Development Bank, 9.25%, 06/15/98..................... 3,022,769
1,260,000 Korea Development Bank, 7.90%, 02/01/02..................... 1,316,311
40,040 Shawmut REMIC Trust, 6.40%, 03/15/07........................ 39,814
7,634,344 Union Acceptance Corp., 6.40%, 10/10/02..................... 7,676,944
1,424,122 Western Finance Grantor Trust, 4.60%, 04/01/99.............. 1,416,574
2,625,433 Western Finance Grantor Trust, 5.875%, 03/01/02............. 2,623,831
------------
TOTAL BANKS................................................. 34,181,495 17.32%
------------
BROKERAGE
6,250,000 Bear Stearns & Company, 7.625%, 09/15/99.................... 6,437,869
725,000 Lehman Brothers, Inc., Medium -- Term Note, 6.08%,
07/08/98.................................................. 719,175
5,000,000 Lehman Brothers, Inc., 7.625%, 08/01/98..................... 5,094,730
1,520,000 Morgan Stanley, 8.875%, 10/15/01............................ 1,654,830
------------
TOTAL BROKERAGE............................................. 13,906,604.. 7.05%
------------
FINANCE
1,250,000 Associates Corp. of North America, 8.89%, 04/12/98.......... 1,294,660
2,000,000 Associates Corp. of North America, 6.46%, 09/18/00.......... 1,999,264
4,000,000 Associates Corp. of North America, 5.99%, 12/15/00.......... 3,929,016
1,000,000 Associates Corp. of North America, 6.01%, 02/07/03.......... 965,662
1,000,000 British Gas Finance, Inc., 8.75%, 09/15/98.................. 1,029,497
5,000,000 CARCO, Auto Loan Series 94-3, 8.125%, 10/15/99.............. 5,084,375
4,572,639 Chase Manhattan Auto Group Trust, 6.61%, 09/15/02........... 4,618,503
2,309,349 Chemical Financial Acceptance Corp., 9.25%, 05/15/98........ 2,396,984
624,449 Chemical Financial Acceptance Corp. Grantor Trust, 9.40%,
03/15/97.................................................. 623,112
1,000,000 Ford Motor Credit, 7.15%, 01/26/00.......................... 1,019,421
3,500,000 Ford Motor Credit, 5.99%, 02/27/01.......................... 3,421,807
4,000,000 Ford Motor Credit, 7.06%, 06/06/01.......................... 4,063,560
5,250,000 General Motors Acceptance Corp., 9.375%, 04/01/00........... 5,671,554
531,888 General Motors Acceptance Corp. Grantor Trust, Series 95,
Class A, 7.15%, 03/15/00.................................. 538,058
800,000 Government Export Trust, Series 93-2, 4.61%, 09/01/98....... 783,439
459,978 Merrill Lynch Mortgage Investors, Inc., 10.10%, 11/15/07.... 484,702
</TABLE>
See notes to financial statements.
F-20
<PAGE> 111
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
FINANCE (CONTINUED)
$ 835,562 Merrill Lynch Mortgage Investors, Inc., 10.35%, 05/15/09.... $ 910,307
521,566 Merrill Lynch Mortgage Investors, Inc., 9.40%, 09/15/09..... 560,221
948,338 Merrill Lynch Mortgage Investors, Inc., 9.00%, 07/15/11..... 974,123
2,381,889 Navistar Finance, 6.55%, 11/20/01........................... 2,401,492
1,000,000 Norwest Financial, 6.00%, 08/15/97.......................... 1,001,604
1,137,453 Pemex Exp Grantor Trust, 7.66%, 08/15/01.................... 1,169,245
------------
TOTAL FINANCE............................................... 44,940,606.. 22.78%
------------
PRIVATE ASSET BACKED: CONSTRUCTION
5,507,243 Case Equipment Loan Trust, Series 1194-C, Class A2, 8.10%,
06/15/01.................................................. 5,618,599 2.85%
------------
PRIVATE ASSET BACKED: CREDIT CARDS
5,000,000 Discover Card Master Trust I, Series 93-2A, 5.40%,
11/16/01.................................................. 4,945,900
2,540,000 First Chicago Master Trust, 6.25%, 08/15/99................. 2,545,486
1,000,000 Household Affinity Credit Card Master Trust Fund, 7.00%,
12/15/99.................................................. 1,010,450
1,000,000 Maryland Bank of North America Master Credit Card, 93-3
Series A, 5.40%, 09/15/00................................. 989,090
2,333,333 Private Label Credit Card, 7.15%, 06/20/01.................. 2,340,847
1,000,000 Signet Credit Card Master Trust, 5.20%, 02/15/02............ 987,020
------------
TOTAL PRIVATE ASSET BACKED: CREDIT CARDS.................... 12,818,793 6.50%
------------
PRIVATE ASSET BACKED: RECEIVABLES
5,000,000 Capital Equipment Receivable Trust, Series 96-1, 6.28%,
06/15/00.................................................. 5,006,950
4,760,030 Chevy Chase Auto Receivable Trust, 6.00%, 12/15/01.......... 4,774,644
4,187,174 Chevy Chase Auto Receivable Trust, 6.60%, 12/15/02.......... 4,229,004
5,000,000 First Sierra Receivables II, 6.85%, 06/10/03................ 5,065,750
2,966,406 IBM Credit Receivable Lease Asset Master Trust, Series
93-1A, 4.55%, 11/15/00.................................... 2,945,908
1,065,204 IBM Credit Receivable Lease Asset Master Trust, 6.55%,
07/16/01.................................................. 1,073,662
3,573,295 Toyota Auto Receivable Trust, Series 96-AA, 6.30%,
07/20/01.................................................. 3,594,413
------------
TOTAL PRIVATE ASSET BACKED: RECEIVABLES..................... 26,690,331 13.53%
------------
REAL ESTATE
560,912 Daiwa Home Equity Loans, 7.875%, 11/25/19................... 559,840
1,311,066 Fleet Financial Home Equity, 5.45%, 03/20/23................ 1,309,021
4,897,377 GE Home Equity Loan, Series 91-1 A, 7.20%, 09/15/11......... 4,951,200
110,244 Security Pacific Home Equity Loan, Series 91-2, 8.10%,
06/15/20.................................................. 110,821
</TABLE>
See notes to financial statements.
F-21
<PAGE> 112
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
REAL ESTATE (CONTINUED)
$3,306,281 Travelers Mortgage, 12.00%, 03/01/14........................ $ 3,812,823
42,294 US Home Equity Loan, 9.25%, 01/15/21........................ 42,206
375,982 US Home Equity Loan, 8.50%, 04/15/21........................ 380,700
------------
TOTAL REAL ESTATE........................................... 11,166,611 5.66%
------------ -------
TOTAL CORPORATE BONDS AND NOTES (Cost $148,701,242)......... 149,323,039 75.69%
------------ -------
US GOVERNMENT SECURITIES
5,000,000 US Treasury Note, 6.25%, 07/31/98........................... 5,023,435
5,000,000 US Treasury Note, 5.00%, 02/15/99(a)........................ 4,907,810
------------
TOTAL US GOVERNMENT SECURITIES (Cost $10,017,683)........... 9,931,245 5.03%
------------ -------
US GOVERNMENT AGENCY SECURITIES
FEDERAL HOME LOAN MORTGAGE CORP.
691,004 Federal Home Loan Mortgage Corp., PL# 306816, 7.00%,
01/01/18.................................................. 690,913
2,261,469 Federal Home Loan Mortgage Corp., PL# 850082, 9.00%,
10/01/05.................................................. 2,344,146
1,147,984 Federal Home Loan Mortgage Corp., PL# D0677, 7.50%,
03/01/08.................................................. 1,168,589
537,346 Federal Home Loan Mortgage Corp. REMIC, Series MH-1, 10.15%,
04/15/06.................................................. 537,930
239,143 Federal Home Loan Mortgage Corp., PL# 273991, 6.50%,
03/01/13.................................................. 237,670
------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP....................... 4,979,248 2.52%
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
275,541 Federal National Mortgage Association PL# 137455, 7.00%,
04/01/04.................................................. 277,053
356,190 Federal National Mortgage Association PL# 6346, 6.75%,
02/01/03.................................................. 356,169
659,259 Federal National Mortgage Association, 8.00%, 07/25/97...... 660,828
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION................. 1,294,050 0.66%
------------
OTHER AGENCIES
2,550,000 Midstate Trust II, Series A3, 9.35%, 04/01/98............... 2,600,771
1,810,333 Guaranteed Export Certificates, 4.813%, 12/15/98............ 1,771,227
------------
TOTAL OTHER AGENCIES........................................ 4,371,998 2.22%
------------
RESOLUTION TRUST CORP.
552,039 Resolution Trust Corp., 7.00%, 02/15/04..................... 552,744
3,145,438 Resolution Trust Corp., 7.92%, 08/25/21..................... 3,248,262
1,802,949 Resolution Trust Corp., Variable Rate, 6.75%, 07/25/27...... 1,801,994
------------
TOTAL RESOLUTION TRUST CORP................................. 5,603,000 2.84%
------------ -------
TOTAL US GOVERNMENT AGENCY SECURITIES (Cost $16,324,670).... 16,248,296 8.24%
------------ -------
</TABLE>
See notes to financial statements.
F-22
<PAGE> 113
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
FOREIGN GOVERNMENT OBLIGATIONS
$5,000,000 Hydro Quebec, 6.36%, 01/15/02............................... $ 4,914,920
7,000,000 Province of Ontario, 7.375%, 01/27/03....................... 7,277,473
------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $12,619,185)..... 12,192,393 6.18%
------------ -------
SHARES
- ----------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
3,056,917 Merrimac Cash Fund -- Premium Class (Cost $3,056,917)(b).... 3,056,917 1.54%
------------ -------
PRINCIPAL
- ----------
COMMERCIAL PAPER
$3,000,000 Sanwa Bank NY Branch, Floating Rate, 5.66%, 01/10/97 (Cost
$3,010,336)............................................... 3,010,336 1.53%
------------ -------
TIME DEPOSIT
360,083 First National Bank of Boston, 7.10%, 01/02/97 (Cost
$360,581) (b)............................................. 360,581 0.18%
------------ -------
TOTAL SECURITIES (Cost $194,090,614)........................ 194,122,807 98.39%
------------ -------
REPURCHASE AGREEMENT
4,345,920 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $4,347,347, 01/02/97
(Collateralized by Federal Home Loan Mortgage Corp., 7.76%
due 02/01/24 with a value of $4,563,552) (Cost
$4,346,634)............................................... 4,346,634 2.20%
------------ -------
Total Investments (Cost $198,437,248)....................... 198,469,441 100.59%
Other assets less liabilities............................... (1,174,778) (0.59)%
------------ -------
NET ASSETS.................................................. $197,294,663 100.00%
============ =======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31,1996 is $198,437,248.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation............................... $ 1,120,305
Gross unrealized depreciation............................... (1,088,112)
------------
Net unrealized appreciation................................. $ 32,193
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
See notes to financial statements.
F-23
<PAGE> 114
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
US GOVERNMENT SECURITIES
US TREASURY NOTES
$ 3,000,000 US Treasury Note, 5.375%, 11/30/97......................... $ 2,985,000
5,000,000 US Treasury Note, 5.875%, 04/30/98......................... 4,995,310
10,000,000 US Treasury Note, 5.25%, 07/31/98.......................... 9,900,000
9,000,000 US Treasury Note, 6.375%, 05/15/99(a)...................... 9,078,750
5,000,000 US Treasury Note, 6.00%, 08/15/99.......................... 4,998,435
7,000,000 US Treasury Note, 7.75%, 12/31/99.......................... 7,319,375
2,500,000 US Treasury Note, 8.875%, 05/15/00......................... 2,710,155
7,000,000 US Treasury Note, 6.25%, 10/31/01(a)....................... 7,004,375
TOTAL US TREASURY NOTES.................................... 48,991,400 47.54%
US TREASURY BOND
8,000,000 US Treasury Bond, 5.625%, 06/30/97......................... 8,000,000 7.76%
-----
TOTAL US GOVERNMENT SECURITIES (Cost $57,230,452).......... 56,991,400 55.30%
-----
US GOVERNMENT AGENCY SECURITIES
FEDERAL HOME LOAN BANK
5,000,000 Federal Home Loan Bank, 6.34%, 03/19/01.................... 4,946,765
5,000,000 Federal Home Loan Bank, 7.39%, 08/22/01.................... 5,198,920
TOTAL FEDERAL HOME LOAN BANK............................... 10,145,685 9.84%
FEDERAL HOME LOAN MORTGAGE CORP.
3,000,000 Federal Home Loan Mortgage Corp. REMIC, Series 1574, 6.50%,
02/15/21................................................. 2,937,210
5,300,000 Federal Home Loan Mortgage Corp. REMIC, Series 1500, 7.00%,
06/15/22................................................. 5,290,725
1,363,393 Federal Home Loan Mortgage Corp. REMIC, Series 31, Floating
Rate, 6.15%, 08/25/23.................................... 1,361,177
1,904,780 Federal Home Loan Mortgage Corp. REMIC, Series 1710, 6.00%,
02/15/24................................................. 1,911,260
TOTAL FEDERAL HOME LOAN MORTGAGE CORP...................... 11,500,372 11.16%
FEDERAL NATIONAL MORTGAGE ASSOCIATION
2,000,000 Federal National Mortgage Association REMIC, Series 94-75,
7.00%, 01/25/03.......................................... 2,017,598
3,000,000 Federal National Mortgage Association, 6.44%, 06/21/05..... 2,955,744
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION................ 4,973,342 4.83%
</TABLE>
See notes to financial statements.
F-24
<PAGE> 115
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- -----
<C> <S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
$ 8,783 Government National Mortgage Association, PL# 209631,
7.50%, 04/15/02.......................................... $ 8,939
470,733 Government National Mortgage Association, PL# 297619,
7.50%, 09/15/07.......................................... 479,118
109,328 Government National Mortgage Association, PL# 322072,
7.50%, 08/15/07.......................................... 111,275
547,610 Government National Mortgage Association, PL# 323189,
7.50%, 08/15/07.......................................... 557,364
34,505 Government National Mortgage Association, PL# 328000,
7.50%, 06/15/07.......................................... 35,120
12,346 Government National Mortgage Association, PL# 328084,
7.50%, 07/15/07.......................................... 12,566
316,503 Government National Mortgage Association, PL# 328188,
7.50%, 08/15/07.......................................... 322,141
527,747 Government National Mortgage Association, PL# 328192,
7.50%, 08/15/07.......................................... 537,148
130,939 Government National Mortgage Association, PL# 328200,
7.50%, 08/15/07.......................................... 133,272
536,364 Government National Mortgage Association, PL# 329060,
7.50%, 08/15/07.......................................... 545,917
445,303 Government National Mortgage Association, PL# 332267,
7.50%, 08/15/07.......................................... 453,235
453,340 Government National Mortgage Association, PL# 332704,
7.50%, 09/15/07.......................................... 461,415
87,213 Government National Mortgage Association, PL# 333320,
7.50%, 09/15/07.......................................... 88,766
464,022 Government National Mortgage Association, PL# 333709,
7.50%, 09/15/07.......................................... 472,287
15,717 Government National Mortgage Association, PL# 335542,
7.50%, 08/15/07.......................................... 15,997
318,774 Government National Mortgage Association, PL# 335995,
7.50%, 08/15/07.......................................... 324,452
205,713 Government National Mortgage Association, PL# 369749,
6.50%, 09/15/08.......................................... 203,013
293,660 Government National Mortgage Association, PL# 345975,
6.50%, 10/15/08.......................................... 289,806
778,722 Government National Mortgage Association, PL# 374726,
6.50%, 10/15/08.......................................... 768,502
365,943 Government National Mortgage Association, PL# 345973,
6.50%, 11/15/08.......................................... 361,140
160,138 Government National Mortgage Association, PL# 363874,
6.50%, 11/15/08.......................................... 158,036
615,184 Government National Mortgage Association, PL# 370448,
6.50%, 11/15/08.......................................... 607,110
</TABLE>
See notes to financial statements.
F-25
<PAGE> 116
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- -----
<C> <S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (CONTINUED)
$ 672,566 Government National Mortgage Association, PL# 371094,
6.50%, 11/15/08.......................................... $ 663,739
375,125 Government National Mortgage Association, PL# 366531,
7.00%, 11/15/08.......................................... 370,201
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION............. 7,980,559 7.74%
STUDENT LOAN MARKETING ASSOCIATION
2,000,000 Student Loan Marketing Association, 6.52%, 9/26/00......... 1,999,918 1.94%
TENNESSEE VALLEY AUTHORITY
2,500,000 Tennessee Valley Authority, 6.38%, 06/15/05................ 2,452,840 2.38%
-----
TOTAL US GOVERNMENT AGENCY SECURITIES (Cost $39,140,685)... 39,052,716 37.89%
-----
SHORT TERM US GOVERNMENT AGENCY SECURITIES
FEDERAL HOME LOAN MORTGAGE CORP.
700,000 Federal Home Loan Mortgage Corp., 5.37%, 01/02/97.......... 699,896
300,000 Federal Home Loan Mortgage Corp., 5.25%, 01/03/97.......... 299,912
700,000 Federal Home Loan Mortgage Corp., 5.42%, 01/06/97.......... 699,473
400,000 Federal Home Loan Mortgage Corp., 5.70%, 01/07/97.......... 399,620
100,000 Federal Home Loan Mortgage Corp., 5.33%, 01/13/97.......... 99,822
100,000 Federal Home Loan Mortgage Corp., 5.21%, 01/16/97.......... 99,783
TOTAL FEDERAL HOME LOAN MORTGAGE CORP...................... 2,298,506 2.23%
FEDERAL NATIONAL MORTGAGE ASSOCIATION
1,100,000 Federal National Mortgage Association, 5.21%, 01/17/97..... 1,097,453
2,300,000 Federal National Mortgage Association, 5.20%, 01/24/97..... 2,292,359
100,000 Federal National Mortgage Association, 5.34%, 03/21/97..... 98,828
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION................ 3,488,640 3.39%
-----
TOTAL SHORT TERM US GOVERNMENT AGENCY (Cost
$5,787,146).............................................. 5,787,146 5.62%
-----
SHARES
- -----------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
2,874,644 Merrimac Cash Fund -- Premium Class (Cost $2,874,644)(b)... 2,874,644 2.79%
-----
PRINCIPAL
- -----------
COMMERCIAL PAPER
$ 4,000,000 Nomura Securities International, 7.20%, 04/23/97(b)........ $ 4,000,703
5,000,000 Republic New York Securities Corp., 7.15%, 07/15/97(b)..... 5,000,873
TOTAL COMMERCIAL PAPER (Cost $9,001,576)................... 9,001,576 8.74%
-----
</TABLE>
See notes to financial statements.
F-26
<PAGE> 117
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
TIME DEPOSITS
$ 1,754,106 First National Bank of Boston, 7.10%, 01/02/97(b).......... $ 1,754,422
3,000,000 First Union National Bank of North Carolina, 6.25%,
01/02/97(b).............................................. 3,000,534
TOTAL TIME DEPOSITS (Cost $4,754,956)...................... 4,754,956 4.61%
-----
TOTAL SECURITIES (Cost $118,789,459)....................... 118,462,438 114.95%
-----
REPURCHASE AGREEMENT
35,988 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $36,000, 01/02/97
(Collateralized by Federal Home Loan Mortgage Corp.,
8.04%, due 01/01/23 with a value of $38,142) (Cost
$35,994)................................................. 35,994 0.03%
-----
Total Investments (Cost $118,825,453)...................... 118,498,432 114.98%
Other assets less liabilities.............................. (15,438,552) (14.98)%
-----
NET ASSETS................................................. $103,059,880 100.00%
=====
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $118,825,453.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation.............................. $ 269,710
Gross unrealized depreciation.............................. (596,731)
------------
Net unrealized depreciation................................ $ (327,021)
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
See notes to financial statements.
F-27
<PAGE> 118
GOVERNMENT/CORPORATE BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
US GOVERNMENT SECURITY
$ 5,000,000 US Treasury Note, 5.625%, 11/30/00 (cost $5,026,995)....... $ 4,909,375 1.52%
---------- -----
US GOVERNMENT AGENCY SECURITIES
FEDERAL HOME LOAN MORTGAGE CORP.
100,000 Federal Home Loan Mortgage Corp., 5.33%, 01/13/97.......... 99,822
5,000,000 Federal Home Loan Mortgage Corp., Series 1666, Class E,
6.00%, 12/15/19.......................................... 4,863,295
3,641,150 Federal Home Loan Mortgage Corp., Series 1377, 7.27%,
09/15/07................................................. 3,658,580
4,090,178 Federal Home Loan Mortgage Corp., Series 31, 6.15%,
08/25/23................................................. 4,083,531
5,937,562 Federal Home Loan Mortgage Corp., Series 1710, 6.00%,
02/15/24................................................. 5,957,761
946,485 Federal Home Loan Mortgage Corp., PL# 413611 7.00%,
01/15/26................................................. 926,075
972,603 Federal Home Loan Mortgage Corp., PL# 292340 7.00%,
02/15/26................................................. 951,630
972,579 Federal Home Loan Mortgage Corp., PL# 373622 7.00%,
03/15/26................................................. 951,607
973,829 Federal Home Loan Mortgage Corp., PL# 373637 7.00%,
03/15/26................................................. 952,829
----------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP...................... 22,445,130 6.96%
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
100,000 Federal National Mortgage Association, 5.24%, 01/03/97..... 99,972
10,000,000 Federal National Mortgage Association, 6.25%, 10/28/98..... 10,000,000
1,486,796 Federal National Mortgage Association REMIC Series
1993-219, Class A, principal only, 08/25/23.............. 1,427,633
117,471 Federal National Conventional Loan, PL# 250510 7.00%,
12/01/25................................................. 114,938
----------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION................ 11,642,543 3.61%
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
973,450 Government National Mortgage Association, PL# 428420,
7.00%, 04/15/26.......................................... 952,459 0.30%
----------
STUDENT LOAN MARKETING ASSOCIATION
3,000,000 Student Loan Marketing Association, 6.52%, 09/26/00........ 2,999,877
5,000,000 Student Loan Marketing Association, Series 1996-2 A2,
5.81%, 07/27/09.......................................... 5,013,477
----------
TOTAL STUDENT LOAN MARKETING ASSOCIATION................... 8,013,354 2.48%
---------- -----
TOTAL US GOVERNMENT AGENCY SECURITIES (Cost $42,859,031)... 43,053,486 13.35%
---------- -----
CORPORATE BONDS AND NOTES
AEROSPACE
5,000,000 Boeing Company, 8.625%, 11/15/31........................... 5,871,180
</TABLE>
See notes to financial statements.
F-28
<PAGE> 119
GOVERNMENT/CORPORATE BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ---------- -----
<C> <S> <C> <C>
AEROSPACE (CONTINUED)
$ 5,000,000 Lockheed Martin, 6.85%, 05/15/01........................... $ 5,046,625
5,000,000 McDonnell Douglas, 6.875%, 11/01/06........................ 4,978,790
----------
TOTAL AEROSPACE............................................ 15,896,595 4.93%
----------
AUTOMOTIVE PRODUCTS
4,000,000 BF Goodrich, 8.65%, 04/15/25............................... 4,524,285
5,000,000 Ford Holdings, 9.375%, 03/01/20............................ 5,999,350
5,000,000 General Motors Corp., 8.80%, 03/01/21...................... 5,762,785
5,000,000 Universal Corp., 6.50%, 02/15/06........................... 4,720,805
----------
TOTAL AUTOMOTIVE PRODUCTS.................................. 21,007,225 6.51%
----------
BANKS
4,000,000 Bank of New York Company, 6.50%, 12/01/03.................. 3,919,856
5,000,000 BankAmerica Corp., 6.625%, 05/30/01........................ 5,006,120
10,000,000 Bankers Trust of New York, 6.75%, 10/03/01................. 10,015,770
5,000,000 BT Trust, 7.75%, 12/01/26.................................. 4,771,145
5,000,000 Chase Manhattan Corp., 8.00%, 05/01/05..................... 5,041,800
5,000,000 International Bank of Reconstruction & Development, 8.625%,
10/15/16................................................. 5,777,130
5,000,000 Midland Bank PLC, Floating Rate, 5.91%, 06/29/49........... 4,300,000
5,000,000 Swiss Bank Corp., 7.75%, 09/01/26.......................... 5,166,775
----------
TOTAL BANKS................................................ 43,998,596 13.64%
----------
CONSUMER GOODS AND SERVICES
5,200,000 Procter & Gamble, 9.36%, 01/01/21.......................... 6,318,359
5,000,000 RJR Nabisco, 8.75%, 04/15/04............................... 5,063,290
----------
TOTAL CONSUMER GOODS AND SERVICES.......................... 11,381,649 3.53%
----------
FINANCE
10,000,000 Associates Corp. N.A., 6.75%, 07/15/01..................... 10,048,680
5,000,000 Capital Equipment Receivables Trust 96-1 Class B, 6.57%,
03/15/01(a).............................................. 5,009,100
10,000,000 Chase Manhattan Credit Card Master Trust Series 1996-3
Class A, 7.04%, 02/15/00................................. 10,249,600
7,040,000 Discover Card Master Trust I Series 1994-2 Class A,
Floating Rate, 5.83%, 10/16/04........................... 7,103,642
6,000,000 Dow Capital BV, 9.20%, 06/01/10............................ 6,943,764
5,000,000 General Electric Capital Corp., 8.50%, 07/24/08............ 5,611,095
5,000,000 General Motors Acceptance Corp., Putable Asset Trust,
6.375%, 09/30/98......................................... 5,012,621
5,000,000 General Motors Acceptance Corp., 8.40%, 10/15/99........... 5,248,550
5,880,000 Structured Asset Securities Corp., Series 1996-CFL, Class
A-IC, 5.944%, 02/25/28................................... 5,765,134
</TABLE>
See notes to financial statements.
F-29
<PAGE> 120
GOVERNMENT/CORPORATE BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ---------- -----
<C> <S> <C> <C>
FINANCE (CONTINUED)
$ 3,000,000 Standard Credit Card Master Trust, Series 95-11, 5.59%,
11/15/00................................................. $ 3,000,600
10,000,000 Xerox Credit Corp., 6.78%, 05/21/01........................ 10,041,160
----------
TOTAL FINANCE.............................................. 74,033,946 22.94%
----------
FOOD AND BEVERAGE
5,000,000 Seagrams (Joseph) & Sons, 9.65%, 08/15/18.................. 6,196,946 1.92%
----------
INDUSTRIAL
5,000,000 Celulosa Arauco y Constitucion, 6.75%, 12/15/03............ 4,833,565
1,000,000 Eli Lilly, 6.770%, 01/01/36................................ 939,931
----------
TOTAL INDUSTRIAL........................................... 5,773,496 1.79%
----------
INSURANCE
5,000,000 Aetna Services, 7.625%, 08/15/26........................... 5,043,400
5,000,000 Prudential Insurance, 8.10%, 07/15/15(a)................... 5,052,515
----------
TOTAL INSURANCE............................................ 10,095,915 3.13%
----------
LEISURE AND RECREATION
7,000,000 Marriott International Inc., 7.875%, 04/15/05.............. 7,271,292 2.25%
----------
OIL AND GAS
5,000,000 Occidental Petroleum, 10.125%, 09/15/09.................... 6,170,535
4,000,000 Texaco Capital, 9.75%, 03/15/20............................ 5,069,432
----------
TOTAL OIL AND GAS.......................................... 11,239,967 3.48%
----------
PAPER AND FOREST PRODUCTS
5,000,000 Republic New York Corp., 7.00%, 03/22/11................... 4,910,475
8,000,000 Westvaco, 10.125%, 06/01/19................................ 8,871,200
----------
TOTAL PAPER AND FOREST PRODUCTS............................ 13,781,675 4.27%
----------
TELECOMMUNICATION
5,000,000 GTE South, 7.50%, 03/15/26................................. 4,941,835 1.53%
----------
UTILITIES
10,000,000 Commonwealth Edison, 8.125%, 01/15/07...................... 9,995,680
5,000,000 Commonwealth Edison, 8.50%, 07/15/22....................... 5,150,305
5,000,000 Philadelphia Electric, 5.375%, 08/15/98.................... 4,935,540
----------
TOTAL UTILITIES............................................ 20,081,525 6.23%
---------- -----
TOTAL CORPORATE BONDS & NOTES (Cost $240,779,900).......... 245,700,662 76.15%
---------- -----
COMMERCIAL PAPER
300,000 American Express Credit Corp., 5.33%, 01/09/97............. 299,645
2,000,000 Capital One Funding Corp., Floating Rate, 5.84%,
01/02/97................................................. 2,017,400
1,700,000 CIT Group Holdings, Inc., 5.48%, 01/31/97.................. 1,692,237
</TABLE>
See notes to financial statements.
F-30
<PAGE> 121
GOVERNMENT/CORPORATE BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
(CONTINUED)
$ 2,200,000 Enterprise Funding Corp., 5.77%, 01/09/97.................. $ 2,197,179
1,879,000 Enterprise Funding Corp., 5.31%, 02/07/97.................. 1,868,745
200,000 General Electric Capital, 5.50%, 01/27/97.................. 199,206
3,700,000 General Electric Capital, 5.40%, 01/23/97.................. 3,687,790
3,500,000 Heller International Corp., 5.70%, 01/21/97................ 3,488,917
300,000 Household Finance Corp., 5.45%, 01/14/97................... 299,410
1,100,000 Metlife Funding Inc., 5.29%, 01/10/97...................... 1,098,545
1,625,000 Morgan, J.P. & Company, 5.36%, 01/02/97.................... 1,624,760
850,000 Sears Roebuck Acceptance Corp., 5.40%, 01/07/97............ 849,235
5,100,000 Weyerhaeuser Mortgage Company, 5.90%, 01/07/97............. 5,094,985
------------
TOTAL COMMERCIAL PAPER (Cost $24,418,054).................. 24,418,054 7.56%
------------ -------
TIME DEPOSIT
9,473,024 First National Bank of Boston TBW-1, 7.10%, 01/02/97 (Cost
$9,474,477)(b)........................................... 9,474,477 2.94%
------------ -------
SHARES
- -----------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
496,576 Merrimac Cash Fund -- Premium Class (Cost $496,576)(b)..... 496,576 0.15%
------------ -------
TOTAL SECURITIES (Cost $323,055,033)....................... 328,052,630 101.67%
------------ -------
PRINCIPAL
- -----------
REPURCHASE AGREEMENT
$ 52,055 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $52,072, 01/02/97
(Collateralized by Federal Home Loan Mortgage Corp.,
7.78%, due 08/01/24, with a value of $55,032) (Cost
$52,064)................................................. 52,064 0.01%
------------ -------
Total Investments (Cost $323,107,097)...................... 328,104,694 101.68%
Other assets less liabilities.............................. (5,428,677) (1.68)%
------------ -------
Net Assets................................................. $322,676,017 100.00%
=========== ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $323,107,097.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation.............................. $ 6,636,512
Gross unrealized depreciation.............................. (1,638,915)
------------
Net unrealized appreciation................................ $ 4,997,597
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
See notes to financial statements.
F-31
<PAGE> 122
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- --------- ------------ -------
<C> <S> <C> <C>
COMMON STOCK
AEROSPACE
49,300 Boeing Company............................................... $ 5,244,288
44,750 Northrop Grumman Corp........................................ 3,703,063
------------
TOTAL AEROSPACE.............................................. 8,947,351 3.38%
------------
AUTOMOBILES
89,600 General Motors Corp.......................................... 4,995,200 1.89%
------------
BANKS
90,700 Banc One Corp................................................ 3,900,100
40,650 Citicorp..................................................... 4,186,950
127,000 C S Holding (ADR)............................................ 3,251,314
17,550 Wells Fargo & Company........................................ 4,734,113
------------
TOTAL BANKS.................................................. 16,072,477 6.07%
------------
CHEMICALS
58,900 Dow Chemical Company(a)...................................... 4,616,288
45,400 Du Pont (E.I.) De Nemours.................................... 4,284,625
55,250 Grace W.R.................................................... 2,859,188
111,700 Rhone Poulenc SA (ADR)(a)(c)................................. 3,783,838
------------
TOTAL CHEMICALS.............................................. 15,543,939 5.87%
------------
COMPUTER AND OFFICE EQUIPMENT
30,900 International Business Machines.............................. 4,665,900 1.76%
------------
DEFENSE
75,800 Raytheon Company............................................. 3,647,875 1.38%
------------
ENVIRONMENTAL MANAGEMENT
103,500 WMX Technologies............................................. 3,376,688 1.27%
------------
FINANCE
37,900 Loews Corp................................................... 3,572,075 1.35%
------------
INDUSTRIAL
64,200 Allegheny Teledyne, Inc.(a).................................. 1,476,600 0.56%
------------
INSURANCE
25,200 Aetna, Inc................................................... 2,016,000
85,650 Allstate, Corp............................................... 4,956,994
85,065 Travelers, Inc............................................... 3,859,804
------------
TOTAL INSURANCE.............................................. 10,832,798 4.09%
------------
</TABLE>
See notes to financial statements.
F-32
<PAGE> 123
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- --------- ------------ ------
<C> <S> <C> <C>
LEISURE AND RECREATION
114,200 Host Marriott Corp.(a)(c).................................... $ 1,827,200 0.69%
------------
MANUFACTURING
49,950 Hasbro, Inc.................................................. 1,941,806
35,435 Mattel....................................................... 983,321
121,300 Peninsular & Oriental (ADR)(a)(c)............................ 2,449,435
128,400 Philips Electronics N.V. (ADR)............................... 5,136,000
------------
TOTAL MANUFACTURING.......................................... 10,510,562 3.97%
------------
MEDIA
107,050 Dun & Bradstreet Corp........................................ 2,542,448
69,950 E.W. Scripps Company -- Class A.............................. 2,448,262
------------
TOTAL MEDIA.................................................. 4,990,710 1.88%
------------
MEDICAL AND OTHER HEALTH SERVICES
67,000 American Home Products Corp.................................. 3,927,875
41,800 Bristol-Myers Squibb Company................................. 4,545,753
114,100 Tenet Healthcare Corp.(a)(c)................................. 2,495,938
------------
TOTAL MEDICAL AND OTHER HEALTH SERVICES...................... 10,969,566 4.14%
------------
OIL AND GAS
61,350 Amoco Corp................................................... 4,938,675
37,900 AMR Corp.(c)................................................. 3,339,937
118,400 Elf Aquitaine (ADR)(a)....................................... 5,357,619
------------
TOTAL OIL AND GAS............................................ 13,636,231 5.15%
------------
PHARMACEUTICALS
105,119 Novartis AG (ADR)(a)......................................... 6,000,760 2.26%
------------
RETAIL
111,250 Federated Department Stores(c)............................... 3,796,406
168,000 Wal-Mart Stores, Inc. ....................................... 3,843,000
------------
TOTAL RETAIL................................................. 7,639,406 2.88%
------------
</TABLE>
See notes to financial statements.
F-33
<PAGE> 124
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- --------- ------------ -------
<C> <S> <C> <C>
TELECOMMUNICATIONS
52,300 General Instrument Corp.(c).................................. $ 1,130,988
76,500 ITT Corp.(c)................................................. 3,318,188
127,900 MCI Communications Corp. .................................... 4,180,731
52,900 Motorola, Inc. .............................................. 3,246,738
47,250 Nokia Corp. (ADR)............................................ 2,722,781
101,100 NYNEX Corp................................................... 4,865,437
152,650 Pacific Telesis Group........................................ 5,609,888
------------
TOTAL TELECOMMUNICATIONS..................................... 25,074,751 9.46%
------------
TRANSPORTATION
50,400 Burlington Northern Santa Fe................................. 4,353,300
85,600 Union Pacific Corp........................................... 5,146,700
------------
TOTAL TRANSPORTATION......................................... 9,500,000 3.59%
------------ ------
TOTAL COMMON STOCK (Cost $145,917,349)....................... 163,280,089 61.64%
------------ ------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
6,661,725 Merrimac Cash Fund-Premium Class (Cost $6,661,725)(b)........ 6,661,725 2.51%
------------ ------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
- -----------
<C> <S> <C> <C>
US GOVERNMENT SECURITIES
US TREASURY BOND
$18,050,000 US Treasury Bond, 7.875%, 11/15/04......................... 19,697,063 7.44%
------------
US TREASURY NOTES
11,230,000 US Treasury Note, 7.125%, 10/15/98(a)...................... 11,454,600
9,000,000 US Treasury Note, 8.50%, 02/15/00.......................... 9,610,308
6,190,000 US Treasury Note, 7.50%, 05/15/02.......................... 6,545,925
21,060,000 US Treasury Note, 5.75%, 08/15/03.......................... 20,428,200
29,705,000 US Treasury Note, 6.50%, 05/15/05.......................... 29,918,490
------------
TOTAL US TREASURY NOTES.................................... 77,957,523 29.43%
------------ ------
TOTAL US GOVERNMENT SECURITIES (Cost $96,698,498).......... 97,654,586 36.87%
------------ ------
</TABLE>
See notes to financial statements.
F-34
<PAGE> 125
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
CORPORATE NOTES
FINANCE
$ 8,000,000 Nomura Securities International, 7.20%, 04/23/97(b)........ $ 8,001,492
12,000,000 Republic New York Securities Corp., 7.15%, 07/15/97(b)..... 12,002,238
------------
TOTAL CORPORATE NOTES (Cost $20,003,730)................... 20,003,730 7.55%
------------ ------
TIME DEPOSIT
3,881,725 First National Bank of Boston, 7.10%, 01/02/97(b) (Cost
$3,882,450).............................................. 3,882,450 1.46%
------------ ------
TOTAL SECURITIES (Cost $273,163,752)....................... 291,482,580 110.03%
------------ ------
REPURCHASE AGREEMENT
2,455,923 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $2,456,738, 01/02/97,
(Collateralized by Federal Home Loan Mortgage
Corporation, 8.10%, due 12/01/22, with a value of
$2,578,944) (Cost $2,456,326)............................ 2,456,326 0.93%
------------ ------
Total Investments (Cost $275,620,078)...................... 293,938,906 110.96%
Other assets less liabilities.............................. (29,029,067) (10.96)%
------------ ------
NET ASSETS................................................. $264,909,839 100.00%
============ ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $276,099,585.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation.............................. $ 19,889,279
Gross unrealized depreciation.............................. (2,049,958)
Net unrealized appreciation................................ $ 17,839,321
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
(c) Non-income producing security
(ADR) -- American Depository Receipt
See notes to financial statements.
F-35
<PAGE> 126
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
COMMON STOCK
AEROSPACE
120,000 Northrop Grumman Corp. .................................... $ 9,930,000
120,000 Textron, Inc. ............................................. 11,310,000
160,000 United Technologies........................................ 10,560,000
------------
TOTAL AEROSPACE............................................ 31,800,000 3.32%
------------
AUTOMOBILES
120,000 Chrysler Corp. ............................................ 3,960,000
130,000 Ford Motor Company......................................... 4,143,750
90,000 General Motors Corp. ...................................... 5,017,500
------------
TOTAL AUTOMOBILES.......................................... 13,121,250 1.37%
------------
BANKS
210,000 Banc One Corp. ............................................ 9,030,000
220,000 Bank of New York........................................... 7,425,000
130,000 BankAmerica Corp. ......................................... 12,967,500
100,000 Bankers Trust New York Corp. .............................. 8,625,000
110,000 Chase Manhattan Corp. ..................................... 9,817,500
130,000 First Union Corp. (N.E.)................................... 9,620,000
300,000 Great Western Financial.................................... 8,700,000
290,000 H. F. Ahmanson & Company................................... 9,425,000
110,000 Nationsbank Corp. ......................................... 10,752,500
40,000 Wells Fargo & Company...................................... 10,790,000
------------
TOTAL BANKS................................................ 97,152,500 10.15%
------------
CHEMICALS
80,000 Dow Chemical Company(a).................................... 6,270,000
120,000 Du Pont (E.I.) De Nemours.................................. 11,325,000
150,000 Merck & Company, Inc. ..................................... 11,887,500
325,000 Monsanto Company........................................... 12,634,375
220,000 Olin Corp.(a).............................................. 8,277,500
------------
TOTAL CHEMICALS............................................ 50,394,375 5.27%
------------
COMPUTERS AND OFFICE EQUIPMENT
230,000 General Signal(a).......................................... 9,832,500
140,000 Harris Corp., Inc. ........................................ 9,607,500
120,000 Honeywell, Inc. ........................................... 7,890,000
200,000 Pitney Bowes, Inc. ........................................ 10,900,000
230,000 Xerox Corp. ............................................... 12,103,750
------------
TOTAL COMPUTERS AND OFFICE EQUIPMENT....................... 50,333,750 5.26%
------------
</TABLE>
See notes to financial statements.
F-36
<PAGE> 127
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
CONSUMER GOODS AND SERVICES
220,000 Avon Products, Inc. ....................................... $ 12,567,500
130,000 Colgate-Palmolive Company.................................. 11,992,500
270,000 Dana Corp. ................................................ 8,808,750
150,000 Eastman Kodak Company...................................... 12,037,500
80,000 GATX Corp. ................................................ 3,880,000
250,000 General Electric Company................................... 24,718,750
140,000 Minnesota Mining & Manufacturing(a)........................ 11,602,500
320,000 Ogden Corp. ............................................... 6,000,000
------------
TOTAL CONSUMER GOODS AND SERVICES.......................... 91,607,500 9.57%
------------
ELECTRONICS
270,000 AMP, Inc. ................................................. 10,361,250
100,000 Eaton Corp. ............................................... 6,975,000
150,000 Emerson Electric........................................... 14,512,500
220,000 Thomas & Betts Corp. ...................................... 9,762,500
------------
TOTAL ELECTRONICS.......................................... 41,611,250 4.35%
------------
FINANCE
180,000 American Express Company................................... 10,170,000
290,000 Federal National Mortgage Association...................... 10,802,500
------------
TOTAL FINANCE.............................................. 20,972,500 2.19%
------------
INDUSTRIAL
120,000 Carpenter Technology....................................... 4,395,000
110,000 Reynolds Metals Company.................................... 6,201,250
170,000 Timken Company............................................. 7,798,750
90,000 USX-US Steel Group, Inc. .................................. 2,823,750
------------
TOTAL INDUSTRIAL........................................... 21,218,750 2.22%
------------
INSURANCE
95,000 Aetna, Inc. ............................................... 7,600,000
110,000 Allstate Corp. ............................................ 6,366,250
90,000 CIGNA Corp. ............................................... 12,296,250
180,000 Lincoln National Corp. .................................... 9,450,000
------------
TOTAL INSURANCE............................................ 35,712,500 3.73%
------------
MACHINERY
140,000 Cooper Industries, Inc. ................................... 5,897,500
210,000 Deere & Company............................................ 8,531,250
160,000 Goulds Pumps............................................... 3,670,000
110,000 Harsco Corp. .............................................. 7,535,000
------------
TOTAL MACHINERY............................................ 25,633,750 2.68%
------------
</TABLE>
See notes to financial statements.
F-37
<PAGE> 128
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
MEDICAL AND OTHER HEALTH SERVICES
150,000 Baxter International, Inc. ................................ $ 6,150,000
40,000 Meditrust Corp. ........................................... 1,600,000
------------
TOTAL MEDICAL AND OTHER HEALTH SERVICES.................... 7,750,000 0.81%
------------
METALS AND MINING
160,000 Freeport McMoran Copper & Gold -- Class A.................. 4,500,000
40,000 Phelps Dodge Corp. ........................................ 2,700,000
------------
TOTAL METALS AND MINING.................................... 7,200,000 0.75%
------------
OIL AND GAS
120,000 Amoco Corp.(a)............................................. 9,660,000
70,000 Atlantic Richfield Company................................. 9,275,000
80,544 British Petroleum PLC (ADR)................................ 11,386,908
150,000 Chevron Corp. ............................................. 9,750,000
140,000 Consolidated Natural Gas................................... 7,735,000
270,000 Dresser Industries, Inc. .................................. 8,370,000
151,160 El Paso Natural Gas Company................................ 7,633,580
110,000 Exxon Corp. ............................................... 10,780,000
80,000 Mobil Corp. ............................................... 9,780,000
180,000 Questar Corp. ............................................. 6,615,000
80,000 Royal Dutch Petroleum (ADR)(a)............................. 13,660,000
160,000 Sonat, Inc. ............................................... 8,240,000
120,000 Tenneco, Inc. ............................................. 5,415,000
120,000 Texaco, Inc. .............................................. 11,775,000
300,000 Williams Companies, Inc. .................................. 11,250,000
------------
TOTAL OIL AND GAS.......................................... 141,325,488 14.77%
------------
PAPER AND FOREST PRODUCTS
70,000 Georgia-Pacific Corp. ..................................... 5,040,000
130,000 International Paper Company(a)............................. 5,248,750
120,000 Union Camp Corp. .......................................... 5,730,000
160,000 Weyerhauser Company........................................ 7,580,000
------------
TOTAL PAPER AND FOREST PRODUCTS............................ 23,598,750 2.47%
------------
PHARMACEUTICALS
180,000 American Home Products Corp. .............................. 10,552,500
90,000 Bristol-Myers Squibb Company............................... 9,787,500
160,000 Eli Lilly & Company........................................ 11,680,000
90,000 Pfizer, Inc. .............................................. 7,458,750
100,000 Pharmacia & Upjohn, Inc. .................................. 3,962,500
80,000 Schering-Plough Corp. ..................................... 5,180,000
</TABLE>
See notes to financial statements.
F-38
<PAGE> 129
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
PHARMACEUTICALS (CONTINUED)
160,000 Smithkline Beecham PLC (ADR)............................... $ 10,880,000
160,000 Warner Lambert Company..................................... 12,000,000
------------
TOTAL PHARMACEUTICALS...................................... 71,501,250 7.47%
------------
PUBLISHING
120,000 Dun & Bradstreet Corp. .................................... 2,850,000
240,000 Mcgraw-Hill Companies, Inc. ............................... 11,070,000
------------
TOTAL PUBLISHING........................................... 13,920,000 1.45%
------------
REAL ESTATE INVESTMENT TRUST
80,000 Avalon Properties, Inc. ................................... 2,300,000
90,000 Bay Apartment Communities.................................. 3,240,000
70,000 Crescent Real Estate Equities.............................. 3,692,500
80,000 Developers Divers Realty Corp. ............................ 2,970,000
80,000 Equity Residential Properties.............................. 3,300,000
80,000 Felcor Suite Hotels, Inc. ................................. 2,830,000
200,000 Health Care Property Invest, Inc. ......................... 7,000,000
80,000 Healthcare Realty Trust.................................... 2,120,000
100,000 Irvine Apartment Communities............................... 2,500,000
45,000 Redwood Trust, Inc. ....................................... 1,676,250
------------
TOTAL REAL ESTATE INVESTMENT TRUST......................... 31,628,750 3.31%
------------
TELECOMMUNICATIONS
100,000 Ameritech Corp. ........................................... 6,062,500
100,000 Bell Atlantic Corp. ....................................... 6,475,000
160,000 Bellsouth Corp. ........................................... 6,460,000
160,000 GTE Corp. ................................................. 7,280,000
80,000 NYNEX Corp. ............................................... 3,850,000
170,000 Pacific Telesis Group...................................... 6,247,500
120,000 SBC Communications, Inc. .................................. 6,210,000
150,000 Sprint Corp. .............................................. 5,981,250
150,000 US West, Inc. ............................................. 4,837,500
------------
TOTAL TELECOMMUNICATIONS................................... 53,403,750 5.58%
------------
TOBACCO
160,000 American Brands, Inc. ..................................... 7,940,000
100,000 Philip Morris Companies, Inc. ............................. 11,262,500
------------
TOTAL TOBACCO.............................................. 19,202,500 2.01%
------------
</TABLE>
See notes to financial statements.
F-39
<PAGE> 130
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
REAL ESTATE INVESTMENT TRUST (CONTINUED)
TRANSPORTATION
53,584 Conrail, Inc. ............................................. $ 5,338,306
110,000 Norfolk Southern Corp. .................................... 9,625,000
100,000 Union Pacific Corp. ....................................... 6,012,500
------------
TOTAL TRANSPORTATION....................................... 20,975,806 2.19%
------------
UTILITIES
150,000 American Electric Power, Inc. ............................. 6,168,750
160,000 Carolina Power & Light..................................... 5,840,000
140,000 FPL Group, Inc. ........................................... 6,440,000
240,000 Southern Company........................................... 5,430,001
------------
TOTAL UTILITIES............................................ 23,878,751 2.50%
------------ -------
TOTAL COMMON STOCK (Cost $665,864,243)..................... 893,943,170 93.42%
------------ -------
PREFERRED STOCK
COMPUTERS AND OFFICE EQUIPMENT
15,000 Microsoft Corp., $2.196 Preferred Stock -- Class A (Cost
$1,201,225)................................................ 1,201,875 0.13%
------------ -------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
6,275,504 Merrimac Cash Fund-Premium Class (Cost $6,275,504)(b)...... 6,275,504 0.66%
------------ -------
PRINCIPAL
- -----------
CONVERTIBLE BOND
COMMUNICATIONS EQUIPMENT
$ 2,000,000 Motorola, Inc., 0.00%, 09/07/09 (a) (cost $1,710,000)...... 2,262,500 0.24%
------------ -------
CORPORATE BONDS
FINANCE
20,000,000 Republic New York Securities Corp., 7.15%, 07/15/97 (Cost
$20,003,672) (b)........................................... 20,003,672 2.09%
------------ -------
COMMERCIAL PAPER
600,000 American Express Credit Corp., 5.33%, 01/09/97............. 599,289
3,000,000 Avco Financial Services -- Canada, 5.34%, 01/21/97......... 2,991,100
2,000,000 Avco Financial Services, Inc., 5.32%, 01/23/97............. 1,993,498
3,000,000 Banc One Corp., 5.46%, 01/06/97............................ 2,997,725
10,000,000 Barclay's Bank PLC, 5.29%, 01/06/97........................ 9,992,653
3,000,000 CIT Group Holdings, Inc., 5.48%, 01/31/97.................. 2,986,300
4,000,000 CIT Group Holdings, Inc., 5.33%, 01/06/97.................. 3,997,039
2,700,000 CIT Group Holdings, Inc., 5.35%, 02/25/97.................. 2,677,931
1,500,000 Enterprise, 5.77%, 01/09/97................................ 1,498,077
200,000 General Electric Capital Corp., 5.50%, 01/27/97............ 199,206
1,000,000 General Electric Capital Corp., 5.50%, 01/30/97............ 995,569
</TABLE>
See notes to financial statements.
F-40
<PAGE> 131
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
$ 100,000 General Electric Capital Corp., 5.41%, 01/09/97............ $ 99,880
3,000,000 General Motors Acceptance Corp., 5.36%, 01/24/97........... 2,989,727
4,200,000 ITT Hartford, 5.30%, 01/24/97.............................. 4,185,778
4,000,000 Merrill Lynch and Company, Inc., 5.34%, 01/27/97........... 3,984,573
3,000,000 National Rural Utilities Corp., 5.30%, 01/10/97............ 2,996,025
2,000,000 Paccar Financial Company, 5.44%, 01/03/97.................. 1,999,395
1,600,000 Sears Roebuck Acceptance Corp., 5.40%, 01/07/97............ 1,598,560
4,000,000 Sony Capital Corp., 5.30%, 01/14/97........................ 3,992,345
5,300,000 Southwestern Bell Capital, 5.52%, 01/30/97................. 5,276,433
2,600,000 Weyerhaeuser Mortgage Company, 5.90%, 01/07/97............. 2,597,443
------------
TOTAL COMMERCIAL PAPER (Cost $60,648,546).................. 60,648,546 6.34%
------------ -------
TIME DEPOSIT
4,216,896 First National Bank of Boston, 7.10%, 01/02/97 (Cost
$4,217,670)(b)............................................. 4,217,670 0.44%
------------ -------
SHORT TERM US GOVERNMENT AGENCY SECURITIES
300,000 Federal Home Loan Mortgage Discount Note, 5.42%,
01/06/97................................................... 299,774
300,000 Federal National Mortgage Association, 5.24%, 01/03/97..... 299,914
200,000 Federal National Mortgage Association, 5.34%, 03/21/97..... 197,656
------------
TOTAL SHORT TERM US GOVERNMENT (Cost $797,344)............. 797,344 0.08%
------------ -------
TOTAL SECURITIES (Cost $760,718,204)....................... 989,350,281 103.40%
------------ -------
REPURCHASE AGREEMENT
26,910 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $26,919, 01/02/97
(Collateralized by Federal National Mortgage Association,
7.92%, due 08/01/24 with a value of $28,562) (Cost
$26,914)................................................... 26,914 0.00%
------------ -------
Total Investments (Cost $760,745,118)...................... 989,377,195 103.40%
Other assets less liabilities.............................. (32,556,526) (3.40)%
------------ -------
NET ASSETS................................................. $956,820,669 100.00%
=========== ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31,1996 is $760,484,068.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation.............................. $231,988,767
Gross unrealized depreciation.............................. (3,095,640)
------------
Net unrealized appreciation................................ $228,893,127
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
(ADR) -- American Depository Receipts
See notes to financial statements.
F-41
<PAGE> 132
EQUITY VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
COMMON STOCK
AEROSPACE
3,600 Allied Signal, Inc. ........................................ $ 241,242 0.83%
AUTOMOBILES
6,200 General Motors Corp. ....................................... 345,650
21,300 Ford Motor Company.......................................... 678,938
TOTAL AUTOMOBILES........................................... 1,024,588 3.53%
BANKS
2,300 Chase Manhattan Corp. ...................................... 205,275
6,500 First Chicago National Bank Corp. .......................... 349,375
TOTAL BANKS................................................. 554,650 1.91%
CHEMICALS
5,700 Du Pont (E.I.) de Nemours................................... 537,937
7,300 Eastman Chemical Company.................................... 403,325
6,100 Hercules, Inc. ............................................. 263,825
4,700 PPG Industries, Inc. ....................................... 263,787
3,600 Union Carbide Corp. ........................................ 147,150
10,700 WMX Technologies............................................ 349,087
TOTAL CHEMICALS............................................. 1,965,111 6.77%
COMPUTERS AND OFFICE EQUIPMENT
12,600 Digital Equipment Corp.(c).................................. 458,325
4,400 International Business Machines............................. 664,400
13,300 Xerox Corp. ................................................ 699,913
TOTAL COMPUTERS AND OFFICE EQUIPMENT........................ 1,822,638 6.28%
CONSTRUCTION
4,600 Fluor Corp. ................................................ 288,650
9,200 Masco Corp. ................................................ 331,200
TOTAL CONSTRUCTION.......................................... 619,850 2.13%
CONSUMER GOODS AND SERVICES
3,000 Eastman Kodak Company....................................... 240,750
1,400 Kimberly-Clark Corp. ....................................... 133,350
TOTAL CONSUMER GOODS AND SERVICES........................... 374,100 1.29%
DEFENSE
5,800 Raytheon Co. ............................................... 279,125 0.96%
ELECTRONICS
12,000 AMP, Inc. .................................................. 460,500
5,700 Rockwell International Corp.(c)............................. 346,988
3,000 Texas Instruments........................................... 191,250
TOTAL ELECTRONICS........................................... 998,738 3.44%
</TABLE>
See notes to financial statements.
F-42
<PAGE> 133
EQUITY VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- --------
---
<C> <S> <C> <C>
FINANCE
10,000 Dean Witter Discover & Company.............................. $ 662,500
4,800 Loews Corp. ................................................ 452,400
TOTAL FINANCE............................................... 1,114,900 3.84%
FOOD AND BEVERAGE
6,700 Albertson's, Inc. .......................................... 238,688
6,100 Anheuser Busch Companies, Inc. ............................. 244,000
15,780 Archer Daniels Midland...................................... 347,160
1,800 CPC International, Inc. .................................... 139,500
TOTAL FOOD AND BEVERAGE..................................... 969,348 3.34%
INSURANCE
9,800 Aetna, Inc. ................................................ 784,000
11,400 Allstate Corp. ............................................. 659,775
1,700 American International Group................................ 184,025
13,300 Chubb Corp. ................................................ 714,875
3,700 General Re Corp. ........................................... 583,675
3,500 UNUM Corp. ................................................. 252,875
TOTAL INSURANCE............................................. 3,179,225 10.95%
MEDIA
12,200 Time Warner, Inc. .......................................... 457,500
14,500 US West Media Group(c)...................................... 268,250
TOTAL MEDIA................................................. 725,750 2.50%
MEDICAL AND OTHER HEALTH SERVICES
2,600 Becton Dickinson & Company.................................. 112,775
4,900 Cognizant Corp. ............................................ 161,710
19,700 Columbia/HCA Healthcare Corp. .............................. 802,775
16,800 Humana, Inc.(c)............................................. 321,300
8,200 United Healthcare Corp.(c).................................. 369,000
TOTAL MEDICAL AND OTHER HEALTH SERVICES..................... 1,767,560 6.09%
METALS AND MINING
4,500 Aluminum Company of America................................. 286,875
8,000 LTV Corp. .................................................. 95,000
11,300 Newmont Mining.............................................. 505,675
TOTAL METALS AND MINING..................................... 887,550 3.06%
OIL AND GAS
7,300 Amerada Hess Corp. ......................................... 422,488
3,400 Amoco Corp. ................................................ 273,740
3,800 Mobil Corp. ................................................ 464,550
23,900 Occidental Petroleum........................................ 558,662
</TABLE>
See notes to financial statements.
F-43
<PAGE> 134
EQUITY VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- --------
---
<C> <S> <C> <C>
OIL AND GAS (CONTINUED)
900 Texaco, Inc. ............................................... $ 88,312
9,800 Union Pacific Resources Group............................... 286,650
TOTAL OIL AND GAS........................................... 2,094,402 7.21%
PAPER AND FOREST PRODUCTS
10,200 Champion International...................................... 441,150
2,500 Georgia-Pacific Corp. ...................................... 180,000
3,600 International Paper Company................................. 145,350
TOTAL PAPER AND FOREST PRODUCTS............................. 766,500 2.64%
PHARMACEUTICALS
4,300 Bristol-Myers Squibb Company................................ 467,650
14,300 Pharmacia & Upjohn, Inc. ................................... 566,638
TOTAL PHARMACEUTICALS....................................... 1,034,288 3.56%
RETAIL
16,000 Dillard Department Stores................................... 494,000
17,300 Federated Department Stores(c).............................. 590,363
8,600 May Department Stores....................................... 402,050
10,100 Sears Roebuck............................................... 465,863
TOTAL RETAIL................................................ 1,952,276 6.72%
TELECOMMUNICATIONS
32,000 American Telephone & Telegraph Corp. ....................... 1,392,000
10,700 Frontier Corp. ............................................. 242,087
15,400 GTE Corp. .................................................. 700,700
9,500 ITT Corp.(c)................................................ 412,062
16,000 NYNEX Corp. ................................................ 770,000
10,300 SBC Communications, Inc. ................................... 533,025
5,800 Sprint Corp. ............................................... 231,275
40,400 Tele-Communications, Inc. Series A(c)....................... 527,725
TOTAL TELECOMMUNICATIONS.................................... 4,808,874 16.57%
TRANSPORTATION
3,300 AMR Corp.(c)................................................ 290,813
1,100 Burlington Northern Santa Fe................................ 95,013
11,700 CSX Corp. .................................................. 494,325
4,000 Delta Air Lines, Inc. ...................................... 283,500
TOTAL TRANSPORTATION........................................ 1,163,651 4.01%
UTILITIES
4,500 Texas Utilities Company..................................... 183,375 0.63%
-------
----
TOTAL COMMON STOCK (Cost $26,959,909)....................... 28,527,741 98.26%
-------
----
</TABLE>
See notes to financial statements.
F-44
<PAGE> 135
EQUITY VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
- ----------
<C> <S> <C> <C>
REPURCHASE AGREEMENT
With Investors Bank & Trust dated 12/31/96, 5.91%,
$1,693,220 repurchase
proceeds at maturity $1,693,776, 01/02/97 (Collateralized by
Federal Home Loan Mortgage Corp., 7.65%, due 09/01/18 with a
value of $1,777,969) (Cost $1,693,498)...................... $ 1,693,498 5.83%
------------ -------
Total Investments (Cost $28,653,407)........................ 30,221,239 104.09%
Other assets less liabilities............................... (1,187,726) (4.09)%
------------ -------
NET ASSETS.................................................. $ 29,033,513 100.00%
=========== ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $28,673,560.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation............................... $ 2,162,357
Gross unrealized depreciation............................... (614,678)
------------
Net unrealized appreciation................................. $ 1,547,679
===========
</TABLE>
- ---------------
(c) Non-income producing security
See notes to financial statements.
F-45
<PAGE> 136
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
------------ -------
<C> <S> <C> <C>
COMMON STOCK
AEROSPACE
34,500 Boeing Company.............................................. $ 3,669,937
28,100 Textron, Inc................................................ 2,648,425
43,100 United Technologies......................................... 2,844,600
----------
TOTAL AEROSPACE............................................. 9,162,962 4.41%
----------
APPAREL
57,900 CVS Corp.(c)................................................ 2,395,612
40,700 Liz Claiborne............................................... 1,572,038
----------
TOTAL APPAREL............................................... 3,967,650 1.91%
----------
BANKS
38,100 Bank of Boston Corp......................................... 2,447,925
41,700 BankAmerica Corp............................................ 4,159,575
56,200 Barnett Banks, Inc.......................................... 2,311,225
25,500 Chase Manhattan Corp........................................ 2,275,875
37,200 Citicorp.................................................... 3,831,600
58,150 MBNA Corp................................................... 2,413,225
----------
TOTAL BANKS................................................. 17,439,425 8.40%
----------
CHEMICALS
40,600 Du Pont (E.I.) de Nemours................................... 3,831,625
50,700 Merck & Company, Inc........................................ 4,017,975
100,600 Monsanto Company............................................ 3,910,825
68,600 Praxair, Inc................................................ 3,164,175
31,300 Sherwin Williams Company.................................... 1,752,800
----------
TOTAL CHEMICALS............................................. 16,677,400 8.03%
----------
COMPUTER AND OFFICE EQUIPMENT
68,150 Computer Associates International, Inc...................... 3,390,462
59,900 EMC Corp.(c)................................................ 1,984,187
36,900 Intel Corp.(a).............................................. 4,831,594
51,800 Microsoft Corp.(c).......................................... 4,279,975
41,600 Peoplesoft(a)(c)............................................ 1,994,200
----------
TOTAL COMPUTER AND OFFICE EQUIPMENT......................... 16,480,418 7.94%
----------
COMPUTER AND SOFTWARE SERVICES
24,100 3Com Corp.(c)............................................... 1,768,338
58,700 Cisco Systems, Inc.(c)...................................... 3,734,787
32,300 Compaq Computer(c).......................................... 2,398,275
27,800 Computer Sciences Corp.(c).................................. 2,283,075
</TABLE>
See notes to financial statements.
F-46
<PAGE> 137
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
---------- ------
<C> <S> <C> <C>
COMPUTER AND SOFTWARE SERVICES (CONTINUED)
59,500 Honeywell, Inc.............................................. $ 3,912,125
30,700 Parametric Technology Corp.(c).............................. 1,577,213
----------
TOTAL COMPUTER AND SOFTWARE SERVICES........................ 15,673,813 7.55%
----------
CONSUMER GOODS AND SERVICES
41,700 Avon Products, Inc.......................................... 2,382,112
23,300 Clorox Company.............................................. 2,338,737
46,000 Eastman Kodak Company....................................... 3,691,500
47,900 General Electric Company.................................... 4,736,113
61,200 Gillette Company............................................ 4,758,300
57,900 Nike, Inc. -- Class B....................................... 3,459,525
67,200 Service Corporation International........................... 1,881,600
----------
TOTAL CONSUMER GOODS AND SERVICES........................... 23,247,887 11.20%
----------
ELECTRONICS
37,700 Texas Instruments........................................... 2,403,375 1.16%
----------
FINANCE
43,300 American Express Company.................................... 2,446,450
57,700 Federal National Mortgage Association....................... 2,149,325
23,800 Franklin Resources, Inc..................................... 1,627,325
58,700 First Data Corp............................................. 2,142,550
18,600 Household International, Inc................................ 1,715,850
25,700 Lowes Company, Inc.......................................... 912,350
----------
TOTAL FINANCE............................................... 10,993,850 5.30%
----------
FOOD AND BEVERAGE
28,000 Campbell Soup Company....................................... 2,247,000
33,300 Safeway, Inc.(a)(c)......................................... 1,423,575
----------
TOTAL FOOD AND BEVERAGE..................................... 3,670,575 1.77%
----------
INSURANCE
67,232 Travelers, Inc.............................................. 3,050,635 1.47%
----------
LEISURE AND RECREATION
25,200 HFS, Inc.(c)................................................ 1,505,700
40,600 Marriott International, Inc................................. 2,243,150
----------
TOTAL LEISURE AND RECREATION................................ 3,748,850 1.81%
----------
MACHINERY
51,000 Baker Hughes, Inc........................................... 1,759,500
29,800 Case Corp................................................... 1,624,100
----------
TOTAL MACHINERY............................................. 3,383,600 1.63%
----------
</TABLE>
See notes to financial statements.
F-47
<PAGE> 138
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
---------- ------
<C> <S> <C> <C>
MANUFACTURING
17,000 Armstrong World Industries, Inc............................. $ 1,181,500 0.57%
----------
MEDIA
31,100 Gannett Company, Inc........................................ 2,328,613
27,400 Tribune Company............................................. 2,161,175
----------
TOTAL MEDIA................................................. 4,489,788 2.16%
----------
MEDICAL AND OTHER HEALTH SERVICES
40,950 Cardinal Health, Inc.(a).................................... 2,385,337
44,600 Healthsouth Corp.(c)........................................ 1,722,675
41,000 HBO & Company............................................... 2,434,375
54,900 Johnson & Johnson........................................... 2,731,275
30,900 Medtronic, Inc.............................................. 2,101,200
18,100 Oxford Health Plans, Inc.(c)................................ 1,059,981
48,000 United States Surgical Corp.(a)............................. 1,890,000
----------
TOTAL MEDICAL AND OTHER HEALTH SERVICES..................... 14,324,843 6.90%
----------
OIL AND GAS
23,100 British Petroleum PLC (ADR)................................. 3,265,763
55,300 Enron Corp.................................................. 2,384,812
37,000 Halliburton Company......................................... 2,229,250
28,500 Schlumberger Ltd............................................ 2,846,438
54,000 Sonat, Inc.................................................. 2,781,000
----------
TOTAL OIL AND GAS........................................... 13,507,263 6.51%
----------
PHARMACEUTICALS
75,100 Abbott Laboratories......................................... 3,811,325
31,300 Eli Lilly & Company......................................... 2,284,900
46,600 Pfizer, Inc................................................. 3,861,975
49,900 Warner Lambert Company...................................... 3,742,500
----------
TOTAL PHARMACEUTICALS....................................... 13,700,700 6.60%
----------
RETAIL
52,700 CompUSA, Inc.(a)(c)......................................... 1,086,937
58,300 Dayton-Hudson Corp.......................................... 2,288,275
55,200 Federated Department Stores(c).............................. 1,883,700
44,000 Harcourt General, Inc....................................... 2,029,500
86,400 Sears Roebuck............................................... 3,985,200
39,500 TJX Companies, Inc.......................................... 1,871,313
48,400 Walgreen Company............................................ 1,936,000
----------
TOTAL RETAIL................................................ 15,080,925 7.26%
----------
</TABLE>
See notes to financial statements.
F-48
<PAGE> 139
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
---------- ------
<C> <S> <C> <C>
TELECOMMUNICATIONS
27,600 Cascade Communications Corp.(c)............................. $ 1,521,450
13,100 Cincinnati Bell, Inc........................................ 807,288
71,300 Sprint Corp................................................. 2,843,088
32,200 Tellabs, Inc.(c)............................................ 1,211,525
----------
TOTAL TELECOMMUNICATIONS.................................... 6,383,351 3.07%
----------
TOBACCO
73,600 RJR Holdings Group, Inc..................................... 2,502,400 1.20%
---------- ------
TOTAL COMMON STOCK (Cost $179,034,540)...................... 201,071,210 96.85%
---------- ------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
7,833,262 Merrimac Cash Fund -- Premium Class (Cost $7,833,262)(b).... 7,833,262 3.77%
---------- ------
PRINCIPAL
COMMERCIAL PAPER
$4,000,000 Republic New York Securities Corp., 7.15%, 07/15/97
(Cost $4,001,339)(b)........................................ 4,001,339 1.93%
---------- ------
TIME DEPOSIT
2,041,838 First National Bank of Boston, 7.10%, 01/02/97 (Cost 2,042,522 0.98%
$2,042,522)(b)..............................................
---------- ------
TOTAL SECURITIES (Cost $192,911,663)........................ 214,948,333 103.53%
---------- ------
REPURCHASE AGREEMENT
6,968,633 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase
proceeds at maturity $6,970,921, 01/02/97 (Collateralized by
Federal Home Loan Mortgage Corp., 7.71% due 05/01/25
with a value of $7,317,773) (Cost $6,969,777)............... 6,969,777 3.36%
---------- ------
Total Investments (Cost $199,881,440)....................... 221,918,110 106.89%
Other assets less liabilities............................... (14,305,684) (6.89)%
---------- ------
NET ASSETS.................................................. $207,612,426 100.00%
========== ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $200,071,840.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation............................... $ 24,400,784
Gross unrealized depreciation............................... (2,554,514)
------------
Net unrealized appreciation................................. $ 21,846,270
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
(c) Non-income producing security
See notes to financial statements.
F-49
<PAGE> 140
EQUITY GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ------------ ----------
<C> <S> <C> <C>
COMMON STOCK
AEROSPACE
73,600 Sundstrand Corp. ......................................... $ 3,128,000
49,000 Textron, Inc. ............................................ 4,618,250
119,000 United Technologies....................................... 7,854,000
----------
TOTAL AEROSPACE........................................... 15,600,250 5.22%
----------
APPAREL
68,400 Nine West Group, Inc.(c).................................. 3,172,050 1.06%
----------
BANKS
71,200 BankAmerica Corp. ........................................ 7,102,200
70,500 Chase Manhattan Corp. .................................... 6,292,125
59,100 Nationsbank Corp. ........................................ 5,777,025
----------
TOTAL BANKS............................................... 19,171,350 6.41%
----------
CHEMICALS
42,200 Grace W.R. ............................................... 2,183,850
108,600 Hercules, Inc. ........................................... 4,696,950
137,500 Merck & Company, Inc. .................................... 10,896,875
185,800 Monsanto Company.......................................... 7,222,975
136,500 Praxair, Inc. ............................................ 6,296,063
----------
TOTAL CHEMICALS........................................... 31,296,713 10.46%
----------
COMPUTER AND OFFICE EQUIPMENT
129,600 Corporate Express, Inc.(c)................................ 3,815,100 1.28%
----------
COMPUTER AND SOFTWARE SERVICES
175,600 3Com Corp.(c)............................................. 12,884,650
125,900 Adaptec, Inc.(c).......................................... 5,036,000
59,600 Computer Associates International, Inc. .................. 2,965,100
250,525 CUC International, Inc.(c)................................ 5,949,969
51,600 Honeywell, Inc. .......................................... 3,392,700
16,700 Rational Software Corp.(c)................................ 660,694
178,900 Peoplesoft(c)............................................. 8,576,018
----------
TOTAL COMPUTER AND SOFTWARE SERVICES...................... 39,465,131 13.19%
----------
CONSUMER GOODS AND SERVICES
107,300 Avon Products, Inc. ...................................... 6,129,512
117,700 Gillette Company.......................................... 9,151,175
203,600 Service Corporate International........................... 5,700,800
----------
TOTAL CONSUMER GOODS AND SERVICES......................... 20,981,487 7.01%
----------
</TABLE>
See notes to financial statements.
F-50
<PAGE> 141
EQUITY GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ---------- ------
<C> <S> <C> <C>
ELECTRONICS
110,300 Fore Systems, Inc.(c)..................................... $ 3,626,112
68,800 Intel Corp. .............................................. 9,008,500
90,000 Texas Instruments......................................... 5,737,500
----------
TOTAL ELECTRONICS......................................... 18,372,112 6.14%
----------
ENVIRONMENTAL MANAGEMENT
93,000 WMX Technologies.......................................... 3,034,125 1.01%
----------
FINANCIAL SERVICES
154,600 First Data Corp. ......................................... 5,642,900
83,800 Student Loan Marketing Association........................ 7,803,875
----------
TOTAL FINANCIAL SERVICES.................................. 13,446,775 4.50%
----------
FOOD AND BEVERAGE
108,500 Boston Chicken, Inc.(c)................................... 3,892,437 1.30%
----------
INSURANCE
163,630 Travelers, Inc. .......................................... 7,424,694 2.48%
----------
LEISURE AND RECREATION
103,000 HFS, Inc.(c).............................................. 6,154,250
237,600 Hilton Hotels............................................. 6,207,300
----------
TOTAL LEISURE AND RECREATION.............................. 12,361,550 4.13%
----------
MACHINERY
72,600 Thermo Electron Corp.(c).................................. 2,994,750 1.00%
----------
MEDICAL AND OTHER HEALTH SERVICES
81,100 Boston Scientific Corp.(c)................................ 4,866,000
117,700 Guidant Corp. ............................................ 6,708,900
134,500 HBO & Company............................................. 7,985,937
112,800 Medtronic, Inc. .......................................... 7,670,400
----------
TOTAL MEDICAL AND OTHER HEALTH SERVICES................... 27,231,237 9.10%
----------
PHARMACEUTICALS
114,700 American Home Products Corp. ............................. 6,724,287
96,800 Eli Lilly & Company....................................... 7,066,400
112,300 Schering-Plough Corp...................................... 7,271,425
----------
TOTAL PHARMACEUTICALS..................................... 21,062,112 7.04%
----------
RETAIL
231,300 Dayton-Hudson Corp. ...................................... 9,078,525
113,200 Home Depot, Inc. ......................................... 5,674,150
84,700 Kohls Corp.(c)............................................ 3,324,475
----------
TOTAL RETAIL.............................................. 18,077,150 6.04%
----------
</TABLE>
See notes to financial statements.
F-51
<PAGE> 142
EQUITY GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ---------- ------
<C> <S> <C> <C>
TELECOMMUNICATIONS
110,000 Ascend Communications, Inc.(c)............................ $ 6,833,750
117,700 Cascade Communications Corp.(c)........................... 6,488,212
----------
TOTAL TELECOMMUNICATIONS.................................. 13,321,962 4.45%
----------
TOBACCO
84,900 Philip Morris Companies, Inc. ............................ 9,561,864 3.20%
----------
TRANSPORTATION
68,500 Burlington Northern Santa Fe.............................. 5,916,688 1.99%
---------- ------
TOTAL SECURITIES (Cost $276,480,203)...................... 290,199,537 97.01%
---------- ------
PRINCIPAL
REPURCHASE AGREEMENT
$6,062,596 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $6,064,586, 01/02/97,
(Collateralized by Federal Home Loan Mortgage Corp.,
7.78%, due 08/01/24 with a value of $6,366,113)
(Cost $6,063,591)......................................... 6,063,591 2.03%
---------- ------
Total Investments (Cost $282,543,794)..................... 296,263,128 99.04%
Other assets less liabilities............................. 2,864,558 0.96%
---------- ------
NET ASSETS................................................ $299,127,686 100.00%
========== ======
The aggregate cost of investments for federal income tax purposes at December 31, 1996 is
$282,543,794.
The following amount is based on costs for federal income tax purposes:
Gross unrealized appreciation............................. $20,146,269
Gross unrealized depreciation............................. (6,426,935)
----------
Net unrealized appreciation............................... $13,719,334
==========
</TABLE>
- ---------------
(c) Non-income producing security
See notes to financial statements.
F-52
<PAGE> 143
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
COMMON STOCK
ADVERTISING
27,700 Catalina Marketing Corp.(c)................................ $ 1,526,963
88,337 HA-LO Industries, Inc.(c).................................. 2,429,268
5,300 Snyder Communications, Inc.(c)............................. 143,100
------------
TOTAL ADVERTISING.......................................... 4,099,331 0.81%
------------
AEROSPACE
146,600 AAR Corp. ................................................. 4,434,650 0.87%
------------
APPAREL
74,700 Catherines Stores Corp.(c)................................. 410,850
13,800 Fila Holdings Spa (ADR)(a)................................. 802,125
61,700 Gadzooks, Inc.(c).......................................... 1,126,025
30,600 Gucci Group................................................ 1,954,575
3,600 Loehmann's, Inc.(c)........................................ 82,800
15,500 The Finish Line............................................ 327,438
------------
TOTAL APPAREL.............................................. 4,703,813 0.93%
------------
AUTOMOTIVE PRODUCTS
37,300 Donnelly Corp. ............................................ 913,850 0.18%
------------
BANKS
144,000 American Federal Bank...................................... 2,718,000
68,873 First Republic BanCorp, Inc.(c)............................ 1,153,623
125,600 First Savings Bank of Washington........................... 2,307,900
71,535 First Union Corp. ......................................... 5,293,590
158,330 HUBCO, Inc. ............................................... 3,879,085
116,400 Norwalk Savings Society(a)................................. 2,720,850
110,000 Peoples Bank............................................... 3,176,250
160,000 Roosevelt Financial Group, Inc. ........................... 3,360,000
145,400 Sterling Financial Corp.(c)................................ 2,053,775
------------
TOTAL BANKS................................................ 26,663,073 5.26%
------------
BUILDING MATERIALS
10,000 Penn-America Group, Inc.(c)................................ 161,250 0.03%
------------
BUSINESS SERVICES
80,800 Accustaff, Inc.(a)(c)...................................... 1,706,900
56,500 Alternative Resources Corp.(c)............................. 981,687
54,800 American Business Information(c)........................... 1,219,300
10,000 CSS Industries, Inc. ...................................... 260,000
30,000 F.Y.I., Inc. .............................................. 626,250
41,900 Iron Mountain, Inc.(c)..................................... 1,267,475
</TABLE>
See notes to financial statements.
F-53
<PAGE> 144
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
BUSINESS SERVICES (CONTINUED)
70,000 Labor Ready, Inc. ......................................... $ 945,000
51,600 Manpower, Inc. ............................................ 1,677,000
------------
TOTAL BUSINESS SERVICES.................................... 8,683,612 1.71%
------------
CHEMICALS
70,576 TETRA Tech, Inc.(c)........................................ 1,393,876 0.27%
------------
COMMERCIAL SERVICES
49,500 Greenwich Air Services -- Class B.......................... 1,101,375
128,300 Protection One, Inc.(a).................................... 1,266,962
------------
TOTAL COMMERCIAL SERVICES.................................. 2,368,337 0.47%
------------
COMPUTERS AND OFFICE EQUIPMENT
70,000 Amplicon, Inc. ............................................ 1,382,500
49,600 Applix, Inc.(c)............................................ 1,085,000
118,550 Cable Design Technologies(c)............................... 3,689,869
36,200 CIBER, Inc.(a)(c).......................................... 1,086,000
61,300 Compaq Computer(c)......................................... 4,551,525
39,500 Computer Associates International, Inc. ................... 1,965,125
65,100 Comverse Technology, Inc.(c)............................... 2,461,594
18,600 Documentum, Inc.(a)(c)..................................... 627,750
31,400 Encad, Inc.(c)............................................. 1,295,250
54,400 Intel Corp.(a)............................................. 7,123,000
10,500 Jaco Electronics, Inc. .................................... 89,250
101,100 May & Speh, Inc.(c)........................................ 1,238,475
72,500 National Data Corp. ....................................... 3,153,750
35,000 Pure Atria Corp.(c)........................................ 866,250
2,820 Radius, Inc.(c)............................................ 1,498
146,300 Seagate Technology, Inc.(a)(c)............................. 5,778,850
145,300 Sterling Commerce, Inc.(a)(c).............................. 5,121,825
121,000 US Office Products Company(a).............................. 4,129,125
35,100 Visio Corp.(a)(c).......................................... 1,737,450
------------
TOTAL COMPUTERS AND OFFICE EQUIPMENT....................... 47,384,086 9.34%
------------
COMPUTER SOFTWARE AND SERVICES
46,120 Aspen Technologies, Inc.(c)................................ 3,701,130
76,100 Cadence Design Systems, Inc.(c)............................ 3,024,975
131,500 Cambridge Technology Partners(c)........................... 4,413,469
28,500 INSO Corp.(a)(c)........................................... 1,132,875
53,300 JDA Software Group, Inc.(c)................................ 1,519,050
41,300 National Computer System, Inc. ............................ 1,053,150
52,800 Network Appliance, Inc.(c)................................. 2,686,200
</TABLE>
See notes to financial statements.
F-54
<PAGE> 145
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
COMPUTER SOFTWARE AND SERVICES (CONTINUED)
19,800 Parametric Technology Corp.(c)............................. $ 1,017,225
29,000 Platinum Entertainment(c).................................. 232,000
43,700 Project Software & Development(c).......................... 1,851,789
85,200 Rational Software Corp.(a)(c).............................. 3,370,725
24,400 Renaissance Solutions, Inc.(c)............................. 1,091,900
41,900 Sapient Corp.(c)........................................... 1,765,038
19,500 Scopus Technology, Inc.(c)................................. 906,750
18,800 Sterling Software(a)(c).................................... 594,550
69,900 Ultrak, Inc.(c)............................................ 2,131,950
33,600 Veritas Software Corp.(c).................................. 1,671,600
59,500 Whittman-Hart, Inc.(c)..................................... 1,524,688
68,200 Wind River Systems(c)...................................... 3,230,975
------------
TOTAL COMPUTER SOFTWARE AND SERVICES....................... 36,920,039 7.29%
------------
CONSTRUCTION
173,300 Daniel Industries.......................................... 2,556,175
90,000 Michael Baker Corp.(c)..................................... 573,750
------------
TOTAL CONSTRUCTION......................................... 3,129,925 0.62%
------------
CONSUMER GOODS AND SERVICES
67,500 Blyth Industries, Inc.(a)(c)............................... 3,079,687
38,900 Carriage Services, Inc.(c)................................. 870,387
39,500 CUC International, Inc.(c)................................. 938,125
83,300 Helen of Troy, Ltd. ....................................... 1,832,600
42,000 LSI LTG Systems, Inc. ..................................... 556,500
69,000 Parlux Fragrances, Inc.(c)................................. 284,625
------------
TOTAL CONSUMER GOODS AND SERVICES.......................... 7,561,924 1.49%
------------
EDUCATION
53,900 Alrenco, Inc.(c)........................................... 572,688
179,825 ITT Educational Services, Inc.(c).......................... 4,158,453
152,500 Kinder Care Learning Centers(c)............................ 2,859,375
32,700 Landauer, Inc. ............................................ 801,150
37,650 Learning Tree International(c)............................. 1,110,675
569,100 National Education Corp.(c)................................ 8,678,775
47,000 Sylvan, Inc.(c)............................................ 611,000
------------
TOTAL EDUCATION............................................ 18,792,116 3.70%
------------
ELECTRICAL EQUIPMENT
57,200 Sawtek, Inc.(c)............................................ 2,266,550 0.45%
------------
</TABLE>
See notes to financial statements.
F-55
<PAGE> 146
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
ELECTRONICS
200,600 Alpha Industries, Inc.(c).................................. $ 1,579,725
217,100 Charter Power Systems...................................... 6,621,550
67,500 Electro Rent Corp.(c)...................................... 1,679,062
104,600 Fore Systems, Inc.(c)...................................... 3,438,725
59,300 Gentex Corp.(c)............................................ 1,193,412
141,400 ILC Technology, Inc.(c).................................... 1,838,200
46,200 Input/Output, Inc.(c)...................................... 854,700
34,700 Perceptron, Inc. .......................................... 1,188,475
79,530 Richardson Electronics..................................... 656,123
40,000 Sanmina Corp.(a)(c)........................................ 2,260,000
65,730 Sterling Electronics(c).................................... 879,139
29,100 Uniphase Corp.(c).......................................... 1,527,750
36,800 Vitesse Semiconductor Corp.(c)............................. 1,674,400
------------
TOTAL ELECTRONICS.......................................... 25,391,261 5.01%
------------
ENGINEERING
19,500 Fluke Corp. ............................................... 870,187
105,000 Rogers Corp.(c)............................................ 2,848,125
111,500 URS Corp.(c)............................................... 1,003,500
------------
TOTAL ENGINEERING.......................................... 4,721,812 0.93%
------------
ENVIRONMENTAL MANAGEMENT SERVICES
114,900 ABM Industries, Inc. ...................................... 2,125,650
53,000 American Disposal Services(c).............................. 980,500
34,300 BHA Group, Inc. ........................................... 553,088
59,500 National Sanitary Supply................................... 780,938
54,000 Newpark Resources, Inc.(c)................................. 2,011,500
66,200 Republic Industries, Inc.(a)(c)............................ 2,064,613
30,000 Superior Services, Inc.(c)................................. 611,250
96,900 United Waste Systems, Inc.(c).............................. 3,330,938
96,550 US Filter Corp.(a)(c)...................................... 3,065,462
------------
TOTAL ENVIRONMENTAL MANAGEMENT SERVICES.................... 15,523,939 3.06%
------------
FINANCE
161,700 Allied Capital Advisers, Inc.(c)........................... 929,775
108,500 Allied Capital Commercial Corp. ........................... 2,522,625
83,500 Allied Capital Corp. ...................................... 1,315,125
85,392 Allied Capital Lending Company............................. 1,302,228
30,000 CACI International, Inc.(c)................................ 630,000
125,200 Cash American Investments, Inc. ........................... 1,064,200
106,470 Charter One Financial, Inc. ............................... 4,471,740
</TABLE>
See notes to financial statements.
F-56
<PAGE> 147
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
FINANCE (CONTINUED)
46,588 Concord EFS, Inc.(c)....................................... $ 1,316,097
80,100 ContiFinancial Corp.(c).................................... 2,893,613
28,000 Dollar Tree Stores, Inc.(c)................................ 1,071,000
27,500 Phoenix Duff & Phelps Corp. ............................... 195,937
42,700 Sirrom Capital Corp. ...................................... 1,569,225
95,500 The Money Store, Inc.(a)................................... 2,638,188
60,000 Washington Mutual, Inc. ................................... 2,598,750
------------
TOTAL FINANCE.............................................. 24,518,503 4.83%
------------
FOOD AND BEVERAGE
54,900 CKE Restaurants, Inc. ..................................... 1,976,400
21,200 Culligan Water Technologies(c)............................. 858,600
1,300 Dairymart Convenient Stores -- Class A(c).................. 5,850
27,200 Glacier Water Services, Inc.(c)............................ 622,200
52,000 Landry's Seafood Restaurants(c)............................ 1,111,500
238,300 Ruby Tuesday, Inc.(c)...................................... 4,408,550
26,700 Scotsman Industries, Inc. ................................. 630,788
------------
TOTAL FOOD AND BEVERAGE.................................... 9,613,888 1.90%
------------
FORESTRY PRODUCTS
31,000 Fibreboard Corp.(c)........................................ 1,046,250 0.21%
------------
FREIGHT AND CARGO
113,800 Air Express International Corp. ........................... 3,670,050
52,900 Atlas Air, Inc.(c)......................................... 2,525,975
105,474 Fritz Companies, Inc.(a)(c)................................ 1,344,794
238,700 Harper Group, Inc. ........................................ 5,669,125
40,500 Intercargo, Inc. .......................................... 346,781
190,050 Pittston Burlington Group.................................. 3,801,000
------------
TOTAL FREIGHT AND CARGO.................................... 17,357,725 3.42%
------------
INDUSTRIAL
27,000 Zoltek Companies, Inc.(a)(c)............................... 982,125 0.19%
------------
INSURANCE
80,000 HCC Insurance Holdings, Inc. .............................. 1,920,000
38,600 National Western Life Insurance -- Class A(c).............. 3,358,200
36,200 Penn Treaty American Corp. ................................ 941,200
66,400 Western National Corp. .................................... 1,278,200
208,800 Willis Corroon Group (ADR)................................. 2,401,200
------------
TOTAL INSURANCE............................................ 9,898,800 1.95%
------------
</TABLE>
See notes to financial statements.
F-57
<PAGE> 148
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
LEISURE AND RECREATION
46,700 Dover Downs Entertainment(c)............................... $ 834,762
61,300 Harveys Casinos Resorts.................................... 1,034,437
41,500 HFS, Inc.(c)............................................... 2,479,625
28,000 Nimbus CD International, Inc.(c)........................... 238,000
16,800 Sun International Hotels, Ltd.(a).......................... 613,200
------------
TOTAL LEISURE AND RECREATION............................... 5,200,024 1.03%
------------
MACHINERY
76,000 K-Tron International, Inc.(c).............................. 779,000
70,100 Varco International, Inc. ................................. 1,621,062
------------
TOTAL MACHINERY............................................ 2,400,062 0.47%
------------
MANUFACTURING
56,000 Chase Brass Industries, Inc.(c)............................ 1,113,000
52,700 DT Industries, Inc. ....................................... 1,844,500
139,800 Lydall, Inc.(c)............................................ 3,145,500
33,050 Watsco, Inc. .............................................. 954,319
------------
TOTAL MANUFACTURING........................................ 7,057,319 1.39%
------------
MEDIA
75,000 Golden Books Family Entertainment(c)....................... 834,375
119,800 Granite Broadcasting Corp.(a)(c)........................... 1,272,875
85,500 Houghton Mifflin Company................................... 4,841,437
19,500 Premiere Radio Networks, Inc.(c)........................... 246,187
50,500 Premiere Radio Networks -- Class A(c)...................... 637,562
308,600 Steck Vaughn Publishing Corp.(c)........................... 3,394,600
------------
TOTAL MEDIA................................................ 11,227,036 2.21%
------------
MEDICAL AND OTHER HEALTH SERVICES
128,600 Advocat, Inc.(c)........................................... 932,350
46,300 Chemed Corp. .............................................. 1,689,950
69,000 Community Care of America(c)............................... 284,625
72,600 Gulf South Medical Supply, Inc.(c)......................... 1,860,375
54,400 HBO & Company.............................................. 3,230,000
33,200 Hologic, Inc.(c)........................................... 821,700
61,300 Lifeline Systems, Inc.(c).................................. 1,072,750
39,900 Living Centers Of America(c)............................... 1,107,225
138,000 Morrison Health Care, Inc. ................................ 2,035,500
2,000 Neuromedical Systems, Inc. ................................ 26,500
83,700 Omnicare, Inc. ............................................ 2,688,862
60,100 Ornda HealthCorp.(c)....................................... 1,757,925
71,600 Orthodontic Centers Of America(a)(c)....................... 1,145,600
</TABLE>
See notes to financial statements.
F-58
<PAGE> 149
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
MEDICAL AND OTHER HEALTH SERVICES (CONTINUED)
285,000 Owens & Minor Holding Company.............................. $ 2,921,250
4,000 Pacificare Health Systems -- Class B....................... 341,000
48,600 Physician Sales & Service(c)............................... 698,625
36,100 Quintiles Transnational Corp.(a)(c)........................ 2,391,625
45,000 Quorum Health Group, Inc.(c)............................... 1,338,750
109,600 Renal Treatment Centers, Inc.(c)........................... 2,794,800
55,200 Retirement Care Associates(c).............................. 455,400
28,000 Summit Care Corp.(c)....................................... 458,500
48,400 Sunrise Assisted Living, Inc.(c)........................... 1,349,150
27,000 Target Therapeutics, Inc.(c)............................... 1,134,000
194,400 Universal Health Services -- Class B(c).................... 5,564,700
------------
TOTAL MEDICAL AND OTHER HEALTH SERVICES.................... 38,101,162 7.51%
------------
METALS AND MINING
38,500 Furon Company.............................................. 818,125
52,200 RMI Titanium Company(a)(c)................................. 1,468,125
29,300 Wolverine Tube, Inc.(c).................................... 1,032,825
------------
TOTAL METALS AND MINING.................................... 3,319,075 0.65%
------------
OIL AND GAS
87,900 Berry Petroleum............................................ 1,263,562
64,100 Pool Energy Services(c).................................... 985,537
49,000 Pride Petroleum Services, Inc.(a)(c)....................... 1,139,250
14,800 Schlumberger, Ltd. ........................................ 1,478,150
78,900 Tosco Corp. ............................................... 6,242,962
46,400 World Fuel Services Corp. ................................. 1,032,400
------------
TOTAL OIL AND GAS.......................................... 12,141,861 2.39%
------------
PHARMACEUTICALS
56,000 Applied Analytical Industries, Inc.(c)..................... 1,071,000
66,800 Dura Pharmaceuticals, Inc.(c).............................. 3,189,700
1,059 Gensia, Inc.(c)............................................ 4,898
27,300 Jones Medical Industries, Inc. ............................ 999,863
33,400 NCS HealthCare, Inc. -- Class A(c)......................... 972,775
26,500 Parexel International Corp.(c)............................. 1,368,062
------------
TOTAL PHARMACEUTICALS...................................... 7,606,298 1.50%
------------
REAL ESTATE INVESTMENT TRUST
115,900 Equity Inns, Inc. ......................................... 1,506,700
32,800 Health Care Property Investments, Inc. .................... 1,148,000
39,000 Remedy Corp.(c)............................................ 2,096,250
</TABLE>
See notes to financial statements.
F-59
<PAGE> 150
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
REAL ESTATE INVESTMENT TRUST (CONTINUED)
57,800 RFS Hotel Investors, Inc. ................................. $ 1,141,550
44,500 Roc Communities, Inc. ..................................... 1,234,875
35,000 Sun Communities, Inc. ..................................... 1,207,500
------------
TOTAL REAL ESTATE INVESTMENT TRUST......................... 8,334,875 1.64%
------------
RETAIL
29,000 ACC Corp. ................................................. 877,250
86,300 American Safety Razor Company(c)........................... 1,208,200
50,750 Chicago Miniature Lamp, Inc.(c)............................ 2,106,125
139,000 Consolidated Stores Corp.(c)............................... 4,465,375
75,100 Fred's, Inc. .............................................. 647,737
175,000 MacFrugals Bargains Close-Outs(c).......................... 4,571,875
155,200 Michael Anthony Jewelers, Inc.(c).......................... 475,300
43,000 Uni-Marts, Inc. ........................................... 247,250
57,200 Vitalink Pharmacy Services(a)(c)........................... 1,315,600
11,900 Wet Seal, Inc. -- Class A(c)............................... 254,362
------------
TOTAL RETAIL............................................... 16,169,074 3.19%
------------
SECURITY SYSTEMS
32,600 ADT, Ltd.(c)............................................... 745,725
78,000 Corestaff, Inc.(c)......................................... 1,847,625
201,000 Pittston Brink's Group..................................... 5,427,000
36,700 Quantum Corp.(a)(c)........................................ 1,050,538
309,300 Sensormatic Electronics Corp.(a)........................... 5,180,775
------------
TOTAL SECURITY SYSTEMS..................................... 14,251,663 2.81%
------------
TELECOMMUNICATIONS
82,700 Aaron Rents, Inc. -- Class B............................... 982,063
47,000 Act Networks, Inc.(c)...................................... 1,715,500
7,900 American Telephone & Telegraph Corp. ...................... 343,650
11,900 Andrew Corp.(c)............................................ 631,444
69,500 Arch Communications Group, Inc.(c)......................... 651,563
76,100 Ascend Communications, Inc.(c)............................. 4,727,712
67,200 Aspect Telecommunication Corp.(c).......................... 4,267,200
6,275 Associated Group, Inc. -- Class A(c)....................... 192,956
25,675 Associated Group, Inc. -- Class B(c)....................... 763,831
19,800 Cascade Communications Corp.(c)............................ 1,091,475
15,700 Cellular Communications of Puerto Rico(c).................. 310,075
131,575 Centennial Cellular Corp. -- Class A(c).................... 1,595,347
23,500 CFW Communications Company................................. 519,938
38,100 Commnet Cellular, Inc.(c).................................. 1,062,037
</TABLE>
See notes to financial statements.
F-60
<PAGE> 151
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
124,400 Communications Central, Inc.(c)............................ $ 964,100
33,500 Data Transmission Network(c)............................... 745,375
62,000 Davel Communications Group(c).............................. 1,131,500
45,600 Davox Corp.(a)(c).......................................... 1,881,000
59,200 DSP Communications, Inc.(c)................................ 1,147,000
29,700 Emmis Broadcasting Corp. -- Class A........................ 972,675
55,000 Gray Communications System................................. 1,038,125
78,100 Inter Tel, Inc.(c)......................................... 1,483,900
119,400 Jones Intercable, Inc. -- Class A(c)....................... 1,238,775
102,800 Loral Space & Communications............................... 1,888,950
65,000 Midcom Communications, Inc.(c)............................. 552,500
120,200 Nokia Corp. (ADR).......................................... 6,926,525
4,300 Osborn Communications Corp.(c)............................. 64,030
74,500 P-Com, Inc.(c)............................................. 2,207,063
72,300 Premisys Communications, Inc.(c)........................... 2,440,124
109,100 Pronet, Inc.(c)............................................ 477,312
19,800 Qualcom, Inc.(c)........................................... 789,525
47,100 Saga Communications, Inc.(c)............................... 918,450
71,000 Sitel Corp.(c)............................................. 1,002,875
29,600 Vanguard Cellular Systems, Inc. -- Class A(c).............. 466,200
66,100 Wireless Telecom Group, Inc. .............................. 684,538
------------
TOTAL TELECOMMUNICATIONS................................... 47,875,333 9.44%
------------
TOBACCO
19,800 Philip Morris Companies, Inc. ............................. 2,229,975 0.44%
------------
TRANSPORTATION
215,000 Airborne Freight Corp. .................................... 5,025,625
198,700 CNF Transportation, Inc. .................................. 4,421,075
65,000 Sea Containers, Ltd. ...................................... 1,015,625
21,900 Seacor Holdings, Inc.(c)................................... 1,379,700
------------
TOTAL TRANSPORTATION....................................... 11,842,025 2.33%
------------
UTILITIES
600,000 El Paso Electric Company(c)................................ 3,900,000 0.77%
------------ ------
Total Common Stock (Cost $392,527,734)..................... 470,186,517 92.69%
------------ ------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
22,801,372 Merrimac Cash Fund -- Premium Class (Cost $22,801,372)(b).. 22,801,372 4.49%
------------
</TABLE>
See notes to financial statements.
F-61
<PAGE> 152
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
TIME DEPOSITS
$ 7,491,678 First National Bank of Boston, 7.10%, 01/02/97(b).......... $ 7,493,636
5,000,000 Harris Trust & Savings Bank, 6.50%, 01/02/97(b)............ 5,001,252
19,000,000 Republic New York Securities Corp., 7.15%, 07/15/97(b)..... 19,004,756
------------
TOTAL TIME DEPOSITS (Cost $31,499,644)..................... 31,499,644 6.21%
------------ -------
TOTAL SECURITIES (Cost $446,828,750)....................... 524,487,533 103.39%
------------ -------
REPURCHASE AGREEMENTS
23,538,299 With Investor's Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $23,546,027, 01/02/97
(Collateralized by various United States Government
Agency Obligations, 6.50% -- 7.99%, due 05/20/22 to
02/20/26, with a total value of $24,715,268) (Cost
$23,542,163)............................................. 23,542,163
12,756,338 With Investor's Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $12,760,526, 01/02/97
(Collateralized by Federal Home Loan Mortgage
Corporation, 8.21%, due 11/01/23 with a value of
$4,975,533 and Federal National Mortgage Association,
6.46%, due 01/25/25 with a value of $8,419,058) (Cost
$12,758,432)............................................. 12,758,432
4,016,318 With Investor's Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $4,017,636 01/02/97
(Collateralized by Federal National Mortgage Association,
6.91%, due 07/01/18 with a value of $4,217,753) (Cost
$4,016,977).............................................. 4,016,977
4,508,214 With Investor's Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $4,509,694 01/02/97
(Collateralized by Federal Home Loan Mortgage
Corporation, 7.41%, due 04/01/24 with a value of
$4,733,999) (Cost $4,508,954)............................ 4,508,954
------------
TOTAL REPURCHASE AGREEMENTS (Cost $44,826,526)............. 44,826,526 8.84%
------------ -------
Total Investments (Cost $491,655,276)...................... 569,314,059 112.23%
Other assets less liabilities.............................. (62,049,816) (12.23)%
------------ -------
NET ASSETS................................................. $507,264,243 100.00%
=========== ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $494,020,516.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation.............................. $ 94,819,037
Gross unrealized depreciation.............................. (19,525,494)
------------
Net unrealized appreciation................................ $ 75,293,543
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan.
(b) Collateral for securities on loan.
(c) Non-income producing security.
(ADR) -- American Depository Receipt
See notes to financial statements.
F-62
<PAGE> 153
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
COMMON STOCK
BUILDING AND CONSTRUCTION
15,500 Eagle Hardware & Garden, Inc.(c)............................. $ 321,624 2.08%
----------
COMPUTERS AND OFFICE EQUIPMENT
9,000 Dell Computer Corp.(c)....................................... 478,125
7,300 Dynatech Corp.(c)............................................ 323,025
10,000 EMC Corp. ................................................... 331,250
11,400 Encad, Inc.(c)............................................... 470,250
20,000 Innovex, Inc. ............................................... 540,000
3,000 Intel Corp. ................................................. 392,813
3,000 Microsoft Corp.(c)........................................... 247,875
24,800 Siebel Systems, Inc.(c)...................................... 669,600
15,000 Sun Microsystems, Inc.(c).................................... 385,313
13,700 Tech Data Corp. ............................................. 375,038
7,000 Western Digital(c)........................................... 398,125
----------
TOTAL COMPUTERS AND OFFICE EQUIPMENT......................... 4,611,414 29.79%
----------
COMPUTER SOFTWARE AND SERVICES
8,000 3Com Corp.(c)................................................ 587,000
5,000 BMC Software, Inc.(c)........................................ 206,875
24,100 Chips & Tech, Inc.(c)........................................ 439,825
6,300 Compaq Computer(c)........................................... 467,775
10,000 Compuware Corp.(c)........................................... 501,250
4,000 Electronics for Imaging(c)................................... 329,000
6,000 McAfee Associates, Inc.(c)................................... 264,000
4,000 Parametric Technology Corp.(c)............................... 205,500
10,300 Scopus Technology, Inc.(c)................................... 478,950
----------
TOTAL COMPUTER SOFTWARE AND SERVICES......................... 3,480,175 22.48%
----------
ELECTRICAL EQUIPMENT
15,900 American Power Conversion Corp.(c)........................... 433,275
7,800 Microchip Technology, Inc.(c)................................ 396,825
8,000 Sanmina Corp.(c)............................................. 452,000
----------
TOTAL ELECTRICAL EQUIPMENT................................... 1,282,100 8.28%
----------
FINANCE
6,700 Student Loan Marketing Association........................... 623,938 4.03%
----------
MEDICAL AND OTHER HEALTH SERVICES
10,000 Jones Medical Industries, Inc. .............................. 366,250
40,000 Molecular Dynamics, Inc. .................................... 430,000
----------
TOTAL MEDICAL AND OTHER HEALTH SERVICES...................... 796,250 5.14%
----------
</TABLE>
See notes to financial statements.
F-63
<PAGE> 154
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ---------- -----
<C> <S> <C> <C>
TECHNOLOGY
17,100 Boston Technology............................................ $ 491,625 3.18%
----------
TELECOMMUNICATIONS
15,000 ADC Telecommunications, Inc.(c).............................. 466,874
6,500 Ascend Communications, Inc.(c)............................... 403,813
15,000 Brightpoint, Inc.(c)......................................... 446,250
5,000 Cascade Communications Corp.(c).............................. 275,625
7,000 Cisco Systems, Inc.(c)....................................... 445,375
13,700 Digital Microwave Corp.(c)................................... 381,887
12,000 Pairgain Technologies, Inc.(c)............................... 365,250
10,800 Tellabs, Inc.(c)............................................. 406,350
----------
TOTAL TELECOMMUNICATIONS..................................... 3,191,424 20.62%
---------- -----
TOTAL SECURITIES (Cost $14,563,091).......................... 14,798,550 95.60%
---------- -----
PRINCIPAL
- ----------
REPURCHASE AGREEMENT
$1,393,369 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $1,393,826, 01/02/97
(Collateralized by Federal National Mortgage Association,
6.55%, due 07/01/18 with a value of $1,463,118) (Cost
$1,393,598)................................................ 1,393,598 9.01%
---------- -----
Total Investments (Cost $15,956,689)......................... 16,192,148 104.61%
Other assets less liabilities................................ (713,018) (4.61)%
---------- -----
NET ASSETS................................................... $15,479,130 100.00%
========== =====
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $15,956,689.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation................................ $ 889,406
Gross unrealized depreciation................................ (653,947)
-----------
Net unrealized appreciation.................................. $ 235,459
==========
</TABLE>
- ---------------
(c) Non-income producing security
See notes to financial statements.
F-64
<PAGE> 155
HIGH YIELD BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES
AEROSPACE
$ 250,000 BE Aerospace, 9.75%, 03/01/03............................... $ 261,875 1.70%
-----------
AUTOMOTIVE PRODUCTS
225,000 Speedy Muffler King, Inc., 10.875%, 10/01/06................ 241,313 1.57%
-----------
APPAREL
300,000 William Carter, 10.375%, 12/01/06........................... 310,500 2.02%
-----------
BUSINESS SERVICES
180,000 Iron Mountain, 10.125%, 10/01/06............................ 190,800 1.24%
-----------
CHEMICAL
150,000 Collins & Aikman Products, 11.50%, 04/15/06................. 163,313
80,000 Foamex Limited Partnership, 11.25%, 10/01/02................ 85,200
240,000 General Chemical, Inc., 9.25%, 08/15/03..................... 245,400
-----------
TOTAL CHEMICAL.............................................. 493,913 3.22%
-----------
CONSTRUCTION
120,000 Toll Corp., 10.50%, 03/15/02................................ 124,200 0.81%
-----------
CONSUMER GOODS AND SERVICES
175,000 Purina Mills, 10.25%, 09/01/03.............................. 180,687 1.18%
-----------
ELECTRONICS
100,000 Calpine Corp., 9.25%, 02/01/04.............................. 99,875 0.65%
-----------
ENVIRONMENTAL MANAGEMENT
350,000 Allied Waste North America, 10.25%, 12/01/06................ 367,063 2.39%
-----------
FINANCE
320,000 Comcast Corp., 9.125%, 10/15/06............................. 327,200
210,000 Costilla Energy, 10.25%, 10/01/06........................... 220,763
300,000 Hawk Corp., 10.25%, 12/01/03................................ 307,500
130,000 ISP Holdings, Inc., 9.75%, 02/15/02......................... 135,525
400,000 Mesa Operating, 11.625%, 07/01/06........................... 276,000
205,000 Muzak LP/Capital, 10.00%, 10/01/03.......................... 209,612
100,000 Primark Corp., 8.75%, 10/15/00.............................. 101,000
150,000 Rayovac Corp., 10.25%, 11/01/06............................. 153,750
-----------
TOTAL FINANCE............................................... 1,731,350 11.26%
-----------
FOOD AND BEVERAGE
250,000 Ameriking, Inc., 10.75%, 12/01/06........................... 258,750
100,000 Cott Corp., 9.375%, 07/01/05................................ 102,500
160,000 Jitney-Jungle Stores, 12.00%, 03/01/06...................... 169,600
</TABLE>
See notes to financial statements.
F-65
<PAGE> 156
HIGH YIELD BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
FOOD AND BEVERAGE (CONTINUED)
$ 150,000 Ralphs Grocery, 10.45%, 06/15/04............................ $ 159,375
120,000 Smith Food & Drug, 11.25%, 05/15/07......................... 132,600
-----------
TOTAL FOOD AND BEVERAGE..................................... 822,825 5.35%
-----------
FOREST AND PAPER PRODUCTS
125,000 Repap New Brunswick, 9.875%, 07/15/00....................... 128,125
150,000 Scotts Company, 9.875%, 08/01/04............................ 156,750
-----------
TOTAL FOREST AND PAPER PRODUCTS............................. 284,875 1.85%
-----------
INDUSTRIAL
200,000 Bell & Howell Company, 0.00%, 03/01/05...................... 145,500
300,000 Clark Materials, 10.75%, 11/15/06........................... 312,000
180,000 Oregon Steel Mills, 11.00%, 06/15/03........................ 191,250
140,000 Riverwood International, 10.25%, 04/01/06................... 137,900
100,000 Schuller International Group, 10.875%, 12/15/04............. 111,375
100,000 Teekay Shipping, 8.32%, 02/01/08............................ 99,625
280,000 Westpoint Stevens, 9.375%, 12/15/05......................... 288,400
-----------
TOTAL INDUSTRIAL............................................ 1,286,050 8.37%
-----------
LEISURE AND RECREATION
200,000 Act III Theatres, 11.875%, 02/01/03......................... 216,000
100,000 Host Marriott Travel Plaza, 9.50%, 05/15/05................. 104,375
250,000 Trump Atlantic City, 11.25%, 05/01/06....................... 247,500
-----------
TOTAL LEISURE AND RECREATION................................ 567,875 3.69%
-----------
MACHINERY
100,000 Carrols Corp., 11.50%, 08/15/03............................. 105,750
80,000 Clark USA, Inc., 10.875%, 12/01/05.......................... 82,200
150,000 Mettler Toledo, 9.75%, 10/01/06............................. 157,500
175,000 Scotsman Group, 9.50%, 12/15/00............................. 180,687
-----------
TOTAL MACHINERY............................................. 526,137 3.42%
-----------
MANUFACTURING
150,000 American Standard Senior Notes, 10.875%, 05/15/99........... 160,125
225,000 Buckeye Cellulose Corp., 8.50%, 12/05/05.................... 225,562
75,000 IDEX Corp., 9.75%, 09/15/02................................. 78,750
190,000 Unisys Corp., 12.00%, 04/15/03.............................. 203,300
250,000 Viking Star Ship, 9.625%, 07/15/03.......................... 261,250
100,000 Westinghouse Air, 9.375%, 06/15/05.......................... 102,500
-----------
TOTAL MANUFACTURING......................................... 1,031,487 6.71%
-----------
</TABLE>
See notes to financial statements.
F-66
<PAGE> 157
HIGH YIELD BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
MEDIA
$ 100,000 ARA Group, 8.50%, 06/01/03.................................. $ 104,182
200,000 Infinity Broadcasting, 10.375%, 03/15/02.................... 212,000
50,000 Jones Intercable, 9.625%, 03/15/02.......................... 52,500
125,000 Rogers Cablesystems, Ltd., 11.00%, 12/01/15................. 134,062
190,000 Rogers Cantel, 9.375%, 06/01/08............................. 199,025
250,000 Viacom International, 8.00%, 07/07/06....................... 239,206
-----------
TOTAL MEDIA................................................. 940,975 6.12%
-----------
MEDICAL AND OTHER HEALTH SERVICES
150,000 NL Industries, Inc., 11.75%, 10/15/03....................... 158,625
210,000 Owens & Minor, Inc., 10.875%, 06/01/06...................... 225,750
120,000 Quorum Health, 8.75%, 11/01/05.............................. 123,150
-----------
TOTAL MEDICAL AND OTHER HEALTH SERVICES..................... 507,525 3.30%
-----------
METALS AND MINING
250,000 Freeport McMoran Resource Partners, 8.75%, 02/15/04......... 259,756
180,000 Renco Metals Senior Notes, 11.50%, 07/01/03................. 188,550
-----------
TOTAL METALS AND MINING..................................... 448,306 2.92%
-----------
OIL AND GAS
175,000 Gulf Canada Resources, Ltd., 9.25%, 01/15/04................ 185,500
230,000 Vintage Petroleum Senior Subordinated Notes, 9.00%,
12/15/05.................................................. 235,750
-----------
TOTAL OIL AND GAS........................................... 421,250 2.74%
-----------
PUBLISHING
210,000 Hollinger International Publishing, 9.25%, 02/01/06......... 207,900.... 1.35%
-----------
RETAIL
175,000 Finlay Fine Jewelry, 10.625%, 05/01/03...................... 182,875.... 1.19%
-----------
TELECOMMUNICATIONS
200,000 Allbritton Communications, 11.50%, 08/15/04................. 211,000
250,000 Century Communications, 9.75%, 02/15/02..................... 257,500
200,000 Essex Group, 10.00%, 05/01/03............................... 207,500
250,000 Gray Communication System, Inc., 10.625%, 10/01/06.......... 264,375
275,000 Jacor Communications, 9.75%, 12/15/06....................... 280,844
100,000 Lenfest Communications, 8.375%, 11/01/05.................... 96,625
50,000 Lenfest Communications, 10.50%, 06/15/06.................... 52,750
-----------
TOTAL TELECOMMUNICATIONS.................................... 1,370,594 8.92%
-----------
</TABLE>
See notes to financial statements.
F-67
<PAGE> 158
HIGH YIELD BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
TRANSPORTATION
$ 200,000 Sea Containers, 9.50%, 07/01/03............................. $ 201,500 1.31%
-----------
UTILITIES -- ELECTRIC
200,000 California Energy Company, Inc., 9.875%, 6/30/03............ 211,000
200,000 El Paso Electric Company, 8.90%, 02/01/06................... 211,000
110,000 El Paso Electric Company, 9.40%, 05/01/11................... 117,700
-----------
TOTAL UTILITIES -- ELECTRIC................................. 539,700 3.51%
----------- -------
TOTAL SECURITIES (Cost $12,969,120)......................... 13,341,450 86.79%
----------- -------
REPURCHASE AGREEMENT
1,751,164 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $1,751,739, 01/02/97
(Collateralized by Federal Home Loan Mortgage Corporation
6.84%, due 11/15/23, with a value of $1,843,413) (Cost
$1,751,451)............................................... 1,751,451 11.39%
----------- -------
Total Investments (Cost $14,720,571)........................ 15,092,901 98.18%
Other assets less liabilities............................... 279,785 1.82%
----------- -------
NET ASSETS.................................................. $15,372,686 100.00%
=========== =======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $14,720,571.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation............................... $ 397,366
Gross unrealized depreciation............................... (25,036)
-----------
Net unrealized appreciation................................. $ 372,330
==========
</TABLE>
See notes to financial statements.
F-68
<PAGE> 159
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------ -------- -------
<C> <S> <C> <C> <C>
COMMON STOCKS AND WARRANTS
AEROSPACE
99,400 CAE Industries................................... $ 750,579 0.51% CDA
AUTOMOBILE
17,000 Daimler Benz AG(c)............................... 1,169,287 GER
50,000 Honda Motor Company, Ltd......................... 1,425,860 JPN
67,000 Mitsubishi Motor Corp............................ 487,760 JPN
10,000 Peugeot SA(c).................................... 1,123,349 FRA
131,000 Suzuki Motor Corp................................ 1,196,344 JPN
47,000 Toyota Motor Company............................. 1,348,406 JPN
20,063 Valeo............................................ 1,234,946 FRA
2,400 Volkswagen AG.................................... 996,685 GER
25,000 Volvo Aktiebolag................................. 551,038 SWE
-------------
TOTAL AUTOMOBILE................................. 9,533,675 6.43%
-------------
BANKS
137,900 Allied Irish Banks PLC........................... 920,345 UK
15,000 Banco de Santander (ADR)......................... 952,500 SPA
2,000 Banco Popular Espanola........................... 392,081 SPA
19,000 Bangkok Bank Company, Ltd........................ 183,774 THA
330,000 Bank of Scotland................................. 1,739,364 UK
21,000 Compagnie Financierede Suez(c)................... 891,099 FRA
11,000 CS Holdings...................................... 1,126,443 SWI
1,860 Holderbank Financial Glaris -- Class B........... 1,324,295 SWI
50,515 National Westminster Bank........................ 593,021 UK
27,500 Overseas Chinese Banking Corp.................... 342,073 SIN
101,800 Thai Farmers Bank(c)............................. 635,252 THA
23,000 The Bank of Tokyo Mitsubishi..................... 426,036 JPN
196,000 Westpac Banking Corp............................. 1,114,613 AUS
-------------
TOTAL BANKS...................................... 10,640,896 7.18%
-------------
CHEMICALS
32,000 AGA AB -- Class B................................ 478,029 SWE
20,000 Norsk Hydro...................................... 1,080,592 NOR
-------------
TOTAL CHEMICALS.................................. 1,558,621 1.05%
-------------
COMPUTER SOFTWARE AND SERVICES
7,000 Softbank Corp.................................... 493,925 0.33% JPN
-------------
CONSTRUCTION
22,000 Rohm Company..................................... 1,440,509 JPN
89,000 Sekisui House, Ltd.(c)........................... 904,792 JPN
-------------
TOTAL CONSTRUCTION............................... 2,345,301 1.58%
-------------
</TABLE>
See notes to financial statements.
F-69
<PAGE> 160
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------- ------
<C> <S> <C> <C> <C>
CONSUMER GOODS AND SERVICES
17,000 Electrolux....................................... $ 985,935 SWE
20,482 EMI Group PLC.................................... 483,613 UK
32,000 Fuji Photo Film.................................. 1,053,155 JPN
12,700 Hennes & Mauritz AB -- Class B................... 1,755,822 SWE
33,000 Hoya Corp.(c).................................... 1,293,613 JPN
24,000 Izumi............................................ 334,968 JPN
99,000 Nikon Corp....................................... 1,228,224 JPN
22,200 Nintendo Corp., Ltd.............................. 1,585,577 JPN
73,203 Reckitt and Colman PLC........................... 905,711 UK
2,000 Secom Company, Ltd............................... 120,789 JPN
15,700 Sony Corp........................................ 1,026,647 JPN
175,346 Thorn PLC(c)..................................... 759,161 UK
-------------
TOTAL CONSUMER GOODS AND SERVICES................ 11,533,215 7.78%
-------------
ELECTRONICS
750 ABB AG........................................... 930,014 SWI
25,200 Bombardier, Inc. -- Class B...................... 465,149 CDA
80,000 Electrocomponents PLC............................ 631,120 UK
50,000 Hitachi Ltd...................................... 465,235 JPN
24,000 Komori Corp...................................... 508,658 JPN
12,000 Kyocera Corp..................................... 746,446 JPN
17,000 Murata Manufacturing Company, Ltd................ 563,883 JPN
28,000 Talisman Energy, Inc.(c)......................... 931,524 CDA
-------------
TOTAL ELECTRONICS................................ 5,242,029 3.54%
-------------
ENGINEERING
17,000 Chudenko Corp.................................... 489,186 0.33% JPN
-------------
ENVIRONMENTAL MANAGEMENT SERVICES
900 Kurita Water Industries.......................... 18,144 0.01% JPN
-------------
FINANCE
62,600 HSBC Holdings PLC................................ 1,398,008 UK
55,953 Lend Lease Corp., Ltd............................ 1,084,358 AUS
130,000 Lloyds TSB Group PLC(c).......................... 958,841 UK
24,000 Nomura Securities Company, Ltd................... 359,782 JPN
6,000 Shohkoh Fund..................................... 1,302,662 JPN
84,000 Wako Securities Company, Ltd..................... 434,213 JPN
-------------
TOTAL FINANCE.................................... 5,537,864 3.74%
-------------
FOOD AND BEVERAGE
98,000 Amatil Ltd., Coca Cola........................... 1,046,905 AUS
80,000 Cadbury Schweppes PLC............................ 674,936 UK
6,300 Heineken NV...................................... 1,113,776 NET
45,000 Jusco Company.................................... 1,523,646 JPN
45,600 Lion Nathan...................................... 109,217 NZE
</TABLE>
See notes to financial statements.
F-70
<PAGE> 161
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------- ------
<C> <S> <C> <C> <C>
FOOD AND BEVERAGE (CONTINUED)
900 Nestle........................................... $ 963,193 SWI
21,000 Seagrams Company, Ltd............................ 813,750 CDA
-------------
TOTAL FOOD AND BEVERAGE.......................... 6,245,423 4.22%
-------------
INDUSTRIAL
31,200 Advantest Corp................................... 1,459,602 JPN
43,000 Alcan Aluminum, Ltd.............................. 1,445,875 CDA
107,000 Kawasaki Steel................................... 306,972 JPN
60,000 Reed International, Ltd.(c)...................... 1,127,400 UK
230,000 Western Mining Corp. Holding, Ltd................ 1,448,632 AUS
-------------
TOTAL INDUSTRIAL................................. 5,788,481 3.91%
-------------
INSURANCE
161,210 Alleanza Assicuraz............................... 805,776 ITA
277,073 GIO Australian Holdings, Ltd..................... 708,586 AUS
12,000 Mapfre Vida Seguros.............................. 830,290 SPA
62,000 Mitsui Marine & Fire Insurance................... 332,779 JPN
78,000 Siebe PLC........................................ 1,446,931 UK
145,000 Yasuda Fire and Marine Insurance................. 752,043 JPN
-------------
TOTAL INSURANCE.................................. 4,876,405 3.29%
-------------
INVESTMENT HOLDING COMPANIES
395 Baloise Holdings................................. 791,340 SWI
477,000 Brierley Investments, Ltd........................ 441,464 NZE
184,000 Hutchison Whampoa................................ 1,445,118 HNG
416,000 Sime Darby Berhad................................ 1,638,957 MAL
-------------
TOTAL INVESTMENT HOLDING COMPANIES............... 4,316,879 2.91%
-------------
LEISURE AND RECREATION
162,000 Euro Disneyland SCA(c)........................... 320,954 FRA
129,200 San Miquel Corp. -- Class B...................... 569,850 PHI
-------------
TOTAL LEISURE AND RECREATION..................... 890,804 0.60%
-------------
MANUFACTURING
16,600 ABB AB -- Class A................................ 1,871,990 SWE
19,800 ASM Lithography Holding NV(c).................... 986,288 NET
8,400 Mannesmann AG.................................... 3,635,563 GER
151,000 Mitsubishi Heavy................................. 1,196,856 JPN
99,000 Morgan Crucible Company PLC...................... 740,352 UK
10,600 Orkla Borregaard................................. 672,317 NOR
30,800 Philips Electronics NV........................... 1,246,430 NET
24,600 Philips Electronics NV (ADR)..................... 984,000 NET
-------------
TOTAL MANUFACTURING.............................. 11,333,796 7.65%
-------------
</TABLE>
See notes to financial statements.
F-71
<PAGE> 162
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------- ------
<C> <S> <C> <C> <C>
MEDIA
115,000 British Sky Broadcasting PLC..................... $ 1,027,284 UK
2,037 Canal Plus(c).................................... 449,032 FRA
17,100 Grupo Televisa (GDR)(c).......................... 438,188 MEX
69,440 News Corp., Ltd.................................. 366,213 AUS
30,000 News Corp., Ltd. (ADR)........................... 626,250 AUS
53,000 Rogers Communications -- Class B(c).............. 390,541 CDA
49,000 Singapore Press Holdings, Ltd.................... 966,814 SIN
100,000 Television Broadcasts, Ltd....................... 399,480 HNG
111,000 Thomson Corp..................................... 2,441,385 CDA
35,000 Tokyo Broadcasting............................... 533,729 JPN
-------------
TOTAL MEDIA...................................... 7,638,916 5.15%
-------------
MEDICAL AND OTHER HEALTH SERVICES
7,400 Synthelabo(c).................................... 798,539 0.54% FRA
-------------
METALS AND MINING
46,000 Inco, Ltd........................................ 1,466,250 CDA
29,863 Pechiney SA -- Class A........................... 1,248,805 FRA
216,000 Placer Pacific, Ltd.............................. 319,097 AUS
-------------
TOTAL METALS AND MINING.......................... 3,034,152 2.05%
-------------
OIL AND GAS
98,000 British Gas Corp................................. 375,663 UK
17,200 Societe Nationale ELF-Aquitaine.................. 1,562,601 FRA
20,000 Suncor, Inc...................................... 827,500 CDA
15,000 YPF Sociedad Anonima -- (ADR).................... 378,750 ARG
-------------
TOTAL OIL AND GAS................................ 3,144,514 2.12%
-------------
PHARMACEUTICALS
59,000 Astra AB......................................... 2,911,969 SWE
8,000 Astra AB -- A Shares (ADR)(c).................... 392,000 SWE
52,000 Banyu Pharmaceutical Company..................... 725,764 JPN
20,000 Hoechst AG....................................... 943,476 GER
3,600 Hoechst AG Warrant, (Expires: 3/19/99)........... 270,039 GER
1,275 Novartis AG...................................... 1,455,681 SWI
76,000 Sankyo Company, Ltd.............................. 2,147,669 JPN
600 Zeneca Group PLC (ADR)........................... 50,400 UK
50,800 Zeneca Group PLC................................. 1,430,061 UK
-------------
TOTAL PHARMACEUTICALS............................ 10,327,059 6.97%
-------------
REAL ESTATE
62,000 City Developments................................ 558,465 SIN
103,000 Mitsui Fudosan................................... 1,029,372 JPN
-------------
TOTAL REAL ESTATE................................ 1,587,837 1.07%
-------------
</TABLE>
See notes to financial statements.
F-72
<PAGE> 163
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------- ------
<C> <S> <C> <C> <C>
TELECOMMUNICATIONS
86,000 Cable & Wireless................................. $ 718,195 UK
84 DDI Corp......................................... 554,355 JPN
12,200 Deutsche Telekom AG(c)........................... 256,886 GER
50,000 Ericsson AB -- Class B Free...................... 1,545,100 SWE
20,000 Ericsson L M Telephone (ADR)..................... 603,750 SWE
790,000 Hong Kong Telecommunications, Ltd................ 1,271,505 HNG
800 Hong Kong Telecommunications, Ltd. (ADR)......... 13,000 HNG
23,800 Nokia AB -- Class A.............................. 1,377,701 FIN
8,300 Nokia AB -- Class K.............................. 479,018 FIN
15,000 Northern Telecom, Ltd............................ 928,125 CDA
22,300 Portugal Telecom SA (ADR)........................ 629,975 POR
350,000 Technology Resources Industries.................. 690,130 MAL
456,000 Telecom Italia Mobile............................ 1,150,077 ITA
253,000 Telecom Italia Mobile DRNC....................... 360,221 ITA
18,500 Telecomunicacoes Brasileiras (ADR)............... 1,424,319 BRA
79,000 Telefonica....................................... 1,831,133 SPA
40,600 Telefonos De Mexico (ADR)........................ 1,339,800 MEX
23,000 Vodafone Group PLC (ADR)......................... 951,625 UK
-------------
TOTAL TELECOMMUNICATIONS......................... 16,124,915 10.88%
-------------
TEXTILES
74,000 Italcenenti Fabbriche Riunit..................... 413,675 ITA
28,000 Wacoal Corp...................................... 308,778 JPN
-------------
TOTAL TEXTILES................................... 722,453 0.49%
-------------
TIRE AND RUBBER
58,000 Bridgestone Corp................................. 1,099,332 0.74% JPN
-------------
TOBACCO
74,100 B.A.T. Industries................................ 613,741 UK
47,000 Imasco, Ltd...................................... 1,152,149 CDA
-------------
TOTAL TOBACCO.................................... 1,765,890 1.19%
-------------
TRANSPORTATION
50,000 Brambles Industries, Ltd......................... 974,945 AUS
189,000 Citic Pacific, Ltd............................... 1,097,088 HNG
122,000 Kawasaki Kisen................................... 277,476 JPN
1,400 Swissair......................................... 1,129,199 SWI
-------------
TOTAL TRANSPORTATION............................. 3,478,708 2.35%
-------------
UTILITIES
336,200 Consolidated Electric Power Asia................. 788,859 HNG
228,000 Hong Kong Electric............................... 757,530 HNG
79 Nippon Telegraph and Telephone Corp.............. 597,587 JPN
300 Tele Danmark -- Class B.......................... 16,528 DEN
</TABLE>
See notes to financial statements.
F-73
<PAGE> 164
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------- ------
<C> <S> <C> <C> <C>
UTILITIES (CONTINUED)
34,600 Tele Danmark (ADR)............................... $ 942,850 DEN
550,000 Telicom Italia Spa(c)............................ 1,425,158 ITA
-------------
TOTAL UTILITIES.................................. 4,528,512 3.06%
-------------
TOTAL COMMON STOCK AND WARRANTS
(Cost $123,595,817)............................ 135,846,050 91.67%
------------- ------
PREFERRED STOCKS
COMPUTER SOFTWARE AND SERVICES
4,900 Sap AG Vorzug.................................... 683,598 0.46% GER
-------------
PHARMACEUTICALS
200 Wella AG......................................... 105,898 0.07% GER
-------------
TOTAL PREFERRED STOCKS (Cost $919,409)........... 789,496 0.53%
------------- ------
PRINCIPAL
----------
CORPORATE BONDS AND NOTES
NON-CONVERTIBLE BONDS AND NOTES
BANKS
$ 243,000 Bangkok Bank Public Company, 3.25%, 03/03/04..... 237,836 0.16% THA
-------------
CONSTRUCTION
150,830 Sekisui House 2.50%, 01/31/02.................... 162,825 0.11% JPN
-------------
TOTAL NON-CONVERTIBLE BONDS AND NOTES............ 400,661 0.27%
------------- ------
CONVERTIBLE BONDS AND NOTES
BANKS
$ 136,661 Fujitsu Ltd. Series 8, 1.90%, 03/29/03........... 145,125 JPN
266,387 Fujitsu Ltd. Series 9, 1.95%, 03/31/03........... 282,576 JPN
192,638 Fujitsu Ltd. Series 10, 2.00%, 03/31/04.......... 202,629 JPN
390,000 Renong Berhad, 2.50% 01/15/05.................... 453,863 MAL
-------------
1,084,193 0.73%
-------------
TELECOMMUNICATIONS
2,000 Ericsson L M Tel, 4.25%, 06/30/00................ 8,375 0.01% SWE
-------------
TIRE AND RUBBER
270,976 Michelin CV, 6.00% 01/02/98...................... 283,746 0.19% FRA
-------------
TOTAL CONVERTIBLE BONDS AND NOTES................ 1,376,314 0.93%
------------- ------
TOTAL CORPORATE BONDS AND NOTES (Cost
$1,825,460).................................... 1,776,975 1.20%
------------- ------
TOTAL SECURITIES (Cost $126,340,686)............. 138,412,521 93.40%
------------- ------
</TABLE>
See notes to financial statements.
F-74
<PAGE> 165
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS COUNTRY
---------- ------------ -------- -------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT
With Investors Bank & Trust, dated 12/31/96,
5.91%, repurchase proceeds at maturity
$8,713,094, 01/02/97 (Collateralized by the
Federal Home Loan Mortgage Corp., 7.10%, due
05/25/23 with a value of $8,471,741 and Federal
National Mortgage Association, 6.77%, due
11/25/22 with a value of $677,555) (Cost
$8,711,664).................................... $ 8,711,664 5.88% USA
8,710,234
------------- ------
Total Investments (Cost $135,052,350)............ 147,124,185 99.28%
Other assets less liabilities.................... 1,060,712 0.72%
------------- ------
NET ASSETS....................................... $148,184,897 100.00%
============= ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $135,240,256.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C> <C>
Gross unrealized appreciation.................... $ 18,055,498
Gross unrealized depreciation.................... (6,171,569)
------------
Net unrealized appreciation...................... $ 11,883,929
===========
</TABLE>
- ---------------
(c) Non-income producing security
(ADR) -- American Depository Receipt
(GDR) -- Global Depository Receipt
See notes to financial statements.
F-75
<PAGE> 166
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT OF TOTAL
COUNTRY COMPOSITION SECURITIES AT VALUE
- --------------------------------------------------------------------------- -------------------
<S> <C>
Argentina (ARG)............................................................ 0.27%
Australia (AUS)............................................................ 5.56%
Brazil (BRA)............................................................... 1.03%
Canada (CDA)............................................................... 8.39%
Denmark (DEN).............................................................. 0.69%
Finland (FIN).............................................................. 1.34%
France (FRA)............................................................... 5.72%
Germany (GER).............................................................. 5.82%
Hong Kong (HNG)............................................................ 4.17%
Italy (ITA)................................................................ 3.00%
Japan (JPN)................................................................ 23.77%
Malaysia (MAL)............................................................. 2.01%
Mexico (MEX)............................................................... 1.28%
Netherlands (NET).......................................................... 3.13%
New Zealand (NZE).......................................................... 0.40%
Norway (NOR)............................................................... 1.27%
Philippines (PHI).......................................................... 0.41%
Portugal (POR)............................................................. 0.46%
Singapore (SIN)............................................................ 1.35%
Spain (SPA)................................................................ 2.89%
Sweden (SWE)............................................................... 8.02%
Switzerland (SWI).......................................................... 5.58%
Thailand (THA)............................................................. 0.76%
United Kingdom (UK)........................................................ 12.68%
------
TOTAL PERCENTAGE........................................................... 100.00%
======
</TABLE>
See notes to financial statements.
F-76
<PAGE> 167
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Diversified Investors Portfolios (the "Series Portfolio"), a series trust
organized on September 1, 1993, under the laws of the State of New York, is
composed of thirteen different series that are, in effect, separate investment
funds: the Money Market Series, the High Quality Bond Series, the Intermediate
Government Bond Series, the Government/Corporate Bond Series, the Balanced
Series, the Equity Income Series, the Equity Value Series, the Growth & Income
Series, the Equity Growth Series, the Special Equity Series, the Aggressive
Equity Series, the High-Yield Bond Series, and the International Equity Series
(each a "Series"). The Declaration of Trust permits the Board of Trustees to
issue an unlimited number of beneficial interests in each Series. Investors in a
Series (e.g., investment companies, insurance company separate accounts and
common and commingled trust funds) will each be liable for all obligations of
that Series (and of no other Series). The High-Yield Bond Series and
International Equity Series commenced operations on August 22, 1995 and
September 29, 1995, respectively. The Equity Value Series and Aggressive Value
Series commenced operations on April 19, 1996.
The International Equity Series was established by a redemption of assets
in-kind, valued at $77,137,079 from the Non-U.S. Equity Fund for Participant
Directed Plans within the Capital Guardian Collective Trust for Employee Benefit
Plans, a bank collective trust fund established and maintained by Capital
Guardian Trust Company, which were immediately invested at market value into the
Portfolio. The transaction was a non-taxable event.
2. SIGNIFICANT ACCOUNTING POLICIES
A. SECURITY VALUATION
Short-term securities having remaining maturities of 60 days or less
are valued at amortized cost or original cost plus accrued interest
receivable, both of which approximate value. The amortized cost of a
security is determined by valuing it at original cost and thereafter
amortizing any discount or premium at a constant rate until maturity.
Securities traded on national securities exchanges are valued at the last
sales price as of the close of business on each day or at the closing bid
price for over-the-counter securities. Equity securities are valued at the
last sale price on the exchange on which they are primarily traded or at
the bid price on the NASDAQ system for unlisted national market issues, or
at the last quoted bid price for securities not reported on the NASDAQ
system. Bonds are valued at the last available price provided by an
independent pricing service for securities traded on a national securities
exchange. Bonds that are listed on a national securities exchange but are
not traded and bonds that are regularly traded in the over-the-counter
market are valued at the mean of the last available bid and asked prices by
an independent pricing service. All other securities will be valued at
their fair value as determined by the Board of Trustees.
B. REPURCHASE AGREEMENTS
Each Series, along with other affiliated entities of the investment
advisor, may enter into repurchase agreements with financial institutions
deemed to be creditworthy by the Series investment advisor, subject to the
seller's agreement to repurchase and the Series agreement to resell such
securities at a mutually agreed upon price. Securities purchased subject to
repurchase agreements are segregated at the custodian, and pursuant to the
terms of the repurchase agreement must have an aggregate market value
greater than or equal to 102% and 105% of domestic and international
securities, respectively, of the repurchase price plus accrued interest at
all times. If the value of the underlying securities falls below the value
of the repurchase price plus accrued interest, the Series will require the
seller to deposit additional collateral by the next business day. If
F-77
<PAGE> 168
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. REPURCHASE AGREEMENTS (CONTINUED)
the request for additional collateral is not met or the seller defaults on
its repurchase obligation, the Series maintains the right to sell the
underlying securities at market value and may claim any resulting loss
against the seller. However, in the event of default or bankruptcy by the
seller, realization and/or retention of the collateral may be subject to
legal proceedings.
C. FOREIGN CURRENCY TRANSLATION
The accounting records of the International Equity Series are
maintained in U.S. dollars. The market values of foreign securities,
currency holdings and other assets and liabilities are translated to U.S.
dollars based on the prevailing exchange rates each business day. Income
and expenses denominated in foreign currencies are translated at prevailing
exchange rates when accrued or incurred. The Series does not isolate
realized gains and losses attributable to changes in exchange rates from
gains and losses that arise from changes in the market value of
investments. Such fluctuations are included with net realized and
unrealized gains or losses on investments. Net realized gains and losses on
foreign currency transactions represent net exchange gains and losses on
disposition of foreign currencies and foreign currency forward contracts
the difference between the amount of investment income receivable and
foreign withholding taxes receivable recorded on the Series' books and the
U.S. dollar equivalent of amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of assets
and liabilities other than investments in securities at fiscal year end and
foreign currency forward contracts, resulting from changes in the exchange
rate.
D. FOREIGN CURRENCY FORWARD CONTRACTS
Each Series may enter into foreign currency forward contracts and
forward cross currency contracts in connection with settling planned
purchases or sales of securities or to hedge the currency exposure
associated with some or all of the Series' portfolio securities. A foreign
currency forward contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
foreign currency forward contract fluctuates with changes in forward
currency exchange rates. Foreign currency forward contracts are marked to
market daily and the change in value is recorded by the Series as an
unrealized gain or loss. When a foreign currency forward is extinguished,
through delivery or offset by entering into another foreign currency
forward contract, the Series records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value of the contract at the time it was extinguished or offset. These
contracts may involve market risk in excess of the unrealized gain or loss
reflected in the Series' Statement of Assets and Liabilities and the
Statement of Operations. In addition, the Series could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar.
E. OPTIONS
Each Series, with the exception of the Money Market Series, may
purchase and write (sell) call and put options on securities indices for
the purpose of protecting against an anticipated decline in the value of
the securities held by that Series. Index options are marked to market
daily and the change in value is recorded by the Series as an unrealized
gain or loss in the "Statement of Assets and Liabilities". A realized gain
or loss equal to the difference between the exercise price and the value of
the index is recorded by the Series upon cash settlement of the option. The
use of index options may expose the Series to the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted or the value of the securities in the index may not
move in direct correlation with the movements of the Series portfolio. In
addition,
F-78
<PAGE> 169
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. OPTIONS (CONTINUED)
there is the risk the Series may not be able to enter into a closing
transaction because of an illiquid secondary market.
F. FEDERAL INCOME TAXES
It is the Series policy to comply with the applicable provisions of
the Internal Revenue Code. Therefore, no federal income tax provision is
required.
G. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on a trade date basis (the day
after the date the order to buy or sell is executed). Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and includes amortization of premium and discount on
investments. Realized gains and losses from securities transactions are
recorded on the identified cost basis.
All of the net investment income and realized and unrealized gains and
losses from security transactions are determined on each valuation day and
allocated pro rata among the investors in a Series at the time of such
determination.
H. OPERATING EXPENSES
The Series Portfolio accounts separately for the assets, liabilities
and operations of each Series. Expenses directly attributable to a Series
are charged to that Series, while expenses attributable to all Series are
allocated among them.
I. OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-79
<PAGE> 170
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FEES AND TRANSACTIONS WITH AFFILIATES
AUSA Life Insurance Company, Inc. ("AUSA") is the parent company of
Diversified Investment Advisors, Inc. (the "Advisor"). AUSA has sub-accounts
which invest in the corresponding Portfolios as follows:
<TABLE>
<CAPTION>
PERCENTAGE INVESTMENT
AUSA SUBACCOUNT IN PORTFOLIO
---------------------------------------------------------------- -----------------------
<S> <C>
Money Market.................................................... 35.19%
High Quality Bond............................................... 60.79%
Intermediate Government Bond.................................... 54.59%
Government/Corporate Bond....................................... 26.46%
Balanced........................................................ 48.20%
Equity Income................................................... 67.31%
Equity Value.................................................... 74.79%
Growth & Income................................................. 64.43%
Equity Growth................................................... 87.94%
Special Equity.................................................. 58.48%
Aggressive Equity............................................... 73.21%
High Yield Bond................................................. 65.69%
International Equity............................................ 54.00%
</TABLE>
The Advisor manages the assets of each Series of the Series Portfolio
pursuant to an Investment Advisory Agreement (the "Advisory Agreement") with the
Series Portfolio with respect to each Series. Subject to such further policies
as the Board of Trustees may determine, the Advisor provides general investment
advice to each Series. For its services under the Advisory Agreement, the
Advisor receives from each Series fees accrued daily and paid monthly at an
annual rate equal to the percentages specified in the table below of the
corresponding Series' average daily net assets. The Advisor is currently waiving
a portion of its investment advisory fee.
For each Series, the Advisor has entered into an Investment Subadvisory
Agreement (each a "Subadvisory Agreement") with the subadvisors listed in the
table below (each a "Subadvisor", collectively the "Subadvisors"). It is the
responsibility of a Subadvisor to make the day-to-day investment decisions of
the Series and to place the purchase and sales orders for securities
transactions of such series, subject in all cases to the general supervision of
the Advisor. For its services under each Subadvisory Agreement, the Subadvisors
receive a fee from the Advisor at an annual rate equal to the percentages
specified in the table below of the corresponding Series' average daily net
assets.
F-80
<PAGE> 171
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FEES AND TRANSACTIONS WITH AFFILIATES (CONTINUED)
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIO ADVISOR SUBADVISORS
SERIES PORTFOLIO SUBADVISORS FEE FEE
- ----------------------------------- ----------------------------------- ------- -----------
<S> <C> <C> <C>
Money Market Series................ 1740 Advisors, Inc. 0.25%(1) 0.05%
High Quality Bond Series........... Merganser Capital Management
Corporation 0.35 (2)
Intermediate Government Bond
Series........................... 1740 Advisors, Inc. 0.35(1) 0.15
Government/Corporate Bond Series... 1740 Advisors, Inc. 0.35 0.15
Balanced Series.................... Institutional Capital Corporation 0.45 (3)
Equity Income Series............... 1740 Advisors, Inc. 0.45 0.25
Equity Value Series................ Ark Asset Management Co., Inc. 0.57(1) (4)
Growth & Income Series............. Putnam Advisory Company, Inc. 0.60(1) (5)
Equity Growth Series............... Jundt Associates, Inc.(6) 0.70 0.63
Chancellor LGT Asset Management 0.62(1) (7)
Special Equity Series.............. (8) 0.80(1) 0.50
Aggressive Equity Series........... McKinley Capital Management 0.97(1) (9)
High-Yield Bond Series............. Delaware Investment Advisors 0.55(1) (10)
International Equity Series........ Capital Guardian Trust Company 0.75(1) (11)
</TABLE>
- ---------------
(1) The Advisor is currently waiving a portion of its fee.
(2) 0.50% on the first $10,000,000 in average daily net assets, 0.375% on the
next $15,000,000 in average daily net assets, 0.25% on the next $75,000,000
in average daily net assets and 0.1875% on all average daily net assets in
excess of $100,000,000.
(3) 0.55% on the first $25,000,000 in average daily net assets, 0.45% on the
next $25,000,000 in average daily net assets, and 0.35% on all average
daily net assets in excess of $50,000,000.
(4) 0.45% on the first $100,000,000 in average daily net assets, 0.40% on the
next $50,000,000 in average daily net assets, and 0.35% on the next
$50,000,000 in average daily net assets. When average daily net assets
reach $200,000,000, 0.40% on the first $200,000,000 in average daily net
assets, and 0.35% on all average daily net assets in excess of
$200,000,000.
(5) 0.30% on the first $100,000,000 in average daily net assets, and 0.20% on
all average daily net assets in excess of $100,000,000.
(6) Jundt Associates, Inc. served as the subadvisor from January 1, 1996 to
November 14, 1996. Chancellor LGT Asset Management assumed the role of
subadvisor on November 15, 1996.
(7) 0.50% on the first $50,000,000 in average daily net assets, 0.30% on the
next $75,000,000 in average daily net assets, 0.25% on the next $75,000,000
in average daily net assets, and 0.20% on all average daily net assets in
excess of $200,000,000
(8) The Special Equity Series has four Subadvisors: Pilgrim Baxter &
Associates, Ltd., Ark Asset Management Co., Inc.; Liberty Investment
Management, Inc.; and Westport Asset Management, Inc.
(9) 0.90% on the first $10,000,000 in average daily net assets, 0.80% on the
next $15,000,000 in average daily net assets, 0.60% on the next $25,000,000
in average daily net assets, 0.40% on the next $50,000,000 in average daily
net assets, and 0.35% on all average daily net assets in excess of
$100,000,000.
(10) 0.40% on the first $20,000,000 in average daily net assets, 0.30% on the
next $20,000,000 in average daily net assets, and 0.20% on all average
daily net assets in excess of $40,000,000.
F-81
<PAGE> 172
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FEES AND TRANSACTIONS WITH AFFILIATES (CONTINUED)
(11) 0.75% on the first $25,000,000 in average daily net assets, 0.60% on the
next $25,000,000 to $50,000,000 in average daily net assets, 0.425% on the
next $50,000,000 to $250,000,000 in average daily net assets and 0.375% on
all average daily net assets in excess of $250,000,000.
For the year ended December 31, 1996, except for the Equity Value Series
and the Aggressive Equity Series which commenced operations on April 19, 1996,
the Advisor has voluntarily undertaken to waive fees in accordance with the
expense caps as follows:
<TABLE>
<CAPTION>
FUND EXPENSE CAP
------------------------------------------------------------- ------------------------
<S> <C>
Money Market Series.......................................... 30 basis points (b.p.)
High Quality Bond Series..................................... 40 b.p.
Intermediate Government Bond Series.......................... 40 b.p.
Government/Corporate Bond Series............................. 40 b.p.
Balanced Series.............................................. 50 b.p.
Equity Income Series......................................... 50 b.p.
Equity Value Series.......................................... 60 b.p.
Growth & Income Series....................................... 65 b.p.
Equity Growth Series......................................... 65 b.p.
Special Equity Series........................................ 85 b.p.
Aggressive Equity Series..................................... 100 b.p.
High-Yield Bond Series....................................... 60 b.p.
International Equity Series.................................. 90 b.p.
</TABLE>
For the Equity Growth Series the expense cap in effect from January 1, 1996
through November 13, 1996 was 75 b.p. Effective November 14, 1996, the Board of
Trustees approved a change in the expense cap to 65 b.p.
Certain trustees and officers of the Series Portfolio are also directors,
officers or employees of the Advisor or its affiliates. None of the trustees so
affiliated receive compensation for services as trustees of the Series
Portfolio. Similarly, none of the Series Portfolio officers receive compensation
from the Series Portfolio.
4. SECURITIES LENDING
All but the High Yield Bond Series and the International Equity Series may
lend its securities to certain member firms of the New York Stock Exchange. The
loans are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. Any
deficiencies or excess of collateral must be delivered or transferred by the
member firms no later than the close of business on the next business day. As
with other extensions of credit, the Series may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Series receives compensation, net of related
expenses, for lending its securities
F-82
<PAGE> 173
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SECURITIES LENDING (CONTINUED)
which is included in interest income on the Statement of Operations. At December
31, 1996, the Series loaned securities having market values as follows:
<TABLE>
<CAPTION>
MARKET VALUE COLLATERAL
------------ -----------
<S> <C> <C>
High Quality Bond Series......................................... $ 3,356,277 $ 3,417,498
Intermediate Government Bond Series.............................. 16,286,002 16,631,176
Government/Corporate Bond Series................................. 9,639,531 9,971,053
Balanced Series.................................................. 29,502,418 30,547,905
Equity Income Series............................................. 29,797,013 30,496,846
Growth & Income Series........................................... 13,582,731 13,877,123
Special Equity Series............................................ 52,667,156 54,301,016
</TABLE>
5. PURCHASE AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and proceeds from sales or
maturities for the year ended December 31, 1996, except for the Equity Value
Series and the Aggressive Equity Series which commenced operations on April 19,
1996, were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
------------ ------------
<S> <C> <C> <C>
High Quality Bond Series.............. Government Obligations $ 24,055,385 $ 18,413,126
Other 107,974,326 90,098,879
Intermediate Government Bond Series... Government Obligations 85,967,508 52,555,511
Government/Corporate Bond Series...... Government Obligations 253,871,378 267,895,236
Other 250,523,876 194,568,714
Balanced Series....................... Government Obligations 94,965,762 56,847,023
Other 218,627,035 187,325,555
Equity Income Series.................. Other 316,278,763 202,011,989
Equity Value Series................... Other 39,450,502 13,550,268
Growth & Income Series................ Other 302,171,234 239,501,492
Equity Growth Series.................. Other 365,020,921 326,233,791
Special Equity Series................. Other 623,318,934 536,845,348
Aggressive Equity Series.............. Other 38,819,662 25,326,665
High-Yield Bond Series................ Other 15,888,442 10,927,076
International Equity Series........... Other 75,599,345 30,145,552
</TABLE>
F-83
<PAGE> 174
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. FOREIGN CURRENCY FORWARD CONTRACTS
At December 31, 1996, the International Equity Series had entered into
Foreign Currency Forward contracts which contractually obligate the Series to
deliver/receive currency at specified future dates. The open contracts were as
follows:
<TABLE>
<CAPTION>
FOREIGN IN EXCHANGE SETTLEMENT NET UNREALIZED
CONTRACT CURRENCY FOR DATE VALUE APPRECIATION/DEPRECIATION
- ------------------------- ----------- ----------- ---------- ---------- -------------------------
<S> <C> <C> <C> <C> <C>
PURCHASES:
British Pounds........... 78,363 $ 132,504 01/08/97 $ 134,201 $ 1,697
Japanese Yen............. 42,075,400 371,875 01/16/97 364,092 (7,783)
Japanese Yen............. 18,835,455 166,996 02/12/97 163,637 (3,359)
Japanese Yen............. 58,450,000 532,477 03/10/97 509,543 (22,934)
Japanese Yen............. 25,950,000 236,403 03/10/97 226,221 (10,182)
Japanese Yen............. 15,300,000 148,558 05/19/97 134,633 (13,925)
Japanese Yen............. 15,228,000 136,942 05/19/97 134,000 (2,942)
Japanese Yen............. 11,700,000 112,587 05/30/97 103,113 (9,474)
Swiss Franc.............. 212,205 159,376 01/17/97 158,501 (875)
--------
TOTAL............... $ (69,777)
========
SALES:
French Franc............. 1,359,776 269,028 02/25/97 262,809 6,219
German Duetsche Mark..... 360,849 241,000 01/21/97 234,656 6,344
German Duetsche Mark..... 499,636 333,418 02/14/97 325,399 8,019
German Duetsche Mark..... 293,580 197,153 02/25/97 191,326 5,827
German Duetsche Mark..... 176,371 115,388 03/13/97 115,049 339
Hong Kong Dollars........ 2,479,747 319,000 11/14/97 320,571 (1,571)
Japanese Yen............. 26,566,167 230,309 01/07/97 229,565 744
Japanese Yen............. 42,075,400 381,463 01/16/97 364,092 17,371
Japanese Yen............. 18,835,455 169,887 02/12/97 163,637 6,250
Japanese Yen............. 116,897,000 1,100,000 03/10/97 1,019,060 80,940
Japanese Yen............. 51,879,030 483,000 03/10/97 452,260 30,740
Japanese Yen............. 26,008,697 239,000 04/08/97 227,565 11,435
Japanese Yen............. 30,528,000 300,000 05/19/97 268,633 31,367
Japanese Yen............. 35,139,000 340,000 05/30/97 309,682 30,318
Japanese Yen............. 141,296,127 1,299,000 10/31/97 1,272,179 26,821
Norwegian Krone.......... 749,184 116,768 03/13/97 117,791 (1,023)
Swedish Krona............ 404,853 59,934 03/13/97 59,553 381
Swiss Franc.............. 212,205 169,000 01/17/97 158,501 10,499
Swiss Franc.............. 1,055,900 843,573 02/04/97 789,995 53,578
Swiss Franc.............. 202,530 159,951 02/19/97 151,721 8,230
Swiss Franc.............. 342,230 272,000 02/19/97 256,375 15,625
Swiss Franc.............. 327,680 260,809 02/25/97 245,601 15,208
Swiss Franc.............. 627,708 510,000 03/27/97 471,692 38,308
Swiss Franc.............. 319,023 259,000 04/09/97 240,011 18,989
--------
TOTAL............... $ 420,958
========
</TABLE>
F-84
<PAGE> 175
(This page intentionally left blank)
F-85
<PAGE> 176
DIVERSIFIED INVESTORS PORTFOLIOS
FINANCIAL HIGHLIGHTS:
<TABLE>
<CAPTION>
RATIO OF GROSS RATIO OF EXPENSES, NET
EXPENSES OF WAIVERS TO AVERAGE
TO AVERAGE NET ASSETS NET ASSETS
---------------------- ----------------------
FOR THE YEAR FOR THE YEAR
ENDED ENDED
---------------------- ----------------------
1996 1995 1994** 1996 1995 1994**
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Money Market Series......................... 0.30% 0.31% 0.32% 0.30% 0.30% 0.30%
High Quality Bond Series.................... 0.40 0.41 0.41 0.40 0.40 0.40
Intermediate Government Bond Series......... 0.43 0.45 0.45 0.40 0.40 0.40
Government/Corporate Bond Series............ 0.39 0.39 0.40 0.39 0.39 0.40
Balanced Series............................. 0.50 0.54 0.53 0.50 0.50 0.50
Equity Income Series........................ 0.48 0.49 0.49 0.48 0.49 n/a
Equity Value Series*+....................... 1.06 n/a n/a 0.60 n/a n/a
Growth & Income Series...................... 0.67 0.68 0.67 0.65 0.65 0.65
Equity Growth Series........................ 0.73 0.75 0.76 0.73(1) 0.75 0.75
Special Equity Series....................... 0.86 0.88 0.88 0.85 0.85 0.85
Aggressive Equity Series*+.................. 1.59 n/a n/a 1.00 n/a n/a
High-Yield Bond Series++.................... 1.25 1.32 n/a 0.60 0.60 n/a
International Equity Series+++.............. 0.96 0.83 n/a 0.90 0.80 n/a
</TABLE>
- ---------------
* Annualized (except "Portfolio Turnover")
** Commencement of Operations, January 3, 1994.
*** For fiscal years beginning on or after September 1, 1995,
the Portfolios are required to disclose their average commission
rate per share for trades on which a commission is charged.
+ Commencement of Operations, April 19, 1996.
++ Commencement of Operations, August 22, 1995.
+++ Commencement of Operations, September 29, 1995.
(1) For the period 1/1/96-11/14/96, expense cap was 75 bp.
For the period 11/15/96 - 12/31/96, expense cap was 65 bp.
F-86
<PAGE> 177
<TABLE>
<CAPTION>
RATIO OF NET
RATIO OF NET INVESTMENT
INVESTMENT INCOME, NET OF WAIVERS AVERAGE
INCOME TO PORTFOLIO TO PORTFOLIO AVERAGE COMMISSION RATE
AVERAGE NET ASSETS NET ASSETS PORTFOLIO TURNOVER PER SHARE***
---------------------- ---------------------- ---------------------- ---------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
---------------------- ---------------------- ---------------------- ---------------
1996 1995 1994** 1996 1995 1994** 1996 1995 1994** 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5.19% 5.70% 4.05% 5.19% 5.69% 4.07% n/a n/a n/a n/a
6.14 5.83 5.77 6.14 5.82 5.79 66% 25% 37% n/a
5.63 5.57 5.71 5.66 5.52 5.76 60 59 21 n/a
6.30 5.90 5.71 6.30 5.90 5.72 146 122 122 n/a
3.39 4.19 3.57 3.39 4.15 3.61 113 124 118 $0.0372
2.97 3.37 3.43 2.97 3.37 3.43 26 23 30 0.0620
1.60 n/a n/a 2.07 n/a n/a 65 n/a n/a 0.0600
1.02 1.49 1.35 1.04 1.47 1.37 142 155 21 0.0476
(0.17) 0.41 0.08 (0.17) 0.41 0.11 133 62 75 0.0553
0.24 0.33 0.27 0.25 0.30 0.30 140 155 90 0.0507
(0.72) n/a n/a (0.13) n/a n/a 186 n/a n/a 0.0540
8.34 8.45 n/a 9.00 7.73 n/a 107 21 n/a n/a
1.12 0.53 n/a 1.18 0.50 n/a 29 7 n/a 0.0030
</TABLE>
F-87
<PAGE> 178
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF TRUSTEES OF
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK:
We have audited the accompanying statutory statements of admitted assets,
liabilities, and surplus of The Mutual Life Insurance Company of New York as of
December 31, 1996 and 1995, and the related statutory statements of operations,
surplus, and cash flows for the years then ended. These statutory financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 2 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of New York ("statutory"),
which practices differ from generally accepted accounting principles ("GAAP").
The effects on the financial statements of the variances between statutory and
GAAP, although not reasonably determinable, are presumed to be material.
In our report dated February 21, 1996, we expressed our opinion that the
1995 financial statements, prepared using statutory accounting, presented
fairly, in all material respects, the financial position of the Company as of
December 31, 1995, and the results of its operations, and its cash flows for the
year then ended in conformity with GAAP. As described in Note 2 to the financial
statements, financial statements of mutual life insurance enterprises issued or
reissued after 1996, which are prepared in accordance with statutory accounting,
are no longer considered to be presentations in conformity with GAAP.
Accordingly, our present opinion on the 1995 financial statements as presented
herein is different from that expressed in our previous report.
In our opinion, because of the effects of the matter discussed in the
second preceding paragraph, the statutory financial statements referred to above
do not present fairly, in conformity with GAAP, the financial position of the
Company as of December 31, 1996 and 1995, or the results of its operations and
its cash flows, for the years then ended.
In our opinion, the statutory financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended on the basis of accounting described in Note 2.
Our audits were conducted for the purpose of expressing an opinion on the
financial statements taken as a whole. The Supplemental Schedule of Selected
Financial Data is presented to comply with the NAIC's Annual Statement
Instructions and is not a required part of the basic financial statements. The
Supplemental Schedule of Selected Financial Data has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, is fairly stated, in all material respects, in relation to the
basic financial statements taken as a whole.
Cooper's & Lybrand, L.L.P.
New York, New York
February 21,1997
F-88
<PAGE> 179
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND SURPLUS -- STATUTORY BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Investments:
Cash and Short-term investments........................... $ 175,173 $ 265,870
Bonds..................................................... 4,328,623 3,769,905
Preferred stocks.......................................... 2,130 17,173
Common stocks............................................. 300,809 264,166
Subsidiary companies...................................... 170,760 135,875
Mortgage loans............................................ 1,509,181 1,636,538
Real estate............................................... 1,345,383 1,739,890
Policy loans.............................................. 1,189,851 1,180,454
Other invested assets..................................... 364,390 352,536
Investment income due and accrued.............................. 141,940 143,412
Premiums deferred and uncollected.............................. 196,926 207,142
Separate account assets........................................ 1,670,886 1,530,226
Amounts due from reinsurers.................................... 74,656 81,200
Other assets................................................... 49,065 46,705
---------- ----------
Total assets......................................... $11,519,773 $11,371,092
========== ==========
POLICY RESERVES, LIABILITIES AND SURPLUS
Policy reserves:
Life insurance and annuity reserves....................... $7,214,620 $7,316,732
Health insurance reserves................................. 155,670 146,802
Deposits left with the Company............................ 504,581 513,347
Liabilities:
Dividends to policyholders................................ 211,765 204,332
Policy claims in process of settlement.................... 74,213 66,003
Funds held under coinsurance.............................. 102,200 112,424
Taxes accrued............................................. 108,691 64,148
Notes payable and accrued interest........................ 33,076 76,405
Separate account liabilities.............................. 1,661,273 1,520,965
Other liabilities......................................... 347,679 289,684
Interest maintenance reserve.............................. 12,663 10,028
Investment reserves....................................... 90,000 90,000
Asset valuation reserve................................... 299,843 271,205
---------- ----------
Total policy reserves and liabilities................ $10,816,274 $10,682,075
Surplus:
Surplus notes............................................. 72,317 72,317
Special surplus funds..................................... 27,150 27,250
Unassigned surplus........................................ 604,032 589,450
---------- ----------
Surplus.............................................. 703,499 689,017
---------- ----------
Total policy reserves, liabilities and surplus....... $11,519,773 $11,371,092
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-89
<PAGE> 180
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1996 1995
--------- ---------
<S> <C> <C>
Premiums, annuity considerations and fund deposits............ $1,222,039 $1,214,625
Net investment income......................................... 640,484 627,609
Commission and expense allowance on reinsurance ceded......... 88,767 98,198
Adjustments on reinsurance ceded.............................. (119,907) (12,094)
Other income (net)............................................ 9,704 20,934
---------- ----------
$1,841,087 $1,949,272
---------- ----------
Policyholder and contractholder benefits...................... 1,292,572 1,517,313
Change in policy and contract reserves........................ (101,355) (56,389)
Commissions................................................... 53,599 62,211
Operating expenses............................................ 265,871 273,783
Reinsurance of group pension liabilities...................... 62,024 540,230
Transfer from separate accounts............................... (51,020) (677,525)
Other deductions (net)........................................ 7,374 7,094
---------- ----------
1,529,065 1,666,717
---------- ----------
Net gain from operations before dividends and federal income
taxes....................................................... 312,022 282,555
Dividends to policyholders.................................... 219,439 210,675
---------- ----------
Net gain from operations before federal income taxes.......... 92,583 71,880
Federal income taxes.......................................... 18,393 10,057
---------- ----------
Net gain from operations...................................... 74,190 61,823
Net realized capital losses (See Note 9).................... (19,550) (8,480)
---------- ----------
Net Income.................................................... $ 54,640 $ 53,343
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-90
<PAGE> 181
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF SURPLUS -- STATUTORY BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Surplus, beginning of year............................... $689,017 $680,070
Net income............................................... 54,640 53,343
Change in net unrealized capital gains................... 34,232 10,220
Change in non-admitted assets............................ (1,275) (7,689)
Change in asset valuation reserve........................ (28,638) (41,057)
Change in policy reserve valuation basis................. -- 5,081
Settlements and provision for contingencies.............. (39,576) (11,300)
Other changes to surplus................................. (4,901) 349
-------- --------
Net change in surplus for the year....................... 14,482 8,947
-------- --------
Surplus, end of year..................................... $703,499 $689,017
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-91
<PAGE> 182
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOW PROVIDED FROM OPERATIONS:
Premiums, annuity considerations and fund deposits....... $1,233,947 $1,221,753
Investment income net of investment expenses............. 680,338 676,190
Adjustments on reinsurance ceded......................... (26,291) 121,818
Other income............................................. 31,373 53,323
Policy benefits paid..................................... (1,285,157) (1,526,851)
Transfers from (to) separate accounts.................... (5,035) 133,408
Commissions, other expenses and taxes paid............... (321,497) (325,056)
Dividends to policyholders............................... (212,006) (217,183)
Federal income taxes (excluding capital gains tax)....... 0 (51,395)
Other deductions......................................... (23,829) (32,777)
---------- ----------
Net cash from operations............................ 71,843 53,230
---------- ----------
CASH FROM INVESTMENTS:
Proceeds from Investments Sold, Matured or Repaid:
Bonds............................................... 516,929 685,588
Stocks.............................................. 199,598 81,590
Mortgage loans...................................... 293,113 190,373
Real estate......................................... 417,955 279,098
Other invested assets............................... 25,734 15,260
Other............................................... (8,652) (45,091)
---------- ----------
Total investment proceeds........................... 1,444,677 1,206,818
---------- ----------
Cost of investments acquired:
Bonds............................................... 1,063,983 879,648
Stocks.............................................. 205,496 137,745
Mortgage loans...................................... 172,644 117,247
Real estate......................................... 56,222 76,032
Other invested assets............................... 32,816 24,316
Miscellaneous....................................... 9,402 (2,647)
---------- ----------
Total investments acquired.......................... 1,540,563 1,232,341
---------- ----------
Net cash from investments...................... (95,886) (25,523)
---------- ----------
CASH FROM FINANCING AND MISCELLANEOUS SOURCES:
Cash Provided
Notes payable............................................ (43,293) 76,341
Other sources............................................ 15,432 34,438
---------- ----------
Total.................................................... (27,861) 110,779
---------- ----------
Other cash applied.......................................... 38,793 23,288
---------- ----------
Net cash from financing and other misc sources...... (66,654) 87,491
---------- ----------
Net change in cash and short-term investments............... (90,697) 115,198
Cash and short-term investments, beginning of year............ 265,870 150,672
---------- ----------
Cash and short-term investments, end of year.................. $ 175,173 $ 265,870
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-92
<PAGE> 183
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION:
The Mutual Life Insurance Company of New York (the "Company") is a mutual
life insurance company primarily engaged in the business of providing individual
life insurance and disability income protection and asset accumulation products.
The Company's principal markets consist of business owners, growing families,
and pre-retirees. The Company's insurance and financial products are marketed
and distributed directly to individuals primarily through the Company's career
agency sales force. These products are sold throughout the United States and
Puerto Rico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of New York ("statutory"), which practices were also considered to be in
conformity with generally accepted accounting principles ("GAAP") prior to the
issuance of the pronouncements described herein. In 1993, the Financial
Accounting Standards Board ("FASB") issued Interpretation No. 40 ("FIN 40"),
"Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises," which clarified that mutual life insurance
companies issuing financial statements described as prepared in conformity with
GAAP after 1995 are required to apply all applicable GAAP pronouncements in
preparing those financial statements. In January 1995, the FASB issued Statement
No. 120 ("SFAS 120"), "Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration Participating
Contracts," which, among other things, extended the applicability of certain
FASB Statements to mutual life insurance companies and deferred the effective
date of FIN 40 to financial statements issued or reissued after 1996. As
required by generally accepted auditing standards, the opinion expressed by our
independent accountants on the 1995 financial statements is different from that
expressed in their previous report.
In financial statements prepared in conformity with statutory accounting,
the accounting treatment of certain items is different than for financial
statements issued in conformity with GAAP. Some of the general differences
include:
- Policy acquisition costs, such as commissions and other costs incurred in
connection with acquiring new and renewal business, are expensed when
incurred; under GAAP, such costs are deferred and amortized over the
present value of expected gross margins.
- Premiums for universal life and investment-type products are recognized
as revenue when due; under GAAP, they are accounted for as deposits and
excluded from revenue.
- Policy reserves are based on statutory mortality and interest
requirements and without consideration of withdrawals and are reported
net of reinsurance reserve credits; under GAAP, the reserves are based on
expected investment yield, mortality and withdrawals and are reported
gross of reinsurance reserve credits.
- No provision is made for deferred income taxes; under GAAP, deferred
taxes result from temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements.
- An interest maintenance reserve ("IMR") is established as a liability to
capture realized investment gains and losses, net of tax, on the sale of
fixed maturities and mortgage loans resulting from changes in the general
level of interest rates, and is amortized into income over the remaining
years to expected maturity of the assets sold; no such reserve is
required under GAAP.
F-93
<PAGE> 184
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
- An asset valuation reserve ("AVR"), based upon a formula prescribed by
the NAIC, is established as a liability to offset potential non-interest
related investment losses, and changes in the AVR are charged or credited
to surplus; no such reserve is required under GAAP.
- Investment in bonds and preferred stocks are generally carried at
amortized cost; under GAAP, investments in bonds and preferred stocks,
other than those classified as held to maturity, are carried at fair
value.
- Certain assets, designated as nonadmitted, are excluded from assets by a
direct charge to surplus; under GAAP, such assets are carried on the
balance sheet with appropriate valuation allowances.
- Pension expense for the qualified defined pension plan ("Plan") is
recognized when pension contributions are deductible for federal income
tax purposes, rather than incurred over the service lives of employees
participating in the Plan, as is the case under GAAP.
- Postretirement benefits are recognized for vested employees and current
retirees, rather than accruing an obligation over the service period for
all eligible employees, as is the case under GAAP.
- In accordance with statutory accounting, the Company's subsidiaries are
not consolidated for statutory filing purposes; under GAAP,
majority-owned subsidiaries are consolidated.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a description of the Company's principal statutory
accounting practices and procedures:
(a) Premiums are included in revenue over the premium payment periods
of the related policies. Annuity considerations and fund deposits are
included in revenue as received.
Commissions and other costs related to issuance, maintenance and
settlement of policies are charged to operations in the year incurred.
(b) Short-term investments are carried at cost and consist of
securities with maturities of three months or less. Bonds eligible for
amortization under rules promulgated by the National Association of
Insurance Commissioners ("NAIC") are carried at amortized cost, while all
other bonds are carried at values adopted by the NAIC, which approximate
fair market value. Loan backed bonds and structured securities are valued
at amortized cost using the effective interest method considering
anticipated prepayments at the date of purchase; significant changes in the
estimated cash flows from the original purchase assumptions are accounted
for using the retrospective method. Common stocks are carried at market
value except investments in subsidiaries, which are generally carried on
the equity basis. Preferred stocks are carried principally at cost except
for those securities in or near default which are valued at market. Policy
loans are carried at their unpaid balances.
Mortgage loans other than those in process of foreclosure are carried
at their unpaid balances adjusted for unamortized discount. Real estate
owned for investment is carried at depreciated cost, less encumbrances
($1.9 million in 1996 and $2.2 million in 1995). Joint ventures and limited
F-94
<PAGE> 185
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
partnerships in real estate, cable television and energy are included in
other invested assets and are carried principally at their equity value.
Other investments are generally carried at cost.
Real estate acquired through foreclosure is carried at the lower of
cost or estimated fair value at the time of foreclosure, less accumulated
depreciation. Mortgage loans in process of foreclosure are also carried at
the lower of cost or estimated fair value. Fair value is determined by
using the estimated discounted cash flows expected from the underlying real
estate properties. These projected cash flows are based on estimates
regarding future operating expenses, lease rates, occupancy levels and
investors' targeted yields.
The Company provides, through a direct charge to surplus, an
investment valuation reserve for permanent impairment of real estate
investments, joint ventures and limited partnerships in real estate and
mortgage loans delinquent for more than 60 days and restructured mortgage
loans. This reserve reflects, in part, the excess of the carrying value of
such assets over the estimated undiscounted cash flows expected from the
underlying real estate properties. These projected cash flows are based on
estimates similar to those described in the preceding paragraph. As of
December 31, 1996 and 1995, the Company's investment reserve for its
mortgage loan and real estate investments was $90 million.
(c) Realized investment gains and losses (net of tax) for bonds and
mortgage loans resulting from changes in interestrates are deferred, and
credited or charged to the Interest Maintenance Reserve ("IMR"). These
amounts are amortized into net income over the remaining years to expected
maturity of the assets sold. Unrealized capital gains and losses are
recorded directly to surplus.
The Asset Valuation Reserve ("AVR") is based upon a formula prescribed
by the NAIC and functions as a reserve for potential non-interest-related
investment losses. In addition, realized investment gains and losses (not
subject to the IMR) and unrealized gains and losses result in offsetting
increases and decreases in the AVR. These changes to the AVR are recorded
directly to surplus.
(d) Policy reserves for life insurance, annuities, and supplemental
benefits are computed by using prescribed statutory interest rates and
mortality factors. Reserves computed by a modified commissioners' reserve
valuation method represent approximately 75% and 74% of gross life
insurance reserves at December 31, 1996 and 1995 respectively.
Reserves for life insurance were principally determined by using the
1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and the
American Experience Tables and assumed interest rates ranging from 2.25% to
7%. Reserves for individual and group annuity mortality tables have assumed
interest rates ranging from 2.25% to 9.5%.
During 1995, the Company changed its methods of accounting for certain
minimum reserves with the approval of the New York State Insurance
Department. The Company incorporated 10-year select factors in its minimum
mortality standard for certain 1980 CSO products, resulting in an increase
in surplus of $5.1 million.
Policy claims in process of settlement include provisions for payments
to be made on reported claims and on claims incurred but not reported.
(e) The Company's subsidiaries are not consolidated. The subsidiaries
are carried principally on the statutory equity basis. Changes in the
Company's equity in subsidiaries are included in unrealized capital gains
and losses. Dividends from subsidiaries are recognized as investment income
when declared.
F-95
<PAGE> 186
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) Dividends to policyholders are determined annually by the Board of
Trustees.
(g) Certain assets designated as "non-admitted" assets (principally
miscellaneous receivables) are excluded from the statements of admitted
assets, liabilities and surplus.
(h) Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of certain
contractholders. Approximately 99% of these assets consist of securities
reported at market value and 1% consist of fixed income securities carried
at amortized cost. Premiums, benefits and expenses of the separate accounts
are included in the Company's statements of operations.
(i) No deferred taxes are recognized for differences that exist between
financial reporting and taxable income.
(j) The Company uses the constant-yield method of depreciation for
substantially all investment real estate, real estate joint ventures and
cable television limited partnerships acquired prior to January 1, 1991.
Acquisitions subsequent to January 1, 1991 and foreclosed real estate are
depreciated on the straight line method. Real estate assets and
improvements are generally depreciated over ten to forty year periods and
leasehold improvements over the lives of the leases. Depreciation expense
related to investments in real estate was $39.1 million and $48.8 million
in 1996 and 1995, respectively; accumulated depreciation was $213.6 million
and $214.3 million at December 31, 1996 and 1995, respectively.
(k) Special surplus funds consist primarily of amounts required by the
State of New York to be assigned as surplus funds for group insurance,
separate accounts, and aviation reinsurance.
(l) Certain amounts for 1995 have been reclassified to conform to the
1996 presentation.
3. REINSURANCE OF GROUP PENSION BUSINESS:
On December 31, 1993, the Company entered into an agreement with AEGON USA,
Inc. ("AEGON USA") under which the Company agreed to transfer $6.3 billion in
group pension assets and liabilities, including $2.7 billion of general account
assets and $3.6 billion of separate account assets. Pursuant to the transaction,
the Company transferred substantially all of its group pension business and
operations, including its full service group pension contracts, consisting
primarily of tax-deferred annuity, 401(k) and managed funds lines of business,
to AEGON USA's wholly-owned subsidiary, AUSA Life Insurance Company, Inc. ("AUSA
Life"). AUSA Life also acquired the corporate infrastructure supporting the
group pension business, including personnel, data processing systems, facilities
and regional offices. In connection with the transaction, the Company and AEGON
USA have entered into certain service agreements. These agreements, among other
things, provide that the Company will continue to manage the transferred assets,
and that AUSA Life will continue to provide certain administrative services to
the Company's remaining group pension contracts not included in the transfer.
Effective with the agreement, AUSA reinsured, on an indemnity reinsurance
basis, the contract liabilities funded by such general account assets. AUSA
agreed to reinsure such general account liabilities on an assumption reinsurance
basis upon the consent of general account contractholders to assumption of their
contracts pursuant to the Group Pension Transaction. As of December 31, 1996,
substantially all of the contractholders have elected assumption reinsurance.
In connection with the transaction at December 31, 1993, the Company made a
$200 million capital investment in AEGON USA by purchasing $150 million of
Series A and $50 million of Series B notes, which have a term of nine years and
receive a market rate of interest. In addition to interest payments
F-96
<PAGE> 187
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
3. REINSURANCE OF GROUP PENSION BUSINESS (CONTINUED):
on the notes, the Company has the right to receive certain payments based on the
profits of the transferred business in force on the transaction date, a future
payment tied to the determination of the value of the transferred business at
the end of nine years, and a potential payment based on new business growth. The
Company has the option to purchase additional Series A notes with payments from
the profits of the transferred business. Net operating losses, if any, on the
transferred business for any year will be carried forward to reduce profit
payments in subsequent years. Any deficit remaining at the end of the nine year
term and any adjustment related to the final value of the transferred business
may only be applied to reduce the principal amount of any outstanding Series A
notes. At December 31, 1996, the Company owned $319 million of Series A Notes.
During 1996 and 1995, the Company earned $65.9 million and $70.2 million,
respectively, based upon the profits of the transferred group pension business
and recorded this amount as revenue from ceded reinsurance in the statement of
operations.
4. SUBSIDIARY COMPANIES:
At December 31, 1996 and 1995, the Company's investments in subsidiaries,
all of which are wholly-owned, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
MONY Life Insurance Company of America................. $121.8 $115.6
Other subsidiaries..................................... 49.0 20.3
------ ------
$170.8 $135.9
====== ======
</TABLE>
At December 31, 1996, MONY Life Insurance Company of America ("MONY
America") had assets of $3.9 billion; including bonds ($1,048 million), mortgage
loans ($159 million) and separate account assets ($2,530 million); and
liabilities of $3.8 billion, primarily life insurance and annuity reserves ($1.3
billion) and separate account liabilities ($2.5 billion). Capital and surplus of
MONY America was $121.8 million. In 1996 and 1995, total revenues of MONY
America were $844 million and $715 million, benefits and expenses were $820
million and $701 million and net income, including realized capital losses, was
$8 million and $5 million, respectively.
During 1995, the Company contributed $10 million to the capital of MONY
America. During 1996 and 1995, the Company made aggregate capital contributions
of $27.7 million and $2.5 million to certain other subsidiaries. The Company
also received aggregate capital distributions of $5.3 million in 1995 from its
other subsidiaries.
During 1996, the Company purchased $44.2 million of commercial mortgages
(plus accrued interest) from MONY Funding Inc., a wholly owned subsidiary of the
Company, at book value.
The Company and MONY America are parties to an agreement dated February 28,
1995 whereby the Company agrees to reimburse MONY America to the extent that
MONY America's recognized loss as a result of mortgage loan default or
foreclosure or subsequent sale of the underlying collateral exceeds the 75% loan
to value ratio for each such mortgage loan at origination. Pursuant to the
agreement, the Company made payments to MONY America totaling $0.1 million in
1996 and $2.1 million in 1995.
5. COMMITMENTS AND CONTINGENCIES:
The Company has guaranteed to certain states that the surplus of MONY
America will be maintained at amounts at least equal to the minimum surplus
required for admission to those states.
F-97
<PAGE> 188
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED):
On April 7, 1987 MONY Funding Inc. issued $125 million of 8.125% notes due
April 7, 1997 in the European markets. The Company has cumulatively repurchased
$35.8 million of these notes at December 31, 1996. The Company has guaranteed
the principal and interest of the remaining notes outstanding.
At December 31, 1996, the Company has guaranteed $34 million related to
real estate held by unrelated investors.
The Company maintains lines of credit with domestic banks totaling $100
million with scheduled renewal dates during 1997. The Company has not borrowed
against its credit lines since 1982.
In 1994, the Company reached an agreement for the transfer of the
management of its information systems operations to Computer Sciences
Corporation ("CSC"). Under the terms of this agreement to operate, manage and
enhance its information systems operations, the Company will pay CSC an
estimated $128 million over the remaining contract period. The total payments
under the contract may vary based upon certain factors, including the volume of
computing services and the introduction of new information systems technology.
The Company is a defendant in various legal actions arising primarily from
its investment and insurance operations. Certain actions include claims of
multiple plaintiffs. In addition, insurance companies are subject to
assessments, up to statutory limits, by state guaranty funds for losses of
policyholders of insolvent insurance companies. In the opinion of management,
assessments and the outcome of the legal proceedings will not have a material
adverse effect on the financial position and the results of operations of the
Company.
During 1996, the Company established approximately $27 million in reserves
relating to the above contingencies through a direct charge to surplus.
Litigation settlements of $12.6 million related to prior years' events were
charged directly to surplus.
6. PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS:
Employee and Field Underwriter Retirement Plans
The Company has a qualified pension plan covering substantially all of its
salaried employees. The provisions of the plan provide both (a) defined benefit
accruals based on (i) years of service, (ii) the employee's final average annual
compensation and (iii) wage bases or benefits under Social Security and (b)
defined contribution accruals based on a Company matching contribution equal to
100% of the employee's elective deferrals under the incentive savings plan for
employees up to 3% of the employee's eligible compensation and an additional 2%
of eligible compensation for each active participant. The Company's funding and
accounting policies are to contribute annually the maximum amount that can be
deducted for federal income taxes and to charge expenses in the year in which
the contributions are made. No contributions were made in the current year or
prior year because the plan was subject to the full funding limitation under
Section 412 of the Internal Revenue Code. At December 31, 1995, the present
value of accumulated benefit obligation, determined in accordance with
Statements of Financial Accounting Standards and based on an assumed settlement
rate of 8.00%, was $242.8 million, including vested benefits of $232.2 million.
The fair value of Plan assets as of December 31, 1995 was $385.1 million.
The Company also has a qualified money purchase pension plan covering
substantially all career field underwriters. Company contributions of 5% of
earnings plus an additional 2% of such earnings in excess of the social security
wage base are made each year. In addition, after-tax voluntary field underwriter
contributions of up to 10% of earnings are allowed. At December 31, 1995, the
fair value of plan assets was $176.7 million.
F-98
<PAGE> 189
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
6. PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS: (CONTINUED)
The Company sponsors a non-qualified defined benefit pension plan, which
provides benefits in excess of Internal Revenue Service limits to certain
employees. The benefits are based on years of service and the employee's final
average annual compensation. Pension benefits are paid from the Company's
general account. The amounts accrued by the Company for this plan, based on an
assumed 7.42% weighted average interest rate for 1996 and 7.3% for 1995 were
$36.9 million and $33.1 million in 1996 and 1995, respectively. The Company also
maintains various non-qualified defined contribution plans for field
underwriters and key employees. The amounts accrued for these various plans were
$67.5 million and $54.2 million in 1996 and 1995, respectively.
Deferred Compensation Plan
The Company has incentive savings plans in which substantially all
employees and career field underwriters are eligible to participate. The Company
matches employee and field underwriter contributions up to 3% and 2%,
respectively, of eligible compensation as defined. In addition, for employees,
the Company contributes 2% of eligible compensation for non-officer employees,
and may contribute up to an additional 3%. In addition, the Company has two
compensation plans for key employees which allow deferral of current
compensation, as allowed by New York Insurance Law.
Postretirement Benefits
The Company provides certain health care and life insurance (postretirement
benefits) for retired employees and field underwriters. In accordance with NAIC
requirements, the Company accrues the estimated employee cost of retiree benefit
payments for current retirees and fully vested employees and field underwriters
by estimating the actuarial present value of benefits expected to be paid after
retirement.
At December 31, 1992, the Company determined that the total pre-tax
postretirement benefit obligation approximated $82.9 million. The Company has
elected to amortize this transition obligation over a period of twenty years as
an expense in its statement of operations. The amount of unrecognized transition
obligation was reduced by approximately $10.8 million due to plan amendments
adopted during 1995. The amount of transition obligation amortized in 1996 and
1995 totaled approximately $3.6 million. The total cost to provide life
insurance and health benefits for fully vested and retired employees and field
underwriters including the expense described above, was $10.6 million in 1996
and $9.2 million in 1995.
At December 31, 1996, the unfunded postretirement benefit obligation for
retirees and fully vested employees was $76.3 million, with $21.4 million
included in other liabilities. The discount rate used in determining the
accumulated postretirement benefit obligation was 7.5%, and the health care cost
trend rate was 11.0% graded to 6.0% over 13 years.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, an increase in the assumed health care cost trend rates
of one percentage point in each year would increase the estimated postretirement
benefit obligation as of December 31, 1996 by $0.8 million and the estimated
eligibility cost and interest cost components of net periodic postretirement
benefit cost for 1996 by $0.1 million.
7. FEDERAL INCOME TAXES:
The Company files a consolidated federal income tax return with its life
and non-life affiliates. The allocation of federal income taxes is based upon
separate return calculations with current credit for net losses. Intercompany
tax balances are settled annually in the first quarter.
F-99
<PAGE> 190
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
7. FEDERAL INCOME TAXES (CONTINUED):
The Company's federal income tax returns for years through 1989 have been
examined with no proposed material adjustments. In the opinion of management,
adequate provision has been made for any additional taxes which may become due
with respect to open years.
Pre-tax operating gains and pre-tax realized gains, as reported in the
accompanying statements of operations, differ from taxable income reported for
tax purposes. Significant differences include the deferral and amortization of
policy acquisition costs for tax purposes, the difference between statutory and
tax reserves, the taxable portion of the Company's surplus (as applicable to
mutual life insurers), depreciation expense and related recapture, capital gains
deferred to the IMR, alternative minimum tax preference items and equity in
partnerships and joint ventures.
8. LEASES:
The Company has entered into various operating lease agreements for office
space and furniture and equipment. These leases have remaining non-cancelable
lease terms in excess of one year. Total rental expense for these operating
leases amounted to $21.8 million in 1996 and $25.1 million in 1995. The future
minimum rental obligations under these leases at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
1997.................................................. $ 18.0
1998.................................................. 16.2
1999.................................................. 14.8
2000.................................................. 15.1
2001.................................................. 14.2
Later years........................................... 147.2
------
$ 225.5
======
</TABLE>
9. CAPITAL GAINS/(LOSSES):
The Company realized net capital losses (after tax and IMR) of $20 million
in 1996 and $8 million in 1995 as follows:
<TABLE>
<CAPTION>
REALIZED CAPITAL GAINS/(LOSSES) 1996 1995
------------------------------------------------------ ---- ----
(IN MILLIONS)
<S> <C> <C>
Bonds and preferred stock............................. $ (8) $ 1
Common stock.......................................... 22 8
Mortgage loans........................................ 3 (3)
Real estate........................................... (2) 0
Cable and other investments........................... 9 0
---- ---
24 6
Tax provision......................................... (39) (5)
Transferred to IMR, net of taxes...................... (5) (9)
---- ---
Net realized capital gains/(losses)................. $(20) $(8)
==== ===
</TABLE>
During 1996 and 1995, realized capital gains resulting from changes in
interest rates on fixed income securities of $5.3 million (net of $2.8 million
tax) and $9.2 million (net of $4.9 million tax), respectively, were transferred
to the Company's IMR for future amortization into net income.
F-100
<PAGE> 191
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
9. CAPITAL GAINS/(LOSSES) (CONTINUED):
The Company incurred net unrealized gains of $34 million and $10 million in
1996 and 1995. The 1996 and 1995 unrealized gains and losses include writedowns
of approximately $11 million and $13 million, respectively, on real estate
acquired through foreclosure and mortgage loans in process of foreclosure. These
gains and losses are detailed by asset type in the table below:
<TABLE>
<CAPTION>
UNREALIZED CAPITAL GAINS/(LOSSES) 1996 1995
------------------------------------------------------------ ----- -----
(IN MILLIONS)
<S> <C> <C>
Bonds and preferred stock................................... $18 $7
Common stock................................................ 21 10
Mortgage loans.............................................. (8) (13)
Real estate................................................. (3) 0
Subsidiaries................................................ 7 8
Other investments........................................... (1) (2)
----- -----
Total unrealized capital gains.................... $34 $10
==== ====
</TABLE>
10. COMMON STOCKS:
Common stocks include marketable equity securities carried at market values
of $160.7 million and $136.3 million at December 31, 1996 and 1995,
respectively, and nonmarketable equity investments carried at estimated fair
values of $140.1 million and $127.9 million at December 31, 1996 and 1995,
respectively. The cost of marketable equity securities was $142.2 million and
$115.1 million at December 31, 1996 and 1995, respectively. At December 31,
1996, gross unrealized gains were $23.6 million, and gross unrealized losses
were $5.1 million for marketable equity securities.
F-101
<PAGE> 192
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
11. FIXED INCOME SECURITIES:
Fixed Income Securities by Investment Type:
The amortized cost and estimated fair value (see note 14) of investments in
fixed income securities which include shortterm investments, bonds and preferred
stocks as of December 31, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS
UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAINS LOSSES VALUE
------------------ ---------------- -------------- ------------------
1996 1995 1996 1995 1996 1995 1996 1995
------- ------- ------ ------ ----- ----- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies................. $ 201.3 $ 165.0 $ 1.5 $ 4.5 $ 0.5 $ 0.0 $ 202.3 $ 169.5
Collateralized Mortgage Obligations:
Government Agency-Backed............... 253.1 254.1 1.4 4.3 3.6 0.7 250.9 257.7
Non-Agency Backed...................... 66.0 66.3 1.3 2.4 0.1 0.2 67.2 68.5
Other asset-backed securities:
Government Agency-Backed............... 68.6 83.4 1.0 4.0 0.9 0.3 68.7 87.1
Non-Agency Backed...................... 295.9 221.7 7.7 13.3 1.4 0.3 302.2 234.7
Foreign governments........................ 4.5 4.5 0.1 0.1 0.0 0.0 4.6 4.6
Utilities.................................. 501.5 448.5 17.2 28.6 3.9 1.0 514.8 476.1
Affiliates................................. 5.8 30.2 0.0 0.7 0.0 0.0 5.8 30.9
Corporate bonds............................ 2,931.9 2,496.2 74.8 141.7 23.7 16.4 2,983.0 2.621.5
------- ------- ------ ------ ----- ----- ------- -------
Total bonds............................ 4,328.6 3,769.9 105.0 199.6 34.1 18.9 4,399.5 3,950.6
Redeemable preferred stock................. 2.1 17.2 0.0 0.3 0.4 0.5 1.7 17.0
Commercial paper........................... 137.8 248.7 0.0 0.0 0.0 0.0 137.8 248.7
------- ------- ------ ------ ----- ----- ------- -------
Total.................................. $4,468.5 $4,035.8 $105.0 $199.9 $34.5 $19.4 $4,539.0 $4,216.3
======= ======= ====== ====== ===== ===== ======= =======
</TABLE>
Amortized cost represents the principal amount of fixed income securities
adjusted by unamortized premium or discount and reduced by writedowns of $16.6
million and $33.5 million for bonds and $0.0 million and $0.8 million for
preferred stock at December 31, 1996 and 1995, respectively, as required by the
NAIC for securities which are in or near default.
At December 31, 1996, 79% of the Company's Collateralized Mortgage
Obligation (CMO) portfolio was held in U.S. government and government
agency-backed securities. The remainder of the CMO portfolio consisted of NAIC
category 1 investment grade securities.
Maturities of Fixed Income Securities:
The amortized cost of fixed income securities and estimated fair value by
maturity date (excluding scheduled sinking funds) as of December 31, 1996 is the
following:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED COST FAIR VALUE
-------------- ----------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less............................. $ 308.6 $ 310.1
Due after one year through five years............... 702.3 721.9
Due after five years through ten years.............. 2,261.9 2,288.8
Due after ten years................................. 1,195.7 1,218.2
------- -------
$4,468.5 $4,539.0
======= =======
</TABLE>
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
F-102
<PAGE> 193
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
11. FIXED INCOME SECURITIES (CONTINUED):
Proceeds from sales of investments in debt securities during 1996 and 1995
were $173.8 million and $383.5 million, respectively. Gross gains of $3.8
million in 1996 and $10.2 million in 1995, and gross losses of $4.0 million in
1996 and $14.5 million in 1995 were realized on these sales.
12. OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK:
Financial Instruments with Off-Balance Sheet Risk:
In 1992, the Company entered into an agreement with a bank to lend
securities to approved borrowers. There were no loaned securities as of December
31, 1996 or 1995.
At December 31, 1996 the Company had commitments to issue $24.6 million of
fixed rate farm loans with interest rates ranging from 7.72% to 8.75% and
durations of two to ten years. The Company also committed to $4.3 million of
commercial loan investments with interest rates of 8.25% and durations of 15
years. There were no outstanding bond commitments as of December 31, 1996.
Concentration of Credit Risk:
At December 31, 1996 and 1995, the Company had no single investment or
series of investments with a single issuer exceeding 3.7% and 2.9%,
respectively, of total general account assets.
The bond portfolio is diversified by industry type. The industries that
comprise more than 10% of the carrying value of the bond portfolio at December
31, 1996 are Financial Services of $640.2 million (14.8%), Government and
Agencies of $527.5 million (12.2%), Other Manufacturing of $524.0 million
(12.1%), Public Utilities of $501.5 million (11.6%), and Consumer goods and
services of $436.3 million (10.1%). At December 31, 1995, the industries
comprising in excess of 10% of the bond portfolio carrying value were Financial
Services of $555 million (14.7%), Government and Agencies of $507 million (13.5
%), Public Utilities of $449 million (11.9%), Other Manufacturing of $400
million (10.6%), and Consumer goods and services of $381 million ( 10.1%).
The Company holds below investment grade bonds of $290.2 million at
December 31, 1996. Below investment grade bonds are defined as those securities
rated in categories 3 through 6 by the NAIC, which are approximately equivalent
to bonds rated below BBB by rating agencies. These bonds consist mostly of
privately issued bonds, which are monitored by the Company through extensive
internal analysis of the financial condition of the borrowers, and which include
protective debt covenants. Of these bonds, $239.6 million are in category 3,
which is considered to be medium quality by the NAIC. At December 31, 1995, the
Company's investments in below investment grade bonds were $226.7 million.
The Company has significant investments in commercial and agricultural
mortgage loans and real estate (including joint ventures and partnerships).
Approximately 53.1% of the Company's real estate and mortgage portfolio is
invested in office building properties. The locations of property
collateralizing
F-103
<PAGE> 194
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
12. OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK (CONTINUED):
mortgage loans and real estate investment carrying values (in millions) at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
GEOGRAPHIC REGION $ % $ %
------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Southeast.................................. 794 24.7 982 26.4
Northeast.................................. 598 18.6 647 17.4
West....................................... 583 18.2 718 19.3
Mountain................................... 539 16.8 582 15.7
Midwest.................................... 356 11.1 392 10.6
Southwest.................................. 340 10.6 393 10.6
----- ----- -----
Total.................................... 3,210 100.0 3,714 100.0
===== ===== =====
</TABLE>
The states with the largest concentrations of mortgage loans and real
estate investments at December 31, 1996 are: California, $416 million (12.9%);
New York, $333 million (10.4%); Arizona, $279 million (8.7%); Texas, $279
million (8.7%); Florida, $213 million (6.7%); Illinois, $211 million (6.6%);
Georgia, $204 million (6.4%); Colorado, $154 million (4.8%).
13. MORTGAGE LOANS, REAL ESTATE AND OTHER INVESTED ASSETS:
The Company invests in mortgage loans collateralized by commercial and
agricultural real estate. Such mortgage loans consist primarily of first
mortgage liens on completed income producing properties. As of December 31,
1996, $391 million of mortgage loans have terms that require amortization, and
$1.1 billion of loans require partial amortization or are non-amortizing.
Mortgage loans delinquent over 90 days or in process of foreclosure were $15
million at December 31, 1996 and $48 million at December 31, 1995. Properties
acquired through foreclosure during the year amounted to $20 million and $47
million in 1996 and 1995, respectively.
The Company has performing restructured mortgage loans of $244 million as
of December 31, 1996 and $250 million as of December 31, 1995. The new terms
typically defer a portion of contract interest payments to future periods.
Interest is recognized in income based on the modified rate of the loan.
Deferred interest, which is the difference between the original contractual rate
and the modified rate, is excluded from income. Gross interest income on
restructured loans that would have been recorded in accordance with the loans'
original terms was approximately $23 million in 1996 and $24 million in 1995.
Gross interest income recognized in net income for the period from these loans
was approximately $16 million in 1996 and $17 million in 1995. There are no
commitments to lend additional funds to any debtor involved in a restructuring.
Other invested assets of $364 million and $353 million at December 31, 1996
and 1995, respectively, include, primarily, investments in real estate joint
ventures and limited partnerships.
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1996 and 1995. The
calculations of estimated fair values involve considerable judgement.
Accordingly, these estimates of fair value are not necessarily indicative of the
values that could be negotiated in an actual sale.
F-104
<PAGE> 195
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Fixed income securities................ $4,328.6 $4,399.5 $3,769.9 $3,950.6
Preferred stocks....................... 2.1 1.7 17.2 17.0
Separate Account Assets................ 1,670.9 1,670.8 1,530.2 1530.9
Liabilities:
Investment-type contracts.............. 1,274.7 1,269.8 1,511.1 1,515.1
Separate Account Liabilities........... 1,661.3 1,661.1 1,521.0 1,520.5
</TABLE>
The estimated fair values of cash, short term investments, unaffiliated
equity securities, mortgage loans, and short term notes payable approximate
their carrying amounts.
The methods and assumptions utilized in estimating these fair values of
financial instruments are summarized as follows:
Fixed Income Securities (See Note 11)
The estimated fair values of fixed income securities are based upon quoted
market prices, where available. The fair values of fixed income securities not
actively traded and other non-publicly traded securities are estimated using
values obtained from independent pricing services or, in the case of private
placements, by discounting expected future cash flows using a current market
interest rate commensurate with the credit quality and term of the investments.
Mortgage Loans
The fair value of mortgage loans is estimated by discounting expected
future cash flows, using current interest rates for similar loans to borrowers
with similar credit risk. Loans with similar characteristics are aggregated for
purposes of the calculations.
Policy Loans
Policy loans are an integral component of insurance contracts and have no
maturity dates. Management has determined that it is not practicable to estimate
the fair value of policy loans.
Separate Account
The estimated fair value of separate account assets and liabilities is
based upon estimates of values available upon full surrender.
Investment-type contract liabilities
The fair values of the Company's liabilities under investment-type
contracts are estimated by discounting expected cash outflows using interest
rates currently offered for similar contracts with maturities consistent with
those remaining for the contracts being valued, where appropriate. The fair
values of other investment-type contracts are based on estimates of the value of
payments available upon full surrender.
F-105
<PAGE> 196
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
15. RESERVES:
The withdrawal characteristics of the Company's annuity actuarial reserves
and deposit liabilities as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
RESERVES
--------------
<S> <C>
Not subject to discretionary withdrawal provision............... $1,105
Subject to discretionary withdrawal -- with adjustment:
- with market value adjustment........................ 259
- at book value less surrender charges................ 167
- at market value..................................... 1,004
------
Subtotal.................................... 1,430
Subject to discretionary withdrawal -- without adjustment:
- at book value (minimal or no charge or
adjustment)......................................... 856
------
Total annuity actuarial reserves and deposit liabilities
(gross)....................................................... 3,391
Less: Reinsurance................................ 178
------
Total annuity actuarial reserves and deposit liabilities
(net)......................................................... $3,213
======
</TABLE>
The amounts shown above are included in the Company's statement of admitted
assets, liabilities and surplus as life insurance and annuity reserves ($1.5
billion) and separate account liabilities ($1.7 billion).
16. REINSURANCE:
Life insurance business is ceded on a yearly renewable term basis under
various reinsurance contracts. The Company's practice is to retain no more than
$4 million of risk on any one person for individual products and $6 million for
last survivor products. The total amount of reinsured life insurance in force on
this basis was $7 billion and $8.2 billion at December 31, 1996 and 1995,
respectively. Premiums ceded under these contracts were $35.1 million and $34.3
million; benefit payments recovered were approximately $31.5 million and $30.2
million; policy reserve credits recorded were $30.9 million and $30.2 million;
and recoverable amounts on paid and unpaid losses were $10.5 million and $7.3
million in 1996 and 1995, respectively.
The Company reinsured certain whole life and endowment contracts issued
through 1974 under an agreement which combines the modified coinsurance and the
coinsurance bases. Reserves subject to this agreement were $936 million in 1996
and $963 million in 1995, for which the Company recorded policy reserve credits
of $44.0 million and $44.0 million in 1996 and 1995 respectively. Premiums ceded
under this contract were $22.3 million in 1996 and $35.6 million in 1995.
The Company also reinsured certain whole life and endowment contracts
issued through 1974 under an agreement which combines the modified coinsurance
and the coinsurance bases. Reserves subject to this agreement were $764 million
in 1996 and $785 million in 1995, for which the Company recorded policy reserve
credits of $34.2 million and $34.2 million in 1996 and 1995, respectively.
Premiums ceded under this contract were $19.9 million in 1996 and $30.5 million
in 1995.
Effective December 31, 1995, the reinsurance agreements discussed in the
two preceeding paragraphs were amended to provide reimbursements for dividends
as required by N.Y. Regulation 102. Pursuant to the amended agreements, the
reinsurers are required to reimburse the Company for their share of dividends
paid on participating policies under a formula based on the relationship between
actual dividends and the Company's general account earnings rate, which will in
most instances result in a payment equal to the reinsurer's percentage share of
the Company's actual dividends.
F-106
<PAGE> 197
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
16. REINSURANCE (CONTINUED):
Under one agreement, the Company holds the entire dividend liability as a
modified coinsurance liability. Under the other agreement, the reinsurer
coinsures $16 million of the Company's dividend liability with the balance of
the dividend liability subject to a modified coinsurance arrangement.
In view of these differences in the agreements, and the fact that these
reimbursements will not in all instances equal the reinsurers' share of the
Company's actual dividends, the Company considers all reimbursements under the
first agreement as miscellaneous income, while it has reported reimbursements
for which it has a coinsurance credit as dividends received with the remainder
accounted for as miscellaneous income.
The Company has entered into coinsurance agreements with other insurers
related to a portion of its disability income, extended term insurance,
guaranteed interest contract and long-term disability claim liabilities. Under
the terms of these agreements at December 31, 1996 and 1995, ceded premiums were
$44.3 million and $43.7 million, respectively. The total ceded reserves and
claims liabilities under these agreements were $246.4 million and $241.5 million
at December 31, 1996 and 1995, respectively.
During 1994, the Company entered into an agreement to reinsure
approximately 50% of its block of paid-up life insurance policies. The Company
transferred assets equal to the total liabilities ceded into a segregated
portfolio within its general account to secure benefit payments from the
reinsurer and established a funds withheld liability to the reinsurer for a
corresponding amount. Reserves ceded under this agreement were $96.9 and $103.5
million at December 31, 1996 and 1995, respectively.
The Company is contingently liable with respect to ceded insurance should
any reinsurer be unable to meet its obligations under these agreements.
17. NOTES PAYABLE:
The Company has an outstanding liability for borrowed money in the amount
of $33.1 million at December 31, 1996, which represents the remaining
outstanding floating rate notes that were issued by a Trust that qualifies as a
REMIC (Real Estate Mortgage Investment Conduit) under Section 860 of the
Internal Revenue Code. These notes are secured by $365.8 million of mortgage
loans the Company transferred to the Trust in 1995 as collateral. Interest on
these notes ranged from 5.56% to 6.07% during 1996. Proceeds of the assets of
the Trust will be the sole source of payment on the notes. The Company has not
guaranteed these notes or the mortgage loans transferred to the Trust. The notes
are scheduled to mature September 25, 1997. The Company has accounted for this
transaction by consolidating the Trust's mortgages and debt. The Insurance
Department of the State of New York has the authority to direct payment in full
of the aggregate outstanding principal balance on the notes and accrued interest
at any time prior to the maturity or payment in full of the outstanding notes.
18. SURPLUS NOTES:
In 1994, the Company completed the sale of $125 million of 30-year Surplus
Notes which generated net proceeds of $70 million after a discount of 42.146%
from the principal amount payable at maturity and issuance expenses of
approximately $2.3 million. The $70 million of net proceeds has increased the
Company's surplus by a corresponding amount. Following the discount period,
interest will begin to accrue on August 15, 1999; thereafter, interest on the
Notes is scheduled to be paid on February 15 and August 15 of each year,
commencing February 15, 2000, at a rate of 11.25% per annum. Each accrual and
payment of interest on the Notes may be made only with the prior approval of the
New York State Superintendent of Insurance. Accordingly, the Company has made no
charge against its surplus for the accretion of discount on the Notes as
authorized by the New York State Insurance Department.
F-107
<PAGE> 198
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(1) With respect to Keynote Series Account ("Keynote")
Report of Independent Accountants................................................ F-1
Statements of Assets and Liabilities as of December 31, 1996..................... F-2
Statements of Operations for the year ended December 31, 1996.................... F-3
Statements of Changes in Net Assets for the year ended December 31, 1996 and the
applicable periods ended December 31, 1995...................................... F-4
Notes to financial statements.................................................... F-6
(2) With respect to the Diversified Investors Portfolios
Economic and Market Review....................................................... F-8
Report of Independent Accountants................................................ F-9
Statement of Assets and Liabilities for the year ended December 31, 1996......... F-10
Statement of Operations for the applicable periods ended December 31, 1996....... F-12
Statements of Changes in Net Assets for the applicable periods ended December 31,
1996 and the year ended December 31, 1995....................................... F-14
Portfolio of Investments for December 31, 1996:
Money Market Portfolio........................................................... F-18
High Quality Bond Portfolio...................................................... F-20
Intermediate Government Bond Portfolio........................................... F-24
Government/Corporate Bond Portfolio.............................................. F-28
Balanced Fund Portfolio.......................................................... F-32
Equity Income Portfolio.......................................................... F-36
Equity Value Portfolio........................................................... F-42
Growth and Income Portfolio...................................................... F-46
Equity Growth Portfolio.......................................................... F-50
Special Equity Portfolio......................................................... F-53
Aggressive Equity Portfolio...................................................... F-63
High Yield Bond Portfolio........................................................ F-65
International Equity Portfolio................................................... F-69
Notes to Financial Statements.................................................... F-77
(3) With respect to The Mutual Life Insurance Company of New York
Report of Independent Accountants................................................ F-88
Statement of Admitted Assets, Liabilities and Surplus -- Statutory Basis as of
December 31, 1996 and 1995...................................................... F-89
Statements of Operations for the years ended December 31, 1996 and 1995.......... F-90
Statements of Surplus for the years ended December 31, 1996 and 1995............. F-91
Statements of Cash Flows for the years ended December 31, 1996 and 1995.......... F-92
Notes to Financial Statements.................................................... F-93
</TABLE>
(b) Exhibits
Any form of Form N-4 Exhibits (1) and (3) through (7), (9), (13) and (14)
previously filed with the Commission as part of the Registrant's N-4
Registration Statement-Registration No. 33-19836 under the Securities Act
of 1933 are incorporated herein by reference.
<TABLE>
<S> <C>
Exhibit (2) Not applicable.
Exhibit (8) Not applicable.
Exhibit(10) Consent of Independent Accountants.
Exhibit(11) Not applicable.
Exhibit(12) Not applicable.
Exhibit(19) Powers of Attorney.
</TABLE>
C-1
<PAGE> 199
ITEM 25. TRUSTEES AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
YEAR
TRUSTEES ELECTED
------------------------------------------------------- -------
<S> <C> <C>
Paul A. Miller........... Chairman of the Executive Committee, Pacific
Enterprises, Los Angeles, CA 1969
John R. Meyer............ Professor Emeritus, Harvard University, Sanibel, FL 1972
James L. Johnson......... Chairman Emeritus, GTE Corporation, Irving, TX 1986
G. Robert Durham......... Retired Chairman and Chief Executive Officer, Walter
Industries, Inc. and Retired Chairman and Chief
Executive Officer, Phelps Dodge Corporation, Tampa,
FL 1988
James B. Farley.......... Retired Chairman and Chief Executive Officer, Mutual of
New York, Delray Beach, FL 1988
Jane C. Pfeiffer......... Management Consultant, Greenwich, CT 1988
Robert Holland, Jr....... Former President and Chief Executive Officer, Ben &
Jerry's Homemade, Inc., White Plains, NY 1990
Thomas C. Theobald....... Managing Director, William Blair Capital Partners,
L.L.C., Chicago, IL 1990
Claude M. Ballard, Jr.... Limited Partner, Goldman, Sachs & Company, Dripping
Springs, TX 1990
Tom H. Barrett........... Former Chairman, President & Chief Executive Officer,
The Goodyear Tire & Rubber Company, Akron, OH 1990
Michael I. Roth.......... Chairman and Chief Executive Officer, Mutual of New
York, Stamford, CT 1991
Samuel J. Foti........... President and Chief Operating Officer, Mutual of New
York, Greenwich, CT 1993
David L. Call............ Ronald P. Lynch Dean Emeritus, Cornell University,
College of Agriculture and Life Sciences, Ithaca, NY 1993
Kenneth M. Levine........ Executive Vice President and Chief Investment Officer,
Mutual of New York, River Vale, NJ 1994
Robert R. Kiley.......... President and Chief Executive Officer, New York City
Partnership and Chamber of Commerce, Inc., New York,
NY 1995
TRUSTEE EMERITUS
George V. Comfort........ Chairman of the Board, George Comfort & Sons, Inc., New
York, NY 1974
Maurice F. Granville..... Retired Chairman of the Board and Chief Executive
Officer, Texaco Inc., Key Largo, FL 1977
Sol M. Linowitz.......... Senior Counsel, Coudert Brothers, Washington, DC 1970
Edward L. Palmer......... Retired Chairman of the Executive Committee and
Director, Citicorp and Citibank, New York, NY 1973
Paul G. Rogers........... Partner, Hogan & Hartson, Washington, DC 1982
Robert S. Smith.......... W.I. Myers Professor Emeritus of Agricultural Finance,
Cornell University; Chairman emeritus, Tompkins
County Trust Company, Ithaca, NY 1980
George A. Stinson........ Director, National Intergroup, Inc., Tryon, NC 1973
Charles C. Tillinghast, Consultant, Merrill Lynch White Weld Capital Markets
Jr..................... Group, Providence, RI 1966
Lawrence E. Walsh........ Counsel to Crowe & Dunlevy, Oklahoma City, OK 1970
Margaret Bush Wilson..... Senior Partner, Wilson & Associates, St. Louis, Mo 1981
</TABLE>
C-2
<PAGE> 200
OFFICER -- TRUSTEES
James B. Farley, Retired Chairman of the Board of Trustees, and Retired
Chief Executive Officer, MONY.
Michael I. Roth, Chairman and Chief Executive Officer, MONY. Director,
Chairman of the Board and Chief Executive Officer, MONY Life Insurance Company
of America; Director, MONY CS, Inc. and 1740 Advisers, Inc.
Samuel J. Foti, President and Chief Operating Officer, MONY. Director,
President and Chief Operating Officer, MONY Life Insurance Company of America;
Director and Chairman of the Board, MONY International Holdings, Inc.; Director,
MONY Life Insurance Company of the Americas, Ltd., Director, MONY Bank & Trust
Company of the Americas, Ltd, and MONY Brokerage, Inc.
Kenneth M. Levine, Executive Vice President and Chief Investment Officer,
MONY. Director, and Executive Vice President, MONY Life Insurance Company of
America; Director, ARES Holdings, Inc., 1740 Advisers, Inc., Director, Chairman
of the Board and President, MONY Series Fund Inc.; Director, Chairman of the
Board and Chief Executive Officer, MONY Realty Partners, Inc., Director and
President, MONY Funding, Inc., and Director, Chairman of the Board and Chief
Executive Officer, 1740 Ventures, Inc.
OTHER OFFICERS
Richard Daddario, Executive Vice President and Chief Financial Officer,
MONY; Executive Vice President, 1740 Advisers, Inc.; Director, Vice President
and Controller, MONY Life Insurance Company of America.
Phillip A. Eisenberg, Senior Vice President and Chief Actuary, MONY; Vice
President and Actuary, MONY Life Insurance Company of America; Vice President,
MONY Credit Corporation.
David V. Weigel, Vice President-Treasurer, MONY; Vice President and
Treasurer, MONY Credit Corporation, MONY Realty Partners, Inc. and 1740
Ventures, Inc.; Treasurer, 1740 Advisers, Inc., MONY International Holdings,
Inc., ARES, Inc., MONY CS, Inc., Smithtown Hotel, Inc., MONY Brokerage, Inc.,
MONY Life Insurance Company of America, MONY Series Fund, Inc., MONY Funding,
Inc. and Advantage Real Estate Services Colorado, Inc.
Thomas J. Conklin, Senior Vice President and Corporate Secretary, MONY.
For more than the past five years, the principal occupation of each of the
officers listed above has been an officer of MONY.
The principal business address of all of the "Officer-Trustees" and "Other
Officers" listed above is 1740 Broadway, New York, New York 10019.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
No person is directly or indirectly controlled by the Registrant. The
Registrant is a separate account of the Depositor.
The following is a diagram showing all corporations directly or indirectly
controlled or under common control with Depositor, 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. (See
diagram on following page.) Omitted from the diagram are subsidiaries of MONY
that, considered in the aggregate, would not constitute a "significant
subsidiary" of MONY (as that term is defined in Rule 8b-2 under Section 8 of the
Investment Company Act of 1940).
ITEM 27. NUMBER OF CONTRACTHOLDERS/PARTICIPANTS
As of January 31, 1997, there were 415 Contractholders.
C-3
<PAGE> 201
LOGO
C-4
<PAGE> 202
ITEM 28. INDEMNIFICATION
The By-Laws of The Mutual Life Insurance Company of New York provide, in
Article XVI, as follows:
Each person (and the heirs, executors and administrators of such
person) made or threatened to be made a party to any action, civil or
criminal, by reason of being or having been a trustee, officer, or employee
of the corporation (or by reason of serving any other organization at the
request of the corporation) shall be indemnified to the extent permitted by
the law of the State of New York and in the manner prescribed therein. To
this end, and as authorized by Chapter 513, 1986 Laws of New York, the
Board of Trustees may adopt all resolutions, authorize all agreements and
take all actions with respect to the indemnification of trustees and
officers, and the advance payment of their expenses in connection
therewith.
Insofar as indemnification for liability arising under the Securities Act
of 1933 ("1933 Act") may be permitted to directors, officers and controlling
persons, if any, of the Registrant pursuant to the above paragraph, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person, if any, 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 1933 Act
and will be governed by the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) MONY Securities Corp. ("MSC") is the principal underwriter of the
Registrant. The names, titles and principal business addresses of the officers
and directors of MSC are as stated on Forms U-4 of Form BD (File No. 8-15289) as
declared effective November 23, 1969, as amended, the text of which is herein
incorporated by reference. Diversified Investment Advisors, Inc., a wholly-owned
subsidiary of MONY acts as investment adviser and administrator to each series
of Diversified Investors Portfolios. With respect to each series of Diversified
Investors Portfolios, Diversified contracted for certain investment advisory
services with a subadviser.
(b) The names, titles and principal business addresses of the officers of
MSC are listed on Schedule A of Form BD for MSC (Registration No. 8-15289)
(originally filed on behalf of MONY Sales, Inc. on November 23, 1969) and Form
U-4 filed by each individual officer, the text of which is hereby incorporated
by reference.
(c) Refer to Prospectus pages 8 and 13, "Charges" and Part B, Statement of
Additional Information, page 3, "Sale of Contracts/Principal Underwriter" for
information regarding compensation.
ITEM 30. 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 The Mutual Life Insurance Company of New York, in
whole or in part, at its principal offices at 1740 Broadway, New York, New York
10019; at its Operations Center at 1 MONY Plaza, Syracuse, New York 13202; at
its Marketing Center at 500 Frank W. Burr Boulevard, Teaneck, New Jersey
07666-6888.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
C-5
<PAGE> 203
ITEM 32. 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) 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.
C-6
<PAGE> 204
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for the effectiveness of this registration statement and has duly
caused this Post-Effective Amendment No. 16 to its Registration Statement to be
signed on its behalf by the undersigned thereunto duly authorized, in the City
of New York, State of New York, on the 30th day of April, 1997.
KEYNOTE SERIES ACCOUNT
(Registrant)
By: /s/ KENNETH M. LEVINE
---------------------------------------
Kenneth M. Levine
THE MUTUAL LIFE INSURANCE COMPANY
OF NEW YORK
(Depositor)
By: /s/ MICHAEL I. ROTH
---------------------------------------
Michael I. Roth
Trustee, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirement of the Securities Act of 1933 this
Post-Effective Amendment No. 16 to its Registration Statement has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ---------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL I. ROTH Trustee, Chairman of the April 30, 1997
- ------------------------------------- Board and Chief Executive
(Michael I. Roth) Officer
/s/ KENNETH M. LEVINE Trustee, Executive Vice April 30, 1997
- ------------------------------------- President and chief
(Kenneth M. Levine) Investment Officer
/s/ SAMUEL J. FOTI Trustee, President and Chief April 30, 1997
- ------------------------------------- Operating Officer
(Samuel J. Foti)
/s/ RICHARD DADDARIO Executive Vice President and April 30, 1997
- ------------------------------------- Chief Financial Officer
(Richard Daddario)
/s/ THOMAS J. CONKLIN Senior Vice President and April 30, 1997
- ------------------------------------- Corporate Secretary
(Thomas J. Conklin)
*/s/ CLAUDE M. BALLARD, JR. Trustee April 30, 1997
- -------------------------------------
(Claude M. Ballard, Jr.)
*/s/ TOM H. BARRETT Trustee April 30, 1997
- -------------------------------------
(Tom H. Barrett)
*/s/ DAVID L. CALL Trustee April 30, 1997
- -------------------------------------
(David L. Call)
</TABLE>
C-7
<PAGE> 205
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ---------------------------- -------------------
<C> <S> <C>
*/s/ G. ROBERT DURHAM Trustee April 30, 1997
- -------------------------------------
(G. Robert Durham)
*/s/ ROBERT HOLLAND, JR. Trustee April 30, 1997
- -------------------------------------
(Robert Holland, Jr.)
*/s/ JAMES L. JOHNSON Trustee April 30, 1997
- -------------------------------------
(James L. Johnson)
*/s/ JOHN R. MEYER Trustee April 30, 1997
- -------------------------------------
(John R. Meyer)
*/s/ PAUL A. MILLER Trustee April 30, 1997
- -------------------------------------
(Paul A. Miller)
*/s/ JANE C. PFEIFFER Trustee April 30, 1997
- -------------------------------------
(Jane C. Pfeiffer)
*/s/ THOMAS C. THEOBALD Trustee April 30, 1997
- -------------------------------------
(Thomas C. Theobald)
*By: /s/ THOMAS J. CONKLIN
- -------------------------------------
Thomas J. Conklin
Attorney-in-Fact
April 30, 1997
</TABLE>
C-8
<PAGE> 206
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for the effectiveness of this registration statement and has duly
caused this Post-Effective Amendment No. 16 to its Registration Statement to be
signed on its behalf by the undersigned thereunto duly authorized, in the County
of Westchester, State of New York, on the 30th day of April, 1997.
DIVERSIFIED INVESTORS PORTFOLIOS
/s/ TOM A. SCHLOSSBERG
--------------------------------------
Tom A. Schlossberg
Trustee, President, Chief Executive
Officer
and Chairman of the Board of Trustees
of
the Portfolios
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 16 to its Registration Statement has been signed
below by the following persons in the capacities indicated on the 30th day of
April, 1997.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- ----------------------- -------------------
<C> <S> <C>
/s/ TOM A. Trustee, President, April 30, 1997
SCHLOSSBERG Chief Executive Officer
- --------------------------------------------- and Chairman of the
Tom A. Schlossberg Board of Trustees of
the Portfolios
*/s/ NEAL M. Trustee of the April 30, 1997
JEWELL Portfolios
- ---------------------------------------------
Neal M. Jewell
*/s/ EUGENE M. MANNELLA Trustee of the April 30, 1997
- --------------------------------------------- Portfolios
Eugene M. Mannella
*/s/ PATRICIA L. Trustee of the April 30, 1997
SAWYER Portfolios
- ---------------------------------------------
Patricia L. Sawyer
*By /s/ ROBERT F. April 30, 1997
COLBY
- ---------------------------------------------
Robert F. Colby
Attorney-in-Fact
</TABLE>
C-9
<PAGE> 207
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------ ------------------------------------------------------------------- -----------
<C> <S> <C>
99.(10) Consent of Independent Accountants
99.(15) Powers of Attorney
</TABLE>
C-10
<PAGE> 1
[COOPERS & LYBRAND LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
-----------------
We consent to the incorporation by reference in this Post-Effective Amendment
No. 16 to the Registration Statement of Keynote Series Account on Form 4 (File
No. 33-19836) of our reports dated February 12, 1997, February 10, 1997 and
February 21, 1997 on our audits of the financial statements of Keynote Series
Account, the financial statements and financial highlights of Diversified
Investors Portfolios and the financial statements of Mutual Life Insurance
Company of New York, respectively.
We also consent to the references to our firm under the caption "Experts" in
the Prospectus and under the caption "Independent Accountants" in the Statement
of Additional Information.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
New York, New York
April 28, 1997
<PAGE> 1
MN029
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg, K.
Rone Baldwin, Robert F. Colby, Alfred J. Sylvain and John F. Hughes, and each
of them, with full powers of substitution as his true and lawful attorneys and
agents to execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by Keynote
Series Account (the "Company") with the Securities and Exchange Commission
under the Investment Company Act of 1940 and the Securities Act of 1933 and any
and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Company to comply with such Acts, the
rules, regulations and requirements of the Securities and Exchange Commission,
and the securities or Blue Sky laws of any state or other jurisdiction, and the
undersigned hereby ratifies and confirms as his own act and deed any and all
acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents have, and may
exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 30th
day of November, 1993.
/s/ Neal M. Jewell
--------------------------------
Neal M. Jewell
<PAGE> 2
MN029
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg, K.
Rone Baldwin, Robert F. Colby, Alfred J. Sylvain and John F. Hughes, and each
of them, with full powers of substitution as his true and lawful attorneys and
agents to execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by Keynote
Series Account (the "Company") with the Securities and Exchange Commission
under the Investment Company Act of 1940 and the Securities Act of 1933 and any
and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Company to comply with such Acts, the
rules, regulations and requirements of the Securities and Exchange Commission,
and the securities or Blue Sky laws of any state or other jurisdiction, and the
undersigned hereby ratifies and confirms as his own act and deed any and all
acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents have, and may
exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 30th
day of November, 1993.
/s/ Patricia L. Sawyer
--------------------------------
Patricia L. Sawyer
<PAGE> 3
MN029
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg, K.
Rone Baldwin, Robert F. Colby, Alfred J. Sylvain and John F. Hughes, and each
of them, with full powers of substitution as his true and lawful attorneys and
agents to execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by Keynote
Series Account (the "Company") with the Securities and Exchange Commission
under the Investment Company Act of 1940 and the Securities Act of 1933 and any
and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Company to comply with such Acts, the
rules, regulations and requirements of the Securities and Exchange Commission,
and the securities or Blue Sky laws of any state or other jurisdiction, and the
undersigned hereby ratifies and confirms as his own act and deed any and all
acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents have, and may
exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 30th
day of November, 1993.
/s/ Eugene M. Mannella
--------------------------------
Eugene M. Mannella
<PAGE> 4
MN029
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg, K.
Rone Baldwin, Robert F. Colby, Alfred J. Sylvain and John F. Hughes, and each
of them, with full powers of substitution as his true and lawful attorneys and
agents to execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by Keynote
Series Account (the "Company") with the Securities and Exchange Commission
under the Investment Company Act of 1940 and the Securities Act of 1933 and any
and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Company to comply with such Acts, the
rules, regulations and requirements of the Securities and Exchange Commission,
and the securities or Blue Sky laws of any state or other jurisdiction, and the
undersigned hereby ratifies and confirms as his own act and deed any and all
acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents have, and may
exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 30th
day of November, 1993.
/s/ Tom A. Schlossberg
--------------------------------
Tom A. Schlossberg
<PAGE> 5
MN029
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg, K.
Rone Baldwin, Robert F. Colby, Alfred J. Sylvain and John F. Hughes, and each
of them, with full powers of substitution as his true and lawful attorneys and
agents to execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by Keynote
Series Account (the "Company") with the Securities and Exchange Commission
under the Investment Company Act of 1940 and the Securities Act of 1933 and any
and all instruments which such attorneys and agents, or any of them, deem
necessary or advisable to enable the Company to comply with such Acts, the
rules, regulations and requirements of the Securities and Exchange Commission,
and the securities or Blue Sky laws of any state or other jurisdiction, and the
undersigned hereby ratifies and confirms as his own act and deed any and all
acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents have, and may
exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 30th
day of November, 1993.
/s/ Alfred J. Sylvain
--------------------------------
Alfred J. Sylvain
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, TOM H. BARRETT,
------------------------
(Name)
Trustee of The Mutual Life Insurance Company of New York ("Corporation"),
which Corporation:
(i) has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C., under the provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as
amended, Registration Statements numbered 2-25204 on Form N-3,
33-19836 and 33-33318 on Form N-4, or such other forms as may be
adopted by the SEC, for the registration under said Act(s) of
certain variable annuity contracts and variable accumulation
annuity contracts to be issued by said Corporation,
(ii) intends to file with the SEC under said Act(s) a Registration
Statement(s), on SEC Form N-4 or such other forms as may be
adopted by the SEC, for the registration of a separate account(s)
consisting of contributions under certain group variable
accumulation annuity contracts issued by said Corporation, as a
unit investment trust which shall invest exclusively in shares of
MONY Series Fund, Inc.,
(iii) intends to file one or more amendments to one or more of said
Registration Statements, and
(iv) has filed with the SEC pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, Form 10-K Annual
Report for Pooled Account Nos. 1, 4, 6 and 10, annuity contracts
and variable accumulation annuity contracts to be issued by said
Corporation,
hereby constitute and appoint WILLARD G. ELDRED, Vice President and Deputy
General Counsel of said Corporation and THOMAS J. CONKLIN, Senior Vice President
and Secretary of said Corporation, my true and lawful attorneys-in-fact and
agents, either of them to act with full power without the other, for me and in
my name, place and stead, to sign any such amended and/or additional
Registration Statements and/or Annual Report and any and all other amendments
and other documents relating thereto, with power where appropriate to affix the
corporate seal of said Corporation thereto and to attest said seal, and to file
such Registration Statements and/or Annual Report and amendments with all
exhibits thereto, any and all other information and documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done as fully as to all intents and
purposes as I might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 31st
day of August, 1990
/s/ Tom Barrett
----------------------------
(Signature)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 31st day of August, 1990 before me personally came Tom H. Barrett,
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
-------------------------------
CATHERINE A. MOHR
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1991
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, CLAUDE MARK BALLARD, JR.,
------------------------
(Name)
Trustee of The Mutual Life Insurance Company of New York ("Corporation"),
which Corporation:
(i) has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C., under the provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as
amended, Registration Statements numbered 2-25204 on Form N-3,
33-19836 and 33-33318 on Form N-4, or such other forms as may be
adopted by the SEC, for the registration under said Act(s) of
certain variable annuity contracts and variable accumulation
annuity contracts to be issued by said Corporation,
(ii) intends to file with the SEC under said Act(s) a Registration
Statement(s), on SEC Form N-4 or such other forms as may be
adopted by the SEC, for the registration of a separate account(s)
consisting of contributions under certain group variable
accumulation annuity contracts issued by said Corporation, as a
unit investment trust which shall invest exclusively in shares of
MONY Series Fund, Inc.,
(iii) intends to file one or more amendments to one or more of said
Registration Statements, and
(iv) has filed with the SEC pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, Form 10-K Annual
Report for Pooled Account Nos. 1, 4, 6 and 10, annuity contracts
and variable accumulation annuity contracts to be issued by said
Corporation,
hereby constitute and appoint WILLARD G. ELDRED, Vice President and Deputy
General Counsel of said Corporation and THOMAS J. CONKLIN, Senior Vice President
and Secretary of said Corporation, my true and lawful attorneys-in-fact and
agents, either of them to act with full power without the other, for me and in
my name, place and stead, to sign any such amended and/or additional
Registration Statements and/or Annual Report and any and all other amendments
and other documents relating thereto, with power where appropriate to affix the
corporate seal of said Corporation thereto and to attest said seal, and to file
such Registration Statements and/or Annual Report and amendments with all
exhibits thereto, any and all other information and documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done as fully as to all intents and
purposes as I might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 31st
day of August, 1990
/s/ Claude Mark Ballard, Jr.
----------------------------
(Signature)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 3rd day of August, 1990 before me personally came Claude Mark Ballard,
Jr., to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Rosemarie Tapia
-------------------------------
ROSEMARIE TAPIA
NOTARY PUBLIC, State of New York
No. 41-4876817
Qualified in Queens County
Term Expires November 24, 1990
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, DAVID L. CALL,
------------------------
(Name)
Trustee of The Mutual Life Insurance Company of New York ("Corporation"),
which Corporation:
(i) has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C., under the provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as
amended, Registration Statements numbered 2-25204 on Form N-3,
33-19836 and 33-33318 on Form N-4, or such other forms as may be
adopted by the SEC, for the registration under said Act(s) of
certain variable annuity contracts and variable accumulation
annuity contracts to be issued by said Corporation,
(ii) intends to file with the SEC under said Act(s) a Registration
Statement(s), on SEC Form N-4 or such other forms as may be
adopted by the SEC, for the registration of a separate account(s)
consisting of contributions under certain group variable
accumulation annuity contracts issued by said Corporation, as a
unit investment trust which shall invest exclusively in shares of
MONY Series Fund, Inc.,
(iii) intends to file one or more amendments to one or more of said
Registration Statements, and
(iv) has filed with the SEC pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, Form 10-K Annual
Report for Pooled Account Nos. 1, 4, 6 and 10, annuity contracts
and variable accumulation annuity contracts to be issued by said
Corporation,
hereby constitute and appoint WILLARD G. ELDRED, Vice President and Deputy
General Counsel of said Corporation and THOMAS J. CONKLIN, Senior Vice President
and Secretary of said Corporation, my true and lawful attorneys-in-fact and
agents, either of them to act with full power without the other, for me and in
my name, place and stead, to sign any such amended and/or additional
Registration Statements and/or Annual Report and any and all other amendments
and other documents relating thereto, with power where appropriate to affix the
corporate seal of said Corporation thereto and to attest said seal, and to file
such Registration Statements and/or Annual Report and amendments with all
exhibits thereto, any and all other information and documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done as fully as to all intents and
purposes as I might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 29th
day of January, 1993
/s/ David L. Call
----------------------------
(Signature)
STATE OF NEW YORK )
) ss.:
COUNTY OF TOMPKINS )
On the 29th day of January, 1993 before me personally came David L. Call,
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Janice H. Hatfield
-------------------------------
JANICE A. HATFIELD
NOTARY PUBLIC, State of New York
Qualified in Tompkins County
No. 4688232
My Commission Expires May 31, 1993
<PAGE> 9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, ROBERT HOLLAND, JR.,
------------------------
(Name)
Trustee of The Mutual Life Insurance Company of New York ("Corporation"),
which Corporation:
(i) has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C., under the provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as
amended, Registration Statements numbered 2-25204 on Form N-3,
33-19836 and 33-33318 on Form N-4, or such other forms as may be
adopted by the SEC, for the registration under said Act(s) of
certain variable annuity contracts and variable accumulation
annuity contracts to be issued by said Corporation,
(ii) intends to file with the SEC under said Act(s) a Registration
Statement(s), on SEC Form N-4 or such other forms as may be
adopted by the SEC, for the registration of a separate account(s)
consisting of contributions under certain group variable
accumulation annuity contracts issued by said Corporation, as a
unit investment trust which shall invest exclusively in shares of
MONY Series Fund, Inc.,
(iii) intends to file one or more amendments to one or more of said
Registration Statements, and
(iv) has filed with the SEC pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, Form 10-K Annual
Report for Pooled Account Nos. 1, 4, 6 and 10, annuity contracts
and variable accumulation annuity contracts to be issued by said
Corporation,
hereby constitute and appoint WILLARD G. ELDRED, Vice President and Deputy
General Counsel of said Corporation and THOMAS J. CONKLIN, Senior Vice President
and Secretary of said Corporation, my true and lawful attorneys-in-fact and
agents, either of them to act with full power without the other, for me and in
my name, place and stead, to sign any such amended and/or additional
Registration Statements and/or Annual Report and any and all other amendments
and other documents relating thereto, with power where appropriate to affix the
corporate seal of said Corporation thereto and to attest said seal, and to file
such Registration Statements and/or Annual Report and amendments with all
exhibits thereto, any and all other information and documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done as fully as to all intents and
purposes as I might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 1st
day of October, 1990
/s/ Robert Holland, Jr.
----------------------------
(Signature)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 1st day of October, 1990 before me personally came Robert Holland, Jr.,
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
-------------------------------
CATHERINE A. MOHR
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1991
<PAGE> 10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, G. ROBERT DURHAM,
------------------------
(Name)
Trustee of The Mutual Life Insurance Company of New York ("Corporation"),
which Corporation:
(i) has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C., under the provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as
amended, Registration Statements numbered 2-25204 on Form N-3,
33-19836 and 33-33318 on Form N-4, or such other forms as may be
adopted by the SEC, for the registration under said Act(s) of
certain variable annuity contracts and variable accumulation
annuity contracts to be issued by said Corporation,
(ii) intends to file with the SEC under said Act(s) a Registration
Statement(s), on SEC Form N-4 or such other forms as may be
adopted by the SEC, for the registration of a separate account(s)
consisting of contributions under certain group variable
accumulation annuity contracts issued by said Corporation, as a
unit investment trust which shall invest exclusively in shares of
MONY Series Fund, Inc.,
(iii) intends to file one or more amendments to one or more of said
Registration Statements, and
(iv) has filed with the SEC pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, Form 10-K Annual
Report for Pooled Account Nos. 1, 4, 6 and 10, annuity contracts
and variable accumulation annuity contracts to be issued by said
Corporation,
hereby constitute and appoint WILLARD G. ELDRED, Vice President and Deputy
General Counsel of said Corporation and THOMAS J. CONKLIN, Senior Vice President
and Secretary of said Corporation, my true and lawful attorneys-in-fact and
agents, either of them to act with full power without the other, for me and in
my name, place and stead, to sign any such amended and/or additional
Registration Statements and/or Annual Report and any and all other amendments
and other documents relating thereto, with power where appropriate to affix the
corporate seal of said Corporation thereto and to attest said seal, and to file
such Registration Statements and/or Annual Report and amendments with all
exhibits thereto, any and all other information and documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done as fully as to all intents and
purposes as I might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25th
day of July, 1990
/s/ G. Robert Durham
----------------------------
(Signature)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of July, 1990 before me personally came G. Robert Durham,
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
-------------------------------
CATHERINE A. MOHR
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1991
<PAGE> 11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, JAMES L. JOHNSON,
------------------------
(Name)
Trustee of The Mutual Life Insurance Company of New York ("Corporation"),
which Corporation:
(i) has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C., under the provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as
amended, Registration Statements numbered 2-25204 on Form N-3,
33-19836 and 33-33318 on Form N-4, or such other forms as may be
adopted by the SEC, for the registration under said Act(s) of
certain variable annuity contracts and variable accumulation
annuity contracts to be issued by said Corporation,
(ii) intends to file with the SEC under said Act(s) a Registration
Statement(s), on SEC Form N-4 or such other forms as may be
adopted by the SEC, for the registration of a separate account(s)
consisting of contributions under certain group variable
accumulation annuity contracts issued by said Corporation, as a
unit investment trust which shall invest exclusively in shares of
MONY Series Fund, Inc.,
(iii) intends to file one or more amendments to one or more of said
Registration Statements, and
(iv) has filed with the SEC pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, Form 10-K Annual
Report for Pooled Account Nos. 1, 4, 6 and 10, annuity contracts
and variable accumulation annuity contracts to be issued by said
Corporation,
hereby constitute and appoint WILLARD G. ELDRED, Vice President and Deputy
General Counsel of said Corporation and THOMAS J. CONKLIN, Senior Vice President
and Secretary of said Corporation, my true and lawful attorneys-in-fact and
agents, either of them to act with full power without the other, for me and in
my name, place and stead, to sign any such amended and/or additional
Registration Statements and/or Annual Report and any and all other amendments
and other documents relating thereto, with power where appropriate to affix the
corporate seal of said Corporation thereto and to attest said seal, and to file
such Registration Statements and/or Annual Report and amendments with all
exhibits thereto, any and all other information and documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done as fully as to all intents and
purposes as I might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25th
day of July, 1990
/s/ James L. Johnson
----------------------------
(Signature)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of July, 1990 before me personally came James L. Johnson,
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
-------------------------------
CATHERINE A. MOHR
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1991
<PAGE> 12
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, JOHN R. MEYER,
------------------------
(Name)
Trustee of The Mutual Life Insurance Company of New York ("Corporation"),
which Corporation:
(i) has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C., under the provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as
amended, Registration Statements numbered 2-25204 on Form N-3,
33-19836 and 33-33318 on Form N-4, or such other forms as may be
adopted by the SEC, for the registration under said Act(s) of
certain variable annuity contracts and variable accumulation
annuity contracts to be issued by said Corporation,
(ii) intends to file with the SEC under said Act(s) a Registration
Statement(s), on SEC Form N-4 or such other forms as may be
adopted by the SEC, for the registration of a separate account(s)
consisting of contributions under certain group variable
accumulation annuity contracts issued by said Corporation, as a
unit investment trust which shall invest exclusively in shares of
MONY Series Fund, Inc.,
(iii) intends to file one or more amendments to one or more of said
Registration Statements, and
(iv) has filed with the SEC pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, Form 10-K Annual
Report for Pooled Account Nos. 1, 4, 6 and 10, annuity contracts
and variable accumulation annuity contracts to be issued by said
Corporation,
hereby constitute and appoint WILLARD G. ELDRED, Vice President and Deputy
General Counsel of said Corporation and THOMAS J. CONKLIN, Senior Vice President
and Secretary of said Corporation, my true and lawful attorneys-in-fact and
agents, either of them to act with full power without the other, for me and in
my name, place and stead, to sign any such amended and/or additional
Registration Statements and/or Annual Report and any and all other amendments
and other documents relating thereto, with power where appropriate to affix the
corporate seal of said Corporation thereto and to attest said seal, and to file
such Registration Statements and/or Annual Report and amendments with all
exhibits thereto, any and all other information and documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done as fully as to all intents and
purposes as I might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25th
day of July, 1990
/s/ John R. Meyer
----------------------------
(Signature)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of July, 1990 before me personally came John R. Meyer,
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
-------------------------------
CATHERINE A. MOHR
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1991
<PAGE> 13
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, PAUL A. MILLER,
------------------------
(Name)
Trustee of The Mutual Life Insurance Company of New York ("Corporation"),
which Corporation:
(i) has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C., under the provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as
amended, Registration Statements numbered 2-25204 on Form N-3,
33-19836 and 33-33318 on Form N-4, or such other forms as may be
adopted by the SEC, for the registration under said Act(s) of
certain variable annuity contracts and variable accumulation
annuity contracts to be issued by said Corporation,
(ii) intends to file with the SEC under said Act(s) a Registration
Statement(s), on SEC Form N-4 or such other forms as may be
adopted by the SEC, for the registration of a separate account(s)
consisting of contributions under certain group variable
accumulation annuity contracts issued by said Corporation, as a
unit investment trust which shall invest exclusively in shares of
MONY Series Fund, Inc.,
(iii) intends to file one or more amendments to one or more of said
Registration Statements, and
(iv) has filed with the SEC pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, Form 10-K Annual
Report for Pooled Account Nos. 1, 4, 6 and 10, annuity contracts
and variable accumulation annuity contracts to be issued by said
Corporation,
hereby constitute and appoint WILLARD G. ELDRED, Vice President and Deputy
General Counsel of said Corporation and THOMAS J. CONKLIN, Senior Vice President
and Secretary of said Corporation, my true and lawful attorneys-in-fact and
agents, either of them to act with full power without the other, for me and in
my name, place and stead, to sign any such amended and/or additional
Registration Statements and/or Annual Report and any and all other amendments
and other documents relating thereto, with power where appropriate to affix the
corporate seal of said Corporation thereto and to attest said seal, and to file
such Registration Statements and/or Annual Report and amendments with all
exhibits thereto, any and all other information and documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done as fully as to all intents and
purposes as I might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26th
day of July, 1990
/s/ Paul A. Miller
----------------------------
(Signature)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 26th day of July, 1990 before me personally came Paul A. Miller,
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
-------------------------------
CATHERINE A. MOHR
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1991
<PAGE> 14
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, JANE C. PFEIFFER,
------------------------
(Name)
Trustee of The Mutual Life Insurance Company of New York ("Corporation"),
which Corporation:
(i) has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C., under the provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as
amended, Registration Statements numbered 2-25204 on Form N-3,
33-19836 and 33-33318 on Form N-4, or such other forms as may be
adopted by the SEC, for the registration under said Act(s) of
certain variable annuity contracts and variable accumulation
annuity contracts to be issued by said Corporation,
(ii) intends to file with the SEC under said Act(s) a Registration
Statement(s), on SEC Form N-4 or such other forms as may be
adopted by the SEC, for the registration of a separate account(s)
consisting of contributions under certain group variable
accumulation annuity contracts issued by said Corporation, as a
unit investment trust which shall invest exclusively in shares of
MONY Series Fund, Inc.,
(iii) intends to file one or more amendments to one or more of said
Registration Statements, and
(iv) has filed with the SEC pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, Form 10-K Annual
Report for Pooled Account Nos. 1, 4, 6 and 10, annuity contracts
and variable accumulation annuity contracts to be issued by said
Corporation,
hereby constitute and appoint WILLARD G. ELDRED, Vice President and Deputy
General Counsel of said Corporation and THOMAS J. CONKLIN, Senior Vice President
and Secretary of said Corporation, my true and lawful attorneys-in-fact and
agents, either of them to act with full power without the other, for me and in
my name, place and stead, to sign any such amended and/or additional
Registration Statements and/or Annual Report and any and all other amendments
and other documents relating thereto, with power where appropriate to affix the
corporate seal of said Corporation thereto and to attest said seal, and to file
such Registration Statements and/or Annual Report and amendments with all
exhibits thereto, any and all other information and documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done as fully as to all intents and
purposes as I might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25th
day of July, 1990
/s/ Jane C. Pfeiffer
----------------------------
(Signature)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of July, 1990 before me personally came Jane C. Pfeiffer,
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
-------------------------------
CATHERINE A. MOHR
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1991
<PAGE> 15
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, THOMAS C. THEOBALD,
------------------------
(Name)
Trustee of The Mutual Life Insurance Company of New York ("Corporation"),
which Corporation:
(i) has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C., under the provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as
amended, Registration Statements numbered 2-25204 on Form N-3,
33-19836 and 33-33318 on Form N-4, or such other forms as may be
adopted by the SEC, for the registration under said Act(s) of
certain variable annuity contracts and variable accumulation
annuity contracts to be issued by said Corporation,
(ii) intends to file with the SEC under said Act(s) a Registration
Statement(s), on SEC Form N-4 or such other forms as may be
adopted by the SEC, for the registration of a separate account(s)
consisting of contributions under certain group variable
accumulation annuity contracts issued by said Corporation, as a
unit investment trust which shall invest exclusively in shares of
MONY Series Fund, Inc.,
(iii) intends to file one or more amendments to one or more of said
Registration Statements, and
(iv) has filed with the SEC pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, Form 10-K Annual
Report for Pooled Account Nos. 1, 4, 6 and 10, annuity contracts
and variable accumulation annuity contracts to be issued by said
Corporation,
hereby constitute and appoint WILLARD G. ELDRED, Vice President and Deputy
General Counsel of said Corporation and THOMAS J. CONKLIN, Senior Vice President
and Secretary of said Corporation, my true and lawful attorneys-in-fact and
agents, either of them to act with full power without the other, for me and in
my name, place and stead, to sign any such amended and/or additional
Registration Statements and/or Annual Report and any and all other amendments
and other documents relating thereto, with power where appropriate to affix the
corporate seal of said Corporation thereto and to attest said seal, and to file
such Registration Statements and/or Annual Report and amendments with all
exhibits thereto, any and all other information and documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done as fully as to all intents and
purposes as I might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 23rd
day of July, 1990
/s/ Thomas C. Theobald
----------------------------
(Signature)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 23rd day of July, 1990 before me personally came Thomas C. Theobald
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
-------------------------------
CATHERINE A. MOHR
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1991
<PAGE> 16
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by Diversified Investors
Portfolios with the Securities and Exchange Commission under the Investment
Company Act of 1940 and any and all instruments which such attorneys and agents,
or any of them, deem necessary or advisable to enable the Company to comply with
such Act, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction, and the undersigned hereby ratifies and confirms as his own act
and deed any and all acts that such attorneys and agents, or any of them, shall
do or cause to be done by virtue hereof. Any one of such attorneys and agents
have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/ Tom A. Schlossberg
--------------------------------------
Tom A. Schlossberg
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995, before me personally came Tom Schlossberg to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
[SEAL]
/s/ Catherine A. Mohr
<PAGE> 17
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by Diversified
Investors Portfolios with the Securities and Exchange Commission under the
Investment Company Act of 1940 and any and all instruments which such attorneys
and agents, or any of them, deem necessary or advisable to enable the Company to
comply with such Act, the rules, regulations and requirements of the Securities
and Exchange Commission, and the securities or Blue Sky laws of any state or
other jurisdiction, and the undersigned hereby ratifies and confirms as his own
act and deed any and all acts that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/ Eugene M. Mannella
--------------------------------------
Eugene M. Mannella
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995, before me personally came Eugene M. Mannella
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
[SEAL]
/s/ Catherine A. Mohr
<PAGE> 18
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by The Diversified
Investors Portfolios with the Securities and Exchange Commission under the
Investment Company Act of 1940 and any and all instruments which such attorneys
and agents, or any of them, deem necessary or advisable to enable the Company to
comply with such Act, the rules, regulations and requirements of the Securities
and Exchange Commission, and the securities or Blue Sky laws of any state or
other jurisdiction, and the undersigned hereby ratifies and confirms as his own
act and deed any and all acts that such attorneys and agents, or any of them,
shall do or cause to be done by virtue hereof. Any one of such attorneys and
agents have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/ Patricia L. Sawyer
--------------------------------------
Patricia L. Sawyer
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995, before me personally came Patricia L. Sawyer
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
[SEAL]
/s/ Catherine A. Mohr
<PAGE> 19
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by Diversified Investors
Portfolios with the Securities and Exchange Commission under the Investment
Company Act of 1940 and any and all instruments which such attorneys and agents,
or any of them, deem necessary or advisable to enable the Company to comply with
such Act, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction, and the undersigned hereby ratifies and confirms as his own act
and deed any and all acts that such attorneys and agents, or any of them, shall
do or cause to be done by virtue hereof. Any one of such attorneys and agents
have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/ Neal M. Jewell
--------------------------------------
Neal M. Jewell
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995, before me personally came Neal M. Jewell to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
[SEAL]
/s/ Catherine A. Mohr
<PAGE> 20
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the Registration
Statement, and any and all amendments thereto, filed by Diversified Investors
Portfolios with the Securities and Exchange Commission under the Investment
Company Act of 1940 and any and all instruments which such attorneys and agents,
or any of them, deem necessary or advisable to enable the Company to comply with
such Act, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction, and the undersigned hereby ratifies and confirms as his own act
and deed any and all acts that such attorneys and agents, or any of them, shall
do or cause to be done by virtue hereof. Any one of such attorneys and agents
have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/ Donald E. Flynn
--------------------------------------
Donald E. Flynn
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995, before me personally came Donald E. Flynn to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
[SEAL]
/s/ Catherine A. Mohr
