File No. 33-30156
As filed with the Securities and Exchange Commission on February 13, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
[X] SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 10
and/or
REGISTRATION STATEMENT UNDER THE
[X] INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 11
(Check appropriate box or boxes)
AUL AMERICAN SERIES FUND, INC.
(Exact Name of Registrant)
One American Square, Indianapolis, Indiana 46282
(Address of Principal Executive Offices)
Insurance Company's Telephone Number: (317) 263-1877
Richard A. Wacker, One American Square, Indianapolis, Indiana 46282
(Name and Address of Agent for Service)
Title of Securities Being Registered: Shares of common stock
It is proposed that this filing will become effective (Check appropriate Space)
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
on (date) pursuant to paragraph (b) of Rule 485
_____
_____ 60 days after filing pursuant to paragraph (a) of Rule 485
_____ on (date) pursuant to paragraph (a) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(2)
X on MAY 1, 1998 pursuant to paragraph (a)(2) of Rule 485
_____ -----------
_____ this post-effective amendment designates a new effective
date for a previously filed amendment.
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2
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CROSS REFERENCE SHEET
Required by Rule 404 under the Securities Act of 1933
Showing Location in Part A (Prospectus) and Part B (Statement of Additional
Information) of Registration Statement of Information Required by Form N-1A
PART A - PROSPECTUS
Heading of Item Prospectus Caption
- --------------- ------------------
<S> <C>
1. Cover Page........................................................ Cover Page
2. Synopsis.......................................................... General Description of the Fund
3. Condensed Financial Information................................... Condensed Financial Information
4. General Description of Registrant................................. General Description of the Fund;
General Description of the Fund;
Investment Objectives and Policies;
Investment Restrictions; Description
of Securities and Investment Techniques
5. Management of the Fund............................................ Management of the Fund
6. Capital Stock and Other Securities................................ Portfolio Transactions; Description of
the Fund's Shares; Dividends, Distributions
and Taxes
7. Purchase of Securities............................................ Purchase and Redemption of Shares
8. Redemption or Repurchase of Securities Being Offered.............. Purchase and Redemption of Shares
9. Legal Proceedings................................................. Not Applicable
PART B - STATEMENT OF ADDITIONAL INFORMATION
Heading of Item Statement of Additional Information Caption
- --------------- -------------------------------------------
10. Cover Page........................................................ Cover Page
11. Table of Contents................................................. Table of Contents
12. General Information and History................................... Management of the Fund
13. Investment Objectives and Policies................................ Not Applicable
14. Management of the Registrant...................................... Management of the Fund
15. Control Persons and Principal Holders of Securities............... Not Applicable
16. Investment Advisory and Other Services............................ Management of the Fund
17. Brokerage Allocation and Other Practices.......................... Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities................................ Capitalization; Voting Rights
19. Purchase, Redemption and Pricing of Securities Being
Offered........................................................ Net Asset Value
20. Tax Status........................................................ Taxation
21. Underwriters...................................................... Not Applicable
22. Calculation of Yield Quotations of Money Market Funds............. Performance Information
23. Financial Statements.............................................. Financial Statements
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1
AUL American Series Fund, Inc.
One American Square
Indianapolis, Indiana 46282
(800) 634-1629
AUL American Series Fund, Inc. (the "Fund") is an open-end, diversified
management investment company currently consisting of eight separate investment
portfolios (the "Portfolios"), each of which has its own investment objectives
and policies. The eight Portfolios of the Fund are the AUL American Equity
Portfolio ("Equity Portfolio"), the AUL American Bond Portfolio ("Bond
Portfolio"), the AUL American Money Market Portfolio ("Money Market Portfolio"),
the AUL American Managed Portfolio ("Managed Portfolio"), the AUL American
Tactical Asset Allocation Portfolio ("Tactical Asset Allocation Portfolio"), the
AUL American Conservative Investor Portfolio ("Conservative Investor
Portfolio"), the AUL American Moderate Investor Portfolio ("Moderate Investor
Portfolio"), and the AUL American Aggressive Investor Portfolio ("Aggressive
Investor Portfolio").
Shares of the Portfolios are sold to separate accounts of American United
Life Insurance Company(R) ("AUL") to serve as the investment medium for variable
life and annuity contracts issued by AUL (the "Contracts"). The separate
accounts invest in shares of one or more of the Portfolios in accordance with
allocation instructions received from owners or participants in the Contracts.
Such allocation rights are described further in the Contract (or the Certificate
thereunder) and, if applicable, in the prospectus offering the Contract.
Information about the investment objective or objectives and policies of
each Portfolio, along with a detailed description of the types of securities in
which each Portfolio may invest, are set forth in this Prospectus. There can be
no assurance that the investment objective or objectives for any Portfolio will
be achieved.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. A Statement of Additional Information,
("SAI") dated May 1, 1998, containing additional and more detailed information
about the Fund has been filed with the Securities and Exchange Commission (the
"SEC") and is hereby incorporated by reference into this Prospectus. The SAI is
available without charge and may be obtained by writing to or calling the Fund
at the address or telephone number printed above.
SHARES OF THE FUND ARE AVAILABLE EXCLUSIVELY TO INSURANCE COMPANY SEPARATE
ACCOUNTS AS AN INVESTMENT VEHICLE FOR VARIABLE LIFE AND ANNUITY CONTRACTS. THIS
PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE VARIABLE LIFE OR ANNUITY
CONTRACT (OR CERTIFICATE THEREUNDER) AND, IF APPLICABLE, THE PROSPECTUS OFFERING
THE VARIABLE LIFE OR ANNUITY CONTRACT. THIS PROSPECTUS SHOULD BE READ CAREFULLY
AND RETAINED FOR FUTURE REFERENCE.
INVESTMENT IN THE AUL AMERICAN MONEY MARKET PORTFOLIO (OR IN ANY OTHER
PORTFOLIO) IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN
BE NO ASSURANCE THAT THE AUL AMERICAN MONEY MARKET PORTFOLIO WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998.
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2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Description Page
<S> <C>
GENERAL DESCRIPTION OF THE FUND........................................ 3
CONDENSED FINANCIAL INFORMATION........................................ 3-5
THE FUND'S PERFORMANCE................................................. 6
INVESTMENT OBJECTIVES AND POLICIES........................................ 6-9
The Equity Portfolio.................................................... 6
The Bond Portfolio...................................................... 7
The Money Market Portfolio.............................................. 7
The Managed Portfolio................................................... 8
The Tactical Asset Allocation Portfolio................................. 8
The LifeStyle Portfolios: The Conservative, Moderate, and Aggressive
Investor Portfolios
The Conservative Investor Portfolio................................... 8
The Moderate Investor Portfolio....................................... 8
The Aggressive Investor Portfolio..................................... 8
Investment Strategy of the LifeStyle Portfolios....................... 8
Equity Securities................................................... 8
Bonds............................................................... 8
Money Market Instruments............................................ 8
Foreign Securities ................................................. 8
MANAGEMENT OF THE FUND..................................................... 9-11
Investment Adviser-American United Life Insurance Company(R)............. 9
The Sub-Advisers......................................................... 10
The Sub-Adviser to the LifeStyle Portfolios... ........................ 10
The Sub-Adviser to the Tactical Asset Allocation Portfolio............. 10
Other Expenses........................................................... 10
Portfolio Expenses....................................................... 11
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES........................11-15
U.S. Government Securities............................................... 11
Bonds Generally.......................................................... 11
High Yield Securities.................................................... 11
Mortgage-Related Securities.............................................. 11
GNMA Certificates....................................................... 11
FNMA and FHLMC Mortgage-Backed Obligations.............................. 11
Other Mortgage-Backed Securities........................................ 12
Risks of Mortgage-Related Securities.................................... 12
Zero Coupon Bonds........................................................ 12
Foreign Securities....................................................... 12
Forward Foreign Currency Contracts....................................... 12
Repurchase Agreements.................................................... 12
Reverse Repurchase Agreements............................................ 13
Banking Industry and Savings Industry Obligations........................ 13
Options.................................................................. 13
Risks of Options Transactions........................................... 14
Futures Contracts........................................................ 14
Risks of Futures........................................................ 14
Illiquid and Restricted Securities...................................... 14
Other Investment Companies............................................... 14
Lending of Portfolio Securities..........................................
INVESTMENT RESTRICTIONS.................................................... 15
PORTFOLIO TRANSACTIONS AND TURNOVER........................................ 15
DESCRIPTION OF THE FUND'S SHARES........................................... 16
DIVIDENDS, DISTRIBUTION AND TAXES.......................................... 16
Federal Income Tax Status................................................ 16
Distributions and Dividends.............................................. 16
PURCHASE AND REDEMPTION OF SHARES.......................................... 16
NET ASSET VALUE............................................................ 17
PERFORMANCE INFORMATION.................................................... 17
LEGAL COUNSEL.............................................................. 17
INDEPENDENT ACCOUNTANTS.................................................... 17
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS...................... 18
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3
GENERAL DESCRIPTION OF THE FUND
The Fund was incorporated under the laws of Maryland on July 26, 1989, and
is registered under the Investment Company Act of 1940 (the "1940 Act") as an
open-end, diversified management investment company.
As a "series" type of mutual fund, the Fund issues shares of common stock
relating to separate investment portfolios (the "Portfolios") currently
consisting of the Equity Portfolio, Bond Portfolio, Money Market Portfolio,
Managed Portfolio, Tactical Asset Allocation Portfolio, Conservative Investor
Portfolio, Moderate Investor Portfolio, and Aggressive Investor Portfolio.
Additional portfolios may be established in the future. An interest in the Fund
is limited to the assets of the particular Portfolio in which shares are held,
and shareholders of each Portfolio are entitled to a pro rata share of all
dividends and distributions paid by the Portfolio.
The Fund's shares currently are offered only to separate accounts of
American United Life Insurance Company(R) ("AUL") to serve as an investment
medium for variable life and annuity contracts issued by AUL. Shares of each
Portfolio may be offered in the future to separate accounts of other affiliated
or unaffiliated insurance companies to serve as an underlying investment vehicle
for variable life and annuity contracts. The separate accounts invest in shares
of the Fund in accordance with allocation instructions received from owners and
participants of the Contracts.
CONDENSED FINANCIAL INFORMATION
Per Share Data and Ratios for the Year Ended December 31, 1997
The following are selected per share data and ratios. Per share amounts
presented are based on a share outstanding throughout the period from the
commencement of operations, April 10, 1990, through December 31, 1997. The
ratios for the period from April 10, 1990 through December 31, 1990 are
annualized. The information in the tables is included in the Fund's financial
statements that have been audited by Coopers & Lybrand L.L.P., the Fund's
independent accountants. The tables should be read in conjunction with the
Fund's financial statements, which are included in the Fund's Annual Report as
of December 31, 1997. Financial information for the Conservative Investor
Portfolio, the Moderate Investor Portfolio, and the Aggressive Investor
Portfolio is not available because these Portfolios had not commenced operations
during the periods shown.
<TABLE>
<CAPTION>
EQUITY PORTFOLIO
----------------
April 10, 1990
through
1997 1996 1995 1994 1993 1992 1991 December 31, 1990
---- ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 14.21 $ 12.27 $ 12.68 $ 11.49 $ 10.49 $ 9.58 $ 10.00
BEGINNING OF PERIOD -------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.28 0.28 0.24 0.18 0.23 0.31 0.27
Net Realized and Unrealized
gain (loss) on securities 2.44 2.12 0.26 1.58 0.92 2.23 (0.39)
---- ---- ---- ---- ---- ---- -----
Total from Investment
Operations 2.72 2.40 0.50 1.76 1.15 2.54 (0.12)
---- ---- ---- ---- ---- ---- -----
LESS DISTRIBUTIONS
Dividends (from net
investment income) 0.28 0.27 0.24 0.18 0.23 0.31 0.27
Distributions (from capital
gains) 0.00 0.19 0.67 0.39 0.32 0.92 0.03
---- ---- ---- ---- ---- ---- ----
Total Distributions 0.28 0.46 0.91 0.57 0.55 1.23 0.30
---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE, END OF
PERIOD $ 16.65 $ 14.21 $ 12.27 $ 12.68 $ 11.49 $ 10.89 $ 9.58
======== ======== ======== ======= ======== ======= =======
TOTAL RETURN 19.17% 19.45% 2.64% 14.80% 10.03% 25.58% (1.60%)
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of
period (in thousands) $ 50,652 $ 35,299 $ 20,563 $ 11,468 $ 6,969 $ 4,128 $ 2,969
Ratio of expenses to
average net assets 0.70% 0.70% 0.73% 0.82% 0.84% 0.80% 1.00%(1)
Ratio of net investment
income to average net
assets 1.81% 2.08% 1.85% 1.46% 2.04% 2.75% 3.93%(1)
Portfolio Turnover Rate 11% 10% 20% 10% 15% 43% 9%
<FN>
(1) In 1990, the ratios were favorably affected by a guarantee of expenses by
the Adviser that the ordinary operating expenses shall not exceed 1% of each
Portfolio's average daily net assets. This guarantee continues month to month
unless the Investment Advisory Agreement is terminated by either party on 30
days prior written notice.
</FN>
<CAPTION>
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4
CONDENSED FINANCIAL INFORMATION (CONTINUED)
BOND PORTFOLIO
--------------
April 10, 1990
through
1997 1996 1995 1994 1993 1992 1991 December 31, 1990
---- ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.06 $ 9.99 $ 11.00 $ 10.65 $ 10.90 $ 10.32 $ 10.00
-------- -------- -------- --------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.62 0.67 0.64 0.66 0.70 0.79 0.55
Net Realized and Unrealized
gain (loss) on securities (0.39) 1.07 (1.01) 0.49 0.06 0.85 0.33
------ ---- ----- ---- ---- ---- ----
Total from Investment
Operations 0.23 1.74 (0.37) 1.15 0.76 1.64 0.88
---- ---- ----- ---- ---- ---- ----
LESS DISTRIBUTIONS
Dividends (from net
investment income) 0.63 0.66 0.64 0.66 0.70 0.79 0.55
Distributions (from
capital gains) 0.01 0.01 --- 0.14 0.31 0.27 0.01
---- ---- ---- ---- ---- ----
Total Distributions 0.64 0.67 0.64 0.80 1.01 1.06 0.56
---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE,
END OF PERIOD $ 10.65 $ 11.06 $ 9.99 $ 11.00 $ 10.65 $ 10.90 $ 10.32
======== ======== ======== ======== ======== ======= =======
TOTAL RETURN 2.23% 17.79% (3.56%) 10.69% 7.19% 16.36% 12.07%
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of period
(in thousands) $ 28,188 $ 25,429 $ 20,453 $ 14,721 $ 11,966 $11,749 $10,897
Ratio of expenses to
average net assets 0.71% 0.70% 0.73% 0.80% 0.79% 0.71% 1.00%(1)
Ratio of net investment
income to average net
assets 5.85% 6.28% 6.19% 5.95% 6.47% 7.46% 7.46%(1)
Portfolio Turnover Rate 62% 55% 50% 29% 41% 61% 5%
MONEY MARKET PORTFOLIO
----------------------
April 10, 1990
through
1997 1996 1995 1994 1993 1992 1991 December 31, 1990
---- ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- --------- --------- --------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.05 0.05 0.04 0.02 0.03 0.05 0.05
Net Realized and
Unrealized gain
(loss) on securities --- --- --- --- --- --- ---
-------- -------- -------- -------- -------- ------- -------
Total from
Investment
Operations 0.05 0.05 0.04 0.02 0.03 0.05 0.05
---- ---- ---- ---- ---- ---- ----
LESS DISTRIBUTIONS
Dividends (from net
investment income) 0.05 0.05 0.04 0.02 0.03 0.05 0.05
Distributions (from
capital gains) --- --- --- --- --- --- ---
-------- -------- -------- -------- ------- ------ ------
Total Distributions 0.05 0.05 0.04 0.02 0.03 0.05 0.05
NET ASSET VALUE,
END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======= =======
TOTAL RETURN 4.63% 5.09% 3.38% 2.33% 3.01% 5.53% 7.13%
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of
period (in thousands) $ 40,227 $ 24,290 $ 15,496 $ 6,153 $ 5,480 $ 5,420 $ 5,269
Ratio of expenses
to average net assets 0.70% 0.73% 0.75% 0.84% 0.85% 0.85% 1.00%(1)
Ratio of net investment
income to average
net assets 4.64% 5.13% 3.71% 2.30% 2.98% 5.35% 7.10%(1)
Portfolio Turnover Rate --- --- --- --- --- --- ---
<FN>
(1) In 1990, the ratios were favorably affected by a guarantee of expenses by
the Adviser that the ordinary operating expenses shall not exceed 1% of each
Portfolio's average daily net assets. This guarantee continues month to month
unless the Investment Advisory Agreement is terminated by either party on 30
days prior written notice.
</FN>
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5
<CAPTION>
CONDENSED FINANCIAL INFORMATION (CONTINUED)
MANAGED PORTFOLIO
-----------------
April 10, 1990
through
1997 1996 1995 1994 1993 1992 1991 December 31, 1990
---- ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 12.42 $ 11.00 $ 11.75 $ 10.92 $ 10.86 $ 10.11 $ 10.00
-------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.44 0.46 0.42 0.40 0.49 0.61 0.47
Net Realized and
Unrealized gain
(loss) on securities 1.01 1.62 (0.45) 1.07 0.41 1.06 0.12
---- ---- ----- ---- ---- ---- ----
Total from Investment
Operations 1.45 2.08 (0.03) 1.47 0.90 1.67 0.59
---- ---- ----- ---- ---- ---- ----
LESS DISTRIBUTIONS
Dividends (from net
investment income) 0.44 0.46 0.42 0.40 0.49 0.61 0.47
Distributions (from
capital gains) 0.03 0.20 0.30 0.24 0.35 0.31 0.01
---- ---- ---- ---- ---- ---- ----
Total Distributions 0.47 0.66 0.72 0.64 0.84 0.92 0.48
---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE,
END OF PERIOD $ 13.40 $ 12.42 $ 11.00 $ 11.75 $ 10.92 $ 10.86 $ 10.11
======== ======== ======== ======== ======== ======= =======
TOTAL RETURN 11.79% 19.13% (0.92%) 12.98% 7.95% 16.73% 7.67%
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of
period (in thousands) $ 43,092 $ 30,844 $ 24,558 $ 14,070 $ 8,300 $ 6,185 $ 5,302
Ratio of expenses to
average net assets 0.70% 0.70% 0.73% 0.81% 0.82% 0.94% 0.98%
Ratio of net investment
income to average
net assets 3.43% 3.86% 3.63% 3.49% 4.46% 5.74% 6.15%
Portfolio Turnover Rate 34% 35% 34% 9% 33% 36% 2%
<CAPTION>
TACTICAL ASSET ALLOCATION PORTFOLIO
-----------------------------------
April 10, 1990
through
1997 1996 1995 1994 1993 1992 1991 December 31, 1990
---- ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.44 $ 10.00 N.A. N.A. N.A. N.A. N.A.
-------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.28 0.16 N.A. N.A. N.A. N.A. N.A.
Net Realized and Unrealized
gain (loss) on securities 1.38 0.49 N.A. N.A. N.A. N.A. N.A.
-------- --------
Total from Investment
Operations 1.66 0.65 N.A. N.A. N.A. N.A. N.A.
-------- --------
LESS DISTRIBUTIONS
Dividends (from net
investment income) 0.28 0.16 N.A. N.A. N.A. N.A. N.A.
Distributions (from
capital gains) 0.17 0.05 N.A. N.A. N.A. N.A. N.A.
-------- --------
Total Distributions 0.45 0.21 N.A. N.A. N.A. N.A. N.A.
-------- --------
NET ASSET VALUE,
END OF PERIOD $ 11.65 $ 10.44 N.A. N.A. N.A. N.A. N.A.
========= ========
TOTAL RETURN(1) 15.67% 6.49% N.A. N.A. N.A. N.A. N.A.
RATIOS/SUPPLEMENTAL DATA(1)
Net Assets, end of
period (in thousands) $ 2,145 $ 1,139 N.A. N.A. N.A. N.A. N.A.
Ratio of expenses to
average net assets 1.00% 1.00% N.A. N.A. N.A. N.A. N.A.
Ratio of net investment income
to average net assets 6.03% 3.70% N.A. N.A. N.A. N.A. N.A.
Portfolio Turnover Rate 25% 4% N.A. N.A. N.A. N.A. N.A.
<FN>
(1) Ratios calculated for period July 31, 1995 through December 31,1995 on annualized basis.
</FN>
</TABLE>
<PAGE>
6
THE FUND'S PERFORMANCE
The following table presents the total return for each Portfolio of the
Fund. Total return represents a change in the value of an investment in the
Fund, and includes reinvestments of dividends and distributions. Total Return
for a Portfolio does not include deductions from a separate account for
mortality and expense risk charges or for charges made under the terms of the
Contracts, which are described in the Contracts (or Certificates thereunder),
and if applicable, the prospectus for the separate account. Further information
on Fund performance including Management's Discussion and Analysis is contained
in the Fund's Annual Report, which is available without charge and may be
obtained by writing to the Fund at One American Square, Indianapolis, IN 46282
or by calling the Fund at (800) 634-1629. Total return for the Conservative
Investor Portfolio, the Moderate Investor Portfolio, and the Aggressive Investor
Portfolio is not available because these Portfolios had not commenced operations
during the periods shown.
<TABLE>
<CAPTION>
Average
Annual
Cumulative Total
Total Return on
Return Investment
Since Since Since
4/10/90 Year Year Year Year Year Year Year Inception Inception Inception
through Ending Ending Ending Ending Ending Ending Ending through through through
Portfolio 12/31/90* 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/97 12/31/97 12/31/97
- --------- --------- -------- -------- -------- -------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity ....... (1.16%) 25.58% 10.03% 14.80% 2.64% 19.45% 19.17%
Bond ......... 8.76% 16.36% 7.19% 10.69% (3.56%) 17.79% 2.23%
Money Market . 5.19% 5.53% 3.01% 2.33% 3.38% 5.09% 4.63%
Managed ...... 5.57% 16.73% 7.95% 12.98% (0.93%) 19.13% 11.79%
Tactical Asset
Allocation . N.A. N.A. N.A. N.A. N.A. N.A. 15.67%
<FN>
*These figures are not annualized.
</FN>
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund currently offers eight Portfolios with separate investment
objectives as described below. There can be no assurance that any of the
Portfolios will achieve its investment objective or objectives. Each Portfolio
is subject to the general risk of changes in economic, business, or other
financial conditions. As with any security, a risk of loss is inherent in an
investment in Fund shares.
The different types of securities and investment techniques used by the
individual Portfolios all have attendant risks of varying degrees. For examples,
with respect to equity securities, there can be no assurance of capital
appreciation and there is a risk of market decline. With respect to debt
securities, there is the risk that the issuer of a security may not be able to
meet its obligation to make scheduled interest or principal payments. Because
each Portfolio seeks different investment objectives, each is subject to varying
degrees of financial and market risks.
Certain types of investments and investment techniques common to one or
more Portfolios are described in greater detail, including the risks of each, in
this Prospectus under "Description of Securities and Investment Techniques" and
in the Statement of Additional Information (the "SAI").
The Portfolios are subject to investment restrictions that are summarized
under "Investment Restrictions" and that are set forth in the SAI. Those
investment restrictions so designated in the SAI and the investment objective or
objectives of each Portfolio are "fundamental policies" of the pertinent
Portfolio, which means that they may not be changed without a majority vote of
shareholders of the affected Portfolio. Except for the investment objective or
objectives and those restrictions specifically identified as fundamental, all
investment policies and practices described in this Prospectus and in the SAI
are not fundamental, and may be changed by the Fund's Board of Directors without
shareholder approval.
THE EQUITY PORTFOLIO
The primary investment objective of the Equity Portfolio is long-term
capital appreciation. The Portfolio seeks current investment income as a
secondary objective. To achieve these objectives, the Portfolio invests
primarily in equity securities selected on the basis of fundamental investment
research for their long-term growth prospects.
Typically, at least 65% of the Portfolio's assets will be invested in
common stocks listed on a national securities exchange or actively traded
over-the-counter on the NASDAQ national market system. The Portfolio may invest
up to 35% of its assets in American Depository Receipts, preferred stock,
debentures convertible into common stocks or which are accompanied by warrants
for the purchase of common stock, nonconvertible debt securities, U.S.
Government securities, commercial paper and other money market instruments,
repurchase agreements and reverse repurchase agreements.
When, in the judgment of the Adviser, financial, economic, and/or market
conditions warrant a defensive strategy, the Portfolio may invest to a greater
degree in nonconvertible debt securities, U.S. Government securities, commercial
paper and other money market instruments, repurchase agreements and reverse
repurchase agreements. In furtherance of its secondary objective of current
income, the Portfolio may also write (i.e.,
<PAGE>
7
sell) covered call options and secured put options on securities and securities
indices. The Portfolio may purchase a put or call only to effect a "closing
purchase transaction." The Portfolio will not invest in options for speculative
purposes.
The day-to-day management of the Equity Portfolio is the responsibility of
Kathryn Hudspeth, CFA, Vice President, Equities. Ms. Hudspeth has been the
Portfolio Manager of the Equity Portfolio since its inception and has been with
AUL since 1989. Previously, Ms. Hudspeth has held positions with AUL which
include Assistant Vice President, Equities, Equity Portfolio Manager and
Director of Equity Investments. Before coming to AUL, she was employed by Bank
One, Indianapolis, as a Vice President and Trust Officer in the Personal Trust
Division.
THE BOND PORTFOLIO
The primary investment objective of the Bond Portfolio is to provide a high
level of income consistent with prudent investment risk. As a secondary
objective, the Portfolio seeks to provide capital appreciation to the extent
consistent with the primary objective. To achieve these objectives, the
Portfolio invests primarily in corporate bonds and other debt securities. At
least ninety percent of the corporate bonds in which the Portfolio may invest
will be rated BBB or better by Standard & Poor's ("S&P") or Baa or better by
Moody's Investors Service, Inc. ("Moody's") or, if not rated, of equivalent
quality in the judgment of the Adviser. Debt securities that are rated BBB or
higher by S&P and Baa or higher by Moody's, or unrated debt securities of
equivalent quality, are considered to be "investment grade" debt securities. The
Portfolio may also invest in U.S. Government securities, convertible debentures
and privately issued mortgage-backed securities.
The Portfolio may invest in debt securities whose maturity is considered
long (10 years or more), intermediate (1-10 years), or short-term (1 year or
less). The dollar-weighted average maturity of the Portfolio will vary from time
to time, depending upon the judgment of the Adviser as to prevailing market
conditions including the prospects for interest rate changes among different
categories of fixed-income securities.
It is intended that the portfolio securities generally will be of
sufficient credit quality to provide a high level of protection against loss of
principal or interest. In addition, the Portfolio will, under normal
circumstances, be positioned to take advantage of any extra yield available on
bonds rated below AAA or Aaa when the higher yield of such instruments is
considered by the Adviser to be sufficient compensation for the risk involved.
The Portfolio may invest no more than 10% of its assets, as of the time the
investment is made, in securities rated less than BBB or Baa. Debt securities
rated below-investment grade, or unrated securities determined to be of
equivalent quality are considered to be "high yield/high risk" securities and
may be referred to colloquially as "junk bonds." For more information on
below-investment grade debt securities, including information regarding the
risks of investing in such securities, see "High Yield Securities" below and
Appendix I in the SAI.
The Portfolio may also invest in money market instruments, repurchase
agreements, and reverse repurchase agreements. In addition, the Portfolio may
invest in dollar-denominated foreign securities, including corporate bonds and
other debt securities that are consistent with the maturity and credit quality
criteria described above. In pursuing its investment objectives, the Portfolio
may engage in the writing (i.e., selling) of covered call and secured put
options and the purchase of call options on debt securities to the extent
described under "Options." The Portfolio will purchase a put option only to
effect a closing purchase transaction. In addition, the Portfolio may purchase
or sell interest rate futures contracts for hedging purposes as described under
"Futures Contracts."
The investment return on a debt security reflects interest earnings and
changes in the market value of the security. The market value of the Portfolio's
securities may be affected by, among other things, changes in interest rates
since the price of debt obligations generally will rise and fall inversely with
interest rates. Longer term debt obligations will generally have greater price
volatility than shorter term obligations. Since shares of the Portfolio normally
represent an investment primarily in debt securities with market prices that
will vary, the value of the Portfolio's shares will vary as the aggregate value
of the Portfolio's investments increases or decreases. See "Bonds Generally"
below for more information on debt securities and Appendix I in the SAI for
further information concerning bond ratings.
The day-to-day management of the Bond Portfolio is the responsibility of
Kent Adams, CFA, Vice President, Fixed Income Securities. Mr. Adams has been the
Portfolio Manager of the Bond Portfolio since its inception and has been with
AUL since 1977. Previously, Mr. Adams has held positions with AUL which include
Senior Securities Analyst, Investment Officer, and Assistant Vice President,
Securities.
THE MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to provide a high
level of current income while preserving assets and maintaining liquidity and
investment quality. The Portfolio attempts to achieve this objective by
investing in short-term money market instruments that are of the highest
quality. The Portfolio invests only in money market instruments denominated in
U.S. dollars.
The Portfolio will invest only in money market instruments that, at the
time of acquisition, present minimal credit risk, are of the highest quality,
and have a maturity or remaining maturity of 13 months or less (or that are
subject to a repurchase agreement requiring repurchase from the Portfolio within
13 months or less). Such instruments may include the following: U.S. Government
securities, repurchase agreements maturing
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8
in seven days or less with Federal Reserve System banks or with dealers in U.S.
Government securities, reverse repurchase agreements, certificates of deposit
and other obligations of banks or other depository institutions, debt
securities, commercial paper, and variable amount floating rate notes and master
notes.
The Adviser shall determine whether a money market instrument presents
minimal credit risk under procedures adopted by the Fund's Board of Directors.
An instrument shall be considered to be of the highest quality under the
following circumstances: (1) it is a U.S. Government security; (2) it (or
another comparable short-term debt obligation of the same issuer) is rated (i)
in the highest rating category (i.e., AAA or A-1 by S&P, Aaa or P-1 by Moody's,
or AAA or D-1 by Duff & Phelps, Inc.) by any nationally recognized statistical
rating organizations ("NRSROs"), or (ii) if rated by only one NRSRO, by that
NRSRO if the acquisition is approved or ratified by the Board of Directors; or
(3) it is not rated but it is of comparable quality as determined by the Adviser
and the acquisition is approved or ratified by the Board of Directors. In the
event that an instrument acquired by the Portfolio is downgraded or otherwise
ceases to be of the highest quality, the Adviser, under procedures approved by
the Board of Directors (or the Board of Directors itself under certain
circumstances) shall promptly reassess whether such security presents minimal
credit risk and determine whether or not to retain the instrument.
Within certain limits, the Portfolio may invest in securities of registered
investment companies with investment policies not substantially broader than
those of the Portfolio.
The Portfolio may invest up to 10% of its total assets in repurchase
agreements maturing in more than seven days or in portfolio securities not
readily marketable.
The Portfolio will be managed so as to maintain a dollar-weighted average
maturity of 90 days or less.
THE MANAGED PORTFOLIO
The investment objective of the Managed Portfolio is to provide a high
total return consistent with prudent investment risk. The Portfolio attempts to
achieve this objective through a fully managed investment policy utilizing
publicly traded common stock, debt securities (including convertible
debentures), and money market securities. Total return is the sum of dividend
and interest income and capital changes in the assets of the Portfolio. The
composition of the Portfolio will vary from time to time, based upon the
Adviser's evaluation of economic and market trends and the anticipated relative
total return available from a particular type of security. Accordingly, at any
given time, up to 100% of the Portfolio may be invested in any one sector such
as common stocks, debt securities (including convertible debentures), or money
market instruments.
The Portfolio may invest in the common stock and debt securities which are
eligible for purchase by the Equity Portfolio and Bond Portfolio, respectively.
Accordingly, the Portfolio may invest up to 10% of its investments in debt
securities that are rated below-investment grade. For more information on high
yield debt securities, including information regarding the risks of investing in
such securities, see "High Yield Securities" below and Appendix I in the SAI.
The Portfolio also may invest in high quality money market instruments, i.e.
money market instruments rated AA or A-2 or better by S&P, Aa or P-2 or better
by Moody's, or AA or D-2 or better by Duff & Phelps, or if not rated, deemed of
equivalent quality by the Adviser. In pursuing its investment objective, the
Portfolio may engage in the writing of covered call and secured put options on
equity and debt securities, and may purchase call options on debt securities to
the extent described in "Options." In addition, the Portfolio may purchase or
sell interest rate future contracts for hedging purposes as described in
"Futures Contracts." The Portfolio may also enter into repurchase agreements and
reverse repurchase agreements.
The day-to-day management of the Managed Portfolio is the joint
responsibility of Kathryn Hudspeth, Vice President, Equities and Kent Adams,
Vice President, Fixed Income Securities, AUL. Biographical information for these
individuals is listed in the descriptions of the AUL American Equity Portfolio
and the AUL American Bond Portfolio.
THE TACTICAL ASSET ALLOCATION PORTFOLIO
The investment objective of the Tactical Asset Allocation Portfolio is
preservation of capital and competitive investment returns. The Portfolio seeks
to achieve its objective by investing primarily in stocks, United States
Treasury bonds, notes and bills, and money market funds as well as by lending
its Portfolio securities to brokers, dealers, and other financial institutions.
The Portfolio's approach seeks positive investment performance during advancing
markets, and maintenance of positive investment performance in declining markets
through reduction in equity exposure. For this purpose, the Portfolio's
Sub-Adviser utilizes forecasting models which evaluate risk versus reward
relationships of different asset classes. These models enable the Sub-Adviser to
determine when to "tactically" adjust the asset allocation through a gradual
shifting of assets among the various categories of investments. The Portfolio
will seek to achieve income yield in excess of the dividend income yield of the
Standard & Poor's Index of 500 Common Stocks.
The principles by which the Sub-Adviser makes its stock selection are based
on value investing combining the attempt to preserve principal while seeking
above average returns. The Sub-Adviser seeks to identify companies whose stocks
are reasonably priced and that the Sub-Adviser believes will perform better than
the current expectations for earnings/cash flow over the next several years.
The Sub-Adviser's focus is on primarily high quality, liquid, large
capitalization stocks. The selection process starts with a "bottoms up"
screening of the market to identify stocks that are statistically undervalued
based on financial characteristics such as Price to Cash Flow, Price to Sales,
Price to Earnings, Dividend Yield, and Return on Equity relative to the stock's
historical norms. The Sub-Adviser seeks to preserve a "margin of safety" which
is critical to the preservation of capital. However, the Sub-Adviser believes
that investors' expecta-
<PAGE>
9
tions and the company's operating performance ultimately determine which
statistically "undervalued" stocks make good investments. The Sub-Adviser's
research staff looks to the future to see which stocks are likely to provide
investors with positive surprises, while avoiding negative surprises, taking
into account projected future cash flows, earnings, and dividends. The
Sub-Adviser's goal is to choose stocks which the market has undervalued based on
"over reaction" to perceived risks.
A stock's fundamentals dominate the selection process. However, technical
analysis is used to improve the timeliness of the Sub-Adviser's trading
decisions. The Sub-Adviser utilizes a series of linear statistical models that
attempt to forecast total stock market returns for both short (12 to 18 months)
and long (36 to 60 months) run time periods. These time series models assist the
Sub-Adviser in comparing the risks and rewards of holding stocks versus treasury
notes and money market funds, and assist the Sub-Adviser in determining when to
"tactically" adjust the asset allocation through a gradual shifting of assets
among stocks, U.S. Treasury bonds and notes, and money market funds. A
combination of fundamental, technical, sentimental, and monetary variables are
used in the forecasting models.
The Portfolio seeks to invest its assets primarily in income producing
common or preferred stock when the Sub-Adviser believes that the relevant market
environment favors profitable investing in those securities. The Portfolio does
not presently intend to invest more than 20% of its total assets in equity
securities which do not pay a dividend. It is anticipated that almost all of the
equity securities in which the Portfolio invests will be listed on a national
securities exchange or on NASDAQ or will be traded in the U.S. over-the-counter
market. The Portfolio may invest up to 25% of its total assets in equity
securities of foreign issuers. It is anticipated that most of the Portfolio's
investments in securities of foreign issuers will be American Depositary
Receipts (ADRs). See "Foreign Securities" for a discussion of some of the risks
involved in foreign investment.
The portion of the Portfolio not invested in equity securities, which will
vary from time to time, will be invested in debt obligations, including U.S.
Government securities, corporate bonds and debentures, high-grade commercial
paper, convertible securities, and certificates of deposit. The Portfolio may
increase its investment in such securities when the Sub-Adviser determines that
equity investment opportunities with desirable risk/reward characteristics are
unavailable, or for temporary defensive purposes. The Portfolio may only invest
in debt securities of U.S. issuers. The Portfolio may also invest in zero coupon
bonds or "strips," which are described under "Zero Coupon Bonds" below.
The Portfolio may invest in corporate debt securities that are rated within
the four highest grades by Moody's (Aaa, Aa, A, or Baa) or S&P (AAA, AA, A, or
BBB). See "Bonds Generally" below for more information on debt securities.
Investments in commercial paper are limited to obligations rated P-1 by Moody's
or A-1 by S&P. See Appendix I in the SAI for further information concerning bond
and commercial paper ratings.
Dean Investment Associates serves as Sub-Adviser to the Portfolio, as
described below under "The Sub-Adviser to the Tactical Asset Allocation
Portfolio." The Portfolio is managed by a team of 10 senior investment
professionals (Central Investment Committee).
John C. Riazzi, CFA, serves as the Senior Portfolio Manager of the
Portfolio and Arvind Sachdeva, CFA, serves as Senior Equity Strategist. Mr.
Riazzi joined the Sub-Adviser in March of 1989. Before being promoted to Vice
President and Director of Consulting Services at the Sub-Adviser, Mr. Riazzi was
responsible for client servicing, portfolio execution and trading operations.
Mr. Riazzi has been a member of the Central Investment Committee and a Senior
Institutional Portfolio Manager since 1990. He received a B.A. in Economics from
Kenyon College in 1985 and was awarded the Chartered Financial Analyst
designation in 1993.
Mr. Sachdeva joined the Sub-Adviser in 1993. Prior to working at the
Sub-Adviser, he was the Senior Security Analyst and Equity Portfolio Manager for
Carillon Advisors, Inc., from January 1985 to September 1993. Carillon Advisors,
Inc., is an investment subsidiary of the Union Central Life Insurance Co.
Because of the Portfolio's flexible investment policy, portfolio turnover
may be greater than for a portfolio that does not allocate assets among various
types of securities.
THE LIFESTYLE PORTFOLIOS: THE CONSERVATIVE, MODERATE, AND AGGRESSIVE INVESTOR
PORTFOLIOS
The LifeStyle Portfolios are three individual portfolios that feature
different allocations of assets to help them achieve their investment
objectives. Each Portfolio's assets are invested, in differing proportions, in
three broad asset classes -- equity securities, bonds, and money market
instruments. Investments in those classes may be allocated to a number of
different types of securities.
Each of the LifeStyle Portfolios is designed to fit a different general
risk profile. Investors are encouraged to choose the appropriate Portfolio or
mix of Portfolios based upon their individual circumstances, including the
anticipated timing of major investment goals, such as sending a child to
college, retirement or purchasing a home, as well as their individual risk
tolerance. As investment goals change, investors are encouraged to re-evaluate
their Portfolio choices to determine whether they should move all or a portion
of their investment to a Portfolio with a more appropriate objective and asset
mix.
Based upon the historic performance of the major asset classes (equity
securities, bonds, and money market instruments) over many years, of the three
Portfolios, the Aggressive Investor Portfolio, which has the highest exposure to
equities, has the highest potential for the greatest long-term total return, but
also presents the potential for the greatest volatility and losses. The
Conservative Investor Portfolio, which has the highest exposure to fixed income
securities, has more limited potential for long-term total return, but also
presents the least potential for sustained volatility and losses. The Moderate
Investor Portfolio presents a balance between the potential returns and
volatility of the Aggressive Investor and the Conservative Investor Portfolios.
Of course, there can be no assurance that any of the Portfolios will meet their
investment objectives.
THE CONSERVATIVE INVESTOR PORTFOLIO
The investment objective of the Conservative Investor Portfolio is high
current income, with opportunities for capital appreciation. The Portfolio seeks
this objective by investing in a strategically allocated portfolio consisting
primarily of bond and money market instruments with the remainder of the
Portfolio invested in equities. The Portfolio's emphasis on bonds and money
market securities is intended to help provide gains through income accumulation
and a measure of principal protection in the event that the stock market is in
decline.
THE MODERATE INVESTOR PORTFOLIO
The investment objective of the Moderate Investor Portfolio is a blend of
capital appreciation and income. The Portfolio seeks this objective by investing
in a strategically allocated portfolio of equities, bonds and money market
instruments with a weighting that normally is slightly heavier in equities. The
asset mix for this Portfolio is intended to provide long-term growth and some
regular income, while helping to moderate losses in the event of stock market
declines.
THE AGGRESSIVE INVESTOR PORTFOLIO
The investment objective of the Aggressive Investor Portfolio is long-term
capital appreciation. The Portfolio seeks this objective by investing in a
strategically allocated portfolio consisting primarily of equities. Current
income is not a primary consideration. The asset mix for this Portfolio is
intended to provide long-term growth, together with a small amount of income to
help cushion the volatility of the equity securities.
Investment Strategy of the LifeStyle Portfolios
In diversifying investments among three major asset classes-- equity
securities, bonds and money market instruments, each LifeStyle Portfolio has its
own target mix that represents a "benchmark" as to how that Portfolio's
investments ideally should be allocated among the major asset classes over the
long term. Each LifeStyle Portfolio's target mix is set forth below:
Target Mixes
LifeStyle Money Market
Portfolio Equity Securities Bonds Instruments
- -----------------------------------------------------------------------
Conservative 35% 50% 15%
Moderate 55% 35% 10%
Aggressive 80% 20% 0%
Although each LifeStyle Portfolio has a targeted asset allocation, AUL or
the Portfolios' Sub-Adviser may adjust each Portfolio's asset mix based upon
cash flow and an evaluation of market conditions and the anticipated returns and
risks for various asset classes. The mix of a Portfolio will vary depending on
the relative performance and perceived relative value of the various asset
classes. However, each Portfolio has operating ranges that are intended to
restrict the amount by which the assets of each class may fluctuate, so that an
investment in any asset class will not normally be acquired if it would cause
that asset class to fall below or rise above its operating range. Allocation to
an asset class may occasionally exceed or fall below the Portfolio's operating
range, such as at times of large cash inflows or outflows, but deviations are
not normally expected. The operating ranges are set forth below:
Operating Ranges
LifeStyle Equity Money Market
Portfolio Securities Bonds Portfolios
- ---------------------------------------------------------------------
Conservative 25-50% 40-60% 5-25%
Moderate 45-65% 25-45% 0-20%
Aggressive 70-90% 10-30% 0-15%
The LifeStyle Portfolios are "strategic" rather than "tactical" allocation
funds, which means that AUL and the Sub-Adviser do not try to time the market to
identify the exact time when a major reallocation should be made. Instead, AUL
and the Sub-Adviser utilize a longer-term (top-down, valuation driven) approach
in pursuing the Portfolios' investment objectives.
Within each asset class, each LifeStyle Portfolio's holdings are invested
across a diversified group of industries and issuers based upon AUL's and the
Sub-Adviser's investment criteria. AUL and the Sub-Adviser regularly review each
LifeStyle Portfolio's investments and allocations and may make changes in the
particular securities or in the asset mix (within the defined operating ranges)
to favor investments that it believes will help achieve a Portfolio's objective.
The LifeStyle Portfolios invest directly in equities, bonds and money
market instruments. In the future, each Portfolio may seek its investment
objective by investing primarily in other mutual funds and closed-end investment
companies. Investments primarily in such funds may require an exemption from the
SEC and there is no assurance that such an exemption would be granted.
BEA Associates, a member of Credit Suisse Asset Management, serves as
Sub-Adviser to a portion of the LifeStyle Portfolios, as described below under
"The Sub-Adviser to the LifeStyle Portfolios," and in this capacity, manages the
Portfolios' investments in growth-oriented equity securities and foreign equity
securities. AUL manages the Portfolios' investments in all other asset classes.
The Portfolio Manager for the growth-oriented equity securities in the
LifeStyle Portfolios is Eric N. Remole. Mr. Remole joined BEA in 1997 as a
Managing Director and Portfolio Manager and is responsible for the management of
structured equity products. Mr. Remole began his career in 1978 as a systems
analyst at Jaycor, Inc. He joined Bankers Trust in 1980 as an internal
management consultant in securities operations. In 1984 he joined Citicorp
Investment Management, Inc., Chancellor Capital Management, Inc.'s predecessor
and was appointed Managing Director in April of 1993. Mr. Remole received a B.A.
from Dartmouth College in 1978 and an M.S. in Operations Research from Stanford
University in 1981.
The Portfolio Manager for the international equity securities in the
LifeStyle Portfolios is Steven Bleiberg. Mr. Bleiberg joined BEA in 1991 as a
Vice President on the management and research team for International equities,
specializing in the application of quantitative techniques for risk control and
security selection. Mr. Bleiberg manages the Japanese portion of BEA's
international portfolios. He also contributes to the asset allocation process
for international and global portfolios. Mr. Bleiberg spent two years as a
portfolio manager at Matrix Capital Management, where he was responsible for all
of the firm's active equity assets. Prior to Matrix, he spent 5 years at BEA in
the equity research department. He received a B.A. from Harvard University and
an M.S. from the Sloan School of Management at MIT.
Equity Securities. The equity portion of each LifeStyle Portfolio may be
invested in any type of domestic or foreign equity security, primarily common
stocks, that meet certain standards of selection. In addition to investing in
common stocks, the LifeStyle Portfolios may invest in preferred stock,
convertible preferred stock, convertible debt securities, warrants, depository
receipts, and other securities believed to have equity characteristics. The
equity portion of each Portfolio may be diversified among small, medium and
large companies. Both growth and value investment disciplines are normally
utilized in managing the equity portion of each Portfolio. The growth discipline
attempts to identify companies whose earnings and revenue trends are believed by
the Sub-Adviser to demonstrate, or have the prospects for demonstrating,
accelerating earnings and revenues as compared to prior periods, competitors, or
market expectations. The value investment discipline attempts to identify
companies that are believed by AUL to be temporarily undervalued. It is believed
that value investing tends to provide less volatile results over the long term.
Bonds. The bond portion of each LifeStyle Portfolio may be invested in U.S.
Treasury securities, securities issued or guaranteed by the U.S. Government or a
foreign government, or an agency or instrumentality of the U.S. or a foreign
government, and non-convertible debt obligations issued by U.S. or foreign
corporations. The LifeStyle Portfolios may also invest in mortgage-backed and
other mortgage-related securities as described under "Mortgage-Related
Securities" and in other asset-backed securities. The bond portion of a
Portfolio may be diversified among the various types of fixed income investment
categories described above. The Sub-Adviser's strategy is to actively manage the
LifeStyle Portfolio by investing the Portfolio's assets in sectors it believes
are undervalued (relative to the other sectors) and which represent better
relative long-term investment opportunities.
For the fixed income portion of its assets, each Portfolio invests primarily in
debt securities that, at the time of investment, are "investment grade." These
include bonds rated BBB or better by S&P or Baa or better by Moody's or, if not
rated, of equivalent quality in the judgment of AUL. See "Bonds Generally" below
for more information on debt securities. In addition, 30% of each Portfolio's
fixed income assets may be invested in "high yield" securities which are debt
securities rated, at the time of investment, lower than Baa by Moody's or BBB by
S&P or of equivalent quality as deemed by the Sub-Adviser. "High Yield" bonds
are not considered to be investment grade and are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. See "High Yield Securities" below and Appendix I in the
SAI for further information concerning bond ratings.
Money Market Instruments. The cash equivalent portion of a LifeStyle Portfolio's
securities may be invested in money market instruments (denominated in U.S.
dollars or foreign currencies), including U.S. Government obligations,
obligations of domestic and foreign banks, short-term corporate debt instruments
and repurchase agreements. The LifeStyle Portfolios may only invest in money
market instruments that are rated AAA or A-1 by S&P, Aaa or P-1 by Moody's, or
AAA or D-1 by Duff & Phelps, Inc., or, if not rated, are of equivalent
investment quality as determined by AUL.
Foreign Securities. Each of the Portfolios may invest in the securities of
foreign issuers. In determining the allocation of assets among U.S. and foreign
issuers, AUL and the Sub-Adviser consider the condition and growth potential of
the various economies; the relative valuations of the markets; and social,
political, and economic factors that may affect the markets. The Conservative
Investor Portfolio will generally invest not more than 20% of its assets in
foreign securities; the Moderate Investor Portfolio will generally invest not
more than 30% of its assets in foreign securities; and the Aggressive Investor
Portfolio will generally invest not more than 35% of its assets in foreign
securities. These percentages are measured at the time of investment.
The LifeStyle Portfolios may make investments in foreign securities either
directly or indirectly by purchasing depository receipts or depository shares of
similar instruments ("depository receipts"). Depository receipts are securities
that are listed on exchanges or quoted in the domestic over-the-counter markets
in one country but represent shares of issuers domiciled in another country.
Direct investments in foreign securities may be made either on foreign
securities exchanges or in the over-the-counter markets. Subject to its
investment objective and policies, each Portfolio may invest in common stocks,
convertible securities, preferred stocks, bonds, notes and other debt securities
of foreign issuers and debt securities of foreign governments and their
agencies. The credit quality standards applicable to domestic securities
purchased by each LifeStyle Portfolio are also applicable to its foreign
securities investments. The LifeStyle Portfolios may also invest a portion of
their international holdings in securities of issuers in emerging market
(developing) countries. See "Foreign Securities" below for more information. In
connection with investments in securities denominated in foreign currencies, AUL
and the Sub-Adviser may seek to hedge all or a part of a Portfolio's foreign
currency exposure through the use of forward foreign currency contracts. See
"Forward Foreign Currency Contracts" below.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of its
Board of Directors according to applicable laws of the State of Maryland and the
Fund's Articles of Incorporation and Bylaws. Information about the directors and
the Fund's executive officers may be found in the SAI under the heading
"Management of the Fund."
<PAGE>
10
INVESTMENT ADVISER-AMERICAN UNITED LIFE INSURANCE COMPANY(R)
The Fund has entered into an Investment Advisory Agreement (the
"Agreement") with AUL (the "Adviser"). The Adviser is a legal reserve mutual
life insurance company existing under the laws of the State of Indiana. It was
originally incorporated as a fraternal society on November 7, 1877, under the
laws of the federal government, and reincorporated under the laws of the State
of Indiana in 1933. It is qualified to do business in 48 states and the District
of Columbia. As a mutual company, it is owned by and operated exclusively for
the benefit of its policyowners. The Adviser has its principal business office
located at One American Square, Indianapolis, IN 46282.
The Adviser conducts a conventional life insurance, reinsurance, and
annuity business, and manages pension and other accounts. At December 31, 1997,
the Adviser had admitted assets of $_____________ and had a policyowners'
surplus of $___________. The Adviser is registered with the SEC as an investment
adviser. Such registration does not involve supervision by the SEC over
investment advice.
Subject to overall supervision of the Board of Directors, the Adviser
exercises overall responsibility for the investment and reinvestment of the
Fund's assets. In so doing, the Adviser manages the day-to-day investment
operations of each Portfolio, except the Tactical Asset Allocation Portfolio and
a portion of each LifeStyle Portfolio, and the composition of the investment
portfolio of such Portfolios, including the purchase, retention, and disposition
of the investments, securities, and cash contained therein in accordance with
the Portfolios' investment objectives and policies as stated in the Fund's
Prospectus as may be from time to time in effect.
AUL has engaged Sub-Advisers to manage the assets of the Tactical Asset
Allocation Portfolio and a portion of the assets of each LifeStyle Portfolio as
described below.
At the Fund's request, the Adviser provides, without charge, personnel (who
may be the Fund's officers) to render certain clerical, accounting,
administrative and other services to the Fund as may from time to time be
requested. Also, the Adviser furnishes to the Fund, without additional charge,
such administrative and management supervision and office facilities (which may
be the Adviser's own offices) as the Adviser may believe appropriate or as the
Fund may reasonably request. However, the Fund may also hire its own employees
and contract for services to be performed by third parties.
Under the Investment Advisory Agreement, the Adviser is compensated for its
services, by a monthly fee based on an annual percentage of the average daily
net assets of each Portfolio. For the Equity, Bond, Money Market and Managed
Portfolios, the Fund pays the Adviser a fee at an annual rate of .50% of the
Portfolio's average daily net assets. For the Tactical Asset Allocation
Portfolio, the Fund pays the Adviser a fee at an annual rate of .80% of the
Portfolio's average daily net assets. For the LifeStyle Portfolios, the Fund
pays the Adviser a fee at an annual rate of .70% of the average daily net assets
of each Portfolio.
The Sub-Advisers
Dean Investment Associates is the Sub-Adviser to the Tactical Asset
Allocation Portfolio. BEA Associates, a member of Credit Suisse Asset
Management, is Sub-Adviser to a portion of the assets of each LifeStyle
Portfolio. Subject to the supervision of the Investment Adviser and the Fund's
Board of Directors, the Sub-Advisers are responsible for the actual management
of their respective Portfolios or portion thereof, and for making decisions to
buy, sell or hold any particular security, and they place orders to buy or sell
securities on behalf of their respective Portfolios.
The Sub-Advisers serve the Portfolios under sub-advisory agreements. These
agreements may be terminated upon notice by the Fund's Board of Directors or the
Investment Adviser, or by shareholder action. In the event that an agreement
with a Sub-Adviser is terminated, the Investment Adviser may assume portfolio
management responsibilities.
THE SUB-ADVISER TO THE TACTICAL ASSET ALLOCATION PORTFOLIO
AUL has engaged Dean Investment Associates, a Division of C.H. Dean and
Associates, Inc., to serve as Sub-Adviser to the Tactical Asset Allocation
Portfolio. Dean Investment Associates is located at 2480 Kettering Tower,
Dayton, Ohio 45423-2480, and is a registered investment adviser with the SEC.
Dean Investment Associates is wholly-owned by C.H. Dean and Associates, Inc.
Founded in 1972, Dean Investment Associates manages portfolios for individuals
and institutional clients worldwide. Dean Investment Associates provides a full
range of investment advisory services and currently has over $4 billion of
assets under management.
For its services, the Sub-Adviser receives fees from the Investment Adviser
(and not the Portfolio) in the amount of (i) 68.75% of the advisory fees
received by the Investment Adviser with respect to the Tactical Asset Allocation
Portfolio, less (ii) 50% of the amount of any excess expenses paid by the
Investment Adviser on behalf of the Portfolio pursuant to the expense guarantee
described below.
THE SUB-ADVISER TO THE LIFESTYLE PORTFOLIOS:
AUL has engaged BEA Associates, a member of Credit Suisse Asset Management,
to serve as Sub-Adviser to a portion of the LifeStyle Portfolios. BEA Associates
is located at One Citicorp Center, 153 East 53rd Street, New York, New York
10022, and is a registered investment adviser with the SEC. BEA Associates will
be responsible for managing the growth-oriented equity and international equity
portions of the LifeStyle Portfolios. BEA is a diversified investment adviser
managing global equity, fixed-income and derivative securities accounts for
corporate pension and profit-sharing plans, state pension funds, union funds,
endowments and other charitable institutions. As of September 30, 1997, BEA
managed approximately $34.6 billion in assets. BEA currently acts as investment
adviser for eleven other investment companies registered under the 1940 Act, and
acts as sub-adviser to certain portfolios of twelve other registered investment
companies.
For its services, the Sub-Adviser receives fees from the Investment Adviser
(and not the LifeStyle Portfolios) as follows:
for domestic equity securities: .60% on the first $25 million of assets,
.55% on the next $25 million of assets, .50% on the next $25 million of
assets, and .45% thereafter, and
for international equities: .80% on the first $25 million of assets,
.70% on the next $25 million of assets, and .60% thereafter.
OTHER EXPENSES
The Fund is responsible for bearing all costs of its operations. Such
costs include fees to the Adviser, shareholder servicing costs, directors' fees
and expenses, legal and auditing fees, custodian fees, registration fees, and
others. Sub-advisory fees paid to Dean Investment Associates and BEA Associates,
are borne by the Adviser and not the Portfolios. Fund expenses directly
attributable to a Portfolio are charged to that Portfolio; other expenses are
allocated proportionately among all the Portfolios in relation to the net assets
of each Portfolio. The Adviser has currently agreed to reduce its fee with
respect to a Portfolio to the extent necessary to prevent the Portfolio's
ordinary operating expenses from exceeding 1.0% of the Portfolio's average daily
net assets during the year. In the event that this fee arrangement is
insufficient to prevent a Portfolio's aggregate ordinary operating expenses from
exceeding 1.0% of the Portfolio's average daily net assets during the year, the
Adviser has further agreed to assume a Portfolio's expenses to the extent
necessary to limit such expenses to 1.0% of the Portfolio's average daily net
assets during the year. Ordinary operating expenses include the advisory fee but
do not include interest, taxes, brokerage commissions and other transactional
expenses and, if any, legal claims and liabilities, litigation costs and
indemnification payments in connection with litigation, and other extraordinary
expenses. If the Adviser has reduced its fee with respect to a Portfolio in any
given year, in any of the next five succeeding years in which the Portfolio's
ordinary operating expenses do not exceed 1.0% of average daily net assets, the
Adviser's fee
<PAGE>
11
will be increased with respect to that Portfolio by an amount equal to any prior
fee reduction; provided that such fee increase does not cause the Portfolio's
expenses to exceed 1.0% of the Portfolio's average daily net assets in that
year. The Adviser may terminate the policy of reducing its fee and/or assuming
Fund expenses upon 30 days written notice to the Fund and such policy will be
terminated automatically by the termination of the Investment Advisory
Agreement.
PORTFOLIO EXPENSES
On December 31 of the years 1997, 1996, 1995, 1994, 1993, 1992, 1991,
and for the period from April 10, 1990 (the date the Fund commenced operations)
through December 31, 1990, the total expenses of each Portfolio of the Fund were
the following percentages of average daily net assets for the periods shown. The
Tactical Asset Allocation Portfolio commenced operations July 31, 1995.
Portfolio Expenses for the Conservative Investor Portfolio, the Moderate
Investor Portfolio, and the Aggressive Investor Portfolio, are not available
because these Portfolios had not commenced operations during the periods shown.
<TABLE>
<CAPTION>
Tactical
Year Equity Bond Money Market Managed Asset
---- ------ ---- ------------ ------- -----
<S> <C> <C> <C> <C> <C>
1997
1996 .70% .71% .70% .70% 1.00%
1995 .70% .70% .73% .70% 1.00%(1)
1994 .73% .73% .75% .73% N.A.
1993 .82% .80% .84%. .81% N.A.
1992 .84% .79% .85% .82% N.A.
1991 .80% .71% .85% .94% N.A.
1990 1.00% 1.00% 1.00% .98% N.A.
<FN>
(1) Ratio calculated for period July 31, 1995 through December 31, 1995 on an
annualized basis.
</FN>
</TABLE>
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
All of the Portfolios may invest in U.S. Government securities. U.S.
Government securities are obligations of or obligations guaranteed by the U.S.
Government, its agencies or instrumentalities. Securities guaranteed by the U.S.
Government include: (1) direct obligations of the U.S. Treasury (such as
Treasury bills, notes, and bonds) and (2) federal agency obligations guaranteed
as to principal and interest by the U.S. Treasury (such as GNMA certificates).
With respect to these securities, the payment of principal and interest is
unconditionally guaranteed by the U.S. Government, and thus they are of the
highest credit quality. Such securities are subject to variations in market
value due to fluctuations in interest rates, but, if held to maturity, are
guaranteed by the U.S. Government to be paid in full. Securities issued by U.S.
Government instrumentalities and certain federal agencies are neither direct
obligations of nor obligations guaranteed by the Treasury. However, they involve
federal sponsorship in one way or another: some are supported by the
discretionary authority of the Treasury to purchase certain obligations of the
issuer; others are supported only by the credit of the issuing government agency
or instrumentality. These agencies and instrumentalities include, but are not
limited to, Federal Land Banks, Farmers Home Administration, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, and Federal Home Loan Banks.
BONDS GENERALLY
As described above, the Bond Portfolio, the Money Market Portfolio, the
Managed Portfolio, the Tactical Asset Allocation Portfolio, and the LifeStyle
Portfolios may invest in corporate bonds or debt securities, which may include,
without limit, debentures, notes and other similar corporate debt instruments,
including convertible securities. Debt securities may be acquired with warrants
attached. Corporate income-producing securities also may include forms of
preferred or preference stock.
The investment return on a debt security reflects interest earnings and
changes in the market value of the security. The market value of each
Portfolio's securities may be affected by, among other things, changes in
interest rates, and the price of debt obligations will generally rise and fall
inversely with interest rates. Longer term debt obligations will normally have
greater price volatility than shorter term obligations.
A debt security also presents the risk that the issuer of the security may
not be able to meet its obligations on interest or principal payments at the
time called for by the instrument. Bonds rated BBB or Baa, which are considered
medium-grade category bonds, do not have economic characteristics that provide
the high degree of security with respect to payment of principal and interest
associated with higher rated bonds, and generally have some speculative
characteristics. A bond will be placed in this rating category where interest
payments and principal security appear adequate for the present, but economic
characteristics that provide longer-term protection may be lacking. Any bond,
and particularly those rated BBB or Baa, may be susceptible to changing
conditions, particularly to economic downturns, which could lead to a weakened
capacity to pay interest and principal. In the event that ratings decline after
the Portfolio's investment in debt securities, the Adviser or Sub-Adviser will
consider all such factors as it deems relevant to the advisability of retaining
such securities. See Appendix I in the SAI for further information concerning
bond ratings.
HIGH YIELD SECURITIES
The Bond Portfolio may invest up to 10% of its assets, measured at the time
of investment, the Managed Portfolio may invest up to 10% of its fixed income
assets, measured at the time of investment, and each of the LifeStyle Portfolios
may invest up to 30% of its fixed income assets, measured at the time of
investment, in high yield securities. High yield/high risk debt securities are
those rated lower than Baa and BBB, or, if not rated by Moody's or S&P, of
equivalent quality and which are commonly referred to as "junk bonds."
Investment in such securities generally provides greater income and increased
opportunity for capital appreciation than investments in higher quality debt
securities, but they also typically entail greater potential price volatility
and principal and income risk. Debt securities rated lower than investment grade
by either S&P or Moody's, but not the other, are not considered to be high yield
securities for purposes of the Portfolios' limits on investments in high yield
securities.
In general, high yield bonds are not considered to be investment grade.
They are regarded as predominately speculative with respect to the issuing
company's continuing ability to meet principal and interest payments. If the
issuer of high yield securities defaults, a Portfolio may incur additional
expenses to seek recovery. Risk of default or bankruptcy may be greater in
periods of economic uncertainty or recession, as the issuers of high yield
securities may be less able to withstand general economic downturns.
Accordingly, while the prices of high yield bonds have been found to be less
sensitive to interest-rate changes than higher-rated investments, high yield
securities may be expected to be more sensitive to adverse economic downturns or
individual corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline in high
yield bond prices. In the case of high yield bonds structured as zero-coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
that pay interest periodically and in cash.
The secondary market in which high yield bonds are traded may be less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Portfolio could sell
a high yield bond; and could adversely affect the daily net asset value of the
Portfolio's shares. At times of less liquidity, it may be more difficult to
value the high yield bonds because such valuation may require more research, and
elements of judgment may play a greater role in the valuation because there is
less reliable, objective data available.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks, as credit ratings evaluate the safety of
principal and interest payments, not the market value risk of high yield
securities. Also, credit rating agencies may fail to change credit ratings in a
timely fashion to reflect events since the security was last rated. Accordingly,
analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of a
Portfolio to achieve its investment objective may, to the extent of its
investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Portfolio were investing
in higher quality securities.
MORTGAGE-RELATED SECURITIES
The LifeStyle Portfolios, Bond Portfolio, Managed Portfolio, and Tactical
Asset Allocation Portfolio may invest in GNMA certificates, FNMA and FHLMC
mortgage-backed obligations and privately issued mortgage-backed securities.
GNMA Certificates: Government National Mortgage Association ("GNMA")
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government. GNMA
certificates differ from typical bonds since principal is repaid monthly over
the term of the loan rather than returned in a lump-sum at maturity. Although
GNMA guarantees timely payment even if homeowners delay or default, tracking the
"pass-through" payments may, at times, be difficult. Expected payments may be
delayed due to the delays in registering the newly traded paper securities. The
Custodian's policies for crediting missed payments while errant receipts are
tracked down may vary. Although the mortgage loans in the pool will have
maturities of up to 30 years, the actual average life of the GNMA certificates,
typically, will be substantially less, since the mortgages will be subject to
normal principal amortization and may be prepaid prior to maturity.
FNMA and FHLMC Mortgage-Backed Obligations: The Federal National Mortgage
Association ("FNMA"), a federally chartered and privately-owned corporation,
issues pass-through securities representing interests in a pool of conventional
mortgage loans. FNMA guarantees the timely payment of principal and interest but
this guarantee is not backed by the full faith and credit of the U.S.
Government. The Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the United States, issues participation certificates which
represent interests in a pool of conventional mortgage loans. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal and
maintains reserves to protect holders against losses due to default, but the
certificates are not backed by the full faith and credit of the U.S. Government.
As in the case with GNMA certificates, the actual maturity of and realized yield
on particular FNMA and FHLMC pass-through securities will vary based on the
prepayment experience of the underlying pool of mortgages.
<PAGE>
12
Other Mortgage-Backed Securities: Mortgage-backed securities are also
issued by financial institutions such as commercial banks, savings and loan
associations, mortgage banks, and securities broker-dealers (or affiliates of
such institutions established to issue these securities) in the form of either
collateralized mortgage obligations ("CMOs") or mortgage-backed bonds. CMOs are
obligations fully collateralized directly or indirectly by a pool of mortgages
on which payments of principal and interest are dedicated to payment of
principal and interest on the CMOs. Payments are passed through to the holders,
although not necessarily on a pro rata basis, on the same schedule as they are
received. Mortgage-backed bonds are general obligations of the issuer fully
collateralized directly or indirectly by a pool of mortgages. The mortgages
serve as collateral for the issuer's payment obligations on the bonds, but
interest and principal payments on the mortgages are not passed through either
directly (as with GNMA certificates and FNMA and FHLMC pass-through securities)
or on a modified basis (as with CMOs). Accordingly, a change in the rate of
prepayments on the pool of mortgages could change the effective maturity of a
CMO but not that of a mortgage-backed bond (although, like many bonds,
mortgage-backed bonds can provide that they are callable by the issuer prior to
maturity).
It is expected that governmental, government-related, or private entities
may create mortgage loan pools and other mortgage-backed securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. As new types of mortgage-backed securities are developed
and offered to investors, investments in such new types of mortgage-backed
securities will be considered.
Risks of Mortgage-Related Securities: In the case of mortgage pass-through
securities such as GNMA certificates or FNMA and FHLMC mortgage-backed
obligations, early repayment of principal arising from prepayments of principal
on the underlying mortgage loans due to the sale of the underlying property, the
refinancing of the loan, or foreclosure may expose a Portfolio to a lower rate
of return upon reinvestment of principal. Prepayment rates vary widely and may
be affected by changes in market interest rates. In periods of falling interest
rates, the rate of prepayment tends to increase, thereby shortening the actual
average life of the mortgage-related security. Conversely, when interest rates
are rising, the rate of prepayment tends to decrease, thereby lengthening the
actual average life of the mortgage-related security. Accordingly, it is not
possible to accurately predict the average life of a particular pool.
Reinvestment of prepayments may occur at higher or lower rates than the original
yield on the certificates. Therefore, the actual maturity and realized yield on
pass-through or modified pass-through mortgage-related securities will vary
based upon the prepayment experience on the underlying pool of mortgages.
ZERO COUPON BONDS
The Bond Portfolio, Managed Portfolio, Tactical Asset Allocation Portfolio
and each of the LifeStyle Portfolios may invest in zero coupon bonds or
"strips." Zero coupon bonds do not make regular interest payments; rather, they
are sold at a discount from face value. Principal and accredit discount
(representing interest accrued but not paid) are paid at maturity. "Strips" are
debt securities that are stripped of their interest after the securities are
issued, but otherwise are comparable to zero coupon bonds. The issuers of all
zero coupon bonds, and the obligor of all "strips" purchased by the Portfolio,
will be the U.S. Government and its agencies or instrumentalities. The market
value of "strips" and zero coupon bonds generally fluctuates in response to
changes in interest rates to a greater degree than interest-paying securities of
comparable term and quality. The Bond Portfolio, Managed Portfolio, Tactical
Asset Allocation Portfolio and each of the LifeStyle Portfolios may also invest
in step coupon securities. For a description of these securities, see "Zero
Coupon and Step Coupon Securities" in the SAI.
FOREIGN SECURITIES
As described above, the LifeStyle Portfolios may invest a certain
percentage of their assets in the securities of foreign issuers, including debt
securities of foreign governments and their agencies, when these securities meet
applicable standards of selection. The Tactical Asset Allocation Portfolio may
also invest up to 25% of its total assets in equity securities of foreign
issuers. It is anticipated that most of the Tactical Asset Allocation
Portfolio's investments in securities of foreign issuers will be American
Depositary Receipts (ADRs). The Equity Portfolio may also invest in ADRs. ADRs
are dollar-denominated receipts issued generally by domestic banks and represent
the deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States.
Foreign securities may be subject to foreign government taxes which would
reduce the income yield on such securities. Foreign investments involve certain
risks, such as political or economic instability of the issuer or of the country
of issue, the difficulty of predicting international trade patterns, fluctuating
exchange rates and the possibility of imposition of exchange controls. Such
securities may also be subject to greater fluctuations in price than securities
of domestic corporations or of the U.S. Government. In addition, there may be
less publicly available information about a foreign company than about a
domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. There is generally less government regulation
of stock exchanges, brokers and listed companies abroad than in the United
States, and, with respect to certain foreign countries, there is a possibility
of expropriation or confiscatory taxation, or diplomatic developments which
could affect investment in those countries. Finally, in the event of a default
on any such foreign securities, it may be more difficult for the Portfolio to
obtain or to enforce a judgment against the issuers of such securities. See the
Statement of Additional Information regarding additional risks associated with
foreign countries.
The LifeStyle Portfolios may invest a portion of their international
holdings in securities of issuers in emerging market (developing) countries.
Investing in emerging market countries involves significantly higher risk than
investing in countries with developed markets as a result of uncertainty
regarding the companies and the markets in which they operate. Securities prices
can be more volatile than in developed countries as a result of investor
concerns regarding the stability of the government, internal economic pressures,
and the impact of external economic factors. In addition, securities markets in
emerging market countries may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
resulting in a lack of liquidity and in volatility in the price of securities
traded on those markets. Also, securities markets in emerging market countries
typically offer less regulatory protection for investors.
FORWARD FOREIGN CURRENCY CONTRACTS
The LifeStyle Portfolios and the Tactical Asset Allocation Portfolio may
invest in forward foreign currency contracts. A forward foreign currency
contract is an obligation to purchase or sell a currency against another
currency at a future date at a price set at the time of the contract. A
Portfolio could engage in a forward foreign currency transaction in anticipation
of or to protect itself against fluctuations in currency exchange rates.
Although forward foreign currency contracts typically will involve the purchase
or sale of a foreign currency against the dollar, a Portfolio also may purchase
or sell one foreign currency forward against another foreign currency. In
addition, a Portfolio may hedge a foreign currency with forward contracts on
another ("proxy") currency of which changes in value generally correlate with
the currency to be hedged. There are certain markets where it is not possible to
engage in effective foreign currency hedging. This may be true, for example, for
the currencies of various Latin American countries in which the foreign exchange
markets are not sufficiently developed to permit hedging activity to take place.
A Portfolio's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency to "lock
in" the U.S. dollar price of a security purchased or sold by a Portfolio.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated in a foreign currency. A Portfolio will
not speculate in forward foreign exchange.
Employing hedging strategies with forward currency contracts does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Forward foreign currency contracts
involve some transactional expense for a Portfolio. Although forward foreign
currency contracts will be used primarily to protect a Portfolio from adverse
currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted, and a Portfolio's total return could
be adversely affected as a result.
REPURCHASE AGREEMENTS
All of the Portfolios may invest in repurchase agreements. Repurchase
agreements are agreements by which a Portfolio purchases a security and obtains
a simultaneous commitment from the seller (a member bank of the Federal Reserve
System or a recognized securities dealer) to repurchase the security at
<PAGE>
13
an agreed upon price and date. The resale price is in excess of the purchase
price and reflects an agreed upon market rate of return unrelated to the coupon
rate on the purchased security. Such transactions afford an opportunity for a
Portfolio to maintain liquidity and earn income over periods of time as short as
overnight.
The underlying securities on repurchase agreements are ordinarily U.S.
Government securities, but may be other securities in which the Portfolio might
otherwise invest. A Portfolio will enter into repurchase agreements only if they
are fully collateralized. The market value of the collateral, including accrued
interest, will equal or exceed the repurchase price, and the collateral will be
in the actual or constructive possession of the Portfolio.
A repurchase agreement subjects a Portfolio to the risk of the inability of
the seller to pay the repurchase price on the delivery date; however, the
underlying security constitutes the collateral for the seller's obligation. In
addition, a Portfolio will enter into repurchase agreements only with parties
that the Adviser or Sub-Adviser considers creditworthy. In the event the seller
does default, the Portfolio may incur (i) a loss if the value of the collateral
declines and (ii) disposition costs in connection with liquidating the
collateral. In the event bankruptcy proceedings are commenced with respect to
the seller, realization of the collateral by the Portfolio may be delayed or
limited and a loss may be incurred if the collateral securing the repurchase
agreement declines in value during the bankruptcy proceedings.
REVERSE REPURCHASE AGREEMENTS
All of the Portfolios may invest in reverse repurchase agreements. A
reverse repurchase agreement involves the sale of a security by a Portfolio and
its agreement to repurchase the instrument at a specified time and price.
Reverse repurchase agreements may be considered borrowings by a Portfolio under
the 1940 Act. A Portfolio will maintain a segregated account consisting of
liquid assets to cover its obligations under reverse repurchase agreements. To
the extent that positions in reverse repurchase agreements are not covered
through the maintenance of a segregated account consisting of liquid assets at
least equal to the amount of any forward purchase commitment, a Portfolio will
limit its investments in such reverse repurchase agreements and other borrowings
to no more than one-third of the current market value of the Portfolio's total
assets. The use of reverse repurchase agreements by a Portfolio creates leverage
which increases a Portfolio's investment risk. If the income and gains on
securities purchased with the proceeds of reverse repurchase agreements exceed
the cost of the agreements, the Portfolio's earnings or net asset value will
increase faster than otherwise would be the case; conversely, if the income and
gains fail to exceed the costs, earnings or net asset value would decline faster
than otherwise would be the case.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
All Portfolios may invest in certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by commercial
banks and in certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ("S&Ls"). Certificates of
deposit are receipts from a bank or an S&L for funds deposited for a specified
period of time at a specified rate of return. Bankers' acceptances are time
drafts drawn on commercial banks by borrowers, usually in connection with
international commercial transactions. The Portfolios may also invest in
obligations of foreign branches of commercial banks and foreign banks so long as
the securities are U.S. dollar-denominated. See "Foreign Securities" discussion
in this section for further information regarding risks associated with
investment in foreign securities.
The Portfolios will not invest in obligations issued by a commercial bank
or S&L unless the bank or S&L has total assets of at least $1 billion, or the
equivalent in other currencies, and the institution has outstanding securities
rated A or better by S&P or Moody's, or, if the institution has no outstanding
securities rated by S&P or Moody's, such institution, in the determination of
the Adviser or Sub-Adviser, has creditworthiness similar to institutions having
outstanding securities so rated.
See the SAI "Description of Securities and Investment Techniques" for
further information regarding these obligations.
OPTIONS
In pursuing their investment objectives, the LifeStyle Portfolios, Equity
Portfolio, Bond Portfolio, and Managed Portfolio may engage in certain
transactions in put and call options.
The LifeStyle Portfolios, Equity Portfolio, Bond Portfolio, and Managed
Portfolio may each write (i.e., sell) call options ("calls") in furtherance of
its respective investment objective or objectives if (i) after any sale, not
more than 25% of that Portfolio's total as- sets are subject to calls; (ii) the
calls are traded on a domestic securities exchange or board of trade; and (iii)
the calls are "covered."
The LifeStyle Portfolios, Equity Portfolio, Bond Portfolio, and Managed
Portfolio may also write put options ("puts") if (i) after any sale, the
aggregate of the exercise prices of all outstanding puts written by the
Portfolio do not exceed 25% of the Portfolio's total assets; (ii) the puts are
traded on a domestic securities exchange or board of trade; and (iii) the puts
are "secured." Each of these Portfolios may purchase a put only in a closing
purchase transaction to terminate an obligation on a put which it has written.
A Portfolio may write a call or put option only if the option is "covered"
or "secured" by the Portfolio holding a position in the underlying securities.
The LifeStyle Portfolios, Bond Portfolio, and Managed Portfolio may each
purchase call options ("calls") on securities to protect against substantial
increases in prices of securities the Portfolio may wish to purchase pending its
ability to invest in such securities in an orderly manner. The Equity Portfolio
may purchase a call only
<PAGE>
14
in a closing purchase transaction to terminate its obligation on a call which it
has written. A portfolio may sell calls it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
call which is sold.
Risks of Options Transactions: The purchase and writing of options involves
certain risks. During the option period, the covered call writer has, in return
for the premium on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. If a call option purchased by a Portfolio is not sold when it has
remaining value, and if the market price of the underlying security remains less
than or equal to the exercise price, the Portfolio will lose its entire
investment in the option.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Portfolio may be unable to
close out a position. If a Portfolio cannot effect a closing transaction, it
will not be able to sell the underlying security while the previously written
option remains outstanding, even if it might otherwise be advantageous to do so.
Since option premiums paid or received by a Portfolio, as compared to
underlying investments, are small in relation to the market value of such
investments, buying call options offers large amounts of leverage, which could
result in the Portfolios' net asset value being more sensitive to changes in the
value of the underlying securities.
FUTURES CONTRACTS
The Bond Portfolio and the Managed Portfolio may invest in interest rate
futures contracts. The LifeStyle Portfolios may invest in interest rate and
stock index futures contracts. These investments may be made solely for the
purpose of hedging against changes in the value of a Portfolio's securities or
securities intended to be purchased due to anticipated changes in interest
rates, market conditions, stock or currency prices and not for purposes of
speculation.
As a hedging strategy, a Portfolio might purchase an interest rate futures
contract when it is not fully invested in long-term debt securities but wishes
to defer their purchase for some time until it can invest in such securities or
because short-term yields are higher than long-term yields. Such purchase would
enable a Portfolio to earn the income on a short-term security while at the same
time minimizing the effect of all or part of an increase of the market price of
the long-term debt security which the Portfolio intended to purchase in the
future. A Portfolio would sell an interest rate futures contract in order to
continue to receive the income from a long-term debt security while endeavoring
to avoid part or all of the decline in market value of that security which would
accompany an increase in interest rates.
The LifeStyles Portfolios may purchase and sell stock index futures
contracts to hedge their securities portfolios. A LifeStyle Portfolio may engage
in transactions in futures contracts only in an effort to protect it against a
decline in the value of the Portfolio's portfolio securities or an increase in
the price of securities that the Portfolio intends to acquire. For example, a
LifeStyle Portfolio may sell stock index futures to protect against a market
decline in an attempt to offset partially or wholly a decrease in the market
value of securities that the LifeStyle Portfolio intends to sell. Similarly, to
protect against a market advance when the LifeStyle Portfolio is not fully
invested in the securities market, the LifeStyle Portfolio may purchase stock
index futures that may partly or entirely offset increases in the cost of
securities that the Portfolio intends to purchase.
Risks of Futures: There are several risks associated with the use of
futures for hedging purposes. While a Portfolio's hedging transactions may
protect the Portfolio against adverse movements in the general level of interest
rates or stock or currency prices, such transactions could also preclude the
opportunity to benefit from favorable movements in the level of interest rates
or stock or currency prices. A hedging transaction may not correlate perfectly
with price movements in the assets being hedged. An incorrect correlation could
result in a loss on both the hedged assets in a Portfolio and/or the hedging
vehicle, so that the Portfolio's return might have been better had hedging not
been attempted. The successful use of futures is dependent on the Adviser's or
Sub-Adviser's ability to predict correctly movements in the direction of the
stock market and no assurance can be given that the Adviser's or Sub-Adviser's
judgment in this respect will be correct.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract. Most futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single day; once the daily limit has been reached on a
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain of these instruments are relatively new and without
a significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent the Portfolio from liquidating an unfavorable position
and the Portfolio would remain obligated to meet margin requirements until the
position is closed.
The Bond and Managed Portfolios will only enter into futures contracts
which are standardized and traded on a U.S. exchange or board of trade. The
LifeStyle Portfolios may also invest in futures contracts on exchanges located
outside of the United States. Foreign markets may offer advantages such as
trading in indices that are not currently traded in the United States. Foreign
markets, however, may have greater risk potential than domestic markets. Unlike
trading on domestic commodity exchanges, trading on foreign commodity exchanges
is not regulated by the Commodity Futures Trading Commission ("CFTC"). Foreign
exchanges generally are principal markets so that no common clearing facility
exists, and a Portfolio might be able to look only to the broker for performance
of the contract. Amounts received for foreign futures may not be provided the
same protection as funds received in respect of transactions on United States
futures exchanges. Trading in foreign futures contracts may not be afforded
certain of the protective measures provided by U.S. law and regulation,
including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided by the National Futures Association or any
domestic futures exchange. In addition, any profits that a Portfolio might
realize in trading could be eliminated by adverse changes in the exchange rate
of the currency in which the transaction is denominated. Transactions on foreign
exchanges may include both commodities that are traded on domestic exchanges or
boards of trade and those that are not.
A Portfolio will not enter into a futures contract if immediately
thereafter the initial margin deposits for futures contracts held by the
Portfolio plus premiums paid by it for open futures option positions, less the
amount by which any such positions are "in-the-money," would exceed 5% of the
Portfolio's total assets.
ILLIQUID AND RESTRICTED SECURITIES
A Portfolio may invest in an illiquid or restricted security if the Adviser
or Sub-Adviser believes that it presents an attractive investment opportunity.
Generally, a security is considered illiquid if it cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which a Portfolio has valued the security. Its illiquidity might prevent the
sale of such a security at a time when the Adviser or Sub-Adviser might wish to
sell, and these securities could have the effect of decreasing the overall level
of a Portfolio's liquidity. A Portfolio may be subject to significant delays in
disposing of illiquid securities, and transactions in illiquid securities may
entail registration expenses and other transaction costs that are higher than
those for transactions in liquid securities. Further, the lack of an established
secondary market may make it more difficult to value illiquid securities,
requiring the Fund to rely on judgments that may be somewhat subjective in
determining value, which could vary from the amount that a Portfolio could
realize upon disposition.
Restricted securities, including private placements, are subject to legal
or contractual restrictions on resale. They can be eligible for purchase without
SEC registration by certain institutional investors known as "qualified
institutional buyers," and under the Fund's procedures, restricted securities
could be treated as liquid. However, some restricted securities may be illiquid,
and restricted securities that are treated as liquid could be less liquid than
registered securities traded on established secondary markets. The LifeStyle
Portfolios may not invest more than 15% of its total assets in illiquid
securities, measured at the time of investment. The Equity, Bond, Money Market
and Tactical Asset Allocation Portfolios may invest up to 10% of the total
assets of the Portfolio in illiquid securities, measured at the time of
investment.
OTHER INVESTMENT COMPANIES
Each of the Portfolios may invest in shares issued by other investment
companies. The LifeStyle Portfolios, subject to SEC approval, intend to invest
an unlimited portion of their assets in other investment companies. The Tactical
Asset Allocation Portfolio may invest up to 10% of its total assets in money
market funds, within limits imposed by the 1940 Act upon investment by the
Portfolio in other investment companies. If the forecasting models employed by
the Sub-Adviser of the Tactical Asset Allocation Portfolio predict a decline in
the stock market, the Sub-Adviser expects to reduce equity exposure and increase
the Portfolio's cash position, including investment in money market funds.
Except for the LifeStyle Portfolios, a Portfolio is limited in the degree to
which it may invest in shares of another investment company in that it may not,
at the time of the purchase, (1) acquire more than 3% of the outstanding voting
shares of the investment company, (2) invest more than 5% of
<PAGE>
15
the Portfolio's total assets in the investment company, or (3) invest more than
10% of the Portfolio's total assets in all investment company holdings. As a
shareholder in any investment company, a Portfolio will bear its ratable share
of the investment company's expenses, including management fees in the case of a
management investment company.
LENDING OF PORTFOLIO SECURITIES
The Portfolios may, from time to time, lend securities from their
Portfolios to brokers, dealers and financial institutions and receive as
collateral cash or U.S. Treasury securities which at all times while the loan is
outstanding will be maintained in amounts equal to at least 100% of the current
market value of the loaned securities. Any cash collateral will be invested in
short-term securities. Such loans may not have terms longer than 30 days and
will be terminable at any time. The Portfolios may also pay reasonable fees to
persons unaffiliated with the Portfolios for services in arranging such loans.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions applicable to each of
the Portfolios. The restrictions are stated in the SAI, and some are briefly
described in this paragraph. A Portfolio will not, with respect to 75% of its
assets, invest more than 5% of its assets in securities of any one issuer,
except that this restriction does not apply to U.S. Government securities. A
Portfolio will not, with respect to 75% of its assets, invest in more than 10%
of any one issuer's outstanding voting securities. No Portfolio will concentrate
more than 25% of its assets in any particular industry, except that this
restriction does not apply to U.S. Government securities and, with respect to
the Money Market Portfolio, to securities or obligations (other than commercial
paper) issued by domestic branches of U.S. banks. In addition, no Portfolio will
borrow money or pledge its assets, with certain exceptions that are set forth
under "Investment Restrictions" in the SAI.
Each Portfolio is subject to the above-referenced and other investment
restrictions, all of which are stated in the SAI. Those restrictions, together
with each Portfolio's investment objective or objectives as set forth under
"Investment Objectives and Policies," are fundamental policies of each existing
Portfolio and may not be changed with respect to any Portfolio without the
approval of a majority of the outstanding voting shares of that Portfolio. The
vote of a majority of the outstanding voting shares of a Portfolio means the
vote at an annual or special meeting of: (i) 67% or more of the voting
securities present at such meeting, if the holders of more than 50% of the
outstanding voting shares of such Portfolio are present or represented by proxy;
or (ii) more than 50% of the outstanding voting securities of such Portfolio,
whichever is less.
PORTFOLIO TRANSACTIONS AND TURNOVER
Pursuant to the Investment Advisory Agreement (and the Sub-Advisory
Agreements with respect to the Tactical Asset Allocation Portfolio and the
LifeStyle Portfolios), the Adviser or Sub-Adviser places orders for the purchase
and sale of portfolio investments for the Fund's Portfolios with brokers or
dealers selected by it in its discretion. In executing transactions, the Adviser
or Sub-Adviser will attempt to obtain the best execution for a Portfolio taking
into account such factors deemed appropriate by the Adviser or Sub-Adviser. In
effecting purchases and sales of portfolio securities for the account of the
Fund, the Adviser or Sub-Adviser may pay higher commission rates than the lowest
available when the Adviser or Sub-Adviser believes it is reasonable to do so in
light of the value of the brokerage and research services provided by the broker
effecting the transaction. In the case of securities traded on the
over-the-counter markets, there is generally no stated commission, but the price
includes an undisclosed commission or markup. For a more complete description of
procedures on effecting portfolio transactions, see the SAI.
Some securities considered for investment by the Fund may also be
appropriate for other accounts served by the Adviser or Sub-Adviser, including
the Adviser's or Sub-Adviser's general account. If a purchase or sale of
securities consistent with the investment policies of a Portfolio and one or
more of these other accounts served by the Adviser or Sub-Adviser is considered
at or about the same time, it is the policy of AUL and the Sub-Adviser not to
favor any one account or Portfolio over another, and any purchase or sale orders
executed contemporaneously are allocated at the average price and as nearly as
practicable on a pro rata basis in proportion to the amounts desired to be
purchased or sold by each account or Portfolio. While it is conceivable that in
certain instances this Procedure could adversely affect the price or number of
shares involved in a particular Portfolio transaction, it is believed that the
procedure generally contributes to better overall execution of the Fund's
portfolio transactions. This allocation method and the results of such
allocations, are subject to periodic review by the Fund's Adviser, Sub-Advisers,
and Board of Directors.
For reporting purposes, each Portfolio's turnover rate is calculated by
dividing the value of the lesser of purchases or sales of portfolio securities
for the fiscal year by the monthly average of the value of portfolio securities
owned by the Portfolio during the fiscal year. In determining such portfolio
turnover, all securities whose maturities at the time of acquisition were one
year or less are excluded. A 100% portfolio turnover rate would occur, for
example, if all of the securities in the Portfolio (other than short-term
securities) were replaced once during the fiscal year. The turnover rate for
each of the Portfolios that had investment operations during the periods shown
is listed in the section titled "Condensed Financial Information" in this
Prospectus.
The turnover rate for each of the Portfolios will vary from year to year,
and, depending on market conditions, turnover could be greater in periods of
unusual market movement and volatility. A higher turnover rate would result in
greater brokerage commissions or other transactional expenses which must be
borne, directly or indirectly, by a Portfolio and ultimately by the Portfolio's
shareholders.
<PAGE>
16
DESCRIPTION OF THE FUND'S SHARES
The Fund was organized as a Maryland Corporation on July 26, 1989, and
currently consists of eight separately managed Portfolios. The Board of
Directors may establish additional portfolios in the future. The capitalization
of the Fund consists of 325,000,000 authorized shares of common stock, par value
$0.001 per share with 20,000,000 unallocated shares. When issued, shares of the
Fund are fully paid, non-assessable, and freely transferable. Maryland corporate
law does not require the Fund to hold annual shareholder meetings, although
special meetings may be called for a specific Portfolio, or for the Fund as a
whole, for purposes such as electing or removing directors, changing fundamental
policies, or approving an advisory contract.
In accordance with current law, it is anticipated that AUL will request
voting instructions from owners or participants of any Contracts that are funded
by separate accounts that are registered investment companies under the 1940 Act
and will vote shares in any such separate account attributable to the Contracts
in proportion to the voting instructions received. AUL may vote shares of any
Portfolio, if any, that it owns beneficially in its own discretion. In
connection with the organization of the Fund, AUL invested in shares of the
Portfolios to provide the initial capital. Thus, until a significant number of
shares of the Portfolios are sold in connection with Contracts funded by
registered separate accounts, AUL may control the Portfolios. It is anticipated
that AUL and one or more of its separate accounts will be the sole record
shareholders of the Fund.
DIVIDENDS, DISTRIBUTION AND TAXES
FEDERAL INCOME TAX STATUS
Each Portfolio intends to qualify and to elect to be treated each year as a
regulated investment company under Sub-chapter M of the Internal Revenue Code
(the "Code"). Each Portfolio that qualifies as a regulated investment company
will not be subject to Federal income tax on the net income (including capital
gains) distributed by it. Such income and capital gains distributions are
automatically reinvested in additional shares of the Portfolio unless the
shareholder (separate account) elects otherwise.
Distributions of any net investment income and of any net realized
short-term capital gains are treated as ordinary income for tax purposes in the
hands of the shareholder (separate account). The excess of any net long-term
capital gains over the short-term capital losses will, to the extent
distributed, be treated as long-term capital gains in the hands of the separate
account regardless of the length of time the separate account may have held the
shares.
Reference is made to the Prospectus for the separate account or accounts
that invest in the Fund and/or the applicable contract for information regarding
the federal income tax treatment of distributions to the separate account or
accounts.
DISTRIBUTIONS AND DIVIDENDS
Any distributions made by a Portfolio will be automatically reinvested in
additional shares of that Portfolio, unless an election is made on behalf of a
separate account to receive distributions in cash. Dividends or distributions by
a Portfolio other than the Money Market Portfolio will reduce the per-share net
asset value by the per-share amount so paid.
PURCHASE AND REDEMPTION OF SHARES
As of the date of this Prospectus, shares of the Fund are offered only for
purchase by one or more separate accounts of AUL to serve as an investment
medium for the Contracts issued by AUL. Shares of each Portfolio may be offered
in the future to separate accounts of other affiliated or unaffiliated insurance
companies to serve as the underlying investments for variable life and annuity
contracts. Shares of each Portfolio are sold at their respective net asset
values (without a sales charge) next computed after receipt of a purchase order
by AUL at its Home Office, on behalf of a separate account. Redemptions will be
effected by the separate accounts to meet obligations under the Contracts.
Owners of the Contracts do not deal directly with the Fund with respect to
acquisition, redemption, or transfer of shares, and should refer to the Contract
(or Certificate thereunder), or if applicable, the prospectus for the separate
account for information on allocation of premiums and on transfers of account
value.
Shares of a Portfolio may be redeemed on any day that AUL is open for
business. Redemptions are effected at the per share net asset value next
determined after receipt of the redemption request by AUL at its home office, on
behalf of a separate account. Redemption proceeds normally will be paid within
seven days following receipt of instructions in proper form. The right of
redemption may be suspended by the Fund (i) when the New York Stock Exchange
(the "NYSE") is closed (other than customary weekend and holiday closings) or
for any period during which trading thereon is restricted; (ii) because an
emergency exists, as determined by the SEC, making disposal of portfolio
securities or valuation of new assets not reasonably practicable; and (iii)
whenever the SEC has by order permitted such suspension or postponement for the
protection of shareholders.
<PAGE>
17
NET ASSET VALUE
The net asset value is determined by dividing the value of each Portfolio's
net assets by the number of its shares outstanding. That determination is made
once each business day, Monday through Friday, at or about 4 p.m., eastern
standard time ("EST"). The determination may be made earlier than 4 p.m. EST if
the NYSE closes earlier than 4 p.m. EST and it is possible to determine the net
asset value at that time. Net asset value will not be determined on days that
the NYSE is closed, on any federal holidays or on days when AUL is not open for
business. Traditionally, in addition to federal holidays, AUL is not open for
business on the day after Thanksgiving and either the day before or after
Christmas or Independence Day.
The value of the assets of each Portfolio other than the Money Market
Portfolio is based on actual or estimated market value, with special provisions
for assets not having readily available market quotations and for short-term
debt securities. The net asset value per share of each Portfolio except the
Money Market Portfolio will fluctuate in response to changes in market
conditions and other factors. The Money Market Portfolio will attempt to
maintain a constant net asset value per share of $1.00, which will not fluctuate
in response to changes in market conditions, although there can be no assurance
that this will be achieved. The Money Market Portfolio attempts to maintain a
constant net asset value per share by using the amortized cost method of
valuation for its portfolio securities. This involves valuing a security at cost
on the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity. See the SAI for a description
of certain conditions and procedures followed by the Portfolio in connection
with amortized cost valuation.
PERFORMANCE INFORMATION
The Fund may, from time to time, include the yield and effective yield of
the Money Market Portfolio, the yield of the remaining Portfolios, and the total
return of all Portfolios in advertisements and sales literature. Performance
information for the Fund will not be advertised or included in sales literature
unless accompanied by comparable performance information for a separate account
to which the Fund offers its shares.
Current yield for the Money Market Portfolio will be based on income
received by a hypothetical investment over a given 7-day period (less expenses
accrued during the period), and then "annualized" (i.e., assuming that the 7-day
yield would be received for 52 weeks, stated in terms of an annual percentage
return on the investment). "Effective yield" for the Money Market Portfolio is
calculated in a manner similar to that used to calculate yield, but reflects the
compounding effect of earnings on reinvested dividends.
For the remaining Portfolios, any quotations of yield will be based on all
investment income per share earned during a given 30-day period (including
dividends and interest), less expenses accrued during the period ("net
investment income"), and will be computed by dividing net investment income by
the maximum public offering price per share on the last day of the period.
Quotations of average annual total return for any Portfolio will be
expressed in terms of the average annual compounded rate of return on a
hypothetical investment in the Portfolio over periods of one, five and ten years
(or if less, up to the life of the Portfolio), will reflect the deduction of a
proportional share of Portfolio expenses (on an annual basis), and will assume
that all dividends and distributions are reinvested when paid. Quotations of
total return may also be shown for other periods.
Quotations of yield or total return for the Fund will not take into account
charges or deductions against any separate account to which Fund shares are sold
or charges and deductions against the Contracts issued by AUL. Performance
information for any Portfolio reflects only the performance of a hypothetical
investment in the Portfolio during the particular time period on which the
calculations are based. Performance information should be considered in light of
the Portfolio's investment objective or objectives, policies and
characteristics, and the market conditions during the given time period, and
should not be considered as a representation of what may be achieved in the
future. For a description of the methods used to determine yield and total
return for the Portfolio, see "Performance Information" in the SAI.
LEGAL COUNSEL
Dechert Price & Rhoads, Washington, D.C., has passed upon certain legal
matters in connection with the shares offered by this Prospectus, and also acts
as outside counsel to the Fund.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One American Square, Indianapolis, Indiana, serve
as independent accountants of the Fund.
<PAGE>
18
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information
relating to the AUL American Series Fund, Inc. A summary of the Table of
Contents of the Statement of Additional Information is set forth below:
<TABLE>
<CAPTION>
Description Page
<S> <C>
INTRODUCTION.............................................................................................................
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES......................................................................
INVESTMENT RESTRICTIONS..................................................................................................
MANAGEMENT OF THE FUND...................................................................................................
PORTFOLIO TRANSACTIONS AND BROKERAGE.....................................................................................
NET ASSET VALUE..........................................................................................................
PERFORMANCE INFORMATION..................................................................................................
TAXATION.................................................................................................................
OTHER INFORMATION........................................................................................................
FINANCIAL STATEMENTS.....................................................................................................
APPENDIX I...............................................................................................................
</TABLE>
A Statement of Additional Information may be obtained by calling or writing to
AUL at the telephone number and address in the front of this Prospectus.
<PAGE>
19
================================================================================
No dealer, salesman or any other person is authorized by the AUL
American Series Fund to give any information or to make any
representation other than as contained in this Prospectus in connection
with the offering described herein.
There has been filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended,
with respect to the offering herein described. For further information
with respect to the AUL American Series Fund, reference is made thereto
and the exhibits filed therewith or incorporated therein, which include
all contracts or documents referred to herein.
================================================================================
AUL AMERICAN SERIES FUND, INC.
Variable Life and Annuity Contracts
Sold By
AMERICAN UNITED
LIFE INSURANCE COMPANY(R)
One American Square
Indianapolis, Indiana 46282
PROSPECTUS
Dated: May 1, 1998
================================================================================
<PAGE>
1
STATEMENT OF ADDITIONAL INFORMATION
AUL AMERICAN SERIES FUND, INC.
May 1, 1998
- --------------------------------------------------------------------------------
AUL American Series Fund, Inc. (the "Fund") is an open-end, diversified
management investment company currently consisting of eight separate investment
portfolios: the AUL American Equity Portfolio ("Equity Portfolio"), the AUL
American Bond Portfolio ("Bond Portfolio"), the AUL American Money Market
Portfolio ("Money Market Portfolio"), the AUL American Managed Portfolio
("Managed Portfolio"), the AUL American Tactical Asset Allocation Portfolio
("Tactical Asset Allocation Portfolio"), the AUL American Conservative Investor
Portfolio ("Conservative Investor Portfolio"), the AUL American Moderate
Investor Portfolio ("Moderate Investor Portfolio"), and the AUL American
Aggressive Investor Portfolio ("Aggressive Investor Portfolio").
This Statement of Additional Information is intended to supplement the
information provided to investors in the Prospectus dated May 1, 1998, of AUL
American Series Fund, Inc., and has been filed with the Securities and Exchange
Commission as part of the Fund's Registration Statement. Investors should note,
however, that this Statement of Additional Information is not itself a
prospectus and should be read carefully in conjunction with the Fund's
Prospectus and retained for future reference. The contents of this Statement of
Additional Information are incorporated by reference in the Prospectus in their
entirety. A copy of the Prospectus may be obtained free of charge from the Fund
at the address and telephone number listed below.
- --------------------------------------------------------------------------------
AUL American Series Fund, Inc.
One American Square
Indianapolis, Indiana 46282
(800) 634-1629
<PAGE>
2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Description Page
INTRODUCTION...............................................................................................................
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES........................................................................
U.S. Government Securities...............................................................................................
Corporate Bonds and Debt Securities......................................................................................
Mortgage-Related Securities..............................................................................................
GNMA Certificates.......................................................................................................
FNMA and FHLMC Obligations..............................................................................................
Collateralized Mortgage Obligations.....................................................................................
Other Mortgage-Backed Securities........................................................................................
Repurchase Agreements....................................................................................................
Reverse Repurchase Agreements............................................................................................
Banking Industry and Savings Industry Obligations........................................................................
Forward Foreign Currency Contracts.......................................................................................
Options..................................................................................................................
Risks Associated with Options...........................................................................................
Futures Contracts........................................................................................................
Limitations.............................................................................................................
Risks Associated with Futures...........................................................................................
INVESTMENT RESTRICTIONS....................................................................................................
MANAGEMENT OF THE FUND.....................................................................................................
Directors and Officers...................................................................................................
Compensation of Directors................................................................................................
The Investment Adviser...................................................................................................
The Sub-Advisers.........................................................................................................
Purchases and Redemptions................................................................................................
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................................................................
Brokerage and Research Services..........................................................................................
NET ASSET VALUE............................................................................................................
PERFORMANCE INFORMATION....................................................................................................
TAXATION...................................................................................................................
Distributions............................................................................................................
OTHER INFORMATION..........................................................................................................
Capitalization...........................................................................................................
Voting Rights............................................................................................................
Custodian, Transfer Agent, and Dividend Disbursing Agent.................................................................
Independent Accountants..................................................................................................
Counsel..................................................................................................................
FINANCIAL STATEMENTS.......................................................................................................
APPENDIX I.................................................................................................................
Corporate Bonds..........................................................................................................
Commercial Paper.........................................................................................................
</TABLE>
<PAGE>
3
INTRODUCTION
This Statement of Additional Information is designed to elaborate upon the
discussion of certain securities and investment techniques which are described
in the Prospectus. The more detailed information contained herein is intended
solely for investors who have read the Prospectus and are interested in a more
detailed explanation of certain aspects of the Fund's securities and investment
techniques. Captions and defined terms in this Statement of Additional
Information generally correspond to like captions and terms in the Prospectus.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
All of the Portfolios may invest in U.S. Government securities. U.S.
Government securities are obligations of, or obligations guaranteed by, the U.S.
Government, its agencies or instrumentalities. Direct obligations of the U.S.
Government include a variety of Treasury securities which differ with respect to
coupons, maturities, and dates of issue. Treasury bills have a maturity of one
year or less. Treasury notes have maturities of one to ten years, and Treasury
bonds generally have a maturity of greater than ten years. Securities guaranteed
by the U.S. Government include federal agency obligations guaranteed as to
principal and interest by the U.S. Treasury (such as Government National
Mortgage Association ("GNMA") certificates and Federal Housing Administration
debentures). The payment of principal and interest of these securities is
unconditionally guaranteed by the U.S. Government. They are thus of the highest
credit quality. Such securities are subject to variations in market value due to
fluctuations in interest rates but, if held to maturity, the United States is
directly obligated or guarantees to pay them in full.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of, nor obligations guaranteed by, the
U.S. Treasury. However, they involve federal sponsorship in one way or another:
some are supported by the issuer's right to borrow from the U.S. Government;
others are supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not
limited to, Federal National Mortgage Association ("FNMA"), Federal Home Loan
Bank, Federal Land Banks, Farmers Financing Bank, Farm Credit Banks, and the
Tennessee Valley Authority.
CORPORATE BONDS AND DEBT SECURITIES
A Portfolio's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities) which meet the
minimum ratings criteria set forth for the Portfolio, or, if unrated, are deemed
to be comparable in quality to corporate debt securities in which the Portfolio
may invest. The rate of return or return of principal on some debt obligations
may be linked or indexed to the level of exchange rates between the U.S. dollar
and a foreign currency or currencies.
Among the corporate debt securities in which the Portfolios may invest are
convertible securities. A convertible debt security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to
non-convertible debt securities. Convertible securities rank senior to common
stock in a corporation's capital structure and, therefore, generally entail less
risk than the corporation's common stock, although the extent to which such risk
is reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by a Portfolio
is called for redemption, the Portfolio would be required to permit the issuer
to redeem the security and convert it to underlying common stock, or would sell
the convertible security to a third party. A Portfolio generally would invest in
convertible securities for their favorable price characteristics and total
return potential.
Certain Portfolios may invest in or acquire warrants to purchase equity or
fixed income securities. Bonds with warrants attached to purchase equity
securities have many characteristics of convertible bonds and their prices may,
to some degree, reflect the performance of the underlying stock. Bonds also may
be issued with warrants attached to purchase additional fixed income securities
at the same coupon rate. A decline in interest rates would permit a Portfolio to
buy additional bonds at the favorable rate or to sell the warrants at a profit.
If interest rates rise, the warrants would generally expire with no value.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's Investors Service, Inc. ("Moody's")
describes securities rated Baa as "medium-grade" obligations; they are "neither
highly protected nor poorly secured . . . [i]nterest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well." Standard & Poor's ("S&P") describes
securities rated BBB as "regarded as having an adequate capacity to pay interest
and repay principal . . . [w]hereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal . . .
than in higher rated categories."
Investments in securities rated below investment grade that are eligible
for purchase by certain of the Portfolios are described as "speculative" by both
Moody's and S&P. Investment in lower rated corporate debt securities ("high
yield securities" or "junk bonds") generally provides greater income and
increased opportunity for capital appreciation than investments in higher
quality securities, but they also typically entail greater price volatility and
principal and income risk. These high yield securities are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Analysis of the creditworthiness of
issuers of debt securities that are high yield may be more complex than for
issuers of higher quality debt securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of high yield securities have been found to be less sensitive to
interest-rate changes than higher-rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If an issuer of high yield securities
defaults, in addition to risking payment of all or a portion of interest and
principal, the Portfolios investing in such securities may incur additional
expenses to seek recovery. In the case of high yield securities structured as
zero coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest rate changes, and therefore, tend to be more volatile
than securities which pay interest periodically and in cash.
The secondary market on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the
Portfolios could sell a high yield security, and could adversely affect the
daily net asset value of the shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high yield securities, especially in a thinly-traded market. When
secondary markets for high yield securities are less liquid than the market for
higher grade securities, it may be more difficult to value the securities
because such valuation may require more research, and elements of judgment may
play a greater role in the valuation because there is less reliable, objective
data available.
MORTGAGE-RELATED SECURITIES
The LifeStyle Portfolios, Bond Portfolio, Managed Portfolio, and Tactical
Allocation Portfolio may invest in GNMA certificates and FNMA and Federal Home
Loan Mortgage Corporation ("FHLMC") mortgage-backed obligations.
Mortgage-related securities are interests in pools of mortgage loans made to
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental
and government-related organizations.
GNMA Certificates: GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans on which timely payment
of interest and principal is guaranteed by the full faith and credit of the U.S.
Government. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the U.S. Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks, and mortgage bankers)
and backed by pools of FHA-insured or VA-guaranteed mortgages.
Interests in pools of mortgage loans differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. Instead,
these securities provide a periodic payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
periodic payments made by the individual borrowers on the residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
refinancing, foreclosure or sale of the underlying residential property, net of
fees or costs which may be incurred. Mortgage-related securities issued by GNMA
are described as "modified pass-through" securities. These securities entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates, regardless of whether
or not the mortgagor actually makes the payment. Although GNMA guarantees timely
payment even if homeowners delay or default, tracking the "pass-through"
payments may, at times, be difficult.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of principal
on the underlying mortgages may expose a Portfolio to a lower rate of return
upon reinvestment of principal. Prepayment rates vary widely and may be affected
by changes in market interest rates. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of the GNMA certificates. Conversely, when interest rates are rising, the rate
of prepayment tends to decrease, thereby lengthening the actual average life of
the GNMA certificates. Accordingly, it is not possible to accurately predict the
average life of a particular pool. Reinvestment of prepayments may
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4
occur at higher or lower rates than the original yield on the certificates. Due
to the prepayment feature and the need to reinvest prepayments of principal at
current rates, GNMA certificates can be less effective than typical bonds of
similar maturities at "locking in" yields during periods of declining interest
rates, although they may have comparable risks of decline in value during
periods of rising interest rates.
FNMA and FHLMC Obligations: FNMA, a federally-chartered and privately-owned
corporation, issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal and
interest but this guarantee is not backed by the full faith and credit of the
U.S. Government. FNMA is a government sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions,
and mortgage bankers.
FHLMC, a corporate instrumentality of the United States, was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the 12 Federal Home Loan
Banks. FHLMC issues Participation Certificates ("PCs") which represent interests
in conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal and maintains
reserves to protect holders against losses due to default, but PCs are not
backed by the full faith and credit of the U.S. Government. As is the case with
GNMA certificates, the actual maturity of and realized yield on particular FNMA
and FHLMC pass-through securities will vary based on the prepayment experience
of the underlying pool of mortgages.
Collateralized Mortgage Obligations (CMOs): A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying investors, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner-than-desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
portfolios (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The portfolio A, B, and C
Bonds all bear current interest. Interest on the portfolio Z Bond is accrued and
added to the principal; a like amount is paid as principal on the portfolio A,
B, or C Bond currently being paid off. When the portfolio A, B, and C Bonds are
paid in full, interest and principal on the portfolio Z Bond begin to be paid
currently. With some CMOs, the issuer acts as a conduit to allow loan
originators (usually builders or savings and loan associations) to borrow
against their loan portfolios.
Certain classes of CMOs pay the holders only the interest paid on the
underlying mortgages or mortgage pass-through securities ("interest-only
class"). Other classes pay the holders only the principal paid on the underlying
mortgages or mortgage pass-through securities ("principal-only class").
Interest-only and principal-only classes of CMOs purchased by a Portfolio are
currently considered to be illiquid securities subject to the 10% limitation on
investment in illiquid securities. See "Investment Restrictions."
Other Mortgage-Backed Securities: Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. In addition, such issuers may be the originators
and/or servicers of underlying mortgage loans as well as the guarantors of the
mortgage-backed securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools, because there are no direct or indirect government or agency guarantees
of payments in the former pools. Timely payment of interest and principal of
these pools may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance, and letters of
credit. The insurance and guarantees are issued by governmental entities,
private insurers, and the mortgage poolers. Such insurance, guarantees, and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-backed security meets a Portfolio's investment quality
standards. There can be no assurance that the private insurers or guarantors can
meet their obligations under the insurance policies or guarantee arrangements.
All Portfolios that may buy mortgage-backed securities may purchase such
securities without insurance or guarantees, if the Adviser or Sub-Adviser
determines that the securities meet a Portfolio's quality standards. Although
the market for such securities is becoming increasingly liquid, securities by
certain private organizations may not be readily
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marketable. As new types of mortgage-backed securities are developed and offered
to investors, the Adviser and the Sub-Advisers will, consistent with a
Portfolio's investment objectives, policies, and quality standards, consider
making investments in such new types of mortgage-backed securities.
REPURCHASE AGREEMENTS
All Portfolios may invest in repurchase agreements. If a Portfolio acquires
a security from a bank or broker-dealer, it may simultaneously enter into a
repurchase agreement with the seller wherein the seller agrees at the time of
sale to repurchase the security at a mutually agreed upon time and price. The
term of such an agreement is generally quite short, possibly overnight or for a
few days, although it may extend over a number of months (up to one year) from
the date of delivery. The resale price is in excess of the purchase price by an
amount which reflects an agreed upon market rate of return, effective for the
period of time the Portfolio is invested in the security. This results in a
fixed rate of return protected from market fluctuations during the term of the
agreement. This rate is not tied to the coupon rate on the security subject to
the repurchase agreement.
Under the Investment Company Act of 1940 (the "1940 Act"), repurchase
agreements are considered to be loans by the purchaser collateralized by the
underlying securities. The Adviser or Sub-Adviser, as appropriate, will monitor
the value of the underlying securities at the time a repurchase agreement is
entered into and at all times during the term of the agreement to ensure that
its value always equals or exceeds the agreed upon repurchase price to be paid
to the Portfolio. The Adviser or Sub-Adviser will also evaluate the
creditworthiness and financial responsibility of the banks and broker-dealers
with which the Portfolios enter into repurchase agreements.
A Portfolio may not enter into a repurchase agreement having more than
seven days remaining to maturity if, as a result, such agreements together with
any other securities which are not readily marketable, would exceed applicable
limits on the Portfolio's investments in illiquid securities. If the seller
should become bankrupt or default on its obligations to repurchase the
securities, a Portfolio may experience delay or difficulties in exercising its
rights to the securities held as collateral and might incur a loss if the value
of the securities should decline. A Portfolio also might incur disposition costs
in connection with liquidation of the securities.
REVERSE REPURCHASE AGREEMENTS
All of the Portfolios may invest in reverse repurchase agreements. Reverse
repurchase agreements involve the sale of a security by a Portfolio and its
agreement to repurchase the instrument at a specified time and price.
A Portfolio will use the proceeds of a reverse repurchase agreement to
purchase other money market instruments which either mature at a date
simultaneous with or prior to the expiration of the reverse repurchase agreement
or which are held under an agreement to resell maturing as of that time. A
Portfolio will enter into a reverse repurchase agreement only when the interest
income to be earned from the investment of the proceeds of the transaction is
greater than the interest expense of the transaction. However, reverse
repurchase agreements involve the risk that the market value of securities
retained by the Portfolio may decline below the repurchase price of the
securities sold by the Portfolio which it is obligated to repurchase.
Under the 1940 Act, reverse repurchase agreements may be considered to be
borrowings by the seller. To the extent that positions in reverse repurchase
agreements are covered through the maintenance of a segregated account
consisting of liquid assets at least equal to the amount of any forward purchase
commitment, such agreements will not be considered to be "senior securities"
subject to the limits otherwise applicable to borrowings by a Portfolio. A
Portfolio may not enter into an uncovered reverse repurchase agreement if, as a
result, its current obligations under such agreements would exceed, when
combined with the total borrowings, one-third of the current market value of the
Portfolio's total assets (less all its liabilities other than obligations under
such agreements).
A Portfolio may enter into reverse repurchase agreements with banks or
broker-dealers. Entry into such agreements with broker-dealers requires the
creation and maintenance of a segregated account consisting of U.S. Government
securities or cash or cash equivalents equal to its obligations under reverse
repurchase agreements.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
All Portfolios may invest in (i) certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by commercial
banks; and (ii) certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ("S&L").
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or S&L for a definite period of time and earning
a specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, which are normally drawn by an importer or exporter to pay for
specific merchandise, and which are "accepted" by a bank, meaning, in effect,
that the bank unconditionally agrees to pay the face value of the instrument on
maturity. Fixed-time deposits are bank obligations payable at a stated maturity
date and bearing interest at a fixed rate. Fixed-time deposits may be withdrawn
on demand by the investor, but may be subject to early withdrawal penalties
which vary depending upon market conditions and the remaining maturity of the
obligation. There are no contractual restrictions on the right to transfer a
beneficial interest in a fixed-time deposit to a third party, because there is
no market for such deposits. A Portfolio will invest in fixed-time deposits (i)
which are not subject to prepayment or (ii) which provide for withdrawal
penalties upon prepayment (other than overnight deposits), consistent with
applicable limits on its investments in illiquid securities.
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The Conservative Investor, Moderate Investor, Aggressive Investor, Money
Market, Managed, and Tactical Asset Allocation Portfolios may invest in U.S.
dollar-denominated obligations of foreign branches of U.S. banks and foreign
banks. Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, which include: (i) the
possibility that their liquidity could be impaired because of future political
and economic developments; (ii) their obligations may be less marketable than
comparable obligations of U.S. banks; (iii) a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations; (iv) foreign
deposits may be seized or nationalized; (v) foreign governmental restrictions,
such as exchange controls, may be adopted which might adversely affect the
payment of principal and interest on those obligations; and (vi) the selection
of those obligations may be more difficult because there may be less publicly
available information concerning foreign banks and/or because the accounting,
auditing, and financial reporting standards, practices, and requirements
applicable to foreign banks may differ from those applicable to U.S. banks.
Foreign banks are not generally subject to examination by any U.S. Government
agency or instrumentality.
FORWARD FOREIGN CURRENCY CONTRACTS
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention (or the failure to
intervene) by U.S. or foreign governments or central banks, by currency controls
or political developments in the U.S. or abroad. Currencies in which the
Portfolios' assets are denominated may be devalued against the U.S. dollar,
resulting in a loss to the Portfolios.
All Portfolios that may invest in securities denominated in foreign
currencies may buy and sell foreign currencies on a forward basis to reduce the
risks of adverse changes in foreign exchange rates. A forward foreign currency
contract involves an obligation 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
agreed upon by the parties, at a price set at the time of the contract. By
entering into a forward foreign currency contract, a Portfolio "locks in" the
exchange rate between the currency it will deliver and the currency it will
receive for the duration of the contract. As a result, a Portfolio reduces its
exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency it will exchange into. The
effect on the value of a Portfolio is similar to selling securities denominated
in one currency and purchasing securities denominated in another. Contracts to
sell foreign currency would limit any potential gain which might be realized by
a Portfolio if the value of the hedged currency increases. A Portfolio may enter
into these contracts for the purpose of hedging against foreign exchange risk
arising from the Portfolio's investment or anticipated investment in securities
denominated in foreign currencies. A Portfolio also may enter into these
contracts for purposes of increasing exposure to a foreign currency or to shift
exposure to foreign currency fluctuations from one country to another. A
Portfolio may use one currency (or a basket of currencies) to hedge against
adverse changes in the value of another currency (or a basket of currencies)
when exchange rates between the two currencies are positively correlated.
Under applicable tax law, the Portfolios may be required to limit their
gains from hedging in forward foreign currency contracts. Although the
Portfolios are expected to comply with such limits, the extent to which these
limits apply is subject to tax regulations as yet unissued. Hedging may also
result in the application of the marked-to-market and straddle provisions of the
Internal Revenue Code of 1986, as amended (the "Code"). Those provisions could
result in an increase (or decrease) in the amount of taxable dividends paid by
the Portfolios and could affect whether dividends paid by the Portfolios are
classified as capital gains or ordinary income.
OPTIONS
In pursuing their investment objectives, the LifeStyle Portfolios, Equity
Portfolio, Bond Portfolio, and Managed Portfolio may engage in the writing
(i.e., selling) of put options ("puts") and call options ("calls") on
securities. The LifeStyle Portfolios, Bond Portfolio and Managed Portfolio may
also purchase calls on securities to protect against substantial increases in
prices of securities the Portfolio intends to purchase pending its ability to
invest in such securities in an orderly manner. The Equity Portfolio may
purchase a call only in a closing purchase transaction to terminate its
obligation on a call which it has written. The LifeStyle Portfolios, Equity
Portfolio, Bond Portfolio and Managed Portfolio may purchase a put only in a
closing purchase transaction to terminate its obligation on a put which it has
written.
An option on a security is a contract that gives the holder of the option,
in return for a premium, the right to buy from (in the case of a call) or sell
to (in the case of a put) the writer of the option the underlying security at a
specified exercise price at any time during the term of the option. The writer
of an option on a security has the obligation upon exercise of the option to
deliver the underlying security (in the case of a call) upon payment of the
exercise price or to pay the exercise price (in the case of a put) upon delivery
of the underlying security.
A Portfolio may write calls and puts only if they are "covered" or
"secured." In the case of a call on a security, the option is "covered" if the
Portfolio owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or cash equivalents in such
amount are placed in a segregated account by its Custodian) upon conversion or
exchange of other securities held by the Portfolio. A put is secured if the
Portfolio maintains cash, cash equivalents or U.S. Government securities with a
value equal to the exercise price in a segregated account or holds a put on the
same underlying security at an equal or greater exercise price.
If an option written by a Portfolio expires unexercised, the Portfolio
realizes a capital gain equal to the premium received at the time the option was
written. If an option purchased by a Portfolio expires unexercised, the
Portfolio realizes a capital loss equal to the premium paid. Prior to the
earlier of exercise or expiration of a call, it may be closed out by an
offsetting purchase of a call option of the same series (type, exchange,
underlying security, exercise price and expiration).
A Portfolio will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from writing
the option. If the cost of closing the option is more, the Portfolio will
realize a capital loss. The principal factors affecting the market value of a
call include supply and demand, interest rates, the current market price of the
underlying security in relation to the exercise price of the option, the
volatility of the underlying security, and the time remaining until the
expiration date.
The premium received for an option written by a Portfolio is recorded as a
deferred credit. The value of the option is marked-to-market daily and is valued
at the closing price on the exchange or board of trade on which it is traded,
or, if no closing price is available, at the mean between the last bid and asked
prices.
Risks Associated with Options: There are several risks associated with
transactions in options. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when, and how to use an option involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out an option position. If a Portfolio were unable to close out a
covered call option it had written on a security, it would not be able to sell
the underlying security unless the option expired without exercise. As a writer
of a covered call option, a Portfolio forgoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the exercise price of
the call.
If trading were suspended in an option written by a Portfolio, the
Portfolio would not be able to close out the option. If restrictions on exercise
were imposed, the Portfolio might be unable to exercise an option it has
purchased.
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FUTURES CONTRACTS
The Bond Portfolio and the Managed Portfolio may invest in interest rate
futures contracts. The LifeStyle Portfolios may invest in interest rate and
stock index futures contracts. A futures contract provides for the future sale
by one party and purchase by another party of a specified quantity of a
financial instrument or the cash value of an index at a specified price and
time. A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract originally was
written. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of these securities is made.
A public market exists in futures contracts covering various financial
instruments including U.S. Treasury bonds, U.S. Treasury notes, GNMA
certificates, three-month U.S. Treasury bills, 90-day commercial paper, bank
certificates of deposit, and Eurodollar certificates of deposit.
To the extent required by regulatory authorities, each investing Portfolio
will limit its use of futures contracts to hedging and related transactions so
that a Portfolio will not be deemed a commodity pool. For example, a Portfolio
might use futures contracts to hedge against anticipated changes in interest
rates that might adversely affect either the value of the Portfolio's securities
or the price of the securities which the Portfolio may wish to purchase. The
hedging techniques used by a Portfolio may include sales of futures contracts as
an offset against the effect of expected increases in interest rates, and
purchases of futures contracts an offset against the effect of expected declines
in interest rates. Although other techniques could be used to reduce a
Portfolio's exposure to interest rate fluctuations, a Portfolio may be able to
hedge its exposure more effectively and perhaps at a lower cost by using futures
contracts.
A Portfolio will only enter into futures contracts which are standardized
and traded on an exchange, board of trade, or similar entity.
If a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with its Custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each investing Portfolio expects to earn interest income on its
initial margin deposits. A futures contract held by a Portfolio is valued daily
at the official settlement price of the exchange on which it is traded. Each day
the Portfolio pays or receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This process is known as
"marking-to-market." Variation margin does not represent a borrowing or loan by
a Portfolio but is instead settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In computing
daily net asset value, each Portfolio will mark-to-market its open futures
positions.
When purchasing a futures contract, a Portfolio must maintain with its
Custodian (or broker, if legally permitted) cash, U.S. Government securities, or
other liquid high grade debt obligations (including any margin) equal to the
market value of such contract. When writing a futures contract, a Portfolio must
maintain with its Custodian cash, U.S. Government securities, or other liquid
high grade debt obligations that, when added to the amounts deposited with a
futures commission merchant or broker as margin, are equal to the market value
of the instruments underlying the contract. Alternatively, a Portfolio may
"cover" its position by owning the instruments underlying the contract, or
holding a call permitting the Portfolio to purchase the same futures contract at
a price no higher than the price of the contract written by the Portfolio (or at
a higher price if the difference is maintained in liquid assets with its
Custodian).
Generally, under futures contracts obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying index, and delivery month). If an offsetting purchase price
is less than the original sale price, the Portfolio realizes a capital gain, or
if it is more, the Portfolio realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Portfolio
realizes a capital gain, or if it is less, the Portfolio realizes a capital
loss. The transaction costs must also be included in these calculations.
Limitations: A Portfolio will not enter into a futures contract if,
immediately thereafter, the initial margin deposits for futures contracts held
by that Portfolio would exceed 5% of the Portfolios' total assets.
A Portfolio may not maintain open short positions in futures contracts if,
in the aggregate, the market value of all such open positions exceeds the
current value of its portfolio securities, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the Portfolio and the positions.
The Fund will comply with certain regulations of the Commodity Futures
Trading Commission, under which an investment company may engage in futures
transactions and qualify for an exclusion from being a "commodity pool," which
require a Portfolio to invest in futures contracts for bona fide hedging
purposes, or alternatively, to set aside cash and short-term obligations with
respect to long positions in a futures contract. Under these regulations, the
"underlying commodity value" (the size of the contract multiplied by the daily
settlement price of the contract) of each long position in a commodity futures
contract in which a Portfolio may invest may not at any time exceed the sum of:
(i) the value of short-term U.S. debt obligations or other U.S.
dollar-denominated high quality short-term money market instruments and
cash set aside in an identifiable manner, plus any funds deposited as
margin on the contract;
(ii) unrealized appreciation on the contract held by the broker; and
(iii) cash proceeds from existing investments due in not more than 30 days.
<PAGE>
8
The Fund reserves the right to engage in other types of futures
transactions in the future and to use futures for other than hedging purposes to
the extent permitted by regulatory authorities. If other types of futures
contracts are traded in the future, a Portfolio may also use such investment
techniques, provided that the Board of Directors determines that their use is
consistent with the Portfolio's investment objective or objectives.
Risks Associated with Futures: There are several risks associated with the
use of futures contracts as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. There can be significant differences between the securities or
currency markets and the futures markets that could result in an imperfect
correlation between the markets, causing a given hedge not to achieve its
objective. The degree of imperfection of correlation depends on circumstances
such as variations in speculative market demand for interest rate or stock index
futures, including technical influences in futures trading, and differences
between the portfolio securities being hedged and the instruments underlying the
hedging vehicle in such respects as interest rate levels, maturities, conditions
affecting particular industries and creditworthiness of issuers. A decision as
to whether, when and how to hedge involves the exercise of skill and judgment
and even a well-conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected interest rate trends.
The price of futures contracts may not correlate perfectly with movement in
the underlying security or stock index, due to certain market distortions. This
might result from decisions by a significant number of market participants
holding stock index futures positions to close out their futures contracts
through offsetting transactions rather than to make additional margin deposits.
Also, increased participation by speculators in the futures market may cause
temporary price distortions. These factors may increase the difficulty of
effecting a fully successful hedging transaction, particularly over a short time
frame. If a hedging transaction is not successful, the Portfolio might
experience losses which it would not have incurred if it had not established
futures positions.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures position. When such a market does not
exist, the Portfolio remains obligated to meet margin requirements until the
position is closed.
FOREIGN SECURITIES
Subject to the limits set forth in the Prospectus, each of the LifeStyle
Portfolios and the Tactical Asset Allocation Portfolio may purchase certain
foreign securities and American Depositary Receipts ("ADRs"). ADRs are
dollar-denominated receipts issued generally by domestic banks and represent the
deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States. Investments in
foreign securities, particularly those of non-governmental issuers, involve
considerations which are not ordinarily associated with investing in domestic
issuers. These considerations include changes in currency rates, currency
exchange control regulations, the possibility of expropriation, the
unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social or diplomatic developments, and the difficulty of assessing
economic trends in foreign countries. It is possible that market quotations for
foreign securities will not be readily available. In such event, these
securities shall be valued at fair market value as determined in good faith by
Dean Investment Associates or BEA Associates under the supervision of the Board
of Directors of the Fund. If it should become necessary, a Portfolio could
encounter greater difficulties in invoking legal processes abroad than would be
the case in the United States. Transaction costs with respect to foreign
securities may be higher. Dean Investment Associates and BEA Associates will
consider these and other factors before investing in foreign securities. A
Portfolio may concentrate its investments in securities of issuers of one or
more foreign countries.
OTHER INVESTMENT COMPANIES
Subject to the limits set forth in the Prospectus, each Portfolio may
invest in shares issued by other investment companies. The Tactical Asset
Allocation Portfolio may invest up to 10% of its total assets, calculated at the
time of purchase, in the securities of money market funds, which are investment
com-
<PAGE>
9
panies. A Portfolio will indirectly bear its proportionate share of any
investment advisory fees and expenses paid by the funds in which it invests, in
addition to the investment advisory fee and expenses paid by the Portfolio.
ZERO COUPON AND STEP COUPON SECURITIES
The Bond Portfolio, Managed Portfolio, Tactical Asset Allocation Portfolio,
and the LifeStyle Portfolios may invest in zero coupon and step coupon
securities. Zero coupon and step coupon bonds are issued and traded at a
discount from their face amounts. They do not entitle the holder to any periodic
payment of interest prior to maturity or prior to a specified date when the
securities begin paying current interest. The discount from the face amount or
par value depends on the time remaining until cash payments begin, prevailing
interest rates, liquidity of the security, and the perceived credit quality of
the issuer.
Current Federal income tax law requires holders of zero coupon securities
and step coupon securities to report the portion of the original issue discount
on such securities that accrues that year as interest income, even though the
holders receive no cash payments of interest during the year. In order to
qualify as a "regulated investment company" under the Code, a Portfolio must
distribute its investment company taxable income, including the original issue
discount accrued on zero coupon or step coupon bonds.
Generally, the market prices of zero coupon and step coupon securities are
more volatile than the prices of securities that pay interest periodically and
in cash and are likely to respond to changes in interest rates to a greater
degree than other types of debt securities having similar maturities and credit
quality.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective or objectives as set forth in the
Prospectus under "Investment Objectives and Policies," together with the
investment restrictions set forth below, are fundamental policies of each
existing Portfolio and may not be changed with respect to any Portfolio without
the approval of a majority of the outstanding voting shares of that Portfolio.
The vote of a majority of the outstanding voting shares of a Portfolio means the
vote at an annual or special meeting of the lesser of: (i) 67% or more of the
voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting shares of such Portfolio are present or represented by
proxy; or (ii) more than 50% of the outstanding voting securities of such
Portfolio. Under these restrictions, an existing Portfolio may not:
(1) Invest in a security if, with respect to 75% of its total assets, more than
5% of its total assets (taken at market value at the time of such
investment) would be invested in the securities of any one issuer, except
that this restriction does not apply to U.S. Government securities.
(2) Invest in a security if, with respect to 75% of its assets, it would hold
more than 10% (taken at the time of such investment) of the outstanding
voting securities of any one issuer, except that this restriction does not
apply to U.S. Government securities.
(3) Invest in a security if more than 25% of its total assets (taken at market
value at the time of such investment) would be invested in the securities
of issuers in any particular industry, except that this restriction does
not apply (a) to U.S. Government securities (or repurchase agreements with
respect thereto), and (b) with respect to the Money Market and Managed
Portfolios, to securities or obligations (other than commercial paper)
issued by domestic branches of U.S. banks.
(4) Purchase or sell real estate, except that a Portfolio may invest in
securities secured by real estate or real estate interests or issued by
companies in the real estate industry or which invest in real estate or
real estate interests.
(5) Purchase securities on margin (except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities),
except a Portfolio engaged in transactions in options and futures, and
options on futures may make margin deposits in connection with those
transactions.
(6) Issue senior securities, except insofar as a Portfolio may be deemed to
have issued a senior security by reason of borrowing money in accordance
with that Portfolio's borrowing policies. For purposes of this investment
restriction, the writing of stock options, and collateral arrangements with
respect to margin or other deposits respecting futures contracts, and
related options, are not deemed to be an issuance of a senior security.
(7) Act as an underwriter of securities of other issuers, except, when in
connection with the disposition of portfolio securities, a Portfolio may be
deemed to be an underwriter under the federal securities laws.
(8) Make short sales of securities, except short sales against the box.
(9) Borrow money or pledge, mortgage, or hypothecate its assets, except that a
Portfolio may (a) borrow from banks for temporary purposes, but any such
borrowing is limited to an amount equal to 25% of a Portfolio's net assets
and a Portfolio will not purchase additional securities while borrowing
funds in excess of 5% of that Portfolio's net assets; and (b) enter into
reverse repurchase agreements and transactions in options, and interest
rate futures contracts, stock index futures contracts, other futures
contracts based on other financial instruments, and options on such futures
contracts. For these purposes, the deposit of assets in escrow in
connection with the writing of covered put and call options and the
purchase of securities on a "when-issued" or delayed delivery basis and
collateral
<PAGE>
10
arrangements with respect to initial or variation margin and other deposits
for futures contracts, and options on futures contracts, will not be deemed
to be pledges of a Portfolio's assets.
(10) Invest in securities that are illiquid because they are subject to legal
or contractual restrictions on resale, in repurchase agreements maturing
in more than seven days, or other securities which in the determination of
the Adviser are illiquid if, as a result of such investment, more than 10%
of the total assets of the Portfolio (taken at market value at the time of
such investment) would be invested in such securities.
(11) Purchase or sell commodities or commodities contracts, except that any
Portfolio may engage in transactions in interest rate futures contracts,
stock index futures contracts, and other futures contracts based on other
financial instruments, and on options on such futures contracts.
To the extent a Portfolio covers its commitment under a reverse repurchase
agreement (or economically similar transaction) by the maintenance of a
segregated account consisting of assets determined to be liquid in accordance
with procedures adopted by the directors, equal in value to the amount of the
Portfolio's commitment to repurchase, such an agreement will not be considered a
"senior security" by the Portfolio and therefore will not be subject to
investment restriction no. 6.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information pertaining to the directors and officers of the Fund is set
forth below.
Principal Occupation During
Name and Position the Past Five Years
----------------- ---------------------------
James W. Murphy,* Senior Vice President
Chairman of the Board and President Corporate Finance, AUL
Dr. Ronald D. Anderson, Director Professor: School of Business,
Indiana University, Indianapolis Indiana University,
801 W. Michigan St. Indianapolis
Indianapolis, IN 46223
Dr. Leslie Lenkowsky, Director Professor: Indiana University
Indiana University Center of Philanthropy Center of Philanthropy
550 W. North St., Suite 301 (9/97 to present)
Indianapolis, IN 46202 President, Hudson Institute
(6/90 - 9/97)
R. Stephen Radcliffe, Director Executive Vice President, AUL
(2/94 to Present); Senior Vice
President & Chief Actuary
10/87 - 2/94)
James P. Shanahan,* Senior Vice President, Pension
Director, Vice President and Treasurer Operations, AUL (1/84 - 1/98)
11103 Sloop Ct.
Indianapolis, IN 46236
Richard A. Wacker,* Secretary Associate General Counsel, AUL,
(10/92 to present)
*Because of their positions as stated above, Messrs. Murphy, Radcliffe ,Shanahan
and Wacker are "interested persons" of the Fund, as defined in the 1940 Act.
With the exception of Mr. Shanahan, whose address is listed above, their
business address is One American Square, Indianapolis, Indiana 46282.
COMPENSATION OF DIRECTORS
The Fund pays those directors who are not officers or employees of AUL a
fee of $4,500 per year plus $450.00 per board meeting attended. The Fund also
pays travel expenses incurred by all directors to attend meetings of the board
or of the audit committee. During the fiscal year ended December 31, 1997, the
Fund paid to all directors who are not "interested persons" of the Fund fees
aggregating $______. AUL pays all salaries, fees, and expenses of any officer or
director of the Fund who is an officer or employee of AUL. As of the end of the
1997 fiscal year, the officers and directors, as a group, have no interest in
any contracts which would entitle them to give voting instructions for any
Portfolio.
THE INVESTMENT ADVISER
American United Life Insurance Company(R) serves as Adviser to the Fund
pursuant to an Investment Advisory Agreement (the "Advisory Agreement") between
it and the Fund. The Adviser is responsible for administering affairs of the
Fund and supervising the investment program for the Portfolios in accordance
with applicable laws and regulations. The Adviser also furnishes to the Board of
Directors, which has overall responsibility for the business and affairs of the
Fund, periodic reports on the investment performance of each Portfolio.
The Advisory Agreement with the Adviser, dated March 8, 1990, was
originally approved by a majority of the Fund's directors, including a majority
of the directors who are not parties to the agreement or interested persons of
any such party (the "independent directors"). Subsequently, on May 10, 1991, the
Advisory Agreement was approved by a majority of the Fund's shareholders at a
meeting called for the purpose of voting on the approval of the Advisory
Agreement. From year to year thereafter, the Advisory Agreement will continue in
effect, provided such continuance is approved at least annually by (i) the
holders of a majority of the outstanding voting securities of the
<PAGE>
11
Fund or by the Board and (ii) a majority of the independent directors. The
Advisory Agreement will terminate automatically in the event of its assignment,
and it may be terminated without penalty on sixty days' written notice by the
Adviser, the Board, or pursuant to a majority vote, in accordance with the 1940
Act, of the persons entitled to vote in respect to the Fund. The Advisory
Agreement was last approved by the Board, including a majority of the
independent directors, on March 27, 1997 for the period March 27, 1997 to March
27, 1998 or if a regularly scheduled Board meeting is not held in March 1998, at
the next regularly scheduled meeting of the Board of Directors held thereafter.
The Fund pays the Adviser a fee for its services under the Advisory
Agreement based on an annual percentage of the average daily net assets of each
Portfolio. The Fund pays the Adviser a monthly fee at an annual rate of .50% of
the average daily net assets for each of the Equity Portfolio, Bond Portfolio,
Money Market Portfolio, and Managed Portfolios; .80% for the Tactical Asset
Allocation Portfolio; and .70% for each of the LifeStyle Portfolios. For the
years ended December 31, 1997, 1996, and 1995, respectively, the Adviser was
entitled to receive (or did receive) the following advisory fees from the
Portfolios: $__________, $212,114, and $144,456 from the Equity Portfolio;
$____________, $166,215, and $117,761 from the Bond Portfolio; $__________,
$137,536, and $96,175 from the Money Market Portfolio; $___________, $184,974,
and $142,020 from the Managed Portfolio; and $___________, $11,644 and $2,399
from the Tactical Asset Allocation Portfolio.
As of December 31, 1997, the percentage of the outstanding voting shares
owned by AUL and held in its general account were as follows: 8.05% of the
Equity Portfolio and 13.97% of the Tactical Asset Allocation Portfolio. As of
the same date, the directors and officers of the Fund, as a group, owned less
than 1% of the Fund's shares or the shares of any Portfolio.
THE SUB-ADVISERS
Dean Investment Associates, ("Dean") a division of C.H. Dean and
Associates, Inc., serves as the Sub-Adviser for the Tactical Asset Allocation
Portfolio pursuant to a Sub-Advisory Agreement dated May 15, 1995. The
Sub-Advisory Agreement initially was approved by the Board of Directors of the
Fund, including a majority of the directors who are not parties to the agreement
or "interested persons" of any such party (as defined in the 1940 Act) on May
12, 1995, and was last approved by the Board of Directors of the Fund, including
a majority of the directors who are not parties to the agreement or "interested
persons" of any such party, on March 27, 1997 for the one-year period ending
March 27, 1998, or if a regularly scheduled Board meeting is not held in March,
1998, at the next regularly scheduled meeting of the Board of Directors held
thereafter. The Sub-Advisory Agreement provides that it will continue in effect
from year to year thereafter if approved annually (a) by the Board of Directors
of the Fund or by a majority of the outstanding shares of the Portfolio, and (b)
by a majority of the directors who are not parties to such agreement or
"interested persons" of any such party. The Sub-Advisory Agreement may be
terminated without penalty on 60 days' written notice at the option of the Fund
or AUL and upon six months' written notice at the option of Dean, and terminates
automatically in the event of its assignment. For the years ended December 31,
1997, 1996, and 1995, Dean was entitled to receive (or did receive) the
following sub-advisory fees from the Adviser: $_____, $_____, and $_____.
BEA Associates ("BEA"), a member of Credit Suisse Asset Management, serves
as the Sub-Adviser for the growth-oriented equity and foreign equity portions of
each LifeStyle Portfolio pursuant to Sub-Advisory Agreements dated ______, 1998.
The BEA Sub-Advisory Agreement was approved by the Board of Directors of the
Fund, including a majority of the directors who are not parties to the agreement
or "interested persons" of any such party (as defined in the 1940 Act), on March
10, 1998. The BEA Sub-Advisory Agreement provides that it will continue in
effect for an initial term of one year from its execution, and from year to year
thereafter if approved annually (a) by the Board of Directors of the Fund or by
a majority of the outstanding shares of the applicable LifeStyle Portfolio, and
(b) by a majority of the directors who are not parties to such agreement or
"interested persons" of any such party. The BEA Sub-Advisory Agreement may be
terminated without penalty on 60 days' written notice at the option of the Fund
or AUL and upon six months' written notice at the option of BEA, and terminates
automatically in the event of its assignment.
Subject to the supervision of the Adviser and the Fund's Board of
Directors, each Sub-Adviser is responsible for the actual management of the
Portfolio or portion thereof, for which it serves as Sub-Adviser, and for making
decisions to buy, sell, or hold any particular security, and it places orders to
buy or sell securities on behalf of the Portfolio.
PURCHASES AND REDEMPTIONS
For information on purchase and redemption of shares, see "Purchase and
Redemption of Shares" in the Prospectus. The Fund may suspend the right of
redemption of shares of any Portfolio for any period: (i) during which the New
York Stock Exchange (the "NYSE") is closed other than customary weekend and
holiday closings or during which trading on the NYSE is restricted; (ii) when
the Securities and Exchange Commission (the "SEC") determines that a state of
emergency exists which may make payment or transfer not reasonably practicable;
(iii) as the SEC may by order permit for the protection of the security holders
of the Fund; or (iv) at any other time when the Fund may, under applicable laws
and regulations, suspend payment on the redemption of its shares.
PORTFOLIO TRANSACTIONS AND BROKERAGE
BROKERAGE AND RESEARCH SERVICES
The Portfolios generally pay a fee or incur an expense in connection with
effecting transactions in securities. Transactions on national stock exchanges
and other agency transactions involve the payment by a Portfolio of brokerage
commissions. Such commissions may be negotiable and may vary among different
brokers. Also, a particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction. There is generally
no stated commission in the case of fixed-income securities, most of which are
traded in the over-the-counter markets, but the price paid by a Portfolio
usually includes an undisclosed dealer commission or mark-up. In underwritten
offerings, the price paid by a Portfolio includes a disclosed, fixed commission
or discount retained by the underwriter or dealer.
The Adviser or Sub-Adviser for a Portfolio places orders for the purchase
and sale of portfolio securities and options for a Portfolio through a
substantial number of broker-dealers. In executing transactions, the Adviser or
Sub-Adviser will attempt to obtain the best execution for a Portfolio taking
into account such factors as price (including the applicable brokerage
commission or dollar spread), size of order, the nature of the market for the
security, the timing of the transaction, the reputation, experience and
financial stability of the broker-dealer involved, the quality of the service,
the difficulty of execution and operational facilities of the firms involved,
and the
<PAGE>
12
firm's risk in positioning a block of securities. In effecting purchases and
sales of portfolio securities in transactions on national stock exchanges for
the account of a Portfolio, the Adviser or Sub-Adviser may pay higher commission
rates than the lowest available when the Adviser or Sub-Adviser believes it is
reasonable to do so in light of the value of the brokerage and research services
provided by the broker-dealer effecting the transaction, as described below. In
the case of securities traded on the over-the-counter markets, there is
generally no stated commission, but the price includes an undisclosed commission
or mark-up.
Some securities considered for investment by the Fund's Portfolios may also
be appropriate for other accounts served by the Adviser or Sub-Adviser,
including the Adviser's or Sub-Adviser's general account. If a purchase or sale
of securities consistent with the investment policies of a Portfolio and one or
more of these accounts served by the Adviser or Sub-Adviser is considered at or
about the same time, it is the policy of AUL and each Sub-Adviser not to favor
any one account or Portfolio over another, and any purchase or sale orders
executed contemporaneously are allocated at the average price and as nearly as
practicable on a pro rata basis in proportion to the amounts desired to be
purchased or sold by each account or portfolio. While it is conceivable that in
certain instances this procedure could adversely affect the price or number of
shares involved in a particular portfolio transaction, it is believed that the
procedure generally contributes to better overall execution of the Fund's
portfolio transactions. This allocation method, and the results of such
allocations, are subject to periodic review by the Fund's Adviser, Sub-Advisers,
and Board of Directors.
For many years, it has been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
the Adviser or a Sub-Adviser may receive research services from many
broker-dealers with which the Adviser or Sub-Adviser places portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities, and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Adviser or Sub-Adviser in advising its various clients (including the
Fund), although not all of these services are necessarily useful and of value in
managing the Fund. The management fee paid by the Fund is not reduced because
the Adviser, Sub-Advisers, and their affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser or Sub-Advisers may cause the Fund to pay a broker-dealer, which
provides "brokerage and research services" (as defined in that Act) to the
Adviser or Sub-Adviser, an amount of disclosed commission for effecting the
commission which another broker-dealer would have charged for effecting that
transaction.
During the fiscal years ended December 31, 1997, 1996, and 1995,
respectively, brokerage commissions in the amount of $ ________, $28,865, and
$25,122 were paid for transactions in the Equity Portfolio, brokerage
commissions in the amount of $ __________, $16,728, and $14,437, were paid for
transactions involving the Managed Portfolio, and brokerage commissions in the
amount of $ ________, $608, and $1,534 were paid for transactions involving the
Tactical Asset Allocation Portfolio. There were no brokerage commissions paid
for the Bond and Money Market Portfolios during these periods, and the LifeStyle
Portfolios had not commenced operations during these periods. The aggregate
dollar value of equity transactions (net of commissions and SEC charges) on
which brokerage commissions were paid for the years ended December 31, 1997,
1996, and 1995, respectively, were as follows: $ ___________, $13,255,756, and
$9,735,024 for the Equity Portfolio, $ ____________, $7,694,750, and $5,663,294
for the Managed Portfolio, $ _________, $187,488, and $1,068,342 for the
Tactical Asset Allocation Portfolio. All of the broker-dealers through which
brokerage transactions were executed provided research services to AUL.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectus, the Fund's net
asset value per share for the purpose of pricing purchase and redemption orders
generally is determined at or about 4:00 P.M. eastern standard time, on each day
the NYSE is open for trading. The determination may be made earlier than 4:00
P.M. EST if the NYSE closes earlier than 4:00 P.M. and it is possible to
determine the net asset value at that time. Net asset value will not be
determined on days that the NYSE is closed, on any federal holidays or on days
when AUL is not open for business. Traditionally, in addition to federal
holidays, AUL is not open for business on the day after Thanksgiving and either
the day before or after Christmas or Independence Day.
The Money Market Portfolio's securities are valued using the amortized cost
method of valuation. This involves valuing a money market security at cost on
the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Portfolio would receive if it sold the instrument. During such periods the yield
to investors in the Portfolio may differ somewhat from that obtained in a
similar investment company which uses available market quotations to value all
of its portfolio securities.
<PAGE>
13
The SEC's regulations require the Money Market Portfolio to adhere to
certain conditions in connection with using the amortized cost method of
valuation. The Portfolio is required to maintain a dollar-weighted average
portfolio maturity of 90 days or less, to limit its investments to instruments
having remaining maturities of 13 months or less (except securities held subject
to repurchase agreements having 13 months or less to maturity), and to invest
only in securities determined by the Adviser to be of the highest quality with
minimal credit risks.
PERFORMANCE INFORMATION
The Fund may, from time to time, include the yield and effective yield of
the Money Market Portfolio, the yield of the remaining Portfolios, and the total
return of all Portfolios in advertisements or sales literature. Performance
information for the Portfolios will not be advertised or included in sales
literature unless accompanied by comparable performance information for a
Separate Account to which the Fund offers its shares.
Current yield for the Money Market Portfolio will be based on the change in
the value of a hypothetical investment (exclusive of capital charges) over a
particular 7-day period, less a pro rata share of Portfolio expenses accrued
over that period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The base
period return is then annualized by multiplying by 365/7, with the resulting
yield figure carried to at least the nearest hundredth of one percent.
"Effective yield" for the Money Market Portfolio assumes that all dividends
received during an annual period have been reinvested. Calculation of "effective
yield" begins with the same "base period return" used in the calculation of
yield, which is then annualized to reflect weekly compounding pursuant to the
following formula:
Effective Yield = [(Base Period Return + 1)**365/7]-1
For the 7-day period ended December 31, 1997, the current yield for the
Money Market Portfolio was _____% and the effective yield was ______%.
Quotations of yield for the remaining Portfolios will be based on all
investment income per share earned during a particular 30-day period (including
dividends and interest), less expenses accrued during the period ("net
investment income"), and are computed by dividing net investment income by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[(a-b/cd + 1)**6 - 1]
where
a = dividends and interests earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period.
For the period ended December 31, 1997, the yield for the Equity Portfolio
was ______%; for the Bond Portfolio, _______%; for the Managed Portfolio, ____%;
and for the Tactical Asset Allocation Portfolio, ______%.
Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolio over certain periods that will include periods of
one, five, and ten years (or, if less, up to the life of the Portfolio),
calculated pursuant to the following formula: P (1 + T)**n = ERV (where P = a
hypothetical initial payment of $1,000, T = the average annual total return, n =
the number of years, and ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the period). Quotations of total return
may also be shown for other periods. All total return figures reflect the
deduction of a proportional share of Portfolio expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid. The
average annual total return for each of the Portfolios for the year ended
December 31, 1997 was _____% for the Equity Portfolio, _____% for the Bond
Portfolio, ______% for the Money Market Portfolio, ______% for the Managed
Portfolio and ______% for the Tactical Asset Allocation Portfolio. The average
annual total return for the period from April 10, 1990 (the date the Fund
commenced operations) through December 31, 1997 for each of the Portfolios was
_____% for the Equity Portfolio, ______% for the Bond Portfolio, ______% for the
Money Market Portfolio, and ______% for the Managed Portfolio. The average
annual total return for the Tactical Asset Allocation Portfolio for the period
from July 31, 1995 (the date the Portfolio commenced operations) through
December 31, 1997 was ______%.
Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's
Index of 500 Common Stocks ("S&P 500"), the Dow Jones Industrial Average
("DJIA"), the Lehman Brothers Government Bond Index, the Donoghue Money Market
Institutional Averages, the Lehman Brothers Government Corporation Index, the
Salomon High Yield Index, or other indices that measure performance of a
pertinent group of securities; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, or
tracked by other services, companies, publications or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Portfolio. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
Quotations of yield or total return for the Fund will not take into account
charges and deductions against any Separate Account or Accounts to which the
Fund shares are sold or charges and deductions against the life or annuity
contracts issued by AUL.
<PAGE>
14
Performance information for any Portfolio reflects only the performance of
a hypothetical investment in the Portfolio during the particular time period on
which the calculations are based. Performance information should be considered
in light of the Portfolio's investment objectives and policies, and the market
conditions during the given time period, and should not be considered as a
representation of what may be achieved in the future.
TAXATION
Each Portfolio intends to qualify annually and elect to be treated as a
regulated investment company under the Code.
To qualify as a regulated investment company, each Portfolio must, among
other things: (i) derive in each taxable year at least ninety percent (90%) of
its gross income from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of stock, securities or
foreign currencies, or other income derived with respect to its business of
investing in such stock, securities or currencies; (ii) derive in each taxable
year less than thirty percent (30%) of its gross income from the sale or other
disposition of stocks, securities, and certain other assets held less than three
months; (iii) diversify its holdings so that, at the end of each quarter of the
taxable year, (a) at least fifty percent (50%) of the market value of the
Portfolio's assets are represented by cash, U.S. Government securities, the
securities of other regulated investment companies with such other securities
any one issuer limited for the purposes of this calculation to an amount not
greater than five percent (5%) of the value of the Portfolio's total assets and
ten percent (10%) of the outstanding voting securities of such issuer, and (b)
not more than twenty-five percent (25%) of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies); and (iv)
distribute at least ninety percent (90%) of its net investment income (which
includes dividends, interest, and net short-term capital gains in excess of any
net long-term capital losses) each taxable year. Certain hedging transactions
that may be undertaken by one or more Portfolios may be limited by the
requirements relating to a Portfolio's status as a regulated investment company.
As a regulated investment company, a Portfolio will not be subject to U.S.
federal income tax on its net investment income and net capital gains (any net
long-term capital gains in excess of the sum of net short-term capital losses
and capital loss carryovers from prior years), if any, that it distributes to
shareholders. Each Portfolio intends to distribute to its shareholders, at least
annually, substantially all of its net investment income and any net capital
gains. In addition, amounts not distributed by a Portfolio on a timely basis in
accordance with a calendar year distribution requirement may be subject to a
nondeductible four percent (4%) excise tax. To avoid the tax, a Portfolio must
distribute during each calendar year, (i) at least ninety-eight percent (98%) of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) at least ninety-eight percent (98%) of its capital gains
in excess of its capital losses (adjusted for certain ordinary losses) for the
twelve-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. Each year, each Portfolio will determine whether it may be
subject to the calendar year distribution requirement. If a Portfolio determines
that it is subject to this distribution requirement, it intends to make its
distributions in accordance with the calendar year distribution requirement. A
distribution will be treated as paid December 31 if it is declared by a
Portfolio in October, November, or December of the year and paid by the
Portfolio by January 31 of the following year. Such distributions will be
taxable to shareholders in the year in which the distributions are declared,
rather than the year in which the distributions are received.
DISTRIBUTIONS
Distributions of any net investment income by a Portfolio are taxable to
the shareholder as ordinary income. Net capital gains will be treated, to the
extent distributed, as long-term capital gains in the hands of the shareholder.
OTHER INFORMATION
CAPITALIZATION
The Fund was incorporated under the laws of Maryland on July 26, 1989. The
capitalization of the Fund consists of 325,000,000 authorized shares of common
stock with a par value of $0.001 each with 20,000,000 unallocated shares. The
Board of Directors may establish additional Portfolios (with different
investment objectives and fundamental policies) at any time in the future.
Establishment and offering of additional Portfolios will not alter the rights of
the Fund's shareholders. When issued, shares are fully paid, nonassessable,
redeemable, and freely transferable. Shares do not have preemptive rights or
subscription rights. In liquidation of a Portfolio of the Fund, each shareholder
is entitled to receive his or her pro rata share of the net assets of that
Portfolio.
Expenses incurred by the Fund in connection with the organization of the
Tactical Asset Allocation Portfolio aggregated approximately $8,688. These costs
have been deferred and are being amortized over a period of 5 years beginning
with the commencement of operations.
Expenses incurred by the Fund in connection with the organization of the
LifeStyle Portfolios aggregated approximately $________. These costs have been
deferred and will be amortized over a period of 5 years beginning with the
commencement of operations.
VOTING RIGHTS
Shareholders of the Fund are given certain voting rights. Each share of
each Portfolio will be given one vote, and each
<PAGE>
15
fractional share will be given a proportionate fractional vote, unless a
different allocation of voting rights is required under applicable law for a
mutual fund that is an investment medium for variable insurance products.
Under the Fund's charter, the Fund is not required to hold annual meetings
of shareholders to elect directors or for other purposes and it is not
anticipated that the Fund will hold shareholders' meetings unless required by
law or the Fund's charter. In this regard, the Fund will be required to hold a
meeting to elect directors to fill any existing vacancies on the Board if, at
any time, fewer than a majority of the directors have been elected by the
shareholders of the Fund. In addition, the charter provides that the holders of
not less than two-thirds of the outstanding shares of the Fund may remove a
person serving as director either by declaration in writing or at a meeting
called for such purpose. The Fund's shares do not have cumulative voting rights.
CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
The Bank of New York, New York, New York, serves as the Fund's Custodian
and Dividend Dispursing Agent. AUL serves as the Fund's Transfer Agent.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as independent accountants of the Fund.
COUNSEL
Dechert Price & Rhoads, Washington, D.C., has passed upon certain legal
matters in connection with the shares offered by the Fund and acts as outside
counsel to the Fund.
FINANCIAL STATEMENTS
The Financial Statements of the Fund, as of December 31, 1997, including
the Notes thereto, are incorporated by reference in the Statement of Additional
Information from the Annual Report of the Fund as of December 31, 1997. The
Financial Statements have been audited by Coopers & Lybrand L.L.P., the
independent accountants for the Fund. Management's Discussion and Analysis is
contained in the Fund's Annual Report, which is available without charge and may
be obtained by writing to the Fund at One American Square, Indianapolis, IN
46282 or by calling the Fund at (800) 634-1629.
<PAGE>
16
APPENDIX I
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
CORPORATE BONDS
Bonds rated Aa by Moody's Investors Service, Inc. ("Moody's") are judged by
Moody's to be of high quality by all standards. Together with bonds rated Aaa
(Moody's highest rating) they comprise what are generally known as high-grade
bonds. Aa bonds are rated lower than Aaa bonds because margins of protection may
not be as large as those of Aaa bonds, or fluctuation of protective elements may
be of greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger than those applicable to Aaa securities.
Bonds which are rated A by Moody's possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Moody's Baa rated bonds are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Bonds rated AA by Standard & Poor's are judged by Standard & Poor's to be
high-grade obligations and in the majority of instances differ only in small
degree from issues rated AAA (Standard & Poor's highest rating). Bonds rated AAA
are considered by Standard & Poor's to be the highest grade obligations and
possess the ultimate degree of protection as to principal and interest. With AA
bonds, as with AAA bonds, prices move with the long-term money market. Bonds
rated A by Standard & Poor's have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
Standard & Poor's BBB rated bonds, or medium-grade category bonds, are
borderline between definitely sound obligations and those where the speculative
elements begin to predominate. These bonds have adequate asset coverage and
normally are protected by satisfactory earnings. Their susceptibility to
changing conditions, particularly to depressions, necessitates constant
watching. These bonds generally are more responsive to business and trade
conditions than to interest rates. This group is the lowest which qualifies for
commercial bank investment.
COMMERCIAL PAPER
The prime rating is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Issuers within this prime
category may be given ratings 1, 2 or 3, depending on the relative strengths of
these factors.
Commercial paper rated A by Standard & Poor's has the following
characteristics: (1) liquidity ratios are adequate to meet cash requirements;
(2) long-term senior debt rating should be A or better, although in some cases
BBB credits may be allowed if other factors outweigh the BBB; (3) the issuer
should have access to at least two additional channels of borrowing; (4) basic
earnings and cash flow should have an upward trend with allowances made for
unusual circumstances; and (5) typically the issuer's industry should be well
established and the issuer should have a strong position within its industry and
the reliability and quality of management should be unquestioned. Issuers rated
A are further referred to by use of numbers 1, 2 and 3 to denote relative
strength within this highest classification.
- --------------------------------------------------------------------------------
<PAGE>
17
================================================================================
No dealer, salesman or any other person is authorized by the AUL
American Series Fund to give any information or to make any
representation other than as contained in this Statement of Additional
Information in connection with the offering described herein.
There has been filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended,
with respect to the offering herein described. For further information
with respect to the AUL American Series Fund, reference is made thereto
and the exhibits filed therewith or incorporated therein, which include
all contracts or documents referred to herein.
================================================================================
AUL AMERICAN SERIES FUND, INC.
Variable Life and Annuity Contracts
Sold By
AMERICAN UNITED
LIFE INSURANCE COMPANY(R)
One American Square
Indianapolis, Indiana 46282
STATEMENT OF ADDITIONAL INFORMATION
Dated: May 1, 1998
================================================================================
<PAGE>
1
Part C: Other Information
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
1. Included in Prospectus (Part A):
Condensed Financial Information
2. Included in Statement of Additional Information (Part B):
Registrant's Annual Report is incorporated by reference
thereto and contains the following Financial Statements:
Management's Discussion of Fund Performance
Report of Independent Accountants
Statement of Net Assets for the year ended December 31, 1997
Statement of Operations for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended December 31,
1997 and 1996
Schedule of Investments--Equity Portfolio--December 31, 1997
Schedule of Investments--Money Market Portfolio--December 31, 1997
Schedule of Investments--Bond Portfolio--December 31, 1997
Schedule of Investments--Managed Portfolio--December 31, 1997
Schedule of Investments--Tactical Asset Allocation Portfolio--
December 31, 1997
Notes to Financial Statements
(b) Exhibits (the number of each exhibit relates to the exhibit designation
in Form N-1A):
1. Articles of Incorporation(1)(7)
2. By-laws(1)
3. Not applicable
4. Not applicable
5. Form in Investment Advisory Agreement(2)(7)
6. Not applicable
7. Not applicable
8. Form of Custodian Agreement(3)(6)(7)
9. Form of Agency Agreement(3)(7)
10. Opinion and Consent of Counsel(2)
11. (a) Consent of Independent Accountants(6)*
(b) Powers of Attorney(2)(5)
12. Financial Statements(6)
13. Not applicable
14. Not applicable
15. Not applicable
16. Computation of Performance Quotations
17. Financial Data Schedules(2)(5)(6)
(1) Filed with the Registrant's Registration Statement (File No. 33-30156)
on July 27, 1989, and incorporated by reference herein.
(2) Filed with Pre-Effective Amendment No. 2, dated January 16, 1990, to
the Registrant's Registration Statement, and incorporated by reference herein.
(3) Filed with Pre-Effective Amendment No. 3, dated January 26, 1990, to
the Registrant's Registration Statement, and incorporated by reference herein.
(4) Filed as an Exhibit with Post-Effective Amendment No. 6, dated April
28, 1995, to the Registrant's Registration Statement, and incorporated by
reference herein.
(5) Filed as an Exhibit with Post-Effective Amendment No. 8, dated May 1,
1996, to the Registrant's Registration Statement, and incorporated by reference
herein.
(6) Filed as an Exhibit with Post-Effective Amendment No. 9, dated May 1,
1997, to the Registrant's Registration Statement, and incorporated by reference
herein.
(7) Filed as an Exhibit with Post-Effective Amendment No. 10, dated
February 13, 1998, to the Registrant's Registration Statement, and incorporated
by reference herein.
*to be filed by Post Effective Amendment.
<PAGE>
2
ITEM 25: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
In accordance with current law, it is anticipated that American United Life
Insurance Company(R) ("AUL") will request voting instructions from owners or
participants of any Contracts that are funded by separate accounts that are
registered investment companies under the Investment Company Act of 1940 and
will vote shares in any such separate account attributable to the Contracts in
proportion to the voting instructions received. AUL may vote shares of any
Portfolio, if any, that it owns beneficially in its own discretion. As a result
of providing the initial capital for the Portfolios, on December 31, 1997, AUL
owned 8.05% of the outstanding shares of Registrant's Equity Portfolio and
13.97% of the Registrant's Tactical Asset Allocation Portfolio. As a mutual
insurance company organized under the laws of the state of Indiana, AUL has no
shareholders and therefore, no one individual controls as much as 10% of AUL.
AUL American Unit Trust and AUL American Individual Unit Trust are separate
accounts of AUL, organized for the purpose of the respective sale of group and
individual variable life and annuity contracts.
AUL American Individual Variable Life Unit Trust is a separate account of AUL,
organized for the purpose of the sale of individual variable life contracts.
American United Life Pooled Equity Fund B is a separate account of AUL organized
for the purpose of the sale of group variable annuity contracts.
AUL Equity Sales Corp. is a wholly owned subsidiary of AUL, organized under the
laws of the State of Indiana in 1969 for the purpose of the sale of mutual funds
on an "application-way" basis only.
AUL may also be deemed to control State Life Insurance Company(R) ("State Life")
since a majority of AUL's Directors also serve as Directors of State Life. By
virtue of an agreement between AUL and State Life, AUL provides investment and
other support services for State Life on a contractual basis.
AUL owns a 20% share of the stock of Princeton Reinsurance Managers, LLC, a
limited liability Delaware company. AUl's affiliation provides an alternative
marketing channel for its Reinsurance Division.
ITEM 26: NUMBER OF HOLDERS OF SECURITIES.
As of the date of this Post-Effective Amendment to the Registration Statement,
AUL, the AUL American Unit Trust, the AUL American Individual Unit Trust, and
the AUL Group Retirement Annuity Separate Account II, separate accounts of AUL,
are the sole record holders of securities registered pursuant to this
Registration Statement.
ITEM 27: INDEMNIFICATION.
Reference is made to Article VIII of the Registrant's Articles of Incorporation
and to Article XI of the Registrant's By-laws, both of which are incorporated by
reference herein.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant by the Registrant pursuant to the Fund's Articles of Incorporation,
its By-laws or otherwise, the Registrant is aware that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act, and therefore, is 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 directors, officers or
controlling persons of the Registrant in connection with the successful defense
of any act, suit or proceeding) is asserted by such directors, officers or
controlling persons in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issues.
<PAGE>
3
ITEM 28: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The business and other connections of Registrant's investment adviser are
described in Part B of this Registrations Statement and in Item 25 above.
Information relating to the Adviser's officers and directors is provided herein.
Name and Address Positions and Offices with AUL
- ---------------- ------------------------------
John H. Barbre* Senior Vice President
Steven C. Beering M.D. Director
Purdue University
West Lafayette, Indiana
William R. Brown* General Counsel and Secretary, AUL
Secretary, State Life
Arthur L. Bryant Director
P.O. Box 406
Indianapolis, Indiana
James M. Cornelius Director
P.O. Box 44906
Indianapolis, Indiana
James E. Dora Director
P.O. Box 42908
Indianapolis, Indiana
Otto N. Frenzel III Director and Chairman of the
101 W. Washington St., Suite 400E Audit Committee
Indianapolis, Indiana
David W. Goodrich Director
Box 82055
Indianapolis, Indiana
William P. Johnson Director
P.O. Box 517
Goshen, Indiana
Scott A. Kincaid* Senior Vice President
Charles D. Lineback* Senior Vice President
James T. Morris Director
1220 Waterway Boulevard
Indianapolis, Indiana
James W. Murphy* Senior Vice President
Jerry L. Plummer* Senior Vice President
R. Stephen Radcliffe* Director and Executive
Vice President
Thomas E. Reilly Jr. Director and Chairman of the
300 N. Meridian St., Suite 1500 Finance Committee
Indianapolis, Indiana
- ----------------------------------------------
*One American Square, Indianapolis, Indiana
<PAGE>
4
ITEM 28: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER. (CONTINUED)
Name and Address Positions and Offices with AUL
- ---------------- ------------------------------
William R. Riggs* Director
G. David Sapp* Senior Vice President
John C. Scully Director
2636 Ocean Dr., # 505
Vero Beach, Florida
Jerry D. Semler* Chairman of the Board, President,
Chief Executive Officer and
Chairman of the Executive
Committee, AUL; Chairman of the
Board, Chief Executive Officer,
State Life
Yvonne H. Shaheen Director
1310 S. Franklin Road
Indianapolis, Indiana
William L. Tindall* Senior Vice President
Frank D. Walker Director
P.O. Box 40972
Indianapolis, Indiana
Gerald T. Walker* Senior Vice President
- ----------------------------------------------
*One American Square, Indianapolis, Indiana
ITEM 29: PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 30: LOCATION OF ACCOUNTS AND RECORDS.
The Registrant and its Adviser maintain at the Fund's principal office located
at One American Square, Indianapolis, Indiana, 46282, physical possession of
each account, book or other document, and shareholder records as required by
Section 31(a) of the 1940 Act and rules thereunder. Certain records with respect
to the Portfolios of the Fund may be kept by the Fund's custodian.
ITEM 31: MANAGEMENT SERVICES.
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32: UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to provide Management's Discussion of Fund
Performance, which is provided in Registrant's latest Annual Report, to
each person to whom a Prospectus is given upon request and without
charge.
<PAGE>
5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it has duly caused this Post-
Effective Amendment to the Registration Statement (Form N-1A) to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Indianapolis and the State of Indiana on this 13th day of February, 1998.
AUL AMERICAN SERIES FUND, INC.
----------------------------------------
By: James W. Murphy*, President
/s/ Richard A. Wacker
- ------------------------
*By: Richard A. Wacker as Attorney-in-fact
Date: February 13, 1998
Pursuant to the requirements of the Securities Act of 1933,this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
- --------------------------------- Chairman of the Board February 13, 1998
James W. Murphy* and President (Chief
Executive Officer)
- --------------------------------- Director, Vice-President February 13, 1998
James P. Shanahan* and Treasurer (Chief
Financial Officer)
- --------------------------------- Director February 13, 1998
Ronald D. Anderson*
- --------------------------------- Director February 13, 1998
Leslie Lenkowsky*
/s/ Richard A. Wacker
-----------------------
By: Richard A. Wacker as Attorney-in-fact
Date: February 13, 1998
<PAGE>
EXHIBIT LIST
Exhibit
Number Name of Exhibit
- ------- ---------------
1 Articles Supplementary
5 Form of Addendum to the Investment Advisory Agreement
for the LifeStyle Portfolios
5 Form of Sub-Advisory Agreement for the LifeStyle
Portfolios
8 Form of Addendum to the Custodian Agreement for the
LifeStyle Portfolios
9 Form of Addendum to the Agency Agreement for the
LifeStyle Portfolios
AUL AMERICAN SERIES FUND, INC.
ARTICLES SUPPLEMENTARY
AUL AMERICAN SERIES FUND, INC., a Maryland corporation, registered as an
open-end, diversified management investment company under the Investment Company
Act of 1940, having a principal office in Baltimore, Maryland (hereinafter
called the "Corporation"), certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Articles of Incorporation dated July 26, 1989, as amended by
Articles Supplementary filed on April 5, 1990, May 22, 1995, September 5, 1997
and October 1, 1997, have previously authorized two hundred fifty million
(250,000,000) shares of Common Stock, par value of $.001 per share, with an
aggregate par value of $250,000 with the preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption thereof as set forth in the Articles of Incorporation
as amended, and whereas the Articles of Incorporation as amended have provided
for the allocation of two hundred thirty million (230,000,000) shares of Common
Stock in the following classes, each class consisting of the number of shares
and having the designations indicated:
AUL American Equity Portfolio Common Stock 20 million
AUL American Bond Portfolio Common Stock 20 million
AUL American Money Market Portfolio Common Stock 125 million
AUL American Managed Portfolio Common Stock 40 million
AUL American Tactical Asset Allocation Portfolio Common Stock 25 million and
the remaining 20 million shares shall be authorized but unallocated.
SECOND: The Board of Directors of the Corporation, at a meeting duly
convened and held on November 19, 1997, adopted resolutions authorizing the
Corporation to issue an additional seventy-five million (75,000,000) shares of
Common Stock, par value of $.001 per share, and classifying said seventy-five
million (75,000,000) of the authorized but unissued shares as follows:
twenty-five million (25,000,000) of the authorized but unissued shares
classified as shares of AUL American Conservative Investor Portfolio Common
Stock, twenty- five million (25,000,000) of the authorized but unissued shares
classified as shares of AUL American Moderate Investor Portfolio, and
twenty-five million (25,000,000) of the authorized but unissued shares
classified as shares of AUL American Aggressive Investor Portfolio, so that
immediately after the effectiveness of these Articles Supplementary, the
Corporation has authority to issue three hundred twenty-five million
(325,000,000)] shares of Common Stock, par value $.001 per share, and aggregate
par value of $325,000 of which the Board of Directors has classified three
hundred and five million (305,000,000) shares as follows:
1
<PAGE>
AUL American Equity Portfolio Common Stock 20 million
AUL American Bond Portfolio Common Stock 20 million
AUL American Money Market Portfolio Common Stock 125 million
AUL American Managed Portfolio Common Stock 40 million
AUL American Tactical Asset Allocation Portfolio Common Stock 25 million
AUL American Conservative Investor Portfolio Common Stock 25 million
AUL American Moderate Investor Portfolio Common Stock 25 million
AUL American Aggressive Investor Portfolio Common Stock 25 million and
the remaining 20 million shares shall be authorized but unallocated.
THIRD: The preferences, rights, voting powers, restrictions, limitations as
to dividends, qualifications, and terms and conditions of redemption of shares
of Common Stock are as set forth in the Articles of Incorporation as amended, of
the Corporation.
FOURTH: The shares of the Corporation classified pursuant to Section
2-105(c) of Corporations and Associations Article, Maryland Public General Laws
and pursuant to Article Second of these Articles Supplementary have been so
classified by the Board of Directors under the authority contained in the
Articles of Incorporation.
IN WITNESS WHEREOF, AUL AMERICAN SERIES FUND, INC. has caused these presents to
be signed in its name and on its behalf by its duly authorized officers who
acknowledge that these Articles Supplementary are the act of the Corporation,
that to the best of their knowledge, information and belief the matters and
facts set forth herein relating to the authorization and approval of the
Articles Supplementary are true in all material respects and that this statement
is made under the penalties of perjury.
Date: November 19, 1997 AUL AMERICAN SERIES FUND, INC.
By: ______________________________________
James W. Murphy, Chairman of the Board and
President
ATTEST:
By: ________________________________
Richard A. Wacker, Secretary
ADDENDUM TO INVESTMENT ADVISORY AGREEMENT
The Investment Advisory Agreement, made the 8th day of March, 1990 and
amended the 12th day of May, 1995, between the AUL American Series Fund, Inc.
(the "Fund"), a Maryland corporation, and American United Life Insurance
Company(R) (the "Adviser"), a life insurance company domiciled in Indiana, (the
"Agreement") is hereby amended by the addition of the provisions set forth in
this addendum to the Agreement, which is made this 19th day of November, 1997.
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares of Common Stock in separate
portfolios with each such portfolio representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Fund currently consists of five separate portfolios designated
as the AUL American Equity Portfolio, the AUL American Bond Portfolio, the AUL
American Money Market Portfolio, the AUL American Managed Portfolio, and the AUL
American Tactical Asset Allocation Portfolio (each a "Portfolio"); and
WHEREAS, the Fund intends to establish three additional LifeStyle
Portfolios to be designated as the AUL American Conservative Investor Portfolio
(the "Conservative Investor Portfolio"), the AUL American Moderate Investor
Portfolio (the "Moderate Investor Portfolio"), and the AUL American Aggressive
Investor Portfolio (the "Aggressive Investor Portfolio"); hereinafter
collectively referred to as the "LifeStyle Portfolios" and
WHEREAS, the Fund desires to appoint the Adviser as investment adviser to
the LifeStyle Portfolios under the provisions set forth in the Agreement and in
this Addendum to the Agreement; and
WHEREAS, the Adviser is willing to accept such appointment;
NOW THEREFORE, in consideration of the mutual promises and covenants
contained in this Addendum, it is agreed between the parties hereto as follows:
1. In addition to its responsibilities as specified in the Agreement, the Fund
hereby appoints the Adviser to provide investment advisory services to the
LifeStyle Portfolios which, in addition to all other Portfolios previously
established, shall be deemed Portfolios under the Agreement, subject to the
terms and conditions as specified in the Agreement, including paragraph six
(6),"Compensation," as amended by this Addendum.
2. Paragraph six (6), ("Compensation") of the Agreement is amended by adding
the following underscored language to paragraph six (6), which is restated
as follows:
<PAGE>
6. Compensation. In consideration of the services to be rendered by the
Adviser under this Agreement, the Fund shall pay the Adviser a fee with
respect to each of the AUL American Equity, AUL American Bond, AUL American
Money Market, and AUL American Managed Portfolios, calculated and accrued
daily and paid each month, according to the following formula: (A) an
amount at an annual rate of 0.50% of the average daily net assets of the
Portfolio; (B) minus, until the later of the Termination of the Expense
Assumption Agreement or December 31, 1990, the amount by which the
Portfolio's aggregate ordinary operating expenses exceed 1.0% of the
Portfolio's average daily net assets during the year, but in no event more
than the amount described in (A), above (the "Reduced Amount"), if any; and
(C) plus, if the aggregate ordinary operating expenses of the Portfolio are
less than 1.0% of the Portfolio's average daily net assets during the year
and if this Agreement is still in effect, the lesser of (i) any Reduced
Amount attributable to any of the preceding five years that has not been
previously reflected in a fee increase received by the Adviser, with such
Reduced Amounts considered in the chronological order of their occurrence,
or (ii) an amount which, when added to the Portfolio's other ordinary
operating expenses, will cause the Portfolio's total ordinary operating
expenses to equal 1.0% of the Portfolio's average daily net assets during
the year. For purposes of this provision, ordinary operating expenses shall
not include interest, taxes, brokerage commissions, legal claims and
liabilities, litigation costs and indemnification payments in connection
with litigation, and other extraordinary expenses. In consideration of the
services to be rendered by the Adviser under this Agreement, the Fund shall
pay the Adviser a fee with respect to the Tactical Asset Allocation
Portfolio, calculated and accrued daily and paid each month, equal at an
annual rate of 0.80% of the average daily net assets of such Portfolio and
a fee with respect to the LifeStyle Portfolios, calculated and accrued
daily and paid each month, equal at an annual rate of 0.70% of the average
daily net assets of such Portfolios.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed
by their officers designated below on the date written above.
On Behalf of AUL AMERICAN SERIES FUND, INC.
_______________________________________ ____________________________________
ATTEST: Richard A. Wacker, Secretary to James W. Murphy, Chairman of the
the Board of Directors Board of Directors
On Behalf of AMERICAN UNITED LIFE INSURANCE COMPANY(R)
___________________________________ ______________________________________
ATTEST: William R. Brown, Secretary Jerry D. Semler, Chairman of the Board,
the Board of Directors President and Chief Executive Officer
SUB-ADVISORY AGREEMENT
FOR THE LIFESTYLE SERIES OF
AUL AMERICAN SERIES FUND, INC.
AGREEMENT made as of this ____ day of February, 1998, among American United
Life Insurance Company(R) ("AUL"), a life insurance company domiciled in
Indiana, BEA Associates, a member of Credit Suisse Management ("BEA" or the
"Sub-Adviser"), a New York General Partnership, and AUL American Series Fund,
Inc. (the "Fund"), a Maryland corporation, on behalf of certain Series of the
Fund.
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end, diversified management investment
company and is authorized to issue separate series, each series having its own
investment objective, policies and limitations;
WHEREAS, the Fund intends to offer shares in, among other series, the AUL
American Conservative Investor Portfolio (the "Conservative Investor
Portfolio"), the AUL American Moderate Investor Portfolio (the "Moderate
Investor Portfolio"), and the AUL American Aggressive Investor Portfolio (the
"Aggressive Investor Portfolio") hereinafter collectively referred to as the
"LifeStyle Portfolios" or the "Series"; and
WHEREAS, the Fund has retained AUL to render investment advisory services
to the Series pursuant to an Investment Advisory Agreement;
WHEREAS, AUL is a registered investment adviser under the Investment
Advisers Act of 1940, as amended ("Advisers Act"); and
WHEREAS, AUL and the Fund desire to retain BEA Associates to furnish
sub-advisory services to the Series in connection with AUL's investment advisory
activities on behalf of the Series, and BEA is willing to furnish such services
to AUL and the Fund;
NOW THEREFORE, in consideration of the promises and mutual covenants herein
contained, it is agreed between AUL, BEA, and the Fund as follows:
1. Appointment. AUL and the Fund hereby appoint BEA to act as Sub-Adviser
to the Series, for the periods and on the terms set forth in this Agreement. BEA
accepts such appointment and agrees to furnish the services herein set forth,
for the compensation herein provided.
In the event the Fund designates one or more of its series other than the
Series with respect to which AUL and the Fund desire to retain BEA to render
sub-advisory
- 1 -
<PAGE>
services hereunder, they shall notify BEA in writing. If the Sub-Adviser is
willing to render such services, it shall notify AUL and the Fund in writing,
whereupon such series shall become a Series hereunder, and be subject to this
Agreement.
2. Sub-Advisory Duties. Subject to the asset allocation set forth from time
to time by AUL, the supervision of AUL and the Fund's Board of Directors, BEA
will provide a continuous investment program for a portion of the Series'
portfolios, including investment research and management with respect to
securities and investments and cash equivalents in the portfolios. As to the
portion of the assets managed by the Sub- Adviser, the Sub-Adviser will
determine from time to time what securities and other investments will be
purchased, retained or sold by the Series. The Sub-Adviser will provide the
services under this Agreement in accordance with the Series' investment
objectives, policies and restrictions as stated in the Fund's Registration
Statement filed with the Securities and Exchange Commission ("SEC"), as amended
from time to time. The Sub-Adviser agrees that:
(a) it will conform with all applicable rules and regulations of the 1940 Act,
all other applicable federal and state laws and regulations and with any
applicable procedures adopted by the Fund's Board of Directors, provided
that such procedures are communicated to it by AUL;
(b) the Sub-Adviser will (1) manage the Series so that each series will qualify
as a regulated investment company under Subchapter M of the Internal
Revenue Code, (2) manage the Series so as to ensure compliance by the
Series with the diversification requirements of Section 817(h) of the
Internal Revenue Code and regulations issued thereunder, and (3) use
reasonable efforts to manage the Series so as to ensure compliance by the
Series with any other rules and regulations pertaining to investment
vehicles underlying variable annuity or variable life insurance policies.
AUL or the Fund will notify the Sub-Adviser of any pertinent changes,
modifications to, or interpretations of Section 817(h) of the Internal
Revenue Code and regulations issued thereunder.
(c) it will place orders pursuant to its investment determinations for the
Series either directly with the issuer or with any broker or dealer. The
Sub-Adviser will select brokers and dealers for and on behalf of the Series
in accordance with procedures established by AUL and approved by the Fund's
Board of Directors. In placing orders with brokers and dealers, the
Sub-Adviser will attempt to obtain the best net price and the most
favorable execution of its orders and shall comply with any criteria set
forth in the Fund's Registration
- 2 -
<PAGE>
Statement. Consistent with this obligation, when, in its view, the execu-
tion and price offered by two or more brokers or dealers are comparable,
the Sub-Adviser may, in its discretion, and to the extent consistent with
applicable law, give preference to brokers and dealers who provide it with
research, statistical and other related services;
(d) on occasions when Sub-Adviser deems the purchase or sale of a security to
be in the best interest of the Fund as well as other investment advisory
clients, it may, to the extent permitted by applicable laws and
regulations, but shall not be obligated to, aggregate the securities to be
so sold or purchased with those of its other clients where such aggregation
is not inconsistent with the policies set forth in the Fund's Registration
Statement. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transactions, will be made by
the Sub-Adviser in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Fund and to such other
clients, subject to review and supervision by AUL and the Fund's Board of
Directors;
(e) in connection with the purchase and sale of securities of the Series, the
Sub-Adviser will arrange for the transmission to the custodian for the Fund
on a daily basis, such confirmations, trade tickets and other documents as
may be necessary to enable the custodian to perform its responsibilities
with respect to the Series in connection with such transactions. Such
transmission may be automatic with respect to portfolio securities to be
purchased or sold through the Depository Trust Company;
(f) The Sub-Adviser will assist the custodian and recordkeeping agent for the
Fund in determining or confirming, consistent with the procedures and
policies stated in the Fund's Registration Statement, the value of any
portfolio securities or other assets of the Series for which the custodian
and recordkeeping agent seeks assistance from or identifies for review by
the Sub-Adviser; and
(g) The Sub-Adviser will maintain and preserve for the periods prescribed under
the 1940 Act any such records as are required to be maintained by the
Sub-Adviser with respect to the Series by the 1940 Act. The Sub-Adviser
further agrees that all records which it maintains for the Series are the
property of the Series and it will promptly surrender any of such records
upon request.
- 3 -
<PAGE>
(h) The Sub-Adviser will not disclose any information relating to the Series'
portfolio transactions in any manner whatsoever except: (i) as expressly
authorized in this Agreement, (ii) in the ordinary course of business in
connection with placing orders for the purchase or sale of securities,
(iii) if authorized by the Board of Directors of the Fund, or (iv) if
expressly required to do so by federal or state regulatory authorities.
(i) The Sub-Adviser shall give AUL and the Fund the benefit of its best
judgment and efforts in rendering services under this Agreement.
3. Expenses. During the term of this Agreement, the Sub-Adviser will pay
all expenses incurred by it and its staff in connection with its sub-advisory
services under this Agreement. This does not include costs payable by the Fund
or AUL as set forth in the Investment Advisory Agreement.
4. Compensation. For the services provided by BEA, AUL will pay the
Sub-Adviser a portion of the fees received by AUL as Adviser. The portion of the
fees paid to the Sub-Adviser shall be based on the amount invested each month by
the Sub-Adviser according to the asset allocation established by AUL and based
on the market value of the aggregate amount of domestic growth equities and
international equities in the LifeStyle Portfolios as follows:
Domestic Equities:
0.60% on the first $25 million of assets
0.55% on the next $25 million of assets
0.50% on the next $25 million of assets
0.45% thereafter
International Equities:
0.80% on the first $25 million of assets
0.70% on the next $25 million of assets
0.60% thereafter
In the event that this Agreement shall be effective for only part of a period to
which any such fee received by AUL is attributable, then an appropriate
pro-ration of the fee that would have been payable hereunder if this Agreement
had remained in effect until the end of such period shall be made, based on the
number of calendar days in such period and the number of calendar days during
the period in which this Agreement was in effect.
5. Representation and Warranty. The Sub-Adviser represents and warrants that
it is duly registered as an investment adviser under the Advisers Act and
agrees to remain registered as long as this Agreement is in effect. The
Sub-Adviser shall immediately
- 4 -
<PAGE>
notify AUL and the Fund in the event that the SEC has censured the Sub-
Adviser, placed limitations upon its activities, suspended or revoked its
registration as an investment adviser, or commenced proceedings or an
investigation that may result in any of these actions.
6. Services Not Exclusive. It is understood that the services of the
Sub-Adviser are not exclusive, and nothing in this Agreement shall prevent
the Sub-Adviser, from providing similar services to other clients.
7. Duration and Termination. This Agreement shall become effective on the date
first designated above. Unless terminated as provided herein, the Agreement
shall remain in full force and effect for one year from such date and
continue on an annual basis thereafter with respect to a Series unless
terminated in accordance with the following sentence; provided that such
annual continuance is specifically approved each year after the initial one
year period, by (a) the vote of a majority of the entire Board of Directors
of the Fund, or by the vote of a majority of the outstanding voting
securities of the Series (as defined in the 1940 Act), and (b) the vote of
a majority of those Directors who are not parties to this Agreement or
interested persons (as such term is defined in the 1940 Act) of any such
party to this Agreement cast in person at a meeting called for the purpose
of voting on such approval. In the event this Agreement is not approved
with respect to a Series in the manner described in the preceding sentence,
the Sub-Adviser shall not provide any services for such Series or receive
any fees on account of such Series. Notwithstanding the foregoing, this
Agreement may be terminated with respect to a Series: (a) by AUL at any
time without penalty, upon sixty (60) days' written notice to the
Sub-Adviser and the Fund (b) by the Fund at any time without penalty, upon
the vote of a majority of the Fund's Board of Directors or a majority of
the outstanding voting securities of the Series, upon sixty (60) days'
written notice to the Sub-Adviser, or (c) by the Sub-Adviser at any time
without penalty, upon six (6) months' written notice to AUL and the Fund.
In the event of termination for any reason, all records of each Series for
which the Agreement is terminated shall promptly be returned to AUL or the
Fund, free from any claim or retention of rights by the Sub-Adviser. The
Agreement shall automatically terminate in the event of its assignment, as
such term is defined in the 1940 Act.
8. Amendments. This Agreement may be amended only by an instrument in writing
signed by each party, and no amendment of this Agreement shall be effective
until approved by an affirmative vote of (i) the holders of a majority of
the outstanding voting securities of the Series as defined in the 1940 Act,
and (ii) the Directors of the Fund, including a majority of the Directors
of the Fund who are not interested persons
- 5 -
<PAGE>
of any party to this Agreement, cast in person at a meeting called for the
purpose of voting on such approval, if such approval is required by
applicable law.
9. Use of Name. It is understood that the names "American United" and "AUL" or
any derivative thereof or logo associated with those names is the valuable
property of AUL and its affiliates, and that the Fund and/or the Series
have the right to use such names (or derivative or logo) only so long as
AUL is Investment Adviser to the Fund and/or the Series. Upon termination
of the Investment Advisory Agreement between the Fund (or Series) and AUL,
the Fund (or Series) shall forthwith cease to use such names (or derivative
or logo) and, in the case of the Fund, shall promptly amend its Articles of
Incorporation to change its name.
It is understood that the name "BEA Associates, a member of Credit Suisse
Asset Management" or any derivative thereof or logo associated with that
name is the valuable property of the Sub-Adviser and its affiliates and
that the Fund and/or the Series have the right to use such name (or
derivative or logo) in offering materials of the Fund with the approval of
the Sub-Adviser and for so long as BEA is the Sub-Adviser to the Fund
and/or the Series. Upon termination of this Agreement between the Fund (or
Series) AUL and the Fund (or Series) shall forthwith cease to use such name
(or derivative or logo).
10. Miscellaneous
(a) This Agreement shall be governed by the laws of the State of Indiana,
provided that nothing herein shall be construed in a manner inconsistent
with the 1940 Act, the Advisers Act or rules or orders of the SEC
thereunder.
(b) The captions of this Agreement are included for convenience only and in no
way define or limit any of the provisions hereof or otherwise affect their
construction or effect.
(c) If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall
not be affected thereby, and to this extent, the provisions of this
Agreement shall be deemed to be severable.
(d) Nothing herein shall be construed as constituting the Sub-Adviser as an
agent of AUL.
- 6 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed as of the day and year first above written.
AMERICAN UNITED LIFE INSURANCE COMPANY(R)
By: __________________________________________
Jerry D. Semler, Chairman of the Board, President,
and Chief Operating Officer
AUL AMERICAN SERIES FUND, INC.
By: __________________________________________
James W. Murphy, Chairman of the Board of
Directors and President
BEA ASSOCIATES, a Member of Credit Suisse Management, by:
- ------------------------------------------------
Signature
- ------------------------------------------------
Printed
- ------------------------------------------------
Title
ADDENDUM TO CUSTODIAN AGREEMENT
The Custodian Agreement, made the 28th day of February, 1997, between AUL
American Series Fund, Inc. (the "Fund"), a Maryland corporation, and The Bank of
New York (the "Bank"), a banking association having its principal place of
business in New York, New York (the "Agreement") is hereby amended by the
addition of the provisions set forth in this Addendum to the Agreement, which is
made this _____ day of ________________, 1997.
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Fund has appointed the Bank as
Custodian and the Bank has accepted such appointment; and
WHEREAS, the Fund currently consists of five separate portfolios designated
as the AUL American Equity Portfolio, the AUL American Bond Portfolio, the AUL
American Money Market Portfolio, the AUL American Managed Portfolio, and the AUL
American Tactical Asset Allocation Portfolio (each a "Portfolio"); and
WHEREAS, the Fund intends to establish three additional Portfolios to be
designated as the AUL American Conservative Investor Portfolio (the
"Conservative Investor Portfolio"), the AUL American Moderate Investor Portfolio
(the "Moderate Investor Portfolio"), and the AUL American Aggressive Investor
Portfolio (the "Aggressive Investor Portfolio"); hereinafter collectively
referred to as the "LifeStyle Portfolios" and
WHEREAS, the Fund desires to appoint the Bank as Custodian for the
LifeStyle Portfolios on the terms set forth in the Agreement and in this
Addendum to the Agreement; and
WHEREAS, the Bank is willing to accept such appointment;
NOW THEREFORE, in consideration of the mutual promises and covenants
contained in this Addendum, it is agreed between the parties hereto as follows:
1. In addition to its responsibilities as specified in the Agreement, the
Fund hereby constitutes and appoints the Bank as Custodian with respect to the
LifeStyle Portfolios, which, in addition to all other Portfolios previously
established by the Fund, shall be deemed Portfolios under the Agreement as
provided in the Agreement subject to the terms and conditions as specified in
the Agreement and this Addendum, including the compensation provisions in
paragraph [II.5.(g)] of the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed by their officers designated below on the date written above.
On Behalf of AUL AMERICAN SERIES FUND, INC.
By:___________________________________ _________________________________
ATTEST: Richard A. Wacker, Secretary to James W. Murphy, Chairman of the
the Board of Directors Board of Directors and President
On Behalf of THE BANK OF NEW YORK
By:_________________________________ Attest:________________________________
Name: Name:
Title: Title:
ADDENDUM TO AGENCY AGREEMENT
The Agency Agreement, made the 28th day of February, 1997, between AUL
American Series Fund, Inc. (the "Fund"), a Maryland corporation, and The Bank of
New York (the "Bank"), a banking association with its principal place of
business in New York, New York (the "Agreement") is hereby amended by the
addition of the provisions set forth in this Addendum to the Agreement, which is
made this ____ day of ________________, 1997.
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Fund has appointed the Bank as
Bookkeeping Agent, Transfer Agent, and Dividend Disbursing Agent and the Bank
has accepted such appointment; and
WHEREAS, the Fund currently consists of five separate portfolios designated
as AUL American Equity Portfolio, the AUL American Bond Portfolio, the AUL
American Money Market Portfolio, the AUL American Managed Portfolio, and the AUL
American Tactical Asset Allocation Portfolio (each a "Portfolio"); and
WHEREAS, the Fund intends to establish three additional Portfolios to be
designated as the AUL American Conservative Investor Portfolio (the"Conservative
Investor Portfolio"), the AUL American Moderate Investor Portfolio (the
"Moderate Investor Portfolio"), and the AUL American Aggressive Investor
Portfolio (the "Aggressive Investor Portfolio"); hereinafter collectively
referred to as the "LifeStyle Portfolios" and
WHEREAS, the Fund desires to appoint the Bank as Bookkeeping Agent,
Transfer Agent, and Dividend Disbursing Agent for the LifeStyle Portfolios on
the terms set forth in the Agreement and in this Addendum to the Agreement; and
WHEREAS, the Bank is willing to accept such appointment;
NOW THEREFORE, in consideration of the mutual promises and covenants
contained in this Addendum, it is agreed between the parties hereto as follows:
1. In addition to its responsibilities as specified in the Agreement, the
Fund hereby employs and appoints the Bank as Bookkeeping Agent, Transfer Agent,
and Dividend Disbursing Agent with respect to the LifeStyle Portfolios which, in
addition to all other Portfolios previously established by the Fund, shall be
deemed Portfolios under the Agreement as provided for in the Agreement, subject
to the terms and conditions as specified in the Agreement and this Addendum,
including the compensation provisions in paragraph fifteen (15) ("Fees and
Charges") of the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed by their officers designated below on the date written above.
On Behalf of AUL AMERICAN SERIES FUND, INC.
By: ___________________________________ _________________________________
ATTEST: Richard A. Wacker, Secretary to James W. Murphy, Chairman of the
the Board of Directors Board of Directors and President
On Behalf of THE BANK OF NEW YORK
By: ________________________________ Attest:____________________________
Name: Name:
Title: Title:
