<PAGE> 1
SUPPLEMENT DATED DECEMBER 29, 1995
TO BE ATTACHED TO DIVERSIFIED INVESTORS VARIABLE FUNDS PROSPECTUS
DATED MAY 1, 1995
Effective November 14, 1995, Diversified terminated its Subadvisory Agreement
with respect to the Growth & Income Portfolio with Munder Capital Management
("Munder") and entered into a new Subadvisory Agreement with respect to the
Growth & Income Portfolio with Putnam Advisory Company, Inc. ("Putnam"). Under
the terms of this new Subadvisory Agreement, Putnam receives a per annum
subadvisory fee equal to 0.30% on the first $100,000,000 in assets and 0.20% on
assets in excess of $100,000,000. Putnam was formed in 1937 and is owned by
Marsh & McLennan Companies, Inc. The principal address of Putnam is One Post
Office Square, Boston, MA 02109. Total assets under management for growth &
income clients at December 31, 1994 were approximately $2.9 billion, $1.2
billion of which were assets of registered investment companies. Investment
management decisions of Putnam are made by committee and not by managers
individually.
All information in the Diversified Investors Variable Funds Prospectus dated
May 1, 1995 relating to Munder and the Growth & Income Portfolio, including the
fee information on page 48 and the fourth paragraph on page 49, is hereby
supplemented and/or superseded, as appropriate, by the information set forth in
the preceding paragraph of this Prospectus Supplement.
Form 2529 Rev. 12/95 33-73734
<PAGE> 2
DIVERSIFIED INVESTORS
VARIABLE FUNDS
PROSPECTUS
May 1, 1995
INTERNATIONAL EQUITY SERIES
CALVERT SERIES
SPECIAL EQUITY SERIES
EQUITY GROWTH SERIES
GROWTH & INCOME SERIES
EQUITY INCOME SERIES
BALANCED SERIES
GOVERNMENT / CORPORATE
BOND SERIES
INTERMEDIATE GOVERNMENT
BOND SERIES
MONEY MARKET SERIES [LOGO]
<PAGE> 3
DIVERSIFIED INVESTORS VARIABLE FUNDS
GROUP VARIABLE ANNUITY CONTRACTS
SECTIONS 401(A), 401(K), 403(B), 408(IRA), 457, 457(F), 72(FLEXIBLE ANNUITIES)
AND NQDC
ISSUED BY
AUSA LIFE INSURANCE COMPANY, INC. ("AUSA")
4 MANHATTANVILLE ROAD, PURCHASE, NEW YORK 10577; (914) 697-8000
The Group Variable Annuity Contracts ("Contracts") described in this
Prospectus are designed and offered as funding vehicles for retirement Plans
maintained by state educational organizations, certain tax-exempt organizations,
IRA Contractholders, taxed organizations in the case of the Section 401(a)
and/or Section 401(k) Contracts and corporate non-qualified deferred
compensation contracts ("NQDC"). The Contracts described in this Prospectus
include certain group variable annuity contracts of the above described types
which were originally issued by The Mutual Life Insurance Company of New York
and which have been assumed by AUSA. See page 30 for a description of this
assumption reinsurance.
Insofar as possible, the provisions of the Contracts are identical, and the
information provided in this Prospectus is generally applicable to all
Contracts. However, whenever statutory or administrative considerations require
significant differences among the Contracts, such differences are explained
separately for each.
Purchase Payments under the Contracts are allocated to a segregated
investment account of AUSA Life Insurance Company, Inc. which account has been
designated the Diversified Investors Variable Funds. Purchase Payments directed
to the Diversified Investors Variable Funds may be allocated among such of the
Subaccounts in the Diversified Investors Variable Funds as are made available
under the Contracts. The assets in each Subaccount are invested in a series of
Diversified Investors Portfolios, in the Calvert Responsibly Invested Balanced
Portfolio ("Calvert Series") or in the International Portfolio of the Scudder
Variable Life Investment Fund (the "International Equity Series") at their net
asset value. (See "Diversified Investors Portfolios" at page 32, Calvert Series
at page 12 and International Equity Series at page 13.) The eight currently
available series of Diversified Investors Portfolios are the Money Market
Series, Intermediate Government Bond Series, Government/Corporate Bond Series,
Balanced Series, Equity Income Series, Growth & Income Series, Equity Growth
Series and Special Equity Series. The Calvert Series is an actively managed,
diversified portfolio of common and preferred stocks, bonds, and money market
instruments which offer income and capital growth opportunity and which satisfy
the social concern criteria established by the Calvert Series. The International
Equity Series is an actively managed, diversified portfolio of marketable
foreign equity investments which offer the opportunity for long-term growth of
capital. Copies of the Calvert Series Prospectus and the International Equity
Series Prospectus appear at the end of this Diversified Investors Variable Funds
Prospectus.
SUBACCOUNTS OF DIVERSIFIED INVESTORS VARIABLE FUNDS WHICH INVEST IN
DIVERSIFIED INVESTORS PORTFOLIOS DO SO UNDER A "HUB AND SPOKE" ARRANGEMENT.
UNLIKE OTHER FUNDING VEHICLES INTO WHICH PURCHASE PAYMENTS MAY BE INVESTED
THROUGH VARIABLE ANNUITY CONTRACTS ISSUED BY INSURANCE COMPANIES, DIVERSIFIED
INVESTORS PORTFOLIOS OFFERS ITS INTERESTS FOR SALE TO OTHER TYPES OF COLLECTIVE
INVESTMENT VEHICLES IN ADDITION TO INSURANCE COMPANY SEPARATE ACCOUNTS
REGISTERED AS INVESTMENT COMPANIES UNDER THE INVESTMENT COMPANY ACT OF 1940.
SUCH INVESTORS MAY INCLUDE MUTUAL FUNDS, BANK COLLECTIVE TRUSTS AND UNREGISTERED
INSURANCE COMPANY SEPARATE ACCOUNTS. SEE "DIVERSIFIED INVESTORS
PORTFOLIOS -- HUB AND SPOKE(R) STRUCTURE" ON PAGE 32 HEREIN. HUB AND SPOKE(R) IS
A REGISTERED SERVICE MARK OF SIGNATURE FINANCIAL GROUP, INC.
The value of the Accumulation Accounts maintained in the Diversified
Investors Variable Funds will vary based upon the investment experience of the
Subaccounts to which Purchase Payments are allocated. The investment experience
of the Subaccounts will vary based on the underlying investment performance of
the series of Diversified Investors Portfolios, the Calvert Series and the
International Equity Series.
This Prospectus sets forth the basic information that a prospective
purchaser should know before investing. Please keep this Prospectus for future
reference.
A Statement of Additional Information dated May 1, 1995 incorporated herein
by reference, and containing additional information about the Contracts and
Diversified Investors Portfolios, has been filed with the Securities and
Exchange Commission. The Statement of Additional Information is available from
AUSA without charge upon written request to the above address or by telephoning
(914) 697-8000. The Table of Contents of the Statement of Additional Information
can be found on page 55 of this Prospectus.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy the Contracts in any jurisdiction in which such may not be lawfully
made.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS
PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED (OR PRECEDED) BY A CURRENT PROSPECTUS
FOR THE CALVERT SERIES AND A CURRENT PROSPECTUS FOR THE INTERNATIONAL EQUITY
SERIES.
DATED MAY 1, 1995
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions........................................................................... 4
Synopsis.............................................................................. 6
Table of Fees....................................................................... 6
The Contracts....................................................................... 7
Diversified Investors Variable Funds................................................ 8
Charges............................................................................. 8
Credit And Allocation Of Purchase Payments.......................................... 9
Redemption.......................................................................... 9
Transfers........................................................................... 9
Payment Options..................................................................... 9
Voting Rights....................................................................... 9
Death Benefit....................................................................... 10
Distribution Of The Contracts....................................................... 10
Financial Information............................................................... 10
AUSA.................................................................................. 12
Diversified Investors Variable Funds.................................................. 12
Calvert Series...................................................................... 12
International Equity Series......................................................... 13
Diversified Investors Portfolios.................................................... 13
Charges............................................................................... 15
Charges for Mortality and Expense Risks............................................. 15
Annual Contract Charge.............................................................. 15
Investment Management Fee........................................................... 16
Premium Tax......................................................................... 17
Summary Of The Contracts.............................................................. 17
Eligible Purchasers................................................................. 17
Ownership........................................................................... 17
Purchase Payments................................................................... 17
Employer Sponsored Plan Requirements................................................ 18
Rights Of The Participant Under The Contract........................................ 18
Rights Upon Suspension Of Contract or Termination Of Plan........................... 18
403(b) Contract..................................................................... 18
401(a) Contract/401(k) Contract and NQDC Contracts.................................. 19
457, 457(f), Flexible Annuity, and 408 (IRA) Contracts.............................. 19
Failure Of Qualification............................................................ 19
Transfers........................................................................... 19
Rights Reserved By AUSA............................................................... 20
Credit Of Purchase Payments........................................................... 20
Allocation Of Purchase Payments..................................................... 20
Determination Of Unit Values........................................................ 21
Death Benefit......................................................................... 21
Redemption During The Accumulation Period............................................. 21
Restrictions Under The Texas Optional Retirement Program.............................. 22
Payment Options....................................................................... 22
Annuity Purchase Date............................................................... 22
Fixed Annuity....................................................................... 23
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fixed Annuity Options............................................................... 23
Payments To A Beneficiary Following The Annuitant's Death........................... 24
Voting Rights......................................................................... 24
Distribution Of The Contracts......................................................... 26
Federal Tax Status.................................................................... 26
Tax Treatment of AUSA............................................................... 26
Taxation of Diversified Investors Portfolios........................................ 27
Section 403(b) Annuities............................................................ 27
Section 401(a) Plans................................................................ 28
Section 408 (IRA) Contracts......................................................... 28
Minimum Distribution Requirements................................................... 29
Section 457 Plans................................................................... 29
Section 457(f) Plans................................................................ 29
Section 72 Flexible Annuities....................................................... 29
Non-Qualified Deferred Compensation Contracts....................................... 29
Income Tax Withholding.............................................................. 30
Assumption Reinsurance................................................................ 30
Performance Data...................................................................... 31
Diversified Investors Portfolios...................................................... 32
Hub & Spoke(R)...................................................................... 32
Investment Objectives and Policies.................................................. 33
Investment Techniques and Restrictions.............................................. 45
Management of Diversified Investors Portfolios...................................... 47
Other Information Regarding Diversified Investors Portfolios........................ 51
Purchase and Redemption of Interests in Diversified Investors Portfolios............ 51
Independent Accountants............................................................... 53
Legal Proceedings..................................................................... 53
Financial Statements.................................................................. 53
Additional Information................................................................ 53
Table Of Contents Of Statement Of Additional Information.............................. 55
Request For Diversified Investors Variable Funds Statement Of
Additional Information.............................................................. 56
APPENDIX.............................................................................. A-1
</TABLE>
3
<PAGE> 6
DEFINITIONS
As used in this Prospectus, the following terms have the indicated meaning:
ACCUMULATION ACCOUNT: an account maintained for each Participant in which
is recorded the number of Units held for his/her credit.
ACCUMULATION PERIOD: the accumulation period for each Participant is the
period during which Purchase Payments may be made on his/her behalf. It begins
when the Participant begins participation under the Plan and ends as of his/her
Annuity Purchase Date (See "Annuity Purchase Date" on page 22), or earlier
termination of his/her Accumulation Account.
BALANCED SERIES: Diversified Investors Balanced Portfolio, a series of
Diversified Investors Portfolios.
CALVERT SERIES: the Calvert Responsibly Invested Balanced Portfolio, a
series of Acacia Capital Corporation, an open-end management investment company
registered under the Investment Company Act of 1940, as amended.
CONTRACT(S): the group variable annuity contract(s) offered by AUSA to
Contractholders or IRA Contractholders as described in this Prospectus.
CONTRACTHOLDER: a state educational organization or certain tax-exempt
organization employer or employer association for affiliated employers, taxed
subsidiaries of tax-exempt organizations and taxed stand alone organizations.
CONTRACT YEAR: a period of 12 months measured from the date of the
Contract issued to or adopted by the Contractholder, and anniversaries thereof.
DIVERSIFIED: Diversified Investment Advisors, Inc., a registered
investment adviser under the Investment Advisers Act of 1940, as amended, and an
affiliate of AUSA.
DIVERSIFIED INVESTORS PORTFOLIOS: Diversified Investors Portfolios, an
open-end diversified management investment company registered under the
Investment Company Act of 1940, as amended.
EQUITY GROWTH SERIES: Diversified Investors Equity Growth Portfolio, a
series of Diversified Investors Portfolios.
EQUITY INCOME SERIES: Diversified Investors Equity Income Portfolio, a
series of Diversified Investors Portfolios.
FIXED ANNUITY: an annuity with payments which remain fixed throughout the
payment period and which do not reflect the investment experience of a separate
account.
GOVERNMENT/CORPORATE BOND SERIES: Diversified Investors
Government/Corporate Bond Portfolio, a series of Diversified Investors
Portfolios.
GROWTH & INCOME SERIES: Diversified Investors Growth & Income Portfolio, a
series of Diversified Investors Portfolios.
INTERMEDIATE GOVERNMENT BOND SERIES: Diversified Investors Intermediate
Government Bond Portfolio, a series of Diversified Investors Portfolios.
INTERNATIONAL EQUITY SERIES: the International Portfolio of Scudder
Variable Life Investment Fund, an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended.
IRA CONTRACTHOLDER: a tax-exempt, or taxed organization or an association
of members who share a common interest.
MONEY MARKET SERIES: Diversified Investors Money Market Portfolio, a
series of Diversified Investors Portfolios.
4
<PAGE> 7
NQDC: Non-qualified deferred compensation arrangement available to taxed
organizations only.
PARTICIPANT: an employee participating under a Contract issued to or
adopted by his/her employer or an individual participating under a Contract
issued to an IRA Contractholder.
PLAN: a retirement plan or program under which benefits are to be provided
pursuant to a Contract described herein.
PURCHASE PAYMENT: the amount contributed and remitted to AUSA by an
employer on behalf of a Participant or by a Participant.
SPECIAL EQUITY SERIES: Diversified Investors Special Equity Portfolio, a
series of Diversified Investors Portfolios.
SUBACCOUNT: a subdivision of Diversified Investors Variable Funds which is
available for the allocation of Purchase Payments under the Contracts. Eight
Subaccounts invest in a corresponding series of Diversified Investors
Portfolios. The Calvert Series Subaccount invests in the Calvert Series and the
International Equity Subaccount invests in the International Equity Series.
UNIT: the measure by which the value of an investor's interest in each
Subaccount is determined.
VALUATION DATE: each day at the close of business of the New York Stock
Exchange (currently at 4:00 p.m. New York City time), each day that the New York
Stock Exchange is open for trading, or any other day on which there is
sufficient trading in securities of a series of Diversified Investors
Portfolios, the Calvert Series or the International Equity Series to affect
materially the value of the Units of the corresponding Subaccount. If the New
York Stock Exchange extends its closing beyond 4:00 p.m. New York City time, and
continues to value after the time of closing of the New York Stock Exchange,
AUSA reserves the right to treat any payment or communication received after
4:00 p.m. New York City time as being received as of the beginning of the next
day.
VALUATION PERIOD: The period between the ending of two successive
Valuation Dates.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE TO ANY PERSON TO
WHOM SUCH OFFER WOULD BE UNLAWFUL IN SUCH STATE. NO PERSON IS AUTHORIZED TO MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
5
<PAGE> 8
SYNOPSIS
AUSA LIFE INSURANCE COMPANY, INC.
DIVERSIFIED INVESTORS VARIABLE FUNDS
TABLE OF FEES(1)
Total Separate Account Annual Expenses (as a percentage of average account
value)
Mortality and Expense Risk Fees........................................ .90%(2)
1 In addition to the mortality and expense risk fees, AUSA reserves the
right to deduct an annual contract charge from a Participant's Accumulation
Account not to exceed $50. See "Charges -- Annual Contract Charge" at page 15.
2 AUSA reserves the right to charge maximum mortality and expense risk fees
of up to 1.25% upon notice.
Portfolio Company Annual Expenses:
DIVERSIFIED INVESTORS PORTFOLIOS,
CALVERT SERIES AND INTERNATIONAL EQUITY SERIES
ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT/
MONEY GOVERNMENT CORPORATE EQUITY GROWTH & EQUITY SPECIAL INTERNATIONAL
MARKET BOND BOND BALANCED INCOME INCOME GROWTH EQUITY CALVERT EQUITY
SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES
------ ------------ ----------- -------- ------ -------- ------ ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees
(After Fee
Reimburse-
ments)(1)...... .223 % .280% .322% .400% .430 % .552% .649 % .768% .700% .875%
Other
Expenses(2).... .077 % .120% .078% .100% .070 % .098% .101 % .082% .110% .205%
Reimbursement
from AUSA(3)... (.200)% -- -- -- (.040)% -- (.250)% -- -- (.060)%
------ --- --- --- ------ --- ------ ------- ------- ---
Total Annual
Expenses After
Fee
Reimburse-
ments.......... .100 % .400% .400% .500% .460 % .650% .500 % .850% .810% 1.020%
</TABLE>
- ---------------
(1) The fees shown on the line "Management Fees" are the fees charged to each
series of Diversified Investors Portfolios by Diversified after waiver. For
the Calvert Series, the fees shown are those charged by Calvert Asset
Management Company to the Calvert Series and, for the International Equity
Series, the fees shown are those charged by Scudder, Stevens & Clark to the
International Equity Series.
(2) "Other expenses" have been estimated for the current fiscal year for each
series of Diversified Investors Portfolios based upon a projected level of
average daily net assets of $127 million for the Money Market Series, $70
million for the Intermediate Government Bond Series, $224 million for the
Government/Corporate Bond Series, $100 million for the Balanced Series, $553
million for the Equity Income Series, $97 million for the Growth & Income
Series, $93 million for the Equity Growth Series and $205 million for the
Special Equity Series. There can be no assurance that these levels of
average daily net assets will be achieved. If average net assets are lower
for any such series, "Other Expenses" may be a higher percentage than
indicated above of such series' average daily net assets. "Other Expenses"
for the Calvert Series and the International Equity Series are actual for
the year ended December 31, 1994.
(3) AUSA has agreed to provide reimbursements to limit total expenses for
Diversified Investors Variable Funds Participants in the Money Market
Series, the Equity Income Series, the Equity Growth Series and the
International Equity Series to .100%, .460%, .500% and 1.020%, respectively,
of average net assets of the applicable series, with AUSA reserving the
right to raise the limit upon notice.
The purpose of this table is to assist you in understanding the various
costs and expenses that you will bear directly and indirectly and reflects
expenses of the separate account as well as the portfolio company. (See Charges
at page 15 for a more complete description of applicable costs and expenses.)
6
<PAGE> 9
EXAMPLE
If you surrender your contract at the end of the applicable time period,
You would pay the following expenses on a $1,000 investment assuming 5% annual
return on assets.
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market............................................ $ 15 $ 46 $ 80 $175
Intermediate Government Bond............................ $ 18 $ 57 $ 98 $214
Government/Corporate Bond............................... $ 20 $ 63 $ 108 $233
Balanced................................................ $ 16 $ 51 $ 88 $191
Equity Income........................................... $ 15 $ 46 $ 79 $172
Growth & Income......................................... $ 42 $ 126 $ 212 $433
Equity Growth........................................... $ 15 $ 48 $ 83 $181
Special Equity.......................................... $ 34 $ 104 $ 176 $367
Calvert................................................. $ 22 $ 67 $ 114 $246
International Equity.................................... $ 31 $ 96 $ 163 $342
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. PREMIUM
TAXES MAY ALSO BE APPLICABLE.
The expense table for Portfolio Company Annual Expenses and the example
reflect a voluntary undertaking by Diversified to waive a portion of the
investment advisory fees payable by series of Diversified Investors Portfolios.
Without such a waiver, the annual investment advisory fee would be .25% for the
Money Market Series, .35% for the Intermediate Government Bond Series, .35% for
the Government/Corporate Bond Series, .45% for the Balanced Series, .45% for the
Equity Income Series, .60% for the Growth & Income Series, .70% for the Equity
Growth Series and .80% for the Special Equity Series.
THE CONTRACTS
The Group Variable Annuity Contract(s) ("Contract(s)") described in this
Prospectus are designed and offered as funding vehicles for retirement Plans
maintained by state educational organizations, certain tax-exempt organizations,
IRA Contractholders and for taxed organizations for Section 401(a) and/or
Section 401(k) Contracts and corporate non-qualified deferred compensation
Contracts ("NQDC"). The Section 401(k) Contract will fund the benefits for
tax-qualified pension and profit-sharing plans from employee/employer
contributions of such organizations. The Section 403(b) Contract will purchase
tax-deferred annuities for employees of these same organizations. The Section
457 Contract will provide deferred compensation eligible for deferred tax
treatment and the Section 457(f) Contract will provide deferred compensation
which is not eligible for deferred tax treatment to these same organizations.
The Section 72 (flexible annuity) Contract will fund after-tax benefits. The
Section 401(a) Contract will fund benefits for tax-qualified pension and
profit-sharing Plans of such tax-exempt organizations as well as taxed
subsidiaries of these organizations and stand alone taxed organizations; the
NQDC Contracts will fund benefits for taxed organizations. The Section 408
(Individual Retirement Account ("IRA")) Contract is a Group Variable Annuity
Contract which will provide for on-going or rollover contributions from
individuals who are eligible under Section 408 to make such contributions.
Section references are to the Internal Revenue Code of 1986, as amended (the
"Code").
Insofar as possible, the provisions of the Contracts are identical, and the
information provided in this Prospectus is generally applicable to all
Contracts. However, whenever statutory or administrative
7
<PAGE> 10
considerations require significant differences among the Contracts, such
differences are explained separately for each.
With respect to the Section 401(a), Section 401 (k) and NQDC Contracts, the
employer and/or the employee will make contributions pursuant to the terms and
conditions of the underlying retirement Plan. As to the Section 403(b), Section
457 and Section 457(f) Contracts, the employer will make Purchase Payments for
each participating employee pursuant to either a salary reduction agreement or
an agreement to forego a salary increase under which the employee decides the
level and number of Purchase Payments to his/her Accumulation Account, except
with respect to employer-sponsored Section 401(a) Plans under which the employer
will make contributions pursuant to the underlying retirement Plan. As to the
Section 72 flexible annuities Contract, the employer will make Purchase Payments
for each participating employee pursuant to a salary deduction agreement. In the
case of the Section 408 IRA Contract, Purchase Payments will be made by the
employer on behalf of and as determined by each participating employee pursuant
to a salary deduction agreement or by the Participant.
The Contracts described in this Prospectus include group variable annuity
contracts of the types described above which were originally issued by The
Mutual Life Insurance Company of New York and have been assumed by AUSA. (See
"Assumption Reinsurance" on page 30.)
DIVERSIFIED INVESTORS VARIABLE FUNDS
Purchase Payments under the Contract(s) are allocated to the Diversified
Investors Variable Funds which is a separate account of AUSA. Diversified
Investors Variable Funds is divided into Subaccounts, eight of which correspond
to Diversified Investors Portfolios' Money Market, Intermediate Government Bond,
Government/Corporate Bond, Balanced, Equity Income, Growth & Income, Equity
Growth and Special Equity Series, respectively. The Calvert Series Subaccount
invests in the Calvert Series and the International Equity Subaccount invests in
the International Equity Series. The assets in each Subaccount are invested in
the corresponding series of Diversified Investors Portfolios, the Calvert Series
or the International Equity Series at their net asset value (See "Diversified
Investors Portfolios" at page 32, "Calvert Series" at page 12 and "International
Equity Series" at page 13.) Each series of Diversified Investors Portfolios is
managed by Diversified, an affiliate of AUSA. Diversified Investors Securities
Corp., a wholly-owned subsidiary of Diversified, is the principal underwriter
and distributor. The Calvert Series is a series of Acacia Capital Corporation,
an open-end management company whose investment adviser is Calvert Asset
Management Company, Inc. The International Equity Series is a series of the
Scudder Variable Life Investment Fund, a diversified open-end management
investment company whose investment adviser is Scudder, Stevens & Clark.
The value of a Participant's Accumulation Account maintained in Diversified
Investors Variable Funds will vary based upon the investment experience of the
series of Diversified Investors Portfolios, the Calvert Series or the
International Equity Series to which Purchase Payments are allocated.
The Calvert Series is an actively managed portfolio of common and preferred
stocks, bonds, and money market instruments which offer income and capital
growth opportunity and which satisfy the social concern criteria established by
the Calvert Series. The International Equity Series is an actively managed,
diversified portfolio of marketable foreign equity investments which offer the
opportunity for long-term growth of capital. Copies of the Calvert Series
Prospectus and the International Equity Series Prospectus appear at the end of
this Diversified Investors Variable Funds Prospectus. Diversified Investors
Portfolios is an open-end, diversified management investment company which has
eight series with differing investment objectives available under the Contracts.
See "Diversified Investors Portfolios" at page 32 herein.
CHARGES
AUSA makes daily charges against the net assets of Diversified Investors
Variable Funds at a maximum annual rate of 1.25%, consisting of .80% for
mortality risks and .45% for administrative
8
<PAGE> 11
expense risks. Currently, the annual rate charged is .90% consisting of .60% for
mortality risks and .30% for administrative expense risk. However, AUSA reserves
the right to charge a maximum fee of 1.25% upon notice thereafter. (See
"Charges -- Charges for Mortality and Expense Risks" on page 15). In addition,
AUSA reserves the right to deduct an annual contract charge not to exceed $50
from a Participant's Accumulation Account (see "Charges -- Annual Contract
Charge" on page 15).
In addition to the charges set forth above, Diversified, which serves as
investment adviser to each series of Diversified Investors Portfolios, Calvert
Asset Management Company, Inc., which serves as investment adviser to the
Calvert Series and Scudder, Stevens & Clark, which serves as investment adviser
to the International Equity Series, impose a charge against the net asset value
of each series of Diversified Investors Portfolios, the Calvert Series or the
International Equity Series, as appropriate, computed daily, for investment
advisory services and other expenses.
Premium taxes may be payable on annuity considerations. (See
"Charges -- Premium Tax" on page 17).
CREDIT AND ALLOCATION OF PURCHASE PAYMENTS
Purchase Payments will be credited to the Subaccounts designated by the
Participant in the form of Units. The number of Units credited will not change
but the dollar value of a Unit will vary depending upon the investment
experience of the series of Diversified Investors Portfolios, the Calvert Series
or the International Equity Series, as appropriate. (See "Credit of Purchase
Payments" on page 20).
REDEMPTION
A Participant may redeem at any time prior to the time an annuity benefit
takes effect and prior to his death all or a portion of the Units credited to
his Accumulation Account without any charge, subject to any limitations in the
underlying Plan. There are no redemption charges. (See "Restrictions Under the
Texas Optional Retirement Program" on page 22 for withdrawal restrictions
applicable to Contracts issued under the Texas Optional Retirement Program.)
A penalty tax may be payable under the Code upon the redemption of amounts
from an Accumulation Account under a Contract and other significant withdrawal
restrictions may be imposed by the Code.
TRANSFERS
A Participant may transfer all or a portion of his/her Accumulation Account
in Diversified Investors Variable Funds among the various Subaccounts. No
transfer charges are imposed, and there is no limit to the number of transfers.
While AUSA has no present intention to do so, it reserves the right to impose
transfer charges at a later date. Transfers may be made in writing or by
telephone by calling (914) 697-8000. (See "Transfers" on page 19). AUSA reserves
the right to discontinue allowing telephone transfers.
PAYMENT OPTIONS
Unless a Fixed Annuity is elected, a Participant will receive a lump sum
payment at the end of the Accumulation Period. The Contracts may provide for
several Fixed Annuity options: Life Annuity, Life Annuity With Period Certain,
Specified Fixed Period Annuity, Contingent Annuity and Contingent Annuity With
Period Certain. For NQDC, an installment payment option may also be available.
(See "Payment Options" on page 22).
VOTING RIGHTS
To the extent required by law, AUSA will vote the interests in Diversified
Investors Portfolios, the Calvert Series and the International Equity Series
held in Diversified Investors Variable Funds in
9
<PAGE> 12
accordance with the instructions received from Contractholders, IRA
Contractholders and NQDC Contractholders; the Contractholders will instruct AUSA
in accordance with the instructions received from Participants. (See "Voting
Rights" on page 24).
DEATH BENEFIT
If a Participant dies before the Annuity Purchase Date, the Accumulation
Account value will be paid to his/her beneficiary in a lump sum. (See "Death
Benefit" on page 21).
DISTRIBUTION OF THE CONTRACTS
Diversified Investors Securities Corp. ("DISC") will be the principal
underwriter and distributor of the Contracts which will be sold by registered
representatives who are also licensed insurance agents of AUSA. The Contracts
may also be sold through registered representatives of other broker-dealers
authorized by DISC and applicable law who may be insurance agents licensed by an
insurance company other than AUSA. (See "Distribution of the Contracts" on page
26).
FINANCIAL INFORMATION
Information about the performance of Diversified Investors Variable Funds
is contained in the Annual Report of Diversified Investors Variable Funds which
is available, free of charge, by contacting AUSA at the address or telephone
number set forth on the cover of this Prospectus.
10
<PAGE> 13
CONDENSED FINANCIAL INFORMATION
DIVERSIFIED INVESTORS VARIABLE FUNDS
ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIO
------------------------------------------------------------------------------------------------
FOR THE PERIOD AUG. 18, 1994* THROUGH DEC. 31, 1994
--------------------------------------------------------------------
MONEY INTERMEDIATE GOVERNMENT/ EQUITY
MARKET GOVERNMENT CORPORATE BALANCED INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $13.44 $12.33 $16.76 $16.85 $17.21
Net asset value, end of period... 13.65 12.24 16.70 16.66 16.86
Accumulation units outstanding,
end of period................... 587,295 580,105 385,881 1,750,876 6,344,534
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIO
------------------------------------------------------------------------------------------------
FOR THE
PERIOD
AUG. 24, AUG. 18, AUG. 24, 1994* AUG. 18, AUG. 24,
1994* 1994* THROUGH 1994* 1994*
DEC. 31, 1994
---------------------------------------------------------------------------------
INTERNATIONAL
GROWTH & EQUITY SPECIAL CALVERT EQUITY
INCOME GROWTH EQUITY SERIES SERIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $10.31 $20.67 $10.47 $13.28 $10.18
Net asset value, end of period... 10.14 21.65 10.63 13.11 9.56
Accumulation units outstanding,
end of period................... 29,489 2,812,266 83,503 575,200 162,316
</TABLE>
- ---------------
* Commencement of operations.
11
<PAGE> 14
AUSA
AUSA Life Insurance Company, Inc. is a stock life insurance company which
was organized under the laws of the State of New York. Its principal place of
business is 4 Manhattanville Road, Purchase, N.Y. 10577; (914) 697-8000.
DIVERSIFIED INVESTORS VARIABLE FUNDS
Diversified Investors Variable Funds was established by AUSA under New York
Insurance Law on November 30, 1993 as a separate account. Diversified Investors
Variable Funds will hold assets that are segregated from all of AUSA's other
assets and at present is used only to support the Contracts. AUSA is the legal
holder of the assets in Diversified Investors Variable Funds and will at all
times maintain assets in Diversified Investors Variable Funds with a total
market value at least equal to the contract liabilities for Diversified
Investors Variable Funds. The obligations under the Contracts are obligations of
AUSA. Income, gains, and losses, whether or not realized, from assets allocated
to Diversified Investors Variable Funds, are, in accordance with the Contracts,
credited to or charged against Diversified Investors Variable Funds without
regard to other income, gains, or losses of AUSA. The assets in Diversified
Investors Variable Funds may not be charged with liabilities which arise from
any other business AUSA conducts. Diversified Investors Variable Funds assets
may include accumulation of the charges AUSA makes against a Contract
participating in Diversified Investors Variable Funds. From time to time, any
such additional assets may be transferred in cash to AUSA's general account.
Diversified Investors Variable Funds is registered with the Securities and
Exchange Commission ("SEC") under the Investment Company Act of 1940, as
amended, ("1940 Act") as a unit investment trust, which is a type of investment
company. This does not involve any supervision by the SEC of the management or
investment policies or practices of Diversified Investors Variable Funds. For
state law purposes, Diversified Investors Variable Funds is treated as a part or
division of AUSA.
There are currently ten Subaccounts within Diversified Investors Variable
Funds which are available for allocation of Purchase Payments under the
Contracts. The Calvert Series Subaccount invests only in the Calvert Responsibly
Invested Balanced Portfolio (the "Calvert Series"), a series of Acacia Capital
Corporation, an open-end management investment company registered with the SEC
under the 1940 Act. The International Equity Subaccount invests only in the
International Portfolio of the Scudder Variable Life Investment Fund (the
"International Equity Series"), an open-end diversified management investment
company registered with the SEC under the 1940 Act. The eight other Subaccounts
invest in eight respective series of Diversified Investors Portfolios, an
open-end diversified management investment company registered with the SEC under
the 1940 Act. Set forth below is a brief description of the Calvert Series, the
International Equity Series and the eight series of Diversified Investors
Portfolios. Full descriptions of the Calvert Series and the International Equity
Series, their investment objectives, policies and restrictions, their expenses,
the risks attendant in investing therein and other aspects of their operations
are contained in the accompanying prospectuses for the Calvert Series and the
International Equity Series. Full descriptions of the eight series of
Diversified Investors Portfolios, their investment objectives, policies and
restrictions, their expenses, the risks attendant to investing therein and other
aspects of their operations are set forth herein under "Diversified Investors
Portfolios" at page 32. Further disclosure appears in the Statement of
Additional Information. Each Participant should periodically consider his/her
allocation among the Subaccounts in light of current market conditions and the
investment risks attendant to investment in the various series of Diversified
Investors Portfolios, the Calvert Series and the International Equity Series.
CALVERT SERIES
The Calvert Series is a series of Acacia Capital Corporation ("Acacia"), a
Maryland corporation registered with the SEC under the 1940 Act as an open-end
management company, whose investment adviser is Calvert Asset Management
Company, Inc. The shares of Acacia are currently sold only to
12
<PAGE> 15
insurance companies for allocation to their separate accounts to fund the
benefits under certain variable annuity and variable life insurance policies
issued by such companies. Because the Calvert Series sells its shares to
insurance companies offering both variable annuity and variable life insurance
policies, potential for conflict between the interests of Contractholders of
these contracts may arise. The Board of Directors of Acacia will monitor the
Calvert Series for the existence of any material irreconcilable conflicts
between interests of Contractholders of all separate accounts investing in the
Calvert Series. If it is determined by a majority of the Board of Directors of
Acacia that such material conflict exists, then AUSA will take whatever steps
are necessary to eliminate the material conflict including withdrawing the
assets allocable to the Calvert Series and reinvesting them in a different
investment medium. For additional risk exposure, see the Calvert Series
prospectus which follows this prospectus. The Calvert Series Subaccount of
Diversified Investors Variable Funds will purchase and redeem shares from the
Calvert Series at net asset value.
The investment objective of the Calvert Series is set forth in the
prospectus for the Calvert Series which appears at the end of this Diversified
Investors Variable Funds prospectus. Briefly, the objective is to achieve a
total return above the rate of inflation through an actively managed,
diversified portfolio of common and preferred stocks, bonds and money market
instruments which offer income and capital growth opportunity and which satisfy
the social concern criteria established for the Calvert Series. There can be no
assurance that the objective of the Calvert Series will be realized.
INTERNATIONAL EQUITY SERIES
The International Equity Series is a series of Scudder Variable Life
Investment Fund, a Massachusetts business trust registered with the SEC under
the 1940 Act as a diversified open-end management company, whose investment
adviser is Scudder, Stevens & Clark. Shares of Scudder Variable Life Investment
Fund, including shares of the International Equity Series, are currently sold
only to insurance companies for allocation to their separate accounts to fund
the benefits under certain variable annuity and variable life insurance policies
issued by such companies. The Board of Trustees of Scudder Variable Life
Investment Fund currently does not foresee any disadvantages to holders of
variable annuity contracts and variable life insurance policies arising from the
fact that the interests of the holders of such contracts and policies may
differ. Nevertheless, the Trustees will monitor events in order to identify any
material irreconcilable conflicts which may possibly arise and to determine what
action, if any, should be taken in response thereto. For additional risk
exposure, see the International Equity Series prospectus which follows this
prospectus. The International Equity Series Subaccount of Diversified Investors
Variable Funds will purchase and redeem shares of the International Equity
Series at net asset value.
The investment objective of the International Equity Series is set forth in
the prospectus for the International Equity Series which appears at the end of
this Diversified Investors Variable Funds prospectus. Briefly, the object is to
achieve long-term growth of capital primarily through diversified holdings of
marketable foreign equity investments. The International Equity Series invests
in companies, wherever organized, which do business primarily outside the United
States. The International Equity Series intends to diversify investment among
several countries and not to concentrate investments in any particular industry.
There can be no assurance that the objective of the International Equity Series
will be realized. It is important that an investor read the prospectus for the
applicable series carefully before investing.
DIVERSIFIED INVESTORS PORTFOLIOS
Each of the other eight Subaccounts of Diversified Investors Variable Funds
listed below invests exclusively in the corresponding series of Diversified
Investors Portfolios set forth below:
<TABLE>
<CAPTION>
DIVERSIFIED SUBACCOUNT SERIES OF DIVERSIFIED INVESTORS PORTFOLIOS
- --------------------------------------------- ---------------------------------------------
<S> <C>
Diversified Investors Variable Funds
Money Market Subaccount.................... Diversified Investors Money Market Portfolio
(the "Money Market Series")
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
DIVERSIFIED SUBACCOUNT SERIES OF DIVERSIFIED INVESTORS PORTFOLIOS
- --------------------------------------------- ---------------------------------------------
<S> <C>
Diversified Investors Variable Funds
Intermediate Government Bond Subaccount.... Diversified Investors Intermediate Government
Bond Portfolio (the "Intermediate Government
Bond Series")
Diversified Investors Variable Funds
Government/Corporate Bond Subaccount....... Diversified Investors Government/Corporate
Bond Portfolio (the "Government/Corporate
Bond Series")
Diversified Investors Variable Funds
Balanced Subaccount........................ Diversified Investors Balanced Portfolio (the
"Balanced Series")
Diversified Investors Variable Funds
Equity Income Subaccount................... Diversified Investors Equity Income Portfolio
(the "Equity Income Series")
Diversified Investors Variable Funds
Growth & Income Subaccount................. Diversified Investors Growth & Income
Portfolio (the "Growth & Income Series")
Diversified Investors Variable Funds
Equity Growth Subaccount................... Diversified Investors Equity Growth Portfolio
(the "Equity Growth Series")
Diversified Investors Variable Funds
Special Equity Subaccount.................. Diversified Investors Special Equity
Portfolio (the "Special Equity Series")
</TABLE>
Diversified Investors Portfolios is registered with the SEC under the 1940
Act as an open-end diversified management investment company. This registration
does not involve supervision by the SEC of the management or investment
practices or policies of Diversified Investors Portfolios.
Diversified acts as investment adviser and administrator to each series of
Diversified Investors Portfolios. Diversified has contracted with one or more
subadvisers for certain investment advisory services for each series.
Diversified and the subadviser or subadvisers for a particular series of
Diversified Investors Portfolios are referred to herein collectively as the
"Advisers". The investment objectives of the series of Diversified Investors
Portfolios currently available under the Contracts through Diversified
Subaccounts are described briefly below. There can be no assurance that the
investment objectives of any of the series will be met.
MONEY MARKET SERIES: To provide liquidity and as high a level of current
income as is consistent with the preservation of capital through investment in
domestic and foreign U.S. dollar-denominated money market obligations with
maturities of 397 days or less. An investor's interest in the Diversified
Investors Variable Funds Money Market Subaccount is neither insured nor
guaranteed by the U.S. Government.
INTERMEDIATE GOVERNMENT BOND SERIES: To provide as high a level of current
income as is consistent with the preservation of capital through investment in
U.S. Government and U.S. Government agency and instrumentality securities with
intermediate maturities and high quality short-term obligations.
GOVERNMENT/CORPORATE BOND SERIES: To achieve the maximum total return
through investment in investment grade debt securities, U.S. Government and U.S.
Government agency and instrumentality securities collateralized mortgage
obligations guaranteed by these agencies and instrumentalities and high quality
short-term obligations.
BALANCED SERIES: To provide a high total return consistent with a broad
diversified mix of stocks, bonds and money market instruments.
14
<PAGE> 17
EQUITY INCOME SERIES: To provide a high level of current income through
investment in a diversified portfolio of common stocks with relatively high
current yields; capital appreciation is a secondary objective.
GROWTH & INCOME SERIES: To provide current income and capital appreciation
through investment primarily in a diversified portfolio of securities selected
for their potential to generate current income or long-term capital
appreciation.
EQUITY GROWTH SERIES: To provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks with potential
for above average growth in earnings; current income is a secondary objective.
SPECIAL EQUITY SERIES: To provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks of small to
medium size companies which, in the opinion of the Special Equity Series'
Advisers, will present an opportunity for significant increases in earnings
and/or value, without consideration for current income.
See "Diversified Investors Portfolios" at page 32 and the Statement of
Additional Information for more information on each of the series of Diversified
Investors Portfolios described above.
CHARGES
CHARGES FOR MORTALITY AND EXPENSE RISKS
The maximum daily charges against Diversified Investors Variable Funds for
mortality and expense risks assumed by AUSA are computed and deducted from the
value of the net assets of Diversified Investors Variable Funds. The maximum
daily charge will be at the rate of 0.003425% (equivalent to an annual rate of
1.25%) of the average daily net assets of Diversified Investors Variable Funds.
The daily charge will be deducted from the net asset value of each Subaccount of
Diversified Investors Variable Funds on each Valuation Date. Where the previous
day (or days) was not a Valuation Date, the maximum deduction on the Valuation
Date will be 0.003425% multiplied by the number of days since the last Valuation
Date. The sum of these charges on an annual basis will not exceed 1.25% of the
average net assets invested in Diversified Investors Variable Funds. Of this
charge, AUSA estimates that .80% is for mortality risk and .45% is for expense
risk. (The daily charge from Diversified Investors Variable Funds based on an
annual mortality and expense risk rate of .90%, .60% for mortality risks and
.30% for administrative expense risks, is 0.002466%).
The mortality risk is that individuals may live for a longer period of time
than projected and therefore a greater amount of annuity benefits than projected
will be payable. The expense risk is that expenses incurred in issuing and
administering the Contract will exceed the administrative expense charge
provided in the Contract. AUSA believes that this level of charge is within the
range of industry practice for comparable group variable annuity contracts.
Sales distribution expenses and any other expenses in excess of the
described charges will be paid from AUSA's general account and not directly from
Diversified Investors Variable Funds or from the mortality and expense risk
charges. However, asset charges for AUSA's assumption of mortality and expense
risks might be a source of contribution to the surplus in AUSA's general
account.
ANNUAL CONTRACT CHARGE
AUSA reserves the right, in accordance with the provisions of the
Contracts, to deduct an annual contract charge from a Participant's Accumulation
Account to reimburse AUSA for administrative expenses relating to the
maintenance of the Contracts. Any such annual charge will not exceed $50. AUSA
also reserves the right, if such a charge is imposed, to waive, on a temporary
or permanent basis, all or part of such charge for certain classes of Contracts
or for certain new classes of Contracts which may be sold in the future. If
imposed, this charge would represent reimbursement for administrative
15
<PAGE> 18
costs expected to be incurred over the life of the Contracts. AUSA does not
anticipate any profit from this charge.
INVESTMENT MANAGEMENT FEE
Because Diversified Investors Variable Funds purchases interests in certain
series of Diversified Investors Portfolios, the Calvert Series and the
International Equity Series, the net assets of Diversified Investors Variable
Funds will reflect the investment management fee and other expenses incurred by
these series of Diversified Investors Portfolios, the Calvert Series and the
International Equity Series.
Diversified serves as the investment adviser to each series of Diversified
Investors Portfolios. For information with respect to the arrangements under
which Diversified provides such advisory services, including charges and
arrangements with subadvisers, reference is made to the information set forth
under "Management of Diversified Investors Portfolios" at page 47.
The Calvert Series' investment adviser is the Calvert Asset Management
Company, Inc. ("Investment Adviser") which is located at 4550 Montgomery Avenue,
Suite 1000N, Bethesda, Maryland 20814. The Investment Adviser is a wholly-owned
subsidiary of Calvert Group, Ltd., which is in turn a wholly-owned subsidiary of
Acacia Mutual Life Insurance Company. Pursuant to its investment advisory
agreement with the Calvert Series, the Investment Adviser manages the
fixed-income investments of the Calvert Series and is responsible for the
overall management of the business affairs of the Calvert Series subject to the
direction and authority of the Board of Directors of Acacia. The subadvisor to
the Calvert Series is NCM Capital Management Group, Inc. ("NCM"). Pursuant to
its Investment Subadvisory Agreement with the Investment Adviser, NCM manages
the equity portion of investments for the Calvert Series. NCM is an
employee-owned subsidiary of Sloan Financial Group. Sloan Financial Group is
controlled by Maceo K. Sloan and Justin F. Beckett and is one of the largest
minority-owned investment management firms in the country. The Investment
Adviser receives from the Calvert Series a monthly base fee, computed on a daily
basis at an annual rate of 0.70% of the average daily net assets of the Calvert
Series. The Investment Adviser pays NCM a base fee of 0.25% of one-half of the
Calvert Series' net assets. In addition, the Investment Adviser and NCM may earn
(or have their fees reduced by) performance fee adjustments based on the extent
to which performance of the Calvert Series exceeds or trails the Lipper Balanced
Funds Index. Payment of the performance fee adjustment begins July 1, 1996. The
specific adjustments are as follows:
INVESTMENT ADVISER'S PERFORMANCE FEE ADJUSTMENT
<TABLE>
<CAPTION>
PERFORMANCE VERSUS THE PERFORMANCE FEE
LIPPER BALANCED FUND INDEX ADJUSTMENT
-------------------------- ---------------
<S> <C> <C>
6% to <12% 0.05%
12% to <18% 0.10%
18% or more 0.15%
</TABLE>
NCM'S PERFORMANCE FEE ADJUSTMENT
<TABLE>
<CAPTION>
PERFORMANCE VERSUS THE PERFORMANCE FEE
LIPPER BALANCED FUND INDEX ADJUSTMENT
-------------------------- ---------------
<S> <C> <C>
6% to <12% 0.05%
12% to <18% 0.10%
18% or more 0.15%
</TABLE>
The performance fee adjustment to NCM is paid out of the fee the Investment
Adviser receives from the Calvert Series. The initial performance period will be
the twelve month period between July 1, 1995 and July 1, 1996. Each month an
additional month's performance will be factored into the calculation until a
total of 36 months comprises the performance computation period. Payment by the
16
<PAGE> 19
Calvert Series of the performance fee adjustment will be conditioned on (i) the
performance of the Calvert Series as a whole having exceeded the Lipper Balanced
Fund Index and (ii) payment of the performance fee adjustment not causing the
Calvert Series' performance to fall below the Lipper Balanced Fund Index.
The International Equity Series' investment adviser is Scudder, Stevens &
Clark, Inc., a Delaware corporation located at 175 Federal Street, Boston,
Massachusetts 02110 ("Scudder, Stevens & Clark"). Pursuant to an Investment
Advisory Agreement, Scudder, Stevens & Clark manages the International Equity
Series' daily investment and business affairs subject to the policies
established by the Board of Trustees of Scudder Variable Life Investment Fund.
Established in 1919, Scudder, Stevens & Clark is one of the most experienced
investment counsel firms in the United States. For its advisory services,
Scudder, Stevens & Clark receives compensation monthly at the annual rate of
.875% of the average daily net asset value of the International Equity Series.
The investment advisory fee for the International Equity Series is higher than
those charged to many funds which invest primarily in U.S. securities, but is
not necessarily higher than those charged to funds with an investment objective
similar to the investment objective of the International Equity Series.
PREMIUM TAX
Under the laws of certain jurisdictions, premium taxes are payable on
annuity considerations which can include Purchase Payments or the Accumulation
Account under the Contracts. Any applicable premium taxes will generally be
deducted when the Accumulation Account under a Contract is applied to purchase
an annuity. Under present laws, the range of premium taxes is from .5% to 4.0%.
Attached as an Appendix to this Prospectus is a schedule of applicable premium
taxes payable upon annuitization which are in effect as of the date of this
Prospectus. The laws of the various jurisdictions relating to annuity taxes and
the interpretations of such laws are subject to changes which may affect the
deductions, if any, under the Contracts for such taxes.
SUMMARY OF THE CONTRACTS
ELIGIBLE PURCHASERS
State educational organizations and organizations that qualify for
tax-exempt status under Code Section 501(c)(3), including associations thereof
that qualify for tax-exempt status under Code Section 501(c)(3), are eligible
purchasers. In addition, any organization qualifying as an IRA Contractholder
may purchase or hold an IRA Contract. Any type of non-profit organization as
well as taxed subsidiaries of tax-exempt organizations and taxed stand-alone
organizations may purchase a Section 401(a) and/or a Section 401(k) or an NQDC
Contract(s).
OWNERSHIP
The organization purchasing or holding a Contract is the owner of the
Contract for the benefit of the Participants. The Contract will cover all
eligible Participants under a Plan. Each Participant will receive a certificate
at the time his/her first annuity payment becomes payable, or earlier, if
required by applicable law. The certificate summarizes the Participant's
benefits under the Contract.
PURCHASE PAYMENTS
With respect to the Section 401(a) Contract, the employer and/or employee
will make contributions pursuant to the underlying retirement Plan. The Section
401(k) and NQDC Contracts will accept employer and/or employee contributions
pursuant to the terms and conditions of the underlying Plan. As to the Section
403(b) Contract, the employer will make Purchase Payments in accordance with a
salary reduction agreement or an agreement to forego a salary increase, except
with respect to employer-sponsored Section 403(b) Plans under which the employer
will make contributions pursuant
17
<PAGE> 20
to the underlying retirement Plan. As to the Section 72 flexible annuities
Contract, the employer will make Purchase Payments for each participating
employee pursuant to a salary deduction agreement. In the case of the Section
408 IRA Contract, Purchase Payments will be made by the employer on behalf of
and as determined by each participating employee pursuant to a salary deduction
agreement or by the Participant. An Accumulation Account will be established for
each Participant which will record the number of Units held in each Subaccount.
Purchase Payments may be allocated among any of the Subaccounts.
All Purchase Payments in Diversified Investors Variable Funds credited to
an Accumulation Account are vested and nonforfeitable. However, Purchase
Payments made by employers, including all such payments made under a Section
401(a) Contract, which are not the result of a reduction in salary or a give up
in salary agreement, under an employer-sponsored Plan may be forfeitable but are
generally subject to the vesting requirements, where applicable, of the Employee
Retirement Income Security Act of 1974, as amended. In general, all Purchase
Payments made to NQDC, Section 457 and Section 457(b) Contracts may be
forfeitable even though partially or fully vested.
EMPLOYER SPONSORED PLAN REQUIREMENTS
Since the Contracts are intended to implement the Plans of state
educational organizations, organizations that qualify for tax-exempt status
under Code Section 501(c)(3), IRA Contractholders and, in the case of Section
401(a) and/or Section 401(k) and NQDC Contracts, for taxed subsidiaries of such
organizations and stand-alone taxed organizations and since such Plans may be
sponsored by employers or associations who may have their own desires regarding
certain Plan details and the manner in which the Plan is to be administered,
there will be some variations in details in the Contract and Plan to reflect
such desires. Reference to the provisions of the Plan in which the individual is
a Participant must be made in all cases for particulars.
RIGHTS OF THE PARTICIPANT UNDER THE CONTRACT
There are no stipulated or required Purchase Payments to be made under the
Contract. Except for the 15 days prior to a Participant's Annuity Purchase Date
(See "Annuity Purchase Date" on page 22) during which no Purchase Payments will
be accepted by AUSA, during a Participant's Accumulation Period Purchase
Payments may be made in the amount authorized by the Participant. The Contract
permits the Participant to elect his/her Annuity Purchase Date, to allocate
Purchase Payments, to redeem all or a portion of the Units in his/her
Accumulation Account, to designate beneficiaries, and to elect Fixed Annuity
options, except that employer-sponsored Plans may affect these rights.
During a Participant's Accumulation Period, one's rights and those of the
Contractholder or IRA Contractholder shall be as set forth in the Contract and
Plan. On and after the Annuity Purchase Date, or on the Participant's death, if
earlier, all rights, as specified in the Contract and Plan, shall belong to the
Participant or beneficiary as the case may be.
RIGHTS UPON SUSPENSION OF CONTRACT OR TERMINATION OF PLAN
403(b) Contract
In the event that the making or receipt of all Purchase Payments under
certain 403(b) Contracts is discontinued or a Contractholder terminates its Plan
or discontinues Purchase Payments for a Participant, AUSA shall give written
notice thereof to the appropriate Participant(s) together with notice of the
right of the Participant to elect to have the value of his/her Accumulation
Account applied under one of the following options: (1) to be held and
distributed by AUSA in accordance with the terms of the Contract, (2) to be paid
to him/her in cash, or (3) in the event of suspension of the Contract or
termination of the Plan, to be transferred to an alternate funding agency (e.g.,
another insurance company). Certain other 403(b) Contracts require the
Contractholder, not AUSA, to give written notice thereof to Participants.
18
<PAGE> 21
401(a) Contract/401(k) Contract and NQDC Contracts
If the Contractholder terminates its Plan or discontinues Purchase
Payments, it is the Contractholder's responsibility, and not AUSA's, to give
written notice thereof to the affected Participants. In such cases, the
Contractholder shall elect to have the entire balance held under the Contract
applied under one of the following options: (1) to be held and distributed by
AUSA in accordance with the terms of the Contract; (2) to be transferred to an
alternate funding agency (e.g., another insurance company); or (3) to purchase
deferred, paid-up life annuity benefits for Participants.
457, 457(f), Flexible Annuity, and 408(IRA) Contracts
If the Contractholder or IRA Contractholder terminates its Plan or
discontinues Purchase Payments for a Participant, AUSA shall give written notice
thereof to the appropriate Participant(s) together with notice of the right of
the Participant to elect to have the value of his/her Accumulation Account
applied under either of the following options: (1) to be held and distributed by
AUSA in accordance with the terms of the Contract or (2) to be paid to him/her
in cash, except that, under the terms of certain 457 Contracts, the
Contractholder, not AUSA, shall give notice to affected Participants.
FAILURE OF QUALIFICATION
In the event that a Plan, Contractholder or IRA Contractholder or a
Participant, thereunder becomes ineligible for any previously applicable tax
benefits under the Code, AUSA upon notice thereof shall refuse during the period
of such ineligibility to accept Purchase Payments with respect to that Plan or
Participant. A failure of qualification under a particular Contract shall have
no effect on other issued and outstanding Contracts.
TRANSFERS
No transfers may be made between any of the Contracts; however, the
following transfers are permissible with respect to each Contract.
401(a), 401(k), 403(b), 457, 457(f), Flexible Annuity, 408(IRA) and NQDC
Contracts
A Participant may transfer all or a portion of his/her Accumulation Account
in Diversified Investors Variable Funds among the various Subaccounts. No
transfer charges are imposed, and there is no limit to the number of transfers
permitted. While AUSA has no present intention to do so, AUSA reserves the right
to impose transfer charges at a later date.
Transfers from the Section 403(b), 401(a) and (k) and NQDC Group Fixed
Annuity Contracts to a Participant's Accumulation Account under the Diversified
Investors Variable Funds Contracts are permitted only to the Subaccounts which
invest in the Balanced Series, Equity Income Series, Growth & Income Series,
Equity Growth Series, Special Equity Series, Calvert Series or International
Equity Series. Certain other restrictions which apply to transfers from the AUSA
Section 403(b), Section 401(a), Section 401(k), NQDC and Section 408(IRA) Group
Fixed Annuity Contracts to the Diversified Investors Variable Funds Contracts
are contained in the AUSA Section 403(b) and Section 401(a) and NQDC and
408(IRA) Group Fixed Annuity Contracts.
Transfers may be made in writing or by telephoning (914) 697-8000.
Transfers are effective within 48 hours of receipt of instructions. All
Participants should be aware that a transfer authorized by telephone and
reasonably believed to be genuine by AUSA may subject the Participant to risk of
loss if such instruction is subsequently found not to be genuine. AUSA will
employ reasonable procedures, including requiring Participants to give certain
identification information and tape recording of telephone instructions, to
confirm that instructions communicated by telephone are genuine. To the extent
that AUSA fails to use reasonable procedures to verify the genuineness of
telephone instructions, AUSA may be liable for any losses due to telephone
instructions that prove to be fraudulent or unauthorized.
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RIGHTS RESERVED BY AUSA
Subject to compliance with applicable laws and, when required by law,
approval of the Contractholders, IRA Contractholders, NQDC Contractholders
and/or Participants and any appropriate regulatory authority, AUSA reserves the
right to make the following changes:
(1) To operate Diversified Investors Variable Funds in any form permitted
under the 1940 Act or in any other form permitted by law;
(2) To take any action necessary to comply with or obtain and continue any
exemptions from the 1940 Act;
(3) To transfer any assets in a Subaccount to another Subaccount or to one
or more separate accounts, or to AUSA's general account to the extent
permitted by law or to add, combine or remove Subaccounts in a separate
account;
(4) To substitute, for the interests in a series of Diversified Investors
Portfolios, the Calvert Series or the International Equity Series held
in any Subaccount, interests in another series of Diversified Investors
Portfolios or interests in another investment company or any other
investment permitted by law; and
(5) To make any necessary technical changes in the Contracts in order to
conform with any of the above-described actions or as may be required
or permitted by applicable laws affecting Diversified Investors
Variable Funds or the Contracts.
CREDIT OF PURCHASE PAYMENTS
A Participant's initial Purchase Payment will be credited to the
Participant's Accumulation Account to provide Units as of a Valuation Date for
the Valuation Period, not later than (1) two business days after receipt of the
Purchase Payment by AUSA at 4 Manhattanville Road, Purchase, New York 10577, if
the contract application and/or Participant's enrollment form is complete upon
receipt, or (2) two business days after an application and/or enrollment form
which is incomplete upon receipt by AUSA is made complete, provided that if such
information is not made complete within five business days after receipt, (i)
the prospective Participant will be informed of the reasons for the delay, and
(ii) the initial Purchase Payment will be returned immediately and in full,
unless the prospective Participant specifically consents to AUSA retaining the
Purchase Payment until such information is made complete.
Subsequent Purchase Payments will be credited to the Participant's
Accumulation Account to provide Units as of the Valuation Date for the Valuation
Period in which the Purchase Payment is received in good order by AUSA.
ALLOCATION OF PURCHASE PAYMENTS
Upon receipt of a Purchase Payment, it will be credited to the Subaccount
designated by the Participant in the form of Units. The number of Units to be
credited is determined by dividing the dollar amount allocated to the particular
Subaccount(s) by the Unit value of that Subaccount for the Valuation Date for
the Valuation Period on which the Purchase Payment is received. The number of
Units shall not be changed by any subsequent change in the value of a Unit, but
the dollar allocation value of a Unit will vary in amount depending upon the
investment experience of the applicable Subaccount.
Allocation instructions may be changed at any time by sending to AUSA a
correctly completed allocation form. Any change in allocations will be effective
within 10 business days following receipt of the allocation form by AUSA. If an
allocation form is incorrectly completed, Purchase Payments will be credited in
accordance with the most recent allocation form on record. AUSA reserves the
right to limit a Participant's right to change allocation instructions to four
times a calendar year.
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DETERMINATION OF UNIT VALUE
The Unit value for a Subaccount for any Valuation Date is determined by
subtracting (b) from (a) and dividing the result by (c), where
(a) is the aggregate net asset value on the Valuation Date of all
investments by the Subaccount in the series of Diversified Investors
Portfolios, the Calvert Series or the International Equity Series in
which the Subaccount invests, and
(b) is the mortality and expense risk charge accrued as of that Valuation
Date; and,
(c) is the total number of Units held in the Subaccount on the Valuation
Date before the purchase or redemption of any Units on that Date.
DEATH BENEFIT
Under Section 403(b), Section 457, Section 457(f), flexible annuity and
408(IRA) Contract, if a Participant dies before the Annuity Purchase Date (See
"Annuity Purchase Date" on page 22), the value of his/her Accumulation Account
will be paid to the beneficiary in a lump sum. If the beneficiary is under the
age of 75 at the time of the Participant's death, the beneficiary may elect to
have this lump sum applied to provide a Fixed Annuity. A lump sum payment to
some extent may be taxed as ordinary income to the beneficiary in the year
received. A beneficiary should consider the possible tax advantages to electing
an annuity. (See "Section 403(b) Annuities" on page 27). Under Section 401(a)
and/or Section 401(k) Contracts, however, the underlying tax-qualified Plan is
generally required to provide that in the case of a married Participant, a
survivorship annuity death benefit will be paid to the surviving spouse if the
Participant dies prior to retirement. In each case involving Section 401(a)
and/or Section 401(k) Contracts, reference must be made to the underlying Plan
for particulars.
If the Participant dies before the Annuity Purchase Date, his/her entire
interest must generally be distributed within five years after the date of
death, or if payable to a designated beneficiary must be annuitized over the
life of that designated beneficiary or over a period not extending beyond the
life expectancy of that beneficiary, within one year after the date of death. If
the beneficiary is the Participant's spouse, distributions are not required to
be made until the April 1st after the end of the calendar year in which the
Participant would have attained age 70 1/2; if the spouse dies before
distributions begin, the rules discussed above will apply as if the spouse were
the Participant (owner).
If a lump sum payment is elected, the Accumulation Account value will be
determined on the Valuation Date for the Valuation Period in which a certified
copy of the death certificate evidencing the Participant's death is received by
AUSA. If a Fixed Annuity is elected, the Accumulation Account value will be
determined on the Valuation Date for the Valuation Period of the beneficiary's
Annuity Purchase Date. For Section 401(a) and/or Section 401(k) and NQDC
Contracts, the underlying Plan should be consulted to determine the options
available.
For NQDC Contracts, the remaining value will be paid to a designated
beneficiary. If no such beneficiary is so designated or in existence, the
remaining value will be paid in the following order: Participant's (1) spouse,
(2) children, (3) parents, (4) siblings and (5) estate.
For all Contracts except NQDC Contracts, the death benefit is guaranteed to
be not less than the total amount of all contributions, less any withdrawals,
made by the Participant.
REDEMPTION DURING THE ACCUMULATION PERIOD
For Section 403(b), Section 457, Section 457(f), flexible annuity and
Section 408(IRA) Contracts and subject to applicable federal tax law
restrictions, a Participant at any time during his/her Accumulation Period and
prior to his/her death may redeem all or a portion of the Units credited to the
Accumulation Account. There is no redemption charge. (See "Federal Tax Status"
on page 26).
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The Accumulation Account value redeemed or the Units remaining after a
partial redemption will be determined on the Valuation Date for the Valuation
Period in which a written request for a redemption on a form approved by AUSA is
received by AUSA. The Accumulation Account will be reduced by the lesser of the
number of Units obtained by dividing the amount of the redemption request by the
Unit value for that day or the number of Units remaining in the Accumulation
Account.
A full or partial redemption payment will be made within seven days after
receipt of the written request. A request for a partial redemption must specify
the Subaccount(s) from which the partial withdrawal is to be made. Payment may
be postponed as permitted by the 1940 Act. Currently, deferment is permissible
only when the New York Stock Exchange is closed or trading is restricted, when
an emergency exists as a result of which disposal of interests in Diversified
Investors Portfolios, the Calvert Series or the International Equity Series held
by Diversified Investors Variable Funds is not reasonably practicable or it is
not reasonably practicable to determine fairly the value of these assets, or
when the SEC has provided for such deferment for the protection of Participants.
A withdrawal will generally have federal income tax consequences which may
include penalties. (See "Federal Tax Status" on page 26).
With respect to Section 401(a), Section 401(k) and NQDC Contracts, the
ability to withdraw funds during the Accumulation Period is generally more
limited; however, in each instance the underlying Plan document should be
consulted to determine what options, if any, are available.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
The Teacher Retirement System of Texas permits Participants in the Texas
Optional Retirement Program ("ORP") to redeem their interest in a variable
annuity contract issued under the ORP only upon termination of employment in the
Texas public institutions of higher education, retirement or death. Accordingly,
a Participant in the ORP will be required to obtain a certificate of termination
from his/her employer before he/she can redeem his/her Accumulation Account.
PAYMENT OPTIONS
With respect to Section 403(b), Section 457, Section 457(f), flexible
annuity and Section 408(IRA) Contracts, unless a Fixed Annuity as described
below is elected, payment to the Participant shall be made at the end of his/her
Accumulation Period in a lump sum calculated in the same manner as if a total
withdrawal request of one's Accumulation Account had been received by AUSA on
his/her Annuity Purchase Date. (See above for "Redemption During the
Accumulation Period"). However, Section 401(a), Section 401(k) and NQDC
Contracts provide the funding for the Plans and reference to the particular Plan
must be made in each case for details. For example, tax-qualified Plans must
generally provide by law that in the case of a married Participant who does not
properly elect otherwise, retirement annuity benefits will be paid in the form
of a contingent annuity with a survivorship annuity benefit for his surviving
spouse at least equal to 50% of the amount which would have been payable if the
Participant were living. For NQDC Contracts, the employer may also provide for
installment payments without the purchase of an annuity.
ANNUITY PURCHASE DATE
The Annuity Purchase Date is the first day of the month coincident with or
following the receipt by AUSA of written notice, submitted through the
Participant's employer, of the Participant's retirement (i.e., the termination
of employment with his/her employer). Subject to the terms of the Plan, a
Participant may elect to retire at any time and receive annuity benefits. As a
general rule, benefits must begin no later than April 1 of the calendar year
following the year in which the Participant attains age 70 1/2 at which time an
election to receive an annuity or lump sum benefit must be made.
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In the case of a beneficiary who elects a Fixed Annuity, the Annuity
Purchase Date will be the first day of the month following receipt by AUSA of
the election of a Fixed Annuity; however, if any election is received during the
last 15 days of a month, the Annuity Purchase Date will be the first day of the
second month after receipt of the election.
For Section 408(IRA) Contracts, the Annuity Purchase Date is the date the
annuity first begins under the terms of the IRA Contract.
FIXED ANNUITY
Fixed Annuity payments are not made from Diversified Investors Variable
Funds but are made from the general account of AUSA which supports insurance and
annuity obligations. Because of exemptive and exclusionary provisions, Fixed
Annuity payments and interests in the general account have not been registered
under the Securities Act of 1933, as amended, (the "1933 Act") nor is the
general account registered as an investment company under the 1940 Act.
Accordingly, neither the general account nor any interests therein are generally
subject to the provisions of the 1933 or 1940 Acts. The SEC staff has not
reviewed the disclosures in this Prospectus that relate to the Fixed Annuity
payments and interests in the general account. Disclosures regarding Fixed
Annuity payments and the general account in this Prospectus, however, may be
subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
A Fixed Annuity may not be elected if the initial monthly payment under the
form elected would be less than $20. Fixed Annuity payments will be made monthly
unless the annuitant elects to receive payments annually, semi-annually or
quarterly. Any such election must be made at the same time that the annuitant
elects to receive a Fixed Annuity and cannot be changed during the annuity
period. Once a Fixed Annuity takes effect, it may not be redeemed, surrendered
or changed to any other form of annuity.
FIXED ANNUITY OPTIONS
The following Fixed Annuity options may be available:
(i) Life Annuity -- Annuity payments will be made during the lifetime of
the annuitant. It would be possible for the annuitant to receive no
annuity payment if he/she died prior to the date of the first annuity
payment.
(ii) Life Annuity With Period Certain -- Annuity payments will be made
during the lifetime of the annuitant with the guarantee that if the
annuitant dies before a period certain elected, the beneficiary will
receive payments for the duration of the period. The period certain
may be any number of years between 5 and 20 inclusive.
(iii) Specified Fixed Period Annuity -- Annuity payments will be made for a
specified fixed period selected by the annuitant. If the annuitant
dies during the specified fixed period, the annuity payments for the
remainder of the period will be paid to the beneficiary. No annuity
payments are made after the expiration of the specified fixed period
even if the annuitant survives. The specified fixed period may be for
any number of years between 10 and 30 years inclusive.
(iv) Contingent Annuity -- Annuity payments will be made during the joint
lifetimes of the annuitant and a designated second person ("contingent
annuitant") with payments continued during the remaining lifetime of
the contingent annuitant. Annuity payments to the contingent annuitant
may be made in the same amount paid while both annuitants lived or a
lesser percentage of this amount. For Section 401(a) and/or Section
401(k) Contracts, in the absence of a proper election by the
Participant, a contingent annuity with a survivorship annuity benefit
for the surviving spouse at least equal to 50% of the amount which
would have been payable if the Participant were living will be the
normal form of benefit.
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If the contingent annuitant dies before the first annuity payment to
the annuitant, the contingent annuity election will be void and the
annuitant will receive a Life Annuity. If the contingent annuitant
dies after the first annuity payment to the annuitant, but before the
death of the annuitant, annuity payments under the Contingent Annuity
election will be made to the annuitant during his/her lifetime. If the
annuitant and the contingent annuitant die before the date of the
first annuity payment, no annuity payments will be made.
(v) Contingent Annuity With Period Certain -- Annuity payments will be
made during the joint lifetimes of the annuitant and a designated
second person ("contingent annuitant"). Annuity payments to the
contingent annuitant may be in the same amount as paid to the
annuitant or a lessor percentage of that amount and will be made for a
period certain of any number of years between 5 and 20 years
inclusive.
The Life Annuity With Period Certain and the Specified Fixed Period Annuity
may only be elected for a number of years that will not exceed an annuitant's
life expectancy. The annuity benefit option elected by the Participant will
affect the level of annuity payments the Participant will receive. The longer
annuity payments are projected to continue based upon actuarial possibilities,
the lower annuity payments will be.
The annuity purchase rates for these Fixed Annuity benefits shall not
exceed, during the initial period set forth in the Contract, the maximum rates
set forth in the Contract. Thereafter, the annuity purchase rate will be the
rate in effect as declared by AUSA as of the Annuity Purchase Date. The
guaranteed level of Fixed Annuity payments will be determined based upon (i) a
Participant's Accumulation Account value on the Annuity Purchase Date, (ii) the
applicable annuity purchase rate on the Annuity Purchase Date which will reflect
the age of the Participant and (iii) the type of Fixed Annuity option elected.
PAYMENTS TO A BENEFICIARY FOLLOWING THE ANNUITANT'S DEATH
If any annuity payment is payable to the beneficiary after the death of an
annuitant on or after his/her Annuity Purchase Date but during a period certain,
it shall be payable as each payment becomes due to the beneficiary. If the
benefit is payable to more than one beneficiary, it shall be paid in equal
shares to such beneficiaries, the survivors or survivor, unless the annuitant
has elected otherwise. Upon the death of the last surviving beneficiary, AUSA
shall pay the commuted value of any remaining payments in a lump sum cash
payment to the estate of such last surviving beneficiary in lieu of any further
income payments.
The annuitant's beneficiary may direct in writing to AUSA that any income
payable after the death of the annuitant or contingent annuitant be terminated
and a single commuted value be paid to the beneficiary. The commuted values
referred to above shall be based upon the value of the payments for the balance
of the period certain determined as of the date AUSA receives written notice of
the beneficiary's election to receive the commuted value on the basis of the
interest rate (compounded annually) inherent in the annuity purchase rate
applied to provide the annuitant's Fixed Annuity.
VOTING RIGHTS
The assets held in the Subaccounts of Diversified Investors Variable Funds
will be invested in the corresponding series of Diversified Investors
Portfolios, the Calvert Series or the International Equity Series. AUSA is the
legal holder of these interests and shares held in a Subaccount and as such has
the right to vote to elect the governing Boards of Diversified Investors
Portfolios, Acacia and Scudder Variable Life Investment Fund, to vote upon
certain matters that are required by the 1940 Act to be approved or ratified by
the shareholders of a mutual fund, and to vote upon any other matter that may be
voted upon at a shareholders' meeting. To the extent required by law, AUSA will
vote at regular and special shareholder meetings in accordance with the
instructions received from Contractholders, IRA Contractholders and NQDC
Contractholders. The record date for any such vote shall be selected by the
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governing Boards of Diversified Investors Portfolios, Acacia or Scudder Variable
Life Investment Fund. AUSA will furnish Contractholders, IRA Contractholders and
NQDC Contractholders with the proper forms to enable them to give it these
instructions.
Each Contractholder, IRA Contractholder and NQDC Contractholder will have
the equivalent of one vote per $100 of the dollar value of the Accumulation
Accounts in a Contract held in each Subaccount of Diversified Investors Variable
Funds, with fractional votes for amounts less than $100. These votes,
represented as votes per $100 of Accumulation Account value in each Subaccount
of Diversified Investors Variable Funds, are converted into a proportionate
number of votes in beneficial interests in a series of Diversified Investors
Portfolios or shares of the Calvert Series or the International Equity Series.
Interests held in each Subaccount for which no timely instructions from
Contractholders, IRA Contractholders or NQDC Contractholders are received will
be voted by AUSA in the same proportion as those interests in that Subaccount
for which instructions are received. Should applicable federal securities laws
or regulations permit, AUSA may elect to vote in its own right.
A Participant will have the right to instruct the Contractholder, IRA
Contractholder or NQDC Contractholder with respect to interests in the series of
Diversified Investors Portfolios, the Calvert Series or the International Equity
Series attributable to his/her portion of the Accumulation Account held in each
Subaccount of Diversified Investors Variable Funds. Each Participant under the
Contract shall receive a statement of the amount attributable to his/her
participation in each Subaccount and stating his/her right to instruct the
Contractholder as to how to vote such interest. AUSA will provide voting
instruction materials to the Contractholder, IRA Contractholder or NQDC
Contractholder and to the Participants.
The Contractholder, IRA Contractholder and NQDC Contractholder shall
provide voting instructions to AUSA with respect to interests attributable to
the Accumulation Account values held in a Subaccount in accordance with
instructions received by Participants. For interests for which no timely
instructions from Participants are received, the Contractholder, IRA
Contractholder or NQDC Contractholder will instruct AUSA to vote these interests
in the same proportion as those shares for which instructions from Participants
are received.
Matters on which the Contractholder, IRA Contractholder or NQDC
Contractholder may give voting instructions include the following: (1) election
of the governing Boards of Diversified Investors Portfolios, Acacia or Scudder
Variable Life Investment Fund; (2) ratification of the independent accountant of
a series of Diversified Investors Portfolios, the Calvert Series or the
International Equity Series corresponding to the Contractholders, IRA
Contractholder's or NQDC Contractholder's selected Subaccount(s); (3) approval
of any change in the Investment Advisory Agreement or any Subadvisory Agreement
for a series of Diversified Investors Portfolios, the Calvert Series or the
International Equity Series corresponding to the Contractholder's, IRA
Contractholder's or NQDC Contractholder's selected Subaccount(s); (4) any change
in the fundamental investment policies of a series of Diversified Investors
Portfolios, the Calvert Series or the International Equity Series corresponding
to the Contractholder's, IRA Contractholder's or NQDC Contractholder's selected
Subaccount(s); and (5) any other matter requiring a vote of the shareholders of
Diversified Investors Portfolios, the Calvert Series or the International Equity
Series. With respect to approval of the Investment Advisory Agreements or
Subadvisory Agreements or any change in a fundamental investment policy,
Contractholders, IRA Contractholders and NQDC Contractholders participating in
that Subaccount will vote separately on the matter pursuant to the requirements
of Rule 18f-2 under the 1940 Act.
AUSA may, if required by state insurance officials, disregard voting
instructions if those instructions would require voting to cause a change in the
subclassification or investment objectives or policies of one or more of the
series of Diversified Investors Portfolios, the Calvert Series or the
International Equity Series, or to approve or disapprove an investment adviser
or principal underwriter for one or more series of Diversified Investors
Portfolios or the Calvert Series or the International Equity Series. In
addition, AUSA may disregard voting instructions that would require changes in
the investment objectives or policies of any series of Diversified Investors
Portfolios, the Calvert Series or the
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International Equity Series or in an investment adviser or principal underwriter
for Diversified Investors Portfolios, the Calvert Series or the International
Equity Series, if AUSA reasonably disapproves those changes in accordance with
applicable federal regulations. If AUSA disregards voting instructions, it will
advise Contractholders, IRA Contractholders, NQDC Contractholders and
Participants of that action and its reasons for the action in the next
semiannual report to Contractholders, IRA Contractholders, NQDC Contractholders
and Participants.
DISTRIBUTION OF THE CONTRACTS
DISC will act as the principal underwriter and the distributor of the
Contracts, pursuant to an underwriting agreement, on behalf of Diversified
Investors Variable Funds, with the Calvert Series and the International Equity
Series. DISC will perform all sales, marketing and administrative functions
relative to the Contracts which participate in Diversified Investors Variable
Funds, with certain exceptions in connection with the use of other authorized
broker-dealers. DISC is registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended, and is a member of the National Association of
Securities Dealers, Inc. The Contracts are sold by individuals who are
registered representatives of DISC and who are also licensed as insurance agents
for AUSA. The Contracts may also be sold through registered representatives of
other broker-dealers authorized by DISC and applicable law who may be insurance
agents licensed by an insurance company other than AUSA. Commissions and other
expenses directly related to the sale of the Contracts will not exceed 8 percent
of Purchase Payments. Additional expense allowance may be paid for other
services not directly related to the sale of the Contracts. Such services
include the training of personnel and the production of promotional literature.
FEDERAL TAX STATUS
The ultimate effect of federal income taxes on Fixed Annuity payments and
on the economic benefit to the Participant, annuitant, payee and beneficiary
depends on the tax and employment status of the individual concerned.
The discussion which follows on the treatment of AUSA and of the Contracts
under federal income tax law is general in nature, is based upon AUSA's
understanding of current federal income tax laws, and is not intended as tax
advice. No representation is made regarding the likelihood of continuation of
the present federal income tax law or of the current interpretations by the
Internal Revenue Service. No attempt is made to consider any applicable state or
other tax laws. Each Contractholder, IRA Contractholder, NQDC Contractholders
and Participant contemplating investment in the Contracts should consult a
qualified tax adviser.
Participants receiving large distributions (generally those in excess of
$150,000 per year; or lump sum distributions in excess of $150,000) from
qualified retirement Plans, including those funded through Section 401(a),
Section 408(IRA) and Section 403(b) Contracts, may be subject to a 15% excise
tax on their distributions in excess of a specified amount.
TAX TREATMENT OF AUSA
AUSA is taxed as a life insurance company under the Code. Investment income
from the assets of Diversified Investors Variable Funds are reinvested and taken
into account in determining the value of Diversified Investors Variable Funds.
Under existing federal income tax law, the investment income of Diversified
Investors Variable Funds, including realized capital gains, is substantially not
taxed to AUSA.
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TAXATION OF DIVERSIFIED INVESTORS PORTFOLIOS
Diversified Investors Portfolios is organized as a New York trust. None of
its series are subject to any income or franchise tax in the State of New York.
AUSA, as an investor in a series of Diversified Investors Portfolios will be
taxable on its share (as determined in accordance with the governing instruments
of Diversified Investors Portfolios) of such series' ordinary income and capital
gain in determining its income tax liability. The determination of such share
will be made in accordance with the Code and regulations promulgated thereunder.
See "Tax Treatment of AUSA" above.
SECTION 403(B) ANNUITIES
Purchase Payments made under a Contract meeting the requirements of Section
403(b) of the Code afford certain federal income tax benefits to employees of
state educational organizations, and organizations which are tax-exempt under
Section 501(c)(3) of the Code.
The employer may make contributions to the Contract or the employer may
agree with the Participant that in return for employer contributions to the
Contract, the Participant will take a reduction in salary or give up a salary
increase. The agreement may not be changed with respect to earnings of the
Participant while the agreement is in effect. The Participant can only make one
agreement with his/her employer during the year, but the Participant may
terminate the agreement at any time with respect to amounts not yet earned. No
federal income tax is payable by the Participant on increases in the value of
his/her Accumulation Account until payments are received by the Participant.
Purchase Payments meeting the requirements of Sections 402(g), Section
403(b) and Section 415 of the Code are not includable in the gross income of the
Participant at the time they are made. Under Section 402(g) of the Code,
Purchase Payments made under a reduction in salary or a give up in salary
increase agreement ("elective deferrals") are excluded from a Participant's
gross income to the extent of the lesser of $9,500 or the Participant's
exclusion allowance. The $9,500 limit will be reduced on a dollar for dollar
basis by employee pre-tax elective deferrals made by that individual under a
Section 401(k) Plan, a simplified employee pension plan, or other tax deferred
annuity. Under Section 403(b) of the Code, Purchase Payments made under a
reduction in salary or a give up in salary agreement and/or contributed by the
employer are excluded from a Participant's gross income to the extent of the
applicable "exclusion allowance". The "exclusion allowance" is equal to 20% of a
Participant's includable compensation (taxable earnings) for the tax year,
multiplied by the number of years of employment, reduced by the total of
Purchase Payments made in prior tax years.
When Fixed Annuity payments commence, or if the Participant obtains a
partial or full redemption of the Units credited to his/her Accumulation Account
under the Contract, the amount received will be includable as ordinary income in
the year received, except that such portion of any amount received as is deemed
to represent a return of Purchase Payments originally included as gross income
made by the Participant will not be taxed. Full redemptions do not qualify for
special capital gains treatment nor 5-year income averaging applicable to
qualified plan lump sum distributions. However, if a Participant makes a full
redemption after attaining age 59 1/2 or on account of a separation from
service, he/she may delay including the distribution in income by making a
rollover transfer, subject to requirements set by the Code, to an Individual
Retirement Account or another Section 403(b) annuity. A partial redemption of at
least 50% of the balance to the credit of a Participant on account of a
separation from service may be rolled over to an Individual Retirement Account,
subject to requirements set by the Code.
If the Participant receives any amount under the Contract, the Participant
must pay an additional tax of 10% of the amount of the distribution includable
in gross income for the taxable year. This additional tax shall not apply to
distributions which are (1) made after the date on which the Participant attains
age 59 1/2, (2) made to a beneficiary on or after the death of the Participant,
(3) attributable to the Participant's becoming permanently disabled, (4) made
after separation from service in a series of substantially equal periodic
payments made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his beneficiary, (5)
made
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to a Participant after separation of service after attainment of age 55, (6)
made to a Participant for medical care (not to exceed the amount deductible by
the employee), or (7) paid to alternate payees under a qualified domestic
relations order.
RESTRICTIONS ON WITHDRAWALS OF ELECTIVE CONTRIBUTIONS. Effective January
1, 1989 and thereafter, any funds in the Participant's account balance other
than funds attributable to assets held at the close of the last year beginning
before January 1, 1989 will be restricted from withdrawal except upon attainment
of age 59 1/2, separation from service, death, disability or hardship (hardship
withdrawals are to be limited to the amount of the Participant's own
contributions exclusive of earnings). However, any funds in the Participant's
account balance attributable to employer contributions, if any, and the earnings
thereon will not be restricted unless specifically provided for by the
employer's plan.
In tax years beginning after 1988, Section 403(b) Plans (other than church
plans) will be subject to nondiscrimination and coverage requirements, as well
as special rules with respect to minimum distributions.
SECTION 401(A) PLANS
An employer maintaining a pension or profit sharing Plan which satisfies
the requirements of Section 401(a) of the Code may make contributions to the
Contract which are generally currently deductible by the employer and are not
currently taxed to the Participants. The Code prescribes various limitations on
the maximum amount which may be contributed on behalf of any Participant. In
addition, Participants may make after-tax contributions to the Contract if their
Section 401(a) Plan permits.
When Fixed Annuity payments commence, or if the Participant obtains a
partial redemption of the Units credited to his/her Accumulation Account under
the Contract, the amount received will be includable as ordinary income in the
year received, except that such portion of any amount received as is deemed to
represent a return of Participant after-tax Purchase Payments will not be taxed.
Full redemptions may qualify for special capital gains treatment or 5-year or
10-year income averaging if the payment constitutes a "lump sum distribution,"
as that term is defined in the Code.
The rules governing rollovers of distributions from a Section 401(a) Plan
are parallel to those dealing with distributions from Section 403(b) annuities.
In addition, the 10% penalty on premature distributions from Section 403(b)
annuities is also applicable to Section 401(a) Plan distributions.
SECTION 408 (IRA) CONTRACTS
An individual, participating under a Contract which satisfies the
requirements of Section 408 of the Code, may make contributions to the Contract.
The Code prescribes various limitations on the maximum amounts which may be
contributed by or on behalf of the Participant and on the deductibility of the
contributions for federal income tax purposes. No federal income tax is payable
by the Participant on increases in the value of his/her Accumulation Account
until payments are received by the Participant.
When Fixed Annuity payments commence, or if the Participant obtains a
partial redemption of the Units credited to his/her Accumulation Account under
the Contract, the amount received will be includable as ordinary income in the
year received, except that such portion of any amount received which is deemed
to represent a return of Participant non-deductible Purchase Payments will not
be taxed. Full or partial redemptions do not qualify for special capital gains
treatment nor 10-year income averaging applicable to certain qualified plan
distributions.
If the Participant receives any amount under the Contract prior to
attainment of age 59 1/2, the Participant must pay an additional excise tax of
10% of the amount of the distribution includable in gross income for the taxable
year. The additional tax shall not apply to distributions which are (1) made to
a beneficiary on or after the death of the Participant, (2) attributable to the
Participant's becoming permanently disabled or (3) made in a series of
substantially equal periodic payments made
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for the life (or life expectancy) of the Participant or the joint lives (or
joint life expectancies) of the Participant and his/her beneficiary. Any full or
partial redemption will not be includable in ordinary income if the Participant
rolls over the distribution within 60 days to another IRA.
MINIMUM DISTRIBUTION REQUIREMENTS
If the actual distributions from a qualified retirement plan, eligible
state or local government deferred compensation plan or an IRA are less than the
minimum required to be distributed commencing by April 1 in the calendar year
following the year the Participant attains age 70 1/2 (see "Annuity Purchase
Date", on page 22) the difference is considered to be an excess accumulation and
the IRS may impose a 50% excise tax on this excess amount.
SECTION 457 PLANS
Section 457 of the Code allows employees of or independent contractors who
furnish services to a state or local government to establish a deferred
compensation plan allowing the deferral of certain limited amounts of
compensation by way of salary reduction. State and local government includes a
state, a political subdivision of a state, any agency or instrumentality of
either of them, a tax-exempt rural electric cooperative or its tax-exempt
affiliates. Contributions are based on a special definition of compensation and
include any amounts contributed to a Section 403(b) tax sheltered annuity for
determining the contribution limits. All amounts deferred property bought with
those amounts or income earned on those amounts remain the property of the
employer and are subject to the claims of its general creditors. Distributions
from a Section 457 Plan are subject to Section 401(a)(9) of the Code in addition
to the rules applicable under Section 457 of the Code and must begin no later
than the April 1st of the calendar year following the year in which the
participant attains age 70 1/2.
SECTION 457(F) PLANS
In the case of a Plan for an eligible employer providing for the deferral
of compensation for an employee but which is not eligible for deferred tax
treatment, the compensation shall be included in the gross income of the
Participant or beneficiary for the first taxable year in which there is no
substantial risk of forfeiture of the rights to such compensation and taxed in
accordance with Section 72 of the Code.
SECTION 72 FLEXIBLE ANNUITIES
The term annuity includes all periodic payments resulting from the
systematic liquidation of a principal sum. Section 72 determines what portion of
each payment is excludable from gross income as a return of the purchaser's
investment and what portion is taxed as interest earned on that investment.
Section 72 of the Code places a penalty on premature distributions but
generally exempts qualified distributions from a qualified retirement plan.
NON-QUALIFIED DEFERRED COMPENSATION CONTRACTS
Taxed employers may establish a non-qualified deferred compensation
arrangement funded by non-qualified deferred compensation contracts allowing the
deferral of compensation through salary reduction. Such Plans include, but are
not limited to, excess benefit plans, plans maintained by an employer primarily
for a select group of management or highly compensated employees, as well as
rabbi and secular trusts. Taxed employers for these non-qualified deferred
compensation Plans include corporations, partnerships, S corporations and any of
their affiliates or subsidiaries. Contributions are determined on the Plan's
definition of compensation. All amounts deferred by employees and any income
earned thereon remain the property of the employer and are subject to the claims
of its general creditors. In-service withdrawals from deferred compensation
Plans may be permitted for reasons of hardship under certain conditions as
specified in the Plans. Distributions from these Plans are permitted when the
Participant terminates employment, becomes permanently disabled, retires, dies
or
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as otherwise specified in the Plan. As a general rule, the Participant is
subject to taxation upon receipt of the funds, and there is usually no tax
consequences to the employer, i.e., no deduction is available for an employee's
salary reduction agreement until paid out.
Such non-qualified deferred compensation arrangements for taxable employers
may be funded by either a Diversified Investors Variable Funds Contract alone or
by a Diversified Investors Variable Funds Contract in combination with a Fixed
Annuity Contract.
INCOME TAX WITHHOLDING
Unless the Participant or payee elects to have no withholding, the taxable
portion of distributions under a Contract will be subject to income tax
withholding under federal and certain state laws. AUSA will notify recipients of
taxable distributions under a Contract of their right to elect not to have
withholding apply.
For NQDC Contracts, no withholding is made and no election is needed.
Distributions from qualified retirement plans and Section 403(b) Contracts,
other than individual retirement arrangements ("IRAs") generally are subject to
mandatory federal income tax withholding unless they either are:
1. Part of a series of substantially equal periodic payments (at least
annually) for the participant's life or life expectancy, the joint lives or
life expectancies of the participant and his/her beneficiary, or a period
certain of not less than 10 years, or
2. Required by the Code upon the participant's attainment of age
70 1/2 or death.
Such withholding will apply even if the distribution is rolled over into
another qualified plan including an IRA. The withholding can be avoided if the
participant's interest is directly transferred by the old plan to another
eligible qualified plan including an IRA. A direct transfer to the new plan can
be made only in accordance with the terms of the old plan. If withholding is not
avoided, the amount withheld may be subject to income tax and penalties.
Pursuant to Revenue Ruling 90-24 of the Code, an exchange of a Section
403(b) annuity contract for another Section 403(b) annuity contract may qualify
as a tax-free exchange.
ASSUMPTION REINSURANCE
The Contracts described in this Prospectus include group variable annuity
contracts which were originally issued by The Mutual Life Insurance Company of
New York ("MONY") and are assumed by AUSA pursuant to certain assumption
reinsurance agreements executed by MONY and AUSA effective December 31, 1993.
Pursuant to the terms of these agreements and applicable state insurance laws,
affected MONY contractholders may elect to participate and "opt in" or choose to
remain contractholders of MONY and "opt out" of the assumption. All affected
MONY contractholders shall receive a Notice of Election which describes the
assumption and procedures for opting in or opting out. This Prospectus should be
read carefully before deciding whether to opt in. In certain jurisdictions a
contractholder that fails to opt out may be deemed under the terms of the
assumption to have opted in.
The former holders of MONY contracts who opt in to the assumption of their
contracts by AUSA will experience no differences in the terms or charges under
the Contracts. All investment options available to MONY contractholders will be
available under the Contracts under Subaccounts which correspond to investment
options under the MONY contracts. In addition, such assumed AUSA Contractholders
may be able to direct the investment of their funds into certain additional
investment options which were not available under the MONY contracts, namely the
Growth & Income Subaccount, Special Equity Subaccount and International Equity
Series Subaccount.
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PERFORMANCE DATA
From time to time the performance of one or more of the Subaccounts may be
advertised. The performance data contained in these advertisements is based upon
historical earnings and is not indicative of future performance. The data for
each Subaccount reflects the results of the corresponding series of Diversified
Investors Portfolios, the Calvert Series or the International Equity Series and
recurring charges and deductions borne by or imposed on the Subaccount and on
the corresponding series of the Diversified Investors Portfolios, the Calvert
Series or the International Equity Series. Set forth below for each Subaccount
is the manner in which the data contained in such advertisements will be
calculated.
MONEY MARKET SUBACCOUNT. The performance data for this Subaccount will
reflect the "yield", "effective yield" and "total return". The "yield" of the
Subaccount refers to the income generated by an investment in the Subaccount
over the seven day period stated in the advertisement. This income is
"annualized", that is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly, but, when annualized, the income earned by an investment in the
Subaccount is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. The total return is calculated as shown below.
INTERMEDIATE GOVERNMENT BOND, GOVERNMENT/CORPORATE BOND, BALANCED, EQUITY
INCOME, GROWTH & INCOME, EQUITY GROWTH, SPECIAL EQUITY, CALVERT SERIES AND
INTERNATIONAL EQUITY SERIES SUBACCOUNTS. The performance data for these
Subaccounts will reflect the "yield" and "total return". The "yield" of each of
these Subaccounts refers to the income generated by an investment in that
Subaccount over the 30 day period stated in the advertisement and is the result
of dividing that income by the value of the Subaccount. The value of each
Subaccount is the average daily number of Units outstanding multiplied by the
Unit Value on the last day of the period. The "yield" reflects deductions for
all charges, expenses, and fees of both the Series and the Subaccount.
"Annualized total return" for each of these Subaccounts and the Money Market
Subaccount refers to the return a Contractholder would receive during the period
indicated if a $1,000 Purchase Payment was made the indicated number of years
ago. It reflects historical investment results less charges and deductions of
both the Series and the Subaccount, with the distribution being made in cash
rather than in the form of one of the settlement options, at the close of the
period for which the "annualized total return" data is given.
Total return is historical in nature and is not intended to indicate future
performance. Total return will be quoted for the most recent one-year period,
and the annualized total return will be quoted for the most recent five- and
ten-year periods, or the period from the commencement of the public offering of
the Contracts, if shorter.
Actual total return quotations may also be advertised for other specified
periods, such as calendar years and calendar quarters. Cumulative total return
for periods of more than one year may also be quoted. These figures will be
accompanied by the standard, annualized total return quotations.
From time to time, any series of Diversified Investors Portfolios, the
Calvert Series or the International Equity Series may provide information
concerning general economic conditions and supply comparative performance data
and rankings, with respect to comparable investments for the same period, for
unmanaged market indices such as the Dow Jones Industrial Average and the
Standard and Poor's 500, and from recognized independent sources such as
Donoghue's Money Fund Report, Bank Rate Monitor, Money, Forbes, Barron's, Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Frank Russell
Universe Data, Wiesenberger Investment Companies Service, Mutual Fund Values,
Mutual Fund Forecaster, VARDS and Morningstar.
In addition, reference may be made in advertisements to various indices
including, without limitation, the Standard & Poor's 500 Stock Index, Salomon
Brothers Broad Investment Grade Index
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and Lehman Brothers Government/Corporate Bond Index, and Russell Price Driven
Index, in order to provide the reader a basis of comparison for performance.
DIVERSIFIED INVESTORS PORTFOLIOS
Eight Subaccounts of Diversified Investors Variable Funds invest
exclusively in corresponding series of Diversified Investors Portfolios.
Diversified Investors Portfolios is a trust organized on September 1, 1993 under
the laws of the State of New York and is registered under the 1940 Act as an
open-end, diversified management investment company. The investment objectives
of the series of Diversified Investors Portfolios currently available under the
Contracts through such Subaccounts are as follows:
MONEY MARKET SERIES: To provide liquidity and as high a level of income as
is consistent with the preservation of capital through investment in domestic
and foreign U.S. dollar-denominated money market obligations with maturities of
397 days or less. An investor's interest in the Money Market Series is neither
insured nor guaranteed by the U.S. Government.
INTERMEDIATE GOVERNMENT BOND SERIES: To provide as high a level of current
income as is consistent with preservation of capital through investment in U.S.
Government and U.S. Government agency and instrumentality securities with
intermediate maturities, and high quality short-term obligations.
GOVERNMENT/CORPORATE BOND SERIES: To achieve maximum total return through
investment in investment grade debt securities, U.S. Government and U.S.
Government agency and instrumentality securities collateralized mortgage
obligations guaranteed by these agencies and instrumentalities and high quality
short-term obligations.
BALANCED SERIES: To provide a high total investment return consistent with
a broad diversified mix of stocks, bonds and money market instruments.
EQUITY INCOME SERIES: To provide a high level of current income through
investment in a diversified portfolio of common stocks with relatively high
current yields; capital appreciation is a secondary objective.
GROWTH & INCOME SERIES: To provide current income and capital appreciation
through investment primarily in a diversified portfolio of securities selected
for their potential to generate current income or long term capital
appreciation.
EQUITY GROWTH SERIES: To provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks with potential
for above-average growth in earnings; current income is a secondary objective.
SPECIAL EQUITY SERIES: To provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks of small to
medium size companies which, in the opinion of the Series' Advisers, will
present an opportunity for significant increases in earnings and/or value,
without consideration for current income.
There can, of course, be no assurance that any series of Diversified
Investors Portfolios will achieve its investment objectives.
HUB AND SPOKE(R) STRUCTURE
AUSA and Diversified Investors Portfolios have licensed certain proprietary
rights, know-how and financial services referred to as Hub and Spoke(R) from
Signature Financial Group, Inc. ("Signature"). Each Subaccount which invests in
a series of Diversified Investors Portfolio (the "spoke" or feeder fund) invests
in such corresponding series of Diversified Investors Portfolios (the "hub" or
master
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fund) through Signature's Hub and Spoke(R) method. Hub and Spoke employs a
two-tier, master/feeder fund structure. Hub and Spoke(R) is a registered service
mark of Signature.
In addition to selling beneficial interests to such Subaccounts,
Diversified Investors Portfolios may sell beneficial interests of its series to
other insurance company separate accounts, mutual funds, collective investment
vehicles or institutional investors. Such investors will invest in a series of
Diversified Investors Portfolios on the same terms and conditions as the
applicable Subaccount and will pay a proportionate share of the series'
expenses. However, the other investors investing in such series are not required
to sell their shares at the same public offering price as the Subaccount due to
variations in sales commissions and other operating expenses. Therefore,
Contractholders should be aware that these differences may result in differences
in returns experienced by investors in the different entities that invest in
each series of Diversified Investors Portfolios.
Smaller entities investing in a series of Diversified Investors Portfolios
may be materially affected by the actions of larger entities investing in that
series. For example, if a large fund withdraws from a series of Diversified
Investors Portfolios, the remaining investors may experience higher pro rata
operating expenses, thereby producing lower returns. Additionally, the affected
series may become less diverse, resulting in increased portfolio risk. (However,
this possibility also exists for any type of collective investment vehicle which
has institutional or other large investors.) Also, investors with a greater pro
rata ownership in a series of Diversified Investors Portfolios could have
effective voting control of the operations of that series. Whenever a Subaccount
is requested to vote on matters pertaining to a series of the Diversified
Investors Portfolios (other than a vote to continue a series upon the withdrawal
of an investor in the series), AUSA, as the legal owner of all assets in the
Subaccount, shall vote in accordance with the procedures set forth under "Voting
Rights" at page 24, including, to the extent required by law, procedures through
which AUSA shall receive instructions with respect to such vote from
Contractholders and/or Participants. Certain changes in the investment
objectives, policies or restrictions of a series of Diversified Investors
Portfolios may require that AUSA withdraw a Subaccount's interest in that
series. Any such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the series). If
securities are distributed, the Subaccount could incur brokerage or other
charges in converting the securities to cash. In addition, the distribution in
kind may result in a less diversified portfolio of investments or adversely
affect the liquidity of the Subaccount. Notwithstanding the above, there are
other ways for Diversified Investors Portfolios to meet redemption requests from
its investors, such as temporary borrowings.
INVESTMENT OBJECTIVES AND POLICIES
Each of the Subaccounts described above seeks to achieve its investment
objective by investing all of its assets in a corresponding series of
Diversified Investors Portfolios, which is a diversified, open-end management
investment company. The investment objective of each series of Diversified
Investors Portfolios may be changed without the approval of the investors in
that series, but not without written notice thereof to its investors (including
the Subaccount) 30 days prior to implementing the change. AUSA may withdraw the
investment of a Subaccount from its corresponding series of Diversified
Investors Portfolios on any Portfolio Business Day (see page 51). Upon any such
withdrawal, AUSA would consider what action might be taken, including the
investment of all the assets of such Subaccount in another pooled investment
entity having the same investment objective.
Each series of Diversified Investors Portfolios has a different investment
objective which it pursues through the investment policies described below.
Since each series of Diversified Investors Portfolios has a different investment
objective, each can be expected to have different investment results and be
subject to different market and financial risks. See "Investment Techniques and
Restrictions" herein and in the Statement of Additional Information for a
description of the fundamental policies of each series of Diversified Investors
Portfolios that cannot be changed without approval by the holders of a "majority
of the outstanding voting securities" (as defined in the 1940 Act) of such
series. Except as stated otherwise, all investment guidelines, policies and
restrictions of each series described herein and in the Statement of Additional
Information are non-fundamental.
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Each series of Diversified Investors Portfolios has a different portfolio
turnover rate which is the percentage computed by dividing the lesser of
portfolio purchases or sales by the average value of the series in each case
excluding securities with maturities at the time of acquisition of one year or
less. Brokerage expenses can be expected to be higher as a result of higher
portfolio turnover rates. The rate of portfolio turnover is not a limiting
factor when it is deemed appropriate to purchase or sell securities of a series.
With respect to each series of Diversified Investors Portfolios,
Diversified has contracted for certain investment advisory services with one or
more subadvisers. Diversified and the subadvisers for a particular series of
Diversified Investors Portfolios are referred to herein collectively as the
"Advisers". There can be no guarantee that the investment objective of any of
the series of Diversified Investors Portfolios will be met. The following
sections describe the investment objective and policies of each series of
Diversified Investors Portfolio currently available under the Contracts through
Subaccounts.
MONEY MARKET SERIES. The investment objective of the Money Market Series
is to provide liquidity and as high a level of current income as is consistent
with the preservation of capital. The Money Market Series invests in high
quality short-term money market instruments. Securities in which the Money
Market Series invests may not earn as high a level of current income as
long-term or lower quality securities which generally have less liquidity,
greater market risk and more fluctuation in market value.
To achieve its investment objective, the Money Market Series invests in
U.S. dollar-denominated short-term money market obligations, including
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits, bankers' acceptances
and other short-term obligations issued by domestic banks and domestic branches
and subsidiaries of foreign banks, and high quality commercial paper and other
short-term corporate obligations, including those with floating or variable
rates of interest. In addition, the Money Market Series may lend its portfolio
securities, enter into repurchase agreements and reverse repurchase agreements,
and invest in securities issued by foreign banks and corporations outside the
United States. The Money Market Series reserves the right to concentrate 25% or
more of its total assets in obligations of domestic banks.
In accordance with Rule 2a-7 under the 1940 Act, the Money Market Series
will maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of 397 days or less and
invest only in U.S. dollar-denominated securities determined in accordance with
procedures established by the Board of Trustees of Diversified Investors
Portfolios (the "Board of Trustees") to present minimal credit risks and which
are rated in one of the two highest rating categories for debt obligations by at
least two nationally recognized statistical rating organizations (an "NRSRO")
(or one NRSRO if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Board of Trustees (collectively, "Eligible Securities").
Eligible Securities include "First Tier Securities" and "Second Tier
Securities." First Tier Securities include those that possess a rating in the
highest category in the case of a single-rated security or at least two ratings
in the highest rating category in the case of multiple-rated securities or, if
the securities do not possess a rating, are determined to be of comparable
quality by the Advisers pursuant to the guidelines adopted by the Board of
Trustees. All other Eligible Securities are Second Tier Securities. The Money
Market Series will invest at least 95% of its total assets in First Tier
Securities.
The NRSROs currently rating instruments of the type the Money Market Series
may purchase are Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), Duff & Phelps, Inc., Fitch Investors Service, Inc., IBCA
Limited, IBCA Inc. and Thomson BankWatch, Inc., and their rating criteria are
described in the Appendix to the Statement of Additional Information. The
Statement of Additional Information contains further information concerning the
rating criteria and other requirements governing the Money Market Series'
investments, including information relating to the treatment of securities
subject to a tender or demand feature and securities deemed to possess a rating
based on comparable rated securities of the same issuer.
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In addition, the Money Market Series will not invest more than 5% of its
total assets in the securities (including the securities collateralizing a
repurchase agreement) of, or subject to puts (including letters of credit,
guaranties or other credit support) issued by, a single issuer, except that (i)
the Money Market Series may invest more than 5% of its total assets in a single
issuer for a period of up to three business days in certain limited
circumstances, (ii) the Money Market Series may invest in obligations issued or
guaranteed by the U.S. Government without any such limitation, and (iii) the
limitation with respect to puts does not apply to unconditional puts if no more
than 10% of the Money Market Series' total assets is invested in securities
issued or guaranteed by the issuer of the unconditional put. Investments in
Second Tier Securities will be limited to 5% of the Money Market Series' total
assets, with the investment in any one such issuer being limited to no more than
the greater of 1% of the Money Market Series' total assets or $1,000,000. As to
each security, these percentages are measured at the time the Money Market
Series purchases the security.
The Money Market Series seeks to achieve its investment objective through
investments in the following types of U.S. dollar-denominated money market
instruments.
BANK OBLIGATIONS. The Money Market Series may invest in U.S.
dollar-denominated certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by domestic banks and
domestic branches and subsidiaries of foreign banks. Certificates of
deposit are certificates evidencing the obligation of a bank to repay funds
deposited with it for a specified period of time. Such instruments include
Yankee Certificates of Deposit which are certificates of deposit
denominated in U.S. dollars and issued in the United States by the domestic
branch of a foreign bank. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a
stated interest rate. Time deposits which may be held by the Money Market
Series are not insured by the Federal Deposit Insurance Corporation or any
other agency of the U.S. Government. The Money Market Series will not
invest more than 10% of the value of its net assets in time deposits
maturing in longer than seven days and other instruments which are illiquid
or not readily marketable. The Money Market Series may also invest in
certificates of deposit and time deposits issued by foreign banks outside
the United States.
The Money Market Series may also invest in bankers' acceptances and other
short-term obligations. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of
the drawer to pay the face amount of the instrument upon maturity. The
other short-term obligations may include uninsured, direct obligations
which have either fixed, floating or variable interest rates.
To the extent the Money Market Series' investments are concentrated in the
banking industry, the Money Market Series will have correspondingly greater
exposure to the risk factors which are characteristic of such investments.
Sustained increases in interest rates can adversely affect the availability
or liquidity and cost of capital funds for a bank's lending activities, and
a deterioration in general economic conditions could increase the exposure
to credit losses. In addition, the value of and the investment return on
investments in the Money Market Series could be affected by economic or
regulatory developments in or related to the banking industry, which
industry also is subject to the effects of the concentration of loan
portfolios in leveraged transactions and in particular businesses, and
competition within the banking industry, as well as with other types of
financial institutions. The Money Market Series, however, will seek to
minimize its exposure to such risks by investing only in debt securities
which are determined to be of high quality.
U.S. GOVERNMENT AND AGENCY SECURITIES. Securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities include U.S.
Treasury securities, which differ only in their interest rates, maturities
and times of issuance. Treasury Bills have initial maturities of one year
or less; Treasury Notes have initial maturities of one to ten years; and
Treasury Bonds generally have initial maturities of greater than ten years.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Associa-
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tion pass-through certificates are supported by the full faith and credit
of the U.S. Treasury; others, such as those of the Federal Home Loan Banks,
by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the
agency or instrumentality; and others, such as those issued by the Student
Loan Marketing Association, only by the credit of the agency or
instrumentality. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated by
law. The Money Market Series will invest in such securities only when the
Advisers are satisfied that the credit risk with respect to the issuer is
minimal. The Money Market Series itself, and its share price and yield, are
not guaranteed by the U.S. Government. For additional information on U.S.
Government securities, see "Diversified Investors Portfolios" in the
Statement of Additional Information.
COMMERCIAL PAPER. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The commercial
paper purchased by the Money Market Series will consist only of U.S.
dollar-denominated direct obligations issued by domestic and foreign
entities. The other corporate obligations in which the Money Market Series
may invest consist of high quality, U.S. dollar-denominated short-term
bonds and notes issued by domestic corporations.
The Money Market Series may invest in commercial paper issued by major
corporations in reliance on the exemption from registration afforded by
Section 3(a)(3) of the 1933 Act. Such commercial paper may be issued only
to finance current transactions and must mature in nine months or less.
Trading of such commercial paper is conducted primarily by institutional
investors through investment dealers, and individual investor participation
in the commercial paper market is very limited.
UNSECURED PROMISSORY NOTES. The Money Market Series also may purchase
unsecured promissory notes ("Notes") which are not readily marketable and
have not been registered under the 1933 Act, provided such investments are
consistent with the Money Market Series' investment objective. The Notes
purchased by the Money Market Series will have remaining maturities of 13
months or less and will be deemed by the Board of Trustees, or by the
Advisers on its behalf, to present minimal credit risks and will meet the
quality criteria set forth above. The Money Market Series will invest no
more than 10% of its net assets in such Notes and in other securities that
are not readily marketable (which securities would include floating and
variable rate demand obligations as to which the Money Market Series cannot
exercise the demand feature described in the Statement of Additional
information and as to which there is no secondary market).
RESTRICTED SECURITIES. The Money Market Series may invest in securities
that are subject to legal or contractual restrictions on resale. These
securities may be illiquid and, thus, the Money Market Series may not
purchase them to the extent that more than 10% of the value of its net
assets would be invested in illiquid securities. However, if a substantial
market of qualified institutional buyers develops pursuant to Rule 144A
under the 1933 Act for such securities held by the Money Market Series, the
Money Market Series intends to treat such securities as liquid securities
in accordance with procedures approved by the Board of Trustees. To the
extent that for a period of time, qualified institutional buyers cease
purchasing such restricted securities pursuant to Rule 144A, the Money
Market Series' investing in such securities may have the effect of
increasing the level of illiquidity in the Money Market Series during such
period.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements involve the acquisition by the Money Market Series of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Money Market Series to resell, the instrument at a
fixed price, usually not more than one week after its purchase. The Money
Market Series or a sub-custodian will have custody of securities acquired
by the Money Market Series under a repurchase agreement.
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Repurchase agreements may be entered into for the Series with sellers which
are usually member banks of the Federal Reserve System or member firms of
New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Series to earn a return on available cash with
minimal market risk. Certain costs may be incurred by the Money Market
Series in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition,
if bankruptcy proceedings are commenced with respect to the seller of the
securities, realization on the securities by the Money Market Series may be
delayed or limited. The Money Market Series will consider on an ongoing
basis the creditworthiness of the institutions with which it enters into
repurchase agreements. Repurchase agreements are considered collateralized
loans under the 1940 Act.
The Money Market Series may borrow funds for temporary or emergency
purposes, such as meeting larger than anticipated redemption requests, and
not for leverage. One means of borrowing is by agreeing to sell portfolio
securities to financial institutions such as banks and broker-dealers and
to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). At the time the Money Market Series enters into a
reverse repurchase agreement it will place in a segregated custodial
account cash, U.S. Government securities or high-grade debt obligations
having a value equal to the repurchase price, including accrued interest.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Money Market Series may decline below the repurchase
price of those securities. Reverse repurchase agreements are considered to
be borrowings by the Money Market Series.
FOREIGN SECURITIES. The Money Market Series may invest in U.S.
dollar-denominated foreign securities issued outside the United States,
such as obligations of foreign branches and subsidiaries of domestic banks
and foreign banks, including Eurodollar certificates of deposit, Eurodollar
time deposits and Canadian time deposits, commercial paper of Canadian and
other foreign issuers, and U.S. dollar-denominated obligations issued or
guaranteed by one or more foreign governments or any of their agencies or
instrumentalities. The Advisers do not intend to concentrate more than 25%
of such foreign investments in any one type of instrument or in any foreign
country. Foreign securities may represent a greater degree of risk than do
securities of domestic issuers due to less publicly available information,
more volatile markets, less securities regulation, less favorable tax
provisions (including possible withholding taxes), changes in governmental
administration or economic or monetary policy (in the United States or
abroad), war or expropriation. For a complete description of foreign
securities the Money Market Series may purchase, see "Investment Policies"
in the Statement of Additional Information.
CERTAIN OTHER OBLIGATIONS. In order to allow for investments in new
instruments that may be created in the future, upon AUSA supplementing this
Prospectus, the Money Market Series may invest in obligations other than
those listed previously, provided such investments are consistent with the
investment objective, policies and restrictions of the Money Market Series.
The Statement of Additional Information includes a discussion of additional
investment techniques such as zero coupon obligations, variable rate and
floating rate securities, participation interests, guaranteed investment
contracts and when-issued and forward commitment securities. The Statement
of Additional Information also includes a discussion of non-fundamental
investment policies, as well as a listing of specific investment
restrictions which constitute fundamental policies of the Money Market
Series which cannot be changed without the approval of the holders of a
"majority of the outstanding voting securities" (as defined in the 1940
Act) of the Money Market Series. See "Diversified Investors
Portfolios -- Investment Restrictions" in the Statement of Additional
Information.
INTERMEDIATE GOVERNMENT BOND SERIES. The investment objective of the
Intermediate Government Bond Series is to provide as high a level of current
income as is consistent with the preservation of capital. The yield of the
Intermediate Government Bond Series normally is expected to be higher than a
money market fund but lower than a longer-term or lower quality bond fund. The
Intermediate
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Government Bond Series pursues its investment objective by investing in high
quality U.S. Government obligations and high quality short-term obligations
(including repurchase agreements and reverse repurchase agreements).
The Advisers attempt to maintain the Intermediate Government Bond Series'
"duration" between one and five years, which means that the Intermediate
Government Bond Series' overall sensitivity to interest rates should be similar
to that of bonds and notes with remaining average maturities from one to five
years. The Intermediate Government Bond Series' dollar-weighted average maturity
(or dollar-weighted average life in the case of mortgage-backed securities) may
be longer than five years from time to time, but will not exceed ten years under
normal conditions. The Intermediate Government Bond Series may hold individual
securities with remaining maturities of up to thirty years.
Since the value of fixed-income securities generally fluctuates inversely
with changes in interest rates, the duration of the Intermediate Government Bond
Series will vary to reflect the Advisers' assessments of prospective changes in
interest rates. The Advisers' strategy will be to adjust the duration of the
Intermediate Government Bond Series so that the Intermediate Government Bond
Series may benefit from relative price appreciation when interest rates decline
and may protect capital value when interest rates rise. The success of this
strategy will depend on the Advisers' ability to manage the Intermediate
Government Bond Series through changes in interest rates, and there is a risk
that the value of the securities held by the Intermediate Government Bond Series
will decline.
The following is a discussion of the various investments of and techniques
employed by the Intermediate Government Bond Series. Additional information
about the investment policies of the Intermediate Government Bond Series appears
under "Diversified Investors Portfolios" in the Statement of Additional
Information.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Intermediate Government Bond
Series may invest in U.S. Government securities. See "U.S. Government and
Agency Securities" above under Money Market Series.
The Intermediate Government Bond Series may invest a portion of its assets
in short-term U.S. Government securities with remaining maturities of one
year or less and repurchase agreements relating thereto. When the Advisers
believe market conditions warrant a temporary defensive position, the
Series may invest up to 100% of its assets in these instruments.
SHORT-TERM INSTRUMENTS. Cash, commercial paper, short-term obligations,
repurchase agreements or other forms of debt securities may be held to
provide a reserve for future purchases of securities during periods of
unusual market conditions or in order to reduce volatility, or as a
temporary defensive measure when the Advisers determine securities markets
to be overvalued. The Intermediate Government Bond Series limits its
short-term investments to those U.S. dollar-denominated instruments which
are determined by or on behalf of the Board of Trustees to present minimal
credit risks and which are of "high quality" as determined by a major
rating service or, in the case of instruments which are not rated, are of
comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from
investments in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements and reverse repurchase agreements may be entered into the
Intermediate Government Bond Series. See "Repurchase Agreements and Reverse
Repurchase Agreements" under Money Market Series. The Intermediate
Government Bond Series may borrow funds for temporary or emergency
purposes, such as meeting larger than anticipated redemption requests, and
not for leverage.
RESTRICTED SECURITIES. The Intermediate Government Bond Series may not
invest more than 15% of its net assets in securities that are subject to
legal or contractual restrictions on resale unless a dealer or
institutional trading market in such securities exists, in which case such
restricted securities would be considered exempt from such 15% limit. Under
the supervision of the Board of
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Trustees, the Advisers determine the liquidity of restricted securities
and, through reports from the Advisers, the Board of Trustees will monitor
trading activity in restricted securities. Because Rule 144A is relatively
new, it is not possible to predict how these markets will develop. If
institutional trading in restricted securities were to decline, the
liquidity of the Intermediate Government Bond Series could be adversely
affected. See "Restricted Securities" above under Money Market Series.
OPTIONS AND FUTURES CONTRACTS. The Intermediate Government Bond Series may
buy and sell options and futures contracts to manage its exposure to
changing interest rates and securities prices. Some options and futures
strategies, including selling futures, buying puts, and writing calls,
hedge the Intermediate Government Bond Series' investments against price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase market exposure. The Intermediate Government
Bond Series may invest in options (including over-the-counter options) and
futures contracts based on any type of security or index related to its
investments.
Options and futures can be volatile investments, and involve certain risks.
If the Advisers apply a hedge at an inappropriate time or judge interest
rates incorrectly, options and futures strategies may lower the
Intermediate Government Bond Series' return. The costs of hedging are not
reflected in the Intermediate Government Bond Series' yield but are
reflected in the Intermediate Government Bond Series' total return. The
Intermediate Government Bond Series could also experience losses if its
options and futures positions were poorly correlated with its other
investments, or if it could not close out its positions because of an
illiquid secondary market.
The Intermediate Government Bond Series currently does not intend to engage
in the writing of options, except for the purpose of terminating an
existing position or under the limited circumstances described under
"Diversified Investors Portfolios" in the Statement of Additional
Information. Nevertheless, the Intermediate Government Bond Series has the
authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the
Intermediate Government Bond Series.
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the availability of
suitable securities for the Intermediate Government Bond Series, the
Advisers may purchase securities for the Intermediate Government Bond
Series on a "when-issued" or on a "forward delivery" basis, which means
that the obligations would be delivered to the Intermediate Government Bond
Series at a future date beyond customary settlement time. Under normal
circumstances, the Intermediate Government Bond Series would take delivery
of such securities. In general, the Series would not pay for the securities
until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery
of the obligations purchased on such basis, the Series would establish a
segregated account consisting of cash, cash equivalents or high grade
liquid debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Series'
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Intermediate Government
Bond Series may, in each case up to 5% of the Series' assets, also utilize
the following investments and investment techniques and practices:
investments in foreign securities, options on futures contracts, foreign
currency exchange transactions and options on foreign currencies. The
Intermediate Government Bond Series does not intend to utilize any of these
investment practices to the extent of more than 5% of its assets. See
"Diversified Investors Portfolios" in the Statement of Additional
Information for further information.
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GOVERNMENT/CORPORATE BOND SERIES. The investment objective of the
Government/Corporate Bond Series is to achieve the maximum total return. The
Government/Corporate Bond Series' yield normally is expected to be higher than a
money market fund but lower than a longer-term or lower quality bond fund. The
Government/Corporate Bond Series pursues its investment objective by investing
in investment grade debt securities, U.S. Government obligations, including U.S.
Government agency and instrumentality obligations, collateralized mortgage
obligations guaranteed by these agencies and instrumentalities and high quality
short-term obligations (including repurchase agreements and reverse repurchase
agreements). At least 65% of the Government Corporate Bond Series' assets is
invested in U.S. Government securities, corporate bonds and short-term
instruments.
The Advisers attempt to maintain the Government/Corporate Bond Series'
"duration" between three and ten years, which means that the Government
Corporate Bond Series' overall sensitivity to interest rates should be slightly
more than that of bonds and notes with remaining average maturities from three
to fifteen years. The Government/Corporate Bond Series' dollar-weighted average
maturity (or dollar-weighted average life in the case of mortgage-backed
securities) may be longer than fifteen years from time to time, but will not
exceed thirty years under normal conditions. The Government/ Corporate Bond
Series may hold individual securities with remaining maturities of up to thirty
years.
Since the value of fixed income securities generally fluctuates inversely
with changes in interest rates, the duration of the Government/Corporate Bond
Series will vary to reflect the Advisers' assessments of prospective changes in
interest rates. The Advisers' strategy will be to adjust the duration of the
Government/Corporate Bond Series so that the Government/Corporate Bond Series
may benefit from relative price appreciation when interest rates decline and may
protect capital value when interest rates rise. The success of this strategy
will depend on the Advisers' ability to manage the Government/Corporate Bond
Series through changes in interest rates, and there is a risk that the value of
the securities held by the Government/Corporate Bond Series will decline.
The following is a discussion of the various investments of and techniques
employed by the Government/Corporate Bond Series. Additional information about
the investment policies of the Government/Corporate Bond Series appears under
"Diversified Investors Portfolios" in the Statement of Additional Information.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Government/Corporate Bond
Series may invest in U.S. Government securities. See "U.S. Government and
Agency Securities" above under Money Market Series.
The Government/Corporate Bond Series may invest a portion of its assets in
short-term U.S. Government securities with remaining maturities of one year
or less and repurchase agreements relating thereto. When the Advisers
believe market conditions warrant a temporary defensive position, the
Government/Corporate Bond Series may invest up to 100% of its assets in
these instruments.
CORPORATE BONDS. The Government/Corporate Bond Series may purchase debt
securities of United States corporations only if they carry a rating of at
least Baa from Moody's or BBB from S&P or which, if not rated by these
rating agencies, are judged by the Advisers to be of comparable quality.
Securities rated Baa by Moody's or BBB by S&P may have speculative
characteristics. Changes in economic condition or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case for higher grade securities. See the Appendix to
the Statement of Additional Information for an explanation of these
ratings.
FOREIGN SECURITIES. The Government/Corporate Bond Series may invest in
securities of foreign issuers. The Government/Corporate Bond Series'
investments in unlisted foreign securities are subject to the overall
restrictions applicable to investments in illiquid securities. The Advisers
do not intend to concentrate more than 25% of such foreign investments in
any one type of instrument or in any foreign country. Foreign securities
may represent a greater degree of risk than do securities of domestic
issuers due to possible exchange rate fluctuations, possible exchange
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controls, less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions (including possible
withholding taxes), changes in governmental administration or economic or
monetary policy (in the United States or abroad), war or expropriation.
Forward foreign currency exchange contracts may also be entered into for
the purchase or sale of foreign currency solely for hedging purposes
against adverse rate changes. A currency exchange contract allows a
definite price in dollars to be fixed for foreign securities that have been
purchased or sold (but not settled) for the Government/Corporate Bond
Series. Entering into such exchange contracts may result in the loss of all
or a portion of the benefits which otherwise could have been obtained from
favorable movements in exchange rates. In addition, entering into such
contracts means incurring certain transaction costs and bearing the risks
of incurring losses if rates do not move in the direction anticipated.
SHORT-TERM INSTRUMENTS. Cash, commercial paper, short-term obligations,
repurchase agreements, bank certificates of deposit or other forms of debt
securities may be held to provide a reserve for future purchases of
securities, during periods of unusual market conditions or in order to
reduce volatility, or as a temporary defensive measure when the Advisers
determine securities markets to be overvalued. See "Short Term Instruments"
above under Intermediate Government Bond Series.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. The
Government/Corporate Bond Series may enter into repurchase agreements and
reverse repurchase agreements. See "Repurchase Agreements and Reverse
Repurchase Agreements" above under Money Market Series. The
Government/Corporate Bond Series may borrow funds for temporary or
emergency purposes, such as meeting larger then anticipated redemption
requests, and not for leverage.
RESTRICTED SECURITIES. The Government/Corporate Bond Series may not invest
more than 15% of its net assets in securities that are subject to legal or
contractual restrictions on resale. See "Restricted Securities" above under
Intermediate Government Bond Series.
OPTIONS AND FUTURES CONTRACTS. The Government/Corporate Bond Series may
buy and sell options and futures contracts to manage its exposure to
changing interest rates and securities prices. See "Options and Futures
Contracts" above under Intermediate Government Bond Series.
The Series currently does not intend to engage in the writing of options,
except for the purpose of terminating an existing position or under the
limited circumstances described in the Statement of Additional Information.
Nevertheless, the Series has the authority to write options and may do so
in the future if the Advisers determine that such transactions are in the
best interests of the Series.
DELAYED DELIVERY TRANSACTIONS. In order to help ensure the availability of
suitable securities for the Government/Corporate Bond Series, the Advisers
may purchase securities for the Government/Corporate Bond Series on a
"when-issued" or on a "forward delivery" basis which means that the
Securities would be delivered to the Government/Corporate Bond Series at a
future date beyond customary settlement times. See "Delayed Delivery
Transactions" above under Intermediate Government Bond Series.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Government/Corporate Bond
Series may, in each case up to 5% of the Series' assets, also utilize the
following investments and investment techniques and practices: options on
futures contracts and options on foreign currencies. The
Government/Corporate Bond Series does not intend to utilize any of these
investments or techniques to the extent of more than 5% of its assets. See
the Statement of Additional Information for further information.
BALANCED SERIES. The investment objective of the Balanced Series is to
provide a high total investment return consistent with a broad mix of stocks,
bonds and money market instruments. The Balanced Series pursues its investment
objective by investing in a managed mix of common stocks (and/or equivalents
including American Depository Receipts), preferred stocks, debt securities of
U.S. domiciled corporations, U.S. government securities, commercial paper of
U.S. corporations, and bank
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obligations. The Advisers will determine the proportions of each type of
investment to achieve an asset mix they believe appropriate for an investor who
desires diversification of investment. The Balanced Series will vary the
proportion of each type of asset purchased according to the Advisers'
interpretations of changes in economic conditions and the sensitivity of each
type of investment to those changes. The Advisers seek to shift emphasis among
stocks, bonds and short-term instruments to maximize participation in positive
markets and preservation of capital in negative markets and otherwise in
response to market conditions.
The Balanced Series' policy is to invest its assets in a broad list of
equity and fixed-income securities, such as common stocks, preferred stocks and
bonds, including short-term obligations. The list may be diversified not only by
companies and industries, but also by type of security. Some fixed-income
securities may also have a right to purchase common stock by means of a
conversion privilege or attached warrants. The Balanced Series may vary the
percentage of assets invested in any one type of security in accordance with the
Advisers' interpretation of economic and market conditions, fiscal and monetary
policy, and underlying securities values. However, at least 25% of the total
assets of the Balanced Series are always invested in fixed-income senior
securities including debt securities and preferred stock. In selecting common
stocks, emphasis is placed on investing in established companies with market
capitalizations, $100,000,000 or more and seasoned management teams. Most of the
Balanced Series' non-convertible long-term debt investments consist of
"investment grade" securities (rated Baa or better by Moody's or BBB or better
by S&P), although unrated debt securities may be purchased and held if they are
judged by the Advisers to be of equivalent quality. Securities rated Baa by
Moody's or BBB by S&P may have speculative characteristics. Changes in economic
conditions or other circumstances may weaken more severely the capacity of
issuers of Baa or BBB securities to make principal and interest payments than in
the case for issuers of higher grade bonds. Less than 5% of the Balanced Series
investments consist of securities rated Baa by Moody's or BBB by S&P. For a
description of these ratings, see the Appendix to the Statement of Additional
Information.
The Balanced Series may invest a portion of its assets in short-term U.S.
Government securities with remaining maturities of one year or less and
repurchase agreements relating thereto. When the Advisers believe market
conditions warrant a temporary defensive position, the Balanced Series may
invest up to 100% of its assets in these instruments or other money market
instruments.
EQUITY INCOME SERIES. The investment objective of the Equity Income Series
is to provide a high level of current income through investment in a diversified
portfolio of common stocks with relatively high current yields; capital
appreciation is a secondary objective. The Equity Income Series seeks to achieve
its investment objective by investing primarily in a diversified portfolio of
stocks of companies which, in the opinion of the Advisers, are fundamentally
sound financially and which pay relatively high dividends on a consistent basis.
The Advisers attempt to manage the Equity Income Series so that it will out
perform other equity income funds in negative markets. As a result of this
objective, the Equity Income Series may underperform relative to other equity
income funds in positive markets. The Equity Income Series invests primarily in
common stocks and preferred stocks listed on the New York Stock Exchange and on
other national securities exchanges and, to a lesser extent, in stocks that are
traded over-the-counter. The Equity Income Series also invests in bonds and
short-term obligations as well as securities convertible into common stocks,
preferred stocks, debt securities and short-term obligations. The Equity Income
Series allocates its investments among different industries and companies, and
changes its portfolio securities for investment considerations and not for
trading purposes.
The Equity Income Series' policy is to invest in a broad list of equity and
fixed-income securities, including short-term obligations. The list may be
diversified not only by companies and industries, but also by type of security.
Some fixed-income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Equity Income Series may vary the
percentage of assets invested in any one type of security in accordance with the
Advisers' interpretation of economic and market conditions, fiscal and monetary
policy, and underlying security values. It is contemplated that most of the
Equity Income Series' non-convertible long-term debt investments will consist of
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"investment grade" securities (rated Baa or better by Moody's or BBB or better
by S&P). However, the Equity Income Series may also invest not more than 25% of
its assets in fixed income securities which either are rated in lower than
"investment grade" categories by either Moody's or S&P or are unrated when, in
the opinion of the Advisers, such an investment presents a greater opportunity
to achieve the Equity Income Series' investment objectives with comparable risk
to an investment in "investment grade" securities. Securities rated Baa by
Moody's or BBB by S&P may have speculative risk characteristics.
NON-INVESTMENT GRADE OBLIGATIONS. Non-investment grade obligations (those
that are rated Ba or lower by Moody's or BB or lower by S&P or comparable
unrated obligations), commonly referred to as "junk bonds", are speculative in
nature. Risks associated with junk bonds are (a) the relative youth and growth
of the market for such securities, (b) the sensitivity of such securities to
interest rate and economic changes, (c) the lower degree of protection of
principal and interest payments, (d) the relatively low trading market liquidity
for the securities, (e) the impact that legislation may have on the high yield
bond market (and, in turn, on the Equity Income Series' net asset value and
investment practices), and (f) the creditworthiness of the issuers of such
securities. During an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress which would
adversely affect their ability to service their principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing. An economic downturn could also disrupt the market for junk bonds and
adversely affect the value of outstanding bonds and the ability of the issuers
to repay principal and interest. If the issuer of a debt obligation held by the
Equity Income Series defaulted, the Equity Income Series could incur additional
expenses to seek recovery. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may also decrease the values and liquidity
of junk bonds held by the Equity Income Series , especially in a thinly traded
market. For a description of ratings of debt obligations which may be purchased
by the Series, see the Appendix to the Statement of Additional Information.
GROWTH & INCOME SERIES. The investment objective of the Growth & Income
Series is to provide current income and capital appreciation. The Growth &
Income Series seeks to achieve its investment objective by investing primarily
in a diversified portfolio of securities selected for their potential to
generate current income or long term capital appreciation. In general, the
objective of the Growth & Income Series is to achieve greater potential for
capital appreciation than an income fund and less price volatility than a growth
fund. The Growth & Income Series invests primarily in common stocks and
preferred stocks listed on the New York Stock Exchange and on other national
securities exchanges and, to a lesser extent, in stocks that are traded
over-the-counter. The Growth & Income Series also invests in bonds and
short-term obligations as well as securities convertible into common stocks,
preferred stocks, debt securities and short-term obligations. The Growth &
Income Series allocates its investments among different industries and
companies, and changes its portfolio securities for investment considerations
and not for trading purposes. In general, the Growth & Income Series seeks to
invest in growing, financially stable and undervalued companies.
The Growth & Income Series' policy is to invest in a broad list of equity
and fixed income securities, including short-term obligations. The list may be
diversified not only by companies and industries, but also by type of security.
Some fixed income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Growth & Income Series may vary
the percentage of assets invested in any one type of security in accordance with
the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying securities values. It is contemplated that most
of the Growth & Income Series' non-convertible long-term debt investments will
consist of "investment grade" categories by either Moody's or S&P or are unrated
when, in the opinion of the Advisers, such an investment presents a greater
opportunity to achieve the Growth & Income Series' investment objectives with
comparable risk to an investment in "investment grade" securities. Such lower
rated or unrated fixed income securities have speculative risk characteristics.
See "Non-Investment Grade Obligations" above under Equity Income Series.
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EQUITY GROWTH SERIES. The investment objective of the Equity Growth Series
is to provide a high level of capital appreciation through investment in a
diversified portfolio of common stocks with potential for above average growth
in earnings and dividends; current income is a secondary objective. The Equity
Growth Series seeks to achieve its investment objective by investing primarily
in a diversified portfolio of common stocks, but may also invest in other types
of securities such as preferred stocks, convertible and non-convertible bonds,
warrants and foreign securities including American Depository Receipts. Under
normal circumstances, at least 65% of the assets of the Equity Growth Series are
invested in equity securities. This is a fundamental investment policy and may
not be changed without investor approval. The Equity Growth Series invests
primarily in stocks of companies that have a market value of all their issued
and outstanding common stock of $10 to $15 billion and preferred stocks listed
on the New York Stock Exchange and on other national securities exchanges and,
to a lesser extent, in stocks that are traded over-the-counter. The Equity
Growth Series also invests in bonds and short-term obligations as well as
securities convertible into common stocks, preferred stocks, debt securities and
short-term obligations. The Equity Growth Series allocates its investments among
different industries and companies, and changes its portfolio securities for
investment considerations and not for trading purposes.
The Equity Growth Series' policy is to invest in a broad list of equity and
fixed-income securities, including short-term obligations. The list may be
diversified not only by companies and industries, but also by type of security.
Some fixed-income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Equity Growth Series may vary the
percentage of assets invested in any one type of security in accordance with the
Adviser's interpretation of economic and market conditions, fiscal and monetary
policy, and underlying security values. It is contemplated that most of the
Equity Growth Series' non-convertible long-term debt investments will consist of
"investment grade" securities (rated Baa or better by Moody's or BBB or better
by S&P). However, the Equity Growth Series may also invest not more than 25% of
its assets in fixed income securities which either are rated in lower than
"investment grade" categories by either Moody's or S&P or are unrated when, in
the opinion of the Adviser, such an investment presents a greater opportunity to
achieve the Equity Growth Series' investment objective with comparable risk to
an investment in "investment grade" securities. Such lower rated or unrated
fixed income securities have speculative risk characteristics. See
"Non-Investment Grade Obligations" above under Equity Income Series.
SPECIAL EQUITY SERIES. The investment objective of the Special Equity
Series is to provide a high level of capital appreciation through investment in
a diversified portfolio of common stocks of small to medium size companies. The
Special Equity Series is designed for investors in search of substantial
long-term growth who can accept above-average stock market risk and little or no
current income. The Special Equity Series seeks to achieve its investment
objective by investing primarily in a diversified portfolio of stocks of small
to medium size companies which, in the opinion of the Advisers, will present an
opportunity for significant increases in earnings and/or value, without
consideration for current income. The Special Equity Series' primary equity
investments will be common stocks of small and medium sized U.S. companies with
market capitalizations of less than $2 billion. Multiple managers are used to
control the volatility often associated with investments in small to medium size
companies and to maximize opportunities in positive markets. The Special Equity
Series may also invest in bonds and short-term obligations as well as securities
convertible into common stocks, preferred stocks, debt securities and short-term
obligations. The Special Equity Series allocates its investments among different
industries and companies, and changes its portfolio securities for investment
considerations and not for trading purposes.
While the Special Equity Series' policy is to invest its assets primarily
in common stocks with potential for above average growth in earnings,
appreciation may be sought in other types of securities such as preferred
stocks, convertible and non-convertible bonds, warrants and foreign securities
including American Depository Receipts. The Special Equity Series may vary the
percentage of assets invested in any one type of security in accordance with the
Advisers' interpretation of economic and market conditions, fiscal and monetary
policy, and underlying securities values. In selecting stocks,
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<PAGE> 47
emphasis is placed on investing in companies with small to medium market
capitalizations, i.e., the market value of all issued and outstanding common
stock of the company will be less than $2 billion. Investing in equity
securities of small to medium companies involves risks not typically associated
with investment in comparable securities of large companies. Such smaller and
medium companies may have narrow product lines and limited financial and
managerial resources. Since the market for the equity securities of small and
medium companies is often characterized by less information and liquidity than
that for the equity securities of large companies, securities of such small and
medium companies may be subject to more abrupt or erratic market movements than
securities of large companies or market averages in general. Therefore, an
investment in the Special Equity Series may be subject to greater declines in
value than an investment in an equity fund investing in the equity securities of
large companies. It is contemplated that most of the Special Equity Series'
non-convertible long-term debt investments will consist of "investment grade"
securities (rated Baa or better by Moody's or BBB or better by S&P). However,
the Special Equity Series may also invest not more than 25% of its assets in
fixed income securities which either are rated in lower than "investment grade"
categories by either Moody's or S&P or are unrated when, in the opinion of the
Advisers, such an investment presents a greater opportunity to achieve the
Special Equity Series' investment objective with comparable risk to an
investment in "investment grade" securities. Such lower rated or unrated fixed
income securities have speculative risk characteristics. See "Non-Investment
Grade Obligations" above under Equity Income Series.
INVESTMENT TECHNIQUES AND RESTRICTIONS
INVESTMENT TECHNIQUES FOR THE BALANCED SERIES, EQUITY INCOME SERIES, GROWTH &
INCOME SERIES, EQUITY GROWTH SERIES AND SPECIAL EQUITY SERIES.
FOREIGN SECURITIES. Each Series' current policy is not to invest more than
25% of its assets in securities of foreign issuers, including investments in
sponsored American Depository Receipts ("ADRs"). ADRs are receipts typically
issued by an American bank or trust company evidencing ownership of the
underlying foreign securities. The Advisers do not intend to concentrate more
than 25% of such foreign investments in any one type of instrument or in any
foreign country. Each Series' investments in unlisted foreign securities, not
including ADRs, are subject to the overall restrictions applicable to
investments in illiquid securities. Foreign securities, including ADRs, may
represent a greater degree of risk than do securities of domestic issuers due to
possible exchange rate fluctuations, possible exchange controls, less publicly
available information, more volatile markets, less securities regulation, less
favorable tax provisions (including possible withholding taxes), changes in
governmental administration or economic or monetary policy (in the United States
or abroad), war or expropriation. Each Series may invest up to 5% of its assets
in closed-end investment companies which primarily hold foreign securities.
Forward foreign currency exchange contracts may also be entered into for the
purchase or sale of foreign currency solely for hedging purposes against adverse
rate changes. A currency exchange contract allows a definite price in dollars to
be fixed for foreign securities that have been purchased or sold (but not
settled) for each Series. Entering into such exchange contracts may result in
the loss of all or a portion of the benefits which otherwise could have been
obtained from favorable movements in exchange rates. In addition, entering into
such contracts means incurring certain transaction costs and bearing the risk of
incurring losses if rates do not move in the direction anticipated.
OPTIONS AND FUTURES CONTRACTS. Each Series may enter into transactions in
futures contracts, options on futures contracts, options on securities indexes
and options on securities, for the purpose of hedging each Series' securities,
which would have the effect of reducing the volatility of its net asset value.
In general, each such transaction involves the establishment of a position which
is expected to move in a direction opposite to that of the security or
securities being hedged.
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<PAGE> 48
For example, each Series may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
that Series. In the event that such decline occurs, and the hedging transaction
is successful, the reduced value of portfolio securities will be offset, in
whole or in part, by a corresponding gain on the futures or option position.
Conversely, when the Series is not fully invested in the securities market, and
it expects a significant market advance, it may purchase futures contracts or
call options on futures contracts, securities indexes or securities in order to
gain rapid market exposure that may in part or entirely offset increases in the
cost of securities that that Series intends to purchase.
The Statement of Additional Information includes further information about
the transactions in futures and option contracts that may be entered into by
each Series.
Gain or loss to each Series on transactions in securities index futures or
options will depend on price movements in the stock market generally (or in a
particular industry or segment of the market), rather than price movements of
individual securities. A securities index assigns relative values to the
securities included in the index and the index fluctuates with changes in the
market values of the securities so included. Some securities index futures or
options are based on broad market indexes, such as the Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures or options on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Options on indexes and options on securities are traded on
securities exchanges regulated by the SEC. Futures contracts and options on
futures contracts are traded only on designated contract markets regulated by
the Commodity Futures Trading Commission and through a registered futures
commission merchant which is a member of such contract market. A commission must
be paid on each completed purchase and sale transaction. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.
Each Series currently does not intend to engage in the writing of options,
except for the purpose of terminating an existing position or under the limited
circumstances described in the Statement of Additional Information.
Nevertheless, each Series has the authority to write options and may do so in
the future if the Advisers determine that such transactions are in the best
interests of the Series.
SHORT-TERM INSTRUMENTS. Each of the Balanced Series, Equity Income Series,
Growth & Income Series, Equity Growth Series and Special Equity Series may
invest in cash, commercial paper, short-term obligations, repurchase agreements
or other forms of debt securities. See "Short-Term Instruments" above under
Intermediate Government Bond Series.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the
Balanced Series, Equity Income Series, Growth & Income Series, Equity Growth
Series and Special Equity Series may enter into repurchase agreements and
reverse repurchase agreements and may borrow funds for temporary or emergency
purposes, such as meeting larger then anticipated redemption requests, and not
for leverage. See "Repurchase Agreements and Reverse Repurchase Agreements"
above under Money Market Series.
RESTRICTED SECURITIES. Each of the Balanced Series, Equity Income Series,
Growth & Income Series, Equity Growth Series and Special Equity Series may not
invest more than 15% of its net assets in securities that are subject to legal
or contractual restrictions on resale. See "Restricted Securities" above under
Intermediate Government Bond Series.
DELAYED DELIVERY TRANSACTIONS. In order to help insure the availability of
suitable securities for each of the Balanced Series, Equity Income Series,
Growth & Income Series, Equity Growth Series and Special Equity Series, the
Advisers may purchase securities for each such Series on a "when-issued" or on a
"forward delivery" basis. See "Delayed Delivery Transactions" above under
Intermediate Government Bond Series.
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Changes to the securities of each Series are generally made without regard
to the length of time a security has been held, or whether a sale would result
in the recognition of a profit or loss. Therefore, the rate of portfolio
turnover is not a limiting factor to trading when such trading is deemed
appropriate. Each Series engages in trading if it believes a transaction net of
costs (including custodian charges) will help it achieve its investment
objective. The portfolio turnover rate for the common stock portion of the
Balanced Series and for each Series as a whole is expected to be less than 100%
annually. The amount of brokerage commissions and realized capital gains will
tend to increase as the level of portfolio activity increases. The primary
consideration in placing portfolio security transactions with broker-dealers for
execution is to obtain, and maintain the availability of, execution at the most
favorable prices and in the most effective manner possible. See "Portfolio
Transactions and Brokerage Commissions" in the Statement of Additional
Information.
INVESTMENT RESTRICTIONS FOR ALL SERIES OF DIVERSIFIED INVESTORS PORTFOLIO.
As "diversified" funds, no more than 5% of the assets of any series of
Diversified Investors Portfolios may be invested in the securities of one issuer
(other than U.S. Government securities), except that up to 25% of each series'
assets may be invested without regard to this limitation. No series of
Diversified Investors Portfolios will invest more than 25% of its assets in the
securities of issuers in any one industry. These are fundamental investment
policies which may not be changed without investor approval. As a
non-fundamental operating policy, no more than 15% (10% in the case of the Money
Market Series) of the net assets of any series may be invested in (i) securities
the resale of which is restricted under federal securities laws and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days). Additional fundamental and operating policies
of Diversified Investors Portfolios are contained in the Statement of Additional
Information.
LENDING OF PORTFOLIO SECURITIES. The Series have the authority to lend
portfolio securities to brokers, dealers and other financial organizations. By
lending its securities, a Series can increase its income by continuing to
receive interest on the loaned securities as well as by either investing the
cash collateral in short-term securities or obtaining yield in the form of
interest paid when U.S. Government obligations are used as collateral. There may
be risks of delay in receiving additional collateral or risks of delay in
recovery of the securities or even loss of rights in the collateral should the
borrower of the securities fail financially. A Series will adhere to the
following conditions whenever its securities are loaned: (i) the Series must
receive at least 100% cash collateral or equivalent securities from the
borrower; (ii) the borrower must increase this collateral whenever the market
value of the loaned securities including accrued interest exceeds the level of
the collateral; (iii) the Series must be able to terminate the loan at any time;
(iv) the Series must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Series may pay only reasonable custodian fees
in connection with the loan; and (vi) voting rights on the loaned securities may
pass to the borrower. However, if a material event adversely affecting the
loaned securities were to occur, the Series would terminate the loan and regain
the right to vote the securities.
MANAGEMENT OF DIVERSIFIED INVESTORS PORTFOLIOS
The Board of Trustees of Diversified Investors Portfolios provides broad
supervision over the affairs of Diversified Investors Portfolios. For further
information about the Board of Trustees, see "Diversified Investors Portfolios"
in the Statement of Additional Information. A majority of the Board of Trustees
are not affiliated with the Advisers.
INVESTMENT ADVISORY SERVICES. Diversified Investment Advisors, Inc.
("Diversified") manages the assets of each series of Diversified Investors
Portfolios pursuant to an Investment Advisory Agreement (the "Advisory
Agreement") with Diversified Investors Portfolios with respect to each series
and in accordance with the investment policies described herein and in the
Statement of
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Additional Information. Subject to such further policies as the Board of
Trustees may determine, Diversified provides general investment advice to each
series. For its services under the Advisory Agreements, Diversified receives
from each series fees accrued daily and paid monthly at an annual rate equal to
the percentages specified in the table below of the corresponding series'
average daily net assets. Diversified is currently waiving a portion of its
investment advisory fee. Investment management decisions are taken by a
committee of Diversified's personnel and not by a particular individual.
Diversified is an indirect, wholly-owned subsidiary of AEGON USA, Inc.
("AEGON") which is a financial services holding company whose primary emphasis
is life and health insurance and annuity and investment products. AEGON is an
indirect, wholly-owned subsidiary of AEGON N.V., a Netherlands corporation which
is a publicly traded international insurance group. Diversified was incorporated
in 1992 for the purpose of acting as investment adviser to Diversified Investors
Portfolios. Accordingly, Diversified Investors Portfolios is the first family of
investment companies for which Diversified serves as investment adviser. It is
Diversified's responsibility to select, subject to the review and approval of
the Diversified Investors Portfolios' Board of Trustees, appropriate subadvisers
with distinguished backgrounds and to review such subadviser's continued
performance.
For each series, Diversified has entered into an Investment Subadvisory
Agreement (each a "Subadvisory Agreement") with the subadvisers listed in the
table below (each a "Subadviser," and collectively the "Subadvisers"). For its
services under each Subadvisory Agreement, the Subadvisers receive a fee from
Diversified at an annual rate equal to the percentages specified in the table
below of the corresponding series' average daily net assets. Each fee will be
accrued monthly by multiplying the arithmetic average of the beginning and
ending monthly net assets in the series by the fee schedule and dividing by 12.
Each fee will be paid on a quarterly basis.
<TABLE>
<CAPTION>
COMPENSATION RATES(%)
DIVERSIFIED INVESTORS PORTFOLIO -------------------------
PORTFOLIO SERIES SUBADVISERS ADVISER(1) SUBADVISERS
- ------------------------------------ ---------------------------------- ---------- ----------
<S> <C> <C> <C>
Money Market Series Capital Management Group 0.25 0.05
Intermediate Government Bond Series Capital Management Group 0.35 0.15
Government/Corporate Bond Series Capital Management Group 0.35 0.15
Balanced Series Institutional Capital Corporation 0.45 (2)
Equity Income Series Asset Management Group 0.45 0.25
Growth & Income Series Munder Capital Management 0.60 (3)
Equity Growth Series Jundt Associates, Inc. 0.70 0.63
Special Equity Series (4) 0.80 0.50
</TABLE>
- ---------------
(1) The Adviser is currently waiving a portion of its fee. See
"Synopsis -- Table of Fees" on page 6 for a discussion of the fee waivers
currently in effect.
(2) 0.55% on the first $25,000,000 in assets, 0.45% on the next $25,000,000 in
assets, and 0.35% on all assets in excess of $50,000,000.
(3) 0.50% on the first $50,000,000 in assets, 0.30% on the next $25,000,000 in
assets and 0.25% on assets in excess of $75,000,000.
(4) Diversified Investors Special Equity Series has four Subadvisers: Pilgrim
Baxter & Associates, Ltd.; Ark Asset Management Co., Inc.; Liberty
Investment Management, Inc.; and Westport Asset Management, Inc.
It is the responsibility of a Subadviser to make the day-to-day investment
decisions of the series and to place the purchase and sales orders for
securities transactions of such series, subject in all cases to the general
supervision of Diversified. Each Subadviser makes the investment selections for
its respective series consistent with the guidelines and directions set by
Diversified and the Board of Trustees of Diversified Investors Portfolios. Each
Subadviser furnishes at its own expense all services, facilities and personnel
necessary in connection with managing the corresponding series' investments and
effecting securities transactions for a series.
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<PAGE> 51
Diversified has entered into separate Subadvisory Agreements with respect
to each of the Money Market Series, Intermediate Government Bond Series and
Government/Corporate Bond Series with Capital Management Group, a division of
1740 Advisers, Inc., a wholly-owned subsidiary of MONY. The address of Capital
Management Group is 1740 Broadway, New York, New York 10019. Total assets under
management by Capital Management Group at December 31, 1994 were approximately
$565 million, all of which were assets of registered investment companies.
Investment management decisions of Capital Management Group are made by
committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Income Series with Asset Management Group, a division of 1740 Advisers,
Inc. a wholly-owned subsidiary of MONY. The address of Asset Management Group is
1740 Broadway, New York, New York 10019. Total assets under management by Asset
Management Group at December 31, 1994 were approximately $730 million, $635
million of which were assets of registered investment companies. Investment
management decisions of Asset Management Group are made by committee and not by
managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Balanced Series with Institutional Capital Corporation ("Institutional
Capital"). Institutional Capital was formed in January 1970 and is owned by
certain of its employees. Total assets under management for all balanced clients
at December 31, 1994 were approximately $448 million, all of which were assets
of registered investment companies. The principal business address of
Institutional Capital is 303 West Madison Street, Chicago, IL 60606. Investment
management decisions of Institutional Capital are made by committee and not by
managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Growth & Income Series with Munder Capital Management ("Munder"). Munder was
formed in December 1994 as the successor to the investment management businesses
of Munder Capital Management, Inc. and the investment management subsidiaries of
Comerica Incorporated and is owned by certain of its employees and investors.
Total assets under management for growth and income clients at December 31, 1994
were approximately $4.7 billion, $244 million of which were assets of registered
investment companies. The principal business address of Munder is 480 Pierce
Street, Birmingham, Michigan 48009. Investment management decisions of Munder
are made by committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Growth Series with Jundt Associates, Inc. ("Jundt"). Jundt was formed in
December 1972 and is owned by certain of its employees. Total assets under
management for all core equity clients at December 31, 1994 were approximately
$2.6 billion, $438 million of which were assets of registered investment
companies. The principal business address of Jundt is 1550 Utica Avenue South,
Suite 950, St. Louis Park, MN 55416. Investment management decisions of Jundt
are made by committee and not by managers individually.
With respect to the Special Equity Series, Diversified has entered into
Subadvisory Agreements with four Subadvisers as follows:
- - ARK Asset Management Co., Inc. ("ARK") was formed in July 1989 and is owned by
certain employees of ARK Asset Holdings, Inc. Total assets under management
for all small capitalization equity clients at December 31, 1994 were
approximately $1.0 million, $200 million of which were assets of registered
investment companies. The principal business address of Ark is 55 Water
Street, New York, NY 10041.
- - Liberty Investment Management, Inc. ("Liberty") was formed in 1994 and is
owned by certain of its employees. Liberty succeeded to certain of the
investment management businesses of Eagle Asset Management, Inc. Total assets
under management for all small capitalization equity clients at December 31,
1994 were approximately $397 million, $99 million of which were assets of
registered investment companies. The principal business address of Eagle is
880 Carillon Parkway, St. Petersburg, FL 33716.
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<PAGE> 52
- - Pilgrim Baxter & Associates, Ltd. ("Pilgrim") was formed in 1995 and is owned
by United Asset Management, Inc., a publicly-owned corporation. Pilgrim
succeeded to certain of the investment management businesses, and acquired the
corporate name, of Pilgrim Baxter & Associates, Ltd. in April, 1995. Total
assets under management for all small capitalization equity clients at
December 31, 1994 were approximately $2.42 billion, $1.1 billion of which were
assets of registered investment companies. The principal business address of
Pilgrim is 1255 Drummers Lanes, Wayne, PA 19087.
- - Westport Asset Management, Inc. ("Westport") was formed in July 1983 and is
owned by certain of its employees. Total assets under management for all
equity clients at December 31, 1994 were approximately $340 million, $115
million of which were assets of registered investment companies. The principal
business address of Westport is 253 Riverside Avenue, Westport, CT 06880.
Investment management decisions by each of these Subadvisers are made by
committee and not by managers individually.
ADMINISTRATOR. Pursuant to an Administrative Services Agreement,
Diversified, as Administrator, provides Diversified Investors Portfolios with
general office facilities and supervises the overall administration of
Diversified Investors Portfolios, including, among other responsibilities, the
negotiation of contracts and fees with, and the monitoring of performance and
billings of, the independent contractors and agents of Diversified Investors
Portfolios; the preparation and filing of all documents required for compliance
by Diversified Investors Portfolios with applicable laws and regulations;
providing equipment and clerical personnel necessary for maintaining the
organization of Diversified Investors Portfolios; preparation of certain
documents in connection with meetings of Trustees and investors of Diversified
Investors Portfolios; and the maintenance of books and records of Diversified
Investors Portfolios. Diversified provides persons satisfactory to the Board of
Trustees of Diversified Investors Portfolios to serve as officers of Diversified
Investors Portfolios. Such officers, as well as certain other employees and
Trustees of Diversified Investors Portfolios, may be directors, officers or
employees of Diversified or its affiliates. The Administrator receives no
additional fee for its administrative services to Diversified Investors
Portfolios.
EXPENSES. The expenses of Diversified Investors Portfolios include the
compensation of its Trustees who are not affiliated with the Adviser or
Diversified; governmental fees; interest charges; taxes; fees and expenses of
independent auditors, of legal counsel and of any transfer agent, depository,
registrar or dividend disbursing agent of Diversified Investors Portfolios;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, beneficial interests in the series of Diversified Investors
Portfolios. Expenses of Diversified Investors Portfolios also include the
expenses connected with the execution, recording and settlement of securities
transactions; fees and expenses of Diversified Investors Portfolios' custodian
for all services to the series of Diversified Investors Portfolios, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of preparing and mailing reports to investors and to governmental
officers and commissions; expenses of meetings of investors and Trustees of
Diversified Investors Portfolios; and the advisory fees payable to Diversified
under the Advisory Agreement.
CUSTODIAN AND DIVIDEND DISBURSING AGENT. Investors Bank & Trust Company is
the custodian of the securities held by Diversified Investors Portfolios and is
authorized to use the facilities of the Depository Trust Company and the
facilities of the book-entry system for the Federal Reserve Bank. Investors Bank
& Trust Company is also dividend-disbursing agent for Diversified Investors
Portfolios.
EXCLUSIVE PLACEMENT AGENT. Diversified Investors Portfolios has retained
the services of Diversified Investors Securities Corp., ("DISC") as Exclusive
Placement Agent. The principal business address of DISC is 4 Manhattanville
Road, Purchase, New York 10577. DISC receives no compensation as Exclusive
Placement Agent.
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<PAGE> 53
OTHER INFORMATION REGARDING
DIVERSIFIED INVESTORS PORTFOLIOS
PURCHASE AND REDEMPTION OF INTERESTS IN DIVERSIFIED INVESTORS
PORTFOLIOS. Beneficial interests in the series of Diversified Investors
Portfolios are described in this Prospectus currently being offered by DISC to
AUSA for allocation to the appropriate Diversified Subaccount to fund benefits
payable under the Contracts. Investments in Diversified Investors Portfolios may
only be made by investment companies, insurance company separate accounts,
common or commingled trust funds or similar organizations or entities that are
"accredited investors" within the meaning of Regulation D under the 1933 Act.
This Prospectus does not constitute an offer to sell, or the solicitation of an
offer to buy, any beneficial interests in any of the series of Diversified
Investors Portfolios.
The net asset value of each series is determined each day during which the
Advisers of that series are open for business ("Portfolio Business Day"). This
determination is made once each day as of 4:00 p.m., New York time (the
"Valuation Time").
Each investor in a series of Diversified Investors Portfolios may add to or
reduce its investment in such series on each Portfolio Business Day. As of the
Valuation Time on each such day, the value of each investor's beneficial
interest in a series will be determined by multiplying the net asset value of
the series by the percentage, effective for that day, which represents that
investor's share of the aggregate beneficial interests in the series. Any
additions or reductions, which are to be effected as of the Valuation Time on
such day, will then be effected. The investor's percentage of the aggregate
beneficial interests in a series will then be recomputed as the percentage equal
to the fraction (i) the numerator of which is the value of such investor's
investment in the series as of the Valuation Time on such day plus or minus, as
the case may be, the amount of net additions to or reductions in the investor's
investment in the series effected as of the Valuation Time, and (ii) the
denominator of which is the aggregate net asset value of the series as of the
Valuation Time on such day, plus or minus, as the case may be, the amount of net
additions to or reductions in the aggregate net asset value of the series as of
the Valuation Time on such day, plus or minus as the case may be, the amount of
net additions to or reductions in the aggregate investments in the series by all
investors in such series. The percentage so determined will then be applied to
determine the value of the investor's interest in the series as of the Valuation
time on the following Portfolio Business Day.
An investor in a series of Diversified Investors Portfolios may withdraw
all or any portion of its investment at the net asset value next determined if a
withdrawal request in proper form is furnished by the investor to Diversified
Investors Portfolios by the designated cut-off time for each accredited
investor. The proceeds of a reduction or a withdrawal will be paid by
Diversified Investors Portfolios in federal funds normally on the Portfolio
Business Day the withdrawal is effected, but in any event within seven days.
Diversified Investors Portfolios, on behalf of each of its series, reserves the
right to pay redemptions in kind. Unless requested by an investor, Diversified
Investors Portfolios will not make a redemption in kind to the investor, except
in situations where that investor may make redemptions in kind. Diversified
Investors Portfolios, on behalf of each of its series, has elected, however, to
be governed by Rule 18f-1 under the 1940 Act, as a result of which Diversified
Investors Portfolios is obligated to redeem beneficial interests in each series
with respect to any one investor during any 90 day period, solely in cash up to
the lesser of $250,000 or 1% of the net asset value of the series at the
beginning of the period. Investments in a Series may not be transferred.
The right to redeem beneficial interests or to receive payment with respect
to any redemption may be suspended only (i) for any period during which trading
on the New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission or when the New York Stock Exchange is closed (other than
customary weekend and holiday closings), (ii) for any period during which an
emergency exists as defined by the Securities and Exchange Commission as a
result of which disposal of a series' securities or determination of the net
asset value of each series is not reasonably practicable, and (iii) for such
other periods as the SEC may by order permit for the protection of investors in
any series of Diversified Investors Portfolios.
51
<PAGE> 54
NET ASSET VALUE. Diversified Investors Portfolios values the securities of
the Money Market Series based on the amortized cost method of valuation.
Securities of other series of Diversified Investors Portfolios are valued based
on their current market value when market quotations are available. Where market
quotations are not available, assets are valued at fair value as determined in
good faith under the direction of the Board of Trustees of Diversified Investors
Portfolios. Debt obligations with 60 days or less remaining to maturity may be
valued by the amortized cost method, which the Board of Trustees of Diversified
Investors Portfolios has determined to constitute fair value for such
securities. For more information on the valuation of portfolio securities, see
"Diversified Investors Portfolios" in the Statement of Additional Information.
TAXATION OF DIVERSIFIED INVESTORS PORTFOLIOS. Diversified Investors
Portfolios is organized as a New York trust. None of its series is subject to
any income or franchise tax in the State of New York. However, each investor in
a series will be taxable on its share (as determined in accordance with the
governing instruments of Diversified Investors Portfolio) of the series'
ordinary income and capital gain in determining its income tax liability. The
determination of such share will be made in accordance with the Code, and
regulations promulgated thereunder.
Diversified Investors Portfolios, since it is taxed as a partnership, is
not subject to federal income taxation. Instead, any investor in Diversified
Investors Portfolios must take into account, in computing its federal income tax
liability, its share of Diversified Investors Portfolios' income, gains, losses,
deductions, credits and tax preference items, without regard to whether it has
received any cash distributions from Diversified Investors Portfolios.
Withdrawals by any investor in Diversified Investors Portfolios from its
corresponding series generally will not result in recognizing any gain or loss
for federal income tax purposes, except that (1) gain will be recognized to the
extent that any cash distributed exceeds the basis of such investor's interest
in the series prior to the distribution, (2) income or gain will be realized if
the withdrawal is in liquidation of such investor's entire interest in the
series and includes a disproportionate share of any unrealized receivables held
by the series and (3) loss will be recognized if the distribution is in
liquidation of that entire interest and consists solely of cash and/or
unrealized receivables. The basis of any investor's interest in Diversified
Investors Portfolios generally equals the amount of cash and the basis of any
property that such investor invests in a series, increased by such investor's
share of income from that series and decreased by the amount of any cash
distributions and the basis of any property distributed from that series.
DESCRIPTION OF BENEFICIAL INTERESTS, VOTING RIGHTS AND
LIABILITIES. Diversified Investors Portfolios is organized as a series trust
under the laws of the State of New York. Under the Declaration of Trust, the
Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"). Investment in each series may not be transferred, but an
investor may withdraw all or any portion of its investment at any time at net
asset value. Investors in a series (e.g., investment companies, insurance
company separate accounts and common and commingled trust funds) will each be
liable for all obligations of that series (and of no other series). However, the
risk of an investor in a series incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance existed
and the series itself was unable to meet its obligations. Investments in each
series have no preemptive or conversion rights and are fully paid and
nonassessable, except as set forth below.
Each investor is entitled to a vote in proportion to the amount of its
investment in each series. Investors in a series will vote as a separate class,
except as to voting for election of Trustees of Diversified Investors
Portfolios, as otherwise required by the 1940 Act, or if determined by the
Trustees of Diversified Investors Portfolios to be a matter which affects all
series. As to any matter which does not affect a particular series, only
investors in the one or more affected series are entitled to vote. Diversified
Investors Portfolios is not required and has no current intention of holding
special meetings of investors, but special meetings of investors will be held
when in the judgment of the Trustees of Diversified Investors Portfolios it is
necessary or desirable to submit matters for an investor vote.
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<PAGE> 55
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with requesting
a meeting of investors for the purpose of removing one or more Trustees of
Diversified Investors Portfolios. Investors also have the right to remove one or
more Trustees of Diversified Investors Portfolios without a meeting by a
declaration in writing by a specified number of investors. Upon liquidation of a
series, investors would be entitled to share pro rata in the net assets of that
series (and no other series) available for distribution to investors. See Voting
Rights at page 24.
Each series determines its net income and realized capital gains, if any,
on each Portfolio Business Day (as defined below) and allocates all such income
and gain pro rata among the investors in such series at the time of such
determination.
The "net income" of each series shall consist of (i) all income accrued,
less the amortization of any premium, on the assets of the series, less (ii) all
actual and accrued expenses of the series determined in accordance with
generally accepted accounting principles. Interest income includes discount
earned (including both original issue and market discount) on discount paper
accrued ratably to the date of maturity and any net realized gains or losses on
the assets of a series. All the net income of each series is allocated pro rata
among the investors in the series (and no other series).
Inquiries regarding Diversified Investors Portfolios may be directed to 4
Manhattanville Road, Purchase, New York 10577 (914-697-8000).
INDEPENDENT ACCOUNTANTS
The financial statements of AUSA included in the Statement of Additional
Information have been audited by Ernst & Young LLP, independent accountants, Des
Moines, Iowa. The financial statements of Diversified Investors Variable Funds
and Diversified Investors Portfolios included in the Statement of Additional
Information have been audited by Coopers & Lybrand L.L.P., independent
accountants, New York, New York.
LEGAL PROCEEDINGS
There are no material legal proceedings to which AUSA or Diversified
Investors Variable Funds is a party.
FINANCIAL STATEMENTS
The financial statements for AUSA, included in the Statement of Additional
Information, should be distinguished from the financial statements of
Diversified Investors Variable Funds and should be considered only as bearing on
the ability of AUSA to meet its obligations under the Contracts. The financial
statements of AUSA should not be considered as bearing on the investment
performance of the assets held in Diversified Investors Variable Funds.
ADDITIONAL INFORMATION
This prospectus does not contain all the information set forth in the
registration statement, certain portions of which have been omitted (including
financial statements relating to AUSA) pursuant to the rules and regulations of
the SEC. The omitted information may be obtained from the SEC's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.
For further information with respect to AUSA, the Contracts offered by this
Prospectus and Diversified Investors Portfolios, including the Statement of
Additional Information (which includes
53
<PAGE> 56
financial statements relating to AUSA), contact AUSA at its address or phone
number set forth on the cover of this Prospectus.
For further information with respect to the Calvert Series, Acacia Capital
Corporation or Calvert Asset Management Company, Inc., including a Statement of
Additional Information, contact Acacia Capital Corporation at 4550 Montgomery
Avenue, Suite 1000N, Bethesda, Maryland 20814, or call (301) 951-4820.
For further information with respect to the International Equity Series,
including a Statement of Additional Information, contact Scudder Investor
Services, Inc. at Two International Place, Boston, Massachusetts 02110.
54
<PAGE> 57
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM PAGE
- -------------------------------------------------------------------------------------- ----
<S> <C>
Independent Accountants............................................................... 2
Sale of Contracts/Principal Underwriter............................................... 2
Performance Data...................................................................... 2
Diversified Investors Portfolios...................................................... 3
Investment Objectives, Policies and Restrictions...................................... 3
Determination of Net Asset Value; Valuation of Securities............................. 21
Management of Diversified Investors Portfolios........................................ 22
Independent Accountant................................................................ 25
Capital Stock and Other Securities.................................................... 25
Taxation.............................................................................. 26
Financial Statements of AUSA.......................................................... 27
Appendix.............................................................................. A-1
Index to Financial Statements......................................................... F-1
</TABLE>
55
<PAGE> 58
REQUEST FOR DIVERSIFIED INVESTORS VARIABLE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
Detach and return in an envelope addressed to:
AUSA
4 Manhattanville Road
Purchase, New York 10577
Please make sure that your name and the address to which you wish AUSA to
send the current Diversified Investors Variable Funds Statement of Additional
Information appears below:
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Employer
- --------------------------------------------------------------------------------
56
<PAGE> 59
APPENDIX
APPLICABLE PREMIUM TAX RATES
<TABLE>
<CAPTION>
PREMIUM TAX RATE PERCENT
-----------------------------
QUALIFIED NON-QUALIFIED
--------- -------------
<S> <C> <C>
California........................................................ .50% 2.35%
District of Columbia.............................................. 2.25% 2.25%
Kentucky.......................................................... 2.00% 2.00%
Maine............................................................. -- 2.00%
Nevada............................................................ -- 3.50%
Pennsylvania...................................................... -- 2.00%
Puerto Rico....................................................... 1.00% 1.00%
South Dakota...................................................... -- 1.25%
West Virginia..................................................... 1.00% 1.00%
Wyoming........................................................... -- 1.00%
</TABLE>
A-1
<PAGE> 60
AUSA LIFE INSURANCE COMPANY, INC.
4 Manhattanville Road, Purchase, New York 10577
2529-5/95 (914) 697-8000
<PAGE> 61
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED BY
DIVERSIFIED INVESTORS VARIABLE FUNDS
AND
AUSA LIFE INSURANCE COMPANY, INC.
4 MANHATTANVILLE ROAD, PURCHASE, N.Y. 10577; (914)697-8000
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT IT RELATES
TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE PROSPECTUS DATED MAY 1, 1995
FOR THE GROUP VARIABLE ANNUITY CONTRACTS ISSUED BY AUSA LIFE INSURANCE COMPANY,
INC. ("AUSA") WHICH INVEST IN THE DIVERSIFIED INVESTORS VARIABLE FUNDS ("THE
FUNDS"). THE PROSPECTUS IS AVAILABLE, AT NO CHARGE, BY WRITING AUSA LIFE AT 4
MANHATTANVILLE RD., PURCHASE, NEW YORK 10577 OR BY CALLING (914) 697-8000.
A SEPARATE STATEMENT OF ADDITIONAL INFORMATION IS AVAILABLE WITHOUT CHARGE FOR
ACACIA CAPITAL CORPORATION OF WHICH THE CALVERT RESPONSIBLY INVESTED BALANCED
PORTFOLIO IS A PART BY WRITING TO ACACIA CAPITAL CORPORATION AT 4550 MONTGOMERY
AVENUE, SUITE 1000N, BETHESDA, MARYLAND 20814 OR BY TELEPHONING 301-951-4820
AND A SEPARATE STATEMENT OF ADDITIONAL INFORMATION IS AVAILABLE WITHOUT CHARGE
FOR THE INTERNATIONAL EQUITY SERIES BY WRITING SCUDDER INVESTOR SERVICES, INC.
AT TWO INTERNATIONAL PLACE, BOSTON, MASSACHUSETTS 02110-4103.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C>
Independent Accountants 2
Sale of Contract/Principal Underwriter 2
Performance Data 2
Diversified Investors Portfolios 5
Investment Objectives, Policies and Restrictions, 5
Determination of Net Asset Value; Valuation of Securities 23
Management of Diversified Investors Portfolios 24
Independent Accountants 27
Capital Stock and Other Securities 27
Taxation 28
Financial Statements of AUSA 29
Appendix A-1
Index To Financial Statements F-1
</TABLE>
<PAGE> 62
INDEPENDENT ACCOUNTANTS
The financial statements of Diversified Investors Variable Funds, and
Diversified Investors Portfolios appearing on the following pages has been
audited by Coopers & Lybrand L.L.P., independent accountants, New York, New
York. The financial statement of AUSA appearing on the following pages has been
audited by Ernst & Young LLP, independent accountants, Des Moines, Iowa.
SALE OF CONTRACTS/PRINCIPAL UNDERWRITER
Diversified Investors Securities Corp. ("DISC") is the principal
underwriter and distributor of the Contracts which will be sold by registered
representatives who are also licensed insurance agents of AUSA. The Contracts
may also be sold through other broker-dealers authorized by DISC and applicable
law and who may be insurance agents licensed by an insurance company other than
AUSA. DISC is registered with the Securities and Exchange Commission as a
broker-dealer under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc.
DISC will not receive underwriting commissions. Registration as a
broker-dealer does not mean that the SEC has passed upon the financial
standing, fitness or conduct of any broker or dealer, or upon the merits of any
security offering or upon any other matter relating to the business of any
broker or dealer.
PERFORMANCE DATA
MONEY MARKET SUBACCOUNT
For the seven day period ended December 31, 1994, the yield for the Money
Market Subaccount was 5.01% and the effective yield was 5.13%.
The yield is calculated by dividing the result of subtracting the value of
one Unit at the end of the seven day period ("Seventh Day Value") from the
value of one Unit at the beginning of the seven day period (""First Day Value")
by the First Day Value (the resulting quotient being the "Base Period Return")
and multiplying the Base Period Return by 365 divided by 7 to obtain the
annualized yield.
The effective yield is calculated by compounding the Base Period Return
calculated in accordance with the preceding paragraph, adding 1 to Base Period
Return, raising that sum to a power equal to 365 divided by 7 and subtracting 1
from the result.
As the Money Market Subaccount invests only in the Money Market Series
(the "Money Market Series") of Diversified Investors Portfolios, the First Day
Value reflects the net asset value of the interest in the Money Market Series
held in the Money Market Subaccount. The Seventh Day Value reflects increases
or decreases in the net asset value of the interest in the Money Market Series
held in the Money Market Subaccount due to the declaration of dividends, net
investment income and the daily charges and deductions from the Subaccount for
mortality and expense risk. Net investment income reflects earnings on
investments less expenses of the Money Market Series including the investment
management fee.
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<PAGE> 63
AVERAGE ANNUAL TOTAL RETURNS: The annualized total return for the
Subaccounts is shown for the periods indicated in the table below.
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE FOR THE FOR THE FOR THE SINCE
12 MONTHS 3 YEARS 5 YEARS 10 YEARS INCEPTION
ENDED ENDED ENDED ENDED THROUGH
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1994 1994 1994 1994 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Subaccount:
Money Market(1) 3.4% 2.9% 4.3% 5.7% 7.9%
Intermediate Government Bond(1) -2.2% 3.6% - - 6.3%
Government/Corporate Bond(1) -3.8% 4.6% 7.2% 8.8% 8.3%
Balanced(1) -1.2% - - - 5.8%
Equity Income(1) -0.8% 7.4% 6.9% 12.3% 12.1%
Growth & Income(1) -3.8% 4.5% 6.8% - 10.3%
Equity Growth(1) 4.2% - - - 5.9%
Special Equity(1) -0.2% 6.7% 8.6% - 12.3%
Calvert(2) -4.2% 3.2% 6.0% - 7.6%
International Equity(2) -2.4% 7.9% 4.5% - 7.4%
</TABLE>
(1) On January 3, 1994, each of the corresponding Pooled Separate Accounts of
MONY set forth below contributed all of its assets to the corresponding
Series of Diversified Investors Portfolios in which a corresponding
Subaccount invests its assets:
3
<PAGE> 64
<TABLE>
<CAPTION>
MONY POOLED
SERIES SEPARATE ACCOUNT
- ------ ----------------
<S> <C>
Money Market Pooled Account No. 4
Intermediate Government Bond Pooled Account No. 10d
Government/Corporate Bond Pooled Account No. 5
Balanced Pooled Account No. 14
Equity Income Pooled Account No. 6
Equity Growth Pooled Account No. 1
Growth & Income Pooled Account No. 10a
Special Equity Pooled Account No. 10b
</TABLE>
Total returns calculated for any period for the Money Market,
Intermediate Government Bond, Government/Corporate Bond,
Balanced, Equity Income, Growth & Income, Equity Growth and
Special Equity Subaccounts reflect the performance of the
corresponding Pooled Separate Account for any period prior to
January 3, 1994 and the performance of the corresponding series
of Diversified Investors Portfolios thereafter. Such total
returns calculated for each of the Subaccounts reflect the
performance of the corresponding Pooled Separate Account only
from the date that such corresponding Pooled Separate Account
utilized the services of the same investment adviser as is
presently providing such advice to the corresponding series of
Diversified Investors Portfolios invested in by the Subaccount.
Such commencement dates are November 1978 for the Money Market
Subaccount, July 1990 for the Intermediate Government Bond
Subaccount, January 1978 for the Government/Corporate Bond
Subaccount, December 1992 for the Balanced Subaccount, January
1978 for the Equity Income Subaccount, January 1986 for the
Growth & Income Subaccount, February 1993 for the Equity Growth
Subaccount and January 1986 for the Special Equity Subaccount.
All total return percentages reflect the historical rates of
return for such period adjusted to assume that all charges,
expenses and fees of the applicable Subaccount and the
corresponding series of Diversified Investors Portfolios which
are presently in effect were deducted during such period.
(2) The annualized total returns for the Calvert Series Subaccount
and the International Equity Series Subaccount reflect the
annualized total returns of the Calvert Series and the
International Equity Series respectively. The commencement date
of the Calvert Series is September 30, 1986 and the
commencement date of the International Equity Series is May 1,
1987.
The table above assumes that a $1,000 payment was made to each Subaccount at the
beginning of the period shown, that no further payments were made, that any
distribution from the corresponding series (or its predecessor investment
vehicle) were reinvested, and that a Contractholder surrendered the Contract for
cash, rather than electing commencement of annuity benefits in the form of one
of the Settlement Options available, at the end of the period shown. The
annualized total return percentages shown in the table reflect the annualized
historical rates of return and deductions for all charges, expenses, and fees
which would be imposed on the payment assumed by both the corresponding series
and Diversified Investors Variable Funds.
4
<PAGE> 65
DIVERSIFIED INVESTORS PORTFOLIOS
Eight series of Diversified Investors Portfolios are presently available
for investment under the Contracts through corresponding Subaccounts of
Diversified Investors Variable Funds. This section of the Statement of
Additional Information describes each such series, including Diversified
Investors Money Market Portfolio (the "Money Market Series"), Diversified
Investors Intermediate Government Bond Portfolio (the "Intermediate Government
Bond Series"), Diversified Investors Government/Corporate Bond Portfolio (the
"Government/Corporate Bond Series"), Diversified Investors Balanced Portfolio
(the "Balanced Series"), Diversified Investors Equity Income Portfolio (the
"Equity Income Series") Diversified Investors Growth and Income Portfolio (the
"Growth and Income Series"), Diversified Investors Equity Growth Portfolio (the
"Equity Growth Series") and Diversified Investors Special Equity Portfolio (the
"Special Equity Series"). The series of Diversified Investors Portfolios
available under the Contracts may be collectively referred to herein as the
"Series".
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective of each Series is described in the Prospectus of
Diversified Investors Variable Funds. There can, of course, be no assurance that
a Series will achieve its investment objective.
INVESTMENT POLICIES
The following discussion supplements the information regarding the
investment objective of each Series and the policies to be employed to achieve
this objective as set forth in the Prospectus of Diversified Investors Variable
Funds.
BANK OBLIGATIONS
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to Federal examination and to a substantial body of Federal law and
regulation. As a result of Federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as Certificates of Deposit
("CDs") and time deposits ("TDs"), may be general obligations of the parent
banks in addition to the issuing branch, or may be limited by the terms of a
specific obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal or
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<PAGE> 66
state regulation as well as governmental action in the country in which the
foreign bank has its head office. A domestic branch of a foreign bank with
assets in excess of $1 billion may be subject to reserve requirements imposed
by the Federal Reserve System or by the state in which the branch is located if
the branch is licensed in that state.
In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (2) maintain assets within the state in
an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Advisers carefully evaluate such investments on a
case-by-case basis.
U.S. GOVERNMENT AND AGENCY SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one
to ten years; and Treasury Bonds generally have initial maturities of greater
than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. A Portfolio
will invest in such securities only when the Advisers are satisfied that the
credit risk with respect to the issuer is minimal.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the
lender may determine to invest varying amounts.
Each Series may invest in commercial paper issued by major corporations in
reliance on the exemption from registration afforded by Section 3(a)(3) of the
Securities Act of 1933, as amended (the "1933 Act"). Such commercial paper may
be issued only to finance current transactions and must mature in nine months
or less. Trading of such commercial paper is conducted primarily by
institutional investors through investment dealers, and individual investor
participation in the commercial paper market is very limited.
6
<PAGE> 67
VARIABLE RATE AND FLOATING RATE SECURITIES
Each Series may purchase floating and variable rate demand notes and
bonds, which are obligations ordinarily having stated maturities in excess of
397 days, but which permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding 397 days, in each case upon not
more than 30 days' notice. Variable rate demand notes include master demand
notes which are obligations that permit a Series to invest fluctuating amounts,
which may change daily without penalty, pursuant to direct arrangements between
the Series, as lender, and the borrower. The interest rates on these notes
fluctuate from time to time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally
will be traded, and there generally is no established secondary market for
these obligations, although they are redeemable at face value. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, a Series' right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies and a Series may invest in
obligations which are not so rated only if the Advisers determine that at the
time of investment the obligations are of comparable quality to the other
obligations in which the Series may invest. The Advisers, on behalf of a
Series, will consider on an ongoing basis the creditworthiness of the issuers
of the floating and variable rate demand obligations held by the Series. A
Series will not invest more than 15% (10% in the case of the Money Market
Series) of the value of its net assets in floating or variable rate demand
obligations as to which it cannot exercise the demand feature on not more than
seven days' notice if there is no secondary market available for these
obligations, and in other securities that are not readily marketable. See
"Investment Restrictions" below.
PARTICIPATION INTERESTS
A Series may purchase from financial institutions participation interests
in securities in which such Series may invest. A participation interest gives a
Series an undivided interest in the security in the proportion that the Series'
participation interest bears to the total principal amount of the security.
These instruments may have fixed, floating or variable rates of interest, with
remaining maturities of 13 months or less. If the participation interest is
unrated, or has been given a rating below that which is permissible for
purchase by the Series, the participation interest will be backed by an
irrevocable letter of credit or guarantee of a bank, or the payment obligation
otherwise will be collateralized by U.S. Government securities, or, in the case
of unrated participation interests, the Advisers must have determined that the
instrument is of comparable quality to those instruments in which a Series may
invest. For certain participation interests, a Series will have the right to
demand payment, on not more than seven days' notice, for all or any part of the
Series' participation interest in the security, plus accrued interest. As to
these instruments, a Series intends to exercise its right to demand payment
only upon a default under the terms of the security, as needed to provide
liquidity to meet redemptions, or to maintain or improve the quality of its
investment portfolio. A Series will not invest more than 15% (10% in the case
of the Money Market Series) of its net assets in participation interests that
do not have this demand feature, and in other securities that are not readily
marketable. See "Investment Restrictions" below.
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have
7
<PAGE> 68
not been registered under the 1933 Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might also have to
register such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer s ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
The SEC has recently adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restriction on
their resale to the general public. Rule 144A establishes a "safe harbor" from
the registration requirements of the 1933 Act of resales of certain securities
to qualified institutional buyers. The Advisers anticipate that the market for
certain restricted securities such as institutional commercial paper will
expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc.
The Advisers will monitor the liquidity of Rule 144A securities for each
Series under the supervision of the Diversified Investors Portfolio's Board of
Trustees. In reaching liquidity decisions, the Advisers will consider, among
other things, the following factors: (1) the frequency of trades and quotes for
the security, (2) the number of dealers and other potential purchasers wishing
to purchase or sell the security, (3) dealer undertakings to make a market in
the security and (4) the nature of the security and of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer) .
UNSECURED PROMISSORY NOTES
A Series also may purchase unsecured promissory notes ("Notes") which are
not readily marketable and have not been registered under the 1933 Act,
provided such investments are consistent with the Series' investment objective.
The Notes purchased by a Series will have remaining maturities of 13 months or
less and will be deemed by the Board of Trustees of Diversified Investors
Portfolios to present minimal credit risks and will meet the quality criteria
set forth above under "Investment Policies." A Series will invest no more than
15% (10% in the case of the Money Market Series) of its net assets in such
Notes and in other securities that are not readily marketable (which securities
would include floating and variable rate demand obligations as to which the
Series cannot exercise the demand feature described above and as to which there
is no secondary market). See "Investment Restrictions" below.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements are agreements by which a person purchases a
security and simultaneously commits to resell that security to the seller
(which is usually a member bank of the Federal Reserve System or a member firm
of the New York Stock Exchange (or a subsidiary thereof)) at an agreed-upon
date within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus an agreed-upon
market rate of interest which is unrelated to the coupon rate or maturity of
the purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed- upon price, which obligation is in effect secured by
the value of the underlying security, usually U.S.
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Government or Government agency issues. Under the Investment Company Act of
1940, as amended (the "1940 Act"), repurchase agreements may be considered to
be loans by the buyer. A Series' risk is limited to the ability of the seller
to pay the agreed upon amount on the delivery date. If the seller defaults, the
underlying security constitutes collateral for the seller's obligation to pay
although a Series may incur certain costs in liquidating this collateral and in
certain cases may not be permitted to liquidate this collateral. All repurchase
agreements entered into by a Series are fully collateralized, with such
collateral being marked to market daily.
A Series may borrow funds for temporary or emergency purposes, such as
meeting larger than anticipated redemption requests, and not for leverage, and
by agreeing to sell portfolio securities to financial institutions such as
banks and broker-dealers and to repurchase them at a mutually agreed date and
price (a "reverse repurchase agreement"). At the time a Series enters into a
reverse repurchase agreement it will place in a segregated custodial account
cash, U.S. Government securities or high-grade debt obligations having a value
equal to the repurchase price, including accrued interest. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Series may decline below the repurchase price of those securities. Reverse
repurchase agreements are considered to be borrowings by a Series.
FOREIGN SECURITIES - ALL SERIES
Each Series may invest its assets in securities of foreign issuers.
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, brokerage or other taxation, limitation on the removal
of funds or other assets of a Series, political or financial instability or
diplomatic and other developments which would affect such investments. Further,
economies of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the U.S.
It is anticipated that in most cases the best available market for foreign
securities would be on exchanges or in over-the-counter markets located outside
the U.S. Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those in the U.S., and securities of some foreign
issuers (particularly those located in developing countries) may be less liquid
and more volatile than securities of comparable U.S. companies. Foreign
security trading practices, including those involving securities settlement
where a Series' assets may be released prior to receipt of payment, may expose
a Series to increased risk in the event of a failed trade or the insolvency of
a foreign broker-dealer. In addition, foreign brokerage commissions are
generally higher than commissions on securities traded in the U.S. and may be
non-negotiable. In general, there is less overall governmental supervision and
regulation of foreign securities exchanges, brokers and listed companies than
in the U.S.
FOREIGN SECURITIES - MONEY MARKET SERIES
The Money Market Series may invest in foreign securities, including only
U.S. dollar-denominated obligations of foreign branches and subsidiaries of
domestic banks and foreign banks, such as Eurodollar certificates of deposit,
which are U.S. dollar-denominated certificates of deposit issued by branches of
foreign and domestic banks located outside the United States, and Yankee Cds,
which are certificates of deposit issued by a U.S. branch of a foreign bank
denominated in U.S. dollars and held in the United States; Eurodollar time
deposits ("ETDs"), which are U.S. dollar-denominated deposits in a foreign
branch of a are issued by branches of major Canadian banks; high quality, U.S.
dollar-denominated short-term bonds and notes (including variable amount master
demand notes) issued by foreign corporations, including Canadian
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commercial paper, which is commercial paper issued by a Canadian corporation or
a Canadian counterpart of a U.S. corporation, and Europaper, which is U.S.
dollar-denominated commercial paper of a foreign issuer; and U.S.
dollar-denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Adviser to be of comparable
quality to the other obligations in which the Money Market Series may invest.
Such securities also include debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
FOREIGN SECURITIES - SERIES OTHER THAN MONEY MARKET SERIES
Each Series' policy is not to invest more than 25% of its assets in
securities of foreign issuers; not more than 5% of a Series' assets may be
invested in closed-end investment companies which primarily hold foreign
securities. Investments m such companies may entail the risk that the market
value of such investments may be substantially less than their net asset value
and that there would be duplication of investment management and other fees and
expenses. Securities of foreign issuers include investments in sponsored
American Depository Receipts ("ADRs"). ADRS are depository receipts for
securities of foreign issuers and provide an alternative method for a Series to
make foreign investments. These securities will not be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs,
in registered form, are designed for use in U.S. securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities.
Each Series may invest in foreign securities that impose restrictions on
transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Because some Series may buy and sell securities denominated in currencies
other than the U.S. dollar and receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, such Series from time to time may enter
into foreign currency exchange transactions to convert to and from different
foreign currencies and to convert foreign currencies to and from the U.S.
dollar. Such Series either enter into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market or
use forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Series
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are transferable in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward
foreign currency exchange contract generally has no deposit requirement and is
traded at a net price without commission. A Series maintains with its custodian
a segregated account of high grade liquid assets in an amount at least equal to
its obligations under each forward foreign currency exchange contract. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Series' securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Series may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes
in foreign currency exchange rates that would adversely affect a portfolio
position or an anticipated investment position. Since consideration of the
prospect for currency parities will be
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incorporated into the Advisers' long-term investment decisions, the Series will
not routinely enter into foreign currency hedging transactions with respect to
security transactions; however, the Advisers believe that it is important to
have the flexibility to enter into foreign currency hedging transactions when
they determine that the transactions would be in a Series' best interest.
Although these transactions tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of the hedged currency
increase. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.
While these contracts are not presently regulated by the Commodity Futures
Trading Commission ("CFTC"), the CFTC may in the future assert authority to
regulate forward contracts. In such event a Series' ability to utilize forward
contracts in the manner set forth herein and in the Prospectus may be
restricted. Forward contracts may reduce the potential gain from a positive
change in the relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for a Series than if it had not entered into such contracts. The use
of foreign currency forward contracts may not eliminate fluctuations in the
underlying U.S. dollar equivalent value of the prices of or rates of return on a
Series' foreign currency denominated portfolio securities and the use of such
techniques will subject a Series to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedge generally will not be precise. In addition, a
Series may not always be able to enter into foreign currency forward contracts
at attractive prices and this will limit a Series' ability to use such contract
to hedge or cross-hedge its assets. Also, with regard to a Series' use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying a Series' cross-hedges and
the movements in the exchange rates of the foreign currencies in which a Series'
assets that are the subject of such cross-hedges are denominated.
GUARANTEED INVESTMENT CONTRACTS
Each Series may invest in guaranteed investment contracts ("GICs") issued
by insurance companies. Pursuant to such contracts, a Series makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the fund guaranteed interest. The GICs provide
that this guaranteed interest will not be less than a certain minimum rate. The
insurance company may assess periodic charges against a GIC for expenses and
service costs allocable to it, and the charges will be deducted from the value
of the deposit fund. Because a Series may not receive the principal amount of a
GIC from the insurance company on seven days' notice or less, the GIC is
considered an illiquid investment and, together with other instruments in a
Series which are not readily marketable, will not exceed 15% (10% in the case of
the Money Market Series) of the Series' net assets. The term of a GIC will be
thirteen months or less. In determining average weighted portfolio maturity, a
GIC will be deemed to have a maturity equal to the longer of the period of time
remaining until the next readjustment of the guaranteed interest rate or the
period of time remaining until the principal amount can be recovered from the
issuer through demand.
WHEN-ISSUED SECURITIES
Each Series may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that, under normal circumstances, a Series would
take delivery of such securities. When a Series commits to purchase a security
on a "when-issued" or on a "forward delivery" basis, the Series establishes
procedures consistent with the relevant policies of the Securities and Exchange
Commission. Since those policies currently
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recommend that an amount of a Series' assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Series expects always to have cash, cash equivalents, or high quality debt
securities sufficient to cover any commitments or to limit any potential risk.
However, although a Series does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of Securities and
Exchange Commission policies, purchases of securities on such bases may involve
more risk than other types of purchases. For example, a Series may have to sell
assets which have been set aside in order to meet redemptions. Also, if a
Series determines it is advisable as a matter of investment strategy to sell
the "when-issued" or "forward delivery" securities, the Series would be
required to meet its obligations from the then available cash flow or the sale
of securities, or, although it would not normally expect to do so, from the
sale of the "when-issued" or "forward delivery" securities themselves (which
may have a value greater or less than the Series' payment obligation).
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ZERO COUPON OBLIGATIONS
Each Series may acquire zero coupon obligations when consistent with its
investment objective and policies. Such obligations have greater price
volatility than coupon obligations and will not result in payment of interest
until maturity. Since dividend income is accrued throughout the term of the
zero coupon obligation but is not actually received until maturity, a Series
may have to sell other securities to pay said accrued dividends prior to
maturity of the zero coupon obligation.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS - SERIES OTHER THAN MONEY
MARKET SERIES
GENERAL. The successful use of such instruments draws upon the Advisers'
skill and experience with respect to such instruments and usually depends on
the Advisers' ability to forecast interest rate and currency exchange rate
movements correctly. Should interest or exchange rates move in an unexpected
manner, a Series may not achieve the anticipated benefits of futures contracts
or options on futures contracts or may realize losses and thus will be in a
worse position than if such strategies had not been used. In addition, the
correlation between movements in the price of futures contracts or options on
futures contracts and movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
FUTURES CONTRACTS. A Series may enter into contracts for the purchase or
sale for future delivery of fixed-income securities or foreign currencies, or
contracts based on financial indices including any index of U.S. Government
securities, foreign government securities or corporate debt securities. U.S.
futures contracts have been designed by exchanges which have been designated
"contracts markets" by the CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. A Series may enter
into futures contracts which are based on debt securities that are backed by the
full faith and credit of the U.S. Government, such as long-term U.S. Treasury
Bonds, Treasury Notes, Government National Mortgage Association modified
pass-through mortgage-backed securities and three-month U.S. Treasury Bills. A
Series may also enter into futures contracts which are based on bonds issued by
entities other than the U.S. Government.
At the same time a futures contract is purchased or sold, the Series must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Series would
provide or receive cash that reflects any decline or increase in the contract's
value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, a Series will incur brokerage fees when it
purchases or sells futures contracts.
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The purpose of the acquisition or sale of a futures contract, in the case
of a Series which holds or intends to acquire fixed-income securities, is to
attempt to protect the Series from fluctuations in interest or foreign exchange
rates without actually buying or selling fixed-income securities or foreign
currencies. For example, if interest rates were expected to increase, a Series
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the debt
securities owned by the Series. If interest rates did increase, the value of the
debt securities in a Series would decline, but the value of the futures
contracts to the Series would increase at approximately the same rate, thereby
keeping the net asset value of the Series from declining as much as it otherwise
would have. The Series could accomplish similar results by selling debt
securities and investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures market is more liquid than the
cash market, the use of futures contracts as an investment technique allows a
Series to maintain a defensive position without having to sell its portfolio
securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Series could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Series could then buy debt securities on
the cash market. To the extent a Series enters into futures contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Series' obligations with respect to such futures contracts will consist of cash,
cash equivalents or high quality liquid debt securities from its portfolio in an
amount equal to the difference between the fluctuating market value of such
futures contracts and the aggregate value of the initial and variation margin
payments made by the Series with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Advisers may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Advisers believe
that use of such contracts will benefit the Series, if the Advisers' investment
judgment about the general direction of interest rates is incorrect, a Series'
overall performance would be poorer than if it had not entered into any such
contract. For example, if a Series has hedged against the possibility of an
increase in interest rates which would adversely affect the price of debt
securities held by it and interest rates decrease instead, the Series will lose
part or all of the benefit of the increased value of its debt securities which
it has hedged because it will have offsetting losses in its futures positions.
In addition, in such situations, if a Series has insufficient cash, it may have
to sell debt securities to meet daily variation margin requirements. Such sales
of bonds may be, but will not necessarily be, at increased prices which reflect
the rising market. A Series may have to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. The Series intend to purchase and write
options on futures contracts for hedging purposes. The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the
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purchase of futures contracts, when a Series is not fully invested it may
purchase a call option on a futures contract to hedge against a market advance
due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Series will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Series' portfolio holdings. The writing of
a put option on a futures contract constitutes a partial hedge against
increasing prices of the security or foreign currency which is deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is higher than the exercise price, the Series will retain the full amount
of the option premium which provides a partial hedge against any increase in the
price of securities which the Series intends to purchase. If a put or call
option the Series has written is exercised, the Series will incur a loss which
will be reduced by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its portfolio securities
and changes in the value of its futures positions, the Series' losses from
existing options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Series may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Series assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Board of Trustees of Diversified Investors Portfolios has adopted the
requirement that futures contracts and options on futures contracts be used
either (i) as a hedge without regard to any quantitative limitation, or (ii) for
other purposes to the extent that immediately thereafter the aggregate amount of
margin deposits on all (non-hedge) futures contracts of the Series and premiums
paid on outstanding (non-hedge) options on futures contracts owned by the Series
does not exceed 5% of the market value of the total assets of a Series. In
addition, the aggregate market value of the outstanding futures contracts
purchased by a Series may not exceed 50% of the market value of the total assets
of the Series. Neither of these restrictions will be changed by the Board of
Trustees of Diversified Investors Portfolios without considering the policies
and concerns of the various applicable federal and state regulatory agencies.
OPTIONS ON FOREIGN CURRENCIES. A Series may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
a Series may purchase put options on the foreign currency. If the value of the
currency does decline, the Series will have the right to sell such currency for
a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Series may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to a Series deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, a Series could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
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A Series may write options on foreign currencies for the same types of
hedging purposes. For example, where a Series anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the Series
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Series to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction: If this does not occur, the option may be exercised and the
Series would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Series also may be required to forego all or
a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
The Series intend to write covered call options on foreign currencies. A
call option written on a foreign currency by a Series is "covered" if the Series
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Series has a call on the
same foreign currency and in the same principal amount as the call written where
the exercise price of the call held (a) is equal to or less than the exercise
price of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Series in cash, U.S. Government
securities and other high quality liquid debt securities in a segregated account
with its custodian.
The Series also intend to write call options on foreign currencies that are
not covered for cross-hedging purposes. A call option on a foreign currency is
for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the Series
owns or has the right to acquire and which is denominated in the currency
underlying the option due to an adverse change in the exchange rate. In such
circumstances, a Series collateralizes the option by maintaining in a segregated
account with its custodian, cash or U.S. Government securities or other high
quality liquid debt securities in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES. Unlike transactions entered into by a Series in
futures contracts, options on foreign currencies and forward contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. Similarly, options on currencies
may be traded over-the-counter. In an over-the-counter trading environment,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of forward contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the
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<PAGE> 77
Options Clearing Corporation ("OCC"), thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-counter
market, potentially permitting a Series to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which may not
be present in the case of exchange-traded currency options. A Series' ability to
terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, each Series will
treat purchased over-the-counter options and assets used to cover written
over-the-counter options as illiquid securities. With respect to options written
with primary dealers in U.S. Government Securities pursuant to an agreement
requiring a closing purchase transaction at a formula price, the amount of
illiquid securities may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the Series'
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
OPTIONS ON SECURITIES - SERIES OTHER THAN MONEY MARKET SERIES
The Series may write (sell) covered call and put options to a limited
extent on its portfolio securities ("covered options") in an attempt to increase
income. However, a Series may forgo the benefits of appreciation on securities
sold or may pay more than the market price on securities acquired pursuant to
call and put options written by the Series.
When a Series writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period. If the option expires unexercised, the Series will realize income
in an amount equal to the premium received for writing the option. If the option
is exercised, a decision over which a Series has no control, the Series must
sell the underlying security to the option holder at the exercise price. By
writing a covered call option, a Series forgoes, in exchange for the premium
less the commission ("net premium"), the opportunity to profit during the option
period from an increase in the market value of the underlying security above the
exercise price.
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<PAGE> 78
When a Series writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Series at the specified
exercise price at any time during the option period. If the option expires
unexercised, the Series will realize income in the amount of the premium
received for writing the option. If the put option is exercised, a decision over
which a Series has no control, the Series must purchase the underlying security
from the option holder at the exercise price. By writing a covered put option, a
Series, in exchange for the net premium received, accepts the risk of a decline
in the market value of the underlying security below the exercise price. A
Series will only write put options involving securities for which a
determination is made at the time the option is written that the Series wishes
to acquire the securities at the exercise price.
A Series may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." Where a Series cannot effect a closing purchase transaction, it
may be forced to incur brokerage commissions or dealer spreads in selling
securities it receives or it may be forced to hold underlying securities until
an option is exercised or expires.
When a Series writes an option, an amount equal to the net premium received
by the Series is included in the liability section of the Series' Statement of
Assets and Liabilities as a deferred credit. The amount of the deferred credit
will be subsequently marked to market to reflect the current market value of the
option written. The current market value of a traded option is the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price. If an option expires on its stipulated expiration date or if the Series
enters into a closing purchase transaction, the Series will realize a gain (or
loss if the cost of a closing purchase transaction exceeds the premium received
when the option was sold), and the deferred credit related to such option will
be eliminated. If a call option is exercised, the Series will realize a gain or
loss from the sale of the underlying security and the proceeds of the sale will
be increased by the premium originally received. The writing of covered call
options may be deemed to involve the pledge of the securities against which the
option is being written. Securities against which call options are written will
be segregated on the books of the custodian for the Series.
A Series may purchase call and put options on any securities in which it
may invest. A Series would normally purchase a call option in anticipation of an
increase in the market value of such securities. The purchase of a call option
would entitle the Series, in exchange for the premium paid, to purchase a
security at a specified price during the option period. A Series would
ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
A Series would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a put
option would entitle a Series, in exchange for the premium paid, to sell a
security, which may or may not be held in the Series' portfolio, at a specified
price during the option period. The purchase of protective puts is designed
merely to offset or hedge against a decline in the market value of the Series'
portfolio securities. Put options also may be purchased by a Series for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Series does not own. A Series would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities remained
at or above the exercise price. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying portfolio securities.
The Series have adopted certain other nonfundamental policies concerning
option transactions which are discussed below. A Series' activities in options
may also be restricted by the requirements of the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a regulated investment company.
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<PAGE> 79
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
The Series may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Series will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Advisers will monitor
the creditworthiness of dealers with whom a Series enters into such options
transactions under the general supervision of the Trustees of Diversified
Investors Portfolios.
OPTIONS ON SECURITIES INDICES - SERIES OTHER THAN MONEY MARKET SERIES
In addition to options on securities, the Series may also purchase and
write (sell) call and put options on securities indices. Such options give the
holder the right to receive a cash settlement during the term of the option
based upon the difference between the exercise price and the value of the
index. Such options will be used for the purposes described above under
"Options on Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Series generally will only purchase or write such an option if the Advisers
believe the option can be closed out.
Use of options on securities indices also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. The Series will not purchase such options unless the
Advisers believe the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the Series may not correlate precisely with movements in
the level of an index and, therefore, the use of options on indices cannot serve
as a complete hedge. Because options on securities indices require settlement in
cash, the Advisers may be forced to liquidate portfolio securities to meet
settlement obligations.
SHORT SALES "AGAINST THE BOX" - SERIES OTHER THAN MONEY MARKET SERIES
In a short sale, a Series sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. A Series may engage
in short sales only if at the time of the short sale it owns or has the right to
obtain, at no additional cost, an equal amount of the security being sold short.
This investment technique is known as a short sale "against the box".
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Series engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Series maintains in a segregated account an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute the Series' long position.
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<PAGE> 80
The Series will not engage in short sales against the box for investment
purposes. A Series may, however, make a short sale as a hedge, when it believes
that the price of a security may decline, causing a decline in the value of a
security (or a security convertible or exchangeable for such security), or when
a Series wants to sell the security at an attractive current price, but also
wishes to defer recognition of gain or loss for federal income tax purposes or
for purposes of satisfying certain tests applicable to regulated investment
companies under the Code. In such case, any future losses in a Series' long
position should be reduced by a gain in the short position. Conversely, any gain
in the long position should be reduced by a loss in the short position. The
extent to which such gains or losses are reduced depends upon the amount of the
security sold short relative to the amount a Series owns. There are certain
additional transaction costs associated with short sales against the box, but
the Series endeavor to offset these costs with the income from the investment of
the cash proceeds of short sales.
As a non-fundamental operating policy, the Advisers do not expect that more
than 40% of a Series' total assets would be involved in short sales against the
box. The Advisers do not currently intend to engage in such sales.
CERTAIN OTHER OBLIGATIONS
In order to allow for investments in new instruments that may be created in
the future, a Series may, upon supplementing this Statement of Additional
Information, invest in obligations other than those listed previously, provided
such investments are consistent with a Series' investment objective, policies
and restrictions.
RATING SERVICES
The ratings of rating services represent their opinions as to the quality
of the securities that they undertake to rate. It should be emphasized, however,
that ratings are relative and subjective and are not absolute standards of
quality. Although these ratings are an initial criterion for selection of
portfolio investments, the Advisers also make their own evaluations of these
securities, subject to review by the Board of Trustees of Diversified Investors
Portfolios. After purchase by a Series, an obligation may cease to be rated or
its rating may be reduced below the minimum required for purchase by the Series.
Neither event would require a Series to dispose of the obligation, but the
Advisers will consider such an event in their determination of whether a Series
should continue to hold the obligation. A description of the ratings used herein
and in the Prospectus is set forth in the Appendix to this Statement of
Additional Information.
Except as stated otherwise, all investment policies and restrictions
described herein are non-fundamental, and may be changed without prior
shareholder approval.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of each
Series and may not be changed without the approval of a "majority of the
outstanding voting securities" of the Series. "Majority of the outstanding
voting securities" under the 1940 Act and as used in this Statement of
Additional Information and the Prospectus, means, with respect to a Series, the
lesser of (i) 67% or more of the total beneficial interests of the Series
present at a meeting if the holders of more than 50% of the total beneficial
interests of the Series are present or represented by proxy or (ii) more than
50% of the total beneficial interests of the Series. If a percentage or a rating
restriction on investment or utilization of assets is adhered to at the time an
investment is made or assets are so utilized, a later change in such percentage
resulting from changes in a Series' total assets or the value of a Series'
securities, or a later change in the rating of a portfolio security, will not be
considered a violation of the relevant policy.
As a matter of fundamental policy, no Series may:
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<PAGE> 81
(1) borrow money or mortgage or hypothecate assets of the Series, except
that in an amount not to exceed 1/3 of the current value of the Series' assets
(including such borrowing) less liabilities (not including such borrowing), it
may borrow money and enter into reverse repurchase agreements, and except that
it may pledge, mortgage or hypothecate not more than 1/3 of such assets to
secure such borrowings or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered a pledge of assets
for purposes of this restriction and except that assets may be pledged to secure
letters of credit solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute;
(2) underwrite securities issued by other persons except insofar as
Diversified Investors Portfolios or a Series may technically be deemed an
underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except (a) through the lending of portfolio
securities and provided that any such loans not exceed 30% of the Series' total
assets (taken at market value), (b) through the use of repurchase agreements or
the purchase of short-term obligations or (c) by purchasing debt securities of
types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein), interests
in oil, gas or mineral leases, commodities or commodity contracts (except
futures and option contracts), except in the ordinary course of business a
Series may hold and sell portfolio real estate acquired as a result of a Series'
ownership of securities;
(5) concentrate its investments in any particular industry (excluding U.S.
Government Securities), but if it is deemed appropriate for the achievement of
the Series' investment objective(s), up to 25% of its total assets may be
invested in any one industry (except that the Money Market Series reserves the
right to concentrate 25% or more of its assets in obligations of domestic
branches of domestic banks);
(6) issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction; or
(7) enter into repurchase agreements providing for settlement in more than
seven days after notice or purchase securities which are not readily marketable
(which securities would include participation interests and floating and
variable rate demand obligations as to which no secondary market exists and the
Series cannot exercise a demand feature on not more than seven days' notice),
if, in the aggregate, more than 15% (10% in the case of the Money Market Series)
of its net assets would be so invested. A Series may not invest in time deposits
maturing in more than seven days.
State and Federal Restrictions. In order to comply with certain state and
federal statutes and policies each Series will not as a matter of operating
policy:
(i) borrow money for any purpose in excess of 10% of the Series' total
assets (taken at cost), except that the Series may borrow for
temporary or emergency purposes up to 1/3 of its assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Series' net assets (taken at market value), provided that
collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, reverse
repurchase agreements, when-issued securities and other similar
investment techniques are not considered a pledge of assets for
purposes of this restriction;
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<PAGE> 82
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures;
(iv) invest for the purpose of exercising control or management;
(v) purchase securities issued by any other investment company except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary
broker's commission, or except when such purchase, though not made in
the open market, is part of a plan of merger or consolidation;
provided, however, that securities of any investment company will not
be purchased for a Series if such purchase at the time thereof would
cause (a) more than 10% of the Series' total assets (taken at the
greater of cost or market value) to be invested in the securities of
such issuers; (b) more that 5% of the Series' total assets (taken at
the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Series; and provided
further that a Series may not purchase any security from any open-end
investment company;
(vi) purchase securities of any issuer if such purchase at the time
thereof would cause the Series to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an
issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(vii) purchase or retain in a Series' portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders
is an officer or Trustee of Diversified Investors Portfolios or is an
officer or partner of the Adviser or Subadviser, if after the
purchase of the securities of such issuer for a Series one or more of
such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and
such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities,
or both, all taken at market value;
(viii) invest more than 5% of a Series' net assets in warrants (valued at
the lower of cost or market), but not more than 2% of a Series' net
assets may be invested in warrants not listed on the New York Stock
Exchange or the American Stock Exchange; or
(ix) make short sales of securities or maintain a short position
(excluding short sales if the Series owns an equal amount of such
securities or securities convertible into or exchangeable for,
without payment of any further consideration, securities of
equivalent kind and amount) if such short sales represent more than
25% of the Series' net assets (taken at market value); provided,
however, that the value of the Series' short sales of securities
(excluding U.S. Government Securities) of any one issuer may not be
greater than 2% of the value (taken at market value) of the Series'
net assets or more than 2% of the securities of any class of any
issuer.
Policies (i) through (ix) may be changed by the Board of Trustees of
Diversified Investors Portfolios.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Portfolio changes are made without regard to the length of time a security
has been held, or whether a sale would result in the recognition of a profit or
loss. Therefore, the rate of portfolio turnover is not a limiting factor when
changes are appropriate. Portfolio trading is engaged in for a Series if the
Advisers
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<PAGE> 83
believe that a transaction net of costs (including custodian charges) will help
achieve the Series' investment objectives.
A Series' purchases and sales of securities may be principal transactions,
that is, securities may be purchased directly from the issuer or from an
underwriter or market maker for the securities. There usually are no brokerage
commissions paid for such purchases and, therefore, the Series do not anticipate
paying brokerage commissions in such transactions. Any transactions for which a
Series pays a brokerage commission will be effected at the best price and
execution available. Purchases from underwriters of securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and the
asked price.
Allocations of transactions, including their frequency, to various dealers
is determined by the Subadvisers in their best judgement and in a manner deemed
to be in the best interest of the investors in a Series rather than by any
formula. The primary consideration is prompt execution of orders in an effective
manner at the most favorable price.
Investment decisions for a Series will be made independently from those for
any other account or investment company that is or may in the future become
managed by the Advisers or their affiliates. If, however, a Series and other
investment companies or accounts managed by the Subadvisers are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by a Series or the size of the position obtainable for the Series. In
addition, when purchases or sales of the same security for a Series and for
other investment companies managed by the Subadvisers occur contemporaneously,
the purchase or sale orders may be aggregated in order to obtain any price
advantages available to large denomination purchases or sales. Furthermore, in
certain circumstances affiliates of the Subadvisers whose investment portfolios
are managed internally, rather than by the Subadvisers, might seek to purchase
or sell the same type of investments at the same time as a Series. Such an event
might also adversely affect that Series.
DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES
Beneficial interests in each Series of Diversified Investors Portfolios are
issued solely in private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the 1933 Act.
Portfolio securities are valued on the basis of market quotations when they
are readily available. Each Series values mortgage-backed and other debt
securities for which market quotations are not readily available at their fair
value as determined in good faith, utilizing procedures approved by the Board of
Trustees of Diversified Investors Portfolios, on the basis of valuations
provided either by dealers or a pricing service. Debt securities having a
remaining maturity of sixty days or less when purchased and debt securities
originally purchased with maturities in excess of sixty days but which currently
have maturities of sixty days or less are valued at cost adjusted for
amortization of premiums and accretion of discounts.
Interest rate futures contracts held by a Series are valued on the basis of
closing market quotations, which are normally available daily. When market
quotations are not readily available, the fair value of these contracts will be
determined in good faith utilizing procedures approved by the Board of Trustees
of Diversified Investors Portfolios.
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<PAGE> 84
A determination of value used in calculating net asset value must be a fair
value determination made in good faith utilizing procedures approved by
Diversified Investors Portfolios Board of Trustees. While no single standard for
deterring fair value exists, as a general rule, the current fair value of a
security would appear to be the amount which a Series could expect to receive
upon its current sale. Some, but not necessarily all, of the general factors
which may be considered in determining fair value include: (i) the fundamental
analytical data relating to the investment; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Without limiting or including all of the specific factors which may be
considered in determining fair value, some of the specific factors include: type
of security, financial statements of the issuer, cost at date of purchase, size
of holding, discount from market value, value of unrestricted securities of the
same class at the time of purchase, special reports prepared by analysts,
information as to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
MANAGEMENT OF DIVERSIFIED INVESTORS PORTFOLIOS
The Trustees and officers of Diversified Investors Portfolios and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate those Trustees who
are "interested persons" (as defined in the 1940 Act) of Diversified Investors
Portfolios. Unless otherwise indicated, the address of each Trustee and officer
of Diversified Investors Portfolios is 4 Manhattanville Road, Purchase, New York
10577.
TRUSTEES AND OFFICERS OF DIVERSIFIED INVESTORS PORTFOLIOS
TRUSTEES
<TABLE>
<CAPTION>
<S> <C>
Tom A. Schlossberg* President, Diversified, 10/92 to present; Executive Vice President and Head of
Pension Operations, Mutual Life Insurance Company of New York, 1/89 to 12/93.
Donald E. Flynn* Vice President, AEGON USA, Inc., 1988 to present; Executive Vice President,
AEGON USA Investment Management, Inc., 1988 to present; Vice President,
AEGON USA Managed Portfolios, Inc., 1988 to present.
Neal M. Jewell Consultant, January 1995; former Executive Vice President, American
International Group Asset Management (since November 1991); Director of
Oversees Pensions, American International Group Asset Management (December
1990 to October 1991); Executive Vice President Pensions, Mutual of New York
(prior to June 1989). His address is 355 Thornridge Drive, Stamford,
Connecticut 06903.
Eugene M. Mannella Vice President, Investment Management Services, Inc. (since August 1993);
Senior Vice President, Lehman Brothers Inc. (May 1986 to August 1993). His
address is Two Orchard Neck Road, Center Moriches, New York 11934.
Patricia L. Sawyer Executive Vice President and Director, Robert L. Smith & Co. (since July 1990);
Vice President, American Express (September 1988 to July 1990). Her address
is 256 East 10th Street, New York, New York 10014.
</TABLE>
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<PAGE> 85
OFFICERS
Mr. Schlossberg is President, Chief Executive Officer and Chairman of the
Board of Diversified Investors Portfolios.
<TABLE>
<S> <C>
Robert F. Colby Secretary; Vice President and Chief Corporate Counsel, Mutual Life Insurance
Company of New York, 1/88 to 12/93; Vice President and General Counsel,
Diversified, 11/93 to present.
Alfred C. Sylvain Treasurer and Assistant Secretary; Vice President and Treasurer of Diversified,
11/93 to present; Vice President, Mutual Life Insurance Company of New York,
1/88 to present.
John F. Hughes Assistant Secretary; Senior Counsel, Mutual Life Insurance Company of New
York, 1/88 to present; Vice President and Senior Counsel, Diversified, 11/93 to
present.
</TABLE>
The Declaration of Trust provides that the Diversified Investors Portfolios
will indemnify its Trustees and officers as described below under "Description
of the Trust; Fund Shares."
For the fiscal year ended December 31, 1994, the Diversified Investors
Portfolios provided the following compensation to its trustees.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement From Registrant
Name of Compensa- Benefits Accrued Estimated Annual and Fund
Person, tion From As Part of Fund Benefits Upon Complex Paid to
Position Registrant Expenses Retirement Trustees
- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Tom A. Schlossberg - 0 - None N/A - 0 -
Trustee
Donald E. Flynn - 0 - None N/A - 0 -
Trustee
Neal M. Jewell $10,000 None N/A $10,000
Trustee
Eugene M. Manella $10,000 None N/A $10,000
Trustee
</TABLE>
INVESTMENT ADVISORY SERVICES
The Adviser manages the assets of each Series pursuant to an
Investment Advisory Agreement (the "Advisory Agreement") with Diversified
Investors Portfolios with respect to that Series and the investment policies
described herein and in the Prospectus. Subject to such further policies as the
Diversified Investors Portfolios' Board of Trustees may determine, the Adviser
provides general investment advice to each Series. For its services under each
Advisory Agreement, Diversified receives from each Series fees accrued daily
and paid monthly at an annual rate equal to the percentages specified in the
table of the corresponding Series' average daily net assets set forth in the
Prospectus.
25
<PAGE> 86
For each Series of Diversified Investors Portfolios, Diversified
has entered into an Investment Subadvisory Agreement (each a "Subadvisory
Agreement") with one or more subadvisers (each "Subadviser," and collectively
the "Subadvisers").
It is the responsibility of a Subadviser to make the day to day investment
decisions for its Series and to place the purchase and sales orders for
securities transactions of such Series, subject in all cases to the general
supervision of Diversified. Each Subadviser furnishes at its own expense all
services, facilities and personnel necessary in connection with managing the
corresponding Series' investments and effecting securities transactions for a
Series.
Each Advisory Agreement provides that Diversified or a Subadviser, as the
case may be, may render services to others. Each agreement is terminable without
penalty on not more than 60 days' nor less than 30 days' written notice by a
Series when authorized either by majority vote of the investors in the Series
(with the vote of each being in proportion to the amount of their investment) or
by a vote of a majority of its Board of Trustees, or by Diversified or a
Subadviser on not more than 60 days' nor less than 30 days' written notice, as
the case may be, and will automatically terminate in the event of its
assignment. Each agreement provides that neither Diversified nor Subadviser nor
their personnel shall be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
execution of security transactions for the corresponding Series, except for
willful misfeasance, bad faith, gross negligence or reckless disregard of its or
their obligations and duties under the Advisory Agreement and the Subadvisory
Agreement, as the case may be.
Diversified's and Subadviser's fees are described in to the Prospectus.
Diversified, if required by applicable state law, shall reimburse a Series or
waive all or part of its fees up to, but not exceeding, its investment advisory
fees from the Series. Such reimbursement, if required, will be equal to the
combined aggregate annual expenses which exceed that expense limitation with the
lowest threshold prescribed by any state in which such Series is qualified for
offer or sale. Management of Diversified Investors Portfolios has been advised
that the lowest such threshold currently in effect is 2 1/2% of net assets up to
$30,000,000, 2% of the next $70,000,000 of net assets and 1/2% of net assets in
excess of that amount.
ADMINISTRATOR
The Administrative Services Agreement between Diversified, as
Administrator, and Diversified Investors Portfolios is described in the
Prospectus. The agreement provides that Diversified may render services to
others as administrator. In addition, the agreement terminates automatically if
it is assigned and may be terminated without penalty by majority vote of the
investors in Diversified Investors Portfolios (with the vote of each being in
proportion to the amount of their investment). The Administrative Services
Agreement also provides that neither Diversified nor its personnel shall be
liable for any error of judgment or mistake of law or for any act or omission in
connection with any Series, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their duties or obligations under said agreements.
CUSTODIAN
Pursuant to a Custodian Contract, Investors Bank & Trust Company acts as
the custodian of each Series' assets (the "Custodian"). The Custodian's business
address is 89 South Street, Boston, Massachusetts 02205-1537. The Custodian's
responsibilities include safeguarding and controlling cash and securities,
handling the receipt and delivery of securities, determining income and
collecting interest on the Series' investments, maintaining books of original
entry for portfolio accounting and other required books and accounts, and
calculating the daily net asset value of beneficial interests in each Series.
Securities held by a Series may be deposited into the Federal Reserve-Treasury
Department Book Entry System or the Depository Trust Company and may be held by
a subcustodian bank if such arrangements are reviewed and approved by the Board
of Trustees of Diversified Investors Portfolios. The Custodian does not
determine the investment
26
<PAGE> 87
policies of any Series or decide which securities any Series will buy or sell.
A Series may, however, invest in securities of the Custodian and may deal with
the Custodian as principal in securities and foreign exchange transactions. For
its services, the Custodian will receive such compensation as may from time to
time be agreed upon by it and Diversified Investors Portfolios.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., serves as the independent accountants for
Diversified Investors Portfolios providing audit and accounting services
including (i) examination of the annual financial statements, (ii) assistance
and consultation with respect to the preparation of filings with the Securities
and Exchange Commission and (iii) preparation of annual income tax returns.
CAPITAL STOCK AND OTHER SECURITIES
Diversified Investors Portfolios is organized as a trust under the law of
the State of New York. Under Diversified Investors Portfolios' Declaration of
Trust, the Trustees are authorized to issue beneficial interest in one or more
Series. Currently there are eight active Series of Diversified Investors
Portfolios. Investors in a Series will be held personally liable for the
obligations and liabilities of that Series (and of no other Series), subject,
however, to indemnification by Diversified Investors Portfolios in the event
that there is imposed upon an investor a greater portion of the liabilities and
obligations of the Series than its proportionate beneficial interest in the
Series. The Declaration of Trust also provides that Diversified Investors
Portfolios shall maintain appropriate insurance (for example, a fidelity bond
and errors and omissions insurance) for the protection of Diversified Investors
Portfolios, its investors, Trustees of Diversified Investors Portfolios,
officers, employees and agents, and covering possible tort and other
liabilities. Thus, the risk of an investor incurring financial loss on account
of investor liability is limited to circumstances in which both inadequate
insurance existed and Diversified Investors Portfolios itself was unable to
meet its obligations.
Investors in a Series are entitled to participate pro rata in distributions
of taxable income, loss, gain and credit of their respective Series only. Upon
liquidation or dissolution of a Series, investors are entitled to share pro rata
in that Series' (and no other Series) net assets available for distribution to
its investors. Diversified Investor Portfolios reserves the right to create and
issue additional Series of beneficial interest, in which case the beneficial
interests in each new Series would participate equally in the earnings,
dividends and assets of that particular Series only (and no other Series). Any
property of Diversified Investors Portfolios is allocated and belongs to a
specific Series to the exclusion of all other Series. All consideration received
by Diversified Investors Portfolios for the issuance and sale of beneficial
interests in a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings and proceeds
thereof, and any funds or payments derived from any reinvestment of such
proceeds, is held by the Trustees of Diversified Investors Portfolios in a
separate subtrust (a Series) for the benefit of investors in that Series and
irrevocably belongs to that Series for all purposes. Neither a Series no
investors in that Series possess any right to or interest in the assets
belonging to any other Series.
Investments in a Series have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Investments in a Series may not be transferred.
Each investor is entitled to a vote in proportion to the amount of its
investment in each Series. Investors in a Series do not have cumulative voting
rights, and investors holding more than 50% of the aggregate beneficial
interests in all outstanding Series may elect all of the Trustees if they choose
to do so and in such event other investors would not be able to elect any
Trustees. Investors in each Series will vote as a separate class except as to
voting for the election of Trustees, as otherwise required by the 1940 Act, or
if determined by the Trustees to be a matter which affects all Series. As to any
matter which does not affect the interest of a particular Series, only investors
in the one or more affected Series are entitled to vote. Diversified Investors
Portfolios is not required and has no current intention of holding annual
meetings of
27
<PAGE> 88
investors, but will hold special meetings of investors when in the judgment of
Trustees it is necessary or desirable to submit matters for an investor vote.
The Declaration of Trust may be amended without the vote of investors, except
that investors have the right to approve by affirmative majority vote any
amendment which would affect their voting rights, alter the procedures to amend
the Declaration of Trust, or as required by law or by Diversified Investors
Portfolios' registration statement, or as submitted to them by the Trustees.
Any amendment submitted to investors which the Trustees determine would affect
the investors of any Series shall be authorized by vote of the investors of
such Series and no vote will be required of investors in a Series not affected.
Diversified Investors Portfolios or any Series may enter into a merger or
consolidation, or sell all or substantially all of its assets, if approved (a)
at a meeting of investors by investors representing the lesser of (i) 67% or
more of the beneficial interest in the affected Series present or represented at
such meeting, if investors in more that 50% of all such beneficial interests are
present or represented by proxy, or (ii) more than 50% of all such beneficial
interests, or (b) by an instrument in writing without a meeting, consented to by
investors representing not less than a majority of the beneficial interest in
the affected Series. Diversified Investors Portfolios or any Series may also be
terminated (i) upon liquidation and distribution of its assets if approved by
the vote of two thirds of its investors (with the vote of each being in
proportion to the amount of its investment), (ii) by the Trustees by written
notice to its investors, or (iii) upon the bankruptcy or expulsion of an
investor in the affected Series, unless the investors in such Series, by
majority vote, agree to continue the Series. Diversified Investors Portfolios
will be dissolved upon the dissolution of the last remaining Series.
The Declaration of Trust provides that obligations of Diversified Investors
Portfolios are not binding upon the Trustees individually but only upon the
property of Diversified Investors Portfolios and that the Trustees will not be
liable for any action or failure to act, but nothing in the Declaration of Trust
protects a Trustee against any liability to which he would otherwise be subject
by reason of wilful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
The Declaration of Trust further provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with
Diversified Investors Portfolios, unless, as to liability to Diversified
Investors Portfolios or its investors, it is finally adjudicated that they
engaged in wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in their offices, or unless with respect to any other
matter it is finally adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of Diversified
Investors Portfolios. In the case of settlement, such indemnification will not
be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
TAXATION
Diversified Investors Portfolios is organized as a New York trust. The
Trust and each Series are not subject to any income or franchise tax in the
State of New York. However, each investor in a Series will be taxable on its
share (as determined in accordance with the governing instruments of the Trust)
of the Series' ordinary income and capital gain in determining its income tax
liability. The determination of such share will be made in accordance with the
Code and regulations promulgated thereunder.
Each Series, since it is taxed as a partnership, is not subject to federal
income taxation. Instead, and investor must take into account, in computing its
federal income tax liability, its share of the Series' income, gains, losses,
deductions, credits and tax preference items, without regard to whether it has
received any cash distributions from the Series.
28
<PAGE> 89
Withdrawals by investors from each Series generally will not result in
their recognizing any gain or loss for federal income tax purposes, except that
(1) gain will be recognized to the extent that any cash distributed exceeds the
basis of the investor's interest in the Series prior to the distribution, (2)
income or gain will be realized if the withdrawal is in liquidation of the
investor's entire interest in the Series and includes a disproportionate share
of any unrealized receivables held by the Series, and (3) loss will be
recognized if the distribution is in liquidation of that entire interest and
consists solely of cash and/or unrealized receivables. The basis of an
investor's interest in a Series generally equals the amount of cash and the
basis of any property that the investor invests in the Series, increased by the
investor's share of income from the Series and decreased by the amount of any
cash distributions and the basis of any property distributed from the Series.
Each Series' taxable year-end will be December 31. Although, as described
above, the Series will not be subject to federal income tax, each will file
appropriate income tax returns.
It is intended that each Series' assets, income and distributions will be
managed in such a way that an investor in each Series will be able to satisfy
the requirements of Subchapter M of the Code.
There are certain tax issues that will be relevant to only certain of the
investors, specifically investors that are segregated asset accounts and
investors who contribute assets rather than cash to a Series. It is intended
that such segregated asset accounts will be able to satisfy diversification
requirements applicable to them and that such contributions of assets will not
be taxable provided certain requirements are met. Such Investors are advised to
consult their own tax advisors as to the tax consequences of an investment in a
Series.
HEDGING STRATEGIES
The use of hedging strategies, such as a Series' entering into interest
rate futures contracts and purchasing options thereon, involves complex rules
that will determine for income tax purposes the character and timing of
recognition of the income received in connection therewith. Income from the
disposition of futures contracts and options thereon will be subject to the
limitation that a Series must derive less than 30% of its gross income from the
sale or other disposition of securities, options or futures contracts held for
less than three months (the "Short-Short Limitation").
If certain requirements are satisfied, any increase in value on a position
that is part of a "designated hedge" will be offset by an decrease in value
(whether realized or not) of the offsetting hedging position during the period
of the hedge for purposes of determining whether the Short-Short Limitation is
satisfied. Thus, only the net gain (if any) from the designated hedge will be
included in gross income for purposes of that limitation. Each Series intends
to qualify for this treatment when it engages in hedging transactions, but at
the present time it is not clear whether this treatment will be available for
all of a Series' hedging transactions. To the extent this treatment is not
available, a Series may be forced to defer the closing out of certain options
and futures contracts beyond the time when it otherwise would be advantageous
to do so, in order for an investor in the Series to qualify as a RIC.
OTHER TAXATION
The investment by an investor in a Series does not cause the investor to
be liable for any income or franchise tax in the State of New York. Investors
are advised to consult their own tax advisers with respect to the particular
tax consequences to them of an investment in a Series.
FINANCIAL STATEMENTS OF AUSA
The financial statements of AUSA that are included in this Statement of
Additional Information are different from the financial statements of
Diversified Investors Variable Funds. The financial statements of AUSA should
be considered only as bearing upon the ability of AUSA to meet its obligations
under the
29
<PAGE> 90
Contracts and should not be considered as bearing on the investment performance
of the assets held in the Diversified Investors Variable Funds.
30
<PAGE> 91
APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
STANDARD & POOR'S BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree.
The rating "AA" may be modified by the addition of a plus or minus sign to
show relative standing within such category.
MOODY'S BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa -
judged to be the best quality, carry the smallest degree of investment risk;
Aa- judged to be of high quality by all standards.
FITCH INVESTORS SERVICE BOND RATINGS
AAA. Securities of this rating are regarded as strictly high-grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions, an
liable to but slight market fluctuation other than through changes in the money
rate. The factor last named is of importance varying with the length of
maturity. Such securities are mainly senior issues of strong companies, and are
most numerous in the railway and public utility fields, though some industrial
obligations have this rating. The prime feature of an AAA rating is showing of
earnings several times or many times interest requirements with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Other features may enter in, such as a wide margin
of protection through collateral security or direct lien on specific property as
in the case of high class equipment certificates or bonds that are first
mortgages on valuable real estate. Sinking funds or voluntary reduction of the
debt by call or purchase are often factors, while guarantee or assumption by
parties other than the original debtor may also influence the rating.
AA. Securities in this group are of safety virtually beyond question, and
as a class are readily salable while many are highly active. Their merits are
not greatly unlike those of the AAA class, but a security so rated may be of
junior though strong lien--in many cases directly following an AAA security--or
the margin of safety is less strikingly broad. The issue may be the obligation
of a small company, strongly secured but influenced as to ratings by the lesser
financial power of the enterprise and more local type of market.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A is the highest commercial paper rating category utilized by S&P, which
uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
A-1
<PAGE> 92
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
FITCH-1, FITCH-2, DUFF 1 AND DUFF 2 COMMERCIAL PAPER RATINGS
Commercial paper rated "Fitch-1" is considered to be the highest grade
paper and is regarded as having the strongest degree of assurance for timely
payment. "Fitch-2" is considered very good grade paper and reflects an assurance
of timely payment only slightly less in degree than the strongest issue.
Commercial paper issues rate "Duff 1" by Duff & Phelps, Inc. have the
following characteristics; very high certainty of timely payment, excellent
liquidity factors supported by strong fundamental protection factors, and risk
factors which are very small. Issues rated "Duff 2" have a good certainty of
timely payment, sound liquidity factors and company fundamentals, small risk
factors, and good access to capital markets.
A-2
<PAGE> 93
FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(1) With respect to Diversified Investors Variable Funds ("the Funds").
Report of Independent Accountants ..................................... F-1
Statements of assets and liabilities as of December 31, 1994 .......... F-2
Statements of operations for the applicable periods
ended December 31, 1994 .............................................. F-3
Statements of changes in net assets for the applicable periods
ended December 31, 1994 the year ended and 1993 ...................... F-4
Notes to financial statements ......................................... F-5
(2) With respect to Diversified Investors Portfolios
Report of Independent Accountants ..................................... F-11
Money Market:
Statement of Assets and Liabilities for the year
ended December 31, 1994 ......................................... F-12
Statement of Operations for the year ended December 31, 1994 .......... F-13
Statement of Changes in Net Assets for the year ended
December 31, 1994 ............................................... F-14
Portfolio of Investments for the year ended
December 31, 1994 ............................................... F-15
High Quality Bond:
Statement of Assets and Liabilities for the year ended
December 31, 1994 ............................................... F-17
Statement of Operations for the year ended December 31, 1994 .......... F-18
Statement of Changes in Net Assets for the year ended
December 31, 1994 ............................................... F-19
Portfolio of Investments for the year ended
December 31, 1994 ............................................... F-20
Intermediate Government Bond:
Statement of Assets and Liabilities for the year ended
December 31, 1994 ............................................... F-23
Statement of Operations for the year
ended December 31, 1994 ......................................... F-24
Statement of Changes in Net Assets for the year ended
December 31, 1994 ............................................... F-25
Portfolio of Investments for the year
ended December 31, 1994 ......................................... F-26
Government/Corporate Bond:
Statement of Assets and Liabilities for the year ended
December 31, 1994 ............................................... F-29
Statement of Operations for the year
ended December 31, 1994 ......................................... F-30
Statement of Changes in Net Assets for the year ended
December 31, 1994 ................................................ F-31
Portfolio of Investments for the year
ended December 31, 1994 ......................................... F-32
</TABLE>
(i)
<PAGE> 94
<TABLE>
<S> <C>
Balanced:
Statement of Assets and Liabilities for the year ended
December 31, 1994 ............................................... F-35
Statement of Operations for the year
ended December 31, 1994 ......................................... F-36
Statement of Changes in Net Assets for the year ended
December 31, 1994 ............................................... F-37
Portfolio of Investments for the year
ended December 31, 1994 ......................................... F-38
Equity Income:
Statement of Assets and Liabilities for the year ended
December 31, 1994 ............................................... F-41
Statement of Operations for the year ended December 31, 1994 ......... F-42
Statement of Changes in Net Assets for the year ended
December 31, 1994 ............................................... F-43
Portfolio of Investments for the year ended December 31, 1994 ........ F-44
Growth and Income:
Statement of Assets and Liabilities for the year ended
December 31, 1994 ............................................... F-51
Statement of Operations for the year ended December 31, 1994 ......... F-52
Statement of Changes in Net Assets for the year ended
December 31, 1994 ............................................... F-53
Portfolio of Investments for the year ended December 31, 1994 ........ F-54
Equity Growth;
Statement of Assets and Liabilities for the year ended
December 31, 1994 ............................................... F-58
Statement of Operations for the year ended December 31, 1994 ......... F-59
Statement of Changes in Net Assets for the year ended
December 31, 1994 ............................................... F-60
Portfolio of Investments for the year ended December 31, 1994 ........ F-61
Special Equity:
Statement of Assets and Liabilities for the year ended
December 31, 1994 ............................................... F-64
Statement of Operations for the year ended December 31, 1994 ......... F-65
Statement of Changes in Net Assets for the year ended
December 31, 1994 ............................................... F-66
Portfolio of Investments for the year ended December 31, 1994 ........ F-67
Notes to Financial Statements ........................................ F-75
(3) With respect to AUSA Life Insurance Company, Inc. ("AUSA")
Report of Independent Accounts ....................................... F-79
Balance Sheets - Statutory Basis at December 31, 1994 and 1993 ....... F-80
Statement of Operations - Statutory Basis for the year
ended December 31, 1994 ......................................... F-82
Statement of Capital and Surplus - Statutory Basis for the year
ended December 31, 1994 ......................................... F-83
Statement of Cash Flows - Statutory Basis for the year
ended December 31, 1994 ......................................... F-84
Notes to Financial Statements - Statutory Basis ...................... F-85
Financial Statement Schedules ........................................ F-97
</TABLE>
(ii)
<PAGE> 95
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of the
AUSA Life Insurance Company, Inc and the
Contractholders of Diversified Investors Variable Funds
We have audited the accompanying statements of assets and liabilities of
Diversified Investors Variable Funds (comprising, respectively, the Money
Market, Intermediate Government, Government/ Corporate, Balanced, Equity
Income, Growth & Income, Equity Growth, Special Equity, Calvert Series and
Scudder International Equity Series Subaccounts) as of December 31, 1994, the
related statements of operations, statements of changes in net assets and the
financial highlights for the period August 18, 1994 (commencement of
operations) to December 31, 1994 for the Money Market, Intermediate Government,
Government/Corporate, Balanced, Equity Income, Equity Growth and the Calvert
Series Subaccounts, the related statements of operations, statements of changes
in net assets and the financial highlights for the period August 24, 1994
(commencement of operations) to December 31, 1994 for the Growth and Income,
Special Equity and Scudder International Equity Series Subaccounts. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining. on a test basis. evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
held by the custodian as of December 31, 1994. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective subaccounts constituting Diversified Investors Variable
Funds as of December 31,1994, the results of their operations, the changes in
their net assets, and the financial highlights for the periods referred to
above, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
February 14, 1995
<PAGE> 96
DIVERSIFIED INVESTORS VARIABLE FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
---------------------------------------------------------------------------------
MONEY INTERMEDIATE GOVERNMENT/ EQUITY GROWTH &
MARKET GOVERNMENT CORPORATE BALANCED INCOME INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in the Funds, at value
(Note 2) ............................. $7,986,817 $7,090,633 $6,429,076 $29,086,708 $106,890,198 $293,571
Receivable for purchase of units ....... 41,151 15,880 25,089 109,700 170,447 5,799
---------- ---------- ---------- ----------- ------------ --------
Total Assets .................. 8,027,968 7,106,513 6,454,165 29,196,408 107,060,645 299,330
---------- ---------- ---------- ----------- ------------ --------
LIABILITIES:
Payable for sale of units .............. 7,752 0 3,919 3,161 17,755 0
Accrued expenses ....................... 4,444 5,053 4,545 21,036 73,881 185
---------- ---------- ---------- ----------- ------------ --------
Total Liabilities ............ 12,196 5,053 8,464 24,197 91,636 185
---------- ---------- ---------- ----------- ------------ --------
Net assets attributable to annuity
contract holders ................... $8,015,772 $7,101,460 $6,445,701 $29,172,211 $106,969,009 $299,145
========== ========== ========== =========== ============ ========
Accumulation units ..................... 587,295 580,105 385,881 1,750,876 6,344,534 29,489
========== ========== ========== =========== ============ ========
Unit value ............................. $ 13.65 $ 12.24 $ 16.70 $ 16.66 $ 16.86 $ 10.14
========== ========== ========== =========== ============ ========
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
--------------------------------------
SCUDDER
EQUITY SPECIAL CALVERT INTERNATIONAL
GROWTH EQUITY SERIES EQUITY SERIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT TOTAL
---------- ---------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in the Funds, at value
(Note 2) ............................. $60,759,442 $876,650 $7,511,422 $1,531,686 $228,456,203
Receivable for purchase of units ....... 169,758 11,535 38,535 20,699 608,553
----------- -------- ---------- ---------- ------------
Total Assets .................. 60,929,200 888,185 7,549,957 1,552,385 229,064,756
----------- -------- ---------- ---------- ------------
LIABILITIES:
Payable for sale of units .............. 6,783 0 5,742 0 45,112
Accrued expenses ....................... 30,597 547 5,476 1,014 146,778
----------- -------- ---------- ---------- ------------
Total Liabilities ............ 37,380 547 11,218 1,014 191,890
----------- -------- ---------- ---------- ------------
Net assets attributable to annuity
contract holders ................... $60,891,820 $887,638 $7,538,739 $1,551,371 $228,872,866
=========== ======== ========== ========== ============
Accumulation units ..................... 2,812,266 83,503 575,200 162,316
=========== ======== ========== ==========
Unit value ............................. $ 21.65 $ 10.63 $ 13.11 $ 9.56
=========== ======== ========== ==========
</TABLE>
See notes to financial statements.
F-2
<PAGE> 97
DIVERSIFIED INVESTORS VARIABLE FUNDS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
-----------------------------------------------------------------------
FOR THE PERIOD AUGUST 18, 1994* THROUGH DECEMBER 31, 1994
-----------------------------------------------------------------------
MONEY INTERMEDIATE GOVERNMENT/ EQUITY
MARKET GOVERNMENTAL CORPORATE BALANCED INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allocated income from Diversified Investors
Portfolios (Note 2) . . . . . . . . . . . $86,867 $ 92,963 $ 80,986 $ 260,266 $ 876,022
Dividend income . . . . . . . . . . . . . . 0 0 0 0 0
------- -------- -------- --------- ----------
Total net investment income . . . . . . 86,867 92,963 80,986 260,266 876,022
------- -------- -------- --------- ----------
Expenses (Note 3):
Mortality and expense risk . . . . . . 15,214 13,389 11,522 55,827 206,729
Less expenses waived by AUSA . . . . . 3,430 0 0 0 0
------- -------- -------- --------- ----------
Net expenses . . . . . . . . . . . . . 11,784 13,389 11,522 55,827 206,729
------- -------- -------- --------- ----------
Net investment income (loss) . . . . . 75,083 79,574 69,464 204,439 669,293
------- -------- -------- --------- ----------
Realized and unrealized gains (losses) on
investments (Note 2)
Net realized gains (losses) on
investments . . . . . . . . . . . . . (113) 689 (56,967) 14,307 7,264
Net increase (decrease) in unrealized
appreciation on investments . . . . . 0 (76,469) 42,725 (436,273) (3,423,467)
------- -------- -------- --------- ----------
Net realized and unrealized gains
(losses) on investments . . . . . . . (113) (75,780) (14,242) (421,966) (3,416,203)
------- -------- -------- --------- ----------
Net increase (decrease) in net assets
resulting from operations . . . . . . $74,970 $ 3,794 $ 55,222 $(217,527) $(2,746,910)
======= ======== ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
----------------------------------
FOR THE PERIOD
AUGUST 24, AUGUST 18, AUGUST 24, AUGUST 18, AUGUST 24,
1994* 1994* 1994* 1994* 1994*
THROUGH DECEMBER 31, 1994
-----------------------------------------------------------------
SCUDDER
GROWTH & EQUITY SPECIAL CALVERT INTERNATIONAL
INCOME GROWTH EQUITY SERIES EQUITY SERIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT TOTAL
---------- ---------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allocated income from Diversified Investors
Portfolios (Note 2) . . . . . . . . . . . $ 759 $ 81,815 $ 1,111 $ 0 $ 0 $ 1,480
Dividend income . . . . . . . . . . . . . . 0 0 0 233,659 0 233
------ --------- ------- --------- -------- -------
Total net investment income . . . . . . 759 81,815 1,111 233,659 0 1,714
------ --------- ------- --------- -------- -------
Expenses (Note 3):
Mortality and expense risk . . . . . . 368 114,974 1,047 14,187 1,923 435
Less expenses waived by AUSA . . . . . 0 0 0 0 0 3
------ --------- ------- --------- -------- -------
Net expenses . . . . . . . . . . . . . 368 114,974 1,047 14,187 1,923 431
------ --------- ------- --------- -------- -------
Net investment income (loss) . . . . . 391 (33,159) 64 219,472 (1,923) 1,282
------ --------- ------- --------- -------- -------
Realized and unrealized gains (losses) on
investments (Note 2)
Net realized gains (losses) on
investments . . . . . . . . . . . . . (680) (651,406) 8,817 (954) (24) (679)
Net increase (decrease) in unrealized
appreciation on investments . . . . . 2,190 288,214 2,163 (266,714) (50,808) (3,918)
------ --------- ------- ---------- -------- -------
Net realized and unrealized gains
(losses) on investments . . . . . . . 1,510 (363,192) 10,980 (267,668) (50,832) (4,597)
------ --------- ------- --------- -------- -------
Net increase (decrease) in net assets
resulting from operations . . . . . . $1,901 $(396,351) $11,044 $( 48,196) $(52,755) $(3,314)
====== ========= ======= ========= ======== =======
- -----------------------
* commencement of operations.
See notes to financial statements.
</TABLE>
F-3
<PAGE> 98
DIVERSIFIED INVESTORS VARIABLE FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
--------------------------------------------------------------------
FOR THE PERIOD AUGUST 18, 1994* THROUGH DECEMBER 31, 1994
--------------------------------------------------------------------
MONEY INTERMEDIATE GOVERNMENT/ EQUITY
MARKET GOVERNMENT CORPORATE BALANCED INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
From Operations:
Net investment income (loss).... $ 75,083 $ 79,574 $ 69,464 $ 204,439 $ 669,293
Net realized gains (losses) on
investments ................... (113) 689 (56,967) 14,307 7,264
Net increase (decrease) in
unrealized appreciation on
investments ................... 0 (76,469) 42,725 (436,273) (3,421,467)
---------- ---------- ---------- ----------- ------------
Net increase (decrease) in net assets
resulting from operations ......... 74,970 3,794 55,222 (217,527) (2,746,460)
========== ========== ========== =========== ============
From unit transactions:
Net proceeds from the issuance
of units ...................... 8,312,365 7,527,162 6,717,812 31,111,015 113,434,098
Net asset value of units
redeemed ...................... (371,561) (429,496) (347,333) (1,721,277) (3,718,179)
---------- ---------- ---------- ----------- ------------
Net increase to assets from unit
transactions ...................... 7,940,802 7,097,666 6,190,479 29,389,738 109,715,919
---------- ---------- ---------- ----------- ------------
Net assets end of period ............ $8,015,772 $7,101,460 $6,445,701 $29,172,211 $106,969,009
========== ========== ========== =========== ============
Units issued during the period ...... 614,681 615,322 406,852 1,854,069 6,563,713
Units redeemed during the period .... (27,386) (35,217) (20,971) (103,193) (219,179)
---------- ---------- ---------- ----------- ------------
Units outstanding end of period ..... 587,295 580,105 385,881 1,750,876 6,344,534
========== ========== ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
----------------------------------------------------------------------
FOR THE PERIOD
AUGUST 24, AUGUST 18, AUGUST 24, AUGUST 18, AUGUST 24,
1994* 1994* 1994* 1994* 1994
THROUGH DECEMBER 31, 1994
----------------------------------------------------------------------
SCUDDER
GROWTH & EQUITY SPECIAL CALVERT INTERNATIONAL
INCOME GROWTH EQUITY SERIES EQUITY SERIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT TOTAL
---------- ---------- ---------- ---------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
From Operations:
Net investment income (loss).... $ 391 $ (88,159) $ 64 $ 219,472 $ (1,923) $ 1,282,698
Net realized gains (losses) on
investments ................... (680) (651,406) 8,817 (954) (24) (679,067)
Net increase (decrease) in
unrealized appreciation on
investments ................... 2,190 288,214 2,163 (266,714) (50,808) (3,918,439)
-------- ------------ -------- ---------- ---------- ------------
Net increase (decrease) in net assets
resulting from operations ......... 1,901 (396,351) 11,044 (48,196) (52,755) (3,314,808)
======== ============ ======== ========== ========== ============
From unit transactions:
Net proceeds from the issuance
of units ...................... 308,974 63,704,643 890,956 8,000,765 1,640,352 241,668,142
Net asset value of units
redeemed ...................... (11,730) (2,416,472) (14,362) (413,830) (36,226) (9,480,468)
-------- ------------ -------- ---------- ---------- ------------
Net increase to assets from unit
transactions ...................... 297,244 61,288,171 876,594 7,586,935 1,604,126 232,187,674
-------- ------------ -------- ---------- ---------- ------------
Net assets end of period ............ $299,145 $60,891,820 $887,638 $7,538,739 $1,551,371 $228,872,866
======== ============ ======== ========== ========== ============
Units issued during the period ...... 30,644 2,925,280 84,857 606,724 166,014 13,868,174
Units redeemed during the period .... (1,155) (113,014) (1,354) (31,542) (3,698) (556,709)
-------- ------------ -------- ---------- ---------- ------------
Units outstanding end of period ..... 29,489 2,812,266 83,503 575,200 162,316 13,311,465
======== ============ ======== ========== ========== ============
- ------------------
* commencement of operations.
See notes to financial statements.
</TABLE>
F-4
<PAGE> 99
DIVERSIFIED INVESTORS VARIABLE FUNDS
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Diversified Investors Variable Funds ("DIVF") is a separate investment
account established on November 30.1993 by AUSA Life Insurance Company. Inc.
("AUSA") under the laws of the State of New York.
DIVF operates as a unit investment trust under the Investment Company Act
of 1940 (the "1940 Act"). DIVF holds assets that are segregated from all of
AUSA's other assets and, at present, is used as an investment vehicle under
certain tax-deferred annuity contracts issued by AUSA to fund retirement plans
maintained by certain not-for-profit and other organizations ("Group Plans").
AUSA is the legal holder of the assets in DIVF.
DIVF had no assets or operations until August 18, 1994 (commencement of
operations). There are currently ten subaccounts within DIVF which are available
to contractholders of Group Plans, and each invests only in a corresponding
portfolio of Diversified Investors Portfolios (the "Portfolios"). the Calvert
Socially Responsible Series of Acacia Capital Corporation ("Calvert") or the
International Portfolio of the Scudder Variable Life Fund ("Scudder")
(collectively referred to as the "Funds"). The Funds are registered under the
1940 Act as open-end, diversified, management investment companies. The
respective financial statements of the Funds are contained separately in this
report.
2. SIGNIFICANT ACCOUNTING POLICIES
A. INVESTMENTS:
The investment by DIVF in the Portfolios reflects DIVF's proportionate
interest in the net assets of the Portfolios. The investment in shares of
Calvert and Scudder is stated at net asset value. The Fund's values are based
upon market valuations, as described below. of the securities held in each of
the corresponding Portfolios.
PORTFOLIO VALUATIONS:
The Portfolios value short-term securities at amortized cost. The amortized
cost of a security is determined by valuing it at original cost and thereafter
amortizing any discount or premium at a constant rate until maturity.
Securities traded on national securities exchanges are valued at the last
sales price as of the close of the New York Stock Exchange or at the last bid
price for over-the-counter securities.
Bonds are valued at the last available price provided by an independent
pricing service for securities traded on a national securities exchange. Bonds
that are listed on a national securities exchange but are not traded and bonds
that are regularly traded in the over-the-counter market are valued at the mean
of the last available bid and asked prices.
A description of portfolio valuation for Calvert and Scudder can be found
in Note A of their financial statements contained within this report.
All other securities, including any restricted securities. will be valued
at their fair value as determined in good faith by the governing Boards of the
Funds.
B. INVESTMENT INCOME:
Each DIVF subaccount earns income, net of expenses. daily on its investment
in the corresponding portfolio. All of the net investment income and realized
and unrealized gains and losses from the security transactions of the
corresponding Portfolios are allocated pro rata among the investors at the time
of such determination. With respect to DIVF Subaccounts which invest in Calvert
and Scudder,
F-5
<PAGE> 100
DIVERSIFIED INVESTORS VARIABLE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
dividend income is recorded on ex-date. Realized gains and losses from the sale
of investments are computed using the identified cost method for both accounting
and Lax purposes.
C. FEDERAL INCOME TAXES
The operations of DIVF form a part of and are taxed with, the operations of
AUSA. AUSA does not expect based upon current tax law, to incur any income tax
burden upon the earnings or realized capital gains attributed to DIVF. Based
upon this expectation, no charges are currently being deducted from DIVF for
Federal income tax purposes.
3. FEES AND TRANSACTIONS WITH AFFILIATES
Because certain subaccounts of DIVF purchase interests in Diversified
Investors Portfolios, the net assets of those DIVF Subaccounts reflect the
investment management fee charged by Diversified Investment Advisors, Inc. (a
wholly owned subsidiary of AUSA), the investment advisor, which provides
investment advice and related services for Diversified Investors Portfolios.
Daily charges to DIVF for mortality and expense risk assumed by AUSA are
computed at an annual rate of 0.90% for Group Plans; however, AUSA reserves the
right to charge maximum fees of 1.25% upon written notice.
AUSA has voluntarily undertaken to waive its fees of the Money Market,
Equity Income. Equity Growth and Scudder International Equity Subaccounts, to
the extent necessary, to limit all expenses to 0.10%. 0.46%. 0.50% and 1.02%,
respectively, of average net assets. AUSA reserves the right to raise this limit
upon written notice.
4. GROUP PLAN ASSUMPTIONS
On December 31, 1993, AUSA entered into an agreement with The Mutual Life
Insurance Company of New York ("MONY") pursuant 10 which certain contracts
issued by MONY to Group Plans may be transferred through assumption reinsurance
to AUSA. Subject to receipt of any necessary state insurance department
approvals and authorizations. The assumption reinsurance of any Group Plan to
AUSA will result in the transfer of the applicable assets out of a corresponding
MONY separate account and into DIVF. During 1994, assets transferred from MONY
pursuant to assumption reinsurance transactions were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS AMOUNT
----------- ------
<S> <C>
Money Market ........................ $ 7,329,470
Intermediate Government ............. 7,009,246
Government/Corporate ................ 6,122,972
Balanced ............................ 28,079,379
Equity Income ....................... 108,398,220
Equity Growth ....................... 57,640,191
Calvert Series ...................... 7,327,885
------------
$221,907,363
============
</TABLE>
The amounts related to these assumptions are reflected as proceeds from the
issuance of units in the statements of changes in net assets.
F-6
<PAGE> 101
DIVERSIFIED INVESTORS VARIABLE FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
--------------------------------------------------------------------------
FOR THE PERIOD AUGUST 18, 1994* THROUGH DECEMBER 31, 1994
--------------------------------------------------------------------------
MONEY INTERMEDIATE GOVERNMENT/ EQUITY
MARKET GOVERNMENT CORPORATE BALANCED INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .................. $13.44 $12.33 $16.76 $16.85 $17.21
------ ------ ------ ------ ------
Income from investment operations:
Net investment income ................................. 0.22 0.24 0.32 0.20 0.18
Net gains on investments, (both realized and
unrealized) ......................................... (0.01) (0.33) (0.38) (0.39) (0.53)
------ ------ ------ ------ ------
Total from investment operations ...................... 0.21 (0.09) (0.06) (0.19) (0.35)
------ ------ ------ ------- ------
Net asset value, end of period ........................ 13.65 12.24 16.70 16.66 16.86
====== ====== ====== ====== ======
Ratio of net income to average net assets (net of
waiver) ............................................. 4.65%** 5.64%** 5.64%** 3.47%** 3.09%**
Ratio of expenses to average net assets (net of
waiver) ............................................. 0.73%** 0.95%** 0.94%** 0.95%** 0.95%**
Ratio of net income to average net assets ............. 4.43%** -- -- -- --
Ratio of expenses to average net assets ............... 0.94%** -- -- -- --
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
------------------------------------------
FOR THE PERIOD
AUGUST 24, AUGUST 18, AUGUST 24, AUGUST 18, AUGUST 24,
1994* 1994* 1994* 1994* 1994*
THROUGH DECEMBER 31, 1994
---------------------------------------------------------------------------
SCUDDER
GROWTH & EQUITY SPECIAL CALVERT INTERNATIONAL
INCOME GROWTH EQUITY SERIES EQUITY SERIES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .................. $10.31 $20.67 $10.47 $13.28 $10.18
------ ------ ------ ------ ------
Income from investment operations:
Net investment income ................................. 0.03 (0.02) -- 0.66 (0.03)
Net gains on investments, (both realized and
unrealized) ......................................... (0.20) 1.00 0.16 (0.83) (0.59)
------ ------ ------ ------ ------
Total from investment operations ...................... (0.17) 0.98 0.16 (0.17) (0.62)
------ ------ ------ ------ ------
Net asset value, end of period ........................ 10.14 21.65 10.63 13.11 9.56
====== ====== ====== ====== ======
Ratio of net income to average net assets (net of
waiver) ............................................. 0.85%** (0.27%**) 0.05%** 11.76%** (0.81%**)
Ratio of expenses to average net assets (net of
waiver) ............................................. 0.80%** 0.93%** 0.80%** 0.76%** 0.81%**
Ratio of net income to average net assets ............. -- -- -- -- --
Ratio of expenses to average net assets ............... -- -- -- -- --
</TABLE>
- ------------
* Commencement of operations.
** Annualized.
<PAGE> 102
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to provide liquidity and as high a level
of income as is consistent with the preservation of capital through investment
in domestic and foreign U.S. dollar-denominated money market obligations with
maturities of 397 days or less.
The year 1994 was the year of monetary policy tightening. Over the course
of a ten month span, beginning February 4, 1994, the Federal Reserve took six
steps changing monetary policy from loose to neutral, and by the end of the
year, to a tightening stance. The Fed Funds target rate was increased 250 basis
points from 3.00% to 5.50% during the year.
Our outlook for 1995 is for continued Fed tightening, with another increase
likely at the end of January 1995. The Federal Reserve is expected to continue
its policy of measured periodic tightenings over the course of the year as the
Fed tries to moderate economic growth and thereby slow inflation. We therefore
expect short term rates to continue to rise through the first half of 1995,
until actions taken in 1994 produce the visible results of moderating economic
growth and reducing inflationary pressures. Once the Federal Reserve sees the
results, tightening actions should dissipate.
The Portfolio continues to be invested in high quality short-term
instruments, principally commercial paper. Our investment strategy is to
emphasize purchases of 30-90 day maturities so as to provide flexibility in
responding to any changes in the market place without sacrificing current
income. As of December 30,1994 the average maturity was 23.2 days, with
maturities ranging from 4 to 60 days. The shorter than usual maturity is due to
the need to respond rapidly to rising interest rates. The 30 day yield of the
Money Market Portfolio at December 30, 1994 was 5.56% after charges imposed by
the Portfolio. Of course, past performance does not guarantee future investment
results.
HIGH QUALITY BOND PORTFOLIO
The High Quality Bond Portfolio seeks to provide as high a level of current
income as is consistent with preservation of capital through investment in high
quality debt securities with short and intermediate maturities.
The bond market as measured by the Lehman Brothers Government/Corporate
Index had a total return of -3.5% for 1994. To put this into perspective,
1994's return marked the Index's worst return since 1974 (+0.2%) and was the
first negative calendar year return since its inception in January 1973. During
the course of the year, there was a pronounced flattening of the yield curve as
short-term interest rates rose more than long-term interest rates. In 1994,
maturity and sector had a major impact on results. The shorter the maturity, the
better the results. Looking back at 1994, it was a year of monetary policy
tightening. Over the course of a ten month span, beginning February 4, 1994, the
Federal Reserve took six steps changing monetary policy from loose to neutral,
and by the end of the year to a tightening stance. The Fed Funds target rate was
increased 250 basis points from 3.00% to 5.50% during the year. The Portfolio's
strong performance was attributable to a shorter duration versus the Index.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
The Intermediate Government Bond Portfolio seeks to provide as high a level
of current income as is consistent with preservation of capital through
investment in U.S. Government and U.S. Government Agency and instrumentality
securities with intermediate maturities, and high quality short-term
obligations.
In 1994, actions taken by the Federal Reserve had a significant effect on
fixed income securities. A 75 basis point increase in the Fed Funds and Discount
rates was enacted on November 15th, the largest single increase since 1981.
Subsequent to this rate increase, yields on short term securities rose in
anticipation that the Fed would raise rates further, while prices on longer
maturities moved higher due to a perception the Fed was intent on fighting
inflation. The result of this activity was a dramatic flattening in the
two-to-thirty year maturity sector of the yield curve.
F-8
<PAGE> 103
The Portfolio was well positioned for the flattening of the yield curve as
its weightings in cash and longer-term securities shielded it from the
volatility of the short-to-intermediate sector of the market. We continue to
seek high quality Government securities and will maintain our cash position
while we determine the direction of the market in 1995.
GOVERNMENT/CORPORATE BOND PORTFOLIO
The Government/Corporate Bond Portfolio seeks to achieve the maximum total
return through investment in investment grade debt securities, U.S. Government
and U.S. Government Agency and instrumentality securities and collateralized
mortgage obligations guaranteed by these agencies and instrumentalities and high
quality short-term obligations.
The bond market, as measured by the Lehman Government/Corporate Index, had
a total return of -3.5% in 1994, the worst calendar return since its inception
in 1973.
After a brief two week rally to start the year, bond prices of all
maturities plunged in nearly a straight line through mid-July. An extremely
strong economy, record job creation levels, and increasing commodity prices were
factors influencing this decline. The market rebounded in late July and August,
but continued its slide in September with shorter term securities hardest hit.
The more aggressive than expected November increase by the Federal Reserve
finally convinced investors that it was serious about fighting inflation.
Subsequent to this increase prices on longer maturities moved higher while
shorter term issues continued to fall due to concerns the Fed would continue to
raise rates in 1995.
The portfolio's barbell strategy of investing in cash and longer term
maturities enabled it to avoid the short-to-intermediate segment of the yield
curve which experienced the greatest price declines.
BALANCED PORTFOLIO
The Balanced Portfolio seeks to provide a high total investment return
consistent with a broad diversified mix of stocks, bonds and money market
instruments.
The financial markets posted mixed results in 1994. The S&P 500 and Russell
1000 Growth were slightly positive and the Russell 1000 Value was slightly
negative. Bond investors concentrating on longer maturities generally
underperformed those focused on intermediate maturities. Moreover, bonds tended
to underperform stocks in general. Treasury bills, which returned 4.2%, were the
best performing asset class.
Asset allocation had a negative impact on performance. Throughout the year
the Portfolio was conservatively positioned with a bias towards bonds and value
oriented stocks. The cash position was kept fairly low as well. However,
superior stock selection was a major mitigating factor and helped the Portfolio
achieve results that were very strong relative to most balanced funds.
EQUITY INCOME PORTFOLIO
The Equity Income Portfolio seeks to provide a high level of current income
through investment in a diversified portfolio of common stocks with relatively
high current yields; capital appreciation is a secondary objective.
The past year was, for the most part, a difficult one for value investors.
One of the major reasons behind the relative weakness for value oriented
strategies was the large disparity of returns between traditional growth and
value oriented sectors. The rise in interest rates and their impact on the
economy and corporate profits was particularly troublesome for value oriented
sectors such as finance, utilities, and basic industries. All of these sectors
substantially underperformed growth areas such as technology and non-cyclicals.
Throughout the year the Portfolio was positioned with a bias toward sectors
which would benefit from a strong global economic expansion. The large sector
weightings in the basis industry and industrial sectors, combined with the
conservative, yield oriented approach to value enabled the Portfolio to post
positive results in a very difficult market environment.
F-9
<PAGE> 104
GROWTH & INCOME PORTFOLIO
The Growth & Income Portfolio seeks to provide current income and capital
appreciation through investment primarily in a diversified portfolio of
securities selected for their potential to generate current income or long-term
capital appreciation.
Despite a year that to say the least, was eventful, the Index managed to
squeak out a slightly positive result with a total return for 1994 of 1.3%.
During the year, investors were confronted with rising interest rates as a
result of the Federal Reserve Boards' change in monetary policy. However, on the
bright side, strong 1994 earnings reports and the prospects of more to follow in
1995, acted as a balance to the rise in interest rates. The Portfolio's relative
underperformance versus the S&P 500 Index was in part attributable to the basic
industry and finance related stocks. The basic industry sector did not have
exposure in the more economically sensitive groups such as steel, aluminum,
paper and forest products which did well for the year. The Portfolio's lack of
exposure in these stocks is due to its investment approach, which focuses on
companies that generate consistent earnings growth. The financial stocks, which
held up surprisingly well during the first six months, finally succumbed to
higher interest rates: banks were the notable loser.
EQUITY GROWTH PORTFOLIO
The Equity Growth Portfolio seeks to provide a high level of capital
appreciation through investment in a diversified portfolio of common stocks with
potential for above-average growth in earnings; current income is a secondary
objective.
The past year saw a shift in emphasis toward growth investing. The Russell
1000 Growth Index outperformed its Value counterpart by 4.6%. One of the main
reasons behind this phenomenon was the relative strength of traditional growth
sectors such as technology and consumer non-cyclicals. The technology area
benefited from a robust economy, which led to tremendous sales and earnings
gains for many companies. These gains were enough to offset concerns about
higher interest rates which were particularly troublesome for more value
oriented sectors. Improved prospects for many HMO and drug companies, due to the
postponement of a health care reform bill, was a major factor behind the
strength of non-cyclical stocks.
The Equity Growth Portfolio through its' networking, cellular and managed
care investment themes participated handsomely in the rally these two sectors
enjoyed. In fact, performance for the portfolio was among the best in the growth
category by several measures. Going forward the Portfolio will continue to
emphasize these themes as the manager feels that many of the fastest growing
companies in America will be within these areas.
SPECIAL EQUITY PORTFOLIO
The Special Equity Portfolio seeks to provide a high level of capital
appreciation through investment in a diversified portfolio of common stocks of
small to medium size companies which, in the opinion of the Portfolio's
investment advisers. will present opportunity for significant increases in
earnings and/or value, without consideration for current income.
Small company stocks as measured by the Russell 2000 Index, at -1.82,
underperformed their brethren large company stocks, as measured by the S&P 500
Index, at 1.3% during 1994. More over, 1994 marked the first year that the large
company stocks outperformed the small company stocks since 1990. The impact of a
falling dollar during the course of the year combined with recovering economies
in both Europe and Japan have clearly benefited the earnings of the large
multi-national companies relative to the small companies, whose businesses tend
to be domestically concentrated. The Portfolio's relative outperformance versus
the Russell 2000 Index was attributed to investments in the technology and
consumer non-cyclical sectors of the market, which were among the market's best
performers. Technology was where the earnings visibility seemed to be, due to
better than expected earnings reports. The strong earnings were directly
correlated to strong demand among computer and semiconductor related products.
The consumer noncyclical sector, a laggard over the previous two years, reversed
its course in 1994. The indefinite postponement of a health care reform bill by
Congress provided the catalyst, as health care related stocks performed well.
F-10
<PAGE> 105
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Owners of Beneficial Interests of the
Diversified Investors Portfolios:
We have audited the accompanying statements of assets and liabilities of
Diversified Investors Portfolios (constituting Money Market, High Quality Bond
Intermediate Government Bond, Government/Corporate Bond, Balanced, Equity
Income, Equity Growth, Growth & Income, and the Special Equity Portfolios)
(collectively the "Series Portfolios") as of December 31, 1994, the related
statements of operations, the statements of changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Series Portfolios management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. Our procedures included
confirmation of securities owned as of December 31, 1994 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the Portfolios constituting Diversified Investors Portfolios as of
December 31, 1994, the results of their operations, the changes in their net
assets and their financial highlights for the year then ended, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
February 14, 1995
F-11
<PAGE> 106
MONEY MARKET
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (cost $161,533,012) ...................... $161,533,012
Cash ........................................................... 33,697
------------
Total assets ............................................ 161,566,709
------------
LIABILITIES
Due to advisor ................................................. 4,905
Accrued expenses:
Investment advisory fees .................................... 28,811
Custody fees ................................................ 4,684
Professional fees ........................................... 14,830
Printing fees ............................................... 2,000
Miscellaneous fees .......................................... 1,687
------------
Total liabilities ....................................... 56,917
------------
Net assets ..................................................... $161,509,792
============
Net assets consist of:
Paid-in capital ............................................. $161,509,792
------------
Total net assets ......................................... $161,509,792
============
</TABLE>
See notes to financial statements.
F-12
<PAGE> 107
MONEY MARKET
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Interest income ............................................. $5,534,540
----------
Expenses:
Investment advisory fees (Note 3) ........................... 312,079
Custodian fees .............................................. 50,498
Professional fees ........................................... 35,617
Printing fees ............................................... 2,000
Miscellaneous fees .......................................... 3,257
----------
403,451
Expenses waived by the investment advisor ...................... 29,141
----------
Total expenses ........................................... 374,310
----------
Net investment income .......................................... 5,160,230
----------
Net realized losses on investments ............................. (9,238)
----------
Net increase in net assets resulting from operations ........... $5,150,992
==========
</TABLE>
See notes to financial statements.
F-13
<PAGE> 108
MONEY MARKET
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
From operations:
Net investment income ........................................ $ 5,160,230
Net realized losses on investments ........................... (9,238)
------------
Net increase in net assets resulting from operations ......... 5,150,992
------------
From capital transactions:
Proceeds from capital invested ............................... 439,406,062
Value of capital withdrawn ................................... 283,047,262
------------
Net increase in net assets resulting from capital transactions .. 156,358,800
------------
Net increase in net assets ...................................... 161,509,792
Net assets:
Beginning of year ............................................ --
------------
End of year .................................................. $161,509,792
============
</TABLE>
See notes to financial statements.
F-14
<PAGE> 109
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
COMMERCIAL PAPER
$ 500,000 American Express Credit Corp 5.81%, Due 1/04/95 ........ $ 499,677
3,000,000 Associates Corp. of North America 5.77%, Due 1/20/95 ... 2,990,383
2,600,000 Associates Corp. of North America 5.94%, Due 1/30/95 ... 2,587,130
3,000,000 Avco Financial Services, Ltd 6.00%, Due 1/10/95 ........ 2,995,000
3,000,000 Avco Financial Services, Ltd 6.00%, Due 1/11/95 ........ 2,994,500
5,000,000 Barclays' 5.75%, Due 1/20/95 ........................... 5,035,139
3,470,000 Bausch & Lomb, Inc. 5.85%, Due 1/31/95 ................. 3,452,519
4,000,000 CIT Group Holdings 6.05%, Due 2/03/95 .................. 3,977,145
2,300,000 CIT Group Holdings 5.97%, Due 2/01/95 .................. 2,287,794
6,000,000 Canadian Imperial Bank 5.70%, Due 1/23/95 .............. 5,978,150
2,000,000 Canadian Wheat Board 6.03%, Due 1/17/95 ................ 1,994,305
1,500,000 Canadian Wheat Board 6.03%, Due 1/27/95 ................ 1,493,216
6,500,000 Commercial Credit Company 5.90%, Due 1/23/95 ........... 6,475,498
2,900,000 Consolidation Coal Company 6.00%, Due 1/10/95 .......... 2,895,167
3,300,000 Consolidation Coal Company 5.87%, Due 1/20/95 .......... 3,289,239
3,300,000 Cooperative Financing Corp. 5.07%, Due 1/03/95 ......... 3,298,433
4,700,000 Copley Financing Company 5.72%, Due 1/04/95 ............ 4,697,013
4,400,000 Enterprise Funding Corporation 6.08%, Due 1/27/95 ...... 4,379,936
2,300,000 Exxon Funding 5.90%, Due 1/04/95 ....................... 2,298,492
300,000 Ford Motor Credit Company 6.00%, Due 1/13/95 ........... 299,350
600,000 Ford Motor Credit Company 6.05%, Due 1/19/95 ........... 598,084
3,600,000 Ford Motor Credit Company 6.00%, Due 1/23/95 ........... 3,586,200
700,000 Ford Motor Credit Company 6.05%, Due 2/03/95 ........... 696,000
5,600,000 General Electric Capital Corp 5.87%, Due 2/28/95 ....... 5,546,127
6,500,000 Goldman Sachs Group L P 6.03%, Due 2/10/95 ............. 6,455,360
2,301,000 HMO Funding Inc. 6.04%, Due 1/09/95 .................... 2,297,525
4,000,000 HMO Funding Inc. 6.12%, Due 1/13/95 .................... 3,991,160
3,000,000 Heller International Corp. 5.83%. Due 1/26/95 .......... 2,987,368
3,200,000 Heller International Corp. 6.00%, Due 1/18/95 .......... 3,190,400
4,900,000 Household Finance Corp. 6.00%, Due 1/20/95 ............. 4,883,665
2,700,000 J.C. Penney & Co Funding Corp. 5.75%, Due 1/17/95 ...... 2,692,669
2,800,000 J.C. Penney & Co Funding Corp. 5.76%, Due 1/17/95 ...... 2,792,383
3,000,000 Merrill Lynch & Company Inc. 5.75%, Due 1/12/95 ........ 2,994,251
3,500,000 Merrill Lynch & Company Inc. 5.75%, Due 2/14/95 ........ 3,474,844
4,000,000 Met Life Funding Inc. 5.75%. Due 1/27/95 ............... 3,982,750
2,600,000 Met Life Funding Inc. 5.90%, Due 2/07/95 ............... 2,583,808
4,917,000 Midwest Funding Corp. 6.28%. Due 7/01/22 (e) ........... 4,942,135
3,500,000 Norwest Financial Inc. 5.08%, Due 2/15/95 .............. 3,474,061
7,000,000 PHH Corp. 5.97%, Due 1/31/95 ........................... 6,964,014
4,200,000 Paccar Financial Group 5.82%, Due 2/22/95 .............. 4,164,013
1,600,000 Prudential Home Mortgage Corp 5.76%, Due 2/16/95 ....... 1,587,968
1,000,000 Sanwa Business Credit 5.89%, Due 1/13/95 ............... 997,874
1,200,000 Sanwa Business Credit 6.10%, Due 1/17/95 ............... 1,196,544
5,000,000 Sanwa Business Credit 6.00%, Due 1/24/95 ............... 4,980,000
</TABLE>
See notes to financial statements.
F-15
<PAGE> 110
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
COMMERCIAL PAPER--(CONTINUED)
$2,000,000 Seagram (Joseph) & Sons Inc. 6.00%, Due 1/09/95 ..... $ 1,997,000
1,100,000 Texas Department of Commerce 6.06%, Due 1/05/95 ..... 1,099,074
4,400,000 Transamerica Finance Group Inc. 5.75%, Due 1/10/95 .. 4,392,973
3,000,000 United Merchants Finance Ltd 5.85%, Due 2/22/95 ..... 2,974,163
5,000,000 Weyerhaueser Mortgage Company 5.89%, Due 1/05/95 .... 4,995,910
900,000 Xerox Credit Corp. 5.95%, Due 1/20/95 ............... 897,025
------------
Total Commercial Paper (cost $161,333,434) ......... 161,333,434 99.89%
------------ ------
GOVERNMENT AGENCY OBLIGATIONS
200,000 Federal Home Loan Mortgage Corp. 5.85%, .............
Due 1/13/95 (cost $199,578) ....................... 199,578 0.12%
------------ ------
Total investments (cost $161,533,012) ............... $161,533,012 100.01%
Liabilities in Excess of Other Assets ............... (23,220) (0.01)%
------------ ------
Net Assets .......................................... $161,509,792 100.00%
============ ======
</TABLE>
------------
(e) This interest rate is subject to change periodically based on
the greater of the 30 or 90 day Federal composite rate. This
instrument resets on a weekly basis. The rate shown was in
effect as of December 31, 1994.
See notes to financial statements.
F-16
<PAGE> 111
HIGH QUALITY BOND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31,1994
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $153,594,290) .......... $148,149,543
Interest receivable ................................ 2,044,737
Receivable from securities lending ................. 2,888
------------
Total assets ................................. 150,197,168
------------
LIABILITIES
Deposit for securities loaned ...................... 6,120,000
Due to advisor ..................................... 10,172
Accrued expenses:
Investment advisory fees ........................ 44,972
Custody fees .................................... 5,979
Professional fees ............................... 15,612
Printing fees ................................... 2,000
Miscellaneous fees .............................. 2,217
------------
Total liabilities ............................ 6,200,952
------------
Net assets ......................................... $143,996,216
============
Net assets consist of:
Paid-in capital ................................. $149,440,963
Net unrealized depreciation on investments ...... (5,444,747)
------------
Total net assets ............................. $143,996,216
============
</TABLE>
See notes to financial statements.
F-17
<PAGE> 112
HIGH QUALITY BOND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Interest income ................................. $10,722,903
-----------
Expenses:
Investment advisory fees (Note 3) ............... 607,967
Custodian fees .................................. 62,821
Professional fees ............................... 37,891
Printing fees ................................... 2,000
Miscellaneous fees .............................. 4,345
-----------
715,024
Expenses waived by the investment advisor .......... 20,204
-----------
Total expenses ............................... 694,820
-----------
Net investment income .............................. 10,028,083
-----------
Net realized and unrealized losses on investments:
Net realized losses on investments .............. (2,474,325)
Net unrealized depreciation on investments ...... (5,444,747)
-----------
Net realized and unrealized losses on investments .. (7,919,072)
-----------
Net increase in net assets resulting from
operations....................................... $ 2,109,011
===========
</TABLE>
See notes to financial statements.
F-18
<PAGE> 113
HIGH QUALITY BOND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
From operations:
Net investment income ......................................... $ 10,028,083
Net realized losses on investments ............................ (2,474,325)
Net unrealized depreciation on investments .................... (5,444,747)
------------
Net increase in net assets resulting from operations .......... 2,109,011
------------
From capital transactions:
Proceeds from capital invested ................................ 324,614,137
Value of capital withdrawn .................................... 182,726,932
------------
Net increase in net assets resulting from capital transactions ... 141,887,205
------------
Net increase in net assets ....................................... 143,996,216
Net assets:
Beginning of year ............................................. --
------------
End of year ................................................... $143,996,216
============
</TABLE>
See notes to financial statements.
F-19
<PAGE> 114
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C>
TIME DEPOSITS
$ 345,041 First National Bank of Boston, Nassau 5.80%,
Due 1/10/95(d) ......................................... $ 345,097
764,794 First National Bank of Boston, Nassau 5.11%,
Due 1/23/95(d) ......................................... 764,902
345,041 First National Bank of Boston. Nassau 5.83%,
Due 1/27/95(d) ......................................... 345,097
1,033,415 Fleet National Bank, Grand Cayman 6.25%,
Due 1/03/95(d) ......................................... 1,033,593
2,000,000 Fuji Bank LTD, Grand Cayman 5.875%,
Due 2/02/95(d) ......................................... 2,000,324
725,204 Harris Bank, Nassau 6.05%, Due 1/17/95(d) ................ 725,325
906,505 Harris Bank, Nassau 5.9375%, Due 2/02/95(d) .............. 906,653
---------
Total Time Deposits (cost $6,120,991) .................. 6,120,991 4.25%
--------- -----
REPURCHASE AGREEMENT
903,670 Repurchase Agreement with Prudential Securities, dated
12/30/94, 5.65%. proceeds at maturity $904,237, Due
1/03/95 (collateralized by Federal Home Loan
Mortgage Corp., 7.00% to 9.00%, Due 12/15/20 to
1/15/24 and Federal National Mortgage Association,
Due 12/01/00 to 11/25/23, with a market value of
$921,755) (cost $903,812) .............................. 903,812 0.63%
--------- -----
CORPORATE BONDS AND NOTES
-------------------------
AUTO
2,000,000 General Motors Acceptance Corp. 9.25%, Due 6/08/95 ....... 2,018,818
2,000,000 General Motors Acceptance Corp. 8.875%, Due 1/09/95 ...... 2,001,658
932,318 Chrysler Financial Corp. 8.65%, Due 10/15/96 ............. 933,147
---------
Total Auto ............................................. 4,953,623 3.44%
--------- -----
BANKING
2,000,000 Korea Development Bank 8.90%, Due 3/12/96 ................ 2,018,198
3,000,000 Korea Development Bank 7.73%, Due 5/05/97 ................ 2,952,807
318,344 Rochester Community Savings Bank 7.75%, Due 11/15/96 ..... 317,707
327,491 Rochester Community Savings Bank 6.70%. Due 4/15/97 ...... 325,647
3,000,000 First Hawaiian Bank Medium Term Note, Due 11/20/96 ....... 2,954,844
5,000,000 Discover Card Master Trust 5.40%, Due 11/16/01 ........... 4,545,145
5,000,000 Peoples' Bank Credit Card Trust 4.80%, Due 12/15/99 ...... 4,800,595
3,975,825 Fleet Finance 8.45%, Due 4/15/06 ......................... 3,996,535
612,309 Shawmut REMIC Trust 6.40%, Due 9/15/96 ................... 578,551
697,657 Security Pacific Home Equity Loan 1991-2 8.10%,
Due 6/15/20 ............................................ 693,442
4,166,667 Signet Credit Card Trust 1990-1 9.00%, Due 6/15/97 ....... 4,193,371
5,000,000 Euro Credit Card Trust 9.50%, Due 11/10/96 ............... 5,068,750
1,440,144 Tax Collection Trust 5.45%, Due 6/15/97 .................. 1,436,067
----------
Total Banking .......................................... 33,881,659 23.53%
---------- -----
BANKING EQUITY
4,000,000 First Chicago Master Trust II 1990-A 9.25%, Due 12/15/96 . 4,031,236
1,154,591 Chemical Financial Acceptance Corp. 9.40%, Due 3/17/97 ... 1,162,880
404,826 First Interstate Of California 8.90%, Due 11/15/97 ....... 403,599
2,000,000 First Chicago Master Trust 6.25%, Due 8/15/99 ............ 1,909,818
---------
Total Banking Equity ................................... 7,507,533 5.21%
--------- -----
</TABLE>
See notes to financial statements.
F-20
<PAGE> 115
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C>
FINANCE
$ 2,000,000 Associates Corp 9.05%, Due 3/20/98 .................... $ 2,035,878
5,000,000 Lehman Brothers Inc. 7.625%, Due 8/01/98 .............. 4,744,300
5,000,000 National Credit Card Trust 1989 9.45%, Due 12/31/97.... 5,106,695
5.000,000 Salomon Brothers Medium Term Note 6.42%,
Due 1/15/96 ......................................... 4,907,395
2,000,000 US Leasing International Notes 8.78%, Due 4/11/95 ..... 2,003,148
725,000 Lehman Medium Term Note 6.08%, Due 7/08/98 ............ 664,085
4,001,230 Chemical Financial Acceptance Corp. 9.25%,
Due 5/15/98 ......................................... 4,079,970
74,115 Chase Lincoln Grantor Trust 7.75%, Due 6/15/97 ........ 73,900
750,973 Merrill Lynch Mortgage Investors 10.10%,
Due 11/15/07 ........................................ 782,236
1,275,569 Merrill Lynch Mortgage Investors 10.35%, Due 5/15/09... 1,353,773
779,214 Merrill Lynch Mortgage Investors 9.40%, Due 9/15/09.... 804,483
1.623,883 Merrill Lynch Mortgage Investors 9.00%, Due 7/15/11.... 1,647,768
2,970,468 Resolution Trust Corp. 6.77%, Due 7/25/25 ............. 2,798,353
------------
Total Finance ....................................... 31,001,984 21.53%
------------ -----
INSURANCE
1,000,000 New York Life Funding 9.25%, Due 5/15/95 .............. 1,010,031
572,790 Central Life Assurance 9.00%, Due 11/01/96 ............ 575,410
------------
Total Insurance ..................................... 1,585,441 1.10%
------------ -----
MOTOR VEHICLES & EQUIPMENT
258,907 Select Autos 7.65%, Due 7/15/96 ....................... 258,184
4,040,475 Ford Motor 6.27%, Due 1/02/00 ......................... 3,945,528
------------
Total Motor Vehicles & Equipment .................... 4,203,712 2.92%
------------ -----
RETAIL
2,000,000 Sears Euro Accounts Receivable Trust 9.75%,
Due 4/15/95 ......................................... 2,013,750
6,000,000 Sears Credit Account 5.90%, Due 11/16/98(a) ........... 5,925,000
------------
Total Retail ........................................ 7,938,750 5.51%
------------ -----
REAL ESTATE
1,337,668 Daiwa Home Equity Loans 7.875%, Due 11/25/19 .......... 1,327,287
2,397,428 Travelers Mortgage 12.00%, Due 3/01/14 ................ 2,579,534
184,384 US Home Equity Loan 9.25%, Due 1/15/21 ................ 185,549
1,313,890 US Home Equity Loan 8.50%, Due 4/15/21 ................ 1,317,659
------------
Total Real Estate ................................... 5,410,029 3.76%
------------ -----
SECURITY & COMMODITY BROKERS/DEALERS
6,000,000 Bear Stearns 7.625%, Due 9/15/99 ...................... 5,743,788
4,650,000 Morgan Stanley 7.32%, Due 1/15/97 ..................... 4,559,358
Total Security & Commodity Brokers/Dealers .......... 10,303,146 7.16%
------------ -----
Total Corporate Bonds and Notes (cost $111,200,510).. 106,785,877 74.16%
------------ -----
U.S. GOVERNMENT SECURITIES
5,000,000 U.S. Treasury Note 5.875%. Due 3/31/99
(cost $4,662,1 17) .................................. 4,645,305 3.22%
------------ -----
</TABLE>
See notes to financial statements.
F-21
<PAGE> 116
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY
$ 3,936,778 Guaranteed Export Certificates 4.813%, Due 12/15/98 .... $ 3,768,508
5,000,000 ITT Floorplan Receivables Master Trust, Due 2/15/01 .... 4,950,000
82,385 Federal Home Loan Mortgage Corp. 5.25%,
Due 7/01/97 .......................................... 81,307
1,040,481 Federal Home Loan Mortgage Corp., Due 3/01/13 .......... 1,013,490
1,157,397 Federal Home Loan Mortgage Corp. 7.00%,
Due 1/01/18 .......................................... 1,100,649
4,299,008 Federal Home Loan Mortgage Corp. 9.00%,
Due 10/01/05 ......................................... 4,312,459
1,861,066 Federal Home Loan Mortgage Corp. 7.50%,
Due 3/01/08 .......................................... 1,811,895
1,494,583 Federal National Mortgage Association 6.75%,
Due 2/01/03 .......................................... 1,458,607
718,830 Federal National Mortgage Association 7.00%,
Due 4/01/04 .......................................... 699,198
287,391 Federal Agricultural Mortgage Corp. 5.25%,
Due 2/25/98 .......................................... 284,654
2,814,818 Federal National Mortgage Association 8.00%,
Due 7/25/97 .......................................... 2,806,427
1,257,446 Federal Home Loan Mortgage Corp. REMIC Series
MH-1 10.15%, Due 4/15/06 ............................. 1,280,619
5,950,000 Midstate Trust II A3 9.35%, Due 4/01/98 ................ 6,125,745
------------
Total U.S. Government Agency (cost $30,706,860) ...... 29,693,558 20.62%
------------ ------
Total investments (cost $153,594,290) ................ $148,149,543 102.88%
Liabilities in Excess of Other Assets ................ (4,153,327) (2.88)%
------------ ------
Net Assets ........................................... $143,996,216 100.00%
============ ======
</TABLE>
The aggregate cost of securities for federal income tax purposes at
December 31,1994 is $153,594,290.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation ................ $ 573
Aggregate gross unrealized depreciation ................ (5,445,320)
-----------
Net unrealized depreciation ............................ $(5,444,747)
===========
</TABLE>
---------------
(a) All or part of this security is on loan.
(d) Collateral for securities on loan.
See notes to financial statements.
F-22
<PAGE> 117
INTERMEDIATE GOVERNMENT BOND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $94,413,587) ..... $89,703,507
Cash ......................................... 8,146
Interest receivable .......................... 1,225,487
Receivable from securities lending ........... 3,347
-----------
Total assets ........................... 90,940,487
-----------
LIABILITIES
Deposit for securities loaned ................ 4,250,000
Payable for securities purchased ............. 339
Due to advisor ............................... 3,211
Accrued expenses:
Investment advisory fees ................... 26,908
Custody fees ............................... 4,858
Professional fees .......................... 13,471
Printing fees .............................. 2,000
Miscellaneous fees ......................... 960
-----------
Total liabilities ...................... 4,301,747
-----------
Net assets ................................... $86,638,740
===========
Net assets consist of:
Paid-in capital ........................... $91,348,820
Net unrealized depreciation on
investments .............................. (4,710,080)
-----------
Total net assets ......................... $86,638,740
===========
</TABLE>
See notes to financial statements.
F-23
<PAGE> 118
INTERMEDIATE GOVERNMENT BOND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Interest income ...................................... $4,319,969
----------
Expenses:
Investment advisory fees (Note 3) .................... 246,814
Custodian fees ....................................... 30,987
Professional fees .................................... 32,772
Printing fees ........................................ 2,000
Miscellaneous fees ................................... 1,808
----------
314,381
Expenses waived by the investment advisor................ 32,308
----------
Total expenses .................................... 282,073
----------
Net investment income ................................... 4,037,896
----------
Net realized and unrealized losses on investments:
Net realized losses on investments ................... (286,190)
Net decrease in unrealized depreciation on
investments ......................................... (4,710,080)
----------
Net realized and unrealized losses on investments ....... (4,996,270)
----------
Net decrease in net assets resulting from operations .... $ (958,374)
==========
</TABLE>
See notes to financial statements.
F-24
<PAGE> 119
INTERMEDIATE GOVERNMENT BOND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
From operations:
Net investment income ..................................... $ 4,037,896
Net realized losses on investments ........................ (286,190)
Net unrealized depreciation on investments ................ (4,710,080)
------------
Net decrease in net assets resulting from operations ...... (958,374)
------------
From capital transactions:
Proceeds from capital invested ............................ 118,805,465
Value of capital withdrawn ................................ 31,208,351
------------
Net increase in net assets resulting from capital
transactions .............................................. 87,597,114
------------
Net increase in net assets ................................... 86,638,740
Net assets:
Beginning of year ......................................... --
------------
End of year ............................................... $ 86,638,740
============
</TABLE>
See notes to financial statements.
F-25
<PAGE> 120
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
TIME DEPOSITS
$ 48,223 First National Bank of Boston, Nassau 5.80%,
Due 1/10/95(d) ........................................... $ 48,231
302,773 First National Bank of Boston, Nassau 5.11%,
Due 1/23/95(d) ........................................... 302,815
48,223 First National Bank of Boston, Nassau 5.83%,
Due 1/27/95(d) ........................................... 48,231
717,650 Fleet National Bank, Grand Cayman 6.25%,
Due 1/03/95(d) ........................................... 717,773
2,000,000 Fuji Bank LTD, Grand Cayman 5.875%,
Due 2/02/95(d) ........................................... 2,000,322
503,614 Harris Bank, Nassau 6.05%, Due 1/17/95(d) .................. 503,697
629,517 Harris Bank, Nassau 5.9375%, Due 2/02/95(d) ................ 629,619
-----------
Total Time Deposits (cost $4,250,688) ................. 4,250,688 4.90%
----------- -----
REPURCHASE AGREEMENT
92,928 Repurchase Agreement with Prudential Securities, Dated
12/30/94, 5.65%, proceeds at maturity $92,987, Due
1/03/95 (collateralized by Federal Home Loan
Mortgage Corp., 7.00% to 9.00%, Due 12/15/20 to
1/15/24 and Federal National Mortgage Association,
1.94% to 10.50%, Due 12/01/00 to 11/25/23, with a
market value of $94,783) (cost $92,943) .................. 92,943 0.11%
----------- -----
GOVERNMENT AGENCY OBLIGATIONS
3,200,000 Federal Farm Credit Bank 5.75%, Due 1/30/95 ................ 3,184,666
1,200,000 Federal Home Loan Mortgage Corp. 5.58%,
Due 1/05/95 .............................................. 1,199,070
100,000 Federal Home Loan Mortgage Corp. 5.55%,
Due 1/06/95 .............................................. 99,908
2,800,000 Federal Home Loan Mortgage Corp. 5.85%,
Due 1/13/95 .............................................. 2,794,085
300,000 Federal Home Loan Mortgage Corp. 5.59%,
Due 1/24/95 .............................................. 298,882
1,400,000 Federal Home Loan Mortgage Corp. 5.73%,
Due 1/30/95 .............................................. 1,393,315
150,000 Federal Home Loan Mortgage Corp. 5.85%.
Due 1/31/95 .............................................. 149,244
1,500,000 Federal Home Loan Mortgage Corp. 5.75%,
Due 2/02/95 .............................................. 1,492,094
540,000 Federal Home Loan Mortgage Corp. 5.95%,
Due 2/10/95 .............................................. 536,341
2,200,000 Federal National Mortgage Association 5.88%,
Due 1/05/95 .............................................. 2,198,203
600,000 Federal National Mortgage Association 5.88%,
Due 1/12/95 .............................................. 598,825
300,000 Federal National Mortgage Association 5.90%,
Due 1/17/95 .............................................. 299,164
-----------
Total Short-term Obligations (cost $14,243,797) ....... 14,243,797 16.44%
----------- -----
</TABLE>
See notes to financial statements.
F-26
<PAGE> 121
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
- --------- ----- ----------
<S> <C> <C> <C>
MORTGAGE BACKED SECURITIES
$ 444,202 Government National Mortgage Association. 6.50%,
Due 11/15/08 ......................................................... $ 405,612
549,543 Government National Mortgage Association. 6.50%,
Due 10/15/08 ......................................................... 501,801
214,715 Government National Mortgage Association. 6.50%,
Due 11/15/08 ......................................................... 196,062
466,377 Government National Mortgage Association. 7.00%,
Due 11/15/08 ......................................................... 425,860
273,511 Government National Mortgage Association. 6.50%,
Due 9/15/08 .......................................................... 249,750
894,177 Government National Mortgage Association. 6.50%,
Due 11/15/08 ......................................................... 816,495
839,447 Government National Mortgage Association. 6.50%,
Due 11/15/08 ......................................................... 766,520
922,808 Government National Mortgage Association. 6.50%,
Due 10/15/08 ......................................................... 842,639
15,375 Government National Mortgage Association. 7.50%,
Due 4/15/02 .......................................................... 14,702
626,123 Government National Mortgage Association. 7.50%,
Due 9/15/07 .......................................................... 598,730
227,334 Government National Mortgage Association. 7.50%,
Due 8/15/07 ........................................................... 217,388
879,913 Government National Mortgage Association. 7.50%,
Due 8/15/07 ........................................................... 841,416
42,132 Government National Mortgage Association. 7.50%,
Due 6/15/07 ........................................................... 40,288
19,511 Government National Mortgage Association. 7.50%,
Due 7/15/07 ........................................................... 18,657
442,204 Government National Mortgage Association. 7.50%,
Due 8/15/07 ........................................................... 422,858
693,019 Government National Mortgage Association. 7.50%,
Due 8/15/07 ........................................................... 662,700
187,750 Government National Mortgage Association. 7.50%,
Due 8/15/07 ........................................................... 179,536
723,504 Government National Mortgage Association. 7.50%,
Due 8/15/07 ........................................................... 691,851
805,155 Government National Mortgage Association. 7.50%,
Due 8/15/07 ........................................................... 769,929
623,779 Government National Mortgage Association. 7.50%,
Due 9/15/07 ........................................................... 596,489
113,813 Government National Mortgage Association. 7.50%,
Due 9/15/07 ........................................................... 108,834
601,271 Government National Mortgage Association. 7.50%,
Due 9/15/07 ........................................................... 574,965
20,521 Government National Mortgage Association. 7.50%,
Due 8/15/07 ........................................................... 19,624
458,521 Government National Mortgage Association. 7.50%,
Due 8/15/07 ........................................................... 438,461
-----------
Total Mortgage Backed Securities (cost $11,286,974) ................. 10,401,167 12.01%
----------- -----
</TABLE>
See notes to financial statements.
F-27
<PAGE> 122
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES
$ 6,500,000 U.S. Treasury Note 8.25%, Due 7/15/98 .................................. $ 6,577,188
1,000,000 U.S. Treasury Note 7.25%, Due 8/31/96 .................................. 994,061
2,000,000 U.S. Treasury Note 7.50%, Due 11/15/01 ................................. 1,963,122
2,000,000 U.S. Treasury Note 4.375%, Due 8/15/96 ................................. 1,903,122
3,000,000 U.S. Treasury Note 5.75%, Due 8/15/03 .................................. 2,607,183
5,000,000 U.S. Treasury Note 5.125%, Due 3/31/96 ................................. 4,857,805
15,000,000 U.S. Treasury Note 6.875%, Due 7/31/99 ................................. 14,446,875
5,500,000 U.S. Treasury Note 8.875%, Due 5/15/00 ................................. 5,752,648
3,310,000 U.S. Treasury Note 8.50%, Due 8/15/95 .................................. 3,337,923
6,000,000 U.S. Treasury Note 8.50%, Due 11/15/00(a) .............................. 6,187,500
-----------
Total U.S. Government Securities (cost $51,777,839) ................. 48,627,427 56.13%
----------- ------
U.S. GOVERNMENT AGENCY
3,000,000 Federal Home Loan Mortgage Corp. 6.50%,
Due 2/15/21 ........................................................... 2,609,187
5,000,000 Federal Home Loan Mortgage Corp. 6.50%,
Due 12/15/21 .......................................................... 4,313,145
2,000,000 Federal Home Loan Mortgage Corp., Due 2/15/24 .......................... 1,977,418
1,845,813 Federal Home Loan Mortgage Corp. GNMA,
Due 8/25/23 ........................................................... 1,760,793
1,477,688 Federal National Mortgage Association, Due 9/25/08 ..................... 1,426,942
-----------
Total U.S. Government Agency (cost $12,761,346) ..................... 12,087,485 13.95%
----------- ------
Total investments (cost $94,413,587) ................................... $89,703,507 103.54%
Liabilities in Excess of Other Assets .................................. (3,064,767) (3.54)%
----------- ------
Net Assets ............................................................. $86,638,740 100.00%
=========== ======
The aggregate cost of securities for federal income tax purposes at December 31, 1994 is $94,413,587.
The following amount is based on costs for federal income tax purposes:
Aggregate gross unrealized appreciation ................................ $ 7,725
Aggregate gross unrealized depreciation ................................ (4,717,805)
-----------
Net unrealized depreciation ............................................ $(4,710,080)
-----------
</TABLE>
- ---------------
(a) All or part of this security is on loan.
(d) Collateral for securities on loan.
See notes to financial statements.
F-28
<PAGE> 123
GOVERNMENT/CORPORATE BOND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $277,120,705) ...................... $263,659,048
Cash ........................................................... 3,818
Interest receivable ............................................ 3,963,839
Receivable from securities lending ............................. 2,313
------------
Total assets ............................................ 267,629,018
------------
LIABILITIES
Deposit for securities loaned .................................. 12,971,797
Payable for securities purchased ............................... 7,558,906
Due to advisor ................................................. 17,053
Accrued expenses:
Investment advisory fees .................................... 68,715
Custody fees ................................................ 5,399
Professional fees ........................................... 16,827
Printing fees ............................................... 2,000
Miscellaneous fees .......................................... 2,929
------------
Total liabilities ....................................... 20,643,626
------------
Net assets ..................................................... $246,985,392
============
Net assets consist of:
Paid-in capital ............................................. $260,447,049
Net unrealized depreciation on investments .................. (13,461,657)
------------
Total net assets ........................................ $246,985,392
============
</TABLE>
See notes to financial statements.
F-29
<PAGE> 124
GOVERNMENT/CORPORATE BOND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Interest income ............................................. $13,712,333
-----------
Expenses:
Investment advisory fees (Note 3) ........................... 776,654
Custodian fees .............................................. 73,080
Professional fees ........................................... 40,568
Printing fees ............................................... 2,000
Miscellaneous fees .......................................... 5,678
-----------
897,980
Expenses waived by the investment advisor ...................... 10,376
-----------
Total expenses ........................................... 887,604
-----------
Net investment income .......................................... 12,824,729
-----------
Net realized and unrealized losses on investments:
Net realized losses on investments .......................... (5,306,941)
Net unrealized depreciation on investments .................. (13,461,657)
-----------
Net realized and unrealized losses on investments .............. (18,768,598)
-----------
Net decrease in net assets resulting from operations ........... $(5,943,869)
===========
</TABLE>
See notes to financial statements.
F-30
<PAGE> 125
GOVERNMENT/CORPORATE BOND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
From operations:
Net investment income ...................................... $ 12,824,729
Net realized losses on investments .......................... (5,306,941)
Net unrealized depreciation on investments .................. (13,461,657)
------------
Net decrease in net assets resulting from operations ........ (5,943,869)
------------
From capital transactions:
Proceeds from capital invested .............................. 292,110,188
Value of capital withdrawn .................................. 39,180,927
------------
Net increase in net assets resulting from capital
transactions ................................................. 252,929,261
------------
Net increase in net assets ..................................... 246,985,392
Net assets:
Beginning of year ........................................... --
------------
End of year ................................................. $246,985,392
============
</TABLE>
See notes to financial statements.
F-31
<PAGE> 126
GOVERNMENT/CORPORATE BOND FUND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
TIME DEPOSITS
$ 159,925 First National Bank of Boston, Nassau 5.80%,
Due 1/10/95(d) ...................................... $ 159,950
2,498,015 First National Bank of Boston, Nassau 5.11%,
Due 1/23/95(d) ...................................... 2,498,371
159,924 First National Bank of Boston, Nassau 5.83%,
Due 1/27/95(d) ...................................... 159,950
2,190,400 Fleet National Bank, Grand Cayman 6.25%,
Due 1/03/95(d) ...................................... 2,190,780
4,000,000 Fuji Bank LTD, Grand Cayman 5.875%,
Due 2/02/95(d) ...................................... 4,000,653
1,537,123 Harris Bank, Nassau 6.05%, Due 1/17/95(d) ............. 1,537,383
2,426,403 Harris Bank, Nassau 5.9375%, Due 2/02/95(d) ........... 2,426,803
-----------
Total Time Deposits (cost $12,973,890) ........ 12,973,890 5.25%
----------- -----
COMMERCIAL PAPER
600,000 American Express Company 5.80%, Due 1/13/95 ........... 598,743
2,000,000 Avco Financial Services, Ltd 6.00%, Due 1/10/95 ....... 1,996,667
1,000,000 Avco Financial Services, Ltd 6.10%, Due 1/10/95 ....... 998,306
1,000,000 Avco Financial Services, Ltd 6.10%, Due 1/17/95 ....... 997,119
1,200,000 CIT Group Holdings 5.97%, Due 2/01/95 ................. 1,193,632
2,000,000 Commercial Credit Company 5.90%, Due 1/23/95 .......... 1,992,461
1,200,000 Consolidation Coal Company 6.00%, Due 1/10/95 ......... 1,198,000
4,600,000 Consolidation Coal Company 5.87%, Due 1/20/95 ......... 4,584,999
700,000 Copley Financing Corporation 5.95%, Due 2/01/95 ....... 696,298
1,600,000 Enterprise Funding Corporation 6.08%, Due 1/27/95 ..... 1,592,704
600,000 Exxon Funding 5.90%, Due 1/04/95 ...................... 599,606
757,000 Midwest Funding Corp. 6.28%, Due 7/01/22(e) ........... 760,870
5,000,000 PHH Corp. 6.00%, Due 1/05/95 .......................... 4,995,833
1,300,000 Prudential Home Mortgage Corp 5.76%, Due 2/16/95 ...... 1,290,224
1,300,000 Sanwa Business Credit 6.10%, Due 1/17/95 .............. 1,296,256
-----------
Total Commercial Paper (cost $24,791,718) ..... 24,791,718 10.04%
----------- -----
REPURCHASE AGREEMENT
88,848 Repurchase Agreement with Prudential Securities,
dated 12/30/94, 5.65% proceeds at maturity
$88,904, Due 1/03/95 (collateralized by Federal
Home Loan Mortgage Corp., 7.00% to 9.00%,
Due 12/15/20 to 1/15/24 and Federal National
Mortgage Association. 1.94% to 10.50%,
Due 12/01/00 to 11/25/23, with a market value of
$90,619) (cost $88,862) ............................. 88,862 0.04%
----------- -----
</TABLE>
See notes to financial statements.
F-32
<PAGE> 127
GOVERNMENT/CORPORATE BOND FUND PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES
BANKING
$ 4,000,000 Bank of New York 6.50%, Due 12/01/03 .................. $ 3,464,336
5,000,000 Boeing Company 8.625%, Due 11/15/31 ................... 4,980,360
6,000,000 Interamerican Development Bank 8.40%,
Due 09/01/09 ........................................ 6,131,040
5,000,000 Chase Manhattan Co 6.05%, Due 1/15/09 ................ 4,050,000
-----------
Total Banking ................................. 18,625,736 7.54%
----------- ----
BANKING EQUITY
5,000,000 Wells Fargo & Co 8.18%, Due 9/11/95 ................... 5,018,750 2.03%
----------- ----
BEVERAGES
5,000,000 Seagrams (Joseph E.) & Sons 9.65%, Due 8/15/18 ........ 5,371,095 2.17%
----------- ----
CIGARETTES
5,000,000 RJR Nabisco Inc. MTN 8.30%, Due 4/15/99 ............... 4,801,240 1.94%
----------- ----
CONSTRUCTION
5,000,000 International Bank Reconstruction & Development
8.875%, Due 3/01/26 ................................. 5,231,390 2.12%
----------- ----
CONSTRUCTION, MINING & MATERIAL
4,000,000 Caterpillar Tractor 6.00%, Due 5/01/07 ................ 3,202,028 1.30%
----------- ----
CONSUMER GOODS & SERVICES
4,000,000 Proctor & Gamble 9.36%, Due 1/01/21 ................... 4,347,332 1.76%
----------- ----
FINANCE
5,000,000 Paccar Financial Corp 5.52%, Due 9/03/96 .............. 4,813,895
6,000,000 Hoechst-Celanese 7.125%, Due 3/15/09 .................. 5,285,394
6,000,000 Discover Card Master Trust 5.40%, Due 11/16/01 ........ 5,454,174
5,000,000 Discover Card Master Trust 1994.2 A -- 0%,
Due 10/16/04 ........................................ 5,003,945
5,000,000 Advanta Credit Card, Due 02/10/01 ..................... 5,015,745
-----------
Total Finance ................................. 25,573,153 10.35%
----------- -----
MEDICAL & OTHER HEALTH SERVICE
5,000,000 Columbia Healthcare 7.50%, Due 12/15/23 ............... 4,264,480 1.73%
----------- -----
MOTOR VEHICLES & EQUIPMENT
5,000,000 Ford Motor 8.875%, Due 1/15/22 ........................ 5,076,015
5,000,000 General Electric Capital Corp 8.50%, Due 7/24/08 ...... 5,096,395
5,000,000 General Motors Acceptance 8.40%, Due 10/15/99 ......... 4,956,630
-----------
Total Motor Vehicles & Equipment .............. 15,129,040 6.13%
----------- -----
OIL & GAS
5,000,000 Atlantic Richfield 9.00%, Due 5/01/31 ................. 5,096,315
5,000,000 Occidental Petroleum 10.125%, Due 9/15/09 ............. 5,395,800
4,000,000 Texaco Capital 9.75%, Due 3/15/20 ..................... 4,494,328
-----------
Total Oil & Gas ............................... 14,986,443 6.07%
----------- -----
PAPER & FOREST PRODUCTS
7,000,000 Westvaco 10.125%, Due 6/01/19 ......................... 7,509,747 3.04%
----------- -----
</TABLE>
See notes to financial statements.
F-33
<PAGE> 128
GOVERNMENT/CORPORATE BOND FUND PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
RETAIL SALES
$ 3,000,000 J.C. Penney & Co 9.375%, Due 2/01/98 ..................... $ 3,004,848 1.22%
------------ -----
SCHOOL BUSES
5,000,000 Laidlaw Inc. 7.70%, Due 8/15/02 .......................... 4,710,705 1.91%
------------ -----
SECURITY & COMMODITY BROKERS, DEALERS
6,000,000 Morgan Stanley Group 9.875%, Due 5/01/95 ................. 6,055,962 2.45%
------------ -----
UTILITIES--ELECTRIC
5,000,000 Hydro-Quebec 8.50%, Due 12/01/29 ......................... 4,703,595
5,000,000 Hydro-Quebec 9.40%, Due 2/01/21 .......................... 5,193,495
5,000,000 Texas Utilities Electric 7.875%, Due 4/01/24 ............. 4,411,200
------------
Total Utilities-Electric ......................... 14,308,290 5.79%
------------ -----
Total Corporate Bonds and Notes
(cost $153,112,667) ............................ 142,140,239 57.55%
------------ -----
U.S. GOVERNMENT SECURITIES
6,000,000 U.S. Treasury Bond 8.125%, Due 8/15/19 ................... 6,075,000
10,000,000 U.S. Treasury Note 5.75%, Due 8/15/03(a) ................. 8,690,610
10,000,000 U.S. Treasury Note 6.00%, Due 6/30/96 .................... 9,784,360
10,000,000 U.S. Treasury Note 7.875%, Due 11/15/04 .................. 10,028,110
15,000,000 U.S. Treasury Note 7.75%, Due 11/30/99 ................... 14,943,750
------------
Total U.S. Government Securities
(cost $50,850,513) ..................................... 49,521,830 20.05%
------------ -----
U.S. GOVERNMENT AGENCY
5,000,000 Federal Home Loan Mortgage Corp. 6.00%,
Due 12/15/19 ........................................... 4,311,795
3,140,013 Federal Home Loan Mortgage Corp. 4.50%,
Due 06/15/04 ........................................... 3,098,374
4,194,614 Federal National Mortgage Association, Due 9/25/06 ....... 4,050,567
2,891,643 Federal National Mortgage Association, Due 12/25/18 ...... 2,631,537
3,676,825 Federal National Mortgage Association, Due 08/25/23 ...... 3,192,289
5,280,138 Federal Home Loan Mortgage Corp., Due 9/15/07 ............ 5,301,728
6,345,486 Federal Home Loan Mortgage Corp., Due 02/15/24 ........... 6,273,839
5,537,440 Federal Home Loan Mortgage Corp., Due 08/25/23 ........... 5,282,380
------------
Total U.S. Government Agency (cost $35,303,055) .. 34,142,509 13.82%
------------ -----
Total investments (cost $277,120,705) .................... $263,659,048 106.75%
Liabilities in Excess of Other Assets .................... (16,673,656) (6.75)%
------------ -----
Net Assets ............................................... $246,985,392 100.0%
============ =====
The aggregate cost of securities for federal income tax purposes at
December 31, 1994 is $277,120,705.
The following amount is based on costs for federal income tax purposes:
Aggregate gross unrealized appreciation ........................... $ 149,480
Aggregate gross unrealized depreciation ........................... (13,611,137)
------------
Net unrealized depreciation ....................................... $(13,461,657)
============
</TABLE>
- ----------------
(a) All or part of this security is on loan.
(d) Collateral for securities on loan.
(e) The interest rate is subject to change periodically based on the
greater of the 30 or 90 day Federal composite rate. This instrument
resets on a weekly basis. The rate shown was in effect as of December
31, 1994.
See notes to financial statements.
F-34
<PAGE> 129
BALANCED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $171,405,355) ..................... $167,936,644
Receivable for securities sold ................................ 1,099,504
Interest receivable ........................................... 1,230,798
Dividends receivable .......................................... 102,484
Receivable from securities lending ............................ 5,892
------------
Total assets ........................................... 170,375,322
------------
LIABILITIES
Deposit for securities loaned ................................. 42,577,850
Payable for securities purchased .............................. 2,216,860
Due to advisor ................................................ 1,851
Accrued expenses:
Investment advisory fees ................................... 45,982
Custody fees ............................................... 5,808
Professional fees .......................................... 14,534
Printing fees .............................................. 2,000
Miscellaneous fees ......................................... 1,322
------------
Total liabilities ...................................... 44,866,207
------------
Net assets .................................................... $125,509,115
============
Net assets consist of:
Paid-in capital ............................................ $128,977,826
Net unrealized depreciation on investments ................. (3,468,711)
------------
Total net assets ....................................... $125,509,115
============
</TABLE>
See notes to financial statements.
F-35
<PAGE> 130
BALANCED PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Dividend income ......................................... $ 1,190,848
Interest income ......................................... 2,916,844
-----------
Total income ................................... 4,107,692
-----------
Expenses:
Investment advisory fees (Note 3) ............................ 443,372
Custodian fees ............................................... 49,636
Professional fees ............................................ 34,200
Printing fees ................................................ 2,000
Miscellaneous fees ........................................... 2,462
-----------
531,670
Expenses waived by the investment advisor ....................... 38,936
-----------
Total expenses ................................. 492,734
-----------
Net investment income ........................................... 3,614,958
Net realized and unrealized gains (losses) on investments:
Net realized gains on investments ............................ 425,349
Net unrealized depreciation on investments ................... (3,468,711)
-----------
Net realized and unrealized gains (losses) on investments ....... (3,043,362)
-----------
Net increase in net assets resulting from operations ............ $ 571,596
===========
</TABLE>
See notes to financial statements.
F-36
<PAGE> 131
BALANCED PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
From operations:
Net investment income ................................... $ 3,614,958
Net realized gains on investments ....................... 425,349
Net unrealized depreciation on investments .............. (3,468,711)
------------
Net increase in net assets resulting from operations .... 571,596
------------
From capital transactions:
Proceeds from capital invested .......................... 212,140,323
Value of capital withdrawn .............................. 87,202,804
------------
Net increase in net assets resulting from capital transactions .. 124,937,519
------------
Net increase in net assets ...................................... 125,509,115
Net assets:
Beginning of year ....................................... --
------------
End of year ............................................. $125,509,115
============
</TABLE>
See notes to financial statements.
F-37
<PAGE> 132
BALANCED FUND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
TIME DEPOSITS
$1,009,072 First National Bank of Boston, Nassau 5.80%,
Due 1/10/95(d) ........................................ $ 1,009,229
4,017,997 First National Bank of Boston, Nassau 5.11%,
Due 1/23/95(d) ........................................ 4,018,555
1,009,073 First National Bank of Boston, Nassau 5.83%,
Due 1/27/95(d) ........................................ 1,009,230
5,000,000 First Union National Bank of North Carolina,
Nassau 5.75%, Due 1/23/95(d) .......................... 5,000,783
8,000,000 Fleet Bank of Massachusetts, Nassau 6.25%,
Due 1/03/95(d) ........................................ 8,001,365
7,189,642 Fleet National Bank, Grand Cayman 6.25%,
Due 1/03/95(d) ........................................ 7,190,868
8,009,000 Fuji Bank LTD, Grand Cayman 5.875%,
Due 2/02/95(d) ........................................ 8,001,282
5,045,363 Harris Bank, Nassau 6.05%, Due 1/17/95(d) ............... 5,046,194
3,306,703 Harris Bank, Nassau 5.9375%,
Due 2/02/95(d) ........................................ 3,307,236
----------
Total Time Deposits (cost $42,584,742) .......... 42,584,742 33.93%
---------- -----
REPURCHASE AGREEMENT
2,653,182 Repurchase Agreement with Prudential Securities, dated
12/30/94, 5.65%, proceeds at maturity $2,654,847,
Due 1/03/95 (collateralized by Federal Home Loan
Mortgage Corp., 7.00% to 9.00%, Due 12/15/20 to
1/15/24 and Federal National Mortgage Association,
1.94% to 10.50, Due 12/01/00 to 11/25/23, with a
market value of $2,706,290) (cost $2,653,598) ......... 2,653,598 2.11%
---------- -----
COMMERCIAL PAPER
1,500.000 E.I. Dupont De Nemours & Company, Inc. 5.87%,
Due 1/20/95 (cost $1,495,108) ......................... 1,495,108 1.19%
---------- -----
U.S. GOVERNMENT SECURITIES
5,575,000 U.S. Treasury Note 7.125%. Due 10/15/98 ................. 5,458.265
4,525,000 U.S. Treasury Note 7.50%. Due 11/15/01 .................. 4,441,564
7,000.000 U.S. Treasury Note 6.375%, Due 1/15/99 .................. 6,645,625
4,500.000 U.S. Treasury Note 7.50%. Due 5/15/02 ................... 4,417,025
5,900,000 U.S. Treasury Note 6.375%. Due 7/15/99 .................. 5,571,813
8,350,000 U.S. Treasury Note 5.75%, Due 8/15/03 ................... 7,256,658
5,650,000 U.S. Treasury Note 7.25%, Due 5/15/04 ................... 5,425,757
6,900,000 U.S. Treasury Note 8.50%, Due 2/15/00 ................... 7,091,903
4,500,000 U.S. Treasury Note 8.875%, Due 5/15/00 .................. 4,706,712
3,300,000 U.S. Treasury Note 8.50%. Due 11/15/95 .................. 3,334,026
4,000,000 U.S. Treasury Note 7.875%. Due 1/15/98 .................. 4,005,000
----------
Total U.S. Government Securities (cost $60,759,869) ..... 58,354,348 46.49%
---------- -----
</TABLE>
<TABLE>
<CAPTION>
SHARES COMMON STOCK
- ------ ------------
<S> <C> <C> <C>
AIRCRAFT & PARTS
5,500 Allied Signal Inc. ...................................... 187,000
8,350 McDonnell Douglas ....................................... 1,185,700
----------
Total Aircraft & Parts .......................... 1,372,700 1.09%
---------- ----
</TABLE>
See notes to financial statements.
F-38
<PAGE> 133
BALANCED FUND PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
BANKING ENTITY
46,600 Citicorp .............................................. $1,928,075
40,800 UST Inc. .............................................. 1,132,200
---------
Total Banking Equity .......................... 3,060,275 2.44%
--------- ----
CHEMICALS & ALLIED PRODUCTS
25,600 Monsanto Company ...................................... 1,804,800 1.44%
--------- ----
COMMUNICATIONS EQUIPMENT
22,100 I T T Corp. ........................................... 1,958,613 1.56%
--------- ----
CONSTRUCTION, MINING & MATERIALS
29,200 Caterpiller Tractor Inc. .............................. 1,609,650 1.28%
--------- ----
DRUGS
21,000 American Home Products ................................ 1,317,750 1.05%
--------- ----
ELECTRICAL EQUIPMENT
24,100 Intel Corp.(b) ........................................ 1,533,363 1.22%
--------- ----
ENVIRONMENTAL MANAGEMENT
68,700 WMX Technologies ...................................... 1,803,375 1.44%
--------- ----
GROCERIES & RELATED PRODUCTS
30,200 Ralston-Purina Group .................................. 1,347,675 1.07%
--------- ----
INDUSTRIAL MACHINERY
23,950 Deere & Co. ........................................... 1,586,688 1.26%
--------- ----
INSURANCE
51,500 Travelers Inc. ........................................ 1,673,750 1.33%
--------- ----
MANUFACTURING
58,900 Philips Electronics N.V. ADR .......................... 1,730,188 1.38%
--------- ----
MEDICAL & OTHER HEALTH SERVICES
31,700 Mallinckrodt Group Inc. ............................... 947,038
67,200 National Medical Enterprises .......................... 949,200
---------
Total Medical & Other Health Service .......... 1,896,238 1.51%
--------- ----
METAL MINING
65,300 LTV Corp.(c) .......................................... 1,061,125 0.85%
--------- ----
MISCELLANEOUS
107,000 Canadian Pacific ...................................... 1,605,000 1.28%
--------- ----
MOTOR VEHICLES & EQUIPMENT
31,900 Chrysler Corp. ........................................ 1,563,100
47,350 Goodyear Tire & Rubber ................................ 1,592,144
---------
Total Motor Vehicles & Equipment .............. 3,155,244 2.51%
--------- ----
OIL & GAS
28,700 Chevron Corp. ......................................... 1,280,738
51,900 Sun Company Inc. ...................................... 1,492,125
39,800 Tenneco Inc. .......................................... 1,691,500
76,900 Unocal Corp. .......................................... 2,095,524
---------
Total Oil & Gas ............................... 6,559,887 5.23%
--------- ----
OIL AND GAS FIELD SERVICES
35,700 McDermott International Inc. .......................... 883,575 0.70%
--------- ----
PAPER & FOREST PRODUCTS
51,800 Weyerhaeuser Company .................................. 1,942,500 1.55%
--------- ----
</TABLE>
See notes to financial statements.
F-39
<PAGE> 134
BALANCED FUND PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C> <C>
PRINTING & PUBLISHING
52,750 Time Warner Inc.(a) ....................................... $ 1,852,844
56,800 Times Mirror .............................................. 1,782,100
23,600 Tribune Company ........................................... 1,292,100
------------
Total Printing & Publishing ....................... 4,927,044 3.93%
------------ ------
RADIO AND TELEVISION BROADCAST
91,900 Comcast Corp.(b) .......................................... 1,441,680 1.15%
------------ ------
RAILROADS
51,000 Southern Pacific Rail Corp.(c) ............................ 924,375
42,900 Union Pacific Corp.(a) .................................... 1,957,313
------------
Total Railroads ................................... 2,881,688 2.30%
------------ ------
RETAIL SALES
94,000 Federated Department Stores(c) ............................ 1,809,500
43,700 Sears Roebuck ............................................. 2,010,200
------------
Total Retail Sales ................................ 3,819,700 3.04%
------------ ------
SEARCH, DETECTION, NAVIGATION, GUIDE
57,400 General Motors Corp Class H ............................... 2,001,824
14,150 Raytheon Company .......................................... 903,831
------------
Total Search, Detection, Navigation, Guide ........ 2,905,655 2.32%
------------ ------
TELECOMMUNICATIONS
36,300 AT & T Corp ............................................... 1,824,075
16,200 Nokia Corp. ADR(a) ........................................ 1,215,000
------------
Total Telecommunications .......................... 3,039,075 2.42%
------------ ------
TOYS
34,375 Mattel .................................................... 863,672 0.69%
------------ ------
TRANSPORTATION
44,400 Carnival Corp. ............................................ 943,500 0.75%
------------ ------
Total Common Stock (cost $59,533,168) ............ 58,724,410 46.79%
------------ ------
PREFERRED STOCK
---------------
CIGARETTES
291,200 RJR Nabisco Holdings CV 9.25% Series C .................... 1,747,200 1.39%
------------ ------
BANKING EQUITY
124,300 Citicorp .................................................. 2,377,238 1.90%
------------ ------
Total Preferred Stock (cost $4,378,870) ........... 4,124,438 3.29%
------------ ------
Total investments (cost $171,405,355) ..................... $167,936,644 133.80%
Liabilities in Excess of Other Assets ..................... (42,427,529) (33.80)%
------------ ------
Net Assets ................................................ $125,509,115 100.00%
============ ======
</TABLE>
The aggregate cost of securities for federal income tax purposes at December 31,
1994 is $171,405,355.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation ............................. $ 1,332,452
Aggregate gross unrealized depreciation ............................. (4,801,163)
-----------
Net unrealized depreciation ......................................... ($ 3,468,711)
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan.
(b) Over-the-counter security.
(c) Non-income producing security as defined by the Investment Company Act
of 1940.
(d) Collateral for securities on loan.
See notes to financial statements.
F-40
<PAGE> 135
EQUITY INCOME
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $633,258,807) ...................... $620,119,343
Cash ........................................................... 8,643
Receivable for securities sold ................................. 1,547,245
Dividends receivable ........................................... 2,042,231
Receivable from securities lending ............................. 7,574
------------
Total assets ............................................ 623,725,036
------------
LIABILITIES
Deposit for securities loaned .................................. 34,325,800
Payable for securities purchased ............................... 417,390
Due to advisor ................................................. 18,629
Accrued expenses:
Investment advisory fees .................................... 220,634
Custody fees ................................................ 12,458
Professional fees ........................................... 26,700
Printing fees ............................................... 2,000
Miscellaneous fees .......................................... 7,327
------------
Total liabilities ....................................... 35,030,938
------------
Net assets ..................................................... $588,694,098
============
Net assets consist of:
Paid-in capital ............................................. $601,833,562
Net unrealized depreciation on investments .................. (13,139,464)
------------
Total net assets ........................................ $588,694,098
============
</TABLE>
See notes to financial statements.
F-41
<PAGE> 136
EQUITY INCOME
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Dividend income ......................................... $ 18,785,686
Interest income ......................................... 2,889,927
------------
Total income ................................... 21,675,613
------------
Expenses:
Investment advisory fees (Note 3) ....................... 2,470,354
Custodian fees .......................................... 167,869
Professional fees ....................................... 57,369
Printing fees ........................................... 2,000
Miscellaneous fees ...................................... 13,802
------------
2,711,394
Expenses waived by the investment advisor ....................... 2,000
------------
Total expenses ................................. 2,709,394
------------
Net investment income ........................................... 18,966,219
Net realized and unrealized losses on investments:
Net realized losses on investments ...................... (3,691,850)
Net unrealized depreciation on investments .............. (13,139,464)
------------
Net realized and unrealized losses on investments ............... (16,831,314)
------------
Net increase in net assets resulting from operations ............ $ 2,134,905
============
</TABLE>
See notes to financial statements.
F-42
<PAGE> 137
EQUITY INCOME
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
From operations:
Net investment income ....................................... $ 18,966,219
Net realized losses on investments .......................... (3,691,850)
Net unrealized depreciation on investments .................. (13,139,464)
-------------
Net increase in net assets resulting from operations ........... 2,134,905
-------------
From capital transactions:
Proceeds from capital invested .............................. 672,360,914
Value of capital withdrawn .................................. 85,801,721
-------------
Net increase in net assets resulting from capital transactions . 586,559,193
-------------
Net increase in net assets ..................................... 588,694,098
Net assets:
Beginning of year ........................................... --
-------------
End of year ................................................. $ 588,694,098
=============
</TABLE>
See notes to financial statements.
F-43
<PAGE> 138
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
TIME DEPOSITS
$ 813,503 First National Bank of Boston, Nassau 5.83%,
Due 1/27/95(d) ....................................... $ 813,636
5,405,670 First National Bank of Boston, Nassau 5.11%,
Due 1/23/95(d) ....................................... 5,406,435
813,504 First National Bank of Boston, Nassau 5.80%,
Due 1/10/95(d) ....................................... 813,636
5,796,211 Fleet National Bank, Grand Cayman 6.25%,
Due 1/03/95(d) ....................................... 5,797,210
9,000,000 Fuji Bank LTD, Grand Cayman 5.875%,
Due 2/02/95(d) ....................................... 9,001,460
6,067,516 Harris Bank, Nassau 6.05%, Due 1/17/95(d) .............. 6,068,530
6,429,396 Harris Bank, Nassau 5,9375%, Due 2/02/95(d) ............ 6,430,450
----------
Total Time Deposits (cost $34,331,357) ......... 34,331,357 5.83%
---------- ----
REPURCHASE AGREEMENT
69,727 Repurchase Agreement with Prudential Securities, dated
12/30/94, 5.65%, proceeds at maturity $69,770. Due
1/03/95 (collateralized by Federal Home Loan
Mortgage Corp., 7.00% to 9.00%, Due 12/15/20 to
1/15/24 and Federal National Mortgage Association,
1.94% to 10.50%, Due 12/01/00 to 11/25/23, with a
market value of $71,116)(cost $69,738) ............... 69,738 0.01%
---------- ----
COMMERCIAL PAPER
3,950,000 American Express Company 5.60%, Due 1/13/95 ............ 3,942,012
500,000 American Express Credit Corp. 5.81%, Due 1/04/95 ....... 499,677
4,600,000 American Express Credit Corp. 5.90%, Due 1/19/95 ....... 4,585,676
1,400,000 Associates Corporation 6.12%, Due 1/27/95 .............. 1,393,574
2,000,000 Avco Financial Services, Ltd. 6.10%, Due 1/10/95 ....... 1,996,611
2,000,000 Avco Financial Services, Ltd. 6.00%, Due 1/11/95 ....... 1,996,333
3,000,000 Avco Financial Services. Ltd. 6.10%, Due 1/17/95 ....... 2,991,359
330,000 Bausch & Lomb, Inc. 5.85%, Due 1/31/95 ................. 328,338
5,000,000 Chevron Oil Finance Company 5.90%, Due 1/04/95 ......... 4,996,722
3,000,000 Commercial Credit Company 5.75%, Due 1/24/95 ........... 2,988,501
2,000,000 Consolidation Coal Company 6.00%, Due 1/17/95 .......... 1,994,334
700,000 Cooperative Financing Corp. 5.70%, Due 1/03/95 ......... 699,668
1,270,000 Copley Financing Corporation 5.95%, Due 2/01/95 ........ 1,263,283
1,355,000 Enterprise Funding Corporation 6.10%, Due 1/11/95 ...... 1,352,474
400,000 Exxon Funding 5,90%, Due 1/04/95 ....................... 399,738
700,000 Ford Motor Credit Company 6.00%, Due 1/13/95 ........... 698,484
900,000 General Electric Capital Corp. 5.40%, Due 1/24/95 ...... 896,760
1,300,000 Goldman Sachs Group 5.90%, Due 2/01/95 ................. 1,293,182
1,881,000 HMO Funding Inc. 6.12%, Due 1/13/95 .................... 1,876,843
2,000,000 Heller International Corp. 6.00%, Due 1/18/95 .......... 1,994,000
4,000,000 Heller International Corp. 6.00%, Due 1/06/95 .......... 3,995,933
5,000,000 J.C. Penney. & Co. Funding Corp. 5.57%, Due 1/09/95 .... 4,993,037
2,200,000 J.C. Penney, & Co. Funding Corp. 5.76%, Due 1/17/95 .... 2,194,016
2,400,000 Met Life Funding Inc. 5.90%, Due 2/07/95 ............... 2,385,053
2,625,000 Motorola Inc. 6.00%, Due 1/10/95 ....................... 2,620,625
</TABLE>
See notes to financial statements.
F-44
<PAGE> 139
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
COMMERCIAL PAPER--(CONTINUED)
$1,750,000 Norfolk Southern Corp. 5.70%, Due 2/16/95 .............. $ 1,736,977
2,975,000 Norwest Corp. 6.02%, Due 1/12/95 ....................... 2,969,030
1,500,000 Norwest Financial Inc. 5.80%, Due 2/15/95 .............. 1,488,883
4,000,000 PHH Corp. 6.00%, Due 1/25/95 ........................... 3,983,333
2,000,000 Prudential Home Mortgage Corp. 5.76%. Due 2/16/95 ...... 1,984,960
1,264,000 Sanwa Business Credit 6.10%, Due 1/17/95 ............... 1,260,359
1,400,000 Texas Department of Commerce 6.06%, Due 1/05/95 ........ 1,398,822
1,700,000 Transamerica Corp. 6.05%, Due 1/20/95 .................. 1,694,286
5,500,000 Weyerhaeuser Company 5.75%, Due 1/30/95 ................ 5,473,645
1,500,000 Xerox Credit Corp. 5.83%, Due 1/20/95 .................. 1,495,142
-----------
Total Commercial Paper (cost $77,861,670) ...... 77,861,670 13.23%
----------- -----
GOVERNMENT AGENCY OBLIGATIONS
600,000 Federal National Mortgage Association, 5.90%,
Due 1/17/95 (cost $598,328) .......................... 598,328 0.10%
----------- -----
CONVERTIBLE BOND
----------------
COMMUNICATIONS EQUIPMENT
2,000,000 Motorola Inc., LYON, Zero Coupon, Due 9/07/09 (cost
$1,710,000) .......................................... 2,130,000 0.36%
----------- -----
</TABLE>
<TABLE>
<CAPTION>
SHARES COMMON STOCK
- ------ ------------
<S> <C> <C> <C>
AIRCRAFT & PARTS
185,000 General Electric ....................................... 9,435,000
120,000 Northrop Grumman Corp. ................................. 5,040,000
110,000 Textron Inc. ........................................... 5,541,250
90,000 United Technologies .................................... 5,658,750
-----------
Total Aircraft & Parts ......................... 25,675,000 4.36%
----------- -----
BANKING
120,000 BankAmerica Corp. ...................................... 4,740,000 0.80%
----------- -----
BANKING EQUITY
20,000 Banc One Corp. ......................................... 507,500
100,000 Chemical Banking Corp. ................................. 3,587,500
10.000 First Interstate Bancorp ............................... 676,250
-----------
Total Banking Equity ........................... 4,771,250 0.81%
----------- -----
CHEMICALS & ALLIED PRODUCTS
64,100 Arco Chemical .......................................... 2,820,400
60,000 Monsanto Company ....................................... 4,230,000
95,000 Imperial Chemical Industries PLC ADR ................... 4,417,500
-----------
Total Chemicals & Allied Products .............. 11,467,900 1.95%
----------- -----
CIGARETTES
90,000 American Brands Inc. ................................... 3,375,000 0.57%
----------- -----
COMMUNICATIONS EQUIPMENT
170,000 GTE Corp. .............................................. 5,163,750 0.88%
----------- -----
CONSTRUCTION
160,000 Halliburton Company .................................... 5,300,000
235,000 Morrison Knudsen Corp.(a) .............................. 2,996,250
-----------
Total Construction ............................. 8,296,250 1.41%
----------- -----
</TABLE>
See notes to financial statements.
F-45
<PAGE> 140
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
- --------- ----- ----------
<S> <C> <C> <C>
CONSUMER GOODS & SERVICES
$ 90,000 Quaker Oats Company .................................... $ 2,767,500
100,000 Sara Lee Corp. ......................................... 2,525,000
-----------
Total Consumer Goods & Services ................ 5,292,500 0.90%
----------- ----
COPPER PRODUCER
115,000 Phelps Dodge Corp. ..................................... 7,115,625 1.21%
----------- ----
DRUGS
85,000 American Home Products ................................. 5,333,750
80,000 Bristol-Myers Squibb Company ........................... 4,630,000
160,000 Grace W.R. & Company ................................... 6,180,000
150,000 Merck & Company Inc. ................................... 5,718,750
75,000 Pfizer Inc. ............................................ 5,793,750
90,000 Schering-Plough Corp. .................................. 6,660,000
60,000 Warner Lambert Company ................................. 4,620,000
80,000 Smithkline Beecham ADR(a) .............................. 2,740,000
-----------
Total Drugs .................................... 41,676,250 7.08%
----------- ----
ELECTRICAL EQUIPMENT
100,000 Emerson Electric ....................................... 6,250,000
170,000 General Signal ......................................... 5,418,750
100,000 Thomas & Betts Corp. ................................... 6,712,500
-----------
Total Electrical Equipment ..................... 18,381,250 3.12%
----------- ----
ENVIRONMENTAL MANAGEMENT
161,200 Browning-Ferris Industries Inc.(a) ..................... 4,574.050 0.77%
----------- ----
FINANCE
100,000 GATX Corporation(a) .................................... 4,400,000 0.75%
----------- ----
FINANCIAL SERVICES
150,000 American Express Company ............................... 4,425,000
100,000 Bank of New York ....................................... 2,900,000
-----------
Total Financial Services ....................... 7,325,000 1.24%
----------- ----
FOOD & BEVERAGE
40,000 CPC International Inc. ................................. 2,130,000
105,000 Philip Morris Comp Cos. Inc. ........................... 6,037,500
-----------
Total Food And Beverage ........................ 8,167,500 1.39%
----------- ----
ADMINISTRATION--HOSPITALS
160,000 Shared Medical(b) ...................................... 5,240,000 0.89%
----------- ----
</TABLE>
See notes to financial statements.
F-46
<PAGE> 141
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
INDUSTRIAL INORGANIC CHEMICALS
$ 80,000 Dow Chemical Company ................................... $ 5,380,000
100,000 E.I. DuPont de Nemours & Co. ........................... 5,625,000
-----------
Total Industrial Inorganic Chemicals ........... 11,005,000 1.87%
----------- ----
INDUSTRIAL MACHINERY
70,000 Carpenter Technology ................................... 3,920,000
130,000 Deere & Co. ............................................ 8,612,500
160,000 Goulds Pumps(b) ........................................ 3,460,000
110,000 Harsco Corp. ........................................... 4,496,250
-----------
Total Industrial Machinery ..................... 20,488,750 3.48%
----------- ----
INSURANCE
90,000 Aetna Life & Casualty .................................. 4,241,250
80,000 CIGNA Corp. ............................................ 5,090,000
140,000 Lincoln National Corp. ................................. 4,900,000
-----------
Total Insurance ................................ 14,231,250 2.42%
----------- ----
INVESTING
62,600 Developers Diversified Realty Corp. .................... 1,956,250
56,000 Factory Stores Of America, Inc. ........................ 1,211,000
54,700 Kranzco Realty Trust ................................... 1,039,300
51,000 RFS Hotel Investors Inc.(b) ............................ 745,875
-----------
Total Investing ................................ 4,952,425 0.84%
----------- ----
MACHINERY, EQUIPMENT, AUTO
140,000 Cooper Industries Inc. ................................. 4,777,500 0.81%
----------- ----
MEDICAL & OTHER HEALTH SERVICE
150,000 Baxter International, Inc. ............................. 4,237,500 0.72%
----------- ----
METAL MINING
210,000 Freeport McMoran Copper & Gold ......................... 4,462,500 0.76%
----------- ----
MISCELLANEOUS INVESTING
192,800 Health Care Property Invest Inc. ....................... 5,808,100 0.99%
----------- ----
MOTOR VEHICLES & EQUIPMENT
290.000 Dana Corp. ............................................. 6,778,750
110,000 Echlin Inc. ............................................ 3,300,000
230,000 Ford Motor(a) .......................................... 6,440,000
-----------
Total Motor Vehicles & Equipment ............... 16,518,750 2.81%
----------- ----
OFFICE & BUSINESS EQUIPMENT
100,000 Harris Corp Inc. ....................................... 4,250,000
60,000 Honeywell Inc. ......................................... 1,890,000
100,000 Xerox Corp. ............................................ 9,900,000
-----------
Total Office & Business Equipment .............. 16,040,000 2.72%
----------- ----
OIL & GAS
130,000 Amoco Corp. ............................................ 7,686,250
55,000 Atlantic Richfield ..................................... 5,596.250
150,000 Chevron Corp. .......................................... 6,693,750
110,000 Exxon Corp. ............................................ 6,682,500
</TABLE>
See notes to financial statements.
F-47
<PAGE> 142
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
- --------- ----- ----------
<S> <C> <C> <C>
OIL & GAS--(CONTINUED)
$120,000 Occidental Petroleum .................................. $ 2,310,000
70,000 Royal Dutch Petroleum-NY Reg(a) ....................... 7,525,000
150,000 Tenneco Inc. .......................................... 6,375,000
100,000 Texaco Inc. ........................................... 5,987,500
80,000 British Petroleum PLC ADR ............................. 6,390,000
-----------
Total Oil & Gas ............................... 55,246,250 9.39%
----------- ----
OIL AND GAS FIELD SERVICES
230,000 Dresser Industries Inc.(a) ............................ 4,341,250
230,000 McDermott International Inc. .......................... 5,692,500
85,000 Mobil Corp. ........................................... 7,161,250
179,500 Williams Companies Inc. ............................... 4,509,937
-----------
Total Oil And Gas Field Services .............. 21,704,937 3.69%
----------- ----
PAPER & FOREST PRODUCTS
160,000 Federal Paper Board Inc.(a) ........................... 4,640,000
100,000 Kimberly-Clark Corp. .................................. 5,050,000
160,000 Minnesota Mining & Manufacturing ...................... 8,540,000
100,000 Union Camp Corp. ...................................... 4,712,500
150,000 Weyerhaeuser Company(a) ............................... 5,625,000
-----------
Total Paper & Forest Products ................. 28,567,500 4.85%
----------- ----
PHOTOGRAPHIC EQUIPMENT & SUPPLIES
130,000 Eastman Kodak Company ................................. 6,207,500 1.05%
----------- ----
PRINTING & PUBLISHING
120,000 Dun & Bradstreet Corp. ................................ 6,600,000
110,000 McGraw-Hill Inc. ...................................... 7,356,250
100,000 Readers Digest Association Inc. ....................... 4,912,500
-----------
Total Printing & Publishing ................... 18,868,750 3.21%
----------- ----
RAILROADS
110,000 Norfolk Southern Corp. ................................ 6,668,750 1.13%
----------- ----
REAL ESTATE
70,000 Bay Apartment Communities ............................. 1,408,750
60,000 Equity Residential Properties ......................... 1,800,000
100,000 Irvine Apartment Communities .......................... 1,637,500
-----------
Total Real Estate ............................. 4,846,250 0.82%
----------- ----
REAL ESTATE/INVESTMENT TRUSTS
59,000 Avalon Properties Inc. ................................ 1,357,000
26,800 Camden Property Trust ................................. 666,650
40,000 Evans Withycombe Residential .......................... 840,000
78,400 Healthcare Realty Trust ............................... 1,646,400
70,000 Horizon Outlet Centers ................................ 1,828,750
-----------
Total Real Estate/Investment Trusts ........... 6,338.800 1.08%
----------- ----
REFINING OF NONFERROUS MATERIALS
140,000 Timken Company(a) ..................................... 4,935,000 0.84%
----------- ----
</TABLE>
See notes to financial statements.
F-48
<PAGE> 143
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
- --------- ----- ----------
<S> <C> <C> <C>
RETAIL SALES
$ 150,000 K Mart Corp.............................................. $ 1,950,000
60,000 J.C. Penney & Co......................................... 2,677,500
50,000 Sears Roebuck............................................ 2,300,000
------------
Total Retail Sales............................... 6,927,500 1.18%
------------ ----
RUBBER & MISCELLANEOUS PLASTICS
77,800 B.F. Goodrich Company(a)................................. 3,374,575 0.57%
------------ ----
SAVINGS & LOAN HOLDING COMPANIES
230,000 Great Western Financial.................................. 3,680,000
250,000 Ahmanson H F & Co........................................ 4,031,250
------------
7,711,250 1.31%
------------ ----
SOAP, DETERGENT, CLEANING PREPARATION, PERFUME
80,000 Avon Products Inc........................................ 4,780,000 0.81%
------------ ----
STEEL WORKS, BLAST FURNACES
80,000 USX-US Steel Group Inc................................... 2,840,000 0.48%
------------ ----
TELECOMMUNICATIONS
90,000 Ameritech Corp.(a)....................................... 3,633,750
90,000 Bell Atlantic Corp.(a)................................... 4,477,500
90,000 Bellsouth Corp........................................... 4,871,250
76,000 NYNEX Corp.(a)........................................... 2,793,000
130,000 Pacific Telesis Group.................................... 3,705,000
120,000 Southwestern Bell Corp................................... 4,845,000
136,700 Sprint Corp.............................................. 3,776,338
112,000 US West Inc.............................................. 3,990,000
------------
Total Telecommunications......................... 32,091,838 5.45%
------------ ----
UTILITIES--ELECTRIC
110,000 American Electric Power Inc.(a).......................... 3,616,250
130,000 Carolina Power & Light Company(a)........................ 3,461,250
120,000 FPL Group Inc............................................ 4,215,000
170,000 Southern Company(a)...................................... 3,400,000
------------
Total Utilities-Electric......................... 14,692,500 2.50%
------------ ----
WHOLESALE TRADE
300,000 Ogden Corp............................................... 5,625,000 0.96%
------------
Total Common Stock (cost $513,668,339)........... 499,609,500 84.87%
------------ ----
</TABLE>
<TABLE>
<CAPTION>
SHARES PREFERRED STOCK
- ------ ---------------
<S> <C> <C>
MOTOR VEHICLES & EQUIPMENT
20,000 General Motors Corp. (cost $1,095,000)...................... 1,147,500 0.20%
--------- ----
</TABLE>
See notes to financial statements.
F-49
<PAGE> 144
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
EQUITY-LINKED DEBT SECURITIES
$15,000 Lehman Bros Hldg 6.50%, Due 11/15/97, Amgen
YEELDS(a).............................................. $ 780,000
40,000 Lehman Bros Hldg 7.25%, Due 12/12/96, Oracle
YEELDS(a)(b)........................................... 1,480,000
25,000 Morgan Stanley Group 7.00%, Due 11/15/97, Cisco
Systems PERQS.......................................... 806,250
15,000 Salomon Inc. 5.25%, Due 1/01/97, Hwp ELKS................ 1,305,000
Total Equity-Linked Debt Securities
(cost $3,924,375)................................ 4,371,250 0.74%
------------ ------
Total investments (cost $633,258,807).................... $620,119,343 105.34%
Liabilities in Excess of Other Assets.................... (31,425,245) (5.34)%
------------ ------
Net Assets............................................... $588,694,098 100.00%
============ ======
The aggregate cost of securities for federal income
tax purposes at December 31, 1994 is $633,258,807.
The following amount is based on costs for federal
income tax purposes:
Aggregate gross unrealized appreciation.................. $ 16,772,018
Aggregate gross unrealized depreciation.................. (29,911,482)
------------
Net unrealized depreciation.............................. $(13,139,464)
============
</TABLE>
- -------------------
(a) All or part of this security is on loan.
(b) Over-the-counter security.
(c) Non-income producing security as defined by the Investment Company Act
of 1940.
(d) Collateral for securities on loan.
See notes to financial statements.
F-50
<PAGE> 145
GROWTH AND INCOME
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (cost $89,653,177) ................................. $ 88,524,777
Repurchase agreement ..................................................... 13,202,147
Dividends receivable ..................................................... 163,072
Receivable from securities lending ....................................... 440
------------
Total assets ...................................................... 101,890,436
------------
LIABILITIES
Deposit for securities loaned ............................................ 4,850,915
Due to advisor ........................................................... 4,163
Payable for securities purchased ......................................... 2,389,938
Accrued expenses:
Investment advisory fees ............................................... 43,107
Custody fees ........................................................... 2,482
Professional fees ...................................................... 13,594
Printing fees .......................................................... 2,000
Miscellaneous fees 937
------------
Total liabilities ................................................. 7,307,136
------------
Net assets ............................................................... $ 94,583,300
============
Net assets consist of:
Paid-in capital ....................................................... $ 95,711,700
Net unrealized depreciation on investments ............................ (1,128,400)
------------
Total net assets .................................................. $ 94,583,300
============
</TABLE>
See notes to financial statements.
F-51
<PAGE> 146
GROWTH AND INCOME
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
Investment income:
Dividend income ........................................................ $1,724,885
Interest income ........................................................ 231,790
Miscellaneous income ................................................... 1,244
----------
Total income ................................................. 1,957,919
----------
Expenses:
Investment advisory fees (Note 3) ...................................... 576,431
Custodian fees ......................................................... 33,531
Professional fees ...................................................... 33,888
Printing fees .......................................................... 2,000
Miscellaneous fees ..................................................... 2,370
----------
648,220
Expenses waived by the investment advisor ................................ 23,726
----------
Total expenses ............................................... 624,494
----------
Net investment income .................................................... 1,333,425
----------
Net realized and unrealized losses on investments:
Net realized losses on investments ..................................... (3,271,268)
Net unrealized depreciation on investments ............................. (1,128,400)
----------
Net realized and unrealized losses on investments ........................ (4,399,668)
----------
Net decrease in net assets resulting from operations .....................($3,066,243)
==========
</TABLE>
See notes to financial statements.
F-52
<PAGE> 147
GROWTH AND INCOME
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
From operations:
Net investment income ................................................. $ 1,333,425
Net realized losses on investments .................................... (3,271,268)
Net unrealized depreciation on investments ............................ (1,128,400)
------------
Net decrease in net assets resulting from operations .................. (3,066,243)
------------
From capital transactions:
Proceeds from capital invested ........................................ 138,102,752
Value of capital withdrawn ............................................ 40,453,209
------------
Net increase in net assets resulting from capital transactions ........... 97,649,543
------------
Net increase in net assets ............................................... 94,583,300
Net assets:
Beginning of year ..................................................... --
------------
End of year ........................................................... $ 94,583,300
============
</TABLE>
See notes to financial statements.
F-53
<PAGE> 148
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
TIME DEPOSITS
$ 114,947 First National Bank of Boston, Nassau 5.80%,
Due 1/10/95(d) ....................................... $ 114,965
508,151 First National Bank of Boston, Nassau 5.11%,
Due 1/23/95(d) ....................................... 508,222
114,947 First National Bank of Boston, Nassau 5.83%,
Due 1/27/95(d) ....................................... 114,965
818,999 Fleet National Bank, Grand Cayman 6.25%,
Due 1/03/95(d) ....................................... 819,139
2,000,000 Fuji Bank LTD, Grand Cayman 5.875%,
Due 2/02/95(d) ....................................... 2,000,326
574,736 Harris Bank, Nassau 6.05%,
Due 1/17/95(d) ....................................... 574,831
718,420 Harris Bank, Nassau 5.9375%,
Due 2/02/95(d) ....................................... 718,537
-------------
Total Time Deposits (cost $4,850,985) .......... 4,850,985 5.13%
------------- ------
REPURCHASE AGREEMENT
13,200,075 Repurchase Agreement with Prudential Securities, dated
12/30/94, 5.65% proceeds at maturity $13,208,362
Due 1/03/95 (collateralized by Federal Home Loan
Mortgage Corp., 7.00% to 9.00%, Due 12/15/20 to
1/15/24 and Federal National Mortgage Association,
1.94% to 10.50%, Due 12/01/00 to 11/25/23, with a
market value of $13,464,321) (cost $13,202,147) ...... 13,202,147 13.96%
------------- ------
SHARES COMMON STOCK
------ ------------
ADVERTISING SERVICES
30,500 Omnicom Group .......................................... 1,578,375 1.67%
------------- ------
AIRCRAFT & PARTS
40,000 Allied Signal Inc. ..................................... 1,360,000
31,000 General Electric ....................................... 1,581,000
25,000 Textron Inc. ........................................... 1,259,375
-------------
Total Aircraft & Parts ......................... 4,200,375 4.44%
------------- ------
BANKING
34,000 Suntrust Banks Inc. .................................... 1,623.500 1.72%
------------- ------
BANKING EQUITY
30,250 Banc One Corp. ......................................... 767,593
45,500 Key Corp (New) ......................................... 1,137,500
55,000 Norwest Corporation(a) ................................. 1,285,625
25,750 Regions Financial Corp.(b) ............................. 798,250
50,000 UST Inc. ............................................... 1,387,500
-------------
Total Banking Equity ........................... 5,376,468 5.68%
------------- ------
COMMUNICATIONS EQUIPMENT
66,666 Federal Signal Corp.(a) ................................ 1,358.320 1.44%
------------- ------
CONSTRUCTION
35,000 Foster Wheeler Corp. ................................... 1,041,250 1.10%
------------- ------
</TABLE>
See notes to financial statements.
F-54
<PAGE> 149
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C> <C>
CONSUMER GOODS & SERVICES
24,500 Colgate-Palmolive Company .............................. $ 1,552,688
25,000 Procter & Gamble Company ............................... 1,550,000
-------------
Total Consumer Goods & Services ................ 3,102,688 3.28%
------------- ------
DRUGS
50,000 Abbott Laboratories .................................... 1,631,250
20,000 Gillette Company ....................................... 1,495,000
17,000 Schering-Plough Corp. .................................. 1,258,000
30,000 Walgreen Company ....................................... 1,312,500
-------------
Total Drugs .................................... 5,696,750 6.02%
------------- ------
EATING & DRINKING PLACES
44,000 McDonalds Corp. ........................................ 1,287,000 1.36%
------------- ------
ELECTRICAL EQUIPMENT
19,000 AMP Inc. ............................................... 1,382,250
24,000 Emerson Electric ....................................... 1,500,000
19,000 Grainger WW Inc. ....................................... 1,097,250
25,000 Johnson Controls ....................................... 1,225,000
30,000 Linear Technology Corp.(b) ............................. 1,485,000
30,000 Medtronic Inc. ......................................... 1,668,750
27,000 Motorola Inc. .......................................... 1,562,625
35,000 Loral Corp. ............................................ 1,325,625
-------------
Total Electrical Equipment ..................... 11,246,500 11.89%
------------- ------
ENVIRONMENTAL MANAGEMENT
48,000 Browning-Ferris Industries Inc. ........................ 1,362,000
79,000 Wheelabrator Technologies Inc. ......................... 1,165,250
-------------
Total Environmental Management ................. 2,527,250 2.67%
------------- ------
FINANCE--SERVICES
36,500 Franklin Resources Inc. ................................ 1,300,312
25,000 Equifax Inc. ........................................... 659,375
-------------
Total Finance-Services ......................... 1,959,687 2.07%
------------- ------
GROCERIES & RELATED PRODUCTS
50,000 Sysco Corp. ............................................ 1,287,500 1.36%
------------- ------
GROCERY STORES
49,000 Albertson's Inc. ....................................... 1,421,000
42,577 Dollar General Corp.(b) ................................ 1,277,310
-------------
Total Grocery Stores ........................... 2,698,310 2.85%
------------- ------
HOUSEHOLD FURNITURE
35,000 Leggett & Platt Inc. ................................... 1,225,000 1.29%
------------- ------
INDUSTRIAL MACHINERY
34,500 Donaldson Company, Inc. ................................ 815,063 0.86%
------------- ------
INSURANCE
40,000 AFLAC Corp. ............................................ 1,280,000
13,850 American International Group ........................... 1,357,300
-------------
Total Insurance ................................ 2,637,300 2.79%
------------- ------
</TABLE>
See notes to financial statements.
F-55
<PAGE> 150
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENT--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C> <C>
MEDICAL & OTHER HEALTH SERVICES
54,000 Manor Care Inc. ........................................ $ 1,478,250
45,000 Wellpoint Health Networks Class A(c) ................... 1,310,625
-------------
Total Medical & Other Health Services .......... 2,788.875 2.95%
------------- ------
METAL MINING
62,500 Engelhard Corp. ........................................ 1,390,625 1.47%
------------- ------
MISCELLANEOUS
16,000 Interpublic Group Inc. ................................. 514,000
55,500 Morton International Inc. 1,581,750
-------------
Total Miscellaneous ............................ 2,095,750 2.22%
------------- ------
MOTOR VEHICLES & EQUIPMENT
42,000 Genuine Parts .......................................... 1,512.000 1.60%
------------- ------
OFFICE & BUSINESS EQUIPMENT
30,000 Automatic Data Processing Inc. ......................... 1,755,000
20,000 BMC Software(b)(c) ..................................... 1,137,500
34,500 Pitney Bowes Inc. ...................................... 1,095,375
-------------
Total Office & Business Equipment .............. 3,987,875 4.22%
------------- ------
OIL & GAS
54,800 Enron .................................................. 1,671,400 1.77%
------------- ------
PAINTS, VARNISHES, LACQUERS
42,500 Sherwin Williams Company ............................... 1,407,812 1.49%
------------- ------
PERSONAL SERVICES
33,000 H & R Block Inc. ....................................... 1,225,125 1.29%
------------- ------
PEST CONTROL
48,400 Rollins Inc. ........................................... 1,107,150 1.17%
------------- ------
PRINTING & PUBLISHING
28,500 Gannett Company Inc. ................................... 1,517,625 1.60%
------------- ------
RAILROADS
45,000 Illinois Central Corp. ................................. 1,383,750 1.46%
------------- ------
RETAIL SALES
35,000 May Dept. Stores ....................................... 1,181,250
29,000 Toys R Us Inc. ......................................... 884,500
-------------
Total Retail Sales ............................. 2,065,750 2.18%
------------- ------
SEARCH, DETECTION, NAVIGATION GUIDE
23,000 Raytheon Company ....................................... 1,469,125 1.55%
------------- ------
SERVICE--HEALTH & ALLIED SERVICES
30,425 US Health Care Inc.(b) ................................. 1,255,031 1.33%
------------- ------
SOAP, DETERGENT, CLEANING PREPARATION, PERFUME
25,000 Johnson & Johnson ...................................... 1,368,750 1.45%
------------- ------
STEEL WORKS, BLAST FURNACES
67,000 Worthington Industries ................................. 1,340,000 1.42%
------------- ------
</TABLE>
See notes to financial statements.
F-56
<PAGE> 151
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
- ------ ----- ----------
<S> <C> <C> <C>
TELECOMMUNICATIONS
50,000 Century Telephone Enter ................................ $ 1,475,000
33,000 Southwestern Bell Corp. ................................ 1,332,375
49,500 Hong Kong Telecom, Ltd. ADR(a) ......................... 946,688
-------------
Total Telecommunications ....................... 3,754,063 3.97%
------------- ------
TRANSPORTATION
64,000 Carnival Corp. ......................................... 1,360,000 1.44%
------------- ------
Total Common Stock (cost $83,389,192) .......... 82,362,042 87.07%
------------- ------
U.S. GOVERNMENT AGENCY
18,000 Federal National Mortgage Association (cost $1,413,000) 1,311,750 1.39%
------------- ------
Total investments (cost $102,855,324) .......... $101,726,924 107.55%
Liabilities in Excess of Other Assets .................. (7,143,624) (7.55)%
------------- ------
Net Assets ............................................. $ 94,583,300 100.00%
============= ======
The aggregate cost of securities for federal income tax purposes at December 31, 1994 is
102,855,324.
The following amount is based on costs for federal income tax purposes:
Aggregate gross unrealized appreciation ................................. $3,994,239
Aggregate gross unrealized depreciation ................................. (5,122,639)
-------------
Net unrealized depreciation ............................................. ($1,128,400)
=============
</TABLE>
- ----------
(a) All or part of this security is on loan.
(b) Over-the-counter security.
(c) Non-income producing security as defined by the Investment Company Act
of 1940.
(d) Collateral for securities on loan.
See notes to financial statements.
F-57
<PAGE> 152
EQUITY GROWTH
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (cost $178,767,259) ............................................... $194,012,265
Receivable for securities sold .......................................................... 480,881
Dividends receivable .................................................................... 104,615
Receivable from securities lending ...................................................... 16,772
------------
Total assets ..................................................................... 194,614,533
------------
LIABILITIES
Deposit for securities loaned ........................................................... 43,055,400
Payable for securities purchased ........................................................ 2,629,941
Due to advisor .......................................................................... 7,248
Accrued expenses:
Investment advisory fees ............................................................. 82,309
Custody fees ......................................................................... 3,803
Professional fees .................................................................... 14,771
Printing fees ........................................................................ 2,000
Miscellaneous fees ................................................................... 1,231
------------
Total liabilities ................................................................ 45,796,703
------------
Net assets .............................................................................. $148,817,830
============
Net assets consist of:
Paid-in capital ...................................................................... $133,572,824
Net unrealized appreciation on investments ........................................... 15,245,006
------------
Total net assets ................................................................. $148,817,830
============
</TABLE>
See notes to financial statements.
F-58
<PAGE> 153
EQUITY GROWTH
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Dividend income ..................................................... $ 296,261
Interest income ..................................................... 482,653
Miscellaneous income ................................................ 1,737
-----------
Total income ................................................... 780,651
-----------
Expenses:
Investment advisory fees (Note 3) ................................... 629,874
Custodian fees ...................................................... 38,436
Professional fees ................................................... 33,769
Printing fees ....................................................... 2,000
Miscellaneous fees .................................................. 2,164
-----------
706,243
Expenses waived by the investment advisor ...................... 31,377
-----------
Total expenses ........................................ 674,866
-----------
Net investment income .................................................. 105,785
-----------
Net realized and unrealized gains (losses) on investments:
Net realized losses on investments .................................. (3,498,589)
Net unrealized appreciation on investments .......................... 15,245,006
-----------
Net realized and unrealized gains (losses) on investments .............. 11,746,417
-----------
Net increase in net assets resulting from operations ................... $11,852,202
===========
</TABLE>
See notes to financial statements.
F-59
<PAGE> 154
EQUITY GROWTH
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
From operations:
Net investment income $ 105,785
Net realized losses on investments (3,498,589)
Net unrealized appreciation on investments 15,245,006
------------
Net increase in net assets resulting from operations 11,852,202
------------
From capital transactions:
Proceeds from capital invested 256,748,572
Value of capital withdrawn 119,782,944
------------
Net increase in net assets resulting from capital transactions 136,965,628
------------
Net increase in net assets 148,817,830
Net assets:
Beginning of year --
------------
End of year $148,817,830
============
</TABLE>
See notes to financial statements.
F-60
<PAGE> 155
EQUITY GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
TIME DEPOSITS
$ 1,020,390 First National Bank of Boston, Nassau 5.80%,
Due 1/10/95(d) ....................................... $ 1,020,552
1,114,950 First National Bank of Boston, Nassau 5.11%,
Due 1/23/95(d) ....................................... 1,115,106
1,020,390 First National Bank of Boston, Nassau 5.83%,
Due 1/27/95(d) ....................................... 1,020,553
5,000,000 First Union National Bank of North Carolina, Nassau
5.75%, Due 1/23/95(d) ................................ 5,000,784
9,000,000 Fleet Bank of Massachusetts, Nassau 6.25%,
Due 1/03/95(d) ....................................... 9,001,501
7,270,280 Fleet National Bank, Grand Cayman 6.25%,
Due 1/03/95(d) ....................................... 7,271,515
9,000,000 Fuji Bank LTD, Grand Cayman 5.875%,
Due 2/02/95(d) ....................................... 9,001,407
2,101,951 Harris Bank, Nassau 6.05%, Due 1/17/95(d) .............. 2,102,299
7,527,439 Harris Bank, Nassau 5.9375%, Due 2/02/95(d) ............ 7,528,653
-------------
Total Time Deposits (cost $43,062,370) ......... 43,062,370 28.94%
------------- -------
REPURCHASE AGREEMENT
10,417,379 Repurchase Agreement with Prudential Securities
Dated 12/30/94, 5.65%, proceeds at maturity
$10,423,919, Due 1/03/95 (collateralized by Federal
Home Loan Mortgage Corp., 7.00% to 9.00%, Due
12/15/20 to 1/15/24, and Federal National
Mortgage Association, 1.94% to 10.50%, Due
12/01/00 to 11/25/23, with a market value of
$10,625,919) (cost $10,419,014) ...................... 10,419.014 7.00%
------------- -------
SHARES COMMON STOCK
ANIMAL SERVICES
98,200 Petsmart Inc.(a)(b)(c) ................................. 3,387,900 2.27%
------------- -------
COMMUNICATIONS EQUIPMENT
110,300 DSC Communications(a)(b)(c) ............................ 3,957,013
85,400 General Instrument Corp.(a)(c) ......................... 2,562,000
92,800 Motorola Inc. .......................................... 5,370,800
-------------
Total Communications Equipment ................. 11,889,813 7.99%
------------- -------
COMMUNICATIONS SERVICES
108,600 Rogers Cantel Mobile Comm-B(a)(b)(c) ................... 3,166,363 2.13%
------------- -------
CONSTRUCTION
105,100 Lowes Co's, Inc. ....................................... 3,652,225 2.45%
------------- -------
</TABLE>
See notes to financial statements.
F-61
<PAGE> 156
EQUITY GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Percent of
Shares Value Net Assets
------ ----- ----------
<S> <C> <C> <C>
EATING & DRINKING PLACES
127,875 Brinker International, Inc.,(c) ....................... $ 2,317,734
109,800 Cracker Barrel Old Country Store(a)(b) ................ 2,031,300
70,800 Starbucks Corp.(a)(b)(c) .............................. 1,947,000
------------
Total Eating & Drinking Places ................ 6,296,034 4.23%
------------ ------
ELECTRICAL EQUIPMENT
42,800 Cisco Systems, Inc.,(b)(c) ............................ 1,503,350
73,100 Intel Corp.(b) ........................................ 4,669,263
------------
Total Electrical Equipment .................... 6,172,613 4.15%
------------ ------
FOOD & BEVERAGE
94,100 Boston Chicken Inc.,(a)(b)(c) ......................... 1,634,987 1.10%
------------ ------
MEDICAL & OTHER HEALTH SERVICES
86,200 Coventry Corporation(b)(c) ............................ 2,111,900
36,000 Healthsource Inc.(c) .................................. 1,471,500
60,400 Oxford Health Plans(a)(b)(c) .......................... 4,786,700
------------
Total Medical & Other Health Services ......... 8,370,100 5.62%
------------ ------
OFFICE & BUSINESS EQUIPMENT
71,500 CUC International Inc.,(a) ............................ 2,395.250
71,100 EMC Corp., Mass(c) .................................... 1,537,537
159,200 Informix Corporation(b)(c) ............................ 5,114,300
98,800 Microsoft Corp.(b)(c) ................................. 6,039,150
114,800 Office Depot(c) ....................................... 2,755,200
117,200 Officemax Inc.,(c) .................................... 3,105,800
117,200 Oracle Systems Corp.(b)(c) ............................ 5,171,450
104,900 Pyxis Inc.,(a)(b)(c) .................................. 1,993,100
89,300 Sybase Inc.,(a)(b)(c) ................................. 4,643,600
------------
Total Office & Business Equipment ............. 32,755,387 22.01%
------------ ------
PERSONAL SERVICES
120,000 H & R Block, Inc. ..................................... 4,455,000 2.99%
------------ ------
RADIO AND TELEVISION BROADCAST
40,400 Lin Broadcasting Corp.(b) ............................. 5,393,400
20,200 Lin Television Corp. .................................. 459,550
------------
Total Radio And Television Broadcast .......... 5,852,950 3.93%
------------ ------
RESEARCH, DEVELOPMENT & TESTING
112,100 Biogen, Inc.(a)(b)(c) ................................. 4,680,175 3.15%
------------ ------
RETAIL SALES
139,900 Autozone Inc.(a)(c) ................................... 3,392,575
144,900 Best Buy Company. Inc.(a) ............................. 4,528,125
114,898 Home Depot ............................................ 5,285,308
209,300 Staples Inc.(a)(b)(c) ................................. 5,180,175
164,700 Wal-Mart Stores Inc. .................................. 3,499,875
------------
Total Retail Sales ............................ 21,886,058 14.71%
------------ ------
SECURITY SYSTEM SERVICES
99,250 Sensormatic Electronics Corp. ......................... 3,573.000 2.40%
------------ ------
SERVICES-HEALTH & ALLIED SERVICES
96,800 United Healthcare Corp. ............................... 4,368,100 2.94%
------------ ------
</TABLE>
See notes to financial statements.
F-62
<PAGE> 157
EQUITY GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C> <C>
TELECOMMUNICATIONS
164,300 Airtouch Communications Inc.(c) .......................... $ 4,785,238
44,100 Paging Network Inc. Telecom(b)(c) ........................ 1,499,400
33,200 Telephone & Data System .................................. 1,531,350
84,100 Ericsson L M Telephone ADR(b) ............................ 4,636,013
176,600 Vodafone Group ........................................... 5,938,175
------------
Total Telecommunications ......................... 18,390,176 12.36%
------------ -------
Total Common Stock (cost $125,285,875) ........... 140,530,881 94.43%
------------ -------
Total investments (cost $178,767,259) .................... $194,012,265 130.37%
Liabilities in Excess of Other Assets .................... (45,194,435) (30.37)%
------------ -------
Net Assets ............................................... $148,817,830 100.00%
============ =======
The aggregate cost of Securities for federal income tax purposes at December 31, 1994
is $178,767,259.
The following amount is based on costs for federal income tax purposes:
Aggregate gross unrealized appreciation ................... $ 18,703,026
Aggregate gross unrealized depreciation ................... (3,458,020)
------------
Net unrealized depreciation ............................... $ 15,245,006
============
</TABLE>
- --------------
(a) All or part of this security is on loan.
(b) Over-the-counter security.
(c) Non-income producing security as defined by the Investment Company Act
of 1940.
(d) Collateral for securities on loan.
See notes to financial statements.
F-63
<PAGE> 158
SPECIAL EQUITY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments, at value (Cost $234,517,196) ...................................... $239,254,274
Receivable for securities sold ................................................. 3,008,482
Dividends receivable ........................................................... 275,437
Receivable from investment advisor ............................................. 9,046
Receivable from securities lending ............................................. 20,532
------------
Total assets ........................................................... 242,567,771
------------
LIABILITIES
Deposit for securities loaned .................................................. 20,629,100
Payable for securities purchased ............................................... 4,090,816
Accrued expenses:
Investment advisory fees .................................................... 138,004
Custody fees ................................................................ 17,063
Professional fees ........................................................... 16,281
Printing fees ............................................................... 2,000
Miscellaneous fees .......................................................... 2,642
------------
Total liabilities ..................................................... 24,895,906
------------
Net assets ..................................................................... $217,671,865
============
Net assets consist of:
Paid-in capital ............................................................. $212,934,787
Net unrealized appreciation on investments .................................. 4,737,078
------------
Total net assets ....................................................... $217,671,865
============
</TABLE>
See notes to financial statements.
F-64
<PAGE> 159
SPECIAL EQUITY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Investment income:
Dividend income ...................................................... $1,454,990
Interest income ...................................................... 883,687
----------
Total income .................................................... 2,338,677
----------
Expenses:
Investment advisory fees (Note 3) .................................... 1,628,738
Custodian fees ....................................................... 117,043
Professional fees .................................................... 39,556
Printing fees ........................................................ 2,000
Miscellaneous fees ................................................... 5,133
----------
1,792,470
Expenses waived by the investment advisor ............................... 61,756
----------
Total expenses .................................................. 1,730,714
----------
Net investment income ................................................... 607,963
----------
Net realized and unrealized gains (losses) on investments:
Net realized losses on investments ................................... (4,329,355)
Net unrealized appreciation on investments ........................... 4,737,078
----------
Net realized and unrealized gains (losses) on investments ............... 407,723
----------
Net increase in net assets resulting from operations .................... $1,015,686
==========
</TABLE>
See notes to financial statements.
F-65
<PAGE> 160
SPECIAL EQUITY
STATEMENT OF CHANGES IN NET ASSETS
For the year ended December 31, 1994
<TABLE>
<S> <C>
From operations:
Net investment income ...................................... $ 607,963
Net realized losses on investments ......................... (4,329,355)
Net unrealized appreciation on investments ................. 4,737,078
------------
Net increase in net assets resulting from operations ....... 1,015,686
------------
From capital transactions:
Proceeds from capital invested ............................. 320,045,388
Value of capital withdrawn ................................. 103,389,209
------------
Net increase in net assets resulting from capital transactions .. 216,656,179
------------
Net increase in net assets ...................................... 217,671,865
Net assets:
Beginning of year .......................................... --
------------
End of year ................................................ $217,671,865
============
</TABLE>
See notes to financial statements.
F-66
<PAGE> 161
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
PRINCIPAL VALUE NET ASSETS
--------- ----- ----------
<S> <C> <C> <C>
TIME DEPOSITS
$ 488,898 First National Bank of Boston, Nassau 5.80%,
Due 1/10/95(d)............................................. $ 488,976
2,667,790 First National Bank of Boston, Nassau 5.11%,
Due 1/23/95(d)............................................. 2,668,165
488,899 First National Bank of Boston, Nassau 5.83%,
Due 1/27/95(d)............................................. 488,977
3,483,403 Fleet National Bank, Grand Cayman 6.25%,
Due 1/03/95(d)............................................. 3,484,002
7,000,000 Fuji Bank LTD, Grand Cayman 5.875%,
Due 2/02/95(d)............................................. 7,001,136
3,444,493 Harris Bank, Nassau 6.05%, Due 1/17/95(d)...................... 3,445,067
3,055,617 Harris Bank, Nassau 5.9375%, Due 2/02/95(d).................... 3,056,116
-----------
Total Time Deposits (cost $20,632,439)..................... 20,632,439 9.48%
----------- -----
REPURCHASE AGREEMENT
22,487,461 Repurchase Agreement with Prudential Securities, Dated
12/30/94, 5.65%, proceeds at maturity $22,501,578, Due
1/03/95 (collateralized by Federal Home Loan Mortgage
Corp., 7.00% to 9.00%, Due 12/15/20 to 1/15/24, and
Federal National Mortgage Association, 1.94% to 10.50%,
Due 12/01/00 to 11/25/23, with a market value of
$22,937,629) (cost $22,490,990).............................. 22,490,990 10.33%
----------- -----
<CAPTION>
SHARES COMMON STOCK
------ ------------
ADVERTISING SERVICES
19,700 Catalina Marketing Corp........................................ 1,095,812 0.50%
----------- -----
BANKING
41,925 Shawmut National Corp.......................................... 686,522 0.32%
----------- -----
BANKING EQUITY
44,700 Advest Group Inc............................................... 229,087
110,000 Peoples Bank Bridgeport(b)..................................... 1,306,250
157,300 Premier Bancorp(b)............................................. 2,497,138
-----------
Total Banking Equity................................ 4,032,475 1.85%
----------- -----
BEVERAGES
95,000 Panamerican Beverages Inc...................................... 3,004,375 1.38%
----------- -----
BROADCASTING
24,000 Jacor Communications Inc.(b)................................... 318,000 0.15%
----------- -----
BROADWOVEN FABRIC MILLS, COTTON
103,800 Cone Mills Corp.(c)............................................ 1,232,625 0.57%
----------- -----
CABLE & OTHER PAY TV SERVICES
20,000 Cablevision Systems Corp.(c)................................... 1,010,000
64,500 Jones Intercable Inc.(b)....................................... 790,125
-----------
Total Cable & Other Pay TV Services................. 1,800,125 0.83%
----------- -----
CHEMICALS & ALLIED PRODUCTS
17,000 Petrolite Corp.(b)............................................. 442,000 0.20%
----------- -----
</TABLE>
See notes to financial statements.
F-67
<PAGE> 162
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS--(Continued)
December 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C> <C>
COMMUNICATIONS EQUIPMENT
53,200 DSC Communications(a)(b)(c).................................... $ 1,908,550
32,900 General Instrument Corp.(a)(c)................................. 987,000
35,700 Glenayre Technologies Inc.(b).................................. 2,061,675
17,800 HBO & Company(b)............................................... 614,100
46,400 Motorola Inc................................................... 2,685,400
12,000 Northern Telecom Ltd........................................... 400,500
-----------
Total Communications Equipment............................ 8,657,225 3.98%
----------- -----
COMMUNICATIONS SERVICES
50,000 ACC Corp....................................................... 737,500
25,200 CommNet Cellular Inc.(b)(c).................................... 730,800
-----------
Total Communications Services............................. 1,468,300 0.67%
----------- -----
CONSTRUCTION AND BUILDING MATERIALS
21,500 Atmel Corp.(b)(c).............................................. 720,250
81,900 HILB Rogal & Hamilton Company.................................. 993,037
22,000 Lowes Co's, Inc................................................ 764,500
-----------
Total Construction and Building Materials................. 2,477,787 1.14%
----------- -----
CONSUMER GOODS & SERVICES
35,000 Armor All Products Corp........................................ 726,250 0.33%
----------- -----
DRUGS
53,400 American Safety Razor Company.................................. 734,250
35,300 Dura Pharmaceuticals Inc.(b)(c)................................ 511,850
71,000 Vitalink Pharmacy Services(b)(c)............................... 1,011,750
-----------
Total Drugs............................................... 2,257,850 1.04%
----------- -----
EATING & DRINKING PLACES
34,938 Apple South Inc.(b)............................................ 458,555 0.21%
----------- -----
EDUCATION
445,800 National Education Corp........................................ 1,838,925 0.84%
----------- -----
ELECTRICAL EQUIPMENT
22,000 Altera Corp.(b)(c)............................................. 921,250
72,900 Applied Materials Inc.(b)(c)................................... 3,080,025
123,550 Checkpoint Systems(c).......................................... 2,378,337
21,600 Colonial Group(b)(c)........................................... 702,000
6,000 Craftmade International Inc.(b)(c)............................. 59,250
17,200 Gentex Corp.(b)(c)............................................. 417,100
6,400 Intel Corp.(b)(c).............................................. 408,800
38,000 Kemet Corp.(b)(c).............................................. 1,125,750
17,000 Macromedia Inc.(b)(c).......................................... 433,500
7,300 Maxim Intergrated Products(b)(c)............................... 255,500
42,500 Rogers Corp.................................................... 2,114,375
21,600 Stratacom Inc.(a)(b)(c)........................................ 756,000
13,700 Tencor Instruments(b)(c)....................................... 527,450
18,100 Texas Instruments.............................................. 1,355,238
21,200 Ultratech Stepper Inc.(b)(c)................................... 805,600
-----------
Total Electrical Equipment................................ 15,340,175 7.05%
----------- -----
</TABLE>
See notes to financial statements.
F-68
<PAGE> 163
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS--(Continued)
December 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C> <C>
ENVIRONMENTAL MANAGEMENT
19,000 United Waste Systems Inc.(c)................................... $ 475,000 0.22%
---------- -----
FABRICATED METAL PRODUCTS
4,600 NN Ball & Roller Inc.(b)....................................... 87,400 0.04%
---------- -----
FARM & GARDEN MACHINERY & EQUIPMENT
14,000 Lindsay Manufacturing Company(b)(c)............................ 423,500 0.19%
---------- -----
FINANCE
83,000 Allied Capital Corporation(b).................................. 1,089,375
40,800 Allied Capital Lending Co(b)................................... 423,300
77,600 Cash American Investments Inc.................................. 766,300
66,800 Foothill Group................................................. 1,002,000
180,500 Kinder Care Learning Ctrs.(b)(c)............................... 2,211,125
----------
Total Finance............................................. 5,492,100 2.52%
---------- -----
FINANCIAL SERVICES
92,000 JMC Group Inc.(b).............................................. 143,750
60,000 Washington Mutual Inc.......................................... 1,012,500
35,900 Credit Acceptance(a)(b)(c)..................................... 637,225
22,542 Value Health Inc.(c)........................................... 839,690
----------
Total Financial Services.................................. 2,633,165 1.21%
---------- -----
FREIGHT
110,000 Harper Group Inc.(b)........................................... 1,732,500
117,000 Intertrans Corp.(b)............................................ 1,521,000
10,000 Sea Containers Inc............................................. 136,250
----------
Total Freight............................................. 3,389,750 1.56%
---------- -----
FUNERAL SERVICES & CREMATORIES
77,800 MHI Group Inc.................................................. 554.325 0.25%
---------- -----
GAMING
25,500 Harveys Casinos Resorts........................................ 328,312 0.15%
---------- -----
GROCERIES & RELATED PRODUCTS
102,500 Dairymart Coven Stores(b)...................................... 410,000
32,000 Eskimo Pie Corp.(b)............................................ 600,000
----------
Total Groceries & Related Products........................ 1,010,000 0.46%
---------- -----
GROCERY STORES
20,400 General Nutrition Companies(b)(c).............................. 591,600
3,000 Scotsman Industries Inc........................................ 51,375
----------
Total Grocery Stores...................................... 642,975 0.30%
---------- -----
HAIR CARE PRODUCTS
38,400 Helen of Troy Ltd.............................................. 652,800 0.30%
---------- -----
HEALTH SERVICES & HOSPITAL SUPPLIES
9,400 American Medical Response Inc.(c).............................. 271,425
12,400 Genesis Health Ventures(a)(c).................................. 392,150
10,500 Healthsouth Rehabilitation(c).................................. 388,500
43,675 Health Management Associates(c)................................ 1,091,875
</TABLE>
See notes to financial statements.
F-69
<PAGE> 164
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS--(Continued)
December 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C> <C>
HEALTH SERVICES & HOSPITAL SUPPLIES--(CONTINUED)
22,100 Sun Healthcare Group Inc.(c)................................... $ 560,788
49,625 Vencor Inc.(c)................................................. 1,383,297
-----------
Total Health Services & Hospital Supplies................. 4,088,035 1.88%
----------- -----
HORTICULTURAL SPECIALTIES
47,000 Sylvan Inc.(b)(c).............................................. 508,188 0.23%
----------- -----
HOTELS, TOURIST COURTS & MOTEL
22,666 Sholodge Inc.(b)............................................... 481,653 0.22%
----------- -----
HOUSEHOLD AUDIO & VIDEO EQUIPMENT
13,600 Broadband Technologies Inc.(b)(c).............................. 414,800 0.19%
----------- -----
INDUSTRIAL MACHINERY
45,000 Electro Rent Corp.(b)(c)....................................... 742,500
87,500 ILC Technology Inc.(b)......................................... 689,062
41,550 Lam Research Corp.(b)(c)....................................... 1,547,738
-----------
Total Industrial Machinery................................ 2,979,300 1.37%
----------- -----
INSURANCE
117,400 American Travellers Corp.(b)(c)................................ 1,922,425
38,600 Natl. Western Life Ins.(b)(c).................................. 1,341,350
51,200 Western National Corp.......................................... 659,200
72,800 Willis Corroon Group ADR....................................... 746,200
-----------
Total Insurance........................................... 4,669,175 2.14%
----------- -----
INVESTING
83,585 Presidential Realty New(b)..................................... 720,921 0.33%
----------- -----
MANUFACTURING
12,900 Cyrk International Inc.(a)(b)(c)............................... 533,737 0.25%
----------- -----
MEDICAL & OTHER HEALTH SERVICE
15,000 Columbia/HCA Healthcare Corp.(a)............................... 547,500
44,199 Community Health Systems(b)(c)................................. 1,204,423
38,300 Coventry Corporation(b)(c)..................................... 938,350
25,700 Healthsource Inc............................................... 1,050,488
36,800 Hillhaven Corp.(c)............................................. 782,000
18,100 Horizon Healthcare Corp.(c).................................... 506,800
17,600 IDEXX Laboratories Inc.(b)(c).................................. 633,600
13,400 Integrated Health Services(a).................................. 529,300
26,500 Living Centers Of America(c)................................... 884,438
31,300 Mariner Health Group Inc.(b)(c)................................ 676,862
120,000 Med-Chem Products Inc.......................................... 555,000
21,800 Omnicare Inc.(a)............................................... 956,475
26,100 Phycor Inc.(a)(b)(c)........................................... 698,175
7,400 Quantum Health Resources(b)(c)................................. 212,750
23,000 Summit Care Corp.(a)(b)(c)..................................... 437,000
15,700 United Healthcare Corp......................................... 708,463
76,000 Universal Health Services(b)................................... 1,862,000
-----------
Total Medical & Other Health Service........................... 13,183,624 6.06%
----------- -----
</TABLE>
See notes to financial statements.
F-70
<PAGE> 165
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS--(Continued)
December 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C>
MISCELLANEOUS INVESTING
99,800 Allied Capital Commercial Corp(b).............................. $1,659,175
22,800 Health Care Property Invest Inc.(a)............................ 686,850
----------
Total Miscellaneous Investing.............................. 2,346,025 1.08%
---------- -----
MISCELLANEOUS
78,000 AAR Corp....................................................... 1,043,250
14,000 Blyth Industries Inc.(c)....................................... 400,750
38,000 Expeditors Intl. Wash Inc.(b).................................. 826,500
54,000 Homeowners Group Inc.(b)....................................... 43,875
180,000 ITT Educational Services Inc.(c)............................... 1,822,500
32,300 Midwest Grain Products, Inc.(b)................................ 775,200
----------
Total Miscellaneous........................................ 4,912,075 2.26%
---------- -----
MISCELLANEOUS SERVICES
101,600 Manpower Inc................................................... 2,857,500 1.31%
---------- -----
MOTOR VEHICLES & EQUIPMENT
8,600 General Motors CL E............................................ 331,100
17,000 Wabash National Corp........................................... 663,000
----------
Total Motor Vehicles & Equipment........................... 994,100 0.46%
---------- -----
OFFICE & BUSINESS EQUIPMENT
27,400 Acxiom Corp.(b)(c)............................................. 760,350
70,000 Amplicon Inc.(b)............................................... 1,295,000
70,175 Brandon System Corp............................................ 1,254,378
6,000 CUC International Inc.......................................... 201,000
40,900 Cambridge Tech Partners Inc.(b)(c)............................. 910,025
11,400 Cerner Corp.(a)(b)(c).......................................... 503,025
25,500 Chipcom Corporation(b)(c)...................................... 1,275,000
21,200 Electronics For Imaging(b)(c).................................. 583,000
24,100 FTP Software Inc.(b)(c)........................................ 762,163
23,200 Fair Issac & Company Inc.(b)................................... 1,305,000
97,900 Jack Henry & Associates(b)..................................... 954,525
16,000 Infocus Systems Incorp.(b)(c).................................. 417,000
39,300 Input/Output Inc.(b)(c)........................................ 928,462
12,900 Micros Systems Inc.(a)(b)(c)................................... 486,975
17,100 Micron Technology.............................................. 754,538
46,800 National Computer System Inc.(b)............................... 725,400
14,000 Netmanage Inc.(b)(c)........................................... 567,000
17,700 Network Peripherals Inc.(b)(c)................................. 482,325
31,500 New Image Industries(b)........................................ 129,938
14,300 Office Depot(c)................................................ 343,200
6,000 Officemax Inc.(c).............................................. 159,000
52,800 Oracle Systems Corp.(b)(c)..................................... 2,329,800
24,800 Parametrics Technology Corp.(b)(c)............................. 855,600
11,800 Proxima Corp.(b)(c)............................................ 340,725
700 Silicon Graphics(c)............................................ 21,613
21,500 Sungard Data Sys Inc.(b)(c).................................... 827,750
12,900 Sybase Inc.(a)(b)(c)........................................... 670,800
</TABLE>
See notes to financial statements.
F-71
<PAGE> 166
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS--(Continued)
December 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C> <C>
OFFICE & BUSINESS EQUIPMENT--(CONTINUED)
38,500 Viewlogic Systems Inc.(b)(c)................................... $ 712,250
17,200 Viking Office Prods Inc.(b)(c)................................. 526,750
9,100 Wall Data Inc.(b)(c)........................................... 361,725
18,900 Wonderware Corporation(b)(c)................................... 637,875
11,900 Zebra Technologies Corp.(b)(c)................................. 464,844
----------
Total Office & Business Equipment.......................... 22,547,036 10.36%
---------- -----
OIL & GAS
49,700 Daniel Industries.............................................. 658,525
98,900 Tosco Corp..................................................... 2,880,463
34,700 UNC Incorporated............................................... 208,200
----------
Total Oil & Gas............................................ 3,747,188 1.72%
---------- -----
OPTICAL & OPTHALMIC GOODS
14,700 KLA Instruments Corp.(b)(c).................................... 720,300 0.33%
---------- -----
PAPER & FOREST PRODUCTS
8,450 BMC West Corp.(b)(c)........................................... 118,300
8,600 Scott Paper Company............................................ 594,475
----------
Total Paper & Forest Products.............................. 712,775 0.33%
---------- -----
PLASTICS MATERIALS & SYNTHETIC
84,300 Lydall Inc..................................................... 2,739,750 1.26%
---------- -----
POLLUTION CONTROL
40,881 Tetra Tech Inc.(b)(c).......................................... 725,642 0.33%
---------- -----
PRINTING & PUBLISHING
7,700 Clear Channel Communications................................... 390,775
60,000 Houghton Mifflin Company....................................... 2,722,500
250,000 Steck Vaughn Publishing Corp.(b)(c)............................ 1,437,500
----------
Total Printing & Publishing................................ 4,550,775 2.09%
---------- -----
PROFESSIONAL & COMMERCIAL EQUIPMENT SUPPLIES
23,100 Callaway Golf Company(a)....................................... 765,187 0.35%
---------- -----
RADIO AND TELEVISION BROADCAST
27,000 Osborn Communications CP--New(b)(c)............................ 202,500 0.09%
---------- -----
RADIO, TV, CONSUMER ELECTRONICS & MUSIC
43,300 Cognex Corp.(b)(c)............................................. 1,114,975
27,900 IMRS Inc.(b)(c)................................................ 1,102,050
----------
Total Radio, TV, Consumer Electronics & Music.............. 2,217,025 1.02%
---------- -----
RAILROADS
13,700 Wisconsin Central Transport(b)(c).............................. 565,125 0.26%
---------- -----
REAL ESTATE
29,300 Roc Communities Inc............................................ 615,300 0.28%
---------- -----
RETAIL SALES
13,800 Ann Taylor Stores(a)(c)........................................ 474,375
16,000 Bed Bath & Beyond Inc.(a)(b)(c)................................ 480,000
15,800 Blair Corporation.............................................. 632,000
124,000 Casey's General Stores Inc.(b)................................. 1,860,000
</TABLE>
See notes to financial statements.
F-72
<PAGE> 167
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS--(Continued)
December 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C> <C>
RETAIL SALES--(CONTINUED)
62,700 Catherines Stores Corp.(b)(c).................................. $ 548,625
173,200 Consolidated Stores Corp.(c)................................... 3,225,850
15,900 Department 56, Inc.(c)......................................... 632,025
69,000 Fred's Inc.(b)................................................. 621,000
150,000 MacFrugals Bargains Close-Outs................................. 3,000,000
146,200 Michael Anthony Jewellers Inc.(c).............................. 986,850
20,900 Micro Warehouse Inc.(b)(c)..................................... 731,500
15,800 Nautica Enterprises Inc.(b).................................... 477,950
110,000 Pentech International Inc.(b)(c)............................... 440,000
54,800 Service Merchandise Company.................................... 253,450
26,850 Sports & Recreation Inc.(c).................................... 691,388
3,100 The Sports Authority Inc.(c)................................... 65,100
25,100 Sunglass Hut Inc.(a)(b)(c)..................................... 577,300
50,000 TJX Cos Inc. New............................................... 781,250
44,500 Tandy Crafts Inc............................................... 483,938
16,600 Tommy Hilfiger Corp.(a)........................................ 749,075
Total Retail Sales......................................... 17,711,676 8.14%
----------- -----
SAVINGS & LOAN HOLDING COMPANIES
52,573 First Republic Bancorp Inc.(a)................................. 591,446
84,500 Firstfed Michigan Corp.(b)..................................... 1,732,250
-----------
Total Savings & Loan Holding Companies..................... 2,323,696 1.07%
----------- -----
SAVINGS INSTITUTIONS
114,000 American Federal Bank(b)....................................... 1,225,500
145,000 American Savings of Fla--FSB(b)................................ 2,845,625
140,000 Roosevelt Financial Grp Inc.(b)................................ 2,100,000
-----------
Total Savings Institutions................................. 6,171,125 2.84%
----------- -----
SECURITY SYSTEM SERVICES
5,000 Sierra On-Line Inc.(b)(c)...................................... 171,250
15,300 Synopsys Inc.(b)(c)............................................ 669,375
753,692 Automated Security Holdings ADR................................ 1,695,807
-----------
Total Security System Services............................. 2,536,432 1.17%
----------- -----
SEMICONDUCTOR CAPITAL EQUIPMENT
6,300 Alliance Semiconductor Corp.(b)(c)............................. 196,875 0.09%
----------- -----
SERVICES-CLEANING & MAINTENANCE TO DWELLERS
31,700 ABM Industries Inc............................................. 737,025 0.34%
----------- -----
SEWER/DRAIN CLEANING SERVICE
29,000 Roto Rooter Inc.(b)............................................ 638,000 0.29%
----------- -----
SOAP, DETERGENT, CLEANING PREPARATION, PERFUME
35,100 Chemed Corp.................................................... 1,171,462
7,600 Sybron Chemicals Inc.(b)(c).................................... 117,800
-----------
Total Soap, Detergent, Clean Preparation, Perfume.......... 1,289,262 0.59%
----------- -----
TELECOMMUNICATIONS
24,300 ALC Communications Corp........................................ 756,337
14,400 Aspect Telecommunication Corp.(b)(c)........................... 482,400
103,500 AT&T Capital................................................... 2,212,312
</TABLE>
See notes to financial statements.
F-73
<PAGE> 168
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS--(Continued)
December 31, 1994
<TABLE>
<CAPTION>
PERCENT OF
SHARES VALUE NET ASSETS
------ ----- ----------
<S> <C> <C> <C>
TELECOMMUNICATIONS--(CONTINUED)
10,700 Airtouch Communications Inc.................................... $ 311,637
21,200 Applied Digital Access Inc.(b)(c).............................. 537,950
14,175 Associated Group Inc.-CL A (b)(c).............................. 333,112
14,175 Associated Group Inc.-CL B (b)(c).............................. 333,112
35,300 Cabletron Systems Inc.(a)(c)................................... 1,641,450
65,975 Centennial Cellular Corp. A(b)................................. 1,121,575
14,600 Cidco Inc.(a)(b)(c)............................................ 423,400
53,000 Davel Communications Group(b)(c)............................... 675,750
10,300 LDDS Communications Inc.(b).................................... 200,206
21,100 MFS Communications Company Inc.(b)(c).......................... 691,025
60,900 Pronet Inc.(b)(c).............................................. 883,050
99,000 TPI Enterprises(a)(b).......................................... 383,625
13,100 Nokia Corp. ADR(a)............................................. 982,500
------------
Total Telecommunications.................................. 11,969,441 5.50%
------------ ------
TRANSPORTATION
40,500 ADESA Corp.(b)................................................. 546,750
70,500 Air Express Intl. Corp.(a)(b).................................. 1,410,000
100,000 Airborne Freight Corp.(a)...................................... 2,050,000
169,100 Consolidated Freightway........................................ 3,783,612
129,700 Pittston Services Group........................................ 3,437,050
------------
Total Transportation...................................... 11,227,412 5.16%
------------ ------
WATCHES, CLOCKS, CLOCKWORK
15,900 Fossil Inc.(a)(b)(c)........................................... 208,687 0.09%
------------ ------
Total Common Stocks (cost $190,697,192)................... 195,333,695 89.74%
------------ ------
PREFERRED STOCK
TELECOMMUNICATIONS
14,900 Cellular Communications Inc.(b) (cost $696,575)................ 797,150 0.37%
------------ ------
Total investments (cost $234,517,196).......................... $239,254,274 109,92%
Liabilities in Excess of Other Assets.......................... (21,582,409) (9.92)%
------------ ------
Net Assets..................................................... $217,671,865 100.00%
============ ======
The aggregate cost of securities for federal income tax purposes at
December 31, 1994 is $234,517,196.
The following amount is based on costs for federal income tax purposes:
Aggregate gross unrealized appreciation........................ $ 21,203,290
Aggregate gross unrealized depreciation........................ (16,466,212)
------------
Net unrealized appreciation.................................... $ 4,737,078
============
</TABLE>
- --------------
(a) All or part of this security is on loan.
(b) Over-the-counter security.
(c) Non-income producing security as defined by the Investment Company Act of
1940.
(d) Collateral for securities on loan.
See notes to financial statements.
F-74
<PAGE> 169
DIVERSIFIED INVESTORS PORTFOLIOS
Notes To Financial Statements
1. ORGANIZATION AND BUSINESS
Diversified Investors Portfolios (the "Series Portfolio"). a series trust
organized on September 1, 1993 under the laws of the State of New York, is
composed of nine different series that are, in effect, separate investment
funds: the Money Market Series, the High Quality Bond Series, the Intermediate
Government Bond Series, the Government/Corporate Bond Series, the Balanced
Series, the Equity Income Series, the Growth & Income Series, the Equity Growth
Series and the Special Equity Series (each a "Series"). The Declaration of Trust
permits the Board of Trustees to issue an unlimited number of beneficial
interests in each Series. Investors in a Series (i.e., investment companies,
insurance company separate accounts and common and commingled trust funds) will
each be liable for all obligations of that Series (and of no other Series). On
January 3, 1994 (commencement of operations) the MONY Pooled Separate Accounts
exchanged all of its investable assets at a market value of $1,183,075,019 to
the Series Portfolio in exchange for an interest in the Series Portfolio.
2. SIGNIFICANT ACCOUNTING POLICIES
A. SECURITY VALUATION:
Short-term securities maturing in sixty days or less are valued at
amortized cost. The amortized cost of a security is determined by valuing it at
original cost and thereafter amortizing any discount or premium at a constant
rate until maturity. Securities traded on national securities exchanges are
valued at the last sales price as of the close of business or at the last bid
price for over-the-counter securities. Bonds are valued at the last available
price provided by an independent pricing service for securities traded on a
national securities exchange. Bonds that are listed on a national securities
exchange but are not traded and bonds that are regularly traded in the
over-the-counter market are valued at the mean of the last available bid and
asked prices by an independent pricing service. All other securities, will be
valued at their fair value as determined by the Board of Trustees.
B. REPURCHASE AGREEMENTS:
The Series, along with other affiliated entities of the investment advisor,
may enter into joint repurchase agreements with financial institutions deemed to
be creditworthy by the Series' investment advisor, subject to the seller's
agreement to repurchase and the Series' agreement to resell such securities at a
mutually agreed upon price. Securities purchased subject to repurchase
agreements are deposited with the Series' custodian, and pursuant to the terms
of the repurchase agreement must have an aggregate market value greater than or
equal to the repurchase price plus accrued interest at all times. If the value
of the underlying securities falls below the value of the repurchase price plus
accrued interest, the Series will require the seller to deposit additional
collateral by the next business day. If the request for additional collateral is
not met, or the seller defaults on its repurchase obligation, the Series
maintains the right to sell the underlying securities at market value and may
claim any resulting loss against the seller. However, in the event of default or
bankruptcy by the seller, realization and/or retention of the collateral may be
subject to legal proceedings.
C. FEDERAL INCOME TAXES:
It is each Series policy to comply with the provisions of the Internal
Revenue Code applicable to it. Therefore, no federal income tax provision is
required.
D. SECURITY TRANSACTIONS AND INVESTMENT INCOME:
Security transactions are accounted for on a trade date basis (the date the
order to buy or sell is executed). Dividend income is recorded on the
ex-dividend basis. Interest income is recorded on the
F-75
<PAGE> 170
DIVERSIFIED INVESTORS PORTFOLIOS
Notes To Financial Statements--(Continued)
accrual basis and includes amortization of premium and discount on investments.
Realized gains and losses from securities transactions are recorded on the
identified cost basis.
All of the net investment income and realized and unrealized gains and
losses from security transactions are determined on each valuation day and
allocated pro rata among the investors in a Series at the time of such
determination.
E. ORGANIZATION EXPENSES:
Costs incurred by the Series Portfolio in connection with its organization
were borne by Diversified Investment Advisors, Inc., (the "Advisor") to the
Series Portfolio.
F. OTHER:
The Series Portfolio accounts separately for the assets, liabilities and
operations of each Series. Expenses directly attributable to a Series are
charged to that Series, while expenses attributable to all Series are allocated
among them.
3. FEES AND TRANSACTIONS WITH AFFILIATES
The Advisor manages the assets of each Series of the Series Portfolio
pursuant to an Investment Advisory Agreement (the "Advisory Agreement") with the
Series Portfolio with respect to each Series. Subject to such further policies
as the Board of Trustees may determine, the Advisor provides general investment
advice to each Series. For its services under the Advisory Agreement, the
Advisor receives from each Series fees accrued daily and paid monthly at an
annual rate equal to the percentages specified in the table below of the
corresponding Series' average daily net assets. Diversified is currently waiving
a portion of its investment advisory fee.
For each Series, the Advisor has entered into an Investment Subadvisory
Agreement (each a "Subadvisory Agreement") with the subadvisers listed in the
table below (each a "Subadviser", collectively the "Subadvisers"). It is the
responsibility of a Subadviser to make the day-to-day investment decisions of
the Series and to place the purchase and sales orders for securities
transactions of such series, subject in all cases to the general supervision of
the Advisor. For its services under each Subadvisory Agreement, the Subadvisers
receive a fee from the Advisor at an annual rate equal to the percentages
specified in the table below of the corresponding Series' average net assets.
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS ADVISER(1) SUBADVISERS
PORTFOLIO SERIES PORTFOLIO SUBADVISERS FEE FEE
--------------------- --------------------- ---------- -----------
<S> <C> <C> <C>
Money Market Series ..................... 1740 Advisors, Inc. 0.25 0.05
High-Quality Bond Series ................ Merganser Capital Management 0.35 (2)
Corporation
Intermediate Government Bond Series ..... 1740 Advisors, Inc. 0.35 0.15
Government/Corporate Bond Series ........ 1740 Advisors, Inc. 0.35 0.15
Balanced Series ......................... Institutional Capital Corporation 0.45 (3)
Equity Income Series .................... Asset Management Group 0.45 0.25
Growth & Income Series .................. Munder Capital Management, 0.60 (4)
Inc.
Equity Growth Series .................... Jundt Associates, Inc. 0.70 0.63
Special Equity Series ................... (5) 0.80 0.50
</TABLE>
F-76
<PAGE> 171
DIVERSIFIED INVESTORS PORTFOLIOS
Notes To Financial Statements--(Continued)
- --------------
(1) The Adviser is currently waiving a portion of its fee.
(2) 0.50 on the first $10,000,000 in assets, 0.375% on the next $15,000,000 in
assets, 0.25% on the next $75,000,000 in assets and 0.1875% on all assets
in excess of $100,000,000.
(3) 0.55% on the first $25,000,000 in assets, 0.45% on the next $25,000,000 in
assets, and 0.35% on all assets in excess of $50,000,000.
(4) 0.50% on the first $50,000,000 in assets, 0.30% on the next $25,000,000 in
assets and 0.25% on assets in excess of $75,000,000.
(5) The Special Equity Series has four Subadvisers: Pilgrim Baxter &
Associates, Ltd., Ark Asset Management Co., Inc.; Eagle Asset Management,
Inc.; and Westport Asset Management, Inc.
For the year ended December 31, 1994, the Advisor earned and has
voluntarily undertaken to waive fees in accordance with the expense caps as
follows:
<TABLE>
<CAPTION>
FUND EXPENSE CAP EARNED WAIVED
---- ----------- ------ ------
<S> <C> <C> <C>
Money Market Series .................... 30 b.p. 312,079 29,141
Intermediate Government Bond Series .... 40 b.p. 246,814 32,308
Government/Corporate Bond Series ....... 40 b.p. 776,654 10,376
High Quality Bond Series ............... 40 b.p. 607,967 20,204
Balanced Series ........................ 50 b.p. 443,372 38,936
Equity Income Series ................... 50 b.p. 2,470,354 2,000
Growth & Income Series ................. 65 b.p. 576,431 23,726
Equity Growth Series ................... 75 b.p. 629,874 31,377
Special Equity Series .................. 85 b.p. 1,628,738 61,756
</TABLE>
Amounts due to the Advisor of $67,232 represent expenses paid on behalf of
the Series Portfolios.
Certain trustees and officers of the Series Portfolio are also directors.
officers or employees of the Advisor or its affiliates. None of the trustees so
affiliated receive compensation for services as trustees of the Series
Portfolio. Similarly, none of the Series Portfolio officers receive compensation
from the Series Portfolio.
4. FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Ratio OF NET
INVESTMENT
RATIO OF NET INCOME,
RATIO OF INVESTMENT NET OF
RATIO OF EXPENSES, INCOME TO WAIVERS
GROSS EXPENSES NET OF WAIVERS PORTFOLIO TO PORTFOLIO
TO AVERAGE TO AVERAGE AVERAGE AVERAGE PORTFOLIO
NET ASSETS NET ASSETS NET ASSETS NET ASSETS TURNOVER
-------------- -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Money Market Series .................... .32% .30% 4.05% 4.07% N/A
Intermediate Government Bond Series .... .45 .40 5.71 5.76 21.4%
Government/Corporate Bond Series ....... .40 .40 5.71 5.72 121.9
High Quality Bond ...................... .41 .40 5.77 5.79 36.5
Balanced Series ........................ .53 .50 3.57 3.61 117.6
Equity Income Series ................... .49 -- 3.43 3.43 29.5
Growth & Income Series ................. .67 .65 1.35 1.37 20.6
Equity Growth Series ................... .76 .75 .08 .11 74.9
Special Equity Series .................. .88 .85 .27 .30 89.9
</TABLE>
(Footnotes continued on following page)
F-77
<PAGE> 172
(Footnotes continued from preceding page)
5. SECURITY LENDING
The Series may lend its securities to certain member firms of the New York
Stock Exchange. The loans are collateralized at all times with cash or
securities with a market value at least equal to the market value of the
securities on loan. Any deficiencies or excess of collateral must be delivered
or transferred by the member firms no later than the close of business on the
next business day. As with other extensions of credit, the Series may bear the
risk of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. The Series receives compensation,
net of related expenses, for lending its securities. At December 31, 1994, the
Series loaned securities having market values as follows:
<TABLE>
<CAPTION>
FUND MARKET VALUE COLLATERAL
---- ------------ ----------
<S> <C> <C>
High Quality Bond Series ................ 5,925,000.00 6,120,000.00
Intermediate Government Bond Series ..... 4,125,000.00 4,250,000.00
Government/Corporate Bond Series ........ 12,243,773.00 12,971,790.00
Balanced Series ......................... 40,936,725.00 42,577,850.00
Equity Income Series .................... 43,936,801.00 34,325,800.00
Equity Growth Series .................... 38,840,168.00 43,055,400.00
Growth & Income Series .................. 4,700,751.00 4,850,000.00
Special Equity Series ................... 19,730,418.00 20,629,100.00
</TABLE>
6. PURCHASE AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and proceeds from the sales or
maturities for the period ended December 31, 1994 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
(COST) (PROCEEDS)
--------- ----------
<S> <C> <C> <C>
Intermediate Government .......... Government Obligations 44,005,068 15,024,974
Government/ Corporate ............ Government Obligations 255,214,767 200,168,176
Other 76,413,461 73,238,776
High Quality ..................... Government Obligations 19,735,357 21,817,113
Other 43,522,925 67,328,609
Balanced ......................... Government Obligations 58,693,393 21,111,883
Other 97,778,280 96,638,214
Equity Income .................... Other 164,802,651 163,034,173
Growth & Income .................. Other 19,972,883 30,485,357
Equity Growth .................... Other 118,754,433 69,631,967
Special Equity ................... Other 197,811,258 183,810,545
</TABLE>
7. EQUITY-LINKED DEBT SECURITIES
The Equity Income Portfolio is currently investing in hybrid equity
securities (Equity-Linked Debt Securities (ELKS), Performance Equity-Linked
Redemption Quarterly-Pay Securities (PERQS), and Yield Enhanced Equity-Linked
Debt Securities (YEELDS)) which usually convert into common stock three years
from the issue date. These securities offer a higher dividend than that on the
common stock and allow the issuer to redeem the instrument for common shares at
predetermined rates of exchange (these exchange rates generally decline daily to
reach the final cap price at the mandatory conversion date). The instruments are
not convertible at the option of the holder. The trade-offs for the higher yield
include: limited appreciation potential, downside exposure, and a finite time to
capture the yield advantage. Should the underlying common stock rise above the
final cap price (historically ranging from 30% to 55% above the issue price),
the convertible's appreciation is limited to the final cap price (the investor
receives fractional shares equivalent to the final cap price). Should the common
price remain or fall below the final cap price at the mandatory conversion date,
the convertible will be redeemed for one common share. These synthetic
convertibles are issued by a company other than the one to which the instrument
is linked and carry the credit of the issuer not that of the underlying common
stock. The portfolio could be exposed to risks if the underlying stock
underperforms or declines and if the issuer defaults on the payment of the
dividend or the common stock at maturity.
F-78
<PAGE> 173
[ERNST & YOUNG LLP LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
AUSA Life Insurance Company, Inc.
We have audited the accompanying statutory-basis balance sheets of AUSA Life
Insurance Company, Inc. as of December 31, 1994 and 1993, and the
statutory-basis statements of operations, capital and surplus and cash flows for
the year ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The Company presents its financial statements in conformity with accounting
practices prescribed or permitted by the Department of Insurance of the State of
New York. The variances between such practices and generally accepted accounting
principles are described in Note 1. The effects of these variances have not been
determined but we believe they are material.
In our opinion, because of the materiality of the effects of the variances
between generally accepted accounting principles and the accounting practices
referred to in the preceding paragraph, the financial statements referred to
above are not intended to and do not present fairly, in conformity with
generally accepted accounting principles, the financial position of AUSA Life
Insurance Company, Inc. at December 31, 1994 and 1993, or the results of its
operations or its cash flows for the year ended December 31, 1994.
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the admitted assets, liabilities, and capital and
surplus of AUSA Life Insurance Company, Inc. at December 31, 1994 and 1993, and
the results of its operations and its cash flows for the year ended December 31,
1994 in conformity with accounting practices prescribed or permitted by the
Department of Insurance of the State of New York.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 17, 1995
F-79
<PAGE> 174
AUSA Life Insurance Company, Inc.
Balance Sheets -- Statutory Basis
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31
1994 1993
-------------------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 89,532 $ 402,519
Bonds (Note 2) 2,099,349 1,507,035
Stocks (Note 2):
Preferred 236 236
Common, at market (cost: 1994 -- $141; 1993 -- $2,135) 274 2,303
Mortgage loans on real estate (Note 2) 862,352 1,045,011
Real estate acquired in satisfaction of debt (Note 2) 10,485 --
Policy loans 24 18
-------------------------
Total cash and invested assets 3,062,252 2,957,122
Accrued investment income 48,845 40,984
Federal income taxes recoverable (Note 4) 12 --
Other assets 2 2
Separate account assets 2,907,674 --
-------------------------
Total admitted assets $6,018,785 $2,998,108
=========================
</TABLE>
F-80
<PAGE> 175
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 199 $ 200
Annuity 7,572 4,850
Policy and contract claim reserves 3 3
Other policyholders' finds 2,761,658 2,727,364
Remittances and items not allocated 16,763 6,423
Federal income taxes payable (Note 4) -- 49
Asset valuation reserve (Note 1) 25,552 12,743
Interest maintenance reserve (Note 1) 1,314 151
Payable to affiliates (Note 6) 7,858 65
Short-term note payable to affiliate (Note 6) 5,200 --
Other liabilities 116,860 37,907
Separate account liabilities 2,891,976 --
------------------------
Total liabilities 5,834,955 2,789,755
Commitments and contingencies (Notes 3 and 7)
Capital and surplus (Note 5):
Common stock, $125 par value, 20 shares authorized,
issued and outstanding 2,500 2,500
Paid-in surplus 210,150 210,150
Unassigned surplus (deficit) (28,820) (4,297)
------------------------
Total capital and surplus 183,830 208,353
------------------------
Total liabilities and capital and surplus $6,018,785 $2,998,108
========================
</TABLE>
See accompanying notes.
F-81
<PAGE> 176
AUSA Life Insurance Company, Inc.
Statement of Operations -- Statutory Basis
(Dollars in thousands)
Year ended December 31, 1994
<TABLE>
<S> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life $ 10
Annuity 426,329
Net investment income (Note 2) 254,539
Amortization of interest maintenance reserve (Note 1) 158
Commissions and expense allowances on reinsurance ceded 11,921
--------
692,957
Benefits and expenses:
Death, surrender and other life insurance and annuity benefits 454,677
Increase (decrease) in aggregate reserves for policies and contracts:
Life (1)
Annuity 2,722
Increase in liability for premium and other deposit type funds 34,294
Commissions 91,312
General insurance expenses 57,207
Taxes, licenses and fees 131
Transfers to separate accounts 63,209
--------
703,551
--------
Loss from operations before federal income taxes and
net realized capital losses on investments (10,594)
Federal income tax expense (Note 4) -
--------
Loss from operations before net realized capital losses on investments (10,594)
Net realized capital losses on investments (net of related
federal income tax expense and amounts transferred to
interest maintenance reserve) (Note 2) (928)
--------
Net loss $(11,522)
========
</TABLE>
See accompanying notes.
F-82
<PAGE> 177
AUSA Life Insurance Company, Inc,
Statement of Capital and Surplus -- Statutory Basis
(Dollars in thousands)
Year ended December 31, 1994
<TABLE>
<S> <C>
Common stock, at beginning and end of year $ 2,500
Paid-in surplus at beginning and end of year 210,150
Unassigned surplus (deficit):
Beginning of year (4,297)
Net loss (11,522)
Net change in unrealized capital gains (losses) (35)
Change in asset valuation reserve (12,809)
Change in non-admitted assets (855)
Seed money contributed to separate account (Note 6) (15,000)
Change in surplus in separate account 15,698
--------
End of year (28,820)
--------
Total capital and surplus $183,830
========
</TABLE>
See accompanying notes.
F-83
<PAGE> 178
AUSA Life Insurance Company, Inc.
Statement of Cash Flows -- Statutory Basis
(Dollars in thousands)
Year ended December 31, 1994
<TABLE>
<S> <C>
SOURCES OF CASH
Net cash provided by operations:
Premiums and other considerations, net of reinsurance $ 438,260
Net investment income 246,801
----------
685,061
Life and accident and health claims 8
Surrender benefits and other fund withdrawals 453,799
Other benefits to policyholders 868
Commissions, other expenses and other taxes 63,919
Net transfers to separate accounts 63,211
Federal income taxes, excluding tax on capital gains 62
Net increase in policy loans 6
----------
581,873
----------
Net cash provided by operations 103,188
Proceeds from investments sold, matured or repaid:
Bonds 421,275
Common stocks 2,022
Mortgage loans 189,421
Other (48)
----------
612,670
Other sources 25,035
Short-term note payable to affiliate (Note 6) 5,200
----------
Total sources of cash 746,093
USES OF CASH
Cost of investments acquired:
Bonds and preferred stocks 1,038,312
Common stocks 27
Mortgage loans 1,544
Real estate (32)
----------
1,039,851
Seed money contributed to separate accounts (Note 6) 15,000
Other uses 4,229
----------
Total uses of cash 1,059,080
----------
Net change in cash and short-term investments (312,987)
Cash and short-term investments at beginning of year 402,519
----------
Cash and short-term investments at end of year $ 89,532
==========
</TABLE>
See accompanying notes.
F-84
<PAGE> 179
AUSA Life Insurance Company, Inc.
Notes to Financial Statements -- Statutory Basis
(Dollars in thousands)
December 31, 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Effective September 24, 1993, First AUSA Life Insurance Company, a wholly-owned
subsidiary of AEGON USA, Inc., purchased from The Dreyfus Corporation
("Dreyfus"), its entire interest in Dreyfus Life Insurance Company, a stock life
insurance company. At the time of purchase, the Company had total assets and
capital and surplus of approximately $17 million and $11 million, respectively.
Effective September 27, 1993, Dreyfus Life Insurance Company changed its name to
AUSA Life Insurance Company, Inc. (the Company).
On December 31, 1993, the Company entered into an indemnity reinsurance
agreement with Mutual Life Insurance Company of New York (MONY) to transfer
certain group pension business of MONY to the Company. Assets and liabilities
were transferred in connection with the agreement, as follows:
<TABLE>
<S> <C>
Cash and short-term investments $ 199,899
Bonds 1,486,230
Mortgage loans on real estate 1,045,011
Accrued investment income 40,550
Other assets 2,864
----------
Total assets $2,774,554
==========
Contract liabilities $2,727,364
Deferred interest on assets purchased 24,889
Other liabilities 22,301
----------
Total liabilities $2,774,554
==========
</TABLE>
In addition, pursuant to the same agreement, approximately $2.9 billion of
separate account assets and liabilities were transferred in 1994.
The agreement with MONY provides for the indemnity reinsurance, on a 100%
coinsurance basis, of this business. The Company and MONY also entered into an
assumption reinsurance agreement pursuant to which approximately 80% of the
general account liabilities were novated to the Company from MONY as state
approvals were received. The majority of the remaining general account
liabilities are expected to be novated during 1995.
F-85
<PAGE> 180
AUSA Life Insurance Company, Inc.
Notes to Financial Statements -- Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with the agreement, MONY will receive payments relating to the
performance of the assets and liabilities that exist at the date of closing for
a period of nine years. These payments will be reduced for certain
administrative expenses as defined in the agreement. The Company will recognize
operating gains and losses on renewal premiums received after December 31, 1993
of the business in-force at December 31, 1993, and on all new business written
after that date. At the end of nine years, the Company will purchase from MONY
the remaining transferred business inforce based upon a formula described in
the agreement. At December 31, 1994, the Company owed MONY approximately $84.7
million which represents the amount earned by MONY under the gain sharing
calculation for the year ended December 31, 1994 discussed above.
In connection with the transaction, MONY purchased $150 million and $50 million
in Series A and Series B notes, respectively, of AEGON USA, Inc. The proceeds
were used to enhance the surplus of the Company. Both the Series A and Series B
notes bear a market rate of interest and mature in nine years.
In accordance with the agreement, MONY will continue to provide investment
management services for assets supporting policy liabilities existing at
December 31, 1993 while the Company will provide investment and general
administrative services and investment management services on new business
received after December 31, 1993. The agreement specifies prescribed rates for
expenses to administer the business up to certain levels.
In accordance with an agreement between AEGON USA, Inc. and the Company, AEGON
USA, Inc. will ensure the maintenance of certain minimum tangible net worth,
operating leverage and liquidity levels of the Company, as defined in the
agreement, through the contribution of additional capital by the Company's
parent as needed.
The accompanying financial statements present the condition of the Company at
December 31, 1994 and 1993 and the results of its operations for the year ended
December 31, 1994. Results of operations for prior periods are not included, as
the Company believes such data would not provide a meaningful comparison with
respect to financial results after the date of the acquisition.
BASIS OF PRESENTATION
The accompanying statutory-basis financial statements have been prepared in
accordance with accounting practices prescribed or permitted by the Department
of Insurance of the State of New York, which are designed primarily to reflect
the Company's ability to meet obligations to policyholders. Statutory insurance
accounting principles differ in many respects from generally accepted accounting
principles (GAAP) followed by other
F-86
<PAGE> 181
AUSA Life Insurance Company, Inc.
Notes to Financial Statements -- Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
business enterprises in determining financial position and results of
operations. Accordingly, the accompanying statutory-basis financial statements
are not intended to present financial position, results of operations and cash
flows in conformity with GAAP. Pursuant to statutory requirements: (a) bonds are
generally carried at amortized cost rather than segregating the portfolio into
held-to-maturity (carried at amortized cost), available-for-sale (carried at
fair value), and trading (carried at fair value) classifications; (b) premium
income on life policies is recognized over the premium paying period of the
policies, whereas the related acquisition costs such as commissions and other
costs related to acquiring new business are charged to current operations as
incurred; (c) aggregate policy reserves are based on statutory mortality,
morbidity and interest requirements without consideration of withdrawals, which
may differ from reserves determined using estimates of mortality, morbidity,
interest and withdrawals; (d) deferred federal income taxes are not provided for
temporary differences between the financial statements and the tax returns; (e)
certain assets designated as "non-admitted assets" have been excluded from the
balance sheet by a charge to surplus; (f) the asset valuation reserve, which is
in the nature of a contingency reserve for possible losses on investments, is
recorded as a liability through a charge to surplus; (g) net realized capital
gains and losses attributable to changes in the level of market interest rates
are deferred and amortized over the remaining life of the bonds and mortgage
loans disposed of rather than being recognized in the statement of operations in
the year of disposition; (h) gross premiums for all insurance products are
considered revenues rather than reporting only various policy charges and fees
for certain long-duration contracts; (i) pension expense is recorded as amounts
are paid; and (j) reinsurance reserve credits are recorded as a reduction to
aggregate policy reserves rather than being recorded as reinsurance recoverable
assets. All pertinent financial statement disclosures otherwise required under
generally accepted accounting principles are presented herein using the
corresponding statutory-basis amounts.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1996,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements.
FAIR VALUES OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using
F-87
<PAGE> 182
AUSA Life Insurance Company, Inc.
Notes to Financial Statements -- Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparisons to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Statement 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents, short-term investments: The carrying amounts
reported in the balance sheet for these instruments approximate their fair
values.
Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or, in the
case of private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values for equity securities are based
on quoted market prices and are recognized in the balance sheet.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107 at December 31, 1994:
F-88
<PAGE> 183
AUSA Life Insurance Company, Inc.
Notes to Financial Statements -- Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
---------------------- ----------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
----------------------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds (Note 2) $2,099,349 $1,976,667 $1,507,035 $1,507,750
Preferred stocks (Note 2) 236 162 236 200
Common Stock 274 274 2,303 2,303
Mortgage loans on real estate 862,352 851,352 1,045,011 1,045,011
Policy loans 24 24 18 18
Cash and short-term investments 89,532 89,532 402,519 402,159
Separate account assets 2,907,674 2,907,674 -- --
LIABILITIES
Investment contract liabilities
(including separate accounts) 5,658,537 5,526,576 2,732,214 2,670,435
</TABLE>
CASH AND SHORT-TERM INVESTMENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with remaining maturity of one year or less when purchased to
be short-term investments. Short-term investments are recorded at amortized
cost, which approximates market.
INVESTMENTS
Bonds and mortgage loans on real estate are carried at amortized costs.
Amortized costs for bonds and mortgage loans on real estate that were acquired
through the reinsurance agreement, described earlier, were initially recorded at
market value, consistent with the aforementioned agreement and as prescribed by
the Department of Insurance of the State of New York. Any resulting premium or
discount as well as the deferred interest on assets purchased will be amortized
using the effective interest method. Policy loans are recorded at unpaid
balances. Preferred stocks are valued primarily at cost. Common stocks, which
may include shares of mutual funds (money market and other), are valued at
market. Realized gains and losses on the sale of securities are recognized using
the specific identification method.
F-89
<PAGE> 184
AUSA Life Insurance Company, Inc.
Notes to Financial Statements -- Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AGGREGATE POLICY RESERVES
Life and annuity benefit reserves are developed by actuarial methods and are
determined based on published tables using statutorily specified interest rates
and valuation methods that will provide, in the aggregate, reserves that are
greater than or equal to the minimum required by law.
The aggregate policy reserves for life insurance policies are based principally
upon the 1941 and 1958 Commissioners' Standard Ordinary Mortality and American
Experience Mortality Tables. The reserves are calculated using interest rates
ranging from 2.50 to 4.00 percent and are computed principally on the Net Level
Valuation and the Commissioners' Reserve Valuation Methods.
Deferred annuity and other policyholders' funds reserves are calculated
according to the Commissioners' Annuity Reserve Valuation Method including
excess interest reserves to cover situations where the future interest
guarantees plus the decrease in surrender charges are in excess of the maximum
valuation rates of interest. Reserves for immediate annuities and supplementary
contracts with and without life contingencies are equal to the present value of
future payments assuming interest rates ranging from 5.50 to 7.50 percent and
mortality rates, where appropriate, from a variety of tables.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. These estimates are subject to the effects of
trends in claim severity and frequency. The estimates are continually reviewed
and adjusted as necessary as experience develops or new information becomes
available.
ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
As prescribed by the NAIC, the Company is required to record an Asset Valuation
Reserve (AVR). The AVR is computed in accordance with a prescribed formula and
represents a provision for possible fluctuations in the value of bonds, equity
securities, mortgage loans, real estate, and other invested assets. Changes to
the AVR are charged or credited directly to unassigned surplus.
F-90
<PAGE> 185
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OR SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company reports an Interest Maintenance Reserve (IMR) that represents the
net accumulated unamortized realized capital gains and losses attributable to
changes in the general level of interest rates on sales of fixed income
investments, principally bonds and mortgage loans. During 1994, net realized
capital gains of $1,321 were credited to the IMR rather than being recognized in
the statement of operations. Such gains or losses are amortized into income on a
straight-line basis over the remaining period to maturity based on groupings of
individual securities sold in five-year bands; amortization of these net gains
aggregated $158 for the year ended December 31, 1994.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 financial statements to
conform to the 1994 presentation.
2. INVESTMENTS
The carrying value and estimated market value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
----------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Bonds:
United States Government and agencies $ 101,024 $ 247 $ 7,604 $ 93,667
State, municipal and other government 23,270 - 1,903 21,367
Public utilities 162,527 15 14,017 148,525
Industrial and miscellaneous 1,448,647 3,569 82,144 1,370,072
Mortgage-backed securities 363,881 377 21,222 343,036
----------------------------------------------
2,099,349 4,208 126,890 1,976,667
Preferred stocks 236 - 74 162
----------------------------------------------
$2,099,585 $4,208 $126,964 $1,976,829
==============================================
DECEMBER 31, 1993
Bonds:
United States Government and agencies $ 91,141 $ 453 $ 14 $ 91,580
State, municipal and other government 20,829 - - 20,829
Public utilities 198,753 209 - 198,962
Industrial and miscellaneous 1,127,594 67 - 1,127,661
Mortgage-backed securities 68,718 - - 68,718
----------------------------------------------
1,507,035 729 14 1,507,750
Preferred stocks 236 15 51 200
----------------------------------------------
$1,507,271 $ 744 $ 65 $1,507,950
==============================================
</TABLE>
F-91
<PAGE> 186
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. INVESTMENTS (CONTINUED)
The carrying value of bonds and preferred stocks at December 31, 1994 and 1993
required no writedowns to estimated fair value.
The carrying value and estimated market value of bonds at December 31, 1994, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
--------------------------
<S> <C> <C>
Due in one year or less $ 161,357 $ 158,387
Due after one year through five years 553,494 523,785
Due after five years through ten years 879,813 824,948
Due after ten years 140,804 126,511
--------------------------
1,735,468 1,633,631
Mortgage-backed securities 363,881 343,036
--------------------------
$2,099,349 $1,976,667
==========================
</TABLE>
A detail of net investment income for the year ended December 31, 1994 is
presented below:
<TABLE>
<S> <C>
Interest on bonds $145,612
Dividends on equity investments 51
Interest on policy loans 1
Mortgage loans 117,859
Real estate 322
Other investment loss (2,458)
--------
Gross investment income 261,387
Investment expenses 6,848
--------
Net investment income $254,539
========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses for the year ended December 31, 1994 were as follows:
<TABLE>
<S> <C>
Proceeds $421,275
========
Gross realized gains $ 7,643
Gross realized losses 13,681
--------
Net realized losses $ (6,038)
========
</TABLE>
F-92
<PAGE> 187
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. INVESTMENTS (CONTINUED)
At December 31, 1994, investments with an aggregate carrying value of $2,114
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required by
statute.
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments for the year ended December 31, 1994 are summarized below:
<TABLE>
<S> <C>
Realized:
Debt securities $(6,038)
Short-term investments (48)
Mortgage loans on real estate 1,067
Other invested assets 5,412
-------
393
Transfer to interest maintenance reserve (1,321)
-------
Total realized losses $ (928)
=======
Unrealized:
Equity securities $ (35)
=======
</TABLE>
Gross unrealized gains and gross unrealized losses on common stocks at December
31, 1994 were as follows:
<TABLE>
<S> <C>
Unrealized gains $133
Unrealized losses --
----
Net unrealized gains $133
====
</TABLE>
During 1994 and 1993, there were $10,587 and $0, respectively, in foreclosed
mortgage loans that were transferred to real estate.
F-93
<PAGE> 188
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. INVESTMENTS (CONTINUED)
At December 31, 1994, the mortgage loan portfolio (all of which are commercial
loans) is diversified by geographic region and specific collateral property type
as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- ------------------------- ----------------------------
<S> <C> <C> <C>
Pacific 23% Office 51%
South Atlantic 21 Apartment 23
Middle Atlantic 19 Retail 16
Mountain 10 Warehouse 7
E. North Central 10 Hotel/Motel 3
W. South Central 7
E. South Central 5
New England 4
W. North Central 1
</TABLE>
At December 31, 1994, the Company had the following investments, excluding U.S.
Government guaranteed or insured issues, which individually represented more
than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
CARRYING
DESCRIPTION OF SECURITY VALUE
- ---------------------------------------------------------------------- --------
<S> <C>
Bonds:
Falcon Telecable $ 43,848
Conn National Bank 39,573
PSEG Capital 34,500
Comast Cablevision 29,302
Natl. Gdn. Soc. Svc. 26,737
Jaco Trust 26,182
Triax USA 25,052
Chemical Banking 23,110
Triax Association 21,603
Pacificorp. 20,381
</TABLE>
3. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to meet
its obligation under the reinsurance treaty. During 1994, there were direct
premiums of $295,678, reinsurance assumed premiums of $130,665 and reinsurance
ceded premiums totaled $4.
F-94
<PAGE> 189
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. INCOME TAXES
The Company filed a short period federal income tax return for the period
September 24, 1993 through December 31, 1993. Prior to 1993, taxable income or
loss of the Company was included in a consolidated return with Dreyfus. Dreyfus
intends to include the taxable income of the Company through September 23, 1993
in its consolidated federal income tax return. Also, in conjunction with the
acquisition of the Company, Dreyfus has indemnified the Company for any tax
deficiencies prior to September 24, 1993.
The following is a reconciliation of the expected federal tax on income before
realized capital gains on investments, based on statutory rates, to the actual
tax expense for the year ended December 31, 1994:
<TABLE>
<S> <C>
Computed expected tax benefit $(3,708)
Tax reserve adjustment 121
Deferred acquisition cost - tax basis 6
Carryforward of current year operating loss 3,460
Other items - net 121
-------
Actual tax expense $ -
=======
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959,
a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($800 at December 31, 1994). To the extent dividends are paid from the
amount accumulated in the policyholders' surplus account, net earnings would be
reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $280.
5. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities. The Company is not entitled to pay out any dividends in 1995
without prior approval.
F-95
<PAGE> 190
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. RELATED PARTY TRANSACTIONS
The Company is allocated administrative and benefit expenses from the parent for
employee related costs, as all employees are considered employees of the parent,
not employees of the Company.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.90% at December 31, 1994. During 1994, the
Company paid interest of $43 to affiliates.
During 1994, the Company contributed seed money of $15,000 in cash to the
Company-sponsored separate account.
At December 31,1994, the Company has a $5,200 short-term note payable to an
affiliate. Interest on this note is payable at 6.08%.
During 1993, the Company received capital contributions of $209,000 in cash from
its parent.
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. In accordance with the purchase agreement,
assessments related to periods prior to the purchase of the Company will be paid
by Dreyfus. Assessments attributable to business reinsured from MONY for
premiums received prior to the date of the transaction will be paid by MONY. The
Company will be responsible for assessments, if any, attributable to premium
income after the date of purchase.
F-96
<PAGE> 191
AUSA Life Insurance Company, Inc.
Summary of Investments - Other Than
Investments in Related Parties
(Dollars in thousands)
December 31, 1994
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and govern-
ment agencies and authorities $ 354,845 $ 330,786 $ 353,852
States, municipalities and political
subdivisions 3,000 2,929 3,000
Foreign governments 20,538 18,437 20,269
Public utilities 164,270 148,525 162,527
All other corporate bonds 1,573,162 1,475,990 1,559,701
Redeemable preferred stock 236 162 236
------------------------------------
Total fixed maturities 2,116,051 1,976,829 2,099,585
EQUITY SECURITIES
Common stocks - industrial,
miscellaneous and all other 141 274 274
Mortgage loans on real estate 862,352 862,352
Real estate - -
Real estate acquired in satisfaction of
debt 10,485 10,485
Policy loans 24 24
Cash and short-term investments 89,532 89,532
---------- ----------
Total investments $3,078,585 $3,062,252
========== ==========
</TABLE>
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
F-97
<PAGE> 192
AUSA Life Insurance Company, Inc.
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE V
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
----------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Individual life $ 197 $- $3
Individual health - - -
Group life and health 2 - -
Annuity 7,572 -
----------------------------------------
$7,771 $- $3
========================================
DECEMBER 31, 1993
Individual life $ 197 $- $3
Individual health - - -
Group life and health 3 - -
Annuity 4,850 - -
----------------------------------------
$5,050 $- $3
========================================
</TABLE>
F-98
<PAGE> 193
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND OPERATING PREMIUMS
REVENUE INCOME SETTLEMENT EXPENSES EXPENSES WRITTEN
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 10 $ 19 $ 5 $ 2 $ -
- - - - -
- - - - -
426,329 254,520 491,686 211,857 426,329
- --------------------------------------------------------------------------------
$426,339 $254,539 $491,691 $211,859 $426,329
================================================================================
</TABLE>
F-99
<PAGE> 194
AUSA Life Insurance Company, Inc.
Reinsurance
(Dollars in thousands)
SCHEDULE VI
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Life insurance in force $ 681 $150 $ - $ 531 -
====================================================
Premiums:
Individual life $ 14 $ 4 $ - $ 10 -
Individual health - - - - -
Group life and health - - - - -
Annuity 295,664 - 130,665 426,329 31
----------------------------------------------------
$295,678 $ 4 $ 130,665 $426,339 31%
====================================================
</TABLE>
F-100
<PAGE> 195
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 196
EXHIBIT INDEX
Exhibit 99 - Investment Subadvisory Agreement
<PAGE> 1
INVESTMENT SUBADVISORY AGREEMENT
INVESTMENT SUBADVISORY AGREEMENT, dated as of November 13, 1995, by and
between Diversified Investment Advisors, Inc., a Delaware corporation
("Diversified") and the Putnam Advisory Company, Inc., a Massachusetts
corporation ("Subadvisor").
WITNESSETH:
WHEREAS, Diversified has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940 and has been
retained to provide investment advisory services to the Growth and Income
Portfolio ("Portfolio"), a series of Diversified Investors Portfolios, a
diversified open-end management investment company registered under the
Investment Company Act of 1940 ("1940 Act");
WHEREAS, Diversified desires to retain the Subadvisor to furnish it
with portfolio investment advisory services in connection with Diversified's
investment advisory activities on behalf of the Portfolio, and the Subadvisor is
willing to furnish such services to Diversified;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of the Subadvisor. In accordance with and subject to
the Investment Advisory Agreement between the Portfolio and Diversified,
attached hereto as Schedule A (the "Advisory Agreement"), Diversified hereby
appoints the Subadvisor to perform the portfolio investment advisory services
described herein for the investment and reinvestment of the Portfolio's assets,
subject to the control and direction of Diversified and the Diversified
Investors Portfolios' Board of Trustees, for the period and on the terms
hereinafter set forth.
The Subadvisor shall provide Diversified with such investment advice
and supervision as the latter may from time to time consider necessary for the
proper supervision of the Portfolio's assets. The Subadvisor shall furnish
continuously an investment program and shall determine from time to time what
securities shall be purchased, sold or exchanged and what portion of the assets
of the Portfolio shall be held uninvested, subject always to the provisions of
the 1940 Act and to the Portfolio's then-current Prospectus and Statement of
Additional Information ("SAI").
<PAGE> 2
In particular, the Subadvisor shall, without limiting the foregoing:
(i) continuously review, supervise and implement the investment program of the
Portfolio; (ii) monitor regularly the relevant securities for the Portfolio to
determine if adjustments are warranted and, if so, to make such adjustments;
(iii) determine, in the Subadvisor's discretion, the securities to be purchased
or sold or exchanged in order to keep the Portfolio in balance with its
designated investment strategy; (iv) determine, in the Subadvisor's discretion,
whether to exercise warrants or other rights with respect to the Portfolio's
securities; (v) determine, in the Subadvisor's discretion, whether the merit of
an investment has been substantially impaired by extraordinary events or
financial conditions, thereby warranting the removal of such securities from the
Portfolio; (vi) as promptly as practicable after the end of each calendar month,
furnish a report showing: (a) all transactions during such month, (b) all assets
of the Portfolio on the last day of such month, rates of return, and (c) such
other information relating to the Portfolio as Diversified may reasonably
request; (vii) meet at least four times per year with Diversified and with such
other persons as may be designated on reasonable notice and at reasonable
locations, at the request of Diversified, to discuss general economic
conditions, performance, investment strategy, and other matters relating to the
Portfolio; (viii) provide the Portfolio with records concerning the Subadvisor's
activities which the Portfolio is required to by law maintain; and (ix) render
regular reports to the Portfolio's officers and Directors concerning the
Subadvisor's discharge of the foregoing responsibilities.
The Subadvisor shall also make recommendations to Diversified as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the Portfolio's securities shall be exercised.
Should the Board of Trustees at any time make any definite
determination as to investment policy with respect to the Portfolio and notify
the Subadvisor thereof in writing, the Subadvisor shall be bound by such
determination for the period, if any, specified in such notice or until
similarly notified that such policy has been revoked.
The Subadvisor shall take, on behalf of the Portfolio, all actions
which it deems necessary to implement the investment policies determined as
provided above, and in particular to place all orders for the purchase or sale
of Portfolio securities for the Portfolio's account with brokers or dealers
selected by it, and to that end the Subadvisor is authorized as the agent of the
Portfolio to give instructions to the custodian of the Portfolio as to
deliveries of securities and payments of cash for the account of the Portfolio.
Subject to the primary objective of obtaining the best available prices and
execution, the Subadvisor may place orders for the purchase and sale of
portfolio securities with such broker/dealers who provide statistical, factual
and financial information and services to the Portfolio, to the Subadvisor, or
to any other fund or account for which the Subadvisor provides investment
advisory services and may place such orders with broker/dealers who sell shares
of the Portfolio or who sell
2
<PAGE> 3
shares of any other fund for which the Subadvisor provides investment advisory
services.
Notwithstanding the provisions of the previous paragraph and subject to
such policies and procedures as may be adopted by the Board of Trustees and
officers of the Portfolio, the Subadvisor may pay a member of an exchange,
broker or dealer an amount of commission for effecting a securities transaction
in excess of the amount of commission another member of an exchange, broker or
dealer would have charged for effecting that transaction, in such instances
where the Subadvisor has determined in good faith that such amount of commission
was reasonable in relation to the value of the brokerage and research services
provided by such member, broker or dealer, viewed in terms of either that
particular transaction or the Subadvisor's overall responsibilities with respect
to the Portfolio and to other funds and separate accounts for which the
Subadvisor exercises investment discretion.
2. Allocation of Charges and Expenses. The Subadvisor shall
furnish at its own expense all necessary services, facilities and personnel in
connection with its responsibilities under Section 1 above. It is understood
that the Portfolio will pay all of its own expenses and liabilities including,
without limitation, compensation and out-of-pocket expenses of Trustees not
affiliated with the Subadvisor or Diversified; governmental fees; interest
charges; taxes; membership dues; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, administrator, distributor, shareholder
servicing agents, registrar or dividend disbursing agent of the Portfolio;
expenses of distributing and redeeming shares and servicing shareholder
accounts; expenses of preparing, printing and mailing prospectuses, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions and to shareholders of the Portfolio; expenses connected with the
execution, recording and settlement of Portfolio security transactions;
insurance premiums; fees and expenses of the custodian for all services to the
Portfolio, including safekeeping of funds and securities and maintaining
required books and accounts; expenses of calculating the net asset value of
shares of the Portfolio; expenses of shareholder meetings; expenses of
litigation and other extraordinary or non-recurring events and expenses relating
to the issuance, registration and qualification of shares of the Portfolio.
3. Compensation of the Subadvisor. For the services to be rendered,
Diversified shall pay to the Subadvisor an investment advisory fee computed in
accordance with the terms of Schedule B herewith attached. If the Subadvisor
serves for less than the whole of any period specified, its compensation shall
be prorated.
4. Covenants and Representations of the Subadvisor. The Subadvisor
represents and warrants that it is duly registered as an investment advisor
under the Investment Advisers Act of 1940, and that it will remain so throughout
the term of this Agreement. The Subadvisor agrees that it will not deal with
itself, or with the
3
<PAGE> 4
Trustees of the Portfolio or with Diversified, or the principal underwriter or
distributor as principals in making purchases or sales of securities or other
property for the account of the Portfolio, except as permitted by the 1940 Act,
will not take a long or short position in the shares of the Portfolio except as
permitted by the Articles, and will comply with all other provisions of the
Articles and By-Laws and any current Prospectus of the Portfolio relative to the
Subadvisor, Advisor and its Trustees and officers.
5. Limits on Duties. The Subadvisor shall be responsible only for
managing the assets in good faith and in accordance with the investment
objectives, fundamental policies and restrictions, and shall have no
responsibility whatsoever for, and shall incur no liability on account of (i)
diversification, selection or establishment of such investment objectives,
fundamental policies and restrictions (ii) advice on, or management of, any
other assets for Diversified or the Portfolio, (iii) filing of any tax or
information returns or forms, withholding or paying any taxes, or seeking any
exemption or refund, (iv) registration with any government or agency, or (v)
administration of the plans and trusts investing through the Portfolio, or (vi)
overall Portfolio compliance with the requirements of the 1940 Act, which
requirements are outside of the Subadvisor's control, and Subchapter M of the
Internal Revenue Code of 1986, as amended, and shall be indemnified and held
harmless by Diversified for any loss in carrying out the terms and provisions of
this Agreement, including reasonable attorney's fees, indemnification to the
Portfolio, or any shareholder thereof and, brokers and commission merchants,
fines, taxes, penalties and interest; provided, however, that Diversified shall
not be required to indemnify Subadvisor for any such liability, damages, or
expenses arising out of Subadvisor's negligence, bad faith, malfeasance, or
disregard of its duties under this Agreement.
The Subadvisor may apply to Diversified at any time for instructions
and may consult counsel for Diversified or its own counsel with respect to any
matter arising in connection with the duties of the Subadvisor. Also, the
Subadvisor shall be protected in acting upon advice of Diversified and/or
Diversified's counsel and upon any document which Subadvisor reasonably believes
to be genuine and to have been signed by the proper person or persons.
6. Exclusivity. The Subadvisor represents to Diversified that during
the first two years of this Agreement the Subadvisor will not enter into any new
subadvisory agreements with a manager unaffiliated with the Subadvisor to manage
any commingled fund(s) of the same investment discipline and which the
Subadvisor believes is primarily intended for companies in Diversified's target
market. (See Schedule C.) At the end of two years, this exclusive management
provision may be continued if both parties to this Agreement agree in writing to
do so. This exclusivity provision also ends if either party to the Agreement
terminates the Agreement.
4
<PAGE> 5
7. Duration, Termination and Amendments of this Agreement. This
Agreement shall become effective as of the day and year first above written and
shall govern the relations between the parties hereto thereafter, and, unless
terminated earlier as provided below, shall remain in force for two years, on
which date it will terminate unless its continuance thereafter is specifically
approved at least annually (a) by the vote of a majority of the Trustees of the
Portfolio who are not "interested persons" to this Agreement or of the
Subadvisor or Diversified at an in person meeting specifically called for the
purpose of voting on such approval, and (b) by the Board of Trustees of the
Portfolio or by vote of a majority of the outstanding voting securities of the
Portfolio. However, if the shareholders of the Portfolio fail to approve the
Agreement as provided herein, the Subadvisor may continue to serve hereunder in
the manner and to the extent permitted by the Investment Company Act of 1940 and
Rules thereunder.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by the vote of a majority of the outstanding voting
securities of the Portfolio, or by Diversified. The Subadvisor may terminate the
Agreement only upon giving 60 days' advance written notice to Diversified. This
Agreement shall automatically terminate in the event of its assignment.
This Agreement may be amended only if such amendment is approved by the
vote of a majority of the outstanding voting securities of the Portfolio and by
vote of a majority of the Board of Trustees of the Fund who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval.
The terms "specifically approved at least annually", "vote of a
majority of the outstanding voting securities", "assignment", "affiliated
person", and "interested persons", when used in this Agreement, shall have the
respective meanings specified in, and shall be construed in a manner consistent
with, the 1940 Act, subject, however, to such exemptions as may be granted by
the Securities and Exchange Commission under said Act.
8. Certain Records. Any records to be maintained and preserved pursuant
to the provisions of Rule 31a-1 and Rule 31a-2 adopted under the 1940 Act which
are prepared or maintained by the Subadvisor on behalf of the Portfolio are the
property of the Portfolio and will be surrendered promptly to the Portfolio on
request.
9. Survival of Compensation Rates. All rights to compensation under
this Agreement shall survive the termination of this Agreement.
10. Entire Agreement. This Agreement states the entire agreement of the
parties with respect to investment advisory services to be provided to the
Portfolio by
5
<PAGE> 6
the Subadvisor and may not be amended except in a writing signed by the parties
hereto and approved in accordance with Section 7 hereof.
11. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York.
12. Change of Management and Pending Litigation. Subadvisor represents
to Diversified that it will disclose to Diversified promptly after it has
knowledge of any significant change or variation in its management structure or
personnel or any significant change or variation in its management style or
investment philosophy. In addition, Subadvisor represents to Diversified that it
will similarly disclose to Diversified, promptly after it has knowledge, the
existence of any pending legal action being brought against it whether in the
form of a lawsuit or a non-routine investigation by any federal or state
governmental agency.
Diversified represents to Subadvisor that any information received by
Diversified pursuant to this section will be kept strictly confidential and will
not be disclosed any third party.
13. Use of Name. Subadvisor hereby agrees that Diversified may use the
Subadvisor's name in its marketing or advertising materials. Diversified agrees
to allow the Subadvisor to examine and approve any such materials prior to use.
IN WITNESS WHEREOF, the parties thereto have caused this Agreement to
be executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
Diversified Investment Advisors, Inc.
By:__________________________________
Putnam Advisory Company, Inc.
By:__________________________________
6
<PAGE> 7
SCHEDULE A
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of January 3, 1994 by and between the Growth & Income
Portfolio, a series of Diversified Investors Portfolios (herein called the
"Portfolio"), and Diversified Investment Advisors, Inc. a Delaware corporation
(herein called "Diversified").
WHEREAS, the Portfolio is registered as a diversified, open-end,
management investment company under the Investment Company Act of 1940 (the
"1940 Act"); and
WHEREAS, Diversified has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940; and
WHEREAS, the Portfolio desires to retain Diversified to render
investment advisory services, and Diversified is willing to so render such
services on the terms hereinafter set forth;
NOW, THEREFORE, this Agreement
WITNESSETH:
In consideration of the promises and mutual covenants herein contained,
it is agreed between the parties hereto as follows:
1. The Portfolio hereby appoints Diversified to act as investment advisor to
the Portfolio for the period and on the terms set forth in this Agreement.
Diversified accepts such appointment and agrees to render the services herein
set forth for the compensation herein provided.
2. (a) Diversified shall, at its expense, (i) employ sub-advisors or associate
with itself such entities as it believes appropriate to assist in performing its
obligations under this Agreement and (ii) provide all services, equipment and
facilities necessary to perform its obligations under this Agreement.
(b) The Portfolio shall be responsible for all of its expenses and
liabilities, including, but not limited to: compensation and out-of-pocket
expenses of Trustees not affiliated with any subadvisor or Diversified;
governmental fees; interest charges; taxes; membership dues; fees and expenses
of independent auditors, of legal counsel and of any transfer agent,
administrator, distributor, shareholder servicing agents, registrar or dividend
disbursing agent
<PAGE> 8
of the Portfolio; expenses of distributing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing prospectuses,
shareholder reports, notices, proxy statements and reports to governmental
officers and commissions and to shareholders of the Portfolio; expenses
connected with the execution, recording and settlement of Portfolio security
transactions; insurance premiums; fees and expenses of the custodian for all
services to the Portfolio, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of shares of the Portfolio; expenses of shareholder meetings; expenses of
litigation and other extraordinary or non-recurring events and expenses relating
to the issuance, registration and qualification of shares of the Portfolio.
3. (a) Subject to the general supervision of the Board of Trustees of
the Portfolio, Diversified shall formulate and provide an appropriate investment
program on a continuous basis in connection with the management of the
Portfolio, including research, analysis, advice, statistical and economic data
and information and judgments of both a macroeconomic and microeconomic
character.
Diversified will determine the securities to be purchased, sold, lent,
exchanged or otherwise disposed of or acquired by the Portfolio in accordance
with predetermined guidelines as set forth from time to time in the Portfolio's
then-current prospectus and Statement of Additional Information ("SAI") and
will place orders pursuant to its determinations either directly with the
issuer or with any broker or dealer who deals in such securities. In placing
orders with brokers and dealers, Diversified will use its reasonable best
efforts to obtain the best net price and the most favorable execution of its
orders, after taking into account all factors it deems relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. Consistent with this obligation, Diversified may, to the
extent permitted by law, purchase and sell Portfolio securities to and from
brokers and dealers who provide brokerage and research services (within the
meaning of Section 28(e) of the Securities Exchange Act of 1934) to or for the
benefit of the Portfolio and/or other accounts over which Diversified or any of
its affiliates exercises investment discretion.
Subject to the review of the Portfolio's Board of Trustees from time to
time with respect to the extent and continuation of the policy, Diversified is
authorized to pay to a broker or dealer who provides such brokerage and
research services a commission for effecting a securities transaction for the
Portfolio which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if Diversified
determines in
2
<PAGE> 9
good faith that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall responsibilities of
Diversified with respect to the accounts as to which it exercises investment
discretion.
In placing orders with brokers and/or dealers, Diversified intends to
seek best price and execution for purchases and sales and may effect
transactions through itself and its affiliates on a securities exchange
provided that the commissions paid by the Portfolio are "reasonable and fair"
compared to commissions received by other broker-dealers having comparable
execution capability in connection with comparable transactions involving
similar securities and provided that the transactions in connection with which
such commissions are paid are effected pursuant to procedures established by
the Board of the Trustees of the Portfolio. All transactions are effected
pursuant to written authorizations from the Portfolio conforming to the
requirements of Section 11(a) of the Securities Exchange Act of 1934 and Rule
11a2-2(T) thereunder. Pursuant to such authorizations, an affiliated
broker-dealer may transmit, clear and settle transactions for the Portfolio
that are executed on a securities exchange provided that it arranges for
unaffiliated brokers to execute such transactions.
Diversified shall determine from time to time the manner in which
voting rights, rights to consent to corporate action and any other rights
pertaining to the Portfolio's securities shall be exercised, provided, however,
that should the Board of Trustees at any time make any definite determination
as to investment policy and notify Diversified thereof in writing, Diversified
shall be bound by such determination for the period, if any, specified in such
notice or until similarly notified that such determination has been revoked.
Diversified will determine what portion of securities owned by the Portfolio
shall be invested in securities described by the policies of the Portfolio and
what portion, if any, should be held uninvested. Diversified will determine
whether and to what extent to employ various investment techniques available to
the Portfolio. In effecting transactions with respect to securities or other
property for the account of the Portfolio, Diversified may deal with itself and
its affiliates, with the Trustees of the Portfolio or with other entities to
the extent such actions are permitted by the 1940 Act.
(b) Diversified also shall provide to the Portfolio administrative
assistance in connection with the operation of the Portfolio, which shall
include compliance with all reasonable requests of the Portfolio for
information, including information required in connection with the Portfolio's
filings with the Securities and Exchange Commission and state securities
commissions.
3
<PAGE> 10
(c) As manager of the assets of the Portfolio, Diversified shall make
investments for the account of the Portfolio in accordance with Diversified's
best judgment and within the Portfolio's investment objectives, guidelines, and
restrictions, the 1940 Act and the provisions of the Internal Revenue Code of
1986 relating to regulated investment companies subject to policy decisions
adopted by the Board of Trustees.
(d) Diversified shall furnish to the Board of Trustees periodic reports
on the investment performance of the Portfolio and on the performance of its
obligations under this Agreement and shall supply such additional reports and
information as the Portfolio's officers or Board of Trustees shall reasonably
request.
(e) On occasions when Diversified deems the purchase or sale of a
security to be in the best interest of the Portfolio as well as other
customers, Diversified, to the extent permitted by applicable law, may
aggregate the securities to be so sold or purchased in order to obtain the best
execution or lower brokerage commissions, if any. Diversified may also on
occasion purchase or sell a particular security for one or more customers in
different amounts. On either occasion, and to the extent permitted by
applicable law and regulations, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by
Diversified in the manner it considers to be the most equitable and consistent
with its fiduciary obligations to the Portfolio and to such other customers.
(f) Diversified shall also provide the Portfolio with the following
services as may be required:
(i) providing office space, equipment and clerical personnel
necessary for maintaining the organization of the Portfolio and
for performing administrative and management functions;
(ii) supervising the overall administration of the Portfolio,
including negotiation of contracts and fees with and the
monitoring of performance and billings of the Portfolio's
transfer agent, custodian and other independent contractors
or agents;
(iii) preparing and, if applicable, filing all documents required
for compliance by the Portfolio with applicable laws and
regulations, including registration statements, registration
fee filings, semi-annual and annual reports to investors,
proxy statements and tax returns;
4
<PAGE> 11
(iv) preparation of agendas and supporting documents for and minutes
of meeting of Trustees, committees of Trustees and investors; and
(v) maintaining books and records of the Portfolio.
4. Diversified shall give the Portfolio the benefit of Diversified's
best judgment and efforts in rendering services under this Agreement. As an
inducement to Diversified's undertaking to render these services, the Portfolio
agrees that Diversified shall not be liable under this Agreement for any mistake
in judgment or in any other event whatsoever provided that nothing in this
Agreement shall be deemed to protect or purport to protect Diversified against
any liability to the Portfolio or its investors to which Diversified would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Adviser's duties under this Agreement or by
reason of the Adviser's reckless disregard of its obligations and duties
hereunder.
5. In consideration of the services to be rendered by Diversified
under this Agreement, the Portfolio shall pay Diversified a fee accrued daily
and paid monthly at an annual rate equal to .60% of the Portfolio's average
daily net assets. If the fees payable to Diversified pursuant to this paragraph
5 begin to accrue before the end of any month or if this ________ any Agreement
terminates before the end of any month, the fees for the period from that date
to the end of that month or from the beginning of that month to the date of
termination, as the case may be, shall be prorated according to the proportion
which the period bears to the full month in which the effectiveness or
termination occurs. For purposes of calculating the monthly fees, the value of
the net assets of the Portfolio shall be computed in the manner specified in
its Regulation Statement on Form N-1A for the computation of net asset value.
For purposes of this Agreement, a "business day" is any day the New York Stock
Exchange is open for trading.
In compliance with the requirements of Rule 31a-3 under the 1940 Act,
Diversified hereby agrees that all records which it maintains for the Portfolio
are property of the Portfolio and further agrees to surrender promptly to the
Portfolio any such records upon the Portfolio's request. Diversified further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
any such records required to be maintained by Rule 31a-1 under the 1940 Act.
6. This Agreement shall be effective as to the Portfolio as of the
date the Portfolio commences investment operations after this Agreement shall
have been approved by the Board of Trustees of the Portfolio and the
investor(s) in the Portfolio in the manner
5
<PAGE> 12
contemplated by Section 15 of the 1940 Act and, unless sooner terminated as
provided herein, shall continue until the second anniversary of the date hereof.
Thereafter, if not terminated, this Agreement shall continue in effect as to the
Portfolio for successive periods of 12 months each, provided such continuance is
specifically approved at least annually by the vote of a majority of those
members of the Board of Trustees of the Portfolio who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval; and either (a) by the vote of
a majority of the full Board of Trustees or (b) by vote of a majority of the
outstanding voting securities of the Portfolio; provided, however, that this
Agreement may be terminated by the Portfolio at any time, without the payment of
any penalty, by the Board of Trustees of the Portfolio or by vote of a majority
of the outstanding voting securities of the Portfolio on 60 days' written notice
to Diversified, or by Diversified as to the Portfolio at any time, without
payment of any penalty, on 90 days' written notice to the Portfolio. This
Agreement will immediately terminate in the event of its assignment. (As used in
this Agreement, the terms "majority of the outstanding voting securities",
"interested person" and "assignment" shall have the same meanings as such terms
have in the 1940 Act and the rule and regulatory constructions thereunder.)
7. Except to the extent necessary to perform Diversified's obligations
under this Agreement, nothing herein shall be deemed to limit or restrict the
right of Diversified, or any affiliate of Diversified, or any employee of
Diversified, to engage in any other business or devote time and attention to
the management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other trust,
corporation, firm, individual or association.
8. The investment management services of Diversified to the Portfolio
under this Agreement are not to be deemed exclusive as to Diversified and
Diversified will be free to render similar services to others.
Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof.
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge, or termination is
sought and no material amendment of this Agreement shall be effective until
approved by vote of the holders of a majority of the outstanding voting
securities of the Portfolio.
This Agreement embodies the entire agreement and understanding between
the parties hereto and supersedes all prior agreements and understandings
relating to the subject matter
6
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hereof. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. Should any part of this
Agreement be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding and shall inure to the benefit of the parties hereto
and their respective successors, to the extent permitted by law.
9. This Agreement shall be construed in accordance with the laws of
the State of New York provided that nothing herein shall be construed in a
manner inconsistent with the requirements of 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first above
written.
Attest: Diversified Investors Portfolios
/s/ John F. Hughes
- ---------------------- By: /s/ Tom Schlossberg
--------------------------------
Tom Schlossberg
Chairman and President
Attest: Diversified Investment Advisors, Inc.
/s/ Catherine A. Mohr
- ---------------------- By: /s/ Gerald L. Katz
--------------------------------
Gerald L. Katz
Vice President and CFO
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SCHEDULE A
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SCHEDULE B
The Subadvisor shall be compensated for its services under this Agreement on the
basis of the below-described annual fee schedule. The fee schedule shall only be
amended by agreement between the parties.
FEE SCHEDULE
.30% of initial $100 million of net assets
.20% of net assets in excess of $100 million
Net assets are equal to the market value of the Portfolio. Fees will be
calculated by multiplying the arithmetic average of the beginning and ending
monthly net assets by the fee schedule and dividing by twelve. The fee will be
paid quarterly.
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SCHEDULE C
Target market for 401(a) plans is those plans with assets between $1 and $50
million.
For 403(b) plans, the target market is those plans that have an employee base
between 300 - 2000 lives, and with assets between $1 and $15 million.