<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1997
REGISTRATION NOS. 33-73734
811-8264
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-4
------------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 8 [X]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 8 [X]
(CHECK APPROPRIATE BOX OR BOXES.)
------------------------
DIVERSIFIED INVESTORS VARIABLE FUNDS
(EXACT NAME OF REGISTRANT)
AUSA LIFE INSURANCE COMPANY, INC.
(NAME OF DEPOSITOR)
4 MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
(ADDRESS AND DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
(914) 697-8000
(DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
ROBERT F. COLBY, ESQ.
AUSA LIFE INSURANCE COMPANY, INC.
4 MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
It is proposed that this filing will become effective on May 1, 1997 pursuant to
paragraph (b) of Rule 485.
The registrant has registered an indefinite amount of securities (variable
annuity contracts) pursuant to Rule 24f-2 under the Investment Company Act of
1940. The Rule 24f-2 Notice was filed on February 25, 1997.
Diversified Investors Portfolios has also executed this Registration
Statement.
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<PAGE> 2
CROSS REFERENCE SHEET
(REQUIRED BY RULES 481(a) and 495)
PART A
<TABLE>
<CAPTION>
ITEM NO. LOCATION
- --------- ----------------------------------------------------------------------------------
<S> <C>
Item 1. Cover Page..............................................................Cover Page
Item 2. Definitions............................................................Definitions
Item 3. Synopsis..................................................................Synopsis
Item 4. Condensed Financial Information....................Condensed Financial Information
Item 5. General Description of Registrant, Depositor,
and Portfolio Companies.......................AUSA Life Insurance Company, Inc.,
Diversified Investors Variable Funds,
Diversified Investors Portfolios
Item 6. Deductions and Expenses....................................................Charges
Item 7. General Description of Variable Annuity Contracts.........Summary of The Contracts
Item 8. Annuity Period.....................................................Payment Options
Item 9. Death Benefit.............................Death Benefit; Payments To A Beneficiary
Following The Annuitant's Death
Item 10. Purchases and Contract Value...Credit of Purchase Payments; Allocation of Purchase
Payments; Determination of Unit Value
Item 11. Redemptions................Redemption During The Accumulation Period; Restrictions
Under The Texas Optional Retirement Program
Item 12. Taxes.........Federal Tax Status; Tax Treatment of AUSA; Section 403(b) Annuities;
Section 401(a) Plans; Section 408 (IRA) Contracts; Section 457 Plans;
Non-Qualified Deferred Compensation Contracts; Income Tax Withholding
Item 13. Legal Proceedings................................................Legal Proceedings
Item 14. Table of Contents of the Statement of
Additional Information............................Table of Contents of Statement
of Additional Information
PART B
Item 15. Cover Page..............................................................Cover Page
Item 16. Table of Contents................................................Table of Contents
Item 17. General Information and History.................................... Not Applicable
Item 18. Services........................................................... Not Applicable
Item 19. Purchases and Securities Being Offered............................. Not Applicable
Item 20. Underwriters...............................Sale of Contracts/Principal Underwriter
Item 21. Calculation of Performance Data...................................Performance Data
Item 22. Annuity Payments................................................... Not Applicable
Item 23. Financial Statements........Financial Statements and Notes to Financial Statements
</TABLE>
PART C
INFORMATION REQUIRED TO BE INCLUDED IN PART C IS SET FORTH UNDER THE APPROPRIATE
ITEM,
SO NUMBERED IN PART C OF THIS REGISTRATION STATEMENT.
<TABLE>
<S> <C>
Item 24. Financial Statements and Exhibits............................................. C-1
Item 25. Directors and Officers of the Depositor....................................... C-2
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant.................................................................. C-3
Item 27. Number of Contractowners...................................................... C-3
Item 28. Indemnification............................................................... C-3
Item 29. Principal Underwriters........................................................ C-3
Item 30. Location of Accounts and Records.............................................. C-6
Item 31. Management Services........................................................... C-6
Item 32. Undertakings.................................................................. C-6
</TABLE>
(i)
<PAGE> 3
DIVERSIFIED INVESTORS VARIABLE FUNDS
GROUP VARIABLE ANNUITY CONTRACTS
SECTIONS 401(a), 401(k), 403(b), 408(IRA), 457 AND NQDC
ISSUED BY
AUSA LIFE INSURANCE COMPANY, INC. ("AUSA")
4 MANHATTANVILLE ROAD, PURCHASE, NEW YORK 10577; (914) 697-8000
The Group Variable Annuity Contracts ("Contracts") described in this
Prospectus are designed and offered as funding vehicles for retirement Plans
maintained by state educational organizations, certain tax-exempt organizations,
IRA Contractholders, 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 29 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 or in the Calvert Socially Responsible Series
("Calvert Series") at their net asset value. (See "Diversified Investors
Portfolios" at page 13 and Calvert Series at page 12.) The thirteen currently
available series of Diversified Investors Portfolios are the Money Market
Series, High Quality Bond Series, Intermediate Government Bond Series,
Government/Corporate Bond Series, High-Yield Bond Series, Balanced Series,
Equity Income Series, Equity Value Series, Growth & Income Series, Equity Growth
Series, Special Equity Series, Aggressive Equity Series and International Equity
Series. The Calvert Series is an actively managed, diversified portfolio of
common and preferred stocks, bonds, and money market instruments which offer
income and capital growth opportunity and which satisfy the social concern
criteria established by the Calvert Series. A copy of the Calvert Series
Prospectus appears at the end of this Diversified Investors Variable Funds
Prospectus.
SUBACCOUNTS OF DIVERSIFIED INVESTORS VARIABLE FUNDS WHICH INVEST IN
DIVERSIFIED INVESTORS PORTFOLIOS DO SO UNDER A CORE/FEEDER ARRANGEMENT. UNLIKE
OTHER FUNDING VEHICLES INTO WHICH PURCHASE PAYMENTS MAY BE INVESTED THROUGH
VARIABLE ANNUITY CONTRACTS ISSUED BY INSURANCE COMPANIES, DIVERSIFIED INVESTORS
PORTFOLIOS OFFERS ITS INTERESTS FOR SALE TO OTHER TYPES OF COLLECTIVE INVESTMENT
VEHICLES IN ADDITION TO INSURANCE COMPANY SEPARATE ACCOUNTS REGISTERED AS
INVESTMENT COMPANIES UNDER THE INVESTMENT COMPANY ACT OF 1940. SUCH INVESTORS
MAY INCLUDE MUTUAL FUNDS, BANK COLLECTIVE TRUSTS AND UNREGISTERED INSURANCE
COMPANY SEPARATE ACCOUNTS. SEE "DIVERSIFIED INVESTORS PORTFOLIOS -- CORE/FEEDER
STRUCTURE" ON PAGE 34 HEREIN.
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 and the Calvert Series.
This Prospectus sets forth the basic information that a prospective
purchaser should know before investing. Please keep this Prospectus for future
reference.
A Statement of Additional Information dated May 1, 1997 incorporated herein
by reference, and containing additional information about the Contracts and
Diversified Investors Portfolios, has been filed with the Securities and
Exchange Commission. The Statement of Additional Information is available from
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 61 of this Prospectus.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy the Contracts in any jurisdiction in which such may not be lawfully
made.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS
PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED (OR PRECEDED) BY A CURRENT PROSPECTUS
FOR THE CALVERT SERIES.
DATED MAY 1, 1997
<PAGE> 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............................................................................. 9
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.................................................................................. 13
Diversified Investors Variable Funds.................................................. 13
Calvert Series...................................................................... 13
Diversified Investors Portfolios.................................................... 14
The Substitution.................................................................... 16
Charges............................................................................... 16
Charges for Mortality and Expense Risks............................................. 16
Annual Contract Charge.............................................................. 16
Investment Management Fee........................................................... 17
Premium Tax......................................................................... 18
Summary Of The Contracts.............................................................. 18
Eligible Purchasers................................................................. 18
Ownership........................................................................... 18
Purchase Payments................................................................... 18
Employer Sponsored Plan Requirements................................................ 18
Rights Of The Participant Under The Contract........................................ 19
Rights Upon Suspension Of Contract or Termination Of Plan........................... 19
403(b) Contract..................................................................... 19
401(a) Contract/401(k) Contract and NQDC............................................ 19
457 and 408 (IRA) Contracts......................................................... 19
Failure Of Qualification............................................................ 19
Transfers........................................................................... 20
Rights Reserved By AUSA............................................................... 20
Credit Of Purchase Payments........................................................... 21
Allocation Of Purchase Payments..................................................... 21
Determination Of Unit Values........................................................ 21
Death Benefit......................................................................... 21
Redemption During The Accumulation Period............................................. 22
Restrictions Under The Texas Optional Retirement Program.............................. 23
Payment Options....................................................................... 23
Annuity Purchase Date............................................................... 23
</TABLE>
2
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fixed Annuity....................................................................... 23
Fixed Annuity Options............................................................... 24
Payments To A Beneficiary Following The Annuitant's Death........................... 25
Voting Rights......................................................................... 25
Distribution Of The Contracts......................................................... 26
Federal Tax Status.................................................................... 26
Tax Treatment of AUSA............................................................... 27
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
Non-Qualified Deferred Compensation Contracts....................................... 29
Income Tax Withholding.............................................................. 30
Assumption Reinsurance................................................................ 30
Performance Data...................................................................... 31
Diversified Investors Portfolios...................................................... 33
Core/Feeder Structure............................................................... 34
Investment Objectives and Policies.................................................. 34
Investment Techniques and Restrictions.............................................. 50
Management of Diversified Investors Portfolios...................................... 53
Other Information Regarding Diversified Investors Portfolios........................ 58
Purchase and Redemption of Interests in Diversified Investors Portfolios............ 58
Independent Accountants............................................................... 60
Legal Proceedings..................................................................... 60
Financial Statements.................................................................. 60
Additional Information................................................................ 61
Table Of Contents Of Statement Of Additional Information.............................. 62
Request For Diversified Investors Variable Funds Statement Of Additional
Information......................................................................... 63
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.
AGGRESSIVE EQUITY SERIES: Diversified Investors Aggressive Equity
Portfolio, a series of Diversified Investors Portfolios.
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 INTERNATIONAL SERIES: Diversified Investors International
Equity Portfolio, a series of Diversified Investors Portfolios.
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.
EQUITY VALUE SERIES: Diversified Investors Equity Value 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.
HIGH QUALITY BOND SERIES: Diversified Investors High Quality Bond
Portfolio, a series of Diversified Investors Portfolios.
HIGH-YIELD BOND SERIES: Diversified Investors High-Yield Bond Portfolio, a
series of Diversified Investors Portfolios.
4
<PAGE> 7
INTERMEDIATE GOVERNMENT BOND SERIES: Diversified Investors Intermediate
Government Bond Portfolio, a series of Diversified Investors Portfolios.
INTERNATIONAL EQUITY SERIES: Diversified Investors International Equity
Portfolio, a series of Diversified Investors Portfolios.
IRA CONTRACTHOLDER: a tax-exempt, or taxed organization or an association
of members who share a common interest.
MONEY MARKET SERIES: Diversified Investors Money Market Portfolio, a series
of Diversified Investors Portfolios.
NQDC: Non-qualified deferred compensation arrangement available to taxed
organizations only.
PARTICIPANT: an employee participating under a Contract issued to or
adopted by his/her employer or an individual participating under a Contract
issued to an IRA Contractholder.
PLAN: a retirement plan or program under which benefits are to be provided
pursuant to a Contract described herein or by a Participant.
PURCHASE PAYMENT: the amount contributed and remitted to AUSA by an
employer on behalf of 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. Thirteen
Subaccounts invest in a corresponding series of Diversified Investors
Portfolios. The Calvert Series Subaccount invests in the Calvert Series.
UNIT: the measure by which the value of an investor's interest in each
Subaccount is determined.
VALUATION DATE: each day at the close of business of the New York Stock
Exchange (currently at 4:00 p.m. New York City time), each day that the New York
Stock Exchange is open for trading, or any other day on which there is
sufficient trading in securities of a series of Diversified Investors Portfolios
or the Calvert Series 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.........................................0.90%(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 PORTFOLIO AND
CALVERT SERIES
ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
HIGH INTERMEDIATE GOVERNMENT/
MONEY QUALITY GOVERNMENT CORPORATE HIGH-YIELD EQUITY
MARKET BOND BOND BOND BOND BALANCED INCOME
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
------ ------- ------------- ----------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees (After Fee
Reimbursements)(1)............... .25% .35% .32% .35% .00% .45% .45%
Other Expenses(2).................. .05% .05% .08% .04% .60% .65% .03%
Reimbursement from AUSA(3)......... (.20% ) -- -- -- -- -- --
----- ---- ---- ---- ---- ---- ----
Total Annual Expenses After Fee
Reimbursements(4)................ .10% .40% .40% .39% .60% .50% .48%
</TABLE>
<TABLE>
<CAPTION>
EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE INTERNATIONAL
VALUE INCOME GROWTH EQUITY EQUITY CALVERT EQUITY
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
------ -------- ------ ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees (After Fee
Reimbursements)(1)..................... .45% .58% .69% .79% .72% .70% .68%
Other Expenses(2)........................ .15% .07% .04% .06% .28% .13% .22%
Reimbursement from AUSA(3)............... -- -- (.23% ) -- -- -- --
----- ---- ---- ---- ---- ---- ----
Total Annual Expenses After Fee
Reimbursements(4)...................... .60% .65% .50% .85% 1.00% .83% .90%
</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.
Without such a waiver, the annual investment advisory fee would be .25% for
the Money Market Series, .35% for the High Quality Bond Series, .35% for the
Intermediate Government Bond Series, .35% for the Government/Corporate Bond
Series, .55% for the High-Yield Bond Series, .45% for the Balanced Series,
.45% for the Equity Income Series, .57% for the Equity Value Series, .60%
for the Growth & Income Series, .70% for the Equity Growth Series, .80% for
the Special Equity Series, .97% for the Aggressive Equity Series and .75%
for the International Equity Series. For the Calvert Series, the fees shown
are those charged by Calvert Asset Management Company to the Calvert Series.
(2) "Other expenses" have been estimated for the current fiscal year based upon
a projected level of average daily net assets of $100 million for the Equity
Value Series and $50 million for the Aggressive Equity
6
<PAGE> 9
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 all other Series
are actual for the year ended December 31, 1996.
(3) AUSA has agreed to provide reimbursements to limit total expenses for
Diversified Investors Variable Funds Participants in the Money Market Series
and the Equity Growth Series to .100% and .500%, respectively, of average
net assets of the applicable series, with AUSA reserving the right to raise
the limit upon notice. Prior to May 1, 1996 AUSA also provided
reimbursements to limit total expenses for Participants in the Equity Income
Series to .460% of average net assets; effective May 1, 1996, AUSA
discontinued such reimbursements.
(4) "Total Annual Expenses After Fee Reimbursements" for certain of the series
of Diversified Investors Portfolios reflect voluntary waivers and
reimbursements by Diversified. In the absence of such waivers and
reimbursements, "Total Annual Expenses After Fee Reimbursements" would be as
follows for the following series: Money Market Series -- .42%; Intermediate
Government Bond Series -- .43%; High Yield Bond Series -- 1.21%; Equity
Income Series -- .45%; Equity Value Series -- 1.17%; Growth & Income
Series -- .67%; Equity Growth Series -- .97%; Special Equity Series -- .86%;
Aggressive Equity Series -- 1.6%; and International Equity Series -- 1.82%.
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.)
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............................................. $ 10 $32 $ 55 $122
High Quality Bond........................................ $ 13 $41 $ 71 $157
Intermediate Government Bond............................. $ 13 $41 $ 71 $157
Government/Corporate Bond................................ $ 13 $41 $ 71 $156
High-Yield Bond.......................................... $ 15 $47 $ 82 $179
Balanced................................................. $ 14 $44 $ 77 $168
Equity Income............................................ $ 14 $44 $ 76 $166
Equity Value............................................. $ 15 $47 $ 82 $179
Growth & Income.......................................... $ 16 $49 $ 84 $185
Equity Growth............................................ $ 14 $44 $ 77 $168
Special Equity........................................... $ 18 $55 $ 95 $206
Calvert.................................................. $ 18 $54 $ 94 $204
Aggressive Equity........................................ $ 19 $60 $ 103 $222
International Equity..................................... $ 18 $57 $ 97 $212
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. PREMIUM
TAXES MAY ALSO BE APPLICABLE.
THE CONTRACTS
The Group Variable Annuity Contract(s) ("Contract(s)") described in this
Prospectus are designed and offered as funding vehicles for retirement Plans
maintained by state educational organizations, certain tax-exempt organizations,
IRA Contractholders and for taxed organizations for Section 401(a) and/or
Section 401(k) Contracts and corporate non-qualified deferred compensation
Contracts ("NQDC"). The
7
<PAGE> 10
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 which is eligible for deferred tax treatment. The Section 401(a)
Contract will fund benefits for tax-qualified pension and profit-sharing Plans
of such tax-exempt organizations as well as taxed subsidiaries of these
organizations and stand alone taxed organizations; the NQDC Contracts will fund
benefits for taxed organizations. The Section 408 (Individual Retirement Account
("IRA")) Contract is a Group Variable Annuity Contract which will provide for
on-going or rollover contributions from individuals who are eligible under
Section 408 to make such contributions. Section references are to the Internal
Revenue Code of 1986, as amended (the "Code").
Insofar as possible, the provisions of the Contracts are identical, and the
information provided in this Prospectus is generally applicable to all
Contracts. However, whenever statutory or administrative considerations require
significant differences among the Contracts, such differences are explained
separately for each.
With respect to the Section 401(a), Section 401(k) and NQDC Contracts, the
employer and/or the employee will make contributions pursuant to the terms and
conditions of the underlying retirement Plan. As to the Section 403(b) and
Section 457 Contracts, the employer will make Purchase Payments for each
participating employee pursuant to either a salary reduction agreement or an
agreement to forego a salary increase under which the employee decides the level
and number of Purchase Payments to his/her Accumulation Account, except with
respect to employer-sponsored Section 401(a) Plans under which the employer will
make contributions pursuant to the underlying retirement Plan. In the case of
the Section 408 IRA Contract, Purchase Payments will be made by the employer on
behalf of and as determined by each participating employee pursuant to a salary
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 29.)
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, thirteen of which
correspond to Diversified Investors Portfolios' Money Market, High Quality Bond,
Intermediate Government Bond, Government/Corporate Bond, High-Yield Bond,
Balanced, Equity Income, Equity Value, Growth & Income, Equity Growth, Special
Equity, Aggressive Equity and International Equity Series, respectively. The
Calvert Series Subaccount invests in the Calvert Series. The assets in each
Subaccount are invested in the corresponding series of Diversified Investors
Portfolios or the Calvert Series at their net asset value. (See "Diversified
Investors Portfolios" at page 13 and "Calvert Series" at page 12.) Each series
of Diversified Investors Portfolios is managed by Diversified, 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 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 or the Calvert Series to which
Purchase Payments are allocated.
The Calvert Series is an actively managed portfolio of common and preferred
stocks, bonds, and money market instruments which offer income and capital
growth opportunity and which satisfy the social concern criteria established by
the Calvert Series. A copy of the Calvert Series Prospectus appears at the end
of this Diversified Investors Variable Funds Prospectus. Diversified Investors
Portfolios is an open-end, diversified management investment company which has
thirteen series with differing investment objectives available under the
Contracts. See "Diversified Investors Portfolios" at page 13 herein.
8
<PAGE> 11
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 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 16). 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 and
Calvert Asset Management Company, Inc., which serves as investment adviser to
the Calvert Series, impose a charge against the net asset value of each series
of Diversified Investors Portfolios or the Calvert Series or the Scudder
International 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 or the Calvert
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 and the Calvert Series held in Diversified Investors
Variable Funds in accordance with the instructions received from
9
<PAGE> 12
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 20).
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
25).
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
FINANCIAL HIGHLIGHTS
The following financial highlights of Diversified Investors Variable Funds
have been audited by Coopers & Lybrand L.L.P., Independent Accountants, whose
report thereon, appears in the Statement of Additional Information.
For one Accumulation Unit outstanding throughout the period:
<TABLE>
<CAPTION>
MONEY MARKET
SUBACCOUNT
----------------
1995 1994*
------ ------
<S> <C> <C>
Net asset value, beginning of period..................................................... $13.65 $13.44
------ ------
Income from investment operations:
Net investment income.................................................................... 0.59 0.22
Net realized and unrealized gains (losses) on investments................................ 0.11 (0.01)
------ ------
Total from investment operations......................................................... 0.70 0.21
------ ------
Net asset value, end of period........................................................... $14.35 $13.65
====== ======
Ratio of net investment income to average net assets (net of reimbursements)***(1)....... 5.05% 4.65%
Ratio of expenses to average net assets (net of reimbursements)***(1).................... 0.71% 0.73%
Ratio of net investment income to average net assets***.................................. 4.85% 4.43%
Ratio of expenses to average net assets***............................................... 0.91% 0.94%
<CAPTION>
INTERMEDIATE
GOVERNMENT
BOND
SUBACCOUNT
---------------------------
1996 1995 1994*
------- ------ ------
<S> <C> <C> <C>
Net asset value, beginning of period..................................................... $12.24 $12.33
------ ------ ------
Income from investment operations:
Net investment income.................................................................... 0.57 0.24
Net realized and unrealized gains (losses) on investments................................ 1.03 (0.33)
------ ------ ------
Total from investment operations......................................................... 1.60 (0.09)
------ ------ ------
Net asset value, end of period........................................................... $13.84 $12.24
====== ====== ======
Ratio of net investment income to average net assets (net of reimbursements)***(1)....... 4.81% 5.64%
Ratio of expenses to average net assets (net of reimbursements)***(1).................... 0.93% 0.95%
Ratio of net investment income to average net assets***.................................. 4.81% 5.64%
Ratio of expenses to average net assets***............................................... 0.93% 0.95%
<CAPTION>
GOVERNMENT/
CORPORATE BOND
SUBACCOUNT
---------------------------
1996 1995 1994*
------- ------ ------
Net asset value, beginning of period..................................................... $16.70 $16.76
------ ------ ------
Income from investment operations:
Net investment income.................................................................... 0.84 0.32
Net realized and unrealized gains (losses) on investments................................ 2.09 (0.38)
------ ------ ------
Total from investment operations......................................................... 2.93 (0.06)
------ ------ ------
Net asset value, end of period........................................................... $19.63 $16.70
====== ====== ======
Ratio of net investment income to average net assets (net of reimbursements)***(1)....... 5.41% 5.64%
Ratio of expenses to average net assets (net of reimbursements)***(1).................... 0.90% 0.94%
Ratio of net investment income to average net assets***.................................. 5.41% 5.64%
Ratio of expenses to average net assets***............................................... 0.90% 0.94%
<CAPTION>
BALANCED
SUBACCOUNT
---------------------------
1996 1995 1994*
------- ------ ------
Net asset value, beginning of period..................................................... $16.66 $16.85
------ ------ ------
Income from investment operations:
Net investment income.................................................................... 0.50 0.20
Net realized and unrealized gains (losses) on investments................................ 4.09 (0.39)
------ ------ ------
Total from investment operations......................................................... 4.59 (0.19)
------ ------ ------
Net asset value, end of period........................................................... $21.25 $16.66
====== ====== ======
Ratio of net investment income to average net assets (net of reimbursements)***(1)....... 3.09% 3.47%
Ratio of expenses to average net assets (net of reimbursements)***(1).................... 9.10% 0.95%
Ratio of net investment income to average net assets***.................................. 3.09% 3.47%
Ratio of expenses to average net assets***............................................... 0.91% 0.95%
<CAPTION>
EQUITY INCOME
SUBACCOUNT
---------------------------
1996 1995 1994*
------- ------ ------
Net asset value, beginning of period..................................................... $16.86 $17.21
------ ------ ------
Income from investment operations:
Net investment income.................................................................... 0.46 0.18
Net realized and unrealized gains (losses) on investments................................ 5.16 (0.53)
------ ------ ------
Total from investment operations......................................................... 5.62 (0.35)
------ ------ ------
Net asset value, end of period........................................................... $22.48 $16.86
====== ====== ======
Ratio of net investment income to average net assets (net of reimbursements)***(1)....... 2.55% 3.09%
Ratio of expenses to average net assets (net of reimbursements)***(1).................... 0.85% 0.95%
Ratio of net investment income to average net assets***.................................. 2.50% 30.9%
Ratio of expenses to average net assets***............................................... 0.90% 0.95%
</TABLE>
- ---------------
* For the period August 18, 1994 (commencement of operations) to December 31,
1994
** For the period August 24, 1994 (commencement of operations) to December 31,
1994
*** All ratios for 1994 are annualized
(1) See Note 4
11
<PAGE> 14
<TABLE>
<CAPTION>
GROWTH &
INCOME
SUBACCOUNT
--------------------------
1996 1995 1994**
------ ------ ------
<S> <C> <C> <C>
Net asset value, beginning of period............................................. $10.14 $10.31
------ ------ ------
Income from investment operations:
Net investment income............................................................ 0.03 0.03
Net realized and unrealized gains (losses) on investments........................ 3.12 (0.20)
------ ------ ------
Total from investment operations................................................. 3.15 (0.17)
------ ------ ------
Net asset value, end of period................................................... $13.29 $10.14
====== ====== ======
Ratio of net investment income to average net assets (net of
reimbursements)***(1)........................................................... 0.47% 0.85%
Ratio of expenses to average net assets (net of reimbursements)***(1)............ 0.89% 0.80%
Ratio of net investment income to average net assets***.......................... 0.47% 0.85%
Ratio of expenses to average net assets***....................................... 0.89% 0.80%
<CAPTION>
EQUITY
GROWTH
SUBACCOUNT
---------------------------
1996 1995 1994*
------- ------ ------
<S> <C> <C> <C>
Net asset value, beginning of period............................................. $21.65 $20.67
------ ------ ------
Income from investment operations:
Net investment income............................................................ (0.02) (0.02)
Net realized and unrealized gains (losses) on investments........................ 3.95 1.00
------ ------ ------
Total from investment operations................................................. 3.93 0.98
------ ------ ------
Net asset value, end of period................................................... $25.58 $21.65
====== ====== ======
Ratio of net investment income to average net assets (net of
reimbursements)***(1)........................................................... -0.11% -0.27%
Ratio of expenses to average net assets (net of reimbursements)***(1)............ 0.66% 0.93%
Ratio of net investment income to average net assets***.......................... -0.36% -0.27%
Ratio of expenses to average net assets***....................................... 0.91% 0.93%
<CAPTION>
SPECIAL
EQUITY
SUBACCOUNT
---------------------------
1996 1995 1994**
------- ------ ------
Net asset value, beginning of period............................................. $10.63 $10.47
------ ------ ------
Income from investment operations:
Net investment income............................................................ (0.04) --
Net realized and unrealized gains (losses) on investments........................ 4.29 0.16
------ ------ ------
Total from investment operations................................................. 4.25 0.16
------ ------ ------
Net asset value, end of period................................................... $14.88 $10.63
====== ====== ======
Ratio of net investment income to average net assets (net of
reimbursements)***(1)........................................................... -0.59% 0.05%
Ratio of expenses to average net assets (net of reimbursements)***(1)............ 0.87% 0.80%
Ratio of net investment income to average net assets***.......................... -0.59% 0.05%
Ratio of expenses to average net assets***....................................... 0.87% 0.80%
<CAPTION>
CALVERT
SUBACCOUNT
---------------------------
1996 1995 1994*
------- ------ ------
Net asset value, beginning of period............................................. $13.11 $13.28
------ ------ ------
Income from investment operations:
Net investment income............................................................ 0.90 0.66
Net realized and unrealized gains (losses) on investments........................ 2.86 (0.83)
------ ------ ------
Total from investment operations................................................. 3.76 (0.17)
------ ------ ------
Net asset value, end of period................................................... $16.87 $13.11
====== ====== ======
Ratio of net investment income to average net assets (net of
reimbursements)***(1)........................................................... 7.00% 11.76%
Ratio of expenses to average net assets (net of reimbursements)***(1)............ 0.88% 0.76%
Ratio of net investment income to average net assets***.......................... 7.00% 11.76%
Ratio of expenses to average net assets***....................................... 0.88% 0.76%
<CAPTION>
INTERNATIONAL
EQUITY
SUBACCOUNT
---------------------------
1996 1995 1994**
------- ------ ------
Net asset value, beginning of period............................................. $ 9.56 $10.18
------ ------ ------
Income from investment operations:
Net investment income............................................................ (0.05) (0.03)
Net realized and unrealized gains (losses) on investments........................ 1.02 (0.59)
------ ------ ------
Total from investment operations................................................. (0.62) 0.97
------ ------ ------
Net asset value, end of period................................................... $10.53 $ 9.56
====== ====== ======
Ratio of net investment income to average net assets (net of
reimbursements)***(1)........................................................... -0.83% -0.81%
Ratio of expenses to average net assets (net of reimbursements)***(1)............ 0.90% 0.81%
Ratio of net investment income to average net assets***.......................... -0.83% -0.81%
Ratio of expenses to average net assets***....................................... 0.90% 0.81%
</TABLE>
12
<PAGE> 15
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 fourteen 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 thirteen other Subaccounts invest in thirteen respective
series of Diversified Investors Portfolios, an open-end diversified management
investment company registered with the SEC under the 1940 Act. Set forth below
is a brief description of the Calvert Series and the thirteen series of
Diversified Investors Portfolios. A full description of the Calvert Series, its
investment objectives, policies and restrictions, its expenses, the risks
attendant in investing therein and other aspects of its operations are contained
in the accompanying prospectus for the Calvert Series. Full descriptions of the
thirteen 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 13. Further disclosure appears
in the Statement of Additional Information. Each Participant should periodically
consider his/her allocation among the Subaccounts in light of current market
conditions and the investment risks attendant to investment in the various
series of Diversified Investors Portfolios and the Calvert Series.
CALVERT SERIES
The Calvert Series is a series of Acacia Capital Corporation ("Acacia"), a
Maryland Corporation registered with the SEC under the 1940 Act as an open-end
management company, whose investment adviser is Calvert Asset Management
Company, Inc. The shares of Acacia are currently sold only to insurance
companies for allocation to their separate accounts to fund the benefits under
certain variable annuity and variable life insurance policies issued by such
companies. Because the Calvert Series sells its shares to insurance companies
offering both variable annuity and variable life insurance policies, potential
for conflict between the interests of Contractholders of these contracts may
arise. The Board of Directors of Acacia will monitor the Calvert Series for the
existence of any material irreconcilable conflicts between interests of
Contractholders of all separate accounts investing in the Calvert Series. If it
is determined by a majority of the
13
<PAGE> 16
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.
DIVERSIFIED INVESTORS PORTFOLIOS
Each of the other thirteen 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")
Diversified Investors Variable Funds
High Quality Bond Subaccount............... Diversified Investors High Quality Bond
Portfolio (the "High Quality Bond Series")
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
High-Yield Bond Subaccount................. Diversified Investors High-Yield Bond
Portfolio (the "High-Yield Bond Series")
Diversified Investors Variable Funds
Balanced Subaccount........................ Diversified Investors Balanced Portfolio (the
"Balanced Series")
Diversified Investors Variable Funds
Equity Value Subaccount.................... Diversified Investors Equity Value Portfolio
(the "Equity Value 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")
Diversified Investors Variable Funds
Aggressive Equity Subaccount............... Diversified Investors Aggressive Equity
Portfolio (the "Aggressive Equity Series")
Diversified Investors Variable Funds
International Equity Subaccount............ Diversified Investors International Equity
Portfolio (the "International Equity Series")
</TABLE>
14
<PAGE> 17
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.
HIGH QUALITY BOND SERIES: To provide as high a level of current income as
is consistent with the preservation of capital through investment in high
quality debt securities with short and intermediate maturities.
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.
HIGH-YIELD BOND SERIES: To provide a high level of current income from a
diversified portfolio consisting primarily of high-yielding, fixed-income and
zero coupon securities, such as bonds, debentures and notes, convertible
securities and preferred stocks.
BALANCED SERIES: To provide a high total return consistent with a broad
diversified mix of stocks, bonds and money market instruments.
EQUITY INCOME SERIES: To provide a high level of current income through
investment in a diversified portfolio of common stocks with relatively high
current yields; capital appreciation is a secondary objective.
EQUITY VALUE SERIES: To provide a high total investment return through
investment in a diversified portfolio of common stocks. The Series emphasizes
stocks which, in the opinion of the Equity Value Series' Advisers, are trading
at low valuations relative to market and/or historical levels.
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 without consideration for current income. The Series
emphasizes stocks which, in the opinion of the Special Equity Series' Advisers,
will present an opportunity for significant increases in earnings and/or value.
AGGRESSIVE 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 without consideration for current income. The Series
emphasizes stocks which, in the opinion of the Aggressive Equity Series'
Advisers, present an opportunity for significant increases in earning, revenue
and/or value.
15
<PAGE> 18
INTERNATIONAL EQUITY SERIES: To provide a high level of long term capital
appreciation through investment in a diversified portfolio of securities of
foreign issuers.
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.
THE SUBSTITUTION
Prior to October 18, 1996, Purchase Payments allocated by Participants to
the International Equity Subaccount were invested in shares of the International
Portfolio of Scudder Variable Life Investment Fund (the "Scudder International
Fund"). On August 28, 1996, the SEC issued an order pursuant to certain
provisions of the 1940 Act approving the substitution within the International
Equity Subaccount of interests in the International Equity Series for the shares
of the Scudder International Fund held by such Subaccount. In accordance with
such SEC order, AUSA effected the redemption of the shares of the Scudder
International Fund held by it in the International Equity Subaccount and
immediately invested the proceeds received from such redemption in the
International Equity Series.
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 to deduct an annual contract charge from a
Participant's Accumulation Account to reimburse AUSA for administrative expenses
relating to the maintenance of the Contracts. AUSA has no present intention to
impose such a charge, however, AUSA may, in the future, impose such a charge in
accordance with the provisions of the Contracts. Any such annual charge will not
exceed $50. AUSA also reserves the right, if such a charge is imposed, to waive,
on a temporary or permanent basis, all or part of such charge for certain
classes of Contracts or for certain new classes of Contracts which may be sold
in the future. If imposed, this charge would represent reimbursement for
administrative costs expected to be incurred over the life of the Contracts.
AUSA does not anticipate any profit from this charge.
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<PAGE> 19
INVESTMENT MANAGEMENT FEE
Because Diversified Investors Variable Funds purchases interests in certain
series of Diversified Investors Portfolios and the Calvert 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 and the Calvert Series.
Diversified serves as the investment adviser to each series of Diversified
Investors Portfolios. For information with respect to the arrangements under
which Diversified provides such advisory services, including charges and
arrangements with subadvisers, reference is made to the information set forth
under "Management of Diversified Investors Portfolios" at page 53.
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 K. Beckett and is one of the largest
minority-owned investment management firms in the country. The Investment
Adviser receives from the Calvert Series a monthly base fee, computed on a daily
basis at an annual rate of 0.70% of the average daily net assets of the Calvert
Series. The Investment Adviser pays NCM a base fee of 0.25% of one-half of the
Calvert Series' net assets. In addition, the Investment Adviser and NCM may earn
(or have their fees reduced by) performance fee adjustments based on the extent
to which performance of the Calvert Series exceeds or trails the Lipper Balanced
Funds Index. Payment of the performance fee adjustment began July 1, 1996. The
specific adjustments are as follows:
INVESTMENT ADVISER'S PERFORMANCE FEE ADJUSTMENT
<TABLE>
<CAPTION>
PERFORMANCE VERSUS THE PERFORMANCE FEE
LIPPER BALANCED FUND INDEX ADJUSTMENT
-------------------------- ---------------
<S> <C> <C>
6% to <12% 0.05%
12% to <18% 0.10%
18% or more 0.15%
</TABLE>
NCM'S PERFORMANCE FEE ADJUSTMENT
<TABLE>
<CAPTION>
PERFORMANCE VERSUS THE PERFORMANCE FEE
LIPPER BALANCED FUND INDEX ADJUSTMENT
-------------------------- ---------------
<S> <C> <C>
6% to <12% 0.05%
12% to <18% 0.10%
18% or more 0.15%
</TABLE>
The performance fee adjustment to NCM is paid out of the fee the Investment
Adviser receives from the Calvert Series. The initial performance period was the
twelve month period between July 1, 1995 and July 1, 1996. Each month an
additional month's performance is factored into the calculation until a total of
36 months comprises the performance computation period. Payment by the Calvert
Series of the performance fee adjustment will be conditioned on (i) the
performance of the Calvert Series as a whole having exceeded the Lipper Balanced
Fund Index and (ii) payment of the performance fee adjustment not causing the
Calvert Series' performance to fall below the Lipper Balanced Fund Index.
17
<PAGE> 20
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 to the underlying retirement Plan. In the case
of the Section 408 IRA Contract, Purchase Payments will be made by the employer
on behalf of and as determined by each participating employee pursuant to a
salary 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 and Section 457 Contracts may be forfeitable even though
partially or fully vested.
EMPLOYER SPONSORED PLAN REQUIREMENTS
Since the Contracts are intended to implement the Plans of state
educational organizations, organizations that qualify for tax-exempt status
under Code Section 501(c)(3), IRA Contractholders and, in the case of Section
401(a) and/or Section 401(k) and NQDC Contracts, for taxed subsidiaries of such
organizations and stand-alone taxed organizations and since such Plans may be
sponsored by employers or associations who may
18
<PAGE> 21
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.
401(a) Contract/401(k) Contract and NQDC Contracts
If the Contractholder terminates its Plan or discontinues Purchase
Payments, it is the Contractholder's responsibility, and not AUSA's, to give
written notice thereof to the affected Participants. In such cases, the
Contractholder shall elect to have the entire balance held under the Contract
applied under one of the following options: (1) to be held and distributed by
AUSA in accordance with the terms of the Contract; (2) to be transferred to an
alternate funding agency (e.g., another insurance company); or (3) to purchase
deferred, paid-up life annuity benefits for Participants.
457 and 408(IRA) Contracts
If the Contractholder or IRA Contractholder terminates its Plan or
discontinues Purchase Payments for a Participant, AUSA shall give written notice
thereof to the appropriate Participant(s) together with notice of the right of
the Participant to elect to have the value of his/her Accumulation Account
applied under either of the following options: (1) to be held and distributed by
AUSA in accordance with the terms of the Contract or (2) to be paid to him/her
in cash, except that, under the terms of certain 457 Contracts, the
Contractholder, not AUSA, shall give notice to affected Participants.
FAILURE OF QUALIFICATION
In the event that a Plan, Contractholder or IRA Contractholder or a
Participant, thereunder becomes ineligible for any previously applicable tax
benefits under the Code, AUSA upon notice thereof shall refuse during the period
of such ineligibility to accept Purchase Payments with respect to that Plan or
Participant. A
19
<PAGE> 22
failure of qualification under a particular Contract shall have no effect on
other issued and outstanding Contracts.
TRANSFERS
No transfers may be made between any of the Contracts; however, the
following transfers are permissible with respect to each Contract.
401(a), 401(k), 403(b), 457, 408(IRA) and NQDC Contracts
A Participant may transfer all or a portion of his/her Accumulation Account
in 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.
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 or the Calvert Series held in any Subaccount, interests in
another series of Diversified Investors Portfolios or interests in
another investment company or any other investment permitted by law;
and
(5) To make any necessary technical changes in the Contracts in order to
conform with any of the above-described actions or as may be required
or permitted by applicable laws affecting Diversified Investors
Variable Funds or the Contracts.
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<PAGE> 23
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.
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 or the Calvert Series, in which the Subaccount invests, and
(b) is the mortality and expense risk charge accrued as of that Valuation
Date; and,
(c) is the total number of Units held in the Subaccount on the Valuation
Date before the purchase or redemption of any Units on that Date.
DEATH BENEFIT
Under Section 403(b), Section 457, 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 26). 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.
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<PAGE> 24
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, and Section 408(IRA) Contracts and subject
to applicable federal tax law restrictions, a Participant at any time during
his/her Accumulation Period and prior to his/her death may redeem all or a
portion of the Units credited to the Accumulation Account. There is no
redemption charge. (See "Federal Tax Status" on page 25).
The Accumulation Account value redeemed or the Units remaining after a
partial redemption will be determined on the Valuation Date for the Valuation
Period in which a written request for a redemption on a form approved by 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 or the Calvert 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 25).
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.
22
<PAGE> 25
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
The Texas Optional Retirement Program ("Program") imposes on participants
in such Program certain restrictions on withdrawal, which affect redemptions
with respect to any variable annuity contract issued under the Program. Under
section 830.104 of the Texas Government Code, such participant in the Program,
in order to withdraw accumulated contributions from the retirement system, must
complete the required application form prescribed by the board of trustees. A
person who withdraws contributions pursuant to section 830.104 relinquishes all
accrued rights in the retirement system.
Nothing in section 830.105 of the Texas Government Code, entitled
Termination of Participation, precludes the election by a participant to
withdraw accumulated contributions pursuant to section 830.104. However, section
830.105 restricts the availability of an annuity purchased under the Program to
situations where the participant attains age 70 1/2 or terminates participation
in the Program by: death, retirement, or termination of employment in all
institutions of higher education.
PAYMENT OPTIONS
With respect to Section 403(b), Section 457, and Section 408(IRA)
Contracts, unless a Fixed Annuity as described below is elected, payment to the
Participant shall be made at the end of his/her Accumulation Period in a lump
sum calculated in the same manner as if a total withdrawal request of one's
Accumulation Account had been received by AUSA on his/her Annuity Purchase Date.
(See page for "Redemption During the Accumulation Period"). However, Section
401(a), Section 401(k) and NQDC Contracts provide the funding for the Plans and
reference to the particular Plan must be made in each case for details. For
example, tax-qualified Plans must generally provide by law that in the case of a
married Participant who does not properly elect otherwise, retirement annuity
benefits will be paid in the form of a contingent annuity with a survivorship
annuity benefit for his surviving spouse at least equal to 50% of the amount
which would have been payable if the Participant were living. For NQDC
Contracts, the employer may also provide for installment payments without the
purchase of an annuity.
ANNUITY PURCHASE DATE
The Annuity Purchase Date is the first day of the month coincident with or
following the receipt by AUSA of written notice, submitted through the
Participant's employer, of the Participant's retirement (i.e., the termination
of employment with his/her employer). Subject to the terms of the Plan, a
Participant may elect to retire at any time and receive annuity benefits. As a
general rule, benefits must begin no later than April 1 of the calendar year
following the year in which the Participant attains age 70 1/2 at which time an
election to receive an annuity or lump sum benefit must be made.
In the case of a beneficiary who elects a Fixed Annuity, the Annuity
Purchase Date will be the first day of the month following receipt by AUSA of
the election of a Fixed Annuity; however, if any election is received during the
last 15 days of a month, the Annuity Purchase Date will be the first day of the
second month after receipt of the election.
For Section 408(IRA) Contracts, the Annuity Purchase Date is the date the
annuity first begins under the terms of the IRA Contract.
FIXED ANNUITY
Fixed Annuity payments are not made from 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
23
<PAGE> 26
subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
A Fixed Annuity may not be elected if the initial monthly payment under the
form elected would be less than $20. Fixed Annuity payments will be made monthly
unless the annuitant elects to receive payments annually, semi-annually or
quarterly. Any such election must be made at the same time that the annuitant
elects to receive a Fixed Annuity and cannot be changed during the annuity
period. Once a Fixed Annuity takes effect, it may not be redeemed, surrendered
or changed to any other form of annuity.
FIXED ANNUITY OPTIONS
The following Fixed Annuity options may be available:
i) Life Annuity -- Annuity payments will be made during the lifetime of
the annuitant. It would be possible for the annuitant to receive no
annuity payment if he/she died prior to the date of the first annuity
payment.
ii) Life Annuity With Period Certain -- Annuity payments will be made
during the lifetime of the annuitant with the guarantee that if the
annuitant dies before a period certain elected, the beneficiary will
receive payments for the duration of the period. The period certain
may be any number of years between 5 and 20 inclusive.
iii) Specified Fixed Period Annuity -- Annuity payments will be made for a
specified fixed period selected by the annuitant. If the annuitant
dies during the specified fixed period, the annuity payments for the
remainder of the period will be paid to the beneficiary. No annuity
payments are made after the expiration of the specified fixed period
even if the annuitant survives. The specified fixed period may be for
any number of years between 10 and 30 years inclusive.
iv) Contingent Annuity -- Annuity payments will be made during the joint
lifetimes of the annuitant and a designated second person ("contingent
annuitant") with payments continued during the remaining lifetime of
the contingent annuitant. Annuity payments to the contingent annuitant
may be made in the same amount paid while both annuitants lived or a
lesser percentage of this amount. For Section 401(a) and/or Section
401(k) Contracts, in the absence of a proper election by the
Participant, a contingent annuity with a survivorship annuity benefit
for the surviving spouse at least equal to 50% of the amount which
would have been payable if the Participant were living will be the
normal form of benefit.
If the contingent annuitant dies before the first annuity payment to
the annuitant, the contingent annuity election will be void and the
annuitant will receive a Life Annuity. If the contingent annuitant
dies after the first annuity payment to the annuitant, but before the
death of the annuitant, annuity payments under the Contingent Annuity
election will be made to the annuitant during his/her lifetime. If the
annuitant and the contingent annuitant die before the date of the
first annuity payment, no annuity payments will be made.
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. The guaranteed level of Fixed Annuity
payments will be
24
<PAGE> 27
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
or the Calvert 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 and Acacia to vote upon certain
matters that are required by the 1940 Act to be approved or ratified by the
shareholders of a mutual fund, and to vote upon any other matter that may be
voted upon at a shareholders' meeting. To the extent required by law, AUSA will
vote at regular and special shareholder meetings in accordance with the
instructions received from Contractholders, IRA Contractholders and NQDC
Contractholders. The record date for any such vote shall be selected by the
governing Boards of Diversified Investors Portfolios or Acacia. 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. 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 or the Calvert 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
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<PAGE> 28
Participants are received, the Contractholder, IRA Contractholder or NQDC
Contractholder will instruct AUSA to vote these interests in the same proportion
as those shares for which instructions from Participants are received.
Matters on which the Contractholder, IRA Contractholder or NQDC
Contractholder may give voting instructions include the following: (1) election
of the governing Boards of Diversified Investors Portfolios or Acacia; (2)
ratification of the independent accountant of a series of Diversified Investors
Portfolios or the Calvert Series corresponding to the Contractholder's, IRA
Contractholder's or NQDC Contractholder's selected Subaccount(s); (3) approval
of any change in the Investment Advisory Agreement or any Subadvisory Agreement
for a series of Diversified Investors Portfolios or the Calvert Series
corresponding to the Contractholder's, IRA Contractholder's or NQDC
Contractholder's selected Subaccount(s); (4) any change in the fundamental
investment policies of a series of Diversified Investors Portfolios or the
Calvert Series corresponding to the Contractholder's, IRA Contractholder's or
NQDC Contractholder's selected Subaccount(s); and (5) any other matter requiring
a vote of the shareholders of Diversified Investors Portfolios or the Calvert
Series. With respect to approval of the Investment Advisory Agreements or
Subadvisory Agreements or any change in a fundamental investment policy,
Contractholders, IRA Contractholders and NQDC Contractholders participating in
that Subaccount will vote separately on the matter pursuant to the requirements
of Rule 18f-2 under the 1940 Act.
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 or the Calvert Series, or to approve
or disapprove an investment adviser or principal underwriter for one or more
series of Diversified Investors Portfolios or the Calvert Series. In addition,
AUSA may disregard voting instructions that would require changes in the
investment objectives or policies of any series of Diversified Investors
Portfolios or the Calvert Series or in an investment adviser or principal
underwriter for Diversified Investors Portfolios or the Calvert Series, if AUSA
reasonably disapproves those changes in accordance with applicable federal
regulations. If AUSA disregards voting instructions, it will advise
Contractholders, IRA Contractholders, NQDC Contractholders and Participants of
that action and its reasons for the action in the next semiannual report to
Contractholders, IRA Contractholders, NQDC Contractholders and Participants.
DISTRIBUTION OF THE CONTRACTS
DISC will act as the principal underwriter and the distributor of the
Contracts. DISC will perform all sales, marketing and administrative functions
relative to the Contracts which participate in 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
26
<PAGE> 29
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.
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
27
<PAGE> 30
as ordinary income in the year received, except that such portion of any amount
received as is deemed to represent a return of Purchase Payments originally
included as gross income made by the Participant will not be taxed. Full
redemptions do not qualify for special capital gains treatment nor 5-year income
averaging applicable to qualified plan lump sum distributions. However, if a
Participant makes a full redemption after attaining age 59 1/2 or on account of
a separation from service, he/she may delay including the distribution in income
by making a rollover transfer, subject to requirements set by the Code, to an
Individual Retirement Account or another Section 403(b) annuity. A partial
redemption of at least 50% of the balance to the credit of a Participant on
account of a separation from service may be rolled over to an Individual
Retirement Account, subject to requirements set by the Code.
If the Participant receives any amount under the Contract, the Participant
must pay an additional tax of 10% of the amount of the distribution includable
in gross income for the taxable year. This additional tax shall not apply to
distributions which are (1) made after the date on which the Participant attains
age 59 1/2, (2) made to a beneficiary on or after the death of the Participant,
(3) attributable to the Participant's becoming permanently disabled, (4) made
after separation from service in a series of substantially equal periodic
payments made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his beneficiary, (5)
made to a Participant after separation of service after attainment of age 55,
(6) made to a Participant for medical care (not to exceed the amount deductible
by the employee), or (7) paid to alternate payees under a qualified domestic
relations order.
RESTRICTIONS ON WITHDRAWALS OF ELECTIVE CONTRIBUTIONS. Effective January 1,
1989 and thereafter, any funds in the Participant's account balance other than
funds attributable to assets held at the close of the last year beginning before
January 1, 1989 will be restricted from withdrawal except upon attainment of age
59 1/2, separation from service, death, disability or hardship (hardship
withdrawals are to be limited to the amount of the Participant's own
contributions exclusive of earnings). However, any funds in the Participant's
account balance attributable to employer contributions, if any, and the earnings
thereon will not be restricted unless specifically provided for by the
employer's plan.
In tax years beginning after 1988, Section 403(b) Plans (other than church
plans) will be subject to nondiscrimination and coverage requirements, as well
as special rules with respect to minimum distributions.
SECTION 401(A) PLANS
An employer maintaining a pension or profit sharing Plan which satisfies
the requirements of Section 401(a) of the Code may make contributions to the
Contract which are generally currently deductible by the employer and are not
currently taxed to the Participants. The Code prescribes various limitations on
the maximum amount which may be contributed on behalf of any Participant. In
addition, Participants may make after-tax contributions to the Contract if their
Section 401(a) Plan permits.
When Fixed Annuity payments commence, or if the Participant obtains a
partial redemption of the Units credited to his/her Accumulation Account under
the Contract, the amount received will be 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
28
<PAGE> 31
federal income tax purposes. No federal income tax is payable by the Participant
on increases in the value of his/her Accumulation Account until payments are
received by the Participant.
When Fixed Annuity payments commence, or if the Participant obtains a
partial redemption of the Units credited to his/her Accumulation Account under
the Contract, the amount received will be includable as ordinary income in the
year received, except that such portion of any amount received which is deemed
to represent a return of Participant non-deductible Purchase Payments will not
be taxed. Full or partial redemptions do not qualify for special capital gains
treatment nor 10-year income averaging applicable to certain qualified plan
distributions.
If the Participant receives any amount under the Contract prior to
attainment of age 59 1/2, the Participant must pay an additional excise tax of
10% of the amount of the distribution includable in gross income for the taxable
year. The additional tax shall not apply to distributions which are (1) made to
a beneficiary on or after the death of the Participant, (2) attributable to the
Participant's becoming permanently disabled or (3) made in a series of
substantially equal periodic payments made for the life (or life expectancy) of
the Participant or the joint lives (or joint life expectancies) of the
Participant and his/her beneficiary. Any full or partial redemption will not be
includable in ordinary income if the Participant rolls over the distribution
within 60 days to another IRA.
MINIMUM DISTRIBUTION REQUIREMENTS
If the actual distributions from a qualified retirement plan, eligible
state or local government deferred compensation plan or an IRA are less than the
minimum required to be distributed commencing by April 1 in the calendar year
following the year the Participant attains age 70 1/2 (see "Annuity Purchase
Date", on page 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 and all property
bought with those amounts or income earned on those amounts remain the property
of the employer and are subject to the claims of its general creditors.
Distributions from a Section 457 Plan are subject to Section 401(a)(9) of the
Code in addition to the rules applicable under Section 457 of the Code and must
begin no later than the April 1st of the calendar year following the year in
which the participant attains age 70 1/2.
NON-QUALIFIED DEFERRED COMPENSATION CONTRACTS
Taxed employers may establish a non-qualified deferred compensation
arrangement funded by non-qualified deferred compensation contracts allowing the
deferral of compensation through salary reduction. Such Plans include, but are
not limited to, excess benefit plans, plans maintained by an employer primarily
for a select group of management or highly compensated employees, as well as
rabbi and secular trusts. Taxed employers for these non-qualified deferred
compensation Plans include corporations, partnerships, S corporations and any of
their affiliates or subsidiaries. Contributions are determined on the Plan's
definition of compensation. All amounts deferred by employees and any income
earned thereon remain the property of the employer and are subject to the claims
of its general creditors. In-service withdrawals from deferred compensation
Plans may be permitted for reasons of hardship under certain conditions as
specified in the Plans. Distributions from these Plans are permitted when the
Participant terminates employment, becomes permanently disabled, retires, dies
or as otherwise specified in the Plan. As a general rule, the Participant is
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<PAGE> 32
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.
Effective January 1, 1992, distributions from qualified retirement plans
and Section 403(b) Contracts, other than individual retirement arrangements
("IRAs") generally are subject to mandatory federal income tax withholding
unless they either are:
1. Part of a series of substantially equal periodic payments (at least
annually) for the participant's life or life expectancy, the joint lives or
life expectancies of the participant and his/her beneficiary, or a period
certain of not less than 10 years, or
2. Required by the Code upon the participant's attainment of age
70 1/2 or death.
Such withholding will apply even if the distribution is rolled over into
another qualified plan including an IRA. The withholding can be avoided if the
participant's interest is directly transferred by the old plan to another
eligible qualified plan including an IRA. A direct transfer to the new plan can
be made only in accordance with the terms of the old plan. If withholding is not
avoided, the amount withheld may be subject to income tax and penalties.
Pursuant to Revenue Ruling 90-24 of the Code, an exchange of a Section
403(b) annuity contract for another Section 403(b) annuity contract may qualify
as a tax-free exchange.
ASSUMPTION REINSURANCE
The Contracts described in this Prospectus include group variable annuity
contracts which were originally issued by The Mutual Life Insurance Company of
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.
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<PAGE> 33
PERFORMANCE DATA
From time to time the performance of one or more of the Subaccounts may be
advertised. The performance data contained in these advertisements is based upon
historical earnings and is not indicative of future performance. The data for
each Subaccount reflects the results of the corresponding series of Diversified
Investors Portfolios or the Calvert Series and recurring charges and deductions
borne by or imposed on the Subaccount and on the corresponding series of the
Diversified Investors Portfolios or the Calvert Series. Set forth below for each
Subaccount is the manner in which the data contained in such advertisements will
be calculated.
MONEY MARKET SUBACCOUNT. The performance data for this Subaccount will
reflect the "yield", "effective yield" and "total return". The "yield" of the
Subaccount refers to the income generated by an investment in the Subaccount
over the seven day period stated in the advertisement. This income is
"annualized", that is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly, but, when annualized, the income earned by an investment in the
Subaccount is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. The total return is calculated as shown below.
INTERMEDIATE GOVERNMENT BOND, HIGH QUALITY BOND, GOVERNMENT/CORPORATE BOND,
HIGH-YIELD BOND, BALANCED, EQUITY INCOME, EQUITY VALUE, GROWTH & INCOME, EQUITY
GROWTH, SPECIAL EQUITY, AGGRESSIVE 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 or the
Calvert Series may provide information concerning general economic conditions
and supply comparative performance data and rankings, with respect to comparable
investments for the same period, for unmanaged market indices such as the Dow
Jones Industrial Average and the Standard and Poor's 500, and from recognized
independent sources such as Donoghue's Money Fund Report, Bank Rate Monitor,
Money, Forbes, Barron's, Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc., Frank Russell Universe Data, Wiesenberger Investment
Companies Service, Mutual Fund Values, Mutual Fund Forecaster, VARDS and
Morningstar.
In addition, reference may be made in advertisements to various indices
including, without limitation, the Standard & Poor's 500 Stock Index, Salomon
Brothers Broad Investment Grade Index and Lehman Brothers Government/Corporate
Bond Index, and Russell Price Driven Index, in order to provide the reader a
basis of comparison for performance.
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<PAGE> 34
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
FOR THE YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
YEAR ENDED ENDED ENDED ENDED ENDED THROUGH
12/31/96 12/31/95 12/31/96 12/31/96 12/31/96 12/31/96
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Subaccount:
Money Market(1)................. 4.59% 4.36% 3.66% 5.26% 7.59%
High Quality Bond(1)............ 4.24% 4.73% 5.05% N/A 6.23%
Intermediate Government
Bond(1)...................... 2.69% 4.30% 5.24% N/A 6.76%
Government/Corporate Bond(1).... 2.40% 5.01% 6.58% 7.45% 8.41%
Balanced(1)..................... 15.86% 13.44% N/A N/A 13.26%
Equity Income(1)................ 17.38% 15.77% 14.13% 12.59% 13.42%
Growth & Income(1).............. 21.08% 15.13% 12.63% 13.03% 13.02%
Equity Growth(1)................ 17.15% N/A N/A N/A 11.94%
Special Equity(1)............... 25.27% 20.50% 16.30% 16.62% 15.75%
International Equity(1)......... 13.82% 10.12% N/A N/A 15.04%
Calvert(2)...................... 11.62% 11.27% 9.59% 10.68% 9.95%
</TABLE>
- ---------------
(1) Each of the corresponding Pooled Separate Accounts of The Mutual Life
Insurance Company of New York ("MONY") set forth below contributed all of
its assets to, and thereby established, the corresponding Series of
Diversified Investors Portfolios in which a corresponding Subaccount invests
its assets:
<TABLE>
<CAPTION>
MONY POOLED
SERIES SEPARATE ACCOUNT
--------------------------------------------- -----------------------
<S> <C>
Money Market................................. Pooled Account No. 4
High Quality Bond............................ Pooled Account No. 15
Intermediate Government Bond................. Pooled Account No. 10d
Government/Corporate Bond.................... Pooled Account No. 5
Balanced..................................... Pooled Account No. 14
Equity Income................................ Pooled Account No. 6
Equity Growth................................ Pooled Account No. 1
Growth & Income.............................. Pooled Account No. 10a
Special Equity............................... Pooled Account No. 10b
International Equity......................... Pooled Account No. 12
</TABLE>
Total returns calculated for any period for each of the Money Market,
High Quality Bond, Intermediate Government Bond, Government/Corporate Bond,
Balanced, Equity Income, Growth & Income, Equity Growth, Special Equity and
International Equity Subaccounts reflect the performance of the
corresponding Pooled Separate Account for any period prior to its
establishment and the performance of the corresponding 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 adopted investment objectives, policies and practices
substantially similar to those of the corresponding series of Diversified
Investors Portfolios invested in by the Subaccount. All total return
percentages reflect the historical rates of return for such period adjusted
to assume that all charges, expenses and fees of the applicable Subaccount
and the corresponding series of Diversified Investors Portfolios which are
presently in effect were deducted during such period. The corresponding
Pooled Separate Accounts were not registered under the Investment Company
Act of 1940 and, therefore, were not subject to certain investment
restrictions imposed by the Act. If the corresponding Pooled Separate
Accounts had been registered under the Act, investment performance might
have been adversely affected.
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<PAGE> 35
(2) The annualized total returns for the Calvert Series Subaccount reflect the
annualized total returns of the Calvert Series. The commencement date of the
Calvert Series is September 30, 1986.
The table above assumes that a $1,000 payment was made to each Subaccount
at the beginning of the period shown, that no further payments were made, that
any distribution from the corresponding series (or its predecessor investment
vehicle) were reinvested, and that a Contractholder surrendered the Contract for
cash, rather than electing commencement of annuity benefits in the form of one
of the Settlement Options available, at the end of the period shown. The average
annual total return percentages shown in the table reflect the annualized
historical rates of return and deductions for all charges, expenses, and fees
which would be imposed on the payment assumed by both the corresponding series
and Diversified Investors Variable Funds.
DIVERSIFIED INVESTORS PORTFOLIOS
Thirteen 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.
HIGH QUALITY BOND SERIES: To provide as high a level of current income as
is consistent with the preservation of capital through investment in high
quality debt securities with short and intermediate maturities.
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.
HIGH-YIELD BOND SERIES: To provide a high level of current income from a
diversified portfolio consisting primarily of high-yielding, fixed-income and
zero coupon securities, such as bonds, debentures and notes, convertible
securities and preferred stocks.
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.
EQUITY VALUE SERIES: To provide a high total investment return through
investment in a diversified portfolio of common stocks. The series emphasizes
stocks which, in the opinion of the Equity Value Series' Advisers, are trading
at low valuations relative to market and/or historical levels.
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.
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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 without consideration for current income. The Series
emphasizes stocks which, in the opinion of the Series' Advisers, will present an
opportunity for significant increases in earnings and/or value.
AGGRESSIVE 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. The Series emphasizes stocks without consideration for
current income which, in the opinion of the Aggressive Equity Series' Advisers,
present an opportunity for significant increases in earning, revenue and/or
value.
INTERNATIONAL EQUITY SERIES: To provide a high level of long term capital
appreciation through investment in a diversified portfolio of securities of
foreign issuers.
There can, of course, be no assurance that any series of Diversified
Investors Portfolios will achieve its investment objectives.
CORE/FEEDER STRUCTURE
Each Subaccount which invests in a series of Diversified Investors
Portfolio does so through a two tier, core/feeder fund structure in which each
such Subaccount invests in a corresponding series of Diversified Investors
Portfolios.
In addition to selling beneficial interests to such Subaccounts,
Diversified Investors Portfolios may sell beneficial interests of its series to
other insurance company separate accounts, mutual funds, collective investment
vehicles or institutional investors. Such investors will invest in a series of
Diversified Investors Portfolios on the same terms and conditions as the
applicable Subaccount and will pay a proportionate share of the series'
expenses. However, the other investors investing in such series are not required
to sell their shares at the same public offering price as the Subaccount due to
variations in sales commissions and other operating expenses. Therefore,
Contractholders should be aware that these differences may result in differences
in returns experienced by investors in the different entities that invest in
each series of Diversified Investors Portfolios.
Smaller entities investing in a series of Diversified Investors Portfolios
may be materially affected by the actions of larger entities investing in that
series. For example, if a large fund withdraws from a series of Diversified
Investors Portfolios, the remaining investors may experience higher pro rata
operating expenses, thereby producing lower returns. Additionally, the affected
series may become less diverse, resulting in increased portfolio risk. (However,
this possibility also exists for any type of collective investment vehicle which
has institutional or other large investors.) Also, investors with a greater pro
rata ownership in a series of Diversified Investors Portfolios could have
effective voting control of the operations of that series. Whenever a Subaccount
is requested to vote on matters pertaining to a series of the Diversified
Investors Portfolios (other than a vote to continue a series upon 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 , 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 manage-
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ment 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 55). 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.
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").
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Eligible Securities include "First Tier Securities" and "Second Tier
Securities." First Tier Securities include those that possess a rating in the
highest category in the case of a single-rated security or at least two ratings
in the highest rating category in the case of multiple-rated securities or, if
the securities do not possess a rating, are determined to be of comparable
quality by the Advisers pursuant to the guidelines adopted by the Board of
Trustees. All other Eligible Securities are Second Tier Securities. The Money
Market Series will invest at least 95% of its total assets in First Tier
Securities.
The NRSROs currently rating instruments of the type the Money Market Series
may purchase are Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), Duff & Phelps, Inc., Fitch Investors Service, Inc., IBCA
Limited, IBCA Inc. and Thomson BankWatch, Inc., and their rating criteria are
described in the Appendix to the Statement of Additional Information. The
Statement of Additional Information contains further information concerning the
rating criteria and other requirements governing the Money Market Series'
investments, including information relating to the treatment of securities
subject to a tender or demand feature and securities deemed to possess a rating
based on comparable rated securities of the same issuer.
In addition, the Money Market Series will not invest more than 5% of its
total assets in the securities (including the securities collateralizing a
repurchase agreement) of, or subject to puts (including letters of credit,
guaranties or other credit support) issued by, a single issuer, except that (i)
the Money Market Series may invest more than 5% of its total assets in a single
issuer for a period of up to three business days in certain limited
circumstances, (ii) the Money Market Series may invest in obligations issued or
guaranteed by the U.S. Government without any such limitation, and (iii) the
limitation with respect to puts does not apply to unconditional puts if no more
than 10% of the Money Market Series' total assets is invested in securities
issued or guaranteed by the issuer of the unconditional put. Investments in
Second Tier Securities will be limited to 5% of the Money Market Series' total
assets, with the investment in any one such issuer being limited to no more than
the greater of 1% of the Money Market Series' total assets or $1,000,000. As to
each security, these percentages are measured at the time the Money Market
Series purchases the security.
The Money Market Series seeks to achieve its investment objective through
investments in the following types of U.S. dollar-denominated money market
instruments.
BANK OBLIGATIONS. The Money Market Series may invest in U.S.
dollar-denominated certificates of deposit, time deposits, bankers'
acceptances and other short-term obligations issued by 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
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regulatory developments in or related to the banking industry, which
industry also is subject to the effects of the concentration of loan
portfolios in leveraged transactions and in particular businesses, and
competition within the banking industry, as well as with other types of
financial institutions. The Money Market Series, however, will seek to
minimize its exposure to such risks by investing only in debt securities
which are determined to be of high quality.
U.S. GOVERNMENT AND AGENCY SECURITIES. Securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities include U.S.
Treasury securities, which differ only in their interest rates, maturities
and times of issuance. Treasury Bills have initial maturities of one year
or less; Treasury Notes have initial maturities of one to ten years; and
Treasury Bonds generally have initial maturities of greater than ten years.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
pass-through certificates are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those
issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the
agency or instrumentality; and others, such as those issued by the Student
Loan Marketing Association, only by the credit of the agency or
instrumentality. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated by
law. The Money Market Series will invest in such securities only when the
Advisers are satisfied that the credit risk with respect to the issuer is
minimal. The Money Market Series itself, and its share price and yield, are
not guaranteed by the U.S. Government. For additional information on U.S.
Government securities, see "Diversified Investors Portfolios" in the
Statement of Additional Information.
COMMERCIAL PAPER. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. The commercial
paper purchased by the Money Market Series will consist only of U.S.
dollar-denominated direct obligations issued by domestic and foreign
entities. The other corporate obligations in which the Money Market Series
may invest consist of high quality, U.S. dollar-denominated short-term
bonds and notes issued by domestic corporations.
The Money Market Series may invest in commercial paper issued by major
corporations in reliance on the exemption from registration afforded by
Section 3(a)(3) of the 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
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securities may have the effect of increasing the level of illiquidity in
the Money Market Series during such period.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements involve the acquisition by the Money Market Series of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Money Market Series to resell, the instrument at a
fixed price, usually not more than one week after its purchase. The Money
Market Series or a sub-custodian will have custody of securities acquired
by the Money Market Series under a repurchase agreement.
Repurchase agreements may be entered into for the Series with sellers which
are usually member banks of the Federal Reserve System or member firms of
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.
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HIGH QUALITY BOND SERIES. The investment objective of the High Quality Bond
Series is to provide as high a level of current income as is consistent with the
preservation of capital. The yield of the High Quality Bond Series normally is
expected to be higher than a money market fund but lower than a longer-term or
lower quality bond fund. Unlike a money market fund, the Series does not seek to
maintain a stable net asset value and may not be able to return
dollar-for-dollar the money invested.
The High Quality Bond Series pursues its investment objective by investing
at least 65% of its assets under normal circumstances in high quality debt
securities with short and intermediate maturities (including repurchase
agreements and reverse repurchase agreements).
The Advisers attempt to maintain the Series' "duration" between one and
four years, which means that the Series' overall sensitivity to interest rates
should be slightly more than that of bonds and notes with remaining average
maturities from one to four years. The Series' dollar-weighted average maturity
(or dollar-weighted average life in the case of asset-backed and mortgage-backed
securities) may be longer than four years from time to time, but will not exceed
five years under normal conditions. The Series may hold individual securities
with remaining maturities of up to thirty years.
The Series seeks consistency of return with minimal exposure to negative
total returns on an annual basis. The Advisers' strategy is to position the
Series in those high quality sectors of the fixed income market that offer the
most attractive yields on a risk-adjusted basis. The duration of the Series will
be a function of the security and sector selection process and market conditions
in general. Since the value of fixed income securities generally fluctuates
inversely with changes in interest rates, the value of securities held by the
Series will tend to decline during periods of rising interest rates.
The Advisers normally will select only securities having a minimum
long-term quality rating of A- by Standard & Poor's Ratings Group ("S&P") or A3
by Moody's Investors Service, Inc. ("Moody's") will at the time of purchase, or,
in the case of instruments that are not rated or are rated by other agencies
(i.e., Fitch Investors Service, Inc., Duff & Phelps, Inc., etc.) are deemed by
the Advisers to be of similar quality. Money market securities will have a
minimum short-term rating of at least A-1 or P-1 by S&P or Moody's,
respectively, or an equivalent rating by other agencies. The Series may continue
to hold such securities if their ratings are reduced after purchase.
The High Quality Bond Series seeks to achieve its investment objective
through investments in the following types of instruments.
U.S. GOVERNMENT AND AGENCY SECURITIES. The Series may invest in U.S.
Government securities and securities issued or guaranteed by its agencies
or instrumentalities. See "U.S. Government and Agency Securities" above
under Money Market Series.
The 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.
CORPORATE BONDS. The Series may purchase public or private corporate bonds,
issued by domestic or foreign issuers, that meet the Series' minimum credit
quality criteria at the time of purchase. The corporate bond market is
customarily subdivided into several segments, which include industrial,
public utility, rail and transportation bonds, and bonds issued by banks
and other financial institutions.
YANKEE BONDS AND EURODOLLAR BONDS. The Series may purchase Yankee and
Eurodollar issues that meet its minimum credit quality standards. Yankee
issues are dollar denominated bonds issued in the United States market by
foreign issuers and are, therefore, subject to SEC regulations. Issuers of
yankee bonds include, among others, foreign corporations, foreign
governments and agencies, and multilateral lending institutions. Eurodollar
bonds are fixed income securities that are denominated in dollars, are
underwritten by an international syndicate, and are sold upon issuance to
non-U.S. investors. U.S.-based investors may purchase eurodollar bonds in
the secondary market after a seasoning period. Eurodollar bonds are not
subject to SEC regulations.
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MORTGAGE PASS-THROUGHS AND COLLATERALIZED MORTGAGE OBLIGATIONS. The Series
may purchase mortgage and mortgage-related securities such as
pass-throughs, collateralized mortgage obligations, and mortgage
derivatives that meet the Series' minimum credit quality criteria
(collectively, "Mortgage Securities"). Mortgage pass-throughs are
securities that pass through to investors an undivided interest in a pool
of underlying mortgages. These may be issued or guaranteed by U.S.
government agencies, or may consist of whole loans originated and issued by
private limited purpose corporations or conduits. Collateralized mortgage
obligation bonds and mortgage derivatives are obligations of special
purpose corporations that are collateralized or supported by mortgages or
mortgage securities such as pass throughs. Principal prepayments on the
underlying mortgages or loans may cause the Mortgage Securities to be
retired substantially earlier than their stated maturities or final
distribution dates, resulting in a loss to the Series of all or part of the
premium, if any, which the Series may pay when investing in Mortgage
Securities.
ASSET-BACKED SECURITIES. The Series may purchase public or private
asset-backed securities of various types, which are fixed income securities
that are collateralized or "backed" by installment receivables (usually
consumer loans) for which some type of credit enhancement is provided.
Asset-backed securities that are eligible for purchase by the Series
include securities backed by automobile receivables, credit card
receivables, home equity loans, manufactured housing loans, business and
recreational vehicle loans, computer leases, and agricultural equipment
loans.
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 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 of Diversified Investors Portfolios (the "Board of
Trustees") to present minimal credit risks and which are of "high quality"
as determined by a major rating service (i.e., rated P-1 by Moody's or A-1
by S&P) 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. The Series may
enter into repurchase agreements and reverse repurchase agreements. See
"Repurchase Agreements and Reverse Repurchase Agreements" above under Money
Market Series.
The High Quality Bond 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 High Quality Bond 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 are considered to be borrowings by the High
Quality Bond Series.
RESTRICTED SECURITIES. The Series may purchase securities in the United
States that are not registered for sale under federal securities laws but
which can be resold to institutions under SEC Rule 144A. Provided that a
dealer or institutional trading market in such securities exists, these
restricted securities are treated as exempt from the Series' 15% limit on
illiquid securities. Under the supervision of the Board of Trustees, the
Advisers determine the liquidity of restricted securities and, through
reports from the Advisers, the Board of Trustees will monitor trading
activity in restricted securities. Because Rule 144A is relatively new, it
is not possible to predict how these markets will develop. If institutional
trading in restricted securities were to decline, the liquidity of the
Series could be adversely affected.
OPTIONS AND FUTURES CONTRACTS. The 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
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selling futures, buying puts, and writing calls, hedge the Series'
investments against price fluctuations. Other strategies, including buying
futures, writing puts and buying calls, tend to increase market exposure.
The 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 Series'
return. The costs of hedging are not reflected in the Series' yield but are
reflected in the Series' total return. The Series could also experience
losses if the Series' 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 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 Series, the Advisers may purchase securities
for the Series on a "when-issued" or on a "forward delivery" basis, which
means that the obligations would be delivered to the Series at a future
date beyond customary settlement time. Under normal circumstances, the
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 Series may also utilize
the following investments and investment techniques and practices:
investments in securities denominated in foreign currencies, options on
futures contracts, foreign currency exchange transactions and options on
foreign currencies. The Series does not intend to utilize any of these
investments or practices to the extent of more than 5% of its assets. See
the Statement of Additional Information for further 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 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
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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. See "Short-Term Instruments" above under the High Quality
Bond Series.
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. Reverse repurchase agreements involve the
risk that the market value of the securities sold by the Intermediate
Government Bond Series may decline below the repurchase price of those
securities. Reverse repurchase agreements are considered to be borrowings
by the Intermediate Government Bond Series.
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. See "Restricted Securities"
above under High Quality Bond 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. See "Options and Futures
Contracts" above under High Quality Bond Series.
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
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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.
See "Delayed Delivery Transactions" above under High Quality Bond Series.
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.
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
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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
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 High Quality 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 longer 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
High Quality 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 High Quality 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 High Quality 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.
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HIGH-YIELD BOND SERIES. The investment objective of the High-Yield Bond
Series is to seek a high level of current income. The High-Yield Bond Series
pursues its investment objective by investing in a diversified portfolio
consisting primarily of high-yielding, fixed-income and zero coupon securities,
such as bonds, debentures and notes, convertible securities and preferred
stocks. The Series may invest all or a substantial portion of its assets in
lower-rated debt securities, commonly referred to as "junk bonds". Such
investments may include foreign securities and obligations issued or guaranteed
by the U.S. government, any of its states or territories, any foreign government
or any of their respective subdivisions, agencies or instrumentalities.
The High-Yield Bond Series normally will invest at least 65% of its assets
in high-yielding, income producing debt securities and preferred stocks,
including convertible and zero coupon securities. Zero coupon securities are
debt securities that pay no cash income but are sold at substantial discounts
from their fact value. Certain zero coupon securities also are sold at
substantial discounts but provide for the commencement of regular interest
payments at a deferred date. The Series may invest up to 35% of its assets in
equity securities, including common stocks, warrants and rights.
Lower-rated debt securities usually are defined as securities rated Ba or
lower by Moody's or BB or lower by S&P. Lower-rated debt securities are
considered speculative and involve greater risk of default or price changes due
to changes in the issuer's creditworthiness than higher-rated securities and are
more sensitive to changes in the issuer's capacity to pay. Investing in
lower-rated debt securities is an aggressive approach to income investing. The
1980s saw a dramatic increase in the use of lower-rated debt securities to
finance highly leveraged corporate acquisitions and restructurings. Past
experience may not provide an accurate indication of future performance of
lower-rated debt securities, especially during period of economic recession. In
fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.
Lower-rated debt securities may be thinly traded, which can adversely
affect the prices at which they can be sold and can result in high transaction
costs. If market quotations are not available, these lower-rated debt securities
will be valued in accordance with standards set by the Board of Trustees,
including the use of outside pricing services. Judgment plays a greater role in
valuing lower-rated debt securities than securities for which more extensive
quotations and last-sale information are available. Adverse publicity and
changing investor perceptions may affect the ability of outside pricing services
used by the Series to value its portfolio securities, and the Series' ability to
dispose of the lower-rated bonds. The market prices of lower-rated debt
securities may decline significantly in periods of general economic difficulty,
which may follow periods of rising interest rates. During an economic downturn
or a prolonged period of rising interest rates, the ability of issuers of
lower-rated debt to service their payment obligations, meet projected goals, or
obtain additional financing may be impaired. The Series may choose, at its own
expense or in conjunction with others, to pursue litigation or otherwise
exercise its rights as a security holder to seek to protect the interests of
security holders if it determines this to be in the interest of Series
investors.
The considerations discussed above for lower-rated debt securities also are
applicable to lower quality unrated debt instruments of all types, including
loans and other direct indebtedness of businesses with poor credit standing.
Unrated debt instruments are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers.
The High-Yield Bond Series may also seek to achieve its investment
objective through investments in the following types of instruments.
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 High Quality Bond Series.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. The High-Yield
Bond Series may enter into repurchase agreements and reverse repurchase
agreements. See "Repurchase Agreements and Reverse Repurchase Agreements"
under Money Market Series. The Series may borrow funds for
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temporary or emergency purposes, such as meeting larger than anticipated
redemption requests, and not for leverage.
RESTRICTED SECURITIES. The High-Yield 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
High Quality Bond Series.
OPTIONS AND FUTURES CONTRACTS. The High-Yield 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 High Quality Bond Series.
The Series currently does not intend to engage in the writing of options,
except 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 High-Yield Bond Series, the Advisers may
purchase securities for the Series on a "when-issued" or on a "forward
delivery" basis which means that the securities would be delivered to the
Series at a future date beyond customary settlement times. See "Delayed
Delivery Transactions" above under High Quality Bond Series.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The High-Yield Bond Series
may also utilize the following investments and investment techniques and
practices: options on futures contracts and options on foreign currencies.
The 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 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.
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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.
EQUITY VALUE SERIES. The investment objective of the Equity Value Series
is to provide a high total investment return through investment in a diversified
portfolio of common stocks. The Equity Value 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 trading at low
valuations relative to market and/or historical levels. These stocks tend to
have relatively low price/earnings ratios and/or relatively low price/book value
ratios. Low price/earnings ratios or price/book value ratios means that the
stock is less expensive than average relative to the company's earnings or book
value, respectively. The Series invests primarily in common stocks listed on the
New York Stock Exchange and on other national securities exchanges and, to a
lesser extent, in stocks that are traded over-the-counter. The 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 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 Portfolio's 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 Portfolio 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.
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
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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.
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.
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,
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and underlying securities values. In selecting stocks, 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.
AGGRESSIVE EQUITY SERIES. The investment objective of the Aggressive
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 Aggressive 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 Aggressive 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, revenue and/or
value, without consideration for current income. The Series' primary equity
investments common stocks of small and medium sized U.S. companies with market
capitalizations between $750 million and $2.5 billion. The 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 Aggressive 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 Aggressive Equity Series' policy is to invest its assets
primarily in common stocks with potential for above average growth in earnings
and/or revenue, 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 Aggressive 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, emphasis is placed on investing in companies with
consistent, above-average and accelerating profitability and growth. These
companies tend to have higher price/earnings ratios which means that the stock
is more expensive than average relative to the company's earnings. 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 Aggressive Equity Fund may be subject to greater declines in
value than an investment in an equity fund investing in the equity securities of
large companies.
INTERNATIONAL EQUITY SERIES. The investment objective of the International
Equity Series is to provide a high level of long-term capital appreciation
through investment in a diversified portfolio of securities of foreign issuers.
The International Equity Series seeks to achieve its investment objective by
investing primarily in foreign securities. Foreign securities are defined as
securities of issuers, wherever organized, which trade solely on a foreign
exchange or over-the-counter market, or, of issuers which in the judgment of the
Advisers, have their principal activities outside of the United States. In
determining whether an issuer's principal activities and interests are outside
the United States, the Advisers will look at such factors as the location of the
issuer's assets, operations, facilities, personnel, sales and earnings. Under
normal circumstances, at least 65% of the assets of the Portfolio are invested
in foreign equity securities. The Advisers will purchase securities of companies
in a minimum of 3 countries outside the United States.
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The Advisers use an approach to investing looking to identify fundamental
values in stocks they select. Further, when allocating the Series' investments
among geographic regions and individual countries, the Advisers consider various
criteria, such as prospects for relative economic growth among countries,
expected levels of inflation, government policies influencing business
conditions, and the outlook for currency relationships. The Series invests most
of its assets in securities of issuers located in developed countries in these
geographic areas: Canada, the Far East, Australia and Europe.
The International Equity Series may invest up to 10% of its assets in
securities of issuers in the world's emerging markets. Countries with emerging
markets include those that have an emerging stock market as defined by the
International Finance Corporation, those with low- to middle-income economies
according to the World Bank, and those listed in World Bank publications as
developing. While the Advisers believe that these investments present the
possibility for significant growth over the long-term, they also entail
significant risks. Many investments in emerging markets can be considered
speculative, and their prices can be much more volatile than those in the more
developed nations of the world. This difference reflects the greater
uncertainties of investing in less established markets and economies.
The International Equity Series may invest in all types of securities, most
of which are denominated in foreign currencies. While the Advisers expect that
opportunities for long term capital appreciation will come primarily from common
stocks, securities convertible into common stock, non-convertible preferred
stocks and depository receipts for these securities, the Series may also invest
in any type or quality of debt securities if the Advisers believe that doing so
may result in long term growth. In addition, the Series may invest in high-
yielding, lower rated debt securities. See the discussion of lower rated debt
securities above under High-Yield Bond Series above. 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 on both a long
and short term basis. 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 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.
Investments in foreign equity and debt securities involve increased or
additional risks from those encountered when investing in securities of domestic
issuers. The Advisers evaluate the risks and opportunities when investing in
particular foreign securities. Such risks include (1) currency fluctuations; (2)
restrictions on, and costs associated with, the exchange of currencies; (3) the
difficulty in obtaining or enforcing a court judgment abroad; (4) reduced levels
of publicly available information concerning issuers; (5) restrictions on
foreign investment in other jurisdictions; (6) reduced levels of governmental
regulation of foreign securities markets; (7) difficulties in effecting the
repatriation of capital invested abroad; (8) difficulties in transaction
settlements and the effect of this delay on shareholder equity; (9) foreign
withholding taxes; (10) political, economic, and similar risks, including
expropriation and nationalization; (11) different accounting, auditing, and
financial standards; (12) price volatility; and (13) the diverse structure and
liquidity of various countries and regions.
INVESTMENT TECHNIQUES AND RESTRICTIONS
INVESTMENT TECHNIQUES FOR THE BALANCED SERIES, EQUITY INCOME SERIES, EQUITY
VALUE SERIES, GROWTH & INCOME SERIES, EQUITY GROWTH SERIES SPECIAL EQUITY
SERIES, AGGRESSIVE EQUITY SERIES AND INTERNATIONAL EQUITY SERIES.
OPTIONS AND FUTURES CONTRACTS. Each Series may enter into transactions in
futures contracts, options on futures contracts, options on securities indexes
and options on securities, for the purpose of hedging each Series' securities,
which would have the effect of reducing the volatility of its net asset value.
In general, each such transaction involves the establishment of a position which
is expected to move in a direction opposite to that of the security or
securities being hedged.
For example, each Series may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of
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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,
Equity Value Series, Growth & Income Series, Equity Growth Series, Special
Equity Series, Aggressive Equity Series and International 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 High
Quality Bond Series.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the
Balanced Series, Equity Income Series, Equity Value Series, Growth & Income
Series, Equity Growth Series, Special Equity Series, Aggressive Equity Series
and International 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,
Equity Value Series, Growth & Income Series, Equity Growth Series, Special
Equity Series, Aggressive Equity Series and International 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
High Quality Bond Series.
DELAYED DELIVERY TRANSACTIONS. In order to help insure the availability of
suitable securities for each of the Balanced Series, Equity Income Series,
Equity Value Series, Growth & Income Series, Equity Growth Series, Special
Equity Series, Aggressive Equity Series and International Equity Series, the
Advisers may purchase securities for each such Series on a "when-issued" or on a
"forward delivery" basis. See "Delayed Delivery Transactions" above under High
Quality Bond Series.
Changes to the securities of each Series are generally made without regard
to the length of time a security has been held, or whether a sale would result
in the recognition of a profit or loss. Therefore, the rate of portfolio
turnover is not a limiting factor to trading when such trading is deemed
appropriate. Each
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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 TECHNIQUES FOR THE BALANCED SERIES, EQUITY INCOME SERIES, EQUITY
VALUE SERIES, GROWTH & INCOME SERIES, EQUITY GROWTH SERIES, SPECIAL EQUITY
SERIES AND AGGRESSIVE EQUITY SERIES. 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 such 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.
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
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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 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
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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
High Quality Bond Series Merganser Capital Management 0.35 (2)
Corporation
Intermediate Government Bond Series Capital Management Group 0.35 0.15
Government/Corporate Bond Series Capital Management Group 0.35 0.15
High-Yield Bond Series Delaware Investment Advisers 0.55 (3)
Balanced Series Institutional Capital Corporation 0.45 (4)
Equity Income Series Asset Management Group 0.45 0.25
Equity Value Series Ark Asset Management Co., Inc. 0.57 (5)
Growth & Income Series Putnam Advisory Company, Inc. 0.60 (6)
Equity Growth Series Chancellor LGT Asset Management, 0.62 (7)
Inc.
Special Equity Series (8) 0.80 0.50
Aggressive Equity Series McKinley Capital Management Inc. 0.97 (9)
International Equity Series Capital Guardian Trust Company 0.75 (10)
</TABLE>
- ---------------
(1) The Adviser is currently waiving a portion of its fee. See "Fees and
Expenses" on page 6 for a discussion of the fee waivers currently in
effect.
(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) 0.40% on the first $20,000,000 in assets, 0.30% on the next $20,000,000 in
assets and 0.20% on assets in excess of $40,000,000.
(4) 0.55% on the first $25,000,000 in assets, 0.45% on the next $25,000,000 in
assets and 0.35% on assets in excess of $50,000,000.
(5) 0.45% on the first $100,000,000 in assets, 0.40% on the next $50,000,000 in
assets and 0.35% on the next $50,000,000 in assets; when the Portfolio
achieves $200,000,000 in assets, the rate shall be 0.40% on assets up to
$200,000,000 and 0.35% on assets in excess of $200,000,000 so long as the
Portfolio continues to have more than $200,000,000 in assets.
(6) 0.30% on the first $100,000,000 in assets, 0.20% on assets in excess of
$100,000,000.
(7) 0.50% on the first $50,000,000 in assets, 0.30% on the next $75,000,000 in
assets, 0.25% on the next $75,000,000 in assets; and 0.20% on assets in
excess of $200,000,000.
(8) The Special Equity Portfolio has four Subadvisers: Pilgrim Baxter &
Associates, Ltd.; Ark Asset Management Co., Inc.; Liberty Investment
Management, Inc.; and Westport Asset Management, Inc.
(9) 0.90% on the first $10,000,000 in assets, 0.80% on the next $15,000,000 in
assets, 0.60% on the next $25,000,000 in assets, 0.40% on the next
$50,000,000 in assets and 0.35% on assets in excess of $100,000,000.
(10) 0.75% on the first $25,000,000 in assets, 0.60% on the next $25,000,000 in
assets, 0.425% on the next $200,000,000 in assets and 0.375% on all assets
in excess of $250,000,000.
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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.
Diversified has entered into a Subadvisory Agreement with respect to the
High Quality Bond Series with Merganser Capital Management Corporation
("Merganser"). Merganser was formed in September 1987 and is owned by certain of
its employees. Total assets under management for all institutional bond clients
at December 31, 1996 were approximately $2.1 billion, $197.3 million of which
were assets of registered investment companies. The principal business address
of Merganser is One Cambridge Center, Cambridge, Massachusetts 02142. Investment
management decisions of Merganser are made by committee and not by managers
individually.
Diversified has entered into separate Subadvisory Agreements with respect
to each of the Money Market Series, Intermediate Government Bond Series and
Government/Corporate Bond Series with Capital Management Group, a division of
1740 Advisers, Inc., a wholly-owned subsidiary of MONY. The address of Capital
Management Group is 1740 Broadway, New York, New York 10019. Total assets under
management by Capital Management Group at December 31, 1996 were approximately
$890 million, of which $890 million were assets of registered investment
companies. The following persons are primarily responsible for the day-to-day
management of the Portfolios (the inception date of such person's responsibility
for the Portfolios and such person's experience for the past five years is
indicated parenthetically -- Money Market Portfolio -- David Wheeler, Investment
Vice President (since 1997, employed by Capital Management group since 1994,
previously employed at AIG Investment Advisors; Intermediate Government Bond
Portfolio and Government/Corporate Bond Portfolio -- Gregory Staples, Vice
President (since 1996 and 1994, respectively, employed by Capital Management
Group since 1987).
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Income Series with Asset Management Group, a division of 1740 Advisers,
Inc. a wholly-owned subsidiary of MONY. The address of Asset Management Group is
1740 Broadway, New York, New York 10019. Total assets under management by Asset
Management Group at December 31, 1996 were approximately $1.3 billion, $1.1
million of which were assets of registered investment companies. Investment
management decisions of Asset Management Group are made by committee and not by
managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
High-Yield Bond Series with Delaware Investment Advisers (a division of Delaware
Management Company, Inc.) ("Delaware"). Delaware was formed in February 1985 and
is owned by Lincoln National Corp. Total assets under management for all
high-yield bond clients at December 31, 1996 were approximately $1.9 billion,
$1.3 billion of which were assets of registered investment companies. The
principal business address of Delaware is 2005 Market Street, Philadelphia,
Pennsylvania 19103. The following person is primarily responsible for the
day-to-day management of the High-Yield Bond Portfolio (the inception date of
such person's business experience for the past five years is indicated
parenthetically); Paul Matlack, Vice President/Senior Portfolio Manager (since
1996, employed by Delaware since 1989).
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, 1996 were approximately $579 million, $183 million 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
Equity Value Series with Ark Asset Management Co., Inc. ("Ark"). Ark was formed
in July 1989 and is owned by Ark Asset Holdings, Inc.
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Ark Assets Holdings, Inc. is owned by certain of the employees. The principal
address of Ark is 55 Water Street, New York, NY 10041. Total assets under
management for equity value clients at December 31, 1996 were approximately
$14.4 billion, $150 million of which were assets of registered investment
companies. Investment management decisions of Ark are made by committee and not
by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Growth & Income Series with Putnam Advisory Company, Inc. ("Putnam"). Putnam was
formed in 1937 and is owned by Marsh & McLennon Companies, Inc. The principal
address of Putnam is One Post Office Square, Boston, MA 02109. Total assets
under management for growth and income clients at December 31, 1996 were
approximately $6.0 billion, $1.8 billion of which were assets of registered
investment companies. Investment management decisions of Putnam are made by
committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Growth Portfolio with Chancellor LGT Asset Management, Inc.
("Chancellor"). Chancellor was formed in 1996 as a result of the merger between
LGT Asset Management, Inc., a wholly-owned subsidiary of Liechtenstein Global
Trust AG ("LGT"), and Chancellor Capital Management, Inc., a wholly-owned
subsidiary of LGT which was acquired by LGT in 1996. Chancellor is a
wholly-owned subsidiary of LGT. LGT is controlled by the Prince of Liechtenstein
Foundation, which serves as the parent organization for the various business
enterprises of the Princely Family of Liechtenstein. Total assets under
management for all equity growth clients at December 31, 1996 were approximately
$2.1 billion, none of which were assets of registered investment companies. The
principal business address of Chancellor is 1166 Avenue of the Americas, New
York, NY 10036. Investment management decisions of Chancellor are made by
committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Aggressive Equity Portfolio with McKinley Capital Management, Inc. ("McKinley").
McKinley was formed in March 1991 and is owned by Robert Gilliam. Total assets
under management for all aggressive equity clients at December 31, 1996 were
approximately $814 million, 16 million of which were assets of registered
investment companies. The principal business address of McKinley is 3301 C
Street, Anchorage, Alaska 99503. The following person is primarily responsible
for the day-to-day management of the Aggressive Equity Portfolio (the inception
date of such person's responsibility for the Portfolio and such person's
business experience for the past five years is indicated parenthetically):
Robert Gilliam, Portfolio Manager (since 1996, employed by McKinley since 1991).
Diversified has entered into a Subadvisory Agreement with respect to the
International Equity Portfolio with Capital Guardian Trust Company ("CGTC").
CGTC was formed in 1968 and is owned by The Capital Group Companies, Inc. The
principal address of CGTC is 333 South Hope Street, Los Angeles, California
90071. Total assets under management for all international equity clients by
CGTC at December 31, 1996 were approximately $21.8 billion, and total assets
under management of registered investment companies for which CGTC acts as
subadviser was $472 million as of that date. CGTC uses a system of multiple
portfolio managers pursuant to which the Portfolio is divided into segments that
are assigned to individual portfolio managers. With investment guidelines, each
portfolio manager makes individual decisions as to company, country, industry,
timing and percentage based on extensive field research and direct company
contact.
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 Ark Asset Holdings, Inc. Ark Asset Holdings, Inc. is owned by
certain of its employees. Total assets under management for all small
capitalization clients at December 31, 1996 were approximately $1.9
billion, $75 million of which were assets of registered investment
companies. The principal business address of Ark is 55 Water Street, New
York, NY 10041.
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- Liberty Investment Management, Inc. ("Liberty"), a division of Goldman
Sachs Asset Management ("GSAM"), was established in January 1997 when
Goldman, Sachs and Co. acquired Liberty Investment Management, Inc. GSAM
is a separate operating division of Goldman, Sachs & Co., a worldwide
investment banking firm. Total assets under management for all equity
clients of Liberty at January 27, 1997 were approximately $37.8 billion,
$5.2 billion of which were assets of registered investment companies. The
principal business address of Liberty is 2502 Rocky Point Drive, Suite
500, Tampa, Florida 33607. The following persons are primarily
responsible for the day-to-day management of the Special Equity Portfolio
on behalf of Liberty (the inception date of each person's responsibility
for the Portfolio and such person's business experience for the past five
years is indicated parenthetically): Herbert E. Ehlers, Managing Director
(since 1994, employed by Liberty or its predecessor Liberty Investment
Management, Inc. since 1988) and Timothy G. Ebright, Portfolio Manager
(since 1994, employed by Liberty or its predecessor Liberty or its
predecessor Liberty Investment Management, Inc. since 1988).
- 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 equity clients at
December 31, 1996 were approximately $3.2 billion, $463.7 million of
which were assets of registered investment companies. The principal
business address of Pilgrim is 1255 Drummers Lanes, Wayne, PA 19087. The
following person is primarily responsible for the day-to-day management
of the Special Equity Portfolio on behalf of Pilgrim (the inception date
of such person's responsibility for the Portfolio and such person's
business experience for the past five years is indicated
parenthetically): John Force, Portfolio Manager (since 1994, employed by
Pilgrim since 1992).
- Westport Asset Management, Inc. ("Westport") was formed in July 1993 and
is owned by certain of its employees. Total assets under management for
all equity clients at December 31, 1996 were approximately $860 million,
$278 million of which were assets of registered investment companies. The
principal business address of Westport is 253 Riverside Avenue, Westport,
CT 06880. The following person is primarily responsible for the
day-to-day management of the Special Equity Portfolio on behalf of
Westport (the inception date of such person's responsibility for the
Portfolio and such person's business experience for the past five years
is indicated parenthetically): Andrew Knuth, Portfolio Manager (since
1994, employed by Westport since 1983).
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
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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.
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
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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.
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.
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.
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Investments in each series have no preemptive or conversion rights and are fully
paid and nonassessable, except as set forth below.
Each investor is entitled to a vote in proportion to the amount of its
investment in each series. Investors in a series will vote as a separate class,
except as to voting for election of Trustees of Diversified Investors
Portfolios, as otherwise required by the 1940 Act, or if determined by the
Trustees of Diversified Investors Portfolios to be a matter which affects all
series. As to any matter which does not affect a particular series, only
investors in the one or more affected series are entitled to vote. Diversified
Investors Portfolios is not required and has no current intention of holding
special meetings of investors, but special meetings of investors will be held
when in the judgment of the Trustees of Diversified Investors Portfolios it is
necessary or desirable to submit matters for an investor vote. Changes in
fundamental policies will be submitted to investors for approval. Investors
under certain circumstances (e.g., upon application and submission of certain
specified documents to the Trustees 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 25.
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 auditors, Des
Moines, Iowa. The 1996 financial statements (and the statement of changes in net
assets for the applicable periods ending December 31, 1995) 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.
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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 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.
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TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM PAGE
- -------------------------------------------------------------------------------------- ----
<S> <C>
Independent Accountants............................................................... 2
Sale of Contracts/Principal Underwriter............................................... 2
Texas Optional Retirement Program..................................................... 2
Performance Data...................................................................... 2
Diversified Investors Portfolios...................................................... 3
Investment Objectives, Policies and Restrictions...................................... 3
Determination of Net Asset Value; Valuation of Securities............................. 19
Management of Diversified Investors Portfolios........................................ 21
Independent Accountants............................................................... 23
Capital Stock and Other Securities.................................................... 23
Taxation.............................................................................. 25
Financial Statements of AUSA.......................................................... 26
Appendix.............................................................................. A-1
</TABLE>
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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 _______________________________________________________________________
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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> 67
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
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, 1997 FOR THE
GROUP VARIABLE ANNUITY CONTRACTS ISSUED BY AUSA LIFE INSURANCE COMPANY, INC.
("AUSA") WHICH INVEST IN 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- -------------------------------------------------------------------------------------- ----
<S> <C>
Independent Accountants............................................................... 2
Sale of Contract/Principal Underwriter................................................ 2
Texas Optional Retirement Program..................................................... 2
Performance Data...................................................................... 2
Diversified Investors Portfolios...................................................... 3
Investment Objectives, Policies and Restrictions.................................... 3
Determination of Net Asset Value; Valuation of Securities........................... 19
Management of Diversified Investors Portfolios...................................... 21
Independent Accountants............................................................. 23
Capital Stock and Other Securities.................................................. 23
Taxation............................................................................ 25
Financial Statements of AUSA.......................................................... 26
Appendix.............................................................................. A-1
</TABLE>
<PAGE> 68
INDEPENDENT ACCOUNTANTS
The 1996 and 1995 financial statements of Diversified Investors Variable
Funds and Diversified Investors Portfolios appearing on the following pages have
been audited by Coopers & Lybrand L.L.P., independent accountants, New York, New
York. The financial statements of AUSA appearing on the following pages have
been audited by Ernst & Young LLP, independent auditors, Des Moines, Iowa.
SALE OF CONTRACTS/PRINCIPAL UNDERWRITER
Diversified Investors Securities Corp. ("DISC") is the principal
underwriter and distributor of the Contracts which will be sold by registered
representatives who are also licensed insurance agents of AUSA. The Contracts
may also be sold through other broker-dealers authorized by DISC and applicable
law and who may be insurance agents licensed by an insurance company other than
AUSA. DISC is registered with the Securities and Exchange Commission as a
broker-dealer under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc.
DISC will not receive underwriting commissions. Registration as a
broker-dealer does not mean that the SEC has passed upon the financial standing,
fitness or conduct of any broker or dealer, or upon the merits of any security
offering or upon any other matter relating to the business of any broker or
dealer.
TEXAS OPTIONAL RETIREMENT PROGRAM
Participants in the Texas Optional Retirement Program (the "Program") are
subject to certain restrictions pertaining to redemptions. (See "Restrictions
Under The Texas Optional Retirement Program" in the prospectus). Pursuant to
Rule 6c-7 of the Investment Company Act of 1940, as amended, ("1940 Act"), the
Registrant hereby represents that Rule 6c-7 of the 1940 Act is being relied upon
and that the provisions of paragraphs (a) through (d) of each Rule have been
complied with.
PERFORMANCE DATA
MONEY MARKET SUBACCOUNT
For the seven day period ended December 31, 1996, the yield for the Money
Market Subaccount was -- 4.42% and the effective yield was 4.51%.
The yield is calculated by dividing the result of subtracting the value of
one Unit at the end of the seven day period ("Seventh Day Value") from the value
of one Unit at the beginning of the seven day period ("First Day Value") by the
First Day Value (the resulting quotient being the "Base Period Return") and
multiplying the Base Period Return by 365 divided by 7 to obtain the annualized
yield.
The effective yield is calculated by compounding the Base Period Return
calculated in accordance with the preceding paragraph, adding 1 to Base Period
Return, raising that sum to a power equal to 365 divided by 7 and subtracting 1
from the result.
As the Money Market Subaccount invests only in the Money Market Series (the
"Money Market Series") of Diversified Investors Portfolios, the First Day Value
reflects the net asset value of the interest in the Money Market Series held in
the Money Market Subaccount. The Seventh Day Value reflects increases or
decreases in the net asset value of the interest in the Money Market Series held
in the Money Market Subaccount due to the declaration of dividends, net
investment income and the daily charges and deductions from the Subaccount for
mortality and expense risk. Net investment income reflects earnings on
investments less expenses of the Money Market Series including the investment
management fee.
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DIVERSIFIED INVESTORS PORTFOLIOS
The thirteen series of Diversified Investors Portfolios which are described
in this Statement of Additional Information 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 High Quality
Bond Portfolio (the "High Quality Bond 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 High-Yield Bond
Series (the "High-Yield Bond Series"), Diversified Investors Balanced Portfolio
(the "Balanced Series"), Diversified Investors Equity Income Portfolio (the
"Equity Income Series"), Diversified Investors Equity Value Portfolio (the
"Equity Value Series"), Diversified Investors Growth & Income Portfolio (the
"Growth & Income Series"), Diversified Investors Equity Growth Portfolio (the
"Equity Growth Series"), Diversified Investors Special Equity Portfolio (the
"Special Equity Series"), Diversified Investors Aggressive Equity Portfolio (the
"Aggressive Equity Series") and Diversified Investors International Equity
Portfolio (the "International Equity Series"). These 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.
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Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to 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.
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.
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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 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.
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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. 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
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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 ("ETD"), which are U.S. dollar-denominated deposits in a foreign branch
of a foreign or domestic bank, and Canadian time deposits, which are essentially
the same as ETDs except they are issued by branches of major Canadian banks;
high quality, U.S. dollar-denominated short-term bonds and notes (including
variable amount master demand notes) issued by foreign corporations including
Canadian commercial paper, which is commercial paper issued by a Canadian
corporation or a Canadian counterpart of a U.S. corporation, and Europaper,
which is U.S. dollar-denominated commercial paper of a foreign issuer; and U.S.
dollar-denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Adviser to be of comparable quality
to the other obligations in which the Money Market Series may invest. Such
securities also include debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
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FOREIGN SECURITIES -- SERIES OTHER THAN MONEY MARKET SERIES
Not more than 5% of a Series' assets may be invested in closed-end
investment companies which primarily hold foreign securities. Investments in
such companies may entail the risk that the market value of such investments may
be substantially less than their net asset value and that there would be
duplication of investment management and other fees and expenses.
Securities of foreign issuers include investments in sponsored American
Depository Receipts ("ADRs"). ADRs are depository receipts for securities of
foreign issuers and provide an alternative method for a Series to make foreign
investments. These securities will not be denominated in the same currency as
the securities into which they may be converted. Generally, ADRs, in registered
form, are designed for use in U.S. securities markets. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying securities.
Each Series may invest in foreign securities that impose restrictions on
transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Because some Series may buy and sell securities denominated in currencies
other than the U.S. dollar and receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, such Series from time to time may enter
into foreign currency exchange transactions to convert to and from different
foreign currencies and to convert foreign currencies to and from the U.S.
dollar. Such Series either enter into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market or use
forward contracts to purchase or sell foreign currencies.
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. With respect to Series other than the
International Equity Series, consideration of the prospect for currency parities
will be incorporated into the Advisers' long-term investment decisions.
Therefore, these 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.
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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 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 THE
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.
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
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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 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.
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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.
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
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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 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
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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.
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.
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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.
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.
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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.
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.
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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:
(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); or
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(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.
State and Federal Restrictions. In order to comply with certain state and
federal statutes and policies each Series will not as a matter of operating
policy:
<TABLE>
<C> <S>
(i) borrow money for any purpose in excess of 10% of the Series' total assets (taken
at cost), except that the Series may borrow for temporary or emergency purposes
up to 1/3 of its assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of the Series'
net assets (taken at market value), provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, reverse repurchase agreements, when issued securities and
other similar investment techniques are not considered a pledge of assets for
purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin, except that
such short-term credit as may be necessary for the clearance of purchases and
sales of securities may be obtained and except that deposits of initial deposit
and variation margin may be made in connection with the purchase, ownership,
holding or sale of futures;
(iv) invest for the purpose of exercising control or management;
(v) purchase securities issued by any other investment company except by purchase in
the open market where no commission or profit to a sponsor or dealer results
from such purchase other than the customary broker's commission, or except when
such purchase, though not made in the open market, is part of a plan of merger
or consolidation; provided, however, that securities of any investment company
will not be purchased for a Series if such purchase at the time thereof would
cause (a) more than 10% of the Series' total assets (taken at the greater of
cost or market value) to be invested in the securities of such issuers; (b) more
that 5% of the Series' total assets (taken at the greater of cost or market
value) to be invested in any one investment company; or (c) more than 3% of the
outstanding voting securities of any such issuer to be held for the Series; and
provided further that a Series may not purchase any security from any open-end
investment company;
(vi) purchase securities of any issuer if such purchase at the time thereof would
cause the Series to hold more than 10% of any class of securities of such
issuer, for which purposes all indebtedness of an issuer shall be deemed a
single class and all preferred stock of an issuer shall be deemed a single
class, except that futures or option contracts shall not be subject to this
restriction;
(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 or rights (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
</TABLE>
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<TABLE>
<C> <S>
(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.
(x) 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.
</TABLE>
Policies (i) through (x) may be changed by the Board of Trustees of
Diversified Investors Portfolios.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Portfolio changes are made without regard to the length of time a security
has been held, or whether a sale would result in the recognition of a profit or
loss. Therefore, the rate of portfolio turnover is not a limiting factor when
changes are appropriate. Portfolio trading is engaged in for a Series if the
Advisers believe that a transaction net of costs (including custodian charges)
will help achieve the Series' investment objectives.
A Series' purchases and sales of securities may be principal transactions,
that is, securities may be purchased directly from the issuer or from an
underwriter or market maker for the securities. There usually are no brokerage
commissions paid for such purchases and, therefore, the Series do not anticipate
paying brokerage commissions in such transactions. Any transactions for which a
Series pays a brokerage commission will be effected at the best price and
execution available. Purchases from underwriters of securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and the
asked price.
Allocations of transactions, including their frequency, to various dealers
is determined by the Subadvisers in their best judgement and in a manner deemed
to be in the best interest of the investors in a Series rather than by any
formula. The primary consideration is prompt execution of orders in an effective
manner at the most favorable price.
Investment decisions for a Series will be made independently from those for
any other account or investment company that is or may in the future become
managed by the Advisers or their affiliates. If, however, a Series and other
investment companies or accounts managed by the Subadvisers are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by a Series or the size of the position obtainable for the Series. In
addition, when purchases or sales of the same security for a Series and for
other investment companies managed by the Subadvisers occur contemporaneously,
the purchase or sale orders may be aggregated in order to obtain any price
advantages available to large denomination purchases or sales. 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
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<PAGE> 86
securities having a remaining maturity of sixty days or less when purchased and
debt securities originally purchased with maturities in excess of sixty days but
which currently have maturities of sixty days or less are valued at cost
adjusted for amortization of premiums and accretion of discounts.
Interest rate futures contracts held by a Series are valued on the basis of
closing market quotations, which are normally available daily. When market
quotations are not readily available, the fair value of these contracts will be
determined in good faith utilizing procedures approved by the Board of Trustees
of Diversified Investors Portfolios.
A determination of value used in calculating net asset value must be a fair
value determination made in good faith utilizing procedures approved by
Diversified Investors Portfolios Board of Trustees. While no single standard for
determining fair value exists, as a general rule, the current fair value of a
security would appear to be the amount which a Series could expect to receive
upon its current sale. Some, but not necessarily all, of the general factors
which may be considered in determining fair value include: (i) the fundamental
analytical data relating to the investment; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Without limiting or including all of the specific factors which may be
considered in determining fair value, some of the specific factors include: type
of security, financial statements of the issuer, cost at date of purchase, size
of holding, discount from market value, value of unrestricted securities of the
same class at the time of purchase, special reports prepared by analysts,
information as to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.
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<PAGE> 87
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>
AGE
(AS OF PRINCIPAL OCCUPATION(S) DURING
NAME AND ADDRESS 11/15/96) PAST 5 YEARS
- --------------------------------- --------- ---------------------------------------------------
<S> <C> <C>
Tom A. Schlossberg*.............. 46 10/92 to present -- President, Chief Executive
(Managing Board Member) Officer and Chairman of the Managing Board,
Diversified Investment Advisors, Inc.; 3/1995 to
present -- President and Director, AUSA Life
Insurance Company, Inc.; 1/93 to 12/93 -- Executive
Vice President, 1/91 to 12/93 -- Senior Vice
President, The Mutual Life Insurance Company of New
York.
Donald E. Flynn*................. 56 1988 to present -- Vice President, AEGON, USA,
(Managing Board Member) Inc., 1988 to present -- Executive Vice President,
AEGON USA Investment Management, Inc.; 1988 to
present -- Vice President, AEGON USA Managed
Portfolios, Inc.
Neal M. Jewell................... 61 1/1995 to present -- Consultant; 11/1991 to
(Managing Board Member) 1/1995 -- Executive Vice President, 12/1990 to
355 Thornridge Drive 10/1991 -- Director of Overseas Pensions, American
Stamford, CT 06903 International Group Asset Management.
Eugene M. Mannella............... 42 8/1993 to present -- Vice President, Investment
(Managing Board Member) Management Services Inc.; 5/1986 to
2 Orchard Neck Road 5/1993 -- Senior Vice President, Lehman Brothers,
Center Moriches, New York 19934 Inc.
Patricia L. Sawyer............... 46 1/1995 to present -- Partner, Smith & Sawyer;
(Managing Board Member) 7/1990 to 1/1995 -- Executive Vice President and
256 East 10th Street Director, Robert L. Smith & Co.; 9/1988 to
New York, New York 10014 7/1990 -- Vice President, American Express.
Robert F. Colby.................. 41 1/1993 to present -- Vice President and General
Counsel, Diversified Investment Advisors Inc.;
3/1995 to present -- Vice President and Assistant
Secretary, AUSA Life Insurance Company, Inc.;
11/1993 to present -- Vice President, Diversified
Investors Securities Corp.; 4/1990 to 12/1993 --
Secretary, Vice President and Chief Corporate
Counsel, The Mutual Life Insurance Company of New
York.
Alfred C. Sylvain................ 45 11/1993 to present -- Vice President, Treasurer and
Assistant Secretary, Diversified Investment
Advisors, Inc.; 11/1993 to present -- Treasurer,
Diversified Investors Securities Corp.; 1/1991 to
12/1993 -- Vice President, The Mutual Life
Insurance Company of New York.
John F. Hughes................... 55 12/1993 to present -- Vice President and Senior
Counsel, Diversified Investment Advisors, Inc.;
8/1995 to present -- Vice President and Assistant
Secretary, AUSA Life Insurance Company, Inc.;
11/1993 to present -- Assistant Secretary,
Diversified Investors Securities Corp.; 1/1988 to
11/1993 -- Assistant Secretary, Senior Counsel, The
Mutual Life Insurance Company of New York.
</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."
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<PAGE> 88
For the fiscal year ended December 31, 1996, the Diversified Investors
Portfolios provided the following compensation to its trustees.
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF BENEFITS UPON COMPLEX PAID
NAME OF PERSON, POSITION FROM REGISTRANT FUND EXPENSES RETIREMENT TO 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. Mannella................. $10,000 None N/A $ 10,000
Trustee
Patricia L. Sawyer................. $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.
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 each Subadviser's fees are described in 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
22
<PAGE> 89
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 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) audit of the annual financial statements, (ii) assistance and
consultation with respect to the preparation of filings with the Securities and
Exchange Commission and (iii) preparation of annual income tax returns.
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 interests in one or more
Series. Currently there are eleven 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.
23
<PAGE> 90
Investors in a Series are entitled to participate pro rata in distributions
of taxable income, loss, gain and credit of their respective Series only. Upon
liquidation or dissolution of a Series, investors are entitled to share pro rata
in that Series' (and no other Series) net assets available for distribution to
its investors. Diversified Investor Portfolios reserves the right to create and
issue additional Series of beneficial interest, in which case the beneficial
interests in each new Series would participate equally in the earnings,
dividends and assets of that particular Series only (and no other Series). Any
property of Diversified Investors Portfolios is allocated and belongs to a
specific Series to the exclusion of all other Series. All consideration received
by Diversified Investors Portfolios for the issuance and sale of beneficial
interests in a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings and proceeds
thereof, and any funds or payments derived from any reinvestment of such
proceeds, is held by the Trustees of Diversified Investors Portfolios in a
separate subtrust (a Series) for the benefit of investors in that Series and
irrevocably belongs to that Series for all purposes. Neither a Series no
investors in that Series possess any right to or interest in the assets
belonging to any other Series.
Investments in a Series have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Investments in a Series may not be transferred.
Each investor is entitled to a vote in proportion to the amount of its
investment in each Series. Investors in a Series do not have cumulative voting
rights, and investors holding more than 50% of the aggregate beneficial
interests in all outstanding Series may elect all of the Trustees if they choose
to do so and in such event other investors would not be able to elect any
Trustees. Investors in each Series will vote as a separate class except as to
voting for the election of Trustees, as otherwise required by the 1940 Act, or
if determined by the Trustees to be a matter which affects all Series. As to any
matter which does not affect the interest of a particular Series, only investors
in the one or more affected Series are entitled to vote. Diversified Investors
Portfolios is not required and has no current intention of holding annual
meetings of investors, but will hold special meetings of investors when in the
judgment of Trustees it is necessary or desirable to submit matters for an
investor vote. The Declaration of Trust may be amended without the vote of
investors, except that investors have the right to approve by 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
24
<PAGE> 91
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.
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
25
<PAGE> 92
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 Contracts and should not be considered as bearing on the investment
performance of the assets held in the Diversified Investors Variable Funds.
26
<PAGE> 93
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.
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.
A-1
<PAGE> 94
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> 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, High Quality Bond, Intermediate Government Bond, Government/Corporate
Bond, Balanced, Equity Income, Equity Value, Growth & Income, Equity Growth,
Special Equity, Aggressive Equity, High Yield Bond, International Equity and
Calvert Subaccounts) (collectively the "Funds") as of December 31, 1996, and the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. 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, 1996, the results of their operations, the changes in
their net assets, and the financial highlights for the periods referred to
above, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
February 12, 1997
F-1
<PAGE> 96
DIVERSIFIED INVESTORS VARIABLE FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
---------------------------------------------------------------------------------------------------
MONEY HIGH INTERMEDIATE GOVERNMENT/ EQUITY
MARKET QUALITY BOND GOVERNMENT BOND CORPORATE BOND BALANCED INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ------------ --------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in the
Funds, at value
(Notes 1 and 2)...... $22,271,137 $207,922 $19,219,275 $16,350,201 $95,789,209 $258,941,870
Receivable for
subscribed units..... 127,494 -- 15,538 34,532 223,895 303,953
Receivable from AUSA... 81,203 6 -- -- -- 109,657
----------- -------- ----------- ----------- ----------- ------------
Total assets...... 22,479,834 207,928 19,234,813 16,384,733 96,013,104 259,355,480
----------- -------- ----------- ----------- ----------- ------------
LIABILITIES:
Payable for redeemed
units................ 351,247 -- 1,509 14,966 159,976 534,108
Accrued expenses....... 94,696 175 15,160 12,820 74,989 312,888
----------- -------- ----------- ----------- ----------- ------------
Total
liabilities..... 445,943 175 16,669 27,786 234,965 846,996
----------- -------- ----------- ----------- ----------- ------------
Net assets
attributable to
annuity contract
holders......... $22,033,891 $207,753 $19,218,144 $16,356,947 $95,778,139 $258,508,484
=========== ======== =========== =========== =========== ============
Accumulation units... 1,468,262 20,094 1,352,706 813,757 3,889,984 9,797,859
=========== ======== =========== =========== =========== ============
Unit value........... $ 15.01 $ 10.34 $ 14.21 $ 20.10 $ 24.62 $ 26.38
=========== ======== =========== =========== =========== ============
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 97
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
---------------------------------------------------------------------------------------------------------
EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE HIGH INTERNATIONAL
VALUE INCOME GROWTH EQUITY EQUITY YIELD BOND EQUITY CALVERT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ----------- ------------ ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$200,680 $21,589,948 $162,882,443 $44,661,440 $484,050 $2,656 $16,635,559 $22,799,035
293 103,785 311,436 175,250 327,743 -- 75,255 50,561
-- -- 920,983 -- -- -- 27,280 --
-------- ----------- ------------ ------------ -------- ------ ----------- -----------
200,973 21,693,733 164,114,862 44,836,690 811,793 2,656 16,738,094 22,849,596
-------- ----------- ------------ ------------ -------- ------ ----------- -----------
-- 84,502 47,812 -- -- -- 2,120 12,242
147 16,835 1,028,968 33,750 361 2 39,883 17,990
-------- ----------- ------------ ------------ -------- ------ ----------- -----------
147 101,337 1,076,780 33,750 361 2 42,003 30,232
-------- ----------- ------------ ------------ -------- ------ ----------- -----------
$200,826 $21,592,396 $163,038,082 $44,802,940 $811,432 $2,654 $16,696,091 $22,819,364
======== =========== ============ ============ ======== ====== =========== ===========
18,336 1,341,567 5,425,276 2,403,076 81,079 251 1,392,586 1,212,176
======== =========== ============ ============ ======== ====== =========== ===========
$ 10.95 $ 16.09 $ 30.05 $ 18.64 $ 10.01 $10.58 $ 11.99 $ 18.83
======== =========== ============ ============ ======== ====== =========== ===========
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 98
DIVERSIFIED INVESTORS VARIABLE FUNDS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
----------------------------------------------------------------------------------------------------
HIGH GOVERNMENT/
MONEY QUALITY INTERMEDIATE CORPORATE EQUITY EQUITY
MARKET BOND(A) GOVERNMENT BOND BOND BALANCED INCOME VALUE(B)
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------- ------------ --------------- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Allocated net investment
income (loss) from
Diversified Investors
Portfolios (Note 2)..... $890,356 $2,057 $ 1,058,560 $ 903,336 $ 2,702,140 $ 6,651,607 $ 723
Dividend Income........... -- -- -- -- -- -- --
-------- ------ ---------- --------- ----------- ----------- -------
Total Investment
Income (loss).... 890,356 2,057 1,058,560 903,336 2,702,140 6,651,607 723
-------- ------ ---------- --------- ----------- ----------- -------
Expenses (Note 3)
Mortality and expense
risk.................. 157,923 310 169,865 129,134 718,333 2,025,073 398
Less expenses reimbursed
by AUSA............... 54,173 6 -- -- -- 20,714 --
-------- ------ ---------- --------- ----------- ----------- -------
Net expenses............ 103,750 304 169,865 129,134 718,333 2,004,359 398
-------- ------ ---------- --------- ----------- ----------- -------
Net investment income
(loss).................. 786,606 1,753 888,695 774,202 1,983,807 4,647,248 325
-------- ------ ---------- --------- ----------- ----------- -------
Realized and unrealized
gains (losses) on
investments (Note 2)
Net realized gains
(losses) on
investments........... (967) (28) (121,220) (28,454) 8,670,042 10,312,373 3,638
Net realized gains on
foreign currency
transactions.......... -- -- -- -- -- -- --
Net change in unrealized
appreciation
(depreciation) on
investments........... -- (114) (263,124) (349,848) 1,420,970 21,307,344 7,981
Net change in unrealized
appreciation in
translation of assets
and liabilities in
foreign currency...... -- -- -- -- -- -- --
-------- ------ ---------- --------- ----------- ----------- -------
Net realized and
unrealized gains
(losses) on
investments........... (967) (142) (384,344) (378,302) 10,091,012 31,619,717 11,619
-------- ------ ---------- --------- ----------- ----------- -------
Net increase in net assets
resulting from
operations.............. $785,639 $1,611 $ 504,351 $ 395,900 $12,074,819 $36,266,965 $ 11,944
======== ====== ========== ========= =========== =========== =======
</TABLE>
- ---------------
(a) Commencement of operations August 20, 1996
(b) Commencement of operations May 10, 1996
(c) Commencement of operations October 18, 1996
See Notes to Financial Statements
F-4
<PAGE> 99
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
-------------------------------------------------------------------------------------
HIGH
GROWTH & EQUITY SPECIAL AGGRESSIVE YIELD INTERNATIONAL
INCOME GROWTH EQUITY EQUITY(B) BOND(A) EQUITY(C) CALVERT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ------------ ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 130,675 $ (530,445) $ 70,014 $ (1,055) $ 41 $ 7,919 $ --
-- -- -- -- -- -- 494,150
---------- ----------- ---------- ------- --- -------- ----------
130,675 (530,445) 70,014 (1,055) 41 7,919 494,150
---------- ----------- ---------- ------- --- -------- ----------
119,047 1,233,689 250,588 1,382 5 28,359 181,821
-- 548,086 -- -- -- 27,280 --
---------- ----------- ---------- ------- --- -------- ----------
119,047 685,603 250,588 1,382 5 1,079 181,821
---------- ----------- ---------- ------- --- -------- ----------
11,628 (1,216,048) (180,574) (2,437) 36 6,840 312,329
---------- ----------- ---------- ------- --- -------- ----------
1,383,983 37,735,857 3,824,321 20,659 (3) 58,468 1,401,094
-- -- -- -- -- 670 --
1,044,969 (14,536,275) 1,991,372 20,953 52 541,093 542,684
-- -- -- -- -- 26,241 --
---------- ----------- ---------- ------- --- -------- ----------
2,428,952 23,199,582 5,815,693 41,612 49 626,472 1,943,778
---------- ----------- ---------- ------- --- -------- ----------
$ 2,440,580 $ 21,983,534 $ 5,635,119 $ 39,175 $ 85 $ 633,312 $ 2,256,107
========== =========== ========== ======= === ======== ==========
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 100
DIVERSIFIED INVESTORS VARIABLE FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
--------------------------------------------------------------------------------
MONEY HIGH INTERMEDIATE GOVERNMENT/
MARKET QUALITY BOND(A) GOVERNMENT BOND CORPORATE BOND BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ --------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss).... $ 786,606 $ 1,753 $ 888,695 $ 774,202 $ 1,983,807
Net realized gains (losses) on
investments.................. (967) (28) (121,220) (28,454) 8,670,042
Net realized gains on foreign
currency transactions........ -- -- -- -- --
Net change in unrealized
appreciation (depreciation)
on investments............... -- (114) (263,124) (349,848) 1,420,970
Net change in unrealized
appreciation in translation
of assets and liabilities in
foreign currency............. -- -- -- -- --
----------- -------- ----------- ----------- ------------
Net increase in net assets
resulting from operations.... 785,639 1,611 504,351 395,900 12,074,819
----------- -------- ----------- ----------- ------------
From unit transactions (Note 4):
Net proceeds from the issuance
of units..................... 18,705,523 207,031 3,541,470 6,036,854 31,385,404
Net asset value of units
redeemed..................... (12,143,061) (889) (2,994,353) (2,610,511) (11,693,397)
----------- -------- ----------- ----------- ------------
Net increase in net assets from
unit transactions............ 6,562,462 206,142 547,117 3,426,343 19,692,007
----------- -------- ----------- ----------- ------------
Net increase in net assets........ 7,348,101 207,753 1,051,468 3,822,243 31,766,826
Net assets:
Beginning of year............... 14,685,790 -- 18,166,676 12,534,704 64,011,313
----------- -------- ----------- ----------- ------------
End of year..................... $ 22,033,891 $ 207,753 $19,218,144 $ 16,356,947 $ 95,778,139
=========== ======== =========== =========== ============
Units outstanding beginning of
year............................ 1,023,590 -- 1,313,065 638,648 3,011,719
Units issued during year.......... 1,273,481 20,182 255,494 309,553 1,395,566
Units redeemed during year........ (828,809) (88) (215,853) (134,444) (517,301)
----------- -------- ----------- ----------- ------------
Units outstanding end of year..... 1,468,262 20,094 1,352,706 813,757 3,889,984
=========== ======== =========== =========== ============
</TABLE>
- ---------------
(a) Commencement of operations August 20, 1996
(b) Commencement of operations May 10, 1996
(c) Commencement of operations October 18, 1996
See Notes to Financial Statements
F-6
<PAGE> 101
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
- ----------------------------------------------------------------------------------------------------------------------------------
EQUITY EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE HIGH INTERNATIONAL
INCOME VALUE(B) INCOME GROWTH EQUITY EQUITY(B) YIELD BOND(A) EQUITY(C)
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ---------- ----------- ------------ ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 4,647,248 $ 325 $ 11,628 $ (1,216,048) $ (180,574) $ (2,437) $ 36 $ 6,840
10,312,373 3,638 1,383,983 37,735,857 3,824,321 20,659 (3) 58,468
-- -- -- -- -- -- -- 670
21,307,344 7,981 1,044,969 (14,536,275) 1,991,372 20,953 52 541,093
-- -- -- -- -- -- -- 26,241
------------ -------- ----------- ------------ ----------- --------- ------ -----------
36,266,965 11,944 2,440,580 21,983,534 5,635,119 39,175 85 633,312
------------ -------- ----------- ------------ ----------- --------- ------ -----------
59,161,388 192,774 16,612,548 46,898,876 32,279,680 1,048,582 2,569 16,825,207
(27,323,483 (3,892) (2,628,407) (19,938,284) (3,986,502) (276,325) -- (762,428)
------------ -------- ----------- ------------ ----------- --------- ------ -----------
31,837,905 188,882 13,984,141 26,960,592 28,293,178 772,257 2,569 16,062,779
------------ -------- ----------- ------------ ----------- --------- ------ -----------
68,104,870 200,826 16,424,721 48,944,126 33,928,297 811,432 2,654 16,696,091
190,403,614 -- 5,167,675 114,093,956 10,874,643 -- -- --
------------ -------- ----------- ------------ ----------- --------- ------ -----------
$258,508,484 $200,826 $21,592,396 $163,038,082 $44,802,940 $ 811,432 $ 2,654 $16,696,091
============ ======== =========== ============ =========== ========= ====== ===========
8,469,952 -- 388,800 4,460,273 730,748 -- -- --
2,460,954 18,687 1,128,246 1,685,093 1,910,970 109,239 251 1,457,266
(1,133,047 (351) (175,479) (720,090) (238,642) (28,160) -- (64,680)
------------ -------- ----------- ------------ ----------- --------- ------ -----------
9,797,859 18,336 1,341,567 5,425,276 2,403,076 81,079 251 1,392,586
============ ======== =========== ============ =========== ========= ====== ===========
<CAPTION>
- ----
CALVERT
SUBACCOUNT
-----------
<S> <<C>
$ 312,329
1,401,094
--
542,684
--
-----------
2,256,107
-----------
6,114,947
(3,297,471)
-----------
2,817,476
-----------
5,073,583
17,745,781
-----------
$22,819,364
===========
1,052,208
347,620
(187,652)
-----------
1,212,176
===========
</TABLE>
See notes to financial statements.
F-7
<PAGE> 102
DIVERSIFIED INVESTORS VARIABLE FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
------------------------------------------------------
INTERMEDIATE GOVERNMENT/
MONEY GOVERNMENT CORPORATE
MARKET BOND BOND BALANCED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss).............. $ 603,539 $ 746,622 $ 534,158 $ 1,508,248
Net realized gains (losses) on
investments............................ (339) 77,297 50,050 4,286,978
Net change in unrealized appreciation
(depreciation) on investments.......... -- 1,119,694 996,478 5,671,255
----------- ----------- ----------- -----------
Net increase in net assets resulting from
operations............................. 603,200 1,943,613 1,580,686 11,466,481
----------- ----------- ----------- -----------
From unit transactions (Note 4):
Net proceeds from the issuance of units... 12,706,887 11,817,737 6,353,831 32,300,710
Net asset value of units redeemed......... (6,640,069) (2,696,134) (1,845,514) (8,928,089)
----------- ----------- ----------- -----------
Net increase in net assets from unit
transactions........................... 6,066,818 9,121,603 4,508,317 23,372,621
----------- ----------- ----------- -----------
Net increase in net assets.................. 6,670,018 11,065,216 6,089,003 34,839,102
Net assets:
Beginning of year......................... 8,015,772 7,101,460 6,445,701 29,172,211
----------- ----------- ----------- -----------
End of year............................... $14,685,790 $ 18,166,676 $12,534,704 $64,011,313
=========== =========== =========== ===========
Units outstanding beginning of year......... 587,295 580,105 385,881 1,750,876
Units issued during year.................... 911,106 938,737 352,907 1,728,730
Units redeemed during year.................. (474,811) (205,777) (100,140) (467,887)
----------- ----------- ----------- -----------
Units outstanding end of year............... 1,023,590 1,313,065 638,648 3,011,719
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-8
<PAGE> 103
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIOS
------------------------------------------------------------ SCUDDER
EQUITY GROWTH & EQUITY SPECIAL INTERNATIONAL
INCOME INCOME GROWTH EQUITY CALVERT EQUITY
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------ ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,908,701 $ 10,986 $ (96,853) $ (27,026) $ 946,599 $ (31,844)
2,577,701 685,410 2,442,805 850,109 756,235 6,827
37,923,714 (79,577) 12,687,743 705,769 1,631,822 422,407
------------ ---------- ------------ ----------- ----------- ----------
44,410,116 616,819 15,033,695 1,528,852 3,334,656 397,390
------------ ---------- ------------ ----------- ----------- ----------
61,691,825 4,932,557 53,802,815 9,355,594 9,140,477 5,377,149
(22,667,336) (680,846) (15,634,374) (897,441) (2,268,091) (826,569)
------------ ---------- ------------ ----------- ----------- ----------
39,024,489 4,251,711 38,168,441 8,458,153 6,872,386 4,550,580
------------ ---------- ------------ ----------- ----------- ----------
83,434,605 4,868,530 53,202,136 9,987,005 10,207,042 4,947,970
106,969,009 299,145 60,891,820 887,638 7,538,739 1,551,371
------------ ---------- ------------ ----------- ----------- ----------
$190,403,614 $5,167,675 $114,093,956 $10,874,643 $17,745,781 $ 6,499,341
============ ========== ============ =========== =========== ==========
6,344,534 29,489 2,812,266 83,503 575,200 162,316
3,297,278 415,475 2,313,863 711,286 626,721 537,369
(1,171,860) (56,164) (665,856) (64,041) (149,713) (82,257)
------------ ---------- ------------ ----------- ----------- ----------
8,469,952 388,800 4,460,273 730,748 1,052,208 617,428
============ ========== ============ =========== =========== ==========
</TABLE>
See notes to financial statements.
F-9
<PAGE> 104
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, as amended (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 fourteen subaccounts within DIVF which are
available to contract holders of Group Plans, and each invests only in a
corresponding portfolio of Diversified Investors Portfolios (the "Portfolios")
or the Calvert Responsibly Invested Balanced Portfolio, a Series of Acacia
Capital Corporation ("Calvert") (collectively referred to as the "Funds"). The
respective financial statements of the Funds are contained elsewhere in this
report. At December 31, 1996, each DIVF Subaccount's investment in the
corresponding Portfolios was as follows:
<TABLE>
<CAPTION>
PERCENTAGE INVESTMENT IN
SUBACCOUNT PORTFOLIO
------------------------------------- ------------------------
<S> <C>
Money Market......................... 12.04%
High Quality Bond.................... 0.11
Intermediate Government Bond......... 18.65
Government/Corporate Bond............ 5.07
Balanced............................. 36.16
Equity Income........................ 27.06
Equity Value......................... 0.69
Growth & Income...................... 10.40
Equity Growth........................ 54.45
Special Equity....................... 8.80
Aggressive Equity.................... 3.13
High Yield Bond...................... 0.02
International Equity................. 11.23
</TABLE>
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 is stated at net asset value. The DIVF subaccount that invests in
Calvert records its security transactions at the prior day's ending net asset
value per share. Valuation of securities held in each of the Portfolios is
discussed in Note 2A of the Portfolios' Notes to Financial Statements which are
included elsewhere in this report. A description of the portfolio valuation
policy for Calvert can be found in Note A of its financial statements contained
elsewhere in this report.
B. Investment Income:
Each 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
F-10
<PAGE> 105
DIVERSIFIED INVESTORS VARIABLE FUNDS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. Investment Income: (Continued)
determination. Dividend income is recorded on the ex-dividend date. Realized
gains and losses from the sale of investments are determined on the basis of
identified cost.
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 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.
D. Other:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. FEES AND TRANSACTIONS WITH AFFILIATES
Because certain subaccounts of DIVF purchase interests in the Portfolios,
the net assets of those DIVF Subaccounts reflect the investment management fee
charged by Diversified Investment Advisors, Inc. (an affiliate of AUSA), the
investment advisor, which provides investment advice and related services for
the Portfolios.
Daily charges to DIVF for mortality and expense risks assumed by AUSA are
computed at an annual rate of 0.90%; however, AUSA reserves the right to charge
maximum fees of 1.25% upon written notice.
AUSA has voluntarily undertaken to reimburse fees of the Money Market, High
Quality, Equity Income, Equity Growth and International Equity Subaccounts to
the extent necessary, to limit all expenses (other than mortality and expense
risk charges) to 0.10%, 0.15%, 0.47%, 0.60% and 0.18% respectively, of average
net assets. AUSA reserves the right to raise these limits 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 to 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. Assets transferred from MONY pursuant to this
assumption reinsurance transaction for the years ended December 31, 1996 and
1995, were as follows:
F-11
<PAGE> 106
DIVERSIFIED INVESTORS VARIABLE FUNDS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. GROUP PLAN ASSUMPTIONS (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS 1996 AMOUNT 1995 AMOUNT
------------------------------------------------ ----------- -----------
<S> <C> <C>
Money Market.................................... $ 216,407 $1,867,363
Intermediate Government Bond.................... 10,488 8,782,763
Government/Corporate Bond....................... 18,592 1,841,524
Balanced........................................ 14,962 11,617,343
Equity Income................................... 2,378,391 29,614,226
Equity Growth................................... 136,247 19,543,177
Calvert......................................... 4,201 3,908,172
---------- -----------
$2,779,288 $77,174,568
========== ===========
</TABLE>
The amounts related to these assumptions are reflected as proceeds from the
issuance of units in the Statements of Changes in Net Assets.
5. DIVERSIFIED INVESTORS INTERNATIONAL EQUITY PORTFOLIO
On October 18, 1996, the DIVF Scudder International Equity Subaccount fully
redeemed its shares in the Scudder Variable Life Fund, valued at $14,141,959,
and invested the proceeds in the Diversified's Investors
Portfolio -- International Equity Portfolio Subaccount.
F-12
<PAGE> 107
FINANCIAL HIGHLIGHTS
For One Accumulation Unit Outstanding Throughout the Period:
<TABLE>
<CAPTION>
GOVERNMENT/
HIGH INTERMEDIATE CORPORATE
MONEY MARKET QUALITY BOND(A) GOVERNMENT BOND BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------ --------------- ------------------------ ------
1996 1995 1994*+ 1996+ 1996 1995 1994*+ 1996
------ ------ ------ --------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period............. $14.35 $13.65 $13.44 $ 10.00 $13.84 $12.24 $12.33 $19.63
------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss)+++............. 0.66 0.69 0.22 0.19 0.66 0.61 0.24 1.06
Net realized and unrealized gains (losses)
on investments +++......................... -- 0.01 (0.01) 0.15 (0.29) 0.99 (0.33) (0.59)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations............ 0.66 0.70 0.21 0.34 0.37 1.60 (0.09) 0.47
------ ------ ------ ------ ------ ------ ------ ------
Unit value, end of period................... $15.01 $14.35 $13.65 $ 10.34 $14.21 $13.84 $12.24 $20.10
====== ====== ====== ====== ====== ====== ====== ======
Ratio of net investment income to average
net assets (net of reimbursement).......... 4.50% 5.05% 4.65% 5.01% 4.73% 4.81% 5.64% 5.42%
Ratio of expenses to average net assets,
including expenses of the Portfolio (net of
reimbursement) ++.......................... 1.00% 1.01% 1.05% 1.28% 1.30% 1.33% 1.42% 1.29%
Ratio of net investment income to average
net assets ++.............................. 4.19% 4.84% 4.42% 4.99% 4.70% 4.77% 5.64% 5.42%
Ratio of expenses to average net assets,
including expenses of the Portfolio ++..... 1.32% 1.22% 1.27% 1.29% 1.33% 1.38% 1.42% 1.29%
<CAPTION>
BALANCED EQUITY INCOME
SUBACCOUNT SUBACCOUNT
------------------------ ------------------------
1995 1994*+ 1996 1995 1994*+ 1996 1995 1994*+
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period............. $16.70 $16.76 $21.25 $16.66 $16.85 $22.48 $16.86 $17.21
------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss)+++............. 0.97 0.32 0.56 0.59 0.20 0.50 0.50 0.18
Net realized and unrealized gains (losses)
on investments +++......................... 1.96 (0.38) 2.81 4.00 (0.39) 3.40 5.12 (0.53)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations............ 2.93 (0.06) 3.37 4.59 (0.19) 3.90 5.62 (0.35)
------ ------ ------ ------ ------ ------ ------ ------
Unit value, end of period................... $19.63 $16.70 $24.62 $21.25 $16.66 $26.38 $22.48 $16.86
====== ====== ====== ====== ====== ====== ====== ======
Ratio of net investment income to average
net assets (net of reimbursement).......... 5.41% 5.64% 2.49% 3.09% 3.47% 2.07% 2.55% 3.09%
Ratio of expenses to average net assets,
including expenses of the Portfolio (net of
reimbursement) ++.......................... 1.30% 1.36% 1.40% 1.40% 1.47% 1.38% 1.34% 1.44%
Ratio of net investment income to average
net assets ++.............................. 5.42% 5.66% 2.49% 3.07% 3.42% 2.06% 2.50% 3.07%
Ratio of expenses to average net assets,
including expenses of the Portfolio ++..... 1.30% 1.34% 1.40% 1.42% 1.52% 1.39% 1.39% 1.46%
</TABLE>
- ---------------
* For the period August 18, 1994 (commencement of operations) to December 31,
1994
** For the period August 24, 1994 (commencement of operations) to December 31,
1994
+ All Ratios are annualized
++ These ratios have been restated for the years ended 1995 and 1994 to
reflect the expenses and reimbursement of expenses allocated from
the Portfolios
+++ These amounts have been restated for the year ended 1995 to reflect
average shares outstanding
(a) Commencement of operations, August 20, 1996
(b) Commencement of operations, May 10, 1996
(c) Commencement of operations, October 18, 1996
F-13
<PAGE> 108
ECONOMIC AND MARKET REVIEW
Economy The pace of the nation's economic growth slowed in the second half
of 1996. Final third quarter Gross Domestic Product was revised downward to 2.1%
from the previous estimate of 3.2%. While growth for the entire year is expected
to be above the Federal Reserve's targeted range of 2.0-2.25%, the moderate
growth in the second half of the year seems to have calmed the bond market.
Inflation as measured by both the Consumer Price and Producer Price Indices
remained under control despite some volatility attributable to the food and
energy components. As a result, the Federal Reserve left interest rates
unchanged at its November and December Federal Open Market Committee meetings.
The economy is growing at a moderate pace and inflation remains subdued. As
we enter 1997, the debate continues as to whether the economy and inflation are
accelerating, and the Federal Reserve needs to tighten; or whether the economy
is slowing, and the Federal Reserve needs to begin easing to avoid a recession
in 1997. We believe that economic growth and inflation may pick up during 1997.
This could result in higher interest rates as we move into the second quarter
and a possible Federal Reserve tightening.
Bonds Long term interest rates started the quarter at 6.92%. In October
and November the bond market rallied as interest rates fell across most of the
yield curve. The long bond fell to 6.36%, a drop of 56 basis points. The
catalysts for the rally were an economy demonstrating moderate growth,
accommodating Federal policy, and the maintenance of political balance between
Congress and the White House. The rally ended in December as interest rates rose
and the long bond finished the quarter at 6.64%. The decline was prompted by
investors who felt that the market had moved to an over bought level. For the
quarter, the Lehman Brothers Government/Corporate Index rose 3.1% to finish the
year with a return of 2.9%.
Long term interest rates should remain within a range of 6 1/4% to 7% until
there is more evidence that economic growth is either accelerating or slowing
significantly. If the economy slows, bonds will rally as rates drop below the 6%
level toward 5% to 5 1/2%. A more likely scenario is for growth and inflation to
pick up into the second quarter with the Fed eventually tightening. Bonds will
decline as rates move above 7%. Bonds should then rally later in the year as
higher rates slow economic activity.
Stocks U.S. stocks, as measured by the S&P 500 Index, returned a strong
8.3% in the fourth quarter, bringing the return for 1996 to 22.7%. The robust
performance by the market over the past two calendar years has only been matched
twice during the past 50 years. The rapid movement in the market during the
fourth quarter was brought about by generally better than expected earnings
reports for the prior quarter, a declining interest rate environment, and large
amounts of cash flowing into equity mutual funds.
The stock market should continue its upward momentum in early 1997 as the
economy grows moderately and interest rates remain stable. Large cap stocks
should continue to lead the market while international equities lag. Small cap
stocks could bounce back after their sluggish performance in the second half of
1996. As the stock market rallies to more overvalued levels, it becomes
increasingly more vulnerable to earnings disappointments. Only a moderately
growing economy with low inflation and steady to slightly declining interest
rates can sustain a prolonged stock market rally in 1997. More likely stronger
growth will unfold in about the second quarter and will result in a moderate
correction in the stock market.
MONEY MARKET PORTFOLIO
The Federal Reserve appears to have been very pleased with the soft landing
of the economy in 1996 that resulted from their interest rate changes in 1995.
With the one last tweak of interest rates in early 1996, placing the Fed Funds
rate at 5.25%, the Federal Reserve has sat back and watched the economy show
overall moderate growth through the past year. Employment and wages remain
strong, but have not skyrocketed out of control. Consumers have generally been
restrained although somewhat more optimistic in their buying patterns this year
as housing sales were sluggish until rates dropped toward the end of 1996, and
as consumers made only moderate increases in Christmas purchases.
The economy continues on its relatively steady moderate growth path.
Federal Reserve members are watching closely for a turn in the economy one way
or the other but overall, they seem to be relatively happy
F-14
<PAGE> 109
with the current economic course. With no pitfalls in sight, we expect the Fed
to remain steady with interest rates through most of 1997. Late 1997 data may
provide information that will lead to a very modest change in interest rates as
another pre-emptive move by the Fed.
The interest rate curve remains relatively flat. Investors are predicting a
steady course in interest rates by the Federal Reserve. We are therefore
generally running an average portfolio maturity of 45 days, while taking
advantage of market anomalies that periodically occur in one particular maturity
or another. At 12/31/96, the average maturity was 35 days, shorter than usual to
take advantage of the year end spike in short maturity interest rates.
The Portfolio continues to be invested in high quality short-term
instruments, principally commercial paper. Our investment strategy is to
emphasize purchases of 30-90 day maturities to provide flexibility to respond to
any changes in the market place without sacrificing current income. The 30-day
and 7-day current yields of the Portfolio were 5.18% and 5.19%, respectively as
of December 31, 1996, after changes imposed by the Portfolio. Of course, past
performance does not guarantee future investment results.
Investments made in the Money Market Portfolio are not insured nor
guaranteed by the U.S. government. There is no assurance that the Portfolio will
maintain a steady net asset value.
HIGH QUALITY BOND PORTFOLIO
High Quality Bond investors surely saved the best for last in 1996 as the
Portfolio enjoyed its highest quarterly returns of the year. The Merrill Lynch
1-3 Year Treasury Index posted a solid 1.9% return for the three month period,
helping to boost one year returns to 5%. The High Quality Bond Portfolio
outperformed the benchmark every quarter in 1996, culminating in a 5.5% return
for the year.
October opened the quarter with rising bond prices. Leading economic
indicators released during the month suggested a slowdown in economic activity
and benign inflation at both the producer and consumer levels, supporting the
bond market's rally. Economic indicators included an unexpectedly weak
employment report, lower employment costs, and declining housing starts, all
contributing to lower yields by the end of October.
The bond market viewed November's Election Day results favorably, as the
Democrats retained the White House, and Republicans held their majorities in the
House and Senate. Bond investors hoped the political mix would yield continued
slow growth and benign inflation, a mix that has worked nicely for bonds.
Investors were not disappointed as the continued slow growth/benign inflation
scenario fostered rising bond values. November's economic indicators reported a
slowdown in retail sales, a tame Consumer Price Index (CPI) report, and a fifth
straight month of declining existing home sales, driving yields down further.
December dampened the bond market's spirit. Federal Reserve Chairman Alan
Greenspan opened the month suggesting that values of U.S. assets were too high,
leaving investors worried about possible Federal Reserve tightening. Reports of
brisk holiday sales early in December suggested signs of accelerated economic
activity, forcing yields higher. Although the Federal Open Market Committee
(FOMC) left rates unchanged at its December 17th meeting, several month-end
indicators pointed towards accelerated growth. Higher than expected consumer
confidence, combined with a sharp resurgence of existing and new home sales,
contributed to lower bond prices by month end, dampening an overall positive
quarter.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
Bonds, as measured by the Lehman Brothers Intermediate Government Index,
gained 2.3% for the three month period ending December 31, the highest calendar
quarterly return in 1996. The total return for bonds for the year ended December
31, 1996 was 4.1%. In contrast to last year, shorter-term securities generally
outperformed longer-term issues, which were much more affected by the rise in
interest rates over the period. Much of the performance in the fourth quarter
could be attributed to falling interest rates in October and November. There was
a back-up in rates in December due to renewed fears that strong economic
activity would be followed by a pick-up in inflation.
F-14A
<PAGE> 110
The quarter began on a positive note for bond investors, as much of the
data released in October measuring levels of economic activity indicated a
continued slowing from the rapid advance of the second quarter. Reports on new
job creation, which probably raised inflation concerns among bond traders more
than any other indicator throughout the year, were far weaker than anticipated.
Moreover, closely watched measures of employment costs were lower as well.
Together with a drop in consumer confidence levels and slower home sales, bonds
in this sector had their best one month return since May, 1995. November was
similar in that generally weaker than expected economic data, coupled with
favorable inflation readings, pushed bond yields down, resulting in solid
returns for the month. December, however, was not as positive as the previous
two months. Bonds in most sectors posted negative returns. Many of the economic
releases in the last few weeks of the year pointed toward a possible rebound in
activity. Although inflation indicators remained within expectations, many bond
traders feared the prospect of stronger growth would finally cause inflation to
become a problem in the future.
The Portfolio maintained a duration slightly shorter than that of its
benchmark, the Lehman Intermediate Government Bond Index, throughout the fourth
quarter of this year. It is expected to be managed to a duration close to that
of its benchmark over the near term. The Portfolio will continue to eliminate
credit risk by seeking and holding only high quality Government issues.
GOVERNMENT/CORPORATE BOND PORTFOLIO
Although there were significant moves in bond yields this quarter, the
market did not experience the same day-to-day volatility associated with the
third quarter of 1996. Except for the very shortest maturities, bond prices
ended this period higher than where they started, which translated into positive
returns for investors. Bonds in the Lehman Brothers Government/Corporate Index
gained 3.1% for the three months ending December 31, bringing the total return
for 1996 to 2.9%. Returns in October and November were responsible for all of
this quarter's gain, as stronger than expected economic reports in December
caused the market to see negative returns.
Early in the quarter, the bond market continued a rally that began when the
Federal Open Market Committee (FOMC), the policy arm of the Federal Reserve
Bank, decided to leave interest rates unchanged at their September meeting. Bond
prices were bid higher as traders believed the long awaited, but never enacted,
bump-up in rates by the Fed would not happen this year. A hands-off policy by
the Federal Reserve, coupled with lackluster economic data, suggested slower
growth in the months ahead. October returns were the strongest in sixteen
months. In November, the market again saw weaker than expected employment
reports, lower consumer confidence levels, and no rebound in retail sales
figures. No increase in interest rates at the November FOMC meeting and strong
foreign demand for U.S. fixed income securities completed the picture, so that
bonds again had solid returns. There seemed, however, to be a dramatic
turnaround in market sentiment in December. Indicators on housing, employment,
and consumer confidence were all reported higher than anticipated. Continued
favorable inflation readings and a decision to leave rates unchanged at the
Federal Reserve's December meeting couldn't reverse the trend toward higher bond
yields. Returns for the month were negative due to concerns the tight labor
markets could result in wage inflation.
The Portfolio benefited from its overweighting of corporate issues relative
to the Index during the period. Generally, Government issues were not able to
match the returns of most of the corporate sectors. The Portfolio was maintained
at about the same duration as its benchmark index during the quarter, but may
extend relative to the benchmark should yields climb to levels where these bonds
could be considered undervalued.
HIGH YIELD BOND PORTFOLIO
As measured by the Salomon Brothers Cash Pay Index, the high yield bond
market returned 3.7% for the fourth quarter of 1996, beating most other fixed
income indices. For the year, bonds in this sector gained over 10%, more than
doubling the return of most investment-grade bond measures. Heavy investor
demand and a benign economic backdrop supported the advance. Credit quality had
a noticeable impact on return for the
F-14B
<PAGE> 111
quarter. BB-rated issues returned 4.4%, outperforming both the lower quality B's
(3.9%), and lower rated CCC's (-3.1%) during the period.
Despite the compression of spreads during the year, demand for high yield
securities remains strong. Faced with an aging bull market in stocks and a
shortage of high income alternatives, investors have poured cash into high yield
mutual funds at an unparalleled rate. More new monies flowed into high yield
market this year than in any other year. Heavy investor demand and secular low
interest rates have also spurred new high yield issuance into record territory,
with $80 billion of new issues this year. Investor uncertainty regarding the
economy, stocks, and interest rates continues to benefit the high yield bond
market. While individuals in need of high income remain the market's core
constituency, both retail and institutional investors are increasingly embracing
high yield as a refuge. These bonds offer equity-like returns, but have risk
characteristics closer to investment grade debt issues. With a yield roughly
comparable to the long term return on common stocks, low correlation to the
broad stock and bond markets, and a roster of names familiar in most households,
the market is entering the mainstream of investment alternatives. The high yield
market has grown in size from $220 billion in 1991 to about $400 billion as of
year end. These issues now comprise 25% of the total corporate bonds
outstanding.
The outlook for the high yield market remains positive, particularly
relative to other fixed income investments. Investor demand for these securities
is likely to remain strong, especially in light of the recent volatility of the
broader stock and bond markets. The Portfolio remains defensively positioned
with respect to industry exposure, and slightly overweighted in top tier BB
rated issues relative to the Salomon Index.
BALANCED PORTFOLIO
Balanced portfolios, as measured by a 60/40 mix of the S&P 500 and the
Lehman Government/Corporate Index, posted their highest quarterly returns of the
year of 6.3%. Bonds had their strongest return in 1996 due to perceptions of
slowing growth and continued favorable inflation readings over the period.
Equity returns, however, were clearly the determining force for the strong gain
in the Index. As has been true for most of the year, stocks were helped by low
levels of interest rates over the period and a healthy growth in corporate
profits.
Asset allocation and equity sector returns had the greatest impact on the
quarterly results of the Balanced Fund. The Portfolio increased its equity
exposure throughout the quarter. This helped performance relative to the Index
in a period in which equities outperformed bonds. The Portfolio finished the
year with a 62% weighting in stocks, slightly higher than the benchmark's 60%.
Although the S&P 500 returned 8.4% for the quarter, financial and
technology issues gained 13.5% and 13.1% respectively. Financial institutions,
like banks, were positively impacted by lower interest rates over the last three
months. However, bank shares were bid higher more due to their improved balanced
sheets, solid dividend and earnings growth, and the reduction in loan losses.
The Balanced Portfolio was equally weighted versus the Index in this sector.
Individual issues that did well within the Portfolio during the quarter included
Travelers (23.5%) and Citicorp (14.2%).
Technology, up 40%, was the best performing sector of the market this year.
This industry continues to benefit from soaring demand, as companies are more
determined than ever to increase productivity. More than 50% of capital spending
by businesses is now technology related. The Portfolio was slightly
underweighted versus the Index over the quarter. However, impressive returns of
individual issues helped the technology sector to an overall 14.1% gain over the
past three months, with Nokia Corp. (30.2%) and International Business Machines
(22%) leading the way.
EQUITY INCOME PORTFOLIO
In the fourth quarter, equity income investing, as measured by the Lipper
Equity Income Index, posted its best results for the year with a total return of
about 7.5%. This puts the total return for the past year at 17.9% and brings
performance over the past two years to about 53%. The Index thus enjoyed its
best two year
F-14C
<PAGE> 112
period since 1981-1982 when it returned over 60%. However, as in 1995, these
more conservative equity strategies failed to beat the rapidly advancing S&P 500
Index, which returned 23.3% for the year. The key factors behind the market's
advance in the fourth quarter were declining interest rates, fairly strong
corporate profits, and election results which preserved the political status quo
in Washington.
Fourth quarter performance of the Equity Income Portfolio was most
influenced by the technology, energy, and cyclical sectors. The technology
sector was a source of weakness due to a lack of exposure to some of the
sector's best performing industries, such as networking and software companies.
It is difficult to reconcile these types of holdings with the Portfolio's yield
oriented, value strategy, inasmuch as these industries predominantly contain
growth companies which pay little or no dividends.
The energy sector of the Portfolio underperformed due to stock selection.
Holdings in this area are biased toward oil and oil service companies, such as
Mobil, Chevron, and McDermott International, which were negatively impacted by
company specific news. Mobil underperformed following reports that declining
prices for some of its key chemical products, and shutdowns at several U.S.
refineries hurt earnings. Chevron, also hurt by lower chemical prices suffered a
decline in refining profits last quarter. McDermott International shares fell
after the company said it expects to report a fiscal second quarter loss and
could cut its dividend. This company has since been eliminated from the Equity
Income Portfolio.
The cyclical sector enhanced total return, as holdings in auto and rail
stocks rallied sharply. General Motors and Chrysler were both up over 16%. Both
companies announced that third quarter profits more than doubled and easily
topped analyst expectations. Conrail stock appreciated about 40% due to its
pending merger with CSX and was the Portfolio's best performer.
EQUITY VALUE PORTFOLIO
Value investing, as measured by the Russell 1000 Value Index, performed
well in the fourth quarter by posting a 9.8% return. This capped-off a very
strong year as the Index returned 21.6%. The quarter's strong result was largely
attributable to the energy, utility and finance sectors, which comprise
approximately 60% of the Index's total weight. The energy stocks benefited from
the rising cost of crude oil and from generally better than expected earnings
from oil producers and service companies. Investors believe that increased
global demand will add to already strong profit growth. The utility and finance
sectors, which tend to be very interest rate sensitive, ascended due to falling
bond yields. The finance sector also was aided by brokerage and investment
firms, which posted strong earnings.
Performance of the Portfolio was enhanced by the utility and consumer
non-cyclical sectors, while the basic industry and consumer cyclical sectors
detracted from the quarter's performance. The utility sector returned
approximately 13% for the Portfolio and was the best performer for the quarter.
The primary determinants were telephone stocks which bounced back after
underperforming the previous nine months. In an environment where interest rates
are falling, the dividend yield is enhanced making these stocks very attractive
to investors. In addition, Federal regulators moved to allow the regional
telephone companies to continue levying access charges on long distance
providers. Stocks which directly contributed were AT&T Corp., NYNEX Corp., and
GTE Corp.
The consumer non-cyclical sector, dominated by health care related
companies such as HMO's, ethical drug companies and acute care providers,
benefited from the November election as Washington was kept status-quo. A
Republican controlled Congress makes any kind of health care reform less likely.
Now that such a reform is put to rest, investors are confident that managed care
providers will be able to raise premiums more easily and spend less on care,
ultimately helping the bottom line.
The basic industry sector has not had the ability to raise prices and is
also ailing from unsatisfactory levels of demand. Moreover, profits are being
squeezed as rising cost of raw materials, particularly sources of energy, are
causing profit margins to fall. The consumer cyclical sector fell prey to
expectations that economic growth will continue to slow. Retailing in particular
detracted from sector returns since holiday sales were not as robust as
originally anticipated.
F-14D
<PAGE> 113
GROWTH & INCOME PORTFOLIO
Growth & Income investors generally saw their best returns of the year in
the fourth quarter. The Lipper Growth & Income Index returned 7.8% for the
quarter and finished the year with a total return of over 20%. This marks only
the fourth time in the Index's 25 year history that it has gained over 20% for
two consecutive calendar years. Additionally, 1996 results compared favorably
with other investment styles, as measured by the Lipper Equity Income, Growth,
and Small Company Indices. One of the key factors in the relative strength of
Growth & Income funds in general was uncertainty over the state of the economy,
bringing investors' focus towards larger companies with stable earnings growth.
Typically, these companies are prominently represented in Growth & Income funds.
In the fourth quarter, the advance of the equity markets could be attributed to
an accommodative Federal Reserve, good earnings reports, and election results
which preserved the political balance in Washington.
Fourth quarter performance of the Growth & Income Portfolio was mixed as
weakness in the non-cyclical sector was mitigated by strength in the Portfolio's
basic industry and financial stocks. The non-cyclical area was hurt by stock
selection because company specific news on some larger holdings (Clorox and
Nike) was viewed unfavorably by investors. Clorox announced that it plans to
finance its proposed acquisition of Armor All Products with debt issuance. Some
felt that this may hurt its earnings somewhat in the near term. Nike shares
failed to keep pace with the market. Some analysts lowered their estimates for
fiscal second quarter earnings because of rising the company's operating costs.
Nike recently signed golf sensation Tiger Woods to a multimillion dollar
endorsement contract and also opened a new NikeTown store.
The basic industry sector was a source of value added. This can be
attributed to Putnam's strict growth criterion steering the Portfolio away from
the area's worst performing industries. The Portfolio had essentially no
exposure to specialty chemical and/or forest product stocks which were both
generally weak due to poor prospects for earnings growth. Finance stocks within
the Portfolio were particularly strong returning about 15% as a group. This
sector was led by money center banks such as BankAmerica and Citicorp which both
outperformed. These issues continue to benefit from stronger than anticipated
earnings and the positive sentiment created by declining interest rates.
EQUITY GROWTH PORTFOLIO
Growth Fund investing, as measured by the Lipper Growth Fund Index,
finished the year strongly with a fourth quarter total return of 5.8%. This
brings performance for all of 1996 to 17.5%. This performance is generally in
line with the 19.5% average return for equity funds tracked by Lipper, and is
well ahead of the average fixed income return of 4.7%. Moreover, annual results
were quite good relative to historical standards as calendar year returns for
the Growth Fund Index of better than 17% had occurred only twelve times since
1970. Some of the catalysts which propelled the equity markets to record highs
in the fourth quarter were declining interest rates, corporate profits generally
exceeding expectations, and mutual funds continuing to receive large cash flows
from investors.
Fourth quarter performance of the Growth Portfolio was most influenced by
the technology and consumer cyclical sectors. Technology was a source of value
added due to sector emphasis. Throughout the period, the Portfolio maintained a
relatively high weighting in this group, which generally outperformed. S&P 500
technology stocks returned about 13%, as investors, uncertain about the state of
the economy, focused on this group whose secular growth prospects still seem
relatively strong. Microsoft and 3Com were two of the Portfolio's best
performers in this sector. Microsoft, which had exhibited tremendous relative
strength all year, rallied an additional 25% in the fourth quarter due to
stronger than anticipated earnings. 3Com advanced about 22% after the company
stated that they expect increasing profit margins and sales growth for the next
few quarters.
The consumer cyclical sector of the Portfolio detracted from total return
from both sector allocation and stock selection perspectives. S&P 500 cyclical
stocks returned only 1.6% for the quarter and were among the broad market's
worst performing groups. This proved somewhat troublesome for the Portfolio,
which maintained a healthy allocation to the sector. In addition, company
specific news, particularly in the specialty
F-14E
<PAGE> 114
retailing area, caused some issues to decline. Lowe's shares fell after the home
improvement retailer said fourth quarter earnings would fall below analysts'
expectations. CompUSA was hurt by slow sales growth for the quarter. Management
cited a shorter Christmas shopping season and consumer anticipation of new
products as key factors.
SPECIAL EQUITY PORTFOLIO
As the famous Hall of Fame catcher Yogi Berra once said, "It's deja-vu all
over again." There couldn't have been a more fitting phrase to summarize the
performance of small company stocks relative to their brethren large company
stocks, in 1996. The Russell 2000 Index, a small company index, returned 16.5%,
while the S&P 500 Index, a measure of large company stocks, returned 23.3%,
bettering the performance of small company stocks for the third consecutive
year. The relative underperformance of the small company stocks is largely
attributable to investors flocking to the comfort of more liquid, blue chip
names, due to uncertainty about the economy, interest rates, earnings, and to
relatively high valuations in the market. This frenzy for large company stocks
is not uncommon in late cycles of a bull market.
Despite this, 1996 was another year in which the Special Equity Portfolio
demonstrated superior results versus its benchmark, the Russell 2000 Index. More
impressive was the Portfolio's ability to post a return comparable to the S&P
500 Index. The multiple manager approach utilized within the Portfolio continues
to provide superior results, while reducing the risks associated with this style
of investing.
During the fourth quarter, the Portfolio was helped by the consumer
cyclical sector, while the industrial and basic industry sectors were primary
detractors. The consumer cyclical sector's outperformance was largely associated
with the Portfolio's exposure to air transportation, publishing and the trucking
stocks, with returns of approximately 11.7%, 12.5%, and 6.8%, respectively. The
air freight companies did well as volume either matched or exceeded investors
expected levels. The trucking and publishing stocks benefited from generally
strong earnings reports.
The largest detractor to performance was the industrial sector, led by
capital equipment, multiple industry and metal fabrication stocks. There was no
common underlying theme for this sector's performance as much as issues specific
to certain companies.
The basic industry sector's underperformance was linked to lackluster
levels of demand and a slowing global economic environment. The latter has made
it nearly impossible to raise prices on products that companies manufacture.
Moreover, the cost of materials needed to manufacture products, such as energy,
have increased, causing profit margins to decline.
AGGRESSIVE EQUITY PORTFOLIO
The fourth quarter proved turbulent for Aggressive Equity investors, as the
benchmark Russell 2000 Growth Index posted a .3% gain. October set the tone for
the quarter. Growth investors experienced broad losses largely due to investors
favoring more liquid, less volatile securities. Although November was more
profitable for Aggressive Equity investors, with positive returns, the trend
continued toward brand name blue chip issues, where returns were more favorable.
Growth oriented investors experienced a mediocre December, as the Russell 2000
Growth Index posted a gain of 2% for the final month of the year. Aggressive
Equity investments underperformed the benchmark for the quarter.
The Aggressive Equity Portfolio remained heavily weighted in technology,
and therefore did not partake in the gains of energy, the hottest sector of the
Russell 2000 Growth Index for the quarter. The Portfolio's technology issues had
mixed returns, with some stocks experiencing broad losses. Cascade
Communications, which makes equipment that links and routes phone calls within
computer networks, could not sustain blistering 1996 growth through the fourth
quarter, as the company announced lower than expected revenue. Sun Microsystems,
a supplier of high-performance workstations, received intense pressure from
rivals in the workstation market. Sun was prompted to slash prices, draining
profits and gross margins.
F-14F
<PAGE> 115
Although Aggressive Equity investors generally underperformed in the
quarter, several issues in the Portfolio managed to enjoy significant gains
because investors favored issues with larger market capitalizations. Stocks of
larger companies are perceived as being more liquid in today's volatile market.
Intel Corp. posted big gains for the Portfolio over the quarter, as technology
analysts expect increased earnings in 1997. The semiconductor company's earnings
are poised for large gains because many corporate customers are planning
upgrades. Dell Computer Corp. has already benefited from increased corporate
demand. Revenue jumped 42%, helped in part by an 80% increase in notebook
computer sales. Microsoft was also included in the list of large cap performers
as it expects to increase spending on research and development six-fold in 1997,
creating the world's largest computer science lab. The software leader will
continue to develop new internet products including technology for letting
people make video phone calls using the Internet.
The Portfolio also enjoyed strong performance from pharmaceutical companies
in the consumer non-cyclical sector. In a quest to reduce costs, many managed
health-care companies are recommending more use of medications. The expectation
is to avoid expensive surgery or long-term care by solving a medical problem
earlier through medication. Bristol-Myers Squibb, producing drugs to treat
cholesterol, and Pfizer, producing drugs to combat depression, enjoyed strong
fourth quarter performance. Pharmaceutical companies also rallied in response to
November's election results, where a Republican controlled Congress has dimmed
prospects for any efforts by President Clinton for health care reform in his
second term.
INTERNATIONAL EQUITY PORTFOLIO
U.S. investors in foreign markets experienced lackluster yet positive
returns as 1996 came to a close, with the Morgan Stanley Capital International
Europe, Australia, and Far East (MSCI EAFE) Index up 1.7% for the final quarter
of the year. Of the 22 countries which make up the Index, 20 had positive
returns as measured in U.S. dollars, and all but one were positive when viewed
in terms of local currency. Spain, Norway and Finland led the way while Japan
trailed, posting its second negative 1996 quarterly return.
Japanese market losses were intensified by an 11.1% depreciation of the
yen. This depreciation, together with an easing monetary policy and a good
economic rebound for the country, should have helped boost Japan's stock market
over the past year. However, overriding factors caused Japanese returns to
falter. Among these were lagging profit growth, sluggish economic and corporate
restructuring, and concern in the markets over a tighter fiscal policy in the
new year as the government moves to repair the worst fiscal deficit of the major
industrial countries. On a prospective basis, although Japan's prospects
currently appear dim, this is one country whose markets can gain if and when
interest rates rise since such a trend will signal a powerful economic recovery.
In Europe, the news over the past year has been dominated by the European
Union's execution of strategies that will eventually bring about a single
currency for all. Specifically, the emphasis was on "convergence" -- narrowing
the gap in interest rates among the 15 member countries. The goal is for the
Italian lira, for example, to be no different than Germany's deutsche mark by
the year 2000. A side effect of convergence measures was a huge bond market
rally across the Continent as rates fell, with stock markets consequently
posting healthy gains. Another overriding trend in Europe is the beginning of
American-style corporate restructuring. This is unfamiliar territory for
traditionally paternalistic European corporations. However, underperforming
businesses should benefit as companies opt to enhance shareholder value by
aggressively cutting costs.
Looking forward, it is possible that Alan Greenspan's question about
"irrational exuberance" as applied to the U.S. market could also be relevant to
most of the developed markets outside Japan. There are signs that European
economies are finally emerging from two sluggish years with low inflation and
monetary authorities therefore unlikely to hike interest rates. Looming over the
Continent is the threat of a U.S. market correction should the Federal Reserve
elect to tighten monetary policy. Whenever U.S. market returns faltered last
year in the face of a possible Fed tightening, Europe's markets also stumbled.
F-14G
<PAGE> 116
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Owners of Beneficial Interests of the
Diversified Investors Portfolios:
We have audited the accompanying statements of assets and liabilities of
Diversified Investors Portfolios (comprising, respectively, the Money Market
Portfolio, High Quality Bond Portfolio, Intermediate Government Bond Portfolio,
Government/Corporate Bond Portfolio, Balanced Portfolio, Equity Income
Portfolio, Equity Value Portfolio, Growth & Income Portfolio, Equity Growth
Portfolio, Special Equity Portfolio, Aggressive Equity Portfolio, High Yield
Bond Portfolio and International Equity Portfolio) (collectively the
"Portfolios") as of December 31, 1996, and the related statements of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended for each of the Portfolios other than the
Equity Value Portfolio and Aggressive Equity Portfolio for which the periods are
from April 19, 1996 (commencement of operations) to December 31, 1996 and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Portfolios'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
respective Portfolios constituting Diversified Investors Portfolios as of
December 31, 1996, the results of their operations, the changes in their net
assets, and the financial highlights for the periods referred to above in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
February 10, 1997
F-15
<PAGE> 117
DIVERSIFIED INVESTORS PORTFOLIOS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT/
MONEY HIGH GOVERNMENT CORPORATE EQUITY
MARKET QUALITY BOND BOND BOND BALANCED INCOME
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities, at cost.......... $185,029,634 $194,090,614 $ 118,789,459 $323,055,033 $273,163,752 $760,718,204
============ ============ ============ ============ ============ ============
Securities, at market........ $185,029,634 $194,122,807 $ 118,462,438 $328,052,630 $291,482,580 $989,350,281
Repurchase agreement, at
value....................... -- 4,346,634 35,994 52,064 2,456,326 26,914
Cash......................... 55,534 -- 272,437 -- -- 24,843
Foreign currency holdings, at
value (cost $612)...........
Receivable for securities
sold........................ -- 110,127 -- -- -- 452,910
Receivable for foreign
currency forward
contracts................... -- -- -- -- -- --
Interest receivable.......... 193 2,226,143 959,953 4,696,158 1,413,326 105
Dividends receivable......... -- -- -- -- 241,387 1,843,283
Receivable from securities
lending..................... -- 170 4,044 -- -- --
Reimbursement from advisor... -- -- 4,884 -- 14,213 1,087
------------ ------------ ------------ ------------ ------------ ------------
Total assets........ 185,085,361 200,805,881 119,739,750 332,800,852 295,607,832 991,699,423
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES:
Deposit for securities
loaned...................... -- 3,417,000 16,628,750 9,969,600 30,543,450 30,492,400
Payable for securities
loaned...................... -- -- -- 19,264 16,667 10,038
Payable for securities
purchased................... -- -- -- -- -- 3,890,433
Payable for foreign currency
forward contracts........... -- -- -- -- -- --
Payable to advisor........... 7,901 12,209 -- 2,904 -- --
Accrued expenses:
Investment advisory fees.... 43,277 63,279 34,105 98,085 106,456 385,563
Custody fees................ 3,324 -- -- 17,404 12,056 55,314
Professional fees........... 15,038 14,999 13,080 13,254 14,451 28,996
Reports to shareholders..... 1,323 1,360 633 1,501 1,619 6,120
Miscellaneous fees.......... 2,244 2,371 3,302 2,823 3,294 9,890
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities... 73,107 3,511,218 16,679,870 10,124,835 30,697,993 34,878,754
------------ ------------ ------------ ------------ ------------ ------------
NET ASSETS.......... $185,012,254 $197,294,663 $ 103,059,880 $322,676,017 $264,909,839 $956,820,669
============ ============ ============ ============ ============ ============
NET ASSETS CONSIST OF:
Paid-in capital............. $185,012,254 $197,262,470 $ 103,386,901 $317,678,420 $246,591,011 $728,188,592
Net unrealized appreciation
(depreciation) on
securities................ -- 32,193 (327,021) 4,997,597 18,318,828 228,632,077
Net unrealized appreciation
on translation of assets
and liabilities in foreign
currencies................ -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSETS.......... $185,012,254 $197,294,663 $ 103,059,880 $322,676,017 $264,909,839 $956,820,669
============ ============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-16
<PAGE> 118
<TABLE>
<CAPTION>
EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE HIGH YIELD INTERNATIONAL
VALUE INCOME GROWTH EQUITY EQUITY BOND EQUITY
----------- ------------ ------------ ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$26,959,909 $192,911,663 $276,480,203 $446,828,750 $14,563,091 $12,969,120 $ 126,340,686
=========== ============ ============ ============ =========== =========== ============
$28,527,741 $214,948,333 $290,199,537 $524,487,533 $14,798,550 $13,341,450 $ 138,412,521
1,693,498 6,969,777 6,063,591 44,826,526 1,393,598 1,751,451 8,711,664
-- -- -- -- -- -- --
597
45,355 -- 3,678,252 1,702,254 -- -- 600,679
-- -- -- -- -- -- 425,249
-- -- 120 -- -- 306,105 37,258
54,436 256,354 213,394 330,003 200 -- 346,211
-- 5,282 23,099 5,466 -- -- --
25,881 -- -- 271,382 13,002 5,118 14,632
----------- ------------ ------------ ------------ ----------- ----------- ------------
30,346,911 222,179,746 300,177,993 571,623,164 16,205,350 15,404,124 148,548,811
----------- ------------ ------------ ------------ ----------- ----------- ------------
-- 13,875,100 -- 54,293,050 -- -- --
-- -- -- -- -- -- --
1,257,288 536,120 859,543 9,382,748 679,437 -- 132,503
-- -- -- -- -- -- 74,068
-- 7,664 10,867 -- -- -- --
14,349 114,836 156,083 629,284 13,188 7,137 95,010
21,977 16,805 5,450 27,902 14,270 114 33,450
10,996 12,433 13,515 14,293 10,838 16,648 21,121
189 1,420 1,552 6,574 86 121 152
8,599 2,942 3,297 5,070 8,401 7,418 7,610
----------- ------------ ------------ ------------ ----------- ----------- ------------
1,313,398 14,567,320 1,050,307 64,358,921 726,220 31,438 363,914
----------- ------------ ------------ ------------ ----------- ----------- ------------
$29,033,513 $207,612,426 $299,127,686 $507,264,243 $15,479,130 $15,372,686 $ 148,184,897
=========== ============ ============ ============ =========== =========== ============
$27,465,681 $185,575,756 $285,408,352 $429,605,460 $15,243,671 $15,000,356 $ 135,763,072
1,567,832 22,036,670 13,719,334 77,658,783 235,459 372,330 12,071,835
-- -- -- -- -- -- 349,990
----------- ------------ ------------ ------------ ----------- ----------- ------------
$29,033,513 $207,612,426 $299,127,686 $507,264,243 $15,479,130 $15,372,686 $ 148,184,897
=========== ============ ============ ============ =========== =========== ============
</TABLE>
F-17
<PAGE> 119
DIVERSIFIED INVESTORS PORTFOLIOS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT/
MONEY HIGH GOVERNMENT CORPORATE EQUITY
MARKET QUALITY BOND BOND BOND BALANCED INCOME
---------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income.................. $ -- $ -- $ -- $ -- $ 2,558,348 $ 24,105,695
Less withholding tax............. -- -- -- -- 29,310 27,363
Interest income.................. 9,760,937 11,653,443 5,846,155 23,444,967 6,061,234 5,661,475
----------- ----------- ------------ ------------ ------------ ------------
Total income.............. 9,760,937 11,653,443 5,846,155 23,444,967 8,590,272 29,739,807
----------- ----------- ------------ ------------ ------------ ------------
Expenses:
Investment advisory fees......... 445,832 627,049 340,989 1,232,524 995,489 3,895,211
Custody fees..................... 45,297 39,474 34,276 85,984 62,393 186,413
Professional fees................ 22,338 23,564 20,891 22,528 23,323 44,998
Reports to shareholders.......... 2,148 2,272 1,125 3,396 2,845 10,746
Miscellaneous fees............... 17,525 17,715 17,480 19,438 18,592 30,709
----------- ----------- ------------ ------------ ------------ ------------
Total expenses............ 533,140 710,074 414,761 1,363,870 1,102,642 4,168,077
Expenses waived by the investment
advisor.......................... 680 -- 27,685 -- -- --
----------- ----------- ------------ ------------ ------------ ------------
Net expenses.............. 532,460 710,074 387,076 1,363,870 1,102,642 4,168,077
----------- ----------- ------------ ------------ ------------ ------------
Net investment income (loss)....... 9,228,477 10,943,369 5,459,079 22,081,097 7,487,630 25,571,730
----------- ----------- ------------ ------------ ------------ ------------
Net realized and unrealized gains
(losses) on securities and
foreign currencies:
Net realized gains (losses) on
securities..................... (8,786) (34,374) (586,993) (913,114) 23,946,320 39,593,303
Net realized gains on foreign
currency transactions.......... -- -- -- -- -- --
Net change in unrealized
appreciation (depreciation) on
securities..................... -- (1,571,971) (1,394,326) (11,013,287) 3,998,704 83,552,175
Net change in unrealized
appreciation on translation of
assets and liabilities in
foreign currencies............. -- -- -- -- -- --
----------- ----------- ------------ ------------ ------------ ------------
Net realized and unrealized gains
(losses) on securities and
foreign currencies............... (8,786) (1,606,345) (1,981,319) (11,926,401) 27,945,024 123,145,478
----------- ----------- ------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations........ $9,219,691 $ 9,337,024 $ 3,477,760 $ 10,154,696 $35,432,654 $148,717,208
=========== =========== ============ ============ ============ ============
</TABLE>
- ---------------
* Commencement of operations, April 19, 1996
See notes to financial statements.
F-18
<PAGE> 120
<TABLE>
<CAPTION>
EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE HIGH YIELD INTERNATIONAL
VALUE* INCOME GROWTH EQUITY EQUITY* BOND EQUITY
---------- ----------- ----------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 288,192 $ 2,447,876 $ 800,318 $ 2,576,979 $ 7,542 $ -- $ 1,933,704
-- 11,760 -- 7,724 -- -- 193,860
41,011 480,282 596,092 1,850,409 19,676 983,639 421,402
----------
-
----------- ------------ ----------- ----------- ------------ ------------
329,203 2,916,398 1,396,410 4,419,664 27,218 983,639 2,161,246
----------
-
----------- ------------ ----------- ----------- ------------ ------------
84,055 1,052,349 1,730,632 3,255,893 95,060 60,742 799,760
41,576 84,559 55,663 194,409 28,524 43,101 185,048
17,932 21,706 22,507 25,638 17,734 18,462 25,981
305 2,444 3,022 9,078 164 150 1,542
14,699 17,978 18,845 21,673 14,482 15,131 16,596
----------
-
----------- ------------ ----------- ----------- ------------ ------------
158,567 1,179,036 1,830,669 3,506,691 155,964 137,586 1,028,927
70,088 39,117 1,462 47,350 57,964 72,277 69,256
----------
-
----------- ------------ ----------- ----------- ------------ ------------
88,479 1,139,919 1,829,207 3,459,341 98,000 65,309 959,671
----------
-
----------- ------------ ----------- ----------- ------------ ------------
240,724 1,776,479 (432,797) 960,323 (70,782) 918,330 1,201,575
----------
-
----------- ------------ ----------- ----------- ------------ ------------
910,307 16,329,122 64,682,669 55,282,281 594,156 (43,340) 2,640,559
-- -- -- -- -- -- 478,445
1,567,832 13,845,816 (25,830,434) 32,173,450 235,459 210,284 10,896,919
-- -- -- -- -- -- 190,167
----------
-
----------- ------------ ----------- ----------- ------------ ------------
2,478,139 30,174,938 38,852,235 87,455,731 829,615 166,944 14,206,090
----------
-
----------- ------------ ----------- ----------- ------------ ------------
$2,718,863 $31,951,417 $38,419,438 $88,416,054 $758,833 $1,085,274 $ 15,407,665
=========== ============ =========== =========== =========== ============ ============
</TABLE>
F-19
<PAGE> 121
DIVERSIFIED INVESTORS PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT/
MONEY HIGH GOVERNMENT CORPORATE
MARKET QUALITY BOND BOND BOND BALANCED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
From operations:
Net investment income (loss)................. $ 9,228,477 $ 10,943,369 $ 5,459,079 $ 22,081,097 $ 7,487,630
Net realized gains (losses) on securities.... (8,786) (34,374) (586,993) (913,114) 23,946,320
Net realized gains on foreign currency
transactions............................... -- -- -- -- --
Net change in unrealized appreciation
(depreciation) on securities............... -- (1,571,971) (1,394,326) (11,013,287) 3,998,704
Net change in unrealized appreciation on
translation of assets and liabilities in
foreign currencies......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net increase in net assets resulting from
operations................................. 9,219,691 9,337,024 3,477,760 10,154,696 35,432,654
------------ ------------ ------------ ------------ ------------
From capital transactions:
Proceeds from capital invested............... 574,726,828 132,353,083 50,100,883 107,972,231 106,232,881
Value of capital withdrawn................... 540,572,513 116,921,547 36,510,377 131,990,320 43,788,651
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets resulting
from capital transactions.................... 34,154,315 15,431,536 13,590,506 (24,018,089) 62,444,230
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets.......... 43,374,006 24,768,560 17,068,266 (13,863,393) 97,876,884
Net assets:
Beginning of year............................ 141,638,248 172,526,103 85,991,614 336,539,410 167,032,955
------------ ------------ ------------ ------------ ------------
End of year.................................. $185,012,254 $197,294,663 $ 103,059,880 $322,676,017 $264,909,839
============ ============ ============ ============ ============
</TABLE>
- ---------------
* Commencement of operations, April 19, 1996
See notes to financial statements.
F-20
<PAGE> 122
<TABLE>
<CAPTION>
EQUITY EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE HIGH YIELD INTERNATIONAL
INCOME VALUE* INCOME GROWTH EQUITY EQUITY* BOND EQUITY
------------ ----------- ------------ ------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 25,571,730 $ 240,724 $ 1,776,479 $ (432,797) $ 960,323 $ (70,782) 918,330 $ 1,201,575
39,593,303 910,307 16,329,122 64,682,669 55,282,281 594,156 (43,340) 2,640,559
-- -- -- -- -- -- -- 478,445
83,552,175 1,567,832 13,845,816 (25,830,434) 32,173,450 235,459 210,284 10,896,919
-- -- -- -- -- -- -- 190,167
------------ ------------ ----------- ------------ ------------ ----------- ------------ ------------
148,717,208 2,718,863 31,951,417 38,419,438 88,416,054 758,833 1,085,274 15,407,665
------------ ------------ ----------- ------------ ------------ ----------- ------------ ------------
293,027,464 28,849,346 146,312,325 136,832,312 247,735,078 20,875,494 7,896,234 77,505,278
249,226,533 2,534,696 95,463,047 98,486,454 144,345,114 6,155,197 2,606,417 28,174,361
------------ ------------ ----------- ------------ ------------ ----------- ------------ ------------
43,800,931 26,314,650 50,849,278 38,345,858 103,389,964 14,720,297 5,289,817 49,330,917
------------ ------------ ----------- ------------ ------------ ----------- ------------ ------------
192,518,139 29,033,513 82,800,695 76,765,296 191,806,018 15,479,130 6,375,091 64,738,582
764,302,530 -- 124,811,731 222,362,390 315,458,225 -- 8,997,595 83,446,315
------------ ------------ ----------- ------------ ------------ ----------- ------------ ------------
$956,820,669 $29,033,513 $207,612,426 $299,127,686 $507,264,243 $15,479,130 $15,372,686 $ 148,184,897
============ ============ =========== ============ ============ =========== ============ ============
</TABLE>
F-21
<PAGE> 123
DIVERSIFIED INVESTORS PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT/
MONEY HIGH GOVERNMENT CORPORATE
MARKET QUALITY BOND BOND BOND
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
From operations:
Net investment income........................ $ 8,949,654 $ 9,914,104 $ 4,558,386 $ 18,181,947
Net realized gains (losses) on securities.... (4,226) (634,835) 379,479 1,365,500
Net realized (losses) on foreign currency
transactions............................... -- -- -- --
Net change in unrealized appreciation on
securities................................. -- 7,048,911 5,777,385 29,472,541
Net change in unrealized appreciation on
translation of assets and liabilities in
foreign currencies......................... -- -- -- --
------------ ------------ ------------ ------------
Net increase in net assets resulting from
operations................................. 8,945,428 16,328,180 10,715,250 49,019,988
------------ ------------ ------------ ------------
From capital transactions:
Proceeds from capital invested............... 393,166,782 141,659,639 38,046,469 151,446,357
Value of capital withdrawn................... 421,983,754 129,457,932 49,408,845 110,912,327
------------ ------------ ------------ ------------
Net increase (decrease) in net assets resulting
from capital transactions.................... (28,816,972) 12,201,707 (11,362,376) 40,534,030
------------ ------------ ------------ ------------
Net increase (decrease) in net assets.......... (19,871,544) 28,529,887 (647,126) 89,554,018
Net assets:
Beginning of year............................ 161,509,792 143,996,216 86,638,740 246,985,392
------------ ------------ ------------ ------------
End of year.................................. $141,638,248 $172,526,103 $ 85,991,614 $336,539,410
============ ============ ============ ============
</TABLE>
- ---------------
* Commencement of operations, August 22, 1995.
** Commencement of operations, September 29, 1995.
See notes to financial statements.
F-22
<PAGE> 124
<TABLE>
<CAPTION>
EQUITY GROWTH & EQUITY SPECIAL HIGH YIELD INTERNATIONAL
BALANCED INCOME INCOME GROWTH EQUITY BOND* EQUITY**
------------ ------------ ------------ ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 5,658,158 $ 21,635,258 $ 1,556,678 $ 868,631 $ 763,542 $ 223,398 $ 102,394
11,609,960 9,847,566 19,009,812 4,768,375 45,159,729 6,659 16,793
-- -- -- -- -- -- (8,241)
17,788,835 158,219,366 9,319,254 24,304,762 40,748,255 162,046 1,174,916
-- -- -- -- -- -- 159,823
------------ ------------ ------------ ------------ --------- ---------- ------------
35,056,953 189,702,190 29,885,744 29,941,768 86,671,526 392,103 1,445,685
------------ ------------ ------------ ------------ --------- ---------- ------------
80,590,418 231,491,356 93,751,429 93,276,744 113,103,544 9,081,530 86,991,521
74,123,531 245,585,114 93,408,742 49,673,952 101,988,710 476,038 4,990,891
------------ ------------ ------------ ------------ --------- ---------- ------------
6,466,887 (14,093,758) 342,687 43,602,792 11,114,834 8,605,492 82,000,630
------------ ------------ ------------ ------------ --------- ---------- ------------
41,523,840 175,608,432 30,228,431 73,544,560 97,786,360 8,997,595 83,446,315
125,509,115 588,694,098 94,583,300 148,817,830 217,671,865 -- --
------------ ------------ ------------ ------------ --------- ---------- ------------
$167,032,955 $764,302,530 $124,811,731 $222,362,390 $315,458,225 $8,997,595 $ 83,446,315
============ ============ ============ ============ ========= ========== ============
</TABLE>
F-23
<PAGE> 125
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL VALUE
- ---------- ------------
<C> <S> <C> <C>
COMMERCIAL PAPER
$6,200,000 American Express Credit Corp., 5.30%, 02/28/97.............. $ 6,147,057
2,000,000 Avco Financial Services Inc. -- Canada, 5.34%, 01/21/97..... 1,994,067
700,000 Avco Financial Services Inc. -- Canada, 5.32%, 01/23/97..... 697,724
6,500,000 Avco Financial Services Inc. -- Canada, 5.52%, 04/04/97..... 6,407,310
1,500,000 Banc One Corp., 5.46%, 01/06/97............................. 1,498,863
4,000,000 Banco Real S.A., 5.36%, 04/21/97............................ 3,934,489
5,500,000 Bank of New York, 5.30%, 01/10/97........................... 5,492,712
1,000,000 Bank of New York, 5.45%, 01/15/97........................... 997,881
7,800,000 Bell South Telecommunications Inc., 5.40%, 02/04/97......... 7,760,220
8,000,000 Chevron Transport Corp., 5.32%, 01/16/97.................... 7,982,266
400,000 CIT Group Holdings Inc., 5.48%, 01/31/97.................... 398,173
1,000,000 Conagra Inc., 6.20%, 01/07/97............................... 998,967
3,300,000 Cooperative Finance Corp., 5.50%, 02/14/97.................. 3,277,817
4,700,000 Du Pont (E.I.) de Nemours, 5.30%, 01/27/97.................. 4,686,161
1,485,000 Enterprise Funding Corp., 5.50%, 01/06/97................... 1,483,866
300,000 Enterprise Funding Corp., 5.77%, 01/07/97................... 299,711
2,800,000 Enterprise Funding Corp., 5.77%, 01/09/97................... 2,796,410
3,000,000 Ford Motor Credit Corp., 5.30%, 01/08/97.................... 2,996,909
4,400,000 Ford Motor Credit Corp., 5.32%, 02/03/97.................... 4,378,542
3,900,000 General Electric Capital Corp., 5.40%, 01/03/97............. 3,898,830
2,700,000 General Electric Capital Corp., 5.41%, 01/09/97............. 2,696,754
1,700,000 General Electric Capital Corp., 5.32%, 01/28/97............. 1,693,217
500,000 General Motors Acceptance Corp., 5.42%, 01/24/97............ 498,269
8,000,000 General Motors Acceptance Corp., 5.33%, 02/05/97............ 7,958,544
6,600,000 Goldman Sachs Group, L.P., 5.37%, 01/14/97.................. 6,587,202
700,000 Heller Financial Inc., 5.70%, 01/15/97...................... 698,448
100,000 Household Finance Corp., 5.45%, 01/14/97.................... 99,803
2,300,000 Household Finance Corp., 5.31%, 01/17/97.................... 2,294,572
8,000,000 Lucent Technologies, Inc., 5.28%, 01/28/97.................. 7,968,320
1,900,000 Merrill Lynch and Company, Inc., 5.44%, 01/21/97............ 1,894,258
6,000,000 Merrill Lynch and Company, Inc., 5.34%, 01/27/97............ 5,976,860
1,000,000 National Westminster Bank, 5.37%, 02/28/97.................. 991,349
6,600,000 Norwest Corp., 5.40%, 01/09/97.............................. 6,592,080
3,000,000 Paccar Financial Company, 5.44%, 01/03/97................... 2,999,093
1,800,000 Penney (JC) Funding Company, 5.30%, 01/30/97................ 1,792,315
8,500,000 Philip Morris Companies, 5.30%, 01/14/97.................... 8,483,732
1,700,000 Quebec Province, 5.30%, 01/23/97............................ 1,694,494
5,000,000 Royal Bank Of Canada, 5.40%, 01/15/97....................... 5,135,633
1,800,000 Sanwa Business Credit, 5.58%, 01/16/97...................... 1,795,815
</TABLE>
See notes to financial statements.
F-24
<PAGE> 126
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
$6,200,000 Sears Roebuck Acceptance Corp., 5.34%, 02/06/97............. $ 6,166,892
2,800,000 Toronto Dominion Bank, 5.40%, 01/09/97...................... 2,796,640
Transamerica Commercial Finance -- Canada, 5.33%,
2,000,000 01/13/97.................................................... 1,996,447
Transamerica Commercial Finance -- Canada, 5.43%,
4,500,000 01/13/97.................................................... 4,491,855
------------
TOTAL COMMERCIAL PAPER (Cost $151,430,567).................. 151,430,567 81.85%
------------
CERTIFICATES OF DEPOSIT
5,300,000 Bank of Nova Scotia, 5.50%, 01/03/97........................ 5,374,494
Capital One Funding Corp., Floating Rate, 5.84%,
5,900,000 01/02/97+................................................... 5,926,388
7,000,000 JP Morgan, 5.52%, 01/06/97.................................. 7,132,509
9,000,000 Mellon Bank Corp., 5.40%, 02/07/97.......................... 9,112,050
------------
TOTAL CERTIFICATES OF DEPOSIT (Cost $27,545,441)............ 27,545,441 14.89%
------------
US GOVERNMENT AGENCY SECURITIES
6,000,000 Federal Home Loan Bank, 5.85%, 11/6/97 (Cost $6,053,626).... 6,053,626 3.27%
------------ -------
Total Investments (Cost $185,029,634)....................... 185,029,634 100.01%
Other assets less liabilities............................... (17,380) (0.01)%
------------ -------
NET ASSETS.................................................. $185,012,254 100.00%
============ =======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996, is $185,029,634.
- ---------------
+ This interest rate is subject to change weekly based on the greater of the 30
day or 90 day Federal composite rate. The rate shown was in effect as of
December 31, 1996.
See notes to financial statements.
F-25
<PAGE> 127
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES
BANKS
$2,000,000 Banque Nationale de Paris, 9.875%, 05/25/98................. $ 2,080,574
1,000,000.. European Investment Bank, 6.60%, 05/15/97................... 1,004,234
8,000,000 First Omni Bank, Series 96, Class A, 6.65%, 09/15/03........ 8,082,400
2,467,079 Fleet Finance, Series 90-1, 6.70%, 01/15/06................. 2,470,827
1,402,778 Fleet Finance, Series 91-A, 8.45%, 4/15/06.................. 1,425,770
3,000,000 Korea Development Bank, 7.73%, 05/05/97..................... 3,021,447
2,905,000 Korea Development Bank, 9.25%, 06/15/98..................... 3,022,769
1,260,000 Korea Development Bank, 7.90%, 02/01/02..................... 1,316,311
40,040 Shawmut REMIC Trust, 6.40%, 03/15/07........................ 39,814
7,634,344 Union Acceptance Corp., 6.40%, 10/10/02..................... 7,676,944
1,424,122 Western Finance Grantor Trust, 4.60%, 04/01/99.............. 1,416,574
2,625,433 Western Finance Grantor Trust, 5.875%, 03/01/02............. 2,623,831
------------
TOTAL BANKS................................................. 34,181,495 17.32%
------------
BROKERAGE
6,250,000 Bear Stearns & Company, 7.625%, 09/15/99.................... 6,437,869
725,000 Lehman Brothers, Inc., Medium -- Term Note, 6.08%,
07/08/98.................................................. 719,175
5,000,000 Lehman Brothers, Inc., 7.625%, 08/01/98..................... 5,094,730
1,520,000 Morgan Stanley, 8.875%, 10/15/01............................ 1,654,830
------------
TOTAL BROKERAGE............................................. 13,906,604.. 7.05%
------------
FINANCE
1,250,000 Associates Corp. of North America, 8.89%, 04/12/98.......... 1,294,660
2,000,000 Associates Corp. of North America, 6.46%, 09/18/00.......... 1,999,264
4,000,000 Associates Corp. of North America, 5.99%, 12/15/00.......... 3,929,016
1,000,000 Associates Corp. of North America, 6.01%, 02/07/03.......... 965,662
1,000,000 British Gas Finance, Inc., 8.75%, 09/15/98.................. 1,029,497
5,000,000 CARCO, Auto Loan Series 94-3, 8.125%, 10/15/99.............. 5,084,375
4,572,639 Chase Manhattan Auto Group Trust, 6.61%, 09/15/02........... 4,618,503
2,309,349 Chemical Financial Acceptance Corp., 9.25%, 05/15/98........ 2,396,984
624,449 Chemical Financial Acceptance Corp. Grantor Trust, 9.40%,
03/15/97.................................................. 623,112
1,000,000 Ford Motor Credit, 7.15%, 01/26/00.......................... 1,019,421
3,500,000 Ford Motor Credit, 5.99%, 02/27/01.......................... 3,421,807
4,000,000 Ford Motor Credit, 7.06%, 06/06/01.......................... 4,063,560
5,250,000 General Motors Acceptance Corp., 9.375%, 04/01/00........... 5,671,554
531,888 General Motors Acceptance Corp. Grantor Trust, Series 95,
Class A, 7.15%, 03/15/00.................................. 538,058
800,000 Government Export Trust, Series 93-2, 4.61%, 09/01/98....... 783,439
459,978 Merrill Lynch Mortgage Investors, Inc., 10.10%, 11/15/07.... 484,702
</TABLE>
See notes to financial statements.
F-26
<PAGE> 128
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
FINANCE (CONTINUED)
$ 835,562 Merrill Lynch Mortgage Investors, Inc., 10.35%, 05/15/09.... $ 910,307
521,566 Merrill Lynch Mortgage Investors, Inc., 9.40%, 09/15/09..... 560,221
948,338 Merrill Lynch Mortgage Investors, Inc., 9.00%, 07/15/11..... 974,123
2,381,889 Navistar Finance, 6.55%, 11/20/01........................... 2,401,492
1,000,000 Norwest Financial, 6.00%, 08/15/97.......................... 1,001,604
1,137,453 Pemex Exp Grantor Trust, 7.66%, 08/15/01.................... 1,169,245
------------
TOTAL FINANCE............................................... 44,940,606.. 22.78%
------------
PRIVATE ASSET BACKED: CONSTRUCTION
5,507,243 Case Equipment Loan Trust, Series 1194-C, Class A2, 8.10%,
06/15/01.................................................. 5,618,599 2.85%
------------
PRIVATE ASSET BACKED: CREDIT CARDS
5,000,000 Discover Card Master Trust I, Series 93-2A, 5.40%,
11/16/01.................................................. 4,945,900
2,540,000 First Chicago Master Trust, 6.25%, 08/15/99................. 2,545,486
1,000,000 Household Affinity Credit Card Master Trust Fund, 7.00%,
12/15/99.................................................. 1,010,450
1,000,000 Maryland Bank of North America Master Credit Card, 93-3
Series A, 5.40%, 09/15/00................................. 989,090
2,333,333 Private Label Credit Card, 7.15%, 06/20/01.................. 2,340,847
1,000,000 Signet Credit Card Master Trust, 5.20%, 02/15/02............ 987,020
------------
TOTAL PRIVATE ASSET BACKED: CREDIT CARDS.................... 12,818,793 6.50%
------------
PRIVATE ASSET BACKED: RECEIVABLES
5,000,000 Capital Equipment Receivable Trust, Series 96-1, 6.28%,
06/15/00.................................................. 5,006,950
4,760,030 Chevy Chase Auto Receivable Trust, 6.00%, 12/15/01.......... 4,774,644
4,187,174 Chevy Chase Auto Receivable Trust, 6.60%, 12/15/02.......... 4,229,004
5,000,000 First Sierra Receivables II, 6.85%, 06/10/03................ 5,065,750
2,966,406 IBM Credit Receivable Lease Asset Master Trust, Series
93-1A, 4.55%, 11/15/00.................................... 2,945,908
1,065,204 IBM Credit Receivable Lease Asset Master Trust, 6.55%,
07/16/01.................................................. 1,073,662
3,573,295 Toyota Auto Receivable Trust, Series 96-AA, 6.30%,
07/20/01.................................................. 3,594,413
------------
TOTAL PRIVATE ASSET BACKED: RECEIVABLES..................... 26,690,331 13.53%
------------
REAL ESTATE
560,912 Daiwa Home Equity Loans, 7.875%, 11/25/19................... 559,840
1,311,066 Fleet Financial Home Equity, 5.45%, 03/20/23................ 1,309,021
4,897,377 GE Home Equity Loan, Series 91-1 A, 7.20%, 09/15/11......... 4,951,200
110,244 Security Pacific Home Equity Loan, Series 91-2, 8.10%,
06/15/20.................................................. 110,821
</TABLE>
See notes to financial statements.
F-27
<PAGE> 129
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
REAL ESTATE (CONTINUED)
$3,306,281 Travelers Mortgage, 12.00%, 03/01/14........................ $ 3,812,823
42,294 US Home Equity Loan, 9.25%, 01/15/21........................ 42,206
375,982 US Home Equity Loan, 8.50%, 04/15/21........................ 380,700
------------
TOTAL REAL ESTATE........................................... 11,166,611 5.66%
------------ -------
TOTAL CORPORATE BONDS AND NOTES (Cost $148,701,242)......... 149,323,039 75.69%
------------ -------
US GOVERNMENT SECURITIES
5,000,000 US Treasury Note, 6.25%, 07/31/98........................... 5,023,435
5,000,000 US Treasury Note, 5.00%, 02/15/99(a)........................ 4,907,810
------------
TOTAL US GOVERNMENT SECURITIES (Cost $10,017,683)........... 9,931,245 5.03%
------------ -------
US GOVERNMENT AGENCY SECURITIES
FEDERAL HOME LOAN MORTGAGE CORP.
691,004 Federal Home Loan Mortgage Corp., PL# 306816, 7.00%,
01/01/18.................................................. 690,913
2,261,469 Federal Home Loan Mortgage Corp., PL# 850082, 9.00%,
10/01/05.................................................. 2,344,146
1,147,984 Federal Home Loan Mortgage Corp., PL# D0677, 7.50%,
03/01/08.................................................. 1,168,589
537,346 Federal Home Loan Mortgage Corp. REMIC, Series MH-1, 10.15%,
04/15/06.................................................. 537,930
239,143 Federal Home Loan Mortgage Corp., PL# 273991, 6.50%,
03/01/13.................................................. 237,670
------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP....................... 4,979,248 2.52%
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
275,541 Federal National Mortgage Association PL# 137455, 7.00%,
04/01/04.................................................. 277,053
356,190 Federal National Mortgage Association PL# 6346, 6.75%,
02/01/03.................................................. 356,169
659,259 Federal National Mortgage Association, 8.00%, 07/25/97...... 660,828
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION................. 1,294,050 0.66%
------------
OTHER AGENCIES
2,550,000 Midstate Trust II, Series A3, 9.35%, 04/01/98............... 2,600,771
1,810,333 Guaranteed Export Certificates, 4.813%, 12/15/98............ 1,771,227
------------
TOTAL OTHER AGENCIES........................................ 4,371,998 2.22%
------------
RESOLUTION TRUST CORP.
552,039 Resolution Trust Corp., 7.00%, 02/15/04..................... 552,744
3,145,438 Resolution Trust Corp., 7.92%, 08/25/21..................... 3,248,262
1,802,949 Resolution Trust Corp., Variable Rate, 6.75%, 07/25/27...... 1,801,994
------------
TOTAL RESOLUTION TRUST CORP................................. 5,603,000 2.84%
------------ -------
TOTAL US GOVERNMENT AGENCY SECURITIES (Cost $16,324,670).... 16,248,296 8.24%
------------ -------
</TABLE>
See notes to financial statements.
F-28
<PAGE> 130
HIGH QUALITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
FOREIGN GOVERNMENT OBLIGATIONS
$5,000,000 Hydro Quebec, 6.36%, 01/15/02............................... $ 4,914,920
7,000,000 Province of Ontario, 7.375%, 01/27/03....................... 7,277,473
------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $12,619,185)..... 12,192,393 6.18%
------------ -------
SHARES
- ----------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
3,056,917 Merrimac Cash Fund -- Premium Class (Cost $3,056,917)(b).... 3,056,917 1.54%
------------ -------
PRINCIPAL
- ----------
COMMERCIAL PAPER
$3,000,000 Sanwa Bank NY Branch, Floating Rate, 5.66%, 01/10/97 (Cost
$3,010,336)............................................... 3,010,336 1.53%
------------ -------
TIME DEPOSIT
360,083 First National Bank of Boston, 7.10%, 01/02/97 (Cost
$360,581) (b)............................................. 360,581 0.18%
------------ -------
TOTAL SECURITIES (Cost $194,090,614)........................ 194,122,807 98.39%
------------ -------
REPURCHASE AGREEMENT
4,345,920 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $4,347,347, 01/02/97
(Collateralized by Federal Home Loan Mortgage Corp., 7.76%
due 02/01/24 with a value of $4,563,552) (Cost
$4,346,634)............................................... 4,346,634 2.20%
------------ -------
Total Investments (Cost $198,437,248)....................... 198,469,441 100.59%
Other assets less liabilities............................... (1,174,778) (0.59)%
------------ -------
NET ASSETS.................................................. $197,294,663 100.00%
============ =======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31,1996 is $198,437,248.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation............................... $ 1,120,305
Gross unrealized depreciation............................... (1,088,112)
------------
Net unrealized appreciation................................. $ 32,193
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
See notes to financial statements.
F-29
<PAGE> 131
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
US GOVERNMENT SECURITIES
US TREASURY NOTES
$ 3,000,000 US Treasury Note, 5.375%, 11/30/97......................... $ 2,985,000
5,000,000 US Treasury Note, 5.875%, 04/30/98......................... 4,995,310
10,000,000 US Treasury Note, 5.25%, 07/31/98.......................... 9,900,000
9,000,000 US Treasury Note, 6.375%, 05/15/99(a)...................... 9,078,750
5,000,000 US Treasury Note, 6.00%, 08/15/99.......................... 4,998,435
7,000,000 US Treasury Note, 7.75%, 12/31/99.......................... 7,319,375
2,500,000 US Treasury Note, 8.875%, 05/15/00......................... 2,710,155
7,000,000 US Treasury Note, 6.25%, 10/31/01(a)....................... 7,004,375
TOTAL US TREASURY NOTES.................................... 48,991,400 47.54%
US TREASURY BOND
8,000,000 US Treasury Bond, 5.625%, 06/30/97......................... 8,000,000 7.76%
-----
TOTAL US GOVERNMENT SECURITIES (Cost $57,230,452).......... 56,991,400 55.30%
-----
US GOVERNMENT AGENCY SECURITIES
FEDERAL HOME LOAN BANK
5,000,000 Federal Home Loan Bank, 6.34%, 03/19/01.................... 4,946,765
5,000,000 Federal Home Loan Bank, 7.39%, 08/22/01.................... 5,198,920
TOTAL FEDERAL HOME LOAN BANK............................... 10,145,685 9.84%
FEDERAL HOME LOAN MORTGAGE CORP.
3,000,000 Federal Home Loan Mortgage Corp. REMIC, Series 1574, 6.50%,
02/15/21................................................. 2,937,210
5,300,000 Federal Home Loan Mortgage Corp. REMIC, Series 1500, 7.00%,
06/15/22................................................. 5,290,725
1,363,393 Federal Home Loan Mortgage Corp. REMIC, Series 31, Floating
Rate, 6.15%, 08/25/23.................................... 1,361,177
1,904,780 Federal Home Loan Mortgage Corp. REMIC, Series 1710, 6.00%,
02/15/24................................................. 1,911,260
TOTAL FEDERAL HOME LOAN MORTGAGE CORP...................... 11,500,372 11.16%
FEDERAL NATIONAL MORTGAGE ASSOCIATION
2,000,000 Federal National Mortgage Association REMIC, Series 94-75,
7.00%, 01/25/03.......................................... 2,017,598
3,000,000 Federal National Mortgage Association, 6.44%, 06/21/05..... 2,955,744
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION................ 4,973,342 4.83%
</TABLE>
See notes to financial statements.
F-30
<PAGE> 132
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- -----
<C> <S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
$ 8,783 Government National Mortgage Association, PL# 209631,
7.50%, 04/15/02.......................................... $ 8,939
470,733 Government National Mortgage Association, PL# 297619,
7.50%, 09/15/07.......................................... 479,118
109,328 Government National Mortgage Association, PL# 322072,
7.50%, 08/15/07.......................................... 111,275
547,610 Government National Mortgage Association, PL# 323189,
7.50%, 08/15/07.......................................... 557,364
34,505 Government National Mortgage Association, PL# 328000,
7.50%, 06/15/07.......................................... 35,120
12,346 Government National Mortgage Association, PL# 328084,
7.50%, 07/15/07.......................................... 12,566
316,503 Government National Mortgage Association, PL# 328188,
7.50%, 08/15/07.......................................... 322,141
527,747 Government National Mortgage Association, PL# 328192,
7.50%, 08/15/07.......................................... 537,148
130,939 Government National Mortgage Association, PL# 328200,
7.50%, 08/15/07.......................................... 133,272
536,364 Government National Mortgage Association, PL# 329060,
7.50%, 08/15/07.......................................... 545,917
445,303 Government National Mortgage Association, PL# 332267,
7.50%, 08/15/07.......................................... 453,235
453,340 Government National Mortgage Association, PL# 332704,
7.50%, 09/15/07.......................................... 461,415
87,213 Government National Mortgage Association, PL# 333320,
7.50%, 09/15/07.......................................... 88,766
464,022 Government National Mortgage Association, PL# 333709,
7.50%, 09/15/07.......................................... 472,287
15,717 Government National Mortgage Association, PL# 335542,
7.50%, 08/15/07.......................................... 15,997
318,774 Government National Mortgage Association, PL# 335995,
7.50%, 08/15/07.......................................... 324,452
205,713 Government National Mortgage Association, PL# 369749,
6.50%, 09/15/08.......................................... 203,013
293,660 Government National Mortgage Association, PL# 345975,
6.50%, 10/15/08.......................................... 289,806
778,722 Government National Mortgage Association, PL# 374726,
6.50%, 10/15/08.......................................... 768,502
365,943 Government National Mortgage Association, PL# 345973,
6.50%, 11/15/08.......................................... 361,140
160,138 Government National Mortgage Association, PL# 363874,
6.50%, 11/15/08.......................................... 158,036
615,184 Government National Mortgage Association, PL# 370448,
6.50%, 11/15/08.......................................... 607,110
</TABLE>
See notes to financial statements.
F-31
<PAGE> 133
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- -----
<C> <S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (CONTINUED)
$ 672,566 Government National Mortgage Association, PL# 371094,
6.50%, 11/15/08.......................................... $ 663,739
375,125 Government National Mortgage Association, PL# 366531,
7.00%, 11/15/08.......................................... 370,201
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION............. 7,980,559 7.74%
STUDENT LOAN MARKETING ASSOCIATION
2,000,000 Student Loan Marketing Association, 6.52%, 9/26/00......... 1,999,918 1.94%
TENNESSEE VALLEY AUTHORITY
2,500,000 Tennessee Valley Authority, 6.38%, 06/15/05................ 2,452,840 2.38%
-----
TOTAL US GOVERNMENT AGENCY SECURITIES (Cost $39,140,685)... 39,052,716 37.89%
-----
SHORT TERM US GOVERNMENT AGENCY SECURITIES
FEDERAL HOME LOAN MORTGAGE CORP.
700,000 Federal Home Loan Mortgage Corp., 5.37%, 01/02/97.......... 699,896
300,000 Federal Home Loan Mortgage Corp., 5.25%, 01/03/97.......... 299,912
700,000 Federal Home Loan Mortgage Corp., 5.42%, 01/06/97.......... 699,473
400,000 Federal Home Loan Mortgage Corp., 5.70%, 01/07/97.......... 399,620
100,000 Federal Home Loan Mortgage Corp., 5.33%, 01/13/97.......... 99,822
100,000 Federal Home Loan Mortgage Corp., 5.21%, 01/16/97.......... 99,783
TOTAL FEDERAL HOME LOAN MORTGAGE CORP...................... 2,298,506 2.23%
FEDERAL NATIONAL MORTGAGE ASSOCIATION
1,100,000 Federal National Mortgage Association, 5.21%, 01/17/97..... 1,097,453
2,300,000 Federal National Mortgage Association, 5.20%, 01/24/97..... 2,292,359
100,000 Federal National Mortgage Association, 5.34%, 03/21/97..... 98,828
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION................ 3,488,640 3.39%
-----
TOTAL SHORT TERM US GOVERNMENT AGENCY (Cost $5,787,146).. 5,787,146 5.62%
-----
SHARES
- -----------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
2,874,644 Merrimac Cash Fund -- Premium Class (Cost $2,874,644)(b)... 2,874,644 2.79%
-----
PRINCIPAL
- -----------
COMMERCIAL PAPER
$ 4,000,000 Nomura Securities International, 7.20%, 04/23/97(b)........ $ 4,000,703
5,000,000 Republic New York Securities Corp., 7.15%, 07/15/97(b)..... 5,000,873
TOTAL COMMERCIAL PAPER (Cost $9,001,576)................... 9,001,576 8.74%
-----
</TABLE>
See notes to financial statements.
F-32
<PAGE> 134
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
TIME DEPOSITS
$ 1,754,106 First National Bank of Boston, 7.10%, 01/02/97(b).......... $ 1,754,422
3,000,000 First Union National Bank of North Carolina, 6.25%,
01/02/97(b).............................................. 3,000,534
TOTAL TIME DEPOSITS (Cost $4,754,956)...................... 4,754,956 4.61%
-----
TOTAL SECURITIES (Cost $118,789,459)....................... 118,462,438 114.95%
-----
REPURCHASE AGREEMENT
35,988 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $36,000, 01/02/97
(Collateralized by Federal Home Loan Mortgage Corp.,
8.04%, due 01/01/23 with a value of $38,142) (Cost
$35,994)................................................. 35,994 0.03%
-----
Total Investments (Cost $118,825,453)...................... 118,498,432 114.98%
Other assets less liabilities.............................. (15,438,552) (14.98)%
-----
NET ASSETS................................................. $103,059,880 100.00%
=====
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $118,825,453.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation.............................. $ 269,710
Gross unrealized depreciation.............................. (596,731)
------------
Net unrealized depreciation................................ $ (327,021)
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
See notes to financial statements.
F-33
<PAGE> 135
GOVERNMENT/CORPORATE BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
US GOVERNMENT SECURITY
$ 5,000,000 US Treasury Note, 5.625%, 11/30/00 (cost $5,026,995)....... $ 4,909,375 1.52%
---------- -----
US GOVERNMENT AGENCY SECURITIES
FEDERAL HOME LOAN MORTGAGE CORP.
100,000 Federal Home Loan Mortgage Corp., 5.33%, 01/13/97.......... 99,822
5,000,000 Federal Home Loan Mortgage Corp., Series 1666, Class E,
6.00%, 12/15/19.......................................... 4,863,295
3,641,150 Federal Home Loan Mortgage Corp., Series 1377, 7.27%,
09/15/07................................................. 3,658,580
4,090,178 Federal Home Loan Mortgage Corp., Series 31, 6.15%,
08/25/23................................................. 4,083,531
5,937,562 Federal Home Loan Mortgage Corp., Series 1710, 6.00%,
02/15/24................................................. 5,957,761
946,485 Federal Home Loan Mortgage Corp., PL# 413611 7.00%,
01/15/26................................................. 926,075
972,603 Federal Home Loan Mortgage Corp., PL# 292340 7.00%,
02/15/26................................................. 951,630
972,579 Federal Home Loan Mortgage Corp., PL# 373622 7.00%,
03/15/26................................................. 951,607
973,829 Federal Home Loan Mortgage Corp., PL# 373637 7.00%,
03/15/26................................................. 952,829
----------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP...................... 22,445,130 6.96%
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
100,000 Federal National Mortgage Association, 5.24%, 01/03/97..... 99,972
10,000,000 Federal National Mortgage Association, 6.25%, 10/28/98..... 10,000,000
1,486,796 Federal National Mortgage Association REMIC Series
1993-219, Class A, principal only, 08/25/23.............. 1,427,633
117,471 Federal National Conventional Loan, PL# 250510 7.00%,
12/01/25................................................. 114,938
----------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION................ 11,642,543 3.61%
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
973,450 Government National Mortgage Association, PL# 428420,
7.00%, 04/15/26.......................................... 952,459 0.30%
----------
STUDENT LOAN MARKETING ASSOCIATION
3,000,000 Student Loan Marketing Association, 6.52%, 09/26/00........ 2,999,877
5,000,000 Student Loan Marketing Association, Series 1996-2 A2,
5.81%, 07/27/09.......................................... 5,013,477
----------
TOTAL STUDENT LOAN MARKETING ASSOCIATION................... 8,013,354 2.48%
---------- -----
TOTAL US GOVERNMENT AGENCY SECURITIES (Cost $42,859,031)... 43,053,486 13.35%
---------- -----
CORPORATE BONDS AND NOTES
AEROSPACE
5,000,000 Boeing Company, 8.625%, 11/15/31........................... 5,871,180
</TABLE>
See notes to financial statements.
F-34
<PAGE> 136
GOVERNMENT/CORPORATE BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ---------- -----
<C> <S> <C> <C>
$ 5,000,000 Lockheed Martin, 6.85%, 05/15/01........................... $ 5,046,625
5,000,000 McDonnell Douglas, 6.875%, 11/01/06........................ 4,978,790
----------
TOTAL AEROSPACE............................................ 15,896,595 4.93%
----------
AUTOMOTIVE PRODUCTS
4,000,000 BF Goodrich, 8.65%, 04/15/25............................... 4,524,285
5,000,000 Ford Holdings, 9.375%, 03/01/20............................ 5,999,350
5,000,000 General Motors Corp., 8.80%, 03/01/21...................... 5,762,785
5,000,000 Universal Corp., 6.50%, 02/15/06........................... 4,720,805
----------
TOTAL AUTOMOTIVE PRODUCTS.................................. 21,007,225 6.51%
----------
BANKS
4,000,000 Bank of New York Company, 6.50%, 12/01/03.................. 3,919,856
5,000,000 BankAmerica Corp., 6.625%, 05/30/01........................ 5,006,120
10,000,000 Bankers Trust of New York, 6.75%, 10/03/01................. 10,015,770
5,000,000 BT Trust, 7.75%, 12/01/26.................................. 4,771,145
5,000,000 Chase Manhattan Corp., 8.00%, 05/01/05..................... 5,041,800
5,000,000 International Bank of Reconstruction & Development, 8.625%,
10/15/16................................................. 5,777,130
5,000,000 Midland Bank PLC, Floating Rate, 5.91%, 06/29/49........... 4,300,000
5,000,000 Swiss Bank Corp., 7.75%, 09/01/26.......................... 5,166,775
----------
TOTAL BANKS................................................ 43,998,596 13.64%
----------
CONSUMER GOODS AND SERVICES
5,200,000 Procter & Gamble, 9.36%, 01/01/21.......................... 6,318,359
5,000,000 RJR Nabisco, 8.75%, 04/15/04............................... 5,063,290
----------
TOTAL CONSUMER GOODS AND SERVICES.......................... 11,381,649 3.53%
----------
FINANCE
10,000,000 Associates Corp. N.A., 6.75%, 07/15/01..................... 10,048,680
5,000,000 Capital Equipment Receivables Trust 96-1 Class B, 6.57%,
03/15/01(a).............................................. 5,009,100
10,000,000 Chase Manhattan Credit Card Master Trust Series 1996-3
Class A, 7.04%, 02/15/00................................. 10,249,600
7,040,000 Discover Card Master Trust I Series 1994-2 Class A,
Floating Rate, 5.83%, 10/16/04........................... 7,103,642
6,000,000 Dow Capital BV, 9.20%, 06/01/10............................ 6,943,764
5,000,000 General Electric Capital Corp., 8.50%, 07/24/08............ 5,611,095
5,000,000 General Motors Acceptance Corp., Putable Asset Trust,
6.375%, 09/30/98......................................... 5,012,621
5,000,000 General Motors Acceptance Corp., 8.40%, 10/15/99........... 5,248,550
5,880,000 Structured Asset Securities Corp., Series 1996-CFL, Class
A-IC, 5.944%, 02/25/28................................... 5,765,134
</TABLE>
See notes to financial statements.
F-35
<PAGE> 137
GOVERNMENT/CORPORATE BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ---------- -----
<C> <S> <C> <C>
FINANCE (CONTINUED)
$ 3,000,000 Standard Credit Card Master Trust, Series 95-11, 5.59%,
11/15/00................................................. $ 3,000,600
10,000,000 Xerox Credit Corp., 6.78%, 05/21/01........................ 10,041,160
----------
TOTAL FINANCE.............................................. 74,033,946 22.94%
----------
FOOD AND BEVERAGE
5,000,000 Seagrams (Joseph) & Sons, 9.65%, 08/15/18.................. 6,196,946 1.92%
----------
INDUSTRIAL
5,000,000 Celulosa Arauco y Constitucion, 6.75%, 12/15/03............ 4,833,565
1,000,000 Eli Lilly, 6.770%, 01/01/36................................ 939,931
----------
TOTAL INDUSTRIAL........................................... 5,773,496 1.79%
----------
INSURANCE
5,000,000 Aetna Services, 7.625%, 08/15/26........................... 5,043,400
5,000,000 Prudential Insurance, 8.10%, 07/15/15(a)................... 5,052,515
----------
TOTAL INSURANCE............................................ 10,095,915 3.13%
----------
LEISURE AND RECREATION
7,000,000 Marriott International Inc., 7.875%, 04/15/05.............. 7,271,292 2.25%
----------
OIL AND GAS
5,000,000 Occidental Petroleum, 10.125%, 09/15/09.................... 6,170,535
4,000,000 Texaco Capital, 9.75%, 03/15/20............................ 5,069,432
----------
TOTAL OIL AND GAS.......................................... 11,239,967 3.48%
----------
PAPER AND FOREST PRODUCTS
5,000,000 Republic New York Corp., 7.00%, 03/22/11................... 4,910,475
8,000,000 Westvaco, 10.125%, 06/01/19................................ 8,871,200
----------
TOTAL PAPER AND FOREST PRODUCTS............................ 13,781,675 4.27%
----------
TELECOMMUNICATION
5,000,000 GTE South, 7.50%, 03/15/26................................. 4,941,835 1.53%
----------
UTILITIES
10,000,000 Commonwealth Edison, 8.125%, 01/15/07...................... 9,995,680
5,000,000 Commonwealth Edison, 8.50%, 07/15/22....................... 5,150,305
5,000,000 Philadelphia Electric, 5.375%, 08/15/98.................... 4,935,540
----------
TOTAL UTILITIES............................................ 20,081,525 6.23%
---------- -----
TOTAL CORPORATE BONDS & NOTES (Cost $240,779,900).......... 245,700,662 76.15%
---------- -----
COMMERCIAL PAPER
300,000 American Express Credit Corp., 5.33%, 01/09/97............. 299,645
2,000,000 Capital One Funding Corp., Floating Rate, 5.84%,
01/02/97................................................. 2,017,400
1,700,000 CIT Group Holdings, Inc., 5.48%, 01/31/97.................. 1,692,237
</TABLE>
See notes to financial statements.
F-36
<PAGE> 138
GOVERNMENT/CORPORATE BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ---------- -----
<C> <S> <C> <C>
$ 2,200,000 Enterprise Funding Corp., 5.77%, 01/09/97.................. $ 2,197,179
1,879,000 Enterprise Funding Corp., 5.31%, 02/07/97.................. 1,868,745
200,000 General Electric Capital, 5.50%, 01/27/97.................. 199,206
3,700,000 General Electric Capital, 5.40%, 01/23/97.................. 3,687,790
3,500,000 Heller International Corp., 5.70%, 01/21/97................ 3,488,917
300,000 Household Finance Corp., 5.45%, 01/14/97................... 299,410
1,100,000 Metlife Funding Inc., 5.29%, 01/10/97...................... 1,098,545
1,625,000 Morgan, J.P. & Company, 5.36%, 01/02/97.................... 1,624,760
850,000 Sears Roebuck Acceptance Corp., 5.40%, 01/07/97............ 849,235
5,100,000 Weyerhaeuser Mortgage Company, 5.90%, 01/07/97............. 5,094,985
----------
TOTAL COMMERCIAL PAPER (Cost $24,418,054).................. 24,418,054 7.56%
---------- -----
TIME DEPOSIT
9,473,024 First National Bank of Boston TBW-1, 7.10%, 01/02/97 (Cost
$9,474,477)(b)........................................... 9,474,477 2.94%
---------- -----
SHARES
- -----------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
496,576 Merrimac Cash Fund -- Premium Class (Cost $496,576)(b)..... 496,576 0.15%
---------- -----
TOTAL SECURITIES (Cost $323,055,033)....................... 328,052,630 101.67%
---------- -----
PRINCIPAL
- -----------
REPURCHASE AGREEMENT
$ 52,055 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $52,072, 01/02/97
(Collateralized by Federal Home Loan Mortgage Corp.,
7.78%, due 08/01/24, with a value of $55,032) (Cost
$52,064)................................................. 52,064 0.01%
---------- -----
Total Investments (Cost $323,107,097)...................... 328,104,694 101.68%
Other assets less liabilities.............................. (5,428,677) (1.68)%
---------- -----
Net Assets................................................. $322,676,017 100.00%
========== =====
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $323,107,097.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation.............................. $ 6,636,512
Gross unrealized depreciation.............................. (1,638,915)
------------
Net unrealized appreciation................................ $ 4,997,597
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
See notes to financial statements.
F-37
<PAGE> 139
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- --------- ------------ -------
<C> <S> <C> <C>
COMMON STOCK
AEROSPACE
49,300 Boeing Company............................................... $ 5,244,288
44,750 Northrop Grumman Corp........................................ 3,703,063
------------
TOTAL AEROSPACE.............................................. 8,947,351 3.38%
------------
AUTOMOBILES
89,600 General Motors Corp.......................................... 4,995,200 1.89%
------------
BANKS
90,700 Banc One Corp................................................ 3,900,100
40,650 Citicorp..................................................... 4,186,950
127,000 C S Holding (ADR)............................................ 3,251,314
17,550 Wells Fargo & Company........................................ 4,734,113
------------
TOTAL BANKS.................................................. 16,072,477 6.07%
------------
CHEMICALS
58,900 Dow Chemical Company(a)...................................... 4,616,288
45,400 Du Pont (E.I.) De Nemours.................................... 4,284,625
55,250 Grace W.R.................................................... 2,859,188
111,700 Rhone Poulenc SA (ADR)(a)(c)................................. 3,783,838
------------
TOTAL CHEMICALS.............................................. 15,543,939 5.87%
------------
COMPUTER AND OFFICE EQUIPMENT
30,900 International Business Machines.............................. 4,665,900 1.76%
------------
DEFENSE
75,800 Raytheon Company............................................. 3,647,875 1.38%
------------
ENVIRONMENTAL MANAGEMENT
103,500 WMX Technologies............................................. 3,376,688 1.27%
------------
FINANCE
37,900 Loews Corp................................................... 3,572,075 1.35%
------------
INDUSTRIAL
64,200 Allegheny Teledyne, Inc.(a).................................. 1,476,600 0.56%
------------
INSURANCE
25,200 Aetna, Inc................................................... 2,016,000
85,650 Allstate, Corp............................................... 4,956,994
85,065 Travelers, Inc............................................... 3,859,804
------------
TOTAL INSURANCE.............................................. 10,832,798 4.09%
------------
</TABLE>
See notes to financial statements.
F-38
<PAGE> 140
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- --------- ------------ ------
<C> <S> <C> <C>
LEISURE AND RECREATION
114,200 Host Marriott Corp.(a)(c).................................... $ 1,827,200 0.69%
------------
MANUFACTURING
49,950 Hasbro, Inc.................................................. 1,941,806
35,435 Mattel....................................................... 983,321
121,300 Peninsular & Oriental (ADR)(a)(c)............................ 2,449,435
128,400 Philips Electronics N.V. (ADR)............................... 5,136,000
------------
TOTAL MANUFACTURING.......................................... 10,510,562 3.97%
------------
MEDIA
107,050 Dun & Bradstreet Corp........................................ 2,542,448
69,950 E.W. Scripps Company -- Class A.............................. 2,448,262
------------
TOTAL MEDIA.................................................. 4,990,710 1.88%
------------
MEDICAL AND OTHER HEALTH SERVICES
67,000 American Home Products Corp.................................. 3,927,875
41,800 Bristol-Myers Squibb Company................................. 4,545,753
114,100 Tenet Healthcare Corp.(a)(c)................................. 2,495,938
------------
TOTAL MEDICAL AND OTHER HEALTH SERVICES...................... 10,969,566 4.14%
------------
OIL AND GAS
61,350 Amoco Corp................................................... 4,938,675
37,900 AMR Corp.(c)................................................. 3,339,937
118,400 Elf Aquitaine (ADR)(a)....................................... 5,357,619
------------
TOTAL OIL AND GAS............................................ 13,636,231 5.15%
------------
PHARMACEUTICALS
105,119 Novartis AG (ADR)(a)......................................... 6,000,760 2.26%
------------
RETAIL
111,250 Federated Department Stores(c)............................... 3,796,406
168,000 Wal-Mart Stores, Inc. ....................................... 3,843,000
------------
TOTAL RETAIL................................................. 7,639,406 2.88%
------------
</TABLE>
See notes to financial statements.
F-39
<PAGE> 141
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- --------- ------------ -------
<C> <S> <C> <C>
TELECOMMUNICATIONS
52,300 General Instrument Corp.(c).................................. $ 1,130,988
76,500 ITT Corp.(c)................................................. 3,318,188
127,900 MCI Communications Corp. .................................... 4,180,731
52,900 Motorola, Inc. .............................................. 3,246,738
47,250 Nokia Corp. (ADR)............................................ 2,722,781
101,100 NYNEX Corp................................................... 4,865,437
152,650 Pacific Telesis Group........................................ 5,609,888
------------
TOTAL TELECOMMUNICATIONS..................................... 25,074,751 9.46%
------------
TRANSPORTATION
50,400 Burlington Northern Santa Fe................................. 4,353,300
85,600 Union Pacific Corp........................................... 5,146,700
------------
TOTAL TRANSPORTATION......................................... 9,500,000 3.59%
------------ ------
TOTAL COMMON STOCK (Cost $145,917,349)....................... 163,280,089 61.64%
------------ ------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
6,661,725 Merrimac Cash Fund-Premium Class (Cost $6,661,725)(b)........ 6,661,725 2.51%
------------ ------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
- -----------
<C> <S> <C> <C>
US GOVERNMENT SECURITIES
US TREASURY BOND
$18,050,000 US Treasury Bond, 7.875%, 11/15/04......................... 19,697,063 7.44%
------------
US TREASURY NOTES
11,230,000 US Treasury Note, 7.125%, 10/15/98(a)...................... 11,454,600
9,000,000 US Treasury Note, 8.50%, 02/15/00.......................... 9,610,308
6,190,000 US Treasury Note, 7.50%, 05/15/02.......................... 6,545,925
21,060,000 US Treasury Note, 5.75%, 08/15/03.......................... 20,428,200
29,705,000 US Treasury Note, 6.50%, 05/15/05.......................... 29,918,490
------------
TOTAL US TREASURY NOTES.................................... 77,957,523 29.43%
------------ ------
TOTAL US GOVERNMENT SECURITIES (Cost $96,698,498).......... 97,654,586 36.87%
------------ ------
</TABLE>
See notes to financial statements.
F-40
<PAGE> 142
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
CORPORATE NOTES
FINANCE
$ 8,000,000 Nomura Securities International, 7.20%, 04/23/97(b)........ $ 8,001,492
12,000,000 Republic New York Securities Corp., 7.15%, 07/15/97(b)..... 12,002,238
------------
TOTAL CORPORATE NOTES (Cost $20,003,730)................... 20,003,730 7.55%
------------ ------
TIME DEPOSIT
3,881,725 First National Bank of Boston, 7.10%, 01/02/97(b) (Cost
$3,882,450).............................................. 3,882,450 1.46%
------------ ------
TOTAL SECURITIES (Cost $273,163,752)....................... 291,482,580 110.03%
------------ ------
REPURCHASE AGREEMENT
2,455,923 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $2,456,738, 01/02/97,
(Collateralized by Federal Home Loan Mortgage
Corporation, 8.10%, due 12/01/22, with a value of
$2,578,944) (Cost $2,456,326)............................ 2,456,326 0.93%
------------ ------
Total Investments (Cost $275,620,078)...................... 293,938,906 110.96%
Other assets less liabilities.............................. (29,029,067) (10.96)%
------------ ------
NET ASSETS................................................. $264,909,839 100.00%
============ ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $276,099,585.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation.............................. $ 19,889,279
Gross unrealized depreciation.............................. (2,049,958)
Net unrealized appreciation................................ $ 17,839,321
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
(c) Non-income producing security
(ADR) -- American Depository Receipt
See notes to financial statements.
F-41
<PAGE> 143
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
COMMON STOCK
AEROSPACE
120,000 Northrop Grumman Corp. .................................... $ 9,930,000
120,000 Textron, Inc. ............................................. 11,310,000
160,000 United Technologies........................................ 10,560,000
------------
TOTAL AEROSPACE............................................ 31,800,000 3.32%
------------
AUTOMOBILES
120,000 Chrysler Corp. ............................................ 3,960,000
130,000 Ford Motor Company......................................... 4,143,750
90,000 General Motors Corp. ...................................... 5,017,500
------------
TOTAL AUTOMOBILES.......................................... 13,121,250 1.37%
------------
BANKS
210,000 Banc One Corp. ............................................ 9,030,000
220,000 Bank of New York........................................... 7,425,000
130,000 BankAmerica Corp. ......................................... 12,967,500
100,000 Bankers Trust New York Corp. .............................. 8,625,000
110,000 Chase Manhattan Corp. ..................................... 9,817,500
130,000 First Union Corp. (N.E.)................................... 9,620,000
300,000 Great Western Financial.................................... 8,700,000
290,000 H. F. Ahmanson & Company................................... 9,425,000
110,000 Nationsbank Corp. ......................................... 10,752,500
40,000 Wells Fargo & Company...................................... 10,790,000
------------
TOTAL BANKS................................................ 97,152,500 10.15%
------------
CHEMICALS
80,000 Dow Chemical Company(a).................................... 6,270,000
120,000 Du Pont (E.I.) De Nemours.................................. 11,325,000
150,000 Merck & Company, Inc. ..................................... 11,887,500
325,000 Monsanto Company........................................... 12,634,375
220,000 Olin Corp.(a).............................................. 8,277,500
------------
TOTAL CHEMICALS............................................ 50,394,375 5.27%
------------
COMPUTERS AND OFFICE EQUIPMENT
230,000 General Signal(a).......................................... 9,832,500
140,000 Harris Corp., Inc. ........................................ 9,607,500
120,000 Honeywell, Inc. ........................................... 7,890,000
200,000 Pitney Bowes, Inc. ........................................ 10,900,000
230,000 Xerox Corp. ............................................... 12,103,750
------------
TOTAL COMPUTERS AND OFFICE EQUIPMENT....................... 50,333,750 5.26%
------------
</TABLE>
See notes to financial statements.
F-42
<PAGE> 144
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
CONSUMER GOODS AND SERVICES
220,000 Avon Products, Inc. ....................................... $ 12,567,500
130,000 Colgate-Palmolive Company.................................. 11,992,500
270,000 Dana Corp. ................................................ 8,808,750
150,000 Eastman Kodak Company...................................... 12,037,500
80,000 GATX Corp. ................................................ 3,880,000
250,000 General Electric Company................................... 24,718,750
140,000 Minnesota Mining & Manufacturing(a)........................ 11,602,500
320,000 Ogden Corp. ............................................... 6,000,000
------------
TOTAL CONSUMER GOODS AND SERVICES.......................... 91,607,500 9.57%
------------
ELECTRONICS
270,000 AMP, Inc. ................................................. 10,361,250
100,000 Eaton Corp. ............................................... 6,975,000
150,000 Emerson Electric........................................... 14,512,500
220,000 Thomas & Betts Corp. ...................................... 9,762,500
------------
TOTAL ELECTRONICS.......................................... 41,611,250 4.35%
------------
FINANCE
180,000 American Express Company................................... 10,170,000
290,000 Federal National Mortgage Association...................... 10,802,500
------------
TOTAL FINANCE.............................................. 20,972,500 2.19%
------------
INDUSTRIAL
120,000 Carpenter Technology....................................... 4,395,000
110,000 Reynolds Metals Company.................................... 6,201,250
170,000 Timken Company............................................. 7,798,750
90,000 USX-US Steel Group, Inc. .................................. 2,823,750
------------
TOTAL INDUSTRIAL........................................... 21,218,750 2.22%
------------
INSURANCE
95,000 Aetna, Inc. ............................................... 7,600,000
110,000 Allstate Corp. ............................................ 6,366,250
90,000 CIGNA Corp. ............................................... 12,296,250
180,000 Lincoln National Corp. .................................... 9,450,000
------------
TOTAL INSURANCE............................................ 35,712,500 3.73%
------------
MACHINERY
140,000 Cooper Industries, Inc. ................................... 5,897,500
210,000 Deere & Company............................................ 8,531,250
160,000 Goulds Pumps............................................... 3,670,000
110,000 Harsco Corp. .............................................. 7,535,000
------------
TOTAL MACHINERY............................................ 25,633,750 2.68%
------------
</TABLE>
See notes to financial statements.
F-43
<PAGE> 145
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
MEDICAL AND OTHER HEALTH SERVICES
150,000 Baxter International, Inc. ................................ $ 6,150,000
40,000 Meditrust Corp. ........................................... 1,600,000
------------
TOTAL MEDICAL AND OTHER HEALTH SERVICES.................... 7,750,000 0.81%
------------
METALS AND MINING
160,000 Freeport McMoran Copper & Gold -- Class A.................. 4,500,000
40,000 Phelps Dodge Corp. ........................................ 2,700,000
------------
TOTAL METALS AND MINING.................................... 7,200,000 0.75%
------------
OIL AND GAS
120,000 Amoco Corp.(a)............................................. 9,660,000
70,000 Atlantic Richfield Company................................. 9,275,000
80,544 British Petroleum PLC (ADR)................................ 11,386,908
150,000 Chevron Corp. ............................................. 9,750,000
140,000 Consolidated Natural Gas................................... 7,735,000
270,000 Dresser Industries, Inc. .................................. 8,370,000
151,160 El Paso Natural Gas Company................................ 7,633,580
110,000 Exxon Corp. ............................................... 10,780,000
80,000 Mobil Corp. ............................................... 9,780,000
180,000 Questar Corp. ............................................. 6,615,000
80,000 Royal Dutch Petroleum (ADR)(a)............................. 13,660,000
160,000 Sonat, Inc. ............................................... 8,240,000
120,000 Tenneco, Inc. ............................................. 5,415,000
120,000 Texaco, Inc. .............................................. 11,775,000
300,000 Williams Companies, Inc. .................................. 11,250,000
------------
TOTAL OIL AND GAS.......................................... 141,325,488 14.77%
------------
PAPER AND FOREST PRODUCTS
70,000 Georgia-Pacific Corp. ..................................... 5,040,000
130,000 International Paper Company(a)............................. 5,248,750
120,000 Union Camp Corp. .......................................... 5,730,000
160,000 Weyerhauser Company........................................ 7,580,000
------------
TOTAL PAPER AND FOREST PRODUCTS............................ 23,598,750 2.47%
------------
PHARMACEUTICALS
180,000 American Home Products Corp. .............................. 10,552,500
90,000 Bristol-Myers Squibb Company............................... 9,787,500
160,000 Eli Lilly & Company........................................ 11,680,000
90,000 Pfizer, Inc. .............................................. 7,458,750
100,000 Pharmacia & Upjohn, Inc. .................................. 3,962,500
80,000 Schering-Plough Corp. ..................................... 5,180,000
</TABLE>
See notes to financial statements.
F-44
<PAGE> 146
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
PHARMACEUTICALS (CONTINUED)
160,000 Smithkline Beecham PLC (ADR)............................... $ 10,880,000
160,000 Warner Lambert Company..................................... 12,000,000
------------
TOTAL PHARMACEUTICALS...................................... 71,501,250 7.47%
------------
PUBLISHING
120,000 Dun & Bradstreet Corp. .................................... 2,850,000
240,000 Mcgraw-Hill Companies, Inc. ............................... 11,070,000
------------
TOTAL PUBLISHING........................................... 13,920,000 1.45%
------------
REAL ESTATE INVESTMENT TRUST
80,000 Avalon Properties, Inc. ................................... 2,300,000
90,000 Bay Apartment Communities.................................. 3,240,000
70,000 Crescent Real Estate Equities.............................. 3,692,500
80,000 Developers Divers Realty Corp. ............................ 2,970,000
80,000 Equity Residential Properties.............................. 3,300,000
80,000 Felcor Suite Hotels, Inc. ................................. 2,830,000
200,000 Health Care Property Invest, Inc. ......................... 7,000,000
80,000 Healthcare Realty Trust.................................... 2,120,000
100,000 Irvine Apartment Communities............................... 2,500,000
45,000 Redwood Trust, Inc. ....................................... 1,676,250
------------
TOTAL REAL ESTATE INVESTMENT TRUST......................... 31,628,750 3.31%
------------
TELECOMMUNICATIONS
100,000 Ameritech Corp. ........................................... 6,062,500
100,000 Bell Atlantic Corp. ....................................... 6,475,000
160,000 Bellsouth Corp. ........................................... 6,460,000
160,000 GTE Corp. ................................................. 7,280,000
80,000 NYNEX Corp. ............................................... 3,850,000
170,000 Pacific Telesis Group...................................... 6,247,500
120,000 SBC Communications, Inc. .................................. 6,210,000
150,000 Sprint Corp. .............................................. 5,981,250
150,000 US West, Inc. ............................................. 4,837,500
------------
TOTAL TELECOMMUNICATIONS................................... 53,403,750 5.58%
------------
TOBACCO
160,000 American Brands, Inc. ..................................... 7,940,000
100,000 Philip Morris Companies, Inc. ............................. 11,262,500
------------
TOTAL TOBACCO.............................................. 19,202,500 2.01%
------------
</TABLE>
See notes to financial statements.
F-45
<PAGE> 147
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
TRANSPORTATION
53,584 Conrail, Inc. ............................................. $ 5,338,306
110,000 Norfolk Southern Corp. .................................... 9,625,000
100,000 Union Pacific Corp. ....................................... 6,012,500
------------
TOTAL TRANSPORTATION....................................... 20,975,806 2.19%
------------
UTILITIES
150,000 American Electric Power, Inc. ............................. 6,168,750
160,000 Carolina Power & Light..................................... 5,840,000
140,000 FPL Group, Inc. ........................................... 6,440,000
240,000 Southern Company........................................... 5,430,001
------------
TOTAL UTILITIES............................................ 23,878,751 2.50%
------------ ------
TOTAL COMMON STOCK (Cost $665,864,243)..................... 893,943,170 93.42%
------------ ------
PREFERRED STOCK
COMPUTERS AND OFFICE EQUIPMENT
15,000 Microsoft Corp., $2.196 Preferred Stock -- Class A (Cost
$1,201,225).............................................. 1,201,875 0.13%
------------ ------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
6,275,504 Merrimac Cash Fund-Premium Class (Cost $6,275,504)(b)...... 6,275,504 0.66%
------------ ------
PRINCIPAL
- -----------
CONVERTIBLE BOND
COMMUNICATIONS EQUIPMENT
$ 2,000,000 Motorola, Inc., 0.00%, 09/07/09 (a) (cost $1,710,000)...... 2,262,500 0.24%
------------ ------
CORPORATE BONDS
FINANCE
20,000,000 Republic New York Securities Corp., 7.15%, 07/15/97 (Cost
$20,003,672) (b)......................................... 20,003,672 2.09%
------------ ------
COMMERCIAL PAPER
600,000 American Express Credit Corp., 5.33%, 01/09/97............. 599,289
3,000,000 Avco Financial Services -- Canada, 5.34%, 01/21/97......... 2,991,100
2,000,000 Avco Financial Services, Inc., 5.32%, 01/23/97............. 1,993,498
3,000,000 Banc One Corp., 5.46%, 01/06/97............................ 2,997,725
10,000,000 Barclay's Bank PLC, 5.29%, 01/06/97........................ 9,992,653
3,000,000 CIT Group Holdings, Inc., 5.48%, 01/31/97.................. 2,986,300
4,000,000 CIT Group Holdings, Inc., 5.33%, 01/06/97.................. 3,997,039
2,700,000 CIT Group Holdings, Inc., 5.35%, 02/25/97.................. 2,677,931
1,500,000 Enterprise, 5.77%, 01/09/97................................ 1,498,077
200,000 General Electric Capital Corp., 5.50%, 01/27/97............ 199,206
1,000,000 General Electric Capital Corp., 5.50%, 01/30/97............ 995,569
</TABLE>
See notes to financial statements.
F-46
<PAGE> 148
EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
$ 100,000 General Electric Capital Corp., 5.41%, 01/09/97............ $ 99,880
3,000,000 General Motors Acceptance Corp., 5.36%, 01/24/97........... 2,989,727
4,200,000 ITT Hartford, 5.30%, 01/24/97.............................. 4,185,778
4,000,000 Merrill Lynch and Company, Inc., 5.34%, 01/27/97........... 3,984,573
3,000,000 National Rural Utilities Corp., 5.30%, 01/10/97............ 2,996,025
2,000,000 Paccar Financial Company, 5.44%, 01/03/97.................. 1,999,395
1,600,000 Sears Roebuck Acceptance Corp., 5.40%, 01/07/97............ 1,598,560
4,000,000 Sony Capital Corp., 5.30%, 01/14/97........................ 3,992,345
5,300,000 Southwestern Bell Capital, 5.52%, 01/30/97................. 5,276,433
2,600,000 Weyerhaeuser Mortgage Company, 5.90%, 01/07/97............. 2,597,443
------------
TOTAL COMMERCIAL PAPER (Cost $60,648,546).................. 60,648,546 6.34%
------------ ------
TIME DEPOSIT
4,216,896 First National Bank of Boston, 7.10%, 01/02/97 (Cost
$4,217,670)(b)........................................... 4,217,670 0.44%
------------ ------
SHORT TERM US GOVERNMENT AGENCY SECURITIES
300,000 Federal Home Loan Mortgage Discount Note, 5.42%,
01/06/97................................................. 299,774
300,000 Federal National Mortgage Association, 5.24%, 01/03/97..... 299,914
200,000 Federal National Mortgage Association, 5.34%, 03/21/97..... 197,656
------------
TOTAL SHORT TERM US GOVERNMENT (Cost $797,344)............. 797,344 0.08%
------------ ------
TOTAL SECURITIES (Cost $760,718,204)....................... 989,350,281 103.40%
------------ ------
REPURCHASE AGREEMENT
26,910 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $26,919, 01/02/97
(Collateralized by Federal National Mortgage Association,
7.92%, due 08/01/24 with a value of $28,562) (Cost
$26,914)................................................. 26,914 0.00%
------------ ------
Total Investments (Cost $760,745,118)...................... 989,377,195 103.40%
Other assets less liabilities.............................. (32,556,526) (3.40)%
------------ ------
NET ASSETS................................................. $956,820,669 100.00%
============ ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31,1996 is $760,484,068.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation.............................. $231,988,767
Gross unrealized depreciation.............................. (3,095,640)
------------
Net unrealized appreciation................................ $228,893,127
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
(ADR) -- American Depository Receipts
See notes to financial statements.
F-47
<PAGE> 149
EQUITY VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
COMMON STOCK
AEROSPACE
3,600 Allied Signal, Inc. ......................................... $ 241,242 0.83%
AUTOMOBILES
6,200 General Motors Corp. ........................................ 345,650
21,300 Ford Motor Company........................................... 678,938
TOTAL AUTOMOBILES............................................ 1,024,588 3.53%
BANKS
2,300 Chase Manhattan Corp. ....................................... 205,275
6,500 First Chicago National Bank Corp. ........................... 349,375
TOTAL BANKS.................................................. 554,650 1.91%
CHEMICALS
5,700 Du Pont (E.I.) de Nemours.................................... 537,937
7,300 Eastman Chemical Company..................................... 403,325
6,100 Hercules, Inc. .............................................. 263,825
4,700 PPG Industries, Inc. ........................................ 263,787
3,600 Union Carbide Corp. ......................................... 147,150
10,700 WMX Technologies............................................. 349,087
TOTAL CHEMICALS.............................................. 1,965,111 6.77%
COMPUTERS AND OFFICE EQUIPMENT
12,600 Digital Equipment Corp.(c)................................... 458,325
4,400 International Business Machines.............................. 664,400
13,300 Xerox Corp. ................................................. 699,913
TOTAL COMPUTERS AND OFFICE EQUIPMENT......................... 1,822,638 6.28%
CONSTRUCTION
4,600 Fluor Corp. ................................................. 288,650
9,200 Masco Corp. ................................................. 331,200
TOTAL CONSTRUCTION........................................... 619,850 2.13%
CONSUMER GOODS AND SERVICES
3,000 Eastman Kodak Company........................................ 240,750
1,400 Kimberly-Clark Corp. ........................................ 133,350
TOTAL CONSUMER GOODS AND SERVICES............................ 374,100 1.29%
DEFENSE
5,800 Raytheon Co. ................................................ 279,125 0.96%
ELECTRONICS
12,000 AMP, Inc. ................................................... 460,500
5,700 Rockwell International Corp.(c).............................. 346,988
3,000 Texas Instruments............................................ 191,250
TOTAL ELECTRONICS............................................ 998,738 3.44%
</TABLE>
See notes to financial statements.
F-48
<PAGE> 150
EQUITY VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- --------
---
<C> <S> <C> <C>
FINANCE
10,000 Dean Witter Discover & Company............................... $ 662,500
4,800 Loews Corp. ................................................. 452,400
TOTAL FINANCE................................................ 1,114,900 3.84%
FOOD AND BEVERAGE
6,700 Albertson's, Inc. ........................................... 238,688
6,100 Anheuser Busch Companies, Inc. .............................. 244,000
15,780 Archer Daniels Midland....................................... 347,160
1,800 CPC International, Inc. ..................................... 139,500
TOTAL FOOD AND BEVERAGE...................................... 969,348 3.34%
INSURANCE
9,800 Aetna, Inc. ................................................. 784,000
11,400 Allstate Corp. .............................................. 659,775
1,700 American International Group................................. 184,025
13,300 Chubb Corp. ................................................. 714,875
3,700 General Re Corp. ............................................ 583,675
3,500 UNUM Corp. .................................................. 252,875
TOTAL INSURANCE.............................................. 3,179,225 10.95%
MEDIA
12,200 Time Warner, Inc. ........................................... 457,500
14,500 US West Media Group(c)....................................... 268,250
TOTAL MEDIA.................................................. 725,750 2.50%
MEDICAL AND OTHER HEALTH SERVICES
2,600 Becton Dickinson & Company................................... 112,775
4,900 Cognizant Corp. ............................................. 161,710
19,700 Columbia/HCA Healthcare Corp. ............................... 802,775
16,800 Humana, Inc.(c).............................................. 321,300
8,200 United Healthcare Corp.(c)................................... 369,000
TOTAL MEDICAL AND OTHER HEALTH SERVICES...................... 1,767,560 6.09%
METALS AND MINING
4,500 Aluminum Company of America.................................. 286,875
8,000 LTV Corp. ................................................... 95,000
11,300 Newmont Mining............................................... 505,675
TOTAL METALS AND MINING...................................... 887,550 3.06%
OIL AND GAS
7,300 Amerada Hess Corp. .......................................... 422,488
3,400 Amoco Corp. ................................................. 273,740
3,800 Mobil Corp. ................................................. 464,550
23,900 Occidental Petroleum......................................... 558,662
</TABLE>
See notes to financial statements.
F-49
<PAGE> 151
EQUITY VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
OIL AND GAS (CONTINUED)
900 Texaco, Inc. ................................................ $ 88,312
9,800 Union Pacific Resources Group................................ 286,650
TOTAL OIL AND GAS............................................ 2,094,402 7.21%
PAPER AND FOREST PRODUCTS
10,200 Champion International....................................... 441,150
2,500 Georgia-Pacific Corp. ....................................... 180,000
3,600 International Paper Company.................................. 145,350
TOTAL PAPER AND FOREST PRODUCTS.............................. 766,500 2.64%
PHARMACEUTICALS
4,300 Bristol-Myers Squibb Company................................. 467,650
14,300 Pharmacia & Upjohn, Inc. .................................... 566,638
TOTAL PHARMACEUTICALS........................................ 1,034,288 3.56%
RETAIL
16,000 Dillard Department Stores.................................... 494,000
17,300 Federated Department Stores(c)............................... 590,363
8,600 May Department Stores........................................ 402,050
10,100 Sears Roebuck................................................ 465,863
TOTAL RETAIL................................................. 1,952,276 6.72%
TELECOMMUNICATIONS
32,000 American Telephone & Telegraph Corp. ........................ 1,392,000
10,700 Frontier Corp. .............................................. 242,087
15,400 GTE Corp. ................................................... 700,700
9,500 ITT Corp.(c)................................................. 412,062
16,000 NYNEX Corp. ................................................. 770,000
10,300 SBC Communications, Inc. .................................... 533,025
5,800 Sprint Corp. ................................................ 231,275
40,400 Tele-Communications, Inc. Series A(c)........................ 527,725
TOTAL TELECOMMUNICATIONS..................................... 4,808,874 16.57%
TRANSPORTATION
3,300 AMR Corp.(c)................................................. 290,813
1,100 Burlington Northern Santa Fe................................. 95,013
11,700 CSX Corp. ................................................... 494,325
4,000 Delta Air Lines, Inc. ....................................... 283,500
TOTAL TRANSPORTATION......................................... 1,163,651 4.01%
UTILITIES
4,500 Texas Utilities Company...................................... 183,375 0.63%
-------
----
TOTAL COMMON STOCK (Cost $26,959,909)........................ 28,527,741 98.26%
-------
----
</TABLE>
See notes to financial statements.
F-50
<PAGE> 152
EQUITY VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
REPURCHASE AGREEMENT
$1,693,220 With Investors Bank & Trust dated 12/31/96, 5.91%, repurchase
proceeds at maturity $1,693,776, 01/02/97 (Collateralized by
Federal Home Loan Mortgage Corp., 7.65%, due 09/01/18 with a
value of $1,777,969) (Cost $1,693,498)....................... $ 1,693,498 5.83%
----------- -------
Total Investments (Cost $28,653,407)......................... 30,221,239 104.09%
Other assets less liabilities................................ (1,187,726) (4.09)%
----------- -------
NET ASSETS................................................... $29,033,513 100.00%
========== ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $28,673,560.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation................................ $ 2,162,357
Gross unrealized depreciation................................ (614,678)
-----------
Net unrealized appreciation.................................. $ 1,547,679
==========
</TABLE>
- ---------------
(c) Non-income producing security
See notes to financial statements.
F-51
<PAGE> 153
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
----- ------------ -------
<C> <S> <C> <C>
COMMON STOCK
AEROSPACE
34,500 Boeing Company.............................................. $ 3,669,937
28,100 Textron, Inc................................................ 2,648,425
43,100 United Technologies......................................... 2,844,600
------------
TOTAL AEROSPACE............................................. 9,162,962 4.41%
------------
APPAREL
57,900 CVS Corp.(c)................................................ 2,395,612
40,700 Liz Claiborne............................................... 1,572,038
------------
TOTAL APPAREL............................................... 3,967,650 1.91%
------------
BANKS
38,100 Bank of Boston Corp......................................... 2,447,925
41,700 BankAmerica Corp............................................ 4,159,575
56,200 Barnett Banks, Inc.......................................... 2,311,225
25,500 Chase Manhattan Corp........................................ 2,275,875
37,200 Citicorp.................................................... 3,831,600
58,150 MBNA Corp................................................... 2,413,225
------------
TOTAL BANKS................................................. 17,439,425 8.40%
------------
CHEMICALS
40,600 Du Pont (E.I.) de Nemours................................... 3,831,625
50,700 Merck & Company, Inc........................................ 4,017,975
100,600 Monsanto Company............................................ 3,910,825
68,600 Praxair, Inc................................................ 3,164,175
31,300 Sherwin Williams Company.................................... 1,752,800
------------
TOTAL CHEMICALS............................................. 16,677,400 8.03%
------------
COMPUTER AND OFFICE EQUIPMENT
68,150 Computer Associates International, Inc...................... 3,390,462
59,900 EMC Corp.(c)................................................ 1,984,187
36,900 Intel Corp.(a).............................................. 4,831,594
51,800 Microsoft Corp.(c).......................................... 4,279,975
41,600 Peoplesoft(a)(c)............................................ 1,994,200
------------
TOTAL COMPUTER AND OFFICE EQUIPMENT......................... 16,480,418 7.94%
------------
COMPUTER AND SOFTWARE SERVICES
24,100 3Com Corp.(c)............................................... 1,768,338
58,700 Cisco Systems, Inc.(c)...................................... 3,734,787
32,300 Compaq Computer(c).......................................... 2,398,275
27,800 Computer Sciences Corp.(c).................................. 2,283,075
</TABLE>
See notes to financial statements.
F-52
<PAGE> 154
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
----- ------------ ------
<C> <S> <C> <C>
COMPUTER AND SOFTWARE SERVICES (CONTINUED)
59,500 Honeywell, Inc.............................................. $ 3,912,125
30,700 Parametric Technology Corp.(c).............................. 1,577,213
------------
TOTAL COMPUTER AND SOFTWARE SERVICES........................ 15,673,813 7.55%
------------
CONSUMER GOODS AND SERVICES
41,700 Avon Products, Inc.......................................... 2,382,112
23,300 Clorox Company.............................................. 2,338,737
46,000 Eastman Kodak Company....................................... 3,691,500
47,900 General Electric Company.................................... 4,736,113
61,200 Gillette Company............................................ 4,758,300
57,900 Nike, Inc. -- Class B....................................... 3,459,525
67,200 Service Corporation International........................... 1,881,600
------------
TOTAL CONSUMER GOODS AND SERVICES........................... 23,247,887 11.20%
------------
ELECTRONICS
37,700 Texas Instruments........................................... 2,403,375 1.16%
------------
FINANCE
43,300 American Express Company.................................... 2,446,450
57,700 Federal National Mortgage Association....................... 2,149,325
23,800 Franklin Resources, Inc..................................... 1,627,325
58,700 First Data Corp............................................. 2,142,550
18,600 Household International, Inc................................ 1,715,850
25,700 Lowes Company, Inc.......................................... 912,350
------------
TOTAL FINANCE............................................... 10,993,850 5.30%
------------
FOOD AND BEVERAGE
28,000 Campbell Soup Company....................................... 2,247,000
33,300 Safeway, Inc.(a)(c)......................................... 1,423,575
------------
TOTAL FOOD AND BEVERAGE..................................... 3,670,575 1.77%
------------
INSURANCE
67,232 Travelers, Inc.............................................. 3,050,635 1.47%
------------
LEISURE AND RECREATION
25,200 HFS, Inc.(c)................................................ 1,505,700
40,600 Marriott International, Inc................................. 2,243,150
------------
TOTAL LEISURE AND RECREATION................................ 3,748,850 1.81%
------------
MACHINERY
51,000 Baker Hughes, Inc........................................... 1,759,500
29,800 Case Corp................................................... 1,624,100
------------
TOTAL MACHINERY............................................. 3,383,600 1.63%
------------
</TABLE>
See notes to financial statements.
F-53
<PAGE> 155
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ ------
<C> <S> <C> <C>
MANUFACTURING
17,000 Armstrong World Industries, Inc............................. $ 1,181,500 0.57%
------------
MEDIA
31,100 Gannett Company, Inc........................................ 2,328,613
27,400 Tribune Company............................................. 2,161,175
------------
TOTAL MEDIA................................................. 4,489,788 2.16%
------------
MEDICAL AND OTHER HEALTH SERVICES
40,950 Cardinal Health, Inc.(a).................................... 2,385,337
44,600 Healthsouth Corp.(c)........................................ 1,722,675
41,000 HBO & Company............................................... 2,434,375
54,900 Johnson & Johnson........................................... 2,731,275
30,900 Medtronic, Inc.............................................. 2,101,200
18,100 Oxford Health Plans, Inc.(c)................................ 1,059,981
48,000 United States Surgical Corp.(a)............................. 1,890,000
------------
TOTAL MEDICAL AND OTHER HEALTH SERVICES..................... 14,324,843 6.90%
------------
OIL AND GAS
23,100 British Petroleum PLC (ADR)................................. 3,265,763
55,300 Enron Corp.................................................. 2,384,812
37,000 Halliburton Company......................................... 2,229,250
28,500 Schlumberger Ltd............................................ 2,846,438
54,000 Sonat, Inc.................................................. 2,781,000
------------
TOTAL OIL AND GAS........................................... 13,507,263 6.51%
------------
PHARMACEUTICALS
75,100 Abbott Laboratories......................................... 3,811,325
31,300 Eli Lilly & Company......................................... 2,284,900
46,600 Pfizer, Inc................................................. 3,861,975
49,900 Warner Lambert Company...................................... 3,742,500
------------
TOTAL PHARMACEUTICALS....................................... 13,700,700 6.60%
------------
RETAIL
52,700 CompUSA, Inc.(a)(c)......................................... 1,086,937
58,300 Dayton-Hudson Corp.......................................... 2,288,275
55,200 Federated Department Stores(c).............................. 1,883,700
44,000 Harcourt General, Inc....................................... 2,029,500
86,400 Sears Roebuck............................................... 3,985,200
39,500 TJX Companies, Inc.......................................... 1,871,313
48,400 Walgreen Company............................................ 1,936,000
------------
TOTAL RETAIL................................................ 15,080,925 7.26%
------------
</TABLE>
See notes to financial statements.
F-54
<PAGE> 156
GROWTH & INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ------------ -------
<C> <S> <C> <C>
TELECOMMUNICATIONS
27,600 Cascade Communications Corp.(c)............................. $ 1,521,450
13,100 Cincinnati Bell, Inc........................................ 807,288
71,300 Sprint Corp................................................. 2,843,088
32,200 Tellabs, Inc.(c)............................................ 1,211,525
------------
TOTAL TELECOMMUNICATIONS.................................... 6,383,351 3.07%
------------
TOBACCO
73,600 RJR Holdings Group, Inc..................................... 2,502,400 1.20%
------------ ------
TOTAL COMMON STOCK (Cost $179,034,540)...................... 201,071,210 96.85%
------------ ------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
7,833,262 Merrimac Cash Fund -- Premium Class (Cost $7,833,262)(b).... 7,833,262 3.77%
------------ ------
PRINCIPAL
- ----------
COMMERCIAL PAPER
$4,000,000 Republic New York Securities Corp., 7.15%, 07/15/97
(Cost $4,001,339)(b)........................................ 4,001,339 1.93%
------------ ------
TIME DEPOSIT
2,041,838 First National Bank of Boston, 7.10%, 01/02/97 (Cost 2,042,522 0.98%
$2,042,522)(b)..............................................
------------ ------
TOTAL SECURITIES (Cost $192,911,663)........................ 214,948,333 103.53%
------------ ------
REPURCHASE AGREEMENT
6,968,633 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase
proceeds at maturity $6,970,921, 01/02/97 (Collateralized by
Federal Home Loan Mortgage Corp., 7.71% due 05/01/25
with a value of $7,317,773) (Cost $6,969,777)............... 6,969,777 3.36%
------------ ------
Total Investments (Cost $199,881,440)....................... 221,918,110 106.89%
Other assets less liabilities............................... (14,305,684) (6.89)%
------------ ------
NET ASSETS.................................................. $207,612,426 100.00%
============ ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $200,071,840.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation............................... $ 24,400,784
Gross unrealized depreciation............................... (2,554,514)
------------
Net unrealized appreciation................................. $ 21,846,270
============
</TABLE>
- ---------------
(a) All or part of this security is on loan
(b) Collateral for securities on loan
(c) Non-income producing security
See notes to financial statements.
F-55
<PAGE> 157
EQUITY GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ------------ ----------
<C> <S> <C> <C>
COMMON STOCK
AEROSPACE
73,600 Sundstrand Corp. ......................................... $ 3,128,000
49,000 Textron, Inc. ............................................ 4,618,250
119,000 United Technologies....................................... 7,854,000
------------
TOTAL AEROSPACE........................................... 15,600,250 5.22%
------------
APPAREL
68,400 Nine West Group, Inc.(c).................................. 3,172,050 1.06%
------------
BANKS
71,200 BankAmerica Corp. ........................................ 7,102,200
70,500 Chase Manhattan Corp. .................................... 6,292,125
59,100 Nationsbank Corp. ........................................ 5,777,025
------------
TOTAL BANKS............................................... 19,171,350 6.41%
------------
CHEMICALS
42,200 Grace W.R. ............................................... 2,183,850
108,600 Hercules, Inc. ........................................... 4,696,950
137,500 Merck & Company, Inc. .................................... 10,896,875
185,800 Monsanto Company.......................................... 7,222,975
136,500 Praxair, Inc. ............................................ 6,296,063
------------
TOTAL CHEMICALS........................................... 31,296,713 10.46%
------------
COMPUTER AND OFFICE EQUIPMENT
129,600 Corporate Express, Inc.(c)................................ 3,815,100 1.28%
------------
COMPUTER AND SOFTWARE SERVICES
175,600 3Com Corp.(c)............................................. 12,884,650
125,900 Adaptec, Inc.(c).......................................... 5,036,000
59,600 Computer Associates International, Inc. .................. 2,965,100
250,525 CUC International, Inc.(c)................................ 5,949,969
51,600 Honeywell, Inc. .......................................... 3,392,700
16,700 Rational Software Corp.(c)................................ 660,694
178,900 Peoplesoft(c)............................................. 8,576,018
------------
TOTAL COMPUTER AND SOFTWARE SERVICES...................... 39,465,131 13.19%
------------
CONSUMER GOODS AND SERVICES
107,300 Avon Products, Inc. ...................................... 6,129,512
117,700 Gillette Company.......................................... 9,151,175
203,600 Service Corporate International........................... 5,700,800
------------
TOTAL CONSUMER GOODS AND SERVICES......................... 20,981,487 7.01%
------------
</TABLE>
See notes to financial statements.
F-56
<PAGE> 158
EQUITY GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ------------ ------
<C> <S> <C> <C>
ELECTRONICS
110,300 Fore Systems, Inc.(c)..................................... $ 3,626,112
68,800 Intel Corp. .............................................. 9,008,500
90,000 Texas Instruments......................................... 5,737,500
------------
TOTAL ELECTRONICS......................................... 18,372,112 6.14%
------------
ENVIRONMENTAL MANAGEMENT
93,000 WMX Technologies.......................................... 3,034,125 1.01%
------------
FINANCIAL SERVICES
154,600 First Data Corp. ......................................... 5,642,900
83,800 Student Loan Marketing Association........................ 7,803,875
------------
TOTAL FINANCIAL SERVICES.................................. 13,446,775 4.50%
------------
FOOD AND BEVERAGE
108,500 Boston Chicken, Inc.(c)................................... 3,892,437 1.30%
------------
INSURANCE
163,630 Travelers, Inc. .......................................... 7,424,694 2.48%
------------
LEISURE AND RECREATION
103,000 HFS, Inc.(c).............................................. 6,154,250
237,600 Hilton Hotels............................................. 6,207,300
------------
TOTAL LEISURE AND RECREATION.............................. 12,361,550 4.13%
------------
MACHINERY
72,600 Thermo Electron Corp.(c).................................. 2,994,750 1.00%
------------
MEDICAL AND OTHER HEALTH SERVICES
81,100 Boston Scientific Corp.(c)................................ 4,866,000
117,700 Guidant Corp. ............................................ 6,708,900
134,500 HBO & Company............................................. 7,985,937
112,800 Medtronic, Inc. .......................................... 7,670,400
------------
TOTAL MEDICAL AND OTHER HEALTH SERVICES................... 27,231,237 9.10%
------------
PHARMACEUTICALS
114,700 American Home Products Corp. ............................. 6,724,287
96,800 Eli Lilly & Company....................................... 7,066,400
112,300 Schering-Plough Corp...................................... 7,271,425
------------
TOTAL PHARMACEUTICALS..................................... 21,062,112 7.04%
------------
RETAIL
231,300 Dayton-Hudson Corp. ...................................... 9,078,525
113,200 Home Depot, Inc. ......................................... 5,674,150
84,700 Kohls Corp.(c)............................................ 3,324,475
------------
TOTAL RETAIL.............................................. 18,077,150 6.04%
------------
</TABLE>
See notes to financial statements.
F-57
<PAGE> 159
EQUITY GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ------------ ------
<C> <S> <C> <C>
TELECOMMUNICATIONS
110,000 Ascend Communications, Inc.(c)............................ $ 6,833,750
117,700 Cascade Communications Corp.(c)........................... 6,488,212
------------
TOTAL TELECOMMUNICATIONS.................................. 13,321,962 4.45%
------------
TOBACCO
84,900 Philip Morris Companies, Inc. ............................ 9,561,864 3.20%
------------
TRANSPORTATION
68,500 Burlington Northern Santa Fe.............................. 5,916,688 1.99%
------------ ------
TOTAL SECURITIES (Cost $276,480,203)...................... 290,199,537 97.01%
------------ ------
PRINCIPAL
REPURCHASE AGREEMENT
$6,062,596 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $6,064,586, 01/02/97,
(Collateralized by Federal Home Loan Mortgage Corp.,
7.78%, due 08/01/24 with a value of $6,366,113)
(Cost $6,063,591)......................................... 6,063,591 2.03%
------------ ------
Total Investments (Cost $282,543,794)..................... 296,263,128 99.04%
Other assets less liabilities............................. 2,864,558 0.96%
------------ ------
NET ASSETS................................................ $299,127,686 100.00%
============ ======
The aggregate cost of investments for federal income tax purposes at December 31, 1996 is
$282,543,794.
The following amount is based on costs for federal income tax purposes:
Gross unrealized appreciation............................. $20,146,269
Gross unrealized depreciation............................. (6,426,935)
------------
Net unrealized appreciation............................... $13,719,334
============
</TABLE>
- ---------------
(c) Non-income producing security
See notes to financial statements.
F-58
<PAGE> 160
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
COMMON STOCK
ADVERTISING
27,700 Catalina Marketing Corp.(c)................................ $ 1,526,963
88,337 HA-LO Industries, Inc.(c).................................. 2,429,268
5,300 Snyder Communications, Inc.(c)............................. 143,100
------------
TOTAL ADVERTISING.......................................... 4,099,331 0.81%
------------
AEROSPACE
146,600 AAR Corp. ................................................. 4,434,650 0.87%
------------
APPAREL
74,700 Catherines Stores Corp.(c)................................. 410,850
13,800 Fila Holdings Spa (ADR)(a)................................. 802,125
61,700 Gadzooks, Inc.(c).......................................... 1,126,025
30,600 Gucci Group................................................ 1,954,575
3,600 Loehmann's, Inc.(c)........................................ 82,800
15,500 The Finish Line............................................ 327,438
------------
TOTAL APPAREL.............................................. 4,703,813 0.93%
------------
AUTOMOTIVE PRODUCTS
37,300 Donnelly Corp. ............................................ 913,850 0.18%
------------
BANKS
144,000 American Federal Bank...................................... 2,718,000
68,873 First Republic BanCorp, Inc.(c)............................ 1,153,623
125,600 First Savings Bank of Washington........................... 2,307,900
71,535 First Union Corp. ......................................... 5,293,590
158,330 HUBCO, Inc. ............................................... 3,879,085
116,400 Norwalk Savings Society(a)................................. 2,720,850
110,000 Peoples Bank............................................... 3,176,250
160,000 Roosevelt Financial Group, Inc. ........................... 3,360,000
145,400 Sterling Financial Corp.(c)................................ 2,053,775
------------
TOTAL BANKS................................................ 26,663,073 5.26%
------------
BUILDING MATERIALS
10,000 Penn-America Group, Inc.(c)................................ 161,250 0.03%
------------
BUSINESS SERVICES
80,800 Accustaff, Inc.(a)(c)...................................... 1,706,900
56,500 Alternative Resources Corp.(c)............................. 981,687
54,800 American Business Information(c)........................... 1,219,300
10,000 CSS Industries, Inc. ...................................... 260,000
30,000 F.Y.I., Inc. .............................................. 626,250
41,900 Iron Mountain, Inc.(c)..................................... 1,267,475
</TABLE>
See notes to financial statements.
F-59
<PAGE> 161
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
BUSINESS SERVICES (CONTINUED)
70,000 Labor Ready, Inc. ......................................... $ 945,000
51,600 Manpower, Inc. ............................................ 1,677,000
------------
TOTAL BUSINESS SERVICES.................................... 8,683,612 1.71%
------------
CHEMICALS
70,576 TETRA Tech, Inc.(c)........................................ 1,393,876 0.27%
------------
COMMERCIAL SERVICES
49,500 Greenwich Air Services -- Class B.......................... 1,101,375
128,300 Protection One, Inc.(a).................................... 1,266,962
------------
TOTAL COMMERCIAL SERVICES.................................. 2,368,337 0.47%
------------
COMPUTERS AND OFFICE EQUIPMENT
70,000 Amplicon, Inc. ............................................ 1,382,500
49,600 Applix, Inc.(c)............................................ 1,085,000
118,550 Cable Design Technologies(c)............................... 3,689,869
36,200 CIBER, Inc.(a)(c).......................................... 1,086,000
61,300 Compaq Computer(c)......................................... 4,551,525
39,500 Computer Associates International, Inc. ................... 1,965,125
65,100 Comverse Technology, Inc.(c)............................... 2,461,594
18,600 Documentum, Inc.(a)(c)..................................... 627,750
31,400 Encad, Inc.(c)............................................. 1,295,250
54,400 Intel Corp.(a)............................................. 7,123,000
10,500 Jaco Electronics, Inc. .................................... 89,250
101,100 May & Speh, Inc.(c)........................................ 1,238,475
72,500 National Data Corp. ....................................... 3,153,750
35,000 Pure Atria Corp.(c)........................................ 866,250
2,820 Radius, Inc.(c)............................................ 1,498
146,300 Seagate Technology, Inc.(a)(c)............................. 5,778,850
145,300 Sterling Commerce, Inc.(a)(c).............................. 5,121,825
121,000 US Office Products Company(a).............................. 4,129,125
35,100 Visio Corp.(a)(c).......................................... 1,737,450
------------
TOTAL COMPUTERS AND OFFICE EQUIPMENT....................... 47,384,086 9.34%
------------
COMPUTER SOFTWARE AND SERVICES
46,120 Aspen Technologies, Inc.(c)................................ 3,701,130
76,100 Cadence Design Systems, Inc.(c)............................ 3,024,975
131,500 Cambridge Technology Partners(c)........................... 4,413,469
28,500 INSO Corp.(a)(c)........................................... 1,132,875
53,300 JDA Software Group, Inc.(c)................................ 1,519,050
41,300 National Computer System, Inc. ............................ 1,053,150
52,800 Network Appliance, Inc.(c)................................. 2,686,200
</TABLE>
See notes to financial statements.
F-60
<PAGE> 162
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
COMPUTER SOFTWARE AND SERVICES (CONTINUED)
19,800 Parametric Technology Corp.(c)............................. $ 1,017,225
29,000 Platinum Entertainment(c).................................. 232,000
43,700 Project Software & Development(c).......................... 1,851,789
85,200 Rational Software Corp.(a)(c).............................. 3,370,725
24,400 Renaissance Solutions, Inc.(c)............................. 1,091,900
41,900 Sapient Corp.(c)........................................... 1,765,038
19,500 Scopus Technology, Inc.(c)................................. 906,750
18,800 Sterling Software(a)(c).................................... 594,550
69,900 Ultrak, Inc.(c)............................................ 2,131,950
33,600 Veritas Software Corp.(c).................................. 1,671,600
59,500 Whittman-Hart, Inc.(c)..................................... 1,524,688
68,200 Wind River Systems(c)...................................... 3,230,975
------------
TOTAL COMPUTER SOFTWARE AND SERVICES....................... 36,920,039 7.29%
------------
CONSTRUCTION
173,300 Daniel Industries.......................................... 2,556,175
90,000 Michael Baker Corp.(c)..................................... 573,750
------------
TOTAL CONSTRUCTION......................................... 3,129,925 0.62%
------------
CONSUMER GOODS AND SERVICES
67,500 Blyth Industries, Inc.(a)(c)............................... 3,079,687
38,900 Carriage Services, Inc.(c)................................. 870,387
39,500 CUC International, Inc.(c)................................. 938,125
83,300 Helen of Troy, Ltd. ....................................... 1,832,600
42,000 LSI LTG Systems, Inc. ..................................... 556,500
69,000 Parlux Fragrances, Inc.(c)................................. 284,625
------------
TOTAL CONSUMER GOODS AND SERVICES.......................... 7,561,924 1.49%
------------
EDUCATION
53,900 Alrenco, Inc.(c)........................................... 572,688
179,825 ITT Educational Services, Inc.(c).......................... 4,158,453
152,500 Kinder Care Learning Centers(c)............................ 2,859,375
32,700 Landauer, Inc. ............................................ 801,150
37,650 Learning Tree International(c)............................. 1,110,675
569,100 National Education Corp.(c)................................ 8,678,775
47,000 Sylvan, Inc.(c)............................................ 611,000
------------
TOTAL EDUCATION............................................ 18,792,116 3.70%
------------
ELECTRICAL EQUIPMENT
57,200 Sawtek, Inc.(c)............................................ 2,266,550 0.45%
------------
</TABLE>
See notes to financial statements.
F-61
<PAGE> 163
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
ELECTRONICS
200,600 Alpha Industries, Inc.(c).................................. $ 1,579,725
217,100 Charter Power Systems...................................... 6,621,550
67,500 Electro Rent Corp.(c)...................................... 1,679,062
104,600 Fore Systems, Inc.(c)...................................... 3,438,725
59,300 Gentex Corp.(c)............................................ 1,193,412
141,400 ILC Technology, Inc.(c).................................... 1,838,200
46,200 Input/Output, Inc.(c)...................................... 854,700
34,700 Perceptron, Inc. .......................................... 1,188,475
79,530 Richardson Electronics..................................... 656,123
40,000 Sanmina Corp.(a)(c)........................................ 2,260,000
65,730 Sterling Electronics(c).................................... 879,139
29,100 Uniphase Corp.(c).......................................... 1,527,750
36,800 Vitesse Semiconductor Corp.(c)............................. 1,674,400
------------
TOTAL ELECTRONICS.......................................... 25,391,261 5.01%
------------
ENGINEERING
19,500 Fluke Corp. ............................................... 870,187
105,000 Rogers Corp.(c)............................................ 2,848,125
111,500 URS Corp.(c)............................................... 1,003,500
------------
TOTAL ENGINEERING.......................................... 4,721,812 0.93%
------------
ENVIRONMENTAL MANAGEMENT SERVICES
114,900 ABM Industries, Inc. ...................................... 2,125,650
53,000 American Disposal Services(c).............................. 980,500
34,300 BHA Group, Inc. ........................................... 553,088
59,500 National Sanitary Supply................................... 780,938
54,000 Newpark Resources, Inc.(c)................................. 2,011,500
66,200 Republic Industries, Inc.(a)(c)............................ 2,064,613
30,000 Superior Services, Inc.(c)................................. 611,250
96,900 United Waste Systems, Inc.(c).............................. 3,330,938
96,550 US Filter Corp.(a)(c)...................................... 3,065,462
------------
TOTAL ENVIRONMENTAL MANAGEMENT SERVICES.................... 15,523,939 3.06%
------------
FINANCE
161,700 Allied Capital Advisers, Inc.(c)........................... 929,775
108,500 Allied Capital Commercial Corp. ........................... 2,522,625
83,500 Allied Capital Corp. ...................................... 1,315,125
85,392 Allied Capital Lending Company............................. 1,302,228
30,000 CACI International, Inc.(c)................................ 630,000
125,200 Cash American Investments, Inc. ........................... 1,064,200
106,470 Charter One Financial, Inc. ............................... 4,471,740
</TABLE>
See notes to financial statements.
F-62
<PAGE> 164
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
FINANCE (CONTINUED)
46,588 Concord EFS, Inc.(c)....................................... $ 1,316,097
80,100 ContiFinancial Corp.(c).................................... 2,893,613
28,000 Dollar Tree Stores, Inc.(c)................................ 1,071,000
27,500 Phoenix Duff & Phelps Corp. ............................... 195,937
42,700 Sirrom Capital Corp. ...................................... 1,569,225
95,500 The Money Store, Inc.(a)................................... 2,638,188
60,000 Washington Mutual, Inc. ................................... 2,598,750
------------
TOTAL FINANCE.............................................. 24,518,503 4.83%
------------
FOOD AND BEVERAGE
54,900 CKE Restaurants, Inc. ..................................... 1,976,400
21,200 Culligan Water Technologies(c)............................. 858,600
1,300 Dairymart Convenient Stores -- Class A(c).................. 5,850
27,200 Glacier Water Services, Inc.(c)............................ 622,200
52,000 Landry's Seafood Restaurants(c)............................ 1,111,500
238,300 Ruby Tuesday, Inc.(c)...................................... 4,408,550
26,700 Scotsman Industries, Inc. ................................. 630,788
------------
TOTAL FOOD AND BEVERAGE.................................... 9,613,888 1.90%
------------
FORESTRY PRODUCTS
31,000 Fibreboard Corp.(c)........................................ 1,046,250 0.21%
------------
FREIGHT AND CARGO
113,800 Air Express International Corp. ........................... 3,670,050
52,900 Atlas Air, Inc.(c)......................................... 2,525,975
105,474 Fritz Companies, Inc.(a)(c)................................ 1,344,794
238,700 Harper Group, Inc. ........................................ 5,669,125
40,500 Intercargo, Inc. .......................................... 346,781
190,050 Pittston Burlington Group.................................. 3,801,000
------------
TOTAL FREIGHT AND CARGO.................................... 17,357,725 3.42%
------------
INDUSTRIAL
27,000 Zoltek Companies, Inc.(a)(c)............................... 982,125 0.19%
------------
INSURANCE
80,000 HCC Insurance Holdings, Inc. .............................. 1,920,000
38,600 National Western Life Insurance -- Class A(c).............. 3,358,200
36,200 Penn Treaty American Corp. ................................ 941,200
66,400 Western National Corp. .................................... 1,278,200
208,800 Willis Corroon Group (ADR)................................. 2,401,200
------------
TOTAL INSURANCE............................................ 9,898,800 1.95%
------------
</TABLE>
See notes to financial statements.
F-63
<PAGE> 165
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
LEISURE AND RECREATION
46,700 Dover Downs Entertainment(c)............................... $ 834,762
61,300 Harveys Casinos Resorts.................................... 1,034,437
41,500 HFS, Inc.(c)............................................... 2,479,625
28,000 Nimbus CD International, Inc.(c)........................... 238,000
16,800 Sun International Hotels, Ltd.(a).......................... 613,200
------------
TOTAL LEISURE AND RECREATION............................... 5,200,024 1.03%
------------
MACHINERY
76,000 K-Tron International, Inc.(c).............................. 779,000
70,100 Varco International, Inc. ................................. 1,621,062
------------
TOTAL MACHINERY............................................ 2,400,062 0.47%
------------
MANUFACTURING
56,000 Chase Brass Industries, Inc.(c)............................ 1,113,000
52,700 DT Industries, Inc. ....................................... 1,844,500
139,800 Lydall, Inc.(c)............................................ 3,145,500
33,050 Watsco, Inc. .............................................. 954,319
------------
TOTAL MANUFACTURING........................................ 7,057,319 1.39%
------------
MEDIA
75,000 Golden Books Family Entertainment(c)....................... 834,375
119,800 Granite Broadcasting Corp.(a)(c)........................... 1,272,875
85,500 Houghton Mifflin Company................................... 4,841,437
19,500 Premiere Radio Networks, Inc.(c)........................... 246,187
50,500 Premiere Radio Networks -- Class A(c)...................... 637,562
308,600 Steck Vaughn Publishing Corp.(c)........................... 3,394,600
------------
TOTAL MEDIA................................................ 11,227,036 2.21%
------------
MEDICAL AND OTHER HEALTH SERVICES
128,600 Advocat, Inc.(c)........................................... 932,350
46,300 Chemed Corp. .............................................. 1,689,950
69,000 Community Care of America(c)............................... 284,625
72,600 Gulf South Medical Supply, Inc.(c)......................... 1,860,375
54,400 HBO & Company.............................................. 3,230,000
33,200 Hologic, Inc.(c)........................................... 821,700
61,300 Lifeline Systems, Inc.(c).................................. 1,072,750
39,900 Living Centers Of America(c)............................... 1,107,225
138,000 Morrison Health Care, Inc. ................................ 2,035,500
2,000 Neuromedical Systems, Inc. ................................ 26,500
83,700 Omnicare, Inc. ............................................ 2,688,862
60,100 Ornda HealthCorp.(c)....................................... 1,757,925
71,600 Orthodontic Centers Of America(a)(c)....................... 1,145,600
</TABLE>
See notes to financial statements.
F-64
<PAGE> 166
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
MEDICAL AND OTHER HEALTH SERVICES (CONTINUED)
285,000 Owens & Minor Holding Company.............................. $ 2,921,250
4,000 Pacificare Health Systems -- Class B....................... 341,000
48,600 Physician Sales & Service(c)............................... 698,625
36,100 Quintiles Transnational Corp.(a)(c)........................ 2,391,625
45,000 Quorum Health Group, Inc.(c)............................... 1,338,750
109,600 Renal Treatment Centers, Inc.(c)........................... 2,794,800
55,200 Retirement Care Associates(c).............................. 455,400
28,000 Summit Care Corp.(c)....................................... 458,500
48,400 Sunrise Assisted Living, Inc.(c)........................... 1,349,150
27,000 Target Therapeutics, Inc.(c)............................... 1,134,000
194,400 Universal Health Services -- Class B(c).................... 5,564,700
------------
TOTAL MEDICAL AND OTHER HEALTH SERVICES.................... 38,101,162 7.51%
------------
METALS AND MINING
38,500 Furon Company.............................................. 818,125
52,200 RMI Titanium Company(a)(c)................................. 1,468,125
29,300 Wolverine Tube, Inc.(c).................................... 1,032,825
------------
TOTAL METALS AND MINING.................................... 3,319,075 0.65%
------------
OIL AND GAS
87,900 Berry Petroleum............................................ 1,263,562
64,100 Pool Energy Services(c).................................... 985,537
49,000 Pride Petroleum Services, Inc.(a)(c)....................... 1,139,250
14,800 Schlumberger, Ltd. ........................................ 1,478,150
78,900 Tosco Corp. ............................................... 6,242,962
46,400 World Fuel Services Corp. ................................. 1,032,400
------------
TOTAL OIL AND GAS.......................................... 12,141,861 2.39%
------------
PHARMACEUTICALS
56,000 Applied Analytical Industries, Inc.(c)..................... 1,071,000
66,800 Dura Pharmaceuticals, Inc.(c).............................. 3,189,700
1,059 Gensia, Inc.(c)............................................ 4,898
27,300 Jones Medical Industries, Inc. ............................ 999,863
33,400 NCS HealthCare, Inc. -- Class A(c)......................... 972,775
26,500 Parexel International Corp.(c)............................. 1,368,062
------------
TOTAL PHARMACEUTICALS...................................... 7,606,298 1.50%
------------
REAL ESTATE INVESTMENT TRUST
115,900 Equity Inns, Inc. ......................................... 1,506,700
32,800 Health Care Property Investments, Inc. .................... 1,148,000
39,000 Remedy Corp.(c)............................................ 2,096,250
</TABLE>
See notes to financial statements.
F-65
<PAGE> 167
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ ------
<C> <S> <C> <C>
REAL ESTATE INVESTMENT TRUST (CONTINUED)
57,800 RFS Hotel Investors, Inc. ................................. $ 1,141,550
44,500 Roc Communities, Inc. ..................................... 1,234,875
35,000 Sun Communities, Inc. ..................................... 1,207,500
------------
TOTAL REAL ESTATE INVESTMENT TRUST......................... 8,334,875 1.64%
------------
RETAIL
29,000 ACC Corp. ................................................. 877,250
86,300 American Safety Razor Company(c)........................... 1,208,200
50,750 Chicago Miniature Lamp, Inc.(c)............................ 2,106,125
139,000 Consolidated Stores Corp.(c)............................... 4,465,375
75,100 Fred's, Inc. .............................................. 647,737
175,000 MacFrugals Bargains Close-Outs(c).......................... 4,571,875
155,200 Michael Anthony Jewelers, Inc.(c).......................... 475,300
43,000 Uni-Marts, Inc. ........................................... 247,250
57,200 Vitalink Pharmacy Services(a)(c)........................... 1,315,600
11,900 Wet Seal, Inc. -- Class A(c)............................... 254,362
------------
TOTAL RETAIL............................................... 16,169,074 3.19%
------------
SECURITY SYSTEMS
32,600 ADT, Ltd.(c)............................................... 745,725
78,000 Corestaff, Inc.(c)......................................... 1,847,625
201,000 Pittston Brink's Group..................................... 5,427,000
36,700 Quantum Corp.(a)(c)........................................ 1,050,538
309,300 Sensormatic Electronics Corp.(a)........................... 5,180,775
------------
TOTAL SECURITY SYSTEMS..................................... 14,251,663 2.81%
------------
TELECOMMUNICATIONS
82,700 Aaron Rents, Inc. -- Class B............................... 982,063
47,000 Act Networks, Inc.(c)...................................... 1,715,500
7,900 American Telephone & Telegraph Corp. ...................... 343,650
11,900 Andrew Corp.(c)............................................ 631,444
69,500 Arch Communications Group, Inc.(c)......................... 651,563
76,100 Ascend Communications, Inc.(c)............................. 4,727,712
67,200 Aspect Telecommunication Corp.(c).......................... 4,267,200
6,275 Associated Group, Inc. -- Class A(c)....................... 192,956
25,675 Associated Group, Inc. -- Class B(c)....................... 763,831
19,800 Cascade Communications Corp.(c)............................ 1,091,475
15,700 Cellular Communications of Puerto Rico(c).................. 310,075
131,575 Centennial Cellular Corp. -- Class A(c).................... 1,595,347
23,500 CFW Communications Company................................. 519,938
38,100 Commnet Cellular, Inc.(c).................................. 1,062,037
</TABLE>
See notes to financial statements.
F-66
<PAGE> 168
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
124,400 Communications Central, Inc.(c)............................ $ 964,100
33,500 Data Transmission Network(c)............................... 745,375
62,000 Davel Communications Group(c).............................. 1,131,500
45,600 Davox Corp.(a)(c).......................................... 1,881,000
59,200 DSP Communications, Inc.(c)................................ 1,147,000
29,700 Emmis Broadcasting Corp. -- Class A........................ 972,675
55,000 Gray Communications System................................. 1,038,125
78,100 Inter Tel, Inc.(c)......................................... 1,483,900
119,400 Jones Intercable, Inc. -- Class A(c)....................... 1,238,775
102,800 Loral Space & Communications............................... 1,888,950
65,000 Midcom Communications, Inc.(c)............................. 552,500
120,200 Nokia Corp. (ADR).......................................... 6,926,525
4,300 Osborn Communications Corp.(c)............................. 64,030
74,500 P-Com, Inc.(c)............................................. 2,207,063
72,300 Premisys Communications, Inc.(c)........................... 2,440,124
109,100 Pronet, Inc.(c)............................................ 477,312
19,800 Qualcom, Inc.(c)........................................... 789,525
47,100 Saga Communications, Inc.(c)............................... 918,450
71,000 Sitel Corp.(c)............................................. 1,002,875
29,600 Vanguard Cellular Systems, Inc. -- Class A(c).............. 466,200
66,100 Wireless Telecom Group, Inc. .............................. 684,538
------------
TOTAL TELECOMMUNICATIONS................................... 47,875,333 9.44%
------------
TOBACCO
19,800 Philip Morris Companies, Inc. ............................. 2,229,975 0.44%
------------
TRANSPORTATION
215,000 Airborne Freight Corp. .................................... 5,025,625
198,700 CNF Transportation, Inc. .................................. 4,421,075
65,000 Sea Containers, Ltd. ...................................... 1,015,625
21,900 Seacor Holdings, Inc.(c)................................... 1,379,700
------------
TOTAL TRANSPORTATION....................................... 11,842,025 2.33%
------------
UTILITIES
600,000 El Paso Electric Company(c)................................ 3,900,000 0.77%
------------ ------
Total Common Stock (Cost $392,527,734)..................... 470,186,517 92.69%
------------ ------
REGULATED INVESTMENT COMPANY
MONEY MARKET FUND
22,801,372 Merrimac Cash Fund -- Premium Class (Cost
$22,801,372)(b).......................................... 22,801,372 4.49%
------------
</TABLE>
See notes to financial statements.
F-67
<PAGE> 169
SPECIAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ----------- ------------ -------
<C> <S> <C> <C>
TIME DEPOSITS
$ 7,491,678 First National Bank of Boston, 7.10%, 01/02/97(b).......... $ 7,493,636
5,000,000 Harris Trust & Savings Bank, 6.50%, 01/02/97(b)............ 5,001,252
19,000,000 Republic New York Securities Corp., 7.15%, 07/15/97(b)..... 19,004,756
------------
TOTAL TIME DEPOSITS (Cost $31,499,644)..................... 31,499,644 6.21%
------------ -------
TOTAL SECURITIES (Cost $446,828,750)....................... 524,487,533 103.39%
------------ -------
REPURCHASE AGREEMENTS
23,538,299 With Investor's Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $23,546,027, 01/02/97
(Collateralized by various United States Government
Agency Obligations, 6.50% -- 7.99%, due 05/20/22 to
02/20/26, with a total value of $24,715,268) (Cost
$23,542,163)............................................. 23,542,163
12,756,338 With Investor's Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $12,760,526, 01/02/97
(Collateralized by Federal Home Loan Mortgage
Corporation, 8.21%, due 11/01/23 with a value of
$4,975,533 and Federal National Mortgage Association,
6.46%, due 01/25/25 with a value of $8,419,058) (Cost
$12,758,432)............................................. 12,758,432
4,016,318 With Investor's Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $4,017,636 01/02/97
(Collateralized by Federal National Mortgage Association,
6.91%, due 07/01/18 with a value of $4,217,753) (Cost
$4,016,977).............................................. 4,016,977
4,508,214 With Investor's Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $4,509,694 01/02/97
(Collateralized by Federal Home Loan Mortgage
Corporation, 7.41%, due 04/01/24 with a value of
$4,733,999) (Cost $4,508,954)............................ 4,508,954
------------
TOTAL REPURCHASE AGREEMENTS (Cost $44,826,526)............. 44,826,526 8.84%
------------ -------
Total Investments (Cost $491,655,276)...................... 569,314,059 112.23%
Other assets less liabilities.............................. (62,049,816) (12.23)%
------------ -------
NET ASSETS................................................. $507,264,243 100.00%
=========== ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $494,020,516.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation.............................. $ 94,819,037
Gross unrealized depreciation.............................. (19,525,494)
------------
Net unrealized appreciation................................ $ 75,293,543
===========
</TABLE>
- ---------------
(a) All or part of this security is on loan.
(b) Collateral for securities on loan.
(c) Non-income producing security.
(ADR) -- American Depository Receipt
See notes to financial statements.
F-68
<PAGE> 170
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
COMMON STOCK
BUILDING AND CONSTRUCTION
15,500 Eagle Hardware & Garden, Inc.(c)............................. $ 321,624 2.08%
----------
COMPUTERS AND OFFICE EQUIPMENT
9,000 Dell Computer Corp.(c)....................................... 478,125
7,300 Dynatech Corp.(c)............................................ 323,025
10,000 EMC Corp. ................................................... 331,250
11,400 Encad, Inc.(c)............................................... 470,250
20,000 Innovex, Inc. ............................................... 540,000
3,000 Intel Corp. ................................................. 392,813
3,000 Microsoft Corp.(c)........................................... 247,875
24,800 Siebel Systems, Inc.(c)...................................... 669,600
15,000 Sun Microsystems, Inc.(c).................................... 385,313
13,700 Tech Data Corp. ............................................. 375,038
7,000 Western Digital(c)........................................... 398,125
----------
TOTAL COMPUTERS AND OFFICE EQUIPMENT......................... 4,611,414 29.79%
----------
COMPUTER SOFTWARE AND SERVICES
8,000 3Com Corp.(c)................................................ 587,000
5,000 BMC Software, Inc.(c)........................................ 206,875
24,100 Chips & Tech, Inc.(c)........................................ 439,825
6,300 Compaq Computer(c)........................................... 467,775
10,000 Compuware Corp.(c)........................................... 501,250
4,000 Electronics for Imaging(c)................................... 329,000
6,000 McAfee Associates, Inc.(c)................................... 264,000
4,000 Parametric Technology Corp.(c)............................... 205,500
10,300 Scopus Technology, Inc.(c)................................... 478,950
----------
TOTAL COMPUTER SOFTWARE AND SERVICES......................... 3,480,175 22.48%
----------
ELECTRICAL EQUIPMENT
15,900 American Power Conversion Corp.(c)........................... 433,275
7,800 Microchip Technology, Inc.(c)................................ 396,825
8,000 Sanmina Corp.(c)............................................. 452,000
----------
TOTAL ELECTRICAL EQUIPMENT................................... 1,282,100 8.28%
----------
FINANCE
6,700 Student Loan Marketing Association........................... 623,938 4.03%
----------
MEDICAL AND OTHER HEALTH SERVICES
10,000 Jones Medical Industries, Inc. .............................. 366,250
40,000 Molecular Dynamics, Inc. .................................... 430,000
----------
TOTAL MEDICAL AND OTHER HEALTH SERVICES...................... 796,250 5.14%
----------
TECHNOLOGY
17,100 Boston Technology............................................ $ 491,625 3.18%
----------
</TABLE>
See notes to financial statements.
F-69
<PAGE> 171
AGGRESSIVE EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
TELECOMMUNICATIONS
15,000 ADC Telecommunications, Inc.(c).............................. 466,874
6,500 Ascend Communications, Inc.(c)............................... 403,813
15,000 Brightpoint, Inc.(c)......................................... 446,250
5,000 Cascade Communications Corp.(c).............................. 275,625
7,000 Cisco Systems, Inc.(c)....................................... 445,375
13,700 Digital Microwave Corp.(c)................................... 381,887
12,000 Pairgain Technologies, Inc.(c)............................... 365,250
10,800 Tellabs, Inc.(c)............................................. 406,350
----------
TOTAL TELECOMMUNICATIONS..................................... 3,191,424 20.62%
---------- -----
TOTAL SECURITIES (Cost $14,563,091).......................... 14,798,550 95.60%
---------- -----
PRINCIPAL
- ----------
REPURCHASE AGREEMENT
$1,393,369 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $1,393,826, 01/02/97
(Collateralized by Federal National Mortgage Association,
6.55%, due 07/01/18 with a value of $1,463,118) (Cost
$1,393,598)................................................ 1,393,598 9.01%
---------- -----
Total Investments (Cost $15,956,689)......................... 16,192,148 104.61%
Other assets less liabilities................................ (713,018) (4.61)%
---------- -----
NET ASSETS................................................... $15,479,130 100.00%
========== =====
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $15,956,689.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation................................ $ 889,406
Gross unrealized depreciation................................ (653,947)
-----------
Net unrealized appreciation.................................. $ 235,459
==========
</TABLE>
- ---------------
(c) Non-income producing security
See notes to financial statements.
F-70
<PAGE> 172
HIGH YIELD BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES
AEROSPACE
$ 250,000 BE Aerospace, 9.75%, 03/01/03............................... $ 261,875 1.70%
-----------
AUTOMOTIVE PRODUCTS
225,000 Speedy Muffler King, Inc., 10.875%, 10/01/06................ 241,313 1.57%
-----------
APPAREL
300,000 William Carter, 10.375%, 12/01/06........................... 310,500 2.02%
-----------
BUSINESS SERVICES
180,000 Iron Mountain, 10.125%, 10/01/06............................ 190,800 1.24%
-----------
CHEMICAL
150,000 Collins & Aikman Products, 11.50%, 04/15/06................. 163,313
80,000 Foamex Limited Partnership, 11.25%, 10/01/02................ 85,200
240,000 General Chemical, Inc., 9.25%, 08/15/03..................... 245,400
-----------
TOTAL CHEMICAL.............................................. 493,913 3.22%
-----------
CONSTRUCTION
120,000 Toll Corp., 10.50%, 03/15/02................................ 124,200 0.81%
-----------
CONSUMER GOODS AND SERVICES
175,000 Purina Mills, 10.25%, 09/01/03.............................. 180,687 1.18%
-----------
ELECTRONICS
100,000 Calpine Corp., 9.25%, 02/01/04.............................. 99,875 0.65%
-----------
ENVIRONMENTAL MANAGEMENT
350,000 Allied Waste North America, 10.25%, 12/01/06................ 367,063 2.39%
-----------
FINANCE
320,000 Comcast Corp., 9.125%, 10/15/06............................. 327,200
210,000 Costilla Energy, 10.25%, 10/01/06........................... 220,763
300,000 Hawk Corp., 10.25%, 12/01/03................................ 307,500
130,000 ISP Holdings, Inc., 9.75%, 02/15/02......................... 135,525
400,000 Mesa Operating, 11.625%, 07/01/06........................... 276,000
205,000 Muzak LP/Capital, 10.00%, 10/01/03.......................... 209,612
100,000 Primark Corp., 8.75%, 10/15/00.............................. 101,000
150,000 Rayovac Corp., 10.25%, 11/01/06............................. 153,750
-----------
TOTAL FINANCE............................................... 1,731,350 11.26%
-----------
FOOD AND BEVERAGE
250,000 Ameriking, Inc., 10.75%, 12/01/06........................... 258,750
100,000 Cott Corp., 9.375%, 07/01/05................................ 102,500
160,000 Jitney-Jungle Stores, 12.00%, 03/01/06...................... 169,600
150,000 Ralphs Grocery, 10.45%, 06/15/04............................ 159,375
120,000 Smith Food & Drug, 11.25%, 05/15/07......................... 132,600
-----------
TOTAL FOOD AND BEVERAGE..................................... 822,825 5.35%
-----------
FOREST AND PAPER PRODUCTS
125,000 Repap New Brunswick, 9.875%, 07/15/00....................... 128,125
150,000 Scotts Company, 9.875%, 08/01/04............................ 156,750
-----------
TOTAL FOREST AND PAPER PRODUCTS............................. 284,875 1.85%
-----------
INDUSTRIAL
200,000 Bell & Howell Company, 0.00%, 03/01/05...................... 145,500
</TABLE>
See notes to financial statements.
F-71
<PAGE> 173
HIGH YIELD BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
FOOD AND BEVERAGE (CONTINUED)
$ 300,000 Clark Materials, 10.75%, 11/15/06........................... $ 312,000
180,000 Oregon Steel Mills, 11.00%, 06/15/03........................ 191,250
140,000 Riverwood International, 10.25%, 04/01/06................... 137,900
100,000 Schuller International Group, 10.875%, 12/15/04............. 111,375
100,000 Teekay Shipping, 8.32%, 02/01/08............................ 99,625
280,000 Westpoint Stevens, 9.375%, 12/15/05......................... 288,400
-----------
TOTAL INDUSTRIAL............................................ 1,286,050 8.37%
-----------
LEISURE AND RECREATION
200,000 Act III Theatres, 11.875%, 02/01/03......................... 216,000
100,000 Host Marriott Travel Plaza, 9.50%, 05/15/05................. 104,375
250,000 Trump Atlantic City, 11.25%, 05/01/06....................... 247,500
-----------
TOTAL LEISURE AND RECREATION................................ 567,875 3.69%
-----------
MACHINERY
100,000 Carrols Corp., 11.50%, 08/15/03............................. 105,750
80,000 Clark USA, Inc., 10.875%, 12/01/05.......................... 82,200
150,000 Mettler Toledo, 9.75%, 10/01/06............................. 157,500
175,000 Scotsman Group, 9.50%, 12/15/00............................. 180,687
-----------
TOTAL MACHINERY............................................. 526,137 3.42%
-----------
MANUFACTURING
150,000 American Standard Senior Notes, 10.875%, 05/15/99........... 160,125
225,000 Buckeye Cellulose Corp., 8.50%, 12/05/05.................... 225,562
75,000 IDEX Corp., 9.75%, 09/15/02................................. 78,750
190,000 Unisys Corp., 12.00%, 04/15/03.............................. 203,300
250,000 Viking Star Ship, 9.625%, 07/15/03.......................... 261,250
100,000 Westinghouse Air, 9.375%, 06/15/05.......................... 102,500
-----------
TOTAL MANUFACTURING......................................... 1,031,487 6.71%
-----------
MEDIA
100,000 ARA Group, 8.50%, 06/01/03.................................. 104,182
200,000 Infinity Broadcasting, 10.375%, 03/15/02.................... 212,000
50,000 Jones Intercable, 9.625%, 03/15/02.......................... 52,500
125,000 Rogers Cablesystems, Ltd., 11.00%, 12/01/15................. 134,062
190,000 Rogers Cantel, 9.375%, 06/01/08............................. 199,025
250,000 Viacom International, 8.00%, 07/07/06....................... 239,206
-----------
TOTAL MEDIA................................................. 940,975 6.12%
-----------
MEDICAL AND OTHER HEALTH SERVICES
150,000 NL Industries, Inc., 11.75%, 10/15/03....................... 158,625
210,000 Owens & Minor, Inc., 10.875%, 06/01/06...................... 225,750
120,000 Quorum Health, 8.75%, 11/01/05.............................. 123,150
-----------
TOTAL MEDICAL AND OTHER HEALTH SERVICES..................... 507,525 3.30%
-----------
METALS AND MINING
250,000 Freeport McMoran Resource Partners, 8.75%, 02/15/04......... 259,756
180,000 Renco Metals Senior Notes, 11.50%, 07/01/03................. 188,550
-----------
TOTAL METALS AND MINING..................................... 448,306 2.92%
-----------
</TABLE>
See notes to financial statements.
F-72
<PAGE> 174
HIGH YIELD BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS
- ---------- ----------- -------
<C> <S> <C> <C>
OIL AND GAS
$ 175,000 Gulf Canada Resources, Ltd., 9.25%, 01/15/04................ $ 185,500
230,000 Vintage Petroleum Senior Subordinated Notes, 9.00%,
12/15/05.................................................. 235,750
-----------
TOTAL OIL AND GAS........................................... 421,250 2.74%
-----------
PUBLISHING
210,000 Hollinger International Publishing, 9.25%, 02/01/06......... 207,900.... 1.35%
-----------
RETAIL
175,000 Finlay Fine Jewelry, 10.625%, 05/01/03...................... 182,875.... 1.19%
-----------
TELECOMMUNICATIONS
200,000 Allbritton Communications, 11.50%, 08/15/04................. 211,000
250,000 Century Communications, 9.75%, 02/15/02..................... 257,500
200,000 Essex Group, 10.00%, 05/01/03............................... 207,500
250,000 Gray Communication System, Inc., 10.625%, 10/01/06.......... 264,375
275,000 Jacor Communications, 9.75%, 12/15/06....................... 280,844
100,000 Lenfest Communications, 8.375%, 11/01/05.................... 96,625
50,000 Lenfest Communications, 10.50%, 06/15/06.................... 52,750
-----------
TOTAL TELECOMMUNICATIONS.................................... 1,370,594 8.92%
-----------
TRANSPORTATION
200,000 Sea Containers, 9.50%, 07/01/03............................. 201,500 1.31%
-----------
UTILITIES -- ELECTRIC
200,000 California Energy Company, Inc., 9.875%, 6/30/03............ 211,000
200,000 El Paso Electric Company, 8.90%, 02/01/06................... 211,000
110,000 El Paso Electric Company, 9.40%, 05/01/11................... 117,700
-----------
TOTAL UTILITIES -- ELECTRIC................................. 539,700 3.51%
----------- -------
TOTAL SECURITIES (Cost $12,969,120)......................... 13,341,450 86.79%
----------- -------
REPURCHASE AGREEMENT
1,751,164 With Investors Bank & Trust, dated 12/31/96, 5.91%,
repurchase proceeds at maturity $1,751,739, 01/02/97
(Collateralized by Federal Home Loan Mortgage Corporation
6.84%, due 11/15/23, with a value of $1,843,413) (Cost
$1,751,451)............................................... 1,751,451 11.39%
----------- -------
Total Investments (Cost $14,720,571)........................ 15,092,901 98.18%
Other assets less liabilities............................... 279,785 1.82%
----------- -------
NET ASSETS.................................................. $15,372,686 100.00%
=========== =======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $14,720,571.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C>
Gross unrealized appreciation............................... $ 397,366
Gross unrealized depreciation............................... (25,036)
-----------
Net unrealized appreciation................................. $ 372,330
==========
</TABLE>
See notes to financial statements.
F-73
<PAGE> 175
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------ -------- -------
<C> <S> <C> <C> <C>
COMMON STOCKS AND WARRANTS
AEROSPACE
99,400 CAE Industries.................................... $ 750,579 0.51% CDA
AUTOMOBILE
17,000 Daimler Benz AG(c)................................ 1,169,287 GER
50,000 Honda Motor Company, Ltd.......................... 1,425,860 JPN
67,000 Mitsubishi Motor Corp............................. 487,760 JPN
10,000 Peugeot SA(c)..................................... 1,123,349 FRA
131,000 Suzuki Motor Corp................................. 1,196,344 JPN
47,000 Toyota Motor Company.............................. 1,348,406 JPN
20,063 Valeo............................................. 1,234,946 FRA
2,400 Volkswagen AG..................................... 996,685 GER
25,000 Volvo Aktiebolag.................................. 551,038 SWE
-------------
TOTAL AUTOMOBILE.................................. 9,533,675 6.43%
-------------
BANKS
137,900 Allied Irish Banks PLC............................ 920,345 UK
15,000 Banco de Santander (ADR).......................... 952,500 SPA
2,000 Banco Popular Espanola............................ 392,081 SPA
19,000 Bangkok Bank Company, Ltd......................... 183,774 THA
330,000 Bank of Scotland.................................. 1,739,364 UK
21,000 Compagnie Financierede Suez(c).................... 891,099 FRA
11,000 CS Holdings....................................... 1,126,443 SWI
1,860 Holderbank Financial Glaris -- Class B............ 1,324,295 SWI
50,515 National Westminster Bank......................... 593,021 UK
27,500 Overseas Chinese Banking Corp..................... 342,073 SIN
101,800 Thai Farmers Bank(c).............................. 635,252 THA
23,000 The Bank of Tokyo Mitsubishi...................... 426,036 JPN
196,000 Westpac Banking Corp.............................. 1,114,613 AUS
-------------
TOTAL BANKS....................................... 10,640,896 7.18%
-------------
CHEMICALS
32,000 AGA AB -- Class B................................. 478,029 SWE
20,000 Norsk Hydro....................................... 1,080,592 NOR
-------------
TOTAL CHEMICALS................................... 1,558,621 1.05%
-------------
COMPUTER SOFTWARE AND SERVICES
7,000 Softbank Corp..................................... 493,925 0.33% JPN
-------------
CONSTRUCTION
22,000 Rohm Company...................................... 1,440,509 JPN
89,000 Sekisui House, Ltd.(c)............................ 904,792 JPN
-------------
TOTAL CONSTRUCTION................................ 2,345,301 1.58%
-------------
</TABLE>
See notes to financial statements.
F-74
<PAGE> 176
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------- ------
<C> <S> <C> <C> <C>
CONSUMER GOODS AND SERVICES
17,000 Electrolux........................................ $ 985,935 SWE
20,482 EMI Group PLC..................................... 483,613 UK
32,000 Fuji Photo Film................................... 1,053,155 JPN
12,700 Hennes & Mauritz AB -- Class B.................... 1,755,822 SWE
33,000 Hoya Corp.(c)..................................... 1,293,613 JPN
24,000 Izumi............................................. 334,968 JPN
99,000 Nikon Corp........................................ 1,228,224 JPN
22,200 Nintendo Corp., Ltd............................... 1,585,577 JPN
73,203 Reckitt and Colman PLC............................ 905,711 UK
2,000 Secom Company, Ltd................................ 120,789 JPN
15,700 Sony Corp......................................... 1,026,647 JPN
175,346 Thorn PLC(c)...................................... 759,161 UK
-------------
TOTAL CONSUMER GOODS AND SERVICES................. 11,533,215 7.78%
-------------
ELECTRONICS
750 ABB AG............................................ 930,014 SWI
25,200 Bombardier, Inc. -- Class B....................... 465,149 CDA
80,000 Electrocomponents PLC............................. 631,120 UK
50,000 Hitachi Ltd....................................... 465,235 JPN
24,000 Komori Corp....................................... 508,658 JPN
12,000 Kyocera Corp...................................... 746,446 JPN
17,000 Murata Manufacturing Company, Ltd................. 563,883 JPN
28,000 Talisman Energy, Inc.(c).......................... 931,524 CDA
-------------
TOTAL ELECTRONICS................................. 5,242,029 3.54%
-------------
ENGINEERING
17,000 Chudenko Corp..................................... 489,186 0.33% JPN
-------------
ENVIRONMENTAL MANAGEMENT SERVICES
900 Kurita Water Industries........................... 18,144 0.01% JPN
-------------
FINANCE
62,600 HSBC Holdings PLC................................. 1,398,008 UK
55,953 Lend Lease Corp., Ltd............................. 1,084,358 AUS
130,000 Lloyds TSB Group PLC(c)........................... 958,841 UK
24,000 Nomura Securities Company, Ltd.................... 359,782 JPN
6,000 Shohkoh Fund...................................... 1,302,662 JPN
84,000 Wako Securities Company, Ltd...................... 434,213 JPN
-------------
TOTAL FINANCE..................................... 5,537,864 3.74%
-------------
FOOD AND BEVERAGE
98,000 Amatil Ltd., Coca Cola............................ 1,046,905 AUS
80,000 Cadbury Schweppes PLC............................. 674,936 UK
6,300 Heineken NV....................................... 1,113,776 NET
45,000 Jusco Company..................................... 1,523,646 JPN
45,600 Lion Nathan....................................... 109,217 NZE
</TABLE>
See notes to financial statements.
F-75
<PAGE> 177
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------- ------
<C> <S> <C> <C> <C>
FOOD AND BEVERAGE (CONTINUED)
900 Nestle............................................ $ 963,193 SWI
21,000 Seagrams Company, Ltd............................. 813,750 CDA
-------------
TOTAL FOOD AND BEVERAGE........................... 6,245,423 4.22%
-------------
INDUSTRIAL
31,200 Advantest Corp.................................... 1,459,602 JPN
43,000 Alcan Aluminum, Ltd............................... 1,445,875 CDA
107,000 Kawasaki Steel.................................... 306,972 JPN
60,000 Reed International, Ltd.(c)....................... 1,127,400 UK
230,000 Western Mining Corp. Holding, Ltd................. 1,448,632 AUS
-------------
TOTAL INDUSTRIAL.................................. 5,788,481 3.91%
-------------
INSURANCE
161,210 Alleanza Assicuraz................................ 805,776 ITA
277,073 GIO Australian Holdings, Ltd...................... 708,586 AUS
12,000 Mapfre Vida Seguros............................... 830,290 SPA
62,000 Mitsui Marine & Fire Insurance.................... 332,779 JPN
78,000 Siebe PLC......................................... 1,446,931 UK
145,000 Yasuda Fire and Marine Insurance.................. 752,043 JPN
-------------
TOTAL INSURANCE................................... 4,876,405 3.29%
-------------
INVESTMENT HOLDING COMPANIES
395 Baloise Holdings.................................. 791,340 SWI
477,000 Brierley Investments, Ltd......................... 441,464 NZE
184,000 Hutchison Whampoa................................. 1,445,118 HNG
416,000 Sime Darby Berhad................................. 1,638,957 MAL
-------------
TOTAL INVESTMENT HOLDING COMPANIES................ 4,316,879 2.91%
-------------
LEISURE AND RECREATION
162,000 Euro Disneyland SCA(c)............................ 320,954 FRA
129,200 San Miquel Corp. -- Class B....................... 569,850 PHI
-------------
TOTAL LEISURE AND RECREATION...................... 890,804 0.60%
-------------
MANUFACTURING
16,600 ABB AB -- Class A................................. 1,871,990 SWE
19,800 ASM Lithography Holding NV(c)..................... 986,288 NET
8,400 Mannesmann AG..................................... 3,635,563 GER
151,000 Mitsubishi Heavy.................................. 1,196,856 JPN
99,000 Morgan Crucible Company PLC....................... 740,352 UK
10,600 Orkla Borregaard.................................. 672,317 NOR
30,800 Philips Electronics NV............................ 1,246,430 NET
24,600 Philips Electronics NV (ADR)...................... 984,000 NET
-------------
TOTAL MANUFACTURING............................... 11,333,796 7.65%
-------------
</TABLE>
See notes to financial statements.
F-76
<PAGE> 178
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------- ------
<C> <S> <C> <C> <C>
MEDIA
115,000 British Sky Broadcasting PLC...................... $ 1,027,284 UK
2,037 Canal Plus(c)..................................... 449,032 FRA
17,100 Grupo Televisa (GDR)(c)........................... 438,188 MEX
69,440 News Corp., Ltd................................... 366,213 AUS
30,000 News Corp., Ltd. (ADR)............................ 626,250 AUS
53,000 Rogers Communications -- Class B(c)............... 390,541 CDA
49,000 Singapore Press Holdings, Ltd..................... 966,814 SIN
100,000 Television Broadcasts, Ltd........................ 399,480 HNG
111,000 Thomson Corp...................................... 2,441,385 CDA
35,000 Tokyo Broadcasting................................ 533,729 JPN
-------------
TOTAL MEDIA....................................... 7,638,916 5.15%
-------------
MEDICAL AND OTHER HEALTH SERVICES
7,400 Synthelabo(c)..................................... 798,539 0.54% FRA
-------------
METALS AND MINING
46,000 Inco, Ltd......................................... 1,466,250 CDA
29,863 Pechiney SA -- Class A............................ 1,248,805 FRA
216,000 Placer Pacific, Ltd............................... 319,097 AUS
-------------
TOTAL METALS AND MINING........................... 3,034,152 2.05%
-------------
OIL AND GAS
98,000 British Gas Corp.................................. 375,663 UK
17,200 Societe Nationale ELF-Aquitaine................... 1,562,601 FRA
20,000 Suncor, Inc....................................... 827,500 CDA
15,000 YPF Sociedad Anonima -- (ADR)..................... 378,750 ARG
-------------
TOTAL OIL AND GAS................................. 3,144,514 2.12%
-------------
PHARMACEUTICALS
59,000 Astra AB.......................................... 2,911,969 SWE
8,000 Astra AB -- A Shares (ADR)(c)..................... 392,000 SWE
52,000 Banyu Pharmaceutical Company...................... 725,764 JPN
20,000 Hoechst AG........................................ 943,476 GER
3,600 Hoechst AG Warrant, (Expires: 3/19/99)............ 270,039 GER
1,275 Novartis AG....................................... 1,455,681 SWI
76,000 Sankyo Company, Ltd............................... 2,147,669 JPN
600 Zeneca Group PLC (ADR)............................ 50,400 UK
50,800 Zeneca Group PLC.................................. 1,430,061 UK
-------------
TOTAL PHARMACEUTICALS............................. 10,327,059 6.97%
-------------
REAL ESTATE
62,000 City Developments................................. 558,465 SIN
103,000 Mitsui Fudosan.................................... 1,029,372 JPN
-------------
TOTAL REAL ESTATE................................. 1,587,837 1.07%
-------------
</TABLE>
See notes to financial statements.
F-77
<PAGE> 179
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------- ------
<C> <S> <C> <C> <C>
TELECOMMUNICATIONS
86,000 Cable & Wireless.................................. $ 718,195 UK
84 DDI Corp.......................................... 554,355 JPN
12,200 Deutsche Telekom AG(c)............................ 256,886 GER
50,000 Ericsson AB -- Class B Free....................... 1,545,100 SWE
20,000 Ericsson L M Telephone (ADR)...................... 603,750 SWE
790,000 Hong Kong Telecommunications, Ltd................. 1,271,505 HNG
800 Hong Kong Telecommunications, Ltd. (ADR).......... 13,000 HNG
23,800 Nokia AB -- Class A............................... 1,377,701 FIN
8,300 Nokia AB -- Class K............................... 479,018 FIN
15,000 Northern Telecom, Ltd............................. 928,125 CDA
22,300 Portugal Telecom SA (ADR)......................... 629,975 POR
350,000 Technology Resources Industries................... 690,130 MAL
456,000 Telecom Italia Mobile............................. 1,150,077 ITA
253,000 Telecom Italia Mobile DRNC........................ 360,221 ITA
18,500 Telecomunicacoes Brasileiras (ADR)................ 1,424,319 BRA
79,000 Telefonica........................................ 1,831,133 SPA
40,600 Telefonos De Mexico (ADR)......................... 1,339,800 MEX
23,000 Vodafone Group PLC (ADR).......................... 951,625 UK
-------------
TOTAL TELECOMMUNICATIONS.......................... 16,124,915 10.88%
-------------
TEXTILES
74,000 Italcenenti Fabbriche Riunit...................... 413,675 ITA
28,000 Wacoal Corp....................................... 308,778 JPN
-------------
TOTAL TEXTILES.................................... 722,453 0.49%
-------------
TIRE AND RUBBER
58,000 Bridgestone Corp.................................. 1,099,332 0.74% JPN
-------------
TOBACCO
74,100 B.A.T. Industries................................. 613,741 UK
47,000 Imasco, Ltd....................................... 1,152,149 CDA
-------------
TOTAL TOBACCO..................................... 1,765,890 1.19%
-------------
TRANSPORTATION
50,000 Brambles Industries, Ltd.......................... 974,945 AUS
189,000 Citic Pacific, Ltd................................ 1,097,088 HNG
122,000 Kawasaki Kisen.................................... 277,476 JPN
1,400 Swissair.......................................... 1,129,199 SWI
-------------
TOTAL TRANSPORTATION.............................. 3,478,708 2.35%
-------------
UTILITIES
336,200 Consolidated Electric Power Asia.................. 788,859 HNG
228,000 Hong Kong Electric................................ 757,530 HNG
79 Nippon Telegraph and Telephone Corp............... 597,587 JPN
300 Tele Danmark -- Class B........................... 16,528 DEN
</TABLE>
See notes to financial statements.
F-78
<PAGE> 180
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
SHARES VALUE ASSETS COUNTRY
---------- ------------- ------
<C> <S> <C> <C> <C>
UTILITIES (CONTINUED)
34,600 Tele Danmark (ADR)................................ $ 942,850 DEN
550,000 Telicom Italia Spa(c)............................. 1,425,158 ITA
-------------
TOTAL UTILITIES................................... 4,528,512 3.06%
-------------
TOTAL COMMON STOCK AND WARRANTS
(Cost $123,595,817)............................. 135,846,050 91.67%
------------- ------
PREFERRED STOCKS
COMPUTER SOFTWARE AND SERVICES
4,900 Sap AG Vorzug..................................... 683,598 0.46% GER
-------------
PHARMACEUTICALS
200 Wella AG.......................................... 105,898 0.07% GER
-------------
TOTAL PREFERRED STOCKS (Cost $919,409)............ 789,496 0.53%
------------- ------
PRINCIPAL
----------
CORPORATE BONDS AND NOTES
NON-CONVERTIBLE BONDS AND NOTES
BANKS
$ 243,000 Bangkok Bank Public Company, 3.25%, 03/03/04...... 237,836 0.16% THA
-------------
CONSTRUCTION
150,830 Sekisui House 2.50%, 01/31/02..................... 162,825 0.11% JPN
-------------
TOTAL NON-CONVERTIBLE BONDS AND NOTES............. 400,661 0.27%
------------- ------
CONVERTIBLE BONDS AND NOTES
BANKS
$ 136,661 Fujitsu Ltd. Series 8, 1.90%, 03/29/03............ 145,125 JPN
266,387 Fujitsu Ltd. Series 9, 1.95%, 03/31/03............ 282,576 JPN
192,638 Fujitsu Ltd. Series 10, 2.00%, 03/31/04........... 202,629 JPN
390,000 Renong Berhad, 2.50% 01/15/05..................... 453,863 MAL
-------------
1,084,193 0.73%
-------------
TELECOMMUNICATIONS
2,000 Ericsson L M Tel, 4.25%, 06/30/00................. 8,375 0.01% SWE
-------------
TIRE AND RUBBER
270,976 Michelin CV, 6.00% 01/02/98....................... 283,746 0.19% FRA
-------------
TOTAL CONVERTIBLE BONDS AND NOTES................. 1,376,314 0.93%
------------- ------
TOTAL CORPORATE BONDS AND NOTES (Cost
$1,825,460)..................................... 1,776,975 1.20%
------------- ------
TOTAL SECURITIES (Cost $126,340,686).............. 138,412,521 93.40%
------------- ------
</TABLE>
See notes to financial statements.
F-79
<PAGE> 181
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT
OF NET
PRINCIPAL VALUE ASSETS COUNTRY
---------- ------------ -------- -------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT
With Investors Bank & Trust, dated 12/31/96,
5.91%, repurchase proceeds at maturity
$8,713,094, 01/02/97 (Collateralized by the
Federal Home Loan Mortgage Corp., 7.10%, due
05/25/23 with a value of $8,471,741 and Federal
National Mortgage Association, 6.77%, due
11/25/22 with a value of $677,555) (Cost
$8,711,664)..................................... $ 8,711,664 5.88% USA
8,710,234
------------- ------
Total Investments (Cost $135,052,350)............. 147,124,185 99.28%
Other assets less liabilities..................... 1,060,712 0.72%
------------- ------
NET ASSETS........................................ $148,184,897 100.00%
============= ======
</TABLE>
The aggregate cost of investments for federal income tax purposes at
December 31, 1996 is $135,240,256.
The following amount is based on costs for federal income tax purposes:
<TABLE>
<C> <S> <C> <C> <C>
Gross unrealized appreciation..................... $ 18,055,498
Gross unrealized depreciation..................... (6,171,569)
------------
Net unrealized appreciation....................... $ 11,883,929
===========
</TABLE>
- ---------------
(c) Non-income producing security
(ADR) -- American Depository Receipt
(GDR) -- Global Depository Receipt
See notes to financial statements.
F-80
<PAGE> 182
INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT OF TOTAL
COUNTRY COMPOSITION SECURITIES AT VALUE
- ---------------------------------------------------------------------------- -------------------
<S> <C>
Argentina (ARG)............................................................. 0.27%
Australia (AUS)............................................................. 5.56%
Brazil (BRA)................................................................ 1.03%
Canada (CDA)................................................................ 8.39%
Denmark (DEN)............................................................... 0.69%
Finland (FIN)............................................................... 1.34%
France (FRA)................................................................ 5.72%
Germany (GER)............................................................... 5.82%
Hong Kong (HNG)............................................................. 4.17%
Italy (ITA)................................................................. 3.00%
Japan (JPN)................................................................. 23.77%
Malaysia (MAL).............................................................. 2.01%
Mexico (MEX)................................................................ 1.28%
Netherlands (NET)........................................................... 3.13%
New Zealand (NZE)........................................................... 0.40%
Norway (NOR)................................................................ 1.27%
Philippines (PHI)........................................................... 0.41%
Portugal (POR).............................................................. 0.46%
Singapore (SIN)............................................................. 1.35%
Spain (SPA)................................................................. 2.89%
Sweden (SWE)................................................................ 8.02%
Switzerland (SWI)........................................................... 5.58%
Thailand (THA).............................................................. 0.76%
United Kingdom (UK)......................................................... 12.68%
------
TOTAL PERCENTAGE............................................................ 100.00%
======
</TABLE>
See notes to financial statements.
F-81
<PAGE> 183
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Diversified Investors Portfolios (the "Series Portfolio"), a series trust
organized on September 1, 1993, under the laws of the State of New York, is
composed of thirteen different series that are, in effect, separate investment
funds: the Money Market Series, the High Quality Bond Series, the Intermediate
Government Bond Series, the Government/Corporate Bond Series, the Balanced
Series, the Equity Income Series, the Equity Value Series, the Growth & Income
Series, the Equity Growth Series, the Special Equity Series, the Aggressive
Equity Series, the High-Yield Bond Series, and the International Equity Series
(each a "Series"). The Declaration of Trust permits the Board of Trustees to
issue an unlimited number of beneficial interests in each Series. Investors in a
Series (e.g., investment companies, insurance company separate accounts and
common and commingled trust funds) will each be liable for all obligations of
that Series (and of no other Series). The High-Yield Bond Series and
International Equity Series commenced operations on August 22, 1995 and
September 29, 1995, respectively. The Equity Value Series and Aggressive Value
Series commenced operations on April 19, 1996.
The International Equity Series was established by a redemption of assets
in-kind, valued at $77,137,079 from the Non-U.S. Equity Fund for Participant
Directed Plans within the Capital Guardian Collective Trust for Employee Benefit
Plans, a bank collective trust fund established and maintained by Capital
Guardian Trust Company, which were immediately invested at market value into the
Portfolio. The transaction was a non-taxable event.
2. SIGNIFICANT ACCOUNTING POLICIES
A. SECURITY VALUATION
Short-term securities having remaining maturities of 60 days or less
are valued at amortized cost or original cost plus accrued interest
receivable, both of which approximate value. The amortized cost of a
security is determined by valuing it at original cost and thereafter
amortizing any discount or premium at a constant rate until maturity.
Securities traded on national securities exchanges are valued at the last
sales price as of the close of business on each day or at the closing bid
price for over-the-counter securities. Equity securities are valued at the
last sale price on the exchange on which they are primarily traded or at
the bid price on the NASDAQ system for unlisted national market issues, or
at the last quoted bid price for securities not reported on the NASDAQ
system. Bonds are valued at the last available price provided by an
independent pricing service for securities traded on a national securities
exchange. Bonds that are listed on a national securities exchange but are
not traded and bonds that are regularly traded in the over-the-counter
market are valued at the mean of the last available bid and asked prices by
an independent pricing service. All other securities will be valued at
their fair value as determined by the Board of Trustees.
B. REPURCHASE AGREEMENTS
Each Series, along with other affiliated entities of the investment
advisor, may enter into repurchase agreements with financial institutions
deemed to be creditworthy by the Series investment advisor, subject to the
seller's agreement to repurchase and the Series agreement to resell such
securities at a mutually agreed upon price. Securities purchased subject to
repurchase agreements are segregated at the custodian, and pursuant to the
terms of the repurchase agreement must have an aggregate market value
greater than or equal to 102% and 105% of domestic and international
securities, respectively, of the repurchase price plus accrued interest at
all times. If the value of the underlying securities falls below the value
of the repurchase price plus accrued interest, the Series will require the
seller to deposit additional collateral by the next business day. If 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
F-82
<PAGE> 184
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. REPURCHASE AGREEMENTS (CONTINUED)
value and may claim any resulting loss against the seller. However, in the
event of default or bankruptcy by the seller, realization and/or retention
of the collateral may be subject to legal proceedings.
C. FOREIGN CURRENCY TRANSLATION
The accounting records of the International Equity Series are
maintained in U.S. dollars. The market values of foreign securities,
currency holdings and other assets and liabilities are translated to U.S.
dollars based on the prevailing exchange rates each business day. Income
and expenses denominated in foreign currencies are translated at prevailing
exchange rates when accrued or incurred. The Series does not isolate
realized gains and losses attributable to changes in exchange rates from
gains and losses that arise from changes in the market value of
investments. Such fluctuations are included with net realized and
unrealized gains or losses on investments. Net realized gains and losses on
foreign currency transactions represent net exchange gains and losses on
disposition of foreign currencies and foreign currency forward contracts
the difference between the amount of investment income receivable and
foreign withholding taxes receivable recorded on the Series' books and the
U.S. dollar equivalent of amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of assets
and liabilities other than investments in securities at fiscal year end and
foreign currency forward contracts, resulting from changes in the exchange
rate.
D. FOREIGN CURRENCY FORWARD CONTRACTS
Each Series may enter into foreign currency forward contracts and
forward cross currency contracts in connection with settling planned
purchases or sales of securities or to hedge the currency exposure
associated with some or all of the Series' portfolio securities. A foreign
currency forward contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
foreign currency forward contract fluctuates with changes in forward
currency exchange rates. Foreign currency forward contracts are marked to
market daily and the change in value is recorded by the Series as an
unrealized gain or loss. When a foreign currency forward is extinguished,
through delivery or offset by entering into another foreign currency
forward contract, the Series records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value of the contract at the time it was extinguished or offset. These
contracts may involve market risk in excess of the unrealized gain or loss
reflected in the Series' Statement of Assets and Liabilities and the
Statement of Operations. In addition, the Series could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar.
E. OPTIONS
Each Series, with the exception of the Money Market Series, may
purchase and write (sell) call and put options on securities indices for
the purpose of protecting against an anticipated decline in the value of
the securities held by that Series. Index options are marked to market
daily and the change in value is recorded by the Series as an unrealized
gain or loss in the "Statement of Assets and Liabilities". A realized gain
or loss equal to the difference between the exercise price and the value of
the index is recorded by the Series upon cash settlement of the option. The
use of index options may expose the Series to the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted or the value of the securities in the index may not
move in direct correlation with the movements of the Series portfolio. In
addition, there is the risk the Series may not be able to enter into a
closing transaction because of an illiquid secondary market.
F-83
<PAGE> 185
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
F. FEDERAL INCOME TAXES
It is the Series policy to comply with the applicable provisions of
the Internal Revenue Code. Therefore, no federal income tax provision is
required.
G. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on a trade date basis (the day
after the date the order to buy or sell is executed). Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and includes amortization of premium and discount on
investments. Realized gains and losses from securities transactions are
recorded on the identified cost basis.
All of the net investment income and realized and unrealized gains and
losses from security transactions are determined on each valuation day and
allocated pro rata among the investors in a Series at the time of such
determination.
H. OPERATING EXPENSES
The Series Portfolio accounts separately for the assets, liabilities
and operations of each Series. Expenses directly attributable to a Series
are charged to that Series, while expenses attributable to all Series are
allocated among them.
I. OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. FEES AND TRANSACTIONS WITH AFFILIATES
AUSA Life Insurance Company, Inc. ("AUSA") is the parent company of
Diversified Investment Advisors, Inc. (the "Advisor"). AUSA has sub-accounts
which invest in the corresponding Portfolios as follows:
<TABLE>
<CAPTION>
PERCENTAGE INVESTMENT
AUSA SUBACCOUNT IN PORTFOLIO
------------------------------------------------------------------ -----------------------
<S> <C>
Money Market...................................................... 35.19%
High Quality Bond................................................. 60.79%
Intermediate Government Bond...................................... 54.59%
Government/Corporate Bond......................................... 26.46%
Balanced.......................................................... 48.20%
Equity Income..................................................... 67.31%
Equity Value...................................................... 74.79%
Growth & Income................................................... 64.43%
Equity Growth..................................................... 87.94%
Special Equity.................................................... 58.48%
Aggressive Equity................................................. 73.21%
High Yield Bond................................................... 65.69%
International Equity.............................................. 54.00%
</TABLE>
F-84
<PAGE> 186
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FEES AND TRANSACTIONS WITH AFFILIATES (CONTINUED)
The Advisor manages the assets of each Series of the Series Portfolio
pursuant to an Investment Advisory Agreement (the "Advisory Agreement") with the
Series Portfolio with respect to each Series. Subject to such further policies
as the Board of Trustees may determine, the Advisor provides general investment
advice to each Series. For its services under the Advisory Agreement, the
Advisor receives from each Series fees accrued daily and paid monthly at an
annual rate equal to the percentages specified in the table below of the
corresponding Series' average daily net assets. The Advisor is currently waiving
a portion of its investment advisory fee.
For each Series, the Advisor has entered into an Investment Subadvisory
Agreement (each a "Subadvisory Agreement") with the subadvisors listed in the
table below (each a "Subadvisor", collectively the "Subadvisors"). It is the
responsibility of a Subadvisor to make the day-to-day investment decisions of
the Series and to place the purchase and sales orders for securities
transactions of such series, subject in all cases to the general supervision of
the Advisor. For its services under each Subadvisory Agreement, the Subadvisors
receive a fee from the Advisor at an annual rate equal to the percentages
specified in the table below of the corresponding Series' average daily net
assets.
<TABLE>
<CAPTION>
DIVERSIFIED INVESTORS PORTFOLIO ADVISOR SUBADVISORS
SERIES PORTFOLIO SUBADVISORS FEE FEE
- ----------------------------------- ------------------------------------- ------- -----------
<S> <C> <C> <C>
Money Market Series................ 1740 Advisors, Inc. 0.25%(1) 0.05%
High Quality Bond Series........... Merganser Capital Management
Corporation 0.35 (2)
Intermediate Government Bond
Series........................... 1740 Advisors, Inc. 0.35(1) 0.15
Government/Corporate Bond Series... 1740 Advisors, Inc. 0.35 0.15
Balanced Series.................... Institutional Capital Corporation 0.45 (3)
Equity Income Series............... 1740 Advisors, Inc. 0.45 0.25
Equity Value Series................ Ark Asset Management Co., Inc. 0.57(1) (4)
Growth & Income Series............. Putnam Advisory Company, Inc. 0.60(1) (5)
Equity Growth Series............... Jundt Associates, Inc.(6) 0.70 0.63
Chancellor LGT Asset Management 0.62(1) (7)
Special Equity Series.............. (8) 0.80(1) 0.50
Aggressive Equity Series........... McKinley Capital Management 0.97(1) (9)
High-Yield Bond Series............. Delaware Investment Advisors 0.55(1) (10)
International Equity Series........ Capital Guardian Trust Company 0.75(1) (11)
</TABLE>
- ---------------
(1) The Advisor is currently waiving a portion of its fee.
(2) 0.50% on the first $10,000,000 in average daily net assets, 0.375% on the
next $15,000,000 in average daily net assets, 0.25% on the next $75,000,000
in average daily net assets and 0.1875% on all average daily net assets in
excess of $100,000,000.
(3) 0.55% on the first $25,000,000 in average daily net assets, 0.45% on the
next $25,000,000 in average daily net assets, and 0.35% on all average
daily net assets in excess of $50,000,000.
(4) 0.45% on the first $100,000,000 in average daily net assets, 0.40% on the
next $50,000,000 in average daily net assets, and 0.35% on the next
$50,000,000 in average daily net assets. When average daily net assets
reach $200,000,000, 0.40% on the first $200,000,000 in average daily net
assets, and 0.35% on all average daily net assets in excess of
$200,000,000.
(5) 0.30% on the first $100,000,000 in average daily net assets, and 0.20% on
all average daily net assets in excess of $100,000,000.
F-85
<PAGE> 187
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FEES AND TRANSACTIONS WITH AFFILIATES (CONTINUED)
(6) Jundt Associates, Inc. served as the subadvisor from January 1, 1996 to
November 14, 1996. Chancellor LGT Asset Management assumed the role of
subadvisor on November 15, 1996.
(7) 0.50% on the first $50,000,000 in average daily net assets, 0.30% on the
next $75,000,000 in average daily net assets, 0.25% on the next $75,000,000
in average daily net assets, and 0.20% on all average daily net assets in
excess of $200,000,000
(8) The Special Equity Series has four Subadvisors: Pilgrim Baxter &
Associates, Ltd., Ark Asset Management Co., Inc.; Liberty Investment
Management, Inc.; and Westport Asset Management, Inc.
(9) 0.90% on the first $10,000,000 in average daily net assets, 0.80% on the
next $15,000,000 in average daily net assets, 0.60% on the next $25,000,000
in average daily net assets, 0.40% on the next $50,000,000 in average daily
net assets, and 0.35% on all average daily net assets in excess of
$100,000,000.
(10) 0.40% on the first $20,000,000 in average daily net assets, 0.30% on the
next $20,000,000 in average daily net assets, and 0.20% on all average
daily net assets in excess of $40,000,000.
(11) 0.75% on the first $25,000,000 in average daily net assets, 0.60% on the
next $25,000,000 to $50,000,000 in average daily net assets, 0.425% on the
next $50,000,000 to $250,000,000 in average daily net assets and 0.375% on
all average daily net assets in excess of $250,000,000.
For the year ended December 31, 1996, except for the Equity Value Series
and the Aggressive Equity Series which commenced operations on April 19, 1996,
the Advisor has voluntarily undertaken to waive fees in accordance with the
expense caps as follows:
<TABLE>
<CAPTION>
FUND EXPENSE CAP
--------------------------------------------------------------- ------------------------
<S> <C>
Money Market Series............................................ 30 basis points (b.p.)
High Quality Bond Series....................................... 40 b.p.
Intermediate Government Bond Series............................ 40 b.p.
Government/Corporate Bond Series............................... 40 b.p.
Balanced Series................................................ 50 b.p.
Equity Income Series........................................... 50 b.p.
Equity Value Series............................................ 60 b.p.
Growth & Income Series......................................... 65 b.p.
Equity Growth Series........................................... 65 b.p.
Special Equity Series.......................................... 85 b.p.
Aggressive Equity Series....................................... 100 b.p.
High-Yield Bond Series......................................... 60 b.p.
International Equity Series.................................... 90 b.p.
</TABLE>
For the Equity Growth Series the expense cap in effect from January 1, 1996
through November 13, 1996 was 75 b.p. Effective November 14, 1996, the Board of
Trustees approved a change in the expense cap to 65 b.p.
Certain trustees and officers of the Series Portfolio are also directors,
officers or employees of the Advisor or its affiliates. None of the trustees so
affiliated receive compensation for services as trustees of the Series
Portfolio. Similarly, none of the Series Portfolio officers receive compensation
from the Series Portfolio.
4. SECURITIES LENDING
All but the High Yield Bond Series and the International Equity Series may
lend its securities to certain member firms of the New York Stock Exchange. The
loans are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. Any
deficiencies or
F-86
<PAGE> 188
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SECURITIES LENDING (CONTINUED)
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 which is included in interest income on the Statement of
Operations. At December 31, 1996, the Series loaned securities having market
values as follows:
<TABLE>
<CAPTION>
MARKET VALUE COLLATERAL
------------ -----------
<S> <C> <C>
High Quality Bond Series.......................................... $ 3,356,277 $ 3,417,498
Intermediate Government Bond Series............................... 16,286,002 16,631,176
Government/Corporate Bond Series.................................. 9,639,531 9,971,053
Balanced Series................................................... 29,502,418 30,547,905
Equity Income Series.............................................. 29,797,013 30,496,846
Growth & Income Series............................................ 13,582,731 13,877,123
Special Equity Series............................................. 52,667,156 54,301,016
</TABLE>
5. PURCHASE AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and proceeds from sales or
maturities for the year ended December 31, 1996, except for the Equity Value
Series and the Aggressive Equity Series which commenced operations on April 19,
1996, were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
------------ ------------
<S> <C> <C> <C>
High Quality Bond Series............... Government Obligations $ 24,055,385 $ 18,413,126
Other 107,974,326 90,098,879
Intermediate Government Bond Series.... Government Obligations 85,967,508 52,555,511
Government/Corporate Bond Series....... Government Obligations 253,871,378 267,895,236
Other 250,523,876 194,568,714
Balanced Series........................ Government Obligations 94,965,762 56,847,023
Other 218,627,035 187,325,555
Equity Income Series................... Other 316,278,763 202,011,989
Equity Value Series.................... Other 39,450,502 13,550,268
Growth & Income Series................. Other 302,171,234 239,501,492
Equity Growth Series................... Other 365,020,921 326,233,791
Special Equity Series.................. Other 623,318,934 536,845,348
Aggressive Equity Series............... Other 38,819,662 25,326,665
High-Yield Bond Series................. Other 15,888,442 10,927,076
International Equity Series............ Other 75,599,345 30,145,552
</TABLE>
F-87
<PAGE> 189
DIVERSIFIED INVESTORS PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. FOREIGN CURRENCY FORWARD CONTRACTS
At December 31, 1996, the International Equity Series had entered into
Foreign Currency Forward contracts which contractually obligate the Series to
deliver/receive currency at specified future dates. The open contracts were as
follows:
<TABLE>
<CAPTION>
FOREIGN IN EXCHANGE SETTLEMENT NET UNREALIZED
CONTRACT CURRENCY FOR DATE VALUE APPRECIATION/DEPRECIATION
- --------------------------- ----------- ----------- ---------- ---------- -------------------------
<S> <C> <C> <C> <C> <C>
PURCHASES:
British Pounds............. 78,363 $ 132,504 01/08/97 $ 134,201 $ 1,697
Japanese Yen............... 42,075,400 371,875 01/16/97 364,092 (7,783)
Japanese Yen............... 18,835,455 166,996 02/12/97 163,637 (3,359)
Japanese Yen............... 58,450,000 532,477 03/10/97 509,543 (22,934)
Japanese Yen............... 25,950,000 236,403 03/10/97 226,221 (10,182)
Japanese Yen............... 15,300,000 148,558 05/19/97 134,633 (13,925)
Japanese Yen............... 15,228,000 136,942 05/19/97 134,000 (2,942)
Japanese Yen............... 11,700,000 112,587 05/30/97 103,113 (9,474)
Swiss Franc................ 212,205 159,376 01/17/97 158,501 (875)
--------
TOTAL................. $ (69,777)
========
SALES:
French Franc............... 1,359,776 269,028 02/25/97 262,809 6,219
German Duetsche Mark....... 360,849 241,000 01/21/97 234,656 6,344
German Duetsche Mark....... 499,636 333,418 02/14/97 325,399 8,019
German Duetsche Mark....... 293,580 197,153 02/25/97 191,326 5,827
German Duetsche Mark....... 176,371 115,388 03/13/97 115,049 339
Hong Kong Dollars.......... 2,479,747 319,000 11/14/97 320,571 (1,571)
Japanese Yen............... 26,566,167 230,309 01/07/97 229,565 744
Japanese Yen............... 42,075,400 381,463 01/16/97 364,092 17,371
Japanese Yen............... 18,835,455 169,887 02/12/97 163,637 6,250
Japanese Yen............... 116,897,000 1,100,000 03/10/97 1,019,060 80,940
Japanese Yen............... 51,879,030 483,000 03/10/97 452,260 30,740
Japanese Yen............... 26,008,697 239,000 04/08/97 227,565 11,435
Japanese Yen............... 30,528,000 300,000 05/19/97 268,633 31,367
Japanese Yen............... 35,139,000 340,000 05/30/97 309,682 30,318
Japanese Yen............... 141,296,127 1,299,000 10/31/97 1,272,179 26,821
Norwegian Krone............ 749,184 116,768 03/13/97 117,791 (1,023)
Swedish Krona.............. 404,853 59,934 03/13/97 59,553 381
Swiss Franc................ 212,205 169,000 01/17/97 158,501 10,499
Swiss Franc................ 1,055,900 843,573 02/04/97 789,995 53,578
Swiss Franc................ 202,530 159,951 02/19/97 151,721 8,230
Swiss Franc................ 342,230 272,000 02/19/97 256,375 15,625
Swiss Franc................ 327,680 260,809 02/25/97 245,601 15,208
Swiss Franc................ 627,708 510,000 03/27/97 471,692 38,308
Swiss Franc................ 319,023 259,000 04/09/97 240,011 18,989
--------
TOTAL................. $ 420,958
========
</TABLE>
F-88
<PAGE> 190
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F-89
<PAGE> 191
DIVERSIFIED INVESTORS PORTFOLIOS
FINANCIAL HIGHLIGHTS:
<TABLE>
<CAPTION>
RATIO OF GROSS RATIO OF EXPENSES, NET
EXPENSES OF WAIVERS TO AVERAGE
TO AVERAGE NET ASSETS NET ASSETS
---------------------- ----------------------
FOR THE YEAR FOR THE YEAR
ENDED ENDED
---------------------- ----------------------
1996 1995 1994** 1996 1995 1994**
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Money Market Series......................... 0.30% 0.31% 0.32% 0.30% 0.30% 0.30%
High Quality Bond Series.................... 0.40 0.41 0.41 0.40 0.40 0.40
Intermediate Government Bond Series......... 0.43 0.45 0.45 0.40 0.40 0.40
Government/Corporate Bond Series............ 0.39 0.39 0.40 0.39 0.39 0.40
Balanced Series............................. 0.50 0.54 0.53 0.50 0.50 0.50
Equity Income Series........................ 0.48 0.49 0.49 0.48 0.49 n/a
Equity Value Series*+....................... 1.06 n/a n/a 0.60 n/a n/a
Growth & Income Series...................... 0.67 0.68 0.67 0.65 0.65 0.65
Equity Growth Series........................ 0.73 0.75 0.76 0.73(1) 0.75 0.75
Special Equity Series....................... 0.86 0.88 0.88 0.85 0.85 0.85
Aggressive Equity Series*+.................. 1.59 n/a n/a 1.00 n/a n/a
High-Yield Bond Series++.................... 1.25 1.32 n/a 0.60 0.60 n/a
International Equity Series+++.............. 0.96 0.83 n/a 0.90 0.80 n/a
</TABLE>
- ---------------
* Annualized (except "Portfolio Turnover")
** Commencement of Operations, January 3, 1994.
*** For fiscal years beginning on or after September 1, 1995,
the Portfolios are required to disclose their average commission
rate per share for trades on which a commission is charged.
+ Commencement of Operations, April 19, 1996.
++ Commencement of Operations, August 22, 1995.
+++ Commencement of Operations, September 29, 1995.
(1) For the period 1/1/96-11/14/96, expense cap was 75 bp.
For the period 11/15/96 - 12/31/96, expense cap was 65 bp.
F-90
<PAGE> 192
<TABLE>
<CAPTION>
RATIO OF NET
RATIO OF NET INVESTMENT
INVESTMENT INCOME, NET OF WAIVERS AVERAGE
INCOME TO PORTFOLIO TO PORTFOLIO AVERAGE COMMISSION RATE
AVERAGE NET ASSETS NET ASSETS PORTFOLIO TURNOVER PER SHARE***
---------------------- ---------------------- ---------------------- ---------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
---------------------- ---------------------- ---------------------- ---------------
1996 1995 1994** 1996 1995 1994** 1996 1995 1994** 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5.19% 5.70% 4.05% 5.19% 5.69% 4.07% n/a n/a n/a n/a
6.14 5.83 5.77 6.14 5.82 5.79 66% 25% 37% n/a
5.63 5.57 5.71 5.66 5.52 5.76 60 59 21 n/a
6.30 5.90 5.71 6.30 5.90 5.72 146 122 122 n/a
3.39 4.19 3.57 3.39 4.15 3.61 113 124 118 $0.0372
2.97 3.37 3.43 2.97 3.37 3.43 26 23 30 0.0620
1.60 n/a n/a 2.07 n/a n/a 65 n/a n/a 0.0600
1.02 1.49 1.35 1.04 1.47 1.37 142 155 21 0.0476
(0.17) 0.41 0.08 (0.17) 0.41 0.11 133 62 75 0.0553
0.24 0.33 0.27 0.25 0.30 0.30 140 155 90 0.0507
(0.72) n/a n/a (0.13) n/a n/a 186 n/a n/a 0.0540
8.34 8.45 n/a 9.00 7.73 n/a 107 21 n/a n/a
1.12 0.53 n/a 1.18 0.50 n/a 29 7 n/a 0.0030
</TABLE>
F-91
<PAGE> 193
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F-92
<PAGE> 194
[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, 1996 and 1995, and the related
statutory-basis statements of operations, changes in capital and surplus, and
cash flows for each of the three years in the period ended December 31, 1996.
Our audits also included the accompanying statutory-basis financial statement
schedules pursuant to Article 7 of Regulation S-X. These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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.
As described in Note 1 to the financial statements, 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, which
practices differ from generally accepted accounting principles. The variances
between such practices and generally accepted accounting principles also are
described in Note 1. The effects on the financial statements of these variances
are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of AUSA Life Insurance Company, Inc. at December 31, 1996 and 1995, or the
results of its operations or its cash flows for each of the three years in the
period ended December 31, 1996.
F-93
<PAGE> 195
[ERNST & YOUNG LLP LETTERHEAD]
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AUSA Life Insurance Company,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with accounting practices prescribed or permitted by the Department
of Insurance of the State of New York. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
statutory-basis financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 21, 1997
F-94
<PAGE> 196
AUSA Life Insurance Company, Inc.
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---- ----
(RESTATED)
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 25,391 $ 111,533
Bonds 3,495,667 3,198,777
Stocks:
Preferred 125 426
Common, at market (cost: $13 in 1996 and
$4,212 in 1995) 18 4,407
Mortgage loans on real estate 618,633 768,424
Real estate acquired in satisfaction of debt, at cost less
accumulated depreciation ($1,087 in 1996 and $404
in 1995) 58,100 29,333
Policy loans 755 759
Other invested assets 3,393 722
---------- ----------
Total cash and invested assets 4,202,082 4,114,381
Premiums deferred and uncollected 3,257 3,365
Accrued investment income 62,258 63,062
Federal income taxes recoverable 416 1,195
Receivable from affiliates -- 1,932
Other assets 5,177 8,432
Separate account assets 4,755,131 4,249,345
---------- ----------
Total admitted assets $9,028,321 $8,441,712
========== ==========
</TABLE>
See accompanying notes.
F-95
<PAGE> 197
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---- ----
(RESTATED)
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 19,716 $ 18,159
Annuity 768,212 709,122
Accident and health 10,180 10,851
Policy and contract claim reserves:
Life 3,826 3,716
Accident and health 11,160 13,515
Other policyholders' funds 3,088,016 2,993,918
Remittances and items not allocated 16,252 28,560
Asset valuation reserve 44,849 38,958
Interest maintenance reserve 5,494 2,913
Payable to affiliates 8,074 4,028
Short-term note payable to affiliate 600 19,800
Deferred income 18,023 19,182
Payable under assumption reinsurance agreement 67,217 73,546
Other liabilities 10,748 23,662
Separate account liabilities 4,721,974 4,230,472
Total liabilities 8,794,341 8,190,402
----------- -----------
Commitments and contingencies
Capital and surplus:
Common stock, $125 par value, 20 shares authorized,
issued and outstanding 2,500 2,500
Paid-in surplus 306,694 306,694
Unassigned surplus (deficit) (75,214) (57,884)
----------- -----------
Total capital and surplus 233,980 251,310
----------- -----------
Total liabilities and capital and surplus $ 9,028,321 $ 8,441,712
=========== ===========
</TABLE>
See accompanying notes.
F-96
<PAGE> 198
AUSA Life Insurance Company, Inc.
Statements of Operations - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of reinsurance:
Life $ 9,344 $ 9,066 $ 9,048
Annuity 1,060,655 1,144,423 656,806
Accident and health 47,695 53,346 45,411
Net investment income 323,828 318,004 292,007
Amortization of interest maintenance reserve 1,903 1,931 208
Commissions and expense allowances on reinsurance ceded
11,280 8,826 11,961
----------- ----------- -----------
1,454,705 1,535,596 1,015,441
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits 39,921 40,719 37,852
Surrender benefits 852,745 815,882 488,243
Other benefits 9,778 7,804 5,068
Increase (decrease) in aggregate reserves for policies
and contracts:
Life 1,557 1,570 433
Annuity 59,090 127,403 212,984
Accident and health (671) 775 606
Other 609 609 270
Increase in liability for premium and other deposit
type funds 93,893 229,485 34,294
----------- ----------- -----------
1,056,922 1,224,247 779,750
Insurance expenses:
Commissions 87,861 95,900 110,731
General insurance expenses 79,310 69,933 68,136
Taxes, licenses and fees 2,643 1,638 1,399
Transfers to separate accounts 227,802 139,912 64,922
Other expenses 479 (37) (6)
----------- ----------- -----------
398,095 307,346 245,122
----------- ----------- -----------
1,455,017 1,531,593 1,024,872
----------- ----------- -----------
Gain (loss) from operations before federal income taxes and
net realized capital losses on investments (312) 4,003 (9,431)
Federal income tax expense 1,305 5,588 1,293
----------- ----------- -----------
Loss from operations before net realized capital losses on
investments (1,617) (1,585) (10,724)
Net realized capital losses on investments (net of related
federal income taxes and amounts transferred to interest
maintenance reserve) (12,097) (3,464) (957)
----------- ----------- -----------
Net loss $ (13,714) $ (5,049) $ (11,681)
=========== =========== ===========
</TABLE>
See accompanying notes.
F-97
<PAGE> 199
AUSA Life Insurance Company, Inc.
Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS CAPITAL AND
STOCK SURPLUS (DEFICIT) SURPLUS
----- ------- --------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 (restated) $2,500 $ 246,894 $(16,772) $ 232,622
Capital contribution -- 18,800 -- 18,800
Net loss for 1994 -- -- (11,681) (11,681)
Net unrealized capital losses -- -- (123) (123)
Increase in non-admitted assets -- -- (920) (920)
Increase in asset valuation reserve -- -- (14,168) (14,168)
Seed money contributed to separate
account, net of redemptions -- -- (15,000) (15,000)
Decrease in liability for reinsurance
in unauthorized companies -- -- 2 2
Increase in surplus in separate account -- -- 15,698 15,698
Change in reserve valuation methodology
-- -- (80) (80)
------ --------- -------- ---------
Balance at December 31, 1994 (restated) 2,500 265,694 (43,044) 225,150
Capital contribution -- 41,000 -- 41,000
Net loss for 1995 -- -- (5,049) (5,049)
Net unrealized capital losses -- -- (501) (501)
Increase in non-admitted assets -- -- (920) (920)
Increase in asset valuation reserve -- -- (10,370) (10,370)
Surplus effect of reinsurance -- -- (70) (70)
Seed money contributed to separate
account, net of redemptions -- -- (1,000) (1,000)
Increase in liability for reinsurance
in unauthorized companies -- -- (51) (51)
Increase in surplus in separate account -- -- 3,121 3,121
------ --------- -------- ---------
Balance at December 31, 1995 (restated) 2,500 306,694 (57,884) 251,310
Net loss for 1996 -- -- (13,714) (13,714)
Net unrealized capital losses -- -- (486) (486)
Decrease in non-admitted assets -- -- 520 520
Increase in liability for reinsurance
in unauthorized companies -- -- (42) (42)
Increase in asset valuation reserve -- -- (5,891) (5,891)
Seed money contributed to separate
account, net of redemptions -- -- (12,500) (12,500)
Increase in surplus in separate account -- -- 14,783 14,783
------ --------- -------- ---------
Balance at December 31, 1996 $2,500 $ 306,694 $(75,214) $ 233,980
====== ========= ======== =========
</TABLE>
See accompanying notes.
F-98
<PAGE> 200
AUSA Life Insurance Company, Inc.
Statements of Cash Flows - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
(RESTATED) (RESTATED)
<S> <C> <C> <C>
SOURCES OF CASH
Premiums and other considerations, net of reinsurance $ 1,128,792 $ 1,215,941 $ 724,388
Net investment income 329,948 316,494 282,678
----------- ----------- -----------
1,458,740 1,532,435 1,007,066
Life and accident and health claims (42,143) (39,194) (35,132)
Surrender benefits and other fund withdrawals (852,745) (815,882) (488,243)
Other benefits to policyholders (9,776) (7,789) (5,051)
Commissions, other expenses and other taxes (187,930) (183,810) (111,031)
Net transfers to separate accounts (229,556) (139,912) (64,922)
Federal income taxes, excluding tax on capital gains (526) (6,299) (1,039)
----------- ----------- -----------
Net cash provided by operations 136,064 339,549 301,648
Proceeds from investments sold, matured or repaid:
Bonds 703,936 529,363 525,148
Common stocks 5,288 2,957 6,559
Mortgage loans 165,460 138,243 189,421
Net decrease in policy loans 4 -- --
Real estate -- 4,953 32
----------- ----------- -----------
Total cash from investments 874,688 675,516 721,160
Capital contribution -- 41,000 18,800
Issuance of intercompany notes payable, net -- 14,600 5,200
Other sources 9,071 29,930 34,370
----------- ----------- -----------
Total sources of cash 1,019,823 1,100,595 1,081,178
APPLICATIONS OF CASH Cost of investments acquired:
Bonds 1,016,678 1,018,097 1,375,143
Common stocks 589 5,174 6,481
Mortgage loans 42,118 54,140 1,544
Net increase in policy loans -- 40 101
Real estate 521 -- --
Issuance of intercompany notes receivable, net 19,200 -- --
Other invested assets 2,881 747 48
----------- ----------- -----------
Total investments acquired 1,081,987 1,078,198 1,383,317
Other applications 23,978 23,043 3,854
----------- ----------- -----------
Total applications of cash 1,105,965 1,101,241 1,387,171
----------- ----------- -----------
Net change in cash and short-term investments (86,142) (646) (305,993)
Cash and short-term investments at beginning of year 111,533 112,179 418,172
----------- ----------- -----------
Cash and short-term investments at end of year $ 25,391 $ 111,533 $ 112,179
=========== =========== ===========
</TABLE>
See accompanying notes.
F-99
<PAGE> 201
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
AUSA Life Insurance Company, Inc. ("the Company") is a stock life insurance
company and is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA") which, in turn, is a wholly-owned subsidiary of AEGON USA
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands. On December 31, 1993, the Company
entered into an assumption reinsurance agreement with Mutual of New York
("MONY") to transfer certain group pension business of MONY to the Company.
In July 1996, the Company completed a merger with International Life Investors
Insurance Company ("ILI"), a wholly-owned subsidiary of Life Investors Insurance
Company of America, another wholly-owned subsidiary of First AUSA, whereby ILI
was merged directly into the Company. The Company received assets of $688,233
and liabilities of $635,189. The difference between assets and liabilities was
transferred directly to capital and surplus. In accordance with National
Association of Insurance Commissioners ("NAIC") statutory accounting principles,
all prior period financial statements presented have been restated as if the
merger took place at the beginning of such periods. Historical book values
carried over from the separate companies to the combined entity. Separate
results of operations for the periods prior to the merger with ILI are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31
(UNAUDITED) 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Revenues:
The Company $ 730,485 $ 1,386,871 $ 692,957
ILI 59,947 148,725 322,484
--------- ----------- -----------
Combined $ 790,432 $ 1,535,596 $ 1,015,441
========= =========== ===========
Net income (loss):
The Company $ (4,448) $ (14,745) $ (11,522)
ILI 3,714 9,696 (159)
--------- ----------- -----------
Combined $ (734) $ (5,049) $ (11,681)
========= =========== ===========
Capital and surplus:
The Company $ 194,144 $ 202,639 $ 183,830
ILI 53,044 48,671 41,320
--------- ----------- -----------
Combined $ 247,188 $ 251,310 $ 225,150
========= =========== ===========
</TABLE>
F-100
<PAGE> 202
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NATURE OF BUSINESS
The Company primarily sells group fixed and variable annuities. The Company is
licensed in 48 states and the District of Columbia and is actively in the
process of becoming licensed in all 50 states. Sales of the Company's products
are primarily through brokers.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract reserves, guarantee fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York, which practices differ in some respects from generally
accepted accounting principles. The more significant of these differences are as
follows: (a) bonds are generally reported at amortized cost rather than
segregating the portfolio into held-to-maturity (reported at amortized cost),
available-for-sale (reported at fair value), and trading (reported at fair
value) classifications; (b) acquisition costs of acquiring new business are
charged to current operations as incurred rather than deferred and amortized
over the life of the policies; (c) policy reserves on traditional life products
are based on statutory mortality rates and interest which may differ from
reserves based on reasonable assumptions of expected mortality, interest, and
withdrawals which include a provision for possible unfavorable deviation from
such assumptions; (d) policy reserves on certain investment products use
discounting methodologies utilizing statutory interest rates rather than full
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet; (f)
deferred income taxes are not provided for the difference between the financial
statement and income tax bases of assets and liabilities; (g) net realized gains
or losses attributed to changes in the level of interest rates in the market are
deferred and amortized over the remaining life of the bond or mortgage loan,
rather than recognized as gains or losses in the statement of operations when
the sale is completed; (h) declines in the estimated realizable value of
investments are provided for through the establishment of a formula-determined
statutory investment reserve (carried as a liability), changes to which are
F-101
<PAGE> 203
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
charged directly to surplus, rather than through recognition in the statement of
operations for declines in value, when such declines are judged to be other than
temporary; (i) certain assets designated as "non-admitted assets" have been
charged to surplus rather than being reported as assets; (j) revenues for
universal life and investment products consist of premiums received rather than
policy charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed; (k)
pension expense is recorded as amounts are paid; (l) adjustments to federal
income taxes of prior years are charged or credited directly to unassigned
surplus, rather than reported as a component of expense in the statement of
operations; and (m) gains or losses on dispositions of business are charged or
credited directly to unassigned surplus rather than being reported in the
statement of operations. The effects of these variances have not been determined
by the Company.
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 1997,
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.
CASH AND CASH EQUIVALENTS
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 cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. 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. Amortization is computed using methods which result in a level yield over
the expected life of the security. The Company reviews its prepayment
assumptions on mortgage and other asset backed securities at regular intervals
and adjusts amortization rates retrospectively when such assumptions are changed
due to experience and/or expected future patterns. Investments in preferred
stocks in good standing are reported at cost. Investments in preferred stocks
not in good standing are reported at the lower of cost or market. Common stocks,
which may include
F-102
<PAGE> 204
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shares of mutual funds (money market and other), are carried at market. Real
estate is reported at cost less allowances for depreciation. Depreciation is
computed principally by the straight-line method. Policy loans are reported at
unpaid principal. Other invested assets consist principally of investments in
various joint ventures and are recorded at equity in underlying net assets.
Other "admitted assets" are valued, principally at cost, as required or
permitted by New York Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for anticipated
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses, net of amounts attributed to changes in the
general level of interest rates. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1996, 1995 and 1994, the
Company excluded investment income due and accrued of $469, $216 and $1,092,
respectively, with respect to such practices.
MONY entered into foreign exchange interest rate swap agreements to modify the
interest characteristics of certain of its outstanding fixed maturity securities
from a fixed rate in a foreign currency to a fixed rate in U. S. Dollars prior
to the reinsurance assumption agreement. These agreements were assigned to the
Company in connection with the reinsurance assumption agreement. The interest
rate swap agreements involve the exchange of a fixed rate in a foreign currency
for fixed rate interest payments in U. S. Dollars over the life of the agreement
without an exchange of the underlying principal amount of $32,500 at December
31, 1996, 1995 and 1994. The differential to be paid or received is accrued as
incurred and recognized as an adjustment to interest related to the underlying
fixed maturity. The related amount payable to or receivable from counterparties
is included in other liabilities or assets. The fair values of the swap
agreements are not recognized in the financial statements.
F-103
<PAGE> 205
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company entered into an interest rate swap agreement to modify the interest
characteristics of certain outstanding fixed maturity securities from a fixed
rate to a variable rate. The agreement involved the exchange of a fixed rate for
a variable rate interest payment over the life of the agreement without an
exchange of the underlying principal amount of $4,000 at December 31, 1996, 1995
and 1994. The differential to be paid or received is accrued as interest rates
change and recognized as an adjustment to interest related to the underlying
fixed maturity. The related amount payable to or receivable from counterparts is
included in other liabilities or assets. The fair values of the swap agreements
are not recognized in the financial statements.
Deferred income for unrealized gains and losses on the securities valued at
market at the time of the assumption reinsurance agreement (described in Note 4)
are returned to MONY at the time of realization pursuant to the agreement.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health 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, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.50 to 6.50 percent and are computed principally on the Net
Level Premium Valuation and the Commissioners' Reserve Valuation Methods.
Deferred annuity 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 3.00 to 8.25 percent and mortality rates, where appropriate, from a variety
of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
F-104
<PAGE> 206
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
SEPARATE ACCOUNT
Assets held in trust for purchases of separate account contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. Income and gains and losses with respect to these assets
accrue to the benefit of the policyholders. The Company received nonguaranteed
separate account premiums of $716,524, $536,128 and $182,465 in 1996, 1995 and
1994, respectively. The assets in the separate accounts for the variable
annuities and participating annuities are held at a market value of $4,141,566,
$3,650,091 and $2,399,949 for the years ended December 31, 1996, 1995 and 1994,
respectively. The separate account assets in the fixed government accounts and
stable fund accounts are carried at an amortized cost of $613,565, $599,254 and
$509,549 for the years ended December 31, 1996, 1995 and 1994, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. SFAS No. 119, Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments, requires additional disclosures about
derivatives. In cases where quoted market prices are not available, fair values
are based on estimates using 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. SFAS
F-105
<PAGE> 207
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
No. 107 and No. 119 exclude certain financial instruments and all nonfinancial
instruments from their disclosure requirements and allow companies to forego the
disclosures when those estimates can only be made at excessive cost.
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 short-term investments: The carrying amounts reported in the
statutory-basis 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.
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.
Interest rate swap: Estimated fair value of the interest rate swaps are based
upon the pricing differential for similar swap agreements. The fair value of
the interest rate swaps has been included with the fair value of the
underlying fixed maturities.
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.
F-106
<PAGE> 208
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
--------------------------------- -------------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $3,495,667 $3,530,250 $3,198,777 $3,314,015
Preferred stocks 125 120 426 366
Common stock 18 18 4,407 4,407
Mortgage loans on real estate 618,633 619,479 768,424 806,395
Policy loans 755 755 759 759
Cash and short-term investments 25,391 25,391 111,533 111,533
Separate account assets 4,755,131 4,754,781 4,249,345 4,261,843
LIABILITIES
Investment contract liabilities 3,855,787 3,731,340 3,701,584 3,663,253
Separate account annuities 4,707,568 4,677,289 4,237,983 4,219,281
</TABLE>
3. INVESTMENTS
The carrying value and estimated market value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
CARRYING VALUE GAINS LOSSES VALUE
-------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and agencies $ 122,355 $ 1,170 $ 1,086 $ 122,439
State, municipal and other government 25,027 519 36 25,510
Public utilities 229,732 2,086 2,977 228,841
Industrial and miscellaneous 2,031,086 33,621 14,895 2,049,812
Mortgage-backed securities 1,087,467 22,579 6,398 1,103,648
--------- ------ ---------- ----------
3,495,667 59,975 25,392 3,530,250
Preferred stocks 125 5 10 120
--------- ------ ---------- ----------
$3,495,792 $59,980 $ 25,402 $3,530,370
========== ======= ========== ==========
</TABLE>
F-107
<PAGE> 209
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
CARRYING VALUE GAINS LOSSES VALUE
-------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Bonds:
United States Government and agencies $ 101,736 $ 2,141 $ 21 $ 103,856
State, municipal and other government 29,522 1,337 16 30,843
Public utilities 203,495 4,863 499 207,859
Industrial and miscellaneous 1,859,496 71,268 8,672 1,922,092
Mortgage-backed securities 1,004,528 47,612 2,775 1,049,365
----------- ---------- ---------- -----------
3,198,777 127,221 11,983 3,314,015
Preferred stocks 426 - 60 366
----------- ---------- ---------- -----------
$3,199,203 $127,221 $12,043 $3,314,381
========== ======== ======= ==========
</TABLE>
The carrying value and estimated market value of bonds at December 31, 1996, 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>
ESTIMATED FAIR
CARRYING VALUE VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less $ 136,961 $ 137,460
Due after one year through five years 1,188,865 1,198,864
Due after five years through ten years 892,453 902,918
Due after ten years 189,921 187,360
---------- ----------
2,408,200 2,426,602
Mortgage-backed securities 1,087,467 1,103,648
---------- ----------
$3,495,667 $3,530,250
========== ==========
</TABLE>
F-108
<PAGE> 210
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Interest on bonds and notes $ 251,923 $ 231,206 $ 184,048
Mortgage loans 83,511 98,653 117,859
Real estate 7,225 2,400 322
Dividends on equity investments 25 137 70
Interest on policy loans 34 40 35
Other investment loss (5,511) (3,926) (2,449)
-----------------------------------------
Gross investment income 337,207 328,510 299,885
Investment expenses 13,379 10,506 7,878
-----------------------------------------
Net investment income $ 323,828 $ 318,004 $ 292,007
=========================================
</TABLE>
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Proceeds $ 703,936 $ 529,363 $ 525,148
=======================================
Gross realized gains $ 9,527 $ 8,541 $ 8,693
Gross realized losses (11,595) (15,255) (15,984)
---------------------------------------
Net realized losses $ (2,068) $ (6,714) $ (7,291)
=======================================
</TABLE>
At December 31, 1996, investments with an aggregate carrying value of $2,329
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.
F-109
<PAGE> 211
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
-----------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Debt securities $ (2,068) $ (6,714) $(7,291)
Common stock 244 -- --
Preferred stock (44) -- --
Short-term investments (115) (24) (93)
Mortgage loans on real estate (12,415) (3,650) 1,067
Real estate -- (628) --
Other invested assets 6,872 11,109 5,412
-----------------------------------
(7,526) 93 (905)
Tax effect (87) 247 414
Transfer to interest maintenance reserve (4,484) (3,804) (466)
-----------------------------------
Total realized losses $(12,097) $ (3,464) $ (957)
===================================
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
------------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
Debt securities $(80,600) $265,890 $(166,278)
Equity securities (190) 74 (47)
------------------------------------
Change in unrealized appreciation $(80,790) $265,964 $(166,325)
====================================
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities at
December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Unrealized gains $ 16 $ 206 $ 133
Unrealized losses (11) (11) (12)
----------------------------
Net unrealized gains $ 5 $ 195 $ 121
============================
</TABLE>
F-110
<PAGE> 212
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
During 1996, the Company issued mortgage loans with interest rates ranging from
7.46% to 8.75%. The maximum percentage of any one loan to the value of the
underlying real estate at origination was 86%. No mortgage loans were non-income
producing for the previous twelve months and, accordingly, no accrued interest
related to these mortgage loans was excluded from investment income. During
1996, the Company refinanced the mortgage loans of three properties with an
aggregate carrying value of $98,543 to reduce the interest rates, as a result of
the current interest rate environment. The Company requires all mortgage loans
to carry fire insurance equal to the value of the underlying property.
During 1996, 1995 and 1994, there were $28,929, $14,264 and $10,587,
respectively, in foreclosed mortgage loans that were transferred to real estate.
At December 31, 1996 and 1995, the Company held a mortgage loan loss reserve in
the asset valuation reserve of $8,368 and $9,921, respectively. The mortgage
loan portfolio is diversified by geographic region and specific collateral
property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION Property Type Distribution
- --------------------------------------------------------- -------------------------------------------------
DECEMBER 31 DECEMBER 31
1996 1995 1996 1995
-------------------- ---------------------
<S> <C> <C> <C> <C> <C>
South Atlantic 37% 31% Retail 30% 37%
E. North Central 21 21 Office 42 33
Mountain 15 16 Apartment 10 17
New England 10 11 Other 17 10
W. North Central 5 10 Industrial 1 3
W. South Central 5 8
Mid-Atlantic 5 -
Pacific 2 3
</TABLE>
At December 31, 1996, 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:
Chase Manhattan Corp. $42,469
Citibank 42,197
Connecticut National Bank 32,463
PSEG Capital 28,157
</TABLE>
F-111
<PAGE> 213
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. 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.
Premiums earned reflect the following reinsurance assumed and ceded amounts for
the year ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Direct premiums $ 1,135,315 $ 1,207,720 $ 685,212
Reinsurance assumed 9,962 37,423 132,314
Reinsurance ceded (27,583) (38,308) (106,261)
-------------------------------------------
Net premiums earned $ 1,117,694 $ 1,206,835 $ 711,265
===========================================
</TABLE>
The Company received reinsurance recoveries in the amounts of $953, $533 and
$149 during 1996, 1995 and 1994, respectively.
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1996 and 1995 of $157,396 and
$136,439, respectively.
At December 31, 1995, reserve credits for reinsurance ceded to unauthorized
reinsurers of $103,182 were associated with a single reinsurer. No significant
reinsurance credits were ceded to unauthorized reinsurers at December 31, 1996.
The Company holds collateral under these reinsurance agreements in the form of
trust agreements and letters of credit totaling $111,891 at December 31, 1995
that can be drawn on for unpaid balances. In addition, the reinsurer has an
investment management agreement, with an affiliate, to manage the investments
held in the trust account.
On December 31, 1993, the Company and MONY entered into an assumption
reinsurance agreement whereby all of the general account liabilities were
novated to the Company from MONY as state approvals were received.
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
F-112
<PAGE> 214
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. REINSURANCE (CONTINUED)
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, 1996 and 1995, the Company owed MONY $67,217 and $73,546, respectively,
which represents the amount earned by MONY under the gain sharing calculation
and certain fees for investment management services for the respective years.
In connection with the transaction, MONY purchased $150,000 and $50,000 in
Series A and Series B notes, respectively, of AEGON. 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.
AEGON provides general and administrative services for the transferred business
under a related agreement with MONY. The agreement specifies prescribed rates
for expenses to administer the business up to certain levels. In addition, AEGON
also provides investment management services on the assets underlying the new
pension business written by the Company while MONY continues to provide
investment management services for assets supporting the remaining policy
liabilities which were transferred at December 31, 1993.
On October 1, 1995, the Company entered into a reinsurance agreement with a
non-affiliate. As a result, the Company received $4,242 of assets, including $38
of cash, and $4,312 of liabilities. The difference between the assets and the
liabilities of $70 was charged directly to unassigned surplus.
F-113
<PAGE> 215
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
5. INCOME TAXES
The Company files a separate federal income tax return.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to loss from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Computed tax expense (benefit) at federal statutory
rate (35%) $ (109) $ 1,402 $(3,301)
Tax reserve adjustment (211) 755 189
Deferred acquisition cost - tax basis 465 636 992
Carryforward of current year operating loss 2,611 3,351 3,460
Excess tax depreciation (13) -- --
Dividend received deduction (4) -- --
Prior year (over)/under accrual 114 (67) (85)
IMR amortization (666) (676) (73)
Other items - net (882) 187 111
---------------------------------
Federal income tax expense $ 1,305 $ 5,588 $ 1,293
=================================
</TABLE>
Federal income tax expense (benefit) differs from the amount computed by
applying the statutory federal income tax rate to realized gains (losses) due to
the agreement between MONY and the Company, as discussed in Note 4 to the
financial statements. In accordance with this agreement, these gains and losses
are included in the net payments MONY will receive relating to the performance
of the assets that existed at the date of closing. Accordingly, income taxes
relating to gains and losses on such assets are not provided for on the income
tax return filed by the Company.
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 ($797 at December 31, 1996). 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 $279.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $22,400 which expire through 2011.
An examination by the Internal Revenue Service is underway for years 1993 -
1995.
F-114
<PAGE> 216
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES
A portion of the Company's policy reserves and other policyholders' funds relate
to liabilities established on a variety of the Company's products that are not
subject to significant mortality or morbidity risk; however, there may be
certain restrictions placed upon the amount of funds that can be withdrawn
without penalty. The amount of reserves on these products, by withdrawal
characteristics, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------------------------------------------
Percent of Percent
AMOUNT Total Amount of Total
------------------------------------------------------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 834,176 10% $ 797,367 10%
Subject to discretionary withdrawal at book
value less surrender charge 1,583,989 18 2,173,509 27
Subject to discretionary withdrawal at market
value 2,254,074 26 1,589,721 20
Subject to discretionary withdrawal at book
value (minimal or no charges or 1,913,542 22 1,213,021 15
adjustments)
Not subject to discretionary withdrawal
provision 2,136,222 24 2,303,747 28
---------------------------------------------------
8,722,003 100% 8,077,365 100%
========= ========== ===
Less reinsurance ceded 157,039 136,130
---------- ----------
Total policy reserves on annuities and deposit
fund liabilities $8,564,964 $7,941,235
========== ==========
</TABLE>
Separate and variable account assets held by the Company represent contracts
where the benefit is determined by the performance of the investments held in
the separate account. There may be certain restrictions placed upon the amount
of funds that can be withdrawn without penalty. The amount of separate account
liabilities on these products, by withdrawal characteristics, are summarized as
follows:
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1996
Subject to discretionary withdrawal
with market value adjustment $ 269,991 $ -- $ 269,991
Subject to discretionary withdrawal at
book value less surrender charge 279,399 -- 279,399
Subject to discretionary withdrawal at
market value 181,158 2,071,160 2,252,318
Not subject to discretionary withdrawal 1,905,860 -- 1,905,860
----------------------------------------
$2,636,408 $2,071,160 $4,707,568
========================================
</TABLE>
F-115
<PAGE> 217
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
--------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1995
Subject to discretionary withdrawal
with market value adjustment $ 290,684 $ -- $ 290,684
Subject to discretionary withdrawal
at book value less surrender charge 280,770 -- 280,770
Subject to discretionary withdrawal
at market value 97,049 1,492,670 1,589,719
Not subject to discretionary
withdrawal 2,076,810 -- 2,076,810
--------------------------------------------
$2,745,313 $1,492,670 $4,237,983
============================================
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Transfers as reported in the summary of operations of
the separate accounts statement:
Transfers to separate accounts $716,525 $536,128 $180,789
Transfers from separate accounts 502,244 404,120 117,442
--------------------------------------
Net transfers to separate accounts 214,281 132,008 63,347
Reconciling adjustments - HUB level fees not paid to
AUSA general account 13,520 7,904 1,575
--------------------------------------
Transfers as reported in the summary of operations of
the life, accident and health annual statement $227,802 $139,912 $ 64,922
======================================
</TABLE>
F-116
<PAGE> 218
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1996 and 1995, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS Loading Net
-------------------------------------
<S> <C> <C> <C>
December 31, 1996
Ordinary direct first year business $ 83 $ (1) $ 84
Ordinary direct renewal business 3,078 25 3,053
Group life direct business 135 22 113
Credit life 5 -- 5
Reinsurance ceded (163) -- (163)
-------------------------------------
3,138 46 3,092
Accident and health:
Direct 165 -- 165
Reinsurance ceded -- -- --
-------------------------------------
Total accident and health 165 -- 165
-------------------------------------
$ 3,303 $ 46 $ 3,257
=====================================
December 31, 1995
Ordinary direct first year business $ 60 $ 42 $ 18
Ordinary direct renewal business 3,147 32 3,115
Group life direct business 109 24 85
Credit life -- -- --
Reinsurance ceded (16) -- (16)
-------------------------------------
3,300 98 3,202
Accident and health:
Direct 163 -- 163
Reinsurance ceded -- -- --
-------------------------------------
Total accident and health 163 -- 163
-------------------------------------
$ 3,463 $ 98 $ 3,365
=====================================
</TABLE>
At December 31, 1996 and 1995, the Company had insurance in force aggregating
$615,025 and $688,470, respectively, in which the gross premiums are less than
the net premiums required by the valuation standards established by the
Department of Insurance of the State of New York. The Company established policy
reserves of $1,520 and $1,272 to cover these deficiencies at December 31, 1996
and 1995, respectively.
F-117
<PAGE> 219
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. A direct charge to surplus of $80 was made for the year ended December
31, 1994, related to the change in reserve methodology.
7. 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 1997
without prior approval.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the FASB
87 expense as a percent of salaries. The benefits are based on years of service
and the employee's compensation during the highest five consecutive years of
employment. The Company was allocated $13, $14 and $12 of pension expense for
the years ended December 31, 1996, 1995 and 1994, respectively. The plan is
subject to the reporting and disclosure requirements of the Employee Retirement
Income Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement Income Security Act of 1974. The Company
was allocated $21, $8 and $6 of expense for the years ended December 31, 1996,
1995 and 1994, respectively.
F-118
<PAGE> 220
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also sponsors
an employee stock option plan for individuals employed at least three years and
a stock purchase plan for its producers, with the participating affiliated
companies establishing their own eligibility criteria, producer contribution
limits and company matching formula. These plans have been accrued or funded as
deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $2 for the
years ended December 31, 1996, 1995 and 1994.
9. RELATED PARTY TRANSACTIONS
In accordance with an agreement between AEGON and the Company, AEGON 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 Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1996, 1995
and 1994, the Company paid $3,539, $3,961 and $1,332, respectively, for these
services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.48% at December 31, 1996. During 1996,
1995 and 1994, the Company paid net interest of $29, $289 and $72, respectively,
to affiliates.
F-119
<PAGE> 221
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. Although
such litigation sometimes includes substantial demands for compensatory and
punitive damages, in addition to contract liability, it is management's opinion,
after consultation with counsel and a review of available facts, that damages
arising from such demands will not be material to the Company's financial
position.
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. Assessments are charged to operations when
received by the Company except where right of offset against other taxes paid is
allowed by law; amounts available for future offsets are recorded as an asset on
the Company's balance sheet. Potential future obligations for unknown
insolvencies are not determinable by the Company. The future obligation has been
based on the most recent information available from the National Organization of
Life and Health Insurance Guaranty Association (NOLHGA). The Company has
established a reserve of $199 and $432 at December 31, 1995 and 1994,
respectively, for its estimated share of future guaranty fund assessments
related to several major insurer insolvencies. No such reserve was established
at December 31, 1996. The guaranty fund expense was $167, $(207) and $61 for the
years ended December 31, 1996, 1995 and 1994, respectively.
F-120
<PAGE> 222
AUSA Life Insurance Company, Inc.
Summary of Investments - Other Than
Investments in Related Parties
(Dollars in thousands)
December 31, 1996
SCHEDULE I
<TABLE>
<CAPTION>
Amount at Which
Market Shown in the
TYPE OF INVESTMENT Cost (1) Value Balance Sheet (2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities
Bonds:
United States Government and govern-
ment agencies and authorities $ 674,877 $ 680,987 $ 674,241
States, municipalities and political
subdivisions 8,948 9,399 8,933
Foreign governments 16,283 16,111 16,094
Public utilities 233,895 228,841 229,732
All other corporate bonds 2,591,226 2,594,912 2,566,667
Redeemable preferred stock 125 120 125
--------------------------------------------
Total fixed maturities 3,525,354 3,530,370 3,495,792
Equity securities
Common stocks - industrial,
miscellaneous and all other 13 18 18
--------------------------------------------
Total equity securities 13 18 18
Mortgage loans on real estate 618,633 618,633
Real estate 58,100 58,100
Policy loans 755 755
Cash and short-term investments 25,391 25,391
---------- ----------
Total investments $4,228,246 $4,198,689
========== ===========
</TABLE>
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments.
(2) Amounts differ from cost as certain bonds have been adjusted to reflect
other than temporary declines in value charged to surplus, as prescribed
by the NAIC.
F-121
<PAGE> 223
AUSA Life Insurance Company, Inc.
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
---------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Individual life $ 19,493 $ -- $ 3,826
Individual health 7,687 2,493 11,160
Group life and health 223 -- --
Annuity 768,212 -- --
------------------------------------
$795,615 $ 2,493 $14,986
====================================
YEAR ENDED DECEMBER 31, 1995
Individual life $ 17,935 $ -- $ 3,716
Individual health 8,009 2,842 13,515
Group life and health 224 -- --
Annuity 709,122 -- --
------------------------------------
$735,290 $ 2,842 $17,231
====================================
YEAR ENDED DECEMBER 31, 1994
Individual life $ 16,357 $ -- $ 3,481
Individual health 3,630 2,267 12,037
Group life and health 232 --
Annuity 581,717 -- --
------------------------------------
$601,936 $ 2,267 $15,518
====================================
</TABLE>
F-122
<PAGE> 224
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND OPERATING PREMIUMS
REVENUE INCOME* SETTLEMENT EXPENSES EXPENSES* WRITTEN
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 8,468 $ 2,040 $ 9,087 $ 734 --
40,479 1,734 25,674 12,534 $40,098
8,092 372 6,056 3,044 10,683
1,060,655 319,682 1,016,105 381,783 --
- -------------------------------------------------------------
$1,117,694 $323,828 $1,056,922 $398,095
=============================================================
$ 8,388 $ 1,634 $ 8,062 $ 770 --
46,975 1,438 29,657 15,204 $46,558
7,049 306 5,293 970 6,074
1,144,423 314,626 1,181,235 290,402
- -------------------------------------------------------------
$1,206,835 $318,004 $1,224,247 $307,346
=============================================================
$ 8,238 $ 1,521 $ 8,404 $ 952 --
42,086 1,209 27,665 14,603 $ 4,326
4,135 261 2,897 854 42,168
656,806 289,016 740,784 228,713 --
- -------------------------------------------------------------
$ 711,265 $292,007 $ 779,750 $245,122
=============================================================
</TABLE>
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
F-123
<PAGE> 225
AUSA Life Insurance Company, Inc.
Reinsurance
(Dollars in thousands)
SCHEDULE IV
<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 Decem-
ber 31, 1996
Life insurance in force $1,238,554 $ 68,804 $ 241,117 $1,410,867 17%
==========================================================================
Premiums:
Individual life $ 7,652 $ 560 $ 1,376 $ 8,468 16%
Individual health 39,593 4 890 40,479 2
Group life and health 8,085 -- 7 8,092 --
Annuity 1,079,985 27,019 7,689 1,060,655 1
--------------------------------------------------------------------------
$1,135,315 $ 27,583 $ 9,962 $1,117,694 1%
==========================================================================
Year ended Decem-
ber 31, 1995
Life insurance in force $1,497,961 $ 34,206 $ 266,127 $1,729,882 15%
==========================================================================
Premiums:
Individual life $ 7,348 $ 359 $ 1,399 $ 8,388 17%
Individual health 46,609 5 371 46,975 1
Group life and health 7,043 -- 6 7,049 --
Annuity 1,146,720 37,944 35,647 1,144,423 3
--------------------------------------------------------------------------
$1,207,720 $ 38,308 $ 37,423 $1,206,835 3%
==========================================================================
YEAR ENDED DECEM-
BER 31, 1994
Life insurance in force $1,616,254 $ 40,221 $ 296,942 $1,872,975 16%
==========================================================================
Premiums:
Individual life $ 7,143 $ 349 $ 1,442 $ 8,238 18%
Individual health 41,912 6 180 42,086 --
Group life and health 4,129 -- 6 4,135 --
Annuity 632,026 105,906 130,686 656,806 20
--------------------------------------------------------------------------
$ 685,212 $106,261 $ 132,314 $ 711,265 19%
==========================================================================
</TABLE>
F-124
<PAGE> 226
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) 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, 1996......................... F-2
Statements of operations for the year ended December 31, 1996........................ F-4
Statements of changes in net assets for the year ended December 31, 1996............. F-6
Notes to financial statements........................................................ F-10
(2)(a) With respect to Diversified Investors Portfolios
Economic and Market Review........................................................... F-14
Report of Independent Accountants.................................................... F-15
Statements of Assets and Liabilities for the year ended December 31, 1996............ F-16
Statement of Operations for the year ended December 31, 1996......................... F-18
Statements of Changes in Net Assets for the year ended December 31, 1996............. F-20
Portfolio of Investments for the year ended December, 31, 1996....................... F-24
Money Market Portfolio............................................................... F-25
High Quality Bond Portfolio.......................................................... F-26
Intermediate Government Bond Portfolio............................................... F-30
Government/Corporate Bond Portfolio.................................................. F-34
Balanced Fund Portfolio.............................................................. F-38
Equity Income Portfolio.............................................................. F-42
Equity Value Portfolio............................................................... F-48
Growth and Income Portfolio.......................................................... F-52
Equity Growth Portfolio.............................................................. F-56
Special Equity Portfolio............................................................. F-59
Aggressive Equity Portfolio.......................................................... F-69
High Yield Bond Portfolio............................................................ F-71
International Equity Portfolio....................................................... F-74
Notes to Financial Statements........................................................ F-82
(3) With respect to AUSA Life Insurance Company, Inc. ("AUSA")
Report of Independent Auditors....................................................... F-93
Balance Sheets -- Statutory Basis at December 31, 1996 and 1995...................... F-95
Statements of Operations -- Statutory Basis for the year ended December 31, 1996,
1995 and 1994...................................................................... F-97
Statements of Changes in Capital and Surplus -- Statutory Basis for the year ended
December 31, 1996.................................................................. F-98
Statements of Cash Flows -- Statutory Basis for the year ended December 31, 1996,
1995 and 1994...................................................................... F-99
Notes to Financial Statements -- Statutory Basis..................................... F-100
Financial Statement Schedules........................................................ F-121
</TABLE>
(b) Exhibits
Any form of Form N-4 Exhibits (1) and (3) through (7) and (9) previously
filed with the Commission as part of Pre-Effective Amendment No. 1 dated
July 7, 1994 to the Registrant's N-4
C-1
<PAGE> 227
Registration Statement -- Registration No. 33-73734 under the Securities
Act of 1933 are incorporated herein by reference.
Exhibits (4), (13) and (14) filed with the Commission as part of
Post-Effective Amendment No. 1 dated April 28, 1995 to the Registrant's
N-4 Registration Statement -- Registration No. 33-73734 under the
Securities Act of 1933 are incorporated herein by reference.
(2) Not applicable.
(8) Not applicable.
(10) Opinions and Consents of Independent Accountants.
(11) Not applicable.
(12) Not applicable.
(15) Powers of Attorney.
ITEM 25. DIRECTORS AND OFFICERS OF AUSA
The Directors and officers of AUSA are set forth below.
<TABLE>
<S> <C>
DIRECTORS
Andrew R. Baer................ KEKST & COMPANY, 437 Madison Ave., New York, New York 10022.
William L. Busler............. AEGON USA, Inc., 4333 Edgewood Road, N.E., Cedar Rapids,
Iowa 52499.
Jack R. Dykhouse.............. AEGON USA, Inc. 9151 Grapevine Highway, North Richland
Hills, Texas 76180.
Peter P. Post................. EMMERLING POST, Inc., 135 East 55th Street, New York, New
York 10022.
Cor H. Verhagen............... AEGON INSURANCE GROUP, 51 JFK Parkway, Short Hills, New
Jersey 07078.
Professor E. Kirby Warren..... COLUMBIA UNIVERSITY SCHOOL OF BUSINESS, 725 Uris Hall, 116th
Street & Broadway, New York, New York 10027.
Steven E. Frushtick........... WIENER, FRUSHTICK & STRAUB, 500 Fifth Avenue, New York, New
York 10110.
Vice Admiral Thor Hanson...... National Multiple Sclerosis Society, 900 Birdseye Road, P.O.
Box 112, Orient, New York 11957-0112.
B. Larry Jenkins.............. Monumental Life Insurance Company, 2 East Chase Street,
Baltimore, Maryland 21202.
DIRECTOR-OFFICERS
Larry G. Brown................ Chairman of the Board and Secretary, AEGON USA, Inc., 111
North Charles Street, Baltimore, Maryland 21201.
Vera F. Mihaic................ Vice President, INTERNATIONAL LIFE INVESTORS INSURANCE
Company 666 Fifth Avenue New York, New York 10103-0001.
Tom Schlossberg............... President, DIVERSIFIED INVESTMENT ADVISORS, Inc., 4
Manhattanville Road, Purchase, New York 10577.
Douglas C. Kolsrud............ Chief Actuary, AEGON USA, Inc., 4333 Edgewood Road, N.E.,
Cedar Rapids, Iowa 52499.
</TABLE>
C-2
<PAGE> 228
ITEM 26. PERSONS CONTROLLED BY OR UNDER CONTROL WITH THE DEPOSITOR OR
REGISTRANT
No person is directly or indirectly controlled by the Registrant. The
Registrant is a separate account of the Depositor.
The diagram on the next page shows all corporations directly or indirectly
controlled or under common control with the Depositor, showing the state or
other sovereign power under the laws of which each is organized and the
percentage ownership of voting securities giving rise to the control
relationship. (See diagram on following page.)
ITEM 27. AS OF JANUARY 31, 1997 THERE WERE 6,380 CONTRACTHOLDERS.
ITEM 28. INDEMNIFICATION
Any person made a party to any action, suit, or proceeding by reason of the
fact that he, his testator or intestate, is or was a director, officer, or
employee of the Company or of any Company which he served as such at the request
of the Company, shall be indemnified by the Company against the reasonable
expenses, including attorney's fees, actually and necessarily incurred by him in
connection with the defense of such action, suite or proceeding, or in
connection with appeal therein, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such officer,
Director, or employee is liable for negligence or misconduct in the performance
of his duties. The Company may also reimburse to any Director, officer, or
employee the reasonable costs of settlement of any such action, suit, or
proceeding, if it shall be found by a majority of a committee composed of the
Directors not involved in the matter in controversy (whether or not a quorum)
that it was in the interest of the Company that such settlement be made and that
such Director, officer or employee was not guilty of negligence or misconduct.
The amount to be paid by way of indemnity shall be determined and paid, in each
instance, pursuant to action of the Board of Directors, and the stockholders
shall be given notice thereof in accordance with applicable provisions of law.
Such right of indemnification shall not be deemed exclusive of any other rights
to which such Director, officer, or employee may be entitled.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Diversified Investors Securities Corp. ("DISC") is the principal
underwriter of the Registrant. The names, titles and principal business
addresses of the officers and directors of "DISC" are as stated on Forms U-4 of
Form BD (File No. 8-45671) as declared effective May 18, 1993, as amended, the
text of which is herein incorporated by reference. Diversified Investment
Advisors, Inc. an affiliate of AUSA, acts as investment advisor and
administrator to each series of Diversified Investors Portfolios. With respect
to each series of Diversified Investors Portfolios, Diversified has contracted
for certain investment advisory services with one or more subadvisors.
(b) The names, titles and principal business addresses of the officers of
DISC are listed on Schedule A of Form BD for DISC (Registration No. 8-45691) and
Form U-4 filed by each individual officer, the text of which is hereby
incorporated by reference.
C-3
<PAGE> 229
[CHART]
C-4
<PAGE> 230
FOOTNOTES
(1) 150,000 shares of Class B Non-Voting Common Stock owned by Ennia
Reinsurance Antilles N.V.
(2) Ordinary common stock is allowed 60% of total cumulative vote.
Participating common stock is allowed 40% of total cumulative vote.
(3) Denotes relationships as advisor, administrator, sponsor, underwriter or
general partner.
(4) First AUSA Life Insurance Company owns 12.89%. PFL Life Insurance Company
owns 13.11%. Bankers United Life Assurance Company owns 4.86%.
(5) PFL Life Insurance Company owns 16.73%. Bankers United Life Assurance
Company owns 3.77%. Life Investors Insurance Company of America owns 3.38%.
AEGON USA Realty Advisors, Inc. owns 1.97%. First AUSA Life Insurance
Company owns .18%.
(6) Class B Common Stock is allocated 75% of total cumulative vote. Class A
Common Stock is allocated 25% of total cumulative vote.
(7) 50% of Idex Management, Inc. is owned by Janus Capital Corporation, a
Colorado corporation.
(8) RCC Group: FGH Realty Credit Corp., FGH USA, Inc., RCC North America, Inc.,
FGH USA Realty, Inc., FGH Eastern Region, Inc., FGH Appraisal Services,
Inc., FGH Western Region, Inc., ALH Properties, Inc., First FGP, Inc.,
Second FGP, Inc., Third FGP, Inc., Fourth FGP, Inc., Fifth FGP, Inc., Sixth
FGP, Inc., Seventh FGP, Inc., FGP Midwood, Inc., FGP Parsippany, Inc., ALH
Properties Two, Inc., ALH Properties Three, Inc., ALH Properties Four,
Inc., ALH Properties Five, Inc., ALH Properties Six, Inc., ALH Properties
Seven, Inc., ALH Properties Eight, Inc., ALH Properties Nine, Inc., ALH
Properties Ten, Inc., ALH Properties Eleven, Inc., ALH Properties Twelve,
Inc., ALH Properties Thirteen, Inc., ALH Properties Fourteen, Inc., ALH
Properties Fifteen, Inc., ALH Properties Sixteen, Inc., ALH Properties
Seventeen, Inc., FGP Keene, Inc., FGP Broadway, Inc., FGP West Street,
Inc., FGP West Street Two, Inc., FGP 90 West Street, Inc., FGP Branford,
Inc., FGP Franklin, Inc., FGP Bala, Inc., FGP Twenty-One, Inc., FGP
Twenty-Two, Inc., FGP Twenty-Five, Inc., FGP Schenectady, Inc., FGP Country
Estates, Inc., FGP Eleventh Street, Inc., FGP 109th Street, Inc., FGP
Seventy-Second Street, Inc., FGP Gaithersburg, Inc., FGP West 32nd Street,
Inc., FGP Beekman, Inc., Dutch Hotel Management, Inc., FGP Landmark, Inc.,
FGP Islandia, Inc., FGP Bridgeport, Inc., FGP Varick, Inc., The RCC Group,
Inc., FGP Union Gardens, Inc., FGP Burkewood, Inc., FGP Stamford, Inc., FGP
Meadow Lane, Inc., FGP Main Street, Inc., FGP Property Services, Inc., FGP
Merrick, Inc., FGP West 14th Street, Inc., FGP 106 Fulton, Inc., FGP Bush
Terminal, Inc., FGP Northern Boulevard, Inc., FGP Seventh Avenue, Inc., FGP
Parsons, Inc., FGP City Hall, Inc., FGP West 88th Street, Inc., FGP
Lincoln, Inc., FGP Emerson, Inc., FGP Brooke, Inc., FGP 86th Street, Inc.,
FGP Edison, Inc., FGP Rider Avenue, Inc., FGP Remsen, Inc., FGP Rockbeach,
Inc., FGP Carter Drive, Inc., FGP Centereach, Inc., FGP Colonial Plaza,
Inc., FGP Coram, Inc., FGP Herald Center, Inc., Eighty-Six Yorkville, Inc.
(9) Subsidiaries of ISI Insurance Agency, Inc. are: ISI Insurance Agency of
Ohio, Inc., ISI Insurance Agency of Massachusetts, Inc., and ISI Insurance
Agency of Texas, Inc.
(10) Subsidiaries of Associated Mariner Agency, Inc. are Associated Mariner
Agency of Hawaii, Inc., Associated Mariner Insurance Agency of
Massachusetts, Inc., Associated Mariner Agency Ohio, Inc., Associated
Mariner Agency Texas, Inc., and Associated Mariner Agency New Mexico, Inc.
(11) Owns 50% interest in DJA Partners (a.k.a. "Teleres"), a Delaware general
partnership. Also owns 2.5% interest in Datalytics, Inc., an Ohio
corporation.
(12) Owns 49% of Quantra Consulting, Inc., a Delaware corporation.
* Includes qualifying shares for Directors.
(c) Refer to Prospectus pages 8 and 15, "Charges" and Part B, Statement of
Additional Information, page 2, "Sale of Contracts/Principal Underwriter" for
information regarding compensation.
C-5
<PAGE> 231
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books, and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder
are primarily maintained by AUSA Insurance Company, Inc. in whole or in part, at
its principal offices at 4 Manhattanville Road, Purchase, NY 10577.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant hereby undertakes to file post-effective amendments to the
Registration Statement as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more than 16 months
old for so long as payments under the group variable annuity contract may be
accepted;
(b) Registrant hereby undertakes to include either (1) as part of any
application to purchase a Contract offered by the prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
post card or similar written communication affixed to or included in the
prospectus that the applicant can remove to send for a Statement of Additional
Information;
(c) Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request.
(d) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
(e) Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(f) Registrant hereby represents that the fees and charges deducted under
the Contracts, in the aggregate, are reasonable in relation to the services
rendered; the expenses expected to be incurred and the risks assumed by the
insurance company.
C-6
<PAGE> 232
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant (certifies that it meets the
requirements of Securities Act Rule 485(b) for the effectiveness of this
registration statement) has duly caused this Post-Effective Amendment No. 8 to
its Registration Statement to be signed on its behalf, by the undersigned
thereunto duly authorized, in the County of Westchester and the State of New
York, on this 30th day of April, 1997.
DIVERSIFIED INVESTORS VARIABLE FUNDS
(Registrant)
By: /s/ TOM A. SCHLOSSBERG
------------------------------------
Tom A. Schlossberg
AUSA LIFE INSURANCE COMPANY, INC.
(Depositor)
By: /s/ TOM A. SCHLOSSBERG
------------------------------------
Tom A. Schlossberg
(Director and President)
Pursuant to the requirement of the Securities Act of 1933 this
Post-Effective Amendment No. 8 to its Registration Statement has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ----------------------------------- ---------------
<C> <S> <C>
/s/ TOM A. SCHLOSSBERG Director and President April 30, 1997
- -------------------------------------
(Tom A. Schlossberg)
*/s/ ANDREW R. BAER Director April 30, 1997
- -------------------------------------
(Andrew R. Baer)
*/s/ LARRY G. BROWN Director April 30, 1997
- -------------------------------------
(Larry G. Brown)
*/s/ WILLIAM L. BUSLER Director April 30, 1997
- -------------------------------------
(William L. Busler)
*/s/ JACK R. DYKHOUSE Director April 30, 1997
- -------------------------------------
(Jack R. Dykhouse)
*/s/ STEVEN E. FRUSCHTICK Director April 30, 1997
- -------------------------------------
(Steven E. Fruschtick)
*/s/ CARL T. Director April 30, 1997
HANSON
- -------------------------------------
(Carl T. Hanson)
*By: /s/ TOM A. SCHLOSSBERG April 30, 1997
- -------------------------------------
Tom A. Schlossberg
Attorney-in-Fact
</TABLE>
C-7
<PAGE> 233
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ----------------------------------- ---------------
<C> <S> <C>
*/s/ B. LARRY Director April 30, 1997
JENKINS
- -------------------------------------
(B. Larry Jenkins)
*/s/ DOUGLAS C. KOLSRUD Director April 30, 1997
- -------------------------------------
(Douglas C. Kolsrud)
*/s/ VERA F. Director April 30, 1997
MIHAIC
- -------------------------------------
(Vera F. Mihaic)
*/s/ PETER P. Director April 30, 1997
POST
- -------------------------------------
(Peter P. Post)
*/s/ COR H. VERHAGEN Director April 30, 1997
- -------------------------------------
(Cor H. Verhagen)
*/s/ E. KIRBY WARREN Director April 30, 1997
- -------------------------------------
(E. Kirby Warren)
*By: /s/ TOM A. SCHLOSSBERG
- -------------------------------------
Tom A. Schlossberg
Attorney-in-Fact
</TABLE>
C-8
<PAGE> 234
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for the effectiveness of this registration statement and has duly
caused this Post-Effective Amendment No. 8 to its Registration Statement to be
signed on its behalf by the undersigned thereunto duly authorized, in the County
of Westchester, State of New York, on the 30th day of April, 1997.
DIVERSIFIED INVESTORS PORTFOLIOS
/s/ TOM A. SCHLOSSBERG
--------------------------------------
Tom A. Schlossberg
Trustee, President, Chief Executive
Officer
and Chairman of the Board of Trustees
of
the Portfolios
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 8 to its Registration Statement has been signed
below by the following persons in the capacities indicated on the 30th day of
April, 1997.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ----------------------------------- ---------------
<C> <S> <C>
/s/ TOM A. SCHLOSSBERG Trustee, President, Chief Executive April 30, 1997
- ------------------------------------- Officer and Chairman of the Board
Tom A. Schlossberg of Trustees of the Portfolios
* /s/ NEAL M. JEWELL Trustee of the Portfolios April 30, 1997
- -------------------------------------
Neal M. Jewell
* /s/ EUGENE M. MANNELLA Trustee of the Portfolios April 30, 1997
- -------------------------------------
Eugene M. Mannella
* /s/ PATRICIA L. SAWYER Trustee of the Portfolios April 30, 1997
- -------------------------------------
Patricia L. Sawyer
*By /s/ ROBERT F. COLBY April 30, 1997
--------------------------------
Robert F. Colby
</TABLE>
C-9
<PAGE> 235
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------
<C> <S> <C>
10 Opinion and Consents of Independent Accountants.
15 Powers of Attorney
</TABLE>
<PAGE> 1
[ERNST & YOUNG LLP LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Independent
Accountants" in the Prospectus and Statement of Additional Information, and to
the use of our report dated February 21, 1997 with respect to the
statutory-basis financial statements and schedules of AUSA Life Insurance
Company, Inc., included in Post-Effective Amendment No. 8 to the Registration
Statement (Form N-4 No. 33-73734) and related Prospectus of Diversified
Investors Variable Funds.
ERNST & YOUNG LLP
Des Moines, Iowa
April 25, 1997
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE> 2
[COOPERS & LYBRAND LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
--------------
We consent to the incorporation by reference in this Post-Effective Amendment
No. 8 to the Registration Statement of Diversified Investors Variable Funds on
Form N-4 (File No. 33-73734) of our reports dated February 12, 1997 end
February 10, 1997 on our audits of the financial statements and financial
highlights of Diversified Investors Variable Funds and Diversified Investors
Portfolios, respectively.
We also consent to the references to our firm under the caption "Financial
Highlights" in the Prospectus and under the caption "Independent Accountants" in
the Statement of Additional Information.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
New York, New York
April 28, 1997
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director of AUSA Life Insurance
Company, Inc. whose signature appears below constitutes and appoints Tom A.
Schlossberg and Craig D. Vermie and each of them, with full and several power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign one or more Registration Statements on Form N-4 under the
Investment Company Act of 1940 and Securities Act of 1933 (or such other form
or forms as the Securities and Exchange Commission may prescribe) relating to
certain group variable annuity contracts funded by the Diversified Investors
Variable Funds, a separate account of AUSA Life Insurance Company, Inc. which
will be registered as a unit investment trust under the Investment Company Act
of 1940, any or all amendments, including post-effective amendments, and
supplements to any such Registration Statements, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as they or he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
/s/ Harry W. Albright /s/ E. Kirby Warren
- --------------------------------- ----------------------------------
Harry W. Albright E. Kirby Warren
/s/ Larry G. Brown /s/ Andrew R. Baer
- --------------------------------- ----------------------------------
Larry G. Brown Andrew R. Baer
/s/ Tom A. Schlossberg /s/ William L. Busler
- --------------------------------- ----------------------------------
Tom A. Schlossberg William L. Busler
/s/ Patrick E. Falconio /s/ Jack R. Dykhouse
- --------------------------------- ----------------------------------
Patrick E. Falconio Jack R. Dykhouse
/s/ Carl T. Hanson /s/ Steven E. Frushtick
- --------------------------------- ----------------------------------
Carl T. Hanson Steven E. Frushtick
/s/ Vera F. Mihaic /s/ Douglas C. Kolsrud
- --------------------------------- ----------------------------------
Vera F. Mihaic Douglas C. Kolsrud
/s/ B. Larry Jenkins /s/ Peter P. Post
- --------------------------------- ----------------------------------
B. Larry Jenkins Peter P. Post
/s/ Cor H. Verhagen
- ---------------------------------
Cor H. Verhagen
<PAGE> 2
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by
Diversified Investors Portfolios with the Securities and Exchange Commission
under the Investment Company Act of 1940 and any and all instruments which
such attorneys and agents, or any of them, deem necessary or advisable to enable
the Company to comply with such Act, the rules, regulations and requirements of
the Securities and Exchange Commission, and the securities or Blue Sky laws of
any state or other jurisdiction, and the undersigned hereby ratifies and
confirms as his own act and deed any and all acts that such attorneys and
agents, or any of them, shall do or cause to be done by virtue hereof. Any one
of such attorneys and agents have, and may exercise, all of the powers hereby
conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/ E.M. Mannella
------------------------------
E.M. Mannella
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK)
On the 25th day of January, 1995 before me personally came E.M. Mannella to me
known to be the person described in and who executed the foregoing instrument,
and acknowledged that he executed same.
/s/ Catherine A. Mohr
CATHERINE A. MOHR
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995
<PAGE> 3
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by
Diversified Investors Portfolios with the Securities and Exchange Commission
under the Investment Company Act of 1940 and any and all instruments which
such attorneys and agents, or any of them, deem necessary or advisable to enable
the Company to comply with such Act, the rules, regulations and requirements of
the Securities and Exchange Commission, and the securities or Blue Sky laws of
any state or other jurisdiction, and the undersigned hereby ratifies and
confirms as his own act and deed any and all acts that such attorneys and
agents, or any of them, shall do or cause to be done by virtue hereof. Any one
of such attorneys and agents have, and may exercise, all of the powers hereby
conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/ Patricia L. Sawyer
------------------------------
Patricia L. Sawyer
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK)
On the 25th day of January, 1995 before me personally came Patricia L. Sawyer
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
CATHERINE A. MOHR
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995
<PAGE> 4
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by
Diversified Investors Portfolios with the Securities and Exchange Commission
under the Investment Company Act of 1940 and any and all instruments which such
attorneys and agents, or any of them, deem necessary or advisable to enable the
Company to comply with such Act, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction, and the undersigned hereby ratifies and confirms
as his own act and deed any and all acts that such attorneys and agents, or any
of them, shall do or cause to be done by virtue hereof. Any one of such
attorneys and agents have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/ Neal M. Jewell
------------------------
Neal M. Jewell
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995, before me personally came Neal M. Jewell to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
-----------------------------------------
Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995
<PAGE> 5
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Tom A. Schlossberg,
Robert F. Colby, Alfred C. Sylvain and John F. Hughes, and each of them, with
full powers of substitution as his true and lawful attorneys and agents to
execute in his name and on his behalf in any and all capacities the
Registration Statement, and any and all amendments thereto, filed by
Diversified Investors Portfolios with the Securities and Exchange Commission
under the Investment Company Act of 1940 and any and all instruments which such
attorneys and agents, or any of them, deem necessary or advisable to enable the
Company to comply with such Act, the rules, regulations and requirements of the
Securities and Exchange Commission, and the securities or Blue Sky laws of any
state or other jurisdiction, and the undersigned hereby ratifies and confirms
as his own act and deed any and all acts that such attorneys and agents, or any
of them, shall do or cause to be done by virtue hereof. Any one of such
attorneys and agents have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 25th
day of January, 1995.
/s/ Tom Schlossberg
-------------------------
Tom Schlossberg
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 25th day of January, 1995 before me personally came Tom Schlossberg to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
/s/ Catherine A. Mohr
-----------------------------------------
Catherine A. Mohr
NOTARY PUBLIC, State of New York
No. 31-4656544
Qualified in New York County
Term Expires June 30, 1995
