File Nos. 33-73734
811-8264
As filed with the Securities and Exchange Commission on May 3, 1999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 / /
POSTEFFECTIVE AMENDMENT NO. 12 /X/
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 12 /X/
DIVERSIFIED INVESTORS VARIABLE FUNDS
(Exact Name of Registrant as Specified in Charter)
AUSA Life Insurance Company, Inc.
Four Manhattanville Road, Purchase, New York 10577
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (914) 697-8000
Robert F. Colby, Esq.
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, New York 10577
(Name and Address of Agent for Service)
Copy to:
Roger P. Joseph, Esq.
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
It is proposed that this filing will become effective on May 3, 1999
pursuant to paragraph (b) of Rule 485. Pursuant to Rule 485(b)(1)(iii), the
Registrant hereby designates that the effective date for Post-Effective
Amendment No. 11 to the Registrant's Registration Statement under the
Securities Act of 1933 and Amendment No. 11 under the Investment Company Act of
1940, as filed pursuant to Rule 485(a) on March 4, 1999, also shall be May 3,
1999.
Diversified Investors Portfolios has also executed this registration
statement.
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DIVERSIFIED INVESTORS VARIABLE FUNDS
FORM N-4
CROSS REFERENCE SHEET
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PART A
ITEM NO. PROSPECTUS HEADINGS
1. Cover Page Cover Page
2. Definitions Definitions
3. Synopsis Synopsis
4. Condensed Financial Information Condensed Financial Information
5. General Description of Registrant, Depositor, AUSA; Diversified Investors
and Portfolio Companies Variable Funds; Diversified Investors
Portfolios
6. Deductions and Expenses Charges
7. General Description of Variable Annuity Contracts Summary of the Contracts
8. Annuity Period Payment Options
9. Death Benefit Death Benefit; Payments To A
Beneficiary Following the Annuitant's
Death
10. Purchases and Contract Value Credit of Purchase Payments;
Allocation of Purchase Payments;
Determination of Unit Value
11. Redemptions Redemption During the Accumulation
Period; Restrictions Under The Texas
Optional Retirement Program
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
13. Legal Proceedings Legal Proceedings
14. Table of Contents of the Statement of Additional Table of Contents of Statement
Information of Additional Information
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PART B STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION HEADINGS
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and History Not Applicable
18. Services Not Applicable
19. Purchases and Securities Being Offered Not Applicable
20. Underwriters Sale of Contracts/Principal
Underwriter
21. Calculation of Performance Data Performance Data
22. Annuity Payments Not applicable
23. Financial Statements Financial Statements and Notes to
Financial Statements
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PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this registration statement.
<PAGE>
Prospectus
DIVERSIFIED INVESTORS VARIABLE FUNDS
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
GROUP VARIABLE ANNUITY CONTRACTS
SECTIONS 401(A), 401(K), 403(B), 408(IRA), 457 AND NQDC
ISSUED BY
AUSA LIFE INSURANCE COMPANY, INC. ("AUSA")
4 MANHATTANVILLE ROAD, PURCHASE, NEW YORK 10577; (800) 926-0044
This prospectus describes group variable annuity contracts (called
Contracts) that are designed and offered as funding vehicles for:
o retirement plans maintained by state educational organizations,
o certain tax-exempt organizations,
o IRA contractholders, and
o taxed organizations in the case of the Section 401(a) and/or Section
401(k) contracts and corporate nonqualified deferred compensation
contracts.
Certain of the Contracts were issued originally by The MONY Group, Inc.
(formerly The Mutual Life Insurance Company of New York) and have since been
assumed by AUSA.
The provisions of the Contracts are identical to the extent possible. As a
result, the information provided in this prospectus generally applies to all of
the Contracts. However, in some cases statutory or administrative
considerations require significant differences among the Contracts. In those
cases, the prospectus explains these differences.
Participants may allocate amounts contributed and remitted to AUSA on
their behalf under the Contracts (called purchase payments) to one of two
segregated investment accounts of AUSA: the DIVERSIFIED INVESTORS VARIABLE
FUNDS and the DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS.
Participants may further allocate purchase payments directed to the
DIVERSIFIED INVESTORS VARIABLE FUNDS ACCOUNT to subaccounts of the Variable
Funds Account currently available under the Contracts. Currently, fourteen
subaccounts are available. Assets in these subaccounts are invested in
corresponding series of Diversified Investors Portfolios or in the Calvert
Social Series at their net asset value. The Diversified Investors Portfolios
series are the Money Market Series, High Quality Bond Series, Intermediate
Government Bond Series, Government/Corporate Bond Series, High-Yield Bond
Series, Balanced Series, Equity Income Series, Equity Value Series, Growth &
Income Series, Equity Growth Series, Special Equity Series, Aggressive Equity
Series and International Equity Series. The Calvert Series is an actively
managed, diversified portfolio of common and preferred stocks, bonds, and money
market instruments which offer income and capital growth opportunity and which
satisfy the social concern criteria established by the Calvert Series. A copy
of the Calvert Series prospectus appears at the end of this prospectus.
Participants may allocate purchase payments directed to the DIVERSIFIED
INVESTORS STRATEGIC VARIABLE FUNDS ACCOUNT to subaccounts of the Strategic
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Variable Funds Account currently available under the Contracts. Currently,
three subaccounts are available. These are the Diversified Investors Short
Horizon Strategic Allocation Variable Fund, the Diversified Investors
Intermediate Horizon Strategic Allocation Variable Fund and the Diversified
Investors Intermediate/Long Horizon Strategic Allocation Variable Fund.
Diversified Investment Advisors, Inc. is the investment adviser to each of
these Strategic Variable Funds subaccounts. Each Strategic Variable Funds
subaccount invests its assets in a diversified portfolio of units issued by the
Variable Funds subaccounts described above. Diversified Investment Advisors
selects the combination of Variable Funds subaccounts in accordance with the
investment objective of each Strategic Variable Funds subaccount.
THE VARIABLE FUNDS SUBACCOUNTS THAT 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. THESE INVESTORS MAY INCLUDE MUTUAL FUNDS,
BANK COLLECTIVE TRUSTS AND UNREGISTERED INSURANCE COMPANY SEPARATE ACCOUNTS.
SEE "DIVERSIFIED INVESTORS PORTFOLIOS -- CORE/FEEDER STRUCTURE" ON PAGE __
HEREIN.
The value of each participant's account maintained in the segregated
investment accounts of AUSA will vary based upon the investment experience of
the subaccounts to which the participant's purchase payments are allocated. The
investment experience of the Variable Funds subaccounts will vary based on the
investment performance of the underlying series of the Diversified Investors
Portfolios and the Calvert Series. The investment experience of the Strategic
Variable Funds subaccounts will vary based on the investment performance of the
underlying Variable Funds subaccounts.
This prospectus sets forth the basic information that you should know
before investing. Please keep this prospectus for future reference.
To learn more about the Contracts, the segregated investment accounts and
their underlying investments, you can obtain a copy of the accounts' most
recent financial reports or a copy of the Statement of Additional Information
("SAI") dated the date of this prospectus. The SAI has been filed with the
Securities and Exchange Commission and is incorporated into this prospectus by
reference. The SAI's table of contents can be found on page __ of this
prospectus. You may obtain these documents from AUSA without charge upon
written request to the above address or by telephoning (800)926-0044. You can
also obtain copies of these documents from the Securities and Exchange
Commission's web site at http://www.sec.gov. Information about contracts can
also be reviewed and copied at the SEC's Public Reference Room in Washington,
DC. You can get information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. You can receive copies of this information
by sending your request and a duplicating fee to the SEC's Public Reference
Section, Washington, DC 20549-6009.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE CONTRACTS IN ANY JURISDICTION IN WHICH SUCH MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ACCURACY OF THIS PROSPECTUS, AND ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
May 3, 1999
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CONTENTS
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PAGE
Definitions .............................................................
Synopsis.................................................................
Expense Summary.....................................................
The Contracts ......................................................
The Accounts .......................................................
Charges ............................................................
Credit And Allocation of Purchase Payments .........................
Redemption .........................................................
Transfers ..........................................................
Payments Options ...................................................
Voting Rights ......................................................
Death Benefit ......................................................
Distribution Of the Contracts ......................................
Financial Information ..............................................
AUSA ....................................................................
Diversified Investors Variable Funds ....................................
Calvert Series .....................................................
Diversified Investors Portfolios ...................................
Diversified Investors Strategic Variable Funds ..........................
Management..........................................................
Charges .................................................................
Charges For Mortality And Expense Risks ............................
Annual Contract Charge .............................................
Investment Management Fee ..........................................
Premium Tax ........................................................
Summary of the Contracts ................................................
Eligible Purchasers ................................................
Ownership ..........................................................
Purchase Payments ..................................................
Employer Sponsored Plan Requirements ...............................
Rights of the Participant Under The Contract .......................
Rights Upon Suspension Of Contract Or Termination of Plan ..........
403(b) Contract ...............................................
401(a) Contract/401(k) Contract and NQDC Contracts ............
457 and 408(IRA) Contracts ....................................
Failure Of Qualification ...........................................
Transfers ..........................................................
401(a), 401(k), 403(b), 457, 408(IRA) and NQDC Contracts ......
Rights Reserved By AUSA .................................................
Credit of Purchase Payments .............................................
Allocation of Purchase Payments ....................................
Determination of Unit Value ........................................
Death Benefit ...........................................................
Redemption During The Accumulation Period ...............................
Restrictions Under The Texas Optional Retirement Program ................
Payment Options .........................................................
Annuity Purchase Date ..............................................
Fixed Annuity ......................................................
Fixed Annuity Options ..............................................
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PAGE
Payments To A Beneficiary Following the Annuitant's Death ..........
Voting Rights ...........................................................
Distribution of The Contracts ...........................................
Federal Tax Status ......................................................
Tax Treatment of AUSA ..............................................
Taxation of Diversified Investors Portfolios .......................
Section 403(b) Annuities ...........................................
Restrictions On Withdrawals Of Elective Contributions .........
Section 401(a) Plans ...............................................
Section 408(IRA) Contracts .........................................
Minimum Distribution Requirements ..................................
Section 457 Plans ..................................................
Non-Qualified Deferred Compensation Contracts ......................
Income Tax Withholding .............................................
Assumption Reinsurance ..................................................
Performance Data ........................................................
Diversified Investors Portfolios ........................................
Core/Feeder Structure ..............................................
Money Market Portfolio .............................................
Bond Portfolios ....................................................
Balanced Portfolio .................................................
Stock Portfolios ...................................................
Additional Investment Policies .....................................
Core/Feeder Structure...............................................
Risk Considerations ................................................
Management Of Diversified Investors Portfolios ..........................
Board of Trustees ..................................................
Investment Adviser .................................................
Advisory Fees ......................................................
Administrator ......................................................
Distribution Arrangements ..........................................
Custodian and Dividend Disbursing Agent ............................
Expenses............................................................
Other Information Regarding Diversified Investors Portfolios ............
Purchase and Redemption of Interests in
Diversified Investors Portfolios ..................................
Net Asset Value ....................................................
Taxation of Diversified Investors Portfolios .......................
Distribution of Beneficial Interests, Voting Rights and Liabilities.
Independent Accountants .................................................
Legal Proceedings .......................................................
Statutory Basis Financial Statements ....................................
Additional Information ..................................................
Miscellaneous............................................................
Table of Contents of Statement of Additional Information ................
Request Form for Statement of Additional Information ....................
Appendix A -- Strategic Variable Funds Subaccounts ...................... Appendix A
Appendix B -- Applicable Premium Tax Rates .............................. Appendix B
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DEFINITIONS
As used in this Prospectus, the following terms have the meanings indicated:
ACCUMULATION ACCOUNT: an account maintained for each Participant in which is
recorded the number of Units held for his/her credit.
ACCUMULATION PERIOD: the accumulation period for each Participant is the period
during which Purchase Payments may be made on his/her behalf. It begins when
the Participant begins participation under the Plan and ends as of his/her
Annuity Purchase Date (see "Annuity Purchase Date" on page __), or earlier
termination of his/her Accumulation Account.
AGGRESSIVE EQUITY PORTFOLIO: Diversified Investors Aggressive Equity Portfolio,
a series of Diversified Investors Portfolios.
BALANCED PORTFOLIO: Diversified Investors Balanced Portfolio, a series of
Diversified Investors Portfolios.
CALVERT SERIES: the Calvert Social Balanced Portfolio, a series of Acacia
Capital Corporation, an open-end management investment company registered under
the Investment Company Act of 1940, as amended.
CONTRACTHOLDER: a state educational organization or certain tax-exempt
organization employer or employer association for affiliated employers, taxed
subsidiaries of tax-exempt organizations and taxed stand-alone organizations.
CONTRACTS: the group variable annuity contracts offered by AUSA to
Contractholders, IRA Contractholders or NQDC Contractholders as described in
this Prospectus.
CONTRACT YEAR: a period of 12 months measured from the date of the Contract
issued to or adopted by the Contractholder, and anniversaries thereof.
DISC: Diversified Investors Securities Corp., a registered broker-dealer under
the Securities Exchange Act of 1934, as amended, and a wholly-owned subsidiary
of Diversified.
DIVERSIFIED: Diversified Investment Advisors, Inc., a registered investment
adviser under the Investment Advisers Act of 1940, as amended, and an affiliate
of AUSA.
DIVERSIFIED INVESTORS PORTFOLIOS: an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended.
EQUITY GROWTH PORTFOLIO: Diversified Investors Equity Growth Portfolio, a
series of Diversified Investors Portfolios.
EQUITY INCOME PORTFOLIO: Diversified Investors Equity Income Portfolio, a
series of Diversified Investors Portfolios.
EQUITY VALUE PORTFOLIO: Diversified Investors Equity Value Portfolio, a series
of Diversified Investors Portfolios.
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FIXED ANNUITY: an annuity with payments which remain fixed throughout the
payment period and which do not reflect the investment experience of a separate
account.
GOVERNMENT/CORPORATE BOND PORTFOLIO: Diversified Investors Government/Corporate
Bond Portfolio, a series of Diversified Investors Portfolios.
GROWTH & INCOME PORTFOLIO: Diversified Investors Growth & Income Portfolio, a
series of Diversified Investors Portfolios.
HIGH QUALITY BOND PORTFOLIO: Diversified Investors High Quality Bond Portfolio,
a series of Diversified Investors Portfolios.
HIGH-YIELD BOND PORTFOLIO: Diversified Investors High-Yield Bond Portfolio, a
series of Diversified Investors Portfolios.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO: Diversified Investors Intermediate
Government Bond Portfolio, a series of Diversified Investors Portfolios.
INTERNATIONAL EQUITY PORTFOLIO: Diversified Investors International Equity
Portfolio, a series of Diversified Investors Portfolios.
IRA CONTRACTHOLDER: a tax-exempt, or taxed organization or an association of
members who share a common interest.
MONEY MARKET PORTFOLIO: Diversified Investors Money Market Portfolio, a series
of Diversified Investors Portfolios.
NQDC: Non-qualified deferred compensation arrangement available to taxed
organizations only.
PARTICIPANT: an employee participating under a Contract issued to or adopted by
his/her employer or an individual participating under a Contract issued to an
IRA Contractholder.
PLAN: a retirement plan or program under which benefits are to be provided
pursuant to a Contract described herein or by a Participant.
PORTFOLIOS: the series of Diversified Investors Portfolios described herein.
PURCHASE PAYMENT: the amount contributed and remitted to AUSA by an employer on
behalf of a Participant.
SPECIAL EQUITY PORTFOLIO: Diversified Investors Special Equity Portfolio, a
series of Diversified Investors Portfolios.
STRATEGIC MANAGING BOARD: The Managing Board of the Strategic Variable Funds
Account.
STRATEGIC VARIABLE FUNDS ACCOUNT: a segregated investment account of AUSA which
has been designated Diversified Investors Strategic Variable Funds and to which
Purchase Payments may be allocated.
STRATEGIC VARIABLE FUNDS SUBACCOUNTS: those Subaccounts of the Strategic
Variable Funds Account that are made available under the Contracts.
UNIT: the measure by which the value of an investor's interest in each
Subaccount is determined.
VALUATION DATE: each day that the New York Stock Exchange is open for trading.
VALUATION PERIOD: The period between the ending of two successive Valuation
Dates.
VARIABLE FUNDS ACCOUNT: a segregated investment account of AUSA which has been
designated Diversified Investors Variable Funds and to which Purchase Payments
may be allocated.
VARIABLE FUNDS BOND SUBACCOUNTS: The High Quality Bond, Intermediate Government
Bond, Government/Corporate Bond and High-Yield Bond Subaccounts of the Variable
Funds Account, each of which invests in a corresponding series of Diversified
Investors Portfolios.
VARIABLE FUNDS MONEY MARKET SUBACCOUNT: The Money Market Subaccount of the
Variable Funds Account, which invests in the Money Market series of Diversified
Investors Portfolios.
VARIABLE FUNDS STOCK SUBACCOUNTS: The Equity Value, Equity Income, Growth &
Income, Equity Growth, Special Equity, Aggressive Equity and International
Equity Subaccounts of the Variable Funds Account, each of which invests in a
corresponding series of Diversified Investors Portfolios.
VARIABLE FUNDS SUBACCOUNTS: those Subaccounts of the Variable Funds Account
that are made available under the Contracts.
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SYNOPSIS
FEE TABLES
These tables describe the various costs and expenses that you will pay,
directly or indirectly, if you invest in the Variable Funds Account or the
Strategic Variable Funds Account.
Your investment in each subaccount of the Variable Funds Account will bear
its pro rata share of Mortality and Risk Expense Fees equal to 1.20% of the
average account value of that subaccount. Your investment also will bear,
indirectly, its pro rata share of the fees and expenses of the underlying
Portfolios (or the Calvert Series) in which the subaccounts invest.
Your investment in each subaccount of the Strategic Variable Funds Account
will bear its pro rata share of a Management Fee equal to .20% of average daily
net assets of that subaccount. Your investment also will bear, indirectly, its
pro rata share of the Mortality and Risk Expense Fees charged at the Variable
Funds Subaccount level and of the fees and expenses of the underlying
Portfolios (or the Calvert Series) in which the Variable Funds Subaccounts
invest.
DIVERSIFIED INVESTORS VARIABLE FUNDS
TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
Annual Contract Fee None (1)
Mortality and Expense Risk Fees 1.20%(2)
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(1) AUSA reserves the right to deduct an annual contract charge from a
Participant's Accumulation Account not to exceed $50. See "Charges --
Annual Contract Charge" at page __.
(2) AUSA reserves the right to charge maximum mortality and expense risk fees
of up to 1.25% upon notice. For the Variable Fund Subaccounts investing
in the Money Market Portfolio and the Equity Value Portfolio, AUSA
reimbursed expenses of 0.18% and 0.14%, respectively, in 1998.
This table shows the annual expenses (after waivers and reimbursements)
for each Portfolio and the Calvert Series. Your investment in each Variable
Funds subaccount will bear its pro rata share of the fees and expenses of the
Portfolio or Calvert Series in which it invests.
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DIVERSIFIED INVESTORS PORTFOLIOS
AND
CALVERT SERIES
ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
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HIGH INTERMEDIATE GOVERNMENT/
MONEY QUALITY GOVERNMENT CORPORATE HIGH-YIELD EQUITY
MARKET BOND BOND BOND BOND BALANCED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
==============================================================================
Management Fees (after
waivers/reimbursements) (1).. 0.25% 0.35% 0.35% 0.35% 0.52% 0.45% 0.45%
Other Expenses .............. 0.03% 0.04% 0.04% 0.03% 0.08% 0.03% 0.02%
TOTAL ANNUAL EXPENSES (AFTER
WAIVERS/REIMBURSEMENTS) (1).. 0.28% 0.39% 0.39% 0.38% 0.60% 0.48% 0.47%
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EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE INTERNATIONAL
VALUE INCOME GROWTH EQUITY EQUITY CALVERT EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO SERIES PORTFOLIO
======================================================================================
Management Fees (after
waivers/reimbursements) (1). 0.56% 0.60% 0.62% 0.80% 0.87% 0.70% 0.75%
Other Expenses ............. 0.04% 0.03% 0.02% 0.03% 0.13% 0.15% 0.13%
TOTAL ANNUAL EXPENSES (AFTER
WAIVERS/REIMBUrSEMENTS) (1). 0.60% 0.63% 0.62% 0.83% 1.00% 0.85% 0.88%
</TABLE>
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(1) Without waivers and reimbursements, management fees and total annual
expenses would be 0.25% and 0.28% for the Money Market Portfolio, 0.35%
and 0.39% for the High Quality Bond Portfolio, 0.35% and 0.39% for the
Intermediate Government Bond Portfolio, 0.35% and 0.38% for the
Government/Corporate Bond Portfolio, 0.55% and 0.63% for the High-Yield
Bond Portfolio, 0.45% and 0.48% for the Balanced Portfolio, 0.45% and
0.47% for the Equity Income Portfolio, 0.57% and 0.61% for the Equity
Value Portfolio, 0.60% and 0.63% for the Growth & Income Portfolio, 0.61%
and 0.65% for the Equity Growth Portfolio, 0.80% and 0.83% for the Special
Equity Portfolio, 0.97% and 1.00% for the Aggressive Equity Portfolio,
0.70% and 0.85% for the Calvert Series, and 0.75% and 0.87% for the
International Equity Portfolio.
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
Annual Contract Fee.................................... None(1)
ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees........................................ 0.20%(2)
Mortality and Expense Risk Fees........................ 1.20%(3)
Other Expenses......................................... None
TOTAL ANNUAL EXPENSES.................................. 1.40%(3)
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(1) AUSA reserves the right to deduct an annual contract charge from a
Participant's Accumulation Account not to exceed $50. See "Charges --
Annual Contract Charge" at page __.
(2) These fees are charged directly to the Strategic Variable Funds
Subaccounts. Each Strategic Variable Funds Subaccount will also bear,
indirectly, its pro rata share of the expenses of the Portfolios in which
it invests through the various Variable Funds Subaccounts. See below for a
table showing the expenses (after waivers and reimbursements) for the
Portfolios in which the Variable Funds Subaccounts invest.
(3) AUSA reserves the right to charge maximum mortality and expense risk fees
of up to 1.25% upon notice. These Mortality and Expense Fees are charged
to the underlying Variable Funds Subaccounts. Each Strategic Variable
Funds Subaccount will bear, indirectly, its pro rata share of the
mortality and expense risk fees charged at the Variable Funds Subaccount
level.
<PAGE>
This table shows the annual expenses (after waivers and reimbursements) for
each Portfolio in which the Strategic Variable Funds Subaccounts will,
indirectly, invest. Your investment in each Strategic Variable Funds Subaccount
will bear its pro rata share of the Portfolios' fees and expenses.
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TOTAL ANNUAL
SHORT HORIZON MANAGEMENT FEE PORTFOLIO EXPENSES
STRATEGIC ALLOCATION (AFTER WAIVERS AND OTHER (AFTER WAIVERS AND
VARIABLE FUND REIMBURSEMENTS) EXPENSES REIMBURSEMENTS)(2)
================================ ================== ========= ====================
Money Market Portfolio (1) 0.25% 0.03% 0.28%
High Quality Bond Portfolio 0.35% 0.04% 0.39%
Intermediate Government Bond Portfolio 0.35% 0.04% 0.39%
Government/Corporate Bond Portfolio 0.35% 0.03% 0.38%
High-Yield Bond Portfolio 0.52% 0.08% 0.60%
Equity Income Portfolio 0.45% 0.02% 0.47%
Equity Value Portfolio 0.56% 0.04% 0.60%
Growth & Income Portfolio 0.60% 0.03% 0.63%
</TABLE>
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TOTAL ANNUAL
PORTFOLIO
INTERMEDIATE AND MANAGEMENT FEE EXPENSES
INTERMEDIATE/LONG HORIZON STRATEGIC (AFTER WAIVERS AND OTHER (AFTER WAIVERS AND
ALLOCATION VARIABLE FUNDS REIMBURSEMENTS) EXPENSES REIMBURSEMENTS)(2)
========================================== ================== ======== ===================
Money Market Portfolio(1) 0.25% 0.03% 0.28%
High Quality Bond Portfolio 0.35% 0.04% 0.39%
Intermediate Government Bond Portfolio 0.35% 0.04% 0.39%
Government/Corporate Bond Portfolio 0.35% 0.03% 0.38%
High-Yield Bond Portfolio 0.52% 0.08% 0.60%
Equity Income Portfolio 0.45% 0.02% 0.47%
Equity Value Portfolio 0.56% 0.04% 0.60%
Growth & Income Portfolio 0.60% 0.03% 0.63%
Equity Growth Portfolio(1) 0.62% 0.02% 0.64%
Special Equity Portfolio 0.80% 0.03% 0.83%
Aggressive Equity Portfolio 0.87% 0.13% 1.00%
International Equity Portfolio 0.74% 0.13% 0.87%
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(1) AUSA has agreed to provide reimbursements to limit total expenses for
Variable Funds Subaccounts investing in the Money Market Portfolio and the
Equity Growth Portfolio to 0.10% and 0.50%, respectively, of average net
assets of the applicable Portfolio, with AUSA reserving the right to raise
the limit upon notice.
(2) Without waivers and reimbursements, total annual portfolio expenses
for the following Portfolios would be as follows: Money Market Portfolio
-- .28%; Intermediate Government Bond Portfolio -- .39%; High-Yield Bond
Portfolio -- .63%; Equity Income Portfolio -- .47%; Equity Value Portfolio
-- .61%; Growth & Income Portfolio -- .63%; Equity Growth Portfolio --
.64%; Special Equity Portfolio -- .83%; Aggressive Equity Portfolio --
1.00%; and International Equity Portfolio -- .87%.
The average weighted expense ratio for the Short Horizon Strategic
Allocation Variable Fund is expected to be from 1.12% to 1.26%, for the
Intermediate Horizon Strategic Allocation Variable Fund from 1.22% to 1.27% and
for the Intermediate/Long Horizon Strategic Allocation Variable Fund from 1.43%
to 1.49%. The lower end of each range reflects the estimated allocation to the
least expensive combination of underlying Portfolios which would trigger
rebalancing by Diversified. The higher end of each range reflects the
estimated allocation to the most expensive combination of underlying
Portfolios which would trigger rebalancing by Diversified.
A range is provided since the average assets of the Strategic
Variable Funds Subaccounts invested in each of the Variable Funds Subaccounts
will fluctuate. These ranges are based on the permissible range of investments
of the Strategic Variable Funds Subaccounts in the underlying Portfolios. For a
list of permissible ranges, see Appendix A. These expense ratios do not include
any management or mortality and expense fees charged directly to the Strategic
Variable Funds Subaccounts or the Variable Funds Subaccounts.
<PAGE>
DIVERSIFIED INVESTORS PORTFOLIOS
AND
CALVERT SERIES
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. This examples
assumes a 5% return each year (the assumption of a 5% return is required by the
SEC for this example and is not a prediction of any subaccount's future
performance). This example should not be considered a representation of past or
future expenses, and actual expenses may be greater or lesser than those shown.
Premium taxes may also be applicable.
AFTER 1 AFTER 3 AFTER 5 AFTER 10
SUBACCOUNT YEAR YEARS YEARS YEARS
Money Market........................ $13 $41 $71 $157
High Quality Bond................... $16 $50 $87 $189
Intermediate Government Bond........ $16 $50 $87 $189
Government/Corporate Bond........... $16 $50 $86 $188
High-Yield Bond..................... $18 $56 $97 $211
Balanced............................ $17 $53 $91 $199
Equity Income....................... $17 $53 $91 $198
Equity Value........................ $18 $57 $97 $212
Growth & Income..................... $18 $57 $99 $214
Equity Growth....................... $17 $54 $92 $201
Special Equity...................... $21 $64 $109 $236
Aggressive Equity................... $22 $69 $117 $252
Calvert............................. $20 $62 $106 $230
International Equity................ $21 $65 $111 $240
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
Example(1)
If you (i) surrender your contract at the end of the applicable time
period, (ii) annuitize at the end of the applicable time period or (iii) do not
surrender your contract, you would pay, using the midpoint ratios of 1.19, 1.25
and 1.46, respectively, of the ranges set forth above, the following expenses
on a $1,000 investment. This example assumes a 5% return each year (the
assumption of a 5% return is required by the SEC and is not a prediction of any
subaccount's future performance). This example should not be considered a
representation of past or future expenses, and actual expenses may be greater
or lesser than those shown. Premium taxes may also be applicable. This example
reflects fees charged at the Strategic Variable Funds Account, Variable Funds
Account and Portfolio levels.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AFTER AFTER AFTER AFTER
STRATEGIC ALLOCATION VARIABLE FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------- ------ ------- ------- --------
Short Horizon...................................... $15 $47 $81 $178
Intermediate Horizon............................... $17 $52 $90 $195
Intermediate/Long Horizon.......................... $17 $54 $92 $201
</TABLE>
<PAGE>
THE CONTRACTS
The Group Variable Annuity Contracts (the "Contracts") described in this
Prospectus are designed and offered as funding vehicles for retirement Plans
maintained by state educational organizations, certain tax-exempt
organizations, and IRA Contractholders and for taxed organizations in the case
of the Section 401(a) and/or Section 401(k) Contracts and corporate
nonqualified deferred compensation Contracts ("NQDC"). The Section 401(k)
Contract will fund the benefits for tax-qualified pension and profit-sharing
plans from employee/employer contributions of such organizations. The Section
403(b) Contract will purchase tax-deferred annuities for employees of these
same organizations. The Section 457 Contract will provide deferred compensation
eligible for deferred tax treatment. The Section 401(a) Contract will fund
benefits for tax-qualified pension and profit-sharing Plans of such tax-exempt
organizations as well as taxed subsidiaries of these organizations and
stand-alone taxed organizations; the NQDC Contracts will fund benefits for
taxed organizations. The Section 408 (Individual Retirement Account ("IRA"))
Contract is a Group Variable Annuity Contract which will provide for on-going
or rollover contributions from individuals who are eligible under Section 408
to make such contributions. Section references are to the Internal Revenue Code
of 1986, as amended (the "Code").
Insofar as possible, the provisions of the Contracts are identical, and
the information provided in this Prospectus is generally applicable to all
Contracts. However, whenever statutory or administrative considerations require
significant differences among the Contracts, such differences are explained
separately for each.
With respect to the Section 401(a), Section 401(k) and NQDC Contracts, the
employer and/or the employee will make contributions pursuant to the terms and
conditions of the underlying retirement Plan. As to the Section 403(b) and
Section 457 Contracts, the employer will make Purchase Payments for each
participating employee pursuant to either a salary reduction agreement or an
agreement to forego a salary increase under which the employee decides the
level and number of Purchase Payments to his/her Accumulation Account, except
with respect to employer-sponsored Section 401(a) Plans under which the
employer will make contributions pursuant to the underlying retirement Plan. In
the case of the Section 408 IRA Contract, Purchase Payments will be made by the
employer on behalf of and as determined by each participating employee pursuant
to a salary reduction agreement or by the Participant.
THE ACCOUNTS
Purchase Payments under the Contracts are allocated to one of two
segregated investment accounts of AUSA Life Insurance Company, Inc., which have
been designated the Diversified Investors Variable Funds (the "Variable Funds
Account") and the Diversified Investors Strategic Variable Funds (the
"Strategic Variable Funds Account", and, together with the Variable Funds
Account, the "Accounts").
The Variable Funds Account
The Variable Funds Account is divided into fourteen Subaccounts (the
"Variable Funds Subaccounts"), thirteen of which correspond to Diversified
Investors Portfolios' Money Market, High Quality Bond, Intermediate Government
Bond, Government/Corporate Bond, High-Yield Bond, Balanced, Equity Income,
Equity Value, Growth & Income, Equity Growth, Special Equity, Aggressive Equity
and International Equity Portfolios, respectively. The Calvert Series
Subaccount invests in the Calvert Series. The assets in each Variable Funds
Subaccount are invested in the corresponding series of Diversified Investors
<PAGE>
Portfolios or the Calvert Series at their net asset value. See "Diversified
Investors Portfolios" at page __ and "Calvert Series" at page __.
Diversified Investors Portfolios is an open-ended, diversified management
investment company which has thirteen series with differing investment
objectives available under the Contracts. Each series of Diversified Investors
Portfolios is managed by Diversified, an affiliate of AUSA. DISC, a
wholly-owned subsidiary of Diversified, is the principal underwriter and
distributor.
The Calvert Series is a series of Acacia Capital Corporation, an open-end
management investment company whose investment adviser is Calvert Asset
Management Company, Inc. The Calvert Series in an actively managed portfolio of
common and preferred stocks, bonds, and money market instruments which offer
income and capital growth opportunity and which satisfy the social concern
criteria established by the Calvert Series. A copy of the Calvert Series
Prospectus appears at the end of this Prospectus.
The value of a Participant's Accumulation Account maintained in a Variable
Funds Subaccount will vary based upon the investment experience of the
corresponding Portfolio or Calvert Series to which Purchase Payments are
allocated.
The Strategic Variable Funds Account
The Strategic Variable Funds Account is divided into three Subaccounts
(the "Strategic Variable Funds Subaccounts"), the Diversified Investors Short
Horizon Strategic Allocation Variable Fund, the Diversified Investors
Intermediate Horizon Strategic Allocation Variable Fund and the Diversified
Investors Intermediate/Long Horizon Strategic Allocation Variable Fund.
Diversified is the investment adviser to each Strategic Variable Funds
Subaccount and seeks to achieve the investment objective of each Strategic
Variable Funds Subaccount by investing in a diversified portfolio of units
issued by the Variable Funds Subaccounts. There are currently twelve Variable
Funds Subaccounts with varying investment objectives available for investment
by the Strategic Variable Funds Subaccounts; the Balanced Subaccount and the
Calvert Series Subaccount are not available to the Strategic Variable Funds
Subaccounts. See "Diversified Investors Strategic Variable Funds" at page __.
As noted above, the assets in each Variable Funds Subaccount are invested in a
corresponding series of Diversified Investors Portfolios. See "Diversified
Investors Portfolios" at page __.
The value of a Participant's Accumulation Account maintained in a
Strategic Variable Funds Subaccount will vary based upon the investment
experience of the various Variable Funds Subaccounts and their corresponding
Portfolios to which Purchase Payments are allocated.
CHARGES
AUSA makes daily charges against the net assets of the Variable Funds
Subaccounts at a maximum annual rate of 1.25%, consisting of .80% for mortality
risks and .45% for administrative expense risks. Currently, the annual rate
charged is 1.20% consisting of % for mortality risks and % for administrative
expense risk. However, AUSA reserves the right to charge a maximum fee of 1.25%
upon notice thereof. See "Charges -- Charges for Mortality and Expense Risks"
on page __.
<PAGE>
Diversified, as investment adviser to each Strategic Variable Funds
Subaccount, imposes a charge against the net assets of each Strategic Variable
Funds Subaccount, computed daily, at an annual rate of .20% for investment
advisory and other services.
In addition, AUSA reserves the right to deduct an annual contract charge
not to exceed $50 from a Participant's Accumulation Account. See "Charges --
Annual Contract Charge" on page __.
In addition to the charges set forth above, Diversified, which serves as
investment adviser to each Portfolio, and Calvert Asset Management Company,
Inc., which serves as investment adviser to the Calvert Series, impose a charge
against the net asset value of each Portfolio or the Calvert Series, as
appropriate, computed daily, for investment advisory services and other
expenses. See "Charges -- Investment Management Fee" on page __.
Premium taxes may be payable on annuity considerations. See "Charges --
Premium Tax" on page __.
CREDIT AND ALLOCATION OF PURCHASE PAYMENTS
Each Participant must direct Purchase Payments to the Variable Funds
Account or the Strategic Variable Funds Account, or a combination of the two.
Each Participant must also designate Subaccounts within each Account to which
Purchase Payments will be directed. Purchase Payments will be credited to the
Subaccounts designated by the Participant in the form of Units. The number of
Units credited will not change but the dollar value of a Unit will vary
depending upon the investment experience of the underlying Portfolio or the
Calvert Series, as appropriate, and, in the case of the Strategic Variable
Funds Subaccounts, the investment experience of the Variable Funds Subaccounts
in which the Strategic Variable Funds Subaccounts invest. See "Credit of
Purchase Payments" on page __.
REDEMPTION
A Participant may redeem at any time prior to the time an annuity benefit
takes effect and prior to his/her death all or a portion of the Units credited
to his/her Accumulation Account without any charge, subject to any limitations
in the underlying Plan. There are no redemption charges. See "Restrictions
Under the Texas Optional Retirement Program" on page __ for withdrawal
restrictions applicable to Contracts issued under the Texas Optional Retirement
Program.
A penalty tax may be payable under the Code upon the redemption of amounts
from an Accumulation Account under a Contract and other significant withdrawal
restrictions may be imposed by the Code. See "Federal Tax Status" on page __.
TRANSFERS
A Participant may transfer Units back and forth between the Variable Funds
Account and the Strategic Variable Funds Account. A participant also may
transfer Units among the various Variable Funds Subaccounts and among the
various Strategic Variable Funds Subaccounts. In any case, no transfer charges
are imposed, and there is no limit to the number of transfers. AUSA may impose
transfer charges at a later date. Transfers may be made in writing or by
telephone by calling (800) 926-0044. See "Transfers" on page __. AUSA reserves
the right to discontinue allowing telephone transfers.
<PAGE>
PAYMENT OPTIONS
Unless a Fixed Annuity is elected, a Participant will receive a lump sum
payment at the end of the Accumulation Period. The Contracts may provide for
several Fixed Annuity options: Life Annuity, Life Annuity With Period Certain,
Specified Fixed Period Annuity, Contingent Annuity and Contingent Annuity With
Period Certain. For NQDC, an installment payment option may also be available.
See "Payment Options" on page __.
VOTING RIGHTS
To the extent required by law, AUSA will vote the interests in the
Portfolios and the Calvert Series held in the Variable Funds Subaccounts in
accordance with the instructions received from Contractholders, IRA
Contractholders and NQDC Contractholders. Similarly, to the extent required by
law, AUSA will vote the interests in the Variable Funds Subaccounts held in the
Strategic Variable Funds Subaccounts in accordance with the instructions
received from Contractholders, IRA Contractholders and NQDC Contractholders. In
each case, the Contractholders will instruct AUSA in accordance with the
instructions received from Participants. See "Voting Rights" on page __.
DEATH BENEFIT
If a Participant dies before the Annuity Purchase Date, the Accumulation
Account value will be paid to his/her beneficiary in a lump sum. See "Death
Benefit" on page __.
DISTRIBUTION OF THE CONTRACTS
DISC will be the principal underwriter and distributor of the Contracts
which will be sold by registered representatives who are also licensed
insurance agents of AUSA. The Contracts may also be sold through registered
representatives of other broker-dealers authorized by DISC and applicable law
who may be insurance agents licensed by an insurance company other than AUSA.
See "Distribution of the Contracts" on page __.
FINANCIAL INFORMATION
These tables contain financial information about the Accounts and are
included in the Accounts' Annual Reports. The tables have been audited by
PricewaterhouseCoopers LLP, independent accountants. Their reports on the
financial statements and condensed financial information are included in the
Annual Reports. The financial statements and condensed financial information
are incorporated by reference into the Statement of Additional Information.
Copies of the Annual Reports may be obtained without charge by calling
(800)926-0044.
<PAGE>
CONDENSED FINANCIAL INFORMATION
DIVERSIFIED INVESTORS VARIABLE FUNDS
ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
UNIT VALUE
--------------------------------------------------------------------------------------------
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994 AUG. 18, 1994
--------------------------------------------------------------------------------------------
Money Market (a)................. $16.45 $15.71 $15.01 $14.35 $13.65 $13.44
High Quality Bond (b)............ $11.45 $10.83 $10.34 $10.00 - -
Intermediate Government Bond (a). $16.06 $15.13 $14.21 $13.84 $12.24 $12.33
Government/Corporate Bond (a).... $23.16 $21.67 $20.10 $19.63 $16.70 $16.76
High-Yield Bond (b).............. $12.04 $11.84 $10.58 $10.00 - -
<PAGE>
Balanced (a)..................... $32.46 $29.12 $24.62 $21.25 $16.66 $16.85
Equity Income (a)................ $38.07 $33.98 $26.38 $22.48 $16.86 $17.21
Equity Value (c)................. $14.62 $13.24 $10.95 $10.00 - -
Growth & Income (d).............. $28.83 $21.50 $16.09 $13.29 $10.14 $10.31
Equity Growth (a)................ $51.55 $37.98 $30.50 $25.58 $21.65 $20.67
Special Equity (d)............... $24.05 $23.40 $18.64 $14.88 $10.63 $10.47
Aggressive Equity (c)............ $14.92 $10.57 $10.01 $10.00 - -
Calvert (a)...................... $25.81 $22.40 $18.83 $16.87 $13.11 $13.28
International Equity (e)......... $14.15 $12.87 $11.99 $10.53 $9.56 -
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
UNITS OUTSTANDING
-----------------------------------------------------------------------------
DEC. 31,1998 DEC. 31,1997 DEC 31,1996 DEC. 31, 1995 DEC. 31, 1994
----------------------------------------------------------------------------
Money Market (a).................. 1,777,954 1,520,230 1,468,262 1,023,590 587,295
High Quality Bond (b)............. 393,946 123,847 20,094 - -
Intermediate Government Bond (a).. 1,623,414 1,285,250 1,352,706 1,313,065 580,105
Government/Corporate Bond......... 1,572,400 962,769 813,757 638,648 385,881
High-Yield Bond (b)............... 203,868 47,081 251 - -
Balanced (a)...................... 4,184,725 4,125,273 3,889,984 3,011,719 1,750,876
Equity Income (a)................. 9,744,341 10,309,097 9,797,859 8,469,952 6,344,534
Equity Value (c).................. 923,179 457,127 18,336 - -
Growth & Income (d)............... 5,222,023 2,817,842 1,341,567 388,800 29,489
Equity Growth (a)................. 5,391,952 5,421,544 5,425,267 4,460,273 2,812,266
Special Equity (d)................ 3,820,805 3,308,346 2,403,076 730,748 83,503
Aggressive Equity (c)............. 1,167,284 533,625 81,079 - -
Calvert (a)....................... 1,381,200 1,293,126 1,212,176 1,052,208 575,200
International Equity (e).......... 2,409,233 2,061,367 1,392,586 - -
</TABLE>
(a) Commencement of Operations on August 18, 1998 at the stated unit value.
(b) Commencement of Operations August 20, 1996 at $10.00 unit value.
(c) Commencement of Operations May 10, 1996 at $10.00 unit value.
(d) Commencement of Operations August 24, 1994 at the stated unit value.
(e) The International Equity Subaccount fully redeemed its shares in the
Scudder Variable Life Fund on October 18, 1996, and invested the proceeds
in the International Equity series of Diversified Investors Portfolios.
The unit value continued after the change in investment options.
CONDENSED FINANCIAL INFORMATION
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
PER ACCUMULATION UNIT INCOME AND CAPITAL CHANGES
SHORT HORIZON STRATEGIC VARIABLE FUNDS SUBACCOUNT
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDING YEAR ENDING
DEC. 31, 1998 DEC. 31, 1997
Investment Income............................................ $ 0.65 $ 0.85
Expenses..................................................... $ (0.02) $ (0.02)
Net Investment Income........................................ $ (0.02) $ (0.02)
Net realized and unrealized gains (losses) on securities..... $ 0.67 $ 0.87
Net increase (decrease) in accumulation unit value........... $ 0.65 $ 0.85
Accumulation unit value at beginning of period............... $ 10.85 $ 10.00
Accumulation unit value at end of period..................... $ 11.50 $ 10.85
Expenses to average net assets............................... 0.20% 0.20%
Net investment income to average net assets.................. (0.20)% (0.20)%
Portfolio turnover rate...................................... 223% 394%
Number of accumulation units outstanding at end of period.... 155,246 69,892
</TABLE>
<PAGE>
INTERMEDIATE HORIZON STRATEGIC VARIABLE FUNDS SUBACCOUNT
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDING YEAR ENDING
DEC. 31, 1998 DEC. 31, 1997
Investment Income............................................ $ 1.27 $ 1.43
Expenses..................................................... $ (0.02) $ (0.02)
Net Investment Income........................................ $ (0.02) $ (0.02)
Net realized and unrealized gains (losses) on securities..... $ 1.29 $ 1.43
Net increase (decrease) in accumulation unit value........... $ 1.27 $ 1.41
Accumulation unit value at beginning of period............... $ 11.41 $ 10.00
Accumulation unit value at end of period..................... $ 12.68 $ 11.41
Expenses to average net assets............................... 0.20% 0.20%
Net investment income to average net assets.................. (0.20)% (0.20)%
Portfolio turnover rate...................................... 129% 419%
Number of accumulation units outstanding at end of period.... 695,501 294,712
</TABLE>
INTERMEDIATE/LONG HORIZON STRATEGIC VARIABLE FUNDS SUBACCOUNT
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDING YEAR ENDING
DEC. 31, 1998 DEC. 31, 1997
Investment Income............................................ $ 1.60 $ 1.88
Expenses..................................................... $ (0.02) $ (0.02)
Net Investment Income........................................ $ (0.02) $ (0.02)
Net realized and unrealized gains (losses) on securities..... $ 1.62 $ 1.90
Net increase (decrease) in accumulation unit value........... $ 1.60 $ 1.88
Accumulation unit value at beginning of period............... $ 11.88 $ 10.00
Accumulation unit value at end of period..................... $ 13.48 $ 11.88
Expenses to average net assets............................... 0.20% 0.20%
Net investment income to average net assets.................. (0.20)% (0.20)%
Portfolio turnover rate...................................... 143% 455%
Number of accumulation units outstanding at end of period.... 838,229 355,329
</TABLE>
AUSA
AUSA Life Insurance Company, Inc. is a stock life insurance company which
was organized under the laws of the State of New York on October 3, 1947. AUSA
is an indirect, wholly-owned subsidiary of AEGON USA, Inc. ("AEGON"), a
financial services holding company whose primary emphasis is life insurance and
annuity and investment products. AEGON is an indirect, wholly-owned subsidiary
of AEGON N.V., a Netherlands corporation which is a publicly traded
international insurance group. AUSA's principal place of business is 4
Manhattanville Road, Purchase, N.Y. 10577; (800) 926-0044.
DIVERSIFIED INVESTORS VARIABLE FUNDS
Diversified Investors Variable Funds (the "Variable Funds Account") was
established by AUSA under New York Insurance Law on November 30, 1993 as a
separate account. The Variable Funds Account will hold assets that are
segregated from all of AUSA's other assets and at present are used only to
support Contracts for which Purchase Payments have been allocated to the
Variable Funds Account. AUSA is the legal holder of the assets in the Variable
Funds Account and will at all times maintain assets in the Variable Funds
Account with a total market value at least equal to the contract liabilities
for the Variable Funds Account. The obligations under the Contracts are
obligations of AUSA. Income, gains, and losses, whether or not realized, from
assets allocated to the Variable Funds Account, are, in accordance with the
Contracts, credited to or charged against the Variable Funds Account without
<PAGE>
regard to other income, gains, or losses of AUSA. The assets in the Variable
Funds Account may not be charged with liabilities which arise from any other
business AUSA conducts. The Variable Funds Account assets may include
accumulation of the charges AUSA makes against a Contract participating in the
Variable Funds Account. From time to time, any such additional assets may be
transferred in cash to AUSA's general account.
The Variable Funds Account is registered with the Securities and Exchange
Commission (the "SEC") under the Investment Company Act of 1940, as amended
(the "1940 Act"), as a unit investment trust, which is a type of investment
company. This does not involve any supervision by the SEC of the management or
investment policies or practices of the Variable Funds Account. For state law
purposes, the Variable Funds Account is treated as a part or division of AUSA.
There are currently fourteen Subaccounts within the Variable Funds Account
which are available for allocation of Purchase Payments under the Contracts.
The Calvert Series Subaccount invests only in the Calvert Social Balanced
Portfolio (the "Calvert Series"), a series of Acacia Capital Corporation, an
open-end management investment company registered with the SEC under the 1940
Act. The thirteen other Variable Funds Subaccounts invest in thirteen
corresponding series of Diversified Investors Portfolios (the "Portfolios"), an
open-end diversified management investment company registered with the SEC
under the 1940 Act. Set forth below is a brief description of the Calvert
Series and the thirteen Portfolios. A full description of the Calvert Series,
its investment objects, policies and restrictions, its expenses, the risks
attendant in investing therein and other aspects of its operations are
contained in the accompanying prospectus for the Calvert Series. Full
descriptions of the thirteen Portfolios, their investment objectives, policies
and restrictions, their expenses, the risks attendant to investing therein and
other aspects of their operations are set forth herein under "Diversified
Investors Portfolios" at page __. Further disclosure appears in the Statement
of Additional Information. Each Participant should periodically consider
his/her allocation among the Variable Funds Subaccounts in light of current
market conditions and the investment risks attendant to investment in the
various Portfolios and the Calvert Series.
CALVERT SERIES
The Calvert Series is a series of Acacia Capital Corporation ("Acacia"), a
Maryland corporation registered with the SEC under the 1940 Act as an open-end
management company, whose investment adviser is Calvert Asset Management
Company, Inc. The shares of Acacia are currently sold only to insurance
companies for allocation to their separate accounts to fund the benefits under
certain variable annuity and variable life insurance policies issued by such
companies. Because the Calvert Series sells its shares to insurance companies
offering both variable annuity and variable life insurance policies, potential
for conflict between the interests of Contractholders of these contracts may
arise. The Board of Directors of Acacia will monitor the Calvert Series for the
existence of any material irreconcilable conflicts between interests of
Contractholders of all separate accounts investing in the Calvert Series. If it
is determined by a majority of the Board of Directors of Acacia that such
material conflict exists, then AUSA will take whatever steps are necessary to
eliminate the material conflict including withdrawing the assets allocable to
the Calvert Series and reinvesting them in a different investment medium. For
additional risk exposure, see the Calvert Series prospectus which follows this
Prospectus. The Calvert Series Subaccount of the Variable Funds Account will
purchase and redeem shares from the Calvert Series at net asset value.
<PAGE>
The investment objective of the Calvert Series is set forth in the
prospectus for the Calvert Series which appears at the end of this Prospectus.
Briefly, the objective is to achieve a total return above the rate of inflation
through an actively managed, diversified portfolio of common and preferred
stocks, bonds and money market instruments which offer income and capital
growth opportunity and which satisfy the social concern criteria established
for the Calvert Series. There can be no assurance that the objective of the
Calvert Series will be realized.
DIVERSIFIED INVESTORS PORTFOLIOS
Each of the other thirteen Variable Funds Subaccounts invests exclusively
in a corresponding Portfolio, as set forth below:
<TABLE>
<CAPTION>
<S> <C>
VARIABLE FUNDS SUBACCOUNT SERIES OF DIVERSIFIED INVESTORS PORTFOLIOS
Diversified Investors Variable Funds Money Diversified Investors Money Market
Market Subaccount................................. Portfolio (the "Money Market Portfolio")
Diversified Investors Variable Funds High Quality Diversified Investors High Quality Bond Portfolio
Bond Subaccount................................... (the "High Quality Bond Portfolio")
Diversified Investors Intermediate Government
Diversified Investors Variable Funds Intermediate Bond Portfolio (the "Intermediate Government
Government Bond Subaccount........................ Bond Portfolio")
Diversified Investors Government/Corporate Bond
Diversified Investors Variable Funds Portfolio (the "Government/Corporate Bond
Government/Corporate Bond Subaccount.............. Portfolio")
Diversified Investors Variable Funds Diversified Investors High-Yield Bond Portfolio
High-Yield Bond Subaccount........................ (the "High-Yield Bond Portfolio")
Diversified Investors Variable Funds Diversified Investors Balanced Portfolio (the
Balanced Subaccount............................... "Balanced Portfolio")
Diversified Investors Variable Funds Equity Diversified Investors Equity Value Portfolio (the
Value Subaccount.................................. "Equity Value Portfolio")
Diversified Investors Variable Funds Equity Diversified Investors Equity Income Portfolio
Income Subaccount................................. (the "Equity Income Portfolio")
Diversified Investors Variable Funds Growth Diversified Investors Growth & Income Portfolio
& Income Subaccount............................... (the "Growth & Income Portfolio")
Diversified Investors Variable Funds Equity Diversified Investors Equity Growth Portfolio (the
Growth Subaccount................................. "Equity Growth Portfolio")
Diversified Investors Variable Funds Diversified Investors Special Equity Portfolio (the
Special Equity Subaccount......................... "Special Equity Portfolio")
Diversified Investors Variable Funds Diversified Investors Aggressive Equity
Aggressive Equity Subaccount...................... Portfolio (the "Aggressive Equity Portfolio")
Diversified Investors Variable Funds Diversified Investors International Equity
International Equity Subaccount................... Portfolio (the "International Equity Portfolio")
</TABLE>
Diversified Investors Portfolios is registered with the SEC under the 1940
Act as an open-end diversified management investment company. This registration
<PAGE>
does not involve supervision by the SEC of the management or investment
practices or policies of Diversified Investors Portfolios.
Diversified acts as investment adviser and administrator to each
Portfolio. Diversified has contracted with one or more subadvisers for certain
investment advisory services for each Portfolio. The investment objectives of
the Portfolios currently available under the Contracts through Variable Funds
Subaccounts are described briefly below. There can be no assurance that the
investment objectives of any of the Portfolios will be met.
MONEY MARKET PORTFOLIO: To provide liquidity and as high a level of income
as is consistent with the preservation of capital.
HIGH QUALITY BOND PORTFOLIO: To provide a high risk-adjusted return while
focusing on the preservation of capital.
INTERMEDIATE GOVERNMENT BOND PORTFOLIO: To provide as high a level of
current income as is consistent with the preservation of capital.
GOVERNMENT/CORPORATE BOND PORTFOLIO: To achieve maximum total return.
HIGH-YIELD BOND PORTFOLIO: To provide a high level of current income.
BALANCED PORTFOLIO: To provide a high total investment return through
investment in a broadly diversified portfolio of stocks, bonds and money market
instruments.
EQUITY INCOME PORTFOLIO: To provide a high level of current income through
investment in a diversified portfolio of common stocks with relatively high
current yield. Capital appreciation is a secondary objective.
EQUITY VALUE PORTFOLIO: To provide a high total investment return through
investment primarily in a diversified portfolio of common stocks.
GROWTH & INCOME PORTFOLIO: To provide capital appreciation and current
income.
EQUITY GROWTH PORTFOLIO: To provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks with a potential
for above-average growth in earnings. Current income is a secondary objective.
SPECIAL EQUITY PORTFOLIO: To provide a high level of capital appreciation
through investment in a diversified portfolio of common stocks of small to
medium size companies.
AGGRESSIVE EQUITY PORTFOLIO: To provide a high level of capital
appreciation primarily through investing in a diversified portfolio of common
stocks.
INTERNATIONAL EQUITY PORTFOLIO: To provide a high level of long-term
capital appreciation primarily through investment in a diversified portfolio of
securities of foreign issuers.
See "Diversified Investors Portfolios" at page __ and the Statement of
Additional Information for more information on each of the Portfolios described
above.
<PAGE>
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
Diversified Investors Strategic Variable Funds (the "Strategic Variable
Funds Account") was established by AUSA under New York Insurance Law on April
15, 1996 as a non-diversified separate account. The Strategic Variable Funds
Account will hold assets that are segregated from all of AUSA's other assets
and at present are used only to support Contracts for which Purchase Payments
have been allocated to the Strategic Variable Funds Account. AUSA is the legal
holder of the assets in the Strategic Variable Funds Account and will at all
times maintain assets in the Strategic Variable Funds Account with a total
market value at least equal to the contract liabilities for the Strategic
Variable Funds Account. The obligations under the Contracts are obligations of
AUSA. Income, gains, and losses, whether or not realized, from assets allocated
to the Strategic Variable Funds Account, are, in accordance with the Contracts,
credited to or charged against the Strategic Variable Funds Account without
regard to other income, gains, or losses of AUSA. The assets in the Strategic
Variable Funds Account may not be charged with liabilities which arise from any
other business AUSA conducts. The Strategic Variable Funds Account assets may
include accumulation of the charges AUSA makes against a Contract participating
in the Strategic Variable Funds Account. From time to time, any such additional
assets may be transferred in cash to AUSA's general account.
The Strategic Variable Funds Account is registered with the SEC under the
1940 Act as a management investment company, which is a type of investment
company. This does not involve any supervision by the SEC of the management or
investment policies or practices of the Strategic Variable Funds Account. For
state law purposes, the Strategic Variable Funds Account is treated as a part
or division of AUSA.
The investment objectives of the Strategic Variable Funds Subaccounts
currently available under the Contracts are described briefly below. There can
be no assurance that the investment objectives of any of the Strategic Variable
Funds Subaccounts will be met. Each of the Strategic Variable Funds
Subaccount's objectives may be changed without the approval of a majority of
interest holders.
SHORT HORIZON STRATEGIC ALLOCATION VARIABLE FUND: To provide a high level
of income and preservation of capital.
INTERMEDIATE HORIZON STRATEGIC ALLOCATION VARIABLE FUND: To provide a high
total investment return.
INTERMEDIATE/LONG HORIZON STRATEGIC ALLOCATION VARIABLE FUND: To provide
long-term growth of capital and growth of income.
As a fundamental policy, each Strategic Variable Funds Subaccount offers a
professionally managed asset allocation investment program by investing in a
combination of the Variable Funds Subaccounts (other than the Balanced and
Calvert Series Subaccounts) described above. These Variable Funds Subaccounts
in turn invest in the Portfolios. Consistent with its investment objective,
each Strategic Variable Funds Subaccount will allocate its assets among the
Variable Funds Subaccounts according to Diversified's outlook for the economy,
financial markets and relative market valuation of the Variable Funds
Subaccounts and the underlying Portfolios. Each Strategic Variable Funds
Subaccount's share price will fluctuate with changing market conditions and the
value of the Variable Funds Subaccounts in which it invests. Purchase Payments
should not be allocated to the Strategic Variable Funds Subaccounts for
short-term financial needs nor used to play short-term swings in the stock or
<PAGE>
bond markets. The Strategic Variable Funds Subaccounts cannot guarantee that
they will achieve their objectives.
As noted above, each Variable Funds Subaccount is a subaccount of the
Variable Funds Account. Each Variable Funds Subaccount available under the
Strategic Variable Funds Subaccounts seeks to achieve its investment objective
by investing all of its assets in a corresponding Portfolio. See "Diversified
Investors Variable Funds" above at page __ and the Statement of Additional
Information for more information on the Variable Funds Subaccounts. See
"Diversified Investors Portfolios" below at page __ and the Statement of
Additional Information for more information on the Portfolios.
The following chart shows approximately how much of the assets of each
Variable Funds Subaccount are invested in the Variable Funds Money Market, Bond
and Stock Subaccounts. These allocations reflect Diversified's present strategy
for asset allocation during normal market conditions, and may be changed at any
time without shareholder approval. Under severe market conditions, Diversified
also may allocate the assets of each Strategic Variable Funds Subaccount
without limit to the Variable Funds Money Market Subaccount. For specific
allocations to the underlying Subaccounts, see Appendix A.
- -------------------------------------------------------------------------------
MONEY MARKET BOND STOCK
SUBACCOUNT SUBACCOUNT SUBACCOUNT
- -------------------------------------------------------------------------------
SHORT HORIZON 10% 80% 10%
- --------------------------- --------------- ----------------- ----------------
INTERMEDIATE HORIZON 3% 47% 50%
- --------------------------- --------------- ----------------- ----------------
INTERMEDIATE/LONG HORIZON 4% 26% 70%
- -------------------------------------------------------------------------------
MANAGEMENT
Subject to such policies as the Board of Directors of AUSA may determine
and pursuant to the Investment Advisory Agreement with AUSA with respect to the
Strategic Variable Funds Subaccounts, Diversified Investment Advisers, Inc.
manages the assets of each Strategic Variable Funds Subaccount in accordance
with the investment policies approved by the Board of Directors of AUSA.
Subject to such policies, Diversified provides general investment advice to
each Strategic Variable Funds Subaccount. Diversified is also the investment
adviser of each of the Portfolios and the Diversified Investors Strategic
Allocation Funds. For its services under the Investment Advisory Agreement,
Diversified receives from each Strategic Variable Funds Subaccount fees accrued
daily and paid monthly at an annual rate equal to 0.20% of the average daily
net assets. Investment management decisions are taken by a committee of
Diversified's personnel and not by a particular individual.
Diversified's address is 4 Manhattanville Road, Purchase, New York 10577.
Diversified is an indirect, wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"), a financial services holding company whose primary emphasis is life
and health insurance and annuity and investment products. AEGON is an indirect,
wholly-owned subsidiary of AEGON N.V., a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as the investment adviser to the Portfolios.
The management of each Strategic Variable Funds Subaccount's business and
affairs is the responsibility of the Board of Directors of AUSA. The Board of
Directors of AUSA has established a managing board (the "Strategic Managing
Board") and has delegated certain responsibilities for the operation of the
Strategic Variable Funds Subaccounts to the Strategic Managing Board. A
<PAGE>
majority of the members of the Strategic Managing Board will be non-interested
persons as defined in Section 2(a)(19) of the 1940 Act. However, the members of
the Strategic Managing Board also serve in similar positions with the
Portfolios. Thus, if the interests of a Strategic Variable Funds Subaccount and
the Portfolios were ever to become divergent, it is possible that a conflict of
interest could arise and affect how these persons fulfill their fiduciary
duties to that Strategic Variable Funds Subaccount and the Portfolios. The
Strategic Managing Board believes they have structured each Strategic Variable
Funds Subaccount to avoid these concerns. However, it is conceivable that a
situation could occur where proper action for a Strategic Variable Funds
Subaccount could be adverse to the interests of a Portfolio, or vice versa. If
such a possibility arises, the Trustees/Directors and Officers of the affected
funds and Diversified will carefully analyze the situation and take all steps
they believe reasonable to minimize and, where possible, eliminate the
potential conflict.
Before approving any advisory contract, the Strategic Managing Board,
including a majority of the members who are not "interested persons" as defined
in Section 2(a)(19) of the 1940 Act, must find that advisory fees charged under
such contract are based on services provided that are in addition to, rather
than duplicative of, services provided pursuant to any Portfolio advisory
contract.
INVESTMENT RESTRICTIONS
The Statement of Additional Information contains a list of specific
investment restrictions which govern the investment policies of the Strategic
Variable Funds Subaccounts. Under its investment restrictions, each Subaccount
may borrow money in an amount not to exceed 30% of the Subaccount's assets. If
a percentage or rating restriction (other than a restriction as to borrowing)
is adhered to at the time an investment is made, a later change in percentage
or rating resulting from changes in a Subaccount's securities is not a
violation of policy.
CHARGES
Following is a discussion of various charges relating to an investment in
either the Variable Funds Account or the Strategic Variable Funds Account. To
the extent that charges are made against the Variable Funds Subaccounts, a pro
rata share of these charges will ultimately be borne by Strategic Variable
Funds Subaccounts investing in the Variable Funds Subaccounts.
CHARGES FOR MORTALITY AND EXPENSE RISKS
The maximum daily charges against the Variable Funds Subaccounts for
mortality and expense risks assumed by AUSA are computed and deducted from the
value of the net assets of the Variable Funds Subaccounts. The maximum daily
charge will be at the rate of 0.003425% (equivalent to an annual rate of 1.25%)
of the average daily net assets of the Variable Funds Subaccounts. The daily
charge will be deducted from the net asset value of each Variable Funds
Subaccount on each Valuation Date. Where the previous day (or days) was not a
Valuation Date, the maximum deduction on the Valuation Date will be 0.003425%
multiplied by the number of days since the last Valuation Date. The sum of
these charges on an annual basis will not exceed 1.25% of the average net
assets invested in the Variable Funds Subaccounts. Of this charge, AUSA
estimates that .80% is for mortality risk and .45% is for expense risk. The
daily charge from the Variable Funds Subaccounts based on an annual mortality
and expense risk rate of 1.20%, % for mortality risks and % for administrative
expense risks, is 0.002466%.
<PAGE>
The mortality risk is that individuals may live for a longer period of
time than projected and therefore a greater amount of annuity benefits than
projected will be payable. The expense risk is that expenses incurred in
issuing and administering the Contract will exceed the administrative expense
charge provided in the Contract. AUSA believes that this level of charge is
within the range of industry practice for comparable group variable annuity
contracts.
Sales distribution expenses and any other expenses in excess of the
described charges will be paid from AUSA's general account and not directly
from any Subaccount or from the mortality and expense risk charges. However,
asset charges for AUSA's assumption of mortality and expense risks might be a
source of contribution to the surplus in AUSA's general account.
ANNUAL CONTRACT CHARGE
AUSA reserves the right to deduct an annual contract charge from a
Participant's Accumulation Account to reimburse AUSA for administrative
expenses relating to the maintenance of the Contracts. AUSA has no present
intention to impose such a charge; however, AUSA may, in the future, impose
such a charge in accordance with the provisions of the Contracts. Any such
annual charge will not exceed $50. AUSA also reserves the right, if such a
charge is imposed, to waive, on a temporary or permanent basis, all or part of
such charge for certain classes of Contracts or for certain new classes of
Contracts which may be sold in the future where circumstances exist that result
in differences in AUSA's costs or in the services required from AUSA. For
example, waivers may be granted for Contractholders with large numbers of
participants with large account balances or for Contractholders which assume
certain administrative expenses which AUSA would otherwise bear. If imposed,
this charge would represent reimbursement for administrative costs expected to
be incurred over the life of the Contracts. AUSA does not anticipate any profit
from this charge.
INVESTMENT MANAGEMENT FEES
The Variable Funds Subaccounts
Because the Variable Funds Account, through the Variable Funds
Subaccounts, purchases interests in the Portfolios and the Calvert Series, the
net assets of the Variable Funds Subaccounts will reflect the investment
management fee and other expenses incurred by the Portfolios and the Calvert
Series, as applicable.
Diversified serves as the investment adviser to each Portfolio. For
information with respect to the arrangements under which Diversified provides
such advisory services, including charges and arrangements with subadvisers,
see "Management of Diversified Investors Portfolios" at page __.
The Calvert Series' investment adviser is the Calvert Asset Management
Company, Inc. (the "Calvert Adviser"), which is located at 4550 Montgomery
Avenue, Suite 1000N, Bethesda, Maryland 20814. The Calvert Adviser is a
wholly-owned subsidiary of Calvert Group, Ltd., which is in turn a wholly-owned
subsidiary of Acacia Mutual Life Insurance Company. Pursuant to its investment
advisory agreement with the Calvert Series, the Calvert Adviser manages the
fixed-income investments of the Calvert Series and is responsible for the
overall management of the business affairs of the Calvert Series subject to the
direction and authority of the Board of Directors of Acacia. The subadviser to
the Calvert Series is NCM Capital Management Group, Inc. ("NCM"). Pursuant to
its Investment Subadvisory Agreement with the Calvert Adviser, NCM manages the
equity portion of investments for the Calvert Series. NCM is an employee-owned
subsidiary of Sloan Financial Group. Sloan Financial Group is controlled by
Maceo K. Sloan and Justin K. Beckett and is one of the largest minority-owned
investment management firms in the country. The Calvert Adviser receives from
the Calvert Series a monthly base fee, computed on a daily basis at an annual
rate of 0.70% of the average daily net assets of the Calvert Series. The
Calvert Adviser pays NCM a base fee of 0.25% of one-half of the Calvert Series'
net assets. In addition, the Calvert Adviser and NCM may earn (or have their
fees reduced by) performance fee adjustments based on the extent to which
performance of the Calvert Series exceeds or trails the Lipper Balanced Funds
Index. Payment of the performance fee adjustment began July 1, 1996. The
specific adjustments are as follows:
CALVERT ADVISER'S PERFORMANCE FEE ADJUSTMENT
Performance versus the Performance Fee
Lipper Balanced Fund Index Adjustment
6% to less than 12% 0.05%
12% to less than 18% 0.10%
18% or more 0.15%
NCM'S PERFORMANCE FEE ADJUSTMENT
Performance versus the Performance Fee
Lipper Balanced Fund Index Adjustment
6% to less than 12% 0.05%
12% to less than 18% 0.10%
18% or more 0.15%
The performance fee adjustment to NCM is paid out of the fee the Calvert
Adviser receives from the Calvert Series. The initial performance period was
the twelve month period between July 1, 1995 and July 1, 1996. Each month an
additional month's performance is factored into the calculation until a total
of 36 months comprises the performance computation period. Payment by the
Calvert Series of the performance fee adjustment will be conditioned on (i) the
performance of the Calvert Series as a whole having exceeded the Lipper
Balanced Fund Index and (ii) payment of the performance fee adjustment not
causing the Calvert Series' performance to fall below the Lipper Balanced Fund
Index.
The Strategic Variable Funds Subaccounts
For its services as investment adviser to the Strategic Variable Funds
Subaccounts, Diversified receives fees, accrued daily and paid monthly, at an
annual rate equal to 0.20% of the average daily net assets of each Strategic
Variable Funds Subaccount.
Because the Strategic Variable Funds Subaccounts purchase interests in the
Variable Funds Subaccounts, which, in turn, purchase interests in the
Portfolios, the net assets of the Strategic Variable Funds Subaccounts will
reflect the investment management fee and other expenses incurred by the
Portfolios. Diversified serves as the investment adviser to each Portfolio. For
information with respect to the arrangements under which Diversified provides
such advisory services, including charges and arrangements with subadvisers,
see "Management of Diversified Investors Portfolios" at page __.
<PAGE>
PREMIUM TAX
Under the laws of certain jurisdictions, premium taxes are payable on
annuity considerations which can include Purchase Payments or the Accumulation
Account under the Contracts. Any applicable premium taxes will generally be
deducted when the Accumulation Account under a Contract is applied to purchase
an annuity. Under present laws, the range of premium taxes is from .5% to 4.0%.
Attached as Appendix B is a schedule of applicable premium taxes payable upon
annuitization which are in effect as of the date of this Prospectus. The laws
of the various jurisdictions relating to annuity taxes and the interpretations
of such laws are subject to changes which may affect the deductions, if any,
under the Contracts for such taxes.
SUMMARY OF THE CONTRACTS
ELIGIBLE PURCHASERS
State educational organizations and organizations that qualify for
tax-exempt status under Code Section 501(c)(3), including associations thereof
that qualify for tax-exempt status under Code Section 501(c)(3), are eligible
purchasers. In addition, any organization qualifying as an IRA Contractholder
may purchase or hold an IRA Contract. Any type of non-profit organization as
well as taxed subsidiaries of tax-exempt organizations and taxed stand-alone
organizations may purchase a Section 401(a) and/or a Section 401(k) or an NQDC
Contract.
OWNERSHIP
The organization purchasing or holding a Contract is the owner of the
Contract for the benefit of the Participants. The Contract will cover all
eligible Participants under a Plan. Each Participant will receive a certificate
at the time his/her first annuity payment becomes payable, or earlier, if
required by applicable law. The certificate summarizes the Participant's
benefits under the Contract.
PURCHASE PAYMENTS
With respect to the Section 401(a) Contract, the employer and/or employee
will make contributions pursuant to the underlying retirement Plan. The Section
401(k) and NQDC Contracts will accept employer and/or employee contributions
pursuant to the terms and conditions of the underlying Plan. As to the Section
403(b) Contract, the employer will make Purchase Payments in accordance with a
salary reduction agreement or an agreement to forego a salary increase, except
with respect to employer-sponsored Section 403(b) Plans under which the
employer will make contributions pursuant to the underlying retirement Plan. In
the case of the Section 408 IRA Contract, Purchase Payments will be made by the
employer on behalf of and as determined by each participating employee pursuant
to a salary reduction agreement or by the Participant. An Accumulation Account
will be established for each Participant which will record the number of Units
held in each Subaccount. Purchase Payments to the Variable Funds Account may be
allocated among any of the Variable Funds Subaccounts. Similarly, Purchase
Payments to the Strategic Variable Funds Account may be allocated among any of
the Strategic Variable Funds Subaccounts.
<PAGE>
All Purchase Payments credited to an Accumulation Account are vested and
nonforfeitable. However, Purchase Payments made by employers, including all
such payments made under a Section 401(a) Contract, which are not the result of
a reduction in salary or a give up in salary agreement, under an
employer-sponsored Plan may be forfeitable but are generally subject to the
vesting requirements, where applicable, of the Employee Retirement Income
Security Act of 1974, as amended. In general, all Purchase Payments made to
NQDC and Section 457 Contracts may be forfeitable even though partially or
fully vested.
EMPLOYER SPONSORED PLAN REQUIREMENTS
Since the Contracts are intended to implement the Plans of state
educational organizations, organizations that qualify for tax-exempt status
under Code Section 501(c)(3), IRA Contractholders and, in the case of Section
401(a) and/or Section 401(k) and NQDC Contracts, for taxed subsidiaries of such
organizations and stand-alone taxed organizations and since such Plans may be
sponsored by employers or associations who may have their own desires regarding
certain Plan details and the manner in which the Plan is to be administered,
there will be some variations in details in the Contract and Plan to reflect
such desires. Reference to the provisions of the Plan in which the individual
is a Participant must be made in all cases for particulars.
RIGHTS OF THE PARTICIPANT UNDER THE CONTRACT
There are no stipulated or required Purchase Payments to be made under the
Contract. Except for the 15 days prior to a Participant's Annuity Purchase Date
(see "Annuity Purchase Date" on page __) during which no Purchase Payments will
be accepted by AUSA, during a Participant's Accumulation Period Purchase
Payments may be made in the amount authorized by the Participant. The Contract
permits the Participant to elect his/her Annuity Purchase Date, to allocate
Purchase Payments, to redeem all or a portion of the Units in his/her
Accumulation Account, to designate beneficiaries, and to elect Fixed Annuity
options, except that employer-sponsored Plans may affect these rights.
During a Participant's Accumulation Period, one's rights and those of the
Contractholder or IRA Contractholder shall be as set forth in the Contract and
Plan. On and after the Annuity Purchase Date, or on the Participant's death, if
earlier, all rights, as specified in the Contract and Plan, shall belong to the
Participant or beneficiary as the case may be.
RIGHTS UPON SUSPENSION OF CONTRACT OR TERMINATION OF PLAN
403(b) Contract
In the event that the making or receipt of all Purchase Payments under
certain 403(b) Contracts is discontinued or a Contractholder terminates its
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.
<PAGE>
401(a) Contract/401(k) Contract and NQDC Contracts
If the Contractholder terminates its Plan or discontinues Purchase
Payments, it is the Contractholder's responsibility, and not AUSA's, to give
written notice thereof to the affected Participants. In such cases, the
Contractholder shall elect to have the entire balance held under the Contract
applied under one of the following options: (1) to be held and distributed by
AUSA in accordance with the terms of the Contract; (2) to be transferred to an
alternate funding agency (e.g., another insurance company); or (3) to purchase
deferred, paid-up life annuity benefits for Participants.
457 and 408(IRA) Contracts
If the Contractholder or IRA Contractholder terminates its Plan or
discontinues Purchase Payments for a Participant, AUSA shall give written
notice thereof to the appropriate Participant(s) together with notice of the
right of the Participant to elect to have the value of his/her Accumulation
Account applied under either of the following options: (1) to be held and
distributed by AUSA in accordance with the terms of the Contract or (2) to be
paid to him/her in cash, except that, under the terms of certain 457 Contracts,
the Contractholder, not AUSA, shall give notice to affected Participants.
FAILURE OF QUALIFICATION
In the event that a Plan, Contractholder or IRA Contractholder or a
Participant thereunder becomes ineligible for any previously applicable tax
benefits under the Code, AUSA upon notice thereof shall refuse during the
period of such ineligibility to accept Purchase Payments with respect to that
Plan or Participant. A failure of qualification under a particular Contract
shall have no effect on other issued and outstanding Contracts.
TRANSFERS
No transfers may be made between any of the Contracts; however, the
following transfers are permissible with respect to each Contract.
401(a), 401(k), 403(b), 457, 408(IRA) and NQDC Contracts
A Participant may transfer all or a portion of his/her Accumulation
Account in the Diversified Investors Variable Funds or the Diversified
Investors Strategic Variable Funds among the various Subaccounts of that
Account. No transfer charges are imposed, and there is no limit to the number
of transfers permitted. While AUSA has no present intention to do so, AUSA
reserves the right to impose transfer charges at a later date.
Transfers from the Section 403(b), 401(a) and (k) and NQDC Group Fixed
Annuity Contracts to a Participant's Accumulation Account under the Diversified
Investors Variable Funds Contracts are permitted only to the Subaccounts which
invest in the Balanced Portfolio, Equity Income Portfolio, Growth & Income
Portfolio, Equity Growth Portfolio, Special Equity Portfolio, Calvert Series or
International Equity Portfolio. Transfers from the Section 403(b), 401(a) and
(k) and NQDC Group Fixed Annuity Contracts to a Participant's Accumulation
Account under the Diversified Investors Strategic Variable Funds Contracts are
permitted only to the Intermediate Strategic Allocation Variable Fund or the
Intermediate/Long Strategic Allocation Variable Fund.
<PAGE>
Certain other restrictions which apply to transfers from the AUSA Section
403(b), Section 401(a), Section 401(k), NQDC and Section 408(IRA) Group Fixed
Annuity Contracts to the Diversified Investors Variable Funds Contracts or the
Diversified Investors Strategic Variable Funds Contracts are contained in the
AUSA Section 403(b) and Section 401(a) and NQDC and 408(IRA) Group Fixed
Annuity Contracts.
Transfers may be made in writing or by telephoning (800) 926-0044.
Transfers are effective within 48 hours of receipt of instructions. All
Participants should be aware that a transfer authorized by telephone and
reasonably believed to be genuine by AUSA may subject the Participant to risk
of loss if such instruction is subsequently found not to be genuine. AUSA will
employ reasonable procedures, including requiring Participants to give certain
identification information and tape recording of telephone instructions, to
confirm that instructions communicated by telephone are genuine. To the extent
that AUSA fails to use reasonable procedures to verify the genuineness of
telephone instructions, AUSA may be liable for any losses due to telephone
instructions that prove to be fraudulent or unauthorized.
RIGHTS RESERVED BY AUSA
Subject to compliance with applicable laws and, when required by law,
approval of the Contractholders, IRA Contractholders, NQDC Contractholders
and/or Participants and any appropriate regulatory authority, AUSA reserves the
right to make the following changes:
(1) To operate the Diversified Investors Variable Funds and the
Diversified Investors Strategic Variable Funds in any form permitted under
the 1940 Act or in any other form permitted by law;
(2) To take any action necessary to comply with or obtain and continue any
exemptions from the 1940 Act;
(3) To transfer any assets in a Subaccount to another Subaccount or to one
or more separate accounts, or to AUSA's general account to the extent
permitted by law or to add, combine or remove Subaccounts in a separate
account;
(4) To substitute, for the interests in a Portfolio or the Calvert Series
held in any Variable Funds Subaccount, interests in another Portfolio or
interests in another investment company or any other investment permitted
by law; and
(5) To make any necessary technical changes in the Contracts in order to
conform with any of the above-described actions or as may be required or
permitted by applicable laws affecting Diversified Investors Variable
Funds, Diversified Investors Strategic Variable Funds or the Contracts.
AUSA will exercise its right to make any of these changes when, in AUSA's
judgment, such change is in the best interests of Contractholders and
Participants and/or such change is required under applicable law.
Contractholders will be notified of any changes and Participants will be
notified of any changes that result in a material change in their Contract or
in the investment options thereunder.
<PAGE>
CREDIT OF PURCHASE PAYMENTS
A Participant's initial Purchase Payment will be credited to the
Participant's Accumulation Account to provide Units as of a Valuation Date for
the Valuation Period, not later than (1) two business days after receipt of the
Purchase Payment by AUSA at 4 Manhattanville Road, Purchase, New York 10577, if
the contract application and/or Participant's enrollment form is complete upon
receipt, or (2) two business days after an application and/or enrollment form
which is incomplete upon receipt by AUSA is made complete, provided that if
such information is not made complete within five business days after receipt
(i) the prospective Participant will be informed of the reasons for the delay,
and (ii) the initial Purchase Payment will be returned immediately and in full,
unless the prospective Participant specifically consents to AUSA retaining the
Purchase Payment until such information is made complete.
Subsequent Purchase Payments will be credited to the Participant's
Accumulation Account to provide Units as of the Valuation Date for the
Valuation Period in which the Purchase Payment is received in good order by
AUSA.
ALLOCATION OF PURCHASE PAYMENTS
Upon receipt of a Purchase Payment, it will be credited to the Account and
the Subaccount or Subaccounts thereof designated by the Participant in the form
of Units. The number of Units to be credited is determined by dividing the
dollar amount allocated to the particular Subaccount(s) by the Unit value of
that Subaccount for the Valuation Date for the Valuation Period on which the
Purchase Payment is received. The number of Units shall not be changed by any
subsequent change in the value of a Unit, but the dollar allocation value of a
Unit will vary in amount depending upon the investment experience of the
applicable Subaccount.
Allocation instructions may be changed at any time by sending to AUSA a
correctly completed allocation form. Any change in allocations will be
effective within 10 business days following receipt of the allocation form by
AUSA. If an allocation form is incorrectly completed, Purchase Payments will be
credited in accordance with the most recent allocation form on record. AUSA
reserves the right to limit a Participant's right to change allocation
instructions to four times a calendar year.
DETERMINATION OF UNIT VALUE
The Variable Funds Subaccounts
The Unit value for a Variable Funds Subaccount for any Valuation Date is
determined by subtracting (b) from (a) and dividing the result by (c), where
(a) is the aggregate net asset value on the Valuation Date of all
investments by the Variable Funds Subaccount in the Portfolio or the
Calvert Series in which the Variable Funds Subaccount invests; and
(b) is the mortality and expense risk charge accrued as of that Valuation
Date; and
(c) is the total number of Units held in the Variable Funds Subaccount on
the Valuation Date before the purchase or redemption of any Units on
that Date.
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The Strategic Variable Funds Subaccounts
The Unit value for a Strategic Variable Funds Subaccount for any Valuation
Date is determined by subtracting (b) from (a) and dividing the result by (c),
where
(a) is the aggregate net asset value on the Valuation Date of all
investments by the Strategic Variable Funds Subaccount in the Variable
Funds Subaccounts; and
(b) is the investment advisory fee accrued as of that Valuation Date; and
(c) is the total number of Units held in the Strategic Variable Funds
Subaccount on the Valuation Date before the purchase or redemption of any
Units on that Date.
AUSA values the investment of each Strategic Variable Funds Subaccount at
the respective unit values of the Variable Funds Subaccounts invested in. The
unit values of such Variable Funds Subaccounts are, in turn, determined by the
valuation practices of the underlying Portfolios. The Portfolios value the
securities of the Money Market Portfolio based on the amortized cost method of
valuation. Securities of other Portfolios are valued based on their current
market value when market quotations are available. Where market quotations are
not available, assets are valued at fair value as determined in good faith
under the direction of the Board of Trustees of the Portfolios. Debt
obligations with 60 days or less remaining to maturity may be valued by the
amortized cost method, which the Board of Trustees of the Portfolios has
determined to constitute fair value for such securities.
DEATH BENEFIT
Under Section 403(b), Section 457, and 408(IRA) Contract, if a Participant
dies before the Annuity Purchase Date (see "Annuity Purchase Date" on page __),
the value of his/her Accumulation Account will be paid to the beneficiary in a
lump sum. If the beneficiary is under the age of 75 at the time of the
Participant's death, the beneficiary may elect to have this lump sum applied to
provide a Fixed Annuity. A lump sum payment to some extent may be taxed as
ordinary income to the beneficiary in the year received. A beneficiary should
consider the possible tax advantages to electing an annuity. See "Section
403(b) Annuities" on page __. Under Section 401(a) and/or Section 401(k)
Contracts, however, the underlying tax-qualified Plan is generally required to
provide that in the case of a married Participant, a survivorship annuity death
benefit will be paid to the surviving spouse if the Participant dies prior to
retirement. In each case involving Section 401(a) and/or Section 401(k)
Contracts, reference must be made to the underlying Plan for particulars.
If the Participant dies before the Annuity Purchase Date, his/her entire
interest must generally be distributed within five years after the date of
death, or if payable to a designated beneficiary must be annuitized over the
life of that designated beneficiary or over a period not extending beyond the
life expectancy of that beneficiary, within one year after the date of death.
If the beneficiary is the Participant's spouse, distributions are not required
to be made until the April 1st after the end of the calendar year in which the
Participant would have attained age 70 1/2; if the spouse dies before
distributions begin, the rules discussed above will apply as if the spouse were
the Participant (owner).
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
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determined on the Valuation Date for the Valuation Period of the beneficiary's
Annuity Purchase Date. For Section 401(a) and/or Section 401(k) and NQDC
Contracts, the underlying Plan should be consulted to determine the options
available.
For NQDC Contracts, the remaining value will be paid to a designated
beneficiary. If no such beneficiary is so designated or in existence, the
remaining value will be paid in the following order: Participant's (1) spouse,
(2) children, (3) parents, (4) siblings and (5) estate.
For all Contracts except NQDC Contracts, the death benefit is guaranteed
to be not less than the total amount of all contributions, less any
withdrawals, made by the Participant.
REDEMPTION DURING THE ACCUMULATION PERIOD
For Section 403(b), Section 457 and Section 408(IRA) Contracts and subject
to applicable federal tax law restrictions, a Participant at any time during
his/her Accumulation Period and prior to his/her death may redeem all or a
portion of the Units credited to the Accumulation Account. There is no
redemption charge. See "Federal Tax Status" on page __.
The Accumulation Account value redeemed or the Units remaining after a
partial redemption will be determined on the Valuation Date for the Valuation
Period in which a written request for a redemption on a form approved by AUSA
is received by AUSA. The Accumulation Account will be reduced by the lesser of
the number of Units obtained by dividing the amount of the redemption request
by the Unit value for that day or the number of Units remaining in the
Accumulation Account.
A full or partial redemption payment will be made within seven days after
receipt of the written request. A request for a partial redemption must specify
the Subaccount(s) from which the partial withdrawal is to be made. Payment may
be postponed as permitted by the 1940 Act. Currently, deferment is permissible
only when the New York Stock Exchange is closed or trading is restricted, when
an emergency exists as a result of which disposal of interests in the
Portfolios or the Calvert Series held by Variable Funds Subaccounts is not
reasonably practicable or it is not reasonably practicable to determine fairly
the value of these assets, or when the SEC has provided for such deferment for
the protection of Participants.
A withdrawal will generally have federal income tax consequences which may
include penalties. See "Federal Tax Status" on page __.
With respect to Section 401(a), Section 401(k) and NQDC Contracts, the
ability to withdraw funds during the Accumulation Period is generally more
limited; however, in each instance the underlying Plan document should be
consulted to determine what options, if any, are available.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
The Texas Optional Retirement Program ("Program") imposes on participants
in such Program certain restrictions on withdrawal, which affect redemptions
with respect to any variable annuity contract issued under the Program. Under
section 830.104 of the Texas Government Code, such participant in the Program,
in order to withdraw accumulated contributions from the retirement system, must
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.
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Nothing in section 830.105 of the Texas Government Code, entitled
Termination of Participation, precludes the election by a participant to
withdraw accumulated contributions pursuant to section 830.104. However,
section 830.105 restricts the availability of an annuity purchased under the
Program to situations where the participant attains age 70 1/2 or terminates
participation in the Program by: death, retirement, or termination of
employment in all institutions of higher education.
PAYMENT OPTIONS
With respect to Section 403(b), Section 457 and Section 408(IRA)
Contracts, unless a Fixed Annuity as described below is elected, payment to the
Participant shall be made at the end of his/her Accumulation Period in a lump
sum calculated in the same manner as if a total withdrawal request of one's
Accumulation Account had been received by AUSA on his/her Annuity Purchase
Date. See page __ for "Redemption During the Accumulation Period". However,
Section 401(a), Section 401(k) and NQDC Contracts provide the funding for the
Plans and reference to the particular Plan must be made in each case for
details. For example, tax-qualified Plans must generally provide by law that in
the case of a married Participant who does not properly elect otherwise,
retirement annuity benefits will be paid in the form of a contingent annuity
with a survivorship annuity benefit for his surviving spouse at least equal to
50% of the amount which would have been payable if the Participant were living.
For NQDC Contracts, the employer may also provide for installment payments
without the purchase of an annuity.
ANNUITY PURCHASE DATE
The Annuity Purchase Date is the first day of the month coincident with or
following the receipt by AUSA of written notice, submitted through the
Participant's employer, of the Participant's retirement (i.e., the termination
of employment with his/her employer). Subject to the terms of the Plan, a
Participant may elect to retire at any time and receive annuity benefits. As a
general rule, benefits must begin no later than April 1 of the calendar year
following the year in which the Participant attains age 70 1/2 at which time an
election to receive an annuity or lump sum benefit must be made.
In the case of a beneficiary who elects a Fixed Annuity, the Annuity
Purchase Date will be the first day of the month following receipt by AUSA of
the election of a Fixed Annuity; however, if any election is received during
the last 15 days of a month, the Annuity Purchase Date will be the first day of
the second month after receipt of the election.
For Section 408(IRA) Contracts, the Annuity Purchase Date is the date the
annuity first begins under the terms of the IRA Contract.
FIXED ANNUITY
Fixed Annuity payments are not made from the Variable Funds Account or the
Strategic Variable Funds Account but are made from the general account of AUSA
which supports insurance and annuity obligations. Because of exemptive and
exclusionary provisions, Fixed Annuity payments and interests in the general
account have not been registered under the Securities Act of 1933, as amended,
(the "1933 Act") nor is the general account registered as an investment company
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,
<PAGE>
however, may be subject to certain generally applicable provisions of the
federal securities laws relating to the accuracy and completeness of statements
made in prospectuses.
A Fixed Annuity may not be elected if the initial monthly payment under
the form elected would be less than $20. Fixed Annuity payments will be made
monthly unless the annuitant elects to receive payments annually, semi-annually
or quarterly. Any such election must be made at the same time that the
annuitant elects to receive a Fixed Annuity and cannot be changed during the
annuity period. Once a Fixed Annuity takes effect, it may not be redeemed,
surrendered or changed to any other form of annuity.
FIXED ANNUITY OPTIONS
The following Fixed Annuity options may be available:
(i) Life Annuity -- Annuity payments will be made during the lifetime of
the annuitant. It would be possible for the annuitant to receive no
annuity payment if he/she died prior to the date of the first annuity
payment.
(ii) Life Annuity With Period Certain -- Annuity payments will be made
during the lifetime of the annuitant with the guarantee that if the
annuitant dies before a period certain elected, the beneficiary will
receive payments for the duration of the period. The period certain may be
any number of years between 5 and 20 inclusive.
(iii) Specified Fixed Period Annuity -- Annuity payments will be made for
a specified fixed period selected by the annuitant. If the annuitant dies
during the specified fixed period, the annuity payments for the remainder
of the period will be paid to the beneficiary. No annuity payments are
made after the expiration of the specified fixed period even if the
annuitant survives. The specified fixed period may be for any number of
years between 10 and 30 years inclusive.
(iv) Contingent Annuity -- Annuity payments will be made during the joint
lifetimes of the annuitant and a designated second person ("contingent
annuitant") with payments continued during the remaining lifetime of the
contingent annuitant. Annuity payments to the contingent annuitant may be
made in the same amount paid while both annuitants lived or a lesser
percentage of this amount. For Section 401(a) and/or Section 401(k)
Contracts, in the absence of a proper election by the Participant, a
contingent annuity with a survivorship annuity benefit for the surviving
spouse at least equal to 50% of the amount which would have been payable
if the Participant were living will be the normal form of benefit.
If the contingent annuitant dies before the first annuity payment to the
annuitant, the contingent annuity election will be void and the annuitant
will receive a Life Annuity. If the contingent annuitant dies after the
first annuity payment to the annuitant, but before the death of the
annuitant, annuity payments under the Contingent Annuity election will be
made to the annuitant during his/her lifetime. If the annuitant and the
contingent annuitant die before the date of the first annuity payment, no
annuity payments will be made.
(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
<PAGE>
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 on the Annuity Purchase Date. The guaranteed
level of Fixed Annuity payments will be determined based upon (i) a
Participant's Accumulation Account value on the Annuity Purchase Date, (ii) the
applicable annuity purchase rate on the Annuity Purchase Date which will
reflect the age of the Participant and (iii) the type of Fixed Annuity option
elected.
PAYMENTS TO A BENEFICIARY FOLLOWING THE ANNUITANT'S DEATH
If any annuity payment is payable to the beneficiary after the death of an
annuitant on or after his/her Annuity Purchase Date but during a period
certain, it shall be payable as each payment becomes due to the beneficiary. If
the benefit is payable to more than one beneficiary, it shall be paid in equal
shares to such beneficiaries, the survivors or survivor, unless the annuitant
has elected otherwise. Upon the death of the last surviving beneficiary, AUSA
shall pay the commuted value of any remaining payments in a lump sum cash
payment to the estate of such last surviving beneficiary in lieu of any further
income payments.
The annuitant's beneficiary may direct in writing to AUSA that any income
payable after the death of the annuitant or contingent annuitant be terminated
and a single commuted value be paid to the beneficiary. The commuted values
referred to above shall be based upon the value of the payments for the balance
of the period certain determined as of the date AUSA receives written notice of
the beneficiary's election to receive the commuted value on the basis of the
interest rate (compounded annually) inherent in the annuity purchase rate
applied to provide the annuitant's Fixed Annuity.
VOTING RIGHTS
The Variable Funds Subaccounts
The assets held in the Variable Funds Subaccounts will be invested in the
Portfolios or the Calvert Series, as applicable. AUSA is the legal holder of
the interests and shares held in a Variable Funds Subaccount and as such has
the right to vote to elect the governing boards of Diversified Investors
Portfolios and Acacia, to vote upon certain matters that are required by the
1940 Act to be approved or ratified by the shareholders of a mutual fund, and
to vote upon any other matter that may be voted upon at a shareholders'
meeting. To the extent required by law, AUSA will vote at regular and special
shareholder meetings in accordance with the instructions received from
Contractholders, IRA Contractholders and NQDC Contractholders. AUSA will
furnish Contractholders, IRA Contractholders and NQDC Contractholders with the
proper forms to enable them to give these instructions. The record date for any
such vote shall be selected by the governing boards of Diversified Investors
Portfolios or Acacia.
<PAGE>
Each Contractholder, IRA Contractholder and NQDC Contractholder will have
the equivalent of one vote per $100 of the dollar value of the Accumulation
Accounts in a Contract held in each Variable Funds Subaccount, with fractional
votes for amounts less than $100. These votes, are converted into a
proportionate number of votes in beneficial interests in a Portfolio or shares
of the Calvert Series. Interests held in each Variable Funds Subaccount for
which no timely instructions from Contractholders, IRA Contractholders or NQDC
Contractholders are received will be voted by AUSA in the same proportion as
those interests in that Subaccount for which instructions are received. Should
applicable federal securities laws or regulations permit, AUSA may elect to
vote in its own right.
A Participant will have the right to instruct the Contractholder, IRA
Contractholder or NQDC Contractholder with respect to interests in the
Portfolio or the Calvert Series attributable to his/her portion of the
Accumulation Account held in each Variable Funds Subaccount. Each Participant
under the Contract shall receive a statement of the amount attributable to
his/her participation in each Variable Funds Subaccount and stating his/her
right to instruct the Contractholder as to how to vote such interest. AUSA will
provide voting instruction materials to the Contractholder, IRA Contractholder
or NQDC Contractholder and to the Participants.
The Contractholder, IRA Contractholder and NQDC Contractholder shall
provide voting instructions to AUSA with respect to interests attributable to
the Accumulation Account values held in each Variable Funds Subaccount in
accordance with instructions received by Participants. For interests for which
no timely instructions from Participants are received, the Contractholder, IRA
Contractholder or NQDC Contractholder will instruct AUSA to vote these
interests in the same proportion as those shares for which instructions from
Participants are received.
Matters on which the Contractholder, IRA Contractholder or NQDC
Contractholder may give voting instructions include the following: (1) election
of the governing boards of Diversified Investors Portfolios or Acacia; (2)
ratification of the independent accountant of a Portfolio or the Calvert Series
corresponding to the Contractholder's, IRA Contractholder's or NQDC
Contractholder's selected Subaccount(s); (3) approval of any change in the
Investment Advisory Agreement or any Subadvisory Agreement for a Portfolio or
the Calvert Series corresponding to the Contractholder's, IRA Contractholder's
or NQDC Contractholder's selected Subaccount(s); (4) any change in the
fundamental investment policies of a Portfolio or the Calvert Series
corresponding to the Contractholder's, IRA Contractholder's or NQDC
Contractholder's selected Subaccount(s); and (5) any other matter requiring a
vote of the investors in Diversified Investors Portfolios or the Calvert
Series. With respect to approval of the Investment Advisory Agreements or
Subadvisory Agreements or any change in a fundamental investment policy,
Contractholders, IRA Contractholders and NQDC Contractholders participating in
the affected Subaccount will vote separately on the matter pursuant to the
requirements of Rule 18f-2 under the 1940 Act.
The Strategic Variable Funds Subaccounts
The assets held in the Strategic Variable Funds Subaccounts will be
invested in units of the Variable Funds Subaccounts. AUSA is the legal holder
of the units in the Strategic Variable Funds Subaccounts and as such has the
right to vote upon any matter that may be voted upon by holders of units. To
the extent required by law, AUSA will vote at regular and special meetings in
accordance with the instructions received from Contractholders, IRA
Contractholders and NQDC Contractholders. AUSA will furnish Contractholders,
<PAGE>
IRA Contractholders and NQDC Contractholders with the proper forms to enable
them to give these instructions.
Each Contractholder, IRA Contractholder and NQDC Contractholder will have
the equivalent of one vote per $100 of the dollar value of the Accumulation
Accounts in a Contract held in each Strategic Variable Funds Subaccount, with
fractional votes for amounts less than $100. Interests held in each Strategic
Variable Funds Subaccount for which no timely instructions from
Contractholders, IRA Contractholders or NQDC Contractholders are received will
be voted by AUSA in the same proportion as those interests in that Strategic
Variable Funds Subaccount for which instructions are received. Should
applicable federal securities laws or regulations permit, AUSA may elect to
vote in its own right.
A Participant will have the right to instruct the Contractholder, IRA
Contractholder or NQDC Contractholder with respect to interests in Strategic
Variable Funds Subaccounts attributable to his/her portion of the Accumulation
Account. Each Participant under the Contract shall receive a statement of the
amount attributable to his/her participation in each Strategic Variable Funds
Subaccount and stating his/her right to instruct the Contractholder as to how
to vote such interest. AUSA will provide voting instruction materials to the
Contractholder, IRA Contractholder or NQDC Contractholder and to the
Participants.
The Contractholder, IRA Contractholder and NQDC Contractholder shall
provide voting instructions to AUSA with respect to interests attributable to
the Accumulation Account values held in a Strategic Variable Funds Subaccount
in accordance with instructions received by Participants. For interests for
which no timely instructions from Participants are received, the
Contractholder, IRA Contractholder or NQDC Contractholder will instruct AUSA to
vote these interests in the same proportion as those shares for which
instructions from Participants are received.
Matters on which the Contractholder, IRA Contractholder or NQDC
Contractholder may give voting instructions include the following: (1) approval
of any change in the Investment Advisory Agreement corresponding to the
Contractholder's, IRA Contractholder's or NQDC Contractholder's selected
Subaccount(s); (2) any change in the fundamental investment policies of the
Contractholder's, IRA Contractholder's or NQDC Contractholder's selected
Subaccount(s); and (3) any other matter requiring a vote of the unitholders of
a Subaccount. With respect to approval of the Investment Advisory Agreements or
any change in a fundamental investment policy, Contractholders, IRA
Contractholders and NQDC Contractholders participating in the affected
Subaccount will vote separately on the matter pursuant to the requirements of
Rule 18f-2 under the 1940 Act. On matters submitted for consideration by
holders of units of the underlying Variable Funds Subaccounts, AUSA will vote
in proportion to the vote of all other holders of units in that underlying
Variable Funds Subaccount.
General
AUSA may, if required by state insurance officials, disregard voting
instructions if those instructions would require voting to cause a change in
the subclassification or investment objectives or policies of one or more of
the Portfolios, the Calvert Series or the Variable Funds Subaccounts, or to
approve or disapprove an investment adviser or principal underwriter for one or
more of the Variable Funds Subaccounts. In addition, AUSA may disregard voting
instructions that would require changes in the investment objectives or
policies of any of the Portfolios, the Calvert Series or the Variable Funds
Subaccounts or in an investment adviser or principal underwriter, if AUSA
reasonably disapproves those changes in accordance with applicable federal
regulations. If AUSA disregards voting instructions, it will advise
<PAGE>
Contractholders, IRA Contractholders, NQDC Contractholders and Participants of
that action and its reasons for the action in the next semiannual report to
Contractholders, IRA Contractholders, NQDC Contractholders and Participants.
DISTRIBUTION OF THE CONTRACTS
DISC will act as the principal underwriter and the distributor of the
Contracts. DISC will perform all sales, marketing and administrative functions
relative to the Contracts which participate in the Variable Funds Account or
the Strategic Variable Funds Account, with certain exceptions in connection
with the use of other authorized broker-dealers. DISC is registered as a
broker-dealer under the Securities Exchange Act of 1934, as amended, and is a
member of the National Association of Securities Dealers, Inc. The principal
business address of DISC is 4 Manhattanville Road, Purchase, New York 10577.
The Contracts are sold by individuals who are registered representatives of
DISC and who are also licensed as insurance agents for AUSA. The Contracts may
also be sold through registered representatives of other broker-dealers
authorized by DISC and applicable law who may be insurance agents licensed by
an insurance company other than AUSA. Commissions and other expenses directly
related to the sale of the Contracts will not exceed 8 percent of Purchase
Payments. Additional expense allowance may be paid for other services not
directly related to the sale of the Contracts. Such services include the
training of personnel and the production of promotional literature.
FEDERAL TAX STATUS
The ultimate effect of federal income taxes on Fixed Annuity payments and
on the economic benefit to the Participant, annuitant, payee and beneficiary
depends on the tax and employment status of the individual concerned.
The discussion which follows on the treatment of AUSA and of the Contracts
under federal income tax law is general in nature, is based upon AUSA's
understanding of current federal income tax laws, and is not intended as tax
advice. No representation is made regarding the likelihood of continuation of
the present federal income tax law or of the current interpretations by the
Internal Revenue Service. No attempt is made to consider any applicable state
or other tax laws. Each Contractholder, IRA Contractholder, NQDC
Contractholders and Participant contemplating investment in the Contracts
should consult a qualified tax adviser.
Participants receiving large distributions (generally those in excess of
$150,000 per year; or lump sum distributions in excess of $150,000) from
qualified retirement Plans, including those funded through Section 401(a),
Section 408(IRA) and Section 403(b) Contracts, may be subject to a 15% excise
tax on their distributions in excess of a specified amount.
TAX TREATMENT OF AUSA
AUSA is taxed as a life insurance company under the Code.
Investment income from the assets of the Variable Funds Account are
reinvested and taken into account in determining the value of the Variable
Funds Account. Under existing federal income tax law, the investment income of
the Variable Funds Account, including realized capital gains, is substantially
not taxed to AUSA.
Investment income from the assets of the Strategic Variable Funds Account
and the underlying Variable Funds Subaccounts are reinvested and taken into
account in determining the value of the Strategic Variable Funds Account and
the underlying Variable Funds Subaccounts. Under existing federal income tax
<PAGE>
law, the investment income of the Strategic Variable Funds Account, including
realized capital gains, is substantially not taxed to AUSA.
TAXATION OF DIVERSIFIED INVESTORS PORTFOLIOS
Diversified Investors Portfolios is organized as a New York trust. None of
its series are subject to any income or franchise tax in the State of New York.
AUSA, as an investor in series of Diversified Investors Portfolios, will be
taxable on its share (as determined in accordance with the governing
instruments of Diversified Investors Portfolios) of such series' ordinary
income and capital gain in determining its income tax liability. The
determination of such share will be made in accordance with the Code and
regulations promulgated thereunder. See "Tax Treatment of AUSA" above.
SECTION 403(b) ANNUITIES
Purchase Payments made under a Contract meeting the requirements of
Section 403(b) of the Code afford certain federal income tax benefits to
employees of state educational organizations, and organizations which are
tax-exempt under Section 501(c)(3) of the Code.
The employer may make contributions to the Contract or the employer may
agree with the Participant that in return for employer contributions to the
Contract, the Participant will take a reduction in salary or give up a salary
increase. The agreement may not be changed with respect to earnings of the
Participant while the agreement is in effect. The Participant can only make one
agreement with his/her employer during the year, but the Participant may
terminate the agreement at any time with respect to amounts not yet earned. No
federal income tax is payable by the Participant on increases in the value of
his/her Accumulation Account until payments are received by the Participant.
Purchase Payments meeting the requirements of Sections 402(g), Section
403(b) and Section 415 of the Code are not includable in the gross income of
the Participant at the time they are made. Under Section 402(g) of the Code,
Purchase Payments made under a reduction in salary or a give up in salary
increase agreement ("elective deferrals") are excluded from a Participant's
gross income to the extent of the lesser of $9,500 or the Participant's
exclusion allowance. The $9,500 limit will be reduced on a dollar for dollar
basis by employee pre-tax elective deferrals made by that individual under a
Section 401(k) Plan, a simplified employee pension plan, or other tax deferred
annuity. Under Section 403(b) of the Code, Purchase Payments made under a
reduction in salary or a give up in salary agreement and/or contributed by the
employer are excluded from a Participant's gross income to the extent of the
applicable "exclusion allowance". The "exclusion allowance" is equal to 20% of
a Participant's includable compensation (taxable earnings) for the tax year,
multiplied by the number of years of employment, reduced by the total of
Purchase Payments made in prior tax years.
When Fixed Annuity payments commence, or if the Participant obtains a
partial or full redemption of the Units credited to his/her Accumulation
Account under the Contract, the amount received will be includable as ordinary
income in the year received, except that such portion of any amount received as
is deemed to represent a return of Purchase Payments originally included as
gross income made by the Participant will not be taxed. Full redemptions do not
qualify for special capital gains treatment nor 5-year income averaging
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
<PAGE>
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.
<PAGE>
SECTION 408 (IRA) CONTRACTS
An individual, participating under a Contract which satisfies the
requirements of Section 408 of the Code, may make contributions to the
Contract. The Code prescribes various limitations on the maximum amounts which
may be contributed by or on behalf of the Participant and on the deductibility
of the contributions for federal income tax purposes. No federal income tax is
payable by the Participant on increases in the value of his/her Accumulation
Account until payments are received by the Participant.
When Fixed Annuity payments commence, or if the Participant obtains a
partial redemption of the Units credited to his/her Accumulation Account under
the Contract, the amount received will be includable as ordinary income in the
year received, except that such portion of any amount received which is deemed
to represent a return of Participant non-deductible Purchase Payments will not
be taxed. Full or partial redemptions do not qualify for special capital gains
treatment nor 10-year income averaging applicable to certain qualified plan
distributions.
If the Participant receives any amount under the Contract prior to
attainment of age 59 1/2, the Participant must pay an additional excise tax of
10% of the amount of the distribution includable in gross income for the
taxable year. The additional tax shall not apply to distributions which are (1)
made to a beneficiary on or after the death of the Participant, (2)
attributable to the Participant's becoming permanently disabled or (3) made in
a series of substantially equal periodic payments made for the life (or life
expectancy) of the Participant or the joint lives (or joint life expectancies)
of the Participant and his/her beneficiary. Any full or partial redemption will
not be includable in ordinary income if the Participant rolls over the
distribution within 60 days to another IRA.
MINIMUM DISTRIBUTION REQUIREMENTS
If the actual distributions from a qualified retirement plan, eligible
state or local government deferred compensation plan or an IRA are less than
the minimum required to be distributed commencing by April 1 in the calendar
year following the year the Participant attains age 70 1/2 (see "Annuity
Purchase Date", on page __) the difference is considered to be an excess
accumulation and the IRS may impose a 50% excise tax on this excess amount.
SECTION 457 PLANS
Section 457 of the Code allows employees of or independent contractors who
furnish services to a state or local government to establish a deferred
compensation plan allowing the deferral of certain limited amounts of
compensation by way of salary reduction. State and local government includes a
state, a political subdivision of a state, any agency or instrumentality of
either of them, a tax-exempt rural electric cooperative or its tax-exempt
affiliates. Contributions are based on a special definition of compensation and
include any amounts contributed to a Section 403(b) tax sheltered annuity for
determining the contribution limits. All amounts deferred property bought with
those amounts or income earned on those amounts remain the property of the
employer and are subject to the claims of its general creditors. Distributions
from a Section 457 Plan are subject to Section 401(a)(9) of the Code in
addition to the rules applicable under Section 457 of the Code and must begin
no later than the April 1st of the calendar year following the year in which
the participant attains age 70 1/2.
<PAGE>
NON-QUALIFIED DEFERRED COMPENSATION CONTRACTS
Taxed employers may establish a non-qualified deferred compensation
arrangement funded by non-qualified deferred compensation contracts allowing
the deferral of compensation through salary reduction. Such Plans include, but
are not limited to, excess benefit plans, plans maintained by an employer
primarily for a select group of management or highly compensated employees, as
well as rabbi and secular trusts. Taxed employers for these non-qualified
deferred compensation Plans include corporations, partnerships, S corporations
and any of their affiliates or subsidiaries. Contributions are determined on
the Plan's definition of compensation. All amounts deferred by employees and
any income earned thereon remain the property of the employer and are subject
to the claims of its general creditors. In-service withdrawals from deferred
compensation Plans may be permitted for reasons of hardship under certain
conditions as specified in the Plans. Distributions from these Plans are
permitted when the Participant terminates employment, becomes permanently
disabled, retires, dies or as otherwise specified in the Plan. As a general
rule, the Participant is subject to taxation upon receipt of the funds, and
there is usually no tax consequences to the employer, i.e., no deduction is
available for an employee's salary reduction agreement until paid out.
INCOME TAX WITHHOLDING
Unless the Participant or payee elects to have no withholding, the taxable
portion of distributions under a Contract will be subject to income tax
withholding under federal and certain state laws. AUSA will notify recipients
of taxable distributions under a Contract of their right to elect not to have
withholding apply.
For NQDC Contracts, no withholding is made and no election is needed.
Effective January 1, 1992, distributions from qualified retirement plans
and Section 403(b) Contracts, other than individual retirement arrangements
("IRAs") generally are subject to mandatory federal income tax withholding
unless they either are:
1. Part of a series of substantially equal periodic payments (at least
annually) for the participant's life or life expectancy, the joint
lives or life expectancies of the participant and his/her
beneficiary, or a period certain of not less than 10 years, or
2. Required by the Code upon the participant's attainment of age 70 1/2
or death.
Such withholding will apply even if the distribution is rolled over into
another qualified plan including an IRA. The withholding can be avoided if the
participant's interest is directly transferred by the old plan to another
eligible qualified plan including an IRA. A direct transfer to the new plan can
be made only in accordance with the terms of the old plan. If withholding is
not avoided, the amount withheld may be subject to income tax and penalties.
Pursuant to Revenue Ruling 90-24 of the Code, an exchange of a Section
403(b) annuity contract for another Section 403(b) annuity contract may qualify
as a tax-free exchange.
<PAGE>
ASSUMPTION REINSURANCE
The Contracts described in this Prospectus include group variable annuity
contracts which were originally issued by The MONY Group, Inc. (formerly 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 Variable Funds Subaccounts which correspond
to investment options under the MONY contracts. In addition, such assumed AUSA
Contractholders may be able to direct the investment of their funds into
certain additional investment options which were not available under the MONY
contracts.
PERFORMANCE DATA
From time to time the performance of one or more of the Subaccounts may be
advertised. The performance data contained in these advertisements is based
upon historical earnings and is not indicative of future performance. The data
for each Variable Funds Subaccount reflects the results of the corresponding
Portfolio or the Calvert Series and recurring charges and deductions borne by
or imposed on the Variable Funds Subaccount and on the corresponding Portfolio
or the Calvert Series. The data for each Strategic Variable Funds Subaccount
reflects the results of the underlying Variable Funds Subaccounts invested in
and the corresponding Portfolios and recurring charges and deductions borne by
or imposed on the Strategic Variable Funds Subaccount, the underlying Variable
Funds Subaccounts and the corresponding Portfolios. Set forth below for each
Subaccount is the manner in which the data contained in such advertisements
will be calculated.
Variable Funds Money Market Subaccount
The performance data for this Subaccount will reflect "yield", "effective
yield" and "total return". The "yield" of the Subaccount refers to the income
generated by an investment in the Subaccount over the seven day period stated
in the advertisement. This income is "annualized", that is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The "effective yield" is calculated similarly, but, when annualized, the income
earned by an investment in the Subaccount is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. The total return is calculated
as shown below.
Other Variable Funds Subaccounts
The performance data for these Subaccounts will reflect "yield" and "total
return". The "yield" of each of these Subaccounts refers to the income
<PAGE>
generated by an investment in that Subaccount over the 30 day period stated in
the advertisement and is the result of dividing that income by the value of the
Subaccount. The value of each Subaccount is the average daily number of Units
outstanding multiplied by the Unit Value on the last day of the period. The
"yield" reflects deductions for all charges, expenses, and fees of both the
underlying Portfolio or Calvert Series, as applicable, and the Subaccount
itself. "Annualized total return" for each of these Subaccounts and the
Variable Funds Money Market Subaccount refers to the return a Contractholder
would receive during the period indicated if a $1,000 Purchase Payment was made
the indicated number of years ago. It reflects historical investment results
less charges and deductions of both the Portfolio or Calvert Series, as
applicable, and the Subaccount itself, with the distribution being made in cash
rather than in the form of one of the settlement options, at the close of the
period for which the "annualized total return" data is given.
Strategic Variable Funds Subaccounts
The performance data for the Strategic Variable Funds Subaccounts will
reflect "yield" and "total return". The "yield" of each of the Strategic
Variable Funds Subaccounts refers to the income generated by an investment in
that Strategic Variable Funds Subaccount over the 30 day period stated in the
advertisement and is the result of dividing that income by the value of the
Strategic Variable Funds Subaccount. The value of each Strategic Variable Funds
Subaccount is the average daily number of Units outstanding multiplied by the
Unit Value on the last day of the period. The "yield" reflects deductions for
all charges, expenses, and fees. "Annualized total return" for each of the
Strategic Variable Funds Subaccounts refers to the return a Contractholder
would receive during the period indicated if a $1,000 Purchase Payment was made
the indicated number of years ago. It reflects historical investment results
less charges and deductions, with the distribution being made in cash rather
than in the form of one of the settlement options, at the close of the period
for which the "annualized total return" data is given.
Information Relating To All Subaccounts
Total return is historical in nature and is not intended to indicate
future performance. Total return will be quoted for the most recent one-year
period, and annualized total return will be quoted for the most recent five-
and ten-year periods, or the period from the commencement of operations of the
Subaccount (or its corresponding Portfolio or predecessor separate account), if
shorter.
Actual total return quotations may also be advertised for other specified
periods, such as calendar years and calendar quarters. Cumulative total return
for periods of more than one year may also be quoted. These figures will be
accompanied by the standard, annualized total return quotations.
From time to time, information may be provided concerning general economic
conditions and supply comparative performance data and rankings, with respect
to comparable investments for the same period, for unmanaged market indices
such as the Dow Jones Industrial Average and the Standard and Poor's 500, and
from recognized independent sources such as 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.
<PAGE>
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.
Please note that the investment results of each Subaccount will fluctuate
over time. Average Annual Total Returns
The annualized total return for the Subaccounts is shown for the periods
indicated in the table below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
FOR THE
PERIOD
FOR THE FOR THE FOR THE FOR THE SINCE
YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
INCEPTION ENDED ENDED ENDED ENDED THROUGH
DATE (1) 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98 (1)
MONEY MARKET (2) 11/78 4.72% 4.67% 4.50% 4.93% 7.30%
- ---------------------------------------------------------------------------------------------------
HIGH QUALITY BOND (2) 7/90 5.75% 4.91% 4.93% -- 5.99%
- ---------------------------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND (2) 7/90 6.16% 5.11% 5.11% -- 6.66%
- ---------------------------------------------------------------------------------------------------
GOVERNMENT/CORPORATE BOND (2) 1/78 6.87% 5.66% 5.94% 8.21% 8.31%
- ---------------------------------------------------------------------------------------------------
HIGH-YIELD BOND 8/95 1.74% 7.33% -- -- 8.13%
- ---------------------------------------------------------------------------------------------------
BALANCED (2) 12/92 11.50% 15.17% 13.99% -- 13.77%
- ---------------------------------------------------------------------------------------------------
EQUITY INCOME 1/78 12.03% 19.21% 17.50% 14.42% 14.04%
- ---------------------------------------------------------------------------------------------------
EQUITY VALUE 4/96 10.37% -- -- -- 15.17%
- ---------------------------------------------------------------------------------------------------
GROWTH & INCOME (2) 1/86 34.11% 29.45% 22.28% 16.89% 16.00%
- ---------------------------------------------------------------------------------------------------
EQUITY GROWTH (2) 3/93 35.73% 26.32% 19.94% -- 18.13%
- ---------------------------------------------------------------------------------------------------
SPECIAL EQUITY (2) 1/86 2.77% 17.35% 17.68% 16.34% 15.41%
- ---------------------------------------------------------------------------------------------------
AGGRESSIVE EQUITY 4/96 41.18% -- -- -- 17.55%
- ---------------------------------------------------------------------------------------------------
CALVERT SERIES 9/86 16.61% 15.71% 13.84% 12.29% 11.20%
- ---------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY (2) 12/92 9.98% 10.34% 9.53% -- 12.89%
- ---------------------------------------------------------------------------------------------------
SHORT HORIZON STRATEGIC 1/97 5.96% -- -- -- 7.24%
- ---------------------------------------------------------------------------------------------------
INTERMEDIATE HORIZON STRATEGIC 1/97 11.14% -- -- -- 12.62%
- ---------------------------------------------------------------------------------------------------
INTERMEDIATE/LONG HORIZON STRATEGIC 1/97 13.40% -- -- -- 16.09%
- ---------------------------------------------------------------------------------------------------
</TABLE>
- ----------------
(1) Inception date refers to the commencement of operations of each Subaccount
except that where indicated by footnote 2, inception date refers to
commencement of operations of a predecessor separate account.
(2) Each of the corresponding Pooled Separate Accounts of The MONY Group, Inc.
(formerly The Mutual Life Insurance Company of New York) ("MONY") set forth
below contributed all of its assets to, and thereby established, the
Portfolios in which the corresponding Variable Funds Subaccounts invest
their assets:
MONY POOLED
SERIES SEPARATE ACCOUNT
Money Market................. Pooled Account No. 4
High Quality Bond............ Pooled Account No. 15
Intermediate Government Bond. Pooled Account No. 10d
Government/Corporate Bond.... Pooled Account No. 5
Balanced..................... Pooled Account No. 14
Equity Income................ Pooled Account No. 6
Equity Growth................ Pooled Account No. 1
Growth & Income.............. Pooled Account No. 10a
Special Equity............... Pooled Account No. 10b
International Equity......... Pooled Account No. 12
<PAGE>
Total returns calculated for any period for each of the Money Market, High
Quality Bond, Intermediate Government Bond, Government/Corporate Bond,
Balanced, Equity Income, Growth & Income, Equity Growth, Special Equity and
International Equity Subaccounts reflect the performance of the corresponding
Pooled Separate Account for any period prior to its establishment and the
performance of the corresponding Portfolio thereafter. Such total returns
calculated for each of the Subaccounts reflect the performance of the
corresponding Pooled Separate Account only from the date that such
corresponding Pooled Separate Account adopted investment objectives, policies
and practices substantially similar to those of the corresponding Portfolio
invested in by the Subaccount. Total return percentages for the Subaccounts
and the Portfolios reflect the historical rates of return for the applicable
period. Total return percentages for the corresponding Pooled Separate
Accounts reflect historical rates of return for after giving effect to a one-
time adjustment to reflect charges, expenses and fees in effect at the time the
Portfolios commenced operations. 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.
The table above assumes that a $1,000 payment was made to each Subaccount
at the beginning of the period shown, that no further payments were made, that
any distribution from the corresponding series (or its predecessor investment
vehicle) were reinvested, and that a Contractholder surrendered the Contract
for cash, rather than electing commencement of annuity benefits in the form of
one of the Settlement Options available, at the end of the period shown. The
average annual total return percentages shown in the table reflect the
annualized historical rates of return and deductions for all charges, expenses,
and fees which would be imposed on the payment assumed by both the
corresponding Portfolio or Calvert Series, as applicable, and the corresponding
Subaccount.
DIVERSIFIED INVESTORS PORTFOLIOS
The Variable Funds Subaccounts other than the Calvert Series Subaccount
(and the Strategic Variable Funds Subaccounts, through those Variable Funds
Subaccounts other than the Balanced Subaccount) invest exclusively in
corresponding series of Diversified Investors Portfolios. Diversified Investors
Portfolios is a trust organized on September 1, 1993 under the laws of the
State of New York and is registered under the 1940 Act as an open-end,
diversified management investment company.
Each of these Subaccounts seeks its investment objective by investing all
of its assets in a corresponding Portfolio. The investment objective of each
Portfolio may be changed without the approval of investors in that Portfolio,
but not without written notice thereof to its investors (including the
applicable Subaccount) 30 days prior to implementing the change. AUSA may
withdraw the investment of a Subaccount from its Portfolio on any Portfolio
Business Day (see page __). Upon any such withdrawal, AUSA would consider what
action might be taken, including investment of the assets of the Subaccount in
another pooled investment entity having the same investment objective.
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES
This section describes principal investment strategies of the series of
Diversified Investors Portfolios currently available under the Contracts
through the Subaccounts. These are the strategies that, in the opinion of each
Portfolio's advisers, are most likely to be important in trying to achieve the
Portfolio's investment objectives. There can, of course, be no assurance that
any Portfolio will achieve its investment objectives. Except as noted below,
each Portfolio's objectives and strategies may be changed without shareholder
approval.
Please note that each Portfolio may also use strategies and invest in
securities that are not described below but which are described in the
Statement of Additional Information. Of course, the Portfolio's advisers may
decide, as a matter of investment strategy, not to use the investments and
investment techniques described below and in the Statement of Additional
Information at any particular time.
Each Portfolio is actively managed, and the portfolio managers may trade
securities frequently, resulting, from time to time, in an annual portfolio
turnover rate of over 100%. Trading securities may produce capital gains, which
are taxable when distributed to investors with non-tax-sheltered accounts.
Active trading may also increase the amount of commissions or mark-ups to
broker-dealers that the Portfolio pays when it buys and sells securities.
Each Portfolio may, from time to time, take temporary defensive positions
that are inconsistent with the Portfolio's principal investment strategies in
attempting to respond to adverse market, political or other conditions. When
doing so, the Portfolio may invest without limit in high quality money market
and other short-term instruments, and may not be pursuing its investment goal.
These investments may result in a lower yield than would be available from
investments with a lower quality or longer term.
- -------------------------------------------------------------------------------
What are Money Market Instruments?
A MONEY MARKET INSTRUMENT is a short-term IOU issued by banks or other
corporations, the U.S. or a foreign government or state or local governments.
Money market instruments have maturity dates of 13 months or less. Money market
instruments may include CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES, VARIABLE
RATE DEMAND NOTES (where the interest rate is reset periodically and the holder
may demand payment from the issuer at any time), FIXED-TERM OBLIGATIONS,
COMMERCIAL PAPER (short term unsecured debt of corporations), ASSET-BACKED
SECURITIES (which are backed by pools of accounts receivable such as car
installment loans or credit card receivables) and REPURCHASE AGREEMENTS. In a
repurchase agreement, the seller sells a security and agrees to buy it back at
a later date (usually within seven days) and at a higher price, which reflects
an agreed upon interest rate.
- -------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to provide
liquidity and as high a level of income as is consistent with the preservation
of capital. This Portfolio invests primarily in high quality, short-term money
market instruments. The Portfolio may invest more than 25% of its total assets
in obligations of U.S. banks.
The Portfolio complies with industry regulations applicable to money
market funds. These regulations require that the Portfolio's investments mature
or be deemed to mature within 397 days from the date of acquisition, that the
average maturity of the Portfolio's investments (on a dollar-weighted basis) be
<PAGE>
ninety days or less, and that all of the Portfolio's investments be in U.S.
dollar-denominated high quality securities which have been determined by the
Portfolio to present minimal credit risks. Investments in high quality,
short-term instruments may, in many circumstances, result in a lower yield than
would be available from investments in instruments with a lower quality or a
longer term.
The Portfolio does not maintain a stable net asset value of $1.00 per
share and does not declare dividends on a daily basis (many money market funds
do). Investment income that has not yet been declared as a dividend, or a
default on a portfolio security, may cause the Portfolio's net asset value to
fluctuate.
If the Portfolio concentrates in bank obligations, the Portfolio will be
particularly sensitive to adverse events affecting U.S. banks. Banks are
sensitive to changes in money market and general economic conditions, as well
as decisions by regulators that can affect banks' profitability.
The Portfolio's portfolio managers employ a "top down" approach when
selecting securities for the Portfolio. This means that the portfolio managers
look first at broad market factors, and, on the basis of those market factors,
choose certain sectors or industries in which to invest. The managers then look
at individual companies within those sectors or industries. The managers use
the same top down approach when deciding which securities to sell. Securities
are sold when the Portfolio needs cash to meet redemptions, or when the
managers believe that better opportunities exist or that particular securities
no longer fit within the overall strategy for achieving the Portfolio's goal.
In general, the portfolio managers attempt to temper income volatility in the
Portfolio by investing significant portions of the portfolio in securities with
maturities of thirty to forty-five days.
BOND PORTFOLIOS
- -------------------------------------------------------------------------------
What is a Bond?
A BOND, which is also called a DEBT SECURITY or DEBT OBLIGATION, is like a
loan. The issuer of the bond, which could be the U.S. government, a
corporation, or a city or state, borrows money from investors and agrees to pay
back the loan amount (the PRINCIPAL) on a certain date (the MATURITY DATE).
Usually, the issuer also agrees to pay interest on certain dates during the
period of the loan. Some bonds, such as ZERO COUPON BONDS, do not pay interest,
but instead pay back more at maturity than the original loan. Most bonds pay a
fixed rate of interest (or income), but some bonds' interest rates may change
based on market or other factors.
- -------------------------------------------------------------------------------
The investment objective of the HIGH QUALITY BOND PORTFOLIO is to provide
a high risk-adjusted return while focusing on the preservation of capital. This
Portfolio invests primarily in a diverse portfolio of high quality debt
securities with short and intermediate maturities, such as corporate bonds and
notes, mortgage-backed and asset-backed securities, U.S. Treasury and
government agency obligations, securities of foreign issuers (such as Yankee
bonds) and repurchase agreements. Under normal circumstances the Portfolio
invests at least 65% of its assets in these securities.
The dollar-weighted average maturity of the Portfolio generally does not
exceed three years under normal circumstances. Individual securities held by
the Portfolio may have longer maturities. Short-term debt securities generally
fluctuate less in price, and have lower yields, than longer-term securities of
comparable quality. The Portfolio's duration generally is between one and three
years. Duration is a way of measuring the Portfolio's overall sensitivity to
interest rate fluctuations. The net asset value of a fund with a shorter
duration will generally fluctuate less in response to interest rate changes
than that of a fund with a longer duration.
<PAGE>
The Portfolio considers securities rated A- or better by Standard & Poor's
or A3 or better by Moody's (and securities that the Portfolio's advisers
believe are of comparable quality) to be high quality. Ratings are described in
the Statement of Additional Information. Investments in higher quality
instruments may result in a lower yield than would be available from
investments in lower quality instruments.
- -------------------------------------------------------------------------------
What are U.S. Government Obligations?
U.S. GOVERNMENT OBLIGATIONS are securities that are issued or guaranteed as to
principal and interest by the U.S. government or one of its agencies or
instrumentalities. Some obligations of U.S. government agencies and
instrumentalities are supported by the "full faith and credit" of the United
States, others by the right of the issuer to borrow from the U.S. Treasury, and
others only by the credit of the agency or instrumentality. U.S. government
obligations generally have less credit risk than other debt obligations.
- -------------------------------------------------------------------------------
The investment objective of the INTERMEDIATE GOVERNMENT BOND PORTFOLIO is
to provide as high a level of current income as is consistent with the
preservation of capital. This Portfolio invests primarily in U.S. government
obligations and repurchase agreements secured by U.S. government obligations.
Under normal circumstances the Portfolio invests at least 65% of its assets in
these securities. U.S. government obligations are issued or guaranteed as to
principal and interest by the U.S. government or one of its agencies or
instrumentalities. Some obligations of U.S. government agencies and
instrumentalities are supported by the "full faith and credit" of the United
States, others by the right of the issuer to borrow from the U.S. Treasury, and
others only by the credit of the agency or instrumentality.
The Portfolio also invests in mortgage-backed securities backed by
pass-through certificates issued or guaranteed by the U.S. government or its
agencies, and in other high quality, short-term obligations (such as corporate
bonds and notes, bank obligations and repurchase agreements). ALTHOUGH THE
PORTFOLIO INVESTS IN U.S. GOVERNMENT OBLIGATIONS, AN INVESTMENT IN THE
PORTFOLIO IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
The Portfolio's duration generally is between one and five years, and its
dollar-weighted average maturity generally is between three and ten years under
normal circumstances. The Portfolio may invest in securities with maturities of
as much as thirty years.
- -------------------------------------------------------------------------------
What are Mortgage-Backed Securities?
Home mortgage loans are typically grouped together into "POOLS" by banks and
other lending institutions. Interests in these pools (called MORTGAGE-BACKED
SECURITIES) are then sold to investors, allowing the bank or other lending
institution to have more money available to loan to home buyers. When
homeowners make interest and principal payments, these payments are passed on
to the investors in the pool. Most of these pools are guaranteed by U.S.
government agencies or by government sponsored private corporations --
familiarly called "GINNIE MAES", "FANNIE MAES" and "FREDDIE MACS."
Mortgaged-backed securities include COLLATERALIZED MORTGAGE OBLIGATIONS, or
CMOs.
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The investment objective of the GOVERNMENT/CORPORATE BOND PORTFOLIO is to
achieve maximum total return. This Portfolio invests primarily in investment
grade debt securities and U.S. government obligations (including
<PAGE>
mortgage-backed securities guaranteed by U.S. government agencies and
instrumentalities). Under normal circumstances the Portfolio invests at least
65% of its assets in U.S. government securities and corporate bonds.
The Portfolio also invests in high quality, short-term obligations and
repurchase agreements, and in securities of foreign issuers.
Investment grade debt securities carry a rating of at least BBB from
Standard & Poor's or Baa from Moody's or are of comparable quality as
determined by the Portfolio's advisers.
The Portfolio's duration generally is between three and ten years, and its
dollar-weighted average maturity generally is between five and fifteen years
(and does not exceed thirty years) under normal circumstances. While
longer-term securities tend to have higher yields than short-term securities,
they are subject to greater price fluctuations as a result of interest rate
changes and other factors.
The portfolio managers of the HIGH QUALITY BOND PORTFOLIO, INTERMEDIATE
GOVERNMENT BOND PORTFOLIO and GOVERNMENT/CORPORATE BOND PORTFOLIO use "top
down" economic analysis to determine economic outlook and to forecast interest
rates. They also analyze the yield curve under multiple market conditions in
making maturity and duration decisions for portfolio securities. The managers
of the High Quality Bond Portfolio and the Intermediate Government Bond
Portfolio then attempt to select securities that will enable each Portfolio to
maintain a stable share price and at the same time to achieve a high level of
income. The managers of the Government/Corporate Bond Portfolio attempt to
select securities that will enable the Portfolio to achieve a growth of capital
and a high level of income. The managers use the same top down approach when
deciding which securities to sell. Securities are sold when a Portfolio needs
cash to meet redemptions, or when the managers believe that better
opportunities exist or that particular securities no longer fit within the
overall strategy for achieving the Portfolio's goal.
The investment objective of the HIGH-YIELD BOND PORTFOLIO is to provide a
high level of current income. This Portfolio invests primarily in
high-yielding, income producing debt securities, such as debentures and notes,
and in convertible and non-convertible preferred stocks. Under normal
circumstances the Portfolio invests at least 65% of its assets in debt
securities and preferred stock.
The Portfolio may invest all or a substantial portion of its assets in
lower-rated debt securities, commonly referred to as "junk bonds." Lower-rated
debt securities offer yields that fluctuate over time but that generally are
superior to the yields offered by higher-rated securities. However, these
securities also involve significantly greater risks, including price volatility
and risk of default in the payment of interest and principal, than higher-rated
securities. Lower-rated debt securities usually are defined as securities rated
BB or lower by Standard & Poor's or Ba or lower by Moody's. See the Statement
of Additional Information for more information on ratings.
Lower quality securities tend to be issued by companies that are less
secure financially. In addition, in the event these companies have financial
difficulty, banks or other senior lenders have priority in being repaid. As a
result, when selecting investments, the Portfolio's advisers rely on
fundamental research to identify companies with adequate cash flows, attractive
valuations and strong management teams. In selecting investments for the
Portfolio, the Portfolio's advisers exclude securities that are in default or
that pay interest in the form of additional debt securities. As a result, the
Portfolio may be somewhat more conservative than certain other high-yield
funds. The Portfolio is designed to outperform more aggressive high-yield funds
in high-yield market downturns, and its performance may lag these funds in
high-yield market upturns. Of course, it is possible that the Portfolio will
not perform as expected.
<PAGE>
The Portfolio may also invest in equity securities, including common
stocks, warrants and rights. Investors should carefully consider the special
risks of investing in this Portfolio.
* * *
Fixed income securities may bear fixed, fixed and contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer or participations based on revenues, sales or profits. Changes
in interest rates will generally cause bigger changes in prices of longer-term
securities than in prices of shorter-term securities.
Each of the Bond Portfolios may use derivatives solely for hedging
purposes. These may include options, futures, swaps and forward currency
contracts.
Each of the Bond Portfolios will use short-term debt and money market
instruments, including short-term U.S. government and corporate obligations,
commercial paper, bank obligations and repurchase agreements, in varying
amounts for liquidity and cash management, and as a risk management tool.
BALANCED PORTFOLIO
The investment objective of the Balanced Portfolio is to provide a high
total investment return through investment in a broadly diversified portfolio
of stocks, bonds and money market instruments. The Portfolio invests in a
managed mix of equity and debt securities of predominately U.S. issuers.
However, the Fund may invest in securities of foreign issuers, including
issuers located in emerging, or developing, markets.
The Portfolio's equity securities include common and preferred stocks (and
their equivalents such as American Depositary Receipts). The Portfolio's debt
securities include corporate bonds, notes and commercial paper, U.S. government
securities and bank obligations.
The Portfolio varies the percentage of assets invested in any one type of
security in accordance with its adviser's interpretation of economic and market
conditions, fiscal and monetary policy, and underlying securities values. Under
normal circumstances, the Portfolio invests approximately 60% of its assets in
equity securities and approximately 40% of its assets in fixed income
securities (investing at least 25% in fixed-income senior securities, including
debt securities and preferred stock).
In selecting common stocks, the Portfolio emphasizes established
companies. Most of the Portfolio's long-term debt investments are investment
grade (rated BBB or better by Standard & Poor's or Baa or better by Moody's) or
considered by the Portfolio's advisers to be of comparable quality.
The Portfolio may use derivatives solely for hedging purposes. These may
include options, futures, swaps and forward currency contracts.
The Portfolio will use short-term debt and money market instruments,
including short-term U.S. government and corporate obligations, commercial
paper, bank obligations and repurchase agreements, in varying amounts for
liquidity and cash management, and as a risk management tool.
<PAGE>
STOCK PORTFOLIOS
The investment objective of the EQUITY INCOME PORTFOLIO is to provide a
high level of current income through investment in a diversified portfolio of
common stocks with relatively high current yield. Capital appreciation is a
secondary goal. This Portfolio invests primarily in stocks of companies which,
in the opinion of the Portfolio's advisers, are fundamentally sound financially
and which pay relatively high dividends on a consistent basis. The Portfolio
emphasizes common stocks and preferred stocks listed on the New York Stock
Exchange and on other national securities exchanges and, to a lesser extent,
stocks that are traded over-the-counter.
- -------------------------------------------------------------------------------
What is Value Investing?
Funds that use a VALUE-ORIENTED STRATEGY search for those companies that appear
to be trading below their true worth. These companies tend to have relatively
low price/earnings ratios and/or relatively low price/book value ratios. Low
price/earnings ratios or price/book value ratios mean that a stock is less
expensive than average relative to the company's earnings or book value,
respectively. These funds use research to identify potential investments,
examining such features as a firm's financial condition, business prospects,
competitive position and business strategy. They look for companies that appear
likely to come back into favor with investors, for reasons that may range from
good prospective earnings or strong management teams to new products or
services.
- -------------------------------------------------------------------------------
The investment objective of the EQUITY VALUE PORTFOLIO is to provide a
high total investment return through investment primarily in a diversified
portfolio of common stocks. This Portfolio invests primarily in stocks of
companies which, in the opinion of the Portfolio's advisers, are trading at low
valuations relative to market and/or historical levels. These stocks tend to
have relatively low price/earnings ratios and/or relatively low price/book
value ratios. Low price/earnings ratios or price/book value ratios mean that
the stock is less expensive than average relative to the company's earnings or
book value, respectively. The Portfolio emphasizes common stocks and preferred
stocks listed on the New York Stock Exchange and on other national securities
exchanges and, to a lesser extent, stocks that are traded over-the-counter.
The portfolio managers of the EQUITY INCOME PORTFOLIO and EQUITY VALUE
PORTFOLIO use a "bottom up" value-oriented approach in selecting investments
for the Portfolios. When portfolio managers use a "bottom up" approach, they
look primarily at individual companies against the context of broader market
factors. A value-oriented approach attempts to identify companies that appear
to be trading below their true worth. The managers use the same bottom up
approach when deciding which securities to sell. Securities are sold when a
Portfolio needs cash to meet redemptions, or when the managers believe that
better opportunities exist or that particular securities no longer fit within
the overall strategy for achieving the Portfolio's goals.
The investment objective of the GROWTH & INCOME PORTFOLIO is to provide
capital appreciation and current income. This Portfolio invests primarily in
securities selected in large part for their potential to generate long-term
capital appreciation. The Portfolio also may select securities based on their
potential to generate current income. The Portfolio emphasizes securities of
growing, financially stable and undervalued companies. This Portfolio attempts
to achieve more capital appreciation than an income fund and less price
volatility than a growth fund. The Portfolio emphasizes common stocks and
preferred stocks listed on the New York Stock Exchange and on other national
securities exchanges and, to a lesser extent, stocks that are traded
over-the-counter.
The investment objective of the EQUITY GROWTH PORTFOLIO is to provide a
high level of capital appreciation through investment in a diversified
portfolio of common stocks with a potential for above-average growth in
<PAGE>
earnings. Current income is a secondary goal. This Portfolio invests primarily
in common stocks of companies with potential for above average growth in
earnings and dividends. Under normal circumstances the Portfolio invests at
least 65% of its assets in equity securities. The Portfolio emphasizes common
and preferred stocks listed on the New York Stock Exchange and other national
securities exchanges and, to a lesser extent, stocks that are traded
over-the-counter. The Portfolio uses multiple managers to control the
volatility often associated with growth funds.
- -------------------------------------------------------------------------------
What is Growth Investing?
Funds that use a GROWTH-ORIENTED STRATEGY search for companies growing faster
than the economy as a whole. Often, these companies are in expanding
industries, such as computers and pharmaceuticals. While the size of a company
is not necessarily a factor in determining whether its stock is suitable for a
growth fund, a growth strategy that focuses on larger companies is generally
considered less aggressive than one that focuses on smaller companies. Many
stocks owned by growth funds do not pay dividends and can be more volatile than
other types of investments. As a result, growth funds are appropriate for
investors who have long-term investment horizons.
- -------------------------------------------------------------------------------
The investment objective of the SPECIAL EQUITY PORTFOLIO is to provide a
high level of capital appreciation through investment in a diversified
portfolio of common stocks of small to medium size companies. This Portfolio
invests primarily in stocks of small to medium size companies which, in the
opinion of the Portfolio's advisers, present an opportunity for significant
increases in earnings, revenue and/or value, without consideration for current
income. The Special Equity Portfolio emphasizes common stocks of U.S. companies
with market capitalizations of less than $1 billion. The Portfolio uses
multiple managers to control the volatility often associated with investments
in companies of this size. The Portfolio utilizes two growth-style managers and
two value-oriented managers. The Portfolio is designed to provide an
opportunity for higher returns relative to the broad small cap market during
periods when a particular style is out of favor.
Investing in securities of smaller companies involves special risks.
Investors should carefully consider the risks of investing in the Special
Equity Portfolio.
The investment objective of the AGGRESSIVE EQUITY PORTFOLIO is to provide
a high level of capital appreciation primarily through investing in a
diversified portfolio of common stocks. This Portfolio invests primarily in
high growth companies without regard to market capitalization. The Portfolio
seeks to invest in companies which present an opportunity for significant
increases in earnings, revenue and/or value, without consideration for current
income, to achieve excess market returns relative to its benchmark, the Russell
2000 Growth Index. The Portfolio also emphasizes stocks of companies with
consistent, above-average and accelerating profitability and growth. The
investment characteristics, such as price-to-earnings ratio, of the Portfolio
can undergo major changes at any time. As a result, the value of shares of this
Portfolio may be very volatile.
The portfolio managers of the GROWTH & INCOME PORTFOLIO, EQUITY GROWTH
PORTFOLIO, SPECIAL EQUITY PORTFOLIO and AGGRESSIVE EQUITY PORTFOLIO use a
"bottom up" approach in selecting securities, relying primarily on stock
selection against the context of broader market factors. These managers look
for companies that they believe are in dynamic high growth sectors of the world
economy, and that are thought to have dominant or strong competitive positions
within their sectors. They also look for companies that are expected to have
strong earnings growth potential. The managers use the same bottom up approach
when deciding which securities to sell. Securities are sold when a Portfolio
needs cash to meet redemptions, or when the managers believe that better
opportunities exist or that particular securities no longer fit within the
overall strategy for achieving the Portfolio's goals.
<PAGE>
The investment objective of the INTERNATIONAL EQUITY PORTFOLIO is to
provide a high level of long-term capital appreciation through investment in a
diversified portfolio of securities of foreign issuers. This Portfolio invests
primarily in foreign securities, meaning securities of issuers that, in the
opinion of the Portfolio's advisers, have their principal activities outside
the United States or whose securities are traded primarily outside the United
States. Under normal circumstances the Portfolio invests at least 65% of its
assets in equity securities of issuers in at least three countries other than
the United States. The Portfolio invests most of its assets in securities of
issuers in Canada, Australia and developed countries in Europe and the Far
East. The Portfolio may invest up to 10% of its assets in securities of issuers
in developing countries. The Portfolio may also invest in any type or quality
of debt securities, including lower-rated securities, and may enter into
forward currency exchange contracts solely for hedging purposes.
The portfolio managers of the International Equity Portfolio use a
"bottom-up" approach in which stock selection is based on in-depth local
research. In selecting individual securities, the portfolio managers use a
value-oriented strategy to identify companies that appear to be trading below
their true worth. The managers blend their basic, fundamental approach with
macroeconomics and political judgments on the outlook for economies,
industries, currencies and markets. The managers also use a bottom up approach
when deciding which securities to sell. Securities are sold when the Portfolio
needs cash to meet redemptions, or when the managers believe that better
opportunities exist or that particular securities no longer fit within the
overall strategy for achieving the Portfolio's goal.
* * *
Each of the Stock Portfolios may use derivatives solely for hedging
purposes. These may include options, futures, swaps and forward currency
contracts.
Each of the Stock Portfolios may also invest in bonds and short-term
obligations as well as securities convertible into common stocks, preferred
stocks, debt securities and short-term obligations. These Portfolios will use
short-term obligations and money market securities, including commercial paper,
bank obligations and repurchase agreements, in varying amounts for liquidity
and cash management, and as a risk management tool.
ADDITIONAL INVESTMENT POLICIES
Investment Restrictions
The Statement of Additional Information contains a list of specific
investment restrictions which govern the investment policies of the Portfolios.
Under its investment restrictions, each Portfolio may borrow money and enter
into reverse repurchase agreements in an amount not to exceed 331/3% of the
Portfolio's assets (including the borrowing) less liabilities (not including
the borrowing). Except as otherwise noted, the Portfolios' investment
objectives and policies may be changed without shareholder approval. If a
percentage or rating restriction (other than a restriction as to borrowing) is
adhered to at the time an investment is made, a later change in percentage or
rating resulting from changes in a Portfolio's securities is not a violation of
policy.
Brokerage Transactions
The primary consideration in placing each Portfolio's securities
transactions with broker-dealers for execution is to obtain and maintain the
availability of execution at the most favorable prices and in the most
<PAGE>
effective manner possible. A Portfolio may execute brokerage or other agency
transactions through an investment adviser or distributor of the Portfolio.
These entities may be paid for these transactions.
CORE/FEEDER STRUCTURE
Each Subaccount which invests in a Portfolio does so through a two tier,
core/feeder fund structure in which each such Subaccount invests in a
corresponding Portfolio.
In addition to selling beneficial interests to such Subaccounts,
Diversified Investors Portfolios may sell beneficial interests in its series to
other insurance company separate accounts, mutual funds, collective investment
vehicles or institutional investors. Such investors will invest in a Portfolio
on the same terms and conditions as the applicable Subaccount and will pay a
proportionate share of the Portfolio's expenses. However, the other investors
investing in such Portfolio are not required to sell their shares at the same
public offering price as the Subaccount due to variations in sales commissions
and other operating expenses. Therefore, Contractholders should be aware that
these differences may result in differences in returns experienced by investors
in the different entities that invest in each Portfolio.
Smaller entities investing in a Portfolio may be materially affected by
the actions of larger entities investing in that Portfolio. For example, if a
large fund withdraws from a Portfolio, the remaining investors may experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, the affected Portfolio may become less diverse, resulting in
increased portfolio risk. (However, this possibility also exists for any type
of collective investment vehicle which has institutional or other large
investors.) Also, investors with a greater pro rata ownership in a Portfolio
could have effective voting control of the operations of that series. Whenever
a Subaccount is requested to vote on matters pertaining to a Portfolio (other
than a vote to continue the Portfolio upon the withdrawal of an investor in the
Portfolio), AUSA, as the legal owner of all assets in the Subaccount, shall
vote in accordance with the procedures set forth under "Voting Rights" at page
__, including, to the extent required by law, procedures through which AUSA
shall receive instructions with respect to such vote from Contractholders
and/or Participants. Certain changes in the investment objectives, policies or
restrictions of a Portfolio may require that AUSA withdraw a Subaccount's
interest in that Portfolio. Any such withdrawal could result in a distribution
"in kind" of portfolio securities (as opposed to a cash distribution from the
Portfolio). If securities are distributed, the Subaccount could incur brokerage
or other charges in converting the securities to cash. In addition, the
distribution in kind may result in a less diversified portfolio of investments
or adversely affect the liquidity of the Subaccount. Notwithstanding the above,
there are other ways for Diversified Investors Portfolios to meet redemption
requests from its investors, such as temporary borrowings.
RISK CONSIDERATIONS
The risks of investing in each Portfolio vary depending upon the nature of
the securities held, and the investment practices employed, on its behalf. For
example, Portfolios investing more of their assets in fixed income securities
may be more susceptible to interest rate risk and credit risk than Portfolios
investing more of their assets in equity securities. Similarly, Portfolios
investing more of their assets in equity securities may be susceptible to
greater price volatility under certain circumstances than Portfolios investing
more of their assets in fixed income securities. Certain of these risks are
described in this section.
The net asset value of each Portfolio will change daily as the value of
its underlying securities change. This means that an investor's shares may be
<PAGE>
worth more or less at the time of redemption than at the rime of purchase. An
investor may receive little or no return on an investment in the Portfolios. An
investor may lose money by investing in the Portfolios.
Certain of the investment practices employed for the Portfolios may entail
certain risks in addition to the risks described below. These risks are
described in the Statement of Additional Information.
MARKET RISK. This is the risk that the prices of securities will rise or
fall due to changing economic, political or market conditions, or due to a
company's individual situation. Historically, equity securities have been more
volatile than debt securities in response to market risk.
INTEREST RATE RISK. In general, the prices of debt securities rise when
interest rates fall, and fall when interest rates rise. Longer term obligations
are usually more sensitive to interest rate changes than shorter term
obligations. A change in interest rates could cause a Portfolio's share price
to go down. Generally, the longer the average maturity of the bonds in a
Portfolio, the more the Portfolio's share price will fluctuate in response to
interest rate changes.
CREDIT RISK. Some issuers may not make payments on debt securities held by
a Portfolio, causing a loss. Or, an issuer may suffer adverse changes in its
financial condition that could lower the credit quality of a security, leading
to greater volatility in the price of the security and in shares of a
Portfolio. A change in the quality rating of a bond or other security can also
affect the security's liquidity and make it more difficult for a Portfolio to
sell. The lower quality debt securities in which the Portfolios may invest are
more susceptible to these problems than higher quality obligations. Investments
held by the High-Yield Bond Portfolio will be particularly susceptible to
credit risk. U.S. government securities are generally considered not to be
subject to credit risk.
GROWTH SECURITIES. Growth securities typically are quite sensitive to
market movements because their market prices tend to reflect future
expectations. When it appears those expectations will not be met, the prices of
growth securities typically fall. The success of a Portfolio's investment in
growth securities depends largely on the Portfolio's advisers' skill in
assessing the growth potential of the companies that issued the securities. In
addition, a Portfolio investing in growth securities may underperform certain
other stock funds (those emphasizing value stocks, for example) during periods
when growth stocks are out of favor.
VALUE INVESTING. When a Portfolio's portfolio managers use a value
oriented approach in managing the Portfolio, they look for securities that they
believe are currently undervalued, or priced below their true worth, but whose
issuers have good longer term prospects. An issuer may be undervalued relative
to the stock market in general, relative to the underlying value of its assets
or relative to what a sophisticated private investor would pay for the entire
company. Value investing is based on the belief that securities of companies
which are temporarily underpriced may provide a higher total return over time
than securities of companies whose positive attributes are reflected in the
securities' current price.
A security may not achieve its expected value because the circumstances
causing it to be undervalued worsen (causing the price to decline further) or
do not change, or because an adviser is incorrect in its determination that the
security is undervalued. In addition, Portfolios with a value orientation may
underperform certain other stock funds (those emphasizing growth stocks, for
example) during periods when value stocks are not in favor.
SMALLER COMPANIES. The securities of smaller capitalization companies may
have more risks than those of larger, more seasoned companies. They may be
particularly susceptible to market downturns because of limited product lines,
<PAGE>
markets, distribution channels or financial and management resources. Also,
there may be less publicly available information about small cap companies.
Investments in small cap companies may be in anticipation of future products or
services to be provided by the companies. If those products or services are
delayed, the prices of the securities of the companies may drop. Sometimes, the
prices of the securities of smaller capitalized companies rise and fall based
on investor perception rather than economics. Securities of small cap companies
may be thinly traded, making their disposition more difficult. For all these
reasons, the prices of the securities of small cap companies may be more
volatile, causing a Portfolio's share price to be volatile. Portfolios that
invest a higher percentage of their assets in small cap stocks are generally
more volatile than funds investing a higher percentage of their assets in
larger, more established companies. Investments held by the Special Equity
Portfolio are likely to be particularly susceptible to the risks of small cap
companies.
FOREIGN SECURITIES. Each Portfolio may invest a portion of its assets in
foreign securities. The International Equity Portfolio will invest a
substantial portion of its assets in foreign securities. Investing in foreign
securities involves risks in addition to those of investing in U.S. securities,
including risks relating to political, social and economic developments abroad,
as well as risks resulting from the differences between the regulations to
which U.S. and foreign issuers and markets are subject.
o These risks may include expropriation of assets, confiscatory taxation,
withholding taxes on dividends and interest paid on Portfolio
investments, currency exchange controls and other limitations on the
use or transfer of Portfolio assets and political or social
instability.
o Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there may be
less public information about their operations.
o Foreign markets may be less liquid and more volatile than U.S. markets.
Rapid increases in money supply may result in speculative investing,
contributing to volatility. Also, equity securities may trade at
price-earnings multiples that are higher than those of comparable U.S.
companies, and that may not be sustainable. As a result, there may be
rapid changes in the value of foreign securities.
o Foreign markets may offer less protection to investors. Enforcing legal
rights may be difficult, costly and slow. There may be special problems
enforcing claims against foreign governments.
o Since foreign securities often trade in currencies other than the U.S.
dollar, changes in currency exchange rates will affect a Portfolio's
net asset value, the value of dividends and interest earned, and gains
and losses realized on the sale of securities. An increase in the U.S.
dollar relative to these other currencies will adversely affect the
value of the Portfolio. In addition, some foreign currency values may
be volatile and there is the possibility of governmental controls on
currency exchanges or governmental intervention in currency markets.
Controls or intervention could limit or prevent a Portfolio from
realizing value in U.S. dollars from its investment in foreign
securities.
o The International Equity Portfolio and the Balanced Portfolio may
invest in issuers located in emerging, or developing, markets.
<PAGE>
o Emerging or developing countries are generally defined as countries
in the initial stages of their industrialization cycles with low per
capita income.
o All of the risks of investing in foreign securities are heightened
by investing in developing countries.
o The markets of developing countries have been more volatile than the
markets of developed countries with more mature economies. These
markets often have provided higher rates of return, and greater
risks, to investors, but they also may provide lower rates of return
or negative returns, for extended periods.
PREPAYMENT RISK. The issuers of debt securities held by a Portfolio may be
able to prepay principal due on the securities, particularly during periods of
declining interest rates. The Portfolio may not be able to reinvest that
principal at attractive rates, reducing income to the Portfolio. On the other
hand, rising interest rates may cause prepayments to occur at slower than
expected rates. This effectively lengthens the maturities of the affected
securities, making them more sensitive to interest rate changes and the
Portfolio's share price more volatile. Mortgage-backed securities are
particularly susceptible to prepayment risk and their prices may be volatile.
SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible securities,
which are debt securities that may be converted into stock, are subject to the
market risk of stocks, and, like other debt securities, are also subject to
interest rate risk and the credit risk of their issuers. Call provisions may
allow the issuer to repay the debt before it matures.
DERIVATIVES. Each Portfolio may, but is not required to, engage in certain
investment strategies involving derivatives (such as options, futures, swaps
and forward currency contracts). These investment strategies may be employed
only in connection with hedging activities such as the following:
o protecting against a decline in value of a Portfolio's current or
anticipated securities holdings;
o as a substitute for buying or selling portfolio holdings; and
o seeking to generate income to offset expenses or increase return.
A hedge is designed to neutralize a loss on a portfolio position with a gain in
the hedge position. A properly executed hedge will result in a loss in the
portfolio position being offset by a gain in the hedge position, or vice versa.
However, the market movement of a hedge may not be of the same magnitude as the
market movement of the hedged position. The success or failure of a hedging
transaction will depend on the advisers' ability to predict movements in the
hedge, the investment being hedged and the market in general (and the
correlation between these factors). Derivatives may not always be available on
terms that make economic sense (for example, they may be too costly), and, when
used, their transaction costs and premiums may adversely affect Portfolio
performance. The ability to use derivatives to hedge may also be restricted by
limits established by securities and commodities exchanges and by tax
considerations.
<PAGE>
MANAGEMENT OF DIVERSIFIED INVESTORS PORTFOLIOS
BOARD OF TRUSTEES
The Board of Trustees of Diversified Investors Portfolios provides broad
supervision over the affairs of Diversified Investors Portfolios. For further
information about the Board of Trustees, see "Diversified Investors Portfolios"
in the Statement of Additional Information. A majority of the Board of Trustees
are not affiliated with Diversified or any Subadviser.
INVESTMENT ADVISER
Diversified manages the assets of each Portfolio pursuant to an Investment
Advisory Agreement with Diversified Investors Portfolios with respect to that
Portfolio and in accordance with the investment policies described herein and
in the Statement of Additional Information. Subject to such further policies as
the Board of Trustees may determine, Diversified provides general investment
advice to each Portfolio. It is Diversified's responsibility to select, subject
to the review and approval of the Diversified Investors Portfolio's Board of
Trustees, appropriate subadvisers with distinguished backgrounds and to review
such subadviser's continued performance. For its services under the Investment
Advisory Agreements, Diversified receives from each Portfolio the fees
specified below. Diversified is currently waiving a portion of its investment
advisory fee. Investment management decisions are taken by a committee of
Diversified's personnel and not by a particular individual.
Diversified is an indirect, wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"), a financial services holding company whose primary emphasis is life
and health insurance and annuity and investment products. AEGON is an indirect,
wholly-owned subsidiary of AEGON N.V., a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as the investment adviser to the Portfolios.
Diversified has selected Subadvisers for each Portfolio which have been
approved by the Board of Trustees of Diversified Investors Portfolios and the
investors in that Portfolio and was entered into an Investment Subadvisory
Agreement with each Subadviser. It is the responsibility of the Subadviser(s)
to each Portfolio to make the day-to day investment decisions for the Portfolio
and to place the purchase and sale orders for securities transactions, subject
in all cases to the general supervision of Diversified and the policies set by
the Trustees of Diversified Investors Portfolios. The Subadvisers are as
follows and, except as otherwise noted, investment decisions are made by a
committee of each subadviser's personnel:
MONEY MARKET PORTFOLIO
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
GOVERNMENT/CORPORATE BOND PORTFOLIO
Capital Management Group. Capital Management Group is a division of 1740
Advisers, Inc., a wholly-owned subsidiary of The MONY Group, Inc. Capital
Management Group has been a registered investment adviser since 1971. The
address of Capital Management Group is 1740 Broadway, New York, New York 10019.
The following representatives of Capital Management Group are primarily
responsible for the day-to-day management of the Portfolios indicated:
<PAGE>
Money Market Portfolio: David E. Wheeler, Investment Vice President and
Portfolio Manager, has been responsible for the day-to-day management of the
Money Market Portfolio since 1997. Mr. Wheeler has been employed by Capital
Management Group since 1994 and was employed at AIG Investment Advisers prior
to 1994.
Intermediate Government Bond Portfolio and Government/Corporate Bond Portfolio:
Gregory Staples, Vice President, has been responsible for the day-to-day
management of both the Intermediate Government Bond Portfolio and the
Government/Corporate Bond Portfolio since 1994. Mr. Staples has been employed
by Capital Management Group since 1987.
HIGH QUALITY BOND PORTFOLIO
Merganser Capital Management Corporation. Merganser was formed in 1984 and is
owned by certain of its employees. Merganser has been a registered investment
adviser since 1984. The principal business address of Merganser is One
Cambridge Center, Cambridge, Massachusetts 02142.
HIGH-YIELD BOND PORTFOLIO
Delaware Investment Advisers. Delaware Investment Advisers is a series of
Delaware Management Business Trust. Delaware is indirectly owned by Lincoln
National Corp. Delaware and its predecessors have been registered investment
advisers since 1952. The principal business address of Delaware Investment
Advisers is 2005 Market Street, Philadelphia, Pennsylvania 19103.
BALANCED PORTFOLIO
Institutional Capital Corporation. Institutional Capital was formed in January
of 1970 and is owned by certain of its employees. Institutional Capital has
been a registered investment adviser since 1975. The principal business address
of Institutional Capital is 225 West Wacker Drive, Chicago, Illinois 60606.
EQUITY INCOME PORTFOLIO
Asset Management Group. Asset Management Group is a division of 1740 Advisers,
Inc., which is a wholly-owned subsidiary of The MONY Group, Inc. Asset
Management Group has been a registered investment adviser since 1971. The
address of Asset Management Group is 1740 Broadway, New York, New York 10019.
EQUITY VALUE PORTFOLIO
Ark Asset Management Co., Inc. Ark was formed in August of 1989 and is owned by
Ark Asset Holdings, Inc. Ark Asset Holdings, Inc. is owned by Ark employees.
Ark has been a registered investment adviser since 1989. The principal address
of Ark is 125 Broad Street, New York, New York 10004.
GROWTH & INCOME PORTFOLIO
Putnam Advisory Company, Inc. Putnam was formed in 1937 and is owned by Marsh &
McLennon Companies, Inc. Putnam has been a registered investment adviser since
1968. The principal address of Putnam is One Post Office Square, Boston,
Massachusetts 02109.
<PAGE>
EQUITY GROWTH PORTFOLIO
Dresdner RCM Global Investors LLC
Montag & Caldwell Incorporated
Dresdner RCM Global Investors LLC was established in 1996, when Dresdner Bank
AG acquired RCM Capital Management. Dresdner RCM has been a registered
investment adviser since 1972. The principal address of Dresdner RCM is Four
Embarcadero Center, San Francisco, California 94111.
Montag & Caldwell Incorporated was established in 1945 and is owned by
Alleghany Corporation. Montag & Caldwell has been a registered investment
adviser since 1968. The principal address of Montag & Caldwell is 3343
Peachtree Road, N.E., Suite 1100, Atlanta, Georgia 30326-1022.
SPECIAL EQUITY PORTFOLIO
Ark Asset Management Co., Inc.
Goldman Sachs Asset Management
Pilgrim Baxter & Associates, Ltd.
Westport Asset Management, Inc.
Ark Asset Management Co., Inc. was formed in August of 1989 and is owned by Ark
Asset Holdings, Inc. Ark Asset Holdings, Inc. is owned by Ark employees. Ark
has been a registered investment adviser since 1989. The principal address of
Ark is 125 Broad Street, New York, New York 10004.
Ronald Wiener, Vice Chairman and Portfolio Manager, has been primarily
responsible for the day-to-day management of the Special Equity Portfolio on
behalf of Ark since 1994. Mr. Wiener has been employed by Ark since 1986 and
was employed at Lehman Management Co., Inc. as Senior Vice President and Senior
Portfolio Manager, Specialty Growth Equity Management, from 1986 to 1989.
Goldman Sachs Asset Management is a separate operating division of Goldman,
Sachs & Co., a worldwide investment banking firm, with numerous offices
throughout the United States and globally. Goldman, Sachs & Co. acquired
Liberty Investment Management, Inc., the predecessor firm, in January of 1997.
Liberty had been a registered investment adviser since 1994. Liberty's
predecessor, Eagle Asset Management, Inc., had been a registered investment
adviser since 1984. The business address of the Goldman Sachs branch office
responsible for managing the Portfolio is 2502 Rocky Point Drive, Suite 500,
Tampa, Florida 33607.
Herbert E. Ehlers, Managing Director, and Timothy G. Ebright, Portfolio
Manager, have been responsible for the day-to-day management of the Special
Equity Portfolio on behalf of Liberty, and now Goldman Sachs, since 1994. Mr.
Ehlers and Mr. Ebright have been employed by Goldman Sachs since 1997. Before
that, they were employed by Liberty Investment Management, Inc. or its
predecessor, Eagle Asset Management, Inc., since 1980 and 1988, respectively.
Pilgrim Baxter & Associates, Ltd. was formed in 1995 and is owned by United
Asset Management, Inc., a publicly-owned corporation. Pilgrim (or its
predecessor) has been a registered investment adviser since 1982. The principal
business address of Pilgrim is 825 Duportail Road, Wayne, Pennsylvania 19087.
Gary Pilgrim, Chief Executive Officer, has been responsible for the day-to-day
management of the Special Equity Portfolio on behalf of Pilgrim since September
1998. He is a founding partner of Pilgrim and has been employed by Pilgrim
since 1982.
<PAGE>
Westport Asset Management, Inc. was formed in 1983 and is owned by certain of
its employees. Westport has been a registered investment adviser since 1983.
The principal business address of Westport is 253 Riverside Avenue, Westport,
Connecticut 06880.
Andrew Knuth, Portfolio Manager, has been responsible for the day-to day
management of the Special Equity Portfolio on behalf of Westport since 1994 and
has been employed by Westport since 1983.
AGGRESSIVE EQUITY PORTFOLIO
McKinley Capital Management, Inc. McKinley was formed in March of 1991 and is
owned by Robert B. Gillam. McKinley has been a registered investment adviser
since 1991. The principal business address of McKinley is 3301 C Street,
Anchorage, Alaska 99503.
Robert B. Gillam, Portfolio Manager, has been responsible for the day-to-day
supervision of management of the Aggressive Equity Portfolio since 1996 and has
been employed by McKinley since 1991.
INTERNATIONAL EQUITY PORTFOLIO
Capital Guardian Trust Company. Capital Guardian was formed in 1968 and is
owned by Capital Group International, Inc., which is owned by The Capital Group
Companies, Inc. Capital Guardian is a trust company regulated by the California
Department of Financial Institutions. The principal address of Capital Guardian
is 333 South Hope Street, Los Angeles, California 90071.
Capital Guardian uses a system of multiple portfolio managers. Within
investment guidelines, each portfolio manager makes individual decisions as to
company, country, industry, timing and percentage based on extensive field
research and direct company contact.
ADVISORY FEES
For its services under the Investment Advisory Agreements Diversified is
entitled to receive investment advisory fees, which are accrued daily and
payable monthly, at an annual rate equal to the percentage of each Portfolio's
average daily net assets shown in the table below. Diversified is currently
waiving a portion of its investment advisory fees.
For its services under its Investment Subadvisory Agreement with
Diversified, each of the Subadvisers is entitled to receive a fee from
Diversified at an annual rate equal to the percentage of the applicable
Portfolio's average daily net assets shown in the table below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMPENSATION COMPENSATION
PORTFOLIO SUBADVISERS (%) (%)
TO DIVERSIFIED TO SUBADVISERS
Money Market Portfolio Capital Management Group 0.25 0.05
High Quality Bond Merganser Capital Management 0.35 (2)
Portfolio Corporation
<PAGE>
Intermediate Capital Management Group 0.35(1) 0.15
Government Bond
Portfolio
Government/Corporate Capital Management Group 0.35 0.15
Bond Portfolio
High-Yield Bond Delaware Investment Advisers 0.55(1) (3)
Portfolio
Balanced Portfolio Institutional Capital Corporation 0.45 (4)
Equity Income Portfolio Asset Management Group 0.45 (5)
Equity Value Portfolio Ark Asset Management Co., Inc. 0.57(1) (6)
Growth & Income Putnam Advisory Company, Inc. 0.60 (7)
Portfolio
Equity Growth Portfolio Dresdner RCM 0.62(1) (8)
Global Investors, LLC
Montag & Caldwell, Inc.
Special Equity Portfolio Pilgrim Baxter & Associates, Ltd. 0.80(1) 0.50
Ark Asset Management Co., Inc.
Goldman Sachs Asset Management
Westport Asset Management, Inc.
Aggressive Equity McKinley Capital Management 0.97(1) (9)
Portfolio
International Equity Capital Guardian Trust Company 0.75(1) (10)
Portfolio
</TABLE>
- ----------------------------------
(1) Diversified is currently waiving a portion of its fees. See "Expense
Summary" on page __ for a review of the fee waivers currently in effect.
(2) 0.25% on the first $100,000,000 of average net assets of the High Quality
Bond Portfolios and 0.15% on all assets in excess of $100,000,000.
(3) 0.40% on the first $20,000,000 of average net assets of the High-Yield Bond
Portfolio, 0.30% on the next $20,000,000 in assets and 0.20% on assets in
excess of $40,000,000.
(4) 0.35% on the first $500,000,000 of average net assets of the Balanced
Portfolio, 0.30% on the next $500,000,000 in assets and 0.25% on assets in
excess of $1,000,000,000.
(5) 0.25% on the first $100,000,000 of average net assets of the Equity Income
Portfolio and 0.20% on assets in excess of $100,000,000.
(6) 0.45% on the first $100,000,000 of average net assets of the Equity Value
Portfolio, 0.40% on the next $50,000,000 in assets and 0.35% on the next
$50,000,000 in assets; when the Portfolio achieves $200,000,000 in assets,
the rate shall be 0.40% on assets up to $200,000,000 and 0.35% on assets in
excess of $200,000,000.
(7) 0.30% on the first $100,000,000 of average net assets of the Growth &
Income Portfolio, 0.20% on assets in excess of $100,000,000.
<PAGE>
(8) With respect to assets of the Equity Growth Portfolio allocated to each
Subadviser: 0.50% on the first $50,000,000 of average net assets, 0.25% on
the next $50,000,000 in assets and 0.20% on all assets in excess of
$100,000,000.
(9) 0.90% on the first $10,000,000 of average net assets of the Aggressive
Equity Portfolio, 0.80% on the next $15,000,000 in assets, 0.60% on the
next $25,000,000 in assets, 0.40% on the next $50,000,000 in assets and
0.35% on assets in excess of $100,000,000.
(10)0.75% on the first $25,000,000 of average net assets of the International
Equity Portfolio, 0.60% on the next $25,000,000 in assets, 0.425% from
$50,000,000 in assets to $250,000,000 in assets, and 0.375% on all assets
in excess of $250,000,000.
Diversified has agreed to waive its investment advisory fees to the extent
necessary to limit the total operating expenses of each Portfolio to a
specified level. See "Expense Summary" on page __ for a review of the fee
waivers currently in effect. Diversified also may contribute to the Portfolios
from time to time to help them maintain competitive expense ratios. These
arrangements are voluntary and may be terminated at any time.
ADMINISTRATOR
Diversified provides administrative services to the Portfolios, including
regulatory reporting, office facilities and equipment and personnel.
Diversified receives no additional fee for its administrative services to
Diversified Investors Portfolios.
DISTRIBUTION ARRANGEMENTS
Diversified Investors Portfolios has retained the services of DISC as
Exclusive Placement Agent. The principal business address of DISC is Four
Manhattanville Road, Purchase, New York 10577. DISC receives no compensation as
Exclusive Placement Agent.
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02205, is the custodian of the securities held by the Portfolios and is
authorized to use the facilities of the Depositary Trust Company and the
facilities of the book-entry system for the Federal Reserve Bank. Securities
may be held by sub-custodians approved by the Board of Trustees of Diversified
Investors Portfolios. Investors Bank & Trust Company is also
dividend-disbursing agent for Diversified Investors Portfolios.
EXPENSES
The expenses of Diversified Investors Portfolios include the compensation
of its Trustees who are not affiliated with Diversified; governmental fees;
interest charges; taxes; fees and expenses of independent auditors, of legal
counsel and of any transfer agent, depository, registrar or dividend disbursing
agent of Diversified Investors Portfolios; insurance premiums; and expenses of
calculating the net asset value of, and the net income on, beneficial interests
in the series of Diversified Investors Portfolios. Expenses of Diversified
Investors Portfolios also include the expenses connected with the execution,
recording and settlement of securities transactions; fees and expenses of
Diversified Investors Portfolios' custodian for all services to the series of
Diversified Investors Portfolios, including safekeeping of funds and securities
and maintaining required books and accounts; expenses of preparing and mailing
reports to investors and to governmental officers and commissions; expenses of
meetings of investors and Trustees of Diversified Investors Portfolios; and the
advisory fees payable to Diversified under the Investment Advisory Agreements.
<PAGE>
OTHER INFORMATION REGARDING
DIVERSIFIED INVESTORS PORTFOLIOS
PURCHASE AND REDEMPTION OF INTERESTS IN DIVERSIFIED INVESTORS PORTFOLIOS
Beneficial interests in the Portfolios described in this Prospectus are
currently being offered by DISC to AUSA for allocation to the appropriate
Variable Funds Subaccount to fund benefits payable under the Contracts.
Investments in the Portfolios may only be made by investment companies,
insurance company separate accounts, common or commingled trust funds or
similar organizations or entities that are "accredited investors" within the
meaning of Regulation D under the 1933 Act. This Prospectus does not constitute
an offer to sell, or the solicitation of an offer to buy, any beneficial
interests in any of the Portfolios.
The net asset value of each Portfolio is determined each day during which
the Advisers of that Portfolio are open for business ("Portfolio Business
Day"). This determination is made once each day as of 4:00 p.m., New York time
(the "Valuation Time").
Each investor in a Portfolio may add to or reduce its investment in such
Portfolio on each Portfolio Business Day. As of the Valuation Time on each such
day, the value of each investor's beneficial interest in a Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
reductions, which are to be effected as of the Valuation Time on such day, will
then be effected. The investor's percentage of the aggregate beneficial
interests in a Portfolio will then be recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of the Valuation Time on such day plus or minus, as the
case may be, the amount of net additions to or reductions in the investor's
investment in the Portfolio effected as of the Valuation Time, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
the Valuation Time on such day, plus or minus, as the case may be, the amount
of net additions to or reductions in the aggregate net asset value of the
Portfolio as of the Valuation Time on such day, plus or minus as the case may
be, the amount of net additions to or reductions in the aggregate investments
in the Portfolio by all investors in such Portfolio. The percentage so
determined will then be applied to determine the value of the investor's
interest in the Portfolio as of the Valuation time on the following Portfolio
Business Day.
An investor in a Portfolio may withdraw all or any portion of its
investment at the net asset value next determined if a withdrawal request in
proper form is furnished by the investor to Diversified Investors Portfolios by
the designated cut-off time for each accredited investor. The proceeds of a
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 Portfolios, reserves the right to pay redemptions in
kind. Unless requested by an investor, Diversified Investors Portfolios will
not make a redemption in kind to the investor, except in situations where that
investor may make redemptions in kind. Diversified Investors Portfolios, on
behalf of each of its Portfolios, has elected, however, to be governed by Rule
18f-1 under the 1940 Act, as a result of which Diversified Investors Portfolios
is obligated to redeem beneficial interests in each Portfolio with respect to
any one investor during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Portfolio at the beginning of the
period. Investments in a Portfolio may not be transferred.
<PAGE>
The right to redeem beneficial interests or to receive payment with
respect to any redemption may be suspended only (i) for any period during which
trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission or when the New York Stock Exchange is
closed (other than customary weekend and holiday closings), (ii) for any period
during which an emergency exists as defined by the Securities and Exchange
Commission as a result of which disposal of a Portfolio's securities or
determination of the net asset value of each Portfolio is not reasonably
practicable, and (iii) for such other periods as the SEC may by order permit
for the protection of investors in any Portfolio.
NET ASSET VALUE
Diversified Investors Portfolios values the securities of the Money Market
Portfolio based on the amortized cost method of valuation. Securities of other
Portfolios are valued based on their current market value when market
quotations are available. Where market quotations are not available, assets are
valued at fair value as determined in good faith under the direction of the
Board of Trustees of Diversified Investors Portfolios. Debt obligations with 60
days or less remaining to maturity may be valued by the amortized cost method,
which the Board of Trustees of Diversified Investors Portfolios has determined
to constitute fair value for such securities. For more information on the
valuation of portfolio securities, see "Diversified Investors Portfolios" in
the Statement of Additional Information.
TAXATION OF DIVERSIFIEd INVESTORS PORTFOLIOS
Diversified Investors Portfolios is organized as a New York trust. None of
its series is subject to any income or franchise tax in the State of New York.
However, each investor in a Portfolio will be taxable on its share (as
determined in accordance with the governing instruments of Diversified
Investors Portfolio) of the Portfolio's ordinary income and capital gain in
determining its income tax liability. The determination of such share will be
made in accordance with the Code, and regulations promulgated thereunder.
Diversified Investors Portfolios, since it is taxed as a partnership, is
not subject to federal income taxation. Instead, any investor in Diversified
Investors Portfolios must take into account, in computing its federal income
tax liability, its share of Diversified Investors Portfolios' income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from Diversified Investors Portfolios.
Withdrawals by any investor in Diversified Investors Portfolios from
its corresponding Portfolio generally will not result in recognizing any gain
or loss for federal income tax purposes, except that (1) gain will be
recognized to the extent that any cash distributed exceeds the basis of such
investor's interest in the Portfolio prior to the distribution, (2) income or
gain will be realized if the withdrawal is in liquidation of such investor's
entire interest in the Portfolio and includes a disproportionate share of any
unrealized receivables held by the Portfolio and (3) loss will be recognized if
the distribution is in liquidation of that entire interest and consists solely
of cash and/or unrealized receivables. The basis of any investor's interest in
Diversified Investors Portfolios generally equals the amount of cash and the
basis of any property that such investor invests in a Portfolio, increased by
such investor's share of income from that Portfolio and decreased by the amount
of any cash distributions and the basis of any property distributed from that
Portfolio.
<PAGE>
DESCRIPTION OF BENEFICIAL INTERESTS, VOTING RIGHTS AND LIABILITIES
Diversified Investors Portfolios is organized as a series trust under the
laws of the State of New York. Under the Declaration of Trust, the Trustees are
authorized to issue beneficial interests in one or more series (referred to
herein as "Portfolios"). Investments in each Portfolio may not be transferred,
but an investor may withdraw all or any portion of its investment at any time
at net asset value. Investors in a Portfolio (e.g., investment companies,
insurance company separate accounts and common and commingled trust funds) will
each be liable for all obligations of that Portfolio (and of no other
Portfolio). However, the risk of an investor in a Portfolio incurring financial
loss on account of such liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations. Investments in each Portfolio have no preemptive or conversion
rights and are fully paid and nonassessable, except as set forth below.
Each investor is entitled to a vote in proportion to the amount of its
investment in each Portfolio. Investors in a Portfolio will vote as a separate
class, except as to voting for election of Trustees of Diversified Investors
Portfolios, as otherwise required by the 1940 Act, or if determined by the
Trustees of Diversified Investors Portfolios to be a matter which affects all
Portfolios. As to any matter which does not affect a particular Portfolio, only
investors in the one or more affected Portfolios are entitled to vote.
Diversified Investors Portfolios is not required and has no current intention
of holding special meetings of investors, but special meetings of investors
will be held when in the judgment of the Trustees of Diversified Investors
Portfolios it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval, or
otherwise voted on in accordance with applicable law. Investors under certain
circumstances (e.g., upon application and submission of certain specified
documents to the Trustees by a specified number of investors) have the right to
communicate with other investors in connection with requesting a meeting of
investors for the purpose of removing one or more Trustees of Diversified
Investors Portfolios. Investors also have the right to remove one or more
Trustees of Diversified Investors Portfolios without a meeting by a declaration
in writing by a specified number of investors. Upon liquidation of a Portfolio,
investors would be entitled to share pro rata in the net assets of that
Portfolio (and no other Portfolio) available for distribution to investors. See
"Voting Rights" at page __.
Each Portfolio determines its net income and realized capital gains, if
any, on each Portfolio Business Day (as defined below) and allocates all such
income and gain pro rata among the investors in such Portfolio at the time of
such determination.
The "net income" of each Portfolio shall consist of (i) all income
accrued, less the amortization of any premium, on the assets of the Portfolio,
less (ii) all actual and accrued expenses of the Portfolio determined in
accordance with generally accepted accounting principles. Interest income
includes discount earned (including both original issue and market discount) on
discount paper accrued ratably to the date of maturity and any net realized
gains or losses on the assets of a Portfolio. All the net income of each
Portfolio is allocated pro rata among the investors in the Portfolio (and no
other Portfolio).
Inquiries regarding Diversified Investors Portfolios may be directed to 4
Manhattanville Road, Purchase, New York 10577 ((800) 926-0044).
<PAGE>
INDEPENDENT ACCOUNTANTS
The statutory basis financial statements of AUSA included in the Statement
of Additional Information have been audited by Ernst & Young LLP, independent
auditors, Des Moines, Iowa. PricewaterhouseCoopers LLP, New York, New York
serves as independent accountants to Diversified Investors Variable Funds,
Diversified Investors Strategic Variable Funds and Diversified Investors
Portfolios.
LEGAL PROCEEDINGS
There are no material legal proceedings to which AUSA, Diversified
Investors Variable Funds or Diversified Investors Strategic Variable Funds is a
party.
STATUTORY BASIS FINANCIAL STATEMENTS
The statutory basis financial statements for AUSA, included in the
Statement of Additional Information, should be distinguished from the statutory
basis financial statements of Diversified Investors Variable Funds and
Diversified Investors Strategic Variable Funds and should be considered only as
bearing on the ability of AUSA to meet its obligations under the Contracts. The
statutory basis financial statements of AUSA should not be considered as
bearing on the investment performance of the assets held in Diversified
Investors Variable Funds or Diversified Investors Strategic Variable Funds.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information set forth in the
registration statement, certain portions of which have been omitted (including
statutory basis financial statements relating to AUSA) pursuant to the rules
and regulations of the SEC. The omitted information may be obtained from the
SEC's principal office in Washington, D.C., upon payment of the fees prescribed
by the Commission.
For further information with respect to AUSA and the Contracts offered by
this Prospectus, including the Statement of Additional Information (which
includes statutory basis financial statements relating to AUSA), contact AUSA
at its address or phone number set forth on the cover of this Prospectus.
For further information with respect to the Calvert Series, Acacia Capital
Corporation or Calvert Asset Management Company, Inc., including a Statement of
Additional Information, contact Acacia Capital Corporation at 4550 Montgomery
Avenue, Suite 1000N, Bethesda, Maryland 20814, or call (301) 951-4820.
MISCELLANEOUS
The Accounts are separate registered accounts of AUSA. There is a
possibility that one Account might become liable for a misstatement in this
Prospectus about the other Account. AUSA believes this possibility is remote.
YEAR 2000
The Funds could be adversely affected if the computer systems used by the
Funds or their service providers are not programmed to accurately process
information on or after January 1, 2000. Diversified's owner, AEGON, has
<PAGE>
adopted and has in place a Year 2000 Assessment and Planning Project to review
and analyze its internal information technology and systems to determine if
they are Year 2000 compatible and to assess Year 2000 issues relating to third
parties with whom it has critical relationships. AEGON has tested and modified,
where necessary, substantially all of its critical internal information
technology systems. AEGON will continue to test non-critical systems throughout
1999. However, to mitigate the effect of outside influences upon the success of
the project, AEGON has undertaken communications with its significant
customers, suppliers and other third parties to determine their Year 2000
compatibility and readiness. AEGON has received written confirmation from
several vendors regarding their Year 2000 status and continues to work with its
business partners to ensure that systems can properly interface.
The primary equipment and electronic devices AEGON uses are computers and
telephone related equipment. This type of hardware can have date sensitive
embedded technology which could have Year 2000 problems. Because of this
exposure, AEGON has reviewed its computer hardware and telephone systems, with
assistance from the applicable vendors, and has upgraded, or replaced, or is in
the process of replacing any equipment that will not properly process date
sensitive data in the Year 2000 or beyond. This undertaking has been
substantially completed for all operations.
AEGON is placing significant emphasis on risk management and Year 2000
business resumption contingency planning in 1999 by modifying its existing
business resumption and disaster recovery plans to address potential Year 2000
issues.
Since the Year 2000 computer problem and its resolution is complex and
multifaceted, the success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived project, including testing
procedures, there is no certainty that any company will achieve complete
success. Notwithstanding the efforts or results of AEGON and the Funds, their
ability to function unaffected to and through Year 2000 may be adversely
affected by actions (or failures to act) of third parties beyond their
knowledge or control.
The Funds also could be adversely affected if the issuers of securities
held by the Funds do not solve their Year 2000 problems, or if it costs them
large amounts of money to solve these problems. To the extent that a Fund
invests in foreign securities, it may be particularly susceptible to these Year
2000 problems. The Funds consider these factors when investing in securities.
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
ITEM PAGE
Independent Accountants
Sale of Contracts/Principal Underwriter
Texas Optional Retirement Program
Performance Data
Variable Funds Money Market Subaccount
Diversified Investors Portfolios
Investment Objectives, Policies and Restrictions Relating
to the Portfolios
Portfolio Transactions and Brokerage Commissions
Investment Restrictions Relating to The Strategic
Variable Funds Subaccounts
Performance Information Relating to The Strategic Variable
Funds Subaccounts
Determination of Unit Value; Valuation of Securities
Management of Diversified Investors Portfolios
Management of The Strategic Variable Funds Account
Diversified Investors Portfolios: Description of Trust
Tax Information Relating to Diversified Investors Portfolios
Statutory Basis Financial Statements of AUSA
Appendix A -- Description of Security Ratings Appendix A
Financial Statements F-1
<PAGE>
REQUEST FOR
DIVERSIFIED INVESTORS VARIABLE FUNDS/
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
Detach and return in an envelope addressed to:
AUSA
4 Manhattanville Road
Purchase, New York 10577
Please make sure that your name and the address to which you wish AUSA to
send the current Statement of Additional Information appears below:
Name
Address
Employer
<PAGE>
APPENDIX A
STRATEGIC SUBACCOUNTS
Under normal circumstances, the Strategic Variable Funds Subaccounts are
allocated among the Variable Funds Money Market, Bond and Stock Subaccounts as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------
SHORT HORIZON INTERMEDIATE HORIZON INTERMEDIATE/LONG
STRATEGIC STRATEGIC HORIZON STRATEGIC
------------------------------------------------------------------
TARGET TARGET TARGET
NORMAL WITHIN NORMAL WITHIN NORMAL WITHIN
RANGE RANGE RANGE RANGE RANGE RANGE
- -----------------------------------------------------------------------------------------------
Money Market 0-20% 10% 0-10% 0% 0-10% 0%
- -----------------------------------------------------------------------------------------------
High Quality Bond 10-30% 20% 0-20% 10% 0-10% 5%
- -----------------------------------------------------------------------------------------------
Intermediate Government Bond 10-30% 20% 0-15% 5% 0-10% 5%
- -----------------------------------------------------------------------------------------------
Government/Corporate Bond 20-40% 30% 15-35% 25% 0-20% 12%
- -----------------------------------------------------------------------------------------------
High-Yield Bond 0-20% 10% 0-20% 10% 0-15% 8%
- -----------------------------------------------------------------------------------------------
Equity Income 0-20% 10% 0-10% 5% 0-15% 5%
- -----------------------------------------------------------------------------------------------
Equity Value N/A N/A 0-20% 10% 5-25% 16%
- -----------------------------------------------------------------------------------------------
Growth & Income N/A N/A 0-10% 5% 0-15% 5%
- -----------------------------------------------------------------------------------------------
Equity Growth N/A N/A 0-20% 10% 5-25% 16%
- -----------------------------------------------------------------------------------------------
Special Equity N/A N/A 0-20% 10% 0-20% 14%
- -----------------------------------------------------------------------------------------------
Aggressive Equity N/A N/A 0-10% 3% 0-10% 4%
- -----------------------------------------------------------------------------------------------
International Equity N/A N/A 0-15% 7% 0-20% 10%
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
APPENDIX B
APPLICABLE PREMIUM TAX RATES
PREMIUM TAX RATE PERCENT
------------------------------
QUALIFIED NON-QUALIFIED
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%
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 3, 1999
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED BY
DIVERSIFIED INVESTORS VARIABLE FUNDS
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
AND
AUSA LIFE INSURANCE COMPANY, INC.
4 MANHATTANVILLE ROAD, PURCHASE, N.Y. 10577; (914) 697-8000
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT IT
RELATES TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE PROSPECTUS DATED MAY 3,
1999, AND SUPPLEMENTED FROM TIME TO TIME (THE "PROSPECTUS"), FOR THE GROUP
VARIABLE ANNUITY CONTRACTS ISSUED BY AUSA LIFE INSURANCE COMPANY, INC. ("AUSA")
WHICH INVEST IN DIVERSIFIED INVESTORS VARIABLE FUNDS (THE "VARIABLE FUNDS
ACCOUNT") OR DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS (THE "STRATEGIC
VARIABLE FUNDS ACCOUNT", AND, TOGETHER WITH THE VARIABLE FUNDS ACCOUNT, THE
"ACCOUNTS"). THE PROSPECTUS IS AVAILABLE, AT NO CHARGE, BY WRITING AUSA AT 4
MANHATTANVILLE RD., PURCHASE, NEW YORK 10577 OR BY CALLING (800) 926-0044.
A separate Statement of Additional Information is available without charge
for Acacia Capital Corporation of which the Calvert Social Balanced Portfolio
is part by writing to Acacia Capital Corporation at 4550 Montgomery Avenue,
Suite 1000N, Bethesda, Maryland 20814 or by telephoning (301) 951-4820.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
Independent Accountants
Sale of Contracts/Principal Underwriter
Texas Optional Retirement Program
Performance Data
Variable Funds Money Market Subaccount
Diversified Investors Portfolios
Investment Objectives, Policies and Restrictions Relating
to the Portfolios
Portfolio Transactions and Brokerage Commissions
Investment Restrictions Relating to The Strategic
Variable Funds Subaccounts
Performance Information Relating to The Strategic Variable
Funds Subaccounts
Determination of Unit Value; Valuation of Securities
Management of Diversified Investors Portfolios
Management of The Strategic Variable Funds Account
Diversified Investors Portfolios: Description of Trust
Tax Information Relating to Diversified Investors Portfolios
Statutory Basis Financial Statements of AUSA
Appendix A -- Description of Security Ratings Appendix A
Financial Statements F-1
<PAGE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, New York, New York serves as independent
accountants to the Accounts. The statutory basis financial statements of AUSA
appearing on the following pages have been audited by Ernst & Young L.L.P.,
independent auditors, Des Moines, Iowa.
SALE OF CONTRACTS/PRINCIPAL UNDERWRITER
Diversified Investors Securities Corp. ("DISC") is the principal
underwriter and distributor of the Contracts which will be sold by registered
representatives who are also licensed insurance agents of AUSA. The Contracts
may also be sold through other broker-dealers authorized by DISC and applicable
law and who may be insurance agents licensed by an insurance company other than
AUSA. DISC is registered with the Securities and Exchange Commission as a
broker-dealer under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc.
DISC will not receive underwriting commissions. Registration as a
broker-dealer does not mean that the SEC has passed upon the financial
standing, fitness or conduct of any broker or dealer, or upon the merits of any
security offering or upon any other matter relating to the business of any
broker or dealer.
TEXAS OPTIONAL RETIREMENT PROGRAM
Participants in the Texas Optional Retirement Program (the "Program") are
subject to certain restrictions pertaining to redemptions. (See "Restrictions
Under The Texas Optional Retirement Program" in the Prospectus). Pursuant to
Rule 6c-7 of the Investment Company Act of 1940, as amended, (the "1940 Act"),
the Registrant hereby represents that Rule 6c-7 of the 1940 Act is being relied
upon and that the provisions of paragraphs (a) through (d) of each Rule have
been complied with.
PERFORMANCE DATA
VARIABLE FUNDS MONEY MARKET SUBACCOUNT
For the seven day period ended December 31, 1998, the yield for the
Variable Funds Money Market Subaccount (the "Money Market Subaccount") was
4.38% and the effective yield was 4.47%.
The yield is calculated by dividing the result of subtracting the value of
one Unit at the end of the seven day period ("Seventh Day Value") from the
value of one Unit at the beginning of the seven day period ("First Day Value")
by the First Day Value (the resulting quotient being the "Base Period Return")
and multiplying the Base Period Return by 365 divided by 7 to obtain the
annualized yield.
The effective yield is calculated by compounding the Base Period Return
calculated in accordance with the preceding paragraph, adding 1 to Base Period
Return, raising that sum to a power equal to 365 divided by 7 and subtracting 1
from the result.
As the Money Market Subaccount invests only in the Money Market Portfolio
(the "Money Market Portfolio") of Diversified Investors Portfolios, the First
Day Value reflects the net asset value of the interest in the Money Market
<PAGE>
Portfolio held in the Money Market Subaccount. The Seventh Day Value reflects
increases or decreases in the net asset value of the interest in the Money
Market Portfolio held in the Money Market Subaccount due to the declaration of
dividends, net investment income and the daily charges and deductions from the
Subaccount for mortality and expense risk. Net investment income reflects
earnings on investments less expenses of the Money Market Portfolio including
the investment management fee.
DIVERSIFIED INVESTORS PORTFOLIOS
There are fourteen Subaccounts of Diversified Investors Variable Funds
that are presently available for investment under the Contracts (the "Variable
Funds Subaccounts"). There are three Subaccounts of Diversified Investors
Strategic Variable Funds (the "Strategic Variable Funds Subaccounts") which are
presently available for investment under the Contracts. Each Variable Funds
Subaccount, other than the Variable Funds Subaccount which invests in the
Calvert Series, invests in a corresponding series of Diversified Investors
Portfolios. Those series of Diversified Investors Portfolios (the "Portfolios")
are described in this Statement of Additional Information. Each Strategic
Variable Funds Subaccount invests in a combination of the Variable Funds
Subaccounts (other than the Variable Funds Subaccounts which invest in the
Balanced Portfolio and the Calvert Series), which, in turn, invest in the
Portfolios.
This section of the Statement of Additional Information describes each
Portfolio, including the Money Market Portfolio, the High Quality Bond
Portfolio, the Intermediate Government Bond Portfolio, the Government/Corporate
Bond Portfolio, the High-Yield Bond Portfolio, the Balanced Portfolio, the
Equity Income Portfolio, the Equity Value Portfolio, the Growth & Income
Portfolio, the Equity Growth Portfolio, the Special Equity Portfolio, the
Aggressive Equity Portfolio and the International Equity Portfolio.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS RELATING TO THE PORTFOLIOS
INVESTMENT OBJECTIVES
The investment objective of each Portfolio is described in the Prospectus.
There can, of course, be no assurance that a Portfolio will achieve its
investment objective.
INVESTMENT POLICIES
The following supplements the discussion of the various investment
strategies and techniques employed by the Portfolios as set forth in the
Prospectus.
BANK OBLIGATIONS
Bank obligations include certificates of deposit, time deposits (including
Eurodollar time deposits) and bankers' acceptances and other shortterm debt
obligations issued by domestic banks, foreign subsidiaries or foreign branches
of domestic banks, domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. The Portfolios
have established certain minimum credit quality standards for bank obligations
in which they invest.
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
<PAGE>
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
and time deposits, may be general obligations of the parent banks in addition
to the issuing branch, or may be limited by the terms of a specific obligation
and governmental regulation. Such obligations are subject to risks that are
different from or are in addition to those of domestic banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign withholding and other taxes
on interest income. These foreign branches and subsidiaries are not necessarily
subject to the same or similar regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements, loan limitations, and
accounting, auditing and financial record keeping requirements. In addition,
less information may be publicly available about a foreign branch of a domestic
bank or about a foreign bank than about a domestic bank. A domestic branch of a
foreign bank with assets in excess of $1 billion may be subject to reserve
requirements imposed by the Federal Reserve System or by the state in which the
branch is located if the branch is licensed in that state.
In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (a) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (b) maintain assets within the state in
an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state.
U.S. GOVERNMENT AND AGENCY SECURITIES
U.S. Treasury obligations include bills, notes and bonds issued by the
U.S. Treasury and separately traded interest and principal component parts of
these obligations that are transferable through the Federal bookentry system
known as Separately Traded Registered Interest and Principal Securities
(STRIPS). STRIPS are sold as zero coupon securities. These securities are
usually structured with two classes that receive different portions of the
interest and principal payments from the underlying obligation. The yield to
maturity on the interestonly class is extremely sensitive to the rate of
principal payments on the underlying obligation. The market value of the
principalonly class generally is unusually volatile in response to changes in
interest rates. See "Zero Coupon Securities" below for more information.
U.S. Treasury securities 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.
Certain Federal agencies such as the Government National Mortgage
Association (GNMA) have been established as instrumentalities of the U.S.
<PAGE>
government to supervise and finance certain types of activities. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, GNMA passthrough 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. Governmentsponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated by law.
COMMERCIAL PAPER
Commercial paper consists of shortterm (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the
lender may determine to invest varying amounts.
The Portfolios may purchase three types of commercial paper, as classified
by exemption from registration under the Securities Act of 1933, as amended
(the "1933 Act"). The three types include open market, privately placed, and
letter of credit commercial paper. Trading of such commercial paper is
conducted primarily by institutional investors through investment dealers or
directly through the issuers. Individual investor participation in the
commercial paper market is very limited.
OPEN MARKET. "Open market" commercial paper refers to the commercial
paper of any industrial, commercial, or financial institution which is
openly traded, including directly issued paper. "Open market" paper's 1933
Act exemption is under Section 3(a)(3) which limits the use of proceeds to
current transactions, limits maturities to 270 days and requires that the
paper contain no provision for automatic rollovers.
PRIVATELY PLACED. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2), which exempts
transactions by an issuer not involving any public offering. The
commercial paper may only be offered to a limited number of accredited
investors. "Privately placed" commercial paper has no maturity
restriction.
LETTER OF CREDIT. "Letter of credit" commercial paper is exempt from
registration under Section 3(a)(2) of the 1933 Act. It is backed by an
irrevocable or unconditional commitment by a bank to provide funds for
repayment of the notes. "Letter of credit" paper has no limitations on
purchasers.
VARIABLE RATE AND FLOATING RATE SECURITIES
The Portfolios may purchase floating and variable rate demand notes and
bonds, which are obligations ordinarily having stated maturities in excess of
397 days, but which permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding 397 days, in each case upon not
more than 30 days' notice. Variable rate demand notes include master demand
<PAGE>
notes which are obligations that permit a Portfolio to invest fluctuating
amounts, which may change daily without penalty, pursuant to direct
arrangements between the Portfolio, as lender, and the borrower. The interest
rates on these notes fluctuate from time to time. The issuer of such
obligations normally has a corresponding right, after a given period, to prepay
in its discretion the outstanding principal amount of the obligations plus
accrued interest upon a specified number of days' notice to the holders of such
obligations. The interest rate on a floating rate demand obligation is based on
a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand obligation is adjusted automatically at specified intervals. The
interest rate on these securities may be reset daily, weekly, quarterly, or
some other reset period and may have a floor or ceiling on interest rate
charges. There is a risk that the current interest rate on such obligations may
not accurately reflect existing market interest rates. Frequently, such
obligations are backed by letters of credit or other credit support
arrangements provided by banks. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, although they are redeemable at face
value. Accordingly, where these obligations are not secured by letters of
credit or other credit support arrangements, a Portfolio's right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. Such obligations frequently are not rated by credit rating agencies and
a Portfolio may invest in obligations which are not so rated only if the
Portfolio's Subadviser determines that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Portfolio may invest. The applicable Subadvisers, on behalf of a Portfolio,
will consider on an ongoing basis the creditworthiness of the issuers of the
floating and variable rate demand obligations held by the Portfolio. The
Portfolios will not invest more than 15% (10% in the case of the Money Market
Portfolio) of the value of their net assets in floating or variable rate demand
obligations as to which they cannot exercise the demand feature on not more
than seven days' notice if there is no secondary market available for these
obligations, and in other securities that are not readily marketable. See
"Investment Restrictions" below.
PARTICIPATION INTERESTS
A Portfolio may purchase from financial institutions participation
interests in securities in which such Portfolio may invest. A participation
interest gives a Portfolio an undivided interest in the security in the
proportion that the Portfolio's participation interest bears to the total
principal amount of the security. These instruments may have fixed, floating or
variable rates of interest, with remaining maturities of 13 months or less. If
the participation interest is unrated, or has been given a rating below that
which is permissible for purchase by the Portfolio, the participation interest
will be backed by an irrevocable letter of credit or guarantee of a bank, or
the payment obligation otherwise will be collateralized by U.S. Government
securities, or, in the case of unrated participation interests, the Portfolio's
Subadviser must have determined that the instrument is of comparable quality to
those instruments in which a Portfolio may invest. For certain participation
interests, a Portfolio will have the right to demand payment, on not more than
seven days' notice, for all or any part of the Portfolio's participation
interest in the security, plus accrued interest. As to these instruments, a
Portfolio intends to exercise its right to demand payment only upon a default
<PAGE>
under the terms of the security, as needed to provide liquidity to meet
redemptions, or to maintain or improve the quality of its investment portfolio.
A Portfolio will not invest more than 15% (10% in the case of the Money Market
Portfolio) of its net assets in participation interests that do not have this
demand feature, and in other securities that are not readily marketable. See
"Investment Restrictions" below.
ILLIQUID SECURITIES
Each Portfolio may invest up to 15% (10% for the Money Market Portfolio)
of its net assets in illiquid securities, including restricted securities that
are illiquid.
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. The absence
of a trading market can make it difficult to ascertain a market value for these
investments. In addition, limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them which, if possible at all, would result
in additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
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.
Rule 144A under the 1933 Act allows a broader institutional trading market
for securities otherwise subject to restriction on their resale to the general
public. Rule 144A establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers.
The applicable Subadviser will monitor the liquidity of Rule 144A
securities for each Portfolio under the supervision of the Board of Trustees.
In reaching liquidity decisions, the Subadviser will consider, among other
things, the following factors: (a) the frequency of trades and quotes for the
security, (b) the number of dealers and other potential purchasers wishing to
purchase or sell the security, (c) dealer undertakings to make a market in the
security and (d) the nature of the security and of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
Institutional trading in Rule 144A securities is relatively new and the
liquidity of these investments could be impaired if trading in Rule 144A
securities does not develop or if qualified institutional buyers become, for a
time, uninterested in purchasing Rule 144A securities.
<PAGE>
UNSECURED PROMISSORY NOTES
A Portfolio also may purchase unsecured promissory notes ("Notes") which
are not readily marketable and have not been registered under the 1933 Act,
provided such investments are consistent with the Portfolio's investment
objective. The Notes purchased by the Portfolio will have remaining maturities
of 13 months or less. The Portfolio will invest no more than 15% (10% in the
case of the Money Market Portfolio) of its net assets in such Notes and in
other securities that are not readily marketable (which securities would
include floating and variable rate demand obligations as to which the Portfolio
cannot exercise the demand feature described above and as to which there is no
secondary market). See "Investment Restrictions" 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 agreedupon 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 agreedupon
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 agreedupon price, which obligation is in effect secured by
the value of the underlying security, usually U.S. Government or government
agency issues. Under the 1940 Act, repurchase agreements may be considered to
be loans by the buyer. A Portfolio's risk is limited to the ability of the
seller to pay the agreed upon amount on the delivery date. If the seller
defaults, the underlying security constitutes collateral for the seller's
obligation to pay although a Portfolio may incur certain costs in liquidating
this collateral and in certain cases may not be permitted to liquidate this
collateral. All repurchase agreements entered into by the Portfolios are fully
collateralized, with such collateral being marked to market daily.
The Portfolios may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and brokerdealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
a Portfolio enters into a reverse repurchase agreement it will place in a
segregated custodial account cash, U.S. Government securities or highgrade debt
obligations having a value equal to the repurchase price, including accrued
interest. The segregation of assets could impair the Portfolio's ability to
meet its current obligations or impede investment management if a large portion
of the Portfolio's assets are involved. Reverse repurchase agreements also
involve the risk that the market value of the securities sold by the Portfolio
may decline below the repurchase price of those securities.
The Portfolios may, together with other registered investment companies
managed by the Portfolios' Subadvisers or their affiliates, transfer uninvested
cash balances into a single joint account, the daily aggregate balance of which
will be invested in one or more repurchase agreements, including tri-party
subcustody repurchase arrangements.
<PAGE>
FOREIGN SECURITIES--ALL PORTFOLIOS
The Portfolios may invest their assets in securities of foreign issuers.
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, brokerage or other taxation, limitation on the removal
of funds or other assets of a Portfolio, political or financial instability or
diplomatic and other developments which would affect such investments. Further,
economies of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States.
It is anticipated that in most cases the best available market for foreign
securities would be on exchanges or in overthecounter markets located outside
the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable United States companies. Foreign security trading practices,
including those involving securities settlement where a Portfolio's assets may
be released prior to receipt of payment, may expose a Portfolio to increased
risk in the event of a failed trade or the insolvency of a foreign
brokerdealer. In addition, foreign brokerage commissions are generally higher
than commissions on securities traded in the United States and may be
nonnegotiable. In general, there is less overall governmental supervision and
regulation of foreign securities exchanges, brokers and listed companies than
in the United States.
FOREIGN SECURITIES - MONEY MARKET PORTFOLIO
The Money Market Portfolio may invest in the following foreign securities:
(a) U.S. dollardenominated obligations of foreign branches and subsidiaries of
domestic banks and foreign banks (such as Eurodollar CDs, which are U.S.
dollardenominated CDs issued by branches of foreign and domestic banks located
outside the United States; Eurodollar TDs ("ETDs"), which are U.S.
dollardenominated deposits in a foreign branch of a foreign or domestic bank;
and Canadian TDs, which are essentially the same as ETDs except they are issued
by branches of major Canadian banks); (b) high quality, U.S. dollardenominated
shortterm bonds and notes (including variable amount master demand notes)
issued by foreign corporations (including Canadian commercial paper, which is
commercial paper issued by a Canadian corporation or a Canadian subsidiary of a
U.S. corporation, and Europaper, which is U.S. dollardenominated commercial
paper of a foreign issuer); and (c) U.S. dollardenominated obligations issued
or guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities that are determined by the
Portfolio's Subadviser to be of comparable quality to the other obligations in
which the Money Market Portfolio may invest. Such securities also include debt
obligations of supranational entities. Supranational entities include
international organizations designated or supported by governmental entities to
<PAGE>
promote economic reconstruction or development and international banking
institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Coal and Steel Community, the Asian Development Bank and the
InterAmerican Development Bank.
FOREIGN SECURITIES - PORTFOLIOS OTHER THAN THE MONEY MARKET PORTFOLIO
Not more than 5% of a Portfolio's assets may be invested in closedend
investment companies which primarily hold foreign securities. Investments in
such companies may entail the risk that the market value of such investments
may be substantially less than their net asset value and that there would be
duplication of investment management and other fees and expenses.
American Depository Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs") and other forms of depositary
receipts for securities of foreign issuers provide an alternative method for a
Portfolio to make foreign investments. These securities are not denominated in
the same currency as the securities into which they may be converted and
fluctuate in value based on the underlying security. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and EDRs and
GDRs, in bearer form, are designed for use in European and global securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. EDRs and GDRs are European
and global receipts evidencing a similar arrangement.
The Portfolios may invest in foreign securities that impose restrictions
on transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Forward currency exchange contracts may be entered into for each Portfolio
for the purchase or sale of foreign currency to hedge against adverse rate
changes or otherwise to achieve the Portfolio's investment objectives. A
currency exchange contract allows a definite price in dollars to be fixed for
securities of foreign issuers that have been purchased or sold (but not
settled) for the Portfolio.
Because some Portfolios may buy and sell securities denominated in
currencies other than the U.S. dollar and receive interest, dividends and sale
proceeds in currencies other than the U.S. dollar, the Portfolios from time to
time may enter into foreign currency exchange transactions to convert to and
from different foreign currencies and to convert foreign currencies to and from
the U.S. dollar. The Portfolios either enter into these transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market or use forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a
Portfolio to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract. Forward foreign
currency exchange contracts establish an exchange rate at a future date. These
contracts are affected in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward foreign currency exchange contract generally has no deposit requirement
and is traded at a net price without commission. A Portfolio maintains with its
custodian a segregated account of high grade liquid assets in an amount at
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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 Portfolio's securities or
in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
The Portfolios may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes
in foreign currency exchange rates that would adversely affect a portfolio
position or an anticipated investment position.
Each Portfolio may also enter into proxy hedges and cross hedges. In a
proxy hedge, which generally is less costly than a direct hedge, a Portfolio,
having purchased a security, will sell a currency whose value is believed to be
closely linked to the currency in which the security is denominated. Interest
rates prevailing in the country whose currency was sold would be expected to be
closer to those in the U.S. and lower than those of securities denominated in
the currency of the original holding. This type of hedging entails greater risk
than a direct hedge because it is dependent on a stable relationship between
the two currencies paired as proxies and the relationships can be very unstable
at times. A Portfolio may enter into a cross hedge if a particular currency is
expected to decrease against another currency. The Portfolio would sell the
currency expected to decrease and purchase a currency which is expected to
increase against the currency sold in an amount equal to some or all of the
Portfolio's holdings denominated in the currency sold.
Entering into exchange contracts may result in the loss of all or a
portion of the benefits which otherwise could have been obtained from favorable
movements in exchange rates. In addition, entering into such contracts means
incurring certain transaction costs and bearing the risk of incurring losses if
rates do not move in the direction anticipated.
The Portfolios (other than the International Equity Portfolio) will not
routinely enter into foreign currency hedging transactions with respect to
security transactions; however, the Portfolios may do so when their Subadvisers
determine that the transactions would be in a Portfolio's best interest.
Although these transactions tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of the hedged currency
increase. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.
While these contracts are not presently regulated by the Commodity Futures
Trading Commission ("CFTC"), the CFTC may in the future assert authority to
regulate forward contracts. In such event a Portfolio's ability to utilize
forward contracts in the manner set forth in the Prospectus for the Portfolio
may be restricted. Forward contracts may reduce the potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for a Portfolio than if it had not entered into such
contracts. The use of foreign currency forward contracts may not eliminate
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fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject the Portfolio to certain
risks.
Even if a hedge is generally successful, the matching of the increase in
value of a forward contract and the decline in the U.S. dollar equivalent value
of the foreign currency denominated asset that is the subject of the hedge
generally will not be precise. In addition, a Portfolio may not always be able
to enter into foreign currency forward contracts at attractive prices and this
will limit a Portfolio's ability to use such contract to hedge or crosshedge
its assets. Also, with regard to a Portfolio's use of crosshedges, there can be
no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying a Portfolio's cross-hedges and the movements in
the exchange rates of the foreign currencies in which the Portfolio's assets
that are the subject of such crosshedges are denominated.
GUARANTEED INVESTMENT CONTRACTS
The Portfolios may invest in guaranteed investment contracts ("GICs")
issued by insurance companies. Pursuant to such contracts, a Portfolio makes
cash contributions to a deposit fund of the insurance company's general
account. The insurance company then credits to the Portfolio guaranteed
interest. The GICs provide that this guaranteed interest will not be less than
a certain minimum rate. The insurance company may assess periodic charges
against a GIC for expenses and service costs allocable to it, and the charges
will be deducted from the value of the deposit fund. Because a Portfolio may
not receive the principal amount of a GIC from the insurance company on seven
days' notice or less, the GIC is considered an illiquid investment and,
together with other instruments in a Portfolio which are not readily
marketable, will not exceed 15% (10% in the case of the Money Market Portfolio)
of the Portfolio's net assets. The term of a GIC will be 13 months or less. In
determining average weighted portfolio maturity, a GIC will be deemed to have a
maturity equal to the longer of the period of time remaining until the next
readjustment of the guaranteed interest rate or the period of time remaining
until the principal amount can be recovered from the issuer through demand.
WHEN-ISSUED SECURITIES
Forward commitments or purchases of securities on a whenissued basis are
transactions where the price of the securities is fixed at the time of
commitment and the delivery and payment ordinarily takes place beyond customary
settlement time. The interest rate realized on these securities is fixed as of
the purchase date and no interest accrues to the buyer before settlement. The
securities are subject to market fluctuation due to changes in market interest
rates; the securities are also subject to fluctuation in value pending
settlement based upon public perception of the creditworthiness of the issuer
of these securities.
It is expected that, under normal circumstances, the Portfolios would take
delivery of such securities. When a Portfolio commits to purchase a security on
a "whenissued" or on a "forward delivery" basis, the Portfolio establishes
procedures consistent with the relevant policies of the SEC. Since those
policies currently require that an amount of a Portfolio's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, the Portfolios expect always to have cash, cash equivalents, or
high quality debt securities sufficient to cover any commitments or to limit
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any potential risk. However, although the Portfolios do not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
SEC policies, purchases of securities on such bases may involve more risk than
other types of purchases. For example, a Portfolio may have to sell assets
which have been set aside in order to meet redemptions. Also, if a Portfolio
determines it is advisable as a matter of investment strategy to sell the
"whenissued" or "forward delivery" securities, the Portfolio would be required
to meet its obligations from the then available cash flow or the sale of
securities, or, although it would not normally expect to do so, from the sale
of the "whenissued" or "forward delivery" securities themselves (which may have
a value greater or less than the Portfolio's payment obligation).
ZERO COUPON OBLIGATIONS
A zero coupon security pays no interest or principal to its holder during
its life. A zero coupon security is sold at a discount, frequently substantial,
and redeemed at face value at its maturity date. The market prices of zero
coupon securities are generally more volatile than the market prices of
securities of similar maturity that pay interest periodically, and zero coupon
securities are likely to react more to interest rate changes than nonzero
coupon securities with similar maturity and credit qualities.
A Portfolio may acquire zero coupon obligations when consistent with its
investment objective and policies. Since interest income is accrued throughout
the term of the zero coupon obligation but is not actually received until
maturity, a Portfolio may have to sell other securities to pay dividends based
on such accrued income prior to maturity of the zero coupon obligation.
FUTURES CONTRACTS AND OPTIONS ON FUTUrES CONTRACTS AND FOREIGN CURRENCIES--
PORTFOLIOS OTHER THAN ThE MONEY MARKET PORTFOLIO
Futures Contracts. A Portfolio may enter into contracts for the purchase
or sale for future delivery of fixedincome securities or foreign currencies, or
contracts based on financial indices including any index of U.S. or foreign
stocks, U.S. Government securities, foreign government securities or corporate
debt securities. U.S. futures contracts have been designed by exchanges which
have been designated "contracts markets" by the CFTC, and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange. A
Portfolio may enter into futures contracts which are based on debt securities
that are backed by the full faith and credit of the U.S. Government, such as
longterm U.S. Treasury Bonds, Treasury Notes, Government National Mortgage
Association modified passthrough mortgagebacked securities and threemonth U.S.
Treasury Bills. A Portfolio may also enter into futures contracts which are
based on bonds issued by entities other than the U.S. Government.
Purchases or sales of stock index futures contracts may be used to attempt
to protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices. For example, the Portfolio may sell stock index
futures contracts in anticipation of or during a decline in the market value of
the Portfolio's securities. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on the futures
position. When a Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures
contracts in order to gain rapid market exposure that may, in part or entirely,
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offset increases in the cost of securities that the Portfolio intends to
purchase. As such purchases are made, the corresponding positions in stock
index futures contracts will be closed out. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the futures position, but under unusual market conditions, a long futures
position may be terminated without a related purchase of securities.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It
is expected that the initial deposit would be approximately 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms may call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded, a
Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the acquisition or sale of a futures contract, in the case
of a Portfolio which holds or intends to acquire fixedincome securities, is to
attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixedincome securities or
foreign currencies. For example, if interest rates were expected to increase, a
Portfolio might enter into futures contracts for the sale of debt securities.
Such a sale would have much the same effect as selling an equivalent value of
the debt securities owned by the Portfolio. If interest rates did increase, the
value of the debt security in a Portfolio would decline, but the value of the
futures contracts to the Portfolio would increase at approximately the same
rate, thereby keeping the net asset value of the Portfolio from declining as
much as it otherwise would have. The Portfolio could accomplish similar results
by selling debt securities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the futures market is
generally more liquid than the cash market, the use of futures contracts as an
investment technique allows a Portfolio to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of
futures contracts should be similar to those of debt securities, a Portfolio
could take advantage of the anticipated rise in the value of debt securities
without actually buying them until the market had stabilized. At that time, the
futures contracts could be liquidated and the Portfolio could then buy debt
securities on the cash market.
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When a Portfolio enters into futures contracts, the Portfolio will
establish a segregated account to cover the Portfolio's obligations with
respect to such futures contracts. The assets in the account will consist of
cash, cash equivalents or high quality liquid debt securities from its
portfolio in an amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the initial and
variation margin payments made by the Portfolio with respect to such futures
contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate or other trends by the applicable
Subadviser may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Subadvisers
believe that use of such contracts will benefit the Portfolios, if the
Subadvisers' investment judgment about the general direction of interest rates
is incorrect, a Portfolio's overall performance would be poorer than if it had
not entered into any such contract. For example, if a Portfolio has hedged
against the possibility of an increase in interest rates which would adversely
affect the price of debt securities held by it and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
a Portfolio has insufficient cash, it may have to sell debt securities to meet
daily variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
Options on Futures Contracts. The Portfolios may purchase and write
options on futures contracts for hedging purposes. The purchase of a call
option on a futures contract is similar in some respects to the purchase of a
call option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying securities, it may or may not be less risky than
ownership of the futures contract or underlying securities. As with the
purchase of futures contracts, when a Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a market advance
due to declining interest rates.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.
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The amount of risk a Portfolio assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or currency which is deliverable
upon exercise of the futures contract. If the futures price at expiration of
the option is below the exercise price, a Portfolio will retain the full amount
of the option premium which provides a partial hedge against any decline that
may have occurred in the Portfolio's portfolio holdings. The writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the security or foreign currency which is deliverable upon exercise
of the futures contract. If the futures price at expiration of the option is
higher than the exercise price, the Portfolio will retain the full amount of
the option premium which provides a partial hedge against any increase in the
price of securities which the Portfolio intends to purchase. If a put or call
option the Portfolio has written is exercised, the Portfolio will incur a loss
which will be reduced by the amount of the premium it receives. In the case of
a call option written by the Portfolio, the loss is potentially unlimited.
Depending on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures positions, the
Portfolio's losses from options on futures may to some extent be reduced or
increased by changes in the value of portfolio securities.
The Board of Trustees of Diversified Investors Portfolios have adopted the
requirement that futures contracts and options on futures contracts be used
either (a) as a hedge without regard to any quantitative limitation, or (b) for
other purposes to the extent that immediately thereafter the aggregate amount
of margin deposits on all (nonhedge) futures contracts of a Portfolio and
premiums paid on outstanding (nonhedge) options on futures contracts owned by
the Portfolio does not exceed 5% of the market value of the total assets of the
Portfolio. In addition, the aggregate market value of the outstanding futures
contracts purchased by the Portfolio may not exceed 50% of the market value of
the total assets of the Portfolio. Neither of these restrictions will be
changed by Diversified Investors Portfolios' Board of Trustees without
considering the policies and concerns of the various applicable federal and
state regulatory agencies.
Options on Foreign Currencies. A Portfolio may purchase and write options
on foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, may be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency does decline, a Portfolio will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
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adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, the Portfolio could sustain losses
on transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
A Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, where a Portfolio anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the Portfolio
to hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
Losses from the writing of call options are potentially unlimited.
Accordingly, the Portfolios intend that any call options on foreign currencies
that they write (other than for cross-hedging purposes as described below) will
be covered. A call option written on a foreign currency by a Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian) upon conversion or exchange of
another foreign currency held in its portfolio. A call option is also covered
if the Portfolio has a call on the same foreign currency and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, U.S. Government securities and other high
quality liquid debt securities in a segregated account with its custodian.
The Portfolios may also write call options on foreign currencies that are
not covered for crosshedging purposes. A call option on a foreign currency is
for crosshedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the
Portfolio owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate.
In such circumstances, the Portfolio collateralizes the option by maintaining
in a segregated account with its custodian, cash or U.S. Government securities
or other high quality liquid debt securities in an amount not less than the
value of the underlying foreign currency in U.S. dollars marked to market
daily.
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Additional Risks of Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies. Unlike transactions entered into by a Portfolio
in futures contracts, forward contracts and options on foreign currencies are
not traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as marketmakers, 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 overthecounter. In an overthecounter trading environment, many of
the protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Moreover, the option writer and a trader of forward contracts could lose
amounts substantially in excess of their initial investments, due to the margin
and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the overthecounter market,
potentially permitting a Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchangetraded 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, exchangetraded options on foreign
currencies involve certain risks not presented by the overthecounter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on
exercise.
As in the case of forward contracts, certain options on foreign currencies
are traded overthecounter and involve liquidity and credit risks which may not
be present in the case of exchangetraded currency options. A Portfolio's
ability to terminate overthecounter options will be more limited than with
exchangetraded options. It is also possible that brokerdealers participating in
overthecounter options transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, each Portfolio will
treat purchased overthecounter options and assets used to cover written
overthecounter options as illiquid securities. With respect to options written
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with primary dealers in U.S. Government securities pursuant to an agreement
requiring a closing purchase transaction at a formula price, the amount of
illiquid securities may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (a) other complex foreign
political and economic factors, (b) lesser availability than in the United
States of data on which to make trading decisions, (c) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (d) the imposition of different
exercise and settlement terms and procedures and margin requirements than in
the United States, and (e) lesser trading volume.
The successful use of futures contracts, options on futures contracts and
options on foreign currencies draws upon the applicable Subadviser's skill and
experience with respect to such instruments. Should stock prices, interest or
exchange rates move in an unexpected manner, a Portfolio may not achieve the
anticipated benefits of futures contracts or options on futures contracts or
foreign currencies or may realize losses and thus will be in a worse position
than if such strategies had not been used. In addition, the correlation between
movements in the price of futures contracts or options on futures contracts or
foreign currencies and movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
OPTIONS ON SECURITIES--PORTFOLIOS OTHER THAN THE MONEY MARKET PORTFOLIO
The Portfolios may write (sell) covered call and put options to a limited
extent on their portfolio securities ("covered options"). However, a Portfolio
may forego the benefits of appreciation on securities sold or may pay more than
the market price on securities acquired pursuant to call and put options
written by the Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period. If the option expires unexercised, the Portfolio will
realize income in an amount equal to the premium received for writing the
option. If the option is exercised, a decision over which a Portfolio has no
control, the Portfolio must sell the underlying security to the option holder
at the exercise price. By writing a covered call option, a Portfolio forgoes,
in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser of
the option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which a Portfolio has no control, the Portfolio must purchase the
underlying security from the option holder at the exercise price. By writing a
covered put option, a Portfolio, in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
<PAGE>
below the exercise price. A Portfolio will only write put options involving
securities for which a determination is made at the time the option is written
that the Portfolio wishes to acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing
purchase transaction." Where a Portfolio cannot effect a closing purchase
transaction, it may be forced to incur brokerage commissions or dealer spreads
in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to reflect
the current market value of the option written. The current market value of a
traded option is the last sale price or, in the absence of a sale, the mean
between the closing bid and asked price. If an option expires on its stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
the Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. Securities against which call options are written
will be segregated on the books of the custodian for the Portfolio.
A Portfolio may purchase call and put options on any securities in which
it may invest. A Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The
purchase of a call option would entitle the Portfolio, in exchange for the
premium paid, to purchase a security at a specified price during the option
period. A Portfolio would ordinarily have a gain if the value of the securities
increased above the exercise price sufficiently to cover the premium and would
have a loss if the value of the securities remained at or below the exercise
price during the option period.
A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle a Portfolio, in exchange for the premium paid, to sell
a security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's portfolio securities. Put options also may be purchased by a
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. A Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The 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
<PAGE>
impossible to predict the volume of trading that may exist in such options, and
there can be no assurance that viable exchange markets will develop or
continue.
The Portfolios may engage in overthecounter options transactions with
brokerdealers who make markets in these options. The ability to terminate
overthecounter option positions is more limited than with exchangetraded option
positions because the predominant market is the issuing broker rather than an
exchange, and may involve the risk that brokerdealers participating in such
transactions will not fulfill their obligations. To reduce this risk, the
Portfolios will purchase such options only from brokerdealers 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 applicable Subadviser
will monitor the creditworthiness of dealers with whom a Portfolio enters into
such options transactions under the general supervision of the Adviser and the
applicable Board of Trustees.
OPTIONS ON SECURITIES INDICES--PORTFOLIOS OTHER THAN THE MONEY MARKET PORTFOLIO
In addition to options on securities, the Portfolios may also purchase and
write (sell) call and put options on securities indices. Such options give the
holder the right to receive a cash settlement during the term of the option
based upon the difference between the exercise price and the value of the
index. Such options will be used for the purposes described above under
"Options on Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Portfolios generally will only purchase or write such an option if the
applicable Subadviser believes 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. A Portfolio will not purchase such options unless the
applicable Subadviser believes the market is sufficiently developed such that
the risk of trading in such options is no greater than the risk of trading in
options on securities.
Price movements in the Portfolios' securities may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, a Portfolio may be forced to liquidate portfolio
securities to meet settlement obligations.
SHORT SALES "AGAINST THE BOX"--PORTFOLIOS OTHER THAN THE MONEY MARKET PORTFOLIO
In a short sale, a Portfolio sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. A
Portfolio may engage in short sales only if at the time of the short sale it
owns or has the right to obtain, at no additional cost, an equal amount of the
security being sold short. This investment technique is known as a short sale
"against the box".
<PAGE>
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Portfolio engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified subcustodian. While
the short sale is open, a Portfolio maintains in a segregated account an amount
of securities equal in kind and amount to the securities sold short or
securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Portfolio's long position.
The Portfolios will not engage in short sales against the box for
investment purposes. A Portfolio may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security (or a security convertible or exchangeable for such
security). In such case, any future losses in a Portfolio's long position
should be reduced by a gain in the short position. Conversely, any gain in the
long position should be reduced by a loss in the short position. The extent to
which such gains or losses are reduced depends upon the amount of the security
sold short relative to the amount a Portfolio owns. There are certain
additional transaction costs associated with short sales against the box, but
the Portfolios endeavor to offset these costs with the income from the
investment of the cash proceeds of short sales.
As a nonfundamental operating policy, it is not expected that more than
40% of a Portfolio's total assets would be involved in short sales against the
box. The Portfolios do not currently intend to engage in such sales.
REAL ESTATE INVESTMENT TRUSTS
Real Estate Investment Trusts ("REITs") pool investors' funds for
investment primarily in income producing real estate or real estate related
loans or interests. A REIT is not taxed on income distributed to its
shareholders or unitholders if it complies with regulatory requirements
relating to its organization, ownership, assets and income and a regulatory
requirement that it distribute to its shareholders or unitholders as least 95%
of its taxable income for each taxable year. Generally, REITs can be classified
as Equity REITs, Mortgage REITs and hybrid REITs. Equity REITs invest the
majority of their assets directly in real property and derive their income
primarily through rents and capital gains from appreciation realized through
property sales. Equity REITs may be affected by changes in the value of the
underlying property owned by the REITs. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive their income primarily from
interest payments. Mortgage REITs are sensitive to the credit quality of the
underlying borrowers. Hybrid REITs combine the characteristics of both Equity
and Mortgage REITs. The value of REITs may be affected by management skill,
cash flow and tax and regulatory requirements. REITs are also subject to risks
generally associated with investments in real estate. A Portfolio will
indirectly bear its proportionate share of any expenses, including management
fees, paid by a REIT in which it invests.
LOANS OF PORTFOLIO SECURITIES
Each Portfolio may lend securities from its portfolio to brokers, dealers
and financial institutions (but not individuals) if cash, U.S. Government
securities or other high quality debt obligations equal to at least 100% of the
current market value of the securities loaned (including accrued interest
thereon) plus the interest payable to the Portfolio with respect to the loan is
maintained with the Portfolio. In determining whether or not to lend a security
<PAGE>
to a particular broker, dealer or financial institution, the Portfolio's
Subadviser considers all relevant facts and circumstances, including the size,
creditworthiness and reputation of the broker, dealer or financial institution.
Any loans of portfolio securities are fully collateralized based on values that
are marked to market daily. No Portfolio enters into any portfolio security
lending arrangements having a duration longer than one year. Any securities
that a Portfolio receives as collateral do not become part of its portfolio at
the time of the loan and, in the event of a default by the borrower, the
Portfolio will, if permitted by law, dispose of such collateral except for such
part thereof that is a security in which the Portfolio is permitted to invest.
During the time securities are on loan, the borrower will pay the Portfolio any
accrued income on those securities, and the Portfolio may invest the cash
collateral and earned income or receive an agreed-upon fee from a borrower that
has delivered cash-equivalent collateral. In the event of the bankruptcy of the
other party to a securities loan, the Portfolio could experience delays in
recovering either the securities lent or cash. To the extent that, in the
meantime, the value of the securities lent has increased or the value of the
securities purchased has decreased, a Portfolio could experience a loss. No
Portfolio will lend securities having a value that exceeds one-third of the
current value of its total assets. Loans of securities by a Portfolio are
subject to termination at the Portfolio's or the borrower's option. A Portfolio
may pay reasonable administrative and custodial fees in connection with a
securities loan and may pay a negotiated portion of the interest or fee earned
with respect to the collateral to the borrower or the placing broker.
INVESTMENTS IN WARRANTS
The Stock Index Fund may invest up to 5% of net assets at the time of
purchase in warrants (other than those that have been acquired in units or
attached to other securities), including not more than 2% of each of their net
assets in warrants which are not listed on the New York or American Stock
Exchange. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time. The prices of
warrants do not necessarily correlate with the prices of the underlying
securities. The Stock Index fund may only purchase warrants on securities in
which the Fund may invest directly.
TEMPORARY DEFENSIVE POSITIONS
Each Portfolio may, from time to time, take temporary defensive positions
that are inconsistent with the Portfolio's principal investment strategies in
attempting to respond to adverse market, political or other conditions. When
doing so, the Portfolio may invest without limit in high quality money market
and other short-term instruments, and may not be pursuing its investment goal.
These investments may result in a lower yield than would be available from
investments with a lower quality or longer term.
CERTAIN OTHER OBLIGATIONS
Each Portfolio may invest in obligations other than those listed
previously, provided such investments are consistent with the Portfolio's
investment objective, policies and restrictions.
RATING SERVICES
The ratings of rating services represent their opinions as to the quality
of the securities that they undertake to rate. It should be emphasized,
<PAGE>
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 Subadvisers also make their own
evaluations of these securities. After purchase by a Portfolio, an obligation
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Portfolio. Neither event would require a Portfolio to
dispose of the obligation, but the applicable Subadviser will consider such an
event in its determination of whether the Portfolio should continue to hold the
obligation. A description of the ratings used herein and in the Prospectus is
set forth in Appendix A.
Except as stated otherwise, all investment policies and restrictions
described herein are nonfundamental, and may be changed without prior
shareholder approval.
INVESTMENT RESTRICTIONS OF THE PORTFOLIOS
The "fundamental policies" of each Portfolio may not be changed with
respect to the Portfolio without the approval of a "majority of the outstanding
voting securities" of the Portfolio. "Majority of the outstanding voting
securities" under the 1940 Act and as used in this Statement of Additional
Information and the Prospectus means, with respect to a Portfolio, the lesser
of (i) 67% or more of the total beneficial interests of the Portfolio present
at a meeting, if the holders of more than 50% of the total beneficial interests
of the Portfolio are present or represented by proxy, or (ii) more than 50% of
the total beneficial interests of the Portfolio.
If a percentage or a rating restriction on investment or utilization of
assets is adhered to at the time an investment is made or assets are so
utilized, a later change in such percentage resulting from changes in a
Portfolio's total assets or the value of a Portfolio's securities, or a later
change in the rating of a portfolio security, will not be considered a
violation of the relevant policy.
Fundamental Policies. As a matter of fundamental policy, no Portfolio may:
(1) borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 1/3 of the current value of the
Portfolio's assets (including such borrowing) less liabilities (not
including such borrowing), it may borrow money and enter into reverse
repurchase agreements, and except that it may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings or
reverse repurchase agreements, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes of
this restriction and except that assets may be pledged to secure letters
of credit solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute;
(2) underwrite securities issued by other persons except insofar as
Diversified Investors Portfolios or a Portfolio may technically be deemed
an underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not
exceed 30% of the Portfolio's total assets (taken at market value), (b)
through the use of repurchase agreements or the purchase of shortterm
obligations or (c) by purchasing debt securities of types distributed
publicly or privately;
<PAGE>
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the ordinary
course of business (Diversified Investors Portfolios may hold and sell,
for the Portfolio's portfolio, real estate acquired as a result of the
Portfolio's ownership of securities);
(5) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the
achievement of the Portfolio's investment objective(s), up to 25% of its
total assets may be invested in any one industry (except that the Money
Market Portfolio reserves the freedom of action to concentrate 25% or more
of its assets in obligations of domestic branches of domestic banks); or
(6) issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.
For purposes of restriction (1) above, arrangements with respect to
securities lending are not treated as borrowing.
Non-Fundamental Policies.
Each Portfolio (other than the Stephens Intermediate Bond Portfolio and
the Stephens Select Equity Portfolio) will not, as a matter of operating
policy, acquire any securities of registered open-end investment companies or
registered unit investment trusts in reliance on Section 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act. This policy does not prevent a Portfolio from
investing in securities of registered open-end investment companies or
registered unit investment trusts in reliance on any other provision of
applicable law or regulation.
Each Portfolio will not, as a matter of operating policy, acquire any
securities of registered open-end investment companies or registered unit
investment trusts in reliance on Section 12(d)(1)(F) or Section 12(d)(1)(G) of
the 1940 Act.
These policies may be changed by the Board of Trustees of Diversified
Investors Portfolios.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Except as may be required to ensure satisfaction of certain tests
applicable to regulated investment companies under the Internal Revenue Code,
portfolio changes are made without regard to the length of time a security has
been held, or whether a sale would result in the recognition of a profit or
loss. Therefore, the rate of portfolio turnover is not a limiting factor when
changes are appropriate. Portfolio trading is engaged in for a Portfolio if the
applicable Subadviser believes that a transaction net of costs (including
custodian charges) will help achieve the Portfolio's investment objective.
A Portfolio's purchases and sales of securities may be principal
transactions, that is, securities may be purchased directly from the issuer or
<PAGE>
from an underwriter or market maker for the securities. There usually are no
brokerage commissions paid for such purchases and, therefore, the Portfolios do
not anticipate paying brokerage commissions in such transactions.
BROKERAGE TRANSACTIONS. Each Portfolio's Subadvisers may use brokers or
dealers for Portfolio transactions who also provide brokerage and research
services to the Portfolio or other accounts over which the advisers exercise
investment discretion. A Portfolio may "pay up" for brokerage services, meaning
that it is authorized to pay a broker or dealer who provides these brokerage
and research services a commission for executing a portfolio transaction which
is higher than the commission another broker or dealer would have charged.
However, a Portfolio will "pay up" only if the applicable adviser determines in
good faith that the higher commission is reasonable in relation to the
brokerage and research services provided, viewed in terms of either the
particular transaction or all of the accounts over which the adviser exercises
investment discretion.
Investment decisions for a Portfolio will be made independently from those
for any other account or investment company that is or may in the future become
managed by the Portfolio's Subadviser or its affiliates. If, however, the
Portfolio and other investment companies or accounts managed by the Subadviser
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 the Portfolio or the size of the position obtainable for the
Portfolio. In addition, when purchases or sales of the same security for the
Portfolio and for other investment companies managed by the Subadviser occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
The following Portfolios paid the approximate brokerage commissions
indicated for the fiscal years noted below:
Balanced Portfolio:
Fiscal year ended December 31, 1996: $317,179
Fiscal year ended December 31, 1997: $324,465
Fiscal year ended December 31, 1998: $488,301
Equity Income Portfolio
Fiscal year ended December 31, 1996: $565,943
Fiscal year ended December 31, 1997: $659,256
Fiscal year ended December 31, 1998: $855,733
Equity Value Portfolio
Fiscal year ended December 31, 1996: $64,207
Fiscal year ended December 31, 1997: $548,229
Fiscal year ended December 31, 1998: $890,565
Growth & Income Portfolio
Fiscal year ended December 31, 1996: $397,075
Fiscal year ended December 31, 1997: $390,268
Fiscal year ended December 31, 1998: $728,627
<PAGE>
Equity Growth Portfolio
Fiscal year ended December 31, 1996: $670,631
Fiscal year ended December 31, 1997: $483,139
Fiscal year ended December 31, 1998: $853,305
Special Equity Portfolio
Fiscal year ended December 31, 1996: $ 678,431
Fiscal year ended December 31, 1997: $1,017,376
Fiscal year ended December 31, 1998: $1,495,526
Aggressive Equity Portfolio
Fiscal year ended December 31, 1996: $ 15,490
Fiscal year ended December 31, 1997: $ 48,943
Fiscal year ended December 31, 1998: $114,263
International Equity Portfolio
Fiscal year ended December 31, 1996: $211,629
Fiscal year ended December 31, 1997: $295,967
Fiscal year ended December 31, 1998: $414,060
INVESTMENT RESTRICTIONS RELATING
TO THE STRATEGIC VARIABLE FUNDS SUBACCOUNTS
Fundamental policies of the Strategic Variable Funds Subaccounts may not
be changed without the approval of the lesser of (1) 67% of the beneficial
holders of units present at a meeting if the holders of more than 50% are
present in person or by proxy or (2) more than 50% of the beneficial holders of
units. Other restrictions, in the form of operating policies, are subject to
change by the Managing Board of the Strategic Variable Funds Account without
unitholder approval. Any investment restriction which involves a maximum
percentage of securities or assets shall not be considered to be violated
unless an excess over the percentage occurs immediately after, and is caused
by, an acquisition of securities or assets of, or borrowings by, a Strategic
Variable Funds Subaccount.
As a matter of fundamental policy, each Strategic Variable Funds
Subaccount may not:
(1) Borrowing. Borrow money, except each Strategic Variable Funds
Subaccount may borrow as a temporary measure for extraordinary or
emergency purposes, and then only in amounts not exceeding 30% of its
total assets valued at market. Each Strategic Variable Funds Subaccount
will not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require untimely
investment liquidations;
(2) Loans. Make loans, although the Portfolios through which the
Strategic Variable Funds Subaccounts invest may purchase money market
securities and enter into repurchase agreements;
(3) Margin. Purchase securities on margin;
(4) Mortgaging. Mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the Strategic Variable Funds Subaccounts
as security for indebtedness except as may be necessary in connection
<PAGE>
with permissible borrowings, in which event such mortgaging, pledging,
or hypothecating may not exceed 30% of each Subaccount's total assets,
valued at market;
(5) Real Estate. Purchase or sell real estate;
(6) Senior Securities. Issue senior securities (except permitted
borrowings);
(7) Short Sales. Effect short sales of securities; or
(8) Underwriting. Underwrite securities issued by other persons,
except to the extent that the Strategic Variable Funds Account or
Subaccounts may be deemed to be underwriters within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of their
portfolio securities in the ordinary course of pursuing their investment
programs.
In addition, as a matter of fundamental policy, each Strategic Variable
Funds Subaccount may engage in futures and options transactions through
investments in the Portfolios.
As a matter of operating policy, each Strategic Variable Funds
Subaccount may not:
(1) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
(2) Illiquid Securities. Purchase a security if, as a result of such
purchase, more than 15% of the value of each Strategic Variable Funds
Subaccount's net assets would be invested in illiquid securities or
other securities that are not readily marketable;
(3) Oil and Gas Programs. Purchase participations or other direct
interests or enter into leases with respect to, oil, gas, other mineral
exploration or development programs;
(4) Options. Invest in options;
(5) Ownership of Portfolio Securities by Officers and Directors.
Purchase or retain the securities of any issuer if, to the knowledge of
the Managing Board of the Strategic Variable Funds Account, those
officers and directors of AUSA and Diversified, who each owns
beneficially more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities;
(6) Unseasoned Issuers. Purchase the securities of any issuer (other
than obligations issued or guaranteed by the U.S. Government or any
foreign government, their agencies or instrumentalities) if, as a
result, more than 5% of the value of each Subaccount's total assets
would be invested in the securities of issuers which at the time of
purchase had been in operation for less than three years, including
predecessors and unconditional guarantors; or
(7) Warrants. Invest in warrants.
<PAGE>
Each Strategic Variable Funds Subaccount may invest more than 5% of its
assets in any one Variable Funds Subaccount, and each Strategic Variable Funds
Subaccount may invest substantially all of its assets, collectively, in
Variable Funds Subaccounts.
Because of their investment objectives and policies, the Strategic
Variable Funds Subaccounts will each concentrate more than 25% of their assets
in the investment company industry. In accordance with the Strategic Variable
Funds Subaccounts' investment programs set forth in the Prospectus, each of the
Strategic Variable Funds Subaccounts may invest more than 25% of its assets in
certain of the Variable Funds Subaccounts. However, each of the Portfolios in
which each Variable Funds Subaccount will invest will not concentrate more than
25% of its total assets in any one industry (except that the Money Market
Portfolio reserves the right to concentrate 25% or more of its assets in
obligations of domestic branches of domestic banks).
PERFORMANCE INFORMATION
RELATING TO THE STRATEGIC VARIABLE FUNDS SUBACCOUNTS
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of a Strategic Variable Funds Subaccount's
performance may be included in advertisements, sales literature or shareholder
reports. These performance figures are calculated in the following manner for
each Strategic Variable Funds Subaccount:
Total Return
The Strategic Variable Funds Subaccount's total return will be calculated
for certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000 to reach the
value of that investment at the end of the periods. The Strategic Variable
Funds Subaccount may also calculate total rates of return which represent
aggregate performance over a period of year-by-year performance.
Yield
The Strategic Variable Funds Subaccount's yield quotation will be based on
the annualized net investment income per unit of the Strategic Variable Funds
Subaccount over a 30-day period. The current yield for the Strategic Variable
Funds Subaccount is calculated by dividing the net investment income per unit
of the Strategic Variable Funds Subaccount earned during the period by the net
asset value per unit of the Strategic Variable Funds Subaccount on the last day
of that period. The resulting figure is then annualized. Net investment income
per unit is determined by dividing (i) the dividends and interest earned during
the period, minus accrued expenses for the period, by (ii) the average number
of units entitled to receive dividends during the period.
COMPARISON OF STRATEGIC VARIABLE FUNDS SUBACCOUNT PERFORMANCE
Comparison of the quoted non-standardized performance of various
investments is valid only if performance is calculated in the same manner.
Since there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of a Strategic Variable Funds Subaccount with performance quoted
with respect to other investment companies or types of investments.
<PAGE>
In connection with communicating its performance to current or prospective
investors, a Strategic Variable Funds Subaccount also may compare these figures
to the performance of other funds tracked by fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs. An underlying
Portfolio may invest in some instruments not eligible for inclusion in such an
index, and may be prohibited from investing in some instruments included in
this index. Evaluations of a Strategic Variable Funds Subaccount's performance
made by independent sources may also be used in advertisements concerning a
Strategic Variable Funds Subaccount. Sources for a Strategic Variable Funds
Subaccount's performance information may include, but are not limited to, the
following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to
time articles on international or country specific funds.
Financial World, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Investor's Daily, a daily newspaper that features financial, economic and
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific
funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
<PAGE>
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
World Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
The performance of the Strategic Variable Funds Accounts may also be
compared to benchmarks consisting of a combination of unmanaged indices, such
as the Lehman Aggregate Bond Index, the Russell 1000 Value Index, the Russell
2000 Small Cap Index, the Salomon 90-Day Treasury Index, and the EAFE GDP
Equity Index. When a Strategic Funds Account's performance is compared to such
a combined benchmark, the percentage of each unmanaged index included in the
benchmark will be disclosed.
DETERMINATION OF UNIT VALUE; VALUATION OF SECURITIES
AUSA determines the unit value of each Subaccount each day on which the
New York Stock Exchange is open for trading. (As a result, a Subaccount will
normally determine its net asset value every weekday except for the following
holidays or the days on which they are observed: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas.) This daily determination of unit
value is made as of the close of regular trading on the New York Stock
Exchange, currently 4:00 p.m., New York time unless the Exchange closes
earlier, by dividing the total assets of a Subaccount less all of its
liabilities, by the total number of units outstanding at the time the
determination is made. Purchases and redemptions will be effected at the time
of determination of unit value next following the receipt of any purchase or
redemption order deemed to be in good order.
Units of each Variable Funds Subaccount are valued based upon the
valuation of the securities held by the corresponding underlying Portfolio in
which the assets of the particular Variable Funds Subaccount are invested.
Units of each Strategic Variable Funds Subaccount are valued based upon the
<PAGE>
valuation of the units of each Variable Funds Subaccount in which the assets of
the particular Strategic Variable Funds Subaccount are invested. Therefore, the
valuation of units in both the Variable Funds Subaccounts and the Strategic
Variable Funds Subaccounts depends on the valuation policies of the underlying
Portfolios. The following discussion describes the valuation policies of the
Portfolios.
Beneficial interests in each Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
Trading in securities on most nonU.S. exchanges and overthecounter markets
is normally completed before the close of regular trading on the New York Stock
Exchange and may also take place on days on which the New York Stock Exchange
is closed. If events materially affecting the value of nonU.S. securities occur
between the time when the exchange on which they are traded closes and the time
when a Portfolio's net asset value is calculated, such securities may be valued
at fair value in accordance with procedures established by and under the
general supervision of the Board of Trustees of Diversified Investors
Portfolios.
Equity securities are valued at the last sale price on the exchange on
which they are primarily traded or at the ask price on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for securities
in which there were no sales during the day or for unlisted securities not
reported on the NASDAQ system. Bonds and other fixed income securities (other
than shortterm obligations, but including listed issues) are valued on the
basis of valuations furnished by a pricing service, the use of which has been
approved by the Board of Trustees of Diversified Investors Portfolios. In
making such valuations, the pricing service utilizes both dealersupplied
valuations and electronic data processing techniques that take into account
appropriate factors such as institutionalsize trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or overthecounter prices, since such valuations are believed
to reflect more accurately the fair value of such securities. Shortterm
obligations which mature in 60 days or less are valued at amortized cost, which
approximates fair value as determined by the Board of Trustees of Diversified
Investors Portfolios. Futures and option contracts that are traded on
commodities or securities exchanges are normally valued at the settlement price
on the exchange on which they are traded. Portfolio securities (other than
shortterm obligations) for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Board of Trustees of Diversified Investors Portfolios.
Interest income on longterm obligations is determined on the basis of
interest accrued plus amortization of discount (generally, the difference
between issue price and stated redemption price at maturity) and premiums
(generally, the excess of purchase price over stated redemption price at
maturity). Interest income on shortterm obligations is determined on the basis
of interest and discount accrued less amortization of premium.
Any assets or liabilities initially denominated in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a
regular participant in the foreign exchange market or on the basis of a pricing
service that takes into account the quotes provided by a number of such major
banks. If neither of these alternatives is available or both are deemed not to
<PAGE>
provide a suitable methodology for converting a foreign currency into U.S.
dollars, the Adviser, under the supervision of the Board of Trustees of
Diversified Investors Portfolios, in good faith, will establish a conversion
rate for such currency.
A determination of fair value used in calculating net asset value must be
made in good faith utilizing procedures approved by the Board of Trustees of
Diversified Investors Portfolios. While no single standard for determining fair
value exists, as a general rule, the current fair value of a security would
appear to be the amount which a Portfolio could expect to receive upon its
current sale. Some, but not necessarily all, of the general factors which may
be considered in determining fair value include: (a) the fundamental analytical
data relating to the investment; (b) the nature and duration of restrictions on
disposition of the securities; and (c) an evaluation of the forces which
influence the market in which these securities are purchased and sold. Without
limiting or including all of the specific factors which may be considered in
determining fair value, some of the specific factors include: type of security,
financial statements of the issuer, cost at date of purchase, size of holding,
discount from market value, value of unrestricted securities of the same class
at the time of purchase, special reports prepared by analysts, information as
to any transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies, and other
relevant matters.
Each investor in each Portfolio, including the Variable Funds Subaccounts,
may add to or reduce its investment in the Portfolio on each day that the New
York Stock Exchange is open for trading. As of 4:00 p.m. (New York time) (or
any earlier close of regular trading on the Exchange) on each such day, the
value of each investor's interest in a Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage representing
that investor's share of the aggregate beneficial interests in the Portfolio.
Any additions or reductions which are to be effected on that day will then be
effected. The investor's percentage of the aggregate beneficial interests in
the Portfolio will then be recomputed as the percentage equal to the fraction
(a) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m. (or the earlier close of regular trading on the
Exchange) on such day plus or minus, as the case may be, the amount of net
additions to or reductions in the investor's investment in the Portfolio
effected on such day, and (b) the denominator of which is the aggregate net
asset value of the Portfolio as of 4:00 p.m. (or the earlier close of regular
trading on the Exchange) on such day plus or minus, as the case may be, the
amount of the net additions to or reductions in the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined
will then be applied to determine the value of the investor's interest in a
Portfolio as of 4:00 p.m. (or the earlier close of regular trading on the
Exchange) on the following day the New York Stock Exchange is open for trading.
MANAGEMENT OF DIVERSIFIED INVESTORS PORTFOLIOS
The Trustees and officers of Diversified Investors Portfolios and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate those Trustees
who are "interested persons" (as defined in the 1940 Act) of Diversified
Investors Portfolios. Unless otherwise indicated, the address of each Trustee
and officer of Diversified Investors Portfolios is 4 Manhattanville Road,
Purchase, New York 10577.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
TRUSTEES AND OFFICERS
AGE
(AS OF PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS 11/15/98) DURING PAST 5 YEARS
Tom A. Schlossberg* 49 12/93 to present-- President, Chief Executive
(Trustee) Officer and Chairman of the Managing Board,
Diversified Investment Advisors, Inc.
Neal M. Jewell 64 1/1995 to present-- Consultant; 1995 to
(Trustee) present--Independent Trustee, EAI Select (a
355 Thornridge Drive registered Investment Company); 11/1991 to
Stamford, CT 06903 1/1995-- Executive Vice President, American
International Group Asset Management.
Eugene M. Mannella 45 8/1993 to present-- Executive Vice President,
(Trustee) Investment Management Services Inc.;
2 Orchard Neck Road 5/1996 to present -- President, Brooks Asset
Center Moriches, New York 19934 Management LLC; President, Arapahs Partners, LLC.
Mark Mullin 35 4/95 to present -- Vice President, Diversified
(Trustee) Investment Advisors, Inc.; 4/93 to 3/95 --
Portfolio Manager, AEGON Netherlands.
Patricia L. Sawyer 48 1990 to present-- President and Executive Search
(Trustee) Consultant, Smith & Sawyer LLC.
P.O. Box 8063
Vero Beach, Florida 32963
Robert F. Colby 43 11/1993 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.
Alfred C. Sylvain 47 11/1993 to present-- Vice President, Treasurer
and Assistant Secretary, Diversified Investment
Advisors, Inc.; 1/1994 to present -- Treasurer,
Diversified Investors Securities Corp.; 2/1995 to present
-- Director, Diversified Investors Securities Corp.
John F. Hughes 57 11/1993 to present-- Vice President and Senior
Counsel, Diversified Investment Advisors, Inc.;
11/1993 to present -- Vice President, AUSA Life
Insurance Company, Inc.; 11/1993 to present --
Assistant Secretary, Diversified Investors Securities
Corp.
Catherine A. Mohr 77 11/1993 to present-- Vice President, Diversified
Investment Advisors, Inc.; 8/1995 to
present -- Assistant Secretary, AUSA Life
Insurance Company, Inc.; 1/1993 to
present -- Assistant Secretary, Diversified
Investors Securities Corp.; 1/1992 to
present -- Assistant Vice President, The Mutual
Life Insurance Company of New York.
</TABLE>
<PAGE>
The Declaration of Trust of Diversified Investors Portfolios provides that
Diversified Investors Portfolios will indemnify its Trustees and officers as
described below under "Diversified Investors Portfolios--Description of the
Trust".
For the fiscal year ended December 31, 1998, the Diversified Investors
Portfolios provided the following compensation to its trustees.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
AGGREGATE
COMPENSATION PENSION OR COMPENSATION
FROM DIVERSIFIED RETIREMENT BENEFITS ESTIMATED ANNUAL FROM THE TRUSTS AND
INVESTORS ACCRUED AS PART OF BENEFITS UPON FUND COMPLEX PAID
NAME PERSON,POSITION OF PORTFOLIO PORTFOLIOS EXPENSES RETIREMENT TO TRUSTEES
- ---------------------------------------------------------------------------------------------------------------
TOM A. SCHLOSSBERG
TRUSTEE None None None None
- ---------------------------------------------------------------------------------------------------------------
NEAL M. JEWELL
TRUSTEE $9,750 None $4,500 $14,250
- ---------------------------------------------------------------------------------------------------------------
EUGENE M. MANELLA
TRUSTEE $9,750 None $4,500 $14,250
- ---------------------------------------------------------------------------------------------------------------
MARK MULLIN
TRUSTEE None None $3,250 $3,250
- ---------------------------------------------------------------------------------------------------------------
PATRICIA L. SAWYER
TRUSTEE $9,750 None None $9,750
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT ADVISORY SERVICES
Diversified Investment Advisers, Inc. (the "Adviser") manages the assets
of each Portfolio pursuant to an Investment Advisory Agreement (the "Advisory
Agreement") with Diversified Investors Portfolios with respect to that
Portfolio, and subject to the investment policies described herein and in the
Prospectus for the Portfolios. Subject to such further policies as the Board of
Trustees of Diversified Investors Portfolios may determine, the Adviser
provides general investment advice to each Portfolio.
For each Portfolio, the Adviser has entered into an Investment Subadvisory
Agreement (each a "Subadvisory Agreement") with one or more Subadvisers.
Each Advisory Agreement and Subadvisory Agreement provides that the
Adviser or a Subadviser, as the case may be, may render services to others.
Each agreement is terminable without penalty on not more than 60 days' nor less
than 30 days' written notice by the Portfolio when authorized either by
majority vote of the investors in the Portfolio (with the vote of each being in
proportion to its interests) or by a vote of a majority of the Board of
Trustees of Diversified Investors Portfolios, or by the Adviser on not more
than 60 days' nor less than 30 days' written notice, or by the applicable
Subadviser on not less than 90 days' written notice, and will automatically
terminate in the event of its assignment. Each agreement provides that neither
the Adviser nor Subadviser nor their personnel shall be liable for any error of
judgment or mistake of law or for any loss arising out of any investment or for
any act or omission in the execution of security transactions for the
Portfolio, except for willful misfeasance, bad faith, gross negligence or
reckless disregard of its or their obligations and duties under the Advisory
Agreement and the Subadvisory Agreement, as the case may be.
The Adviser's and Subadviser's fees with respect to each Portfolio are
described in the Prospectus.
<PAGE>
Diversified is an investment firm dedicated to meeting the complete needs
of retirement plan sponsors and participants from pre through postretirement.
Diversified provides flexible, highquality services coupled with the employment
of independent investment managers in an innovative investment structure.
Diversified provides services with respect to $23 billion in retirement
plan assets and has offices in Boston, Charlotte, Chicago, Cincinnati, Dallas,
Houston, New Orleans, New York, Philadelphia, Portland and San Francisco. It
maintains recordkeeping for 500,000 participants and has 700 employees
dedicated to retirement plan investment and administration. Its employees
average more than seven years of retirement plan experience.
As experts in customizing retirement solutions, Diversified offers
comprehensive programs of highquality investments and administrative services
to defined benefit, defined contribution and notforprofit pension plan
sponsors. Diversified forms a partnership with its clients to provide
exceptional plan design, participant communication programs, recordkeeping
services and technical guidance. Diversified's investment structure provides
access to an array of complementary investment alternatives representing the
major asset classes along the risk/reward spectrum.
Subadvisers are selected from more than 4,000 independent firms. Through a
rigorous portfolio manager selection process which includes researching each
potential subadviser's asset class, track record, organizational structure,
management team, consistency of performance and assets under management, five
to ten potential subadvisers are chosen. Out of that group, Diversified then
carefully chooses the three most qualified potential subadvisers based on
performance evaluation, ownership structure, personnel and philosophy to return
for an onsite visit and a quantitative and qualitative analysis by the
investment committee. Out of those three potential subadvisers, Diversified
then hires the most qualified, independent subadviser for each Portfolio,
subject to approval by the Board of Trustees of Diversified Investors
Portfolios, including a majority of the Trustees who are not "interested
persons" of Diversified Investors Portfolios.
Each Subadviser's performance on behalf of a Portfolio is carefully
monitored by Diversified taking into consideration investment objectives and
policies and level of risk. Diversified brings comprehensive monitoring and
control to the investment management process. It seeks superior portfolio
management and moves purposefully in replacing managers when warranted. From a
plan sponsor's perspective, replacing a manager, and not the investment fund,
is a key advantage in avoiding the expense and difficulty of reenrolling
participants or disrupting established plan administration.
Diversified Investors Portfolios has obtained an exemptive order from the
Securities and Exchange Commission which permits the Portfolios to obtain the
services of one or more subadvisers without investor or shareholder approval.
The exemptive order also permits the terms of sub-advisory agreements to be
changed and the employment of subadvisers to be continued after events that
would otherwise cause an automatic termination of a sub-advisory agreement, in
each case without shareholder approval if those changes or continuation are
approved by the Portfolio's Board of Trustees. If a subadviser were added or
changed without shareholder approval, the Prospectus would be revised and
shareholders notified. Before a Portfolio relies on the exemptive order, the
Portfolio's investors must approve it.
<PAGE>
Highly disciplined manager evaluation on both a quantitative and
qualitative basis is an ongoing process. Diversified's Manager Monitoring Group
gathers and analyzes performance and Diversified's Investment Committee reviews
it. Performance attribution, risk/return ratios and purchase/sale assessments
are prepared monthly and, each quarter, a more comprehensive review is
completed which consists of manager visits, fundamental analysis and
statistical analysis. Extensive quarterly analysis is conducted to ensure that
the investment fund is being managed in line with the stated objectives.
Semiannually, the Investment Committee reviews the backup manager selection,
regression analysis and universe comparisons.
A number of "red flags" signal a more extensive and frequent manager
review. These flags consist of a return inconsistent with the investment
objective, changes in subadviser leadership, ownership or portfolio managers,
large changes in assets under management and changes in philosophy or
discipline. The immediate response to any red flag is to assess the potential
impact on the manager's ability to meet investment objectives. Diversified
monitors "backup" additional independent managers for each investment class so
that, should a manager change be warranted, the transition can be effected on a
timely basis.
For the fiscal year ended December 31, 1996, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market.......................... $ 445,832 $ 680
High Quality Bond.................... 627,049 --
Intermediate Government Bond.......... 340,989 27,685
Government/Corporate Bond............. 1,232,524 --
High-Yield Bond....................... 60,742 60,742
Balanced.............................. 995,489 --
Equity Income......................... 3,895,211 --
Equity Value.......................... 84,055 70,088
Growth & Income....................... 1,052,349 39,117
Equity Growth......................... 1,730,632 1,462
Special Equity........................ 3,255,893 47,350
Aggressive Equity..................... 95,060 57,964
International Equity.................. 799,760 69,256
<PAGE>
For the fiscal year ended December 31, 1997, Diversified earned and voluntarily
waived advisory fees as indicated with respect to the following Portfolios:
PORTFOLIO EARNED WAIVED
Money Market.......................... $ 553,205 $--
High Quality Bond..................... 707,143 --
Intermediate Government Bond.......... 340,670 15,525
Government/Corporate Bond............. 1,174,374 --
High-Yield Bond....................... 182,367 46,946
Balanced.............................. 1,547,690 --
Equity Income......................... 4,950,239 --
Equity Value.......................... 882,508 56,044
Growth & Income....................... 1,679,535 --
Equity Growth......................... 2,405,212 --
Special Equity........................ 4,986,640 --
Aggressive Equity..................... 182,991 61,577
International Equity.................. 1,434,770 16,399
For the fiscal year ended December 31, 1998, Diversified earned and
voluntarily waived advisory fees as indicated with respect to the following
Portfolios:
PORTFOLIO EARNED WAIVED
Money Market.......................... $ 654,703 $ --
High Quality Bond..................... 753,726 --
Intermediate Government Bond.......... 491,360 2,380
Intermediate Bond..................... 12,711 12,711
Government/Corporate Bond............. 1,606,383 --
Balanced.............................. 2,065,391 --
Equity Income......................... 5,830,442 --
Equity Value.......................... 2,104,570 42,746
Growth & Income....................... 3,258,008 --
Equity Growth......................... 3,276,416 11,336
Special Equity........................ 6,306,553 5,925
Select Equity......................... -- --
Aggressive Equity..................... 470,377 51,355
High-Yield Bond....................... 423,436 27,930
International Equity.................. 2,029,625 30,764
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 its interest). The Administrative Services Agreement also
provides that neither Diversified nor its personnel shall be liable for any
error of judgment or mistake of law or for any act or omission in connection
with any Portfolio, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their duties or obligations under said agreements.
<PAGE>
CUSTODIAN
Pursuant to a Custodian Contract, Investors Bank & Trust Company acts as
the custodian of each Portfolio's assets (the "Custodian"). The Custodian's
business address is 89 South Street, Boston, Massachusetts 02205-1537. The
Custodian's responsibilities include safeguarding and controlling cash and
securities, handling the receipt and delivery of securities, determining income
and collecting interest on the Portfolios' investments, maintaining books of
original entry for portfolio accounting and other required books and accounts,
and calculating the daily net asset value of beneficial interests in each
Portfolio. Securities held by a Portfolio may be deposited into the Federal
Reserve-Treasury Department Book Entry System or the Depository Trust Company
and may be held by a subcustodian bank if such arrangements are reviewed and
approved by the Board of Trustees of Diversified Investors Portfolios. The
Custodian does not determine the investment policies of any Portfolio or decide
which securities any Portfolio will buy or sell. A Portfolio may, however,
invest in securities of the Custodian and may deal with the Custodian as
principal in securities and foreign exchange transactions. For its services,
the Custodian will receive such compensation as may from time to time be agreed
upon by it and Diversified Investors Portfolios.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 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.
MANAGEMENT OF THE STRATEGIC VARIABLE FUNDS ACCOUNT
The members of the Managing Board of Diversified Investors Strategic
Variable Funds and officers of AUSA directly involved in activities related to
Diversified Investors Strategic Variable Funds, and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those members of the Managing Board who
are "interested persons" (as defined in the 1940 Act) of Diversified Investors
Strategic Variable Funds. Unless otherwise indicated, the address of each
member and officer of AUSA is Four Manhattanville Road, Purchase, New York
10577.
<TABLE>
<CAPTION>
<S> <C> <C>
AGE
(AS OF PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS 11/15/98) DURING PAST 5 YEARS
Tom A. Schlossberg* 49 12/93 to present-- President, Chief Executive
(Managing Board Member) Officer and Chairman of the Managing Board,
Diversified Investment Advisors, Inc.
Neal M. Jewell 64 1/1995 to present-- Consultant; 1995 to
(Managing Board Member) present - Independent Trustee, EAI Select (a
355 Thornridge Drive registered investment company); 11/1991 to
Stamford, CT 06903 1/1995-- Executive Vice President, American
International Group Asset Management.
Eugene M. Mannella 44 8/1993 to present-- Vice President, Investment
(Managing Board Member) Management Services Inc.; 5/1996 to present --
2 Orchard Neck Road President, Brooks Asset Management LLC.
Center Moriches, New York 19934
<PAGE>
Mark Mullin 35 4/95 to present -- Vice President, Diversified
(Managing Board Member) Investment Advisors, Inc.; 4/93 to 3/95 --
Portfolio Manager, AEGON Netherlands.
Patricia L. Sawyer 48 1990 to present-- President and Executive Search
(Managing Board Member) Consultant, Smith & Sawyer LLC
P.O. Box 8063
Vero Beach, Florida 32963
Robert F. Colby 43 11/1993 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.
<PAGE>
Alfred C. Sylvain 47 11/1993 to present-- Vice President, Treasurer
and Assistant Secretary, Diversified Investment
Advisors, Inc.; 1/1994 to present -- Treasurer,
Diversified Investors Securities Corp.;
2/1995 to present - Director, Diversified
Investors Securities Corp.
John F. Hughes 57 11/1993 to present-- Vice President and Senior
Counsel, Diversified Investment Advisors, Inc.;
11/1993 to present -- Vice President , AUSA Life
Insurance Company, Inc.; 11/1993 to present --
Assistant Secretary, Diversified Investors Securities
Corp.
Catherine A. Mohr 77 11/1993 to present-- Vice President,Diversified
Investment Advisors, Inc.; 8/1995 to
present -- Assistant Secretary, AUSA Life
Insurance Company, Inc.; 1/1993 to
present -- Assistant Secretary, Diversified
Investors Securities Corp.; 1/1992 to
present -- Assistant Vice President, The Mutual
Life Insurance Company of New York.
</TABLE>
Compensation
For the fiscal year ended December 31, 1998, Diversified Investors
Strategic Variable Funds provided the following compensation to members of the
Managing Board.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
PENSION OR COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL FROM THE REGISTRANT
COMPENSATION ACCRUED AS PART OF BENEFITS UPON AND FUND COMPLEX
NAME OF PERSON,POSITION FROM REGISTRANT FUND EXPENSES RETIREMENT PAID TO MEMBERS
- --------------------------------------------------------------------------------------------------------------
TOM A. SCHLOSSBERG
MANAGING BOARD MEMBER None None None None
- --------------------------------------------------------------------------------------------------------------
NEAL M. JEWELL
MANAGING BOARD MEMBER $3,250 None None $3,250
- --------------------------------------------------------------------------------------------------------------
EUGENE M. MANELLA
MANAGING BOARD MEMBER $3,250 None None $3,250
- --------------------------------------------------------------------------------------------------------------
MARK MULLIN
MANAGING BOARD MEMBER None None None None
- --------------------------------------------------------------------------------------------------------------
PATRICIA L. SAWYER
MANAGING BOARD MEMBER $3,250 None None $3,250
- --------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT ADVISORY SERVICES
Diversified manages the assets of each Strategic Variable Funds Subaccount
pursuant to an Investment Advisory Agreement with AUSA with respect to such
Strategic Variable Funds Subaccount and the investment policies described
herein and in the Prospectus. AUSA will bear any expenses of the Strategic
Variable Funds Subaccounts other than the 0.20% advisory fee. Of course, the
Strategic Variable Funds Subaccounts will still indirectly bear their
proportionate share of the cost of operating the underlying Variable Funds
Subaccounts in which the Strategic Variable Funds Subaccounts invest because
the Strategic Variable Funds Subaccounts, as shareholders of the underlying
Variable Funds Subaccounts, will bear their proportionate share of any fees and
expenses paid by the underlying Variable Funds Subaccounts.
<PAGE>
Under the Investment Advisory Agreement with each Strategic Variable Funds
Subaccount, Diversified provides each Strategic Variable Funds Subaccount with
discretionary investment services. Specifically, Diversified is responsible for
supervising and directing the investments of each Strategic Variable Funds
Subaccount in accordance with each Strategic Variable Funds Subaccount's
investment objectives, program, and restrictions as provided in the Prospectus
and this Statement of Additional Information. Diversified is also responsible
for effecting all security transactions on behalf of each Strategic Variable
Funds Subaccount. The Strategic Variable Funds Subaccounts will invest their
assets in units of the underlying Variable Funds Subaccounts and such
investments will be made without the payment of any commission or other sales
charges. In addition to these services, Diversified provides each Strategic
Variable Funds Subaccount with certain administrative services, including:
maintaining records, and registering and qualifying each Strategic Variable
Funds Subaccount's units under federal and state laws; monitoring the
financial, accounting, and administrative functions of each Strategic Variable
Funds Subaccount; maintaining liaison with the agents employed by each
Strategic Variable Funds Subaccount such as the custodian; assisting each
Strategic Variable Funds Subaccount in the coordination of such agents'
activities; and permitting Diversified's employees to serve as officers,
managing board members, and committee members of the Strategic Variable Funds
Account without cost to the Strategic Variable Funds Account.
Each Strategic Variable Funds Subaccount's Investment Advisory Agreement
also provides that Diversified, its directors, officers, employees, and certain
other persons performing specific functions for the Strategic Variable Funds
Subaccount will only be liable to the Strategic Variable Funds Subaccount for
losses resulting from willful misfeasance, bad faith, gross negligence, or
reckless disregard of duty.
For general information regarding Diversified, see the discussion in
"Management of Diversified Investors Portfolios--Investment Advisory Services"
on page __ above.
CUSTODIAN
Pursuant to a Custodian Agreement, Investors Bank & Trust Company (the
"Custodian") acts as the custodian of each Strategic Variable Funds
Subaccount's assets, i.e., each Strategic Variable Funds Subaccount's interest
in the underlying Variable Funds Subaccounts. For its services, the Custodian
will receive such compensation as may from time to time be agreed upon by it
and AUSA. AUSA has agreed to pay all such fees.
DIVERSIFIED INVESTORS PORTFOLIOS: DESCRIPTION OF TRUST
Diversified Investors Portfolios is organized as a trust under the law of
the State of New York. Under Diversified Investors Portfolios' Declaration of
Trust, the Trustees are authorized to issue beneficial interests in one or more
series. Currently there are fifteen active series of Diversified Investors
Portfolios. Investors in a Portfolio will be held personally liable for the
obligations and liabilities of that Portfolio (and of no other Portfolio),
subject, however, to indemnification by Diversified Investors Portfolios in the
event that there is imposed upon an investor a greater portion of the
liabilities and obligations of the Portfolio than its proportionate beneficial
interest in the Portfolio. The Declaration of Trust also provides that
Diversified Investors Portfolios shall maintain appropriate insurance (for
<PAGE>
example, a fidelity bond and errors and omissions insurance) for the protection
of Diversified Investors Portfolios, its investors, Trustees of Diversified
Investors Portfolios, officers, employees and agents, and covering possible
tort and other liabilities. Thus, the risk of an investor incurring financial
loss on account of investor liability is limited to circumstances in which both
inadequate insurance existed and Diversified Investors Portfolios itself was
unable to meet its obligations.
Investors in a Portfolio are entitled to participate pro rata in
distributions of taxable income, loss, gain and credit of their respective
Portfolio only. Upon liquidation or dissolution of a Portfolio, investors are
entitled to share pro rata in that Portfolio's (and no other Portfolio) net
assets available for distribution to its investors. Diversified Investor
Portfolios reserves the right to create and issue additional series of
beneficial interest, in which case the beneficial interests in each new
Portfolio would participate equally in the earnings, dividends and assets of
that particular Portfolio only (and no other Portfolio). Any property of
Diversified Investors Portfolios is allocated and belongs to a specific
Portfolio to the exclusion of all other Portfolios. All consideration received
by Diversified Investors Portfolios for the issuance and sale of beneficial
interests in a particular Portfolio, together with all assets in which such
consideration is invested or reinvested, all income, earnings and proceeds
thereof, and any funds or payments derived from any reinvestment of such
proceeds, is held by the Trustees of Diversified Investors Portfolios in a
separate subtrust (a Portfolio) for the benefit of investors in that Portfolio
and irrevocably belongs to that Portfolio for all purposes. Neither a Portfolio
nor investors in that Portfolio possess any right to or interest in the assets
belonging to any other Portfolio.
Investments in a Portfolio have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Investments in a Portfolio may not be transferred.
Each investor is entitled to a vote in proportion to the amount of its
investment in each Portfolio. Investors in a Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interests in all outstanding Portfolios may elect all of the Trustees if they
choose to do so and in such event other investors would not be able to elect
any Trustees. Investors in each Portfolio will vote as a separate class except
as to voting for the election of Trustees, as otherwise required by the 1940
Act, or if determined by the Trustees to be a matter which affects all
Portfolios. As to any matter which does not affect the interest of a particular
Portfolio, only investors in the one or more affected Portfolios are entitled
to vote. Diversified Investors Portfolios is not required and has no current
intention of holding annual meetings of investors, but will hold special
meetings of investors when in the judgment of Trustees it is necessary or
desirable to submit matters for an investor vote. The Declaration of Trust may
be amended without the vote of investors, except that investors have the right
to approve by affirmative majority vote any amendment which would affect their
voting rights, alter the procedures to amend the Declaration of Trust, or as
required by law or by Diversified Investors Portfolios' registration statement,
or as submitted to them by the Trustees. Any amendment submitted to investors
which the Trustees determine would affect the investors of any Portfolio shall
be authorized by vote of the investors of such Portfolio and no vote will be
required of investors in a Portfolio not affected.
Diversified Investors Portfolios or any Portfolio may enter into a merger
or consolidation, or sell all or substantially all of its assets, if approved
(a) at a meeting of investors by investors representing the lesser of (i) 67%
or more of the beneficial interest in the affected Portfolio present or
represented at such meeting, if investors in more that 50% of all such
beneficial interests are present or represented by proxy, or (ii) more than 50%
<PAGE>
of all such beneficial interests, or (b) by an instrument in writing without a
meeting, consented to by investors representing not less than a majority of the
beneficial interest in the affected Portfolio. Diversified Investors Portfolios
or any Portfolio may also be terminated (i) upon liquidation and distribution
of its assets if approved by the vote of two thirds of its investors (with the
vote of each being in proportion to the amount of its investment), (ii) by the
Trustees by written notice to its investors, or (iii) upon the bankruptcy or
expulsion of an investor in the affected Portfolio, unless the investors in
such Portfolio, by majority vote, agree to continue the Portfolio. Diversified
Investors Portfolios will be dissolved upon the dissolution of the last
remaining Portfolio.
The Declaration of Trust provides that obligations of Diversified
Investors Portfolios are not binding upon the Trustees individually but only
upon the property of Diversified Investors Portfolios and that the Trustees
will not be liable for any action or failure to act, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
The Declaration of Trust further provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with
Diversified Investors Portfolios, unless, as to liability to Diversified
Investors Portfolios or its investors, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or unless with respect to
any other matter it is finally adjudicated that they did not act in good faith
in the reasonable belief that their actions were in the best interests of
Diversified Investors Portfolios. In the case of settlement, such
indemnification will not be provided unless it has been determined by a court
or other body approving the settlement or other disposition, or by a reasonable
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees or in a written opinion of independent
counsel, that such officers or Trustees have not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
TAX INFORMATION RELATING
TO DIVERSIFIED INVESTORS PORTFOLIOS
Diversified Investors Portfolios is organized as a New York trust. The
Trust and each Portfolio are not subject to any income or franchise tax in the
State of New York. However, each investor in a Portfolio will be taxable on its
share (as determined in accordance with the governing instruments of the Trust)
of the Portfolio's ordinary income and capital gain in determining its income
tax liability. The determination of such share will be made in accordance with
the Internal Revenue Code and regulations promulgated thereunder.
Each Portfolio, since it is taxed as a partnership, is not subject to
federal income taxation. Instead, and investor must take into account, in
computing its federal income tax liability, its share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether it has received any cash distributions from the Portfolio.
Withdrawals by investors from each Portfolio generally will not result in
their recognizing any gain or loss for federal income tax purposes, except that
(1) gain will be recognized to the extent that any cash distributed exceeds the
basis of the investor's interest in the Portfolio prior to the distribution,
<PAGE>
(2) income or gain will be realized if the withdrawal is in liquidation of the
investor's entire interest in the Portfolio and includes a disproportionate
share of any unrealized receivables held by the Portfolio, and (3) loss will be
recognized if the distribution is in liquidation of that entire interest and
consists solely of cash and/or unrealized receivables. The basis of an
investor's interest in a Portfolio generally equals the amount of cash and the
basis of any property that the investor invests in the Portfolio, increased by
the investor's share of income from the Portfolio and decreased by the amount
of any cash distributions and the basis of any property distributed from the
Portfolio.
Each Portfolio's taxable year-end will be December 31. Although, as
described above, the Portfolios will not be subject to federal income tax, each
will file appropriate income tax returns.
It is intended that each Portfolio's assets, income and distributions will
be managed in such a way that an investor in each Portfolio will be able to
satisfy the requirements of Subchapter M of the Code.
There are certain tax issues that will be relevant to only certain of the
investors, specifically investors that are segregated asset accounts and
investors who contribute assets rather than cash to a Portfolio. It is intended
that such segregated asset accounts will be able to satisfy diversification
requirements applicable to them and that such contributions of assets will not
be taxable provided certain requirements are met. Such Investors are advised to
consult their own tax advisors as to the tax consequences of an investment in a
Portfolio.
HEDGING STRATEGIES
The use of hedging strategies, such as a Portfolio's entering into
interest rate futures contracts and purchasing options thereon, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith. Income
from the disposition of futures contracts and options thereon will be subject
to the limitation that a Portfolio must derive less than 30% of its gross
income from the sale or other disposition of securities, options or futures
contracts held for less than three months (the "Short-Short Limitation").
If certain requirements are satisfied, any increase in value on a position
that is part of a "designated hedge" will be offset by an decrease in value
(whether realized or not) of the offsetting hedging position during the period
of the hedge for purposes of determining whether the Short-Short Limitation is
satisfied. Thus, only the net gain (if any) from the designated hedge will be
included in gross income for purposes of that limitation. Each Portfolio
intends to qualify for this treatment when it engages in hedging transactions,
but at the present time it is not clear whether this treatment will be
available for all of a Portfolio's hedging transactions. To the extent this
treatment is not available, a Portfolio may be forced to defer the closing out
of certain options and futures contracts beyond the time when it otherwise
would be advantageous to do so, in order for an investor in the Portfolio to
qualify as a RIC.
OTHER TAXATION
The investment by an investor in a Portfolio does not cause the investor
to be liable for any income or franchise tax in the State of New York.
Investors are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Portfolio.
<PAGE>
STATUTORY BASIS FINANCIAL STATEMENTS OF AUSA
The statutory basis financial statements of AUSA that are included in this
Statement of Additional Information are different from the financial statements
of Diversified Investors Variable Funds and Diversified Investors Strategic
Variable Funds. The statutory basis financial statements of AUSA should be
considered only as bearing upon the ability of AUSA to meet its obligations
under the Contracts and should not be considered as bearing on the investment
performance of the assets held in Diversified Investors Variable Funds or
Diversified Investors Strategic Variable Funds.
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA--An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA--An obligation rated AA differs from the highest rated obligations only
in a small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A--An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB--An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB--An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
Plus (+) or minus (-)--The ratings from AA to BB may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Commercial Paper, including Tax Exempt
A1--A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2--A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3--A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
<PAGE>
MOODY'S
Corporate and Municipal Bonds
AAA--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
BAA--Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as wellassured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Commercial Paper
PRIME-1--Issuers rated Prime1 (or supporting institutions) have a superior
ability for repayment of senior shortterm debt obligations. Prime1 repayment
ability will often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
-- Well-established access to a range of financial markets and
assureds sources of alternate liquidity.
<PAGE>
FINANCIAL STATEMENTS - STATUTORY BASIS
AUSA LIFE INSURANCE COMPANY, INC.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
AUSA Life Insurance Company, Inc.
Financial Statements - Statutory Basis
Years ended December 31, 1998, 1997 and 1996
CONTENTS
Report of Independent Auditors................................................1
Audited Financial Statements
Balance Sheets - Statutory Basis..............................................2
Statements of Operations - Statutory Basis....................................4
Statements of Changes in Capital and Surplus - Statutory Basis................5
Statements of Cash Flows - Statutory Basis....................................6
Notes to Financial Statements - Statutory Basis...............................7
<PAGE>
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, 1998 and 1997 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, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
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, 1998
and 1997, or the results of its operations or its cash flows for each of the
three years in the period ended December 31, 1998.
However, 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, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 in conformity with accounting practices prescribed or permitted by the
Department of Insurance of the State of New York.
Ernst & Young LLP
Des Moines, Iowa
February 19, 1999
<PAGE>
AUSA Life Insurance Company, Inc.
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31
1998 1997
----------------------------
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 61,065 $ 68,131
Bonds 4,151,780 3,988,635
Stocks:
Preferred 2,582 1,792
Common, at market (cost: $14 in 1998 and
$118 in 1997) 2 144
Mortgage loans on real estate 413,107 495,009
Real estate acquired in satisfaction of debt, at cost less
accumulated depreciation ($2,474 in 1998 and $1,816
in 1997) 33,986 45,695
Policy loans 3,181 3,046
Other invested assets 30,795 22,414
----------------------------
Total cash and invested assets 4,696,498 4,624,866
Short-term note receivable from affiliate 10,400 8,800
Receivable from affiliates 14,731 794
Premiums deferred and uncollected 6,408 6,316
Accrued investment income 64,859 69,989
Federal income taxes recoverable 527 -
Other assets 12,567 7,609
Separate account assets 6,517,152 5,630,093
----------------------------
Total admitted assets $11,323,142 $10,348,467
============================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31
1998 1997
----------------------------
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 109,132 $ 103,370
Annuity 868,294 911,075
Accident and health 16,416 16,547
Policy and contract claim reserves:
Life 4,927 5,456
Accident and health 10,302 11,125
Other policyholders' funds 3,267,417 3,181,719
Remittances and items not allocated 58,724 35,267
Asset valuation reserve 84,077 67,324
Interest maintenance reserve 37,253 25,882
Payable to affiliates - 2,247
Deferred income 5,230 13,421
Payable under assumption reinsurance agreement 52,837 56,952
Other liabilities 7,422 8,400
Federal income taxes payable - 1,010
Separate account liabilities 6,497,865 5,608,364
----------------------------
Total liabilities 11,019,896 10,048,159
Commitments and contingencies
Capital and surplus:
Common stock, $125 par value, 20,000 shares authorized,
issued and outstanding 2,500 2,500
Paid-in surplus 319,180 319,180
Special surplus funds 1,827 1,607
Unassigned surplus (deficit) (20,261) (22,979)
----------------------------
Total capital and surplus 303,246 300,308
----------------------------
Total liabilities and capital and surplus $11,323,142 $10,348,467
============================
See accompanying notes.
</TABLE>
<PAGE>
AUSA Life Insurance Company, Inc.
Statements of Operations - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
Revenues:
Premiums and other considerations, net of reinsurance:
Life $ 22,664 $ 71,899 $ 21,120
Annuity 1,132,120 1,199,470 1,092,033
Accident and health 32,869 39,999 52,831
Net investment income 345,660 341,540 339,460
Amortization of interest maintenance reserve 6,116 3,392 2,326
Commissions and expense allowances on reinsurance
ceded 302 374 438
Other income - 17,240 10,739
-------------------------------------------
1,539,731 1,673,914 1,518,947
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits 32,464 39,045 50,647
Surrender benefits 1,117,653 1,175,051 864,643
Other benefits 20,886 14,316 11,699
Increase (decrease) in aggregate reserves for policies
and contracts:
Life 5,762 52,500 2,492
Annuity (42,781) 65,982 53,136
Accident and health (131) (1,357) (1,063)
Other (67) 580 609
Increase in liability for premium and other deposit
type funds 85,461 92,280 93,893
-------------------------------------------
1,219,247 1,438,397 1,076,056
Insurance expenses:
Commissions 69,009 79,099 87,938
General insurance expenses 95,169 92,613 83,885
Taxes, licenses and fees 1,466 3,717 3,335
Net transfers to separate accounts 130,910 42,490 255,672
Other expenses 978 181 145
-------------------------------------------
297,532 218,100 430,975
-------------------------------------------
1,516,779 1,656,497 1,507,031
-------------------------------------------
Gain from operations before federal income tax expense
and net realized capital gains (losses) on investments 22,952 17,417 11,916
Federal income tax expense 4,021 5,247 5,719
Gain from operations before net realized capital gains -------------------------------------------
(losses) on investments 18,931 12,170 6,197
Net realized capital gains (losses) on investments (net of
related federal income taxes and amounts transferred to
interest maintenance reserve) 3,770 831 (12,107)
-------------------------------------------
Net income (loss) $ 22,701 $ 13,001 $ (5,910)
===========================================
See accompanying notes.
</TABLE>
<PAGE>
AUSA Life Insurance Company, Inc.
Statements of Changes in Capital and
Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
SPECIAL UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS SURPLUS CAPITAL AND
STOCK SURPLUS FUNDS (DEFICIT) SURPLUS
-----------------------------------------------------
Balance at January 1, 1996 $2,500 $319,180 $1,357 $ 5,217 $328,254
Net loss - - - (5,910) (5,910)
Change in net unrealized capital gains (losses) - - - (460) (460)
Change in non-admitted assets - - - 437 437
Change in special surplus funds - - 116 - 116
Change in liability for reinsurance in
unauthorized companies - - - (42) (42)
Change in asset valuation reserve - - - (6,217) (6,217)
Seed money contributed to separate account,
net of redemptions - - - (12,500) (12,500)
Change in surplus in separate account - - - 14,783 14,783
Prior year federal income tax adjustment - - - 446 446
-----------------------------------------------------
Balance at December 31, 1996 2,500 319,180 1,473 (4,246) 318,907
Net income - - - 13,001 13,001
Change in net unrealized capital gains (losses) - - - (2,710) (2,710)
Change in non-admitted assets - - - (8,617) (8,617)
Change in special surplus funds - - 134 - 134
Change in liability for reinsurance in
unauthorized companies - - - 29 29
Change in asset valuation reserve - - - (20,446) (20,446)
Seed money withdrawn from separate account,
net of redemptions - - - 11,700 11,700
Change in surplus in separate account - - - (11,749) (11,749)
Prior year federal income tax adjustment - - - 59 59
-----------------------------------------------------
Balance at December 31, 1997 2,500 319,180 1,607 (22,979) 300,308
Net income - - - 22,701 22,701
Change in net unrealized capital gains (losses) - - - 4,439 4,439
Change in non-admitted assets - - - (511) (511)
Change in special surplus funds - - 220 - 220
Change in liability for reinsurance in
unauthorized companies - - - 18 18
Change in asset valuation reserve - - - (16,753) (16,753)
Seed money withdrawn from separate account,
net of redemptions - - - 1,818 1,818
Change in surplus in separate account - - - (994) (994)
Dividend to stockholder - - - (8,000) (8,000)
-----------------------------------------------------
Balance at December 31, 1998 $2,500 $319,180 $1,827 $(20,261) $303,246
=====================================================
See accompanying notes.
</TABLE>
<PAGE>
AUSA Life Insurance Company, Inc.
Statements of Cash Flows - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance $1,191,035 $1,340,757 $1,177,613
Net investment income 353,054 340,150 345,153
Life and accident and health claims (33,979) (40,151) (52,590)
Surrender benefits and other fund withdrawals (1,117,653) (1,175,051) (864,643)
Other benefits to policyholders (20,876) (14,290) (11,697)
Commissions, other expenses and other taxes (169,784) (184,457) (193,405)
Net transfers to separate account (130,976) (43,309) (257,467)
Federal income taxes paid (5,558) (4,704) (4,490)
Other, net (3,806) (3,744) (14,431)
-------------------------------------------
Net cash provided by operating activities 61,457 215,201 124,043
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks 1,381,784 968,184 777,107
Common stocks 164 - 5,288
Mortgage loans on real estate 138,723 179,810 165,460
Real estate 22,067 25,104 -
Policy loans - 16 4
Other (21) - -
-------------------------------------------
1,542,717 1,173,114 947,859
Cost of investments acquired:
Bonds and preferred stocks (1,554,838) (1,260,122) (1,101,918)
Common stocks - (103) (589)
Mortgage loans on real estate (51,862) (60,722) (42,118)
Real estate (561) - (521)
Policy loans (135) (146) (153)
Other 5,756 (17,805) (2,695)
-------------------------------------------
(1,601,640) (1,338,898) (1,147,994)
-------------------------------------------
Net cash used in investing activities (58,923) (165,784) (200,135)
FINANCING ACTIVITIES
Payment of intercompany notes, net (1,600) (9,400) (19,200)
Dividends to stockholders (8,000) - -
-------------------------------------------
Net cash used in financing activities (9,600) (9,400) (19,200)
-------------------------------------------
Increase (decrease) in cash and short-term investments (7,066) 40,017 (95,292)
Cash and short-term investments at beginning of year 68,131 28,114 123,406
-------------------------------------------
Cash and short-term investments at end of year $ 61,065 $ 68,131 $ 28,114
===========================================
See accompanying notes.
</TABLE>
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
AUSA Life Insurance Company, Inc. ("the Company") is a stock life insurance
company and is 82 percent owned by First AUSA Life Insurance Company ("First
AUSA"), a wholly-owned subsidiary of AEGON USA, Inc. ("AEGON"), and 18 percent
owned by Veterans Life Insurance Company, an indirect wholly-owned subsidiary
of AEGON. AEGON is a wholly-owned subsidiary of AEGON N.V., a holding company
organized under the laws of The Netherlands. Effective September 24, 1993,
First AUSA purchased from The Dreyfus Corporation ("Dreyfus"), its entire
interest in Dreyfus Life Insurance Company and subsequently changed the name to
AUSA Life Insurance Company, Inc. 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.
On October 1, 1998, the Company completed a merger with First Providian Life
and Health Insurance Company ("FPLH"), an indirect wholly-owned subsidiary of
Commonwealth General Corporation which, in turn, is an indirect wholly-owned
subsidiary of AEGON, whereby FPLH was merged directly into the Company. The
accompanying financial statements give retroactive effect as if the merger had
occurred on January 1, 1996 in conformity with the practices of the NAIC and
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York. This merger was accounted for under the pooling of
interests method of accounting and, accordingly, the historical book values
carried over from the separate companies to the Company.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Summarized financial information for the Company and FPLH prior to the merger
are as follows:
PERIOD ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
---------------------------------------------
(UNAUDITED)
Revenues:
The Company $1,155,265 $ 1,585,260 $1,454,207
FPLH 75,929 88,654 64,740
---------------------------------------------
As restated $1,231,194 $ 1,673,914 $1,518,947
=============================================
Net income (loss):
The Company $ 3,944 $ 3,503 $ (13,714)
FPLH 6,911 9,498 7,804
---------------------------------------------
As restated $ 10,855 $ 13,001 $ (5,910)
=============================================
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------------------------
(UNAUDITED)
Assets:
The Company $10,411,596 $ 9,951,625
FPLH 445,873 396,842
--------------------------------
As restated $10,857,469 $10,348,467
================================
Liabilities:
The Company $10,208,203 $ 9,745,504
FPLH 352,184 302,655
--------------------------------
As restated $10,560,387 $10,048,159
================================
Capital and surplus:
The Company $ 203,393 $ 206,121
FPLH 93,689 94,187
--------------------------------
As restated $ 297,082 $ 300,308
================================
NATURE OF BUSINESS
The Company primarily sells group fixed and variable annuities and group life
coverages. The Company is licensed in 49 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.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 ("Insurance Department"), 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 (reported as
a liability), changes to which are 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) stock options settled in cash are recorded as an expense of the
Company's indirect parent rather than charged to current operations; (m)
adjustments to federal income taxes of prior years
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are charged or credited directly to unassigned surplus, rather than reported as
a component of expense in the statement of operations; and (n) 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.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted
codified statutory accounting principles ("Codification"). Codification 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. Codification will require
adoption by the various states before it becomes the prescribed statutory basis
of accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the State
of New York must adopt Codification as the prescribed basis of accounting on
which domestic insurers must report their statutory-basis results to the
Insurance Department. At this time, it is unclear whether the State of New York
will adopt Codification. However, based on current guidance, management
believes that the impact of Codification will not be material to the Company's
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 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
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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, 1998, 1997 and 1996, the
Company excluded investment income due and accrued of $216, $473 and $469,
respectively, with respect to such practices.
The Company uses interest rate swaps as part of its overall interest rate risk
management strategy for certain life insurance and annuity products. The net
interest effect of such swap transactions is reported as an adjustment of
interest income from the hedged items as incurred.
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 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 Method. Reserves for universal life policies
are based on account balances adjusted for the Commissioners' Reserve Valuation
Method.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 3.00 to 8.50 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.
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 ACCOUNTS
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 and, accordingly, the operations of
the separate accounts are not included in the accompanying financial
statements.
Certain separate account assets and liabilities reported in the accompanying
financial statements contain contractual guarantees. Guaranteed separate
accounts represent funds invested by the Company for the benefit of individual
contract holders who are guaranteed certain returns as specified in the
contracts. Separate account asset performance different than guaranteed
requirements is either transferred to or received from the general account and
reported in the statements of operations. Guaranteed separate account assets
and liabilities are reported at estimated fair value except for certain
government and fixed-rate separate accounts, which are carried at amortized
cost. The assets and liabilities of the nonguaranteed separate accounts are
carried at estimated fair value.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTION PLAN
AEGON N.V. sponsors a stock option plan for eligible employees of the Company.
Under this plan, certain employees have indicated a preference to immediately
sell shares received as a result of their exercise of the stock options; in
these situations, AEGON N.V. has settled such options in cash rather than
issuing stock to these employees. These cash settlements are paid by the
Company, and AEGON N.V. subsequently reimburses the Company for such payments.
Under statutory accounting principles, the Company does not record any expense
related to this plan, as the expense is recognized by AEGON N.V. However, the
Company is allowed to record a deduction in the consolidated tax return filed
by the Company and certain affiliates.
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 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
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 is assumed to equal its 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 swaps: Estimated fair value of interest rate swaps are based
upon the pricing differential for similar swap agreements.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of SFAS No. 107
and No. 119:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
DECEMBER 31
1998 1997
------------------------ ------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------------------ ------------------------
ADMITTED ASSETS
Cash and short-term investments $ 61,065 $ 61,065 $ 68,131 $ 68,131
Bonds 4,151,780 4,246,901 3,988,635 4,083,280
Preferred stock 2,582 2,529 1,792 1,892
Common stock 2 2 144 144
Mortgage loans on real estate 413,107 429,716 495,009 504,947
Interest rate swap - - 391
Policy loans 3,181 3,181 3,046 3,046
Separate account assets 6,517,152 6,527,180 5,630,093 5,640,386
LIABILITIES
Investment contract liabilities 4,134,507 4,057,004 4,091,938 4,011,465
Separate account annuities 6,408,436 6,387,445 5,594,880 5,577,854
</TABLE>
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-----------------------------------------------
DECEMBER 31, 1998
Bonds:
United States Government and agencies $ 99,834 $ 1,776 $ 285 $ 101,325
State, municipal and other government 38,387 1,427 1,625 38,189
Public utilities 355,719 10,239 825 365,133
Industrial and miscellaneous 2,398,132 88,051 25,538 2,460,645
Mortgage-backed and asset-backed
securities 1,259,708 27,387 5,486 1,281,609
-----------------------------------------------
4,151,780 128,880 33,759 4,246,901
Preferred stocks 2,582 - 53 2,529
-----------------------------------------------
$4,154,362 $128,880 $33,812 $4,249,430
===============================================
DECEMBER 31, 1997
Bonds:
United States Government and agencies $ 102,628 $ 943 $ 255 $ 103,316
State, municipal and other government 60,427 1,413 1,761 60,079
Public utilities 251,071 4,943 892 255,122
Industrial and miscellaneous 2,324,342 66,883 6,424 2,384,801
Mortgage-backed and asset-backed
securities 1,250,167 32,779 2,984 1,279,962
-----------------------------------------------
3,988,635 106,961 12,316 4,083,280
Preferred stocks 1,792 100 - 1,892
-----------------------------------------------
$3,990,427 $107,061 $12,316 $4,085,172
===============================================
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1998, 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.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
CARRYING ESTIMATED
VALUE FAIR VALUE
--------------------------
Due in one year or less $ 262,288 $ 263,578
Due after one year through five years 1,553,746 1,582,380
Due after five years through ten years 825,886 849,510
Due after ten years 250,152 269,824
--------------------------
2,892,072 2,965,292
Mortgage-backed and asset-backed securities 1,259,708 1,281,609
--------------------------
$4,151,780 $4,246,901
===========================
</TABLE>
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
Interest on bonds and notes $290,967 $285,730 $267,510
Mortgage loans 46,027 57,659 83,511
Real estate 12,741 13,976 7,225
Dividends on equity investments 254 223 220
Interest on policy loans 317 168 154
Derivative instruments (3,265) 100 -
Other investment gain (loss) 9,568 1,543 (5,482)
---------------------------------------
Gross investment income 356,609 359,399 353,138
Investment expenses 10,949 17,859 13,678
---------------------------------------
Net investment income $345,660 $341,540 $339,460
=======================================
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
Proceeds $1,381,784 $968,184 $777,107
---------------------------------------
Gross realized gains $ 19,871 $ 19,165 $ 9,697
Gross realized losses (5,974) (11,997) (12,291)
---------------------------------------
Net realized gains (losses) $ 13,897 $ 7,168 $ (2,594)
=======================================
</TABLE>
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
At December 31, 1998, investments with an aggregate carrying value of $4,378
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required
by statute.
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
REALIZED
--------------------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------
Debt securities $13,897 $ 7,168 $ (2,594)
Common stock 60 - 244
Preferred stock 170 (7) (44)
Short-term investments (41) (6) (115)
Mortgage loans on real estate 325 287 (12,415)
Real estate 3,967 4,059 -
Other invested assets 2,859 5,035 6,872
--------------------------------------
21,237 16,536 (8,052)
Tax effect 20 (747) 87
Transfer to interest maintenance reserve (17,487) (14,958) (4,142)
--------------------------------------
Total realized gains (losses) $ 3,770 $ 831 $(12,107)
======================================
CHANGE IN UNREALIZED
--------------------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------
Debt securities $323 $56,129 $(87,888)
Equity securities (38) 21 (190)
--------------------------------------
Change in unrealized appreciation
(depreciation) $285 $56,150 $(88,078)
======================================
Gross unrealized gains and gross unrealized losses on equity securities at December 31,
1998, 1997 and 1996 were as follows:
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------
Unrealized gains $ - $38 $16
Unrealized losses (12) (12) (11)
--------------------------------------
Net unrealized gains (losses) $(12) $26 $ 5
======================================
</TABLE>
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
During 1998, the Company issued mortgage loans with interest rates ranging from
6.55% to 8.49%. The maximum percentage of any one loan to the value of the
underlying real estate at origination was 79%. 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. The Company requires all mortgage loans to carry fire insurance equal
to the value of the underlying property.
During 1998, 1997 and 1996, there were $2,796, $4,427 and $28,929,
respectively, in foreclosed mortgage loans that were transferred to real
estate. At December 31, 1998 and 1997, the Company held a mortgage loan loss
reserve in the asset valuation reserve of $34,083 and $20,191, respectively.
The mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
- ------------------------------------ ------------------------------------
DECEMBER 31 DECEMBER 31
1998 1997 1998 1997
------ ------ ------ ------
South Atlantic 22% 20% Office 37% 30%
Mid-Atlantic 20 16 Industrial 29 13
E. North Central 20 16 Retail 24 19
Pacific 9 20 Apartment 4 23
W. South Central 9 2 Agricultural 2 -
New England 8 7 Other 4 15
Mountain 7 15
E. South Central 3 2
W. North Central 2 2
At December 31, 1998, the Company had no 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.
The Company utilized an interest rate swap agreement as part of its efforts to
hedge and manage fluctuations in the market value of its investment portfolio
attributable to changes in general interest rate levels and to manage duration
mismatch of assets and liabilities. The contract or notional amounts of those
instruments reflect the extent of involvement in the various types of financial
instruments.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company has delivered funds or securities under terms of the contract) that
would result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). Credit loss exposure resulting from nonperformance
by a counterparty for commitments to extend credit is represented by the
contractual amounts of the instruments.
At December 31, 1998, the Company held no derivative instruments. At December
31, 1998 and 1997, the Company's outstanding financial instruments with on and
off-balance sheet risks, shown in notional amounts, are summarized as follows:
NOTIONAL AMOUNT
-----------------------
1998 1997
-----------------------
Derivative securities:
Interest rate swaps:
Receive fixed - pay floating $74,588 $50,800
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:
1998 1997 1996
-------------------------------------------
Direct premiums $1,183,777 $1,309,731 $1,185,163
Reinsurance assumed 6,415 6,905 9,962
Reinsurance ceded (2,539) (5,268) (29,141)
-------------------------------------------
Net premiums earned $1,187,653 $1,311,368 $1,165,984
-------------------------------------------
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. REINSURANCE (CONTINUED)
The Company received reinsurance recoveries in the amounts of $2,493,
$1,992 and $1,758 during 1998, 1997 and 1996, respectively.
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1998 and 1997 of $143,819 and
$153,092, respectively.
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 December 31, 1993, and on all new business written
after that date. At the end of nine years from the date of closing, the Company
will purchase from MONY the remaining transferred business inforce based upon a
formula described in the agreement. At December 31, 1998 and 1997, the Company
owed MONY $52,837 and $56,952, 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 from the date of closing.
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 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.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax return
filing with certain affiliated companies. Under the terms of a tax-sharing
agreement between the Company and its affiliates, the Company computes federal
income tax expense as if it were filing a separate income tax return, except
that tax credits and net operating loss carryforwards are determined on the
basis of the consolidated group. Additionally, the alternative minimum tax is
computed for the consolidated group and the resulting tax, if any, is allocated
back to the separate companies on the basis of the separate companies'
alternative minimum taxable income.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before federal income
tax expense and net realized capital gains (losses) on investments primarily
due to differences in the statutory and tax treatment of certain investments,
deferred policy acquisition costs, stock options exercised, dividends received
deduction, carryforward (utilization) of operating loss, IMR amortization, and
certain adjustments related to the agreement between MONY and the Company.
These adjustments caused the Company to calculate federal income tax expense
using alternative minimum tax requirements in 1998.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to net realized capital gains (losses) on
investments 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 ($2,427 at December 31, 1998). 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 $849.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $8,514 which expire through 2011.
In 1998, the Company reached a final settlement with the Internal Revenue
Service for years 1993 through 1995 resulting in no tax due or refunded.
<PAGE>
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>
<S> <C> <C> <C> <C>
DECEMBER 31
1998 1997
------------------------- -------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------------------- -------------------------
Subject to discretionary withdrawal with
market value adjustment $ 912,692 9% $ 910,528 9%
Subject to discretionary withdrawal at book
value less surrender charge 1,013,495 10 1,045,807 11
Subject to discretionary withdrawal at
market value 3,678,649 34 2,950,639 30
Subject to discretionary withdrawal at book
value (minimal or no charges or
adjustments) 2,666,670 25 2,616,308 27
Not subject to discretionary withdrawal
provision 2,416,602 22 2,317,823 23
------------------------- -------------------------
10,688,108 100% 9,841,105 100%
============ ============
Less reinsurance ceded 143,475 152,726
------------- -------------
Total policy reserves on annuities and
deposit fund liabilities $10,544,633 $9,688,379
============= =============
</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. Information regarding the separate accounts of the
Company as of and for the years ended December 31, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
--------------------------------------------
Premiums, deposits and other
considerations for the year ended
December 31, 1998 $ 84,150 $ 767,676 $ 851,826
============================================
Reserves for separate accounts with
assets as of December 31, 1998 at:
Fair value $2,350,983 $3,461,715 $5,812,698
Amortized cost 595,738 - 595,738
--------------------------------------------
Total $2,946,721 $3,461,715 $6,408,436
============================================
</TABLE>
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
--------------------------------------------
Premiums, deposits and other
considerations for the year ended
December 31, 1997 $ 147,638 $ 648,056 $ 795,694
============================================
Reserves for separate accounts with
assets as of December 31, 1997 at:
Fair value $2,204,931 $2,767,245 $4,972,176
Amortized cost 622,703 - 622,703
--------------------------------------------
Total $2,827,634 $2,767,245 $5,594,879
============================================
Premiums, deposits and other
considerations for the year ended
December 31, 1996 $ - $ 747,506 $ 747,506
============================================
Reserves for separate accounts with
assets as of December 31, 1996 at:
Fair value $2,022,843 $2,178,445 $4,201,288
Amortized cost 613,565 - 613,565
--------------------------------------------
Total $2,636,408 $2,178,445 $4,814,853
============================================
</TABLE>
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, is summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
--------------------------------------------
DECEMBER 31, 1998
Subject to discretionary withdrawal
with market value adjustment $ 345,379 $ - $ 345,379
Subject to discretionary withdrawal at
book value less surrender charge 250,359 - 250,359
Subject to discretionary withdrawal at
market value 216,935 3,461,715 3,678,650
Not subject to discretionary withdrawal 2,134,048 - 2,134,048
--------------------------------------------
$2,946,721 $3,461,715 $6,408,436
============================================
</TABLE>
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
--------------------------------------------
DECEMBER 31, 1997
Subject to discretionary withdrawal with
market value adjustment $ 358,061 $ - $ 358,061
Subject to discretionary withdrawal at
book value less surrender charge 264,642 - 264,642
Subject to discretionary withdrawal at
market value 180,802 2,767,245 2,948,047
Not subject to discretionary withdrawal 2,024,129 - 2,024,129
--------------------------------------------
$2,827,634 $2,767,245 $5,594,879
============================================
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts
is presented below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
-----------------------------------
Transfers as reported in the summary of operations of
the separate accounts annual statement:
Transfers to separate accounts $851,826 $795,663 $747,677
Transfers from separate accounts 723,321 767,049 505,592
-----------------------------------
Net transfers to separate accounts 128,505 28,614 242,085
Reconciling adjustments - HUB level fees not paid to
AUSA general account 1,317 13,756 13,520
Fees paid to external fund manager - 120 67
Assumption of liabilities via merger of FPLH 1,088 - -
-----------------------------------
Net adjustments 2,405 13,876 13,587
-----------------------------------
Transfers as reported in the summary of operations of
the life, accident and health annual statement $130,910 $ 42,490 $255,672
===================================
</TABLE>
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, 1998 and 1997, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
GROSS LOADING NET
-------------------------------
DECEMBER 31, 1998
Ordinary direct first year business $ 351 $ 339 $ 12
Ordinary direct renewal business 6,760 1,087 5,673
Group life direct business 851 482 369
Credit life 37 - 37
Reinsurance ceded (6) - (6)
-------------------------------
7,993 1,908 6,085
Accident and health:
Direct 363 - 363
Reinsurance ceded (40) - (40)
-------------------------------
Total accident and health 323 - 323
-------------------------------
$8,316 $1,908 $6,408
===============================
DECEMBER 31, 1997
Ordinary direct first year business $ 460 $ 336 $ 124
Ordinary direct renewal business 6,138 1,081 5,057
Group life direct business 1,267 433 834
Credit life 41 - 41
Reinsurance ceded (14) - (14)
-------------------------------
7,892 1,850 6,042
Accident and health:
Direct 325 - 325
Reinsurance ceded (51) - (51)
-------------------------------
Total accident and health 274 - 274
-------------------------------
$8,166 $1,850 $6,316
===============================
At December 31, 1998 and 1997, the Company had insurance in force aggregating
$474,471 and $597,855, 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 $1,348 and $1,476 to cover these deficiencies at December
31, 1998 and 1997, respectively.
7. DIVIDEND RESTRICTIONS
The Company is subject to certain limitations relative to statutory surplus,
imposed by the State of New York, on the payment of dividends to its parent
company.
The Company paid dividends to its parent of $8,000 in 1998. The Company is not
entitled to pay out any dividends in 1999 without prior approval.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
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 $4, $0 and $13 of pension
expense for the years ended December 31, 1998, 1997 and 1996, 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 $9, $12 and $21 of expense for the years ended December
31, 1998, 1997 and 1996, respectively.
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 $4, $2 and
$2 for the years ended December 31, 1998, 1997 and 1996, respectively.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
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 1998,
1997 and 1996, the Company paid $5,650, $7,330 and $5,739, 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 4.95% at December 31, 1998. During 1998,
1997 and 1996, the Company paid net interest of $232, $142 and $29,
respectively, to affiliates.
10. COMMITMENTS AND CONTINGENCIES
The Company has issued Trust GIC contracts to plan sponsors totaling $153,146
at December 31, 1998, pursuant to terms under which the plan sponsor retains
ownership of the assets related to these contracts. The Company guarantees
benefit responsiveness in the event that plan benefit requests and other
contractual commitments exceed plan cash flows. The plan sponsor agrees to
reimburse the Company for such benefit payments with interest, either at a
fixed or floating rate, from future plan and asset cash flows. In return for
this guarantee, the Company receives a premium which varies based on such
elements as benefit responsive exposure and contract size. The Company
underwrites the plans for the possibility of having to make benefit payments
and also must agree to the investment guidelines to ensure appropriate credit
quality and cash flow matching. The assets and liabilities relating to such
contracts are not recognized in the Company's statutory-basis financial
statements.
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.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 and assessments attributable to business reinsured from MONY
for premiums received prior to the date of the transaction will be paid by MONY
(see Note 1). 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
Associations. The guaranty fund expense was $126, $586 and $246 for the years
ended December 31, 1998, 1997 and 1996, respectively.
11. YEAR 2000 (UNAUDITED)
The term Year 2000 issue generally refers to the improper processing of dates
and incorrect date calculations that might occur in computer software and
hardware and embedded systems as the Year 2000 is approached. The use of
computer programs that rely on two-digit date fields to perform computations
and decision-making functions may cause systems to malfunction when processing
information involving dates after 1999. For example, any computer software that
has date-sensitive coding might recognize a code of 00 as the year 1900 rather
than the year 2000.
The Company has developed a Year 2000 Project Plan (the Plan) to address the
Year 2000 issue as it affects the Company's internal Information Technology
("IT") and non-IT systems, and to assess Year 2000 issues relating to third
parties with whom the Company has critical relationships.
The Plan for addressing internal systems generally includes an assessment of
internal IT and non-IT systems and equipment affected by the Year 2000 issue;
definition of strategies to address affected systems and equipment; remediation
of identified systems and equipment; internal testing and certification that
each internal system is Year 2000 compliant; and a review of existing and
revised business resumption and contingency plans to address potential Year
2000 issues. The Company has remediated and tested substantially all of its
mission-critical internal IT systems as of December 31, 1998. The Company
continues to remediate and test certain non-critical internal IT systems,
internal non-IT systems and will continue with a revalidation testing program
throughout 1999.
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
11. YEAR 2000 (UNAUDITED) (CONTINUED)
The Company's Year 2000 issues are more complex because a number of its systems
interface with other systems not under the Company's control. The Company's
most significant interfaces and uses of third-party vendor systems are in the
bank, financial services and trust areas. The Company utilizes various banks to
handle numerous types of financial and sales transactions. Several of these
banks also provide trustee and custodial services for the Company's investment
holdings and transactions. These services are critical to a financial services
company such as the Company as its business centers around cash receipts and
disbursements to policyholders and the investment of policyholder funds. The
Company has received written confirmation from its vendor banks regarding their
status on Year 2000. The banks indicate their dedication to resolving any Year
2000 issues related to their systems and services prior to December 31, 1999.
The Company anticipates that a considerable effort will be necessary to ensure
that its corrected or new systems can properly interface with those business
partners with whom it transmits and receives data and other information
(external systems). The Company has undertaken specific testing regimes with
these third-party business partners and expects to continue working with its
business partners on any interfacing of systems. However, the timing of
external system compliance cannot currently be predicted with accuracy because
the implementation of Year 2000 readiness will vary from one company to
another.
The Company does have some exposure to date-sensitive embedded technology such
as micro-controllers, but the Company views this exposure as minimal. Unlike
other industries that may be equipment intensive, like manufacturing, the
Company is a life insurance and financial services organization providing
insurance, annuities and pension products to its customers. As such, the
primary equipment and electronic devices in use are computers and telephone
related equipment. This type of hardware can have date-sensitive embedded
technology which could have Year 2000 problems. Because of this exposure, the
Company has reviewed its computer hardware and telephone systems, with
assistance from the applicable vendors, and has upgraded, or replaced, or is in
the process of replacing any equipment that will not properly process
date-sensitive data in the Year 2000 or beyond.
For the Company, a reasonably likely worst case scenario might include one or
more of the Company's significant policyholder systems being non-compliant.
Such an event could result in a material disruption of the Company's
operations. Specifically, a number of the Company's operations could experience
an interruption in the ability to collect and process premiums or deposits,
process claim payments, accurately maintain policyholder information,
accurately maintain accounting records, and/or perform adequate customer
service. Should the worst case scenario occur, it could, dependent upon its
duration, have a material impact on the Company's business and financial
condition. Simple failures can
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
11. YEAR 2000 (UNAUDITED) (CONTINUED)
be repaired and returned to production within a matter of hours with no
material impact. Unanticipated failures with a longer service disruption period
could have a more serious impact. For this reason, the Company is placing
significant emphasis on risk management and Year 2000 business resumption
contingency planning in 1999 by modifying its existing business resumption and
disaster recovery plans to address potential Year 2000 issues.
The actions taken by management under the Year 2000 Project Plans are intended
to significantly reduce the Company's risk of a material business interruption
based on the Year 2000 issues. It should be noted that the Year 2000 computer
problem, and its resolution, is complex and multifaceted, and any company's
success cannot be conclusively known until the Year 2000 is reached. In spite
of its efforts or results, the Company's ability to function unaffected to and
through the Year 2000 may be adversely affected by actions (or failure to act)
of third parties beyond our knowledge or control. It is anticipated that there
may be problems that will have to be resolved in the ordinary course of
business on and after the Year 2000. However, the Company does not believe that
the problems will have a material adverse affect on the Company's operations or
financial condition.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(1) Financial Statements of AUSA audited by Ernst & Young L.L.P. (**)
(2) Financial Statements of Diversified Investors Variable Funds and
Diversified Investors Portfolios audited by Coopers & Lybrand
L.L.P. (***)
(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 Registration Statement
No. 33-73734 under the Securities Act of 1933 are incorporated herein
by reference.
(10) Opinions and Consents of Independent Accountants.(**)
(14) Financial Data Schedules.(**)
** To be filed herewith.
*** To be incorporated herein by reference.
ITEM 25. DIRECTORS AND OFFICERS OF AUSA
The Directors and Officers of AUSA are set forth below.
<TABLE>
<CAPTION>
<S> <C>
DIRECTORS
BROWNSTONE MANAGEMENT CONSULTANTS,
INC., 14 Windward Avenue, White Plains, New
William Brown, Jr......................... York 10605.
AEGON USA, Inc., 4333 Edgewood Road, N.E.,
William L. Busler......................... Cedar Rapids, Iowa 52499.
AEGON USA, Inc., Suite 302, Brown Trail,
Jack R. Dykhouse.......................... Bedford, Texas 76021.
WIENER, FRUSHTICK & STRAUB, 500 Fifth
Steven E. Frushtick....................... Avenue, New York, New York 10110.
AEGON USA Investment Management, 400
Eric Goodman.............................. West Market Street, Louisville, Kentucky 40204.
National Multiple Sclerosis Society,
900 Birdseye Road, P.O. Box 112, Orient, New York
Vice Admiral Thor Hanson.................. 11957-0112.
<PAGE>
EMMERLING POST, Inc., 415 Madison Avenue,
Peter P. Post............................. New York, New York 10017.
DIVERSIFIED INVESTMENT ADVISORS, Inc., 4
Colette F. Vargas......................... Manhattanville Road, Purchase, New York 10577.
AEGON INSURANCE GROUP, 51 JFK Parkway,
Cor H. Verhagen........................... Short Hills, New Jersey 07078.
COLUMBIA UNIVERSITY SCHOOL OF
BUSINESS, 725 Uris Hall, 116th Street &
Professor E. Kirby Warren................. Broadway, New York, New York 10027.
DIRECTOR-OFFICERS
Larry G. Brown (Chairman of the Board and WESTERN RESERVE LIFE, P.O. Box 5068,
Secretary)................................ Clearwater, Florida 34618
Vera F. Mihaic (Director and Vice AUSA LIFE INSURANCE COMPANY, INC., 666
President)................................ Fifth Avenue, New York, New York 10103-0001.
DIVERSIFIED INVESTMENT ADVISORS, INC., 4
Tom Schlossberg (Director and President).. Manhattanville Road, Purchase, New York 10577.
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER CONTROL WITH THE INSURANCE COMPANY
No person is directly or indirectly controlled by the Registrant. The
Registrant is a separate account of the Insurance Company.
The following is a list of all entities directly or indirectly controlled
or under common control with the Insurance Company, showing the state or other
sovereign power under the laws of which each is organized and the percentage
ownership of voting securities giving rise to the control relationship.
ALABAMA
ZCI, Inc. -- 100%
ARIZONA
Bankers Financial Life Insurance Company (Footnote 6)
Iowa Fidelity Life Insurance Company -- 100% Voting Common (Footnote 4)
Southwest Equity Life Insurance Company -- 100% Voting Common
CALIFORNIA
Ammest Insurance Agency, Inc. -- 100%
Endeavor Investment Advisors -- 49.9% (Footnote 7)
ISI Insurance Agency, Inc. and its subsidiaries -- 100% (Footnote 5)
Zahorik Company, Inc. -- 100%
<PAGE>
DELAWARE
Academy Insurance Group, Inc. -- 100%
Academy Services, Inc. -- 100%
AEGON Abbet Management Services, Inc. -- 100%
AEGON USA Real Estate Services, Inc. -- 100%
AEGON U.S. Holding Corporation -- 100%
Benefit Plans, Inc. -- 100%
Capital 200 Block Corporation -- 100%
Capital General Development Corporation -- 100%
Capital Liberty, L.P. (Footnote 18)
Capital Real Estate Development Corporation -- 100%
Commonwealth General Corporation -- 100% (Footnote 2)
Data/Mark Services, Inc. -- 100%
Diversified Financial Products, Inc. -- 100%
Diversified Investors Securities Corp. -- 100%
Diversified Investment Advisors, Inc. -- 100%
Force Financial Group, Inc. -- 100%
Idex Management, Inc. -- 100%
Intersecurities, Inc. -- 100%
Landauer Associates, Inc. -- 100%
Life Investors Alliance, LLC -- 100%
Money Services, Inc. -- 100%
OSC Holding, Inc. -- 100%
PB Investment Advisors, Inc. -- 100%
RCC North America, Inc. -- 100% (Footnote 3)
Veterans Insurance Services, Inc. -- 100%
<PAGE>
DISTRICT OF COLUMBIA
Financial Planning Services, Inc. -- 100%
FLORIDA
AEGON Equity Group, Inc. -- 100%
Idex Investor Services, Inc. -- 100%
Independence Automobile Association, Inc. -- 100%
WRL Investment Management, Inc. -- 100%
WRL Investment Services, Inc. -- 100%
GEORGIA
Independence Automobile Club, Inc. -- 100%
NCOA Motor Club, Inc. -- 100%
ILLINOIS
AEGON Assignment Corporation -- 100%
Frazer Association Consultants, Inc. -- 100% (Footnote 19)
Veterans Life Insurance Company -- 100%
INDIANA
AEGON Management Company -- 100%
IOWA
AEGON USA Investment Management, Inc. -- 100%
AEGON USA Realty Advisors, Inc. -- 100% (Footnotes 9)
AEGON USA, Inc. -- 100% (Footnote 1)
AEGON USA Securities, Inc. -- 100%
AUSA Financial Markets, Inc. -- 100%
Bankers United Life Assurance Company -- 100%
Cadet Holding Corp. -- 100%
Investors Warranty of America Inc. -- 100%
<PAGE>
Landauer Realty Advisors, Inc. -- 100%
Life Investors Agency Group, Inc. -- 100%
Life Investors Insurance Company of America -- 100%
Massachusetts Fidelity Trust Company -- 100%
PFL Life Insurance Company -- 100%
RCC Properties Limited Partnership (Footnotes 12 and 13)
Realty Information Systems, Inc. -- 100% (Footnote 10)
Universal Benefits Corporation -- 100%
USP Real Estate Investment Trust (Footnotes 11 and 13)
KANSAS
Ammest Development Corporation, Inc. -- 100%
Trip Mate Insurance Agency, Inc. -- 100%
KENTUCKY
AEGON Assignment Corporation of Kentucky -- 100%
Capital Broadway Corporation -- 100%
Commonwealth General Assignment Corporation -- 100%
Commonwealth General Corporation Voluntary
Employees' Beneficiary Association -- 100%
Monumental Agency Group, Inc. -- 100%
Worldwide Casualty Insurance Company -- 100% (Footnote 21)
Worldwide Direct Auto Insurance Company -- 100% (Footnote 22)
MARYLAND
AEGON Special Markets Group, Inc. -- 100%
AEGON USA Managed Portfolios, Inc. (Footnote 13)
AUSA Holding Company -- 100%
Executive Management and Consultant Services, Inc. -- 100%
<PAGE>
First AUSA Life Insurance Company -- 100%
Monumental General Administrators, Inc. -- 100%
Monumental General Casualty Company -- 100%
Monumental General Insurance Group, Inc. -- 100%
Monumental General Mass Marketing, Inc. -- 100%
Monumental Life Insurance Company (Footnote 16)
The Whitestone Corporation -- 100%
United Financial Services, Inc. -- 100%
Weiner Agency, Inc. -- 100%
WRL Series Fund Inc. (Footnote 13)
MASSACHUSETTS
Ammest Massachusetts Insurance Agency, Inc. -- 100%
Force Financial Services, Inc. -- 100%
Idex Series Fund (Footnote 13)
MICHIGAN
Associated Mariner Agency, Inc. and its subsidiaries -- 100% (Footnote 8)
Associated Mariner Financial Group, Inc. -- 100%
Creditor Resources, Inc. -- 100%
Mariner Financial Services, Inc. -- 100%
Mariner Mortgage Corp. -- 100%
Mariner Planning Corporation -- 100%
MINNESOTA
AEGON Financial Services Group Inc. -- 100%
MISSISSIPPI
JMH Operating Company, Inc. -- 100%
<PAGE>
MISSOURI
Academy Life Insurance Company -- 100%
Peoples Benefit Life Insurance Company -- 100% (Footnotes 17 and 20)
Worldwide Insurance Company -- 100% (Footnote 23)
NEW JERSEY
Pension Life Insurance Company of America -- 100%
Short Hills Management Company -- 100%
NEW YORK
AUSA Life Insurance Company, Inc. -- 82.33% (Footnote 14)
Corpa Reinsurance Company -- 100%
OHIO
Western Reserve Life Assurance Co. of Ohio -- 100%
PENNSYLVANIA
AFSG Securities Corporation -- 100%
Ammest Realty, Inc. -- 100%
Ampac Insurance Agency, Inc. -- 100%
Compass Rose Development Corporation -- 100%
Military Associates, Inc. -- 100%
National Home Life Corporation -- 100%
Peoples Benefit Services, Inc. -- 100%
Unicom Administrative Services, Inc. -- 100%
Valley Forge Associates, Inc. -- 100%
Veterans Benefits Plan, Inc. -- 100%
PUERTO RICO
Monumental General Life Insurance Company of Puerto Rico -- 51% (Footnote 15)
<PAGE>
TENNESSEE
Southlife, Inc. -- 100%
Supplemental Insurance Division, Inc. -- 100%
TEXAS
Ammest Realty Corporation -- 100%
Ampac, Inc. -- 100%
NCOAA Management Company -- 100%
VIRGINIA
DurCo Agency, Inc. -- 100%
CANADA
CRC Creditor Resources Canadian Dealer Network Inc. -- 100%
GERMANY
Unicom Administrative Services GmbH -- 100%
NETHERLANDS
Vereniging AEGON Netherlands Membership Association owns 54.43% of AEGON
N.V., a Netherlands corporation, which owns 100% of each of the following
entities: AEGON Nederland n.v., a Netherlands corporation, AEGON
International n.v., a Netherlands corporation, AEGON Nevak Holding b.v., a
Netherlands corporation, and Groninger Financieringen b.v., a Netherlands
corporation. AEGON International n.v. owns 100% of AEGON U.S. Holding
Corporation, a Delaware corporation.
TURKS & CAICOS ISLANDS
Commonwealth General LLC -- 100%
FOOTNOTES
(1) 150,000 shares of Class B Non-Voting Common Stock owned by AEGON
Antilles n.v.
(2) 457,400 shares of $13.00 cumulative Preferred Stock, Series K owned by
Monumental Life Insurance Company.
(3) RCC Group: ALH Properties Eight, Inc., ALH Properties Eleven, Inc., ALH
Properties Fifteen, Inc., ALH Properties Five, Inc., ALH Properties
Four, Inc., ALH Properties Fourteen, Inc., ALH Properties Nine, Inc.,
ALH Properties Seven, Inc., ALH Properties Seventeen, Inc., ALH
<PAGE>
Properties Six, Inc., ALH Properties Sixteen, Inc., ALH Properties Ten,
Inc., ALH Properties Thirteen, Inc., ALH Properties Three, Inc., ALH
Properties Twelve, Inc., ALH Properties Two, Inc., ALH Properties,
Inc., Dutch Hotel Management, Inc., Eighty-Six Yorkville, Inc., FGH
Appraisal Services, Inc., FGH Eastern Region, Inc., FGH Realty Credit
Corp., FGH USA Realty, Inc., FGH USA, Inc., FGH Western Region, Inc.,
FGP 106 Fulton, Inc., FGP 109th Street, Inc., FGP 86th Street, Inc.,
FGP 90 West Street, Inc., FGP Bala, Inc., FGP Beekman, Inc., FGP
Branford, Inc., FGP Bridgeport, Inc., FGP Brooke, Inc., FGP Burkewood,
Inc., FGP Bush Terminal, Inc., FGP Carter Drive, Inc., FGP Centereach,
Inc., FGP City Hall, Inc., FGP Colonial Plaza, Inc., FGP Coram, Inc.,
FGP Edison, Inc., FGP Eleventh Street, Inc., FGP Emerson, Inc., FGP
Franklin, Inc., FGP Gaithersburg, Inc., FGP Herald Center, Inc., FGP
Heritage Square, Inc., FGP Islandia, Inc., FGP Keene, Inc., FGP
Broadway, Inc., FGP Landmark, Inc., FGP Lincoln, Inc., FGP Main Street,
Inc., FGP Meadow Lane, Inc., FGP Merrick, Inc., FGP Midwood, Inc., FGP
Northern Boulevard, Inc., FGP Parsippany, Inc., FGP Parsons, Inc., FGH
Property Services, Inc., FGP Remsen, Inc., FGP Rider Avenue, Inc., FGP
Schenectady, Inc., FGP Seventh Avenue, Inc., FGP Seventy-Second Street,
Inc., FGP Stamford, Inc., FGP Twenty-Five, Inc., FGP Twenty-One, Inc.,
FGP Twenty-Two, Inc., FGP Union Gardens, Inc., FGP Varick, Inc., FGP
West 14th Street, Inc., FGP West 32nd Street, Inc., FGP West 88th
Street, Inc., FGP West Street Two, Inc., FGP West Street, Inc., Fifth
FGP, Inc., First FGP, Inc., Fourth FGP, Inc., RCC North America, Inc.,
FGP Rockbeach, Inc., Second FGP, Inc., Seventh FGP, Inc., Sixth FGP,
Inc., The RCC Group, Inc., Third FGP, Inc.
(4) Ordinary common stock is allowed 60% of total cumulative vote.
Participating common stock is allowed 40% total cumulative vote.
(5) 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.
(6) Class B Common Stock is allocated 75% of total cumulative vote. Class A
Common Stock is allocated 25% of total cumulative vote.
(7) California general partnership owned 50.1% by Endeavor Management Co.
and 49.9% by AUSA Financial Markets, Inc.
(8) 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.
(9) Owns 49% of Quantra Consulting, Inc., a Delaware corporation.
(10)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.
(11)First AUSA Life Insurance Company owns 12.89%. PFL Life Insurance
Company owns 13.11%. Bankers United Life Assurance Company owns 4.86%.
(12)AEGON USA Realty Advisors is General partner and 5% owner; all limited
partners are RCC entities within the RCC Group.
<PAGE>
(13)Denotes relationships as advisor, administrator, sponsor, underwriter or
general partner.
(14)First AUSA Life Insurance Company owns 82.33% and Veterans Life
Insurance Company owns 17.67%.
(15)First AUSA Life Insurance Company owns 51% and Baldrich & Associates of
Puerto Rico owns 49%.
(16)Capital General Development Corporation owns 73.23% and First AUSA Life
Insurance Company owns 26.77%.
(17)Monumental Life owns 76.3%; Capital Liberty, L.P. owns 20%; and
Commonwealth General owns 3.7%.
(18)Commonwealth General owns 1.0% and Monumental Life owns 99.0%.
(19)Name changed from Association Consultants, Inc., 7/15/98.
(20)Name changed from Providian Life and Health Insurance Company, 10/1/98.
(21)Name changed from Providian Fire Insurance Company, 10/15/98.
(22)Name changed from Providian Property and Casualty Insurance Company,
10/15/98.
(23)Name changed from Providian Auto and Home Insurance Company, 10/15/98.
ITEM 27. NUMBER OF CONTRACTHOLDERS
NUMBER OF CONTRACTHOLDERS
TITLE OF CLASS AS OF MARCH 31, 1999
Money Market 832
High Quality Bond 393
Intermediate Government Bond 801
Government/Corporate Bond 944
HighYield Bond 12
Balanced 1225
Equity Income 1520
Equity Value 619
Growth & Income 982
Equity Growth 1335
Special Equity 930
Aggressive Equity 691
International Equity 813
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
<PAGE>
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, suit or
proceeding, or in connection with appeal therein, except in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
officer, Director, or employee is liable for negligence or misconduct in the
performance of his duties. The Company may also reimburse to any Director,
officer, or employee the reasonable costs of settlement of any such action,
suit, or proceeding, if it shall be found by a majority of a committee composed
of the Directors not involved in the matter in controversy (whether or not a
quorum) that it was in the interest of the Company that such settlement be made
and that such Director, officer or employee was not guilty of negligence or
misconduct. The amount to be paid by way of indemnity shall be determined and
paid, in each instance, pursuant to action of the Board of Directors, and the
stockholders shall be given notice thereof in accordance with applicable
provisions of law. Such right of indemnification shall not be deemed exclusive
of any other rights to which such Director, officer, or employee may be
entitled.
ITEM 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) Refer to Prospectus pages 6 and 16, "Charges" and Part B, Statement of
Additional Information, page 1, "Sale of Contracts/Principal Underwriter" for
information regarding compensation.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books, and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are primarily maintained by 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
<PAGE>
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) AUSA Life Insurance Company, Inc. hereby represents that the fees and
charges deducted under the Contracts, in the aggregate, are reasonable in
relation to the services rendered; the expenses expected to be incurred and the
risks assumed by the insurance company.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrant certifies that it meets the requirements of Securities
Act Rule 485(b) for the effectiveness of this Post Effective Amendment to the
Registration Statement and has caused this Registration Statement to be signed
on its behalf, in the County of Westchester and the State of New York, on this
30th day of April, 1999.
DIVERSIFIED INVESTORS
VARIABLE FUNDS
(Registrant)
By: /s/ Tom A. Schlossberg
-----------------------------
Tom A. Schlossberg
Director and President
AUSA LIFE INSURANCE COMPANY, INC.
(Depositor)
By: /s/ Tom A. Schlossberg
-----------------------------
Tom A. Schlossberg
Director and President
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities indicated on April 30, 1999.
SIGNATURES TITLE
/s/ Tom A. Schlossberg
- -----------------------------
Tom A. Schlossberg Director and President
*/s/ Larry G. Brown
- -----------------------------
Larry G. Brown Director
*/s/ William L. Busler
- -----------------------------
William L. Busler Director
*/s/ Jack R. Dykhouse
- -----------------------------
Jack R. Dykhouse Director
*/s/ Steven E. Frushtick
- -----------------------------
Steven E. Frushtick Director
*/s/ Carl T. Hanson
- -----------------------------
Carl T. Hanson Director
*By: /s/ Tom A. Schlossberg
---------------------
Tom A. Schlossberg
Attorney-in-Fact
<PAGE>
*/s/ Vera F. Mihaic
- -----------------------------
Vera F. Mihaic Director
*/s/ Peter P. Post
- -----------------------------
Peter P. Post Director
*/s/ Cor H. Verhagen
- -----------------------------
Cor H. Verhagen Director
*/s/ E. Kirby Warren
- -----------------------------
E. Kirby Warren Director
*By: /s/ Tom A. Schlossberg
---------------------
Tom A. Schlossberg
Attorney-in-Fact
<PAGE>
SIGNATURES
Diversified Investors Portfolios has duly caused this Post-Effective
Amendment to the Registration Statement on Form N-4 of Diversified Investors
Variable Funds to be signed on its behalf by the undersigned, thereunto duly
authorized in the County of Westchester and the State of New York, on the 30th
day of April, 1999.
DIVERSIFIED INVESTORS PORTFOLIOS
By: /s/ Tom A. Schlossberg
---------------------------
Tom A. Schlossberg
Trustee, President, Chief Executive Officer
and Chairman of the Board of Trustees of
Diversified Investors Portfolios
This PostEffective Amendment to the Registration Statement on Form N-4 of
Diversified Investors Variable Funds has been signed below by the following
persons in the capacities indicated on April 30, 1999.
SIGNATURES TITLE
/s/ Tom A. Schlossberg
- ---------------------------
Tom A. Schlossberg Trustee, President, Chief Executive
Officer and Chairman of the Board of
Trustees of Diversified Investors Portfolios
*/s/ Neal M. Jewell
- ---------------------------
Neal M. Jewell Trustee of Diversified Investors Portfolios
*/s/ Eugene M. Mannella
- ---------------------------
Eugene M. Mannella Trustee of Diversified Investors Portfolios
*/s/ Mark Mullin
- ---------------------------
Mark Mullin Trustee of Diversified Investors Portfolios
*/s/ Patricia L. Sawyer
- ---------------------------
Patricia L. Sawyer Trustee of Diversified Investors Portfolios
/s/ Alfred C. Sylvain
- ---------------------------
Alfred C. Sylvain Chief Financial Officer and Principal
Accounting Officer of Diversified
Investors Portfolios
*By: /s/ Robert F. Colby
-------------------
Robert F. Colby
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(10) Opinions and Consents of Independent Accountants.
(14) Financial Data Schedules.
Exhibit 10
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Independent
Accountants" in both the Prospectus and Statement of Additional Information,
and to the use of our report dated February 19, 1999 with respect to the
statutory-basis financial statements of AUSA Life Insurance Company, Inc.,
included in Post-Effective Amendment No. 12 to the Registration Statement (Form
N-4 No. 33-73734) and related Prospectus of Diversified Investors Variable
Funds.
Des Moines, Iowa
April 26, 1999
Exhibit 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this PostEffective Amendment
No. 12 to the Registration Statement of Diversified Investors Variable Funds on
Form N4 (File Nos. 3373734 and 8118264) of our reports dated February 18, 1999,
on our audits of the financial statements and financial highlights of
Diversified Investors Variable Funds and Diversified Investors Portfolios,
which reports are included in the 1998 Annual Report of Diversified Investors
Variable Funds and Strategic Variable Funds, which is also incorporated by
reference in this Post Effective Amendment to the Registration Statement.
We also consent to the reference to our firm under the captions "Financial
Information" and "Independent Accountants" in the Prospectus and under the
caption "Independent Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
New York, New York
April 29, 1999
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<TABLE> <S> <C>
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<CIK> 0000916943
<NAME> GOVERNMENT-CORPORATE BOND PORTFOLIO
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<NAME> GOVERNMENT-CORPORATE BOND PORTFOLIO
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<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000916943
<NAME> BALANCED
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<NAME> BALANCED
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<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000916943
<NAME> EQUITY INCOME PORTFOLIO
<SERIES>
<NUMBER> 6
<NAME> EQUITY INCOME PORTFOLIO
<MULTIPLIER> 1
<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000916943
<NAME> EQUITY VALUE PORTFOLIO
<SERIES>
<NUMBER> 7
<NAME> EQUITY VALUE PORTFOLIO
<MULTIPLIER> 1
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000916943
<NAME> GROWTH & INCOME PORTFOLIO
<SERIES>
<NUMBER> 8
<NAME> GROWTH & INCOME PORTFOLIO
<MULTIPLIER> 1
<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000916943
<NAME> EQUITY GROWTH PORTFOLIO
<SERIES>
<NUMBER> 9
<NAME> EQUITY GROWTH PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000916943
<NAME> SPECIAL EQUITY PORTFOLIO
<SERIES>
<NUMBER> 10
<NAME> SPECIAL EQUITY PORTFOLIO
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000916943
<NAME> AGGRESSIVE EQUITY PORTFOLIO
<SERIES>
<NUMBER> 11
<NAME> AGGRESSIVE EQUITY PORTFOLIO
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000916943
<NAME> HIGH YIELD BOND PORTFOLIO
<SERIES>
<NUMBER> 12
<NAME> HIGH YIELD BOND PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
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