<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 2, 2000
REGISTRATION NOS. 33-73734
811-8264
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-4
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 13 [X]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 13 [X]
(CHECK APPROPRIATE BOX OR BOXES.)
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DIVERSIFIED INVESTORS VARIABLE FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
AUSA LIFE INSURANCE COMPANY, INC.
(NAME OF DEPOSITOR)
4 MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
(914) 697-8000
(DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
ROBERT F. COLBY, ESQ.
AUSA LIFE INSURANCE COMPANY, INC.
4 MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
(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 1, 2000 pursuant to
paragraph (a) of Rule 485.
Diversified Investors Portfolios has also executed this Registration Statement.
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<PAGE> 2
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 retirement plans
maintained by state educational organizations, certain tax-exempt organizations,
IRA contractholders, and taxed organizations in the case of the Section 401(a)
and/or Section 401(k) contracts and corporate nonqualified deferred compensation
contracts.
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 allocate purchase payments directed to the DIVERSIFIED
INVESTORS VARIABLE FUNDS ACCOUNT to subaccounts that invest in underlying mutual
funds. Currently, fourteen subaccounts are available. The underlying mutual
funds are the following series of Diversified Investors Portfolios: Money Market
Series, High Quality Bond Series, Intermediate Government Bond Series, Core Bond
Series (formerly 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 and the Calvert Social Series.
Participants may allocate purchase payments directed to the DIVERSIFIED
INVESTORS STRATEGIC VARIABLE FUNDS ACCOUNT to subaccounts that invest in
subaccounts of the Diversified Investors Variable Funds Account. 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.
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 54 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.
This prospectus sets forth the basic information that you should know before
investing. Please keep this prospectus for future reference.
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 1, 2000
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<PAGE> 4
-i-
CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Definitions................................................. iii
Synopsis.................................................... 1
Fee Tables................................................ 1
The Contracts............................................. 4
The Accounts.............................................. 5
Charges................................................... 6
Credit And Allocation of Purchase Payments................ 6
Redemption................................................ 7
Transfers................................................. 7
Payment Options........................................... 7
Voting Rights............................................. 7
Death Benefit............................................. 7
Distribution of the Contracts............................. 7
Financial Information..................................... 7
AUSA........................................................ 10
Diversified Investors Variable Funds........................ 10
Calvert Series............................................ 10
Diversified Investors Portfolios.......................... 11
Diversified Investors Strategic Variable Funds.............. 13
Management................................................ 14
Investment Restrictions................................... 15
Charges..................................................... 15
Charges For Mortality And Expense Risks................... 15
Annual Contract Charge.................................... 15
Investment Management Fees................................ 16
Premium Tax............................................... 16
Summary of the Contracts.................................... 17
Eligible Purchasers....................................... 17
Ownership................................................. 17
Purchase Payments......................................... 17
Employer Sponsored Plan Requirements...................... 17
Rights of the Participant Under The Contract.............. 18
Rights Upon Suspension of Contract or Termination of
Plan................................................... 18
Failure of Qualification.................................. 18
Transfers................................................. 19
Rights Reserved By AUSA..................................... 19
Credit of Purchase Payments................................. 20
Allocation of Purchase Payments........................... 20
Determination of Unit Value............................... 20
Death Benefit............................................... 21
Redemption During The Accumulation Period................... 22
Restrictions Under The Texas Optional Retirement Program.... 22
Payment Options............................................. 22
Annuity Purchase Date..................................... 23
Fixed Annuity............................................. 23
Fixed Annuity Options..................................... 23
Payments To A Beneficiary Following the Annuitant's
Death.................................................. 24
Voting Rights............................................... 25
Distribution of The Contracts............................... 27
</TABLE>
<PAGE> 5
-ii-
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Federal Tax Status.......................................... 27
Tax Treatment of AUSA..................................... 27
Taxation of Diversified Investors Portfolios.............. 28
Section 403(b) Annuities.................................. 28
Restrictions On Withdrawals Of Elective
Contributions......................................... 29
Section 401(a) Plans...................................... 29
Section 408(IRA) Contracts................................ 29
Minimum Distribution Requirements......................... 30
Section 457 Plans......................................... 30
Non-Qualified Deferred Compensation Contracts............. 30
Income Tax Withholding.................................... 30
Assumption Reinsurance...................................... 31
Performance Data............................................ 31
Diversified Investors Portfolios............................ 34
Principal Investment Strategies........................... 34
Money Market Portfolio.................................... 35
Bond Portfolios........................................... 36
Balanced Portfolio........................................ 38
Stock Portfolios.......................................... 39
Additional Investment Policies............................ 41
Core/Feeder Structure..................................... 42
Risk Considerations....................................... 42
Management of Diversified Investors Portfolios.............. 46
Board of Trustees......................................... 46
Investment Adviser........................................ 46
Advisory Fees............................................. 49
Administrator............................................. 49
Distribution Arrangements................................. 49
Custodian and Dividend Disbursing Agent................... 50
Expenses.................................................. 50
Other Information Regarding Diversified Investors
Portfolios................................................ 50
Portfolio Business Day....................................
Purchase and Redemption of Interests in Diversified
Investors Portfolios................................... 50
Net Asset Value........................................... 51
Taxation of Diversified Investors Portfolios.............. 51
Description of Beneficial Interests, Voting Rights and
Liabilities............................................ 52
Independent Accountants..................................... 53
Legal Proceedings........................................... 53
Statutory Basis Financial Statements........................ 53
Additional Information...................................... 53
Miscellaneous............................................... 53
Table of Contents of Statement of Additional Information.... 54
Request Form for Statement of Additional Information........ 55
Appendix A -- Strategic Variable Funds Subaccounts.......... Appendix A
Appendix B -- Applicable Premium Tax Rates.................. Appendix B
</TABLE>
<PAGE> 6
-iii-
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 23), 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.
CORE BOND PORTFOLIO: Diversified Investors Core Bond Portfolio, a series of
Diversified Investors Portfolios.
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.
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.
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.
<PAGE> 7
-iv-
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, Core 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.
<PAGE> 8
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 1.10% 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
<TABLE>
<S> <C>
TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
Annual Contract Fee......................................... None(1)
Mortality and Expense Risk Fees (after waiver).............. 1.10%(2)
</TABLE>
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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 15.
(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 Growth 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.
DIVERSIFIED INVESTORS PORTFOLIOS
AND
CALVERT SERIES
ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
HIGH INTERMEDIATE
MONEY QUALITY GOVERNMENT CORE HIGH-YIELD EQUITY
MARKET BOND BOND BOND BOND BALANCED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO(2) PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------ ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
<PAGE> 9
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<TABLE>
<CAPTION>
EQUITY GROWTH & EQUITY SPECIAL AGGRESSIVE INTERNATIONAL
VALUE INCOME GROWTH EQUITY EQUITY CALVERT EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO SERIES PORTFOLIO
--------- --------- --------- --------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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% 0.64% 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 Core 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, 0.62% 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.
(2) Prior to August 17, 1999, Core Bond Portfolio was named Diversified
Investors Government/Corporate Bond Fund.
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
<TABLE>
<S> <C>
Annual Contract Fee......................................... None(1)
ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees............................................. 0.20%(2)
Mortality and Expense Risk Fees............................. 1.10%(3)
Other Expenses.............................................. None
TOTAL ANNUAL EXPENSES....................................... 1.30%(3)
</TABLE>
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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 15.
(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.
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.
<TABLE>
<CAPTION>
TOTAL ANNUAL
SHORT HORIZON MANAGEMENT FEE PORTFOLIO EXPENSES
STRATEGIC ALLOCATION (AFTER WAIVERS AND OTHER (AFTER WAIVERS AND
VARIABLE FUND REIMBURSEMENTS) EXPENSES REIMBURSEMENTS)(2)
- -------------------- ------------------ -------- ------------------
<S> <C> <C> <C>
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%
Core 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>
<PAGE> 10
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<TABLE>
<CAPTION>
TOTAL ANNUAL
INTERMEDIATE AND MANAGEMENT FEE PORTFOLIO EXPENSES
INTERMEDIATE/LONG HORIZON STRATEGIC (AFTER WAIVERS AND OTHER (AFTER WAIVERS AND
ALLOCATION VARIABLE FUNDS REIMBURSEMENTS) EXPENSES REIMBURSEMENTS)(2)
- ----------------------------------- ------------------ -------- ------------------
<S> <C> <C> <C>
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%
Core 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%
</TABLE>
- ------------------
(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 fees
charged directly to the Strategic Variable Funds Subaccounts or the Variable
Funds Subaccounts.
<PAGE> 11
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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.
<TABLE>
<CAPTION>
AFTER AFTER AFTER AFTER
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market......................................... $10 $32 $ 55 $122
High Quality Bond.................................... $13 $41 $ 71 $156
Intermediate Government Bond......................... $13 $41 $ 71 $156
Core Bond............................................ $13 $41 $ 70 $155
High-Yield Bond...................................... $15 $47 $ 81 $178
Balanced............................................. $14 $44 $ 76 $166
Equity Income........................................ $14 $43 $ 75 $165
Equity Value......................................... $15 $47 $ 82 $179
Growth & Income...................................... $15 $48 $ 83 $181
Equity Growth........................................ $14 $44 $ 77 $168
Special Equity....................................... $18 $54 $ 94 $204
Aggressive Equity.................................... $19 $59 $102 $221
Calvert.............................................. $17 $53 $ 91 $198
International Equity................................. $18 $56 $ 96 $208
</TABLE>
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>
AFTER AFTER AFTER AFTER
STRATEGIC ALLOCATION VARIABLE FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Short Horizon........................................ $12 $38 $65 $144
Intermediate Horizon................................. $14 $43 $74 $162
Intermediate/Long Horizon............................ $14 $44 $77 $168
</TABLE>
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
<PAGE> 12
-5-
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, Core
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 Portfolios or the Calvert Series
at their net asset value. See "Diversified Investors Portfolios" at page 11 and
"Calvert Series" at page 10.
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.
<PAGE> 13
-6-
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 13. 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 11.
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. The annual rate charged is
1.10% consisting of .70% for mortality risks and .40% 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
15.
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 15.
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 16.
Premium taxes may be payable on annuity considerations. See "Charges -- Premium
Tax" on page 16.
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 20.
<PAGE> 14
-7-
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 22 for withdrawal restrictions
applicable to Contracts issued under the Texas Optional Retirement Program.
A penalty tax may be payable under the Code upon the redemption of amounts from
an Accumulation Account under a Contract and other significant withdrawal
restrictions may be imposed by the Code. See "Federal Tax Status" on page 27.
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 19. AUSA reserves
the right to discontinue allowing telephone transfers.
PAYMENT OPTIONS
Unless a Fixed Annuity is elected, a Participant will receive a lump sum payment
at the end of the Accumulation Period. The Contracts may provide for several
Fixed Annuity options: Life Annuity, Life Annuity With Period Certain, Specified
Fixed Period Annuity, Contingent Annuity and Contingent Annuity With Period
Certain. For NQDC, an installment payment option may also be available. See
"Payment Options" on page 22.
VOTING RIGHTS
To the extent required by law, AUSA will vote the interests in 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 25.
DEATH BENEFIT
If a Participant dies before the Annuity Purchase Date, the Accumulation Account
value will be paid to his/her beneficiary in a lump sum. See "Death Benefit" on
page 21.
DISTRIBUTION OF THE CONTRACTS
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 27.
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
<PAGE> 15
-8-
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.
CONDENSED FINANCIAL INFORMATION
DIVERSIFIED INVESTORS VARIABLE FUNDS
ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
UNIT VALUE
---------------------------------------------------------------------------------------------
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Money Market(a)......... $16.45 $15.71 $15.01 $14.35 $13.65
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
Core Bond(a)............ $23.16 $21.67 $20.10 $19.63 $16.70
High-Yield Bond(b)...... $12.04 $11.84 $10.58 $10.00 --
Balanced(a)............. $32.46 $29.12 $24.62 $21.25 $16.66
Equity Income(a)........ $38.07 $33.98 $26.38 $22.48 $16.86
Equity Value(c)......... $14.62 $13.24 $10.95 $10.00 --
Growth & Income(d)...... $28.83 $21.50 $16.09 $13.29 $10.14
Equity Growth(a)........ $51.55 $37.98 $30.50 $25.58 $21.65
Special Equity(d)....... $24.05 $23.40 $18.64 $14.88 $10.63
Aggressive Equity(c).... $14.92 $10.57 $10.01 $10.00 --
Calvert(a).............. $25.81 $22.40 $18.83 $16.87 $13.11
International
Equity(e)............. $14.15 $12.87 $11.99 $10.53 $ 9.56
<CAPTION>
UNIT VALUE
-------------
AUG. 18, 1994
-------------
<S> <C>
Money Market(a)......... $13.44
High Quality Bond (b)... --
Intermediate Government
Bond(a)............... $12.33
Core Bond(a)............ $16.76
High-Yield Bond(b)...... --
Balanced(a)............. $16.85
Equity Income(a)........ $17.21
Equity Value(c)......... --
Growth & Income(d)...... $10.31
Equity Growth(a)........ $20.67
Special Equity(d)....... $10.47
Aggressive Equity(c).... --
Calvert(a).............. $13.28
International
Equity(e)............. --
</TABLE>
<TABLE>
<CAPTION>
UNITS OUTSTANDING
---------------------------------------------------------------------------------------------
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
Core 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.
<PAGE> 16
-9-
CONDENSED FINANCIAL INFORMATION
DIVERSIFIED INVESTORS STRATEGIC VARIABLE FUNDS
PER ACCUMULATION UNIT INCOME AND CAPITAL CHANGES
SHORT HORIZON STRATEGIC VARIABLE FUNDS SUBACCOUNT
<TABLE>
<CAPTION>
YEAR ENDING YEAR ENDING YEAR ENDING
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
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>
INTERMEDIATE HORIZON STRATEGIC VARIABLE FUNDS SUBACCOUNT
<TABLE>
<CAPTION>
YEAR ENDING YEAR ENDING YEAR ENDING
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
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>
YEAR ENDING YEAR ENDING YEAR ENDING
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
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>
<PAGE> 17
-10-
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 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 34. 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
<PAGE> 18
-11-
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
disclosure, 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.
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>
VARIABLE FUNDS SUBACCOUNT SERIES OF DIVERSIFIED INVESTORS PORTFOLIOS
- ------------------------- ------------------------------------------
<S> <C>
Diversified Investors Variable Funds Money Market
Subaccount............................................... Diversified Investors Money Market Portfolio (the "Money
Market Portfolio")
Diversified Investors Variable Funds High Quality Bond
Subaccount............................................... Diversified Investors High Quality Bond Portfolio (the
"High Quality Bond Portfolio")
Diversified Investors Variable Funds Intermediate
Government Bond Subaccount............................... Diversified Investors Intermediate Government Bond
Portfolio (the "Intermediate Government Bond Portfolio")
Diversified Investors Variable Funds Core Bond
Subaccount............................................... Diversified Investors Core Bond Portfolio (the "Core Bond
Portfolio")
Diversified Investors Variable Funds High-Yield Bond
Subaccount............................................... Diversified Investors High-Yield Bond Portfolio (the
"High-Yield Bond Portfolio")
Diversified Investors Variable Funds Balanced Subaccount... Diversified Investors Balanced Portfolio (the "Balanced
Portfolio")
Diversified Investors Variable Funds Equity Value
Subaccount............................................... Diversified Investors Equity Value Portfolio (the "Equity
Value Portfolio")
Diversified Investors Variable Funds Equity Income
Subaccount............................................... Diversified Investors Equity Income Portfolio (the "Equity
Income Portfolio")
Diversified Investors Variable Funds Growth & Income
Subaccount............................................... Diversified Investors Growth & Income Portfolio (the
"Growth & Income Portfolio")
Diversified Investors Variable Funds Equity Growth
Subaccount............................................... Diversified Investors Equity Growth Portfolio (the "Equity
Growth Portfolio")
Diversified Investors Variable Funds Special Equity
Subaccount............................................... Diversified Investors Special Equity Portfolio (the
"Special Equity Portfolio")
Diversified Investors Variable Funds Aggressive Equity
Subaccount............................................... Diversified Investors Aggressive Equity Portfolio (the
"Aggressive Equity Portfolio")
Diversified Investors Variable Funds International Equity
Subaccount............................................... Diversified Investors International Equity Portfolio (the
"International Equity Portfolio")
</TABLE>
<PAGE> 19
-12-
Diversified Investors Portfolios is registered with the SEC under the 1940 Act
as an open-end diversified management investment company. This registration does
not involve supervision by the SEC of the management or investment practices or
policies of Diversified Investors Portfolios.
Diversified acts as investment adviser and administrator to each 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.
CORE 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 34 and the Statement of
Additional Information for more information on each of the Portfolios described
above.
<PAGE> 20
-13-
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 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 10 and the Statement of Additional
Information for more information on the Variable Funds Subaccounts. See
"Diversified Investors Portfolios" below at page 34 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
<PAGE> 21
-14-
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
MONEY MARKET BOND STOCK
SUBACCOUNT SUBACCOUNT SUBACCOUNT
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT HORIZON 10% 80% 10%
- -----------------------------------------------------------------------------------------------
INTERMEDIATE HORIZON None 50% 50%
- -----------------------------------------------------------------------------------------------
INTERMEDIATE/LONG HORIZON None 30% 70%
- -----------------------------------------------------------------------------------------------
</TABLE>
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 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.
<PAGE> 22
-15-
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 1.10%,
.70% for mortality risks and .40% for administrative expense risks, is
0.030139%.
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.
<PAGE> 23
-16-
INVESTMENT MANAGEMENT FEES
The Variable Funds Subaccounts
Because the Variable Funds Subaccounts purchase 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 45.
Calvert Asset Management Company, Inc. ("CAMCO") (4550 Montgomery Avenue, Suite
1000N, Bethesda, Maryland 20814) is the investment adviser to the Calvert Series
and provides day-to-day investment management services to the Calvert Series. It
has been managing mutual funds since 1976. CAMCO is the investment adviser for
over 25 mutual funds, including the first and largest family of socially
screened funds. As of December 31, 1998, CAMCO had $6 billion in assets under
management.
CAMCO uses a team approach to its management of the Calvert Series. Reno J.
Martini, Senior Vice President and Chief Investment Officer, heads this team and
oversees the management of all Calvert Funds for CAMCO. Mr. Martini has over 15
years of experience in the investment industry and has been the head of CAMCO's
asset management team since 1985.
NCM Capital Management Group, Inc., 103 West Main Street, Durham, North Carolina
27701, has managed part of the equity investments of the Calvert Series since
1995. NCM is one of the largest minority-owned investment management firms in
the country and provides products in equity fixed income and balanced portfolio
management. It is also one of the industry leaders in the employment and
training of minority and women investment professionals.
NCM's portfolio management team consists of several members, headed by Maceo K.
Sloan. Mr. Sloan has more than 10 years of experience in the investment
industry, and is a frequent panelist on Wall Street Week with Louis Rukeyser.
Acacia has obtained an exemptive order from the Securities and Exchange
Commission to permit the Calvert Series, pursuant to approval by the Board of
Directors, to enter into and materially amend contracts with subadvisers without
shareholder approval.
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 45.
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 3.5%.
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
<PAGE> 24
-17-
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.
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.
<PAGE> 25
-18-
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 23) during which no Purchase Payments will
be accepted by AUSA, during a Participant's Accumulation Period Purchase
Payments may be made in the amount authorized by the Participant. The Contract
permits the Participant to elect his/her Annuity Purchase Date, to allocate
Purchase Payments, to redeem all or a portion of the Units in his/her
Accumulation Account, to designate beneficiaries, and to elect Fixed Annuity
options, except that employer-sponsored Plans may affect these rights.
During a Participant's Accumulation Period, one's rights and those of the
Contractholder or IRA Contractholder shall be as set forth in the Contract and
Plan. On and after the Annuity Purchase Date, or on the Participant's death, if
earlier, all rights, as specified in the Contract and Plan, shall belong to the
Participant or beneficiary as the case may be.
RIGHTS UPON SUSPENSION OF CONTRACT OR TERMINATION OF PLAN
403(b) Contract
In the event that the making or receipt of all Purchase Payments under certain
403(b) Contracts is discontinued or a Contractholder terminates its Plan or
discontinues Purchase Payments for a Participant, AUSA shall give written notice
thereof to the appropriate Participant(s) together with notice of the right of
the Participant to elect to have the value of his/her Accumulation Account
applied under one of the following options: (1) to be held and distributed by
AUSA in accordance with the terms of the Contract, (2) to be paid to him/her in
cash, or (3) in the event of suspension of the Contract or termination of the
Plan, to be transferred to an alternate funding agency (e.g., another insurance
company). Certain other 403(b) Contracts require the Contractholder, not AUSA,
to give written notice thereof to Participants.
401(a) Contract/401(k) Contract and NQDC Contracts
If the Contractholder terminates its Plan or discontinues Purchase Payments, it
is the Contractholder's responsibility, and not AUSA's, to give written notice
thereof to the affected Participants. In such cases, the Contractholder shall
elect to have the entire balance held under the Contract applied under one of
the following options: (1) to be held and distributed by AUSA in accordance with
the terms of the Contract; (2) to be transferred to an alternate funding agency
(e.g., another insurance company); or (3) to purchase deferred, paid-up life
annuity benefits for Participants.
457 and 408(IRA) Contracts
If the Contractholder or IRA Contractholder terminates its Plan or discontinues
Purchase Payments for a Participant, AUSA shall give written notice thereof to
the appropriate Participant(s) together with notice of the right of the
Participant to elect to have the value of his/her Accumulation Account applied
under either of the following options: (1) to be held and distributed by AUSA in
accordance with the terms of the Contract or (2) to be paid to him/her in cash,
except that, under the terms of certain 457 Contracts, the Contractholder, not
AUSA, shall give notice to affected Participants.
FAILURE OF QUALIFICATION
In the event that a Plan, Contractholder or IRA Contractholder or a Participant
thereunder becomes ineligible for any previously applicable tax benefits under
the Code, AUSA upon notice thereof shall refuse during the period of such
ineligibility to accept Purchase Payments with respect to that Plan or
Participant. A failure of qualification under a particular Contract shall have
no effect on other issued and outstanding Contracts.
<PAGE> 26
-19-
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.
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 (914) 697-8000. Transfers are
effective within 48 hours of receipt of instructions. All Participants should be
aware that a transfer authorized by telephone and reasonably believed to be
genuine by AUSA may subject the Participant to risk of loss if such instruction
is subsequently found not to be genuine. AUSA will employ reasonable procedures,
including requiring Participants to give certain identification information and
tape recording of telephone instructions, to confirm that instructions
communicated by telephone are genuine. To the extent that AUSA fails to use
reasonable procedures to verify the genuineness of telephone instructions, AUSA
may be liable for any losses due to telephone instructions that prove to be
fraudulent or unauthorized.
RIGHTS RESERVED BY AUSA
Subject to compliance with applicable laws and, when required by law, approval
of the Contractholders, IRA Contractholders, NQDC Contractholders and/or
Participants and any appropriate regulatory authority, AUSA reserves the right
to make the following changes:
(1) To operate 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
<PAGE> 27
-20-
(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.
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.
<PAGE> 28
-21-
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 23), 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 28. Under Section 401(a) and/or Section 401(k) Contracts, however, the
underlying tax-qualified Plan is generally required to provide that in the case
of a married Participant, a survivorship annuity death benefit will be paid to
the surviving spouse if the Participant dies prior to retirement. In each case
involving Section 401(a) and/or Section 401(k) Contracts, reference must be made
to the underlying Plan for particulars.
If the Participant dies before the Annuity Purchase Date, his/her entire
interest must generally be distributed within five years after the date of
death, or if payable to a designated beneficiary must be annuitized over the
life of that designated beneficiary or over a period not extending beyond the
life expectancy of that beneficiary, within one year after the date of death. If
the beneficiary is the Participant's spouse, distributions are not required to
be made until the April 1st after the end of the calendar year in which the
Participant would have attained age 70 1/2; if the spouse dies before
distributions begin, the rules discussed above will apply as if the spouse were
the Participant (owner).
If a lump sum payment is elected, the Accumulation Account value will be
determined on the Valuation Date for the Valuation Period in which a certified
copy of the death certificate evidencing the Participant's death is received by
AUSA. If a Fixed Annuity is elected, the Accumulation Account value will be
determined on the Valuation Date for the Valuation Period of the beneficiary's
Annuity Purchase Date. For Section 401(a) and/or Section 401(k) and NQDC
Contracts, the underlying Plan should be consulted to determine the options
available.
For NQDC Contracts, the remaining value will be paid to a designated
beneficiary. If no such beneficiary is so designated or in existence, the
remaining value will be paid in the following order: Participant's (1) spouse,
(2) children, (3) parents, (4) siblings and (5) estate.
<PAGE> 29
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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 27.
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 27.
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.
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 above
for "Redemption During the Accumulation Period". However, Section 401(a),
Section 401(k) and NQDC Contracts provide the funding for the Plans and
reference to the particular Plan must be made in each
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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,
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.
<PAGE> 31
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(iii) Specified Fixed Period Annuity -- Annuity payments will be made for a
specified fixed period selected by the annuitant. If the annuitant dies
during the specified fixed period, the annuity payments for the
remainder of the period will be paid to the beneficiary. No annuity
payments are made after the expiration of the specified fixed period
even if the annuitant survives. The specified fixed period may be for
any number of years between 10 and 30 years inclusive.
(iv) Contingent Annuity -- Annuity payments will be made during the joint
lifetimes of the annuitant and a designated second person ("contingent
annuitant") with payments continued during the remaining lifetime of the
contingent annuitant. Annuity payments to the contingent annuitant may
be made in the same amount paid while both annuitants lived or a lesser
percentage of this amount. For Section 401(a) and/or Section 401(k)
Contracts, in the absence of a proper election by the Participant, a
contingent annuity with a survivorship annuity benefit for the surviving
spouse at least equal to 50% of the amount which would have been payable
if the Participant were living will be the normal form of benefit.
If the contingent annuitant dies before the first annuity payment to the
annuitant, the contingent annuity election will be void and the
annuitant will receive a Life Annuity. If the contingent annuitant dies
after the first annuity payment to the annuitant, but before the death
of the annuitant, annuity payments under the Contingent Annuity election
will be made to the annuitant during his/her lifetime. If the annuitant
and the contingent annuitant die before the date of the first annuity
payment, no annuity payments will be made.
(v) Contingent Annuity With Period Certain -- Annuity payments will be made
during the joint lifetimes of the annuitant and a designated second
person ("contingent annuitant"). Annuity payments to the contingent
annuitant may be in the same amount as paid to the annuitant or a lessor
percentage of that amount and will be made for a period certain of any
number of years between 5 and 20 years inclusive.
The Life Annuity With Period Certain and the Specified Fixed Period Annuity may
only be elected for a number of years that will not exceed an annuitant's life
expectancy. The annuity benefit option elected by the Participant will affect
the level of annuity payments the Participant will receive. The longer annuity
payments are projected to continue based upon actuarial possibilities, the lower
annuity payments will be.
The annuity purchase rates for these Fixed Annuity benefits shall not exceed,
during the initial period set forth in the Contract, the maximum rates set forth
in the Contract. Thereafter, the annuity purchase rate will be the rate in
effect as declared by AUSA 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
<PAGE> 32
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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.
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
<PAGE> 33
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affected Subaccount will vote separately on the matter pursuant to the
requirements of Rule 18f-2 under the 1940 Act.
Furthermore, Diversified Investors Portfolios has obtained an exemptive order
from the Securities and Exchange Commission to permit the Portfolios, pursuant
to approval by the Board of Trustees, to enter into and materially amend
contracts with subadvisers without the approval of the investors of the
applicable Portfolio. Before a Portfolio relies on the exemptive order, the
Portfolio's investors must approve it. To date, the investors of the Core Bond,
Balanced, Equity Growth and Special Equity Portfolios have each approved
operation under the exemptive order.
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, 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.
<PAGE> 34
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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 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
<PAGE> 35
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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 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 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.
<PAGE> 36
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If the Participant receives any amount under the Contract, the Participant must
pay an additional tax of 10% of the amount of the distribution includable in
gross income for the taxable year. This additional tax shall not apply to
distributions which are (1) made after the date on which the Participant attains
age 59 1/2, (2) made to a beneficiary on or after the death of the Participant,
(3) attributable to the Participant's becoming permanently disabled, (4) made
after separation from service in a series of substantially equal periodic
payments made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his beneficiary, (5)
made to a Participant after separation of service after attainment of age 55,
(6) made to a Participant for medical care (not to exceed the amount deductible
by the employee), or (7) paid to alternate payees under a qualified domestic
relations order.
RESTRICTIONS ON WITHDRAWALS OF ELECTIVE CONTRIBUTIONS. Effective January 1, 1989
and thereafter, any funds in the Participant's account balance other than funds
attributable to assets held at the close of the last year beginning before
January 1, 1989 will be restricted from withdrawal except upon attainment of age
59 1/2, separation from service, death, disability or hardship (hardship
withdrawals are to be limited to the amount of the Participant's own
contributions exclusive of earnings). However, any funds in the Participant's
account balance attributable to employer contributions, if any, and the earnings
thereon will not be restricted unless specifically provided for by the
employer's plan.
In tax years beginning after 1988, Section 403(b) Plans (other than church
plans) will be subject to nondiscrimination and coverage requirements, as well
as special rules with respect to minimum distributions.
SECTION 401(a) PLANS
An employer maintaining a pension or profit sharing Plan which satisfies the
requirements of Section 401(a) of the Code may make contributions to the
Contract which are generally currently deductible by the employer and are not
currently taxed to the Participants. The Code prescribes various limitations on
the maximum amount which may be contributed on behalf of any Participant. In
addition, Participants may make after-tax contributions to the Contract if their
Section 401(a) Plan permits.
When Fixed Annuity payments commence, or if the Participant obtains a partial
redemption of the Units credited to his/her Accumulation Account under the
Contract, the amount received will be includable as ordinary income in the year
received, except that such portion of any amount received as is deemed to
represent a return of Participant after-tax Purchase Payments will not be taxed.
Full redemptions may qualify for special capital gains treatment or 5-year or
10-year income averaging if the payment constitutes a "lump sum distribution,"
as that term is defined in the Code.
The rules governing rollovers of distributions from a Section 401(a) Plan are
parallel to those dealing with distributions from Section 403(b) annuities. In
addition, the 10% penalty on premature distributions from Section 403(b)
annuities is also applicable to Section 401(a) Plan distributions.
SECTION 408 (IRA) CONTRACTS
An individual, participating under a Contract which satisfies the requirements
of Section 408 of the Code, may make contributions to the Contract. The Code
prescribes various limitations on the maximum amounts which may be contributed
by or on behalf of the Participant and on the deductibility of the contributions
for 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.
<PAGE> 37
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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 23) the difference is considered to be an excess accumulation and the IRS
may impose a 50% excise tax on this excess amount.
SECTION 457 PLANS
Section 457 of the Code allows employees of or independent contractors who
furnish services to a state or local government to establish a deferred
compensation plan allowing the deferral of certain limited amounts of
compensation by way of salary reduction. State and local government includes a
state, a political subdivision of a state, any agency or instrumentality of
either of them, a tax-exempt rural electric cooperative or its tax-exempt
affiliates. Contributions are based on a special definition of compensation and
include any amounts contributed to a Section 403(b) tax sheltered annuity for
determining the contribution limits. All amounts deferred property bought with
those amounts or income earned on those amounts remain the property of the
employer and are subject to the claims of its general creditors. Distributions
from a Section 457 Plan are subject to Section 401(a)(9) of the Code in addition
to the rules applicable under Section 457 of the Code and must begin no later
than the April 1st of the calendar year following the year in which the
participant attains age 70 1/2.
NON-QUALIFIED DEFERRED COMPENSATION CONTRACTS
Taxed employers may establish a non-qualified deferred compensation arrangement
funded by non-qualified deferred compensation contracts allowing the deferral of
compensation through salary reduction. Such Plans include, but are not limited
to, excess benefit plans, plans maintained by an 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.
<PAGE> 38
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For NQDC Contracts, no withholding is made and no election is needed.
Effective January 1, 1992, distributions from qualified retirement plans and
Section 403(b) Contracts, other than individual retirement arrangements ("IRAs")
generally are subject to mandatory federal income tax withholding unless they
either are:
1. Part of a series of substantially equal periodic payments (at least
annually) for the participant's life or life expectancy, the joint
lives or life expectancies of the participant and his/her beneficiary,
or a period certain of not less than 10 years, or
2. Required by the Code upon the participant's attainment of age 70 1/2 or
death.
Such withholding will apply even if the distribution is rolled over into another
qualified plan including an IRA. The withholding can be avoided if the
participant's interest is directly transferred by the old plan to another
eligible qualified plan including an IRA. A direct transfer to the new plan can
be made only in accordance with the terms of the old plan. If withholding is not
avoided, the amount withheld may be subject to income tax and penalties.
Pursuant to Revenue Ruling 90-24 of the Code, an exchange of a Section 403(b)
annuity contract for another Section 403(b) annuity contract may qualify as a
tax-free exchange.
ASSUMPTION REINSURANCE
The Contracts described in this Prospectus include group variable annuity
contracts which were originally issued by MONY Life Insurance Company (formerly
The Mutual Life Insurance Company of New York) ("MONY") and then 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.
The former holders of MONY contracts who opted in to the assumption of their
contracts by AUSA experience no differences in the terms or charges under the
Contracts. All investment options previously available to these MONY
contractholders are 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.
<PAGE> 39
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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 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,
<PAGE> 40
-33-
Wiesenberger Investment Companies Service, Mutual Fund Values, Mutual Fund
Forecaster, VARDS and Morningstar.
In addition, reference may be made in advertisements to various indices
including, without limitation, the Standard & Poor's 500 Stock Index, Salomon
Brothers Broad Investment Grade Index and Lehman Brothers Core 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>
----------------------------------------------------------------------------------------------------------------------------
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) 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99(1)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MONEY MARKET(2) 11/78 4.39% 4.61% 4.70% 4.52% 7.16%
----------------------------------------------------------------------------------------------------------------------------
HIGH QUALITY BOND(2) 7/90 2.36% 4.27% 5.36% N/A 5.61%
----------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE GOVERNMENT BOND(2) 7/90 0.71% 4.43% 5.74% N/A 6.01%
----------------------------------------------------------------------------------------------------------------------------
CORE BOND(2) 1/78 (1.74)% 4.22% 6.38% 6.78% 7.83%
----------------------------------------------------------------------------------------------------------------------------
HIGH-YIELD BOND 8/95 (0.31)% 4.29% N/A N/A 6.12%
----------------------------------------------------------------------------------------------------------------------------
BALANCED(2) 12/92 10.59% 13.40% 16.60% N/A 13.32%
----------------------------------------------------------------------------------------------------------------------------
EQUITY INCOME 1/78 7.35% 15.71% 19.38% 12.95% 13.73%
----------------------------------------------------------------------------------------------------------------------------
EQUITY VALUE 4/96 (3.47)% 8.81% N/A N/A 9.76%
----------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME(2) 1/86 29.71% 32.45% 29.81% 17.76% 16.93%
----------------------------------------------------------------------------------------------------------------------------
EQUITY GROWTH(2) 3/93 36.86% 32.91% 26.66% N/A 20.70%
----------------------------------------------------------------------------------------------------------------------------
SPECIAL EQUITY(2) 1/86 24.92% 17.24% 23.10% 15.61% 16.07%
----------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE EQUITY 4/96 63.32% 34.55% N/A N/A 28.58%
----------------------------------------------------------------------------------------------------------------------------
CALVERT SERIES 9/86 11.22% 15.57% 17.29% 11.49% 11.13%
----------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY(2) 12/92 63.30% 24.45% 19.79% N/A 18.93%
----------------------------------------------------------------------------------------------------------------------------
SHORT HORIZON STRATEGIC 1/97 1.15% 5.17% N/A N/A 5.17%
----------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE HORIZON STRATEGIC 1/97 13.17% 12.80% N/A N/A 12.80%
----------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE/LONG HORIZON
STRATEGIC 1/97 18.63% 16.93% N/A N/A 16.93%
----------------------------------------------------------------------------------------------------------------------------
</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.
<PAGE> 41
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(2) Each of the corresponding Pooled Separate Accounts of 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:
<TABLE>
MONEY POOLED
SERIES SEPARATE ACCOUNT
- ------------------------------------------------------------ -----------------------
<S> <C>
Money Market................................................ Pooled Account No. 4
High Quality Bond........................................... Pooled Account No. 15
Intermediate Government Bond................................ Pooled Account No. 10d
Core Bond................................................... Pooled Account No. 5
Balanced.................................................... Pooled Account No. 14
Equity Income............................................... Pooled Account No. 6
Equity Growth............................................... Pooled Account No. 1
Growth & Income............................................. Pooled Account No. 10a
Special Equity.............................................. Pooled Account No. 10b
International Equity........................................ Pooled Account No. 12
</TABLE>
Total returns calculated for any period for each of the Money Market,
High Quality Bond, Intermediate Government Bond, Core 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 after giving effect to a one-time adjustment
to reflect charges, expenses and fees in affect 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 49). 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.
PRINCIPAL INVESTMENT STRATEGIES
This section describes principal investment strategies of the series of
Diversified Investors Portfolios currently available under the Contracts through
the Subaccounts. There can, of course, be no assurance
<PAGE> 42
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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 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 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.
<PAGE> 43
-36-
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.
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.
<PAGE> 44
-37-
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.
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.
The investment objective of the CORE BOND PORTFOLIO is to achieve maximum total
return. This Portfolio invests primarily in investment grade debt securities and
U.S. government obligations (including 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 CORE 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 Core 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
<PAGE> 45
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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.
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).
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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.
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. A fund's advisers may not be correct in its determinations of
companies that are in fact undervalued, but have good longer term business
prospects.
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
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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 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. A fund's advisers may fail to pick stocks that outperform the
economy or that do as well as the economy. 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
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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.
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 33 1/3% 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
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most 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 25,
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 worth
more or less at the time of redemption than at the time 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.
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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 most debt securities in response to market risk. The value of some
securities held by certain of the Portfolios may be quite volatile.
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.
PORTFOLIO SELECTION FOR THE BOND PORTFOLIOS. The advisers of the Bond Portfolios
may not pick securities that perform well because they are unable to predict
accurately the direction of interest rates or the maturity of certain debts
obligations or to assess accurately credit quality or other factors. In that
case, investors in a Bond Portfolio may lose money or their investment in such a
Portfolio may not do as well as other similar investments.
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. 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.
PORTFOLIO SELECTION FOR THE GROWTH & INCOME PORTFOLIO AND EQUITY GROWTH
PORTFOLIO. The success of the Growth & Income and Equity Growth Portfolios'
investment strategy depends largely on the skill of those Portfolios' advisers
in assessing the growth potential of companies in which the Portfolios invest.
The advisers may fail to pick stocks that outperform the market or that do as
well as the market. In that case, investors in one of these Portfolios may lose
money or their investment may not do as well as an investment in another stock
fund using a growth approach.
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. 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.
PORTFOLIO SELECTION FOR VALUE INVESTING. The success of a Portfolio using a
value approach depends largely on the adviser's skill in identifying securities
of companies that are in fact undervalued, but have good longer term business
prospects. The advisers may not be correct in their determinations. In that
case, investors in such a Portfolio may lose money or their investment in the
Portfolio may not do as well as an investment in another stock fund using a
value approach.
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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,
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- The International Equity Portfolio and the Balanced Portfolio may invest
in issuers located in emerging, or developing, markets. Emerging or
developing countries are generally defined as countries in the initial
stages of their industrialization cycles with low per capita income. All
of the risks of investing in foreign securities are heightened by
investing in developing countries. 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 AND EXTENSION 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. The Portfolio would also lose the
benefit of falling interest rates on the price of the repaid bond. Securities
subject to prepayment risk generally
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offer less potential for gains when interest rates decline, and may offer a
greater potential for loss when interest rates rise. Also, 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:
- protecting against a decline in value of a Portfolio's current or
anticipated securities holdings;
- as a substitute for buying or selling portfolio holdings; and
- 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.
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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 "Management of 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 Investors Portfolios has obtained an exemptive order from the
Securities and Exchange Commission to permit the Portfolios, pursuant to
approval by the Board of Trustees, to enter into and materially amend contracts
with subadvisers without the approval of the investors of the applicable
Portfolio. Before a Portfolio relies on the exemptive order, the Portfolio's
investors must approve it. To date, the investors of the Core Bond, Balanced,
Equity Growth and Special Equity Portfolios have each approved operation under
the exemptive order.
Diversified has selected Subadvisers for each Portfolio which have been approved
by the Board of Trustees of Diversified Investors Portfolios and, except as
permitted by the Portfolios exemptive order, 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 AND
INTERMEDIATE GOVERNMENT 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:
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
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been employed by Capital Management Group since 1994 and was employed at AIG
Investment Advisers prior to 1994.
Intermediate Government Bond Portfolio: Gregory Staples, Vice President, has
been responsible for the day-to-day management of the Intermediate Government
Bond Portfolio since 1994. Mr. Staples has been employed by Capital Management
Group since 1987.
CORE BOND PORTFOLIO
Payden & Rygel. Payden was formed in 1984 and is owned by Joan A. Payden, John
P. Isaacson and Scott A. King. Payden (or its predecessors) has been a
registered investment adviser since 1983. The principal business address of
Payden is 333 South Grand Avenue, 32nd Floor, Los Angeles, California 90071.
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 FUND
Aeltus Investment Management, Inc.
Payden & Rygel
Aeltus Investment Management, Inc. Aeltus was formed in 1972 and is an indirect
wholly-owned subsidiary of Aetna Inc. Aeltus has been a registered investment
adviser since 1972. The principal business address of Aeltus is 10 State House
Square, Hartford, Connecticut 06103-3602.
Geoffrey A. Brod, Portfolio Manager, has been responsible for the day-to-day
supervision of the Balanced Fund on behalf of Aeltus since 1999 and has been
employed by Aeltus or its parent company since 1966.
Payden & Rygel. Payden was formed in 1984 and is owned by Joan A. Payden, John
P. Isaacson and Scott A. King. Payden (or its predecessors) has been a
registered investment adviser since 1983. The principal business address of
Payden is 333 South Grand Avenue, 32nd Floor, Los Angeles, California 90071.
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.
<PAGE> 55
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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.
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
Goldman Sachs Asset Management
Husic Capital Management
RS Investment Management, L.P.
Westport Asset Management, Inc.
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.
Husic Capital Management ("Husic") was founded in March 1986 and is a California
limited partnership. The General Partner of Husic is Frank J. Husic & Co., a
California corporation ("Husic & Co."). Mr. Frank J. Husic is the sole
shareholder of Husic & Co. Husic has been a registered investment adviser since
1986. The principal business address of Husic is 555 California Street, Suite
2900, San Francisco, California 94104.
RS Investment Management, L.P. RS was formed in 1999 and is owned by certain of
its employees. RS (or its predecessor) has been a registered investment adviser
since 1984. The principal business address of RS is 555 California Street, San
Francisco, California 94104.
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.
<PAGE> 56
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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 the fiscal year ended December 31, 1999, Diversified and the subadvisers
received aggregate advisor fees (after waivers) equal to that percentage of each
Fund's average daily net assets set forth in the table below.
<TABLE>
<S> <C>
Money Market Fund 0.25%
High Quality Bond Fund 0.35%
Intermediate Government Bond Portfolio 0.35%
Core Bond Portfolio 0.35%
High-Yield Bond Portfolio 0.55%
Balanced Portfolio 0.45%
Equity Income Portfolio 0.45%
Equity Value Portfolio 0.57%
Growth & Income Portfolio 0.60%
Equity Growth Portfolio 0.62%
Special Equity Portfolio 0.80%
Aggressive Equity Portfolio 0.90%
International Equity Portfolio 0.75%
</TABLE>
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.
<PAGE> 57
-50-
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.
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
<PAGE> 58
-51-
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.
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
<PAGE> 59
-52-
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.
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 25.
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 (914-697-8000).
<PAGE> 60
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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, Diversified Investors Strategic Variable Funds or Diversified 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.
<PAGE> 61
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TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----------
<S> <C>
Independent Accountants..................................... 1
Sale of Contracts/Principal Underwriter..................... 1
Texas Optional Retirement Program........................... 1
Performance Data............................................ 1
Variable Funds Money Market Subaccount.................... 1
Diversified Investors Portfolios............................ 2
Investment Objectives, Policies and Restrictions Relating
to the Portfolios...................................... 2
Portfolio Transactions and Brokerage Commissions.......... 20
Investment Restrictions Relating to The Strategic Variable
Funds Subaccounts......................................... 22
Performance Information Relating to The Strategic Variable
Funds Subaccounts......................................... 23
Determination of Unit Value; Valuation of Securities........ 25
Management of Diversified Investors Portfolios.............. 28
Management of The Strategic Variable Funds Account.......... 32
Diversified Investors Portfolios: Description of Trust...... 35
Tax Information Relating to Diversified Investors
Portfolios................................................ 36
Statutory Basis Financial Statements of AUSA................ 38
Appendix A -- Description of Security Ratings.............. Appendix A
Financial Statements........................................ F-1
</TABLE>
<PAGE> 62
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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> 63
-A-1-
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>
-----------------------------------------------------------------------------
SHORT HORIZON INTERMEDIATE INTERMEDIATE/LONG
STRATEGIC HORIZON STRATEGIC HORIZON STRATEGIC
-----------------------------------------------------------------------------
TARGET TARGET TARGET
NORMAL WITHIN NORMAL WITHIN NORMAL WITHIN
RANGE RANGE RANGE RANGE RANGE RANGE
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market 0-20% 10% 0-10% 0% 0-10% 0%
------------------------------------------------------------------------------------------------------------------------
High Quality Bond 10-30% 20% 0-20% 10% 0-15% 5%
------------------------------------------------------------------------------------------------------------------------
Intermediate Government Bond 10-30% 20% 0-15% 5% 0-15% 5%
------------------------------------------------------------------------------------------------------------------------
Core 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% 0-20% 9% 0-20% 12%
------------------------------------------------------------------------------------------------------------------------
Equity Value N/A N/A 0-15% 6% 0-20% 9%
------------------------------------------------------------------------------------------------------------------------
Growth & Income N/A N/A 0-20% 8% 0-20% 11%
------------------------------------------------------------------------------------------------------------------------
Equity Growth N/A N/A 0-15% 7% 0-20% 10%
------------------------------------------------------------------------------------------------------------------------
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> 64
-B-1-
APPENDIX B
APPLICABLE PREMIUM TAX RATES
<TABLE>
<CAPTION>
PREMIUM TAX RATE PERCENT
---------------------------
NON-
QUALIFIED QUALIFIED
--------- ------------
<S> <C> <C>
California.......................... .50% 2.35%
District of Columbia................ 2.25% 2.25%
Kentucky............................ 2.00% 2.00%
Maine............................... -- 2.00%
Nevada.............................. -- 3.50%
Puerto Rico......................... 1.00% 1.00%
South Dakota........................ -- 1.25%
West Virginia....................... 1.00% 1.00%
Wyoming............................. -- 1.00%
</TABLE>
<PAGE> 65
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.
<PAGE> 66
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 2000
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; (800) 926-0044
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT IT RELATES TO,
AND SHOULD BE READ IN CONJUNCTION WITH, THE PROSPECTUS DATED MAY 1, 2000, 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
Independent Accountants..................................... 1
Sale of Contracts/Principal Underwriter..................... 1
Texas Optional Retirement Program........................... 1
Performance Data............................................ 1
Variable Funds Money Market Subaccount.................... 1
Diversified Investors Portfolios............................ 2
Investment Objectives, Policies and Restrictions Relating
to the Portfolios...................................... 2
Portfolio Transactions and Brokerage Commissions.......... 20
Investment Restrictions Relating to The Strategic Variable
Funds Subaccounts......................................... 22
Performance Information Relating to The Strategic Variable
Funds Subaccounts......................................... 23
Determination of Unit Value; Valuation of Securities........ 25
Management of Diversified Investors Portfolios.............. 28
Management of The Strategic Variable Funds Account.......... 32
Diversified Investors Portfolios: Description of Trust...... 35
Tax Information Relating to Diversified Investors
Portfolios................................................ 36
Statutory Basis Financial Statements of AUSA................ 38
Appendix A -- Description of Security Ratings............... A-1
Financial Statements........................................ F-1
</TABLE>
<PAGE> 67
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, 1999, the yield for the Variable
Funds Money Market Subaccount (the "Money Market Subaccount") was 5.84% and the
effective yield was 6.01%.
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 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.
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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 Core 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 short-term 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
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
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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 book-entry 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
interest-only class is extremely sensitive to the rate of principal payments on
the underlying obligation. The market value of the principal-only 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. government to
supervise and finance certain types of activities. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, for example, GNMA
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan Banks, by the
right of the issuer to borrow from the Treasury; others, such as those issued by
the Federal National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. While the U.S.
Government provides financial support to such U.S. Government-sponsored agencies
or instrumentalities, no assurance can be given that it will always do so, since
it is not so obligated by law.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually from 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations. A variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving periodically
fluctuating rates of interest under 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
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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 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.
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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 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
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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.
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 agreed-upon date within a number of
days (usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed-upon price,
which obligation is in effect secured by the value of the underlying security,
usually U.S. Government or government agency issues. Under the 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 broker-dealers 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 high-grade 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.
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
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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 over-the-counter 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 broker-dealer. In addition,
foreign brokerage commissions are generally higher than commissions on
securities traded in the United States and may be non-negotiable. In general,
there is less overall governmental supervision and regulation of foreign
securities exchanges, brokers and listed companies than in the United States.
FOREIGN SECURITIES -- MONEY MARKET PORTFOLIO
The Money Market Portfolio may invest in the following foreign securities: (a)
U.S. dollar-denominated obligations of foreign branches and subsidiaries of
domestic banks and foreign banks (such as Eurodollar CDs, which are U.S.
dollar-denominated CDs issued by branches of foreign and domestic banks located
outside the United States; Eurodollar TDs ("ETDs"), which are U.S.
dollar-denominated 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. dollar-denominated
short-term bonds and notes (including variable amount master demand notes)
issued by foreign corporations (including Canadian commercial paper, which is
commercial paper issued by a Canadian corporation or a Canadian subsidiary of a
U.S. corporation, and Europaper, which is U.S. dollar-denominated commercial
paper of a foreign issuer); and (c) U.S. dollar-denominated obligations issued
or guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities that are determined by the
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
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 closed-end
investment companies which primarily hold foreign securities. Investments in
such companies may entail the risk that the market value of such investments may
be substantially less than their net asset value and that there would be
duplication of investment management and other fees and expenses.
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
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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 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.
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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
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 cross-hedge its assets.
Also, with regard to a Portfolio's use of cross-hedges, there can be no
assurance that historical correlations between the movement of certain foreign
currencies relative to the U.S. dollar will continue. Thus, at any time poor
correlation may exist between movements in the exchange rates of the foreign
currencies underlying a 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 cross-hedges 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 when-issued 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
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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 "when-issued" 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 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
"when-issued" 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 "when-issued" 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 non-zero 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 fixed-income 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
long-term U.S. Treasury Bonds, Treasury Notes, Government National Mortgage
Association modified pass-through mortgage-backed securities and three-month
U.S. Treasury Bills. A 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
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order to gain rapid market exposure that may, in part or entirely, 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 fixed-income securities, is to
attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currencies. For example, if interest rates were expected to increase, a
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.
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
require-
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ments, 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.
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
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quantitative limitation, or (b) for other purposes to the extent that
immediately thereafter the aggregate amount of margin deposits on all
(non-hedge) futures contracts of a Portfolio and premiums paid on outstanding
(non-hedge) 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 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
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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 cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the 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.
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 market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on currencies may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting a 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 exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. A Portfolio's ability
to terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position,
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each Portfolio will treat purchased over-the-counter options and assets used to
cover written over-the-counter options as illiquid securities. With respect to
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
In addition, futures contracts, options on futures contracts, forward contracts
and options on foreign currencies may be traded on foreign exchanges. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (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
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.
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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 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 over-the-counter options transactions with
broker-dealers who make markets in these options. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolios will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The 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
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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".
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 sub-custodian. 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
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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 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.
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RATING SERVICES
The ratings of rating services represent their opinions as to the quality of the
securities that they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings are an initial criterion for selection of portfolio
investments, the 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 short-term
obligations or (c) by purchasing debt securities of types distributed
publicly or privately;
(4) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) 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);
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(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 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.
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 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
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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, 1997: $324,465
Fiscal year ended December 31, 1998: $488,301
Fiscal year ended December 31, 1999: $
EQUITY INCOME PORTFOLIO
Fiscal year ended December 31, 1997: $659,256
Fiscal year ended December 31, 1998: $855,733
Fiscal year ended December 31, 1999: $
EQUITY VALUE PORTFOLIO
Fiscal year ended December 31, 1997: $548,229
Fiscal year ended December 31, 1998: $890,565
Fiscal year ended December 31, 1999: $
GROWTH & INCOME PORTFOLIO
Fiscal year ended December 31, 1997: $390,268
Fiscal year ended December 31, 1998: $728,627
Fiscal year ended December 31, 1999: $
EQUITY GROWTH PORTFOLIO
Fiscal year ended December 31, 1997: $483,139
Fiscal year ended December 31, 1998: $853,305
Fiscal year ended December 31, 1999: $
SPECIAL EQUITY PORTFOLIO
Fiscal year ended December 31, 1997: $1,017,376
Fiscal year ended December 31, 1998: $1,495,526
Fiscal year ended December 31, 1999: $
AGGRESSIVE EQUITY PORTFOLIO
Fiscal year ended December 31, 1997: $ 48,943
Fiscal year ended December 31, 1998: $114,263
Fiscal year ended December 31, 1999: $
INTERNATIONAL EQUITY PORTFOLIO
Fiscal year ended December 31, 1997: $295,967
Fiscal year ended December 31, 1998: $414,060
Fiscal year ended December 31, 1999: $
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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 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,
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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.
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
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comparing performance of a Strategic Variable Funds Subaccount with performance
quoted with respect to other investment companies or types of investments.
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.
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.
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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 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 non-U.S. exchanges and over-the-counter 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 non-U.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
short-term obligations, but
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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 dealer-supplied valuations and electronic data processing
techniques that take into account appropriate factors such as institutional-size
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 over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. Short-term 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 short-term 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 long-term 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 short-term 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 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
<PAGE> 93
-27-
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.
<PAGE> 94
-28-
MANAGEMENT OF DIVERSIFIED INVESTORS PORTFOLIOS
The Trustees and officers of Diversified Investors Portfolios and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate those Trustees who
are "interested persons" (as defined in the 1940 Act) of Diversified Investors
Portfolios. Unless otherwise indicated, the address of each Trustee and officer
of Diversified Investors Portfolios is 4 Manhattanville Road, Purchase, New York
10577.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
AGE
(AS OF PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS 11/15/99) DURING PAST 5 YEARS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tom A. Schlossberg* 49 12/93 to present -- President, Chief Executive Officer
(Trustee) and Chairman of the Managing Board, Diversified
Investment Advisors, Inc.
- ------------------------------------------------------------------------------------------------------------
Neal M. Jewell 64 1/1995 to present -- Consultant; 1995 to present --
(Trustee) Independent Trustee, EAI Select (a registered Investment
355 Thornridge Drive Company); 11/1991 to 1/1995 -- Executive Vice President,
Stamford, CT 06903 American International Group Asset Management.
- ------------------------------------------------------------------------------------------------------------
Eugene M. Mannella 45 8/1993 to present -- Executive Vice President, Investment
(Trustee) Management Services Inc.; 5/1996 to present -- President,
2 Orchard Neck Road Brooks Asset Management LLC; President, Arapahs Partners,
Center Moriches, New York 19934 LLC.
- ------------------------------------------------------------------------------------------------------------
Mark Mullin 35 4/95 to present -- Vice President, Diversified Investment
(Trustee) 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 44 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 and Secretary, Diversified Investors Securities
Corp.
- ------------------------------------------------------------------------------------------------------------
Alfred C. Sylvain 48 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 6/1999 -- Director,
Diversified Investors Securities Corp.
- ------------------------------------------------------------------------------------------------------------
John F. Hughes 58 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.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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".
<PAGE> 95
-29-
For the fiscal year ended December 31, 1999, the Diversified Investors
Portfolios provided the following compensation to its trustees.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
PENSION OR TOTAL
AGGREGATE RETIREMENT COMPENSATION
COMPENSATION BENEFITS FROM THE TRUSTS
FROM ACCRUED AS PART ESTIMATED AND
DIVERSIFIED OF ANNUAL FUND COMPLEX
INVESTORS PORTFOLIO BENEFITS UPON PAID
NAME OF PERSON, POSITION PORTFOLIOS EXPENSES RETIREMENT TO TRUSTEES
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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>
CODE OF ETHICS
The Trustees of The Diversified Investors Funds Group (the "Trust") and The
Diversified Investors Strategic Allocation Funds (The "SAFs") has adopted a Code
of Ethics (the "Code"). This Code prohibits specific types of personal
securities transactions which would create a conflict of interest. It also
establishes reporting requirements and preventive procedures pursuant to the
provisions of Rule 17j-1(b)(1) under the 1940 Act.
Diversified Investment Advisors, Inc. and Diversified Investors Securities
Corp., the investment adviser and the broker-dealer, respectively adopted Codes
of Ethics substantially identical to this Code.
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.
<PAGE> 96
-30-
The Adviser's and Subadviser's fees with respect to each Portfolio are described
in the Prospectus.
Diversified is an investment firm dedicated to meeting the complete needs of
retirement plan sponsors and participants from pre- through post-retirement.
Diversified provides flexible, high-quality services coupled with the employment
of independent investment managers in an innovative investment structure.
Diversified provides services with respect to $26 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 more than 500,000 participants and has 750 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 high-quality investments and administrative services to defined
benefit, defined contribution and not-for-profit 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 on-site 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 re-enrolling 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. To date, the investors of the Core Bond,
Balanced, Equity Growth and Special Equity Portfolios have each approved
operation under the exemptive order.
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 back-up manager selection, regression analysis and
universe comparisons.
<PAGE> 97
-31-
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 "back-up"
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, 1997, Diversified earned and voluntarily
waived advisory fees as indicated with respect to the following Portfolios:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
PORTFOLIO EARNED WAIVED
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $ 553,205 $ --
- ----------------------------------------------------------------------------------------
High Quality Bond 707,143 --
- ----------------------------------------------------------------------------------------
Intermediate Government Bond 340,670 15,525
- ----------------------------------------------------------------------------------------
Core 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
- ----------------------------------------------------------------------------------------
</TABLE>
For the fiscal year ended December 31, 1998, Diversified earned and voluntarily
waived advisory fees as indicated with respect to the following Portfolios:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
PORTFOLIO EARNED WAIVED
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $ 654,703 $ --
- ----------------------------------------------------------------------------------------
High Quality Bond 753,726 --
- ----------------------------------------------------------------------------------------
Intermediate Government Bond 491,360 2,380
- ----------------------------------------------------------------------------------------
Intermediate Bond 12,711 12,711
- ----------------------------------------------------------------------------------------
Core 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
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE> 98
-32-
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.
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.
<PAGE> 99
-33-
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
AGE
(AS OF PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS 11/16/98) DURING PAST 5 YEARS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tom A. Schlossberg 49 12/93 to present -- President, Chief Executive Officer and
(Managing Board Member) Chairman of the Managing Board, Diversified Investment
Advisors, Inc.
- --------------------------------------------------------------------------------------------------------------
Neal M. Jewell 64 1/1995 to present -- Consultant; 1995 to present -
(Managing Board Member) Independent Trustee, EAI Select (a registered investment
355 Thornridge Drive company); 11/1991 to 1/1995 -- Executive Vice President,
Stamford, CT 06903 American International Group Asset Management.
- --------------------------------------------------------------------------------------------------------------
Eugene M. Mannella 45 8/1993 to present -- Vice President, Investment Management
(Managing Board Member) Services Inc.; 5/1996 to present -- President, Brooks Asset
2 Orchard Neck Road Management
Center Moriches, New York 19934
- --------------------------------------------------------------------------------------------------------------
Mark Mullin 35 4/95 to present -- Vice President, Diversified Investment
(Managing Board Member) 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,
P.O. Box 8063 Smith & Sawyer LLC
Vero Beach, Florida 32963
- --------------------------------------------------------------------------------------------------------------
Robert F. Colby 44 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 48 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 6/1999 -- Director, Diversified
Investors Securities Corp.
- --------------------------------------------------------------------------------------------------------------
John F. Hughes 58 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.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 100
-34-
COMPENSATION
For the fiscal year ended December 31, 1999, Diversified Investors Strategic
Variable Funds provided the following compensation to members of the Managing
Board.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM THE
AGGREGATE BENEFITS ESTIMATED REGISTRANT AND
COMPENSATION ACCRUED AS PART ANNUAL FUND COMPLEX
FROM OF BENEFITS UPON PAID TO
NAME OF PERSON, POSITION REGISTRANT FUND EXPENSES RETIREMENT MEMBERS
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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.
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.
<PAGE> 101
-35-
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 29
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 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
<PAGE> 102
-36-
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% 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.
<PAGE> 103
-37-
Each Portfolio, since it is taxed as a partnership, is not subject to federal
income taxation. Instead, an 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, (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> 104
-38-
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> 105
A-1
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
A-1 -- 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.
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.
<PAGE> 106
A-2
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 well-assured. 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 Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 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> 107
AUSA LIFE INSURANCE COMPANY, INC.
4 MANHATTANVILLE ROAD, PURCHASE, NEW YORK 10577
(914) 697-8000
2538 (REV. 5/00)
<PAGE> 108
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
<TABLE>
<S> <C>
(1) Financial Statements of AUSA audited by Ernst & Young
L.L.P.*
(2) Financial Statements of Diversified Investors Variable
Funds and Diversified Investors Portfolios as audited by
Coopers & Lybrand L.L.P.**
</TABLE>
(b) Exhibits
Any form of Form N-4 Exhibits (1) and (3) through (7) and (9) previously
filed with the Commission as part of Pre-Effective Amendment No. 1 dated
July 7, 1994 to the Registrant's N-4 Registration
Statement -- Registration No. 33-73734 under the Securities Act of 1933
are incorporated herein by reference.
(8)(a) Form of Investment Subadvisory Agreement between Diversified and
Husic Capital Management.
(8)(b) Form of Investment Subadvisory Agreement between Diversified and
Payden & Rygel.
(10) Opinions and Consents of Independent Accountants.*
(14) Financial Data Schedules.*
-----------------------
* To be filed at a later date.
** To be incorporated herein by reference.
ITEM 25. DIRECTORS AND OFFICERS OF AUSA
The Directors and officers of AUSA are set forth below.
<TABLE>
<S> <C>
DIRECTORS
William Brown, Jr.................... BROWNSTONE MANAGEMENT CONSULTANTS, INC., 14 Windward Avenue,
White Plains, New York 10605.
William L. Busler.................... AEGON USA, Inc., 4333 Edgewood Road, N.E., Cedar Rapids,
Iowa 52499.
Jack R. Dykhouse..................... AEGON USA, Inc., Suite 302, Brown Trail, Bedford, Texas
76021.
Steven E. Frushtick.................. WIENER, FRUSHTICK & STRAUB, 500 Fifth Avenue, New York, New
York 10110.
Eric Goodman......................... AEGON USA INVESTMENT MANAGEMENT, 400 West Market Street,
Louisville, Kentucky 40204.
Vice Admiral Thor Hanson............. NATIONAL MULTIPLE SCLEROSIS SOCIETY, 900 Birdseye Road, P.O.
Box 112, Orient, New York 11957-0112.
Peter P. Post........................ EMMERLING POST, Inc., 415 Madison Avenue, New York, New York
10017.
Colette G. Vargas.................... DIVERSIFIED INVESTMENT ADVISORS, 4 Manhattanville Road,
Purchase, New York 10577.
Cor H. Verhagen...................... AEGON INSURANCE GROUP, 51 JFK Parkway, Short Hills, New
Jersey 07078.
Professor E. Kirby Warren............ COLUMBIA UNIVERSITY SCHOOL OF BUSINESS, 725 Uris Hall, 116th
Street & Broadway, New York, New York 10027.
</TABLE>
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<PAGE> 109
<TABLE>
<S> <C>
DIRECTOR-OFFICERS
Vera F. Mihaic (Director and Vice
President)........................ AUSA LIFE INSURANCE COMPANY, INC., 666 Fifth Avenue, New York, New York
10103-0001.
Tom Schlossberg (Director and
President)........................ DIVERSIFIED INVESTMENT ADVISORS, INC., 4 Manhattanville Road, Purchase, New York
10577.
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER CONTROL WITH THE DEPOSITOR OR
REGISTRANT
No person is directly or indirectly controlled by the Registrant. The Registrant
is a separate account of the Depositor.
The diagram on the next page shows all corporations directly or indirectly
controlled or under common control with the Depositor, showing the state or
other sovereign power under the laws of which each is organized and the
percentage ownership of voting securities giving rise to the control
relationship. (See diagram on following page.)
C- 2
<PAGE> 110
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
VERENIGING AEGON
NETHERLANDS MEMBERSHIP
ASSOCIATION
53.16%
AEGON N.V.
NETHERLANDS CORPORATION
100% 100% 100% 100%
AEGON Netherland N.V. AEGON INTERNATIONAL N.V. AEGON NEVAK HOLDING B.V. GRONINGER FINANCIERINGEN B.V.
Netherlands Corporation Netherlands Corporation Netherlands Corporation Netherlands Corporation
DE
THE AEGON TRUST
Advisory Board: K.J. Storm
Donald J. Shepard
H.B. Van Wik
Dennis Hersch
DE 100%
AEGON U.S. HOLDING
CORPORATION
DE 100%(2)
TRANSAMERICA IA 100%(1)
CORPORATION AEGON USA, INC.
DE 100%
TRANSAMERICA
HOLDING COMPANY
DE 100% MD 100% MD 100% DE 100%(3)
AEGON FUNDING FIRST AUSA LIFE AUSA HOLDING COMMONWEALTH GENERAL
CORP. INSURANCE COMPANY COMPANY CORPORATION
NJ 100% NY 82.33%(5) MD 100% MD 100% IA 100% DE 100%
SHORT HILLS AUSA LIFE INSURANCE MONUMENTAL GENERAL MONUMENTAL GENERAL AUSA FINANCIAL DIVERSIFIED INVESTMENT
MANAGEMENT COMPANY COMPANY, INC. CASUALTY COMPANY INSURANCE GROUP, INC. MARKETS, INC. ADVISORS, INC.
NY 100% IA 100% MD 100% KS 100% CA 100% DE 100%
CORPA REINSURANCE LIFE INVESTORS UNITED FINANCIAL TRIP MATE INSURANCE TRANSAMERICA DIVERSIFIED INVESTORS
COMPANY INSURANCE COMPANY SERVICES, INC. AGENCY, INC. CAPITAL, INC. SECURITIES CORP.
OF AMERICA
IN 100% DE 100% AZ (8) MD 100% CA 100% MA 100%
AEGON MANAGEMENT LIFE INVESTORS BANKERS FINANCIAL LIFE MONUMENTAL GENERAL ENDEAVOR MANAGEMENT GEORGE BERAM
COMPANY ALLIANCE, LLC INSURANCE COMPANY ADMINISTRATORS, INC. COMPANY & COMPANY, INC.
DE 100%(4) IA 100% MD 100% MD 100% IA 100% IA 100%
RCC NORTH AMERICA GREAT AMERICAN THE WHITESTONE EXECUTIVE MANAGEMENT UNIVERSAL BENEFITS AEGON USA
INC. INSURANCE AGENCY, INC. CORPORATION AND CONSULTANT CORPORATION SECURITIES, INC.
SERVICES, INC.
IA 100% IA 100% MD 100% IA 100% MI 100%
BANKERS UNITED LIFE CADET HOLDING CORP. MONUMENTAL GENERAL INVESTORS WARRANTY CREDITOR RESOURCES,
ASSURANCE COMPANY MASS MARKETING, INC. OF AMERICA, INC. INC.
IA 100% IA 100% CN 100%
PFL LIFE MASSACHUSETTS FIDELITY CRC CREDITOR
INSURANCE COMPANY TRUST COMPANY RESOURCES CANADIAN
DEALER NETWORK INC.
MN 100% PR 51%(9) DE 100% MD 100%
AEGON FINANCIAL MONUMENTAL GENERAL LIFE MONEY SERVICES, INC. WEINER AGENCY, INC.
SERVICES GROUP INC. INSURANCE COMPANY OF
PUERTO RICO
KY 100% DE 100% IA 100%
AEGON ASSIGNMENT ADS CORPORATION, L.L.C . AEGON USA INVESTMENT
CORPORATION OF MANAGEMENT, INC.
KENTUCKY
IL 100% CA 10.56% IA 100%(11)
AEGON ASSIGNMENT ORBA INSURANCE AEGON USA REALTY (15)
CORPORATION SERVICES, INC. ADVISORS, INC.
AZ 100% Voting Common CA 100% DE 100%
SOUTHWEST EQUITY LIFE ZAHORIK COMPANY, INC. AEGON USA REAL
INSURANCE COMPANY ESTATE SERVICES, INC.
AZ 100% Voting Common(6) AL 100% DE 100%
IOWA FIDELITY LIFE ZCI, INC. QSC HOLDING, INC.
INSURANCE COMPANY
OH 100% TX 100% IA 100%
WESTERN RESERVE LIFE ZAHORIK TEXAS, LRA, INC.
ASSURANCE CO. OF OHIO INC.
(15) MD CA 33 1/3% DE 100%
WRL SERIES FIND LONG, MILLER & LANDAUER
INC. ASSOCIATES, L.L.C. ASSOCIATES, INC.
FL 100% DE 100% TX 100%
WRL INVESTMENT AEGON ASSET LANDAUDER REALTY
SERVICES, INC. MANAGEMENT ASSOCIATES, INC.
SERVICES, INC.
FL 100% (15) DE 100% IA 100%(12)
WRL INVESTMENT INTERSECURITIES, REALTY INFORMATION
MANAGEMENT, INC. INC. SYSTEMS, INC.
CA 100%(7) MI 100%(10) IA (13)
ISI INSURANCE ASSOCIATED MARINER USP REAL ESTATE
AGENCY, INC. AND FINANCIAL GROUP, INC. INVESTMENT TRUST
ITS SUBSIDIARIES
HI 100% FL 100% IA (14)
ISI INSURANCE AGENCY IDEX INVESTOR RCC PROPERTIES
OF HAWAII, INC. SERVICES, INC. LIMITED PARTNERSHIP
NM 100% DE 100%
ISI INSURANCE IDEX MANAGEMENT,
AGENCY, OF NEW INC.
MEXICO, INC.
FL 100% MA
AEGON EQUITY IDEX MUTUAL
GROUP, INC. FUNDS
</TABLE>
C-3
<PAGE> 111
Footnotes
(1) 150,000 shares of Class B Non-Voting Common Stock owned by AEGON Antilles
N.V.
(2) See Chart #3 for a listing of Transamerica Corporation subsidiaries.
(3) See Chart #2. 457,400 shares of $13.00 cumulative Preferred Stock, Series K
owned by Monumental Life Insurance Company.
(4) 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 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 Brooke, Inc., FGP Burkewood, Inc., FGP Bush Terminal, Inc., FGP
Centereach, Inc., FGP City Hall, Inc., FGP Colonial Plaza, Inc., FGP Coram,
Inc., FGP Edison, 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 Lincoln, Inc., FGP
Main Street, Inc., FGP Meadow Lane, Inc., FGP Merrick, Inc., FGP Northern
Blvd., Inc., FGP Parsippany, Inc., FGP Parsons, Inc., FGH Property
Services, Inc., FGP Remsen, Inc., FGP Schenectady, Inc., FGP Seventy-Second
Street, Inc., FGP Stamford, Inc., FGP Twenty-Two, Inc., FGP Union Gardens,
Inc., FGP West 14th Street, Inc., FGP West 32nd 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., The RCC Group, Inc., Third FGP, Inc.
(5) First AUSA Life Insurance Company owns 82.33% and Veterans Life Insurance
Company owns 17.67%.
(6) Ordinary common stock is allowed 60% of total cumulative vote.
Participating common stock is allowed 40% of total cumulative vote.
(7) Subsidiaries of ISI Insurance Agency, Inc. are: ISI Insurance Agency of
Ohio, Inc., ISI Insurance Agency of Massachusetts, Inc., ISI Insurance
Agency of Alabama, and ISI Insurance Agency of Texas, Inc.
(8) Class B Common stock is allocated 75% of total cumulative vote. Class A
Common stock is allocated 25% of total cumulative vote.
(9) First AUSA Life Insurance Company owns 51% and Baldrich & Associates of
Puerto Rico owns 49%.
(10) Subsidiaries of Associated Mariner Financial Group, Inc. are Associated
Mariner Insurance Agency of Massachusetts, Inc., Associated Mariner Agency
Ohio, Inc., and Associated Mariner Agency Texas, Inc.
(11) Owns 49% of Quantra Consulting, Inc., a Delaware corporation.
(12) 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.
(13) First AUSA Life Insurance Company owns 12.89%. PFL Life Insurance Company
owns 13.11%. Bankers United Life Assurance Company owns 4.86%.
(14) AEGON USA Realty Advisors is General partner and 5% owner; all limited
partners are RCC entities within the RCC Group.
(15) Denotes relationships as investment advisor, transfer agent, administrator,
sponsor, principal underwriter/distributor or general partner.
C- 4
<PAGE> 112
COMMONWEALTH GENERAL CORPORATION AND RELATED LEGAL ENTITIES
DECEMBER 31, 1999
<TABLE>
<S> <C> <C> <C> <C>
Commonwealth
General
Corporation
AFSG Securities Ampac Insurance Academy Insurance Capital General
Corporation Agency, Inc. Group, Inc. Development
(EIN 23-1720755) Corporation
Benefit Plans, Inc. Compass Rose Academy Life Insurance Monumental Life
Development Company Insurance
Corporation Company(2)
DurCo Agency, Inc. Financial Printing Pension Life Insurance AEGON Special
Services, Inc. Company of America Markets Group, Inc.
Capital 200 Block Frazer Association FED Financial, Inc. Peoples Benefit Life
Corporation Consultants, Inc. Insurance Company(3)
(formerly Association
Consultants, Inc.)
Capital Real Estate Nation Home Life Ammest Development Veterans Life
Development Corporation Corporation Corporation, Inc. Insurance Company
Commonwealth General Valley Forge Associates, Ammest Insurance Agency, Peoples Benefit
Assignment Corporation Inc. Inc. Services, Inc.
Diversified Financial Veterans Benefits Plans, Ammest Massachusetts Coverna Direct
Products, Inc. Inc. Insurance Agency, Inc. Insurance Services,
Inc.
Monumental Agency Veterans Insurance Ammest Realty, Inc. Ammest Realty
Group, Inc. Services, Inc. Corporation
PB Investment Advisors, Ampac, Inc. JMH Operating
Inc. Company, Inc.
Southlife, Inc. Ampac Insurance Capital
Agency, Inc. Liberty, L.P.(4)
(EIN 23-2364438)
Commonwealth General Force Financial Group, NL/UL Joint Venture
LLC(1) Inc.
Commonwealth General Force Financial Services, Inc.
Corporation Voluntary
Employees' Beneficiary Military Associates, Inc.
Association
NCOAA Management Company
NCOA Motor Club, Inc.
Unicom Administrative
Services, Inc.
Unicom Administrative
Services, GmbH
</TABLE>
(1) Commonwealth General LLC ownership: Commonwealth General Corporation - 4,997
shares (99.98%); AEGON USA Real Estate Services, Inc. - 1 share (0.02%).
(2) Monumental Life Insurance Company ownership: Capital General Development
Corporation - 73.23% and First AUSA Life Insurance Company - 26.77%.
(3) Peoples Benefit Life Insurance Company common stock ownership: Monumental
Life Insurance Company - 76.3%; Capital Liberty, L.P. - 20.0%; Commonwealth
General Corporation - 3.7%.
(4) Capital Liberty, L.P. partnership profit sharing: General
Partner-Commonwealth General Corporation - 1.0%; Limited Partner-Monumental
Life Insurance Company - 99.0%.
C-5
<PAGE> 113
COMMONWEALTH GENERAL CORPORATION AND RELATED LEGAL ENTITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
EIN LEGAL DOMICILE
--- --------------
<S> <C> <C> <C>
1. Academy Insurance Group, Inc. 58-1949029 Delaware
2. Academy Life Insurance Company 84-0528301 Missouri
3. AFSG Securities Corporation 23-2421076 Pennsylvania
4. AEGON Special Markets Group, Inc. 42-1470697 Maryland
5. Ammest Development Corporation, Inc. 48-0767488 Kansas
6. Ammest Insurance Agency, Inc. 75-1467693 California
7. Ammest Massachusetts Insurance Agency, Inc. 06-1171577 Massachusetts
8. Ammest Realty Corporation 74-2135472 Texas
9. Ammest Realty, Inc. 23-2221268 Pennsylvania
10. Ampac, Inc. 23-2113311 Texas
11. Ampac Insurance Agency, Inc. 23-1720755 Pennsylvania
12. Ampac Insurance Agency, Inc. 23-2364438 Pennsylvania
13. Benefit Plans, Inc. 61-1201322 Delaware
14. Capital 200 Block Corporation 61-1164056 Delaware
15. Capital General Development Corporation 61-1014834 Delaware
16. Capital Liberty, L.P. 61-0989122 Delaware
17. Capital Real Estate Development Corporation 61-1014814 Delaware
18. Commonwealth General Assignment Corporation 61-1068209 Kentucky
19. Commonwealth General Corporation 51-0108922 Delaware
20. Commonwealth General Corporation Voluntary Employees' 61-1135036 Kentucky22
Beneficiary Association
21. Coverna Direct Insurance Services, Inc. 42-1489645 Maryland
22. Commonwealth General LLC 98-0140083 Turks & Caicos Is.
23. Compass Rose Development Corporation 23-1886091 Pennsylvania
24. Diversified Financial Products, Inc. 61-1085329 Delaware
25. DurCo Agency, Inc. 56-1358257 Virginia
26. FED Financial, Inc.(1) 74-1502783 Delaware
27. Financial Planning Services, Inc. 23-2130174 Dist. of Columbia
28. Force Financial Group, Inc. 04-3017062 Delaware
29. Force Financial Services, Inc. 04-3017057 Massachusetts
30. Frazer Association Consultants, Inc. 36-3340427 Illinois
31. JMH Operating Company, Inc. 64-0876853 Mississippi
32. Military Associates, Inc. 23-2109900 Pennsylvania
33. Monumental Agency Group, Inc. 56-1680040 Kentucky
34. Monumental Life Insurance Company 52-0419790 Maryland
35. National Home Life Corporation 23-1857095 Pennsylvania
36. NCOA Motor Club, Inc. 74-1708561 Georgia
37. NCOAA Management Company 74-2281206 Texas
38. NL/UL Joint Venture 23-2695184 None
39. PB Investment Advisors, Inc. 61-1160818 Delaware
40. Pension Life Insurance Company of America 22-1731007 New Jersey
41. Peoples Benefit Services, Inc. 23-1705984 Pennsylvania
42. Peoples Benefit Life Insurance Company(2) 43-0378030 Iowa
43. Southlife, Inc. 61-1166357 Tennessee
44. Unicom Administrative Services GmbH None Germany
</TABLE>
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<PAGE> 114
<TABLE>
<CAPTION>
EIN LEGAL DOMICILE
--- --------------
<S> <C> <C> <C>
45. Unicom Administrative Services, Inc. 23-6537972 Pennsylvania
46. Valley Forge Associates, Inc. 23-1608635 Pennsylvania
47. Veterans Benefits Plan, Inc. 23-1895584 Pennsylvania
48. Veterans Insurance Services, Inc. 51-0247259 Delaware
49. Veterans Life Insurance Company 36-2545774 Illinois
</TABLE>
- ---------------
(1) Name changed from Academy Services, Inc. 4/21/99
(2) Name changed from Providian Life and Health Insurance Company, 10/1/98
Redomiciled to Iowa effective 12/31/99
ENTITIES LIQUIDATED DURING 1999:
Capital Broadway Corporation, 3/12/99
Data/Mark Services, Inc., 8/17/99
Independence Automobile Association, Inc., 4/5/99
Independence Automobile Club, Inc., 4/5/99
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<PAGE> 115
TRANSAMERICA CORPORATION
AS OF 12/15/99
TRANSAMERICA CORPORATION DIVISIONS
- SUBSIDIARIES - Transamerica Investment Division
- ARC Reinsurance Corporation - Transamerica Real Estate Tax Service
- Transamerica Management, Inc. - Transamerica Flood Hazard
Certification
- Inter-America Corporation
- Pyramid Insurance Company, Ltd.
- Pacific Cable Ltd.
- Transamerica Business Technologies Corporation
- Transamerica CBO I, Inc.
- Transamerica Corporation (Oregon)
- Transamerica Finance Corporation (see page iii Corporate Chart)
- Transamerica Financial Products, Inc.
- Transamerica Insurance Corporation of California
(see page ii Corporate Chart)
- Transamerica Intellitech, Inc.
- Transamerica International Holdings, Inc.
- Transamerica International RE (Bermuda) Ltd.
- Transamerica Investment Services, Inc.
- Transamerica LP Holdings Corp.
- Transamerica Pacific Insurance Company, Ltd.
- Transamerica Realty Services, Inc.
- Bankers Mortgage Company of California
- Pyramid Investment Corporation
- The Gilwell Company
- Transamerica Affordable Housing, Inc.
- Transamerica Minerals Company
- Transamerica Oakmont Corporation
- Transamerica Senior Properties, Inc.
- Transamerica Senior Living, Inc.
- TREIC Enterprises, Inc.
- TerraPoint, LLC (Joint Venture - 83%)
C-8
<PAGE> 116
TRANSAMERICA CORPORATION
AS OF 12/15/99
Transamerica Insurance Corporation of California
- Arbor Life Insurance Company
- Plaza Insurance Sales, Inc.
- Transamerica Advisors, Inc.
- Transamerica Annuity Service Corporation
- Transamerica Financial Resources, Inc.
- Financial Resources Insurance Agency of Texas
- TBK Insurance Agency of Ohio, Inc.
- Transamerica Financial Resources Insurance Agency of Alabama, Inc.
- Transamerica Financial Resources Insurance Agency of
Massachusetts, Inc.
- Transamerica International Insurance Services, Inc.
- Home Loans and Finance Ltd.
- Transamerica Occidental Life Insurance Company
- NEF Investment Company
- Transamerica China Investments Holdings Limited (Jointly owned 99%
by TOLIC and 1% by THS)
- Transamerica Life Insurance and Annuity Company
- Transamerica Assurance Company
- Gemini Investments, Inc.
- Transamerica Life Insurance Company of Canada
- Transamerica Life Insurance Company of New York
- Transamerica South Park Resources, Inc.
- USA Administration Services, Inc.
- Transamerica Products, Inc.
- Transamerica Products I, Inc.
- Transamerica Products II, Inc.
- Transamerica Products IV, Inc.
- Transamerica Securities Sales Corporation
- Transamerica Service Company
C-9
<PAGE> 117
TRANSAMERICA CORPORATION
as of 12/15/99
Transamerica Finance Corporation
--TA Leasing Holding Co., Inc. (see page VI Corporate Chart)
--Transamerica Commercial Finance Corporation, I
--BWAC Credit Corporation
--BWAC International Corporation
--BWAC Twelve, Inc.
--TIFCO Lending Corporation
--Transamerica Insurance Finance Corporation
--Transamerica Insurance Finance Company (Europe)
--Transamerica Insurance Finance Corporation, California
--Transamerica Insurance Finance Corporation, Canada
--Transamerica Distribution Finance Corporation
--Transamerica Accounts Holding Corporation
--Transamerica Inventory Finance Corporation
--BWAC Seventeen, Inc.
--Transamerica Commercial Finance Corporation, Canada
--Transamerica Acquisition Corporation, Canada
--Cantrex Group, Inc. (Joint Venture 76.2%)
--Transamerica Commercial Finance Canada, Limited
--BWAC Twenty-One, Inc.
--Transamerica Commercial Holdings Limited
--Transamerica Commercial Finance Limited
--TDF Credit Insurance Services Limited
(Joint Venture 75%)
--Transamerica Distribution Capital Services
Iberica, S.A.
--WFC Polska Sp. Zo.o.
--Transamerica Trailer Leasing Limited
(Joint Venture 51%)
--OBDH. Ltd. (Joint Venture 33%)
--Transamerica Commercial Finance Corporation
--TCF Asset Management Corporation
--Transamerica Joint Ventures, Inc.
--Amana Finance (Joint Venture 50%)
--American Standard Financial Services
(Joint Venture 50%)
--Penske Financial Services, LLC (Joint Venture 50%)
--Polaris Acceptance (Joint Venture 50%)
--Transamerica Distribution Finance Corporation de Mexico
--TDF de Mexico
--Transamerica Corporate Services de Mexico
--Transamerica Distribution Finance-Overseas, Inc.
--TDF Mauritius Limited
--Transamerica Apple Distribution Finance, PLC
(Joint Venture 69%)
--Chrysler Factorje S.A., Mexico
--Transamerica GmbH Inc.
--Transamerica Financieringsmaatschappij B.V.
--Transamerica GmbH - Germany (jointly owned 90% by
Transamerica GmbH Inc. and 10% by BWAC 21)
--Transamerica Commercial Finance France S.A.
--Transamerica Retail Financial Services Corporation
--Transamerica Bank N.A.
--Transamerica Consumer Finance Holding Company
(see page IV Corporate Chart)
--Transamerica Vendor Financial Services Corporation
--Transamerica Business Credit Corporation (see page V Corporate Chart)
--Transamerica Equipment Financial Services Corporation
--TA Air I, Corp.
--TA Air II, Corp.
--TA Air XI, Corp.
--TA Air XII, Corp.
--TA Air XIII, Corp.
--TA Air, XIV, Corp.
--TA Air XV, Corp.
--Transamerica Public Finance LLC (jointly owned 70% by TCFCI and 30%
by TFC)
--Transamerica Home Loan
--Transamerica Lending Company
C-10
<PAGE> 118
TRANSAMERICA CORPORATION
as of 12/15/99
Transamerica Consumer Finance Holding Company
--Transamerica Mortgage Company
--Transamerica Consumer Mortgage Receivables Corporation
--Metropolitan Mortgage Company
--Easy Yes Mortgage, Inc.
--Easy Yes Mortgage, Inc. (Georgia)
--First Florida Appraisal Services, Inc.
--First Georgia Appraisal Services, Inc.
--Freedom Tax Services, Inc.
--J.J. & W. Advertising, Inc.
--J.J. & W. Realty Services, Inc.
--Liberty Mortgage Company of Ft. Myers, Inc.
--Metropolis Mortgage Company
--Perfect Mortgage Company
C-11
<PAGE> 119
TRANSAMERICA CORPORATION
as of 12/15/99
- -Transamerica Business Credit Corporation
-The Plain Company
-TA Air I, Corp.
-TA Air II, Corp.
-TA Air III, Corp.
-TA Air IV, Corp.
-TA Air V, Corp.
-TA Air VI, Corp.
-TA Air VII, Corp.
-TA Air VIII, Corp.
-TA Air IX, Corp.
-TX Air X Corp.
-TA Air XI Corporation
-TA Air East, Corp.
-TA Marine I Corp.
-TA Marine II Corp.
-Direct Capital Equity Investment, Inc.
-Direct Capital Partners, L.P. (Joint Venture 75%)
-Inland Water Transportation, LLC (Joint Venture 80%)
-TBC I, Inc.
-FACTA, L.L.P. (Joint Venture 50%)
-TBC II, Inc.
-TBC III, Inc.
-Transcap Trade Finance (Joint Venture 50%)
-TBC IV, Inc.
-TBC V, Inc.
-Breakthrough Funding, L.L.P. (Joint Venture 40%)
-TBC VI, Inc.
-Presidential Business Credit, L.L.P. (Joint Venture 50%)
-TBC VII, Inc.
-TBC Tax I, Inc.
-TBC Tax II, Inc.
-TBC Tax III, Inc.
-TBC Tax IV, Inc.
-TBC Tax V, Inc.
-TBC Tax VI, Inc.
-TBC Tax VII, Inc.
-TBC Tax VIII, Inc.
-TBC Tax IX, Inc.
-Bay Capital Corporation
-Gulf Capital Corporation
-Coast Funding Corporation
-Transamerica Business Advisory Group, Inc.
-Transamerica Mezzanine Financing, Inc.
-Transamerica Small Business Capital, Inc.
-Emergent Business Capital Holdings Inc.
-Transamerica Commercial Real Estate Finance, LLC
-Auto Funding Services, LLC
C-12
<PAGE> 120
TRANSAMERICA CORPORATION
AS OF 12/15/99
TA Leasing Holding Co., Inc.
- Trans Ocean Ltd.
- Trans Ocean Container Corp.
- SpaceWise Inc.
- Trans Ocean Leasing Deutschland GmbH
- Trans Ocean Leasing PTY Limited
- Trans Ocean Management S.A.
- Trans Ocean Regional Corporate Holdings
- Trans Ocean Tank Services Corporation
- Trans Ocean Container Finance Corp.
- Transamerica Leasing Inc.
- Better Asset Management Company LLC (Joint Venture 50%)
- Transamerica Leasing Holdings Inc.
- Greybox Logistics Services Inc.
- Greybox LLC
- Transamerica Trailer Leasing SNC
- Greybox Services Limited
- Intermodal Equipment, Inc.
- Transamerica Leasing N.V.
- Transamerica Leasing SRL
- Transamerica Distribution Services Inc.
- Transamerica Leasing Coordination Center
- Transamerica Leasing do Brasil Ltda.
- Transamerica Leasing GmbH
- Transamerica Leasing Limited
- ICS Terminals (UK) Limited
- Transamerica Leasing Pty. Ltd.
- Transamerica Leasing (Canada) Inc.
- Transamerica Leasing (HK) Ltd.
- Transamerica Leasing (Proprietary) Limited
- Transamerica Tank Container Leasing Pty. Limited
- Transamerica Trailer Holdings I Inc.
- Transamerica Trailer Holdings II Inc.
- Transamerica Trailer Holdings III Inc.
- Transamerica Trailer Leasing AB
- Transamerica Trailer Leasing AG
- Transamerica Trailer Leasing A/S
- Transamerica Trailer Leasing GmbH
- Transamerica Trailer Leasing (Belgium) N.V.
- Transamerica Trailer Leasing (Netherlands) B.V.
- Transamerica Trailer Spain S.A.
- Transamerica Transport Inc.
C-13
<PAGE> 121
ITEM 27. NUMBER OF CONTRACTHOLDERS
<TABLE>
<CAPTION>
NUMBER OF CONTRACTHOLDERS
TITLE OF CLASS AS OF MARCH 31, 2000
-------------- --------------------------
<S> <C>
Money Market................................................ 832
High Quality Bond........................................... 393
Intermediate Government Bond................................ 801
Core Bond................................................... 944
High-Yield Bond............................................. 12
Balanced.................................................... 1,225
Equity Income............................................... 1,520
Equity Value................................................ 619
Growth & Income............................................. 982
Equity Growth............................................... 1,335
Special Equity.............................................. 930
Aggressive Equity........................................... 691
International Equity........................................ 813
</TABLE>
ITEM 28. INDEMNIFICATION
Any person made a party to any action, suit, or proceeding by reason of the fact
that he, his testator or intestate, is or was a director, officer, or employee
of the Company or of any Company which he served as such at the request of the
Company, shall be indemnified by the Company against the reasonable expenses,
including attorney's fees, actually and necessarily incurred by him in
connection with the defense of such action, suite or proceeding, or in
connection with appeal therein, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such officer,
Director, or employee is liable for negligence or misconduct in the performance
of his duties. The Company may also reimburse to any Director, officer, or
employee the reasonable costs of settlement of any such action, suit, or
proceeding, if it shall be found by a majority of a committee composed of the
Directors not involved in the matter in controversy (whether or not a quorum)
that it was in the interest of the Company that such settlement be made and that
such Director, officer or employee was not guilty of negligence or misconduct.
The amount to be paid by way of indemnity shall be determined and paid, in each
instance, pursuant to action of the Board of Directors, and the stockholders
shall be given notice thereof in accordance with applicable provisions of law.
Such right of indemnification shall not be deemed exclusive of any other rights
to which such Director, officer, or employee may be entitled.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Diversified Investors Securities Corp. ("DISC") is the principal underwriter
of the Registrant. The names, titles and principal business addresses of the
officers and directors of "DISC" are as stated on Forms U-4 of Form BD (File No.
8-45671) as declared effective May 18, 1993, as amended, the text of which is
herein incorporated by reference. Diversified Investment Advisors, Inc. an
affiliate of AUSA, acts as investment adviser and administrator to each series
of Diversified Investors Portfolios. With respect to each series of Diversified
Investors Portfolios, Diversified has contracted for certain investment advisory
services with one or more 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.
C- 14
<PAGE> 122
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 Life Insurance Company, Inc. in whole or in part,
at its principal offices at 4 Manhattanville Road, Purchase, NY 10577.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant hereby undertakes to file post-effective amendments to the
Registration Statement as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more than 16 months
old for so long as payments under the group variable annuity contract may be
accepted;
(b) Registrant hereby undertakes to include either (1) as part of any
application to purchase a Contract offered by the prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
post card or similar written communication affixed to or included in the
prospectus that the applicant can remove to send for a Statement of Additional
Information;
(c) Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request.
(d) Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
(e) Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(f) Registrant hereby represents that the fees and charges deducted under the
Contracts, in the aggregate, are reasonable in relation to the services
rendered; the expenses expected to be incurred and the risks assumed by the
insurance company.
C- 15
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant (certifies that it meets the requirements of
Securities Act Rule 485(a) for the effectiveness of this registration statement)
has duly caused this Post-Effective Amendment to its Registration Statement to
be signed on its behalf, by the undersigned thereunto duly authorized, in the
County of Westchester and the State of New York, on this 2nd day of March, 2000.
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 requirement of the Securities Act of 1933 this Post-Effective
Amendment to its Registration Statement has been signed below by the following
persons in the capacities indicated on March 2, 2000.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S> <C>
/s/ TOM A. SCHLOSSBERG Director and President
- ---------------------------------------------
(Tom A. Schlossberg)
*/s/ LARRY G. BROWN Director and Chairman of the Board
- ---------------------------------------------
(Larry G. Brown)
*/s/ WILLIAM BROWN, JR. Director
- ---------------------------------------------
(William Brown, Jr.)
*/s/ WILLIAM L. BUSLER Director
- ---------------------------------------------
(William L. Busler)
*/s/ JACK R. DYKHOUSE Director
- ---------------------------------------------
(Jack R. Dykhouse)
*/s/ STEVEN E. FRUSCHTICK Director
- ---------------------------------------------
(Steven E. Fruschtick)
*/s/ ERIC GOODMAN Director
- ---------------------------------------------
(Eric Goodman)
*/s/ CARL T. HANSON Director
- ---------------------------------------------
(Carl T. Hanson)
*By: /s/ TOM A. SCHLOSSBERG
---------------------------------------
Tom A. Schlossberg
Attorney-in-Fact
</TABLE>
C- 16
<PAGE> 124
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S> <C>
*/s/ VERA F. MIHAIC Director
- ---------------------------------------------
(Vera F. Mihaic)
*/s/ PETER P. POST Director
- ---------------------------------------------
(Peter P. Post)
*/s/ COR H. VERHAGEN Director
- ---------------------------------------------
(Cor H. Verhagen)
*/s/ E. KIRBY WARREN Director
- ---------------------------------------------
(E. Kirby Warren)
*By: /s/ TOM A. SCHLOSSBERG
---------------------------------------
Tom A. Schlossberg
Attorney-in-Fact
</TABLE>
C- 17
<PAGE> 125
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 2nd day of March,
2000.
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 Post-Effective 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 March 2, 2000.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ TOM A. SCHLOSSBERG Trustee, President, Chief Executive Officer and
- --------------------------------------------------- Chairman of the Board of Trustees of Diversified
(Tom A. Schlossberg) Investors Portfolios
*/s/ NEAL M. JEWELL Trustee of Diversified Investors Portfolios
- ---------------------------------------------------
(Neal M. Jewell)
*/s/ EUGENE M. MANNELLA Trustee of Diversified Investors Portfolios
- ---------------------------------------------------
(Eugene M. Mannella)
*/s/ MARK MULLIN Trustee of Diversified Investors Portfolios
- ---------------------------------------------------
(Mark Mullin)
*/s/ PATRICIA L. SAWYER Trustee of Diversified Investors Portfolios
- ---------------------------------------------------
(Patricia L. Sawyer)
/s/ ALFRED C. SYLVAIN Chief Financial Officer and Principal
- --------------------------------------------------- Accounting Officer of Diversified
(Alfred C. Sylvain) Investors Portfolios
*By: /s/ ROBERT F. COLBY
---------------------------------------------
Robert F. Colby
Attorney-in-Fact
</TABLE>
C- 18
<PAGE> 126
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
(8)(a) Form of Investment Subadvisory Agreement between
Diversified and Husic Capital Management.
(8)(b) Form of Investment Subadvisory Agreement between
Diversified and Payden & Rygel.
(10) Opinion and Consents of Independent Accountants.*
(14) Financial Data Schedules.*
</TABLE>
- ---------------
* To be filed at a later date.
<PAGE> 1
INVESTMENT SUBADVISORY AGREEMENT
INVESTMENT SUBADVISORY AGREEMENT, dated as of November 16, 1999, by and
between Diversified Investment Advisors, Inc., a Delaware corporation
("Diversified") and Husic Capital Management, a California limited partnership
(hereinafter "Subadvisor" or "Husic")
WITNESSETH:
WHEREAS, Diversified has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940 and has been
retained to provide investment advisory services to the Special Equity
Portfolio ("Portfolio"), a series of Diversified Investors Portfolios, a
diversified open-end management investment company registered under the
Investment Company Act of 1940 ("1940 Act");
WHEREAS, Diversified desires to retain the Subadvisor to furnish it with
portfolio investment advisory services in connection with Diversified's
investment advisory activities on behalf of the Portfolio, and the Subadvisor
is willing to furnish such services to Diversified;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of the Subadvisor. In accordance with and subject to the
Investment Advisory Agreement between the Portfolio and Diversified, attached
hereto as Schedule A (the "Advisory Agreement"), Diversified hereby appoints
the Subadvisor to perform the portfolio investment advisory services described
herein for the investment and reinvestment of such amount of the Portfolio's
assets as is determined from time to time by the Portfolio's Board of Trustees
and communicated in writing to the Subadvisor, subject to the control and
direction of Diversified and the Diversified Investors Portfolios' Board of
Trustees, for the period and on the terms hereinafter set forth.
The Subadvisor shall provide Diversified with such investment advice and
supervision as the latter may from time to time reasonably consider necessary
for the proper supervision of the Subadvisor's portion of the Portfolio's
assets. The Subadvisor shall furnish continuously an investment program and
shall determine from time to time what securities shall be purchased, sold or
exchanged and what portion of the assets of the Portfolio under the control of
the Subadvisor shall be held uninvested, subject always to the provisions of
the 1940 Act and to the Portfolio's then-current Registration Statement on Form
N-1A.
In particular, the Subadvisor shall, without limiting the foregoing: (i)
continuously review, supervise and implement the investment program of the
<PAGE> 2
Portfolio under their control; (ii) monitor regularly the relevant securities
for the Portfolio to determine if adjustments are warranted and, if so, to make
such adjustments; (iii) determine, in the Subadvisor's discretion, the
securities to be purchased or sold or exchanged in order to keep the Portfolio
in balance with its designated investment strategy; (iv) determine, in the
Subadvisor's discretion, whether to exercise warrants or other rights with
respect to the Portfolio's securities; (v) determine, in the Subadvisor's
discretion, whether the merit of an investment has been substantially impaired
by extraordinary events or financial conditions, thereby warranting the removal
of such securities from the Portfolio; (vi) as promptly as practicable after the
end of each calendar month, furnish a report showing: (a) all transactions
during such month, (b) all assets of the Portfolio on the last day of such
month, rates of return, and (c) such other information relating to the Portfolio
as Diversified may reasonably request; (vii) meet at least four times per year
with Diversified and with such other persons as may be designated on reasonable
notice and at reasonable locations, at the request of Diversified, to discuss
general economic conditions, performance, investment strategy, and other matters
relating to the Portfolio; (viii) provide the Portfolio with records concerning
the Subadvisor's activities which the Portfolio is required by law to maintain
as requested in writing; and (ix) render regular reports as requested to the
Portfolio's officers and Directors concerning the Subadvisor's discharge of the
foregoing responsibilities.
The Subadvisor shall also make recommendations to Diversified as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the Portfolio's securities shall be exercised, and
Subadvisor shall be responsible for effecting such recommendations.
Should the Board of Trustees at any time make any definite determination
as to investment policy with respect to the Portfolio and notify the Subadvisor
thereof in writing, the Subadvisor shall be bound by such determination for the
period, if any, specified in such notice or until similarly notified in writing
that such policy has been revoked. The initial Statement of Investment Policy
and Guidelines is attached hereto as Appendix I ("Guidelines").
The Subadvisor shall take, on behalf of the Portfolio, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
Portfolio securities for the Portfolio's account with brokers or dealers
selected by it, and to that end the Subadvisor is authorized as the agent of
the Portfolio to give instructions to the custodian of the Portfolio as to
deliveries of securities and payments of cash for the account of the Portfolio.
Subject to the primary objective of obtaining best execution, the Subadvisor
may place orders for the purchase and sale of portfolio securities with such
broker/dealers who provide statistical, factual and financial information and
services to the Portfolio, to the Subadvisor, or to any other fund or account
for which the Subadvisor provides investment advisory services and may
2
<PAGE> 3
place such orders with broker/dealers who sell shares of the Portfolio or who
sell shares of any other fund for which the Subadvisor provides investment
advisory services. Broker/dealers who sell shares of the funds of which Husic is
investment advisor shall only receive orders for the purchase or sale of
portfolio securities to the extent that the placing of such orders is in
compliance with the Rules of the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc. Diversified understands and
agrees that Subadvisor's brokerage practices shall be consistent with the
disclosure in Schedule F of Subadvisor's Form ADV, as amended from time to time,
and that Subadvisor's brokerage practices so disclosed shall be deemed
acceptable for purposes of this Agreement.
Notwithstanding the provisions of the previous paragraph and subject to
such policies and procedures as may be adopted by the Board of Trustees and
officers of the Portfolio and communicated in writing to Subadvisor, the
Subadvisor may pay a member of an exchange, broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission another member of an exchange, broker or dealer would have charged
for effecting that transaction, in such instances where the Subadvisor has
determined in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
member, broker or dealer, viewed in terms of either that particular transaction
or the Subadvisor's overall responsibilities with respect to the Portfolio and
to other funds and separate accounts for which the Subadvisor exercises
investment discretion.
2. Allocation of Charges and Expenses. The Subadvisor shall furnish at
its own expense all necessary services, facilities and personnel in connection
with its responsibilities under Section 1 above. It is understood that the
Portfolio will pay all of its own expenses and liabilities including, without
limitation, compensation and out-of-pocket expenses of Trustees not affiliated
with the Subadvisor or Diversified; governmental fees; interest charges; taxes;
membership dues; fees and expenses of independent auditors, of legal counsel and
of any transfer agent, administrator, distributor, shareholder servicing agents,
registrar or dividend disbursing agent of the Portfolio; expenses of
distributing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing prospectuses, shareholder reports, notices,
proxy statements and reports to governmental officers and commissions and to
shareholders of the Portfolio; expenses connected with the execution, recording
and settlement of Portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Portfolio, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of the Portfolio; expenses
of shareholder meetings; expenses of litigation and other extraordinary or
non-recurring events and expenses relating to the issuance, registration and
qualification of shares of the Portfolio.
3
<PAGE> 4
3. Compensation of the Subadvisor. For the services to be rendered,
Diversified shall pay to the Subadvisor an investment advisory fee computed in
accordance with the terms of Schedule B herewith attached. If the Subadvisor
serves for less than the whole of any period specified, its compensation shall
be prorated.
4. Covenants and Representations of the Subadvisor. The Subadvisor
agrees that it will not deal with itself, or with the Trustees of the Portfolio
or with Diversified, or the Portfolio's principal underwriter or distributor as
principals in making purchases or sales of securities or other property for the
account of the Portfolio, except as permitted by the 1940 Act, and will comply
with all other provisions of the Declaration of Trust and any current
Registration Statement on Form N-1A of the Portfolio relative to the
Subadvisor, Advisor and its Trustees and officers.
5. Representations and Warranties of Diversified. Diversified represents
and warrants to Subadvisor and agrees with Subadvisor as follows. Diversified
has the requisite legal capacity and authority to execute, deliver and perform
its obligations under this Agreement. This Agreement has been duly authorized,
executed and delivered by Diversified and is the legal, valid and binding
agreement of Diversified, enforceable against Diversified in accordance with
its terms. Diversified's execution of this Agreement and the performance of its
obligations hereunder do not conflict with or violate any provisions of the
governing documents (if any) of Diversified or the Portfolio or any obligations
by which Diversified or the Portfolio is bound, whether arising by contract,
operation of law or otherwise. Diversified is experienced in engaging
subadvisors and is aware of the risks associated with such engagements,
including the risk that the Portfolio could suffer substantial diminution in
value.
6. Allocation of Investments. Diversified acknowledges and understands
that Subadvisor engages in an investment advisory business apart from managing
the Portfolio. This will create conflicts of interest with the Portfolio over
Subadvisor's time devoted to managing the Portfolio and the allocation of
investment opportunities among accounts (including the Portfolio) managed by
Subadvisor. Subadvisor will attempt to resolve all such conflicts in a manner
that is generally fair to all of its clients. Diversified confirms that
Subadvisor may give advice and take action with respect to any of its other
clients that may differ from advice given or the timing or nature of action
taken with respect to the Portfolio so long as it is Subadvisor's policy, to the
extent practicable, to allocate investment opportunities to the Portfolio over
a period of time on a fair and equitable basis relative to other clients.
Nothing in this Agreement shall be deemed to obligate Subadvisor to acquire for
the Portfolio any security that Subadvisor or Subadvisor's officers, partners,
employees or affiliates may acquire for Subadvisor's or their own
4
<PAGE> 5
accounts or for the account of any other client, if, in the absolute discretion
of Subadvisor, it is not practical or desirable to acquire such Security for
the Portfolio.
7. Limits on Duties. The Subadvisor shall be responsible only for
managing the assets in good faith and in accordance with the Portfolio's
Guidelines and shall have no responsibility whatsoever for, and shall incur no
liability on account of (i) diversification, selection, establishment or
modification of such Guidelines (ii) advice on, or management of, any other
assets for Diversified or the Portfolio, (iii) filing of any tax or information
returns or forms, withholding or paying any taxes, or seeking any exemption or
refund, (iv) registration with any government or agency, or (v) administration
of the plans and trusts investing through the Portfolio, or (vi) overall
Portfolio compliance with the requirements of the 1940 Act, which requirements
are outside of the Subadvisor's control, or compliance with Subchapter M of the
Internal Revenue Code of 1986, as amended, and Husic and its partners, officers
and employees shall to the fullest extent permitted by applicable law (and
subject to the applicable provisions of Section 17(i) of the 1940 Act), be
indemnified and held harmless by Diversified for Husic's actions or omissions
in carrying out the terms and provisions of this Agreement, and including,
without limitation, against any actual or alleged loss, claim, damage,
expense, (including without limitation, reasonable attorneys fees and costs),
costs and settlement related to or resulting from indemnification to the
Portfolio, or any shareholder thereof and, brokers and commission merchants,
fines, taxes, penalties and interest. To the extent permitted under applicable
law, Diversified agrees that Subadvisor will not be liable to Diversified or
the Portfolio for any losses incurred by Diversified or the Portfolio that
arise out of or are in any way connected with any recommendation or other act
or failure to act of Subadvisor under this Agreement, including, but not
limited to, any error in judgment with respect to the Portfolio, so long as
such recommendation or other act or failure to act does not constitute a breach
of Subadvisor's fiduciary duty to Diversified or the Portfolio, or a breach of
applicable law, or a breach of the terms of this Agreement. Should any such
breach occur the indemnification by Diversified, referred to above, shall be
inapplicable.
The Subadvisor may apply to Diversified at any time for instructions and
may consult counsel for Diversified or its own counsel with respect to any
matter arising in connection with the duties of the Subadvisor. Also, the
Subadvisor shall be protected in acting upon advice of Diversified and/or
Diversified's counsel and upon any document which Subadvisor reasonably
believes to be genuine and to have been signed by the proper person or persons.
8. Exclusivity. Subadvisor represents to Diversified that during the term
of this Agreement Subadvisor will not enter into any further agreement to
subadvise any similar portfolio, any collective trust, open-end investment
company registered under the Investment Company Act of 1940, Variable Insurance
Contract registered under the Investment Company Act of 1940, or insurance
company separate account
5
<PAGE> 6
that are offered to the types of employee benefit plans (referenced in Schedule
C) without providing Diversified with written notice after agreement is reached.
It is understood that Subadvisor shall not be limited by this section 8 with
respect to any other portfolio that it may offer (such as a small, medium or
large capitalization specific portfolio, a portfolio that includes a significant
portion devoted to non-U.S. securities or a commingled vehicle that is not
sponsored by a provider of bundled services to the types of employee benefit
plans specified on Schedule C).
9. Duration, Termination and Amendments of this Agreement. This
Agreement shall become effective as of the day and year first above written and
shall govern the relations between the parties hereto thereafter, and, unless
terminated earlier as provided below, shall remain in force for two years, on
which date it will terminate unless its continuance thereafter is specifically
approved at least annually (a) by the vote of a majority of the Trustees of the
Portfolio who are not "interested persons" with respect to this Agreement or of
the Subadvisor or Diversified at an in person meeting specifically called for
the purpose of voting on such approval, and (b) by the Board of Trustees of the
Portfolio or by vote of a majority of the outstanding voting securities of the
Portfolio. However, if the shareholders of the Portfolio fail to approve the
Agreement as provided herein; the Subadvisor may continue to serve hereunder in
the manner and to the extent permitted by the Investment Company Act of 1940 and
Rules thereunder.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees, or by the vote of a majority of the outstanding voting
securities of the Portfolio, or by Diversified. The Subadvisor may terminate the
Agreement only upon giving 90 days' advance written notice to Diversified. This
Agreement shall automatically terminate in the event of its assignment.
This Agreement may be amended only if such amendment is approved by the
vote of a majority of the outstanding voting securities of the Portfolio and by
vote of a majority of the Board of Trustees of the Portfolio who are not parties
to this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval.
The terms "specifically approved at least annually", "vote of a majority of
the outstanding voting securities", "assignment", "affiliated person", and
"interested persons", when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
10. Certain Records. Any records to be maintained and preserved pursuant
to the provisions of Rule 31a-1 and Rule 31a-2 adopted under the 1940 Act which
are prepared or maintained by the Subadvisor on behalf of the Portfolio are the
6
<PAGE> 7
property of the Portfolio and will be surrendered promptly to the Portfolio on
request.
11. Survival of Compensation Rates. All rights to compensation under this
Agreement and the provisions of Section 7 hereof, shall survive the termination
of this Agreement.
12. Entire Agreement. This Agreement states the entire agreement of the
parties with respect to investment advisory services to be provided to the
Portfolio by the Subadvisor and may not be amended except in a writing signed
by the parties hereto and approved in accordance with Section 9 hereof.
13. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
14. Change of Management and Pending Litigation. Subadvisor represents to
Diversified that it will disclose to Diversified promptly after it has
knowledge of any significant change or variation in its management structure or
personnel or any significant change or variation in its management style or
investment philosophy. In addition, Subadvisor represents to Diversified that
it will similarly disclose to Diversified, promptly after it has knowledge, the
existence of any pending legal action being brought against it whether in the
form of a lawsuit or a non-routine investigation by any federal or state
governmental agency.
Diversified represents to Subadvisor that any information received by
Diversified pursuant to this section will be kept strictly confidential and
will not be disclosed to any third party.
15. Use of Name and Confidentiality. Subadvisor hereby agrees that
Diversified may use the Subadvisor's name in its marketing or advertising
materials. Diversified agrees to allow the Subadvisor a reasonable time to
examine and approve any such materials prior to use. Except as required by law,
(a) Subadvisor agrees to maintain in strict confidence all financial
information regarding Diversified that is furnished to Subadvisor by
Diversified (except that Diversified consents to disclosure of Diversified's
identity as a client of Subadvisor), and (b) Diversified agrees to maintain in
strict confidence all investment advice and information furnished to
Diversified by Subadvisor. Notwithstanding anything to the contrary above,
Diversified consents to the use and disclosure by Subadvisor of Subadvisor's
investment experience and performance with respect to the Portfolio, without
disclosing the identity of Diversified in connection with such experience or
performance. Subadvisor may disclose identity of Diversified in its
representative client list.
7
<PAGE> 8
16. Severability. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any and all
other provisions hereof.
17. Delivery of Information. Diversified acknowledges receipt of
Subadvisor's brochure required to be delivered under the Investment Advisers
Act of 1940 (including the information in Part II of Subadvisor's Form ADV).
Upon written request by Diversified, Subadvisor agrees to deliver annually,
without charge, Subadvisor's brochure required by the Investment Advisers Act
of 1940.
18. Third-Party Beneficiaries. Neither party intends for this
Agreement to benefit any third party not expressly named in this Agreement.
19. Binding Arbitration. The parties waive their right to seek
remedies in court, including any right to a jury trial. The parties agree that
in the event of any dispute between the parties arising out of, relating to or
in connection with this Agreement or the Portfolio, such dispute shall be
resolved exclusively by arbitration to be conducted only in New York, New York
in accordance with the rules of JAMS/ENDISPUTE applying the laws of New York.
Disputes shall not be resolved in any other forum or venue. The parties agree
that such arbitration shall be conducted by a retired judge who is experienced
in resolving disputes regarding the securities business, that discovery shall
not be permitted except as required by the rules of JAMS/ENDISPUTE, that the
arbitration award shall not include factual findings or conclusions of law and
that no punitive damages shall be awarded. The parties understand that any
party's right to appeal or to seek modification of any ruling or award of the
arbitrator is severely limited. Any award rendered by the arbitrator shall be
final and binding, and judgment may be entered on it in any court of competent
jurisdiction in New York, New York or as otherwise provided by law.
Notwithstanding the foregoing, the Subadvisor may bring an action in any
court of competent jurisdiction in New York, New York for equitable relief to
compel performance of the indemnification and defense obligations of
Diversified under Section 7 of this Agreement.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties thereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
Diversified Investment Advisors, Inc.
By: /s/ John F. Hughes
---------------------------------
Husic Capital Management
By: /s/ Cynthia A. Slaherty
---------------------------------
9
<PAGE> 10
APPENDIX I
November 16, 1999
STATEMENT OF INVESTMENT POLICY AND GUIDELINES
FOR THE
HUSIC CAPITAL MANAGEMENT
SMALL CAPITALIZATION PORTFOLIO
<PAGE> 11
2
STATEMENT OF INVESTMENT POLICY AND GUIDELINES
FOR
THE HUSIC CAPITAL MANAGEMENT
SMALL CAPITALIZATION PORTFOLIO
TABLE OF CONTENTS
I. PURPOSE
II. OBJECTIVES
III. INVESTMENT GUIDELINES
IV. PERFORMANCE EVALUATION
V. COMMUNICATION
VI. OTHER
<PAGE> 12
3
STATEMENT OF INVESTMENT POLICY AND GUIDELINES
FOR
THE HUSIC CAPITAL MANAGEMENT
SMALL CAPITALIZATION PORTFOLIO
I. PURPOSE
The purpose of this Statement of Investment Policy and Guidelines is to
communicate the Husic Small Capitalization Portfolio investment objectives,
guidelines and performance evaluation standards adopted by Diversified
Investment Advisors and its sub-advisor, Husic Capital Management.
This statement is intended to (1) help the sub-advisor understand Diversified's
investment goals (2) identify portfolio management activities to be employed by
the sub-adviser to achieve those goals, and (3) supply Diversified with a tool
to monitor and evaluate the operations and performance of the fund.
II. OBJECTIVES AND CONSTRAINTS
The primary objectives of the fund are:
- - To provide a high level of capital appreciation through investment in a
diversified portfolio of common stocks of small to medium size companies.
- - To outperform the Russell 2000 Growth Index over full market cycles.
- - To achieve mid-second quartile or better performance among a group of peer
funds as defined by recognized reporting services and consulting
organizations (e.g., Lipper, Frank Russell, Callan).
The primary constraint of the fund is:
- - To manage the portfolio without excessive risk relative to the Russell 2000
Growth Index, or peer funds, as measured by annualized standard deviation
over 3-5 year periods.
<PAGE> 13
4
III. INVESTMENT GUIDELINES
A) Permissible securities:
----------------------
In addition to legal requirements specified in the Diversified prospectus to
conform with SEC requirements:
- - Common stocks of small to medium size companies as defined below. As of August
1999, small capitalization firms range from $50 million to $1.9 billion, and
mid-cap companies are defined to be greater than $1.9 billion and less than
$8.4 billion.
- - Preferred stocks of small to medium size companies.
- - Convertible debt securities of small to medium size U.S. corporations.
- - ADR's up to 10% of portfolio holdings.
- - Any security residing in the Russell 2000 Growth Index.
B) Prohibited Securities, and Limitations and Restrictions on Permissible
Investments:
- -------------------------------------------------------------------------
- - No more than 5% of the assets (at cost) of the portfolio may be invested in
the securities of any one issuer (other than U.S. government securities).
- - Any combination of three names may not exceed 25% of the market value of the
portfolio, with no single name exceeding 9% of the market value of the
portfolio.
- - No more than 25% of the assets of the portfolio may be invested in securities
of issuers in any one industry.
- - No more than 5% of the voting securities of any one issuer may be acquired.
- - Non-public illiquid securities may not exceed 15% of the portfolio under
normal market conditions (i.e., 144A).
- - The portfolio may not borrow funds except for temporary or emergency purposes.
C) Leverage:
---------
The portfolio may not be leveraged beyond short-term (e.g., one to two week)
marginal cash overdraft borrowing (e.g., 1-5% of the portfolio) resulting from
temporary cash management.
D) Derivatives:
------------
- - Derivatives may not be used for speculative purposes.
- - Exchange traded Russell 2000 Index futures can be used for hedging purposes
either to securitize cash inflows or to immunize securities for redemption
requests.
- - Exchange traded covered call options may be utilized up to the extent of the
individual security holding as part of the sales strategy, but should not
exceed 20% of the portfolio.
- - No uncovered call writing is permitted.
<PAGE> 14
5
E) Quality
-------
- - Non-dollar foreign securities are prohibited.
F) Capitalization Guidelines Relative to Benchmark
-----------------------------------------------
- - At least 75% of the market value of the portfolio should be invested in
securities with an average weighted market cap between 10% and 200% of the
average weighted market cap of the Russell 2000 Growth Index
- - Not more than 25% of the market value of the portfolio should be invested in
securities with an average weighted market cap between 200% and 1000% of the
average weighted market cap of the Russell 2000 Growth Index, unless the
security resides in the Russell 2000 Growth Index
- - No securities with a market cap above 1000% of the average weighted market cap
of the Russell 2000 Growth Index, unless it still resides in that Index
G) Risk Controls
-------------
- - Standard deviation of return not more than 25% greater than the Russell 2000
Growth Index, or the median in a peer universe, over 3-5 year periods
- - A minimum of 30 securities in the portfolio at all times
- - A maximum of 50% in any one sector (as defined by Frank Russell Co.)
- - Tracking error targeted to not exceed 10% with respect to the Russell 2000
Growth Index over a three year period
- - Elimination of any holding that exceeds cap guidelines established in
section F by current calendar quarter-end
H) Cash Management
---------------
- - Typical cash balances will be maintained in a range of 0-6% under normal
circumstances.
- - Cash balances will not be less than zero except during temporary overdraft
positions to efficiently manage short-term cash requirements during periods of
unusual market conditions (e.g., one to seven business days)
<PAGE> 15
6
IV. PERFORMANCE EVALUATION
- -- The performance benchmark for the fund will be the Russell 2000 Growth
Index. It is expected that the fund will outperform the benchmark by at
least 400 basis points over 3-5 year periods.
- -- Additionally, it is expected that the fund will be in the upper second
quartile of peer universes (specify -- Lipper, Russell, Callan or
Morningstar), or better, over full market cycles.
- -- The foregoing performance objectives are to be accomplished without taking
excessive risk. Specifically, volatility should not exceed the risk
control guidelines established in section (G) over 3-5 year periods, and
the Sharpe ratio should exceed the peer universe average.
V. COMMUNICATION
- -- Monthly -- conference calls to explain to designated Diversified analysts:
the current portfolio position, recent trades and their rationale, market
outlook for the fund, and expected portfolio actions.
- -- Quarterly -- portfolio manager writeups covering material similar to
monthly conference calls, but also including material specified by
Diversified's communications department.
- -- Annually -- meetings between interested parties to reaffirm or change the
Investment Policy Statement, Bi-annual visits by Diversified personnel at
the sub-advisor site to update due diligence.
- -- As needed on an ad hoc basis to explain major market moves between other
communications.
- -- Immediate notification regarding sub-advisor change in ownership, change
in personnel involved in management of the account, conflicts of interest,
pending lawsuits or government investigations, change in investment
philosophy or discipline, or large absolute changes in assets under
management.
VI. OTHER
- -- Explanation of best execution trading practices, including soft dollar
arrangements
- -- Evidence of disaster recovery plan, including Y2K, and EURO conversion
plans
- -- Cooperation with outside audits (Diversified's or its clients' auditors,
SEC).
Signed Cynthia A. Slaherty
---------------------------------
(Husic Capital Management)
Signed [Illegible]
---------------------------------
(Diversified Investment Advisors)
<PAGE> 16
SCHEDULE A
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of January 3, 1994 by and between the Special Equity
Portfolio, a series of Diversified Investors Portfolios (herein called the
"Portfolio"), and Diversified Investment Advisors, Inc. a Delaware corporation
(herein called "Diversified").
WHEREAS, the Portfolio is registered as a diversified, open-end,
management investment company under the Investment Company Act of 1940 (the
"1940 Act"); and
WHEREAS, Diversified has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940; and
WHEREAS, the Portfolio desires to retain Diversified to render investment
advisory services, and Diversified is willing to so render such services on the
terms hereinafter set forth;
NOW, THEREFORE, this Agreement
WITNESSETH:
In consideration of the promises and mutual covenants herein contained, it
is agreed between the parties hereto as follows:
1. The Portfolio hereby appoints Diversified to act as investment advisor to
the Portfolio for the period and on the terms set forth in this Agreement.
Diversified accepts such appointment and agrees to render the services herein
set forth for the compensation herein provided.
2. (a) Diversified shall, at its expense, (i) employ sub-advisors or
associate with itself such entities as it believes appropriate to assist it in
performing its obligations under this Agreement and (ii) provide all services,
equipment and facilities necessary to perform its obligations under this
Agreement.
(b) The Portfolio shall be responsible for all of its expenses and
liabilities, including, but not limited to: compensation and out-of-pocket
expenses of Trustees not affiliated with any subadvisor or Diversified;
governmental fees; interest charges; taxes; membership dues; fees and expenses
of independent auditors, of legal counsel and of any transfer agent,
administrator, distributor, shareholder servicing agents, registrar or dividend
disbursing agent
<PAGE> 17
-3-
good faith that such commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall responsibilities of
Diversified with respect to the accounts as to which it exercises investment
discretion.
In placing orders with brokers and/or dealers, Diversified intends to seek
best price and execution for purchases and sales and may effect transactions
through itself and its affiliates on a securities exchange provided that the
commissions paid by the Portfolio are "reasonable and fair" compared to
commissions received by other broker-dealers having comparable execution
capability in connection with comparable transactions involving similar
securities and provided that the transactions in connection with which such
commissions are paid are effected pursuant to procedures established by the
Board of the Trustees of the Portfolio. All transactions are effected pursuant
to written authorizations from the Portfolio conforming to the requirements of
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder. Pursuant to such authorizations, an affiliated broker-dealer may
transmit, clear and settle transactions for the Portfolio that are executed on a
securities exchange provided that it arranges for unaffiliated brokers to
execute such transactions.
Diversified shall determine from time to time the manner in which voting
rights, rights to consent to corporate action and any other rights pertaining to
the Portfolio's securities shall be exercised, provided, however, that should
the Board of Trustees at any time make any definite determination as to
investment policy and notify Diversified thereof in writing, Diversified shall
be bound by such determination for the period, if any, specified in such notice
or until similarly notified that such determination has been revoked.
Diversified will determine what portion of securities owned by the Portfolio
shall be invested in securities described by the policies of the Portfolio and
what portion, if any, should be held uninvested. Diversified will determine
whether and to what extent to employ various investment techniques available to
the Portfolio. In effecting transactions with respect to securities or other
property for the account of the Portfolio, Diversified may deal with itself and
its affiliates, with the Trustees of the Portfolio or with other entities to the
extent such actions are permitted by the 1940 Act.
(b) Diversified also shall provide to the Portfolio administrative
assistance in connection with the operation of the Portfolio, which shall
include compliance with all reasonable requests of the Portfolio for
information, including information required in connection with the Portfolio's
filings with the Securities and Exchange Commission and state securities
commissions.
<PAGE> 18
-4-
(c) As manager of the assets of the Portfolio, Diversified shall make
investments for the account of the Portfolio in accordance with Diversified's
best judgement and within the Portfolio's investment objectives, guidelines,
and restrictions, the 1940 Act and the provisions of the Internal Revenue Code
of 1986 relating to regulated investment companies subject to policy decisions
adopted by the Board of Trustees.
(d) Diversified shall furnish to the Board of Trustees periodic reports on
the investment performance of the Portfolio and on the performance of its
obligations under this Agreement and shall supply such additional reports and
information as the Portfolio's officers or Board of Trustees shall reasonably
request.
(e) On occasions when Diversified deems the purchase or sale of a security
to be in the best interest of the Portfolio as well as other customers,
Diversified, to the extent permitted by applicable law, may aggregate the
securities to be so sold or purchased in order to obtain the best execution or
lower brokerage commissions, if any. Diversified may also on occasion purchase
or sell a particular security for one or more customers in different amounts.
On either occasion, and to the extent permitted by applicable law and
regulations, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by Diversified in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Portfolio and to such other customers.
(f) Diversified shall also provide the Portfolio with the following
services as may be required:
(i) providing office space, equipment and clerical personnel
necessary for maintaining the organization of the Portfolio and
for performing administrative and management functions;
(ii) supervising the overall administration of the Portfolio,
including negotiation of contracts and fees with and the
monitoring of performance and billings of the Portfolio's
transfer agent, custodian and other independent contractors or
agents;
(iii) preparing and, if applicable, filing all documents required for
compliance by the Portfolio with applicable laws and
regulations, including registration statements, registration fee
filings, semi-annual and annual reports to investors, proxy
statements and tax returns;
<PAGE> 19
-5-
(iv) preparation of agendas and supporting documents for and minutes
of meeting of Trustees, committees of Trustees and investors; and
(v) maintaining books and records of the Portfolio.
4. Diversified shall give the Portfolio the benefit of Diversified's best
judgment and efforts in rendering services under this Agreement. As an
inducement to Diversified's undertaking to render these services, the Portfolio
agrees that Diversified shall not be liable under this Agreement for any mistake
in judgment or in any other event whatsoever provided that nothing in this
Agreement shall be deemed to protect or purport to protect Diversified against
any liability to the Portfolio or its investors to which Diversified would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Adviser's duties under this Agreement or
by reason of the Adviser's reckless disregard of its obligations and duties
hereunder.
5. In consideration of the services to be rendered by Diversified under
this Agreement, the Portfolio shall pay Diversified a fee accrued daily and
paid monthly at an annual rate equal to .80% of the Portfolio's average daily
net assets. If the fees payable to Diversified pursuant to this paragraph 5
begin to accrue before the end of any month or if this Agreement terminates
before the end of any month, the fees for the period from that date to the end
of that month or from the beginning of that month to the date of termination,
as the case may be, shall be prorated according to the proportion which the
period bears to the full month in which the effectiveness or termination
occurs. For purposes of calculating the monthly fees, the value of the net
assets of the Portfolio shall be computed in the manner specified in its
Regulation Statement on Form N-1A for the computation of net asset value. For
purposes of this Agreement, a "business day" is any day the New York Stock
Exchange is open for trading.
In compliance with the requirements of Rule 31a-3 under the 1940 Act,
Diversified hereby agrees that all records which it maintains for the Portfolio
are property of the Portfolio and further agrees to surrender promptly to the
Portfolio any such records upon the Portfolio's request. Diversified further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
any such records required to be maintained by Rule 31a-1 under the 1940 Act.
6. This Agreement shall be effective as to the Portfolio as of the date
the Portfolio commences investment operations after this Agreement shall have
been approved by the Board of Trustees of the Portfolio and the investor(s) in
the Portfolio in the manner
<PAGE> 20
-6-
contemplated by Section 15 of the 1940 Act and, unless sooner terminated as
provided herein, shall continue until the second anniversary of the date hereof.
Thereafter, if not terminated, this Agreement shall continue in effect as to the
Portfolio for successive periods of 12 months each, provided such continuance is
specifically approved at least annually by the vote of a majority of those
members of the Board of Trustees of the Portfolio who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval; and either (a) by the vote of
a majority of the full Board of Trustees or (b) by vote of a majority of the
outstanding voting securities of the Portfolio; provided, however, that this
Agreement may be terminated by the Portfolio at any time, without the payment of
any penalty, by the Board of Trustees of the Portfolio or by vote of a majority
of the outstanding voting securities of the Portfolio on 60 days' written notice
to Diversified, or by Diversified as to the Portfolio at any time, without
payment of any penalty, on 90 days' written notice to the Portfolio. This
Agreement will immediately terminate in the event of its assignment. (As used in
this Agreement, the terms "majority of the outstanding voting securities",
"interested person" and "assignment" shall have the same meanings as such terms
have in the 1940 Act and the rule and regulatory constructions thereunder.)
7. Except to the extent necessary to perform Diversified's obligations
under this Agreement, nothing herein shall be deemed to limit or restrict the
right of Diversified, or any affiliate of Diversified, or any employee of
Diversified, to engage in any other business or devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other trust,
corporation, firm, individual or association.
8. The investment management services of Diversified to the Portfolio
under this Agreement are not to be deemed exclusive as to Diversified and
Diversified will be free to render similar services to others.
Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof.
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge, or termination is
sought and no material amendment of this Agreement shall be effective until
approved by vote of the holders of a majority of the outstanding voting
securities of the Portfolio.
This Agreement embodies the entire agreement and understanding between the
parties hereto and supersedes all prior agreements and understandings relating
to the subject matter
<PAGE> 21
-7-
hereof. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. Should any part of this
Agreement be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding and shall inure to the benefit of the parties
hereto and their respective successors, to the extent permitted by law.
9. This Agreement shall be construed in accordance with the laws of the
State of New York provided that nothing herein shall be construed in a manner
inconsistent with the requirements of 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first above
written.
Attest: Diversified Investors Portfolios
/s/ John F. Hughes By: /s/ Tom Schlossberg
- ----------------------------------- ----------------------------------
Tom Schlossberg
Chairman and President
Attest: Diversified Investment Advisors, Inc.
/s/ Catherine A. Mohr By: /s/ Gerald L. Katz
- ----------------------------------- ----------------------------------
Gerald L. Katz
Vice President and CFO
<PAGE> 22
SCHEDULE B
The Subadvisor shall be compensated for its services under this Agreement on
the basis of the below-described annual fee schedule. The fee schedule shall
only be amended by agreement between the parties.
FEE SCHEDULE
.40% OF THE FIRST $250M OF NET ASSETS
.25% OF NET ASSETS BETWEEN $250M AND $350M
.20% OF NET ASSETS IN EXCESS OF $350M
Net assets are equal to the market value of the Subadvisor's portion of the
Portfolio. Fees will be calculated by multiplying the arithmetic average of the
beginning and ending monthly net assets by the fee schedule and dividing by
twelve. The sum of the three consecutive months will be paid in arrears on
calendar quarters.
Husic agrees that if at anytime during the term of this Subadvisory Agreement,
Husic offers another of its clients a lower fee than that set forth in this
Schedule B for the management of a similarly structured small-cap growth
separate account then Diversified will also be charged the lower rate.
Diversified will benefit from the lower rate from the first day that it is in
effect for Husic's other client. It is understood and agreed by both Husic and
Diversified that this paragraph is applicable solely to Diversified's small-cap
growth Portfolio and not to any other fund/assets which Husic now manages or
may manage in the future on Diversified's behalf.
<PAGE> 23
SCHEDULE C
Target market for 401(a), 403(b) and 457 plans is those plans between $1 and
$250 million.
<PAGE> 1
INVESTMENT SUBADVISORY AGREEMENT
INVESTMENT SUBADVISORY AGREEMENT, dated as of August 19, 1999, by and
between Diversified Investment Advisors, Inc., a Delaware corporation
("Diversified"), and Payden & Rygel, a California corporation ("Subadvisor").
WITNESSETH:
WHEREAS, Diversified has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940, and has been
retained to provide investment advisory services to the Core Bond Portfolio
("Portfolio"), a series of Diversified Investors Portfolios, a diversified
open-end management investment company registered under the Investment Company
Act of 1940 ("1940 Act");
WHEREAS, Diversified desires to retain the Subadvisor to furnish it with
portfolio investment advisory services in connection with Diversified's
investment advisory activities on behalf of the Portfolio, and the Subadvisor
is willing to furnish such services to Diversified;
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of the Subadvisor. In accordance with and subject to the
Investment Advisory Agreement between the Portfolio and Diversified, attached
hereto as Schedule A (the "Advisory Agreement"), Diversified hereby appoints
the Subadvisor to perform the portfolio investment advisory services described
herein for the investment and reinvestment of the Portfolio's assets, subject
to the control and direction of Diversified and the Diversified Investors
Portfolios' Board of Trustees, for the period and on the terms hereinafter set
forth.
The Subadvisor shall provide Diversified with such investment advice and
supervision as the latter may from time to time consider necessary for the
proper supervision of the Portfolio's assets. The Subadvisor shall furnish
continuously an investment program and shall determine from time to time what
securities shall be purchased, sold or exchanged and what portion of the assets
of the Portfolio shall be held uninvested, subject always to the provisions of
the 1940 Act and to the Portfolio's then-current Registration Statement on Form
N-1A.
<PAGE> 2
In particular, the Subadvisor shall, without limiting the foregoing: (i)
continuously review, supervise and implement the investment program of the
Portfolio; (ii) monitor regularly the relevant securities for the Portfolio to
determine if adjustments are warranted and, if so, to make such adjustments;
(iii) determine, in the Subadvisor's discretion, the securities to be purchased
or sold or exchanged in order to keep the Portfolio in balance with its
designated investment strategy; (iv) determine, in the Subadvisor's discretion,
whether to exercise warrants or other rights with respect to the Portfolio's
securities; (v) determine, in the Subadvisor's discretion, whether the merit of
an investment has been substantially impaired by extraordinary events or
financial conditions, thereby warranting the removal of such securities from
the Portfolio; (vi) as promptly as practicable after the end of each calendar
month, furnish a report showing: (a) all transactions during such month, (b)
all assets of the Portfolio on the last day of such month, rates of return, and
(c) such other information relating to the Portfolio as Diversified may
reasonably request; (vii) meet at least four times per year with Diversified
and with such other persons as may be designated on reasonable notice and at
reasonable locations, at the request of Diversified, to discuss general economic
conditions, performance, investment strategy, and other matters relating to the
Portfolio; (viii) provide the Portfolio with records concerning the Subadvisor's
activities which the Portfolio is required by law to maintain; and (ix) render
regular reports to the Portfolio's officers and Directors concerning the
Subadvisor's discharge of the foregoing responsibilities.
The Subadvisor shall also make recommendations to Diversified as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the Portfolio's securities shall be exercised.
Should the Board of Trustees at any time make any definite determination
as to investment policy with respect to the Portfolio and notify the Subadvisor
thereof in writing, the Subadvisor shall be bound by such determination for
the period, if any, specified in such notice or until similarly notified that
such policy has been revoked. The initial Statement of Investment Policy and
Guidelines is attached hereto as Appendix I.
The Subadvisor shall take, on behalf of the Portfolio, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
Portfolio securities for the Portfolio's account with brokers or dealers
selected by it, and to that end the Subadvisor is authorized as the agent of
the Portfolio to give instructions to the custodian of the Portfolio as to
deliveries of securities and payments of cash for the account of the Portfolio.
Subject to the primary objective of obtaining the best available prices and
execution, the Subadvisor may place orders for the purchase and sale of
portfolio securities with such broker/dealers who provide statistical, factual
and financial information and services to the Portfolio, to the Subadvisor, or
to any other fund or account for which the Subadvisor provides investment
advisory services and may place such orders with brokers/dealers who sell
shares of the
2
<PAGE> 3
Portfolio or who sell shares of any other fund for which the Subadvisor
provides investment advisory services. Broker/dealers who sell shares of the
funds of which Payden & Rygel is investment advisor shall only receive orders
for the purchase or sale of portfolio securities to the extent that the placing
of such orders is in compliance with the Rules of the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
Notwithstanding the provisions of the previous paragraph and subject to
such policies and procedures as may be adopted by the Board of Trustees and
officers of the Portfolio, the Subadvisor may pay a member of an exchange,
broker or dealer an amount of commission for effecting a securities transaction
in excess of the amount of commission another member of an exchange, broker or
dealer would have charged for effecting that transaction, in such instances
where the Subadvisor has determined in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and
research services provided by such member, broker or dealer, viewed in terms of
either that particular transaction or the Subadvisor's overall responsibilities
with respect to the Portfolio and to other funds and separate accounts for
which the Subadvisor exercises investment discretion.
2. Allocation of Charges and Expenses. The Subadvisor shall furnish at
its own expense all necessary services, facilities and personnel in connection
with its responsibilities under Section 1 above. It is understood that the
Portfolio will pay all of its own expenses and liabilities including, without
limitation, compensation and out-of-pocket expenses of Trustees not affiliated
with the Subadvisor or Diversified; governmental fees; interest charges; taxes;
membership dues; fees and expenses of independent auditors, of legal counsel and
of any transfer agent, administrator, distributor, shareholder servicing agents,
registrar or dividend disbursing agent of the Portfolio; expenses of
distributing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing prospectuses, shareholder reports, notices,
proxy statements and reports to governmental officers and commissions and to
shareholders of the Portfolio; expenses connected with the execution, recording
and settlement of Portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Portfolio, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of the Portfolio; expenses
of shareholder meetings; expenses of litigation and other extraordinary or
non-recurring events and expenses relating to the issuance, registration and
qualification of shares of the Portfolio.
3. Compensation of the Subadvisor. For the services to be rendered,
Diversified shall pay to the Subadvisor an investment advisory fee computed in
accordance with the terms of Schedule B herewith attached. If the Subadvisor
serves for less than the whole of any period specified, its compensation shall
be prorated.
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<PAGE> 4
4. Covenants and Representations of the Subadvisor. The Subadvisor agrees
that it will not deal with itself, or with the Trustees of the Portfolio or with
Diversified, or the principal underwriter or distributor as principals in
making purchases or sales of securities or other property for the account of
the Portfolio, except as permitted by the 1940 Act, and will comply with all
other provisions of the Declaration of Trust and any current Registration
Statement on Form N-1A of the Portfolio relative to the Subadvisor, Advisor and
its Trustees and officers.
5. Limits on Duties. The Subadvisor shall be responsible only for managing
the assets in good faith and in accordance with the investment objectives,
fundamental policies and restrictions, and shall have no responsibility
whatsoever for, and shall incur no liability on account of (i) diversification,
selection or establishment of such investment objectives, fundamental policies
and restrictions (ii) advice on, or management of, any other assets for
Diversified or the Portfolio, (iii) filing of any tax or information returns or
forms, withholding or paying any taxes, or seeking any exemption or refund,
(iv) registration with any government or agency, or (v) administration of the
plans and trusts investing through the Portfolio, or (vi) overall Portfolio
compliance with the requirements of the 1940 Act, which requirements are
outside of the Subadvisor's control, and Subchapter M of the Internal Revenue
Code of 1986, as amended, and shall be indemnified and held harmless by
Diversified for any loss in carrying out the terms and provisions of this
Agreement, including reasonable attorney's fees, indemnification to the
Portfolio, or any shareholder thereof and, brokers and commission merchants,
fines, taxes, penalties and interest. Subadvisor, however, shall be liable for
any liability, damages, or expenses of Diversified arising out of the
negligence, malfeasance or violation of applicable law by any of its employees
in providing management under this Agreement; and, in such cases, the
indemnification by Diversified, referred to above, shall be inapplicable.
The Subadvisor may apply to Diversified at any time for instructions and
may consult counsel for Diversified or its own counsel with respect to any
matter arising in connection with the duties of the Subadvisor. Also, the
Subadvisor shall be protected in acting upon advice of Diversified and/or
Diversified's counsel and upon any document which Subadvisor reasonably
believes to be genuine and to have been signed by the proper person or persons.
6. Exclusivity. Subadvisor represents to Diversified that during the term
of this Agreement Subadvisor will not manage any portfolio, any collective
trust, open-end investment company registered under the Investment Company Act
of 1940, Variable Insurance Contract registered under the Investment Company
Act of 1940, or insurance company separate account that are offered to the
types of employee benefit plans referred to in Schedule C and sponsored by
competitors of Diversified in providing services to such types of employee
benefit plans referred to in Schedule C and sponsored by competitors of
Diversified in providing services to such types of employee benefit plans
without providing Diversified with 60 days prior written notice. It is
understood that Subadvisor shall not be limited by this section 6
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<PAGE> 5
with respect to any other portfolio that it may offer (such as a small, medium
or large capitalization specific portfolio, a portfolio that includes a
significant portion devoted to non-U.S. securities or a commingled vehicle that
is not sponsored by a provider of bundled services to the types of employee
benefit plans specified on Schedule C).
7. Duration, Termination and Amendments of this Agreement. This Agreement
shall become effective as of the day and year first above written and shall
govern the relations between the parties hereto thereafter, and, unless
terminated earlier as provided below, shall remain in force for two years, on
which date it will terminate unless its continuance thereafter is specifically
approved at least annually (a) by the vote of a majority of the Trustees of the
Portfolio who are not "interested persons" to this Agreement or of the
Subadvisor or Diversified at an in person meeting specifically called for the
purpose of voting on such approval, and (b) by the Board of Trustees of the
Portfolio or by vote of a majority of the outstanding voting securities of the
Portfolio. However, if the shareholders of the Portfolio fail to approve the
Agreement as provided herein, the Subadvisor may continue to serve hereunder in
the manner and to the extent permitted by the Investment Company Act of 1940 and
Rules thereunder.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees, or by the vote of a majority of the outstanding voting
securities of the Portfolio, or by Diversified. The Subadvisor may terminate
the Agreement only upon giving 90 days' advance written notice to Diversified.
This Agreement shall automatically terminate in the event of its assignment.
This Agreement may be amended only if such amendment is approved by the
vote of a majority of the outstanding voting securities of the Portfolio and by
vote of a majority of the Board of Trustees of the Portfolio who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval.
The terms "specifically approved at least annually", "vote of a majority
of the outstanding voting securities", "assignment", "affiliated person", and
"interested persons", when used in this Agreement, shall have the respective
meanings specified in, and shall be construed in a manner consistent with, the
1940 Act, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
8. Certain Records. Any records to be maintained and preserved pursuant to
the provisions of Rule 31a-1 and Rule 31a-2 adopted under the 1940 Act which
are prepared or maintained by the Subadvisor on behalf of the Portfolio are the
property of the Portfolio and will be surrendered promptly to the Portfolio on
request.
9. Survival of Compensation Rates. All rights to compensation under this
Agreement shall survive the termination of this Agreement.
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<PAGE> 6
10. Entire Agreement. This Agreement states the entire agreement of the
parties with respect to investment advisory services to be provided to the
Portfolio by the Subadvisor and may not be amended except in a writing signed
by the parties hereto and approved in accordance with Section 7 hereof.
11. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
12. Change of Management and Pending Litigation. Subadvisor represents to
Diversified that it will disclose to Diversified promptly after it has knowledge
of any significant change or variation in its management structure or personnel
or any significant change or variation in its management style or investment
philosophy. In addition, Subadvisor represents to Diversified that it will
similarly disclose to Diversified, promptly after it has knowledge, the
existence of any pending legal action being brought against it whether in the
form of a lawsuit or a non-routine investigation by any federal or state
governmental agency.
Diversified represents to Subadvisor that any information received by
Diversified pursuant to this section will be kept strictly confidential and
will not be disclosed to any third party.
13. Use of Name. Subadvisor hereby agrees that Diversified may use the
Subadvisor's name in its marketing or advertising materials. Diversified agrees
to allow the Subadvisor to examine and approve any such materials prior to use.
IN WITNESS WHEREOF, the parties thereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
Diversified Investment Advisors, Inc.
By: /s/ John F. Hughes
-----------------------------------
John F. Hughes
Payden & Rygel
By: /s/ Brian W. Matthews
-----------------------------------
Brian W. Matthews
Managing Principal
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