File No. 811-8272
As filed with the Securities and Exchange Commission on April 30, 1997
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 5
DIVERSIFIED INVESTORS PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
FOUR MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
(Address of Principal Executive Office) (ZIP Code)
Registrant's Telephone Number, including Area Code: (914) 697-8000
Robert F. Colby
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, New York 10577
(Name and Address of Agent for Service)
Copy to:
Roger P. Joseph
Bingham, Dana & Gould LLP
150 Federal Street
Boston, Massachusetts 02110
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EXPLANATORY NOTE
This Registration Statement of Diversified Investors Portfolios has been
filed by the Registrant pursuant to Section 8(b) of the Investment Company Act
of 1940, as amended (the "1940 Act"). However, beneficial interests in the
Registrant are not being registered under the Securities Act of 1933, as
amended (the "1933 Act"), since such interests will be offered solely in
private placement transactions which do not involve any "public offering"
within the meaning of Section 4(2) of the 1933 Act. Investments in the
Registrant may only be made by investment companies, insurance company separate
accounts, common or commingled trust funds or similar organizations or entities
which are "accredited investors" as defined in Regulation D under the 1933 Act.
This Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any beneficial interests in the Registrant.
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PART A
DIVERSIFIED INVESTORS PORTFOLIOS - MONEY MARKET PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, Money Market Portfolio (the "Portfolio"), is described herein.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to provide liquidity and as
high a level of current income as is consistent with the preservation of
capital. The Portfolio seeks to accomplish its investment objective by
investing in domestic and foreign U.S. dollar-denominated money market
obligations with maturities of 397 days or less. An investment in the Portfolio
is neither insured nor guaranteed by the U.S. Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Capital Management Group, a division
of 1740 Advisers, Inc. ("Capital Management Group"), is the subadviser (the
"Subadviser") of the Portfolio. The Adviser and Subadviser are referred to
herein collectively as the "Advisers". Diversified is also the administrator
(the "Administrator") of the Portfolio. Diversified Investors Securities Corp.
is the exclusive placement agent ("DISC" or the "Placement Agent") of interests
in the Portfolio and the Trust in general.
The Portfolio pursues its investment objective by investing in high
quality short-term money market instruments consistent with its specific
investment objective. Securities in which the Portfolio invests may not earn as
high a level of current income as long-term or lower quality securities which
generally have less liquidity and greater market risk and fluctuate in market
value to a greater extent.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can be no assurance that the investment objective of the
Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
To achieve its investment objective, the Portfolio invests in U.S.
dollar-denominated short-term money market obligations, including securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits, bankers' acceptances
and other short-term obligations issued by domestic banks and domestic branches
and subsidiaries of foreign banks, repurchase agreements, and high quality
domestic commercial paper and other short-term corporate obligations, including
those with floating or variable rates of interest. In addition, the Portfolio
may lend portfolio securities, enter into reverse repurchase agreements, and
invest in securities issued by foreign banks and corporations outside the
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United States. The Portfolio reserves the right to concentrate 25% or more of
its total assets in obligations of domestic branches of domestic banks.
In accordance with Rule 2a-7 under the Investment Company Act of 1940, as
amended (the "1940 Act"), the Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days or less and invest only in U.S.
dollar-denominated securities determined in accordance with procedures
established by the Board of Trustees of the Trust (the "Board of Trustees") to
present minimal credit risks and which are rated in one of the two highest
rating categories for debt obligations by at least two nationally recognized
statistical rating organizations (an "NRSRO") (or one NRSRO if the instrument
was rated by only one such organization) or, if unrated, are of comparable
quality as determined in accordance with procedures established by the Board of
Trustees (collectively, "Eligible Securities").
Eligible Securities include "First Tier Securities" and "Second Tier
Securities." First Tier Securities include those that possess a rating in the
highest category in the case of a single-rated security or at least two ratings
in the highest rating category in the case of multiple-rated securities or, if
the securities do not possess a rating, are determined to be of comparable
quality by the Advisers pursuant to the guidelines adopted by the Board of
Trustees. All other Eligible Securities are Second Tier Securities. The
Portfolio will invest at least 95% of its total assets in First Tier
Securities.
The NRSROs currently rating instruments of the type the Portfolio may
purchase are Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch Investors Service,
Inc. ("Fitch"), IBCA Limited and IBCA Inc. ("IBCA") and Thomson BankWatch, Inc.
("BankWatch"), and their rating criteria are described below. Part B contains
further information concerning the rating criteria and other requirements
governing the Portfolio's investments, including information relating to the
treatment of securities subject to a tender or demand feature and securities
deemed to possess a rating based on comparable rated securities of the same
issuer.
The following is a description of the two highest commercial paper, bond
and other short-and long-term rating categories assigned by S&P, Moody's,
Fitch, Duff, IBCA and BankWatch:
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus sign (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned
by Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations, and ordinarily will be evidenced by leading
market positions in well established industries, high rates of return on funds
employed, conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established
access to a range of financial markets and assured sources of alternate
liquidity. Issues rated Prime-2 (P-2) have a strong capacity for repayment of
short-term promissory obligations. This ordinarily will be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
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The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors are small.
The designation A-1 by IBCA indicates that the obligation is supported by
a very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. Obligations rated A2
are supported by a strong capacity for timely repayment, although such capacity
may be susceptible to adverse changes in business, economic or financial
conditions.
The rating TBW-1 is the highest short-term obligation rating assigned by
BankWatch. Obligations rated TBW-1 are regarded as having the strongest
capacity for timely repayment. Obligations rated TBW-2 are supported by a
strong capacity for timely repayment, although the degree of safety is not as
high as for issues rated TBW-1.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest, and in the majority of instances, differ only in small
degrees from issues rated AAA.
Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
rated Aa by Moody's are judged by Moody's to be of high quality by all
standards and, together with the Aaa group, they comprise what are generally
known as high-grade bonds. Bonds rated Aa are rated lower than Aaa bonds
because margins of protection may not be as large or fluctuations of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger. Moody's applies
numerical modifiers 1, 2 and 3 in the Aa rating category. The modifier 1
indicates a ranking for the security in the higher end of this rating category,
the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a
ranking in the lower end of the rating category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high-grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less
strikingly broad. The issue may be the obligation of a small company, strongly
secured but influenced as to rating by the lesser financial power of the
enterprise and more local type of market.
Bonds rated AAA by Duff are considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than U.S.
Treasury debt. Bonds rated AA are considered by Duff to be of high credit
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quality with strong protection factors. Risk is modest but may vary slightly
from time to time because of economic conditions.
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA by
IBCA have a very low expectation of investment risk. Capacity for timely
repayment of principal and interest is substantial. Adverse changes in
business, economic or financial conditions may increase investment risk albeit
not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An
IBCA bank rating represents IBCA's current assessment of the strength of the
bank and whether such bank would receive support should it experience
difficulties. In its assessment of a bank, IBCA uses a dual rating system
comprised of Legal Ratings and Individual Ratings. In addition, IBCA assigns
banks Long- and Short- Term Ratings as used in the corporate ratings discussed
above. Legal Ratings, which range in gradation from 1 through 5, address the
question of whether the bank would receive support provided by central banks or
shareholders if it experienced difficulties, and such ratings are considered by
IBCA to be a prime factor in its assessment of credit risk. Individual Ratings,
which range in gradations from A through E, represent IBCA's assessment of a
bank's economic merits and address the question of how the bank would be viewed
if it were entirely independent and could not rely on support from state
authorities or its owners.
In addition to its ratings of short-term obligations, BankWatch assigns a
rating to each issuer it rates, in gradations of A through E. BankWatch
examines all segments of the organization, including, where applicable, the
holding company, member banks or associations, and other subsidiaries. In those
instances where financial disclosure is incomplete or untimely, a qualified
rating (QR) is assigned to the institution. BankWatch also assigns, in the case
of foreign banks, a country rating which represents an assessment of the
overall political and economic stability of the country in which the bank is
domiciled.
The Portfolio will not invest more than 5% of its total assets in the
securities (including the securities collateralizing a repurchase agreement)
of, or subject to puts (including letters of credit, guaranties or other credit
support) issued by, a single issuer, except that (i) the Portfolio may invest
more than 5% of its total assets in a single issuer for a period of up to three
business days in certain limited circumstances, (ii) the Portfolio may invest
in obligations issued or guaranteed by the U.S. Government without any such
limitation, and (iii) the limitation with respect to puts does not apply to
unconditional puts if no more than 10% of the Portfolio's total assets is
invested in securities issued or guaranteed by the issuer of the unconditional
put. Investments in rated securities not rated in the highest category by at
least two rating organizations (or one rating organization if the instrument
was rated by only one such organization), and unrated securities not determined
by the Board of Trustees to be comparable to those rated in the highest
category, will be limited to 5% of the Portfolio's total assets, with the
investment in any one such issuer being limited to no more than the greater of
1% of the Portfolio's total assets or $1,000,000. As to each security, these
percentages are measured at the time the Portfolio purchases the security.
The Portfolio seeks to achieve its investment objective through
investments in the following types of U.S. dollar-denominated money market
instruments.
BANK OBLIGATIONS
The Portfolio may invest in U.S. dollar-denominated certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations
issued by domestic banks and domestic branches and subsidiaries of foreign
banks. Certificates of deposit are certificates evidencing the obligation of a
bank to repay funds deposited with it for a specified period of time. Such
instruments include Yankee Certificates of Deposit ("Yankee CDs"), which are
certificates of deposit denominated in U.S. dollars and issued in the United
States by the domestic branch of a foreign bank. Time deposits are
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non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Time deposits which may be held by
the Portfolio are not insured by the Federal Deposit Insurance Corporation or
any other agency of the U.S. Government. The Portfolio will not invest more
than 10% of the value of its net assets in time deposits maturing in longer
than seven days and other instruments which are illiquid or not readily
marketable. The Portfolio may also invest in certificates of deposit and time
deposits issued by foreign banks outside the United States.
The Portfolio may also invest in bankers' acceptances and other short-term
obligations. Bankers' acceptances are credit instruments evidencing the
obligation of a bank to pay a draft drawn on it by a customer. These
instruments reflect the obligation both of the bank and of the drawer to pay
the face amount of the instrument upon maturity. The other short-term
obligations may include uninsured, direct obligations which have either fixed,
floating or variable interest rates.
To the extent the Portfolio's investments are concentrated in the banking
industry, the Portfolio will have correspondingly greater exposure to the risk
factors which are characteristic of such investments. Sustained increases in
interest rates can adversely affect the availability or liquidity and cost of
capital funds for a bank's lending activities, and a deterioration in general
economic conditions could increase the exposure to credit losses. In addition,
the value of an investment in the Portfolio could be affected by economic or
regulatory developments in or related to the banking industry, which industry
also is subject to the effects of the concentration of loan portfolios in
leveraged transactions and in particular businesses, and competition within the
banking industry, as well as with other types of financial institutions. The
Portfolio, however, will seek to minimize its exposure to such risks by
investing only in debt securities which are determined to be of high quality.
U.S. GOVERNMENT AND AGENCY SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one
to ten years; and Treasury Bonds generally have initial maturities of greater
than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to such U.S. Government-
sponsored agencies or instrumentalities, no assurance can be given that it will
always do so, since it is not so obligated by law. The Portfolio will invest in
such securities only when the Advisers are satisfied that the credit risk with
respect to the issuer is minimal.
COMMERCIAL PAPER
Commercial paper consists of short-term, unsecured promissory notes issued
to finance short-term credit needs. The commercial paper purchased by the
Portfolio will consist only of U.S. dollar-denominated direct obligations
issued by domestic and, subject to the 5% limit discussed below (see "Foreign
Securities"), foreign entities. The other corporate obligations in which the
Portfolio may invest consist of high quality, U.S. dollar-denominated
short-term bonds and notes (including variable amount master demand notes)
issued by domestic corporations.
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The Portfolio may invest in commercial paper issued by major corporations
in reliance on the exemption from registration afforded by Section 3(a)(3) of
the 1933 Act. Such commercial paper may be issued only to finance current
transactions and must mature in nine months or less. Trading of such commercial
paper is conducted primarily by institutional investors through investment
dealers, and individual investor participation in the commercial paper market
is very limited.
UNSECURED PROMISSORY NOTES
The 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 and will be deemed by the Board of Trustees, or by the
Advisers on its behalf, to present minimal credit risks and will meet the
quality criteria set forth above. The Portfolio will invest no more than 10% of
its net assets in such Notes and in other securities that are not readily
marketable (which securities would include floating and variable rate demand
obligations as to which the Portfolio cannot exercise the demand feature
described in Part B and as to which there is no secondary market).
RESTRICTED SECURITIES
The Portfolio may invest in securities that are subject to legal or
contractual restrictions on resale. These securities may be illiquid and, thus,
the Portfolio may not purchase them to the extent that more than 10% of the
value of its net assets would be invested in illiquid securities. However, if a
substantial market of qualified institutional buyers develops pursuant to Rule
144A under the 1933 Act for such securities held by the Portfolio, the
Portfolio intends to treat such securities as liquid securities in accordance
with procedures approved by the Board of Trustees. To the extent that for a
period of time, qualified institutional buyers cease purchasing such restricted
securities pursuant to Rule 144A, the Portfolio's investing in such securities
may have the effect of increasing the level of illiquidity in the Portfolio
during such period.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument, subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price,
usually not more than one week after its purchase. The Portfolio or a
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sub-custodian will have custody of securities acquired by the Portfolio under a
repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
the 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities. Reverse repurchase agreements are
considered to be borrowings by the Portfolio.
FOREIGN SECURITIES
The Portfolio may invest in U.S. dollar-denominated foreign securities
issued outside the United States, such as obligations of foreign branches and
subsidiaries of domestic banks and foreign banks, including Eurodollar
certificates of deposit, Eurodollar time deposits and Canadian time deposits,
commercial paper of Canadian and other foreign issuers, and U.S.
dollar-denominated obligations issued or guaranteed by one or more foreign
governments or any of their agencies or instrumentalities. Foreign securities
may represent a greater degree of risk than do securities of domestic issuers
due to possible exchange rate fluctuations, possible exchange controls, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions (including possible withholding
taxes), changes in governmental administration or economic or monetary policy
(in the United States or abroad), war or expropriation. For a complete
description of foreign securities the Portfolio may purchase, see "Investment
Policies" in Part B.
CERTAIN OTHER OBLIGATIONS
In order to allow for investments in new instruments that may be created
in the future, the Portfolio may invest in obligations other than those listed
previously, provided such investments are consistent with the Portfolio's
investment objective, policies and restrictions.
Part B includes a discussion of additional investments such as zero coupon
obligations, variable rate and floating rate securities, participation
interests, guaranteed investment contracts and when-issued and forward
commitment securities. Part B also includes a discussion of nonfundamental
investment policies, as well as a listing of specific investment restrictions
which constitute fundamental policies of the Portfolio and cannot be changed
without the approval of the holders of a "majority of the outstanding voting
securities" (as defined in the 1940 Act) of the Portfolio. See "Investment
Restrictions" in Part B.
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ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.25% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are made by committee and not by managers individually. The principal
business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Capital Management Group. Capital Management
Group makes the investment selections for the Portfolio consistent with the
guidelines and directions set by the Adviser and the Board of Trustees. For its
services under the Subadvisory Agreement, Capital Management Group receives a
fee from Diversified. This fee is calculated by multiplying the arithmetic
average of the beginning and ending monthly net assets in the Portfolio by the
fee schedule and dividing by twelve. The fee is paid on a quarterly basis at an
annual rate equal to 0.05% of the Portfolio's average daily net assets. Capital
Management Group furnishes at its own expense all services, facilities and
personnel necessary in connection with managing the Portfolio's investments and
effecting securities transactions for the Portfolio.
Capital Management Group is a division of 1740 Advisers, Inc., which is a
subsidiary of The Mutual Life Insurance Company of New York. Its address is
1740 Broadway, New York, New York 10019. Total assets under management by
Capital Management Group as of December 31, 1996 were approximately $890
million, all of which were assets of registered investment companies. The
following person is primarily responsible for the day-to-day management of the
Portfolio: David E. Wheeler, Investment Vice President and Portfolio Manager
(since 1997, employed by Capital Management Group since 1994; previously
employed at AIG Investment Advisers and at Mutual Benefit Life).
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
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of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0.25% of the Portfolio's
average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.30% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
below. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
<PAGE>
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
<PAGE>
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio's assets are valued by using the amortized cost method of
valuation. This method of valuation involves valuing a security at its cost at
the time of purchase and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. The market value of the
securities held by the Portfolio will fluctuate on the basis of the
creditworthiness of the issuers of such securities and on the levels of
interest rates generally. While the amortized cost method provides certainty in
valuation, it may result in periods when the value so determined is higher or
lower than the price the Portfolio would receive if the security were sold.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the New York Stock Exchange ("NYSE") is closed
(other than weekends or holidays) or trading on the NYSE is restricted or, to
the extent otherwise permitted by the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - HIGH QUALITY BOND PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, High Quality Bond Portfolio (the "Portfolio"), is described herein.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to provide as high a level of
current income as is consistent with the preservation of capital. The Portfolio
seeks to accomplish its investment objective by investing primarily in high
quality debt securities with short and intermediate maturities. An investment
in the Portfolio is neither insured nor guaranteed by the U.S. Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Merganser Capital Management Corp.
("Merganser") is the subadviser (the "Subadviser") of the Portfolio. The
Adviser and Subadviser are referred to herein collectively as the "Advisers".
Diversified is also the administrator (the "Administrator") of the Portfolio.
Diversified Investors Securities Corp. is the exclusive placement agent ("DISC"
or the "Placement Agent") of interests in the Portfolio and the Trust in
general.
The Portfolio pursues its investment objective by investing at least 65%
of its assets under normal circumstances in high quality debt securities with
short and intermediate maturities (including repurchase agreements and reverse
repurchase agreements). See "Short-Term Instruments" below for an explanation
of high quality ratings.
The Advisers attempt to maintain the Portfolio's "duration" between one
and four years, which means that the Portfolio's overall sensitivity to
interest rates should be slightly more than that of bonds and notes with
remaining average maturities from one to four years. The Portfolio's
dollar-weighted average maturity (or dollar-weighted average life in the case
of asset-backed and mortgage-backed securities) may be longer than four years
from time to time, but will not exceed five years under normal conditions. The
Portfolio may hold individual securities with remaining maturities of up to
thirty years.
A primary goal of the Portfolio is consistency of return with minimal
exposure to negative total returns on an annual basis. The Adviser's strategy
is to position the Portfolio in those high quality sectors of the fixed income
market that offer the most attractive yields, on a risk-adjusted basis. The
duration of the Portfolio will be a function of the security and sector
selection process and market conditions in general. Since the value of fixed
income securities generally fluctuates inversely with changes in interest
rates, the value of securities held by the Portfolio will tend to decline
during periods of rising interest rates.
<PAGE>
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
The Advisers normally select only securities having a minimum long-term
quality rating of A- by Standard & Poor's Ratings Group ("S&P") or A3 by
Moody's Investors Service, Inc. ("Moody's"), respectively at the time of
purchase, or, in the case of instruments that are not rated or are rated by
other agencies (i.e., Fitch Investors Service, Inc. ("Fitch"), Duff & Phelps,
Inc. ("Duff"), etc.) are deemed by the Advisers to be of similar quality. Money
market securities have a minimum short-term rating of at least A-1 or P-1 by
S&P or Moody's, respectively, or an equivalent rating by other agencies. The
Portfolio may continue to hold such securities if their ratings are reduced
after purchase.
Additional information about the investment policies of the Portfolio
appears in Part B.
U.S. GOVERNMENT AND AGENCY SECURITIES
The Portfolio may invest in U.S. Government securities and securities
issued or guaranteed by its agencies or instrumentalities. These securities
have varying degrees of government backing. They may be backed by the credit of
the government as a whole or only by the issuing agency. For example,
securities issued by certain agencies are supported only by the credit of the
agency that issued them, and not by the U.S. Government. Securities issued by
the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association are supported by the agency's right to borrow money from the U.S.
Treasury under certain circumstances. U.S. Treasury bonds, notes and bills, and
some agency securities, such as those issued by the Government National
Mortgage Association, are backed by the full faith and credit of the U.S.
Government as to payment of principal and interest and are the highest quality
government securities. There is no assurance that the U.S. Government will
support obligations of its agencies unless it is required to do so by law. An
investment in the Portfolio is not guaranteed by the U.S. Government. For
additional information on U.S. Government securities, see Part B.
The Portfolio may invest a portion of its assets in short-term U.S.
Government securities with remaining maturities of one year or less and
repurchase agreements relating thereto. When the Advisers believe market
conditions warrant a temporary defensive position, the Portfolio may invest up
to 100% of its assets in these instruments.
CORPORATE BONDS
The Portfolio may purchase public or private corporate bonds, issued by
domestic or foreign issuers, that meet the Portfolio's minimum credit quality
criteria at the time of purchase. The corporate bond market is customarily
subdivided into several segments, which include industrial, public utilities,
rail and transportation bonds, and bonds issued by banks and other financial
institutions.
YANKEE BONDS AND EURODOLLAR BONDS
The Portfolio may purchase yankee and eurodollar issues that meet its
minimum credit quality standards. Yankee issues are dollar-denominated bonds
issued in the United States market by foreign issuers and are, therefore,
subject to Securities and Exchange Commission ("SEC") regulations. Issuers of
yankee bonds include, among others, foreign corporations, foreign governments
and agencies, and multilateral lending institutions. Eurodollar bonds are fixed
<PAGE>
income securities that are denominated in dollars, are underwritten by an
international syndicate, and are sold upon issuance to non-U.S. investors.
U.S.-based investors may purchase eurodollar bonds in the secondary market
after a seasoning period. Eurodollar bonds are not subject to SEC regulations.
MORTGAGE PASS THROUGHS AND COLLATERALIZED MORTGAGE OBLIGATIONS
The Portfolio may purchase mortgage and mortgage-related securities such
as pass throughs, collateralized mortgage obligations, and mortgage derivatives
that meet the Portfolio's minimum credit quality. Mortgage pass throughs are
securities that pass through to investors an undivided interest in a pool of
underlying mortgages. These may be issued or guaranteed by U.S. government
agencies, or may consist of whole loans originated and issued by private
limited purpose corporations or conduits. Collateralized mortgage obligation
bonds and mortgage derivatives are obligations of special purpose corporations
that are collateralized or supported by mortgages or mortgage securities such
as pass throughs.
ASSET-BACKED SECURITIES
The Portfolio may purchase public or private asset-backed securities in
various types, which are fixed income securities that are collateralized or
"backed" by installment receivables (usually consumer loans) for which some
type of credit enhancement is provided. Asset-backed securities that are
eligible for purchase by the Portfolio include securities backed by automobile
receivables, credit card receivables, home equity loans, manufactured housing
loans, business and recreational vehicle loans, computer leases, and
agricultural equipment loans.
SHORT-TERM INSTRUMENTS
Cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities may be held to provide a reserve for future
purchases of securities during periods of unusual market conditions or in order
to reduce volatility, or as a temporary defensive measure when the Advisers
determine security markets to be overvalued. The Portfolio limits its
short-term investments to those U.S. dollar-denominated instruments which are
determined by or on behalf of the Board of Trustees of the Trust (the "Board of
Trustees") to present minimal credit risks and which are of "high quality" as
determined by a major rating service (i.e., rated P-1 by Moody's or A-1 by S&P)
or, in the case of instruments which are not rated, are of comparable quality
pursuant to procedures established by the Board of Trustees. Investments in
high quality short-term instruments may, in many circumstances, result in a
lower yield than would be available from investments in instruments with a
lower quality or longer term.
The following is a description of the two highest commercial paper, bond
and other short-and long-term rating categories assigned by S&P, Moody's,
Fitch, Duff, IBCA Limited and IBCA Inc. ("IBCA") and Thomson BankWatch, Inc.
("BankWatch"):
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus sign (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned
by Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations, and ordinarily will be evidenced by leading
market positions in well established industries, high rates of return on funds
employed, conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established
access to a range of financial markets and assured sources of alternate
<PAGE>
liquidity. Issues rated Prime-2 (P-2) have a strong capacity for repayment of
short-term promissory obligations. This ordinarily will be evidenced by many
of the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff.
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors are small.
The designation A-1 by IBCA indicates that the obligation is supported by
a very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. Obligations rated A2
are supported by a strong capacity for timely repayment, although such capacity
may be susceptible to adverse changes in business, economic or financial
conditions.
The rating TBW-1 is the highest short-term obligation rating assigned by
BankWatch. Obligations rated TBW-1 are regarded as having the strongest
capacity for timely repayment. Obligations rated TBW-2 are supported by a
strong capacity for timely repayment, although the degree of safety is not as
high as for issues rated TBW-1.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest, and in the majority of instances, differ only in small
degrees from issues rated AAA.
Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
rated Aa by Moody's are judged by Moody's to be of high quality by all
standards and, together with the Aaa group, they comprise what are generally
known as high-grade bonds. Bonds rated Aa are rated lower than Aaa bonds
because margins of protection may not be as large or fluctuations of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger. Moody's applies
numerical modifiers 1, 2 and 3 in the Aa rating category. The modifier 1
indicates a ranking for the security in the higher end of this rating category,
the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a
ranking in the lower end of the rating category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high-grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is
<PAGE>
less strikingly broad. The issue may be the obligation of a small company,
strongly secured but influenced as to rating by the lesser financial power of
the enterprise and more local type of market.
Bonds rated AAA by Duff are considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than U.S.
Treasury debt. Bonds rated AA are considered by Duff to be of high credit
quality with strong protection factors. Risk is modest but may vary slightly
from time to time because of economic conditions.
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA by
IBCA have a very low expectation of investment risk. Capacity for timely
repayment of principal and interest is substantial. Adverse changes in
business, economic or financial conditions may increase investment risk albeit
not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An
IBCA bank rating represents IBCA's current assessment of the strength of the
bank and whether such bank would receive support should it experience
difficulties. In its assessment of a bank, IBCA uses a dual rating system
comprised of Legal Ratings and Individual Ratings. In addition, IBCA assigns
banks Long- and Short- Term Ratings as used in the corporate ratings discussed
above. Legal Ratings, which range in gradation from 1 through 5, address the
question of whether the bank would receive support provided by central banks or
shareholders if it experienced difficulties, and such ratings are considered by
IBCA to be a prime factor in its assessment of credit risk. Individual Ratings,
which range in gradations from A through E, represent IBCA's assessment of a
bank's economic merits and address the question of how the bank would be viewed
if it were entirely independent and could not rely on support from state
authorities or its owners.
In addition to its ratings of short-term obligations, BankWatch assigns a
rating to each issuer it rates, in gradations of A through E. BankWatch
examines all segments of the organization, including, where applicable, the
holding company, member banks or associations, and other subsidiaries. In those
instances where financial disclosure is incomplete or untimely, a qualified
rating (QR) is assigned to the institution. BankWatch also assigns, in the case
of foreign banks, a country rating which represents an assessment of the
overall political and economic stability of the country in which the bank is
domiciled.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
<PAGE>
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them
at a mutually agreed date and price (a "reverse repurchase agreement"). At the
time the 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may buy and sell options and futures contracts to manage its
exposure to changing interest rates and security prices. Some options and
futures strategies, including selling futures, buying puts, and writing calls,
hedge the Portfolio's investments against price fluctuations. Other strategies,
including buying futures, writing puts and buying calls, tend to increase
market exposure. The Portfolio may invest in options (including
over-the-counter options) and futures contracts based on any type of security
or index related to its investments.
Options and futures can be volatile investments, and involve certain
risks. If the Advisers apply a hedge at an inappropriate time or judge interest
rates incorrectly, options and futures strategies may lower the Portfolio's
return. The costs of hedging are not reflected in an investor's yield but are
reflected in the investor's total return. An investor could also experience
losses if the Portfolio's options and futures positions were poorly correlated
with its other investments, or if it could not close out its positions because
of an illiquid secondary market.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the Portfolio.
<PAGE>
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
<PAGE>
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase "when-
issued" securities. An increase in the percentage of the Portfolio's assets
committed to the purchase of securities on a "when-issued" basis may increase
the volatility of its net asset value.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
The Portfolio may, in each case up to 5% of the Portfolio's assets, also
utilize the following investments and investment techniques and practices:
investments in securities denominated in foreign currencies, options on futures
contracts, foreign currency exchange transactions or options on foreign
currencies. See Part B for further information.
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
See the Statement of Additional Information, including the financial statements
incorporated by reference therein, for further information. The amount of
brokerage commissions and realized capital gains will tend to increase as the
level of portfolio activity increases. The primary consideration in placing
portfolio security transactions with broker-dealers for execution is to obtain,
and maintain the availability of, execution at the most favorable prices and in
the most effective manner possible. See "Portfolio Transactions and Brokerage
Commissions" "Brokerage Allocation and Other Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days, over-the-counter options and assets used to
cover over-the-counter options). Additional fundamental and operating
investment policies of the Portfolio are contained in Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
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INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.35% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are made by committee and not by managers individually. The principal
business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Merganser. The Subadviser makes the day-to-day
investment selections for the Portfolio consistent with the guidelines and
directions set by Diversified and the Board of Trustees. For its services under
the Subadvisory Agreement, Merganser receives a fee from Diversified. This fee
is calculated by multiplying the arithmetic average of the beginning and ending
monthly net assets in the Portfolio by the fee schedule and dividing by twelve.
The fee is paid on a quarterly basis at an annual rate equal to 0.50% of the
first $10 million of average net assets of the Portfolio; 0.375% of the next
$15 million of average net assets; 0.25% of the next $75 million of average net
assets; and 0.1875% of average net assets in excess of $100 million. Merganser
furnishes at its own expense all services, facilities and personnel necessary
in connection with managing the Portfolio's investments and effecting
securities transactions for the Portfolio.
Merganser was formed in September 1987 and is owned by Edward R.
Bedrosian, Edward M. Safran, Douglas A. Kelly, James S. Wakefield, employees of
Merganser. Total assets under management for all institutional bond clients at
December 31, 1996 were approximately $2.1 billion, $197.3 million of which are
assets of registered investment companies. The principal business address of
Merganser is One Cambridge Center, Cambridge, Massachusetts 02142. Investment
management decisions by Merganser are made by committee and not by managers
individually.
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
<PAGE>
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0.35% of the Portfolio's
average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.40% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
below. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
<PAGE>
The 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 the Portfolio at the time of
such determination.
The "net income" of the 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
<PAGE>
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - GOVERNMENT/CORPORATE BOND PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, Government/Corporate Bond Portfolio (the "Portfolio"), is described
herein. Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act"). Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to achieve maximum total
return. The Portfolio seeks to accomplish its objective by investing in
investment grade debt securities, U.S. Government obligations, and high quality
short-term obligations. An investment in the Portfolio is neither insured nor
guaranteed by the U.S. Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Capital Management Group, a division
of 1740 Advisers, Inc. ("Capital Management Group"), is the subadviser (the
"Subadviser") of the Portfolio. The Adviser and Subadviser are referred to
herein collectively as the "Advisers". Diversified is also the administrator
(the "Administrator") of the Portfolio. Diversified Investors Securities Corp.
is the exclusive placement agent ("DISC" or the "Placement Agent") of interests
in the Portfolio and the Trust in general.
The Portfolio pursues its investment objective by investing in investment
grade debt securities, U.S. Government obligations, including U.S. Government
agency and instrumentality obligations and collateralized mortgage obligations
guaranteed by these agencies and high quality short-term obligations (including
repurchase agreements and reverse repurchase agreements). At least 65% of the
Portfolio's assets is invested in U.S. Government securities, corporate bonds
and short-term instruments.
The Advisers attempt to maintain the Portfolio's "duration" between three
and ten years, which means that the Portfolio's overall sensitivity to interest
rates should be similar to that of bonds and notes with remaining average
maturities from three to fifteen years. The Portfolio's dollar-weighted average
maturity (or dollar-weighted average life in the case of mortgage-backed
securities) may be longer than fifteen years from time to time, but will not
exceed thirty years under normal conditions. The Government/Corporate Bond
Portfolio may hold individual securities with remaining maturities up to thirty
years.
Since the value of fixed income securities generally fluctuates inversely
with changes in interest rates, the duration of the Portfolio will vary to
reflect the Advisers' assessments of prospective changes in interest rates. The
Advisers' strategy will be to adjust the duration of the Portfolio so that the
Portfolio may benefit from relative price appreciation when interest rates
decline and may protect capital value when interest rates rise.
<PAGE>
The success of this strategy will depend on the Advisers' ability to manage the
Portfolio through changes in interest rates, and there is a risk that the value
of the securities held by the Portfolio will decline.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
U.S. GOVERNMENT AND AGENCY AND INSTRUMENTALITY SECURITIES
The Portfolio may invest in U.S. Government securities and securities
issued or guaranteed by agencies or instrumentalities of the U.S. Government.
Securities issued or guaranteed by agencies or instrumentalities of the U.S.
Government have varying degrees of government backing. They may be backed by
the credit of the government as a whole or only by the issuing agency. For
example, securities issued by certain agencies are supported only by the credit
of the agency that issued them, and not by the U.S. Government. U.S. Treasury
bonds, notes and bills, and some agency securities, such as those issued by the
Government National Mortgage Association, are backed by the full faith and
credit of the U.S. Government as to payment of principal and interest and are
the highest quality government securities. There is no assurance that the U.S.
Government will support obligations of its agencies unless it is required to do
so by law. An investment in the Portfolio is not guaranteed by the U.S.
Government. For additional information on U.S. Government securities, see Part
B.
The Portfolio may invest a portion of its assets in short-term U.S.
Government securities with remaining maturities of one year or less and
repurchase agreements relating thereto. When the Advisers believe market
conditions warrant a temporary defensive position, the Portfolio may invest up
to 100% of its assets in these instruments.
CORPORATE BONDS
The Portfolio may purchase debt securities of United States corporations
only if they carry a rating of at least Baa from Moody's Investors Service,
Inc. ("Moody's") or BBB from Standard & Poor's Ratings Group ("S&P") or which,
if not rated by these rating agencies, are judged by the Advisers to be of
comparable quality. Securities rated Baa by Moody's and BBB by S&P may have
speculative characteristics. Changes in economic condition or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case for higher grade securities. See Part B
for an explanation of these ratings.
FOREIGN SECURITIES
The Portfolio may invest in securities of foreign issuers. The Portfolio's
investments in unlisted foreign securities are subject to the overall
restrictions applicable to investments in illiquid securities. The Advisers do
not intend to concentrate more than 25% of foreign investments in any one type
of instrument or in any foreign country. Foreign securities may represent a
greater degree of risk than do securities of domestic issuers due to possible
exchange rate fluctuations, possible exchange controls, less publicly available
information, more volatile markets, less securities regulation, less favorable
tax provisions (including possible withholding taxes), changes in governmental
administration or economic or monetary policy (in the United States or abroad),
war or expropriation. Forward foreign currency exchange contracts may also be
entered into for the purchase or sale of foreign currency solely for hedging
purposes against adverse rate changes. A currency exchange contract allows a
definite price in dollars to be fixed for foreign securities that have been
<PAGE>
purchased or sold (but not settled) for the Portfolio. Entering into such
exchange contracts may result in the loss of all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates. In addition, entering into such contracts means incurring certain
transaction costs and bearing the risks of incurring losses if rates do not
move in the direction anticipated.
SHORT-TERM INSTRUMENTS
Cash, commercial paper, short-term obligations, repurchase agreements,
bank certificates of deposit or other forms of debt securities may be held to
provide a reserve for future purchases of securities during periods of unusual
market conditions or in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine security markets to be overvalued. The
Portfolio limits its short-term investments to those U.S. dollar-denominated
instruments which are determined by or on behalf of the Board of Trustees of
the Trust (the "Board of Trustees") to present minimal credit risks and which
are of "high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are of comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
the 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
<PAGE>
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may buy and sell options and futures contracts to manage its
exposure to changing interest rates and security prices. Some options and
futures strategies, including selling futures, buying puts, and writing calls,
hedge the Portfolio's investments against price fluctuations. Other strategies,
including buying futures, writing puts and buying calls, tend to increase
market exposure. The Portfolio may invest in options (including
over-the-counter options) and futures contracts based on any type of security
or index related to its investments.
Options and futures can be volatile investments, and involve certain
risks. If the Advisers apply a hedge at an inappropriate time or judge interest
rates incorrectly, options and futures strategies may lower an investor's
return. An investor could also experience losses if the Portfolio's options and
futures positions were poorly correlated with its other investments, or if it
could not close out its positions because of an illiquid secondary market.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the Portfolio.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase "when-
issued" securities. An increase in the percentage of the Portfolio's assets
committed to the purchase of securities on a "when-issued" basis may increase
the volatility of its net asset value.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
<PAGE>
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
The Portfolio may, in each case up to 5% of the Portfolio's assets, also
utilize the following investments and investment techniques and practices:
options on futures contracts, foreign currency exchange transactions and
options on foreign currencies. See Part B for further information.
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
See the Statement of Additional Information, including the financial statements
incorporated by reference therein, for further information. The amount of
brokerage commissions and realized capital gains will tend to increase as the
level of portfolio activity increases. The primary consideration in placing
portfolio security transactions with broker-dealers for execution is to obtain,
and maintain the availability of, execution at the most favorable prices and in
the most effective manner possible. See "Brokerage Allocation and Other
Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days, over-the-counter options and assets used to
cover over-the-counter options). Additional fundamental and operating
investment policies of the Portfolio are contained in Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.35% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Diversified are made by committee and not by managers individually. The
principal business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
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series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Capital Management Group. Capital Management
Group makes the investment selections for the Portfolio consistent with the
guidelines and directions set by the Adviser and the Board of Trustees. For its
services under the Subadvisory Agreement, Capital Management Group receives a
fee from Diversified. This fee is calculated by multiplying the arithmetic
average of the beginning and ending monthly net assets in the Portfolio by the
fee schedule and dividing by twelve. The fee is paid on a quarterly basis at an
annual rate equal to 0.15% of the Portfolio's average daily net assets. Capital
Management Group furnishes at its own expense all services, facilities and
personnel necessary in connection with managing the Portfolio's investments and
effecting securities transactions for the Portfolio.
Capital Management Group is a division of 1740 Advisers, Inc., which is a
subsidiary of The Mutual Life Insurance Company of New York. Its address is
1740 Broadway, New York, New York 10019. Total assets under management by
Capital Management Group as of December 31, 1996 were approximately $890
million, all of which were assets of registered investment companies. The
following person is primarily responsible for the day-to-day management of the
Portfolio (the inception date of such person's responsibility for the Portfolio
and such person's business experience for the past five years is indicated
parenthetically): Gregory Staples, Vice President (since 1994, employed by
Capital Management Group since 1987).
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0.35% of the Portfolio's
average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, including safekeeping of
<PAGE>
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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.39% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
above. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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
<PAGE>
capital gain in determining its income tax liability. The determination of such
share will be made in accordance with the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days.
<PAGE>
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - BALANCED PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, Balanced Portfolio (the "Portfolio"), is described herein. Beneficial
interests in the Portfolio are issued solely in private placement transactions
that do not involve any "public offering" within the meaning of Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"). Investments in the
Portfolio 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 Registration Statement does not constitute an offer to sell, or
the solicitation of an offer to buy, any "security" within the meaning of the
1933 Act.
The investment objective of the Portfolio is to provide a high total
return consistent with a broad mix of stocks, bonds and money market
instruments. The Portfolio seeks to accomplish its investment objective by
investing in a broad mix of stocks, bonds and money market instruments. An
investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Institutional Capital Corporation
("Institutional Capital") is the subadviser (the "Subadviser") of the
Portfolio. The Adviser and Subadviser are referred to herein collectively as
the "Advisers". Diversified is also the administrator (the "Administrator") of
the Portfolio. Diversified Investors Securities Corp. is the exclusive
placement agent ("DISC" or the "Placement Agent") of interests in the Portfolio
and the Trust in general.
The Portfolio pursues its investment objective by investing in a managed
mix of common stocks (and/or equivalents including American Depositary
Receipts), preferred stocks, debt securities of U.S. domiciled corporations,
U.S. government securities, commercial paper of U.S. corporations, and bank
obligations. The Advisers will determine the proportions of each type of
investment to achieve an asset mix they believe appropriate for an investor who
desires diversification of investment. The Portfolio will vary the proportion
of each type of asset purchased according to the Advisers' interpretations of
changes in economic conditions and the sensitivity of each type of investment
to those changes. In seeking to maximize participation in positive markets and
preservation of capital in negative markets, the Advisers will shift emphasis
among stocks, bonds and short-term instruments in response to market
conditions.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
The Portfolio's policy is to invest its assets in a broad list of equity
and fixed income securities, such as common stocks, preferred stocks and
<PAGE>
bonds, including short-term obligations. The list may be diversified not only
by companies and industries, but also by type of security. Some fixed income
securities may also have a right to purchase common stock by means of a
conversion privilege or attached warrants. The Portfolio may vary the
percentage of assets invested in any one type of security in accordance with
the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values. However, at least 25% of the
total assets of the Portfolio are always invested in fixed income senior
securities including debt securities and preferred stock. In selecting common
stocks, emphasis is placed on investing in established companies with medium to
large market capitalizations, i.e., $100,000,000 or more, and seasoned
management teams. Greater than 75% of the Portfolio's non-convertible long-term
debt investments consist of "investment grade" securities (rated Baa or better
by Moody's Investors Service, Inc. ("Moody's") or BBB or better by Standard &
Poor's Ratings Group ("S&P")), although unrated debt securities may be
purchased and held if they are judged by the Advisers to be of equivalent
quality. Securities rated Baa by Moody's or BBB by S&P may have speculative
characteristics. Changes in economic conditions or other circumstances may
weaken more severely the capacity of issuers of Baa or BBB securities to make
principal and interest payments than in the case of issuers of higher grade
bonds. Less than 5% of the Portfolio's investments consist of securities rated
lower than Baa by Moody's or BBB by S&P For a description of these ratings, see
Part B.
FOREIGN SECURITIES
The Portfolio's current policy is not to invest more than 25% of its
assets in securities of foreign issuers, including investments in sponsored
American Depositary Receipts ("ADRs"). ADRs are receipts typically issued by an
American bank or trust company evidencing ownership of the underlying foreign
securities. The Portfolio's investments in unlisted foreign securities, not
including ADRs, are subject to the overall restrictions applicable to
investments in illiquid securities. Foreign securities, including ADRs, may
represent a greater degree of risk than do securities of domestic issuers due
to possible exchange rate fluctuations, possible exchange controls, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions (including possible withholding
taxes), changes in governmental administration or economic or monetary policy
(in the United States or abroad), war or expropriation. The Portfolio may
invest up to 5% of its assets in closed-end investment companies which
primarily hold foreign securities. Forward foreign currency exchange contracts
may also be entered into for the purchase or sale of foreign currency solely
for hedging purposes against adverse rate changes. A currency exchange contract
allows a definite price in dollars to be fixed for foreign securities that have
been purchased or sold (but not settled) for the Portfolio. Entering into such
exchange contracts may result in the loss of all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates. In addition, entering into such contracts means incurring certain
transaction costs and bearing the risk of incurring losses if rates do not move
in the direction anticipated.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may enter into transactions in futures contracts, options on
futures contracts, options on securities indexes and options on securities, for
the purpose of hedging the Portfolio's securities, which would have the effect
of reducing the volatility of an investment in the Portfolio. In general, each
such transaction involves the establishment of a position which is expected to
move in a direction opposite to that of the security or securities being
hedged.
For example, the Portfolio may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
the Portfolio. In the event that such decline occurs, and the hedging
transaction is successful, the reduced value of portfolio securities will be
offset, in whole or in part, by a corresponding gain on the futures or option
position. Conversely, when the Portfolio is not fully invested in the
securities market, and it expects a significant market advance, it may purchase
futures contracts or call options on futures contracts, security indexes or
<PAGE>
securities in 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. Part B includes further information about the transactions in futures
and option contracts to be entered into by the Portfolio.
Gain or loss to the Portfolio on transactions in security index futures or
options will depend on price movements in the stock market generally (or in a
particular industry or segment of the market), rather than price movements of
individual securities. A security index assigns relative values to the
securities included in the index and the index fluctuates with changes in the
market values of the securities so included. Some security index futures or
options are based on broad market indexes, such as the Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures or options on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Options on indexes and options on securities are traded on
securities exchanges regulated by the Securities and Exchange Commission.
Futures contracts and options on futures contracts are traded only on
designated contract markets regulated by the Commodity Futures Trading
Commission and through a registered futures commission merchant which is a
member of such contract market. A commission must be paid on each completed
purchase and sale transaction. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees performance between the
clearing members which are parties to each contract.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the Portfolio.
SHORT TERM INVESTMENTS
Cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities may be held to provide a reserve for future
purchases of common stock or securities during periods of unusual market
conditions or in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine security markets to be overvalued. The
Portfolio limits its short-term investments to those U.S. dollar-denominated
instruments which are determined by or on behalf of the Board of Trustees of
the Trust (the "Board of Trustees") to present minimal credit risks and which
are of "high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are of comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
<PAGE>
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
the 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities described below. Under the supervision of the Board of Trustees, the
Advisers will determine the liquidity of restricted securities and, through
reports from the Advisers, the Board of Trustees will monitor trading activity
in restricted securities. Because Rule 144A is relatively new, it is not
possible to predict how these markets will develop. If institutional trading in
restricted securities were to decline, the liquidity of the Portfolio could be
adversely affected.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Portfolio's
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
<PAGE>
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
The amount of brokerage commissions and realized capital gains will tend to
increase as the level of portfolio activity increases. The primary
consideration in placing portfolio security transactions with broker-dealers
for execution is to obtain, and maintain the availability of, execution at the
most favorable prices and in the most effective manner possible. See "Brokerage
Allocation and Other Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days).
Part B includes a discussion of additional nonfundamental investment
policies and a listing of specific investment restrictions which constitute
fundamental policies of the Portfolio, and cannot be changed without the
approval of the holders of a "majority of the outstanding voting securities"
(as defined in the 1940 Act) of the Portfolio. See "Investment Restrictions" in
Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.45% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are made by committee and not by managers individually. The principal
business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
<PAGE>
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Institutional Capital. The Subadviser makes the
investment selections for the Portfolio consistent with the guidelines and
directions set by the Adviser and the Board of Trustees. For its services under
the Subadvisory Agreement, Institutional Capital receives a fee from
Diversified. This fee is accrued monthly by multiplying the arithmetic average
of the beginning and ending monthly net assets in the Portfolio by the fee
schedule and dividing by twelve. The fee is paid on a quarterly basis at an
annual rate equal to 0.55% of the first $25 million of average net assets of
the Portfolio; 0.45% of the next $25 million of average net assets; and 0.35%
of average net assets in excess of $50 million. Institutional Capital furnishes
at its own expense all services, facilities and personnel necessary in
connection with managing the Portfolio's investments and effecting securities
transactions for the Portfolio.
Institutional Capital was formed in January 1970 and is owned by Robert H.
Lyon, Barbara A. Chiesa, Margaret Raymond, Donald D. Wieman, Gary S. Maurer and
Gerrold K. Sensor, employees of Institutional Capital. Total assets under
management for all balanced fund clients at December 31, 1996 were
approximately $579 million, $183 million of which were assets of registered
investment companies. The principal business address of Institutional Capital
is 303 West Madison Street, Chicago, Illinois 60606. Investment management
decisions of Institutional Capital are made by committee and not by managers
individually.
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0.45% of the Portfolio's
average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
<PAGE>
preparing and mailing reports to investors and to governmental officers and
commissions; expenses of meetings of investors and Trustees; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.50% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
above. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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
<PAGE>
share will be made in accordance with the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days.
<PAGE>
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - EQUITY INCOME PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, Equity Income Portfolio (the "Portfolio"), is described herein.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to provide a high level of
current income through investment in a diversified portfolio of common stocks
with relatively high current yields; capital appreciation is a secondary
objective. An investment in the Portfolio is neither insured nor guaranteed by
the U.S. Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Asset Management Group, a division of
1740 Advisers, Inc. ("Asset Management Group"), is the subadviser (the
"Subadviser") of the Portfolio. The Adviser and Subadviser are referred to
herein collectively as the "Advisers". Diversified is also the administrator
(the "Administrator") of the Portfolio. Diversified Investors Securities Corp.
is the exclusive placement agent ("DISC" or the "Placement Agent") of interests
in the Portfolio and the Trust in general.
The Portfolio seeks to achieve its investment objective by investing
primarily in a diversified portfolio of stocks of companies, which, in the
opinion of the Advisers, are fundamentally sound financially and which pay
relatively high dividends on a consistent basis. The Advisers' attempt to
manage the Portfolio so that it will outperform other equity income funds in
negative markets. As a result of this objective, the Portfolio may under
perform relative to other equity income funds in positive markets. The
Portfolio invests primarily in common stocks listed on the New York Stock
Exchange (the "NYSE") and on other national securities exchanges and, to a
lesser extent, in stocks that are traded over-the-counter. The Portfolio also
invests in bonds and short-term obligations as well as securities convertible
into common stocks, preferred stocks, debt securities and short-term
obligations. The Portfolio allocates its investments among different industries
and companies, and changes its portfolio securities for investment
considerations and not for trading purposes.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
<PAGE>
The Portfolio's policy is to invest in a broad list of equity and fixed
income securities, including short-term obligations. The list may be
diversified not only by companies and industries, but also by type of security.
Some fixed income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Portfolio may vary the
percentage of assets invested in any one type of security in accordance with
the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values.
FOREIGN SECURITIES
The Portfolio's current policy is not to invest more than 25% of its
assets in securities of foreign issuers, including investments in sponsored
American Depositary Receipts ("ADRs"). ADRs are receipts typically issued by an
American bank or trust company evidencing ownership of the underlying foreign
securities. The Portfolio's investments in unlisted foreign securities, not
including ADRs, are subject to the overall restrictions applicable to
investments in illiquid securities. Foreign securities, including ADRs, may
represent a greater degree of risk than do securities of domestic issuers due
to possible exchange rate fluctuations, possible exchange controls, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions (including possible withholding
taxes), changes in governmental administration or economic or monetary policy
(in the United States or abroad), war or expropriation. The Portfolio may
invest up to 5% of its assets in closed-end investment companies which
primarily hold foreign securities. Forward foreign currency exchange contracts
may also be entered into for the purchase or sale of foreign currency solely
for hedging purposes against adverse rate changes. A currency exchange contract
allows a definite price in dollars to be fixed for foreign securities that have
been purchased or sold (but not settled) for the Portfolio. Entering into such
exchange contracts may result in the loss of all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates. In addition, entering into such contracts means incurring certain
transaction costs and bearing the risk of incurring losses if rates do not move
in the direction anticipated.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may enter into transactions in futures contracts, options on
futures contracts, options on securities indexes and options on securities, for
the purpose of hedging the Portfolio's securities, which would have the effect
of reducing the volatility of an investment in the Portfolio. In general, each
such transaction involves the establishment of a position which is expected to
move in a direction opposite to that of the security or securities being
hedged.
For example, the Portfolio may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
the Portfolio. In the event that such decline occurs, and the hedging
transaction is successful, the reduced value of portfolio securities will be
offset, in whole or in part, by a corresponding gain on the futures or option
position. Conversely, when the Portfolio is not fully invested in the
securities market, and it expects a significant market advance, it may purchase
futures contracts or call options on futures contracts, security indexes or
securities in 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.
Part B includes further information about the transactions in futures and
option contracts to be entered into by the Portfolio. Gain or loss to the
Portfolio on transactions in security index futures or options will depend on
price movements in the stock market generally (or in a particular industry or
segment of the market), rather than price movements of individual securities. A
security index assigns relative values to the securities included in the index
and the index fluctuates with changes in the market values of the securities so
included. Some security index futures or options are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures or options on
<PAGE>
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Options on indexes
and options on securities are traded on securities exchanges regulated by the
Securities and Exchange Commission. Futures contracts and options on futures
contracts are traded only on designated contract markets regulated by the
Commodity Futures Trading Commission and through a registered futures
commission merchant which is a member of such contract market. A commission
must be paid on each completed purchase and sale transaction. Transactions on
such exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the Portfolio.
SHORT TERM INVESTMENTS
Cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities may be held to provide a reserve for future
purchases of common stock or securities during periods of unusual market
conditions or in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine security markets to be overvalued. The
Portfolio limits its short-term investments to those U.S. dollar-denominated
instruments which are determined by or on behalf of the Board of Trustees of
the Trust (the "Board of Trustees") to present minimal credit risks and which
are of "high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are of comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
the 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
<PAGE>
accrued interest. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers will
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Portfolio's
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
<PAGE>
See the Statement of Additional Information, including the financial statements
incorporated by reference therein, for further information. The amount of
brokerage commissions and realized capital gains will tend to increase as the
level of portfolio activity increases. The primary consideration in placing
portfolio security transactions with broker-dealers for execution is to obtain,
and maintain the availability of, execution at the most favorable prices and
in the most effective manner possible. See "Brokerage Allocation and Other
Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days).
Part B includes a discussion of additional nonfundamental investment
policies and a listing of specific investment restrictions which constitute
fundamental policies of the Portfolio, and cannot be changed without the
approval of the holders of a "majority of the outstanding voting securities"
(as defined in the 1940 Act) of the Portfolio. See "Investment Restrictions" in
Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.45% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are made by committee and not by managers individually. The principal
business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Asset Management Group. Asset Management Group
makes the investment selections for the Portfolio consistent with the
guidelines and directions set by the Adviser and the Board of Trustees. For its
services under the Subadvisory Agreement, Asset Management Group receives a fee
from Diversified. This fee is accrued monthly by multiplying the arithmetic
average of the beginning and ending monthly net assets in the Portfolio by the
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fee schedule and dividing by twelve. This fee is paid on a quarterly basis at
an annual rate equal to 0.25% of the Portfolio's average daily net assets.
Asset Management Group furnishes at its own expense all services, facilities
and personnel necessary in connection with managing the Portfolio's investments
and effecting securities transactions for the Portfolio.
Asset Management Group is a division of 1740 Advisers, Inc., which is a
subsidiary of The Mutual Life Insurance Company of New York. Its address is
1740 Broadway, New York, New York 10019. Total assets under management by Asset
Management Group as of December 31, 1996 were approximately $1.3 billion, $1.1
billion of which were assets of registered investment companies. Investment
management decisions of Asset Management Group are made by committee and not by
managers individually.
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0.45% of the Portfolio's
average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.48% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the Portfolio may not be
transferred, but an investor may withdraw all or any portion of its
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investment at any time at net asset value. Investors in the Portfolio (e.g.,
investment companies, insurance company separate accounts and common and
commingled trust funds) will each be liable for all obligations of the
Portfolio (and of no other Series). However, the risk of an investor in the
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 the Portfolio have no
preemptive or conversion rights and are fully paid and nonassessable, except as
set forth above. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York, 10577, (914)
697-8000.
<PAGE>
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days. The Portfolio reserves the right under certain circumstances, such
as accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
<PAGE>
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - GROWTH & INCOME PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, Growth & Income Portfolio (the "Portfolio"), is described herein.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to provide current income and
capital appreciation. In general, the objective of the Portfolio is to achieve
greater capital appreciation than an income fund and less price volatility than
a growth fund. The Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of securities selected for their
potential to generate current income or long term capital appreciation. An
investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Putnam Advisory Company, Inc.
("Putnam") is the subadviser (the "Subadviser") of the Portfolio. The Adviser
and Subadviser are referred to herein collectively as the "Advisers".
Diversified is also the administrator (the "Administrator") of the Portfolio.
Diversified Investors Securities Corp. is the exclusive placement agent ("DISC"
or the "Placement Agent") of interests in the Portfolio and the Trust in
general.
The Portfolio seeks to achieve its investment objective by investing
primarily in a diversified portfolio of stocks, selected for their potential to
generate current income and/or long term capital appreciation. The Portfolio
invests primarily in preferred stocks and common stocks listed on the New York
Stock Exchange (the "NYSE") and on other national securities exchanges and, to
a lesser extent, in stocks that are traded over-the-counter. The Portfolio also
invests in bonds and short-term obligations as well as securities convertible
into common stocks, preferred stocks, debt securities and short-term
obligations. The Portfolio allocates its investments among different industries
and companies, and changes its portfolio securities for investment
considerations and not for trading purposes. In general, the Portfolio seeks to
invest in growing, financially stable and undervalued companies.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
<PAGE>
The Portfolio's policy is to invest in a broad list of equity and fixed
income securities, including short-term obligations. The list may be
diversified not only by companies and industries, but also by type of security.
Some fixed income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Portfolio may vary the
percentage of assets invested in any one type of security in accordance with
the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values.
FOREIGN SECURITIES
The Portfolio's current policy is not to invest more than 25% of its
assets in securities of foreign issuers, including investments in sponsored
American Depositary Receipts ("ADRs"). ADRs are receipts typically issued by an
American bank or trust company evidencing ownership of the underlying foreign
securities. The Portfolio's investments in unlisted foreign securities, not
including ADRs, are subject to the overall restrictions applicable to
investments in illiquid securities. Foreign securities, including ADRs, may
represent a greater degree of risk than do securities of domestic issuers due
to possible exchange rate fluctuations, possible exchange controls, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions (including possible withholding
taxes), changes in governmental administration or economic or monetary policy
(in the United States or abroad), war or expropriation. The Portfolio may
invest up to 5% of its assets in closed-end investment companies which
primarily hold foreign securities. Forward foreign currency exchange contracts
may also be entered into for the purchase or sale of foreign currency solely
for hedging purposes against adverse rate changes. A currency exchange contract
allows a definite price in dollars to be fixed for foreign securities that have
been purchased or sold (but not settled) for the Portfolio. Entering into such
exchange contracts may result in the loss of all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates. In addition, entering into such contracts means incurring certain
transaction costs and bearing the risk of incurring losses if rates do not move
in the direction anticipated.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may enter into transactions in futures contracts, options on
futures contracts, options on securities indexes and options on securities, for
the purpose of hedging the Portfolio's securities, which would have the effect
of reducing the volatility of the net asset value an investment in the
Portfolio. In general, each such transaction involves the establishment of a
position which is expected to move in a direction opposite to that of the
security or securities being hedged.
For example, the Portfolio may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
the Portfolio. In the event that such decline occurs, and the hedging
transaction is successful, the reduced value of portfolio securities will be
offset, in whole or in part, by a corresponding gain on the futures or option
position. Conversely, when the Portfolio is not fully invested in the
securities market, and it expects a significant market advance, it may purchase
futures contracts or call options on futures contracts, security indexes or
securities in 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.
Part B includes further information about the transactions in futures and
option contracts to be entered into by the Portfolio. Gain or loss to the
Portfolio on transactions in security index futures or options will depend on
price movements in the stock market generally (or in a particular industry or
segment of the market), rather than price movements of individual securities. A
security index assigns relative values to the securities included in the index
and the index fluctuates with changes in the market values of the securities so
included. Some security index futures or options are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures or options on
<PAGE>
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Options on indexes
and options on securities are traded on securities exchanges regulated by the
Securities and Exchange Commission. Futures contracts and options on futures
contracts are traded only on designated contract markets regulated by the
Commodity Futures Trading Commission and through a registered futures
commission merchant which is a member of such contract market. A commission
must be paid on each completed purchase and sale transaction. Transactions on
such exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the Portfolio.
SHORT TERM INVESTMENTS
Cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities may be held to provide a reserve for future
purchases of common stock or securities during periods of unusual market
conditions or in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine security markets to be overvalued. The
Portfolio limits its short-term investments to those U.S. dollar-denominated
instruments which are determined by or on behalf of the Board of Trustees of
the Trust (the "Board of Trustees") to present minimal credit risks and which
are of "high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are of comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
the 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. Reverse repurchase agreements involve the risk that the
<PAGE>
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers will
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Portfolio's
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
See the Statement of Additional Information, including the financial statements
incorporated by reference therein, for further information. The
<PAGE>
amount of brokerage commissions and realized capital gains will tend to
increase as the level of portfolio activity increases. The primary
consideration in placing portfolio security transactions with broker-dealers
for execution is to obtain, and maintain the availability of, execution at the
most favorable prices and in the most effective manner possible. See "Brokerage
Allocation and Other Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days).
Part B includes a discussion of additional nonfundamental investment
policies and a listing of specific investment restrictions which constitute
fundamental policies of the Portfolio, and cannot be changed without the
approval of the holders of a "majority of the outstanding voting securities"
(as defined in the 1940 Act) of the Portfolio. See "Investment Restrictions" in
Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.60% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are made by committee and not by managers individually. The principal
business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Putnam. The Subadviser makes the investment
selections for the Portfolio consistent with the guidelines and directions set
by the Adviser and the Board of Trustees. For its services under the
Subadvisory Agreement, Putnam receives a fee from Diversified. This fee is
accrued monthly by multiplying the arithmetic average of the beginning and
ending monthly net assets in the Portfolio by the fee schedule and dividing by
twelve. The fee is paid on a quarterly basis at an annual rate equal to 0.30%
<PAGE>
of the first $100 million of average net assets; and 0.20% of average net
assets in excess of $100 million. Putnam furnishes at its own expense all
services, facilities and personnel necessary in connection with managing the
Portfolio's investments and effecting securities transactions for the
Portfolio.
Putnam was formed in 1937 and is owned by Marsh & McLennon Companies, Inc.
The principal address of Putnam is One Post Office Square, Boston, MA 02109.
Total assets under management for growth and income clients at December 31,
1996 were approximately $6 billion, $1.8 billion of which were assets of
registered investment companies. Investment management decisions of Putnam are
made by committee and not by managers individually.
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0.58% of the Portfolio's
average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.65% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g.,
<PAGE>
investment companies, insurance company separate accounts and common and
commingled trust funds) will each be liable for all obligations of the
Portfolio (and of no other Series). However, the risk of an investor in the
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 the Portfolio have no
preemptive or conversion rights and are fully paid and nonassessable, except as
set forth above. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
<PAGE>
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
<PAGE>
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - INTERNATIONAL EQUITY PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, International Equity Portfolio (the "Portfolio"), is described herein.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to provide a high level of
capital appreciation through investment in a diversified portfolio of
securities of foreign issuers. The Portfolio seeks to achieve its investment
objective by investing primarily in foreign securities. Foreign securities are
defined as securities of issuers, wherever organized, which trade solely on a
foreign exchange or, in the judgment of the Advisers, have their principal
activities outside of the United States. In determining whether an issuer's
principal activities and interests are outside the United States, the Advisers
will look at such factors as the location of its assets, personnel, sales and
earnings. Under normal circumstances, at least 65% of the assets of the
Portfolio are invested in foreign equity securities. The Advisers will purchase
securities of companies in a minimum of 3 countries outside the United States.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Capital Guardian Trust Company
("Capital Guardian") is the subadviser (the "Subadviser") of the Portfolio. The
Adviser and Subadviser are referred to herein collectively as the "Advisers".
Diversified is also the administrator (the "Administrator") of the Portfolio.
Diversified Investors Securities Corp. is the exclusive placement agent ("DISC"
or the "Placement Agent") of interests in the Portfolio and the Trust in
general.
When allocating the Portfolios' investments among geographic regions and
individual countries, the Advisers consider various criteria, such as prospects
for relative economic growth among countries, expected levels of inflation,
government policies influencing business conditions, and the outlook for
currency relationships. The Portfolio expects to invest most of its assets in
securities of issuers located in developed countries in the following
geographic areas: Canada, the Far East, Australia and Europe.
The Portfolio may invest up to 10% of its assets in securities of issuers
in the world's emerging markets. Countries with emerging markets include those
that have an emerging stock market as defined by the International Finance
Corporation, those with low-to middle-income economies according to the World
Bank, and those listed in World Bank publications as developing. While the
Advisers believe that these investments present the possibility for significant
growth over the long-term, they also entail significant risks. Many investments
in emerging markets can be considered speculative, and their prices can be much
more volatile than those in the more
<PAGE>
developed nations of the world. This difference reflects the greater
uncertainties of investing in less established markets and economies.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
The Portfolio may invest in all types of securities, most of which are
denominated in foreign currencies. While the Advisers expect that opportunities
for long term growth of capital will come primarily from common stocks,
securities convertible into common stock, non-convertible preferred stocks and
depositary receipts for these securities, the Portfolio may also invest in any
type or quality of debt securities if the Advisers believe that doing so may
result in long term growth. Forward foreign currency exchange contracts may
also be entered into for the purchase or sale of foreign currency solely for
hedging purposes against adverse rate changes. A currency exchange contract
allows a definite price in dollars to be fixed for foreign securities that have
been purchased or sold (but not settled) for the Portfolio. Entering into such
exchange contracts may result in the loss of all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates. In addition, entering into such contracts means incurring certain
transaction costs and bearing the risk of incurring losses if rates do not move
in the direction anticipated.
Investments in foreign equity and debt securities involve increased or
additional risks from those encountered when investing in securities of
domestic issuers. The Advisers evaluate the risks and opportunities when
investing in particular foreign securities. Such risks include trade balances
and imbalances and related economic policies; currency exchange rate
fluctuations; foreign exchange control policies; expropriation or confiscatory
taxation; limitations on the removal of funds or other assets; political or
social instability; the diverse structure and liquidity of securities markets
in various countries and regions; policies of governments with respect to
possible nationalization of their own industries; and other specific local,
political and economic considerations.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may enter into transactions in futures contracts, options on
futures contracts, options on securities indexes and options on securities, for
the purpose of hedging the Portfolio's securities, which would have the effect
of reducing the volatility of an investment in the Portfolio. In general, each
such transaction involves the establishment of a position which is expected to
move in a direction opposite to that of the security or securities being
hedged.
For example, the Portfolio may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
the Portfolio. In the event that such decline occurs, and the hedging
transaction is successful, the reduced value of portfolio securities will be
offset, in whole or in part, by a corresponding gain on the futures or option
position. Conversely, when the Portfolio is not fully invested in the
securities market, and it expects a significant market advance, it may purchase
futures contracts or call options on futures contracts, security indexes or
securities in 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.
Part B includes further information about the transactions in futures and
option contracts to be entered into by the Portfolio.
<PAGE>
Gain or loss to the Portfolio on transactions in security index futures or
options will depend on price movements in the stock market generally (or in a
particular industry or segment of the market), rather than price movements of
individual securities. A security index assigns relative values to the
securities included in the index and the index fluctuates with changes in the
market values of the securities so included. Some security index futures or
options are based on broad market indexes, such as the Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures or options on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Options on indexes and options on securities are traded on
securities exchanges regulated by the Securities and Exchange Commission.
Futures contracts and options on futures contracts are traded only on
designated contract markets regulated by the Commodity Futures Trading
Commission and through a registered futures commission merchant which is a
member of such contract market. A commission must be paid on each completed
purchase and sale transaction. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees performance between the
clearing members which are parties to each contract.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Adviser
determines that such transactions are in the best interests of the Portfolio.
SHORT TERM INVESTMENTS
Cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities may be held to provide a reserve for future
purchases of common stock or securities during periods of unusual market
conditions or in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine security markets to be overvalued. The
Portfolio limits its short-term investments to those U.S. dollar-denominated
instruments which are determined by or on behalf of the Board of Trustees of
the Trust (the "Board of Trustees") to present minimal credit risks and which
are of "high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are of comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio 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
<PAGE>
mutually agreed date and price (a "reverse repurchase agreement"). At the
time the 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers will
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a "when-
issued" or on a "forward delivery" basis, which means that the obligations
would be delivered to the Portfolio at a future date beyond customary
settlement time. Under normal circumstances, the Portfolio would take delivery
of such securities. In general, the Portfolio would not pay for the securities
until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Portfolio's
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
<PAGE>
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
The amount of brokerage commissions and realized capital gains will tend to
increase as the level of portfolio activity increases. The primary
consideration in placing portfolio security transactions with broker-dealers
for execution is to obtain, and maintain the availability of, execution at the
most favorable prices and in the most effective manner possible. See "Brokerage
Allocation and Other Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days).
Part B includes a discussion of additional nonfundamental investment
policies and a listing of specific investment restrictions which constitute
fundamental policies of the Portfolio, and cannot be changed without the
approval of the holders of a "majority of the outstanding voting securities"
(as defined in the 1940 Act) of the Portfolio. See "Investment Restrictions" in
Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.75% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are made by committee and not by managers individually. The principal
business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
<PAGE>
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Capital Guardian. The Subadviser makes the
investment selections for the Portfolio consistent with the guidelines and
directions set by the Adviser and the Board of Trustees. For its services under
the Subadvisory Agreement, Capital Guardian receives a fee from Diversified.
This fee is accrued monthly by multiplying the arithmetic average of the
beginning and ending monthly net assets in the Portfolio by the fee schedule
and dividing by twelve. The fee is paid on a quarterly basis at an annual rate
equal to 0.75% of the first $25 million of average net assets of the Portfolio,
0.60% of the next $25 million of average net assets, 0.425% of the next $50
million of average net assets, and 0.375% of average net assets in excess of
$250 million. Capital Guardian furnishes at its own expense all services,
facilities and personnel necessary in connection with managing the Portfolio's
investments and effecting securities transactions for the Portfolio.
Capital Guardian was formed in 1968 and is owned by certain of its
employees. The principal address of Capital Guardian is 333 South Hope Street,
Los Angeles, California 90071. Total assets under management for all
international equity clients by Capital Guardian at December 31, 1996 were
approximately $21.8 billion, and total assets under management of registered
investment companies for which Capital Guardian acts as subadviser were $472
million as of that date. Capital Guardian uses a system of multiple portfolio
managers pursuant to which the Portfolio is divided into segments that are
assigned to individual 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.
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0.68% of the Portfolio's
average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
<PAGE>
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.90% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
above. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
<PAGE>
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
<PAGE>
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - EQUITY GROWTH PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, Equity Growth Portfolio (the "Portfolio"), is described herein.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to provide a high level of
capital appreciation through investment in a diversified portfolio of common
stocks with potential for above average growth in earnings and dividends;
current income is a secondary objective. The Portfolio seeks to achieve its
investment objective by investing in a diversified portfolio of common stocks.
Investments will be selected based on their potential for above average growth
in earnings and dividends, with current income a secondary consideration. An
investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Chancellor LGT Asset Management, Inc.
("Chancellor") is the subadviser (the "Subadviser") of the Portfolio. The
Adviser and Subadviser are referred to herein collectively as the "Advisers".
Diversified is also the administrator (the "Administrator") of the Portfolio.
Diversified Investors Securities Corp. is the exclusive placement agent ("DISC"
or the "Placement Agent") of interests in the Portfolio and the Trust in
general.
The Portfolio seeks to achieve its investment objective by investing
primarily in a diversified portfolio of common stocks but may also invest in
other types of securities such as preferred stock, convertible and
non-convertible bonds and warrants and in foreign securities including American
Depositary Receipts. Under normal circumstances, at least 65% of the
Portfolio's assets is invested in equity securities. This is a fundamental
investment policy and may not be changed without investor approval. Investments
will be selected based on their potential for above average growth in earnings
and dividends, with current income a secondary consideration. The Portfolio
invests primarily in stocks of companies that have a market value of all their
issued and outstanding common stock of $10 to $15 billion and preferred stocks
and common stocks listed on the New York Stock Exchange (the "NYSE") and on
other national securities exchanges and, to a lesser extent, in stocks that are
traded over-the-counter. The Portfolio also invests in bonds and short-term
obligations as well as securities convertible into common stocks, preferred
stocks, debt securities and short-term obligations. The Portfolio allocates its
investments among different industries and companies, and changes its portfolio
securities for investment considerations and not for trading purposes.
<PAGE>
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
While the Portfolio's policy is to invest its assets primarily in
preferred and common stocks with potential for above average growth in earnings
and dividends, appreciation may be sought in other types of securities such as
convertible and non-convertible bonds and warrants. The Portfolio may vary the
percentage of assets invested in any one type of security in accordance with
the Adviser's interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values. In selecting stocks, emphasis
is placed on investing in companies with medium to large market
capitalizations, i.e., the market value of all issued and outstanding common
stock of the company equals approximately $10 to $15 billion.
FOREIGN SECURITIES
The Portfolio's current policy is not to invest more than 25% of its
assets in securities of foreign issuers, including investments in sponsored
American Depositary Receipts ("ADRs"). ADRs are receipts typically issued by an
American bank or trust company evidencing ownership of the underlying foreign
securities. The Portfolio's investments in unlisted foreign securities, not
including ADRs, are subject to the overall restrictions applicable to
investments in illiquid securities. Foreign securities, including ADRs, may
represent a greater degree of risk than do securities of domestic issuers due
to possible exchange rate fluctuations, possible exchange controls, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions (including possible withholding
taxes), changes in governmental administration or economic or monetary policy
(in the United States or abroad), war or expropriation. The Portfolio may
invest up to 5% of its assets in closed-end investment companies which
primarily hold foreign securities. Forward foreign currency exchange contracts
may also be entered into for the purchase or sale of foreign currency solely
for hedging purposes against adverse rate changes. A currency exchange contract
allows a definite price in dollars to be fixed for foreign securities that have
been purchased or sold (but not settled) for the Portfolio. Entering into such
exchange contracts may result in the loss of all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates. In addition, entering into such contracts means incurring certain
transaction costs and bearing the risk of incurring losses if rates do not move
in the direction anticipated.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may enter into transactions in futures contracts, options on
futures contracts, options on securities indexes and options on securities, for
the purpose of hedging the Portfolio's securities, which would have the effect
of reducing the volatility of an investment in the Portfolio. In general, each
such transaction involves the establishment of a position which is expected to
move in a direction opposite to that of the security or securities being
hedged.
For example, the Portfolio may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
the Portfolio. In the event that such decline occurs, and the hedging
transaction is successful, the reduced value of portfolio securities will be
offset, in whole or in part, by a corresponding gain on the futures or option
position. Conversely, when the Portfolio is not fully invested in the
securities market, and it expects a significant market advance, it may purchase
futures contracts or call options on futures contracts, security indexes or
securities in order to gain rapid market exposure that may in part or entirely
<PAGE>
offset increases in the cost of securities that the Portfolio intends to
purchase.
Part B includes further information about the transactions in futures and
option contracts to be entered into by the Portfolio. Gain or loss to the
Portfolio on transactions in security index futures or options will depend on
price movements in the stock market generally (or in a particular industry or
segment of the market), rather than price movements of individual securities. A
security index assigns relative values to the securities included in the index
and the index fluctuates with changes in the market values of the securities so
included. Some security index futures or options are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures or options on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Options on indexes
and options on securities are traded on securities exchanges regulated by the
Securities and Exchange Commission. Futures contracts and options on futures
contracts are traded only on designated contract markets regulated by the
Commodity Futures Trading Commission and through a registered futures
commission merchant which is a member of such contract market. A commission
must be paid on each completed purchase and sale transaction. Transactions on
such exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Adviser
determines that such transactions are in the best interests of the Portfolio.
SHORT TERM INVESTMENTS
Cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities may be held to provide a reserve for future
purchases of common stock or securities during periods of unusual market
conditions or in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine security markets to be overvalued. The
Portfolio limits its short-term investments to those U.S. dollar-denominated
instruments which are determined by or on behalf of the Board of Trustees of
the Trust (the "Board of Trustees") to present minimal credit risks and which
are of "high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are of comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENT
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
<PAGE>
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
RESTRICTED SECURITIES
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
the 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
LENDING OF PORTFOLIO SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers will
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Portfolio's
<PAGE>
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
See the Statement of Additional Information, including the financial statements
incorporated by reference therein, for further information. The amount of
brokerage commissions and realized capital gains will tend to increase as the
level of portfolio activity increases. The primary consideration in placing
portfolio security transactions with broker-dealers for execution is to obtain,
and maintain the availability of, execution at the most favorable prices and in
the most effective manner possible. See "Brokerage Allocation and Other
Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days).
Part B a discussion of additional nonfundamental investment policies and a
listing of specific investment restrictions which constitute fundamental
policies of the Portfolio, and cannot be changed without the approval of the
holders of a "majority of the outstanding voting securities" (as defined in the
1940 Act) of the Portfolio. See "Investment Restrictions" in Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.62% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are made by committee and not by managers individually. The principal
business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
<PAGE>
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Chancellor. The Subadviser makes the investment
selections for the Portfolio consistent with the guidelines and directions set
by the Adviser and the Board of Trustees. For its services under the
Subadvisory Agreement, Chancellor receives a fee from Diversified. This fee is
accrued monthly by multiplying the arithmetic average of the beginning and
ending monthly net assets in the Portfolio by the fee schedule and dividing by
twelve. The fee is paid on a quarterly basis at an annual rate equal to 0.50%
on the first $50,000,000 of average net assets of the Portfolio, 0.30% on the
next $75,000,000 in average net assets, 0.25% on the next $75,000,000 in
average net assets, and 0.20% on all assets in excess of $200,000,000.
Chancellor furnishes at its own expense all services, facilities and personnel
necessary in connection with managing the Portfolio's investments and effecting
securities transactions for the Portfolio.
Chancellor was formed in 1996 as a result of the merger between LGT Asset
Management, Inc., a wholly-owned subsidiary of Liechtenstein Global Trust AG
("LGT"), and Chancellor Capital Management, Inc., a wholly-owned subsidiary of
LGT which was acquired by LTG in 1996. Chancellor is a wholly-owned subsidiary
of LGT. LGT is controlled by the Prince of Liechenstein Foundation, which
serves as the parent organization for the various business enterprises of the
Princely Family of Liechenstein. Total assets under management for all equity
growth clients at December 31, 1996 were approximately $2.1 billion, none of
which were assets of registered investment companies. The principal business
address of Chancellor is 1166 Avenue of the Americas, New York, NY 10036.
Investment management decisions of Chancellor are made by committee and not by
managers individually.
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0.69% of the Portfolio's
average daily net assets. The Adviser's annual compensation rate with respect
to the Portfolio was reduced to 0.62% of the Portfolio's average daily net
assets, effective November 15, 1996.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
<PAGE>
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.73% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
above. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
<PAGE>
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
<PAGE>
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - SPECIAL EQUITY PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, Special Equity Portfolio (the "Portfolio"), is described herein.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the 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. The Portfolio seeks to achieve its
investment objective by investing primarily in a diversified portfolio of
stocks of small to medium size companies which, in the opinion of the
Portfolio's investment advisers, will present an opportunity for significant
increases in earnings and/or value, without consideration for current income.
An investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Pilgrim Baxter & Associates, ARK
Asset Management Co., Inc., Liberty Investment Management Inc., and Westport
Asset Management, Inc. are the subadvisers (the "Subadvisers") of the
Portfolio. The Adviser and Subadviser are referred to herein collectively as
the "Advisers". Diversified is also the administrator (the "Administrator") of
the Portfolio. Diversified Investors Securities Corp. is the exclusive
placement agent ("DISC" or the "Placement Agent") of interests in the Portfolio
and the Trust in general.
The Portfolio seeks to achieve its investment objective by investing
primarily in a diversified portfolio of stocks of small to medium size
companies which, in the opinion of the Portfolio's Advisers, will present an
opportunity for significant increases in earnings and/or value, without
consideration for current income. The Portfolio's primary equity investments
are common stocks of small and medium sized U.S. companies with market
capitalizations of less than $2 billion. Multiple managers are used to control
the volatility often associated with investments in small to medium size
companies and to maximize opportunities in positive markets. The Portfolio may
also invest in bonds and short-term obligations as well as securities
convertible into common stocks, preferred stocks, debt securities and
short-term obligations. The Portfolio allocates its investments among different
industries and companies, and changes its portfolio securities for investment
considerations and not for trading purposes.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
<PAGE>
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
While the Portfolio's policy is to invest its assets primarily in common
stocks with potential for above average growth in earnings, appreciation may be
sought in other types of securities such as preferred stocks, convertible and
non-convertible bonds and warrants as well as foreign securities including
American Depositary Receipts. The Portfolio may vary the percentage of assets
invested in any one type of security in accordance with the Advisers'
interpretation of economic and market conditions, fiscal and monetary policy,
and underlying security values. In selecting stocks, emphasis is placed on
investing in companies with small to medium market capitalizations, i.e., the
market value of all issued and outstanding common stock of the company equals
up to approximately $1.5 billion. Investing in equity securities of small to
medium companies involves risks not typically associated with investment in
comparable securities of large companies. Such smaller companies may have
narrow product lines and limited financial and managerial resources. Since the
market for the equity securities of small companies is often characterized by
less information and liquidity than that for the equity securities of large
companies, securities of such small companies may be subject to more abrupt or
erratic market movements than securities of large companies or market averages
in general. Therefore, an investment in the Portfolio may be subject to greater
declines in value than an investment in an equity fund investing in the equity
securities of large companies.
FOREIGN SECURITIES
The Portfolio's current policy is not to invest more than 25% of its
assets in securities of foreign issuers, including investments in sponsored
American Depositary Receipts ("ADRs"). ADRs are receipts typically issued by an
American bank or trust company evidencing ownership of the underlying foreign
securities. The Portfolio's investments in unlisted foreign securities, not
including ADRs, are subject to the overall restrictions applicable to
investments in illiquid securities. Foreign securities, including ADRs, may
represent a greater degree of risk than do securities of domestic issuers due
to possible exchange rate fluctuations, possible exchange controls, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions (including possible withholding
taxes), changes in governmental administration or economic or monetary policy
(in the United States or abroad), war or expropriation. The Portfolio may
invest up to 5% of its assets in closed-end investment companies which
primarily hold foreign securities. Forward foreign currency exchange contracts
may also be entered into for the purchase or sale of foreign currency solely
for hedging purposes against adverse rate changes. A currency exchange contract
allows a definite price in dollars to be fixed for foreign securities that have
been purchased or sold (but not settled) for the Portfolio. Entering into such
exchange contracts may result in the loss of all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates. In addition, entering into such contracts means incurring certain
transaction costs and bearing the risk of incurring losses if rates do not move
in the direction anticipated.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may enter into transactions in futures contracts, options on
futures contracts, options on securities indexes and options on securities, for
the purpose of hedging the Portfolio's securities, which would have the effect
of reducing the volatility of the net asset value of an investment in the
Portfolio. In general, each such transaction involves the establishment of a
position which is expected to move in a direction opposite to that of the
security or securities being hedged.
For example, the Portfolio may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
<PAGE>
of protecting against an anticipated decline in the value of securities held by
the Portfolio. In the event that such decline occurs, and the hedging
transaction is successful, the reduced value of portfolio securities will be
offset, in whole or in part, by a corresponding gain on the futures or option
position. Conversely, when the Portfolio is not fully invested in the
securities market, and it expects a significant market advance, it may purchase
futures contracts or call options on futures contracts, security indexes or
securities in 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.
Part B includes further information about the transactions in futures and
option contracts to be entered into by the Portfolio. Gain or loss to the
Portfolio on transactions in security index futures or options will depend on
price movements in the stock market generally (or in a particular industry or
segment of the market), rather than price movements of individual securities. A
security index assigns relative values to the securities included in the index
and the index fluctuates with changes in the market values of the securities so
included. Some security index futures or options are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures or options on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Options on indexes
and options on securities are traded on securities exchanges regulated by the
Securities and Exchange Commission. Futures contracts and options on futures
contracts are traded only on designated contract markets regulated by the
Commodity Futures Trading Commission and through a registered futures
commission merchant which is a member of such contract market. A commission
must be paid on each completed purchase and sale transaction. Transactions on
such exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the Portfolio.
SHORT TERM INVESTMENTS
Cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities may be held to provide a reserve for future
purchases of common stock or securities during periods of unusual market
conditions or in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine security markets to be overvalued. The
Portfolio limits its short-term investments to those U.S. dollar-denominated
instruments which are determined by or on behalf of the Board of Trustees of
the Trust (the "Board of Trustees") to present minimal credit risks and which
are of "high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are of comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
<PAGE>
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage,
and by agreeing to sell portfolio securities to financial institutions such as
banks and broker-dealers and to repurchase them at a mutually agreed date and
price (a "reverse repurchase agreement"). At the time the 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. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Portfolio may decline below the repurchase price of those securities. Reverse
repurchase agreements are considered to be borrowings by the Portfolio.
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers will
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
<PAGE>
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Portfolio's
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
See the Statement of Additional Information, including the financial statements
incorporated by reference therein, for further information. The amount of
brokerage commissions and realized capital gains will tend to increase as the
level of portfolio activity increases. The primary consideration in placing
portfolio security transactions with broker-dealers for execution is to obtain,
and maintain the availability of, execution at the most favorable prices and in
the most effective manner possible. See "Brokerage Allocation and Other
Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days).
Part B includes a discussion of additional nonfundamental investment
policies and a listing of specific investment restrictions which constitute
fundamental policies of the Portfolio, and cannot be changed without the
approval of the holders of a "majority of the outstanding voting securities"
(as defined in the 1940 Act) of the Portfolio. See "Investment Restrictions" in
Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.80% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are made by committee and not by managers individually. The principal
business address of Diversified is Four Manhattanville Road, Purchase, New York
10577.
<PAGE>
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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser or subadvisers with a
distinguished background and to review such subadviser's continued performance.
Diversified has entered into Investment Subadvisory Agreements with each
of the Subadvisers (the "Subadvisory Agreements"). The Subadvisers make the
day-to-day investment selections for the Portfolio consistent with the
guidelines and directions set by Diversified and the Board of Trustees. For its
services under the Subadvisory Agreement, each of the Subadvisers receives a
fee from Diversified. This fee is accrued monthly by multiplying the arithmetic
average of the beginning and ending monthly net assets in the Portfolio by the
fee schedule and dividing by twelve. The fee is paid on a quarterly basis at an
annual rate equal to 0.50% of the Portfolio's average net assets under
management by each of the Subadvisers. The Subadvisers furnish at their own
expense all services, facilities and personnel necessary in connection with
managing the Portfolio's investments and effecting securities transactions for
the Portfolio.
There are four Subadvisers:
* ARK Asset Management Co., Inc. ("Ark") was formed in July 1989 and is
owned by C. Charles Hetzel, Henry Breck, Colman M. Brandt and Jay Mermelstein,
employees of ARK Asset Holdings, Inc. Assets under management for all small
capitalization clients at December 31, 1996 equaled approximately $1.9 billion,
$75 million of which were assets of registered investment companies. The
principal business address of Ark is 55 Water Street, New York, New York 10004.
The following person is primarily responsible for the day-to-day management of
the Special Equity Portfolio on behalf of Ark (the inception date of such
person's responsibility for the Portfolio and such person's business experience
for the past five years is indicated parenthetically): Ronald Weiner, Vice
Chairman and Portfolio Manager (since 1994, employed by Ark since 1986;
previously employed at Lehman Management Co., Inc. as Senior Vice President and
Senior Portfolio Manager, Specialy Growth Equity Management, 1989-1995).
* Liberty Investment Management ("Liberty"), a division of Goldman Sachs
Asset Management ("GSAM"), was established in January 1997 when Goldman, Sachs
and Co. acquired Liberty Investment Management, Inc. GSAM is a separate
operating division of Goldman, Sachs & Co., a worldwide investment banking
firm. Total assets under management for all equity clients of Liberty at
January 27, 1997 were approximately $37.8 billion, $5.2 billion of which were
assets of registered investment companies. The principal business address of
Liberty is 2502 Rocky Point Drive, Suite 500, Tampa, Florida 33607. The
following persons are primarily responsible for the day-to-day management of
the Special Equity Portfolio on behalf of Liberty (the inception date of each
person's responsibility for the Portfolio and such person's business experience
for the past five years is indicated parenthetically): Herbert E. Ehlers,
Managing Director (since 1994, employed by Liberty or its predecessor Liberty
Investment Management, Inc. since 1988) and Timothy G. Ebright, Portfolio
Manager (since 1994, employed by Liberty or its predecessor Liberty or its
predessor Liberty Investment Management, Inc. since 1988).
* Pilgrim Baxter & Associates, Ltd. ("Pilgrim") was formed in 1995 is and
owned by United Asset Management, Inc., a publicly owned corporation. Pilgrim
succeeded to certain of the investment management businesses and acquired the
corporate name of Pilgrim Baxter & Associates, Ltd. in April 1996. Total assets
under management for all equity clients at December 31, 1996 were approximately
$3.2 billion, $463.7 million of which were assets of registered investment
companies. The principal business address of Pilgrim is 1255 Drummers Lanes,
Wayne, Pennsylvania 19087. The following person is primarily
<PAGE>
responsible for the day-to-day management of the Special Equity Portfolio on
behalf of Pilgrim (the inception date of such person's responsibility for the
Portfolio and such person's business experience for the past five years is
indicated parenthetically): John Force, Portfolio Manager (since 1994, employed
by Pilgrim since 1992).
* Westport Asset Management, Inc. ("Westport") was formed in July 1983 and
is owned by Andrew J. Knuth and Ronald H. Oliver, employees of Westport. Total
assets under management for all equity clients at December 31, 1996 equaled
approximately $860 million, $278 million of which were assets of registered
investment companies. The principal business address of Westport is 253
Riverside Avenue, Westport, Connecticut 06880. The following person is
primarily responsible for the day-to-day management of the Special Equity
Portfolio on behalf of Westport (the inception date of such person's
responsibility for the Portfolio and such person's business experience for the
past five years is indicated parenthetically): Andrew Knuth, Portfolio Manager
(since 1994, employed by Westport since 1983).
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0.79% of the Portfolio's
average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.85% of the Portfolio's average net assets.
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ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
above. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
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Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York, 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
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The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - INTERMEDIATE GOVERNMENT BOND PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, Intermediate Government Bond Portfolio (the "Portfolio"), is described
herein. Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act"). Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to provide as high a level of
current income as is consistent with the preservation of capital. The Portfolio
seeks to accomplish this objective by investing in high quality U.S. Government
securities with intermediate maturities and high quality short-term
obligations. An investment in the Portfolio is neither insured nor guaranteed
by the U.S. Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. 1740 Advisers, Inc. ("1740 Advisers")
is the subadviser (the "Subadviser") of the Portfolio. The Adviser and
Subadviser are referred to herein collectively as the "Advisers". Diversified
is also the administrator (the "Administrator") of the Portfolio. Diversified
Investors Securities Corp. is the exclusive placement agent ("DISC" or the
"Placement Agent") of interests in the Portfolio and the Trust in general.
The Portfolio pursues its investment objective by investing in high
quality U.S. Government obligations, including U.S. Government agency
obligations, including collateralized mortgage obligations guaranteed by those
agencies, and high quality short-term obligations (including repurchase
agreements and reverse repurchase agreements).
The Advisers attempt to maintain the Portfolio's "duration" between one
and five years, which means that the Portfolio's overall sensitivity to
interest rates should be similar to that of bonds and notes with remaining
average maturities from one to five years. The Portfolio's dollar-weighted
average maturity (or dollar-weighted average life in the case of
mortgage-backed securities) may be longer than five years from time to time,
but will not exceed ten years under normal conditions. The Portfolio may hold
individual securities with remaining maturities of up to thirty years.
Since the value of fixed income securities generally fluctuates inversely
with changes in interest rates, the duration of the Portfolio will vary to
reflect the Advisers' assessments of prospective changes in interest rates, so
that the Portfolio may benefit from relative price appreciation when interest
rates decline and may protect capital value when interest rates rise. The
success of this strategy will depend on the Advisers' ability to manage the
<PAGE>
Portfolio through changes in interest rates, and there is a risk that the value
of the securities held by the Portfolio will decline.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
U.S. GOVERNMENT AND AGENCY SECURITIES
The Portfolio may invest in U.S. Government securities. U.S. Government
securities are securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. U.S. Government securities have varying degrees
of government backing. They may be backed by the credit of the government as a
whole or only by the issuing agency. For example, securities issued by certain
agencies are supported only by the credit of the agency that issued them, and
not by the U.S. Government. Securities issued by the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association are supported by the
agency's right to borrow money from the U.S. Treasury under certain
circumstances. U.S. Treasury bonds, notes and bills, and some agency
securities, such as those issued by the Government National Mortgage
Association, are backed by the full faith and credit of the U.S. Government as
to payment of principal and interest and are the highest quality government
securities. There is no assurance that the U.S. Government will support such
obligations of its agencies unless it is required to do so by law. The
Portfolio itself, and an investment therein, are not guaranteed by the U.S.
Government. For additional information on U.S. Government securities, see Part
B.
The Portfolio may invest a portion of its assets in short-term U.S.
Government securities with remaining maturities of one year or less and
repurchase agreements relating thereto. When the Advisers believe market
conditions warrant a temporary defensive position, the Portfolio may invest up
to 100% of its assets in these instruments.
SHORT-TERM INSTRUMENTS
Cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities may be held to provide a reserve for future
purchases of securities during periods of unusual market conditions or in order
to reduce volatility, or as a temporary defensive measure when the Advisers
determine security markets to be overvalued. The Portfolio limits its
short-term investments to those U.S. dollar-denominated instruments which are
determined by or on behalf of the Board of Trustees of the Trust (the "Board of
Trustees") to present minimal credit risks and which are of "high quality" as
determined by a major rating service [i.e., rated P-1 by Moody's Investors
Service, Inc. or A-1 by Standard & Poor's Corporation)] or, in the case of
instruments which are not rated, are of comparable quality pursuant to
procedures established by the Board of Trustees. Investments in high quality
short-term instruments may, in many circumstances, result in a lower yield than
would be available from investments in instruments with a lower quality or
longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
<PAGE>
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated withdrawal and/or liquidation requests, and
not for leverage. One means of borrowing is by agreeing to sell portfolio
securities to financial institutions such as banks and broker-dealers and to
repurchase them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time the 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. Reverse repurchase agreements
involve the risk that the market value of the securities sold by the Portfolio
may decline below the repurchase price of those securities.
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may buy and sell options and futures contracts to manage its
exposure to changing interest rates and security prices. Some options and
futures strategies, including selling futures, buying puts, and writing calls,
hedge the Portfolio's investments against price fluctuations. Other strategies,
including buying futures, writing puts and buying calls, tend to increase
market exposure. The Portfolio may invest in options (including
over-the-counter options) and futures contracts based on any type of security
or index related to its investments.
Options and futures can be volatile investments, and involve certain
risks. If the Advisers apply a hedge at an inappropriate time or judges
interest rates incorrectly, options and futures strategies may lower the
Portfolio's return. The costs of hedging are not reflected in the Portfolio's
yield but are reflected in the Portfolio's total return. The Portfolio could
also experience losses if its options and futures positions were poorly
correlated with its other investments, or if it could not close out its
positions because of an illiquid secondary market.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the Portfolio.
<PAGE>
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Portfolio's
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
The Portfolio may, in each case up to 5% of the Portfolio's assets, also
utilize the following investments and investment techniques and practices:
investments in foreign securities, options on futures contracts, foreign
currency exchange transactions and options on foreign currencies. See Part B
for further information.
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
See the Statement of Additional Information, including the financial statements
incorporated by reference therein, for further information. The amount of
brokerage commissions and realized capital gains will tend to increase as the
level of portfolio activity increases. The primary consideration in placing
portfolio security transactions with broker-dealers for execution is to obtain,
and maintain the availability of, execution at the most favorable prices and in
the most effective manner possible. See "Brokerage Allocation and Other
Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
<PAGE>
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days[, over-the-counter options and assets used to
cover over-the-counter options]). Additional fundamental and operating
investment policies of the Portfolio are contained in Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.35% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are taken by committee and not by managers individually. The principal
business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Capital Management Group, a division of 1740
Advisers. The Subadviser makes the investment selections for the Portfolio
consistent with the guidelines and directions set by the Adviser and the Board
of Trustees. For its services under the Subadvisory Agreement, Capital
Management Group receives a fee from Diversified accrued daily and paid monthly
at an annual rate equal to 0.15% of the Portfolio's average daily net assets.
The Subadviser furnishes at its own expense all services, facilities and
personnel necessary in connection with managing the Portfolio's investments and
effecting securities transactions for the Portfolio.
1740 Advisers is a subsidiary of The Mutual Life Insurance Company of New
York. Its address is 1740 Broadway, New York, New York 10019. Total assets
under management by Capital Management Group as of December 31, 1996 were
approximately $890 million, all of which were assets of registered investment
companies. The following person is primarily responsible for the day-to-day
management of the Portfolio (the inception date of such person's responsibility
for the Portfolio and such person's business experience for the past five years
is indicated parenthetically): Gregory Staples, Vice President (since 1996,
employed by Capital Management Group since 1987).
<PAGE>
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0.32% of the Portfolio's
average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.40% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
above. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
<PAGE>
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
<PAGE>
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - HIGH-YIELD BOND PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, High-Yield Bond Portfolio (the "Portfolio"), is described herein.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to seek a high level of
current income. The Portfolio pursues its investment objective by investing in
a diversified portfolio consisting primarily of high-yielding, fixed-income and
zero coupon securities, such as bonds, debentures and notes, convertible
securities and preferred stocks. The Portfolio may invest all or a substantial
portion of its assets in lower-rated debt securities, commonly referred to as
"junk bonds". Such investments may include foreign securities and obligations
issued or guaranteed by the U.S. government, any of its states or territories,
any foreign government or any of their respective subdivisions, agencies or
instrumentalities. An investment in the Portfolio is neither insured nor
guaranteed by the U.S. Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Delaware Investment Advisors, a
division of Delaware Management Company, Inc. ("Delaware"), is the subadviser
(the "Subadviser") of the Portfolio. The Adviser and Subadviser are referred to
herein collectively as the "Advisers". Diversified is also the administrator
(the "Administrator") of the Portfolio. Diversified Investors Securities Corp.
is the exclusive placement agent ("DISC" or the "Placement Agent") of interests
in the Portfolio and the Trust in general.
The Portfolio normally will invest at least 65% of its assets in
high-yielding, income producing debt securities and preferred stocks, including
convertible and zero coupon securities. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts from
their fact value. Certain zero coupon securities also are sold at substantial
discounts but provide for the commencement of regular interest payments at a
deferred date. The Portfolio may invest up to 35% of its assets in equity
securities, including common stocks, warrants and rights.
Lower-rated debt securities usually are defined as securities rated Ba or
lower by Moody's or BB or lower by S&P. Lower-rated debt securities are
considered speculative and involve greater risk of default or price changes due
to changes in the issuer's creditworthiness than higher-rated securities and
are more sensitive to changes in the issuer's capacity to pay. Investing in
lowerrated debt securities is an aggressive approach to income investing. The
1980s saw a dramatic increase in the use of lower-rated debt securities to
finance highly leveraged corporate acquisitions and restructurings. Past
<PAGE>
experience may not provide an accurate indication of future performance of
lower-rated debt securities, especially during period of economic recession. In
fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.
Lower-rated debt securities may be thinly traded, which can adversely
affect the prices at which they can be sold and can result in high transaction
costs. If market quotations are not available, these lower-rated debt
securities will be valued in accordance with standards set by the Board of
Trustees, including the use of outside pricing services. Judgment plays a
greater role in valuing lower-rated debt securities than securities for which
more extensive quotations and last-sale information are available. Adverse
publicity and changing investor perceptions may affect the ability of outside
pricing services used by the Portfolio to value its portfolio securities, and
the Portfolio's ability to dispose of the lower-rated bonds. The market prices
of lower-rated debt securities may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates. During
an economic downturn or a prolonged period of rising interest rates, the
ability of issuers of lower-rated debt to service their payment obligations,
meet projected goals, or obtain additional financing may be impaired. The
Portfolio may choose, at its own expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interests of security holders if it determines this to be in the
interest of Portfolio investors.
The considerations discussed above for lower-rated debt securities also
are applicable to lower quality unrated debt instruments of all types,
including loans and other direct indebtedness of businesses with poor credit
standing. Unrated debt instruments are not necessarily of lower quality than
rated securities but they may not be attractive to as many buyers.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
SHORT-TERM INSTRUMENTS
Cash, commercial paper, short-term obligations, repurchase agreements,
bank certificates of deposit or other forms of debt securities may be held to
provide a reserve for future purchases of securities during periods of unusual
market conditions or in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine security markets to be overvalued. The
Portfolio limits its short-term investments to those U.S. dollar-denominated
instruments which are determined by or on behalf of the Board of Trustees of
the Trust (the "Board of Trustees") to present minimal credit risks and which
are of "high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are of comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
<PAGE>
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
the 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may buy and sell options and futures contracts to manage its
exposure to changing interest rates and security prices. Some options and
futures strategies, including selling futures, buying puts, and writing calls,
hedge the Portfolio's investments against price fluctuations. Other strategies,
including buying futures, writing puts and buying calls, tend to increase
market exposure. The Portfolio may invest in options (including
over-the-counter options) and futures contracts based on any type of security
or index related to its investments.
Options and futures can be volatile investments, and involve certain
risks. If the Advisers apply a hedge at an inappropriate time or judge interest
rates incorrectly, options and futures strategies may lower an investor's
return. An investor could also experience losses if the Portfolio's options and
futures positions were poorly correlated with its other investments, or if it
could not close out its positions because of an illiquid secondary market.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the Portfolio.
<PAGE>
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Portfolio's
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
The Portfolio may, in each case up to 5% of the Portfolio's assets, also
utilize the following investments and investment techniques and practices:
options on futures contracts, and options on foreign currencies. See Part B for
further information.
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
The amount of brokerage commissions and realized capital gains will tend to
increase as the level of portfolio activity increases. The primary
consideration in placing portfolio security transactions with broker-dealers
for execution is to obtain, and maintain the availability of, execution at the
most favorable prices and in the most effective manner possible. See "Brokerage
Allocation and Other Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
<PAGE>
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days, over-the-counter options and assets used to
cover over-the-counter options). Additional fundamental and operating
investment policies of the Portfolio are contained in Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.55% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of
Diversified are made by committee and not by managers individually. The
principal business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Delaware. Delaware makes the investment
selections for the Portfolio consistent with the guidelines and directions set
by the Adviser and the Board of Trustees. For its services under the
Subadvisory Agreement, Delaware receives a fee from Diversified. This fee is
calculated by multiplying the arithmetic average of the beginning and ending
monthly net assets in the Portfolio by the fee schedule and dividing by twelve.
The fee is paid on a quarterly basis at an annual rate equal to 0.40% on the
first $20,000,000 in average net assets of the Portfolio, 0.30% on the next
$20,000,000 in average net assets, and 0.20% on average net assets in excess of
$40,000,000. Delaware furnishes at its own expense all services, facilities and
personnel necessary in connection with managing the Portfolio's investments and
effecting securities transactions for the Portfolio.
Delaware was formed in February 1985 and is owned by Lincoln National
Corp. Total assets under management for all high-yield bond clients at December
31, 1996 were approximately $1.9 billion, $1.3 billion of which were assets of
registered investment companies. The principal business address of Delaware is
2005 Market Street, Philadelphia, Pennsylvania 19103. The following person is
primarily responsible for the day-to-day management of the Portfolio (the
inception date of such person's responsibility for the Portfolio and such
person's business experience for the past five years is indicated
parenthetically): Paul Matlack, Vice President/Senior Portfolio Manager (since
1996, employed by Delaware since 1989).
<PAGE>
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser after any applicable waivers were equal to 0% of the Portfolio's
average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio after any applicable fee waivers and expense reimbursements were
equal to 0.60% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
below. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
<PAGE>
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio
<PAGE>
Business Day"). As of 4:00 p.m., New York time, on each such day, the value of
each investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. Investments in the Portfolio may not
be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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PART A
DIVERSIFIED INVESTORS PORTFOLIOS - EQUITY VALUE PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, Equity Value Portfolio (the "Portfolio"), is described herein.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to provide a high total
investment return through investment in a diversified portfolio of common
stocks. An investment in the Portfolio is neither insured nor guaranteed by the
U.S. Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. Ark Asset Management Co., Inc.
("Ark") is the subadviser (the "Subadviser") of the Portfolio. The Adviser and
Subadviser are referred to herein collectively as the "Advisers". Diversified
is also the administrator (the "Administrator") of the Portfolio. Diversified
Investors Securities Corp. is the exclusive placement agent ("DISC" or the
"Placement Agent") of interests in the Portfolio and the Trust in general.
The Portfolio seeks to achieve its investment objective by investing
primarily in a diversified portfolio of stocks of companies, which, in the
opinion of the Advisers, are trading at low valuations relative to market
and/or historical levels. The stocks tend to have relatively low price/earnings
ratios and/or relatively low price/book value ratios. Low price/earnings ratios
or price/book value ratios means that the stock is less expensive than average
relative to the company's earnings or book value, respectively. The Portfolio
invests primarily in common stocks listed on the New York Stock Exchange (the
"NYSE") and on other national securities exchanges and, to a lesser extent, in
stocks that are traded over-the-counter. The Portfolio may also invest in bonds
and short-term obligations as well as securities convertible into common
stocks, preferred stocks, debt securities and short-term obligations. The
Portfolio allocates its investments among different industries and companies,
and changes its portfolio securities for investment considerations and not for
trading purposes.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
The Portfolio's policy is to invest in a broad list of equity and fixed
income securities, including short-term obligations. The list may be
<PAGE>
diversified not only by companies and industries, but also by type of security.
Some fixed income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Portfolio may vary the
percentage of assets invested in any one type of security in accordance with
the Advisers' interpretation of economic and market conditions, fiscal and
monetary policy, and underlying security values.
FOREIGN SECURITIES
The Portfolio's current policy is not to invest more than 25% of its
assets in securities of foreign issuers, including investments in sponsored
American Depositary Receipts ("ADRs"). ADRs are receipts typically issued by an
American bank or trust company evidencing ownership of the underlying foreign
securities. The Advisers do not intend to concentrate more than 25% of such
foreign investments in any one type of instrument or in any foreign country.
The Portfolio's investments in unlisted foreign securities, not including ADRs,
are subject to the overall restrictions applicable to investments in illiquid
securities. Foreign securities, including ADRs, may represent a greater degree
of risk than do securities of domestic issuers due to possible exchange rate
fluctuations, possible exchange controls, less publicly available information,
more volatile markets, less securities regulation, less favorable tax
provisions (including possible withholding taxes), changes in governmental
administration or economic or monetary policy (in the United States or abroad),
war or expropriation. The Portfolio may invest up to 5% of its assets in
closed-end investment companies which primarily hold foreign securities.
Forward foreign currency exchange contracts may also be entered into for the
purchase or sale of foreign currency solely for hedging purposes against
adverse rate changes. A currency exchange contract allows a definite price in
dollars to be fixed for foreign securities that have been purchased or sold
(but not settled) for the Portfolio. Entering into such exchange contracts may
result in the loss of all or a portion of the benefits which otherwise could
have been obtained from favorable movements in exchange rates. In addition,
entering into such contracts means incurring certain transaction costs and
bearing the risk of incurring losses if rates do not move in the direction
anticipated.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may enter into transactions in futures contracts, options on
futures contracts, options on securities indexes and options on securities, for
the purpose of hedging the Portfolio's securities, which would have the effect
of reducing the volatility of an investment in the Portfolio. In general, each
such transaction involves the establishment of a position which is expected to
move in a direction opposite to that of the security or securities being
hedged.
For example, the Portfolio may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
the Portfolio. In the event that such decline occurs, and the hedging
transaction is successful, the reduced value of portfolio securities will be
offset, in whole or in part, by a corresponding gain on the futures or option
position. Conversely, when the Portfolio is not fully invested in the
securities market, and it expects a significant market advance, it may purchase
futures contracts or call options on futures contracts, security indexes or
securities in 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.
Part B includes further information about the transactions in futures and
option contracts to be entered into by the Portfolio. Gains or losses to the
Portfolio on transactions in security index futures or options will depend on
price movements in the stock market generally (or in a particular industry or
segment of the market), rather than price movements of individual securities. A
security index assigns relative values to the securities included in the index
and the index fluctuates with changes in the market values of the securities so
included. Some security index futures or options are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures or options on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Options on indexes
and options on securities are traded on securities exchanges
<PAGE>
regulated by the Securities and Exchange Commission. Futures contracts and
options on futures contracts are traded only on designated contract markets
regulated by the Commodity Futures Trading Commission and through a registered
futures commission merchant which is a member of such contract market. A
commission must be paid on each completed purchase and sale transaction.
Transactions on such exchanges are cleared through a clearing corporation,
which guarantees performance between the clearing members which are parties to
each contract.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the Portfolio.
SHORT TERM INVESTMENTS
Cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities may be held to provide a reserve for future
purchases of common stock or securities during periods of unusual market
conditions or in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine security markets to be overvalued. The
Portfolio limits its short-term investments to those U.S. dollar-denominated
instruments which are determined by or on behalf of the Board of Trustees of
the Trust (the "Board of Trustees") to present minimal credit risks and which
are of "high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are of comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or limited. Repurchase agreements
are considered collateralized loans under the 1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
the 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
<PAGE>
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers will
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Portfolio's
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive income on the loaned
securities as well as by either investing the cash collateral in short-term
securities or obtaining yield in the form of interest paid when U.S. Government
obligations are used as collateral. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities or even
loss of rights in the collateral should the borrower of the securities fail
financially. The Portfolio will adhere to the following conditions whenever its
securities are loaned: (i) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the borrower; (ii) the borrower must
increase this collateral whenever the market value of the loaned securities
including accrued interest exceeds the level of the collateral; (iii) the
Portfolio must be able to terminate the loan at any time; (iv) the Portfolio
must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any increase in
market value; (v) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (vi) voting rights on the loaned securities may
pass to the borrower. However, if a material event adversely affecting the
loaned securities were to occur, the Portfolio would terminate the loan and
regain the right to vote the securities.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
See the Statement of Additional Information, including the financial statements
incorporated by reference therein, for further information. The amount of
brokerage commissions and realized capital gains will tend to increase as the
level of portfolio activity increases. The primary consideration in placing
portfolio security transactions with broker-dealers
<PAGE>
for execution is to obtain, and maintain the availability of, execution at the
most favorable prices and in the most effective manner possible. See "Brokerage
Allocation and Other Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days).
Part B includes a discussion of additional nonfundamental investment
policies and a listing of specific investment restrictions which constitute
fundamental policies of the Portfolio, and cannot be changed without the
approval of the holders of a "majority of the outstanding voting securities"
(as defined in the 1940 Act) of the Portfolio. See "Investment Restrictions" in
Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.57% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are made by committee and not by managers individually. The principal
business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with Ark Asset Management Co., Inc. Ark Asset
Management Co., Inc. makes the investment selections for the Portfolio
consistent with the guidelines and directions set by the Adviser and the Board
of Trustees. For its services under the Subadvisory Agreement, Ark Asset
Management Co., Inc. receives a fee from Diversified. This fee is accrued
monthly by multiplying the arithmetic average of the beginning and ending
monthly net assets in the Portfolio by the fee schedule and dividing by twelve.
This fee is paid on a quarterly basis at an annual rate equal to 0.45% on the
first $100,000,000 in average net assets of the Portfolio, 0.40% on the next
$50,000,000 in average net assets, and 0.35% on the next $50,000,000 in average
net assets; when the Portfolio achieves $200,000,000 in average net assets, the
<PAGE>
rate shall be 0.40% on average net assets up to $200,000,000 and 0.35% on
average net assets in excess of $200,000,000 so long as the Portfolio continues
to have more than $200,000,000 in average net assets. Ark Asset Management Co.,
Inc. furnishes at its own expense all services, facilities and personnel
necessary in connection with managing the Portfolio's investments and effecting
securities transactions for the Portfolio.
Ark Asset Management Co., Inc. was formed in July 1989 and is owned by
certain employees of Ark Asset Holdings, Inc. Its address is 55 Water Street,
New York, NY 10041. Total assets under management by Ark Asset Management Co.,
Inc. for equity value clients as of December 31, 1996 were approximately $14.4
billion, $150 million of which were assets of registered investment companies.
Investment management decisions of Ark Asset Management Co., Inc. are made by
committee and not by managers individually.
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser on an annual basis after any applicable waivers were equal to 0.10% of
the Portfolio's average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio on an annual basis after any applicable fee waivers and expense
reimbursements were equal to 0.60% of the Portfolio's average net assets.
<PAGE>
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
above. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for
approval. Investors under certain circumstances (e.g., upon application and
submission of certain specified documents to the Trustees by a specified number
of investors) have the right to communicate with other investors in connection
with requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
<PAGE>
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days. The Portfolio reserves the right under certain circumstances, such
as accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
<PAGE>
investor's portfolio, as the case may be.
Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART A
DIVERSIFIED INVESTORS PORTFOLIOS - AGGRESSIVE EQUITY PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Diversified Investors Portfolios (the "Trust") is a diversified, open-end
management investment company which was organized as a Trust under the laws of
the State of New York on September 1, 1993. Beneficial interests of the Trust
are divided into series, thirteen of which are currently active and one of
which, Aggressive Equity Portfolio (the "Portfolio"), is described herein.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act").
Investments in the Portfolio 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 Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" within the meaning of the 1933 Act.
The investment objective of the 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. The Aggressive Equity Fund is
designed for investors in search of substantial long-term growth who can accept
above-average stock market risk and little or no current income. An investment
in the Portfolio is neither insured nor guaranteed by the U.S. Government.
Diversified Investment Advisors, Inc. ("Diversified") is the investment
adviser (the "Adviser") of the Portfolio. McKinley Capital Management, Inc.
("MCKinley"), is the subadviser (the "Subadviser") of the Portfolio. The
Adviser and Subadviser are referred to herein collectively as the "Advisers".
Diversified is also the administrator (the "Administrator") of the Portfolio.
Diversified Investors Securities Corp. is the exclusive placement agent ("DISC"
or the "Placement Agent") of interests in the Portfolio and the Trust in
general.
The Portfolio seeks to achieve its investment objective by investing
primarily in a diversified portfolio of stocks of small to medium size
companies which, in the opinion of the Advisers, will present an opportunity
for significant increases in earnings, revenue and/or value, without
consideration for current income. The Portfolio's primary equity investments
are common stocks of small and medium sized U.S. companies. The Portfolio also
invests in bonds and short-term obligations as well as securities convertible
into common stocks, preferred stocks, debt securities and short-term
obligations. The Portfolio allocates its investments among different industries
and companies, and changes its portfolio securities for investment
considerations and not for trading purposes.
The investment objective of the Portfolio may be changed without the vote
of the holders of a majority of the outstanding voting securities of the
Portfolio. There can, of course, be no assurance that the investment objective
of the Portfolio will be achieved.
DESCRIPTION OF PORTFOLIO INVESTMENTS
Additional information about the investment policies of the Portfolio
appears in Part B.
While the Aggressive Equity Portfolio's policy is to invest its assets
primarily in common stocks with potential for above average growth in earnings
<PAGE>
and/or revenue, appreciation may be sought in other types of securities such as
preferred stocks, convertible and non-convertible bonds, warrants and foreign
securities including American Depositary Receipts. The Aggressive Equity
Portfolio may vary the percentage of assets invested in any one type of
security in accordance with the Advisers' interpretation of economic and market
conditions, fiscal and monetary policy, and underlying securities values.
In selecting stocks, emphasis is placed on investing in companies with
consistent, above-average and accelerating profitability and growth. These
companies tend to have higher price/earnings ratios which means that the stock
is more expensive than average relative to the company's earnings. Investing in
equity securities of small to medium companies involves risks not typically
associated with investment in comparable securities of large companies. Such
smaller and medium companies may have narrow product lines and limited
financial and managerial resources. Since the market for the equity securities
of small and medium companies is often characterized by less information and
liquidity than that for the equity securities of large companies, securities of
such small and medium companies or market averages in general. Therefore, an
investment in the Aggressive Equity Fund may be subject to greater declines in
value than an investment in an equity fund investing in the equity securities
of large companies.
FOREIGN SECURITIES
The Portfolio's current policy is not to invest more than 25% of its
assets in securities of foreign issuers, including investments in sponsored
American Depositary Receipts ("ADRs"). ADRs are receipts typically issued by an
American bank or trust company evidencing ownership of the underlying foreign
securities. The Advisers do not intend to concentrate more than 25% of such
foreign instruments in any one type of instrument or in any foreign country.
The Portfolio's investments in unlisted foreign securities, not including ADRs,
are subject to the overall restrictions applicable to investments in illiquid
securities. Foreign securities, including ADRs, may represent a greater degree
of risk than do securities of domestic issuers due to possible exchange rate
fluctuations, possible exchange controls, less publicly available information,
more volatile markets, less securities regulation, less favorable tax
provisions (including possible withholding taxes), changes in governmental
administration or economic or monetary policy (in the United States or abroad),
war or expropriation. The Portfolio may invest up to 5% of its assets in
closed-end investment companies which primarily hold foreign securities.
Forward foreign currency exchange contracts may also be entered into for the
purchase or sale of foreign currency solely for hedging purposes against
adverse rate changes. A currency exchange contract allows a definite price in
dollars to be fixed for foreign securities that have been purchased or sold
(but not settled) for the Portfolio. Entering into such exchange contracts may
result in the loss of all or a portion of the benefits which otherwise could
have been obtained from favorable movements in exchange rates. In addition,
entering into such contracts means incurring certain transaction costs and
bearing the risk of incurring losses if rates do not move in the direction
anticipated.
OPTIONS AND FUTURES CONTRACTS
The Portfolio may enter into transactions in futures contracts, options on
futures contracts, options on securities indexes and options on securities, for
the purpose of hedging the Portfolio's securities, which would have the effect
of reducing the volatility of an investment in the Portfolio. In general, each
such transaction involves the establishment of a position which is expected to
move in a direction opposite to that of the security or securities being
hedged.
For example, the Portfolio may sell futures contracts, or purchase put
options on futures contracts, securities indexes or securities for the purpose
of protecting against an anticipated decline in the value of securities held by
the Portfolio. In the event that such decline occurs, and the hedging
transaction is successful, the reduced value of portfolio securities will be
offset, in whole or in part, by a corresponding gain on the futures or option
position. Conversely, when the Portfolio is not fully invested in the
securities market, and it expects a significant market advance, it may purchase
futures contracts or call options on futures contracts, security indexes or
<PAGE>
securities in 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.
Part B includes further information about the transactions in futures and
option contracts to be entered into by the Portfolio. Gain or loss to the
Portfolio on transactions in security index futures or options will depend on
price movements in the stock market generally (or in a particular industry or
segment of the market), rather than price movements of individual securities. A
security index assigns relative values to the securities included in the index
and the index fluctuates with changes in the market values of the securities so
included. Some security index futures or options are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures or options on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Options on indexes
and options on securities are traded on securities exchanges regulated by the
Securities and Exchange Commission. Futures contracts and options on futures
contracts are traded only on designated contract markets regulated by the
Commodity Futures Trading Commission and through a registered futures
commission merchant which is a member of such contract market. A commission
must be paid on each completed purchase and sale transaction. Transactions on
such exchanges are cleared through a clearing corporation, which guarantees
performance between the clearing members which are parties to each contract.
The Portfolio currently does not intend to engage in the writing of
options, except for the purpose of terminating an existing position or under
the limited circumstances described in Part B. Nevertheless, the Portfolio has
the authority to write options and may do so in the future if the Advisers
determine that such transactions are in the best interests of the Portfolio.
SHORT TERM INSTRUMENTS
Cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities may be held to provide a reserve for future
purchases of common stock or securities during periods of unusual market
conditions or in order to reduce volatility, or as a temporary defensive
measure when the Advisers determine security markets to be overvalued. The
Portfolio limits its short-term investments to those U.S. dollar-denominated
instruments which are determined by or on behalf of the Board of Trustees of
the Trust (the "Board of Trustees") to present minimal credit risks and which
are of "high quality" as determined by a major rating service (i.e., rated P-1
by Moody's or A-1 by S&P) or, in the case of instruments which are not rated,
are of comparable quality pursuant to procedures established by the Board of
Trustees. Investments in high quality short-term instruments may, in many
circumstances, result in a lower yield than would be available from investments
in instruments with a lower quality or longer term.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements involve the acquisition by the Portfolio of an
underlying debt instrument subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the instrument at a fixed price
usually not more than one week after its purchase. The Portfolio's custodian or
a sub-custodian will have custody of securities acquired by the Portfolio under
a repurchase agreement.
Repurchase agreements may be entered into for the Portfolio with sellers,
which are usually member banks of the Federal Reserve System or member firms of
the New York Stock Exchange (or a subsidiary thereof). Such transactions afford
an opportunity for the Portfolio to earn a return on available cash at minimal
market risk. Certain costs may be incurred by the Portfolio in connection with
the sale of the securities if the seller does not repurchase them in accordance
with the repurchase agreement. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the securities, realization on the
securities by the Portfolio may be delayed or
<PAGE>
limited. Repurchase agreements are considered collateralized loans under the
1940 Act.
The Portfolio may borrow funds for temporary or emergency purposes, such
as meeting larger than anticipated redemption requests, and not for leverage.
One means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
the 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
RESTRICTED SECURITIES
The Portfolio may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under Rule 144A under the 1933 Act. Provided that a dealer or
institutional trading market in such securities exists, these restricted
securities are treated as exempt from the Portfolio's 15% limit on illiquid
securities. Under the supervision of the Board of Trustees, the Advisers will
determine the liquidity of restricted securities and, through reports from the
Advisers, the Board of Trustees will monitor trading activity in restricted
securities. Because Rule 144A is relatively new, it is not possible to predict
how these markets will develop. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
DELAYED DELIVERY TRANSACTIONS
In order to help ensure the availability of suitable securities for the
Portfolio, the Advisers may purchase securities for the Portfolio on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations would be delivered to the Portfolio at a future date beyond
customary settlement time. Under normal circumstances, the Portfolio would take
delivery of such securities. In general, the Portfolio would not pay for the
securities until they are received, and would not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such basis, the Portfolio would establish a
segregated account consisting of cash, cash equivalents or high grade liquid
debt securities equal to the amount of its commitments to purchase
"when-issued" securities. An increase in the percentage of the Portfolio's
assets committed to the purchase of securities on a "when-issued" basis may
increase the volatility of its net asset value.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers,
dealers and other financial organizations. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid when U.S.
Government obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. The Portfolio will adhere to the following conditions
whenever its securities are loaned: (i) the Portfolio must receive at least
100% cash collateral or equivalent securities from the borrower; (ii) the
borrower must increase this collateral whenever the market value of the loaned
securities including accrued interest exceeds the level of the collateral;
(iii) the Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (v) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
<PAGE>
affecting the loaned securities were to occur, the Portfolio would terminate
the loan and regain the right to vote the securities.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
Changes to the Portfolio's securities generally 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 to trading when such trading is deemed appropriate.
The Portfolio engages in trading if it believes a transaction net of costs
(including custodian charges) will help it achieve its investment objective.
See the Statement of Additional Information, including the financial statements
incorporated by reference therein, for further information. The amount of
brokerage commissions and realized capital gains will tend to increase as the
level of portfolio activity increases. The primary consideration in placing
portfolio security transactions with broker-dealers for execution is to obtain,
and maintain the availability of, execution at the most favorable prices and in
the most effective manner possible. See "Brokerage Allocation and Other
Practices" in Part B.
As a diversified fund, no more than 5% of the assets of the Portfolio may
be invested in the securities of one issuer (other than U.S. Government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. As a nonfundamental operating investment policy, no
more than 15% of the Portfolio's net assets may be invested in (i) securities
the resale of which is restricted under federal securities laws; and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days).
Part B includes a discussion of additional nonfundamental investment
policies and a listing of specific investment restrictions which constitute
fundamental policies of the Portfolio, and cannot be changed without the
approval of the holders of a "majority of the outstanding voting securities"
(as defined in the 1940 Act) of the Portfolio. See "Investment Restrictions" in
Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio and the Trust. For further information about the Trustees and
officers of the Trust see "Management of the Fund" in Part B. A majority of the
Trust's Trustees are not affiliated with the Advisers.
INVESTMENT ADVISERS AND ADMINISTRATOR
Subject to such policies as the Board of Trustees may determine, and
pursuant to an Investment Advisory Agreement with the Portfolio (the "Advisory
Agreement"), Diversified, as the Adviser, manages the assets of the Portfolio,
including providing general supervision of the Subadviser. For its services
under the Advisory Agreement, the Adviser receives from the Portfolio a fee
accrued daily and paid monthly at an annual rate equal to 0.97% of the
Portfolio's average daily net assets. The Adviser is currently waiving a
portion of its investment advisory fee. Investment management decisions of the
Adviser are made by committee and not by managers individually. The principal
business address of Diversified is Four 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 nv, a Netherlands corporation which is a
publicly traded international insurance group. Diversified was incorporated in
1992 for the purpose of acting as investment adviser to the Portfolio and other
series of the Trust. Accordingly, the Trust is the first family of investment
<PAGE>
companies for which Diversified serves as investment adviser. It is the
Adviser's responsibility to select, subject to the review and approval of the
Board of Trustees, an appropriate subadviser with a distinguished background
and to review such subadviser's continued performance.
Diversified has entered into an Investment Subadvisory Agreement (the
"Subadvisory Agreement") with McKinley Capital Management Inc. McKinley Capital
Management Inc. makes the investment selections for the Portfolio consistent
with the guidelines and directions set by the Adviser and the Board of
Trustees. For its services under the Subadvisory Agreement, McKinley Capital
Management Inc. receives a fee from Diversified. This fee is accrued monthly by
multiplying the arithmetic average of the beginning and ending monthly net
assets in the Portfolio by the fee schedule and dividing by twelve. This fee is
paid on a quarterly basis at an annual rate equal to 0.90% on the first
$10,000,000 in average net assets of the Portfolio, 0.80% on the next
$15,000,000 in average net assets, 0.60% on the next $25,000,000 in average net
assets, 0.40% on the next $50,000,000 in average net assets, and 0.35% on
average net assets in excess of $100,000,000. McKinley Capital Management Inc.
furnishes at its own expense all services, facilities and personnel necessary
in connection with managing the Portfolio's investments and effecting
securities transactions for the Portfolio.
McKinley Capital Management Inc. was formed in March 1991 and is owned by
Robert Gillam. Its address is 3301 C Street, Anchorage, Alaska 99502. Total
assets under management by McKinley Capital Management Inc. as of December 31,
1996 were approximately $814 million, $16 million of which were assets of
registered investment companies. The following person is primarily responsible
for the day-to-day management of the Portfolio (the inception date of such
person's responsibility for the Portfolio and such person's business experience
for the past five years is indicated parenthetically): Robert Gilliam,
Portfolio Manager (since 1996, employed by McKinley since 1991).
Under the Advisory Agreement with the Trust, Diversified, as
Administrator, provides the Trust with general office facilities and supervises
the overall administration of the Trust, including, among other
responsibilities, the negotiation of contracts and fees with, and the
monitoring of performance and billings of, the independent contractors and
agents of the Trust; the preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations; providing
equipment and clerical personnel necessary for maintaining the organization of
the Trust; preparation of certain documents in connection with meetings of
Trustees and investors in the Trust; and the maintenance of books and records
of the Trust. The Administrator provides persons satisfactory to the Board of
Trustees to serve as officers of the Trust. Such officers, as well as certain
other employees and Trustees of the Trust, may be directors, officers or
employees of Diversified or its affiliates. Diversified receives no additional
compensation for providing such administrative services.
For the fiscal year ended December 31, 1996, the advisory fees paid to the
Adviser on an annual basis after any applicable waivers were equal to 0.37% of
the Portfolio's average daily net assets.
The Trust has not retained the services of a distributor, as interests in
the Portfolio are offered solely in private placement transactions. See
"Management of the Fund" in Part B for additional information about DISC, the
Placement Agent of interests in the Portfolio.
Expenses. The expenses of the Trust include the compensation of its
Trustees who are not affiliated with the Adviser or Subadviser; governmental
fees; interest charges; taxes; fees and expenses of independent auditors, of
legal counsel and of any transfer agent, custodian or registrar of the Trust;
insurance premiums; and expenses of calculating the net asset value of, and the
net income on, interests in the Portfolio.
<PAGE>
Expenses of the Trust also include expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Trust's custodian for all services to the Portfolio, 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; and the advisory
fees payable to the Adviser under the Advisory Agreement.
For the fiscal year ended December 31, 1996, the total expenses of the
Portfolio on an annual basis after any applicable fee waivers and expense
reimbursements were equal to 1.00% of the Portfolio's average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a separate series of the Trust, which is organized as a
trust under the laws of the State of New York. Under the Declaration of Trust,
the Trustees are authorized to issue beneficial interests in one or more series
(each a "Series"), including the Portfolio. Currently, the Portfolio is one of
thirteen active Series of the Trust. Investments in the 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 the Portfolio (e.g., investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio (and of no
other Series). However, the risk of an investor in the 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 the Portfolio have no preemptive or
conversion rights and are fully paid and nonassessable, except as set forth
above. For more information regarding the Trustees of the Trust, see
"Management of the Fund" in Part B.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio will vote as a separate
class, except as to voting of Trustees, as otherwise required by the 1940 Act,
or if determined by the Trustees to be a matter which affects all Series. As to
any matter which does not affect a particular Series, only investors in the one
or more affected Series are entitled to vote. The Portfolio is not required and
has no current intention of holding special meetings of investors, but the
Portfolio will hold special meetings of investors when in the judgment of the
Trustees it is necessary or desirable to submit matters for an investor vote.
Changes in fundamental policies will be submitted to investors for approval.
Investors under certain circumstances (e.g., upon application and submission of
certain specified documents to the Trustees by a specified number of investors)
have the right to communicate with other investors in connection with
requesting a meeting of investors for the purpose of removing one or more
Trustees. Investors also have the right to remove one or more Trustees without
a meeting by a declaration in writing by a specified number of investors. Upon
liquidation of the Portfolio, investors would be entitled to share pro rata in
the net assets of the Portfolio (and no other Series) available for
distribution to investors.
The 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 the Portfolio at the time of
such determination.
The "net income" of the Portfolio consists 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 the Portfolio. All the net income of the Portfolio is allocated
pro rata among the investors in the Portfolio (and no other Series).
<PAGE>
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the 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 of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
Investor inquiries regarding the Portfolio may be directed to the
Placement Agent at Four Manhattanville Road, Purchase, New York 10577, (914)
697-8000.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 above.
An investment in the Portfolio may be made in U.S. dollars without a sales
load at the net asset value next determined after an order is received in "good
order" by the Portfolio. There is no minimum initial or subsequent investment
in the Portfolio.
The Trust reserves the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each day the Advisers are open for business ("Portfolio Business
Day"). As of 4:00 p.m., New York time, on each such day, the value of each
investor's beneficial interest in the 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 4:00 p.m., New York time, on such 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m., New York 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 4:00 p.m., New York time, on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m., New York 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 the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., New York time, on the following
Portfolio Business Day.
The Portfolio values its assets 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. Debt obligations with 60 days or less remaining to
maturity may be valued by the amortized cost method which the Trust's Trustees
have determined to constitute fair value for such securities.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the 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 the Portfolio by the designated
cutoff time for each accredited investor. The proceeds of a reduction or
withdrawal will be paid by the Portfolio in federal funds normally on the
Portfolio Business Day the withdrawal is effected, but in any event within
seven days. The Portfolio reserves the right under certain circumstances, such
<PAGE>
as accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be.
Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal proceeds postponed
during any period in which the NYSE is closed (other than weekends or holidays)
or trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE>
PART B
ITEM 10. COVER PAGE.
Not Applicable.
ITEM 11. TABLE OF CONTENTS.
General Information and History ..................................... B-1
Investment Objectives and Policies ................................... B-1
Management of the Fund ............................................... B-27
Control Persons and Principal Holders of Securities .................. B-28
Investment Advisory and Other Services ............................... B-29
Brokerage Allocation and Other Practices ............................. B-32
Capital Stock and Other Securities ................................... B-32
Purchase, Redemption and Pricing of Securities Being Offered ......... B-34
Tax Status ........................................................... B-36
Underwriters ......................................................... B-37
Calculations of Performance Data ..................................... B-37
Financial Statements ................................................. B-37
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
Part A contains additional information about the investment objective and
policies of each of Money Market Portfolio, High Quality Bond Portfolio,
Government/Corporate Bond Portfolio, Balanced Portfolio, Equity Income
Portfolio, Growth & Income Portfolio, Equity Growth Portfolio, Special Equity
Portfolio, Intermediate Government Bond Portfolio, High-Yield Bond Portfolio,
International Equity Portfolio, Equity Value Portfolio and Aggressive Equity
Portfolio (each a "Portfolio and collectively the "Portfolios"), the thirteen
active series of Diversified Investors Portfolios (the "Trust"). There can, of
course, be no assurance that a Portfolio will achieve its investment objective.
This Part B should only be read in conjunction with Part A of this Registration
Statement.
The approval of the investors in a Portfolio is not required to change any
of the investment policies of the Portfolio discussed herein or in Part A of
this Registration Statement, unless otherwise indicated.
The Trust is an open-end diversified management investment company which
was organized as a trust under the laws of the State of New York on September
1, 1993. Beneficial interests in the Trust will be issued in private placement
transactions in each of the Portfolios.
As of the date hereof, there are no other active series of the Trust.
However, additional series may be added from time to time.
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The investment adviser of each Portfolio is Diversified Investment
Advisors, Inc. ("Diversified" or the "Adviser"). The subadviser (the
"Subadviser") of each Portfolio is set forth in the table below.
PORTFOLIO PORTFOLIO SUBADVISER
Money Market Portfolio Capital Management Group
High Quality Bond Portfolio Merganser Capital Management Corp.
Intermediate Government Bond Portfolio Capital Management Group
Government/Corporate Bond Portfolio Capital Management Group
High-Yield Bond Portfolio Delaware Investment Advisors
Balanced Portfolio Institutional Capital Corporation
Equity Income Portfolio Asset Management Group
Equity Value Portfolio Ark Asset Management, Inc.
Growth & Income Portfolio Putnam Advisory Company, Inc.
Equity Growth Portfolio Chancellor LGT Asset Management, Inc.
Special Equity Portfolio (1)
Aggressive Equity Portfolio McKinley Capital Management, Inc.
International Equity Portfolio Capital Guardian Trust Company
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(1) Special Equity Portfolio has four Subadvisers: Pilgrim Baxter &
Associates; Ark Asset Management Co., Inc.; Liberty Investment Management,
Inc.; and Westport Asset Management, Inc.
As to each Portfolio, the Adviser and its Subadviser or Subadvisers are
referred to herein collectively as the "Advisers."
BANK OBLIGATIONS
Domestic commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to federal examination and to a substantial body of federal law and
regulation. As a result of federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
("CDs") and time deposits ("TDs"), may be general obligations of the parent
banks in addition to the issuing branch, or may be limited by the terms of a
specific obligation and governmental regulation. Such obligations are subject
to different risks than are those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obligations,
foreign exchange controls and foreign withholding and other taxes on interest
income. These foreign branches and subsidiaries are not necessarily subject to
the same or similar regulatory requirements that apply to domestic banks, such
as mandatory reserve requirements, loan limitations, and accounting, auditing
and financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal or state
regulation as well as governmental action in the country in which the foreign
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bank has its head office. A domestic branch of a foreign bank with assets in
excess of $1 billion may be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state.
In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (2) maintain assets within the state in
an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Advisers carefully evaluate such investments on a
case-by-case basis.
U.S. GOVERNMENT AND AGENCY SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one
to ten years; and Treasury Bonds generally have initial maturities of greater
than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. A Portfolio
will invest in such securities only when the Advisers are satisfied that the
credit risk with respect to the issuer is minimal.
COMMERCIAL PAPER
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the
lender may determine to invest varying amounts.
The Portfolios may purchase three types of commercial paper, as classified
by exemption from registration under the Securities Act of 1933, as amended
(the "1933 Act"). The three types include open market, privately placed, and
letter of credit commercial paper. Trading of such commercial paper is
conducted primarily by institutional investors through investment dealers or
directly through the issuers. Individual investor participation in the
commercial paper market is very limited.
Open Market. "Open market" commercial paper refers to the commercial paper
of any industrial, commercial, or financial institution which is openly traded,
including directly issued paper. "Open market" paper's 1933 Act exemption is
under Section 3(a)(3) which limits the use of proceeds to current
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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. Unlike "open market" and "privately placed" commercial
paper, "letter of credit" paper has no limitations on purchases.
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.
Frequently, such obligations are collateralized 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 Advisers determine that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Portfolio may invest. The Advisers, on behalf of a Portfolio, will consider on
an ongoing basis the creditworthiness of the issuers of the floating and
variable rate demand obligations held by the Portfolio. The Portfolios will not
invest more than 15% (10% in the case of the Money Market Portfolio) of the
value of their net assets in floating or variable rate demand obligations as to
which they cannot exercise the demand feature on not more than seven days'
notice if there is no secondary market available for these obligations, and in
other securities that are not readily marketable. See "Investment Restrictions"
below.
PARTICIPATION INTERESTS
A Portfolio may purchase from financial institutions participation
interests in securities in which such Portfolio may invest. A participation
interest gives a Portfolio an undivided interest in the security in the
proportion that the Portfolio's participation interest bears to the total
principal amount of the security. These instruments may have fixed, floating or
variable rates of interest, with remaining maturities of 13 months or less. If
the participation interest is unrated, or has been given a rating below that
which is permissible for purchase by the Portfolio, the participation interest
will be backed by an irrevocable letter of credit or guarantee of a bank, or
the payment obligation otherwise will be collateralized by U.S. Government
securities, or, in the case of unrated participation interests, the Advisers
must have determined that the instrument is of comparable quality to those
instruments in which a Portfolio may invest. For certain participation
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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
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid securities because
of the potential for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. A mutual fund
might also have to register such restricted securities in order to dispose of
them 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.
The Securities and Exchange Commission (the "SEC") has recently adopted
Rule 144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act for resales of certain securities to qualified institutional buyers.
The Advisers will monitor the liquidity of Rule 144A securities for each
Portfolio under the supervision of the Board of Trustees of the Trust (the
"Board of Trustees"). In reaching liquidity decisions, the Advisers will
consider, among other things, the following factors: (1) the frequency of
trades and quotes for the security, (2) the number of dealers and other
potential purchasers wishing to purchase or sell the security, (3) dealer
undertakings to make a market in the security and (4) the nature of the
security and of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer).
UNSECURED PROMISSORY NOTES
A 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 and will be deemed by the Board of Trustees to present
minimal credit risks. 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
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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 (the "NYSE") (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 collateralized by the value of the underlying security, usually U.S.
Government or government agency issues. Under the Investment Company Act of
1940, as amended (the "1940 Act"), repurchase agreements may be considered to
be loans by the buyer. A 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. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Portfolio may decline below the
repurchase price of those securities.
FOREIGN SECURITIES - ALL PORTFOLIOS
The Portfolios may invest their assets in securities of foreign issuers.
Investing in securities issued by companies whose principal business activities
are outside the United States may involve significant risks not present in
domestic investments. For example, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, brokerage or other taxation, limitation on the removal
of funds or other assets of a Portfolio, political or financial instability or
diplomatic and other developments which would affect such investments. Further,
economies of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States.
It is anticipated that in most cases the best available market for foreign
securities would be on exchanges or in 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 U.S. 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
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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:
(i) 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), (ii) high quality, U.S.
dollar-denominated short-term bonds and notes (including variable amount master
demand notes) issued by foreign corporations, (including Canadian commercial
paper, which is commercial paper issued by a Canadian corporation or a Canadian
counterpart of a U.S. corporation, and Europaper, which is U.S.
dollar-denominated commercial paper of a foreign issuer) and (iii) 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 Advisers 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 MONEY MARKET PORTFOLIO
Each Portfolio's policy is to invest not more than 5% of a Portfolio's
assets in closed-end investment companies which primarily hold foreign
securities. Investments in such companies may entail the risk that the market
value of such investments may be substantially less than their net asset value
and that there would be duplication of investment management and other fees and
expenses. Securities of foreign issuers include investments in sponsored
American Depositary Receipts ("ADRs"). ADRs are depositary receipts for
securities of foreign issuers and provide an alternative method for a Portfolio
to make foreign investments. These securities will not be denominated in the
same currency as the securities into which they may be converted. Generally,
ADRs, in registered form, are designed for use in U.S. securities markets. ADRs
are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities.
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
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.
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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 transferable in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
forward foreign currency exchange contract generally has no deposit requirement
and is traded at a net price without commission. A 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. Since consideration of the
prospect for currency parities will be incorporated into the Advisers'
long-term investment decisions, the Portfolios will not routinely enter into
foreign currency hedging transactions with respect to security transactions;
however, the Advisers believe that it is important to have the flexibility to
enter into foreign currency hedging transactions when they determine that the
transactions would be in a 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 Part A 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.
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.
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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 fund guaranteed interest.
The GICs provide that this guaranteed interest will not be less than a certain
minimum rate. The insurance company may assess periodic charges against a GIC
for expenses and service costs allocable to it, and the charges will be
deducted from the value of the deposit fund. Because a 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
The Portfolios may purchase securities on a "when-issued" or on a "forward
delivery" basis. 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 recommend 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 Portfolio expects always to have cash, cash
equivalents, or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, although a Portfolio does
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, a
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 Portfolio may acquire zero coupon obligations when consistent with its
investment objective and policies. Such obligations have greater price
volatility than coupon obligations and will not result in payment of interest
until maturity. Since dividend income is accrued throughout the term of the
zero coupon obligation but is not actually received until maturity, a Portfolio
may have to sell other securities to pay said accrued dividends prior to
maturity of the zero coupon obligation.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS - PORTFOLIOS OTHER THAN
MONEY MARKET PORTFOLIO
General. The successful use of such instruments draws upon the Advisers'
skill and experience with respect to such instruments. Should 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
may realize losses and thus will be in a worse position than if such strategies
had not been used. In addition, the correlation between movements in the price
of futures contracts or options on futures contracts and movements in the price
of the securities and currencies hedged or used for cover will not be perfect
and could produce unanticipated losses.
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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. 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 are 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 that might otherwise result. If such decline occurs,
the loss in value of portfolio securities may be offset, in whole or part, by
gains on the futures position. When a Portfolio is not fully invested in the
securities market and anticipates a significant market advance, it may purchase
stock index futures contracts in order to gain rapid market exposure that may,
in part or entirely, 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 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
<PAGE>
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
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. To the extent a Portfolio enters into futures
contracts for this purpose, the assets in the segregated asset account
maintained to cover the Portfolio's obligations with respect to such futures
contracts will consist of cash, cash equivalents or high quality liquid debt
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Portfolio with respect to
such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Advisers may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Advisers believe
that use of such contracts will benefit the Portfolios, if the Advisers'
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 intend to purchase and write
options on futures contracts for hedging purposes. The purchase of a call
option on a futures contract is similar in some respects to the purchase of a
call option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when a Portfolio is not fully invested it
<PAGE>
may purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a 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. 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 existing options on futures may to some
extent be reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a 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 Board of Trustees has adopted the requirement that futures contracts
and options on futures contracts be used either (i) as a hedge without regard
to any quantitative limitation, or (ii) for other purposes to the extent that
immediately thereafter the aggregate amount of margin deposits on all
(non-hedge) futures contracts of the 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 the 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, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
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.
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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.
The Portfolios intend to write covered call options on foreign currencies.
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 other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Portfolio in cash, U.S. Government securities and other high quality liquid
debt securities in a segregated account with its custodian.
The Portfolios also intend to write call options on foreign currencies
that are not covered for cross-hedging purposes. A call option on a foreign
currency is for cross-hedging purposes if it is not covered, but is designed to
provide a hedge against a decline in the U.S. dollar value of a security which
the 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, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board
Options Exchange, subject to SEC regulation. Similarly, options on currencies
may be traded over-the-counter. In an over-the-counter trading environment,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time.
<PAGE>
Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose
amounts substantially in excess of their initial investments, due to the margin
and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting a 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, 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 (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in
the United States, and (v) lesser trading volume.
OPTIONS ON SECURITIES - PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO
The Portfolios may write (sell) covered call and put options to a limited
extent on its portfolio securities ("covered options"). However, a Portfolio
may forgo the benefits of appreciation on securities sold or may pay more than
the market price on securities acquired pursuant to call and put options
written by the Portfolio.
<PAGE>
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.
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. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated
on the books of the custodian for the 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
<PAGE>
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 Portfolios have adopted certain other nonfundamental policies
concerning option transactions which are discussed below. A Portfolio's
activities in options may also be restricted by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options, and
there can be no assurance that viable exchange markets will develop or
continue.
The Portfolios may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
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 Advisers will monitor
the creditworthiness of dealers with whom a Portfolio enters into such options
transactions under the general supervision of the Trustees.
OPTIONS ON SECURITIES INDICES - PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO
In addition to options on securities, the Portfolios may also purchase and
write (sell) call and put options on securities indices. Such options give the
holder the right to receive a cash settlement during the term of the option
based upon the difference between the exercise price and the value of the
index. Such options will be used for the purposes described above under
"Options on Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Portfolios generally will only purchase or write such an option if the Advisers
believe the option can be closed out.
Use of options on securities indices also entails the risk that trading in
such options may be interrupted if trading in certain securities included in
the index is interrupted. The Portfolios will not purchase such options unless
the Advisers believe the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the 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
<PAGE>
securities indices require settlement in cash, the Advisers may be forced to
liquidate portfolio securities to meet settlement obligations.
SHORT SALES "AGAINST THE BOX" - PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO
In a short sale, a fund 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), or when a Portfolio wants to sell the security at an attractive
current price, but also wishes to defer recognition of gain or loss for federal
income tax purposes or for purposes of satisfying certain tests applicable to
regulated investment companies under the Code. In such case, any future losses
in a 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, the Advisers do not expect that more
than 40% of a Portfolio's total assets would be involved in short sales against
the box. The Advisers do not currently intend to engage in such sales.
CERTAIN OTHER OBLIGATIONS
In order to allow for investments in new instruments that may be created
in the future, upon amending this registration statement, a Portfolio or
Portfolios may invest in obligations other than those listed previously,
provided such investments are consistent with a Portfolio's investment
objective, policies and restrictions.
RATING SERVICES
The ratings of rating services represent their opinions as to the quality
of the securities that they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although these ratings are an initial criterion for
selection of portfolio investments, the Advisers also make their own
evaluations of these securities, subject to review by the Board of Trustees.
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
Advisers will consider such an event in their determination of whether a
Portfolio should continue to hold the obligation. A description of security
ratings used herein and in Part A is set forth below:
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STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S")
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A - Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debts in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debts in this category than for debts in higher rated categories.
BB - Debt rated BB is regarded as having less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
MOODY'S INVESTORS SERVICE, INC.
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 risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
<PAGE>
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 P-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Except as stated otherwise, all investment policies and restrictions
described herein are nonfundamental, and may be changed without prior
shareholder approval.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of each
Portfolio and 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 registration statement means, with respect to the 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.
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
<PAGE>
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 the
Trust or the 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 (the
Trust may hold and sell, for the Portfolio's portfolio, real estate acquired as
a result of the Portfolio's ownership of securities);
(5) concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement of
the Portfolio's investment objective, 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);
(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.
Non-Fundamental Restrictions. Each Portfolio will not as a matter of
operating policy:
(i) borrow money for any purpose in excess of 10% of the Portfolio's total
assets (taken at cost), except that the Portfolio may borrow for temporary or
emergency purposes up to 1/3 of its assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Portfolio's net assets (taken at market value), provided that collateral
arrangements with respect to options and futures, including deposits of initial
deposit and variation margin, reverse repurchase agreements, when-issued
securities and other similar investment techniques are not considered a pledge
of assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures;
(iv) invest for the purpose of exercising control or management;
(v) purchase securities issued by any other investment company except by
purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's commission,
or except when such purchase, though not made in the open market, is part of a
plan of merger or consolidation; provided, however, that securities of any
investment company will not be purchased for the Portfolio if such purchase at
the time thereof would cause (a) more than 10% of the Portfolio's total assets
<PAGE>
(taken at the greater of cost or market value) to be invested in the securities
of such issuers; (b) more that 5% of the Portfolio's total assets (taken at the
greater of cost or market value) to be invested in any one investment company;
or (c) more than 3% of the outstanding voting securities of any such issuer to
be held for the Portfolio; and provided further that the Portfolio may not
purchase any security from any open-end investment company;
(vi) purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts shall not be
subject to this restriction;
(vii) purchase or retain in the Portfolio's portfolio any securities
issued by an issuer any of whose officers, directors, trustees or security
holders is an officer or Trustee of the Trust, or is an officer or partner of
the Adviser or Subadviser, if after the purchase of the securities of such
issuer for the Portfolio one or more of such persons owns beneficially more
than 1/2 of 1% of the shares or securities, or both, all taken at market value,
of such issuer, and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or securities,
or both, all taken at market value;
(viii) invest more than 5% of the Portfolio's net assets in warrants
(valued at the lower of cost or market), but not more than 2% of the
Portfolio's net assets may be invested in warrants not listed on the NYSE or
the American Stock Exchange; and
(ix) make short sales of securities or maintain a short position
(excluding short sales if the Portfolio owns an equal amount of such securities
or securities convertible into or exchangeable for, without payment of any
further consideration, securities of equivalent kind and amount) if such short
sales represent more than 25% of the Portfolio's net assets (taken at market
value); provided, however, that the value of the Portfolio's short sales of
securities (excluding U.S. Government securities) of any one issuer may not be
greater than 2% of the value (taken at market value) of the Portfolio's net
assets or more than 2% of the securities of any class of any issuer.
(x) enter into repurchase agreements providing for settlement in more than
seven days after notice or purchase securities which are not readily marketable
(which securities would include participation interests that are not subject to
the demand feature described in this registration statement and floating and
variable rate demand obligations as to which no secondary market exists and the
Portfolio cannot exercise the demand feature described in this registration
statement on not more than seven days' notice), if, in the aggregate, more than
15% (10% in the case of the Money Market Portfolio) of its net assets would be
so invested. A Portfolio may not invest in TDs maturing in more than seven
days.
Policies (i) through (x) may be changed by the Board of Trustees.
ITEM 14. MANAGEMENT OF THE FUND.
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. An asterisk indicates that a Trustee is an "interested
person" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated,
the address of each Trustee and officer is Four Manhattanville Road, Purchase,
New York 10577.
<PAGE>
TRUSTEES
Donald E. Flynn:* Vice President, AEGON USA, Inc., 1988 to present; Executive
Vice President, AEGON USA Investment Management, Inc., 1988 to present; Vice
President, AEGON USA Managed Portfolios, Inc., 1988 to present. Age: 56.
Neal M. Jewell: Executive Vice President, American International Group Asset
Management (since November 1991); Director of Oversees Pensions, American
International Group Asset Management (December 1990 to October 1991); Executive
Vice President Pensions, Mutual of New York (prior to June 1989). His address
is 355 Thornridge Drive, Stamford, Connecticut 06903. Age: 62.
Eugene M. Mannella: Vice President, Investment Management Services, Inc.
(since August 1993); Senior Vice President, Lehman Brothers Inc. (May 1986 to
August 1993). His address is Two Orchard Neck Road, Center Moriches, New
York 11934. Age: 43.
Patricia L. Sawyer: Executive Vice President and Director, Robert L. Smith &
Co. (since July 1990); Vice President, American Express (September 1988 to
July 1990). Her address is 256 West 10th Street, New York, New York 10014.
Age: 46.
Tom A. Schlossberg:* Vice President, Diversified (since October 1992);
Executive Vice President and Head of Pension Operations, Mutual Life Insurance
Company of New York. Age: 47.
OFFICERS
Mr. Schlossberg is President, Chief Executive Officer and Chairman of the
Board of Trustees of the Trust. In addition, he holds the same position with
The Diversified Investors Funds Group (the "Diversified Funds Group"), an
open-end management investment company, of which Mr. Schlossberg is also a
trustee.
Robert F. Colby: Secretary; Vice President and Chief Corporate Counsel, Mutual
Life Insurance Company of New York; Vice President and General Counsel,
Diversified (since November 1993); Vice President of Diversified Investors
Securities Corp. ("DISC") (since November 1993). Age: 41.
Alfred C. Sylvain: Treasurer and Assistant Secretary; Vice President and
Treasurer of Diversified (since November 1993); Treasurer of DISC (since
November 1993); Vice President, Mutual Life Insurance Company of New York
(since July 1987). Age: 45.
John F. Hughes: Assistant Secretary; Senior Counsel, Mutual Life Insurance
Company of New York; Vice President and Senior Counsel, Diversified (since
November 1993); Assistant Secretary, DISC (Since November 1993). Age: 56.
<PAGE>
COMPENSATION
For the fiscal year ended December 31, 1996, the Portfolios provided the
following compensation to its trustees.
TOTAL
COMPENSATION FROM
AGGREGATE REGISTRANT
COMPENSA- AND FUND
PERSON, TION FROM COMPLEX PAID
POSITION REGISTRANT TO DIRECTORS
Tom A. Schlossberg None None
Trustee
Donald E. Flynn None None
Trustee
Neal M. Jewell $9,725 $9,725
Trustee
Eugene M. Mannella $9,725 $9,725
Trustee
Patricia L. Sawyer $9,725 $9,725
Trustee
No director, officer of employee of Diversified or any of their affiliates
will receive any compensation from the Trust for serving as a Trustee or
officer of the Trust.
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers as described below under Item 18.
<PAGE>
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
At April 1, 1997, AUSA Life Insurance Company, Inc. ("AUSA"), Four
Manhattanville Road, Purchase, New York 10577, and The Mutual Life Insurance
Company ("MONY"), 1740 Broadway, New York, New York 10019, owned the following
percentage interests of the outstanding beneficial interests of the Portfolios
indicated (all such interests being held in separate accounts of AUSA and MONY,
respectively):
AUSA MONY
Money Market 36.87% 41.93%
High Quality Bond 41.32% 46.33%
Intermediate Government Bond 59.26% 20.96%
Government/Corporate Bond 26.00% 63.80%
High-Yield Bond 33.16% 37.13%
Balanced 77.05% 2.18%
Equity Income 66.14% 27.65%
Equity Value 34.50% 18.22%
Growth & Income 63.14% 10.75%
Equity Growth 79.20% 7.00%
Special Equity 57.22% 31.69%
Aggressive Equity 38.53% 24.21%
International Equity 36.70% 45.35%
As of April 1, 1997 the officers and Trustees of the Trust owned beneficially
and in the aggregate less than 1% of the outstanding interests in each of the
Portfolios.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
Investment Advisory Services. The Adviser manages the assets of each
Portfolio pursuant to an Investment Advisory Agreement (the "Advisory
Agreement") with the Trust with respect to that Portfolio and the investment
policies described herein and in Part A. Subject to such further policies as
the Board of Trustees 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 each Subadviser.
It is the responsibility of a Subadviser to make the day-to-day investment
decisions for its Portfolio and to place the purchase and sales orders for
securities transactions of such Portfolio, subject in all cases to the general
supervision of the Adviser. Each Subadviser furnishes at its own expense all
services, facilities and personnel necessary in connection with managing its
Portfolio's investments and effecting securities transactions for the
Portfolio.
Each Advisory 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 a Portfolio when authorized either by majority vote of the investors in the
Portfolio (with the vote of each being in proportion to the amount of its
investment) or by a vote of a majority of the Board of Trustees, or by the
Adviser or a Subadviser on not more than 60 days' nor less than 30 days'
written notice, as the case may be, and will automatically terminate in the
event of its assignment. Each agreement provides that neither 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 corresponding
Portfolio, except for willful misfeasance, bad faith, gross negligence or
<PAGE>
reckless disregard of its or their obligations and duties under the Advisory
Agreement and the Subadvisory Agreement, as the case may be.
The Adviser's and Subadviser's fees are described in Part A.
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 services over $8 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 300,000 participants and has 490 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 2,000
highly accomplished independent firms. Each subadviser's performance is
carefully monitored by Diversified taking into consideration fund performance
in light of investment objectives and policies and level of risk.
Through a rigorous portfolio manager selection process which includes
researching each subadviser's asset class, track record, organizational
structure, management team, consistency of performance and assets under
management, five to ten subadvisers are chosen. Out of that group, Diversified
then carefully chooses the three most qualified 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 subadvisers, Diversified then hires
the most qualified, independent subadviser for each Portfolio, subject to
approval by the Board of Trustees including a majority of the Trustees who are
not "interested persons" of the Trust.
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. Replacing a Subadviser, however,
will necessitate a proxy solicitation which involves other expenses.
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>
A number of "red flags" signal a more extensive and frequent manager
review. These flags consist of a return inconsistent with the investment
objectives 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 so that,
should a manager change be warranted, the transition can be effected on a
timely basis.
For the fiscal year ended December 31, 1994, Diversified earned and
voluntarily waived advisory fees as follows:
Portfolio Fee Earned Fee Waived
Money Market $312,079 $29,141
High Quality Bond 607,967 20,204
Intermediate Government Bond 246,814 32,308
Government/Corporate Bond 776,654 10,376
Balanced 443,372 38,936
Equity Income 2,470,354 2,000
Growth & Income 576,431 23,726
Equity Growth 629,874 31,377
Special Equity 1,628,738 61,756
For the fiscal year ended December 31, 1995, Diversified earned and
voluntarily waived advisory fees as follows:
Portfolio Fee Earned Fee Waived
Money Market $391,657 $22,086
High Quality Bond 562,958 9,897
Intermediate Government Bond 286,019 44,808
Government/Corporate Bond 1,011,116 ---
High-Yield Bond 11,146 11,146
Balanced 639,345 51,146
Equity Income 2,878,308 ---
Growth & Income 639,911 28,140
Equity Growth 1,272,213 ---
Special Equity 2,018,861 82,511
International Equity 143,910 6,191
<PAGE>
For the fiscal year ended December 31, 1996, Diversified earned and
voluntarily waived advisory fees as follows:
Portfolio Fee Earned Fee Waived
Money Market $445,832 $ 680
High Quality Bond 627,049 ---
Intermediate Government Bond 340,989 27,685
Government/Corporate Bond 1,232,524 ---
High-Yield Bond 60,742 60,742
Balanced 995,489 ---
Equity Income 3,895,211 ---
Equity Value 84,055 70,088
Growth & Income 1,052,349 39,117
Equity Growth 1,730,632 1,462
Special Equity 3,255,893 47,350
Aggressive Equity 95,060 57,964
International Equity 799,760 69,256
Administrator. For a description of the administrative services
Diversified provides to the Portfolios under the Advisory Agreements, see Part
A.
Placement Agent. Investor inquiries may be directed to the Trust's
exclusive placement agent, DISC, Four Manhattanville Road, Purchase, New York
10577, ([914] 697-8000).
Custodian. Pursuant to a Custodian Agreement, Investors Bank & Trust
Company acts as the custodian of Portfolio's assets (the "Custodian"). The
Custodian's responsibilities include safeguarding and controlling the
Portfolios' 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 the Portfolios may
be deposited into the Federal Reserve-Treasury Department Book Entry System or
the Depositary Trust Company and may be held by a subcustodian bank if such
arrangements are reviewed and approved by the Trustees of the Trust. The
Custodian does not determine the investment policies of the Portfolios or
decide which securities the Portfolios 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 the Trust.
Independent Accountants. Coopers & Lybrand, L.L.P. serves as the
Portfolios' independent accountants providing audit and accounting services
including (i) examination of the annual financial statements, (ii) assistance
and consultation with respect to the preparation of filings with the SEC and
(iii) preparation of annual income tax returns.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
Except as may be required to ensure satisfaction of certain tests
applicable to regulated investment companies under the 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 Advisers
believe that a transaction net of costs (including custodian charges) will help
achieve the Portfolio's investment objective.
Set forth below are the portfolio turnover rates for the Portfolios. A
rate of 100% indicates that the equivalent of all of the Portfolio's assets
<PAGE>
have been sold and reinvested in a year. High portfolio turnover may result in
the realization of substantial net capital gains or losses. To the extent net
short term capital gains are realized, any distriubtions resulting from such
gains are considered ordinary income for federal income tax purposes.
Portfolio Turnover rates Turnover rates
1995 1996
High Quality Bond 25% 66%
Intermediate Government Bond 59% 60%
Government/Corporate Bond 122% 146%
High-Yield Bond 21% 107%
Balanced 124% 113%
Equity Income 23% 26%
Equity Value (*) -- 65%
Growth & Income 155% 142%
Equity Growth 62% 133%
Special Equity 155% 140%
Aggressive Equity (*) -- 186%
International Equity 7% 29%
- -----------------
(*)Not annualized for 1996. Commencement of operations, April 19, 1996.
A Portfolio's purchase 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. Any
transactions for which a Portfolio pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and the asked price.
Allocations of transactions, including their frequency, to various dealers
is determined by the Subadvisers in their best judgment and in a manner deemed
to be in the best interest of the investors in a Portfolio rather than by any
formula. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price.
Investment decisions for a 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 Advisers or their affiliates. If, however, a Portfolio and other
investment companies or accounts managed by the Subadvisers are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by a Portfolio or the size of the position obtainable for the
Portfolio. In addition, when purchases or sales of the same security for a
Portfolio and for other investment companies managed by the Subadvisers occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases or sales.
Furthermore, in certain circumstances affiliates of the Subadvisers whose
investment portfolios are managed internally, rather than by the Subadvisers,
might seek to purchase or sell the same type of investments at the same time as
a Portfolio. Such an event might also adversely affect that Portfolio.
<PAGE>
The following Portfolios paid the approximate brokerage commissions
indicated for the fiscal years noted below:
Balanced Portfolio:
Fiscal year ended December 31, 1994: $245,752.
Fiscal year ended December 31, 1995: $199,128.
Fiscal year ended December 31, 1996: $317,179.
Equity Income Portfolio
Fiscal year ended December 31, 1994: $487,599.
Fiscal year ended December 31, 1995: $377,904.
Fiscal year ended December 31, 1996: $565,943.
Equity Value Portfolio
Fiscal year ended December 31, 1996: $64,207.
Growth & Income Portfolio
Fiscal year ended December 31, 1994: $64,869.
Fiscal year ended December 31, 1995: $348,828.
Fiscal year ended December 31, 1996: $397,075.
Equity Growth Portfolio
Fiscal year ended December 31, 1994: $162,258.
Fiscal year ended December 31, 1995: $174,716.
Fiscal year ended December 31, 1996: $670,631.
Special Equity Portfolio
Fiscal year ended December 31, 1994: $308,251.
Fiscal year ended December 31, 1995: $425,803.
Fiscal year ended December 31, 1996: $678,431.
Aggressive Equity Portfolio
Fiscal year ended December 31, 1996: $15,490.
International Equity Portfolio
Fiscal year ended December 31, 1995: $38,261.
Fiscal year ended December 31, 1996: $211,629.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Each Portfolio is a series of the Trust, which is organized under the laws
of the State of New York. Under the Trust's Declaration of Trust, the Trustees
are authorized to issue beneficial interests in one or more series (each a
"Series"), including the Portfolios. Currently, the thirteen Portfolios are the
only active Series of the Trust. Investors in a Series will be held personally
liable for the obligations and liabilities of that Series (and of no other
Series), subject, however, to indemnification by the Trust in the event that
there is imposed upon an investor a greater portion of the liabilities and
obligations of the Series than its proportionate beneficial interest in the
Series. The Declaration of Trust also provides that the Trust shall maintain
appropriate insurance (for example, a fidelity bond and errors and omissions
insurance) for the protection of the Trust, its investors, Trustees, 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 the Trust itself was unable to meet its obligations.
Investors in a Series are entitled to participate pro rata in
distributions of taxable income, loss, gain and credit of their respective
Series only. Upon liquidation or dissolution of a Series, investors are
entitled to share pro rata in that Series' (and no other Series') net assets
available for distribution to its investors. The Trust reserves the right to
create and issue additional Series of beneficial interests, in which case the
beneficial interests in each new Series would participate equally in the
<PAGE>
earnings, dividends and assets of that particular Series only (and no other
Series). Any property of the Trust is allocated and belongs to a specific
Series to the exclusion of all other Series. All consideration received by the
Trust for the issuance and sale of beneficial interests in a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings and proceeds thereof, and any funds or payments derived
from any reinvestment of such proceeds, is held by the Trustees in a separate
subtrust (a Series) for the benefit of investors in that Series and irrevocably
belongs to that series for all purposes. Neither a Series nor investors in that
Series possess any right to or interest in the assets belonging to any other
Series.
Investments in a Series have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Investments in a Series may not be transferred. Certificates representing an
investor's beneficial interest in a Series are issued only upon the written
request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in each Series. Investors in a Series do not have cumulative voting
rights, and investors holding more than 50% of the aggregate beneficial
interests in all outstanding Series may elect all of the Trustees if they
choose to do so and in such event other investors would not be able to elect
any Trustees. Investors in each Series will vote as a separate class except as
to voting of Trustees, as otherwise required by the 1940 Act, or if determined
by the Trustees to be a matter which affects all Series. As to any matter which
does not affect the interest of a particular Series, only investors in the one
or more affected Series are entitled to vote. The Trust is not required and has
no current intention of holding annual meetings of investors, but the Trust
will hold special meetings of investors when in the judgment of the Trustees it
is necessary or desirable to submit matters for an investor vote.
The Trust's 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 the
Trust's registration statement, or as submitted to them by the Trustees. Any
amendment submitted to investors which the Trustees determine would affect the
investors of any Series shall be authorized by vote of the investors of such
Series and no vote will be required of investors in a Series not affected.
The Trust or any Series (including the 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 interests in the affected Series present of
represented at such meeting, if investors in more than 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 interests in the affected Series. The Trust or any Series (including
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 Series, unless the investors in such
Series, by majority vote, agree to continue the Series. The Trust will be
dissolved upon the dissolution of the last remaining Series.
The Trust's Declaration of Trust provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of
the Trust 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 office.
<PAGE>
The Trust's 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 the Trust, unless, as to liability to the Trust 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 the Trust. 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.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolios are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See Item 4 in Part A.
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 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. 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. 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.
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 Board of Trustees, in good faith, will establish a conversion rate
for such currency.
A determination of value used in calculating net asset value must be a
fair value determination made in good faith utilizing procedures approved by
<PAGE>
the Board of Trustees. While no single standard for determining fair value
exists, as a general rule, the current fair value of a security would appear to
be the amount which a 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: (i) the fundamental analytical data relating
to the investment; (ii) the nature and duration of restrictions on disposition
of the securities; and (iii) an evaluation of the forces which influence the
market in which these securities are purchased and sold. Without limiting or
including all of the specific factors which may be considered in determining
fair value, some of the specific factors include: type of security, financial
statements of the issuer, cost at date of purchase, size of holding, discount
from market value, value of unrestricted securities of the same class at the
time of purchase, special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies, and other
relevant matters.
Each investor in each Portfolio may add to or reduce its investment in the
Portfolio on each day that the Adviser and the Subadviser of the Portfolio are
open for business. As of 4:00 p.m. (New York time) 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
(i) the numerator of which is the value of such investor's investment in the
Portfolio as of 4:00 p.m. 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 (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of 4:00 p.m. 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 the Portfolio as of 4:00 p.m. on the following day the
NYSE is open for trading.
Each Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the
investor's portfolio, as the case may be. A Portfolio will not make a
distribution in kind except in circumstances in which the owner of a beneficial
interest in that Portfolio is permitted to redeem in kind or unless requested
by such owner.
Investments in the Portfolio may not be transferred.
ITEM 20. TAX STATUS.
The Trust is organized as a New York trust. The Portfolios are not subject
to any income or franchise tax in the State of New York or the Commonwealth of
Massachusetts. 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 Code, and regulations promulgated thereunder.
Under interpretations of the Internal Revenue Service (1) each Portfolio
will be treated for federal income tax purposes as a partnership which is not a
publicly traded partnership and (2) for purposes of determining whether an
investor in a Portfolio satisfies requirements of Subchapter M of the Code, the
investor will be deemed to own a proportionate share of the Portfolio's assets
and will be deemed to be entitled to the Portfolio's income attributable to
that share. The Trust has advised the initial investors that it
<PAGE>
intends to conduct its operations so as to enable investors to satisfy those
requirements.
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 a 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.
The Portfolios' taxable year-end will be December 31. Although, as
described above, a Portfolio will not be subject to federal income tax, it 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 the 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.
ITEM 21. UNDERWRITERS.
Not applicable.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The financial statements of the Trust as of December 31, 1996 have been
filed with the Securities and Exchange Commission as part of the Portfolio
Series' annual report pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1
thereunder, and are hereby incorporated herein by reference from such report. A
copy of such report will be provided without charge to each person receiving
this Part B.
<PAGE>
PART C
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
The financial statements incorporated by reference into Part B are as follows:
Diversified Investors Portfolios
Statements of Assets and Liabilities at December 31, 1996
Statements of Operations For the Year Ended December 31, 1996
Statements of Changes in Net Assets For the Years Ended December 31,
1995 and December 31, 1996.
Portfolio of Investments at December 31, 1996
Notes to Financial Statements at December 31, 1996
Financial Highlights
Report of Independent Accountants
(b) Exhibits:
1. Declaration of Trust of the Registrant(*).
2. By-Laws of the Registrant(*).
5(a). Form of Investment Advisory Agreement between the Registrant and
Diversified Investment Advisors, Inc.(*)
5(b). Form of Investment Subadvisory Agreement(*).
8. Form of Custodian Contract between the Registrant and Investors Bank & Trust
Company(1).
13. Investment representation letters from initial investors(1).
17. Financial Data Schedules (*).
- -------------------
(1) Incorporated herein by reference from the registration statement on Form
N-1A of Diversified Investors Portfolios (File no. 811-8272) as filed with the
U.S. Securities and Exchange Commission on January 3, 1994.
(*) Filed herewith.
Item 25. Persons Controlled by or Under Common Control with the Registrant.
Not applicable.
<PAGE>
Item 26. Number of Holders of Securities.
Title of Class Number of Record Holders
- -------------- ------------------------
(as of March 1, 1997)
Balanced Portfolio 9
Money Market Portfolio 10
Growth & Income Portfolio 8
Equity Growth Portfolio 9
Equity Income Portfolio 10
Special Equity Portfolio 10
High Quality Bond Portfolio 9
Government/Corporate Bond Portfolio 10
Intermediate Government Bond Portfolio 9
High-Yield Bond Portfolio 8
Equity Value Portfolio 9
Aggressive Equity Portfolio 8
International Equity Portfolio 8
Item 27. Indemnification.
Reference is hereby made to Article V of the Registrant's Declaration of
Trust, filed as an Exhibit herewith.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940,
as amended.
Item 28. Business and Other Connections of Investment Adviser.
Diversified Investment Advisors, Inc. ("Diversified") is an indirect,
wholly-owned subsidiary of AEGON USA, Inc., 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 nv,
a Netherlands corporation which is a publicly traded international insurance
group.
Information as to the name, address and principal business of the
directors and executive officers of Diversified and of each Subadviser listed
in Part B is included in their respective Form ADV, each as filed with the
Commission, and such information is hereby incorporated herein by reference
from each such Form ADV.
Item 29. Principal Underwriters.
Not applicable.
<PAGE>
Item 30. Location of Accounts and Records.
Diversified Investors Portfolios
Four Manhattanville Road
Purchase, New York 10577
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, New York 10577
Diversified Investors Securities Corp.
Four Manhattanville Road
Purchase, New York 10577
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02205-1537
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
County of Westchester and State of New York on the 29th day of April, 1997.
DIVERSIFIED INVESTORS PORTFOLIOS
By /s/ Robert F. Colby
--------------------------
Robert F. Colby, Secretary
<PAGE>
DIVERSIFIED INVESTORS PORTFOLIOS
EXHIBIT INDEX
Exhibit No.
1. Declaration of Trust of the Registrant.
2. By-Laws of the Registrant.
5a. Form of Investment Advisory Agreement between the Registrant and
Diversified Investment Advisors, Inc.
5b. Form of Investment Subadvisory Agreement.
17. Financial Data Schedules.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MONEY MARKET PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 185,029,634
<INVESTMENTS-AT-VALUE> 185,029,634
<RECEIVABLES> 193
<ASSETS-OTHER> 55,534
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 185,085,361
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 73,107
<TOTAL-LIABILITIES> 73,107
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 161,696,143
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 23,338,361
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (22,250)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 185,012,254
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,760,937
<OTHER-INCOME> 0
<EXPENSES-NET> 532,460
<NET-INVESTMENT-INCOME> 9,228,477
<REALIZED-GAINS-CURRENT> (8,786)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 9,219,691
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 43,374,006
<ACCUMULATED-NII-PRIOR> 14,109,884
<ACCUMULATED-GAINS-PRIOR> (13,464)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 184,202
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 227,795
<AVERAGE-NET-ASSETS> 147,378,174
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> HIGH QUALITY BOND PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 194,090,614
<INVESTMENTS-AT-VALUE> 194,122,807
<RECEIVABLES> 2,336,440
<ASSETS-OTHER> 4,346,634
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 200,805,881
<PAYABLE-FOR-SECURITIES> 3,417,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 94,218
<TOTAL-LIABILITIES> 3,511,218
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 169,520,448
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 30,885,556
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,143,534)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 32,193
<NET-ASSETS> 197,294,663
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,653,443
<OTHER-INCOME> 0
<EXPENSES-NET> 710,074
<NET-INVESTMENT-INCOME> 10,943,369
<REALIZED-GAINS-CURRENT> (34,374)
<APPREC-INCREASE-CURRENT> (1,571,971)
<NET-CHANGE-FROM-OPS> 9,337,024
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 24,768,560
<ACCUMULATED-NII-PRIOR> 19,942,187
<ACCUMULATED-GAINS-PRIOR> (3,109,160)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 286,441
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 330,676
<AVERAGE-NET-ASSETS> 165,424,254
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.39
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> INTERMEDIATE GOVERNMENT BOND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 118,789,459
<INVESTMENTS-AT-VALUE> 118,462,438
<RECEIVABLES> 963,997
<ASSETS-OTHER> 313,315
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 119,739,750
<PAYABLE-FOR-SECURITIES> 16,628,750
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 51,120
<TOTAL-LIABILITIES> 16,679,870
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 89,825,244
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 14,055,361
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (493,704)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (327,021)
<NET-ASSETS> 103,059,880
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,846,155
<OTHER-INCOME> 0
<EXPENSES-NET> 387,076
<NET-INVESTMENT-INCOME> 5,459,079
<REALIZED-GAINS-CURRENT> (586,993)
<APPREC-INCREASE-CURRENT> (1,394,326)
<NET-CHANGE-FROM-OPS> 3,477,760
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 17,068,266
<ACCUMULATED-NII-PRIOR> 8,596,282
<ACCUMULATED-GAINS-PRIOR> 93,289
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 162,617
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 200,354
<AVERAGE-NET-ASSETS> 93,151,820
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> GOVERNMENT / CORPORATE BOND PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 323,055,033
<INVESTMENTS-AT-VALUE> 328,052,630
<RECEIVABLES> 4,696,158
<ASSETS-OTHER> 52,064
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 332,800,852
<PAYABLE-FOR-SECURITIES> 9,988,864
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 135,971
<TOTAL-LIABILITIES> 10,124,835
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 269,445,202
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 53,087,773
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,854,555)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,997,597
<NET-ASSETS> 322,676,017
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 23,444,967
<OTHER-INCOME> 0
<EXPENSES-NET> 1,363,870
<NET-INVESTMENT-INCOME> 22,081,097
<REALIZED-GAINS-CURRENT> (913,114)
<APPREC-INCREASE-CURRENT> (11,013,287)
<NET-CHANGE-FROM-OPS> 10,154,696
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (13,863,393)
<ACCUMULATED-NII-PRIOR> 31,006,676
<ACCUMULATED-GAINS-PRIOR> (3,941,441)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 631,865
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 706,664
<AVERAGE-NET-ASSETS> 362,425,453
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> BALANCED PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 273,163,752
<INVESTMENTS-AT-VALUE> 291,482,580
<RECEIVABLES> 1,654,713
<ASSETS-OTHER> 2,470,539
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 295,607,832
<PAYABLE-FOR-SECURITIES> 30,560,117
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 137,876
<TOTAL-LIABILITIES> 30,697,993
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 193,848,636
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 16,760,746
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 35,981,629
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,318,828
<NET-ASSETS> 264,909,839
<DIVIDEND-INCOME> 2,558,348
<INTEREST-INCOME> 6,061,234
<OTHER-INCOME> 29,310
<EXPENSES-NET> 1,102,642
<NET-INVESTMENT-INCOME> 7,487,630
<REALIZED-GAINS-CURRENT> 23,946,320
<APPREC-INCREASE-CURRENT> 3,998,704
<NET-CHANGE-FROM-OPS> 35,432,654
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 97,876,884
<ACCUMULATED-NII-PRIOR> 9,273,116
<ACCUMULATED-GAINS-PRIOR> 12,035,309
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 446,066
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 498,534
<AVERAGE-NET-ASSETS> 198,137,140
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> EQUITY INCOME PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 760,718,204
<INVESTMENTS-AT-VALUE> 989,350,281
<RECEIVABLES> 2,296,298
<ASSETS-OTHER> 52,844
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 991,699,423
<PAYABLE-FOR-SECURITIES> 34,392,871
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 485,883
<TOTAL-LIABILITIES> 34,878,754
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 616,266,366
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 66,173,207
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 45,749,019
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 228,632,077
<NET-ASSETS> 956,820,669
<DIVIDEND-INCOME> 24,105,695
<INTEREST-INCOME> 5,661,475
<OTHER-INCOME> 27,363
<EXPENSES-NET> 4,168,077
<NET-INVESTMENT-INCOME> 25,571,730
<REALIZED-GAINS-CURRENT> 39,593,303
<APPREC-INCREASE-CURRENT> 83,552,175
<NET-CHANGE-FROM-OPS> 148,717,208
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 192,518,139
<ACCUMULATED-NII-PRIOR> 40,601,477
<ACCUMULATED-GAINS-PRIOR> 6,155,716
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,844,838
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,983,581
<AVERAGE-NET-ASSETS> 819,392,777
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> GROWTH & INCOME PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 192,911,663
<INVESTMENTS-AT-VALUE> 214,948,333
<RECEIVABLES> 261,636
<ASSETS-OTHER> 6,969,777
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 222,179,746
<PAYABLE-FOR-SECURITIES> 14,411,220
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 156,100
<TOTAL-LIABILITIES> 14,567,320
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 148,841,508
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 4,666,582
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,067,666
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22,036,670
<NET-ASSETS> 207,612,426
<DIVIDEND-INCOME> 2,447,876
<INTEREST-INCOME> 480,282
<OTHER-INCOME> 11,760
<EXPENSES-NET> 1,139,919
<NET-INVESTMENT-INCOME> 1,776,479
<REALIZED-GAINS-CURRENT> 16,329,122
<APPREC-INCREASE-CURRENT> 13,845,816
<NET-CHANGE-FROM-OPS> 31,951,417
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 82,800,695
<ACCUMULATED-NII-PRIOR> 2,890,103
<ACCUMULATED-GAINS-PRIOR> 15,738,544
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 461,373
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 521,130
<AVERAGE-NET-ASSETS> 155,535,659
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> EQUITY GROWTH PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 276,480,203
<INVESTMENTS-AT-VALUE> 290,199,537
<RECEIVABLES> 3,914,865
<ASSETS-OTHER> 6,063,591
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 300,177,993
<PAYABLE-FOR-SECURITIES> 859,543
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 190,764
<TOTAL-LIABILITIES> 1,050,307
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 218,914,278
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 541,619
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 65,952,455
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,719,334
<NET-ASSETS> 299,127,686
<DIVIDEND-INCOME> 800,318
<INTEREST-INCOME> 596,092
<OTHER-INCOME> 0
<EXPENSES-NET> 1,829,207
<NET-INVESTMENT-INCOME> (432,797)
<REALIZED-GAINS-CURRENT> 64,682,669
<APPREC-INCREASE-CURRENT> (25,830,434)
<NET-CHANGE-FROM-OPS> 38,419,438
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 76,765,296
<ACCUMULATED-NII-PRIOR> 974,416
<ACCUMULATED-GAINS-PRIOR> 1,269,786
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 812,912
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 865,870
<AVERAGE-NET-ASSETS> 236,241,273
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> SPECIAL EQUITY PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 446,828,750
<INVESTMENTS-AT-VALUE> 524,487,533
<RECEIVABLES> 2,037,723
<ASSETS-OTHER> 45,097,908
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 571,623,164
<PAYABLE-FOR-SECURITIES> 63,675,798
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 683,123
<TOTAL-LIABILITIES> 64,358,921
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 331,160,977
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2,331,828
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 96,112,655
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 77,658,783
<NET-ASSETS> 507,264,243
<DIVIDEND-INCOME> 2,576,979
<INTEREST-INCOME> 1,850,409
<OTHER-INCOME> 7,724
<EXPENSES-NET> 3,459,341
<NET-INVESTMENT-INCOME> 960,323
<REALIZED-GAINS-CURRENT> 55,282,281
<APPREC-INCREASE-CURRENT> 32,173,450
<NET-CHANGE-FROM-OPS> 88,416,054
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 191,806,018
<ACCUMULATED-NII-PRIOR> 1,371,505
<ACCUMULATED-GAINS-PRIOR> 40,830,374
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,460,066
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,576,547
<AVERAGE-NET-ASSETS> 372,216,473
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> HIGH YEILD BOND PROTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 12,969,120
<INVESTMENTS-AT-VALUE> 13,341,450
<RECEIVABLES> 306,105
<ASSETS-OTHER> 1,756,569
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15,404,124
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 31,438
<TOTAL-LIABILITIES> 31,438
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,895,309
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,141,728
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (36,681)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 372,330
<NET-ASSETS> 15,372,686
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 983,639
<OTHER-INCOME> 0
<EXPENSES-NET> 65,309
<NET-INVESTMENT-INCOME> 918,330
<REALIZED-GAINS-CURRENT> (43,340)
<APPREC-INCREASE-CURRENT> 210,284
<NET-CHANGE-FROM-OPS> 1,085,274
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6,375,091
<ACCUMULATED-NII-PRIOR> 223,398
<ACCUMULATED-GAINS-PRIOR> 6,659
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 27,437
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 64,516
<AVERAGE-NET-ASSETS> 10,031,838
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> INTERNATIONAL EQUITY PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 126,340,686
<INVESTMENTS-AT-VALUE> 138,412,521
<RECEIVABLES> 1,409,397
<ASSETS-OTHER> 8,726,893
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 148,548,811
<PAYABLE-FOR-SECURITIES> 132,503
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 157,343
<TOTAL-LIABILITIES> 363,914
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 132,159,982
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,303,969
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,649,111
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,071,835
<NET-ASSETS> 148,184,897
<DIVIDEND-INCOME> 1,933,704
<INTEREST-INCOME> 421,402
<OTHER-INCOME> 193,860
<EXPENSES-NET> 959,671
<NET-INVESTMENT-INCOME> 1,201,575
<REALIZED-GAINS-CURRENT> 2,640,559
<APPREC-INCREASE-CURRENT> 10,896,919
<NET-CHANGE-FROM-OPS> 15,407,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 64,738,582
<ACCUMULATED-NII-PRIOR> 102,394
<ACCUMULATED-GAINS-PRIOR> 8,552
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 341,942
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 468,815
<AVERAGE-NET-ASSETS> 94,004,721
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> AGGRESSIVE EQUITY PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 14,563,091
<INVESTMENTS-AT-VALUE> 14,798,550
<RECEIVABLES> 200
<ASSETS-OTHER> 1,406,600
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,205,350
<PAYABLE-FOR-SECURITIES> 679,437
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 46,783
<TOTAL-LIABILITIES> 726,220
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,720,297
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (70,782)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 594,156
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 235,459
<NET-ASSETS> 15,479,130
<DIVIDEND-INCOME> 7,542
<INTEREST-INCOME> 19,676
<OTHER-INCOME> 0
<EXPENSES-NET> 98,000
<NET-INVESTMENT-INCOME> (70,782)
<REALIZED-GAINS-CURRENT> 594,156
<APPREC-INCREASE-CURRENT> 235,459
<NET-CHANGE-FROM-OPS> 758,833
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 15,479,130
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 22,285
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 39,468
<AVERAGE-NET-ASSETS> 14,050,069
<PER-SHARE-NAV-BEGIN> 0.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 0.00
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> EQUITY VALUE PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 26,959,909
<INVESTMENTS-AT-VALUE> 28,527,741
<RECEIVABLES> 99,791
<ASSETS-OTHER> 1,719,379
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,346,911
<PAYABLE-FOR-SECURITIES> 1,257,288
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 56,110
<TOTAL-LIABILITIES> 1,313,398
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,314,650
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</TABLE>
EXHIBIT 1
DIVERSIFIED INVESTORS PORTFOLIOS
DECLARATION OF TRUST
Dated as of September 1, 1993
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I -- The Trust.................................................. 1
Section 1.1 Name................................................ 1
Section 1.2 Definitions......................................... 2
ARTICLE II -- Trustees.................................................. 4
Section 2.1 Number and Qualification............................ 4
Section 2.2 Term and Election .................................. 4
Section 2.3 Resignation, Removal and Retirement................. 5
Section 2.4 Vacancies........................................... 5
Section 2.5 Meetings............................................ 6
Section 2.6 Officers; Chairman of the Board..................... 7
Section 2.7 By-Laws............................................. 7
ARTICLE III -- Powers of Trustees....................................... 7
Section 3.1 General............................................. 7
Section 3.2 Investments......................................... 8
Section 3.3 Legal Title......................................... 9
Section 3.4 Sale and Increases of Interests..................... 9
Section 3.5 Decreases and Redemptions of Interests.............. 9
Section 3.6 Borrow Money........................................ 10
Section 3.7 Delegation; Committees.............................. 10
Section 3.8 Collection and Payment.............................. 10
Section 3.9 Expenses............................................ 10
Section 3.10 Miscellaneous Powers................................ 11
Section 3.11 Further Powers...................................... 12
ARTICLE IV -- Investment Advisory, Administration and Placement
Agent Arrangements; Custodian............................. 12
Section 4.1 Investment Advisory and Other Arrangements.......... 12
Section 4.2 Parties to Contract................................. 13
Section 4.3 Custodian........................................... 13
Section 4.4 1940 Act Governance................................. 13
ARTICLE V -- Liability of Holders; Limitations of Liability
of Trustees, Officers, etc................................ 14
<PAGE>
Section 5.1 Liability of Holders; Indemnification............... 14
Section 5.2 Limitations of Liability of Trustees, Officers,
Employees, Agents, Independent Contractors
to Third Parties.................................... 14
Section 5.3 Limitations of Liability of Trustees, Officers,
Employees, Agents, Independent Contractors
to Trust, Holders, etc.............................. 15
Section 5.4 Mandatory Indemnification........................... 15
Section 5.5 No Bond Required of Trustees........................ 16
Section 5.6 No Duty of Investigation; Notice in Trust
Instruments, etc.................................... 16
Section 5.7 Reliance on Experts, etc............................ 17
Section 5.8 No Repeal or Modification........................... 17
ARTICLE VI -- Interests................................................. 17
Section 6.1 Interests........................................... 17
Section 6.2 Establishment and Designation of Series............. 18
Section 6.3 Non-Transferability................................. 19
Section 6.4 Register of Interests............................... 19
ARTICLE VII -- Increases, Decreases and Redemptions of Interests........ 20
ARTICLE VIII --Determination of Book Capital Account Balances,
and Distributions........................................ 20
Section 8.1 Book Capital Account Balances....................... 20
Section 8.2 Allocations and Distributions to Holders............ 21
Section 8.3 Power to Modify Foregoing Procedures................ 21
ARTICLE IX --Holders.................................................... 21
Section 9.1 Rights of Holders................................... 21
Section 9.2 Meetings of Holders................................. 22
Section 9.3 Notice of Meetings.................................. 23
Section 9.4 Record Date for Meetings, Distributions, etc........ 23
Section 9.5 Proxies, etc........................................ 23
Section 9.6 Reports............................................. 24
Section 9.7 Inspection of Records............................... 24
Section 9.8 Holder Action by Written Consent.................... 24
Section 9.9 Notices............................................. 24
ARTICLE X -- Duration; Termination; Dissolution; Amendment;
Mergers; Etc............................................. 25
<PAGE>
Section 10.1 Duration........................................... 25
Section 10.2 Dissolution........................................ 25
Section 10.3 Termination........................................ 26
Section 10.4 Amendment Procedure................................ 27
Section 10.5 Merger, Consolidation and Sale of Assets........... 28
Section 10.6 Incorporation...................................... 28
ARTICLE XI -- Miscellaneous............................................. 29
Section 11.1 Certification of Designation; Agent for
Service of Process................................. 29
Section 11.2 Governing Law...................................... 29
Section 11.3 Counterparts....................................... 29
Section 11.4 Reliance by Third Parties.......................... 29
Section 11.5 Provisions in Conflict with Law
or Regulations..................................... 29
<PAGE>
DECLARATION OF TRUST
OF
DIVERSIFIED INVESTORS PORTFOLIOS
--------------------
This DECLARATION OF TRUST of Diversified Investors Portfolios is made as
of the 1st day of September, 1993 by the parties signatory hereto, as Trustees
(as defined in Section 1.2 hereof).
W I T N E S S E T H:
WHEREAS, the Trustees desire to form a master trust fund or "Trust" (as
defined in Section 1.2 hereof) under the law of the State of New York
consisting of one or more subtrusts or "Series" (as defined in Section 1.2
hereof) for the investment and reinvestment of assets contributed thereto; and
WHEREAS, it is proposed that the trust assets be composed of money and
other property contributed to the Series, such assets to be held and managed in
trust for the benefit of the holders of beneficial interests in such Series;
NOW, THEREFORE, the Trustees hereby declare that they will hold in trust
all money and other property contributed to the Trust and will manage and
dispose of the same for the benefit of such holders of beneficial interests and
subject to the provisions hereof, to wit:
ARTICLE I
The Trust
1.1. Name. The name of the Trust shall be Diversified Investors Portfolios
and so far as may be practicable the Trustees shall conduct the Trust's
activities, execute all documents and sue or be sued under that name, which
name (and the term "Trust" wherever hereinafter used) shall refer to the
Trustees as Trustees, and not individually, and shall not refer to the
officers, employees, agents or independent contractors of the Trust or its
holders of beneficial interests.
<PAGE>
1.2. Definitions. As used in this Declaration, the following terms shall
have the following meanings:
"Administrator" shall mean any party furnishing services to one or more
Series pursuant to any administration contract described in Section 4.1 hereof.
"Book Capital Account" shall mean, for any Holder (as hereinafter defined)
at any time, the Book Capital Account of the Holder at such time with respect
to the Holder's beneficial interest in the Trust Property (as hereinafter
defined) of any Series, determined in accordance with the method established by
the Trustees pursuant to Section 8.1 hereof. The Trust shall maintain separate
records of Book Capital Accounts for each such Series.
"Code" shall mean the United States Internal Revenue Code of 1986, as
amended from time to time, as well as any non-superseded provisions of the
Internal Revenue Code of 1954, as amended (or any corresponding provision or
provisions of succeeding law).
"Commission" shall mean the United States Securities and Exchange
Commission.
"Declaration" shall mean this Declaration of Trust as amended from time to
time. References in this Declaration to "Declaration", "hereof", "herein" and
"hereunder" shall be deemed to refer to this Declaration rather than the
article or section in which any such word appears.
"Fiscal Year" shall mean an annual period determined by the Trustees which
ends on December 31 of each year or on such other day as is permitted or
required by the Code.
"Holder" shall mean the record holder of any Interest.
"Institutional Investor(s)" shall mean any regulated investment company,
segregated asset account, foreign investment company, common trust fund, group
trust or other investment arrangement, whether organized within or without the
United States of America, other than an individual, S corporation, partnership
or grantor trust beneficially owned by any individual, S corporation or
partnership.
"Interested Person" shall have the meaning given it in the 1940 Act (as
hereinafter defined).
<PAGE>
"Interest" shall mean the beneficial interest of a Holder in the Trust
Property of any Series, including all rights, powers and privileges accorded to
Holders by this Declaration, which interest may be expressed as a percentage,
determined by calculating for a particular Series, at such times and on such
basis as the Trustees shall from time to time determine, the ratio of each
Holder's Book Capital Account balance to the total of all Holders' Book Capital
Account balances. Reference herein to a specified percentage of, or fraction
of, Interests, means Holders whose combined Book Capital Account balances
represent such specified percentage or fraction of the combined Book Capital
Account balances of all, or a specified group of, Holders.
"Investment Adviser" shall mean any party furnishing services to one or
more Series of the Trust pursuant to any investment advisory contract described
in Section 4.1 hereof.
"Majority Interests Vote" shall mean the vote, at a meeting of Holders of
one or more Series as the context may require, of (A) 67% or more of the
Interests present or represented at such meeting, if Holders of more than 50%
of all Interests in such one or more Series are present or represented by
proxy, or (B) more than 50% of all Interests in such one or more Series,
whichever is less.
"1940 Act" shall mean the United States Investment Company Act of 1940, as
amended from time to time, and the rules and regulations thereunder.
"Person" shall mean and include individuals, corporations, partnerships,
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof.
"Redemption" shall mean the complete withdrawal of an Interest of a Holder
the result of which is to reduce the Book Capital Account balance of that
Holder to zero, and the term "redeem" shall mean to effect a Redemption.
"Series" shall mean the subtrusts of the Trust as the same are established
and designated pursuant to Article VI hereof, each of which shall be a separate
subtrust.
"Trust" shall mean the master trust fund established hereby and shall
include each Series hereof.
<PAGE>
"Trust Property" shall mean as of any particular time any and all assets
or other property, real or personal , tangible or intangible, which at such
time is owned or held by or for the account of any Series or for the account of
the Trustees, each component of which shall be allocated and belong to a
specific Series to the exclusion of all other Series.
"Trustees" shall mean each signatory to this Declaration, so long as such
signatory shall continue in office in accordance with the terms hereof, and all
other individuals who at the time in question have been duly elected or
appointed and have qualified as Trustees in accordance with the provisions
hereof and are then in office, and reference in this Declaration to a Trustee
or Trustees shall refer to such individual or individuals in their capacity as
Trustees hereunder.
ARTICLE II
Trustees
2.1. Number and Qualification. The number of Trustees shall be fixed from
time to time by action of the Trustees taken as provided in Section 2.5 hereof;
provided, however, that the number of Trustees so fixed shall in no event be
less than three. Any vacancy created by an increase in the number of Trustees
may be filled by the appointment of an individual having the qualifications
described in this Section 2.1 made by action of the Trustees taken as provided
in Section 2.5 hereof. Any such appointment shall not become effective,
however, until the individual named in the written instrument of appointment
shall have accepted in writing such appointment and agreed in writing to be
bound by the terms of this Declaration. No reduction in the number of Trustees
shall have the effect of removing any Trustee from office. Whenever a vacancy
occurs, until such vacancy is filled as provided in Section 2.4 hereof, the
Trustees continuing in office, regardless of their number, shall have all the
powers granted to the Trustees and shall discharge all the duties imposed upon
the Trustees by this Declaration. A Trustee shall be an individual at least 21
years of age who is not under legal disability.
2.2. Term and Election. Each Trustee named herein, or elected or appointed
prior to the first meeting of Holders, shall (except in the event of
resignations, retirements, removals or vacancies pursuant to Section 2.3 or
Section 2.4 hereof) hold office until a successor to such Trustee has been
elected at such meeting and has qualified to serve as Trustee, as required
<PAGE>
under the 1940 Act. Subject to the provisions of Section 16(a) of the 1940 Act
and except as provided in Section 2.3 hereof, each Trustee shall hold office
during the lifetime of the Trust and until its termination as hereinafter
provided.
2.3. Resignation, Removal and Retirement. Any Trustee may resign his or
her trust (without need for prior or subsequent accounting) by an instrument in
writing executed by such Trustee and delivered or mailed to the Chairman, if
any, the President or the Secretary of the Trust and such resignation shall be
effective upon such delivery, or at a later date according to the terms of the
instrument. Any Trustee may be removed with or without cause by the affirmative
vote of Holders of two-thirds of the Interests or (provided the aggregate
number of Trustees, after such removal and after giving effect to any
appointment made to fill the vacancy created by such removal, shall not be less
than the number required by Section 2.1 hereof) by the action of two-thirds of
the remaining Trustees. Any Trustee who has attained a mandatory retirement
age, if any, established pursuant to any written policy adopted from time to
time by a majority of the Trustees shall, automatically and without action by
such Trustee or the remaining Trustees, be deemed to have retired in accordance
with the terms of such policy, effective as of the date determined in
accordance with such policy. Any Trustee who has become incapacitated by
illness or injury as determined by a majority of the other Trustees, may be
retired by written instrument executed by a majority of the other Trustees,
specifying the date of such Trustee's retirement. Upon the resignation,
retirement or removal of a Trustee, or a Trustee otherwise ceasing to be a
Trustee, such resigning, retired, removed or former Trustee shall execute and
deliver such documents as the remaining Trustees shall require for the purpose
of conveying to the Trust or the remaining Trustees any Trust Property held in
the name of such resigning, retired, removed or former Trustee. Upon the death
of any Trustee or upon removal, retirement or resignation due to any Trustee's
incapacity to serve as Trustee, the legal representative of such deceased,
removed, retired or resigning Trustee shall execute and deliver on behalf of
such deceased, removed, retired or resigning Trustee such documents as the
remaining Trustees shall require for the purpose set forth in the preceding
sentence.
2.4. Vacancies. The term of office of a Trustee shall terminate and a
vacancy shall occur in the event of the death, resignation, retirement or
removal of a Trustee. No such vacancy shall operate to annul this Declaration
or to revoke any existing agency created pursuant to the terms of this
Declaration. In the case of a vacancy, Holders of at least a majority of the
Interests entitled to vote, acting at any meeting of Holders held in accordance
with Section 9.2 hereof, or, to the extent permitted by the 1940 Act, a
<PAGE>
majority vote of the Trustees continuing in office acting by written instrument
or instruments, may fill such vacancy, and any Trustee so elected by the
Trustees or the Holders shall hold office as provided in this Declaration. The
Trustees may appoint a new Trustee as provided above in anticipation of a
vacancy expected to occur because of the retirement, resignation or removal of
a Trustee, or an increase in number of Trustees, provided that such appointment
shall become effective only when or after the expected vacancy occurs. Subject
to the foregoing sentence, as soon as any Trustee has accepted such appointment
in writing, the Trust estate shall vest in the new Trustee, together with the
continuing Trustees, without any further act or conveyance, and he or she shall
be deemed a Trustee hereunder. The power of appointment is subject to Section
16(a) of the 1940 Act.
2.5. Meetings. Meetings of the Trustees shall be held from time to time
upon the call of the Chairman, if any, the President, the Secretary, an
Assistant Secretary or any two Trustees. Regular meetings of the Trustees may
be held without call or notice at a time and place fixed by the By-Laws or by
resolution of the Trustees. Notice of any other meeting shall be mailed or
otherwise given not less than 24 hours before the meeting but may be waived in
writing by any Trustee either before or after such meeting. The attendance of a
Trustee at a meeting shall constitute a waiver of notice of such meeting except
in the situation in which a Trustee attends a meeting for the express purpose
of objecting to the transaction of any business on the ground that the meeting
was not lawfully called or convened. The Trustees may act with or without a
meeting. A quorum for all meetings of the Trustees shall be a majority of the
Trustees. Unless provided otherwise in this Declaration, any action of the
Trustees may be taken at a meeting by vote of a majority of the Trustees
present (a quorum being present) or without a meeting by written consent of a
majority of the Trustees.
Any committee of the Trustees, including an executive committee, if any,
may act with or without a meeting. A quorum for all meetings of any such
committee shall be a majority of the members thereof. Unless provided otherwise
in this Declaration, any action of any such committee may be taken at a meeting
by vote of a majority of the members present (a quorum being present) or
without a meeting by written consent of a majority of the members.
Any notice, waiver or written consent hereunder may be provided and
delivered to the Trust or a Trustee by facsimile or other similar electronic
mechanism.
<PAGE>
With respect to actions of the Trustees and any committee of the Trustees,
Trustees who are Interested Persons of the Trust or otherwise interested in any
action to be taken may be counted for quorum purposes under this Section 2.5
and shall be entitled to vote to the extent permitted by the 1940 Act.
All or any one or more Trustees may participate in a meeting of the
Trustees or any committee thereof by means of a conference telephone or similar
communications equipment by means of which all individuals participating in the
meeting can hear each other and participation in a meeting by means of such
communications equipment shall constitute presence in person at such meeting.
2.6. Officers; Chairman of the Board. The Trustees shall, from time to
time, elect a President, a Secretary and a Treasurer. The Trustees may elect or
appoint, from time to time, a Chairman of the Board who shall preside at all
meetings of the Trustees and carry out such other duties as the Trustees may
designate. The Trustees may elect or appoint or authorize the President to
appoint such other officers, agents or independent contractors with such powers
as the Trustees may deem to be advisable. The Chairman, if any, shall be and
each other officer may, but need not, be a Trustee.
2.7. By-Laws. The Trustees may adopt and, from time to time, amend or
repeal By-Laws for the conduct of the business of the Trust.
ARTICLE III
Powers of Trustees
3.1. General. The Trustees shall have exclusive and absolute control over
the Trust Property and over the business of the Trust and each Series to the
same extent as if the Trustees were the sole owners of the Trust Property and
such business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees may perform such acts as in their
sole discretion they deem proper for conducting the business of the Trust and
any Series. The enumeration of or failure to mention any specific power herein
shall not be construed as limiting such exclusive and absolute control. The
powers of the Trustees may be exercised without order of or resort to any
court.
The Trustees shall have full power and authority to do any and all acts
and to make and execute any and all contracts and instruments that they may
<PAGE>
consider necessary or appropriate in connection with the management of the
Trust. The Trustees shall have full authority and power to make any and all
investments which they, in their uncontrolled discretion, shall deem proper to
accomplish the purposes of this Trust.
3.2. Investments. The Trustees shall have the power with respect to the
Trust and each Series to:
(a) conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute or
otherwise deal in or dispose of United States and foreign currencies and
related instruments including forward contracts, and securities, including
common and preferred stock, warrants, bonds, debentures, time notes and all
other evidences of indebtedness, negotiable or non-negotiable instruments,
obligations, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, reverse repurchase agreements, convertible securities,
forward contracts, options, futures contracts, and other securities, including,
without limitation, those issued, guaranteed or sponsored by any state,
territory or possession of the United States and the District of Columbia and
their political subdivisions, agencies and instrumentalities, or by the United
States Government, any foreign government, or any agency, instrumentality or
political subdivision of the United States Government or any foreign
government, or any international instrumentality, or by any bank, savings
institution, corporation or other business entity organized under the laws of
the United States or any state or under any foreign laws; and to exercise any
and all rights, powers and privileges of ownership or interest in respect of
any and all such investments of any kind and description, including, without
limitation, the right to consent and otherwise act with respect thereto, with
power to designate one or more Persons to exercise any of such rights, powers
and privileges in respect of any of such investments; and the Trustees shall be
deemed to have the foregoing powers with respect to any additional instruments
in which the Trustees may determine to invest;
(c) definitively interpret the investment objectives, policies and
limitations of any Series.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
<PAGE>
3.3. Legal Title. Legal title to all Trust Property shall be vested in the
Trustees as joint tenants except that the Trustees shall have the power to
cause legal title to any Trust Property to be held by or in the name of one or
more of the Trustees, or in the name of the Trust or any Series, or in the name
or nominee name of any other Person on behalf of the Trust or any Series, on
such terms as the Trustees may determine.
The right, title and interest of the Trustees in the Trust Property shall
vest automatically in each individual who may hereafter become a Trustee upon
his due election and qualification. Upon the resignation, removal or death of a
Trustee, such resigning, removed or deceased Trustee shall automatically cease
to have any right, title or interest in any Trust Property, and the right,
title and interest of such resigning, removed or deceased Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents
have been executed and delivered.
3.4. Sale and Increases of Interests. The Trustees, in their discretion,
may, from time to time, without a vote of the Holders, permit any Institutional
Investor to purchase an Interest in a Series, or increase such Interest, for
such type of consideration, including cash or property, at such time or times
(including, without limitation, each business day), and on such terms as the
Trustees may deem best, and may in such manner acquire other assets (including
the acquisition of assets subject to, and in connection with the assumption of,
liabilities) and businesses. Individuals, S corporations, partnerships and
grantor trusts that are beneficially owned by any individual, S corporation or
partnership may not purchase Interests. The Trustees, in their discretion, may
refuse to sell an Interest in a Series to any person without any cause or
reason therefor. A Holder which has redeemed its Interest in a Series may not
be permitted to purchase an Interest in such Series until the later of 60
calendar days after the date of such Redemption or the first day of the Fiscal
Year next succeeding the Fiscal Year during which such Redemption occurred.
3.5 Decreases and Redemptions of Interests. Subject to Article VII hereof,
the Trustees, in their discretion, may, from time to time, without a vote of
the Holders, permit a Holder to redeem its Interest in a Series, or decrease
<PAGE>
such Interest, for either cash or property, at such time or times (including,
without limitation, each business day), and on such terms as the Trustees may
deem best.
3.6. Borrow Money. The Trustees shall have power on behalf of any Series
to borrow money or otherwise obtain credit and to secure the same by
mortgaging, pledging or otherwise subjecting as security the assets belonging
to such Series, as appropriate, including the lending of portfolio securities,
and to endorse, guarantee, or undertake the performance of any obligation,
contract or engagement of any other Person.
3.7. Delegation; Committees. The Trustees shall have power, consistent
with their continuing exclusive and absolute control over the Trust Property
and over the business of the Trust and any Series, to delegate from time to
time to such of their number or to officers, employees, agents or independent
contractors of the Trust or any Series the doing of such things and the
execution of such instruments in either the name of the Trust or any Series or
the names of the Trustees or otherwise as the Trustees may deem expedient.
3.8. Collection and Payment. The Trustees shall have power to collect all
property due to the Trust; and to pay all claims, including taxes, against the
Trust Property on behalf of any Series; to prosecute, defend, compromise or
abandon any claims relating to the Trust or the Trust Property on behalf of any
Series; to foreclose any security interest securing any obligation, by virtue
of which any property is owed to the Trust; and to enter into releases,
agreements and other instruments.
3.9. Expenses. The Trustees shall have power to incur and pay any expenses
from the Trust Property which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of this Declaration, and to pay
reasonable compensation from the Trust Property to themselves as Trustees.
Permitted expenses of the Trust include, but are not limited to, interest
charges, taxes, brokerage fees and commissions; expenses of sales, increases,
decreases or redemptions of Interests; certain insurance premiums; applicable
fees, interest charges and expenses of third parties, including the Trust's
investment advisers, managers, administrators, placement agents, custodians
transfer agents and fund accountants; fees of pricing, interest, dividend,
credit and other reporting services; costs of membership in trade associations;
telecommunications expenses; costs of forming the Trust and its Series and
maintaining its and their existence; costs of preparing and printing the
registration statements and Holder reports of the Trust and each Series and
delivering them to Holders; expenses of meetings of Holders; costs of
maintaining books and accounts; costs of reproduction, stationery and supplies;
<PAGE>
fees and expenses of the Trustees; compensation of the Trust's officers and
employees and costs of other personnel performing services for the Trust or any
Series; costs of Trustee meetings; Commission registration fees and related
expenses; state or foreign securities laws registration fees and related
expenses; and for such nonrecurring items as may arise, including litigation to
which the Trust or a Series (or a Trustee or officer of the Trust acting as
such) is a party, and for all losses and liabilities by them incurred in
administering the Trust. The Trustees shall have a lien on the assets belonging
to the appropriate Series, or in the case of an expense allocable to more than
one Series, on the assets of each such Series, prior to any rights or interests
of the Holders thereto, for the reimbursement to them of such expenses,
disbursements, losses and liabilities. The Trustees shall fix the compensation
of all officers, employees and Trustees. The Trustees may pay themselves such
compensation for special services, including legal and brokerage services, as
they in good faith may deem reasonable, and reimbursement for expenses
reasonably incurred by themselves on behalf of the Trust or any Series.
3.10. Miscellaneous Powers. The Trustees shall have power to: (a) employ
or contract with such Persons as the Trustees may deem appropriate for the
transaction of the business of the Trust or any Series and terminate such
employees or contractual relationships as they consider appropriate; (b) enter
into joint ventures, partnerships and any other combinations or associations;
(c) purchase, and pay for out of Trust Property insurance policies insuring the
Investment Adviser, Administrator, placement agent, Holders, Trustees,
officers, employees, agents or independent contractors of the Trust against all
claims arising by reason of holding any such position or by reason of any
action taken or omitted by any such Person in such capacity, whether or not the
Trust would have the power to indemnify such Person against such liability; (d)
establish pension, profit-sharing and other retirement, incentive and benefit
plans for the Trustees, officers, employees or agents of the Trust or any
Series; (e) prosecute, defend and settle lawsuits in the name of the Trust or
any Series and pay settlements and judgments out of the Trust Property; (f) to
the extent permitted by law, indemnify any Person with whom the Trust has
dealings, including the Investment Adviser, Administrator, placement agent,
Holders, Trustees, officers, employees, agents or independent contractors of
the Trust, to such extent as the Trustees shall determine; (g) guarantee
indebtedness or contractual obligations of others; (h) determine and change the
Fiscal Year of the Trust or any Series and the method by which its accounts
shall be kept; and (i) adopt a seal for the Trust or any Series, but the
<PAGE>
absence of such a seal shall not impair the validity of any instrument executed
on behalf of the Trust or such Series.
3.11. Further Powers. The Trustees shall have power to conduct the
business of the Trust or any Series and carry on its operations in any and all
of its branches and maintain offices, whether within or without the State of
New York, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the
United States of America and of foreign governments, and to do all such other
things and execute all such instruments as they deem necessary, proper,
appropriate or desirable in order to promote the interests of the Trust or any
Series although such things are not herein specifically mentioned. Any
determination as to what is in the interests of the Trust or any Series which
is made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration, the presumption shall be in favor of a grant of
power to the Trustees. The Trustees shall not be required to obtain any court
order in order to deal with Trust Property.
ARTICLE IV
Investment Advisory, Administration
and Placement Agent Arrangements; Custodian
4.1. Investment Advisory and Other Arrangements. The Trustees may in their
discretion, from time to time, enter into investment advisory contracts,
administration contracts, placement agent agreements or other service
agreements whereby the other party to such contract or agreement shall
undertake to furnish with respect to one or more particular Series such
investment advisory, administration, placement agent and/or other services as
the Trustees shall, from time to time, consider appropriate or desirable and
all upon such terms and conditions as the Trustees may in their sole discretion
determine. Notwithstanding any provision of this Declaration, the Trustees may
authorize any Investment Adviser (subject to such general or specific
instructions as the Trustees may, from time to time, adopt) to employ one or
more subadvisers and to effect purchases, sales, loans or exchanges of Trust
Property on behalf of any Series or may authorize any officer, employee or
Trustee to effect such purchases, sales, loans or exchanges pursuant to
recommendations of any such Investment Adviser (all without any further action
by the Trustees).
<PAGE>
4.2. Parties to Contract. Any contract of the character described in
Section 4.1 or Section 4.3 hereof or in the By-Laws of the Trust may be entered
into with any corporation, firm, trust or association, although one or more of
the Trustees or officers of the Trust may be an officer, director, Trustee,
shareholder or member of such other party to the contract, and no such contract
shall be invalidated or rendered voidable by reason of the existence of any
such relationship, nor shall any individual holding such relationship be liable
merely by reason of such relationship for any loss or expense to the Trust or
any Series under or by reason of any such contract or accountable for any
profit realized directly or indirectly therefrom, provided that the contract
when entered into was reasonable and fair and not inconsistent with the
provisions of this Article IV or the By-Laws. The same Person may be the other
party to one or more contracts entered into pursuant to Section 4.1 or Section
4.3 hereof or the By-Laws, and any individual may be financially interested or
otherwise affiliated with Persons who are parties to any or all of the
contracts mentioned in this Section 4.2 or in the By-Laws.
4.3. Custodian. The Trustees shall at all times place and maintain the
securities and similar investments of the Trust on behalf of each Series in
custody meeting the requirements of Section 17(f) of the 1940 Act and the rules
thereunder. The Trustees, on behalf of the Trust or any Series, may enter into
an agreement with a custodian on terms and conditions acceptable to the
Trustees, providing for the custodian, among other things, (a) to hold the
securities owned by the Trust on behalf of any Series and deliver the same upon
written order or oral order confirmed in writing, (b) to receive and receipt
for any moneys due to the Trust on behalf of any Series and deposit the same in
its own banking department or elsewhere, (c) to disburse such funds upon orders
or vouchers, and (d) to employ one or more subcustodians.
4.4. 1940 Act Governance. Any contract referred to in Section 4.1 hereof
shall be consistent with and subject to the applicable requirements of Section
15 of the 1940 Act and the rules and orders thereunder with respect to its
continuance in effect, its termination, and the method of authorization and
approval of such contract or renewal. No amendment to a contract referred to in
Section 4.1 hereof shall be effective unless assented to in a manner consistent
with the requirements of Section 15 of the 1940 Act, and the rules and orders
thereunder.
<PAGE>
ARTICLE V
Liability of Holders; Limitations of
Liability of Trustees, Officers, etc.
5.1. Liability of Holders; Indemnification. Each Holder of an Interest in
a Series shall be jointly and severally liable with every other Holder of an
Interest in that Series (with rights of contribution inter se in proportion to
their respective Interests in the Series) for the liabilities and obligations
of that Series (and of no other Series) in the event that the Trust fails to
satisfy such liabilities and obligations from the assets of that Series;
provided, however, that, to the extent assets of that Series are available in
the Trust, the Trust shall indemnify and hold each Holder harmless from and
against any claim or liability to which such Holder may become subject by
reason of being or having been a Holder of an Interest in that Series to the
extent that such claim or liability imposes on the Holder an obligation or
liability which, when compared to the obligations and liabilities imposed on
other Holders of Interests in that Series, is greater than such Holder's
Interest (proportionate share), and shall reimburse such Holder for all legal
and other expenses reasonably incurred by such Holder in connection with any
such claim or liability. The rights accruing to a Holder under this Section 5.1
shall not exclude any other right to which such Holder may be lawfully
entitled, nor shall anything contained herein restrict the right of the Trust
to indemnify or reimburse a Holder in any appropriate situation even though not
specifically provided herein. Notwithstanding the indemnification procedure
described above, it is intended that each Holder of an Interest in a Series
shall remain jointly and severally liable to the creditors of that Series as a
legal matter. The liabilities of a particular Series and the right to
indemnification granted hereunder to Holders of Interests in such Series shall
not be enforceable against any other Series or Holders of Interests in any
other Series.
5.2. Limitations of Liability of Trustees, Officers, Employees, Agents,
Independent Contractors to Third Parties. No Trustee, officer, employee, agent
or independent contractor (except in the case of an agent or independent
contractor to the extent expressly provided by written contract) of the Trust
or any Series shall be subject to any personal liability whatsoever to any
Person, other than the Trust or the Holders, in connection with Trust Property
or the affairs of the Trust; and all such Persons shall look solely to the
Trust Property for satisfaction of claims of any nature against a Trustee,
<PAGE>
officer, employee, agent or independent contractor (except in the case of an
agent or independent contractor to the extent expressly provided by written
contract) of the Trust arising in connection with the affairs of the Trust.
5.3. Limitations of Liability of Trustees, Officers or Employees to Trust,
Holders, etc. No Trustee, officer or employee of the Trust shall be liable to
the Trust or the Holders for any action or failure to act (including, without
limitation, the failure to compel in any way any former or acting Trustee to
redress any breach of trust) except for such Person's own bad faith, willful
misfeasance, gross negligence or reckless disregard of such Person's duties.
5.4. Mandatory Indemnification. The Trust shall indemnify, to the fullest
extent permitted by law (including the 1940 Act), each Trustee, officer or
employee of the Trust (including any Person who serves at the Trust's request
as a director, officer or trustee of another organization in which the Trust
has any interest as a shareholder, creditor or otherwise) against all
liabilities and expenses (including amounts paid in satisfaction of judgments,
in compromise, as fines and penalties, and as counsel fees) reasonably incurred
by such Person in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, in which such Person may
be involved or with which such Person may be threatened, while in office or
thereafter, by reason of such Person being or having been such a Trustee,
officer, employee, agent or independent contractor, except with respect to any
matter as to which such Person shall have been adjudicated to have acted in bad
faith, willful misfeasance, gross negligence or reckless disregard of such
Person's duties, such liabilities and expenses being liabilities only of the
Series out of which such claim for indemnification arises; provided, however,
that as to any matter disposed of by a compromise payment by such Person,
pursuant to a consent decree or otherwise, no indemnification either for such
payment or for any other expenses shall be provided unless there has been a
determination that such Person did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Person's office (i) by the court or other body approving the
settlement or other disposition; or (ii) based upon a review of readily
available facts (as opposed to a full trial-type inquiry), by written opinion
from independent legal counsel approved by the Trustees; or (iii) by a majority
of the Trustees who are neither Interested Persons of the Trust nor parties to
the matter, based upon a review of readily available facts (as opposed to a
full trial-type inquiry). The rights accruing to any Person under these
provisions shall not exclude any other right to which such Person may be
lawfully entitled; provided that no Person may satisfy any right of indemnity
<PAGE>
or reimbursement granted in this Section 5.4 or in Section 5.2 hereof or to
which such Person may be otherwise entitled except out of the Trust Property.
The rights of indemnification provided herein may be insured against by
policies maintained by the Trust. The Trustees may make advance payments in
connection with indemnification under this Section 5.4, provided that the
indemnified Person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that such Person is not
entitled to such indemnification, and provided further that either (i) such
Person shall have provided appropriate security for such undertaking, or (ii)
the Trust is insured against losses arising out of any such advance payments,
or (iii) either a majority of the Trustees who are neither Interested Persons
of the Trust nor parties to the matter, or independent legal counsel in a
written opinion, shall have determined, based upon a review of readily
available facts (as opposed to a trial-type inquiry or full investigation),
that there is reason to believe that such Person will not be disqualified from
indemnification under this Section 5.4.
5.5. No Bond Required of Trustees. No Trustee shall, as such, be obligated
to give any bond or surety or other security for the performance of any of such
Trustee's duties hereunder.
5.6. No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender or other Person dealing with any Trustee, officer, employee,
agent or independent contractor of the Trust or any Series shall be bound to
make any inquiry concerning the validity of any transaction purporting to be
made by such Trustee, officer, employee, agent or independent contractor or be
liable for the application of money or property paid, loaned or delivered to or
on the order of such Trustee, officer, employee, agent or independent
contractor. Every obligation, contract, instrument, certificate or other
interest or undertaking of the Trust or any Series, and every other act or
thing whatsoever executed in connection with the Trust or any Series shall be
conclusively taken to have been executed or done by the executors thereof only
in their capacity as Trustees, officers, employees, agents or independent
contractors of the Trust or any Series. Every written obligation, contract,
instrument, certificate or other interest or undertaking of the Trust or any
Series made or sold by any Trustee, officer or employee of the Trust or any
Series, in such, capacity, shall contain an appropriate recital to the effect
that the Trustee, officer or employee of the Trust or any Series shall not
personally be bound by or liable thereunder, nor shall resort be had to their
private property for the satisfaction of any obligation or claim thereunder,
and appropriate references shall be made therein to the Declaration, and may
contain any further recital which they may deem appropriate, but the omission
<PAGE>
of such recital shall not operate to impose personal liability on any Trustee,
officer or employee of the Trust or any Series. Subject to the provisions of
the 1940 Act, the Trust may maintain insurance for the protection of the Trust
Property, the Holders, and the Trustees, officers or employees of the Trust and
any Series in such amount as the Trustees shall deem adequate to cover possible
tort liability, and such other insurance as the Trustees in their sole judgment
shall deem advisable.
5.7. Reliance on Experts, etc. Each Trustee, officer or employee of the
Trust and any Series shall, in the performance of such Person's duties, be
fully and completely justified and protected with regard to any act or any
failure to act resulting from reliance in good faith upon the books of account
or other records of the Trust or any Series (whether or not the Trust or any
Series would have the power to indemnify such Persons against such liability),
upon an opinion of counsel, or upon reports made to the Trust or any Series by
any of its officers or employees or by any Investment Adviser or Administrator,
accountant, appraiser or other experts or consultants selected with reasonable
care by the Trustees, officers or employees of the Trust or any Series,
regardless of whether such counsel or expert may also be a Trustee.
5.8. No Repeal or Modification. Any repeal or modification of this Article
V by the Holders, or adoption or modification of any other provision of this
Declaration or the By-Laws inconsistent with this Article V, shall be
prospective only, to the extent that such repeal or modification would, if
applied retrospectively, adversely affect any limitation on the liability of
any Person or indemnification available to any indemnified Person with respect
to any act or omission which occurred prior to such repeal, modification or
adoption.
ARTICLE VI
Interests
6.1. Interests. The beneficial interest in the Trust Property shall
consist of non-transferable Interests. Interests may be sold only to
Institutional Investors, as may be approved by the Trustees, for cash or other
consideration acceptable to the Trustees, subject to the requirements of the
1940 Act. The Interests shall be personal property giving only the rights in
this Declaration specifically set forth. The value of an Interest shall be
equal to the Book Capital Account balance of the Holder of the Interest.
<PAGE>
The Trustees shall have authority, from time to time, to establish Series,
each of which shall be a separate subtrust and the Interests in which shall be
separate and distinct from the Interests in any other Series. The Series shall
include, without limitation, those Series specifically established and
designated pursuant to Section 6.2 hereof, and such other Series as the
Trustees may deem necessary or desirable. The Trustees shall have exclusive
power without the requirement of Holder approval to establish and designate
such separate and distinct Series, and, subject to the provisions of this
Declaration and the 1940 Act, to fix and determine the rights of Holders of
Interests in such Series, including with respect to the price, terms and manner
of purchase and redemption, dividends and other distributions, rights on
liquidation, sinking or purchase fund provisions, conversion rights and
conditions under which the Holders of the several Series shall have separate
voting rights or no voting rights.
6.2. Establishment and Designation of Series. The establishment and
designation of any Series shall be effective upon the execution by the
Secretary or an Assistant Secretary of the Trust, pursuant to authorization by
a majority of the Trustees, of an instrument setting forth such establishment
and designation and the relative rights and preferences of the Interests in
such Series, or as otherwise provided in such instrument. At any time that
there are no Interests outstanding of any particular Series previously
established and designated, the Trustees may by resolution adopted by a
majority of their number, and evidenced by an instrument executed by the
Secretary or an Assistant Secretary of the Trust, abolish that Series and the
establishment and designation thereof. Each instrument referred to in this
paragraph shall have the status of an amendment to this Declaration of Trust.
Without limiting the authority of the Trustees set forth above to
establish and designate further Series, the Trustees hereby establish and
designate the Series set forth on Schedule A hereto. The Interests in each of
these Series and any Interests in any further Series that may from time to time
be established and designated by the Trustees shall (unless the Trustees
otherwise determine with respect to some further Series at the time of
establishing and designating the same) have the following relative rights and
preferences:
(a) Assets Belonging to Series. All consideration received by the Trust
for the issue or sale of Interests in a particular Series, together with all
assets in which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof, including any proceeds derived from
<PAGE>
the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may
be, shall be held by the Trustees in a separate trust for the benefit of the
Holders of Interests in that Series and shall irrevocably belong to that Series
for all purposes, and shall be so recorded upon the books of account of the
Trust. Such consideration, assets, income, earnings, profits, and proceeds
thereof, including any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
belonging to" that Series. No Series shall have any right to or interest in the
assets belonging to any other Series, and no Holder shall have any right or
interest with respect to the assets belonging to any Series in which it does
not hold an Interest.
(b) Liabilities Belonging to Series. The assets belonging to each
particular Series shall be charged with the liabilities in respect of that
Series and all expenses, costs, charges and reserves attributable to that
Series. The liabilities, expenses, costs, charges and reserves so charged to a
Series are herein referred to as "liabilities belonging to" that Series. No
Series shall be liable for or charged with the liabilities belonging to any
other Series, and no Holder shall be subject to any liabilities belonging to
any Series in which it does not hold an Interest.
(c) Voting. On each matter submitted to a vote of the Holders, each Holder
shall be entitled to a vote proportionate to its Interest as recorded on the
books of the Trust. Each Series shall vote as a separate class except as to
voting for Trustees, as otherwise required by the 1940 Act, or if determined by
the Trustees to be a matter which affects all Series. As to any matter which
does not affect the interest of all Series, only the Holders in the one or more
affected Series shall be entitled to vote. On each matter submitted to a vote
of the Holders, a Holder may apportion its vote with respect to a proposal in
the same proportion as its own shareholders voted with respect to that
proposal.
6.3. Non-Transferability. A Holder may not transfer its Interest.
6.4. Register of Interests. A register shall be kept at the Trust under
the direction of the Trustees which shall contain the name, address and Book
Capital Account balance of each Holder in each Series. Such register shall be
conclusive as to the identity of the Holders. No Holder shall be entitled to
receive payment of any distribution, nor to have notice given to it as herein
provided, until it has given its address to such officer or agent of the Trust
as is keeping such register for entry thereon.
<PAGE>
ARTICLE VII
Increases, Decreases And Redemptions of Interests
Subject to applicable law, to the provisions of this Declaration and to
such restrictions as may from time to time be adopted by the Trustees, each
Holder may vary its Interest in any Series at any time by increasing (through a
capital contribution) or decreasing (through a capital withdrawal) or by a
Redemption of its Interest. An increase in the Interest of a Holder in a Series
shall be reflected as an increase in the Book Capital Account balance of that
Holder in that Series and a decrease in the Interest of a Holder in a Series or
the Redemption of the Interest of that Holder shall be reflected as a decrease
in the Book Capital Account balance of that Holder in that Series. The Trust
shall, upon appropriate and adequate notice from any Holder, increase, decrease
or redeem such Holder's Interest for an amount determined by the application of
a formula adopted for such purpose by resolution of the Trustees; provided that
(a) the amount received by the Holder upon any such decrease or Redemption
shall not exceed the decrease in the Holder's Book Capital Account balance
effected by such decrease or Redemption of its Interest, and (b) if so
authorized by the Trustees, the Trust may, at any time and from time to time,
charge fees for effecting any such decrease or Redemption, at such rates as the
Trustees may establish, and may, at any time and from time to time, suspend
such right of decrease or Redemption. The procedures for effecting decreases or
Redemptions shall be as determined by the Trustees from time to time.
ARTICLE VIII
Determination of Book Capital Account
Balances and Distributions
8.1. Book Capital Account Balances. The Book Capital Account balance of
Holders with respect to a particular Series shall be determined on such days
and at such time or times as the Trustees may determine. The Trustees shall
adopt resolutions setting forth the method of determining the Book Capital
Account balance of each Holder. The power and duty to make calculations
pursuant to such resolutions may be delegated by the Trustees to the Investment
Adviser or Administrator, custodian, or such other Person as the Trustees may
<PAGE>
determine. Upon the Redemption of an Interest, the Holder of that Interest
shall be entitled to receive the balance of its Book Capital Account. A Holder
may not transfer its Book Capital Account balance.
8.2. Allocations and Distributions to Holders. The Trustees shall, in
compliance with the Code, the 1940 Act and generally accepted accounting
principles, establish the procedures by which the Trust shall make with respect
to each Series (i) the allocation of unrealized gains and losses, taxable
income and tax loss, and profit and loss, or any item or items thereof, to each
Holder, (ii) the payment of distributions, if any, to Holders, and (iii) upon
liquidation, the final distribution of items of taxable income and expense.
Such procedures shall be set forth in writing and be furnished to the Trust's
accountants. The Trustees may amend the procedures adopted pursuant to this
Section 8.2 from time to time. The Trustees may retain from the net profits of
each Series such amount as they may deem necessary to pay the liabilities and
expenses of that Series.
8.3. Power to Modify Foregoing Procedures. Notwithstanding any of the
foregoing provisions of this Article VIII, the Trustees may prescribe, in their
absolute discretion, such other bases and times for determining the net income
and net assets of the Trust and of each Series, the allocation of income of the
Trust and of each Series, the Book Capital Account balance of each Holder, or
the payment of distributions to the Holders as they may deem necessary or
desirable to enable the Trust or a Series to comply with any provision of the
1940 Act or any order of exemption issued by the Commission or with the Code.
ARTICLE IX
Holders
9.1. Rights of Holders. The ownership of the Trust Property and the right
to conduct any business described herein are vested exclusively in the
Trustees, and the Holders shall have no right or title therein other than the
beneficial interest conferred by their Interests and they shall have no power
or right to call for any partition or division of any Trust Property.
The Trust shall be entitled to treat a Holder of record as the holder in
fact and shall not be bound to recognize any equitable or other claim of
<PAGE>
interest in such Holder's Interest on the part of any other entity except as
may be otherwise expressly provided by law.
In addition, the Holders shall have power to vote only with respect to (a)
the election of Trustees as provided in Article II, Section 2.4; (b) the
removal of Trustees as provided in Article II, Section 2.3; (c) any investment
advisory contract as provided in Article IV, Section 4.1; (d) any dissolution
of a Series as provided in Article X, Section 10.2; (e) the amendment of this
Declaration to the extent and as provided in Article X, Section 10.4; (f) any
merger, consolidation or sale of assets as provided in Article X, Section 10.5;
and (g) such additional matters relating to the Trust as may be required or
authorized by law, by this Declaration or the By-Laws or any registration
statement of the Trust filed with the Commission, or as the Trustees may
consider desirable.
9.2. Meetings of Holders. Meetings of Holders may be called at any time by
a majority of the Trustees and shall be called by any Trustee upon written
request of Holders holding, in the aggregate, not less than 10% of the
Interests in one or more Series (if the meeting relates solely to such Series),
or not less than 10% of the Interests in the Trust (if the meeting relates to
the Trust and not solely to one or more particular Series), such request
specifying the purpose or purposes for which such meeting is to be called. Any
such meeting shall be held within or without the State of New York and within
or without the United States of America on such day and at such time as the
Trustees shall designate. Holders of at least one-third of the Interests in one
or more Series (if the meeting relates solely to such one or more Series) or
Holders of at least one-third of the Interests in the Trust (if the meeting
relates to the Trust and not solely to one or more particular Series), present
in person or by proxy, shall constitute a quorum for the transaction of any
business, except as may otherwise be required by the 1940 Act, other applicable
law, this Declaration or the By-Laws. If a quorum is present at a meeting, an
affirmative vote of the Holders present, in person or by proxy, holding more
than 50% of the total Interests of the Holders present in a Series or the
Trust, as applicable, either in person or by proxy, at such meeting constitutes
the action of the Holders in such Series or the Trust, as applicable, unless a
greater number of affirmative votes is required by the 1940 Act, other
applicable law, this Declaration or the By-Laws, and except that a plurality of
the total Interests of the Holders present shall elect a Trustee. All or any
one of more Holders may participate in a meeting of Holders by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other and participation in a
meeting by means of such communications equipment shall constitute presence in
person at such meeting.
<PAGE>
9.3. Notice of Meetings. Notice of each meeting of Holders, stating the
time, place any purposes of the meeting, shall be given by the Trustees by mail
to each Holder of the Series or the Trust, as the case may be, at its
registered address, mailed at least 10 days and not more than 60 days before
the meeting. Notice of any meeting may be waived in writing by any Holder
either before or after such meeting. The attendance of a Holder at a meeting
shall constitute a waiver of notice of such meeting except in the situation in
which a Holder attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting was not lawfully
called or convened. At any meeting, any business properly before the meeting
may be considered whether or not stated in the notice of the meeting. Any
adjourned meeting may be held as adjourned without further notice.
9.4. Record Date for Meetings, Distributions, etc. For the purpose of
determining the Holders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any other
action, the Trustees may from time to time fix a date, not more than 90 days
prior to the date of any meeting of Holders or the payment of any distribution
or the taking of any other action, as the case may be, as a record date for the
determination of the Persons to be treated as Holders of the Series or the
Trust, as the case may be, for such purpose.
9.5. Proxies, etc. At any meeting of Holders, any Holder entitled to vote
thereat may vote by proxy, provided that no proxy shall be voted at any meeting
unless it shall have been placed on file with the Secretary, or with such other
officer or agent of the Trust as the Secretary may direct, for verification
prior to the time at which such vote is to be taken. A proxy may be revoked by
a Holder at any time before it has been exercised by placing on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary
may direct, a later dated proxy or written revocation. Pursuant to a resolution
of a majority of the Trustees, proxies may be solicited in the name of the
Trust or of one or more Trustees or of one or more officers of the Trust. Only
Holders on the record date shall be entitled to vote. Each such Holder shall be
entitled to a vote proportionate to its Interest in the Series or the Trust, as
the case may be. When an Interest is held jointly by several Persons, any one
of them may vote at any meeting in person or by proxy in respect of such
Interest, but if more than one of them is present at such meeting in person or
by proxy, and such joint owners or their proxies so present disagree as to any
vote to be cast, such vote shall not be received in respect of such Interest. A
proxy purporting to be executed by or on behalf of a Holder, including proxies
received via telecopy, shall be deemed valid unless challenged at or prior to
<PAGE>
its exercise, and the burden of proving invalidity shall rest on the
challenger.
9.6. Reports. As to each Series, the Trustees shall cause to be prepared
and furnished to each Holder thereof, at least annually as of the end of each
Fiscal Year, a report of operations containing a balance sheet and a statement
of income of such Series prepared in conformity with generally accepted
accounting principles and an opinion of an independent public accountant on
such financial statements. The Trustees shall, in addition, with respect to
each Series furnish to each Holder of such Series at least semi-annually
interim reports of operations containing an unaudited balance sheet as of the
end of such period and an unaudited statement of income for the period from the
beginning of the then-current Fiscal Year to the end of such period.
9.7. Inspection of Records. The records of the Trust shall be open to
inspection by Holders during normal business hours for any purpose not harmful
to the Trust.
9.8. Holder Action by Written Consent. Any action which may be taken on
behalf of-the Trust or any Series by Holders may be taken without a meeting if
Holders holding more than 50% of all Interests entitled to vote (or such larger
proportion thereof as shall be required by any express provision of this
Declaration or of applicable law) consent to the action in writing and the
written consents are filed with the records of the meetings of Holders. Such
consents shall be treated for all purposes as a vote, taken at a meeting of
Holders. Each such written consent shall be executed by or on behalf of the
Holder delivering such consent and shall bear the date of such execution. No
such written consent shall be effective to take the action referred to therein
unless, within one year of the earliest dated consent, written consents
executed by a sufficient number of Holders to take such action are filed with
the records of the meetings of Holders.
9.9. Notices. Any and all communications, including any and all notices to
which any Holder may be entitled, shall be deemed duly served or given if
mailed, postage prepaid, addressed to a Holder at its last known address as
recorded on the register of the Trust or if delivered to a Holder by courier or
by facsimile or other similar electronic mechanism.
<PAGE>
ARTICLE X
Duration; Termination; Dissolution;
Amendment; Mergers; Etc.
10.1. Duration. Subject to possible dissolution or termination in
accordance with the provisions of Section 10.2 and Section 10.3 hereof,
respectively, the Trust created hereby shall continue until the expiration of
20 years after the death of the last survivor of the initial Trustees named
herein and the following named persons:
Date of
Name Address Birth
Michelle Muriel Rumery 18 Rio Vista Street 7/11/93
North Billerica, MA 01862
Nicole Catherine Rumery 18 Rio Vista Street 12/21/91
North Billerica, MA 01862
Shelby Sara Wyetzner 8 Oak Brook Lane 10/18/90
Merrick, NY 11566
Amanda Jehan Sher Coolidge 483 Pleasant Street, No. 9 08/16/89
Belmont, MA 02178
Caroline Bolger Cima 11 Beechwood Lane 12/23/88
Scarsdale, NY 10583
Adriana L. Saldana 58 Newell Road 3/22/88
Newton, MA 02166
10.2. Dissolution. Any Series shall be dissolved (i) by the affirmative
vote of the Holders of not less than two-thirds of the Interests in the Series
at any meeting of the Holders or by an instrument in writing, without a
meeting, signed by a majority of the Trustees and consented to by the Holders
of not less than two-thirds of such Interests, (ii) by the Trustees by written
notice of dissolution to the Holders of the Interests in the Series, or (iii)
upon the bankruptcy or withdrawal of a Holder of an Interest in the Series,
unless the remaining Holders of Interests in such Series, by majority vote,
agree to continue the Series. The Trust may be dissolved by action of the
Trustees upon the dissolution of the last remaining Series.
<PAGE>
10.3. Termination.
(a) Upon an event of dissolution of the Trust or a Series, unless
the Trust or Series is continued in accordance with the proviso to Section 10.2
above, the Trust or Series, as applicable, shall be terminated in accordance
with the following provisions:
(i) the Trust or Series, as applicable, shall carry on no
business except for the purpose of winding up its affairs;
(ii) the Trustees shall proceed to wind up the affairs of the
Trust or Series, as applicable, and all of the powers of the Trustees
under this Declaration shall continue until the affairs of the Trust or
Series have been wound up, including the power to fulfill or discharge
the contracts of the Trust or Series, collect the assets of the Trust of
Series, sell, convey, assign, exchange or otherwise dispose of all or any
part of the Trust Property affected to one or more Persons at public or
private sale for consideration which may consist in whole or in part of
cash, securities or other property of any kind, discharge or pay the
liabilities of the Trust or Series, and do all other acts appropriate to
liquidate the business of the Trust or Series; provided that any sale,
conveyance, assignment, exchange or other disposition of all or
substantially all the Trust Property or substantially all of the assets
belonging to a particular Series, other than for cash, shall require
approval of the principal terms of the transaction and the nature and
amount of the consideration by the vote of Holders holding more than 50%
of the total Interests in the Trust or Series, as applicable; and
(iii)after paying or adequately providing for the payment of
all liabilities of the Trust or of the Series being terminated, and upon
receipt of such releases, indemnities and refunding agreements as they
deem necessary for their protection, the Trustees shall distribute the
remaining Trust Property of the Trust or Series, as applicable, in cash
or in kind or partly each, among the Holders according to their
<PAGE>
respective rights as set forth in the procedures established pursuant to
Section 8.2 hereof.
(b) Upon termination of the Trust or Series and distribution to the
Holders as herein provided, a majority of the Trustees shall execute and file
with the records of the Trust an instrument in writing setting forth the fact
of such termination and distribution. Upon termination of the Trust, the
<PAGE>
Trustees shall thereupon be discharged from all further liabilities and duties
hereunder, and the rights and interests of all Holders shall thereupon cease.
10.4. Amendment Procedure.
(a) The Trustees may, without any vote of Holders, amend or
otherwise supplement this Declaration by an instrument in writing executed by a
majority of the Trustees, provided that Holders shall have the right to vote on
any amendment (a) which would affect the voting rights of Holders granted in
Article IX, Section 9.1, (b) to this Section 10.4, (c) required to be approved
by Holders by law or by the Trust's registration statement filed with the
Commission, or (d) submitted to them by the Trustees. Any amendment submitted
to Holders which the Trustees determine would affect the Holders of certain but
not all Series shall be authorized by vote of the Holders of such Series
affected and no vote shall be required of Holders of a Series not affected. Any
amendment applicable to the Trust as a whole, unless otherwise required by law
or by this Declaration or the By-Laws, shall be authorized by vote of the
Holders of the Trust. Notwithstanding anything else herein, any amendment to
Article V which would have the effect of reducing the indemnification and other
rights provided thereby and any repeal or amendment of this sentence shall each
require the affirmative vote of the Holders of two-thirds of the Interests
entitled to vote thereon.
(b) No amendment may be made under Section 10.4(a) hereof which would
change any rights with respect to any Interest by reducing the amount payable
thereon upon liquidation of the Trust or any Series or by diminishing or
eliminating any voting rights pertaining thereto, except with the vote or
consent of Holders of two-thirds of all Interests which would be so affected by
such amendment.
(c) A certification in recordable form executed by a majority of the
Trustees setting forth an amendment and reciting that it was duly adopted by
the Holders or by the Trustees as aforesaid or a copy of the Declaration, as
amended, in recordable form, and executed by a majority of the Trustees, shall
be conclusive evidence of such amendment when filed with the records of the
Trust.
Notwithstanding any other provision hereof, until such time as Interests
are first sold, this Declaration may be terminated or amended in any respect by
the affirmative vote of a majority of the Trustees at any meeting of Trustees
or by an instrument executed by a majority of the Trustees.
<PAGE>
10.5. Merger, Consolidation and Sale of Assets. The Trust or any Series
may merge or consolidate with any other corporation, association, trust or
other organization or may sell, lease or exchange all or substantially all of
the Trust Property, or assets belonging to such Series, as applicable,
including good will, upon such terms and conditions and for such consideration
when and as authorized at any meeting of Holders called for such purpose by
Majority Interests Vote of Interests in the Series affected by such action, or
by an instrument in writing without a meeting, consented to by Holders of not
less than a majority of the Interests in the Series affected by such action,
and any such merger, consolidation, sale, lease or exchange shall be deemed for
all purposes to have been accomplished under and pursuant to the law of the
State of New York, provided however that no such vote shall be required where
by reorganization, purchase of assets or otherwise, the Trust or any affected
Series is the surviving entity.
10.6. Incorporation. Upon a Majority Interests Vote, the Trustees may
cause to be organized or assist in organizing a corporation or corporations
under the law of any jurisdiction or a trust, partnership, association or other
organization to take over the Trust Property or to carry on any business in
which the Trust directly or indirectly has any interest, and to sell, convey
and transfer the Trust Property to any such corporation, trust, partnership,
association or other organization in exchange for the equity interests thereof
or otherwise, and to lend money to, subscribe for the equity interests of, and
enter into any contract with any such corporation, trust, partnership,
association or other organization, or any corporation, trust, partnership,
association or other organization in which the Trust holds or is about to
acquire equity interests. The Trustees may also cause a merger or consolidation
between the Trust or any successor thereto and any such corporation, trust,
partnership, association or other organization if and to the extent permitted
by law. Nothing contained herein shall be construed as requiring approval of
the Holders for the Trustees to organize or assist in organizing one or more
corporations, trusts, partnerships, associations or other organizations and
selling, conveying or transferring a portion of the Trust Property to one or
more of such organizations or entities.
<PAGE>
ARTICLE XI
Miscellaneous
11.1. Certificate of Designation; Agent for Service of Process. If
required by New York law, the Trust shall file, with the Department of State of
the State of New York, a certificate, in the name of the Trust and executed by
an officer of the Trust, designating the Secretary of State of the State of New
York as an agent upon whom process in any action or proceeding against the
Trust or any Series may be served.
11.2. Governing Law. This Declaration is executed by the Trustees and
delivered in the State of New York and with reference to the law thereof, and
the rights of all parties and the validity and construction of every provision
hereof shall be subject to and construed in accordance with the law of the
State of New York and reference shall be specifically made to the trust law of
the State of New York as to the construction of matters not specifically
covered herein or as to which an ambiguity exists.
11.3. Counterparts. This Declaration may be simultaneously executed in
several counterparts, each of which shall be deemed to be an original, and such
counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any one such original counterpart.
11.4. Reliance by Third Parties. Any certificate executed by an individual
who, according to the records of the Trust or of any recording office in which
this Declaration may be recorded, appears to be a Trustee hereunder, certifying
to: (a) the number or identity of Trustees or Holders, (b) the due
authorization of the execution of any instrument or writing, (c) the form of
any vote passed at a meeting of Trustees or Holders, (d) the fact that the
number of Trustees or Holders present at any meeting or executing any written
instrument satisfies the requirements of this Declaration, (e) the form of any
By-Laws adopted by or the identity of any officer elected by the Trustees, or
(f) the existence of any fact or facts which in any manner relate to the
affairs of the Trust, shall be conclusive evidence as to the matters so
certified in favor of any Person dealing with the Trustees.
11.5. Provisions in Conflict with Law or Regulations.
(a) The provisions of this Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any of such
<PAGE>
provisions is in conflict with the 1940 Act, or with other applicable law and
regulations, the conflicting provision shall be deemed never to have
constituted a part of this Declaration; provided, however, that such
determination shall not affect any of the remaining provisions of this
Declaration or render invalid or improper any action taken or omitted prior to
such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have executed this Declaration of
Trust of Diversified Investors Portfolios as of the day and year first above
written.
/s/ James B. Craver
-------------------
James B. Craver
As Trustee and not individually
/s/ Thomas M. Lenz
------------------
Thomas M. Lenz
As Trustee and not individually
/s/ Andres E. Saldana
---------------------
Andres E. Saldana
As Trustee and not individually
<PAGE>
SCHEDULE A
Diversified Investors Portfolios
Initial Series
Money Market Portfolio
High Quality Bond Portfolio
Government/Corporate Bond Portfolio
Balanced Portfolio
Equity Income Portfolio
Growth & Income Portfolio
Equity Growth Portfolio
Special Equity Portfolio
Intermediate Government Bond Portfolio
Schedule A
DIVERSIFIED INVESTORS PORTFOLIOS
Amended and Restated Establishment and
Designation of Series of Beneficial Interest
Dated as of February 20, 1996
Pursuant to Section 6.2 of the Declaration of Trust, dated as of
September 1, 1993 (the "Declaration of Trust"), of Diversified Investors
Portfolios (the "Trust"), the Trustees of the Trust hereby amend and restate
the Establishment and Designation of Series appended to the Declaration of
Trust to establish and designate the "Equity Value Portfolio" and the
"Aggressive Equity Portfolio" as additional series of Interests (as defined in
the Declaration of Trust) to the Trust's eleven series of Interests (each a
"Series" and collectively the "Series") having the following special and
relative rights:
1. The Series shall be designated as follows:
Balanced Portfolio
Money Market Portfolio
Growth & Income Portfolio
Equity Growth Portfolio
Equity Income Portfolio
Special Equity Portfolio
High Quality Bond Portfolio
Government/Corporate Bond Portfolio
Intermediate Government Bond Portfolio
High-Yield Bond Portfolio
International Equity Portfolio
Equity Value Portfolio
Aggressive Equity Portfolio
2. Each Series shall be authorized to hold cash, invest in securities,
instruments and other properties and use investment techniques as from time to
time described in the Trust's then currently effective registration statement
under the Investment Company Act of 1940, as amended, to the extent pertaining
to that Series. The proceeds of sales of Interests of a Series, together with
any income and gain thereon, less any diminution or expenses thereof, shall
irrevocably belong to that Series, unless otherwise required by law.
3. Investors in each Series shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to each Series as provided in, Rule 18f-2,
<PAGE>
as from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rule, and by the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated among the
Series as set forth in Section 6.2 of the Declaration of Trust.
5. Subject to the provisions of Section 6.2 and Article X of the
Declaration of Trust, the Trustees (including any successor Trustees) shall
have the right at any time and from time to time to reallocate assets and
expenses, to change the designation of any Series created previously or now or
hereafter created, or otherwise to change the special and relative rights of
any Series.
IN WITNESS WHEREOF, the undersigned have signed this instrument as of
February 20, 1996. This instrument may be executed by the Trustees on separate
counterparts but shall be effective only when signed by a majority of the
Trustees.
/s/Donald E. Flynn
---------------------------------
Donald E. Flynn
As Trustee and not Individually
/s/Neal M. Jewell
---------------------------------
Neal M. Jewell
As Trustee and not Individually
/s/Eugene M. Mannella
---------------------------------
Eugene M. Mannella
As Trustee and not Individually
/s/Patricia L. Sawyer
---------------------------------
Patricia L. Sawyer
As Trustee and not Individually
/s/Thomas A. Schlossberg
---------------------------------
Thomas A. Schlossberg
As Trustee and not Individually
EXHIBIT 2
DIVERSIFIED INVESTORS PORTFOLIOS
------------------------
BY-LAWS
As Adopted September 1, 1993
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I -- Meetings of Holders....................................... 1
Section 1.1 Fixing Record Dates................................. 1
Section 1.2 Records at Holder Meetings.......................... 1
Section 1.3 Inspectors of Election.............................. 1
Section 1.4 Proxies; Voting..................................... 2
Section 1.5 Series Holders Meetings............................. 2
ARTICLE II -- Meetings of Trustees..................................... 3
Section 2.1 Annual and Regular Meetings......................... 3
Section 2.2 Notice.............................................. 3
ARTICLE III -- Officers................................................ 3
Section 3.1 Officers of the Trust............................... 3
Section 3.2 Election and Tenure................................. 3
Section 3.3 Removal of Officers................................. 3
Section 3.4 Bonds and Surety.................................... 4
Section 3.5 Chairman, President and Vice President.............. 4
Section 3.6 Secretary........................................... 5
Section 3.7 Treasurer........................................... 5
Section 3.8 Other Officers and Duties........................... 5
ARTICLE IV -- Miscellaneous............................................ 6
Section 4.1 Depositories........................................ 6
Section 4.2 Signatures.......................................... 6
Section 4.3 Seal................................................ 6
Section 4.4 Indemnification..................................... 6
Section 4.5 Distribution Disbursing Agents and the Like......... 7
ARTICLE V -- Regulations; Amendment of By-Laws......................... 7
Section 5.1 Regulations......................................... 7
Section 5.2 Amendment and Repeal of By-Laws..................... 7
<PAGE>
BY-LAWS
OF
DIVERSIFIED INVESTORS PORTFOLIOS
----------------------
These By-Laws are made and adopted pursuant to Section 2.7 of the
Declaration of Trust establishing Diversified Investors Portfolios (the
"Trust"), dated as of September 1, 1993, as from time to time amended (the
"Declaration"). All words and terms capitalized in these By-Laws shall have the
meaning or meanings set forth for such words or terms in the Declaration.
ARTICLE I
Meetings of Holders
Section 1.1. Fixing Record Dates. If the Trustees do not, prior to any
meeting of the Holders, fix a record date, then the date of mailing notice of
the meeting shall be the record date.
Section 1.2. Records at Holder Meetings. At each meeting of the Holders
there shall be open for inspection the minutes of the last previous meeting of
Holders of the Trust and a list of the Holders of the Trust, certified to be
true and correct by the Secretary or other proper agent of the Trust, as of the
record date of the meeting. Such list of Holders shall contain the name of each
Holder in alphabetical order and the address and Interest owned by such Holder
on such record date.
Section 1.3. Inspectors of Election. In advance of any meeting of the
Holders, the Trustees may appoint Inspectors of Election to act at the meeting
or any adjournment thereof. If Inspectors of Election are not so appointed, the
chairman, if any, of any meeting of the Holders may, and on the request of any
Holder or his proxy shall, appoint Inspectors of Election. The number of
Inspectors of Election shall be either one or three. If appointed at the
meeting on the request of one or more Holders or proxies, a Majority Interests
Vote shall determine whether one or three Inspectors of Election are to be
appointed, but failure to allow such determination by the Holders shall not
affect the validity of the appointment of Inspectors of Election. In case any
individual appointed as an Inspector of Election fails to appear or fails or
refuses to so act, the vacancy may be filled by appointment made by the
<PAGE>
Trustees in advance of the convening of the meeting or at the meeting by the
individual acting as chairman of the meeting. The Inspectors of Election shall
determine the Interest owned by each Holder, the Interests represented at the
meeting, the existence of a quorum, the authenticity, validity and effect of
proxies, shall receive votes, ballots or consents, shall hear and determine all
challenges and questions in any way arising in connection with the right to
vote, shall count and tabulate all votes or consents, shall determine the
results, and shall do such other acts as may be proper to conduct the election
or vote with fairness to all Holders. If there are three Inspectors of
Election, the decision, act or certificate of a majority is effective in all
respects as the decision, act or certificate of all. On request of the
chairman, if any, of the meeting, or of any Holder or his proxy, the Inspectors
of Election shall make a report in writing of any challenge or question or
matter determined by them and shall execute a certificate of any facts found by
them.
Section 1.4. Proxies; Voting. No proxy shall be valid after one year from
the date of its execution, unless a longer period is expressly stated in such
proxy.
Section 1.5. Series Holders Meetings. Whenever a matter is required to be
voted by Holders of the Trust in the aggregate under Section 9.1 and 9.2 of the
Declaration, the Trust may either hold a meeting of Holders of all series to
vote on such matter, or hold separate meetings of Holders of each of the
individual series to vote on such matter, provided that (i) such separate
meetings shall be held within one year of each other, (ii) a quorum of the
individual series entitled to vote in person or by proxy shall be present at
each such separate meeting, and (iii) a quorum shall be present in the
aggregate at such separate meetings, and the votes of Holders at all such
separate meetings shall be aggregated in order to determine if sufficient votes
have been cast for such matter to be voted.
When separate meetings are held for Holders of each of the individual
series to vote on a matter required to be voted on by Holders of the Trust in
the aggregate, the record date of each such separate meeting shall be
determined in the manner described above in Section 1.1.
<PAGE>
ARTICLE II
Meetings of Trustees
Section 2.1. Annual and Regular Meetings. The Trustees shall hold an
annual meeting for the election of officers and the transaction of other
business which may come before such meeting.
Section 2.2. Notice. Notice of a meeting shall be given by mail, by
telegram (which term shall include a cablegram), by telecopier or delivered
personally (which term shall include by telephone). Neither the business to be
transacted at, nor the purpose of, any meeting of the Trustees need be stated
in the notice or waiver of notice of such meeting, and no notice need be given
of action proposed to be taken by written consent.
ARTICLE III
Officers
Section 3.1. Officers of the Trust. The officers of the Trust shall
consist of a Chairman, if any, a President, a Secretary, a Treasurer and such
other officers or assistant officers, including Vice Presidents, as may be
elected by the Trustees. Any two or more of the offices may be held by the same
person. The Trustees may designate a Vice President as an Executive Vice
President and may designate the order in which the other Vice Presidents may
act. The Chairman shall be a Trustee, but no other officer of the Trust,
including the President, need be a Trustee.
Section 3.2. Election and Tenure. At the initial organization meeting and
thereafter at each annual meeting of the Trustees, the Trustees shall elect the
Chairman, if any, the President, the Secretary, the Treasurer and such other
officers as the Trustees shall deem necessary or appropriate in order to carry
out the business of the Trust. Such officers shall hold office until the next
annual meeting of the Trustees and until their successors have been duly
elected and qualified. The Trustees may fill any vacancy in office or add any
additional officer at any time.
Section 3.3. Removal of Officers. Any officer may be removed at any time,
with or without cause, by action of a majority of the Trustees. This provision
shall not prevent the making of a contract of employment for a definite term
with any officer and shall have no effect upon any cause of action which any
<PAGE>
officer may have as a result of removal in breach of a contract of employment.
Any officer may resign at any time by notice in writing signed by such officer
and delivered or mailed to the Chairman, if any, the President or the
Secretary, and such resignation shall take effect immediately, or at a later
date according to the terms of such notice in writing.
Section 3.4. Bonds and Surety. Any officer may be required by the
Trustees to be bonded for the faithful performance of his duties in such amount
and with such sureties as the Trustees may determine.
Section 3.5. Chairman, President and Vice Presidents. The Chairman, if
any, shall, if present, preside at all meetings of the Holders and of the
Trustees and shall exercise and perform such other powers and duties as may be
from time to time assigned to him by the Trustees. Subject to such supervisory
powers, if any, as may be given by the Trustees to the Chairman, if any, the
President shall be the chief executive officer of the Trust and, subject to the
control of the Trustees, shall have general supervision, direction and control
of the business of the Trust and of its employees and shall exercise such
general powers of management as are usually vested in the office of President
of a corporation. In the absence of the Chairman, if any, the President shall
preside at all meetings of the Holders and, in the absence of the Chairman, the
President shall preside at all meetings of the Trustees. The President shall
be, ex officio, a member of all standing committees of Trustees. Subject to the
direction of the Trustees, the President shall have the power, in the name and
on behalf of the Trust, to execute any and all loan documents, contracts,
agreements, deeds, mortgages and other instruments in writing, and to employ
and discharge employees and agents of the Trust. Unless otherwise directed by
the Trustees, the President shall have full authority and power to attend, to
act and to vote, on behalf of the Trust, at any meeting of any business
organization in which the Trust holds an interest, or to confer such powers
upon any other person, by executing any proxies duly authorizing such person.
The President shall have such further authorities and duties as the Trustees
shall from time to time determine. In the absence or disability of the
President, the Vice Presidents in order of their rank or the Vice President
designated by the Trustees, shall perform all of the duties of the President,
and when so acting shall have all the powers of and be subject to all of the
restrictions upon the President. Subject to the direction of the President,
each Vice President shall have the power in the name and on behalf of the Trust
to execute any and all loan documents, contracts, agreements, deeds, mortgages
<PAGE>
and other instruments in writing, and, in addition, shall have such other
duties and powers as shall be designated from time to time by the Trustees or
by the President.
Section 3.6. Secretary. The Secretary shall keep the minutes of all
meetings of, and record all votes of, Holders, Trustees and the Executive
Committee, if any. The results of all actions taken at a meeting of the
Trustees, or by written consent of the Trustees, shall be recorded by the
Secretary. The Secretary shall be custodian of the seal of the Trust, if any,
and (and any other person so authorized by the Trustees) shall affix the seal
or, if permitted, a facsimile thereof, to any instrument executed by the Trust
which would be sealed by a New York corporation executing the same or a similar
instrument and shall attest the seal and the signature or signatures of the
officer or officers executing such instrument on behalf of the Trust. The
Secretary shall also perform any other duties commonly incident to such office
in a New York corporation, and shall have such other authorities and duties as
the Trustees shall from time to time determine.
Section 3.7. Treasurer. Except as otherwise directed by the Trustees, the
Treasurer shall have the general supervision of the monies, funds, securities,
notes receivable and other valuable papers and documents of the Trust, and
shall have and exercise under the supervision of the Trustees and of the
President all powers and duties normally incident to his office. The Treasurer
may endorse for deposit or collection all notes, checks and other instruments
payable to the Trust or to its order and shall deposit all funds of the Trust
as may be ordered by the Trustees or the President. The Treasurer shall keep
accurate account of the books of the Trust's transactions which shall be the
property of the Trust, and which together with all other property of the Trust
in his possession, shall be subject at all times to the inspection and control
of the Trustees. Unless the Trustees shall otherwise determine, the Treasurer
shall be the principal accounting officer of the Trust and shall also be the
principal financial officer of the Trust. The Treasurer shall have such other
duties and authorities as the Trustees shall from time to time determine.
Notwithstanding anything to the contrary herein contained, the Trustees may
authorize the Investment Manager and Administrator to maintain bank accounts
and deposit and disburse funds on behalf of the Trust.
Section 3.8. Other Officers and Duties. The Trustees may elect such other
officers and assistant officers as they shall from time to time determine to be
necessary or desirable in order to conduct the business of the Trust. Assistant
<PAGE>
officers shall act generally in the absence of the officer whom they assist and
shall assist that officer in the duties of his office. Each officer, employee
and agent of the Trust shall have such other duties and authorities as may be
conferred upon him by the Trustees or delegated to him by the President.
ARTICLE IV
Miscellaneous
Section 4.1. Depositories. The funds of the Trust shall be deposited in
such depositories as the Trustees shall designate and shall be drawn out on
checks, drafts or other orders signed by such officer, officers, agent or
agents (including the Investment Manager and Administrator) as the Trustees may
from time to time authorize.
Section 4.2. Signatures. All contracts and other instruments shall be
executed on behalf of the Trust by such officer, officers, agent or agents as
provided in these By-Laws or as the Trustees may from time to time by
resolution provide.
Section 4.3. Seal. The seal of the Trust, if any, may be affixed to any
document, and the seal and its attestation may be lithographed, engraved or
otherwise printed on any document with the same force and effect as if it had
been imprinted and attested manually in the same manner and with the same
effect as if done by a New York corporation.
Section 4.4. Indemnification. Insofar as the conditional advancing of
indemnification monies under Section 5.4 of the Declaration for actions based
upon the 1940 Act may be concerned, such payments will be made only on the
following conditions: (i) the advances must be limited to amounts used, or to
be used, for the preparation or presentation of a defense to the action,
including costs connected with the preparation of a settlement; (ii) advances
may be made only upon receipt of a written promise by, or on behalf of, the
recipient to repay the amount of the advance which exceeds the amount to which
it is ultimately determined that he is entitled to receive from the Trust by
reason of indemnification; and (iii) (a) such promise must be secured by a
surety bond, other suitable insurance or an equivalent form of security which
assures that any repayment may be obtained by the Trust without delay or
litigation, which bond, insurance or other form of security must be provided by
the recipient of the advance, or (b) a majority of a quorum of the Trust's
disinterested, non-party Trustees, or an independent legal counsel in a written
<PAGE>
opinion, shall determine, based upon a review of readily available facts, that
the recipient of the advance ultimately will be found entitled to
indemnification.
Section 4.5. Distribution Disbursing Agents and the Like. The Trustees
shall have the power to employ and compensate such distribution disbursing
agents, warrant agents and agents for the reinvestment of distributions as they
shall deem necessary or desirable. Any of such agents shall have such power and
authority as is delegated to any of them by the Trustees.
ARTICLE V
Regulations; Amendment of By-Laws
Section 5.1. Regulations. The Trustees may make such additional rules and
regulations, not inconsistent with these By-Laws, as they may deem expedient
concerning the sale and purchase of Interests of the Trust.
Section 5.2. Amendment and Repeal of By-Laws. In accordance with Section
2.7 of the Declaration, the Trustees shall have the power to alter, amend or
repeal the By-Laws or adopt new By-Laws at any time. Action by the Trustees
with respect to the By-Laws shall be taken by an affirmative vote of a majority
of the Trustees. The Trustees shall in no event adopt By-Laws which are in
conflict with the Declaration.
The Declaration refers to the Trustees as Trustees, but not as
individuals or personally; and no Trustee, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim or otherwise
in connection with the affairs of the Trust.
EXHIBIT 5(a)
FORM OF INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of ___________, 199__ by and between the __________
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
<PAGE>
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. (a) Subject to the general supervision of the Board of Trustees of the
Portfolio, Diversified shall formulate and provide an appropriate investment
program on a continuous basis in connection with the management of the
Portfolio, including research, analysis, advice, statistical and economic data
and information and judgments of both a macroeconomic and microeconomic
character.
Diversified will determine the securities to be purchased, sold, lent,
exchanged or otherwise disposed of or acquired by the Portfolio in accordance
with predetermined guidelines as set forth from time to time in the Portfolio's
then-current prospectus and Statement of Additional Information ("SAI") and
will place orders pursuant to its determinations either directly with the
issuer or with any broker or dealer who deals in such securities. In placing
orders with brokers and dealers, Diversified will use its reasonable best
efforts to obtain the best net price and the most favorable execution of its
orders, after taking into account all factors it deems relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. Consistent with the obligation, Diversified may, to the
extent permitted by law, purchase and sell Portfolio securities to and from
brokers and dealers who provide brokerage research services (within the meaning
of Section 28(e) of the Securities Exchange Act of 1934) to or for the benefit
of the Portfolio and/or other accounts over which Diversified or any of its
affiliates exercises investment discretion.
Subject to the review of the Portfolio's Board of Trustees from time to
time with respect to the extent and continuation of the policy, Diversified is
authorized to pay a broker or dealer who provides such brokerage and research
services a commission for effecting a securities transaction for the Portfolio
which is in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction if Diversified determines in 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
<PAGE>
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, 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.
(c) As manager of the assets of the Portfolio, Diversified shall make
investments for the account of the Portfolio in accordance with Diversified's
best judgment and within the Portfolio's investment objectives, guidelines, and
restrictions, the 1940 Act and the provisions of the Internal Revenue Code of
1986 relating to regulated investment companies subject to policy decisions
adopted by the Board of Trustees.
<PAGE>
(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 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;
(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
<PAGE>
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 or 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 ____% 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 the 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 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. This Agreement will immediately terminate in
the event of its assignment. (As used in this Agreement, the terms "majority of
<PAGE>
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, 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 hereof. The captions in this Agreement are
including 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 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.
<PAGE>
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
__________ By:___________________
Tom Schlossberg
Chairman and President
Attest: Diversified Investment Advisors, Inc.
__________ By:___________________
Gerald L. Katz
Vice President and CFO
<PAGE>
EXHIBIT 5(b)
FORM OF INVESTMENT SUBADVISORY AGREEMENT
INVESTMENT SUBADVISORY AGREEMENT, dated as of __________, 19___, by and
between Diversified Investment Advisors, Inc., a Delaware corporation
("Diversified") and ____________ ("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 __________ Portfolio, a
series of Diversified Investors Portfolios ("Portfolio"); and
WHEREAS, Diversified desires to retain the Subadvisor to furnish it with
portfolio management 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 management services described herein
for the investment and reinvestment of that portion of the Portfolio's assets
(the "Assets") allocated to the Subadvisor by Diversified, subject to the
control and direction of Diversified and the Portfolio's 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 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 shall be held
uninvested, subject always to the provisions of the Investment Company Act of
1940, as amended ("1940 Act"), and to the Portfolio's then-current Prospectus
and Statement of Additional Information ("SAI").
In particular, the Subadvisor shall: (i) continuously review, supervise
and administer the investment program of the Portfolio; (ii) monitor regularly
the relevant securities for the Portfolio to determine if adjustments are
<PAGE>
warranted and, if so, to make such adjustments on a periodic basis; (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 on the last day of such month, rates of return, and (c) such other
information relating to the Portfolio as Diversified may request; (vii) meet at
least four times per year with Diversified and with such other persons as may
be designated on reasonable notice and at reasonable locations, at the request
of Diversified, to discuss general economic conditions, performance, investment
strategy, and other matters relating to the Portfolio; (viii) provide the
Portfolio with records concerning the Subadvisor's activities which the
Portfolio is required to by law maintain; and (ix) render regular reports to
the Portfolio's officers and Directors concerning the Subadvisor's discharge of
the foregoing responsibilities.
The Subadvisor shall also make recommendations 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 of the Portfolio at any time, however, make any definite
determination as to investment policy 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
determination has been revoked.
The Subadvisor shall take, on behalf of the Portfolio, all actions which
it deems necessary to implement the investment policies determined as provided
above, and in particular to place all orders for the purchase or sale of
Portfolio securities for the Portfolio's account with brokers or dealers
selected by it, and to that end the Subadvisor is authorized as the agent of
the Portfolio to give instructions to the custodian of the Portfolio as to
deliveries of securities and payments of cash for the account of the Portfolio.
In connection with the selection of such brokers or dealers and the placing of
such orders, the Subadvisor is directed to seek for the Portfolio, in its best
judgment, prompt execution in an effective manner at the most favorable price.
Subject to this requirement of seeking the most favorable price, securities may
be bought from or sold to broker-dealers who have furnished statistical,
research and other information or services to the Subadvisor or the Portfolio,
subject to any applicable laws, rules and regulations.
2. Allocation of Charges and Expenses. The Subadvisor shall furnish at
its own expense all necessary services, facilities and personnel in connection
<PAGE>
with its responsibilities under Section 1 above. It is understood that the
Portfolio will pay all of its own expenses including, without limitation,
compensation and out-of-pocket expenses of Trustees not affiliated with the
Subadvisor or Diversified; governmental fees; interest charges: taxes;
membership dues; fees and expenses of independent auditors, of legal counsel
and of any transfer agent, administrator, distributor, shareholder servicing
agents, registrar or dividend disbursing agent of the Portfolio; expenses of
distributing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing prospectuses, shareholder reports, notices,
proxy statements and reports to governmental officers and commissions and to
shareholders of the Portfolio; expenses connected with the execution, recording
and settlement of Portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Portfolio, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the
Portfolio; expenses of shareholder meetings; expenses of litigation and other
extraordinary or non-recurring events and expenses relating to the issuance,
registration and qualification of shares of the Portfolio.
3. Compensation of the Subadvisor. For the services to be rendered,
Diversified shall pay to the Subadvisor an investment advisory fee computed in
accordance with the terms of Schedule B herewith attached. If the Subadvisor
serves for less than the whole of any period specified, its compensation shall
be prorated.
4. Covenants and Representations of the Subadvisor. The Subadvisor agrees
that it will not deal with itself, or with the Trustees of the Portfolio or
with Diversified, or with 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, will not
take a long or short position in the shares of the Portfolio except as
permitted by the Portfolio's Articles, and will comply with all other
provisions of the Portfolio's Articles and By-Laws and any current Prospectus
of the Portfolio relative to the Subadvisor, Advisor and its Trustees and
officers.
5. Limits on Duties. The Subadvisor shall be responsible only for
managing the Assets in good faith and in accordance with the investment
guidelines, and shall have no responsibility whatsoever for, and shall incur no
liability on account of (i) selection of such investment guidelines, (ii)
advice on, or management of, any other assets for Diversified, (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 this
Agreement, and shall be indemnified by Diversified for any loss in carrying out
the terms and provisions of this Agreement, including reasonable attorney's
fees, indemnification to brokers and commission merchants, fines, taxes,
<PAGE>
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 it or 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 any document which it reasonably
believes to be genuine and to have been signed by the proper person or persons.
6. 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 a 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 or 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.
<PAGE>
7. Certain Records. Any records to be maintained and preserved pursuant
to the provisions of Rule 31a-1 and Rule 31a-2 adopted under the Investment
Company 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.
8. Survival of Compensation Rights. All rights of compensation under this
Agreement shall survive the termination of this Agreement.
9. Entire Agreement. This Agreement states the entire agreement of the
parties with respect to management of the Portfolio and may not be amended
except in a writing signed by the parties.
10. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
11. Change of Management and Pending Litigation. Subadvisor represents to
Diversified that it will disclose to Diversified as soon as 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, as soon as it has knowledge, the existence
of any pending or threatened, significant legal action being brought against it
whether in the form of a lawsuit or an 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, except
as Diversified may deem reasonably necessary to comply with applicable legal
requirements and requests of regulatory authorities.
12. 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.
<PAGE>
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:____________________________
[Subadvisor]
By:____________________________
<PAGE>
SCHEDULE A
See Form of Investment Advisory Agreement included as Exhibit 5(a) to this
Registration Statement.
<PAGE>
SCHEDULE B
The Subadvisor shall be compensated for its service 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
------------------------
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 fee will be paid quarterly.
